Ver 25 and ERGO derisked
Nic Dinham
Ver 25: DRD recently refreshed its production forecasts for the next four years. Gold output is expected to remain around 5t/a until 2028FY when it is expected to increase to 6t/a. This review lowers previously forecast gold production over the next four years and delays the FWGR expansion by a year to 2028FY.
Cap 28: The new capex schedule will need R10bn to complete the expansion. Peak capital spend of R3.5bn/a is now expected in 2025FY and 2026FY. The total forecast capex spend has increased since the latest Technical Report Summary (TRS).
Cash costs: DRD forecasts a fall in R/t costs at ERGO from 2025H2. There are now six fewer clean-up sites than there were six months ago, the newly completed Solar Power Project is fully operational and sand volumes are falling. The impact on future R/kg costs is not expected to be material.
Earnings upgrade: Despite the negative adjustments to the mine plans, the current gold price at R1.5m/kg could provide DRD with earnings of R1.98c/s in 2025FY, up 27% from the previous period. In 2028FY, all other things being equal, DRD could earn >R3.00/s after the FWGR expansion is complete.
SPP: The SPP now has 60MW of solar panel capacity and 187MW of installed battery storage, which could allow ERGO to run up to nine hours of the day and avoid peak tariffs. DRD expects cash cost savings of up to R250m/a although the R2.8bn cost of the SPP may mean that earnings benefits will be muted.
ERGO strategy: ERGO submitted its WUL application to the DWS in October. The process of certification and public participation may take up to a year. This should leave ERGO just enough time to start constructing the Withok Extension to allow a seamless transition from depositing 1.65mtpm tailings on the Brakpan TSF to the combined Brakpan/Withok TSF in three years’ time.
ERGO derisked: The adoption of GISTM standards by DRD has had an impact not only on the design of its new TSFs but also on the safety standards of the existing TSFs, including rate of rises. This and the possibility of delays to building the Withok extension are encouraging DRD to look at converting Daggafontein back into a live TSF.
ERGO LOM revision? If a decision is made to use Daggafontein for tailings, ERGO will require replacement reserves. These are likely to be sourced from the 270mt of resources in the Crown Mines dumps. This could allow ERGO to increase its reserves to over 20 years and improve its production rate.
Valuation: We estimate the base case value of DRD as R16.38/s. Our optimistic case which includes the further expansion of FWGR to 2.4mtpm is R24.78/s (prev R21.70). The principal risk to these forecasts is the rand gold price.
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