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DRDGold LTD 14 January 2022

Green growth

Overview: DRD is a waste recycler that produced 136,986oz gold bullion in FY2021 from its substantial low-grade reserves of slimes and sand dumps located near Johannesburg (Ergo) and a further 46,915oz from its Far West Gold Recovery (FWGR) operation near Carletonville.

Green credentials: The company removes old dumps that are a hazard to nearby communities and their groundwater and relocates them to tailings storage facilities (TSFs) that are concurrently vegetated to minimise environmental issues for surrounding communities.

DRD’s real green credentials come from the fact that it creates very low Scope 1 CO2eq emissions/oz gold that we think is probably unmatched by any gold miner. Just as importantly, it doesn’t sterilise large tracts of land the way mining operations typically do.

DRD’s future: The FWGR operation will soon be expanded to add at least 30,000oz/a to its output. This should ensure that DRD is able to stabilise current production levels for at least seven years (base case).

It is likely that DRD will acquire sufficient third-party resources near FWGR which along with likely life extensions at ERGO would allow DRD to produce 250,000oz/a by 2030 (+30%). (optimistic case)

Longer term, there are up to 1bn tonnes of resources in the Far West Rand that could also be treated by FWGR which should allow DRD to expand beyond 300,000oz/a (+60%) by 2032E.

Valuation: We value DRD within a range of between R11.6/s (base case) and R15.9/s (optimistic case) based on a gold price of R898,000/kg. However, when the optimistic case becomes reality, DCF valuations would increase to R22.3/s, all other things being equal. 

DRD’s value is highly leveraged to the gold price. In the event of a 10% rand gold price increase the base case would be worth R16.3/s and the optimistic case would be worth R29.8/s. 

Summary: DRD is a mid-tier company that has the potential for strong growth over the next decade. For South African small to medium-sized portfolios there are few local gold companies with similar organic growth possibilities. DRD’s ‘green growth’ credentials as well as its ability to pay dividends through its next investment cycle will also be attractive to foreign investors.

Risks: DRD business and share price are sensitive to the gold price. Its future is also dependent on a number of technical developments and improvements as well as regulatory approvals.

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