Perfect timing?

Gold prices: The recent fall in gold prices from over $5,500/oz to $4,600/oz caused global gold counters to fall abruptly. However, gold prices for SA producers have seen only a modest retreat from R2.6m/kg to R2.5m/kg.

Perfect timing? DRDGOLD is executing a major expansion at FWGR that matches its peak capex funding of R3.5bn with record operating cash flows. We expect capex to fall by 20% in 2027FY and more rapidly in 2028FY.

FWGR expansion: The project will double the capacity of its DP2 plant, build a world-class free-standing TSF (RTSF) as well as construct a 135km pipeline and pumping facilities. Despite walking a narrow critical path, the project appears to be on time and on budget for an increase from 0.5mtpm to 0.6mtpm from October 2026 and then a step up to 1.2mtpm from April 2027.

Timing benefits: The gold price, decreasing capex and expansion of the FWGR in 2027FY may change DRDGOLD's financial trajectory. There is now a real possibility of building a cash surplus over the next three years. This could lead to dividend growth as well as early investments in projects in the Far West Rand to sustain production growth beyond Vision 2028FY. 

Beyond Vision 2028FY: The pivot for further growth is the spare deposition capacity of 1.2mtpm of the RTSF that will become available from 2030FY. The most likely project to use some of this spare capacity is the acquisition of a dormant plant in the region capable of treating 0.6mtpm.

Other possibilities: If acquired, the new plant could be expanded to 1.2mtpm on a very similar basis to what is happening with DP2. However, Sibanye-Stillwater is engaging in a feasibility study to treat its Cooke dumps that may also require RTSF's spare capacity and create a low-cost additional profit stream.

Profits ahead: The combination of gold production growth from 2027FY and current prices also imply strong earnings growth forecast by SBG Securities from the R4.47/s in 2026FY to R5.69/s in 2027FY and to R7.16/s in 2028FY.  

Other surprises: ERGO may have some medium-term surprises. One possibility is the possible re-acquisition of the Grootvlei dump that was lost through legal processes. In the current owner's hands, the dump risks becoming a stranded asset. New TSFs are prohibitively expensive and difficult to build. 

A new technology? DRDGOLD has been testing a new technology for several years and we expect further details to be announced within six to twelve months. The company recovers between 40% and 60% of its head grades so even a 5% recovery benefit would create significant value.  

Valuation: Our latest valuation range of R45.0/s to R67.3/s matches our previous range of R42.1/s to 63.5/s fairly closely due to the similar spot gold price of R2.5m/kg being used along with our mid-point estimate of R56.2/s.

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