DRDGOLD Limited's (DROOY) comeback is just the beginning of their Gold Rush

DRDGOLD Limited (NASDAQ:DROOY) is a gold miner with an annual production of about 350,000 oz currently and it plans to increase it to 400,000 oz for 2008. The stock has had quite the week, up 36% since last Friday and I'm happy to say I benefited from the run. But ol' Steve Reeves isn't going to get cocky, it's been a terrible week on the market, so my heart goes out to you if you are down on your luck. So, let's end the week on a positive note, a quality stock, and a reason to celebrate the most precious metal of them all - Gold.

DRDGOLD Limited it is not just another exploration story with dubious results, they are a top producer and Wall Street rewarded them after they strengthened their balance sheet and shifted focus to their South African operations this week. They have 3 mines in South Africa (Blyvoor, ERPM, Crown) and 3 mines in Australia (Vatukula, Porgera, Tolukuma). The South Africa mines are profitable (racking in $55 million annually - Rand earnings for FY 2007) while the Australasian mines have been dragging the bottom line - they are unprofitable and their losses overwhelmingly offset the earnings from the African mines.

In Jan 2007 the former CEO was pushed by the disappointed shareholders to quit due to his disastrous choices which were generating constant losses on a consolidated basis during almost all the years of his management. S The restructuring process started in Jan 2007 under the new management of Mr John Sayers. Based on the pro forma version of the latest released quarter report which accounts the $250 million from the recent sale of Porgera mine to Barrick , the stockholder equity is $160 million so the P/BV is only 1, which is why the stock price has jumped from $5 to $7 in one week.

The P/BV of the DRDGOLD's peers climbs from 3 up to 10 and take note that most of them are not profitable, such as Krystallex (KRY), Gold Reserve (GRZ), Banro (BAA) , Seabridge Gold (SA) and Nevsun (NSU) to name a few. Great Basin Gold (GBN) with P/BV 3 and Northern Dynasty Minerals (NAK) with P/BV 5 make DRDGOLD look like 14 carrot gold.

DRDGOLD's current ratio (current assets /current liabilities) is 3.2 which provides a satisfactory cash base for sustainable growth which is more than it's peers can say for themselves. Besides, the improvement is also evident at the total liabilities /stockholder equity ratio which became below 1 (810/1106 = 0.723 ).

To get such a healthy balance sheet , the new CEO sold 2 mines of the unprofitable Australasian division (Vatukula and Porgera) which resulted in strengthening the cash base and in vanishing the huge debt of the past. DRDGOLD has only one remaining unprofitable mine (Tolukuma) which belongs to the Australasian division and CEO John Sayers has plans to sell it before the end of the calendar 2007. Sayers is already seeking potential bidders and the sale has been set in motion.

Far from the sale of the 2 mines , the new CEO accomplished some other significant goals during his brief tenure:

1) He diversified the mining portfolio with Uranium, the price of which has soared during the last 12 months and is trading close to $150 lb. today. This effort was perfect timing due to a 200% increase in uranium when compared to prices during Autumn 2006. DROOY currently develops 2 sources to mine uranium.
The first one is through the Byvoor and the second one comes through a joint venture with the ASX listed company, Mintails. The production is scheduled to begin in the first half of 2008 and apparently it is not a long awaiting plan. Although uranium will not replace gold as core product, its high margin will significantly increase the earnings of the African division. Uranium helps DRDGOLD Limited justify the high margins since it is found at the surface dumps of the mines, unlike the historical production of gold requiring deep and expensive drilling.

2) Sayers extended both the life of the ERPM up to 2036 (extensions ERPM 1 and 2) increasing 150 % the corporate total gold resources and the life of Crown through a second gold surface re-treatment with Mintails.

3) The CEO started the procedure to exploit financially the unused idle real estate portfolio of the company (golf course etc.) creating an instant cash generator for the company.

DROOY will most likely sell the unprofitable Tolukuma mine which will vanish the remaining loss from the corporate sheets. The profits from the 3 African mines supported by the upcoming uranium earnings can fully change the future of this gold producer without taking into account the bullish trend of gold. Let's not forget that a a possible increase in gold prices can beneficially impact DRDGOLD Limited income statement and make the earnings shine even brighter.

Article written by: Steve Reeves
Article posted on: September 7th, 2007

Disclaimer: The Author is holding a long position in DROOY