Minyan Mailbag: DROOY
Thx for the help Laurie!
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Good stuff on the Ville. Are you familiar with DRDGOLD Ltd (DROOY) - what's the deal here? Looks like a cash crunch. Do you see any light at the end of the tunnel?
(Sunday 3pm) - The kids are napping and I'm out of the office and am flying blind and would want to talk with the company to see what they are prepared to do, let alone what they propose to do. I haven't seen much apart from what the papers are reporting, but....
Durban Deeps is a South African based gold company that is the most leveraged to the price of gold, anywhere in the world, that I know of. They need a high gold price, in rand terms as that is their major expense currency. The dollar price rise of recent years has been made inconsequential due to the Rand more than doubling in "value" against the U.S. Dollar. South Africa has many problems that do not justify much currency strength, let alone where it is now. But we must deal with the reality the markets lob at us, not what we believe or expect. Leverage works both ways, though, as we have seen the last 3 days or so. Just my 2 Aussie cents worth.
A cash crunch could be an understatement for Durban Deeps. I haven't seen the numbers but there seems to be more to it than just the rand strength. Cash flow throw-off is very important but only if a company is exploiting the asset in the ground. Gold in the ground is still gold, as long as they can get it out profitably, sometime. It's effectively a call option at higher prices but there's plenty more to consider. If they were to stop mining and wait for a higher price, I'd be happier than them mining at no margin, or worse. Care and maintenance of substantial mines may be the way forward but I dunno the economics of such a move. The social implications would be very nasty and I would expect some repercussions throughout the whole industry in South Africa. Cash flow is being eroded by the rand strength and wage pressures and may continue to do so.
High cost producers are the most leveraged to the gold price but hiccups occur in mining and sometimes they can kill. Water and weather problems, wall / shaft collapses, strikes, government intervention, geological misinterpretation, general snafu's...and then the financial ones like debt, hedge books and the realized price of production, and finally the "free" market price of the commodity.
I wouldn't want them to take on any more debt so it may come down to benevolent shareholders who may have had enough of them! A carve-up may be in the cards and equity holders are the last in the queue. What is their reserves position? They have many millions of ounces at higher gold prices, but they may not be around to enjoy them! Someone will, though! Their assets outside South Africa in PNG, Australia and Fiji are still valuable and people seem to dismiss them outright. Maybe they should be floated out of the company? Watch for someone like the Chinese to step in - a la their recent attack at Noranda (NRD), or even Russia thru Norilsk. Hmmm...
Any idea what the "insiders" have been doing recently? I note that Golden Star Resources (GSS) has been hammered too but their CEO and Board is buying which I see as some comfort. Insiders tell us much about the future outlook, I believe.
It's a freaking huge punt but it depends on your risk appetite and strength of conviction regarding higher prices, in Rand as well as dollars. Do you want to sleep at night?
I bought some, personally, down here at 90c with a 50-50 expectation that I lose it all, but the risk / reward, based off in ground reserves, looks ok to me. Sentiment will be hard against them for some time now (NOT ADVICE).
Remember, I own a few racehorses so am definitely more stupid with my own money than most! (I'm still trying to ditch most of them and the major sales are at Easter.... )
Do some historical analysis versus where they were at gold $275 a few years back. Look at total market capitalization, not just share price. Check in Rand and Dollars as well! What do you see? I dunno, 'coz I'm unable to from here at present!
I note the CRB Index is now at all-time highs yet precious metals and grains haven't participated. Hmmm. Maybe Volcker's statement about the 1970's-80's inflation debacle has been acted upon - "The mistake we made was not controlling the Gold Price". Hmmm. The physical markets are sucking up as much gold as can be delivered these days with European refineries backed up like a dunny on Derby Day. I note the $436 level has proven good resistance, as has $430 in support. Silver touched my $7.22 target and should be set for a punch back up through $7.50 again. Not advice, but I'm personally buying some 5kg bars!
The Macro world is not so flash with GWB "touring" and pi$$ing off a whole bunch of people around "old" and "new" Europe. Korea said what everyone thought about the buck, and then backpedaled pretty quickly. Whatever. The dollar is and must be headed lower, it's just a matter of time in my humble view. It won't be all one way traffic, but the trend is in.
I note bonds have also backed up after their flirtation under 4%. What a gimme that was.
I am out of office with no communications for the next few days, and am sorry to be so brief but will be back at full swing on Wednesday, I am assured! I will believe it when I see it! Moving is such a pain in the arse!!
Something nasty is brewing I reckon, and holding physical gold and silver is my financial insurance policy. Got yours?
Maybe a white knight could step up and become involved in a bailout of sorts?... like the newly formed GoldCorp (GG) - Wheaton (WHT) entity that is so robustly constructed? Some serious due diligence would be required, though!
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