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Gold/Mining/Energy : Gold and Silver Mining Stocks -- Ignore unavailable to you. Want to Upgrade?

To: goldsheet who wrote (868)	4/26/2001 11:35:03 PM
From: russwinter	Read Replies (2) \| Respond to of 4051

Double ugly report from DROOY and a glaring example of my criticism of South African (and Aussie) miners. I have serious doubts about these guys surviving any kind of gold market. Having hedge book troubles already and they haven't even tasted the cold steel of a real rally. And the reference to 70% of their shareholders being Americans, is a damn shame and waste of good gold investment dollars. By: Stewart Bailey Posted: 04/26/2001 02:00:00 PM \| © Miningweb 1997-2001 There were a few surprises at Durban Roodepoort Deep's [JSE:DUR] quarterly results presentation today. But a nightmare of a hedge book, a poor operational performance and greater than expected losses, raised few eyebrows among a group of investors that - in the words of one analyst - has "learnt to expect surprises on the downside". - Realistically though, only the die-hard supporters of the company expected the marginal gold producer to sustain its short-lived semi-recovery posted last quarter. The massive production fallout of the March quarter has afflicted even the most robust companies in the local gold sector. But DRD managed to pull another string of reasons out of the bag for its worse than anticipated performance. Not only did the lost days and slow start-up after Christmas slam the bottom line, but problems with underground transport and stuttering grades at its Harties and Blyvoor mines compounded its misery. The share closed 40 cents down to R7.55 in Johannesburg today, despite a marginal rise in the bourse's gold index. Underwater Another smack to earnings came from DRD's hedge position. Although its grade and logistics woes can be ironed out, the structural flaws in the company's hedge book will take the next year to solve. The essence of the hedging dilemma for DRD is its long position, which executives say was forced onto the company by its bullion bankers after the Washington Accord caused a spike in the bullion price in late 1999. The credit exposure the banks faced from their hedged customers hedge positions – which were underwater - was highlighted by the margin calls made on Ashanti, which nearly spelled its end. DRD was threatened with margin calls by its bankers if it did not take out the long positions totaling 800 000 ounces at a massive $337 an ounce. This would have forced it to shut down its operations. The company took out the position which Ian Murray, DRD's financial director, says will cost it about R40 million a quarter - over the next three to four quarters - to wind up. Its remaining commitments now total slightly over 213 000 ounces. "What this basically means for DRD is that they bought the gold at $337 an ounce and now they have to sell it back at whatever the spot is," says one gold analyst. Murray says the restructuring will be funded out of DRD's own cash. He also says the company is aiming at reducing its total hedged position to "an acceptable level; around 10 percent to 15 percent of annual production". This will undoubtedly raise the appeal of the company among a section of North American retail investors, who spurn the forward selling practice. DRD already has more than 70 percent of its shareholder base in the US. Not making the grade The writing was on the wall more than a month ago when Murray warned that DRD's recovery would not necessarily be a linear one. But the bottom line earnings loss of 43 cents a share surprised market watchers who had expected a loss of between 20 cents and 25 cents a share. The net loss after taxation was a shade above R59 million,ompared to R9 million for the December quarter. Grades at Harties dipped by 12 percent to 5.83 grams a ton and Blyvoor's five shaft also suffered from declining yields, falling as low as 3,5 grams a ton. Group chairman Mark Wellesley Wood says the grades at Blyvoor has since rebounded to 8,5 grams a ton, while he says Harties recovered grade is now at a more respectable 7 grams a ton. The lower grades for the quarter led to an increase in total cash costs at Harties, from $218 an ounce in the December quarter, to $241 for the three months to March. Across the board, costs increased from $224 to $237 an ounce, despite a stellar recovery from DRD's Tolukuma mine in Papua New Guinea, which returned total costs of only $161 an ounce. The disastrous operational period impacted revenue from gold sales. Production was almost 20 000 ounces lower than for the December quarter, knocking R22 million of the revenue line, which came in at R517 million for the quarter. The rest of the income statement looks like a battlefield, particularly the net cash operating loss of R27.1 million, a far cry from the cash profit of R8.9 million which DRD used to herald its turnaround last quarter. Growth plan Wellesley Wood is nothing if he's not resilient. He has assured that the operational problems are a thing of the past and that loss makers will be axed along with his "no passengers" approach. First on the block is its R44 kg a month West Wits gold dump reprocessing operation and the disposal of its stake in Wine Waste Solutions, its mine rehabilitation joint venture. On the acquisition front though, Wellesley Wood was a little less forthcoming on how DRD planned to fund its proposed acquisition of AngloGold's Savuka mine and possibly Ergo, its surface retreatment operation, both of which DRD has said it is gunning for. Murray would also not shed any light on the funding avenues likely to be pursued by the company. He said simply that the options were "debt, equity, royalties and cash, or a combination of these" and the ultimate mechanism would depend heavily on the price.