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US$/oz Margin management Rand strength Margin restored 11% margin 330 R590m write-off Hedge book close out Dec 99 Mar 00 Jun 00 Sep 00 Dec 00 Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun
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US$/oz Margin management Rand strength Margin restored 11% margin 330 R590m write-off Hedge book close out Dec 99 Mar 00 Jun 00 Sep 00 Dec 00 Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun 02 Sep 02 Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Cash operating costs Gold price CHAIRMAN S STATEMENT This has been a year of substantial transformation for Durban Roodepoort Deep, Limited (DRDGOLD). We have sought to capture some of this change through considered and economical application of a new corporate identity that will commence shortly with a slight adjustment in our name to DRDGOLD Limited. DRD has been retained as a reminder of the best from our long history and GOLD will be introduced, lest there be any doubt regarding our focus on and dedication to exploration for and mining of this extraordinary metal. Our vision, after careful review, remains to be the gold investment of choice. Our core value statement, expressed in full on page 2 of this report, has been expanded to capture our commitment to delivering value to our shareholders, safely and with respect for other stakeholders; learning from the past and being flexible in pursuit of the future; making sure we do clean business; and, in particular, taking pleasure in all that we do. Words, of course, are not wholly adequate; within the organisation and beyond we are engaged in a programme of action to ensure that they are met with deeds. Our acquisition during July 2004 of an additional 25.55% of Emperor Mines Limited of Australia and the acquisition in October 2003 of the 20% interest in the Porgera Joint Venture in Papua New Guinea (PNG), together with a strong performance from our wholly owned Tolukuma Mine in PNG, brings the Group within reach of its target of ounces of low-cost annual gold production from this region in a relatively short space of time. This, together with the closure of high-cost business units in South Africa over the past few years, has substantially reduced our risk profile and significantly, most of our profits now originate from outside of South Africa. Most of our gold reserves some 9.9 million ounces or 84.2% of total attributable reserves are in South Africa and when the Rand weakens, as we believe inevitably it must, these reserves have the potential to add significant value to our business. In respect of our South African operations, we continue our efforts to counter the negative impact of the local currency s strength and above-inflation increases in key consumables such as electricity, steel and water, with drives to increase efficiencies and to improve grade control. When, patently, there are no alternatives, we may well have to close down further areas of high-cost production in these mines. While the gold price has risen when measured against a weakening Dollar, it has failed to break out against relatively strong currencies such as the Rand against which it has fallen by 16%. Even in Dollar terms, the gold price appears undervalued when one considers that it is still at the same Dollar price as it was nearly a quarter of a century ago. By comparison, fiat currency (that is, currency not backed by gold) has increased at an incredible rate over the same period. Our long-term confidence in the future of gold remains intact; underpinning this is the metal s intrinsic value, when all else fails, as money. DRDGOLD s interactions with the communities in which it operates have both increased in scope and improved in substance in the year under review. At Tolukuma, we have been able to help residents of surrounding villages with crop development and marketing, in particular with the export of locally-grown coffee. In addition, we have assisted with the provision of water pumps and health and education infrastructure. We have made good progress with our localisation programme and now more than 90% of our workers are PNG nationals. Due to our expanded presence in PNG, we felt it necessary to provide investors in that country with access to DRDGOLD shares and so we listed on the Port Moresby Stock Exchange in August In South Africa, somewhat paradoxically, we have been brought closer to the communities in which we operate through the various consultation processes accompanying our restructuring initiatives. At the North West Operations and at ERPM, we have worked closely with all of the stakeholders to develop and implement social plans that seek to manage and thus minimise the inevitable social impacts of downsizing. The Scorecard accompanying South Africa s Broad-based Socio Economic Charter has served to provide integrity to our various developmental initiatives in respect of our employees and the broader community. Our Adult Basic Education and Training (ABET) programme continues to expand and compliments our new Train for the Nation initiative designed to identify, develop and retain historically Our long-term confidence in the future of gold remains intact; underpinning this is the metal s intrinsic value, when all else fails, as money 7 disadvantaged South Africans. We are also making good progress with the conversion of single-sex hostel accommodation to family units and are engaged with various local authorities in discussion on the transfer of surplus mine social infrastructure, such as clinics and recreational facilities, for community use. In the year under review, we have also been paying more attention to how we govern ourselves. Your Board has formed a Risk Committee, which not only monitors risk on a Group basis but has also taken an overseeing role for our safety, health and environmental programmes. It is a pleasure for me to welcome Professor Doug Blackmur to the DRDGOLD Board and to the chairmanship of this important new committee. I have split my previous combined role of Chairman and Chief Executive Officer, retaining the former and passing the latter to Ian Murray, who continues also as Chief Financial Officer. We have appointed Geoff Campbell as Senior Independent Non-Executive Director, and we have developed the parameters for continuous improvement through our own Board evaluation exercise. Our shareholding base has changed substantially. We now have more shareholders in Australia than in South Africa, and our institutional ownership has risen to 30% of the total. However, by far the greater segment of our ownership is with US based investors and our principal trading market is NASDAQ in the United States of America. There is also a growing and important market in Europe on the Frankfurt Stock Exchange. Share turnover continues to grow, with more than 450% of our shares changing hands this past year which made us the fifth most active stock on the NASDAQ SmallCap Market. The combination of risk reduction, improving competitiveness and high share liquidity has defined our niche as a mid-cap, growing gold investment. While there has been considerable consolidation in the industry, I believe that DRDGOLD now represents a unique proposition capable of outperforming its larger peers. I would like to thank our staff, suppliers and advisers, all part of the greater DRDGOLD family, for their role in the road travelled thus far. We have a marvellous product, the potential of which will come to be appreciated by a broader constituency of investors in years to come. I am looking forward to the rest of our journey and hope all of our stakeholders will travel it with us. Mark Wellesley-Wood Chairman This has been a year of considerable achievement in respect of safety in the Group as a whole 9 CEO S REVIEW AND REVIEW OF OPERATIONS The 2004 financial year has been a year of contrast as we expand our operations in the Australasian region through acquisition and battle the strength of the Rand as it takes its toll on the South African gold mining industry. We continue to make good progress on several fronts as we reposition the business for the future. SAFETY AND HEALTH While this has been a year of considerable achievement in respect of safety overall, it is with deep regret that we report the death of 11 employees in work-related incidents at our South African operations. We extend our heartfelt condolences to their families and friends. The most meaningful memorial to those of our colleagues who died is our continued commitment to further safety improvements across the Group. Our North West Operations (NWO) in South Africa, the focus of a substantial restructuring exercise in the first quarter of the financial year, recorded one million fatality-free shifts in January, while the Blyvooruitzicht Mine (Blyvoor), received the West Rand Mines Safety Award for the sixth year in succession with its attainment of a Lost Time Injury Frequency Rate (LTIFR) of These achievements point to the success of various operation-specific initiatives designed to effect behavioural change amongst employees. These have been developed as a consequence of research that confirms human error as a primary cause of workplace accidents. In Australasia, we are particularly pleased with the improvement in the safety performance recorded by our wholly owned and operated Tolukuma Mine in Papua New Guinea (PNG). Again, a focus on effecting behavioural change amongst the workforce through appropriate training and related initiatives has contributed to the mine having achieved 361 days without a lost time injury (LTI). While, regrettably, an accident towards year-end resulted in an LTI that broke the track record of success, this is the mine s best LTI achievement since production began in The health of our employees in the workplace remains a primary focus, not least because of the largely unknown impacts, into the future, of the HIV/AIDS pandemic. In South Africa, all of our HIV/AIDS initiatives derive from and are driven through the collaborative efforts of representatives of management and organised labour, through various consultative forums. Education programmes at our operations and in the surrounding communities, aimed at prevention of transmission of the HIV virus, as well as voluntary testing and counselling, continue. We subscribe, on behalf of our employees, to a wellness programme, marketed by another South African mining company. This programme has proved successful in slowing the advance of the disease amongst those that are HIV-positive to its full-blown status through the provision of advice on appropriate nutrition and drugs that help prevent the onset of opportunistic infections, pneumonia and tuberculosis. We welcome the South African Government s decision to provide free anti-retroviral therapy (ART) to HIV patients that require it. Our intention is to explore with the local government authorities how the financial provision we currently make towards the provision of ART for affected employees can best augment the State s initiative. PRODUCTION For DRDGOLD as a whole, production levels have been satisfactory. Total gold production (including attributable portion of associates and joint ventures) for the year was ounces and we are pleased to retain our position as the world s ninth largest primary gold producer. On a demographic basis, production has shifted substantially with the escalation of our growth strategy in the Australasian region. Through our acquisition, during the financial year, of a 20% interest in the Porgera Joint Venture in PNG, a substantial and sustained improvement in production from our whollyowned and operated Tolukuma mine in PNG, and an increase in our interest in Emperor Mines Limited of Australia to 45.33% in July 2004, we are within reach of our initial growth target of sourcing ounces at less than US$250 cash cost per production ounce from the Australasian region, all within a relatively short time frame. While 74% of our production in the 2004 financial year continued to be sourced from our South African operations, 26% came from our Australasian interests (excluding Emperor), compared with 8% in the previous financial year. 10 Sadly, the decline of the Rand gold price and cost escalations in key consumables in the second half substantially negated reductions in the Rand cost of production achieved in the first half of the 2004 financial year Jun-03 Gold Price 340 Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun US$/oz R/kg CEO S REVIEW AND REVIEW OF OPERATIONS South Africa, however, is likely to remain our largest source of reserves and resources for the foreseeable future, notwithstanding growth in the Australasian region and beyond. The challenges of mining our mature, deep-level South African operations in the year under review have been daunting, not least because of the impact of the stronger Rand on Dollar-denominated gold revenues and the effect on total working costs of increases in wages and many key consumables in particular, electricity, steel and water far in excess of the rate of inflation. We must, and will, plan on the assumption that these conditions are likely to continue into the year ahead. Our knowledge and experience of the South African mining environment stand us in good stead. COST TRENDS On a Group basis, average cash costs were well contained, due primarily to our acquiring and achieving lower cost ounces of production in Australasia and, to a lesser extent, effective margin management and restructuring of the South Africa operations. Regarding the latter, while a reduction in the Rand cost of production in the first half of the year by the South African operations was commendable, sadly the aforementioned decline of the Rand gold price and cost escalations in key consumables in the second half substantially negated these positive achievements. These pressures continued beyond the year-end, making further restructuring, in order to better manage costs, unavoidable. PROFITS AND MARGIN MANAGEMENT Cash operating profits for the Group overall were satisfactory, however, efforts to manage margins at the operational level were unable to offset the effects of the strong Rand. The outcomes from our Australasian interests were substantially more rewarding than they were from our South African mines, due largely to the different economic environments and nature of mining operations. In respect of our Australasian interests as a whole, a stronger average Dollar gold price received in the year under review bolstered operational efforts to increase production and better contain costs, resulting in improved margins and higher profits. The effects of similar efforts in South Africa, however, have been completely eroded by the circumstances in that country to which I have already referred. RESERVES AND RESOURCE MANAGEMENT The strength of the South African Rand rendered some 16% of our South African Ore Reserves unpayable in 2004 and consequently, our total attributable Ore Reserve decreased by 4.1 million ounces or 26% from 15.8 million ounces to 11.7 million ounces year-on-year. Despite the overall decline, we enjoyed considerable success in growing our attributable Australasian Ore Reserve by 1.5 million ounces to 1.9 million ounces in the year under review, largely as a result of the acquisition of a 20% interest in the Porgera Joint Venture, which added 1.4 million ounces to the reserves. ACQUISITIONS Attaining annualised production of approximately ounces from Australasia, partly through the acquisition of an additional 25.55% interest in Emperor in July 2004, brings the Group within reach of its initial growth target of ounces of low-cost gold production from this region, which is a major achievement. In October 2003 we acquired Oil Search Limited s 20% interest in the Placer Dome Inc. managed unincorporated Porgera Joint Venture (Porgera) in PNG for R542.3 million (US$77.1 million). Porgera s strong cash generation means that it suited and continues to suit our need for an enabler for our growth strategy. Our stake in Porgera, together with our ownership of Tolukuma, gives us a significant presence in the PNG mining sector and, indeed, in the country s economy as a whole. In March 2004, we announced our intention to acquire the remaining 80.22% of the ordinary shares in Emperor Mines Limited (Emperor), owner of the Vatukoula Gold Mine in Fiji, in which we had a 19.78% interest at the time. When our offer to Emperor shareholders closed on 30 July 2004 we had increased our 19.78% interest at 30 June 2004 to 45.33%. On 4 August 2004 DRDGOLD announced that Emperor s board of directors appointed Executive Chairman, Mr Wellesley-Wood as Managing Director of Emperor and Mr Johnson, Divisional Director: Australasia, as a Non-Executive Director of Our Australasian portfolio featuring Porgera s strong cashflow, Tolukuma s attractive exploration potential and Vatukoula s long-life is very well balanced 11 Emperor, both with effect from 3 August On 9 September 2004, Emperor shareholders approved a resolution to remove two independent directors from the board of Emperor and to confirm Mr Johnson s appointment as a Non-Executive Director of Emperor. As a result, there are now three DRDGOLD representatives on the six member Emperor board. On 14 September 2004, Emperor announced an A$20.4 million nonrenouncable rights issue to fund a portion of its Phase 2 expansion project. Under the rights issue, eligible Emperor shareholders will be entitled to subscribe for four fully paid ordinary shares in Emperor for every ten ordinary shares held in Emperor at an issue price of A$0.45 per share. Whilst the rights offering is not underwritten, Emperor is offering shareholders the ability to subscribe for shares in addition to their entitlement under a shortfall facility. DRDGOLD has agreed to apply for its entitlement under the rights issue, as well as any shortfall to the issue (subject to certain conditions) under the shortfall facility. Emperor s rights offering is currently scheduled to close on 8 October While the Vatukoula Mine currently has a high-cost, low-margin profile, it is a long-life operation with attractive reserves and resources. We are confident that, by applying our knowledge and experience of mining deep-level, Witwatersrand-type reefs in South Africa to the mining of Vatukoula s similar, epithermal orebody, we can substantially improve this mine s overall performance. By identifying and exploiting synergies in areas such as logistics and procurement, for example between Vatukoula and our other Australasian interests, we believe additional value can be added. A primary focus of attention will be completion of Vatukoula s Phase 2 development. Our Australasian portfolio featuring Porgera s strong cashflow, Tolukuma s attractive exploration potential and Vatukoula s long-life is well balanced. With this first phase of our growth strategy virtually complete, we are well positioned to pursue the second phase. This is likely to feature additional production from Australasia and possibly, from a third region that offers similar benefits a Dollardenominated revenue stream, miningfriendly administrations and long-life ore bodies similar to those of which we have experience in exploring and exploiting. In April 2004, the Group acquired 50.25% of the shares in a subsidiary (Net-Gold Services Limited) of the internet-based gold investment company, G.M. Network Limited ( to promote and enhance the Group s participation in marketing of gold and the various uses thereof. The entity brokers the payment of purchases made by subscribers, through settlement in gold. BALANCE SHEET STRENGTHENING A number of factors have contributed to a strengthening of our balance sheet in the year under review. Through three separate transactions with the South African based Investec Group between August 2003 and June 2004, some 41.5 million new DRDGOLD ordinary shares were issued, raising a total of R775.7 million. The greater proportion of these proceeds were to fund the acquisition of a 20% interest in the Porgera Joint Venture for R542.3 million, which substantially boosted our mini
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