DRD - DRDGOLD Limited's (DRD) CEO Niël Pretorius on Q2 2022 Results - Earnings Call Transcript

DRDGOLD Limited (DRD)

Q2 2022 Earnings Conference Call

August 24, 2022, 4:00 AM ET

Company Participants

Niël Pretorius - Chief Executive Officer

Riaan Davel - Chief Financial Officer

Jaco Schoeman - Chief Operating Officer

Conference Call Participants

Presentation

Niël Pretorius

Good morning, everybody. And thank you very much for joining us for our Results Presentation for the year ended 30th June, 2022. I am Niël Pretorius and joining me is Riaan Davel, who is our Chief Financial Officer; and Jaco Schoeman, who is the Chief Operating Officer.

I would like to provide a little bit of context before we kick off, just in terms of the year. It’s certainly been a year like no other. We are almost at a point where we were the sigh of relief, saying, we made it through another winter.

Just in terms of local context. Beginning of the year was deeply unsettling with some of the riots that we saw in KwaZulu-Natal freaking to spill over into Gauteng. We also saw how vulnerable we were in terms of just logistics into Gauteng from the coast, with the collapse of Transnet and over reliance on ground transportation.

Globally, what we witnessing is more and more uncertainty against the backdrop of the war in Ukraine-Russia, an increase in international tension. We have seen economic uncertainty, inflation going rampant America for the first time in decades, seeing double-digit inflation and the accompanying increase in interest rates.

Closer to home, we have had weather like we have never seen before, the amount of rain that we experienced, especially in the East. It’s just been different from anything else we have ever experienced in the past and we had our hands full in terms of clean and warty, clean and dirty water separation rather.

Again, we had these blackouts, rolling blackouts, Eskom, really batting under the strength of delivering into the energy requirements of the nation. And then, of course, coming out of COVID impact that it’s had on our economy, hardship experienced in many of the communities where we operate, definitely saw an increase in the, let’s call the, level of anger, the intensity of social discontent, and worryingly, the changes in the patterns of organized crime and violent crime in particular.

We definitely saw that crimes that in the past were simply just theft that now become armed robbery relating to cable theft, et cetera, et cetera. So all of these things were certainly dynamics that, that were new, dynamics that we had to deal with and we had to navigate our way through that.

And worryingly seeing the rise of, let’s call, these crime enclaves, where there’s almost a dilution of, say, sovereignty, where the police are fearing to go in and from where these criminal attacks on mob, so very different approach in terms of security and keeping our staff safe and keeping our assets safe.

So those were some of the things that I think we experienced that informed our thinking, that’s impacting our costs and that we are also having to plan for going forward. And that is the backdrop against which we are also sharing these results with you.

Coming out of that and into the new year, needless to say that we are quite pleased with how the year came panned out for us, in terms of particularly production and you will see some of the cost trends as well.

So getting straight into the highlights for the key features, still a growth in terms of revenue and in terms of production, things were pretty flat and that’s understanding the fact that there was a slight decrease in the gold price.

When we saw changes coming through against the backdrop of what I just described to you for the costs that were up on a number of scores. Now they are the typical dynamics that we deal with on an annual basis that have become predictable around Eskom price increases in electricity and so forth.

But then there were also some dynamics in particular to this particular year, where we relied more on the mechanical movement of material as a consequence of some of the volume throughput challenges that we face and those being related to both the weather, and in certain instances, also, the supply of electricity into areas or units where we rely on municipalities and the local councils, as opposed to Eskom where we just have curtailment correction.

So those impacted on the bottomline and impacted our costs, and as a consequence, you can see that both operating profit, while they are still very healthy at R1.7 billion for the year, and headline earnings, also still quite healthy at R1.1 billion, both of those down by just over 20%.

We still managed to pay our due to make our contribution towards the Fiscus with a very healthy contribution, total contribution of just over R400 million in terms of income tax and pay as you earn, and we are looking forward to seeing the value delivery that we as citizens of this country are entitled to see going forward. We will be pleasantly surprised once that starts happening.

And then of course, this is also the 15th year of paying a dividend and healthy one of that of around 6%. It’s a little downward last year, but a healthy dividend, nonetheless, within the context of what’s been happening in the industry and also globally.

See that women in mining remain virtually unchanged at 23%. It’s an important number for us, one of our key goals that we set in terms of the transformation of our business. Socio-economic spend, which has become very important, even more so against the backdrop of rising discontent, R52.9 million and I will elaborate a little bit more on that during the ESG part.

And then there’s also been a slight increase at one or two of the areas where we measure dust. When we are getting to the bottom of this, we don’t think more or less on our own operations. It might be related to the road infrastructure and also some construction area, but it’s been monitored, it’s been picked up and they have also been looked into.

Those pretty much the years’ performance in a nutshell, getting into a little bit more of the detail in terms of operating trends. You can see the story. Let’s go first to the Ergo operating trends. You could see the story around a volume throughput, especially in the second half of the year and a lot of that the 10.7 million tonnes as opposed to for the comparative period close to 12 million tonnes. A lot of that related to both weather and also some of the electricity interruptions that we had, a lot of materials moved mechanically and that impacted also.

The cost, at least we got the cost and I think that’s where that federal comes in and it’s something that will also encourage the thing dynamically about achieving throughput and the thing dynamically about getting the gold through the plot, because of the very high fixed cost components of our cost profile.

Now, of course, with the stuff that you do with mechanically are sort of the lower regions of recovery sites, it’s flow cleanup mostly and they typically will also find slightly hydrates, so you can see that the yield per tonne was also quite a bit up compared to comparative period last year, bumping against the 0.2 parameter. This is an ongoing process and our focus is not just volume throughput, but also optimizing the value about every single ton and that’s why we are reporting this on a per ton basis.

Production kilos wise, up on the previous half year compared to first half here and relatively flat look at the first half of the year. So, all in all, looking at where Ergo operates, what it had to deal with in terms of just getting the volumes through. The plant was stable and that’s really important.

Operations were well managed, well contained and I think testimony to a lot of the work that’s been done in the past in managing these various contingencies that we have got to deal with, the risk factors that I referred to you earlier in terms of volume throughput, weather, rain and electricity.

Moving on Far West Gold and its operating trends, pretty flat testimony to an operation that does not have as many moving parts, but also that’s being looked at very carefully with a keen eye and that was brought to a level of stability and being maintained at that level. So in terms of volume throughput, you can see very, very flat.

And this is an operation also we are obviously we are not running at full capacity, we are running at the capacity, which, firstly, is required for responsible management of our ore body. And secondly, also the rate at which we can deposit onto our Tailings deposition facility. So it’s all about making sure that we don’t put stress on our Tailings there and hence 3 million tonnes a quarter, overall the half year and maintaining that.

Same in terms of production kilos, slightly higher head grades this year and being able to take advantage of that, by actually getting the gold out, you will remember that this was the first full year that we have had the benefit of the copper producing plan and a part of the year we also have the benefit of the new models and those models will be further upgraded this year to become close circuit to introduce an even better fraction of material into the CIL tanks for better citation and absorption.

In terms of operating trends, again, on a combined basis, you could see the challenges right at the end of the year, gone from 14.4 million tonnes to 13.7 million tonnes, but made up to an extent by slightly higher head grades and an improvement on yield, and then production relatively flat. So out of the four periods that we reporting, our demand reflecting here. See that so first half and the second half were the second and third best of the steady service.

Riaan will take you through the financial review and then he will hand back to me around at the end to just talk a little bit broader about ESG and strategy. Thank you, Riaan.

Riaan Davel

Thank you very much, Niël. Good morning, everyone, from my perspective. Just want to echo from Niël perspective, the intro that he has given and the financial results. In context of many, many challenges, he named a few and he elaborated further in the Letter to Shareholders, which I will encourage everyone to read in our results booklet and also more detail on the financial results.

But as he mentioned, high summer rain fall, load shedding, supply pressures, cost pressures, and again, it’s testimony to operational teams at Ergo and Far west Gold recoveries with notwithstanding all those challenges making sure that the trains come through in our 24 hour a day, seven day a week, 365 day year operation.

So always my privilege then to present the results of a team that look at things on a per second basis and cannot keep, can’t take your eyes off anything. So this is the result of 365 days of hard work and my testimony to the teams that produced this.

So within the context that Niël provided on tons, yield and production, Ergo, has had a very, very stable performance. Again, its resiliency shining through, where maybe a couple of years ago, it faced maybe less challenges with more sporadic achievement. It’s remarkable when I look at these results, the stability that Ergo has our flagship operation producers.

We say that first half of 2021 year was the remarkable six months from a gold production, gold price, almost R1 million per kilogram and it shows throughout, you will see in the presentation, it’s just a remarkable six months. But year-on-year, Ergo’s revenue down by 6%, 3% of that sitting in the average rand gold price received and 3% less in gold sold, but overall stable.

The cash operating cost that we alluded to, again, we can see it there, year-on-year increase in cash operating costs of close to 13%. But, again, in the operating profit, which is the net result of some inventory movements also taken into account very stable and even the second six months with lower tonnes where the yield came through, a very, very solid operating profit performance for Ergo as well.

Going to Far West, again, marvelous performance, as Niël described it as a much simpler operation. But, again, in this year, our two operations and the diversification that, that gives us, again, some through where there were challenges with the DP1 operation, our smelting and maybe we couldn’t use that all the time. Ergo came through, also supporting Far West from a DRDGOLD point of view so that we can keep on eluting our gold and selling it.

And Far West actually showed a year-on-year improvement in gold revenue of 7%, with gold sold up 9%, 8% increase in yield, as Niël mentioned, with the Driefontein 5 Tailing showing high head grades, but at the same time, as a result of that site drawing nearer to its completion.

Cash operating costs, similar cost pressures as at Ergo around key consumables, diesel, cyanide, steel, with a 12% increase year-on-year. But with that good revenue performance and increase in gold sold, the operating profit of Far West up 3% year-on-year. So well-run operation. It was great to also visiting the other day and what’s happening there is really, really exciting for our business.

Then some other Group financial trends that I want to mention. You will see throughout this that marvelous six-month period of very high gold price, Ergo high yield, high gold production throughout the results. But if you look at this year from an operating margin point of view, well managed, although it’s down 20% year-on-year with the gold price down 3% and then cost pressures coming through.

So if you look at 32.6% in the second six months of the year, I believe that costs managed very well and helped by a slightly higher gold price than in the first six months, and obviously, the yield for Ergo and in Far West assisting to have a very stable operating margin overall for the year.

All-in sustaining cost margin, obviously, an impact then where we take cash operating cost, but we add sustaining capital expenditure. This one is always a positive picture, although it has declined. The 16% in the last six months of this financial year is also decimated to more sustaining CapEx. Our sustaining CapEx for the Group is up 41% year-on-year.

And as we indicated to the market, we will not hold back to make sure our business is resilient, we have options and we will keep on investing to make sure that we can mine our ore body for as long as possible. So although the all-in sustaining cost margin is down. It also has a very positive picture that we will keep on investing capital into our business.

Free cash flow number that we are very proud of, obviously, lower than the R1.1 billion that we generated last year, it’s R871.6 million. It’s a number that we closely manage and that we believe is the heartbeat of any business, is the cash that you generate, because you can do a lot with it. As Niël alluded to paying tax and we continue to hope that, that value is seen through the communities and contingencies that supported by government, but also through employees and then, as Niël alluded to it, our final dividend of $0.40 to return, keep on returning capital to shareholders, bringing our total dividend for the year, including our interim of R0.20 that we declared in February to R0.60.

And then headline earnings, again, seeing that more or less six-month period. But specifically, that R72.7 in the last six months is something that we are very proud of on the tough circumstances, and as Niël mentioned, overall, headline earnings this year down 22% year-on-year and very much in line with the decrease in our operating profit for the Group.

Going to the statement of profit or loss, the income statement and just quickly running through the various line items. So revenue down 3% year-on-year, mostly sitting in gold price. Cost of sales overall up 10%, some positive gold in inventory or process movements there, getting our -- getting to our gross profit from operating activities down 27% year-on-year.

Then a line item that I was going to highlight, and again, it’s showing to -- for me to a business well run, also from a governance point of view, most of that R91.3 million in other income is as a result of a business interruption insurance claim that we instituted as a result of business interruption experienced with the odd lockdown from the end of March 2020. So it took a long time to finalize, was a complex claim. But, again, we had that in place and we could go to insurers and through that insurance in place, got a covered plan, which again, as I said, is testimony to our business well run or from a governance point of view, all the right insurances in place.

Organization and other costs from a share-based payment point of view, where we switched to -- from a cash-based payment to an equity settle as part of that move and then increase -- slight increase in short-term incentive benefits, increase in exploration and project costs and also IT costs.

And again, destiny, as we have indicated, the market in our search for opportunities, we will not stop investing in our two operations that we have, but we are looking for other opportunities for growth in various parts and that’s a positive indicator for me as well.

Finance income, stable year-on-year. Finance expense is mostly unwinding of the decommissioning and restoration liabilities. And then income tax, as Niël alluded to, that number, both the result of current and deferred tax. And profit then for the year, again, very similar to the operating profit line down 22%, but still more than R1.1 billion, which we are really proud of.

On the statement of financial position or the balance sheet, and again, for me, this is very pleasant reading and I hope for -- even for non-accountants that will be. Property, plant and equipment, increased CapEx, you can see in that movement assets above $3 billion.

Non-current investments and other assets, the majority of that balance more than $700 million sitting in rehabilitation and other funds, again, we have indicated to the market, if you look at the size of our -- the present value of our rehabilitation liability, that money set aside is at the present value level more than what is required, which is almost a unique position, I believe, in the mining industry and some a position that we are very proud of and that we have built up over many years and a consequence of the fact that we take money to rehabilitate on a concurrent basis and you will see that every year in our results.

We don’t wait for rehabilitation. If there’s a lift on there, for example, at the Brakpan/Withok facility or even at Driefontein plant 4, we do that rehabilitation as it happens. So we don’t wait. Obviously, that reduces any dust exposure. And then there’s also in that line, some other investments at fair value, the biggest one being our investment in Rand Refinery.

Cash and cash equivalents of R2.5 billion will annualize in the cash flow statement. And in other current assets, a slight increase in inventories year-on-year.

Then while it’s a pleasant reading, so equity increases and I know everyone understands that, that normally happens when your assets grow more than your liabilities, which is an excellent position.

Provision for environmental, rehabilitation, and again, very well managed. It’s also a consequence of changes in the life of mine for both Ergo and Far West. Example, for ERGO, we are looking at the possibility and it has been included as a mineral reserve finding Driefontein and that obviously has an impact on the manner of settlement and also on the timing to measure the present value of that liability.

Deferred tax, yes, as we invest in our business, there is the possibility of ways that will generate taxable income in the future, of which we will pay more tax at that increase in deferred tax liability. And then current liability slight increase in trade and other payables year-on-year, so an extremely healthy 4.9% current ratio that we are also maintaining.

And then cash flow statement, just to end off or hand back to Niël, very well managed year-on-year, so close to net cash from operating activities of R1.5 billion, interest received and dividends also from Rand Refinery in that line of R182 million [ph]. And then income tax that Niël mentioned, slightly lower than the prior year, obviously, responding to slightly lower profitability in our business.

And then a number that I want to emphasize that we have talked to now about sustaining and also going forward in growth capital. So the R584.1 million that we expend, it increased 48% year-on-year and we came close to the R600 million that we guide the market and we are proud to manage a number of projects and that will continue for our business in the foreseeable future and that’s very exciting.

And then the dividend that you see there, the R513 million is obviously last year’s final dividend. So the 2021 final dividend of R0.30 and the interim dividend in February declared that we paid in March of R0.20. So the total that’s the R513 million outflow.

And then year-on-year, in a marvelous position, a 16% increase in cash and cash equivalents, which again puts our business on a one -- in a one-off position to continue on the sustaining CapEx and growth CapEx phase and also keep on looking for other opportunities to increase the growth in our business.

On that, I am going to hand over back to Niël for business updates.

Niël Pretorius

Thanks, Riaan. So let me just move on to the next slide. We talk a little bit broadly, more broadly about our ESG and strategy going forward. All right, there we go. That’s, obviously, share price performance. Share price pretty much trended the industry down quite a lot from where we were a year ago, and then, perhaps, in anticipation of an economic recovery and a lowering of the gold price, whether that’s going to happen. It’s anybody’s guess. But we do seem to offer an interesting buying opportunity at this moment in terms of share price performance right.

All right, then moving on to ESG, the theme of the day. So what is ESG? ESG is a measure of sustainable development and those of you have been following our story over the last decade or so, would know that sustainable development is deeply embedded in our strategic thinking.

Nothing we do will last considering the impact that what we intend doing as on the different capital stocks that make up the composite of sustainable development. And as a consequence, the story that we have to tell is one based on ex fact [ph]. And one which I believe is different in the sense that it presents a story or a picture of integrated value. And all that means really is that value on the one also contributes to value in the other. It is not independent.

These are things that run in silos or in isolated within a sort of an isolated band. What we do environmentally impacts on the financial bottomline and what we do in terms of our operating performance impacts environment.

I am quite sure whether this slide is 100% showing what it should be showing, but I am sure it will pick up as we go on. But let me reflect very briefly on some of the parameters here. So a decrease in externally sourced potable water. It’s one of our key risks that we identified a number of years ago and both from an operational perspective, as well as an environmental perspective, we are committed to reducing potable water usage by at least 10% every year.

And we have consistently done so on an aggregate -- on aggregate we have done so over that period. It’s a target that been very solid. So I think last year increased marginally with the addition of Secretary in [inaudible], if I am not mistaken. But it’s also hold the basis of an integrated close to certainty of water that stays in circuit at Ergo.

All the water that we introduced into that circuit, most of it from greywater resources to obtain or retained in the circuit itself and the only water that leaves that circuit is through evaporation that gets used over and over and over here.

The rehabilitation spend is also something that I think is deeply embedded in our spending profile. And as a consequence of that, a lot of the work that we have done, particularly, from the planning and vegetation of our Tailings staff is nearing the tail end. So whereas 10 years ago, 12 years ago, we drove from Rustenburg to the South Johannesburg through the trial complex and it was a windy day to become a dust. It look very good, you would be watching your curtains once, twice three times a month, those base is something in the past.

All intention purpose, the dust on those facilities being contacted and the same applies to all of the other Tailings sands that we have. And I really encourage I invite you in fact, we don’t have a look at the state that our permanent tailing storage facilities are in and compare that to some of the others that you may find in the industry, just in terms of planning and vegetation. I believe that this has truly become work that establishes a benchmark of what good governance environmentally speaking, is all about, comes to the management of Tailings, not coincidental.

We see what the numbers are there in terms of additional vegetation, and as I said, we are now nearing the tailing in the vegetation, most of the slopes that are in the teeth of the wind that being planted, have been vegetated and hence you see the very significant production in visible dust, fell dust in those areas where those dams are situated.

Now just in terms of Tailings management, it become the topic of the day and one of the things that we think we can offer as an additional service beyond the boundaries of our own business is a complete tailings management solution, combined with concurrent rehabilitation.

So apply some capital and the remaining revenue generating capacity of your waste, of your mine rates, apply then -- combined and applied towards closure and also responsible containment of your environmental footprint.

But in order to do that, you obviously need to be aligned with contemporary thinking in terms of standards of management, quality of management of tailings sands, because that’s where our skill set lies. We run some of the largest upstream tailings sands in the industry, not just locally, but I suppose also, I would imagine also internationally.

And although there’s a big move away from upstream deposition where the one bench is on top of the next, that sort of moves inward towards the top as opposed to cockpit, although the sentiment at the moment is away from there, the reality is that there are many of those out there and they need to be managed responsibly, they need to be managed safely and in a way that limits their impact on the environment.

And that’s where we were earning our skills and that’s where our focus with any lives in becoming the benchmark in the industry on that, maintaining the highest standards. Not necessarily 100% aligned with some of the generic curves that we have seen at the moment, but without a doubt, achieving the outcomes that are being envisaged in those curves.

You just need -- read the bottom where I am pointing at my screen here and you can’t see them, but if you read the bottom part here, I hope you can see my cursor, of the stuff that’s happening there in terms of tailings management, then this is governance of a very good nature, of a very high standard.

The independent as performance management system that we have with international authorities, independent international authorities have seats on their panel and they hold up Ammirato [ph] to what we do and then point out the things that they believe we would to be doing in order to get closer and closer to the status that we are trying to achieve.

What I can tell some of those standards, for example, Freeborn, which is an important one. The one that if you neglect it brings you closest to overtopping failure of Italian sale, the way ahead of what the international standard is, even in terms of our and in terms of the annual stacks that it might be apply. But this is being monitored independently and there’s a direct line from this into the board. So there’s no sugar cutting of information. What they see is what the Board sees.

One that I am particularly excited about, because I do believe that technology plays such an important role in managing an industry that is this complex and of at this scale and that is the use of InSAR imagery. This is a satellite inventory that really picks up the slightest movement in just the shape, high, width, of tailings facility. So if there’s any movement of a sidewall then this gets specter and its brought to your attention. Then you know that there’s something happening on the tailings dam that you need to be aware of.

And more often than not, it would be involving panic service to be related to the management support and then we support go and surveillance as well to make sure that all of our facilities are working, all the drains are draining, but you don’t have wash out that you don’t have a wet holes appearing that could compromise the safety of that dam. So something that we take a very, very close look at and try to maintain high levels of diligence and good governance.

Then in terms of the environmental value add, environmental dividends, all about containment in terms of our tailings stands and respiration and reversal of the impact of mining on the landscape, on the environment in terms of the retreatment, so the sites that we, excuse me, of the sites that we retreat are retreated back to a point where they can either be applied for sustainable use or we are resorting nature.

Many of the old tailing dams around the Johannesburg are built in the lying areas where spoiled tension flat areas or environmentally sensitive areas. So from a biodiversity perspective and from a restoration of Rand perspective, these are important considerations.

So just looking at the performance for the year, new hectares vegetated 58, we are the biggest, with the minerals that we had, obviously, we had some damage of vegetation as well, some of the bans and about another 25, maybe 30 hectares of damaged areas will also be detected during the course of the year. So closer to 80, if you add those two number.

You see what electricity consumption was slightly down. So we use what we can get us, but not really. There were some units that weren’t running for certain parts of the year. But that’s, of course, going to change quite a lot over the next year. The next three years, in fact, the near terms 20 megawatts, so the power coming in, some way we use power is going to change, when we use power for grid, because part of this process in the first year involves installation of power storage units, where we will be storing power during peak, during off-peak hours and drawing power during peak hours. And so a lot of the financial model that basically pays for itself and to use it only for that at the current pricing profile of the utilities company of Eskom. But that’s an important one that we are looking out for and more than half the carbon footprint, carbon emissions.

So moving on to the next one. Our special involvement just under R53 million spent on social-economic development. Here too, focuses on sustainable development -- sustainable development that certainly exist. What we really want to achieve here, it’s not just something that contributes towards the quality of life of our communities while we are around them, but that outlives our involvement.

So a little bit more about that and two slides away from this one, I will talk a little bit more about that. Importantly, also the terms of social performance, the well being -- stop the working environment that is both emotionally and physically safe. However, they can focus on gender-based violence, on creating awareness on addressing behaviors and attitudes that lead to gender-based violence.

It’s something that the entire group, I believe -- is excited about, and we are getting really good cooperation in that regard putting that out also in tufts around communities. And then also -- employee support, coming out of COVID with a financial pressures with the isolation, et cetera, et cetera. There are so many pressures there in guarding people, the safety -- security situation, the commute, getting back into sort of the normal swing of things in terms of commute and just how these customers escalating.

What we are seeing is that staff under pressure and staff support in that regard, providing a facility that they can do that. It’s actually playing an important role. And many of our staff members are making use of this. It’s not stigmatized it’s in fact encouraged a lot of people actually do that.

So the next slide is slightly off the topic of social capital and into the governance aspect. So there is codes and standards that we aspire to, and against which we measure our performance with reference to governance and with reference to sustainable development, reporting. We believe that our programs are aligned with these and that we have a, training closer to the -- responsible, accountable compact assessment, contribution in the long-term sustainability.

It’s part of the narratives, it’s part of our business language that we have found out that we developed over the last decade or so. So back to the social investment aspect, and community support, I made mention of just the -- deeply unsettling events of July of last year, when we saw rioting, destruction of property, believe the impact on the economy was close to R55 million.

We have always believed that it’s impossible to conduct business successfully in a state of anarchy, believing that you could be an island of stability and an ocean of instability is folly. And as a consequence, there’s always been a keen focus in our operation and our business, on social stability and on the social well being of our surrounding communities.

What we have intentionally steered and cleared off was creating platforms for self aggrandizement, political self aggrandizement, and empowering individuals and communities, we have really gone to community members themselves, grass-root level, people who genuinely want to change their lives for the better.

And all they need is just a bit of a nudge, bit of knowledge and an enabling environment. And what we have seen here several years down the line, for more than 8,000 rather direct participants in our email program, the merits of this, programs really caught on.

And we saw that again in the fall -- in the recent past, when there was an interruption in income for many of those communities, that suddenly there was a surge also in the number of individuals taking up this BBL program.

So this is not a hydroponic scheme flapping in the wind, after four or five years, people showing and thinking that they can give up the job, this is an opportunity to create your own future to maybe write your own script.

And it’s been -- it’s been taken up a number of notches, not everybody wants to be involved in vegetable farming. So -- MyFuture initiative, which is more about life skills, about preparing you for life, making the right decisions, when you are confronted with crossroads, et cetera, et cetera.

Those are -- just one level up two, three levels up, on equipping individuals for a life outside of informal settlement outside of the situation that they have been subjected to their entire lives and poverty spot and hopelessness. These we find our programs that are gaining credibility, and also establishing a bigger platform for the next phase is based on five pillars of -- turning informal settlements into sustainable village, so to speak villages so to speak.

Quality of life and economic model is of sports and culture, there’s an aesthetics elements as well of cleaning it up and making it just more aesthetically pleasing, less -- of a rubble heap and more of a pleasing police so to speak. This is something that we are doing in collaboration with our partner many years from CZ, and also the University of Pretoria 27 programs have been picked out of 41. And we believe that those will start to get a bit of traction now in the year going forward.

This is essential, these are important dynamics, we believe -- the important programs, which all corporations should really involve, themselves in. Some of the commentary that came out in the weeks after the riots last year, is that to believe that you could protect yourself against this sort of thing by simply just increasing the heights of the things around your business or around the community, something works it’s not sustainable.

What we also saw was that it was -- it was society -- it was private individuals creeping together and fighting off the riots. So it was -- the establishment of different social relationships of new social partnerships, reaching out, we all have the same goal of living a better life and these programs we believe, can actually be a catalyst in that regard. So it will remain core for many, many years to come.

Until we achieve the outcomes that we set out -- it’s not a substitute for business. And it’s also not a saying to -- rather it’s not a substitute for government, for the state and it’s not business saying to the state, you are absolved. You don’t have to worry about your duties anymore. We are going to do it for you. This may be an expectation that business will keep promises made by state. And that’s -- it doesn’t work.

What does -- what this does achieve is to equip people with knowledge and with opportunity to improve their own lives in anticipation of better political governance and a different approach from the state, which here and there we seen starting to happen, right.

So moving on to the next slide looking ahead, so in order to flourish in South Africa in order to prosper -- in South Africa, you do need to take a, very specific approach in terms of risk. And in terms of some of the business interruptions that one may experience, is the security element, is the water element, is the electricity element. We believe that those things are things -- that are that we as a nation are capable of overcoming.

We believe that South Africa has many good years ahead of it, that society is just strong enough. The people of South Africa are resilient and determined to make this work. And therefore, we will continue to invest in this and we will continue to collaborate with those with positive energy moving in the same direction and then share our consensus and our view for the future. And we are therefore happy to offer the following guidance in terms of production 160,000 to 180,000 ounces for the gain depending mostly on volume throughput.

Cash operating costs slightly up and then -- both as a consequence of rising costs, spoke about some of the logistics, we spoke about some of the inability that fuel price has gone up 80% in this year, and with the economy, relying mostly on road transportation, following the collapse of transit. So you are obviously going to see that -- some of your pricing is so little, so slightly lower production, but still healthy, against the gold price where it is.

And then expected CapEx of R1.4 billion half of which roughly is strategic CapEx and a big chunk of that in generating our income so, for Ergo all eyes are on the solar project of the 20 megawatts and -- our storage project. And then we are moving further East in terms of our mine plan, Riaan mentioned, Driefontein which has also now been included as part of the future mine and the reserve state there.

Far West Gold commissioning of Driefontein number three that’s the second there, and our commissioning of debts. And this is going to be the catalyst also for putting us some of the other dams. Once we are in a position to cut the volume throughput to 780,000 tons per month, we are going there to we are moving slightly East further East, and combining material from at least two dots to make sure that we optimize the exploitation of this resource as well, that will not take the eyes out prematurely.

So lots to be excited about going forward, there is a, realism in our organization in terms of what it is that we are up against. They are not cynical, they are not trying to be funny, and how we play some of these things or try to be mean, they are really just calling it by its first name, because that’s really how you identify what it is. And then we are moving forward with all those who are keen to collaborate with us on building a better future for this country and its people.

And making sure that we don’t leave value on the table, that there’s nobody that we have been entrusted with, that we deal with it responsibly and benefit primarily our shareholders and ultimately also for the benefit of the remaining stakeholders. So that’s it then in terms of postural medicine, small glimpse into what we anticipate for the governments going forward.

Thank you very much. We will now take your questions.

Question-and-Answer Session

Operator

A - Niël Pretorius

So I just want to open the chat feature here and then I should be able to see the questions. Is it just me or there are questions. Riaan looks like we covered everything.

Riaan Davel

I just see one -- I see one from let me read it from an Arnold [inaudible] Hello, Arnold. Neil could you please give us a sense of your same business CapEx evolving over the next three years?

Niël Pretorius

Yes. Certainly, Arnold. So obviously the key focus areas for same business CapEx for the next few years. So same business is mostly focused on opening new pump stations and new dumps for retreatment, two of those are happening in the next year.

That’s the number three dump and also for the Eastern program, and Roy Crowe, certain facts we see. So it’s kind of a CapEx going into that, and then work to the plants itself towards the improvements of efficiencies. And then from next year onwards, there’s not a lot for this year, other than the purchase consideration for the landlady RTSA [ph] extract that we bought $15 million set aside for that.

But from next year, the next financial year onwards, you will see some, some big numbers coming through in terms of the expansion of the Brakpan tailings dam, and also work on expanding what was Gold’s tailings deposition facility. The former is called RTSA that will be up and running in 2029. So we bought ourselves five years of infant deposition.

While we deal with that design specifications of the parties, the regional tailings facility, construction there has to start two years before deposition and deposition will start in 2029. So that gives you a bit of a profile in terms of the investment business side.

We don’t look at the investment into solar staying business, but I suppose it’s part of that because it unlocks some of our resources by making -- affordable or less expensive and more secure by having a flat cost profile for power going forward. Some of your resources, converted reserves, that extends life of mine, I think improves the margin. It’s quite a bit of that’s going in there as well, for the next three to four years.

Niël Pretorius

Right. I actually don’t see the comments, I am not pressing the right button here or there it is. Are they plans for self generation of power and forward scope similar to those that can have at Ergo not individually?

I mean, we are looking at wheeling and drawing power at other Eskom, substations, once the 60 megawatts up and running. We are however, in conversation with Sibanye-Stillwater. So if something were to happen there, it will happen in collaboration with Sibanye-Stillwater.

But individually, Martin, we won’t be building our own pump station not as yet. I mean, we don’t have any immediate plans to build from there we will be generating surplus at Ergo and then putting some of it off the grid there.

Niël Pretorius

Nick Dunham [ph], please give us a clearer idea of what’s happening at Ergo don’t say legal issue and Withok right? So there isn’t a legal issue in respect of red flag that I am aware of. We have a prospecting parameter with the floods like dams. But and it’s in resource B, we are not including it in reserve. There is a claim of common law ownership and respect to the steps. But we think it’s opportunistic, but no legal issue as yet.

And then in terms of at Withok at Withok, in order to expand the size of at Withok, we are happy we have to apply for a new water usage license, certain portions of Withok have not been in use for a period of time.

And there are provisions in the legislation guiding this that provides that certain portions of land lies under portion lie undisturbed portion of land lies undisturbed for a period of time. Before you put it back into use, you have to bring an application for a license.

So that processes is up and running. We are going forward in terms of that process. Incidentally, a part of Withok was never decommissioned, was incorporated into the Brakpan tailings dam. Whether that is something that we believe we can rely on, is yet to be seen. But we are approaching it from the point of view of applying for a new license for Withok water usage license for Withok.

And then in terms of capital for Far West expansion, capital for Far West for the next year, it’s about a R0.25 billion. And about half of that is in terms of the number three dam for the upgrading of the plant to doubling its size and also for the RTS if there’s not much CapEx this year.

There’s certainly no CapEx this year for the doubling of the size that only happen in year two, closer to year three, and in terms of the tailings dam itself we just buying the land. We are not starting any major construction of the dam just yet. So about a R0.25 billion, it’s going to Far West.

Niël Pretorius

And then Martin is saying going forward, do you expect to be recovering value from dumps internationally in the same way as you are in South Africa? It depends, it really depends Martin on you know, what you find dumps are difficult to mine of a Greenfield’s site. In order to mine dump successfully, there has to be a measure of the sort of some capital of existing infrastructure in place.

And those didn’t get converted. I suppose one could construct a model depending on just how big it can go and how much water is available and the size of the tailings dam that you could vote. But whether there are many of those out there, it’s difficult to say, we believe that the near term value for us remains with Sibanye-Stillwater I am being a pilot fish, they focus on salt rock mining.

Our focus is tailings retreatment, and the two are well aligned. They there’s no friction between those two models. And we believe that the shortest route for us towards growth both locally and internationally, is by staying close to Sibanye-Stillwater, and we have been having very good conversations with them in that regard. And hopefully in the not too distant future, we would be in a position to say something tangible about that moving forward in terms of that.

In terms of offering our services as part of our business value proposition, offering our services as a complete tailing solution, and impacting the rehabilitation exposure or liability of businesses positively by bringing concurrent rehabilitation into their model, thriving that sort of thing. It certainly I believe that we can add value in that regard.

I believe that sentiment is moving more towards being a being seem to close a mine as opposed to selling non-core businesses sort of five years or six years before they close. And within that context, we do believe that we can, that we can offer value, but that would be more sort of a services offering it wouldn’t be commission model.

And I think the total CapEx is not in the public domain just yet. You are asking for risk CapEx estimate over the project life not just next year, that’s not in the public domain the reason being that the model hasn’t been finalized. So once it has been finalized, we will be able to put those numbers into the market. For the near term, it’s for the next 12 months it’s just under R250 million.

And then remember, one of the reasons why it’s not in the public domain just yet is that we did a, feasibility on the model as big as it can be. So a 1.8 million ton plant and 800 million ton tailings deposition facility that model works, it’s robust. But in this sort of environment, you are not going to be spending all of that as the same time you will see in the later that I again refer to the idea or the notion of planning big, but implementing incrementally.

So first, doubling the size of the Driefontein 2, the plant, then making use of or at the same time making use of over sort of improved asset in collaboration with Sibanye-Stillwater. Then getting the design finalized, the design like, the model works like, so on the basis of the current design the current conditions with synthetic liner, but it’s a lot cheaper it’s not having a synthetic liner but you have other means of environmental containment that is equally effective. So once we have decided on that, we will be putting those numbers out as well.

Niël Pretorius

And Riaan I think the next question is for you from Andy Sunderland [ph]. Can you please kindly provide guidance of the effective tax rate for -- tax rate for 2023? Why would the slow in 2022?

Riaan Davel

Yes. Thanks, Andy. So obviously, as you know, we determine that by the goal tax formula, obviously impacted this year by the amount of CapEx we have spent and then you would have noted a good guide, maybe for 2023 but not specifically for that year going forward is our measurement of the deferred tax liability. So that and then we will see it in the detail booklet, where for Far West we decrease that rate from 30% to 29%.

Obviously, as you know, the corporate general income tax rate, also decrease so that impacts the gold tax rate formula as well. And then for Ergo, we decreased the deferred tax rate from 25% to 22%.

And again, it’s an estimated rate based and that formula, take into account assumptions around gold price CapEx, and spend over the updated life of mine. So hopefully, that will give you a sense of deferred tax and how we look at that over the life.

Yes and then your question on grades -- that is given for us that’s something we deal with. But we look more as Neil alluded to it more towards volume, as well. And yes, if you look at our mineral reserves overall yes, the grade is declining over time.

So we will have to manage that. And hopefully, we will be able to talk to that, as Neil said at that time that we put that information together around fewer sites, managing our cost of time, and managing it -- the declining growth through volume and also stability in our operations.

That’s something we have to deal with over time, but hopefully, and we will be publishing more information about our life with our -- obviously this process now continues through our integrated report and full financial statements, and also our 28th filing in the U.S. at the end of October, with additional information that we will provide to the market at that time.

Niël Pretorius

So Andy at the moment, for example, we have 15 operating sites, we hope to at least half that over the next two to three years, many of us operating sites at Ergo our late stage cleanup sites. So every way we have a presence there -- adds to your operating costs. So by reducing the number of sites by reducing the complexity that make up for the business, you are going to rebuild, the bank to be reducing your cost profile as well.

By mining mainly from large volume, individual sites, so fewer sites, but more volume from a particular site, the cost profile also changes. So you see a reduction in cost per ton. And then finally, in terms of efficiencies, you know, there’s an ongoing process, try and improve the recovery efficiency on a per ton basis. And this is something that will that will never stop we refer to this project that’s cracking the code. And there’s always something new that comes on board.

At the moment, these are small, incremental improvements as we go along and this year was a good example of that, notwithstanding the fact that operating conditions were very tough, especially weather wise, managing your densities when the weather is like that when it’s raining, so much raining or weather when there’s interruptions in flow, stopping and starting. It’s not that easy but the system has been adapted and improved to a point where it’s -- being -- a lot easier than what it was in the past.

What used to be a three week stoppage is now a two-hour inconvenience, because of the changes that have been made over time. And this is ongoing. So it’s enhanced efficiencies. It’s a simpler model. And it’s mining from higher volumes from fewer sites. That’s how you offset that, but you can’t fix the grade, I mean, the grades, you just need to do something for it. And then by the way, it also levels out.

So certainly, it’s not a linear trend, that you have I can credit at a particular level and then your resource changes then adjust and then sort of it levels out again for a period of time until you move on to the next site.

Niël Pretorius

Nick, I think, in terms of your question with regards to budgeted operating costs forecast, we think they are conservative in that regard. I think the -- what’s been factored in -- is there not -- I mean, you can help me out here, but I think it’s we are not hoping for lower prices. We sort of we were fairly conservative, especially on the reagent side. I think we saw big some big changes there.

Riaan Davel

Yes. So, simple answer is -- so we have yes forecast -- taken all the increases into account in our forecast or the guidance that we provided, Nick. We have yes so we comfortable with that obviously, we have to work hard to still get the tons and the kilos out because that’s obviously not the only cost measure.

But yes, it was a difficult budget, as we have alluded to in an environment with many products services across the board increasing. So I believe we have factored that into the budgeted cash operating costs.

Niël Pretorius

Yes. Peter wants to add to that in terms of CapEx, maybe?

Riaan Davel

Yes. I think so to just talk with what Niël said. So the only one that is still outstanding on the cost day is that we Eskom increases so we have allowed for a significant increase. But I do understand that there was a case won by Eskom recently, and the full extent of how that’s going to be implemented.

We are not 100% sure. So that’s the only portion which we haven’t allowed for 100%. But we have allowed for a significant portion of that already. And then from a capital perspective, we have, as Neil has indicated, we expecting to build or to spend approximately R1.4 billion worth of capital during this year and a significant increase in capital expenditure even here.

Niël Pretorius

Thanks Nick. I don’t see any other questions. I think that is a wrap. Thank you very much, everyone who for joining us, and for listening to our presentation, watching our presentation, and we will keep you updated as we go along on anything material. Well, have a good day. Thank you.

Riaan Davel

Thanks everyone.

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DRDGOLD Limited's (DRD) CEO Niël Pretorius on Q2 2022 Results - Earnings Call Transcript