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DRDGOLD 05 October 2022

2022 FY results, green flags

2022 FY results: DRD’s HEPS fell 22% to 131cps from the previous year. It’s better-than-expected performance benefitted from the H2 gold price rally, a lower tax expense and FWGR’s improved working profits. The company declared a total dividend of 60cps and cash in hand rose to R2.5bn. 

2023 Forecasts: The fall in the gold price to $1,640/oz and recovery to $1,700/oz has been buffered by the rand’s depreciation which should ensure that DRD’s revenue in 2023E remains flat yoy. However, R/t costs rose sharply last year, and we expect similar increases this year. As a result, we expect HEPS to fall to 84cps and dividends to be reduced to 33cps in 2023E. 

Project green flags: DRD has several critical projects that are now on the starting line and the 2022 results provided some guidance as how they will be executed. An S-K 1300 compliant summary providing finer details will be published soon. 

The FWGR Phase 2: DRD has secured additional storage capacity for the FWGR. It has indicated the expansion of the DP2 plant’s capacity to 1.2Mtpm from 2026 although it will only operate at 0.8Mtpm until the large-scale RTSF is approved. An approved RTSF is critical to the long-term future of FWGR. 

Buying time: With the new storage capacity, the key date for the approval of the RTSF shifts out to 2028. However, we expect the licences to be in place well before then. Once received, FWGR should increase production from DP2 to 80,000oz/a. With third-party resources, a second 1.2Mtpm plant could also be constructed by 2030E. 

ERGO life extension: DRD has confirmed that it has added 1m oz/a to ERGO’s reserve base, which will extend its life to an unprecedented 18 years. The new LOM may see ERGO’s gold output, and its R/t costs fall after five years.

Less time: The Withok TSF is critical to ERGO’s mine plan. Like the RTSF, it has experienced regulatory delays and the key approval date is only two years away. Delays beyond this are likely to require ERGO to progressively reduce output. However, once approved, ERGO could potentially accelerate its throughput by up to 30%.

Solar power plant: The SPP is under construction. DRD will spend R600m to provide 20MW and upgrade power lines by Q2 2023. A further R1,4b in debt or equity should complete Phase 2 to 60MW and add 140MW of battery power. When complete, ERGO’s power bill could potentially fall by a very significant 40%.

Platinum: This project has advanced to the point where DRD has surveyed and sampled many of the dumps owned by Sibanye-Stillwater in the Rustenburg region. These dumps could provide DRD with another large-scale dump retreatment project as well as speculative appeal. 

Valuation: After incorporating the FY22 results, we derive a revised FVVR of R9.70 – R13.10 (previously R11.60 – R15.90). Our base-case valuation of R9.70/s incorporates the latest developments at FWGR and ERGO. Our speculative value of R13.10/s assumes a rapid increase to 2.4Mtpm processing at the 6FWGR by 2030E as well as 30% volume expansion at ERGO within six years to offset the grade decline.

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