DRD Gold stock seen as expensive after strong start to 2008
mineweb.co.za
Deutsche Securities says "hold" DRD after returning 35% in US dollar terms by 28 March.
Author: Tessa Kruger
Posted: Sunday , 13 Apr 2008
JOHANNESBURG -
DRD Gold has had a "remarkable start" to 2008, returning 59% in rand and 35% in US dollar terms, but Deutsche Securities says the stock appears expensive at current levels.
Gold analyst Muneer Ismail said in a recent research note the stock outperformed the FTSE/JSE Africa Gold index by a remarkable 50% from January to end of March this year.
But despite the fact that Deutsche recently upgraded its DRD price target by 10% to 800c/R8 on the back of a higher forecast gold price, the stock now appeared expensive and the firm has downgraded its recommendation to "hold".
Deutsche Securities valued DRDGold on a sum-of-the-parts discounted cash flow (DCF) basis, discounting each asset's cash flows at a weighted average cost of capital of 9.3% over the asset's reserve life.
It estimated a $409m discounted cash flow value and a Net Asset Value of $459m for DRD Gold.
"To derive our price target, we apply a 0.85 price/discounted cash flow exit multiple - (representing a 15% discount to the South African gold majors) - to the discount cash flow value of the group's operating assets, resulting in a market value of $397m."
The analyst assumed the company had 376m shares in issue.
Ismail said the valuation covered both the Mintails East Rand Joint Venture and the Top Star Dump, but they attached no value to the group's Blyvoor uranium assets until more details were made available.
Risks to Deutsche's valuation of the company included power capacity problems in South Africa, especially given DRD Gold's high volume surface operations. Any failure on the pumping circuit could result in blockages that were difficult to clear on the surface pipelines.
Deutsche had tried to compensate for this risk, but feared the situation could worsen.
DRD also held deep level gold mining risk and was exposed to government enforced health and safety compliance - posing a risk to mining volumes.
Upside potential included uranium and sulphuric acid opportunities earmarked for extraction from the East Rand tailings project.
"In addition, there is the probability of some positive restructuring at the group's underground ERPM operations," said Ismail. |
