DRDGOLD Limited (DRDGF)

How it makes money

Revenue is simply tonnes of old tailings processed multiplied by the tiny amount of gold recovered per tonne, sold at the prevailing gold price. Because the company does not control the gold price, profitability depends on keeping processing costs and volumes efficient: it earns more by moving more material through its plants at low unit cost than by any pricing power. A rising gold price flows almost directly to profit, since the tailings feedstock itself is largely a sunk cost from decades ago.

Revenue by segment

Reprocessing tailings that were already mined and crushed decades ago avoids the drilling, blasting and underground labour costs of conventional gold mining, giving DRDGOLD a lower cost structure than most primary producers. The advantage is site-specific, however: it depends on a finite, non-renewable supply of Witwatersrand-era tailings dumps that will eventually be exhausted.

Revenue moves almost one-for-one with the gold price and with the exchange rate between the US dollar and the South African rand, since gold is priced in dollars but most of the company's costs are in rand. A stronger rand against the dollar therefore erodes profitability even if the tonnage processed and the dollar gold price stay unchanged.

Key risks

• Gold price dependence — A drop in the gold price directly reduces revenue and could affect the company's ability to pay dividends and fund capital expenditure, since DRDGOLD has no ability to influence the price it is paid.
• Rand-dollar exchange rate — Gold is sold in US dollars but most operating costs are incurred in South African rand; a sustained strengthening of the rand against the dollar reduces reported profitability even at an unchanged gold price.
• Regulatory and licensing risk — Adverse changes to South African mining, water or environmental regulation, or difficulty maintaining the governmental approvals the operations depend on, could disrupt production or raise compliance costs.
• Operational disruption at key facilities — A major disruption at either the Ergo or Far West Gold Recoveries processing plants — mechanical failure, power supply issues or labour action — would have an outsized effect given the company's concentration in two operations.