a “sex and violence, full frontal gold share”

"DRD gets institutional nod

By: Stewart Bailey


Posted: 2004/03/16 Tue 18:17 | © Mineweb 1997-2004


JOHANNESBURG (Mineweb.com) – A glance at the Durban Roodepoort Deep presentation to shareholders made earlier this week, at the announcement of its bid for control of Emperor Gold Mines, reveals a radical change in the make-up of the mid-tier gold miner’s shareholder register.
In little over a year, the share traditionally known for its attractiveness to gold-crazed North American retail shareholders, has grown its institutional shareholding from 5 percent to 40 percent. Retailer shareholders, who had traditionally given the group its seemingly bullet-proof ability to raise fresh equity at the drop of a hat, regardless of the state of its operations, have made some room for professional investors.

Ilja Graulich, DRD’s investor relations executive, says the same elements of the company’s profile the gained it a foothold in Middle America – gearing, gearing and more gearing - has given it increasing cachet among fund managers.

Graulich says he first noticed a large uptick in institutional shareholding in June last year, when international investors took a bet that the rand’s remarkable rally against the dollar had ended. An end to the South African currency’s run against the dollar – it gained more 50 percent against the dollar since the beginning of 2002 – would mean a sharp rise in the profitability of South Africa’s miners. In any event, the fall of the rand never happened.

“But the international funds have hung on,” says Graulich. Their patience, he says, was helped by DRD’s diversification out of South Africa, with two purchases in Australasia over the past year. The two deals – one for a 15 percent stake in Placer Dome’s Porgera mine in Papua New Guinea and the other the latest bid for control of Emperor Gold Mines – will raise the proportion of the company’s production outside of South Africa to about 40 percent.

The offshore production base is something that foreigners, who hold 95 percent of DRD’s stock like. Graulich is quick to add, though, that they’re no less enthusiastic about DRD’s pronounced gearing to the rand; a weakening rand sees not only profitability rise for DRD, but also the size of its reserve and resource base, as more ounces become profitable to mine. Resource bases are the basis for calculations of relative value for many gold investors, particularly in a gold bull market. Market capitlisation per resource ounce valuations are also an area in which DRD and many of its South African peers, with their mammoth resource bases, fair especially well.

But when all’s said and done, the share’s gearing to the gold price is what gets investors excited. One Johannesburg mining analyst calls DRD a “sex and violence, full frontal gold share”, a tribute to its ability to climb remarkably quickly when the gold price rises. The reverse is also true on the downside of course, making the stock an exhilarating investment, to say the least.

Graulich does not shun the description. “If you believe in gold, you may as well take the outperformance, which is what DRD gives…but at least there’s also stability,” he says.

For the past year, Graulich and the DRD’s executive pair of Mark Wellesley Wood and Ian Murray, have pounded the streets of financial districts in North America, Australia and Europe, sending the message to investors. Some have listened.

Graulich admits, however, that the massive gearing in the stock makes it attractive to the more transient hedge funds; it’s an attraction he’s happy with.

“We’re liquid enough for them to come and go undetected and they cannot take a strong enough position in us to influence the share price,” he says. DRD is one of the most traded ADR’s on the NASDAQ exchange, turning over more than 500 percent of its shares in issue each year, making it easy for punters of all sizes, to enter and exit.

Graulich says DRD did face some fallout from its US shareholders in December last year, however, after its smaller compatriot, the marginal Afrikaner Lease, closed its only operating asset. The mine was shut down after the strong rand sent the open cast operation into serious financial difficulty. Aflease too has a strong retail shareholder base and DRD was a logical victim of collateral damage. Aflease lost more than half its value in a matter of days, while DRD’s stock fell as far at $2.15.

It has since staged a recovery, first primed by Gold’s January run to the mid-$420/oz range, and is now sitting fairly comfortably at $3.35 a share"