Economic performance

DRDGOLD proactive in seeking provisional judicial management for Blyvoor

DRDGOLD made history in November 2009 when it became the first company in the South African mining industry to proactively request provisional judicial management. The application, in terms of the provisions of Section 427 of the South African Companies Act, was made to the country’s High Court to save the Blyvoor mine from the possible threat of liquidation.

The provisional judicial management order was granted on 10 November 2009. The period of provisional judicial management was successful and the order was lifted in April 2010.

The Financial Manager of Blyvoor, Mark Burrell, explains that the move was prompted by Blyvoor's inability to continue to sustain losses which had reached R27 million a month. These losses, which started in May 2009, were largely the result of:

• a sharp decline in the gold price between February and May 2009, from R317 000/kg to R240 000/kg;
• a series of seismic events during May 2009 which caused a substantial drop in mining production;
• a 33% rate increase imposed by power utility Eskom during July 2009; and
• a protracted wage strike by the National Union of Mineworkers, which resulted in the loss of approximately 8 000 ounces of production worth R60 million.

Although the mine was restructured after consultation in terms of Section 189A of the Labour Relations Act in an attempt to deal with these circumstances, this did not deliver the expected turnaround as rapidly as had been anticipated.

Burrell says: “By seeking judicial management we ring-fenced Blyvoor and protected DRDGOLD. It demonstrated that we had identified the problems, which were beyond the control of the Board of Directors and management, and were asking for help. It was the correct action to take and sent out the right message.”

In terms of the order, the Master of the High Court appointed judicial managers with a wide range of powers to take whatever actions were necessary to save the business.

In the case of Blyvoor, Burrell explains, the mine was not allowed to settle any debts incurred prior to the granting of the order without approval from the judicial managers. With regard to any purchases made after that date, suppliers were paid on a cash-on-delivery basis. The mine was also prevented from entering into any contracts for future supplies while the order was in place.

Towards the end of the third quarter of the 2010 financial year, Blyvoor’s situation had improved and DRDGOLD applied to the High Court for the lifting of the provisional judicial management order. The application pointed out that:

• for the period from November 2009 to February 2010, Blyvoor had traded at an unaudited profit of R33.6 million;
• trade creditors at the time that the provisional judicial management order was granted had been reduced from R39 million to R2 million;
• monthly production of gold had increased from 272 to 315 kilograms; and
• the gold price had risen from R240 000/kg to R265 000/kg.

On 13 April 2010, the High Court agreed to lift the provisional judicial management order with immediate effect. It was granted on condition that DRDGOLD's provision of a R15 million facility to Blyvoor, available from November 2009 but not accessed, remained in place.

At the time DRDGOLD CEO Niël Pretorius commented: "The provisional judicial management of Blyvoor has been a success; the company is able to pay its debts as and when they fall due for payment; it has turned the corner and is, once again, a successful concern."

DRDSA Empowerment Trust – one of a kind in South African mining industry

DRDGOLD’s DRDSA Empowerment Trust is one of a kind in the South African mining industry and, the company believes, more advantageous to employees than the more conventional employee share ownership plan (ESOP).

To understand the DRDSA Empowerment Trust and how it came to be established, it is necessary to go back to 2005 when DRDGOLD’s black economic empowerment (BEE) partner, Khumo Gold, acquired a 15% interest in DRDGOLD SA. This operating subsidiary of DRDGOLD was especially formed to enable DRDGOLD to fulfil the BEE equity targets set by the South African Broad-based Socio-economic Empowerment Charter of 15% by 2009 and 26% by 2014.At the time that the 15% holding was acquired by Khumo Gold, the company was granted an option, exercisable over the next three years, to acquire a further 11% interest in DRDGOLD SA.

When Khumo Gold exercised this option in 2006, it chose only to acquire a further 5% of DRDGOLD SA, to bring its stake in the company to 20%. In the interest of promoting true broadbased empowerment, Khumo Gold decided to place the remaining 6% into an empowerment trust, for the benefit of the employees of the subsidiary companies of DRDGOLD SA.

DRDGOLD’s Executive Officer: Legal, Compliance and Company Secretary, Themba Gwebu, pays tribute to Khumo Gold for taking the initiative and suggesting that an empowerment trust be set up rather than an ESOP. “The point made was that when employees own shares directly they tend to sell their shares to take a profit in the short term. Effectively, then, the shares are a once-off benefit. With a trust, however, employees have the opportunity to receive regular benefits,” he explains.

The participants in the DRDSA Empowerment Trust are all fulltime employees of DRDGOLD SA companies, from categories 4 to 18 – some 4 000 people, close to 90% of whom are historically disadvantaged South Africans. It works differently from an ESOP because it is the Trust that directly owns 6% of the shares of DRDGOLD SA, not the employees.

A major strength of the Trust is that, unlike an ESOP, it makes provision for the beneficiaries of an employee who dies in a work-related incident to be treated as participants. This applies to the beneficiaries of all employees who have died on or after 30 June 2000. In addition, employees who have been retrenched or have retired (provided they worked for the company for at least five years before retirement) will remain beneficiaries. As Gwebu observes, this broad base means that the Trust has the potential to play a role in community upliftment.

Another strength is that the Trust has been set up in such a way that the empowerment of employees is not confined to monetary gains. It will extend to several employees acquiring administration and management skills as well as considerable insight into the financial side of business.

Nevertheless, the General Manager of Corporate Services, Barry de Blocq, says that the process of establishing the Trust has taken time because there was initial resistance to the idea. “The unions knew about ESOPs and how they worked. A trust was a different concept and it was necessary to break down barriers before the unions gave their buy-in and commitment and nominated their trustees. Credit must be given to our union representatives for their open-minded and progressive thinking in adopting this unique approach to employee empowerment.”

In all, 11 trustees were nominated: five from the National Union of Mineworkers, three from UASA – the Union, two from Khumo Gold and there is one independent trustee.

It is these trustees who will administer the Trust and make the necessary investment/disbursement decisions. DRDGOLD will play no part in the running of the Trust.What the company will provide to the trustees free of charge is a secretarial, financial and human resources service.

Once the Master of the High Court had accepted the nominees, the company ensured that the eight employee trustees were trained before they took up their duties and these trustees were involved in the choice of a trainer. At the time of the first payout from the Trust, the company, again with the involvement of the trustees, will make sure that employees are educated so that they understand how the Trust works.

Gwebu notes that it is not only employees who are set to gain from the establishment of the Trust, the company will benefit too because employees will know that through this vehicle they have a long-term interest in DRDGOLD SA and this will act as an incentive for them to work hard and contribute to the company’s growth.

It is expected that the trustees will start administering the Trust during the 2011 financial year. One of their first tasks will be to make decisions about the disbursement of the R3.5 million in income which was paid into the Trust following Crown’s repayment of a loan from DRDGOLD.