durbans.com - online annual report

This year was definitely a year of two halves, with the divide being marked by an abrupt change in South African Reserve Bank exchange rate policy. While the dollar gold price continued its upward trend, the local gold price declined 23% over the year in Rand terms. Against the euro, the rand strengthened by 15% as high domestic interest rates attracted short-term capital into the country. While many commentators believe that the rand is as overvalued today as it was undervalued some two years ago, and the volatility and uncertainty caused by a near doubling of the exchange rate make long-term mine planning extremely difficult. The need for some sense of balance is evident, especially in a developing country where employment and social upliftment are priorities. The effect on DRD is illustrated by the fact that we earned R371 million for the year – no mean feat as this is nearly equivalent to the entire market capitalisation of the company some two years ago.

Indeed, the first half of the year now seems like a false dawn, as we set about the rejuvenation of DRD. Having thrown off the oppressive mantle of our hedgebook and completed a ground-breaking black economic empowerment (“BEE”) transaction, we went on to raise US$66 million by way of convertible loan notes. The proceeds from this were earmarked to increase our gold production and ore reserves, and to lower costs.

With these successes under our belt, we set our strategy for improving cash flow from our South African mines and growth in Australasia. Then we hit the brick wall of rand strength. Since the end of September 2002, the gold price in rand terms has fallen by more than 20% which, for a marginal miner like DRD, represented the margin – all of this at a time when the dollar gold price has been relatively strong.

Our Blyvooruitzicht mine (“Blyvoor”, which incorporates the Doornfontein lease area) has become the mainstay of the company, with a mine life in excess of 20 years. This has been achieved by gradually rehabilitating the infrastructure and a diligent approach to opening up old areas, thus increasing the reserves available for mining.

At Crown, which is now part of our BEE joint venture, gold production was on target at 141 000 ounces for the year, achieving a profit margin of US$77 per ounce. This served to underpin our new BEE initiative. Crown acquired the adjacent ERPM mine in October 2002, and despite setbacks such as strikes and underground fires, the turnaround of this operation is well underway. The potential for ERPM has been highlighted by a doubling of the reserve base to 2.0 million ounces of contained gold.

The dramatic change in the fortunes of our South African operations has taken its toll on our capital investment programmes. We had planned to invest R143 million this year. In reality, that was reduced to R121 million. Our programme for the 2003/2004 year was to have been nearly double this amount, but now all capital spending decisions are on hold pending a weakening of the rand.

Similarly, any decision to pay a dividend has had to be postponed for the time being.

We have, however, been able to sustain our reserve base despite the currency weakness, and ore reserves remain at just under 16 million ounces of gold contained.

The most challenging issue facing the company at the moment is the future of the North West Operations, comprising the Harties and Buffels mines. Despite several changes of management, the Harties side of this division has continued to disappoint. This has been due to external factors such as fires, power cuts and seismicity. Meanwhile surface sources – the open pits and old rock dumps – dwindled during the year, aggravating the shortfall to the plants. The medium grade project, which was based on the new mid-shaft loading on 6 Shaft, was rendered uneconomic due to poor grades and the lower rand gold price. Consequently, the North West Operations lost R63 million in the second half of the year.

Despite a relatively healthier cash and balance sheet performance, we cannot tolerate loss-makers in the hope that the exchange rate will turn around. Therefore, the North West operations were placed under review on July 21, 2003 and given 60 days to agree an economically viable plan with the workforce. While numbers employed had been dropping, it was felt necessary to introduce a more radical rightsizing to restore profitable production. This plan will concentrate production on the higher grade areas of the mine, rationalise surface treatment plant, and accelerate development to new reserves. In doing so, management believes it can preserve the operation’s life of 15 years and preserve the option of accessing substantial marginal reserves at higher gold prices.

Our Tolukuma mine in Papua New Guinea was not affected by the Rand’s strength of course, and it continued to achieve its turnaround. In the last quarter, this small high grade mine posted margins of more than 40% and contributed a greater cash flow than all of our South African operations put together. This strikes home the importance of diversification and the need for DRD to develop lower cost production which, by necessity, will come from overseas.

South Africa got a new Mineral and Petroleum Resources Development Act during the year, which also ushered in a Broad Based Socio-Economic Empowerment Charter and a draft Royalty Bill. While the need for new legislation is founded on sound regulatory and economic bases, the interpolation of social objectives has caused some uncertainty among overseas investors. Providers of capital pay scant regard for national policies, and while many will sympathise with the need to redress the “sins of the past”, the South African mining industry will have to demonstrate that these changes can lead to greater competitiveness. Certainly, several of the targets in the Charter should achieve this, but, the separate draft Royalty Bill, which proposes a revenue royalty will not. A revenue royalty, if imposed, would undoubtedly sterilise reserves, undermine the objectives of the new Minerals Act and raise barriers to entry for new empowerment players.

Pursuing Australasian growth, we acquired a 19.81% stake in Emperor Mines Limited, which mines the Vatukoula orebody in Fiji. Emperor has embarked on a A$76 million expansion which is targeted to increase annual gold production to 180 000 ounces by 2004/2005. The mine, which has been in continuous operation for 70 years, mines 46 geological structures containing resources of 7.0 million ounces of gold.

Your board has embarked on a shareholder value recovery programme in order to recoup some of the financial abuses committed by former directors and officers who were mainly involved in related party transactions. All of our claims have now been upheld by the courts and actions taken where appropriate. The defendants in this litigation have responded with a concerted public relations campaign – at times derogatory and abusive – to demoralise the company. This has not shaken your board’s resolve to continue with its valid actions and to practice sound corporate governance principles, however uncomfortable this may be for the other parties.

We ended the year with a much sounder balance sheet and cash position. Shareholders’ equity improved to R456 million and cash and receivables at year end amounted to R332 million.

Basic earnings per share moved from a loss of 316 cents to a positive figure of 202 cents.

The turnover of DRD shares on its principal exchange, NASDAQ, has continued to grow despite the strong Rand having lessened the correlation to the gold price. We now have more than 50 000 US shareholders and we turned over nearly 400% of our issued capital. This is a phenomenal performance and has made “DROOY” one of the most successful ADR programmes ever launched. This resulted in the stock’s inclusion in the Philidelphia Gold Index with effect from August 18, 2003.

We have said farewell to Frik Coetzee as operations director, and Nick Goodwin as a non-executive director. There were two high profile departures in March, when Mrs Maryna Eloff and Mrs Benita Morton, company secretary and legal adviser respectively, chose to side with the Kebble family in a manner most damaging to the company.

On a more positive note, we have invited both Deon van der Mescht and Anton Lubbe to become alternate directors to myself and Ian Murray. I intend splitting the roles of Chairman and CEO in November 2003.

The strength of the Rand has set us a new challenge to restore our competitiveness, which we can achieve by reducing costs and because of the grade flexibility in our ore reserves. We will continue to build on our success at Tolukuma with the addition of further low cost ounces in that region. Since we have substantially complied with the transfer of ownership into empowerment hands by our joint venture at Crown, we are well positioned to continue to grow our South African reserve base.

DRD is a far stronger business today, both in the quality of its management team and in its financial position. It is tough at present and it may get tougher, but for DRD it has always been that way. We are as up to the new challenges, as we were to the old.

Mark Wellesley-Wood
Chairman and CEO