open letter from Mark Wellesley-Wood zum mineweb-Bericht

verfasst von spieler, 01.11.2002, 15:47

-->OPEN LETTER TO SHAREHOLDERS BY CHAIRMAN AND CEO MARK
WELLESLEY-WOOD REGARDING THE ESKOM GOLD LINKED
ELECTRICITY TARIFF AND OTHER MATTERS
Once again, I’m writing to you to set the record straight; more specifically, in this
instance, to address any misperceptions that may have been created about
DRD’s contract with Eskom and other matters, arising from a BoE report dated
24 October and a subsequent Mineweb report, quoting BoE, dated 29 October.
I would suggest that, if you have read neither reports, you ignore both and direct
any queries you may have regarding the Eskom contract directly to me or to
DRD’s CFO, Ian Murray.
For those of you who have read one or both reports, and are disturbed, I would
offer the following by way of clarification:
BoE asserts that: “DRD has effectively transferred (hidden) the losses associated
with its previous hedgebook from the income statement to the balance sheet and
cash flow statement”.
Mineweb deduces: “This follows from closing its hedge book using forward
purchase agreements that offset its hedging exposure. That effectively makes
the touted gearing to the spot gold price a chimera, leaving the group’s financial
position no better than before”.
In fact, when the previous hedge book was closed out in May and June
2002, the full mark-to-market loss on the positions (R837m) was recognized
in the Income Statement. The corresponding outstanding amounts due to
the bullion banks were raised on the Balance Sheet as long- and short-term
borrowings amounting to R360m, with the remainder paid in cash prior to
year-end. The outstanding balance is payable over two years and does not
fluctuate with changes in the gold price or the R/$ exchange rate. This
treatment was compliant with SA GAAP as at the end of June 2002. Under
AC133, no further adjustments will be required.
Mineweb continues, quoting the BoE report: “…without a big move in the gold
price, Durban’s shareholders will still suffer the same negative cash flows -
around R150m ($14.7m) over the next year!”

In fact, while the Eskom hedge - at the current gold price and R/$ exchange
rate - will incur an additional electricity cost of R150m for the year, the
group will generate very healthy cash flows for the 2002/2003 financial
year. In the September 2002 quarter, DRD generated R100m from operating
activities after the additional Eskom cost of R28m.
To quote BoE again: “DRD could never be accused of consistent accounting.
Without fail the group seems to restate figures from quarter to quarter and this
reporting period was no different. This time the change was with regard to the
Eskom linked tariff (hedge).”
In fact, the accounting treatment for Eskom has not changed from the
previous quarter. The only change is that it is now shown as a separate line
item in the income statement and is not included in revenue as in the
previous quarter. The previous quarter’s revenue was restated in order to
be more consistent for comparative purposes. The effect is to give users
of the financial statements more information on the cost of this position.
There is no impact on EPS.
Mineweb quotes BoE as saying that “Durbans did not disclose details of the
hedge until the second quarter”.
In fact, BoE stated that “until the June quarter presentation, management
refused to disclose the magnitude of the hedge”. Both are wrong. The
Eskom hedge was discussed for the first time in the September 2000
quarterlies. To quote from that quarterly report: “The company has
concluded a gold-linked tariff agreement with Eskom, whereby 50% of the
group’s electricity cost over the next five years is linked to the dollar gold
spot price. Electricity accounts for 12% of the total production cost”. In
addition, the position has been disclosed in the company’s 2001 and 2002
annual reports, the 2001 20F filing with the United States Securities and
Exchange Commission and March 2001, June 2001, September 2001 and
June 2002 quarterly reports. Further, the 2001 20F filing disclosed the
mark-to-market of these positions.
Mineweb goes on to opine: “The ‘book’ is incredibly volatile, with a10%
depreciation in the rand-dollar price and 10% appreciation in the gold price
potentially doubling the unrealized loss for Durbans based on today’s (Tuesday)
closing prices”.
In fact, the rand gold price needs to increase by 53% for the Eskom
position to double, which means from the gold price, currently at $316 per
ounce, would need to increase to $485 per ounce at a R/$ exchange rate of
10:1. In addition, the company has entered into a call buying strategy to be
funded out of operating cash flow, whereby the exposure will be capped
and the electricity cost will not increase pro-rata to the increase in rand
gold price. In other words, after this strategy is implemented the position
will not double at any gold price.
I hopes this helps.
With best wishes,
Mark Wellesley-Wood

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  • open letter from Mark Wellesley-Wood zum mineweb-Bericht - spieler, 01.11.2002, 15:47