JOHANNESBURG (Business Day) -- Market perception is that DRDGold's [Nasdaq:DROOY; JSE:DRD] management made a serious mistake in focusing its growth strategy on Australasia rather than South Africa.
Irritation with what is perceived to be poor judgment on the part of management - even though that has changed recently - is part of what has caused a general move by South African analysts and fund managers to turn their backs on the shares.
DRDGold completed the sale of its unprofitable Fijian assets yesterday to Westech Gold, and said another announcement on the group's restructuring would be made shortly.
DRDGold holds its Australasian assets through 78.7% subsidiary Emperor Mines [ASX:EMP], which is listed on the Australian Stock Exchange.
Apart from 100% of the Vatukoula mine, the Tuvatu gold deposit and some regional exploration properties in Fiji, Emperor also holds assets in Papua New Guinea: 20% of the Porgera mine and 100% of the Tolukuma gold mine. In SA, DRDGold owns ERPM, Blyvooruitzicht and the Crown recovery operations.
But did DRDGold management really underestimate the growth prospects of its South African mines? CEO Mark Wellesley-Wood was reported in the media in late 2004 as saying that the company could not see any growth in SA, where its mines were old and there was very limited opportunity.
The Vatukoula mine was closed in December after management concluded it was no longer viable. Emperor CEO Brad Gordon said the disposal would help to stem the group's cash flow drain because of the continuing costs of keeping the mine on care and maintenance.
But looking back at the group's annual financial statements for the past four years, it is impossible to find any formal statement emphasising Australasia at the expense of SA.
Even after the rand strengthened strongly in 2003, DRDGold's annual report carried a firm rebuttal from Wellesley-Wood that the company was disenchanted with doing business under SA's new mining regime.
"It is sensible, when you run a capital intensive business in a risk-averse investing environment... to diversify" he was quoted as saying. In 2004 he pointed out that most of the company's profits were generated outside SA, but most of its reserves remained in SA.
Of course the art of being a CEO is to be as equivocal as possible about strategy so that fingers cannot be pointed at mistakes later.
Management statements in annual reports and regulatory filings can also be used by government to accuse companies of a lack of patriotism, so they tend to err on the side of tactfulness.
Emperor Mines requested suspension of trade in its shares while negotiations were under way, and as DRDGold was a shareholder of Emperor, it was waiting with other shareholders for an announcement to be made.
DRDGold's share price rose 3 cents, or 0,66%, to 460 cents yesterday on JSE, partly reflecting a better gold price. It has climbed steadily in the past two weeks from a low of 398 cents in mid-month. At the beginning of last year, the shares were trading at R12.
Although the share price fall partly reflects a revaluation of the assets after disposals, it is also being driven by speculation as there is uncertainty about what further disposals could be made, at what price, and what the strategy will be.
In the past financial year, DRDGold's South African operations produced 315,976/oz of gold.
