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INTEGRATED REPORT 2013

Above: Tailings reclamation site

Key opportunities and risks

Quarterly risk assessments are carried out at all of the DRDGOLD operations where all the key risks are analysed and new risks and opportunities are identified.

Each risk is ranked and allocated to a person who is then responsible for the implementation of actions to mitigate the risk. All risks are included in a centralised database from which data is taken to draw up risk maps for each operation or division. These are then presented to management for review and those risks that are material to the business are reported to the Risk Committee.

In addition to the Enterprise Wide Risk Management programme, an independent risk management process has been implemented at the operations that addresses operational risks in the following three categories:

Benchmarking

In order to improve and enhance the systems used in the Enterprise Wide Risk Management process, DRDGOLD uses external advisers to conduct various surveys, benchmarking exercises, reviews and activities throughout the year. These are important aspects of the risk management programme and assist in the improvement of the operational risk profile of the company.

Staff members involved in operational risk management use information and detailed analyses to assist in decision-making and the latest information and technology is used wherever it is required.

Opportunities and risks matrix

The following matrix identifies the key opportunities and risks that are specific to DRDGOLD, including the specific source of these opportunities and risks, which may be internal or external.

Opportunities Risks
Internal
  • Large surface gold resources
  • Leading surface retreatment operator
  • Strong balance sheet
  • Strong, experienced management team
  • Competitive advantage (Ergo footprint)
  • Relatively small workforce
  • Low health and safety risks
  • Automated 24/7/365 operation, utilising technology
  • Uranium and acid potential
  • Delivery on strategic plan
  • Diminishing head grades
  • High water usage
  • Environmental compliance
  • Cost increases
External
  • Large surface gold resources
  • Relatively good political stability (democracy)
  • Size of economy (largest in Africa)
  • Relatively good infrastructure
  • Sophisticated capital markets
  • Government regulations and policies
  • Access to and availability of water
  • Labour unrest
  • Fraud, theft and criminality
  • Skills shortage
  • Gold price and currency volatility

Key opportunities and strategic focus areas

We create value for all stakeholders by determining the strategic focus areas which flow from the key opportunities referred to below.

Key opportunities   Strategic focus areas
  • Large surface gold resources
  • Low health and safety risks
  • Competitive advantage
  • Strong, experienced management team
  • Relatively small workforce
  • Strong balance sheet
  • Automated 24/7/365 operation, utilising technology
  • Uranium and acid potential
results in



results in



results in
  • Effectively exploit our large surface gold resources
  • Reduce risk and create opportunities
  • Control costs and maximise margins
  • Assume our social and environmental responsibilities
  • Embrace technology and innovation
Risk Response Reference
Delivery on strategic and operational plan
DRDGOLD’s strategy is to enhance shareholder value by reducing risk, controlling costs, maximising margins and assuming our environmental and social responsibilities. This strategy may not result in the expected benefits because of factors such as a significant decrease in the gold price, a sustained strengthening of the rand against the US$, failure to meet production targets, unanticipated increases in operating costs or capital expenditure, adverse regulatory developments, or inability to expand or replace current production, as well as various other factors. DRDGOLD has implemented a strategic scorecard which allows the board to engage effectively in the company’s strategic process and to focus on key strategic issues. Operational plans, production and results information are monitored and reviewed regularly by management and the board to ensure alignment with DRDGOLD’s strategic plan. Project management controls have been put in place and project management processes are monitored and reviewed regularly.
  • Shareholders
  • Employees
  • Unions/organised labour
Access to and availability of water
Various national studies conducted by the Water Research Commission may lead to the revision of water usage strategies by several sectors in the South African economy, including electricity generation and municipalities. This may result in rationing, or increased water costs in the future. Such changes would have an adverse impact on the DRDGOLD operations as they require water to operate. The surface retreatment process uses water to transport slimes or sand from reclaimed areas to the processing plant and to the tailings facilities. In addition, as the DRDGOLD gold plants and piping infrastructure were designed to carry certain minimum throughputs, any reductions in the volumes of available water may require the company to adjust production at these operations.

A water management programme is in place at the company’s operations. This includes regular reading of flow meters to monitor water usage.

DRDGOLD is currently considering a project whereby surface retreatment operations would make use of effluent water and underground water at ERPM.

A heads of agreement has been signed with Trans- Caledon Tunnel Authority (TCTA), aimed at laying a foundation for a self-sustainable solution to acid mine drainage (AMD). In terms of the heads of agreement, Ergo has, at its election, the option of acquiring up to 30Ml of untreated or partially treated AMD a day.

  • Shareholders
  • Communities
  • Government and regulators
Government regulations and policies
As a mining company in South Africa, DRDGOLD is subject to extensive mining regulations. The formulation or implementation of government policies may be unpredictable on certain issues. These could include changes in laws relating to mineral rights and the ownership of mining assets and the rights to prospect and mine. In addition, the cost of compliance with these regulations is expected to increase in the future as they become more extensive and continue to evolve.

The company adheres to all the required regulations and laws of South Africa. DRDGOLD monitors any changes to regulations or government policies, and engages with government and regulators to ensure compliance. The company maintains extensive relationships with regional and national government bodies to ensure any issues that may arise are addressed immediately.

Through its relationships with various government bodies, DRDGOLD may be in a position to influence and guide policies and frameworks.

  • Government and regulators
  • Unions/organised labour
Skills shortages
DRDGOLD competes globally with other mining companies to attract and retain key human resources. The need to recruit, develop and retain skilled employees is particularly critical with respect to HDSAs and women in mining in South Africa. Due to the limited availability of skills and experience, there is no guarantee that the company will attract and retain the necessary personnel.

The phantom share incentive scheme serves as a long-term incentive to retain senior employees and certain key employees are retained with lock-in contracts. In addition, competitive bonus schemes and salaries are used to attract and retain talent. Employees with high potential participate in individual development programmes to ensure the retention of appropriate candidates to fill senior positions in the future.

The current turmoil within the mining industry in South Africa, and in particular underground mining companies, may benefit DRDGOLD by attracting skilled, high-calibre people, seeking a more “stable and sustainable” environment.

  • Communities
  • Government and regulators
  • Employees
Fraud, theft and criminality
DRDGOLD’s operations are a target for criminals, and employees are sometimes threatened or attacked. The main objective of these criminal activities is to gain access to the property and to steal company assets. In most cases this involves the theft of copper cable and scrap metal. Such activities could adversely affect the company’s operational output and/or put the lives of employees in danger.

Relationships are established and maintained with the leaders of communities in the vicinity of DRDGOLD’s operations. Security departments at the operations and the security service provider increase their staff complement as required. Surveillance equipment has been installed and there is continuous monitoring by security personnel.

  • Communities
  • Employees
Cost increases
Most of DRDGOLD’s operating costs consist of labour, steel, electricity, water, reagents, fuels, lubricants and other oil- and petroleum-based products. The company has no influence over the cost of consumables, many of which are linked to the price of oil and steel. The majority of the South African labour force is unionised and wage increase demands have in recent years been above the prevailing rates of inflation. DRDGOLD’s mining operations are dependent on electrical power supplied by Eskom. Eskom indicated that it did not have sufficient funding for planned infrastructure development, and imposed tariff increases that have had an adverse effect on DRDGOLD’s operating costs. Eskom has announced further above-inflation increases in future.

Operating and capital costs are monitored and reviewed regularly by management and the board.
A dedicated procurement department manages all purchases, contracts and tenders. Where possible, power conservation and reduction initiatives are taken at the operations.

The new project to utilise effluent water and reduce reliance on potable water will also assist in reducing water costs.

  • Employees
  • Suppliers
  • Unions/organised labour
Environmental compliance

DRDGOLD’s operations are subject to increasingly extensive laws and regulations governing the protection of the environment. These regulate air and water quality, hazardous waste management and environmental rehabilitation and reclamation. The group’s mining and related activities have an impact on the environment, including land, habitat and streams near the mining sites. Delays in obtaining, or failures to obtain, government permits and approvals may adversely affect DRDGOLD’s operations. In addition, the regulatory environment in which the company operates could change, resulting in substantial cost increases to achieve compliance, thus having a material adverse effect on DRDGOLD’s profitability.

Flooding of underground mining areas is an inherent risk at some DRDGOLD properties. The central basin, created during South Africa’s 125 years of mining, is currently flooding and water is expected to decant in and around ERPM’s Cinderella Shaft if nothing is done to stop it. This water is contaminated with metal sulphides from past mining activities and is known as AMD. Progressive flooding could eventually cause the discharge of AMD at the surface and into local water sources. Estimates of the probable rate of rise of water are contradictory and lack scientific support. However, should underground water levels not reach a natural subterranean equilibrium, and in the event that underground water rises to the surface, DRDGOLD could face claims relating to environmental damage as a result of the pollution of groundwater, streams and wetlands.

The company integrates environmental management into its business and planning so as to minimise the influence of its activities on the receiving environment. This includes carrying out internal risk and environmental impact assessments. DRDGOLD complies with the relevant environmental legislation as a minimum and adopts and applies the best environmental options with respect to current activities as well as potential projects. Through a process of monitoring, auditing and reviewing by management, the company evaluates the success of the management and mitigation measures applied. It also ensures that environmental risks and potential emergencies are identified and managed through effective controls and procedures as identified in the risk register and the applicable Environmental Management Programmes.

The government has appointed TCTA to develop a solution for AMD and DRDGOLD is collaborating with TCTA by providing access to its existing infrastructure.

A heads of agreement has been signed with the TCTA, aimed at laying a foundation for a solution to AMD. In terms of the agreement Ergo has, at its election, the option of acquiring up to 30Ml of untreated or partially treated AMD a day.

  • Shareholders
  • Communities
  • Government and regulators
  • Employees

SD Natural capital
For more on our environmental compliance and approach to AMD

Gold price and currency volatility
DRDGOLD’s revenue and earnings are dependent on the prevailing gold price. Historically, the gold price has fluctuated widely and is affected by a number of factors over which the company has no control. DRDGOLD’s profitability may be negatively affected if revenue from gold sales drops below the cost of production for an extended period. As the majority of the company’s operating costs are in rands while gold is generally sold in US$, its financial condition could be materially harmed in the future by an appreciation in the value of the rand. Strategic focus on reducing risk, controlling costs and improving margins. Currently, and for the foreseeable future, it is not DRDGOLD’s policy to enter into forward contracts to reduce its exposure to fluctuations in the US$ gold price or the exchange rate movements of the rand.
  • Shareholders
Labour unrest
DRDGOLD may experience labour unrest and violent strike action for increased wages and improved employment conditions. These potential situations may be fuelled by inter-union rivalry, politics, and mine workers’ debt levels. Prolonged strike action could have a material adverse effect on the company’s operating and financial results. Our policy is to negotiate a two-year collective wage agreement. We continue to engage with unions at regional and national levels. There is an increased focus on enhanced, direct communication with our workforce.
  • Shareholders
  • Employees
  • Unions/organised labour
  • Government and regulators
Diminishing head grades
Our surface resources contain relatively low grades of mineralisation and these grades decrease over the life of mine. A sustained decrease in the grade delivered to the plant below our cut-off grade could have a material adverse effect on the company’s operating and financial results.

Our investment in technology to improve recovery efficiencies may offset the impact of diminishing head grades.

Securing additional higher-grade surface resources within our current footprint may also offset the impact of diminishing head grades.

  • Shareholders
  • Employees

Transfer of risks

An aspect of risk management is to identify and implement, where appropriate, the transfer of risk to third parties to protect the company from any major disaster. Certain of DRDGOLD’s risks are therefore covered by the group insurance policies. The majority of these policies, which encompass all the operations, are held through insurance companies operating in Britain, Europe and South Africa.