Saturday, November 17, 2012

Is DROOY The Dog Finally a Buy?

DRDGold Ltd (DRD) is a beaten down gold miner with as many names as it has problems. Back when it was called DURBAN ROODEPOORT DEEP and had the ticker DROOY,  I called it Drooy The Dog. That's about the nicest thing this stock has ever been called as it has been a poster stock for miner disenchantment for the entire 10 plus years of the gold bull market. I wrote an article at Seeking Alpha back on July 15, 2011 on this called "DRDGOLD Limited: Also Known as Drooy the Dog" wherein I discuss a possible major bottoming basement forming in the stock after some overly starry eyed outlooks by management in the early years of gold's bull market ran into one major mining problem after another. It looked like an abandoned stock to me. These can be very powerful climbers if a turnaround happens. Well, a rsing from the ashes is happening apparently. There was an article on November 1 at Seeking Alpha "From Iscarus To Phoenix - A Tale Of A Miner" describing some of the past tribulations, CEO swaps, and reinvention of the business. They have pretty much given up on gold mining per se, changing to a gold processor.

The company now focuses almost entirely on extracting gold from tailings. These are the scraps thrown away by miners as uneconomical to mess with but with significant amounts of gold in them. They are also called by such dog-like names as mine dumps, culm dumps, slimes, tails, refuse, leach residue or slickens. This is quite the letdown from the days of  "megalomaniac CEO's that managed the firm in the late 90's to the mid 2000's" as Pater Tenebrarum describes the company back in the day in his November article. But with established processing abilities for tailings, they are developing safe, dependable cash flows now. You have to have capital already paid for and operational for this to be worth doing, and DRD has it. And they got the cashflow with a very cheap price/cashflow multiple of just over 4:

Their cashflow from operations is growing much faster than revenue, what I call an inverted cashflow curve, suggesting they are doing more with each revenue dollar. It has "abandoned stock" written all over it.

They have long since thrown away their hedge book and, as I noted in my other article, were rated by Wikinvest as one of the top 4 stocks in leverage to a rising gold price. The other three - Barrick, Newmont, and Anglogold - all have market caps at least 80 times that of DRD. Where you really want to search for fast movers is in the sub 50 million share float range. DRD's float is a measly 34 million, an infinitesimal portion of the 3 big names ahead of it in the leverage rankings..

In my July, 2011 article I was wary about jumping on it:

The stock hasn't followed the miners' movements very well, drifting lower throughout most of 2010 while the HUI index did a nice climb. Only lately has DROOY started twitching a finger promising an escape from the coma. Last September saw a brief rally along with the miner group as well as this March. But it is still a technical basket case while being a valuation marvel. It is certainly one to keep a close technical eye on. I wouldn't buy it until it gets its 140/200 ema moving average act together, unless you want to accumulate it and perhaps be a poodle for awhile.

In perfect 20/20 hindsight, I wish I had jumped on it. It's up 41% YTD. Since, that first article, it has definitely got its technical act together, so I'm adding it to the blog's portfolio now at $7.68 (still wary of it). It lacks a high insider ownership, but its unusual stronghanded ownership characteristics prompt me to award it an honorary high IH.

If you are looking for gold miners who are established in stable production with good valuation but small enough to really move in response to gold, you might want to think about the Dog.