DRD - watch vol, page-2

G'day snuff,

I'm not sure whether you have seen this article. FYI.


DRD counts cost of hedging

By: David McKay


Posted: 2002/04/25 Thu 21:06 ZE2 | © Miningweb 1997-2002


JOHANNESBURG -- Durban Roodepoort Deep [JSE:DUR] confirmed it would borrow R350 million as it strove to close out the remaining 390 000 ounces of hedged gold by June-end, the company's self-imposed deadline. Almost as if vindicating the strategy, the gold price breezed through $308 per ounce, its highest level in 26 months. The metal since settle back somewhat and was last trading at $306 per ounce.
South Africa's unhedged gold producers are expected to benefit from an average rand gold price of R107 000 per kilogram, roughly a 19 percent improvement on the December quarter's average spot price. The rand stabilised against the dollar mid-way through the first quarter but it was an improvement in the dollar gold price which is providing the upside. Analysts reckon Harmony and Gold Fields, scheduled to report their operating and financial results on 29 April and 2 May respectively, could report a near doubling in earnings because all of their gold production is sold at the spot price.

Durban Roodepoort Deep (DRD), however, was left mulling the sins of the past. By June the company will have delivered into 805 000 ounces of gold sold forward not including a number of so-called 'longs', derivative contracts in which the company effectively bets on a higher gold price. All of the book deliveries cost the company's shareholders money. For the remaining slice of hedged gold to which DRD is still obliged, shareholders will wave goodbye to $69 million (R750 million) which should have accrued to the bottom line. This is the value of the negative mark-to-market of DRD's extant hedge book at quarter's average gold price.

Of this, $32 million (R350 million) will be paid with the loan raised through Standard Merchant & Corporate Bank. The remainder will be financed through cash flow and a once-off capital inflow of about R200 million representing the sale of part of the company's dump retreatment operation, Crown, to black empowerment company, Khumo Bathong.

DRD chief executive and chairman, Mark Wellesley-Wood, said raising the loan was necessary to meet the company's promise to shareholders. One sidelight consequence was that is showed the company was clawing back market credibility: the banks would not have loaned this money before because there were fears over the liquidity of DRD. Financial director, Ian Murray said the company was now in a position to raise $65 million (R700 million) on its balance sheet without seriously affecting the company's financial ratios. Gearing currently stood at about 14 percent.

A world without hedging

Had DRD been unhedged, it would have reported a net dollar cash operating profit of just under $25 million against actual March quarter figures of about $2 million, Wellesley-Wood mused. Share earnings in dollar terms would have been roughly a positive 2 cents a share compared to the reported loss in earnings.

As it happened, DRD reported a one-third decline in operating cash profit to $11 million (R116 million) largely owing to hedge book repayments. But there were also production problems at the company's North West operations where seismicity, a long-term liability at the Hartebeestfontein mine, resulted in lower gold production. The re-opening of older sections of existing gold mines, in part influenced by the higher gold price which is making these sections more economic, also resulted in higher costs. The outcome was that DRD slid into a loss for the March quarter reporting negative 0.3 cents a share compared to 3.7 cents in the December period.

Murray, said earnings in the June quarter would similarly be cramped by the hedge book obligations. Cash flow of about R200 million will be needed although he warned all available cash flow would be pumped into the hedge book. This means DRD shareholders ought to downgrade earnings expectations until the September quarter when the company is fully exposed to the gold price.