RTSF breakthrough
Nic Dinham
RTSF breakthrough: In June, after nearly five years, DRD finally received DWS approvals for the construction of the Regional Tailings Storage Facility (RTSF) on the West Rand. Construction, which has already commenced, will be phased in over the next five years at a cost of R4.4bn including piping and contingencies.
FWGR expansion: The construction of the RTSF will be timed to allow the DP2 plant to continue operating at 0.6mtpm until FY27E, when it will be expanded to 1.2mtpm at a cost of R2bn.
Earnings implications: The expansion will materially increase FWGR’s low-cost gold production from c. 40,000oz/a to c. 90,000oz/a by FY28E. This should be more than enough to offset lower gold production trends at ERGO and help ensure real earnings growth for DRD over the next five years.
Capital implications: The approvals came late in FY24 and is likely to result in FWGR’s capital spend being well below the originally forecast R0.9bn. The shortfall may have to be absorbed into the FY25E and FY26E budgets to preserve the very demanding timetables.
FWGR blue skies: FWGR will have the ability to store 800mt of tailings at a deposition rate of 2.4mtpm, double the currently planned 1.2mtpm rate. This excess represents FWGR’s blue skies potential.
ERGO benefit: The approval of the RTSF should ensure that ERGO’s imminent application for the R1.2bn Withok TSF is also successful. Withok must be constructed within three years to derisk ERGO’s LOM and prevent ERGO from having to throttle back production.
ERGO SPP: ERGO’s SPP is almost complete. It has 60MW of solar power generation and a battery storage capacity of 160MWh. SPP’s power will supply its own operations as well as the Eskom grid by Oct-24. Power to the grid will be credited against DRD’s other operations’ electricity bills.
Gold price: The recent gold price increase to R1.4m/kg is providing another layer of good news that should not only lift DRD’s earnings and valuations if it persists, but also provide a just-in-time cushion for DRD’s capital project spend, which may exceed R3.5bn in FY25E as well as in the FY26E.
Earnings upgrades: The gold price has increased our forecast for the FY24E to ZAR154cps. Our FY25E and FY26E forecasts are also significantly improved and should benefit from lower costs at ERGO. Further real earnings boosts can now be expected beyond our forecast timelines in FY27E and FY28E with the completion of the FWGR expansion.
Valuation: Our base case valuation of DRD, based on a spot gold price of R1.4m/kg (previously R1.2m/kg), is R16.40/s (previously R14.60/s), while our speculative case includes a blue skies capacity increase at FWGR to 2.4mtpm by FY32E and values DRD at R21.70/s (previously R17.30/s).
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