A mine affected by the NUM threat to down tools says it will sink if the union carries out its plans
David McKay
Durban Roodepoort Deep (DRD) chief executive Mark Wellesley-Wood says he would be forced to hand the company over to liquidators if the National Union of Mineworkers (NUM) makes good on threats to strike.
In a matter of days the DRD’s executive committee would tell the market a sustained gold production loss would ruin the company, he says.
“I am not going to be personally liable, neither would my colleagues, for trading irresponsibly,” he says. “After a few days of the strike we would have to call in a liquidator.”
Most analysts agree DRD makes money only in the last week of any particular month (the balance is dedicated to making up hedging losses). It also has little recourse to debt.
Haydn Franckeiss, head of equities at Sanlam Investments, South Africa’s second-biggest institutional investor, said: “Durban Deep is the most geared mine in the world, but they’ve got no balance sheet, they haven’t got too many financial resources. So I think the strike certainly will kill DRD.”
But it’s also possible the company could rely on the support of a bank such as Rothschilds, which recently converted debt to equity and would, therefore, prefer not to see the company declare insolvency. Failing to explore this possibility would be remiss of Wellesley-Wood and that’s why his words smack of brinkmanship.
There’s also word from highly placed sources at the Chamber of Mines of South Africa that a resolution to outstanding disputes between producers and the union is quite possible. The chamber recently agreed to pay a basic R2 000 a month wage, but it has stopped short on other key aspects of the stand-off with the NUM.
The NUM says it will reply on Friday to the Chamber’s counter-proposals. “It is now imperative that the Friday meeting should make good and emerge, once and for all, with a settlement package acceptable to both parties.
“Contrary to populist analysis that is currently suggesting that there is either brinkmanship or posturing in this process, this stage is beyond ‘injury time’. We are at a knife’s edge.”
Interestingly, DRD is the only gold producer not to have settled on a basic wage with the NUM.
That the company cannot afford to pay R2 000 basic wages to a miner shows it’s a marginal producer. Part of the problem is the group’s disastrous hedge-book policy, which management is still trying to net off.
Wellesley-Wood explains that, while the hedge is being worked through the system about R38-million is being closed down in opportunity costs each quarter forward contracts are costing the company an additional R82 an ounce. “All that is happening is that we are giving up opportunity costs. All our hedges are above our production cost; we haven’t locked in losses, it’s just that we are not getting the full spot price,” says Wellesley-Wood.
DRD on Tuesday posted a June quarter headline profit of R5,4-million, the first time it has reported positive earnings on a quarterly basis for more than 15 years. However, a R112-million exceptional item for the June quarter, stemming from the hedge book and other items, resulted in a net loss of more than R108-million against a net loss of about R67-million in the previous quarter. The outcome was a net loss of more than R261-million for the financial year, which translates into a per-share loss of 25 US cents.
Meanwhile, coal miners Anglo Coal, a unit of United Kingdom-listed Anglo American, BHP Billiton’s coal operator, Ingwe, and newly formed black-owned coal producer Eyesizwe are all the subject of strike action by the NUM announced on Wednesday. It’s a sharp irony that South Africa’s coal mines are set to lose production at a time when the market is finally reviving after a two- to three-year price slump.
20