Chief Financial Officer’s review

Key features for the year

• Dividend declared of 7.5 cents, up 50%
• Gold production up 10% to 265 179 ounces
• Ergo’s gold production up 37%
• Revenue up 29% to R2 565 million
• Operating profit up 76% to R477 million
• Headline earnings per share up 115% to 28 cents per share
• Net cash inflow from operations up 504% to R324 million
• Crown/Ergo pipeline project on schedule and within budget, to be completed in December 2011
• Net asset value of Blyvoor written down to Rnil

Our performance

Key focus areas

The key financial focus areas for FY2011 and the results achieved were as follows:

Key focus areas for FY2011	Results achieved
Improving operating margins	Our operating margin rose to 18%, from 13% in FY2010. Ergo’s and Crown’s operating margins increased to 33% and 27% (FY2010: 13% and 25%), respectively.
Improving headline earnings per share	Headline earnings per share went up by 115% to 28 cents, from 13 cents in FY2010.
Improving cash inflow from operations	Net cash inflow from operations increased by 504% to R324 million, from R54 million in FY2010.
Stringent capital allocation, management and measurement against return on investment	Capital is allocated for new projects with the intention of maximising return on equity. In FY2011 we allocated capital of approximately R340 million for the Crown/ Ergo pipeline project, which is on schedule and within budget. Our return on equity has risen to 9%, from 3% in FY2010. Crown and Ergo achieved a combined return on equity of 25%, up from 10% in FY2010.
Funding for the Crown/Ergo pipeline project	A R500.0 million Domestic Medium Term Note Programme (DMTN Programme) was successfully established, specifically for the funding of the Crown/Ergo pipeline project. In October 2010, R108 million loan notes were issued under the DMTN Programme.

Production

Group gold production for FY2011 went up by 10% to 265 179 ounces compared with 241 194 ounces in FY2010. Both Blyvoor and Ergo managed to increase their gold production by 14% and 37%, respectively. Crown’s gold production decreased by 4%, mainly as a result of diminishing grades as the processing of the Top Star dump neared completion. Crown and Ergo’s gold production constituted 54% of total gold production for FY2011.

Revenue

In FY2011, the group’s revenue rose by 29% to R2 565.3 million from R1 990.5 million in FY2010. This was the result of the higher rand gold price and the increase in gold production. Ergo’s revenue rose significantly by 59%, due to an increase in volumes and recovered grade.

⁽¹⁾ Excludes ERPM underground production.

Operating profit

The increase in gold production and the higher rand gold price resulted in a 76% rise in our group operating profit, from R271.6 million in FY2010 to R477.0 million in FY2011. Of particular importance is the fact that our surface operations, Crown and Ergo, contributed 85% of our group operating profit for FY2011.

⁽¹⁾ Excludes ERPM underground production.

Operating costs

An increase in volumes, together with above inflation increases in both labour and electricity resulted in a 19% rise in operating costs. In particular, electricity cost increases and winter tariffs remain a major concern. Electricity costs have more than doubled over the last three years since significant cost increases were introduced in July 2008 following the electricity supply crisis.

Electricity and water costs comprise 18% of costs in FY2011, a significant increase from 13% in FY2009.

Group cash operating costs per unit of production went up by 8% to R251 296/kg in FY2011, from R233 112/kg in FY2010. Of note is the fact that Crown and Ergo’s combined cash operating costs only increased by 5% in FY2011, from R207 568/kg to 218 868/kg.

⁽¹⁾ Excludes ERPM underground production.

Operating margins

In FY2011, group operating margins rose to 18% (FY2010: 13%), as a result of the increase in gold production and higher rand gold prices. The combined operating margins of Crown and Ergo was 29% for FY2011, compared with 22% in FY2010. Crown and Ergo’s operating margins have been consistently higher than that of Blyvoor and unfortunately the underground operation has had a negative impact on the group operating margin.

⁽¹⁾ Excludes ERPM underground production.

Year-on-year financial statement analysis

Income statement

An analysis of the summarised group income statement for the year, with comments on significant variances is presented below:

Summarised group income statement (R million)	Note	2011	2010
Revenue	1	2 565.3	1 990.5
Cost of sales	2	(2 343.5)	(1 891.8)
Gross profit from operations		221.8	98.7
Impairments	3	(547.7)	(6.2)
Administration expenses and general costs	4	(88.1)	(57.0)
Net finance income	5	30.8	176.1
(Loss)/profit before taxation		(383.2)	211.6
Income tax	6	(32.2)	(8.2)
(Loss)/profit for the year		(415.4)	203.4

The loss for the year of R415.4 million was mainly as a result of the impairment of Blyvoor’s property, plant and equipment, which amounted to R546.6 million. Without this impairment the FY2011 profit would have been R131.2 million.

1. Revenue

   Both the 15% increase in the rand gold price and the 10% increase in gold production for the year resulted in the group’s revenue increasing by 29% to R2 565.3 million in FY2011, from R1 990.5 million in FY2010.

2. Cost of sales

   Cost of sales increased by 24% from R1 891.8 million to R2 343.5 million in FY2011.

The components of cost of sales are as follows:

• Operating costs went up by 19% mainly as a result of a 7% rise in volumes, together with above inflation increases in both labour and electricity costs.
• Depreciation decreased by 31% owing mainly to changes to the life-of-mine plans at Crown.
• Retrenchment costs decreased by 96% and related to ERPM.
• Movement in provision for environmental rehabilitation increased to R52.6 million in FY2011 from a credit of R88.0 million in FY2010. The credit in FY2010 was mainly as a result of a decrease in the environmental rehabilitation provision for the old Durban Roodepoort Deep and West Wits mining licences, which were sold.
• Movement in gold in process was a debit of R15.6 million in FY2011 compared with a credit of R29.9 million in FY2010, resulting from movements in gold inventories.

3. Impairments

   In FY2011, the impairments of R547.7 million consist mainly of an impairment of Blyvoor’s property, plant and equipment, amounting to R546.6 million. On 23 June 2011, DRDGOLD announced that it had suspended financial assistance to Blyvoor and the Board of Directors of Blyvoor had, in response to DRDGOLD’s decision, resolved to begin business rescue proceedings for Blyvoor in terms of Chapter 6 of the Companies Act. Blyvoor’s production had been trending down as a result of a drop in grade, public holiday interruptions and seismicity-related work stoppages, while costs had increased owing mainly to higher electricity charges, and particularly Eskom’s winter tariff which added R11.0 million a month to overhead costs. After taking into consideration the decision to divest, the business rescue proceedings, DRDGOLD’s market capitalisation and the value in use of Blyvoor, it was decided to impair Blyvoor’s property, plant and equipment.

4. Administration expenses and general costs

   Administration expenses and general costs increased by 55% in FY2011, from R57.0 million to R88.1 million. In FY2010, administration expenses and general costs included a non-recurring credit of approximately R30.0 million as a result of a decrease in the provision for post-retirement medical benefits. Other than inflation related increases, this was the main reason for the year-on-year increase.

5. Net finance income

   In FY2011, net finance income decreased by 83% to R30.8 million (FY2010: R176.1 million). The decrease was due to the fact that net finance income in FY2010 included a gain of R156.7 million for foreign currency translation reserves realised on the liquidation of foreign subsidiaries. Interest received decreased from R17.7 million to R13.3 million as a result of lower interest rates received for the year. Interest paid increased from R3.7 million to R10.5 million, because of the issue of R108.0 million worth of loan notes in October 2010.

6. Income tax

   The tax charge was substantially higher in FY2011 at R32.2 million, compared with R8.2 million in FY2010. The year-on- year increase was mainly due to higher profits, in particular at Crown and Ergo, which resulted in an increase in the deferred tax charge for the year.

Statement of financial position

An analysis of the summarised group statement of financial position as at 30 June, with comments on significant variances is presented below:

Summarised group statement of financial position (R million)	Note	2011	2010
Property, plant and equipment	1	1 540.0	1 857.6
Other non-current assets	2	238.7	320.6
Cash and cash equivalents		259.1	188.2
Other current assets	3	250.9	213.9
Total assets		2 288.7	2 580.3
Equity	4	1 219.2	1 650.0
Non-current borrowings	5	30.3	–
Other non-current liabilities	6	629.1	661.1
Current borrowings	5	79.3	–
Other current liabilities	7	330.8	269.2
Total equity and liabilities		2 288.7	2 580.3

1. Property, plant and equipment

   The decrease in property, plant and equipment from R1 857.6 million to R1 540.0 million was mainly due to the impairment of Blyvoor’s property, plant and equipment amounting to R546.6 million and depreciation of R130.9 million, which were partially offset by capital expenditure incurred during the year amounting to R317.3 million. The balance of movements included changes in estimates of decommissioning assets, asset reclassifications and disposals.

2. Other non-current assets

   Other non-current assets, comprising investments, non-current inventories and deferred tax asset, decreased from R320.6 million to R238.7 million.

Significant movements included:

• a recoupment of the preference shares held in our black economic empowerment (BEE) partner, Khumo Gold SPV (Pty) Limited, amounting to R23.4 million; and
• a decrease of R71.5 million in the deferred tax asset, mainly as a result of the profits generated by Ergo and a decrease in the estimated deferred tax rate.

3. Other current assets

   Other current assets consist of inventories, trade and other receivables and a current tax asset. Other current assets increased from R213.9 million to R250.9 million. The increase was mainly as a result of an increase in trade receivables (gold sold by Rand Refinery) and value added tax as at 30 June 2011.

4. Equity

   Equity decreased from R1 650.0 million in FY2010 to R1 219.2 million in FY2011.

Significant movements included:

• the loss for the year of R415.4 million, which included the impairment of Blyvoor’s property, plant and equipment, amounting to R546.6 million; and
• a dividend paid to ordinary shareholders, amounting to R19.2 million.

5. Borrowings

   Borrowings increased to R109.6 million in FY2011, mainly as a result of the R500.0 million DMTN Programme, which DRDGOLD entered into with Absa Capital, a division of Absa Bank Limited, on 30 September 2010. Loan notes, amounting to R108.0 million, were issued on 1 October 2010 under the DMTN Programme. The first tranche of loan notes, amounting to R78.0 million, are due for repayment on 3 October 2011.

6. Other non-current liabilities

   Other non-current liabilities, which consist of preference shares held by BEE partners, provision for environmental rehabilitation, post-retirement and other employee benefits and deferred tax liability, decreased to R629.1 million in FY2011 from R661.1 million in FY2010.

Significant movements included:

• a decrease in the carrying value of preference shares held by BEE partners of R48.8 million, which was largely due to a positive adjustment of Blyvoor’s preference shares resulting from the Blyvoor life-of-mine plan indicating that no cash flows will be available to repay the preference shares and the payment of a dividend on ERPM’s preference shares;
• a R69.6 million increase in the provision for environmental rehabilitation due to changes and reviews in estimates, discount and inflation rate assumptions at 30 June 2011. In addition, changes in estimates resulted from changes to the life of mines and additional environmental damage incurred;
• a decrease in post-retirement and other employee benefits, amounting to R7.1 million, was mainly as a result of the settlement of a portion of Crown’s post-retirement medical benefits; and
• a decrease in the deferred tax liability of R45.6 million was largely as a result of a change in the estimated deferred tax rate.

7. Other current liabilities

   Other current liabilities increased from R269.2 million to R330.8 million, mainly as a result of an increase in Blyvoor’s trade and other payables.

Statement of cash flows

An analysis of the summarised group statement of cash flows for the year, with comments on significant variances is presented below:

Summarised group statement of cash flows (R million)	Note	2011	2010
Cash flows from operating activities	1	324.0	53.6
Cash flows from investing activities	2	(335.2)	(226.4)
Cash flows from financing activities	3	81.3	7.8
Net increase/(decrease) in cash and cash equivalents		70.1	(165.0)
Cash and cash equivalents at the beginning of the year		188.2	353.6
Foreign exchange movements		0.8	(0.4)
Cash and cash equivalents at the end of the year		259.1	188.2

The rise in cash and cash equivalents at the end of the year to R259.1 million was mainly as a result of increased cash inflows from operating activities.

1. Cash flows from operating activities

   The rise in cash inflow from operating activities to R324.0 million in FY2011 from R53.6 million in FY2010 was largely due to the 15% increase in the rand gold price and the 10% improvement in gold production for the year, which resulted in a significant rise in the group’s revenue. Although Blyvoor contributed towards the increase in cash inflow from operating activities, our surface retreatment operations generated most of the cash flows from operating activities.

2. Cash flows from investing activities

   Cash outflow from investing activities went up from R226.4 million to R335.2 million, which was mainly as a result of the increase in capital expenditure on the Crown/Ergo pipeline project and the upgrade of the Ergo plant during the year.

3. Cash flows from financing activities

   Cash inflows from financing activities rose to R81.3 million in FY2011 from R7.8 million in FY2010. The increase was largely due to the loan notes, amounting to R108.0 million, which were issued during the year under the DMTN Programme. This cash inflow was partially offset by dividends on ordinary shares of R19.2 million which were paid during the year. In addition, there were some dividends paid on the ERPM preference shares to our BEE partner amounting to R31.7 million.

Looking ahead

Our key financial focus areas for FY2012 will be the following:

• improving operating margins;
• improving headline earnings per share;
• improving cash inflow from operations;
• stringent capital allocation, management and measurement against return on investment; and
• completing the consolidation of the surface retreatment operations into a single entity, in order to exploit the resulting synergies

Craig Barnes
Chief Financial Officer

19 September 2011

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