SHARES such as DRDGold — once known as the “Roodepoort Rocket” — are proof that traditional sell signals have weakened in precious metals. The gold tailings miner was said to be fully priced in mid-February when its share was trading at R19. Since then, the stock is nearly 750c higher — taking full-year gains to 66%.“What I’m learning fast in this market is that the traditional relationships and fundamental indicators have broken down,” said Arnold van Graan, an analyst for Nedbank Securities, who made the sell call on DRDGold. “But I still think gold needs to correct at some point. And with it the stocks.”Too true, but when? Earlier in March, John Reade, market strategist for the World Gold Council, said in a podcast that tariff distress had been absorbed by the gold market and, with little encouragement from the bar and coin market in Europe, gold was “range bound”. He saw little indication the metal would get through the psychological barrier of $3,000/oz.Then it did, first fleetingly so, then it stayed there. At the time of writing, gold is trading at $3,079.53/oz. That moment prompts the question: Where to from here? Potentially even higher, is the answer.For gold to match its inflation-adjusted high achieved in the 1980s, it would have to go to $3,800/oz. Even to achieve $3,500/oz, investment demand would need to rise 10%, said Bank of America analyst Michael Widmer in a February 12 note. Yet it’s “not impossible,” he added.And that investment support may be coming.Just over a month ago China’s regulator permitted the country’s 10 largest insurers to allocate some assets to gold.“It is only 1% to start with but I think this is very much the beginning of something that could become bigger,” said Reade, who thinks this may have a bearing on the gold market in the second half of this year, and beyond. “There is so much in assets under management [AUM] in China that 1% of their AUM represents between 150 tons and 500t of gold demand. In a context of a 5,000t gold market, that is significant.”Even in the absence of this new demand from China, analysts think gold still has some room to travel. “We think it is possible to see a high through $3,200, before prices gradually ease and stabilise at elevated levels over the next few years,” said Joni Teves, a market strategist for UBS in a recent note.Bottom lineFor gold miners such as DRDGold, price pulses like this go straight to the bottom line. It’s only extracting 0.33 grams for every ton of gold waste it processes. That means it’s highly marginal and its share performance shows this. Its shares traded as high as R27 in 2020, the early days of the gold price bull run, when the metal gained $400/oz in about a month.But the company is taking a defensive approach, using the gold price to extend its resources and milling capacity. It sanctioned a R10bn project build last year — more than the previous R7bn capital plan — which runs until 2028, when it hopes to have added a ton of additional gold production. By that time the gold price run will most likely be history, but DRDGold will have extended operations by 15 to 18 years without having taken on debt.We are running as hard as we can, spending money as quickly as we can. The big issue is implementation of the project, that is the only constriction that we have – Niël PretoriusCEO Niël Pretorius said: “At the moment, the margin is such that we don’t have to dip into our facility with Nedbank [up to R2bn]. We have spent R1bn in the six months to December and ended the half-year with R600m in the bank. The gold price is playing its part, so why not do this now?”DRDGold operates two plants: the Ergo facility at Brakpan, east of Joburg, and Far West Gold Recoveries (FWGR), a vast resource it “bought” by selling control to Sibanye-Stillwater, which owns 51% of DRDGold. An extension of FWGR involves building a new tailings facility that will also process uranium-bearing waste ore at some future point.DRDGold pays a dividend, it has done for years, but Pretorius is adamant this is the time to reinvest. “We are running as hard as we can, spending money as quickly as we can,” he said. There are about 120 pieces of hardware on the FWGR construction site. “The big issue is implementation of the project, that is the only constriction that we have,” he saic.In December, Nic Dinham, an analyst for SBG Securities, said of DRDGold’s capital escalation to R10bn: “The escalation of capital commitments greater than inflation, and delays to milestones, are typical for the mining industry. It remains a concern for investors, but current gold prices mean that the timing of the capex investment could not have been better and DRDGold’s R2bn debt facilities may not be required.”A version of this article first appeared in the Financial Mail.The post Record gold is putting bang in the ‘Roodepoort Rocket’ appeared first on Miningmx.
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