Why DRDGOLD $DRD is the blueprint for how Sibanye Stillwater $SBSW will handle its 60 million pounds of uranium reserves.

Ferengi Law of Acquisition 287: Always get somebody else to do the lifting.

DRDGOLD (DRD) is the 50% owned subsidiary of Sibanye Stillwater (SBSW), and it processes the tailings of various South African gold mines in order to extract their proven reserves of 5.79 million ounces of gold.  A tailings dump is the pile of crushed rock left behind after a mine has been operating for decades, and they can be enormous.

Before I even go much farther, I have to point out that the company that processes SBSW’s old gravel piles currently has a market capitalization of $850 million, and SBSW owns half of it.  SBSW has a market capitalization of $3.144 billion, and if you subtract $425 million for their 50% ownership stake in DRD, you are effectively buying SBSW for $2.7 billion.  This is a company that did $11.6 billion in revenue in 2021 and had a net income of $2.2 billion that year.  If you include acquisitions since then, you are probably buying SBSW today for less than a price to peak earnings of 1.  But I digress.

DRD processed and sold about 163,000 ounces of gold in 2023 for revenues of about $297 million, and profits of a bit under $70 million.  It is currently trading at about 2.8 times 2023 revenue, and about 12 times 2023 net income.  All in sustaining costs were somewhere around $1,575 an ounce.  Not particularly cheap, but the stability of the business, aside from the instability of South Africa, probably deserves a high multiple.  The gravel is known, already somewhat crushed, and processing it is reasonably predictable especially when compared to the business of mining.

DRD does have expansion potential, they have already finished due diligence on phase 2 of their Far West Gold Recoveries project, which would double production there.  This would increase future production by about another 38,000 ounces of gold annually to bring total production to just over 200,000 ounces.  Capex for this expansion was estimated to be somewhere near one billion Rand, this estimate was years ago, and the Rand conversion has changed dramatically, but probably about the same size as 2023’s net income.

The stock price has just about doubled off from the 2022 lows, but gold closed today over $2,400 an ounce, and for their last six month period, DRD sold their production for $1,954 an ounce.  Due to operating leverage, profits should double over the next year if gold prices stay where they are, and although the stock price has run up, it probably is not reflecting sustained $2,400 gold.

In summary, DRD is like a gold miner in a bad jurisdiction, but with much fewer operational challenges.  It could easily see net income of $100 million or more in 2025 if the gold price stays high and costs don’t creep up to challenge those margins.  Being neither miner nor royalty company, it’s not clear what multiple it would eventually fetch, but the stock price appreciation potential doesn’t strike me as enough to make me want to sell my Equinox (EQX) to buy it.

What is much more interesting is the way in which SBSW acquired 50% of DRD.  In 2017, the two companies agreed to an asset for equity swap, SBSW would receive 38% of DRD with an option to buy another 12%, and DRD would receive SBSW’s West Rand Tailings Retreatment Project.  This sort of transaction accomplishes two things for SBSW, first it takes away a future need for capex.  Rather than have to budget for their own tailings treatment needs, a stand alone entity can take care of the problem.  Second, while everyone is familiar with economies of scale, there is not enough understanding around diseconomies of scope.  The more different things a business tries to do, the worse it is at all of them.  By having DRD manage the tailings of SBSW, it leaves SBSW to focus on other things.

From a negotiating standpoint, this sort of structure creates an easy environment to make a deal.  From the point of view of the CEO of the acquired company, this takes away a lot of career risk.  With SBSW having 50% ownership, the c-suite can sleep easy at night knowing that no activist investor or board of directors vote can ever unseat them as long as the CEO of SBSW is content with their operations.  From the perspective of the CEO of SBSW, he can plant his flag and expand his empire while at the same time, getting rid of a distracting operating headache.  SBSW gets something for nothing, and DRD gets to double their reserves and ensure job security.  

I believe that this is exactly what SBSW wants to accomplish with their uranium reserves.  SBSW has no desire to engage in the capex and operations necessary to permit and build out a uranium processing mill, probably a $100 million investment and a distraction from their core business.  But 60 million pounds of uranium at $80 a pound, is a large enough value that it could be swapped for considerable equity in a pure uranium company.  In my recent writeup for Energy Fuels (UUUU), we saw that uranium in the ground is worth between $5 and $10 of market cap.  This would put SBSW’s 60 million pounds at a value of between $300 million and $600 million in an equity swap arrangement with a uranium junior mining company, preferably one in which that much equity gives meaningful control if not complete control with a 50% ownership stake.

If SBSW can’t find a junior miner to swap reserves for equity, they might be able to convince Gold Fields (GFI), who already processes uranium in South Africa, to create a joint venture subsidiary with SBSW contributing reserves for equity.  Alternatively, SBSW could task DRD to try and develop a uranium competency, and pay SBSW royalties for the uranium, but this path is likely less desirable as SBSW would be less interested in a distant revenue stream than an initial equity swap. 

Whatever the eventual uranium outcome, I do predict that SBSW will never do the dirty work of spending on capex and processing uranium themselves.  

Ferengi Law of Acquisition 287: Always get somebody else to do the lifting.