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DRDGold 11 April 2023

Gold bonanza in the wings?

Nic Dinham

2023 H1 results and updated 2023-2025 forecasts

Power problems: Operational issues at Ergo had a significant impact on DRD’s H1 results. The common theme was power supply interruptions from load shedding and unplanned outages, both from Eskom and the City of Johannesburg. 

Regulatory changes: Ergo’s start of reclamation at Rooikraal TSF was affected by a revision in procedures required by the regulator (DWS) that effectively increased the costs and delayed new production. 

Legal challenges: Ergo also faced a temporary legal challenge to its water use licence, which delayed the commencement of extracting the Valley Silts reserve. 

Earnings recovery in H2E: The power issue will be diluted by the recent switch from the CoJ substation to Eskom at the City operations. As a result, production for the year has been guided to around 170,000oz/a. This is 10,000oz lower than 2022FY. Fortunately, the recent gold price increase should more than offset the production decrease.

Cost increases: Like the rest of the mining industry, DRD’s operations have experienced severe inflationary pressures with ‘normalised’ unit cost increases in the high teens. To a large extent, these were built into DRD’s forecast cash costs of R685,000/kg which remain intact, although some slippage appeared at Ergo.

Capex: DRD has reduced its capex spend estimate for the year. This follows several downgrades from previous forecasts. We believe this may point to the inability to estimate and spend capex, which may become more obvious as it enters a period of high capex spend over the next three years. 

Gold price boom: Despite a poor H1, gold prices have moved significantly from R0,98m/kg received in H1 to over R1,1m/kg at present. This resets our earnings guidance, and we now expect HEPS to reach R1.4/s if current spot prices are sustained.

Gold bonanza? The SK-1300 disclosures discussed in detail in our recent companion report The SK-1300 Unveiling provided insight into the company’s production plans. Ergo is expected to produce 147,000oz in FY2024E up 18% from FY2023E and real unit costs are forecast to fall to R116/t in FY2025E. Taken at face value, and assuming spot prices continue, DRD could enjoy bonanza earnings of over R2/s for the next two years and dividends of over R0.9/s. Ergo’s profits are very sensitive to the gold price.

Valuation: We have updated the LOM DCFs based on the SK-1300. We have increased the discount rates of our valuation in view of the higher risk profile, but even so, the spot gold price has improved valuations and our fair value range is now R16.4/s to R18.6/s.

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