missing golden opportunities

Mines: South Africa’s DRDGOLD scratches the surface for revenue

By Olivier Holmey

Posted on July 18, 2019 16:05

Power outages have been hurting the bottom lines of South African miners like DRDGOLD, one of the country’s oldest mining companies.

DRDGold, one of the oldest companies listed on the Johannesburg Stock Exchange, employs 900 people and some 1,400 contract workers and specialises in the recovery of gold tailings deposited on the surface after mining by other companies.

In 2018, the company made a profit of only $450,000 against sales of $173m, half the previous year’s profits. This was partly due to disruptions from frequent Eskom power outages. But exploiting surface tailing is a costly activity, as the gold is present in low doses, the recovery work is time-consuming and energy-intensive, and it requires a high level of expertise.

Far West

In July 2018, however, the company acquired Far West Gold Recoveries (FWGR) from Johannesburg-owned by mining giant Sibanye-Stillwater. This increased its gold reserves by 90% to 170tn and is expected to double its turnover.

DRDGold reported a 15% quarter-on-quarter rise in gold production for the quarter ended 31 March 2019. This was due primarily to increases in tonnage throughput as it ramped up the first phase of the FWGR operation.

Critical of the coalition

The takeover of FWGR was in the form of new shares in exchange for which Sibanye-Stillwater acquired 38% of DRD’s share capital, with the option to increase that to 50.1% within two years.

DRDGold Chief Executive Officer Niël Pretorius has driven the closer links with Sibanye-Stillwater, which may also make it possible to venture into platinum mining. However, some analysts are critical of the link, which will see Sibanye benefiting from a 10% discount from the market price.

South African bank Nedbank mining analyst Leon Esterhuizen said: “I’ve never seen a company sell off like this before. This agreement is not satisfactory.”

Opposing views

But Maria Rosa Gobitz, an analyst at Wood Mackenzie, said the 2018 acquisition would benefit the company. “DRD’s main asset was previously Ergo, a very expensive site to operate,” said Gobitz. “Ergo’s reserves will probably dry up over the next ten years.” FWGR has twice the gold content and should prove more profitable.

Esterhuizen agreed. “The company can now survive even if the price of yellow metal drops. This was one of the major concerns for DRD just a year ago,” he noted. “In the West Rand region [where FWGR is located], there are enough tailings to occupy DRD for another 50 years.”

The group, however, has other more down-to-earth concerns. Pretorius said earlier this year: “We have to produce 24 hours a day, seven days a week. Any interruption has an impact on our results.” Faced with Eskom’s unreliable electricity supply, DRD therefore increased its number of generators to reduce the impact of power outages. Despite this, it continues to report disruptions.

This article first appeared in Jeune Afrique.

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