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.


  1. A question regarding the DROOY business model:

    Based on your article it sounds like the primary barrier to entry in their business model is capital investment to extract value from tailings. I'm also guessing that due to their small size what might be a fairly small amount of actual gold extracted is significant for them and is apparently insignificant to the miners who sell them their source tailings. Please correct any misconceptions here.

    My question is can there come a point where the economics of deriving gold from tailings reduces the amount of tailings as a source to the point that it could significantly hurt DROOY? This might be in the form of too little supply to maintain current operations or the price of the tailings rising to the point that good returns cannot be made from extracting the gold from them.

    I am actually a professional oil and gas analyst but maintain an interest in all natural resource business models. There have definitely been times where major oil companies--as one example--have been more reluctant to sell off aging properties to smaller E&P's than in the past due to a run-up in oil prices. On the other hand, E&P's have been able to make acquisitions of private acreage holders because they had the capital to develop the resources faster than the acquired company (e.g., APA and Cordillera).

    Thanks for your thoughts.

  2. I am not a mining expert, but I've been intrigued by what mining CEOs and other knowledgeable people are saying about DRDs type of operation.

    As to the barriers to entry by competition, there was a piece written back in 2008, before DRD really got into this business, called "Resurgence in Johannesburg's Gold Tailings Reclamation". This was about the South African gold industry in general, but they had a lot to say about DRD. You can read all this (just google the title) but I'll just quote what Charles Symons, regional manager of DRDs tailings said then - "Newcomers have not had a good track record in the surface material reclamation business and we have taken note of that." I get the impression from this article that it takes an inordinate amount of real estate, infrastructure, waterways, and all the things that give a start-up trouble with their profits. DRD has, through the process of all their troubles through the years, acquired all this stuff and knows how to use it. When the tailings business was on the rocks in the mid 2000s, DRD was about the only one still making a profit from it.

    As to your concern about DRD running out of feasible tailings to process - NOT TO WORRY. I won't go into all the facts and figures (I may do that in a future article) but suffice it to say there is no problem here. I have dug up a few stats on this and, to say the least, I am flabbergasted.

    As to your comparison of DRD to oil E&Ps who became reluctant to sell off aging, unprofitable, properties when oil goes up; I get the impression from what little I've read so far that the new gang at DRD have become very tightfisted about their property. The seem to think of all the tailings mountains in their back yard as new gold finds (even if gold doesn't go up) and will slap the hands of anyone wanting to grab any away from them.