John Sayers: CEO, DRDGold
moneyweb.co.za
01 November 2007 21:56
MONEYWEB: It's been a pretty busy time of things for DRDGold. There have been a lot of changes, and a lot of refocusing. Particularly now, John Sayers, with the gold price where it is, do you think you're prepared to make the most of things?
JOHN SAYERS: Yes, I think we are actually, Geoff. Our South African mines are profitable and they have positive cash flow after capex, and we've been involved in the last 12 months in changing fundamentally the way we approach our marginal underground mining, and those results are coming through now.
MONEYWEB: What was that change?
JOHN SAYERS: We moved away from looking for higher grades, which tend to be in unstable areas of our mines, and we've moved to a more volume approach - higher core level in tonnage, and a slightly lower grade. And that is working now.
MONEYWEB: Is that a trend across the industry? That where the higher grades are, there tends to be more seismicity, or is it purely [audio loss]...
JOHN SAYERS: ... because the more you mine, the less stable the ore body becomes, so the newer mines are more stable than the older mines.
MONEYWEB: What is happening? I want to get into the safety issues a little bit now, given that there has been so much focus on them recently, and there have been a lot of accidents. What's going on?
JOHN SAYERS: The industry's had a bad run. Certainly, as far as DRDGold is concerned, our safety record is very, very good - and in fact we won the DME award for the best safety standards for several years running at Blyvoor. I can't speak for the other mines, but I suspect some of the older mines have some infrastructural issues that haven't been addressed over time. We have spent a lot of money uplifting our basic infrastructure to ensure we have adequate safety on our mines.
MONEYWEB: Looking at what's going on now, going forward there seems to be this order by the government to look into an audit of the mine safety and that sort of thing, across the board. Is there capacity for that?
JOHN SAYERS: I think the DME will struggle to do that, and it would take some time. But I have no problem with the concept of doing it at all.
MONEYWEB: Do you think it needs to be done?
JOHN SAYERS: I think it's a good thing to do.
MONEYWEB: What else can industry do, then - obviously there's maintenance and the day-to-day things that need to happen to ensure safety, but on a broader level what needs to be done?
JOHN SAYERS: The fundamental issue with safety is everybody must be committed to it, and everybody must be with the programme. What we do is - it's not fundamentally the plant, it's the people that you really have to focus your energies on. All of our workers go through intensive retraining exercises. For example, when they take the holiday break, we make sure they're retrained when they come back, and we spend that time continuously retraining them, because they work under very difficult conditions - hot, dark, hard work - and we know they get tired and we spend a lot of money retraining them.
MONEYWEB: Is it likely to get increasingly difficult?
JOHN SAYERS: Geoff, I don't think so. The union, with which we have good relations, is very committed to safety, and that's an important part of our ability to retrain.
MONEYWEB: Let's look at the results now, because the market seems to have liked them, and there is definitely a refocusing, and there seems to be a plan, once again, at the mine. Do you think you've turned the corner?
JOHN SAYERS: Geoff, I have no doubt that within the last 12 months we've thoroughly restructured our group. I mean, if you look at the Australasian exercise, it wiped out our reserves, it put debt on the balance sheet that we couldn't service, and it was draining R450m a year out of the coffers on profit. If you look now, the SA operations have made R18.4m after tax for the three months. That's R136m turnaround from the previous period. We've got R820m-odd cash on the balance sheet, and we have no debt at all.
MONEYWEB: What should we be expecting over the next quarter?
JOHN SAYERS: I think the next quarter you will not see too much of a change because the quantum leaps will come from what we use the capital for. You will see fairly steady progress; with gold at this price clearly you'll see a better result coming through. But everything tells us that it won't be going backwards.
MONEYWEB: Where would the gold price need to come down to before things started to get a lot more difficult with the refocused DRD?
JOHN SAYERS: Well, our average cost on service operations is $515/oz. Average cost on underground operations, if you factor in the surface ability as well, is round about $640.
MONEYWEB: And what are you hoping for in terms of the gold price? Where do you see it going to? Are the claims of $1200 gold realistic?
JOHN SAYERS: Geoff, when I sat here for the year-end results, I said we were expecting $800 by the end of the year. Well, it's there and we've got two months to go. We think it'll be a four-digit gold price within, broadly, 18 months' time.
MONEYWEB: We've seen other commodities go up, particularly oil - what does that do to your cost base?
JOHN SAYERS: The oil doesn't have a dramatic effect. But that's where Australasia's suffered, because all of the supplies were flown in by helicopter. There were no roads, so it was a huge factor there. Our big costs are people and electricity.
MONEYWEB: And have you been affected by Eskom's power cuts and the load-shedding that's been going on?
JOHN SAYERS: Generally, no. But we do have in place, of course, back-up power to make sure we can get everybody out of the mine if there is a power cut.
MONEYWEB: We've seen costs being a problem across the industry, the escalating costs seemingly very difficult to rein in. Your costs did go up a little bit, but where are they likely to go in future?
JOHN SAYERS: There's no doubt that costs will continue to rise, but we tend to see them in two-year spurts. In other words, when you negotiate a contract, we've got a fairly good, stable cost-base for two, three years - and then we see another rise.
MONEYWEB: Looking at the various operations, how's the Mintails JV going?
JOHN SAYERS: The Mintails JV is very promising. In terms of funding, both parties are committed to putting R200m in for capex. That will give us another 200kg gold a month.
MONEYWEB: And what about Top Star? What is the timeline for that?
JOHN SAYERS: Top Star will be very, very soon. We're expecting to get machinery on there within a month.
MONEYWEB: Let's talk a bit about uranium, because we saw the production cuts at Uranium One yesterday. It's a great story, but some of the producers seemingly struggling a little bit to get on stream all the operations that have been planned. What is your plan for the uranium, and getting that on board?
JOHN SAYERS: We have been, how can I put it, cautious. We had a number of pluses, not least that our uranium is above surface, and it's a pure by-product. We think that it's feasible, but we have to do a lot of tests to see how much uranium we can actually get out of our dams.
MONEYWEB: Looking at what happened in Australasia, what went wrong? I mean, the thinking was to expand, to diversify, to internationalise the operation. Clearly that didn't work according to plan. But what were the major reasons for it?
JOHN SAYERS: I think there was an element of optimism, quite frankly, and I think the whole project was geared around the Porgera cash flows. Porgera had a problem with its west wall, remediation took a long time, those cash flows dried up. If you look at the other mines, Vatukoula was not a good mine, and was closed down, and Tolukuma has been running at $1000/oz. On that basis there really isn't a business, and that's the view that we took.
MONEYWEB: What's the thinking of the people that bought it, then?
JOHN SAYERS: When you say "bought it", what do you mean, because our shares went to institutions?
MONEYWEB: Sure. Well, are there still ever going to be viable mines in Papua New Guinea and those operations?
JOHN SAYERS: I don't know. The issue is how you mine it - we adhere to the highest standards of safety. If you wish to take a different view as a third-world player, you might mine it differently, and you might make some money, I don't know.
MONEYWEB: Coming back to the South African focus now, or the refocus, some of the comments initially from analysts and commentators was that seemingly the internationalisation strategy was the way forward, purely because there's only so much gold left in South Africa. What is your view of that?
JOHN SAYERS: I don't agree with that at all. If you look at our attributable reserves and resources, our reserves in the year have moved up from 5.8m ounces to 6.4m, and our resources have moved up from 36m, 38m, to 55m ounces. And that's after we've mined our gold, so we're one of the few companies that is replacing our gold reserves and resources as we mine them.
MONEYWEB: How long is that likely to continue for, though?
JOHN SAYERS: Life of mine for all of them is well in excess of 20 years now.
MONEYWEB: And what about other potential tailings, operations, surface operations, how much of that is still left in the country?
JOHN SAYERS: A huge amount, absolutely a huge amount. There's over a billion tons out there to process.
MONEYWEB: And how much of that would you like?
JOHN SAYERS: We'd like to get all of it, which we probably will.
MONEYWEB: Why is no one really going into that space as quickly and efficiently as DRD, then?
JOHN SAYERS: It's a question of infrastructure. The whole attraction with the Mintails deal is that it was the old Ergo infrastructure which comes with all the traversing rights, all the mining rights - you know, to re-establish that infrastructure again would be incredibly difficult under existing legislation.
MONEYWEB: How important is the legislation, the use-it-or-lose-it policy, and how has that changed the thinking behind DRD's strategy?
JOHN SAYERS: It hasn't changed our thinking at all. Under the new legislation we've obtained ERPM 1, the old Sallies 1, we've obtained rights to ERPM 2, the old Sallies 2, and we've got prospecting rights we are applying for on Argonaut. So we manage that.
MONEYWEB: There have been some comments around the possibility of selling Argonaut - would that happen?
JOHN SAYERS: Ja, there's a possibility. That's a very deep ore body, but we've got to get the right to prospect it first to ascertain what is actually there.
MONEYWEB: There were also some questions raised at the launch of your annual report about the bonuses and the salary paid to the former CEO, Mark Wellesley-Wood. What exactly is the company statement there?
JOHN SAYERS: The company statement is those were paid in line with his KPIs, and fundamentally in line with his contract. I find it very difficult to comment on that any more because it's a personal issue between Remco and Mark, and I wasn't involved in that.
MONEYWEB: Sure. How are executives remunerated now? Is it the same sort of manner?
JOHN SAYERS: Well, I'm not in the superclass, so don't worry about that! No, we have very tight KPIs, we have a very clear Remco policy - and if we don't meet those KPIs, well, then your remuneration is fundamentally your salary.
MONEYWEB: John, what can we expect over the next year from DRDGold?
JOHN SAYERS: I think you're going to see a great company. We've got Mintails coming on stream, we've just committed R20m capex to improving the access through ERPM's far-east vertical, which will considerably increase its production and put ERPM into a comfortable position in terms of cash and profit. We've got a good young management team, and we've got some exciting projects. We've been given permission to over-stope into Sallies 1, ERPM 1, which has very high grades, round about 12g a ton. And we are exploring with some detail ERPM 2 - that won't be a small project, but it's a good ore body, right next to ERPM. And on top of that we have uranium to explore, but we're not pinning any hopes on that. We maintain gold is our core business.
MONEYWEB: John Sayers, the CEO of DRDGold. That's all from Power Lunch in association with Moneyweb. |
