RTSF Breakthrough?
Nic Dinham
FY23: DRD’s production fell from 5,720kg to 5,282kg due to operational constraints including delays in acquiring water use licences, power shortages and heavy rain. Unit costs continued their rapid rise in the period from R123/t to R160/t. A large part of the increase was driven by the 45% increase in consumable costs to R52/t.
FY23 Profits: Despite the lower gold production and higher costs, DRD’s results were supported by the weaker rand, which increased HEPS by 13% to R1.48/s. Cash holdings were maintained at R2.4bn.
Poor 1H24E? DRD experienced a poor 1Q24 due to delayed regulatory approvals, which prevented ERGO from transitioning to new source dumps. Similar problems were experienced in 2Q24. By January 2024, all approvals were in place. This should ensure a stronger 2H24E and full-year production of c. 5,200kg.
FY24E: 1Q24 results also show that costs are still rising sharply and could exceed R800,000/kg for the year. This could result in DRD’s earnings falling 15% to R1.27/s although the spot gold price should improve the final result.
TSF bottleneck: For many years, DRD has been unable to get approval for its Tailings Storage Facility (TSF) designs both for the FWGR and ERGO. The timeous construction of these TSFs is crucial to de-risking ERGO’s and FWGR’s LOM plans and to allow FWGR to expand.
DWAS reluctance: The DWAS has blocked DRD’s initial designs, which excluded expensive plastic liners. Its position has been strengthened by the introduction of stringent global technical guidance and standards.
RTSF breakthrough? In the past six months, DRD has revised its designs to match or even exceed DWAS’ requirement. This could potentially open the door to rapid approval of both the RTSF as well as the Withok extension applications.
New strategy: The latest technical report (TRS) shows a sea change in DRD’s long-term strategies. Based on early approval by DWAS, FWGR will construct the RTSF and expand the DP2 plant almost simultaneously from 2H CY24E. It has also approved Phase 2 of the R1.9bn Solar Power Project.
What the new strategy means: The rapid expansion should double FWGR’s output within four years. Group production is estimated to rise from c. 5,200kg to 6,200kg in FY27E, a modest but meaningful increase for a high-cost producer. The new strategy is likely to also increase group capex materially from R6bn over the next five years to R11bn, a programme which we believe will be difficult to implement.
Valuation: Our base case DCF valuation, which uses the TRS-based LOM, is R14.6/s (previously R16.4/s). In our model, the higher gold prices have been offset by higher capex resulting from the new TSF designs and the >R2bn to be spent on the SPP. Our optimistic case assumes a longer LOM at ERGO and the construction of a second plant at FWGR and values DRD at R17.3/s (previously R18.6/s).
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