DRDGOLD (DRD) - 2019 Q4 - Annual Report

PART I Key Information This section presents DRDGOLD's selected financial data and outlines key business, industry, and ownership risks Selected Financial Data DRDGOLD's fiscal 2019 revenue and profit increased significantly, driven by the FWGR acquisition, boosting assets and earnings per share Selected Consolidated Financial Data (Fiscal Years 2017-2019) | Financial Metric | 2019 (R million) | 2018 (R million) | 2017 (R million) | | :--- | :--- | :--- | :--- | | Revenue | 2,762.1 | 2,490.4 | 2,339.9 | | Results from operating activities | 125.2 | 52.0 | (24.6) | | Profit for the year attributable to equity owners | 78.5 | 6.5 | 13.7 | | Total assets | 4,059.9 | 2,360.5 | 2,287.4 | | Equity (Net assets) | 2,688.5 | 1,267.2 | 1,302.4 | | Basic earnings per share (cents) | 11.8 | 1.5 | 3.2 | Risk Factors The company faces significant risks from gold price volatility, FWGR integration, South African instability, and major shareholder influence - The profitability of operations is highly sensitive to fluctuations in the market price of gold and the ZAR/USD exchange rate, as production costs are in rands while gold is sold in dollars[32][33] - The development of large projects, particularly the newly acquired Far West Gold Recoveries (FWGR), is subject to significant risks of schedule delays and cost overruns, which could render them less profitable or unviable[41][42][44] - Operations in South Africa face substantial risks from political and economic instability, high inflation, and critical infrastructure challenges, including power stoppages from the state-owned utility Eskom and water scarcity[93][94][108][117] - Sibanye-Stillwater holds approximately 38.05% of outstanding shares and has an option to increase its stake to 50.1%, giving it significant influence over the company's board and strategic decisions, which may create conflicts of interest with other shareholders[160] Information on the Company This section details DRDGOLD's corporate history, business model, organizational structure, and physical assets, including the FWGR acquisition History and Development of the Company DRDGOLD, a surface gold tailings retreatment specialist, significantly expanded assets and reserves through the July 2018 FWGR acquisition - On July 31, 2018, the company acquired the West Rand Tailings Retreatment Project (WRTRP) assets from Sibanye-Stillwater, renaming it Far West Gold Recoveries (FWGR)[167] - The acquisition of FWGR significantly increased the company's assets. As consideration, DRDGOLD issued new shares to Sibanye-Stillwater, giving them a 38.05% stake and an option to increase ownership to 50.1% within two years[167] - A legal review is underway to increase the deposition capacity of the Brakpan/Withok TSF, which could potentially increase capacity by 800 million tons and extend the life of the Ergo mine from 11 years to over 20 years[173] Business Overview DRDGOLD specializes in surface gold tailings retreatment, with ore reserves significantly boosted by the FWGR acquisition - The company's business is surface gold tailings retreatment, which involves reprocessing waste material from historical underground mining activities to extract gold[178][183] Ore Reserves Change (Fiscal 2018 vs. 2019) | Metric | June 30, 2018 (million ounces) | June 30, 2019 (million ounces) | Change (million ounces) | | :--- | :--- | :--- | :--- | | Ore Reserves | 3.28 | 5.77 | +2.49 | - The increase in Ore Reserves was mainly due to the acquisition of the FWGR project from Sibanye-Stillwater, which added 2.72 million ounces, offset by depletion from mining activities[200] - The company must comply with the Broad-Based Socio-Economic Empowerment Charter of 2018 (Mining Charter 2018), which requires a 30% BEE interest for new mining rights and sets targets for local procurement and management representation[216][217] Organizational Structure This section illustrates the company's principal South African subsidiaries as of June 30, 2019 - The report includes a chart showing the principal subsidiaries as of June 30, 2019, all of which are incorporated in South Africa[242] Property, Plant and Equipment This section details DRDGOLD's key properties and operations, Ergo and FWGR, including production and cost data - The Ergo operation consists of two gold-producing metallurgical plants (Ergo and Knights) with a combined installed capacity to treat approximately 25 million tons per year[250] Ergo Production and Costs (Fiscal 2017-2019) | Metric | 2019 (ounces) | 2018 (ounces) | 2017 (ounces) | | :--- | :--- | :--- | :--- | | Gold produced | 144,453 | 150,433 | 137,114 | | Revenue | 2,577.5 (R million) | 2,490.4 (R million) | 2,339.9 (R million) | | Cash operating costs | 512,439 (Rands per kilogram) | 458,866 (Rands per kilogram) | 489,549 (Rands per kilogram) | - The newly acquired FWGR operation commenced commercial production for Phase 1 on April 1, 2019, after reconfiguring its DP2 plant[290] FWGR Production and Costs (Fiscal 2019) | Metric | 2019 (ounces) | | :--- | :--- | | Gold produced | 10,706 | | Revenue | 184.6 (R million) | | Cash operating costs | 313,443 (Rands per kilogram) | Operating and Financial Review and Prospects This section analyzes DRDGOLD's financial performance, liquidity, and outlook, highlighting profit growth driven by FWGR and gold prices Operating Results Fiscal 2019 profit surged due to increased gold production and prices, despite rising costs, with ore reserves significantly up - Profit for fiscal 2019 increased significantly due to a 3% rise in gold production, an 8% increase in the average rand gold price, and a non-recurring credit of R60.0 million from a change in the environmental rehabilitation provision estimate[317] Key Financial and Operating Indicators (Fiscal 2018 vs. 2019) | Indicator | 2019 | 2018 | | :--- | :--- | :--- | | Revenue | 2,762.1 (R million) | 2,490.4 (R million) | | Gold production | 155,159 (ounces) | 150,433 (ounces) | | Average gold price received | 577,483 (Rands per kilogram) | 534,368 (Rands per kilogram) | | Cash operating costs | 499,749 (Rands per kilogram) | 458,866 (Rands per kilogram) | | All-in costs | 600,941 (Rands per kilogram) | 524,651 (Rands per kilogram) | | Ore Reserves | 5.77 (million ounces) | 3.28 (million ounces) | - Capital expenditure increased significantly to R347.4 million in FY2019 from R125.9 million in FY2018, primarily due to R324.4 million spent on the development of Phase 1 of FWGR[341] Reconciliation of Adjusted EBITDA (FY 2019) | Item | Amount (R million) | | :--- | :--- | | Profit for the year | 78.5 | | Income tax | 26.6 | | Finance expense | 78.4 | | Finance income | (58.3) | | Depreciation | 169.1 | | Share based payment | 21.4 | | Change in estimate of environmental rehabilitation | (60.0) | | Other adjustments | (1.6) | | Adjusted EBITDA | 254.1 | Liquidity and Capital Resources Fiscal 2019 saw increased operating cash flow but higher investing outflow due to FWGR, with sufficient liquidity for 2020 Summary of Cash Flows (Fiscal 2018 vs. 2019) | Cash Flow Activity | 2019 (R million) | 2018 (R million) | | :--- | :--- | :--- | | Net cash from operating activities | 288.3 | 233.8 | | Net cash from investing activities | (303.0) | (140.4) | | Net cash from financing activities | (7.9) | (45.0) | | Cash and cash equivalents at year end | 279.5 | 302.1 | - The increase in cash used for investing activities was mainly due to R347.4 million in additions to property, plant and equipment, of which R330.7 million was for the FWGR project[395][396] - The company has an available R300 million Revolving Credit Facility, of which R125 million is committed to a guarantee, leaving R175 million available[404] Trend Information DRDGOLD targets 175,000-190,000 ounces gold production for FY2020, with strong Q1 FY2020 results driven by FWGR - The company targets gold production of 175,000 to 190,000 ounces for fiscal year 2020, with cash operating costs of approximately R490,000 per kilogram[406] Operating Results (Quarter ended Sep 30, 2019 vs. Jun 30, 2019) | Metric | Q1 FY2020 (Sep 30, 2019) (ounces) | Q4 FY2019 (Jun 30, 2019) (ounces) | % Change | | :--- | :--- | :--- | :--- | | Gold produced | 48,001 | 45,590 | 5% | | Average gold price received | 696,368 (Rands per kilogram) | 603,755 (Rands per kilogram) | 15% | | Cash operating costs | 459,868 (Rands per kilogram) | 475,657 (Rands per kilogram) | -3% | - Adjusted EBITDA more than doubled in the first quarter of fiscal 2020 compared to the previous quarter, driven by a 15% increase in the gold price received and a 6% increase in gold sold[413] Tabular Disclosure Of Contractual Obligations The company's contractual obligations total R1,137.6 million, primarily environmental rehabilitation and trade payables Contractual and Cash Obligations (as of June 30, 2019) | Obligation Type | Total (R million) | Less than 1 year (R million) | 1-3 years (R million) | 3-5 years (R million) | More than 5 years (R million) | | :--- | :--- | :--- | :--- | :--- | :--- | | Provision for environmental rehabilitation | 682.6 | 56.7 | 120.8 | 106.3 | 398.8 | | Finance leases | 11.0 | 11.0 | - | - | - | | Trade and other payables | 419.2 | 419.2 | - | - | - | | Purchase obligations | 18.6 | 18.6 | - | - | - | | Total | 1,137.6 | 508.0 | 124.5 | 106.3 | 398.8 | Directors, Senior Management and Employees This section details DRDGOLD's leadership, compensation, board practices, employee information, and incentive schemes Directors and Senior Management As of June 30, 2019, the board comprised eight directors, with recent appointments following the FWGR transaction - The board of directors consisted of eight members as of June 30, 2019[416] - Recent board appointments include Jean Johannes Nel (November 2018) in connection with the WRTRP asset acquisition and Kuby Prudence Lebina (May 2019)[419][420] Compensation Fiscal 2019 director and officer remuneration totaled R24.8 million, with executive incentives tied to KPIs Director and Prescribed Officer Remuneration (FY 2019) | Individual | Total Remuneration Recognised (thousand Rands) | | :--- | :--- | | Executive Directors | | | D J Pretorius (CEO) | 6,481 | | A J Davel (CFO) | 3,669 | | Total Executive | 10,150 | | Total Non-executive | 4,583 | | Total Prescribed Officers | 5,957 | - Executive directors have service agreements that include short-term incentive bonuses of up to 100% of their annual remuneration package, contingent on achieving key performance indicators[444][447][448] Board Practices The board comprises two executive and six independent non-executive directors, with three key standing committees - The board consists of two Executive Directors and six Non-Executive Directors, all of whom are independent under NYSE and South African standards[452] - The board has three standing committees to oversee key governance areas: Remuneration and Nominations Committee, Audit and Risk Committee, and Social and Ethics Committee[466] Employees As of June 30, 2019, DRDGOLD had 2,617 employees, with wage agreements in place and one fatality reported - Total workforce as of June 30, 2019, was 2,617, consisting of 1,026 direct employees and 1,591 contractors[484] - In September 2019, the Ergo operation signed a two-year wage agreement with unions for an average annual increase of 5.9%[486] Safety Statistics (Per million man hours, FY 2019) | Metric | Consolidated 2019 (Per million man hours) | Consolidated 2018 (Per million man hours) | | :--- | :--- | :--- | | Lost time injury frequency rate (LTIFR) | 2.37 | 2.92 | | Reportable incidence frequency rate (RIFR) | 1.78 | 1.55 | | Fatalities | 1 | 0 | Share Ownership The company details its long-term incentive schemes, including a proposed new equity-settled plan for shareholder approval - The current DRDGOLD Phantom Share Scheme is a cash-settled plan with 16,157,058 phantom shares outstanding as of June 30, 2019[494][495] - A new equity-settled Long-Term Incentive Scheme is proposed to replace the current phantom share scheme, pending shareholder approval[497][498] - The proposed new scheme will issue Performance Shares and Retention Shares that vest over three years, subject to performance conditions including Total Shareholder Return (TSR) relative to peers and the company's WACC[499][501] Major Shareholders and Related Party Transactions This section details DRDGOLD's ownership structure, with Sibanye-Stillwater as the largest shareholder at 38.05% Major Shareholders Sibanye-Stillwater is the largest shareholder at 38.05%, with an option to increase its stake to 50.1% - Following the acquisition of FWGR assets, Sibanye-Stillwater became the largest shareholder, holding 265 million ordinary shares, which constitutes 38.05% of the company[512] - Sibanye-Stillwater was granted an option to subscribe for additional shares to achieve a 50.1% shareholding, exercisable within two years from July 31, 2018[512] Major Shareholders (as of September 30, 2019) | Holder | Percent of outstanding ordinary shares | | :--- | :--- | | Sibanye-Stillwater | 38.05% | | Ruffer, LLP | 7.13% | | Renaissance Technologies, LLC | 1.80% | The Offer and Listing DRDGOLD's shares trade on the JSE and NYSE (ADSs), with each ADS representing ten ordinary shares - The company's ordinary shares trade on the JSE (symbol: DRD) and its ADSs trade on the NYSE (symbol: DRD)[529] - Each American Depositary Share (ADS) represents ten ordinary shares[529] Additional Information This section covers corporate governance, material contracts, exchange controls, and tax implications for shareholders Memorandum of Incorporation The MOI outlines governance, director powers, re-election, shareholder meeting quorums, and amendment procedures - Directors have the authority to borrow funds for the company's purposes as they see fit[535] - One-third of the directors are subject to re-election by rotation at each annual general meeting[545] - The quorum for a general meeting is three members present in person or by proxy, holding at least 25% of the total voting rights[548] Material Contracts Key material contracts include the FWGR acquisition agreements with Sibanye-Stillwater and a ZAR300 million RCF with ABSA Bank - Agreements with Sibanye-Stillwater govern the acquisition of FWGR assets, in exchange for which DRDGOLD issued shares and granted Sibanye-Stillwater an option to acquire up to a 50.1% stake in the company[563] - On August 1, 2018, the company entered into a ZAR300 million Revolving Credit Facility (RCF) with ABSA Bank to finance the FWGR Phase 1 development and working capital[564] - The RCF has financial covenants requiring an interest cover ratio of not less than 4 times and a net debt to adjusted EBITDA ratio not exceeding 2 times, calculated on a rolling 12-month basis[565] Exchange Controls South African exchange controls restrict capital export but allow free remittance of share sale proceeds and dividends for non-residents - South African exchange control regulations restrict the export of capital and require SARB approval for South African companies to hold foreign currency or make significant foreign investments[570][572] - For non-resident shareholders, proceeds from the sale of ordinary shares on the JSE are freely remittable outside the Common Monetary Area[578] - Dividends declared to non-resident shareholders are freely remittable, paid in rands and converted to dollars for ADS holders by the depositary[579][580] Taxation This section outlines South African and U.S. tax implications for shareholders, including dividend withholding tax and PFIC risk - South Africa imposes a 20% dividend withholding tax. However, the U.S.-South Africa tax treaty can reduce this rate to 5% for corporate holders with at least a 10% stake, and to 15% for other U.S. residents[585] - The South African gold mining tax rate is calculated using the formula Y = 34 – 170/X, where X is the ratio of taxable income to mining income[587] - For U.S. holders, there is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC), which would result in adverse U.S. tax consequences[602][607] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from gold price, foreign currency, interest rates, and credit, with gold price being most significant - The company's primary market risk is the fluctuation of the rand gold price, which significantly impacts operating results and share price[616] - While generally unhedged, the company entered into a zero-cost collar for 50,000 ounces of gold in fiscal 2019 to mitigate liquidity risk from borrowings for the FWGR project[615][617] - Foreign currency risk is significant as gold is sold in USD, while production costs are primarily in ZAR[621] Description of Securities Other Than Equity Securities This section describes the company's ADSs, trading on NYSE, with each ADS representing ten ordinary shares ADS Depositary Service Fees | Service | Fee (USD) | | :--- | :--- | | Issuance of ADSs | $5.00 (or less) per 100 ADSs | | Cancellation of ADSs | $5.00 (or less) per 100 ADSs | | Distribution of cash dividends | 2 cents (or less) per ADS | - The Bank of New York Mellon, as Depositary, has agreed to an annual reimbursement of $75,000 to DRDGOLD for investor relations activities[625] PART II Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[626] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of June 30, 2019[631] - The independent registered public accounting firm, KPMG Inc., audited and confirmed the effectiveness of the internal control over financial reporting as of June 30, 2019[632] Governance and Management This section covers governance, audit committee expertise, accountant fees, and the company's share repurchase program - The board has identified Mr. J.A. Holtzhausen as the audit committee financial expert[635] Principal Accountant Fees (KPMG Inc.) | Fee Type | 2019 (R million) | 2018 (R million) | | :--- | :--- | :--- | | Audit fees | 8.3 | 5.7 | | All other fees | 1.0 | 1.7 | | Total | 9.3 | 7.4 | - A share repurchase program was established in May 2019, authorizing the company to buy back up to 5 million ordinary shares before February 29, 2020[641][642] PART III Financial Statements This section presents the audited consolidated financial statements, including auditor's report and key financial notes - The independent auditor, KPMG Inc., issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of June 30, 2019[649] Consolidated Statement of Profit or Loss (FY 2017-2019) | Item (R million) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Revenue | 2,762.1 | 2,490.4 | 2,339.9 | | Cost of sales | (2,553.9) | (2,347.7) | (2,307.9) | | Results from operating activities | 125.2 | 52.0 | (24.5) | | Profit before tax | 105.1 | 32.4 | (36.7) | | Income tax | (26.6) | (25.9) | 50.4 | | Profit for the year | 78.5 | 6.5 | 13.7 | Consolidated Statement of Financial Position (as of June 30) | Item (R million) | 2019 | 2018 | | :--- | :--- | :--- | | Total Assets | 4,060.0 | 2,360.4 | | Non-current assets | 3,403.9 | 1,734.1 | | Current assets | 656.1 | 626.3 | | Total Equity and Liabilities | 4,060.0 | 2,360.4 | | Total Equity | 2,688.6 | 1,267.3 | | Total Liabilities | 1,371.4 | 1,093.1 | Consolidated Statement of Cash Flows (FY 2017-2019) | Item (R million) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net cash inflow from operating activities | 288.3 | 233.8 | 51.6 | | Net cash outflow from investing activities | (303.0) | (140.4) | (96.7) | | Net cash outflow from financing activities | (7.9) | (45.0) | (53.0) | | Net (decrease)/increase in cash | (22.6) | 48.4 | (98.1) | Exhibits This section lists all exhibits filed with the Annual Report on Form 20-F, including corporate and material contracts - The exhibits include key corporate documents, material contracts, and required certifications[886]