DRDGF - DRDGOLD Limited (DRD) Q4 2022 Earnings Call Transcript

2023-08-24 09:22:03 ET

DRDGOLD Limited (DRD)

Q4 2022 Earnings Conference Call

August 24, 2023 04:00 AM ET

Company Participants

Niel Pretorius - CEO

Riaan Davel - CFO

Jaco Schoeman - COO

Conference Call Participants

Presentation

Niel Pretorius

Good morning, everyone, and thank you very much for joining myself, Riaan and Jaco for our results presentation for the financial year ending the June 30, 2023.

Before we start -- all right. I think this is somebody who needs to go on to mute. Thank you. Before we start, I think maybe just a moment to remember Derek Watts, who passed away yesterday. I think we all remember Derek is a fearless journalist with integrity, relentless pursuit to the truth (ph). And I think he state for certainty leaving a gap in the community, the media community.

Moving on to the first page. That is our disclaimer. We are keeping the content of this presentation fairly light. We're not going to go into a lot of detail, really just the highlights and the events that impacted and contributed to our financial operating performance this year. We'll obviously deal with everything from more extensively in our integrated report.

Just in terms of highlights, the key group features for this year, see that on the back of a very good gold price. Our revenue is up 7% for the year, and that also contributed to an 8% increase in operating profit of just over ZAR1.8 billion. That in turn contributed to a very nice increase in headline earnings, a 14% increase of just 14% or rather 14% to just over ZAR1.2 billion, and that has enabled us to pay, 16th consecutive dividend.

We're topping up the interim dividend by another ZAR0.65 to take the total dividend for the year to ZAR0.85. And I remind myself that being a shareholder myself, a very large percentage of the shares that I purchased and which are now earning dividends I bought for just over ZAR2, I think ZAR2, 13 months. It's been a long-term strategy on my part, and I'm hoping that some of the shareholders are finding results in a similar position.

Moving into the operating trends. We'll deal with both operating segments individually and then we want to be the group operating features. And I think what we want to emphasize here and what the graph is showing, two things really. The first being volumes coming under pressure, especially towards the second half of the financial year, but offset to an extent by an increase in yield.

Obviously, every year, we do anticipate certain things from happening, and we factor that into the -- into our thinking as part of what we provide for in terms of contingencies. I think there were one or two additional ones this year in terms of the volume throughput that we were unable to respond to the way that we would have preferred. And that really involved the delay on a number of new sites.

You would have seen in the letter that we also released this morning that we consider this year to be an in-between year that some of the earlier sites initial sites, the Elsburg site in particular that those are coming to an end, they reach the end of the producing life and they need to be replaced. Now we have a program of sequencing our reclamation sites. And we work towards a time line, and there were a number of delays in actually implementing that.

So you would have seen in the letter to the right trial site, which is the main volume of site, the replacement side. It's only come online recently and is only now starting to get to a stage of -- state rather of, or steady state. So that being the case, a lot of the throughput this year was supplemented with material from, we call them clean-up sites, a few years back. We started a program to start cleaning up some of the legacy sites. So there's a fairly large fleet of yellow machines lifting and stockpiling material.

And these were activated and a lot of the material that came in into the plant into the Ergo plant was from these sites. And that helped with recoveries, the head grade from the sites typically is higher because it's also material and the, therefore, the increase in yield of 0.25 gram per tonne compared to where it was in the past.

And then you would have seen how that impacted the Ergo production output as well -- there's just one microphone that needs to go into mute. So that's how you would have seen the -- I mean you could see the impact also on the production throughput right at the end of just over 2 tonnes per half year to just under 2 tonnes per half year. And these sites are -- or these circuits are sensitive both to volume and grade -- grade does help quite a bit higher grade.

Moving on to Far West Gold operating trends. There too, you would have seen in the letter that towards the end of the year, there was a delay in the new site that's been commissioned, the number 3 dam. So the first slide number 5 dam, which is really just a few baby steps away from the Far West Gold Plant, very neat and simple operation.

Let's now move on to the second slide. So the number 3 dam has also now come online, but that too has its own set of challenges at getting it commissioned on time. And that had to do, by and large, with the delay in the delivery of componentry that we had to import to a logistical issue and we attribute part of that really to global economy and supply lights that have yet not fully recovered following the lockdown, the COVID pandemic associated lockdown.

Far West Gold also had a direct impact of the impact of the load curtailment arrangement that we have with Eskom. And you see that in the production numbers, the yield and also the production number. So it has to switch off it to mills to grind down the course material. It runs close-circuit mill, but you've got to switch that off and the benefit that you have from the mill has lost. And you could see some of that also coming through both in the yield and in the production numbers.

So on a group basis, a very, very steep decline, which, thankfully, is only a temporary decline. It will start picking back up again now that both number 3 dam, [indiscernible] number 3 at Far West Gold and reroll at [indiscernible] to now that they're up and running again, and there are a few others in the pipeline that will systematically also come online. You will see the opposite happening in terms of yield. So it's higher volume, lower grade material. And then hopefully, these will balance each other out, and we've been delivering to the guidance that we give at the end of this presentation.

So total production for the two half years or for the financial year, so just under 3 tonnes for the first half and 2.5 tonnes for the second take us just to be low 6 tonnes for the year. The 6 tonnes really, I think, is where we want to be, somewhere between 5.5 tonnes and 6 tonnes. That gives us the volume throughput, the weight or the scale that can support the overhead structure of the business.

I think the next is the financial review. I'll hand you over to Riaan to take you through some of those numbers. Riaan, thank you.

Riaan Davel

Thank you very much, Niel. Good morning, everyone, from my side. As always, a hedge privilege for me to take you through the financial results, was very helpful with the operating context that Niel has fined to be, before I do that, just two specific words of thanks from my side, firstly, to our operational team for delivering these results. We all know that we're a 24-hour a day business. In a sports analogy, what that means is we can capitate our eye off the ball, the ball is always in play. And I want to recognize the operational team that produces ultimately these results.

And then secondly, just a reporting team as well. I know when we talk, as Niels said, in a summarized way in these presentations that it may look pretty simple, pretty easy, but I can show you it's not a lot of effort and dedication by the team goes in, and I want to just want to thank each and every one of them for their support in ultimate coming up with the set of numbers for our year, which I'm very, very proud to present. And then as Niel said, yes, there's a summarized presentation. Hopefully, we'll give you the key features of our results. But please do have a look at our condensed financial statements that we've released. We prepare that booklet with great care, and I know you will find the information in there.

So on the financial review side, as nearest time to start with ERGO. As you could see there, Ergo's revenue overall for the year, increased by 11% in comparison to the FY 2022 financial year, which was driven by overall an increase of 16% in the average rand gold price received although gold sold was down 5%, as alluded in an environment for ERGO, which had much more difficult tonnes, so lower tonnage but a higher yield.

Just period-on-period, if you compare the first six months of the FY 2023 financial year to the second six months, in that time, we saw also a steep increase in gold price, if we compare second six months, the first six months, gold price was up 17%, although gold sold in that period, was down 7%. But overall, a very good revenue performance.

From a cash operating cost point of view, obviously, overall, if you look at a cash operating cost increase only 6% year-on-year. But obviously, that's in a lower tonnage environment where the volume was down 22%, but yield overall, up 21% sort of offsets that for us in very neat way. But yes, the cost pressures are very much there. We noted in the booklet as well, reagents, diesel electricity security. It's a very large focus for us Cheniere yellow machines for late-stage cleanup. We've experienced very high and well above inflationary increases there and all of that contributes to the cost overall.

So the net of those two have some inventory adjustments then get us to operating profit. And again, what a very good six months that you have with, obviously, profitable ounces. And as such, we had high yield and slightly lower tonnages and a high gold price wonderful second six months. Year-on-year, the increase was 26% increase in operating profit for Ergo, which is an excellent result and just over ZAR920 million is a gross contribution. So excellent performance, I believe, on the challenging circumstances from our mothership operation urban.

Moving on to the Far West. A slightly different picture, as Niel mentioned as well. There are not many sites there. It was in the late stage -- final stages of Driefontein 5. But unfortunately, and that's often how it works in these -- on these sites. We cannot choose the grade, and we work through those sites in a methodical way. But at Driefontein 5, they didn't contribute it was a lower grade part of the dam. And then also when Driefontein 3 got online, the parts that we mine in there at the moment is also not close to the average overall of that site.

And as everyone knows, those sites aren't homogeneous, the grade isn't spread evenly through some areas higher than others. And we often look overall at the average grade of that site only. So tonnages impacted that overall. And unfortunately, it didn't have the yield impact that Ergo did. So if you look at revenue than year-on-year, overall down by 2% with gold sold down by 15%, but offset by the 16% increase in the average gold price received.

If I look at cash operating costs in that context, so up 11% year-on-year. Similar cost pressures as Ergo that we experience in there -- at this stage of both Driefontein 5 late stage and the start of the Driefontein 3 sites, unfortunately, not that yield offset that we saw very distinctly in ERGO, giving us with some energy adjustments. Overall, on the operating profit side, 6% down year-on-year in this scenario where revenue is slightly down, costs up. Obviously, that will impact operating profit. But still look at the number, just below ZAR900 million contribution by Far West to the operating profit of the group, which overall by is still an excellent result.

If we look at the group then overall, operating margin percentage, again, assisted by the gold price as our patients, specifically in the second six months, increased 17% period-on-period, a very healthy operating margin and that 36.1% is the highest we've seen over the last four half years, and you can see that on the slide. All-in sustaining cost margin, similarly, very healthy at 24% was taking into account that we've spent ZAR476 million in sustaining CapEx and it's very much in line with last year. So still, even with that sustaining capital investment, very healthy 24.1% margin in the year in the second six months and overall all-in sustaining gross margin of 20.6%.

Moving on to the free cash flow. It appears, yes, and that's true that the cash flow, free cash flow year-on-year decrease. Although, when I get to the cash flow statement, I'll talk to that, cash generated from -- cash generated from operations up year-on-year. So what that free cash flow shows us, and we'll talk to that in the cash flow statement as well is that over ZAR550 million of capital spend on the growth side. And for me, that is a really wonderful growth story. So as with sustaining CapEx also down more and more with growth CapEx. We invest in a business that works and we're investing in a purpose that we believe.

So for me, it's a wonderful result. And I've almost summarized that. So we've tested over ZAR1.1 billion of investing activities. So you'll see that in the cash flow later as well, which is almost 90% more than last year. Last year, we spent ZAR626 million. And remember, free cash flow is a gold number. It does not lie. It just take operating cash, less investing cash and that is the answer. So a very positive cash position, but I'll elaborate on that, when we get to the cash flow statement.

And then headline earnings per share, a wonderful result that you already alluded to, so overall, 13% increase in headline per share to ZAR148.2 -- ZAR148.2 share and again, it's a very solid second six months of 85.9%.

Then moving on to the statement of profit and loss income statement. Just that at a high level, revenue increased by 7% as a result of the gold price increase, 16% year-on-year, offset by gold sold down year-on-year by 8%. Cost of sales, up 5%, so one of the other elements more than cash operating costs that come in there is depreciation, for example, depreciation was down period-on-period with lower tonnages that we produced as has mentioned. Leading our gross profit from operating activities up 15% year-on-year at just under ZAR1.6 billion.

Net income, we remained lowest here at 91.3, the majority of that was COVID claim that we successfully been accounted for and received mostly in that period and the last bit in this year. [indiscernible] expense is 7% year-on-year increase. Finance income up year-on-year. Obviously, in our environment, we're very fortunate to carry cash balances less, obviously, in a high interest rate environment, that means that more finance income. Obviously, if you have debt in that environment, you pay higher interest charges were fortunate to earn interest at the current high relatively high interest rates. And that line also includes dividends from [indiscernible], but you see both of those on the cash flow statement.

In finance expense, as you know, was a small -- just a small portion, only 5 million of that in cash. The rest is an unwinding -- mostly an unwinding of the discount on our environmental liabilities. And then income tax current and deferred. As you know, in that line, leaving us with a profit for the year of ZAR1.281 (ph) million, ZAR1.2 billion, up by 14% year-on-year.

Looking our statement of financial position, more on balance sheet. Wonderfully, if you look at the property plant and equipment line that Niel alluded to, there's a healthy increase as we keep on investing in our business, in our assets, which is always the best kind of investment, if you can build and maintain through capital infrastructure. And we've seen in other businesses, some of them owned by government and the result, if you do not do that. And the big method, as I said, to our purpose and we'll continue to do that. And it's a healthy increase in property, plant and equipment.

Market investments and other assets, mostly our rehab assets that sits there, also benefit from a higher interest rate environment. So healthy growth year-on-year in that line. Cash and cash equivalents, again, I'll talk through in quite some detail on the next page. But overall, what you can see there is only a ZAR54 million so-called cash burn year-on-year, but I'll elaborate that on the cash flow statement.

And then other current assets came up year-on-year, but the positive way is that it includes and we alluded to that in our results booklet as well 185 million prepayment towards solar project capital, which again, all investing activity for us and very positive that we can execute also our solar project. Equity, how to increase year-on-year, even after the dividend. And again, as you know, the profits contribute overall to the equity of the company.

Provision for environmental rehabilitation, fairly stable year-on-year, mostly the unwinding and some other changes that we lead to in the note in our financial statements. Deferred tax liability that increased year-on-year, some property plant equipment items that we've already fully claimed for tax purposes under our tax regime. And then current liability is slight increase year-on-year, but giving us in a very, very healthy current ratio at June 30, 2023 of 4.5.

Then to the statement of cash flows. Yes, my personal opinion, the most relevant and useful primary statement of the ore. Because as you know, it doesn't deal with fair value versus historical cost, pros and cons of both in just deals with gas, and it tells you the truest, in my view, picture of what the business has generated. And for us, really, really good reading.

So if you look at the net cash inflow from operating activities, obviously, for any business, the most important line is our cash generated from operations. So in my thank you at the beginning of what I said, that's what drives the business. The underlying operations, what kind of cash does it generate. And for us, the year-on-year increase to just over ZAR1.7 billion in cash generation.

Finance income received that I mentioned, obviously increased year-on-year, as a result of the balance that we carry and cash that we still generate and then the highest interest rate -- high interest rate environment dividends you see mostly from rand refinery. You can see there separately. And there's the ZAR5 million finance expense paid in cash that I mentioned, relatively small in context of the other numbers.

And then income tax paid from my viewpoint is a significant contribution that our business also makes directly in that income tax line, also in other tax lines to the fiscus and we always hope that, that money will spend in a responsible way.

The net cash flow from investing activity is also very happy reading. If you look at acquisition of property, plant and equipment, so at just over ZAR1.1 billion, almost doubled from last year. which is, I believe, an excellent message. So we keep on investing in our business and more so also in non-sustaining or growth capital expenditure.

And then environmental rehabilitation payments, we'll continue to do that. I still believe not many other mining companies get that right. We continue to spend money. And most of that spend to currently active tailings facilities, so DRDGOLD Withok and Driefontein 4. And sometimes it's challenging if it's -- as it has been a very high rainfall summer sometimes those activities are slightly delayed on the vegetation and some other challenges, but that's something we're committed to, and we'll keep on spending money to rehabilitate concurrently.

Then on dividends, as Niel has already mentioned, we paid just over ZAR500 million in dividends in this financial year in cash. So then that's the overall that ZAR63 netted off by the positive at [indiscernible] variance. That gets us to the ZAR54 million essential cash burn for the year. But overall, from our perspective, we've invested more than ZAR1.1 billion in property, plant and equipment paid over ZAR500 million in dividends and our cash position stayed virtually unchanged, which I believe is a really magnificent result.

Then yes, this is always the sort of handover slide to Mr. Pretorius. And maybe he would like to speak to this because this is also a very, very happy reading. As you can see, we had it there for a least February. But even if you go slightly back, we've had a really wonderful run in our share price, and I believe we're one of the best-performing shares on the Johannesburg Stock Exchange for this calendar year. We take 1 January to 30 June, but our run started slightly earlier. So we were hovering 10 around just under 10 in October and moving to November. So if you just look at that, from 12 obviously to around 24 is more than 100% increase. So a wonderful result, I believe, our shareholders in this period.

But with that, I'll hand over to Niel to maybe say something on that and then talk to the ESG and the rest of the present question. Thanks, Niel.

Niel Pretorius

Thanks, Riaan. Yes, it has been a good period for us in terms of share price performance. I think you could see that the share price is still tracking the gold price compare to the multiple might be slightly more steeply get to the gold price than some of the other companies. And to Riaan’s point, on performance year-to-date minus loans I think basically, we kindly emailed me some statistics in July, suggesting that year-to-date at the time, DRD gained 58%.

But I think that the one number that I thought I feel just explain this, performance gold sector performance or return over 10 years, which is 794%. And that's what DRD is all about. It's the long-term performance. It's a sustainability focus. That's hopefully taking us into the future and is setting us up to take full advantage of ore body and continue to deliver into the multiple value focused areas that we've made part of our strategy. And that takes us into sustainable development, the very next slide, what we've been doing in that regard.

So moving on to the environmental aspect of that. The prior to reduce potable water usage by relying increasingly on industrial water, recycled water or water that we harvest that continues. And again, we saw a 10% decrease this year. And compared to where it was 10, 15 years ago, it's come down every year. For most years, and we're now a point we're roughly 90%, which is more than 90% of all the processed water that we use.

In fact, all the water that the we use in our process is non-potable, which I believe is an important part in terms of the sustainability drive. We're having power issues now. We know that in the not-too-distant future, we're going to be adding to those issues, namely not enough water because of the -- simply the size and the availability of water for use for personal years.

So it's a good way to set ourselves up to not just from an environmental perspective, but also from the business resilient perspective. [indiscernible] to use 187%. And those are, by and large, not related to tailings thus from tailings, but more infrastructure, so dust from grows or from where vehicles are moving in terms of recommission of materials. So that also is a number which I personally find encouraging.

The rehabilitation spend remains high in the circumstances. And when these are costs that are directly attributed to rehabilitation categorized in that line. We know that our mining process, in essence, is rehabilitation with the removal of tailings from areas where were they shouldn't be and processing them and storing them elsewhere that's about 42 million. And then another 25 million hectors are permanent storage facilities, tailing storage facilities have been vegetated during the course of this year.

And to a large extent, the dust risk that these facilities pose to surrounding communities. I'm talking about the current facility in particular. That has been dealt with fully, which I believe is very important. And I remember like it was yesterday, 2006, when we were presented by a budget proposal by the then General Manager of [indiscernible] a refer saying that ZAR116 million to start revegetating these tailings. And now many years later, 15 years later, we could stand back reflect on what's been achieved over that period so that the people are so delivering around this facility are no longer suffering being convenience of us coming off those facilities.

Moving on to the environmental add, which is the next slide. So there too, I think what I want to focus on here is more what you can expect to be seeing going forward, particularly in terms of the electricity consumption aspect and the carbon emissions aspect. So there, you could see the trending from the '21, '22 and '23, where as we go. And of course, with 20 megawatt of solar power coming online in the not-too-distant future, that consumption from the national grid will reduce. And 18 months from now at the end of the next calendar year, we hope to have an additional 40 megawatt put in place together with very significant storage capacity, 160 megawatt storage capacity or timing and then the carbon emission number would look quite differently. The electricity consumption of the grid would look quite differently.

And our risk profile would it differently. The impact on cost would also start flowing through. And this is what we like about our model is that we're really taking four out of five sustainable development capital stock boxes integrated value that it's really, very going to be alive. So this is an exciting time for us and it's pleased to be investing money in. I will reflect a little bit more on that later on in the presentation.

So moving on to the next slide on our social investment aspect with long been containing for the notion or being supportive of the notion that you cannot run a business. It cannot be an island of stability and an ocean of anarchy. So it would be stability of societies around your operations is essential to be successful in business at some stage, frustration falls over and this could be very disruptive when it comes to business. And the money that we spend in that regard, particularly in terms of community development, the broad-based livelihood part of the business. I think that's really taken off beyond expectation. And it's contributed towards a very significant network that we have access to and a little bit more about that later on.

The one thing that we do believe we should be cautious of, especially now that the private sector has become increasingly involved in some of the gaps that are been left by the state just to become a proxy for delivery in terms of the state. This company, which is one of the smaller companies on the JSE, paid ZAR314 million, ZAR320 million in income tax in the last year. And I think it's important that we monitor the extent to which some of that is being reinvested by the state in the communities where we operate. This cannot be a situation where private sector pays taxes and then still expect it also to deliver into what essentially is government's responsibility.

And one of the things that I think we will be increasingly focusing on -- in the years to come and the months to come and the years to come, would be awareness, to create awareness through our network that yes, it does make an impression if you have a protest. And if you're disruptive in response to lack of services or the absence of services, but they're better ways of doing that. Many of these things that form the subject matter of protest action are services that society is entitled to in terms of constitutional guarantees.

And failure on the part of the state of delivering to those is a failure to delivering to a constitutional guarantee, and there's a legal process available in terms of which departments, both local provincial and at national can be held accountable. They can be ported to delivering to those services, and if we fail to do so they can be held in it. And somehow I just think that we're at a point where the likelihood of a positive result of an official getting locked up or content of court is better than just be burning another tire. So that's certainly -- and we're not going to be causing uprising and stuff like that, but we will be -- we've been talking to communities to maybe just make them aware of some of the remedies that are available, that are legal remedies that are enforceable and they are effective in terms of the desired result that we want to achieve.

Looking on to the next slide. This is the community to support aspect. Now here, too, just on the longer story line of sustainable development and overlapping value. So it's not always easy to motivate the capital spend in terms of corporate social investment and on existing communities to empower themselves. It's not always easy to motivate those in terms of brands and central to motivate commercially. But what we are finding is that the networks that are being established through these initiatives are increasingly becoming part of the consultancy platform or the consulting platform rather that is required on so many levels when it comes to regulatory compliance.

So you apply for a license, whether it's a water usage license or whether it's an environmental authorization. Many of these things or most of these things have an element of community consultation that's required as part of the process. And we believe that this was value and we're actually witnessing that now there's vice value being recognized through this network. And this is increasing the facilitating consultation. And I know I have one about this, but this is once again an instance where there's multiple integrated value delivery and the notion of sustainable development. And was in terms of social investment that's now been eight, nine, 10 years in the making. We're finding that there's another level of value that's been delivered in this regard.

And the same agency that's been conducting many of these initiatives on our behalf they broadened their service delivery -- proposal service delivery ability to also include the type of consultation that's required for regulatory approvals and so forth. So we'll continue with those and approach remains the first step out of property, property deviation, to a knowledge and a match very keen focus still on youth education, math, science and accountancy and we're starting to actually see some of those candidates finding the way to our bursary scheme and also into employment with our company that we're very pleased about and very thankful for.

But those will continue, and hopefully, we can broaden them in terms of some of the material that's been created over the last few years, the circled five pillars of sustainable development within a community. Some of those on that finding its way, we see into our social and labor plans and really excited about the impact that we've had just gauging by what we've seen just out of a very modest program otherwise.

So moving on to the next slide. This is on the excellence in reporting. There is something I wanted to say about tailings management. Just want to make sure that I'm still on the right track here. Somehow seem to tick over that. So that is in the latter in terms of some of the governance steps that you've taken there and how that's being dealt with. But moving on to excellence in integrated reporting, we're very proud of the delivery of this particular team and also proud of the rest of our colleagues in providing the material that we can report on that is sort of quality that supports recognition of this kind. And this is a lot of effort, a big part of this is from announced resources. So we want to congratulate our team. And also, we want to congratulate our service provider in this regard for assisting and guiding also delivering to us very, very good result.

So moving on to the last slide, which is, looking at this slide. In terms of guidance, we are seeing a nice reversal of trend in terms of volume throughput. So we are in a position to be slightly more ambitious in terms of our production guidance for the year. And then also you'll see the cash operating cost guidance of ZAR770,000 per kilo. It is up from last year, but you are looking at a slightly more complex circuit at Far West Gold. And then, of course, pleased with the normal cost pressures as well. We do have our [indiscernible] in the controller. And hopefully, we'll be able to match the previous year's performance in terms of guidance in so far as costs are concerned. And hopefully, also in terms of production, we did land in terms of production for the current year, we sort of landed in the midrange of guidance.

We're expecting to spend about ZAR3.5 billion on capital in a number so that this is still a number that catches the eye considering where we were a few years ago and what we're tackling now and just the relative ability to actually venture into these things. And I'll spend a bit of time maybe just talking about the environment into which we're investing this. Now a very large chunk of this ZAR3.5 billion will go into the solar plant. And just on some of the conversations that we've had we've been having in that regard.

We believe that this is a very sound investment to make because it's clearly speaking, it's not just mining investment. So it's not dependent solely on what happens in mining, what happens in the gold price. This is something for which there is a very significant national requirement. And we happen to be very well positioned geographically also in terms of the national grid. So we are delivering power into the grid is not a challenge to us at all having gone through the regulatory process a certain scopes to actually do that. So this is probably something that you're not going to be stuck with. So we will be taking a bit of funding in that regard, and then Riaan can elaborate a bit if required to. But we think that it's a solid responsible investment in current circumstances to be investing in solar power to the extent that we have.

The second part is we are -- we're determined to mine as much of our resource as we possibly can. And we've been talking about blend and sequencing some for retreatment at now for a long, long time. In the Johannesburg area, we treated more than 138 [indiscernible] over the life of this company, cleaning up an excess of 2,000 hectares. So a big part of that is now more recently land that we ourselves own. So sustainable land use and how that can contribute also to quality of life into Johannesburg. I think those are going to become topics of conversation going forward. It's a very large area that well, ERP in the brand area, that's my final phase and will be cleaned up over the next year or so.

And then these are areas that are very near or very close to where people actually work. So hopefully, where the areas where development is taking place, where those have been moving further and further away from the economic hub of the Johannesburg and surrounding areas by opening up these areas, that will reverse. We're encouraging other land owners where we cleaned up land and we're in a position to hand them over to do just that, to make that contribution to reduce the duration of the compete and to vested into something that can bring quality to the lives of the communities who up until recently live next to a tailings another living next to an area which has been cleaned to a very, very high specification and that can now be used for something different.

And we're hoping to see that. We're hoping that those areas once they handed over, don't become reduced upsides or informal settlements but they are being put to us that we can actually even of sustainable lands. But that's been part of what's been driving us, cleaning up these areas, making them available and contributing towards a different kind of society in Johannesburg placed as more space closer to where people work. And that is dependent on one very important ongoing qualification and that is to make sure that we have a good deposition space.

So when you look at the money that's being spent at Far West Gold, the ZAR800 million, a big part of that tailings dam and in the not-too-distant future, amount not quite as high, but a similar amount will be spent at ERGO in order to also expand the size and capacity of the [indiscernible] tailings capacity so that we can deliver into this site deal. We're not going to be running out of resources anytime soon. But we do have to manage tailings deposition quite carefully, and we do spend time collaborating on that in the letter to shareholders on the design, challenges and the regulatory process and how we just aligning ourselves closer to what we believe the contemporary thinking on that, what that involves.

So in summary, ZAR3.5 billion for the next year, a big part of which is going into solar and a big part of which is going into long-term sustainability by creating the position facility. Of course, in the Far West Land that drive the pace to drive of the West Land operations that involves this lifting a whole range a whole cluster of tailings from areas where at the moment, they still built over environmentally sensitive areas and pose a risk to underground water. And the big part of the environmental authorization associated with the Far West bill operations. A big part of the motivation involves the removal of those sailings from two areas where they’re no longer pose that risk. So there's a societal aspect. There's an environmental aspect. And most part of it is that in doing it, we can contribute to the economy and provide to delivering to the integrated deals in South Africa.

Now a question obviously been, that one has to ask when looking at these sorts of numbers is, are you investing in the sort of environment where it's responsible to invest this kind of money. And we switch on television and maybe you would wonder -- you read the Fraser Institute report and maybe you would wonder, if you look at where capital is going, and a lot of it is going away from South Africa, not much or less is coming into South Africa. So one has to reflect on these things carefully before you commit your shareholders running into that. And we believe that there is, it is responsible to invest in South Africa. We do believe that South Africa doesn't stand or fall based on the quality of political governance in the country. There's a private sector and there's a society, which when they join forces become unstoppable and can really turn things around. So increasingly, in order to assess whether or not there is responsible.

One looks not so much at the kind of challenges that we face, but you also look at what has been the response or what is the response to those challenges. And the responses to some of those challenges, in fact, I believe, have been remarkable. What we are seeing, well, firstly, what we are seeing is that the face of political leadership is systematically changing. We're seeing a different kind of leader, emerging younger dynamic with lots of energy, paid firm values, at the moment, maybe still more at proven local and provincial level. But increasingly, I think we'll start seeing those phases and those profiles finding their way into the national leadership as well.

People who are externally focused, a genuinely wanting to deliver into the well-being of their constituency. So that certainly is changing. It is going to take a while before it changes completely. But we are seeing very positive first indications of a changing face of political leadership. I think the second thing which is really encouraging is that it seems the private capital has found its voice.

We're seeing less in the way of nuanced attaints (ph) on the product business leaders for more direct communication and more very prominent leaders are becoming involved in initiatives that can contribute towards some of the very pricing challenges that we are faced with, like prime, like logistics and so forth. Very recognizable names, very influential people who have come on to reverse capital, and that can activate the capital over which they have concerning ship activate that quite quickly and bring about positive change.

I think something which is also very encouraging is the way that we are seeing private capital being mobilized with that towards -- that which is strategically important. I read a very interesting article just this morning, suggesting that the amount of energy that's being generated from rooftop solar panels, that’s now reached 4.4 gigawatts. It's 2 phases of low ceding. And it's jumped almost doubled in the last year. So the private sector come to realize that sitting around and waiting is not going to be the solution. We've got a jump in, and they're jumping at a rate that I think is catching us by surprise.

So 4.4 gigawatts of electricity already being generated. That's not the conduct or the behavior of somebody who's given up on the country. So we're seeing capital at work. We've seen on again people at work, we're seeing a different kind of energy. People are not waiting for government to step in and fix it for them, but communities doing it for themselves. So the same sort of resilience that we've been working hard at as a company to establish to overcome some of the challenges that we're facing. We are undoubtedly seeing that becoming a feature also of our society, more and more pockets of society while behaving in this way. And South African people becoming an increasingly resilient people.

So yes, what has happened in the recent past in terms of how we position ourselves. We position ourselves favorably in terms of water. We've positioned ourselves favorably in terms of security and we're positioning ourselves favorably in terms of -- we're not allowed much larger sections of society are doing the same thing, either getting involved. We're doing it for themselves. So we do believe that this is many [indiscernible] spending and looking towards future for South Africa.

Yes, I think that's pretty much it, Riaan. I don't know if you want to add to that. I don't know, Jaco, if you want to jump in, but I think that's what we wanted to share for purposes of this presentation. There are -- I just want to check. Anything else, guys? Or can we go to the questions.

Jaco Schoeman

Thank you.

Question-and-Answer Session

A - Niel Pretorius

Okay. Wonderful. Thank you very much. So I just wanted to ask the master of ceremonies, can I move on to the question for lack of a better description. So we seem to be -- Okay, good stuff. So we can move on to that. So [indiscernible] from Nedbank once a breakdown of the 3.5%. I don't I think I sort of cover that in the looking forward in terms of the solar and the large part also in terms of tailings. And then, of course, there's element of sustaining CapEx as well, Riaan, I don't know if you want to elaborate on that?

Riaan Davel

No, that's right, Niel. So the majority of it, as you said, towards the solar project at Ergo, then different than to what is if expansion is the ZAR800 million, and roughly that difference, as I alluded to around ZAR500 million to the sustaining CapEx for both operations. And again, it sounds quite a number and it will be a challenge to spend all of that. But again, for something like the battery I think a lot of that is happening as we speak and we're confident that we will be able to execute that. Jaco, I don't know if you want to add any comments to that.

Jaco Schoeman

Riaan, you are 100% correct. Do you hear me? So the -- as you said, the majority of that is on base and Phase 2 of Far West and in some reclamation sites at Ergo. There will possibly be some capital from the solar and batteries running over into the next year, but that's a normal cash flow.

Niel Pretorius

Riaan, and then do you want to have a little bit of the next question from Alexander, the contribution towards decommissioning liabilities that come down? What informs its reduction and what future contributions can we expect on average, please?

Riaan Davel

Yeah. Thanks, Niel. Thanks, Alexander, for the question. So yes, you note well. Maybe just some of the points that were also elaborate on in our results, booklet, and for example, on Far West, we only spent -- we only vegetated five week days [indiscernible]. But in this year, that positive maximum available CapEx that we could vegetated. So it's still a relative good achievement. At Ergo, for Bracknell storage facility. Yes. So we experienced by long wet season. There was some rain damage scores, which avoided us to vegetate the tailings and to the extent that we would have liked. And there's also some community disruptions sadly that hindered our vegetation program on the [indiscernible] complex.

But to give you an indication now, so that's not the level that we would like to spend at. And we've again committed to up that to at least between ZAR30 million and ZAR40 million for this year and hope to achieve, and we'll continue to do that. So specifically on our tailing stands to keep on with the concurrent vegetation program. Hopefully, that gives you a sense of what we want to do. Unfortunately, it's not always possible for us to keep that up in the way that we would like, but we'll definitely continue to do that.

Niel Pretorius

Thanks, Riaan. [Indiscernible] has a question about [indiscernible]. I'll deal with that question. But before maybe that's a bold strategic issue. Before I do that, there is still a question on some of the numbers Riaan, which I'm also going to deflect to you. And that is Nick Hoskin, asking the discussion around the [indiscernible] and reflecting that it's positive and optimistic and an early build up. To ask you question about the expected Phase 1 build and also the NPV improvements on the project. I'm not quite sure the extent to which we can delve into the specifics, but we're in a position to give an indication on sort of the range I suppose the one thing before you go into that.

The one thing that we should maybe just point out is the fact that the regional trading facility, the design that we've now submitted, which is an amendment will enable us to perceive tailings in addition to our own resource. So once we've depleted our entire owned resource, there will still be an efficient space on the standing stand to receive very significant quantities of material to from surrounding mine. So everyone in that area as a trading stand on [indiscernible] and who wants to remove it, or is going to take in to remove that because of the impact that the infrastructure is having on underground water, there will be an opportunity to do that.

And I think a good way of describing that would be a sustainable solution, environmental site as solution, but also a collaboration or consolidation of sorts. So we're setting it up for the next generation of operators to bring about an enduring and effective solution environment that and that is a purely on the capacity that we're creating in terms of the tailings not going to be all in one go. And this thing is going to be built the curve over six or seven years if I'm not mistaken. You can correct me if I'm wrong. But once it's there, the footprint is there. That it does provide a very significant opportunity to bring about a wholesale cleanup of the 12 weeks, right? So Riaan, if you want to maybe reflect on what Nick (ph) is asking there?

Riaan Davel

Yeah. So specifically I agree, Nick, it is very exciting around the route that you also alluded in the letter to shareholders and yield around that are really taking for the [indiscernible]. So we're not pursuing the interim solution that we indicated last year, but going for that build of the [indiscernible]. And as we indicated, that has always been our objective from a Far West trend consolidation point of view. So we're planning for much more resources than what we currently own, but we know those resources in that area. So -- and a lot of work has gone into that design. I know over the last year, and we're very optimistic about the next steps.

And then, yes, you will maybe on the detail of that. As everyone knows, this is our just condensed financials that we give out. So no reserve changes that we are anticipating. But more detail, obviously, spelt out in our integrated report and other reporting that we do towards the end of October around the 20-F filling and its related documents. But we're very enthusiastic about this Far West project, which is hopefully coming to fruition. And I'll maybe ask Jaco to add anything to that.

Jaco Schoeman

No, Riaan, I think you've covered it well.

Niel Pretorius

Thanks, Riaan. And then [indiscernible] question on guidance. So his comment is that the guide for higher production, but the mid guidance ranges around this year's gold production, does this mean you guide for an [indiscernible] gold production. I think if we do hit midrange, then yes, it's in essence, we are guiding the same. But I think we're guiding within a tighter range because of -- hopefully, we passed this what I referred to as an interim phase or a changeover year with some of the higher volume sites now coming on stream. So effect which we're assuming and that which we're anticipating and that which we're factoring into our planning for the time being, if that were to play out, been hopefully in the range. The volume range will be tighter than last year, we'll get closer to that.

And of course, if we sort of hit the higher end of at range and if we can maintain plant efficiencies. And hopefully, we will do better than mid guidance, we do not guiding in order to hit the mid-range we are guiding hopefully to meet to test the higher range of guidance. But yes, I think it's a valid comment. So it’s tighter range and hopefully less uncertainty based on current assumptions in terms of volume throughput. And then with higher CapEx, the interest income will be less and with higher cash operating costs unchanged production does this mean that net income will be negatively affected by the higher CapEx. Yes, I'm pretty sure that we'll see less in net cash flow.

And then the 20-megawatt solar plant will be online during next year, how come we do not see positive effects on the cash operating cost. We're sort of talking about that internally, but I think we want to see exactly just what the actual reduction is going to be. And then we might want to factor that into the guidance as well. But the guidance that you're seeing, you're absolutely right, does not take into account the potential flow-through of benefits from the silo in terms of power costs. I'm correct in saying that.

Riaan Davel

That's right, Niel. And maybe I can -- you alluded to it. So that's something, although we're executing it flat out the solar and battery project at Ergo. We are busy fine-tuning, let's say, the structuring. And we have many possibilities there because under our control to optimally structure for, as you mentioned, we are to make sure that we do not only benefit Ergo, but also because it's not only an asset that will contribute to Ergo. That's why we planned it, but there's also other possibilities. And we're setting that up to ultimately with the capital that we're spending. And clearly, it's clear from our cash balance now, what we're spending, what will generate that it is that time towards the end of the financial year that we need refinancing in place for that solar project.

I mean, it's ideally suited, it's a wonderful project, and we're doing it almost the other way around. We'll take cash, building it and then refinancing the best terms possible. And those benefits and what you are asking will then optimize around how do we account and how do we allocate to show the benefit in Ergo, by Far West definitely for the group and then very precisely say how we measure that. So that's an exciting development. But like I say, the most important bit is to run build it, and we know it -- we're busy doing that and then to update the market as and when we've progressed on that funding solution. But ultimately, we're aiming for that to be in place nothing later at the end of our financial year 2024.

Niel Pretorius

Thank you, Riaan. I think that also deals with question that’s next asked [indiscernible] on the solar project and how we'll see that in the numbers also in terms of its sort of let's call it, stand-alone valuation. We have a few questions from the floor from Bruce Williamson. Before I take Bruce’s question, I just want to answer [indiscernible] question, which was, do you still see any value in being listed on the JSE and the answer to it is, we do and the reason why we do a significant or register then we're certainly seeing some names popping up in the register, which we find encouraging local names, local funds, some money that's finding its way into the register, which we've been hoping to happen.

And that is finally starting to happen. We don't consider it to be particularly onerous, and we don't consider. We don't see any downside in the invested [indiscernible]. So yes, we didn't see that as a benefit. Remembering also that we are the oldest [indiscernible] Johannesburg that's still in business. Many there's been a tradition there as well, but we are looking at the value proposition.

So please, Bruce Williamson, rise his hand up. Happy to take your question, please.

Unidentified Participant

Yes, Niel. Hi, good day and good day to Riaan and Jaco. Thanks very much for the update. It's been great. Also your closing remarks on the interaction between this additional private expenditure and some pretty positive outcomes with society, and that's great to hear. Can you maybe just tell us whether that is spot over and that the security side of things has improved. And then secondly, could you sort of look a little bit further out and say, let's say, over the next five years, your confidence in continuing to convert resources to reserves and possibly just a wild guess of how much more CapEx would you spend over five years on infrastructure, tailings storage, et cetera. And then finally, third one is any progress on the PGM recycling opportunities?

Niel Pretorius

So I'll deal with the first one. Let me deal with the second question first on the wild guess of CapEx going forward. Since we've been required to file a technical summary report for the SEC will no longer take qual cases. We're very careful about what we put in there and this is also to a question that [indiscernible] asking of a contradiction between the SK-39 production cost guidance on this guidance and as to explain the reason for that. In as much as we do qualify the numbers that we published, and we do list the assumptions on which we rely and we try to be thorough in using the contingencies associated with that. Then we reassess them from time to time. I think as much as those assumptions have changed, we apply them.

And hopefully, it's not seen as a contradiction because of an oversight or is there anything that we got wrong, it will be seen as a number that's been adjusted because the assumption on which it was based, which at the time was a responsible assumption at some of those assumptions of chat. To give these forecasts in the sort of environment that we're in and where the volatilities and contingencies associated with that environment. There are a lot of things over which we do have control, but then there are also a whole lot of things which you do not have control.

And you need to take a view on the things over which you have not controlled. But in fact, you've got to take a view on both. And sometimes, you don't get it right. And if you don't get right, you've got the same way. You've got to explain why and then explain what the basis is for whatever the newer [indiscernible] assumption is. And I foresee -- and this is based on my experience in the last and how many years, it looking at life of mine plans year after year after year, looking at the sequence at which we want to bring certain resources in and others that you will see an adjustment on these numbers every year. And sometimes, they will be material to the point where you actually have to file an amendment and sometimes they will not be material. But there's zero chance that you will get your life of mine plan 100% correct going forward. There are just too many moving parts. And that's part of the industry.

I think we do explain that very, very clearly, both in our 20-F filing and also in end of the second quarter summary report. And that's the nature of mining. That's the nature of investing in this industry. The other industries that are less volatile like fixed income, this is not fixed income. We have -- we filed a 20-F I don't know how many pages and a very large portion of the stages deal with contingencies, risks and so forth to read those. And I think that will then also give a perspective as to why from time-to-time you will see changes. We do our best forecasting. So we do our best to interpret them and to form a view. But it does not make signs -- sorry, the other question that you asked, and I'll come back to the other question that the impact of the investment in society on crime and crime patents and climate tendencies.

So the societies where we operate to a large extent, they're not the criminals. They suffer at the hands of the same criminals that pose a threat to our operations. Whilst you must have community protests from time to time, while you might have angry community members from time to time demanding to be accommodated in employment and that sort of thing. Those aren't -- that's not crime. Crime is the group of people are showing up with heavily on group of people cutting through your cables, cable network or hijacking your vehicle or shooting a security guard on their way to a theft. But that's crime. And no degree of investment into society that's going to alleviate that. That's where the authorities to step up and spin and start dealing with it.

And we're hoping the initiative that's now been launched between the private sector and the present will start bearing fruit because these are behaviors that need to be categorized as special crops. And we are canvassing for a regime in terms of which they are dealt with in a very particular way procedurally. So without violating the principles of our constitution, it's becoming apparent that. The criminal support these clients need to be removed from society for an extended period of time. And then not be allowed to find their way back into these domains where they perpetrate these crimes.

There are certain areas where there's been a loss of sovereign team where hotels and I'm talking about illegal mining, in particular, where it's simply to dangerous we're pleased to go there, considering their current resources and the current capacity and training that they have at their disposal. That needs to be restored. So -- and that is a problem that all of South Africa's face, but the communities where we operate, they're really at the short end of this neglect, to maintain law and order and to the cost of them. So there's just a whole host of factors that combine to make life in those areas quite tough.

We're trying obviously to do our part in enabling these communities to self-mobilize and to become self-sustainable. But an intervention is required, we can certainly no longer have these game people ripping apart our infrastructure stealing electricity infrastructure, mining below the streets of Johannesburg maybe even potentially contributing to a street getting blown up and at the same time, also mining illegally in areas and having shutouts and bringing terror to the communities where they operate. That is something that requires a national response.

We've got means to protect ourselves we been serious about that, where they go, how they get exported, et cetera, et cetera, we make use of technology through a private company, and I do not believe in private arms, there are private armies in South Africa, some of our stock were held up by one of them not too long ago when they were violating a taxi road they were pulled out of their cars. By people yielding AK-47. So very disappointing the police didn't do anything about it and repeat prosecute them because maybe too. They are being held ransom by this. So that's what a private army does. That's what it could turn into a -- the private sector has no business having private armies. The government police and the armies to step up in that regard. And sorry, Bruce, I didn't just repeat your last question, the third one, if you don’t mind.

Unidentified Participant

It was on the possibility of the PGM tailings project.

Niel Pretorius

Yes. So it's been a project that we've been involved in as, let's call it, almost in a consultancy capacity in providing and collaborating in defining what could potentially become a project and the plans have been finalized. And I think what we're waiting for now is to see whether we could sort of transition from being a so-called consultant into being an operator. But that is -- remember, it's a binders asset. It is [indiscernible] choice as to whether or not they want one of their subsidiaries to operate that or whether they want to do that in us. We remain keen, and we think that we can make that contribution. But it's a decision that will be made on the basis of where the best value contribution is.

And obviously, we have a responsibility to all of our shareholders, so we need to make sure that whatever structure is decided upon is for the benefit of all of our shareholders. But the opportunity is certainly there, and we're certainly keen to be part of that, but it's going to be -- it's a decision that's going to be taken at a different level. But I have to say that, which is very important to present. And I think this is something that we only appreciated the deeper we got into this study is that this particular the layout is very complex, and it is extensively integrated in existing operations. But they're also -- it's a very complex legal structure, they're minorities that own different parts of the whole -- it's what the PGM footprint. I remember that entire footprint that Frasenburg footprint is made up of several companies that have been acquired over time, they were acquired over time, and they have different empowerment structures, et cetera, et cetera.

And then the one thing that I never do, but that's become I find confusing but also that it's been explained to me is that, it would seem that different entities have conflicting or competing interests in different parts of the basket of minerals that come out of what we refer to as a PGM resource. And then that also needs to be thought about. So it's not easy to sort of just wondering you don't just open a plant and say, hey, I'm [indiscernible]. It's a little bit more complicated than that. Having said that though, it's an exciting project. It's got exciting prospects. So it's certainly doable, and we dead keen to be part of that, if given a chance given half the chance.

Unidentified Participant

Thanks very much, Niel. Thank you.

Niel Pretorius

I think that covers it. I don't see any more hands. And I think we question...

Jaco Schoeman

There was one earlier question by Alexander Dave. Asking about total water, if you're comfortable, can I answer that?

Niel Pretorius

Yes, please do that. Sorry, I saw one question by Alexander I didn't see the second, thank you Jaco for pointing that out. You can please go ahead.

Jaco Schoeman

So just on optimization of the portable water, we specifically look at optimizing the usage and reusing of our water from the tailings dam by investing in infrastructure and distribution and collection infrastructure, making sure that we take the water back to the mining sites. Secondly, we utilize additional water from TCTA treated asset in drainage. And then the third source is dams that were created to cumulate rainwater. We also utilize that in the circuit. And only once all of that has been depleted, do we actually look at the potable water circuit itself. So that's the way that we reduce the amount of water intake portable take into the operation.

Second section of your question was just around the radio activity, all of the resources that we are currently treating are below the exposure limits. So that's not a problem for us. And then as mentioned, the third section -- the third question you had is on grade. How do we intend to maintain a Far West operations. We've moved over from Driefontein 5 tailing dam to Driefontein 3 tailings dams. Both tailings dams have got very similar head grades. But Driefontein 3 being a much larger resource than Driefontein 5. Going forward, as part of Phase 2, we will obviously look at bringing in additional resources, as Niel said, and that will look at -- those resources will be at lower grades. But for obvious reasons been, higher tonnages and therefore, unit costs also comes down. So I hope I've answered that question now.

Niel Pretorius

Thanks, Jaco.

Riaan Davel

All right, I think that covers it. I don't see anything else. So I think we can call it a day. Thank you very much, everyone, for listening in, and we'll obviously update as we go along from time to time and thank you for dialing in. We appreciate it.

Jaco Schoeman

Thanks, everyone.

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DRDGOLD Limited (DRD) Q4 2022 Earnings Call Transcript