The strength of the rand continues to eat away at the profitability
of South Africa’s fourth-largest gold producer, DRDGold.
Speaking when he presented the company’s results for the six
months ended December 31, 2004, in Johannesburg last week, CEO Mark
Wellesley-Wood likened operating the group’s mature assets in
South Africa to “swimming against the tide”.
He said that, despite its best efforts, which included
restructuring and rightsizing at the Blyvoor-uitzicht mine, in
Gauteng, and rationalising unprofitable mining areas at its North
West operations, the company could not offset the effects of the
strong rand.
The robust performance of the currency resulted in an 11% increase
in cash operating costs in US dollar terms and pushed up local
production costs to $472/oz in the periodmobile crushing and screening under review.
However, the stellar performance of DRDGold’s offshore assets
provided a cushion against the blows inflicted by the rand and
enabled the group to achieve an average cost of $372/oz.
During the six months ending December, the gold price was about
$420, which meant that the company made a margin of $48/oz.
Nevertheless, the margin was not sufficient to keep DRDGold in the
black – it suffered a headline loss of R159,1-million and a
net loss (as a result of an impairment of R21used iron crusher machines4m) of
R370,1-million.
Wellesley-Wood said that the focus now is on returning the
company’s South African mines to break-even position.
The North West operations are receiving priority.
The ongoing poor performance of these operations in the current
rand environment has necessitated a full impairment of the mining
assets amounting to R214-million. Labour currently represents 58%
of total costs at the North West operations, which comprise the
Hartbeesfontein and Buffelsfontein gold-mines.
barite crushing processing plant“We are currently engaged in discussions with unions and
associ-ations on how best to deal with the situation,”
Wellesley-Wood said.
The group employs 12 000 people in South Africa, of whom 5 600 are
at the North West operations.
“Restructuring will mean that we will have less production,
less shafts and less people,” Wellesley-Wood pointed
out.
He said that the company cannot pre-empt the restructuring process
at the two affected mines, as it has to consult with labour on the
process.
However, Wellesley-Wood said that not all employees will be
retrenched, as surface mining will probably continue, with the
underground sections put on a care-and-maintenance programme.
He added that the grades achieved by the operations – about 5
g/t – are not profitable enough to continue with underground
mining.
The North Plant at the North West operations currently treats about
100 000 t of rock-dump material a month, and the group intends to
build further on these low-cost sources of gold.
Wellesley-Wood maintained that finding the right mix between
surface and underground mining will assist the group in returning
its local operations to profitability.
At Blyvooruitzicht, the mining plan has been revised and mining
reduced to focus on the production of more cost-effective
ounces.
A retreatment project has also been commissioned successfully at
the mine, as well as at the Cason dumps.
Together, these operations produce 53 000 oz at an average cost of
R70 700/kg, which is about R10 000 less than the current rand gold
price.
Wellesley-Wood said that dump-reclam-ation company Crown Gold
Recoveries was a consistent performer and that its lone-player
status as a tailings-retreater is an advantage which represents
future opportunities.
DRDGold also owns a stake in century-old marginal gold-miner East
Rand Proprietary Mines (ERPM).
Despite a two-week strike in November, Wellesley-Wood said that
ERPM rose to the challenge and delivered a cash operating profit of
R1,3-million. The production pro-file at the mine is also
improving, which means that its life could be prolonged.
DRDGold has submitted an application to the Department of Minerals
and Energy for the renewal of ERPM’s State pumping subsidy,
which came to an end last month. The subsidy provides a vital
lifeline to ERPM, which would otherwise become uneconomical due to
the significant volumes of water which have to be pumped from the
mine.
Concerning DRDGold’s offshore operations, Wellesley-Wood said
that the group is seeking to unlock further value in its
portfolio.
The group’s offshore portfolio ranks as the 18th-largest
primary gold producer worldwide.
Offshore production has increased to 37% of the group’s total
production.