Interview Posted on ’29-JUN-04 06:41′ GMT – Archive
MINEWEB: DRD’s Ilja Graulich is with us in the studio. A fascinating company, DRD. There always seems to be something new happening with your business. Before we talk about your “Gold for Electricity” contract, how are things going at DRD? You must be under some pressure with these rand gold prices?
ILJA GRAULICH: Certainly I think there are two parts to our business. Our offshore business, where we produce some 260,000 ounces annually – that’s going wonderfully. In South Africa, certainly it’s tough times, like anybody else. The rand, with the current strength that we are seeing, we are now at about 80,000 a kg, and it’s not an easy picture. So we have to look at some possible restructuring into the future. So it is tight.
MINEWEB: But the decision to look at your North West operation some months ago is now proving to be rather fortuitous.
ILJA GRAULICH: Yes, certainly. I think at that stage we were the company that felt the pinch first. We didn’t have the size of the offshore operations that we currently have. And we felt that rand strength come through. We took the right decisions over there and, yes, it is coming through now, and certainly we are seeing some major restructuring from some of our competitors in South Africa.
MINEWEB: Ilja, take us back into the history of the “Gold for Electricity” contract that you have with Eskom.
ILJA GRAULICH: What happened is we entered into it in about October 2000. That was shortly after we had that massive write-off where, after the governance cleanup was started at DRD, we discovered that we didn’t really have much of a balance sheet, and we didn’t have operations that were performing adequately. We were looking at a way to pay our suppliers, and electricity being about 10% of the operating costs, the only thing that we actually had available was gold, as a gold producer. So with the help of some of the banks, we entered into some derivative structures, and the “Gold for Electricity” swap was borne. At that stage it looked very clever – it’s like any company that the gold price of $250 had hedges of $350 an ounce. We were well in the money. And then suddenly the rand depreciated rapidly, and the hedge didn’t look as clever as it did when we entered into it, initially.
MINEWEB: And over the life of this contract, how much has it cost you?
ILJA GRAULICH: Well, it was 900,000 ounces in total. We estimate that we had to pay in not more than about R250m – that is, excluding the current cost of taking the remaining hedges out, which as a whole is around about R180m.
MINEWEB: And what would the electricity have cost you, had you paid in rands and cents?
ILJA GRAULICH: We don’t have an exact number, because the swap was entered into such a way that we actually got some preferential treatment on the amount of hours. Bottom line was, we didn’t have any cash to pay for electricity. So we wouldn’t have been around. So there’s not much of an argument around what we could have done and what we couldn’t have done.
MINEWEB: And right now, the decision to get out of this hedge – in other words, in future you are going to be paying for your electricity by cheque?
ILJA GRAULICH: We’re going to be paying by cheque, yes. Unfortunately those prices are also going up quite dramatically, as is water and steel, but yes, we will be paying for it in cash, and we’ve taken this out now. The rand strength does bring its upsides with it, in the sense that the mark-to-market value of that hedge, meaning the current cost of the hedge, has come down dramatically because it is rand-based. So yes, will be passing over a cheque to Eskom on a regular basis.
MINEWEB: How much will you be saving, on a monthly basis?
ILJA GRAULICH: At the current spot price, which is a little bit lower than we did the calculations, about R6m a month on the extra costs. And that is a cash flow, that is not an income statement item.
MINEWEB: OK, David? It’s costing them R100m to close out the hedge, but they will make it up in a couple of years?
ILJA GRAULICH: Yes, it’s R60m to close it out. We will make it up. Obviously all the upside is there now, and everybody asks us when is the rand going to weaken – and, certainly with the weakening of the rand, the upside is huge on the South African operations.
MINEWEB: Good news for DRD. Elja Graulich taking us through some of the restructuring – probably the final restructuring that you’ve got, of the hedges that you had in the past. They’ve all gone now. Now you’re just a pure exposed gold play.
ILJA GRAULICH: Yes. It’s fully exposed, no more merchant banks coming to see us about restructuring those hedges.
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