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www.drdgold.com
Very soon after the devastating
earthquake that struck DRDGOLD’s
North West Operations on 9 March
2005, my colleagues and I realised
that we were riding a corporate
rollercoaster that would severely test
our combined intellectual capacity
and emotional reserves. Another
rollercoaster, that is, for we had
ridden – and survived – a number of
others in recent times. There had
been corporate governance abuse of
mind-boggling proportions and the
most testing and varied of challenges
at almost all of our gold mining
operations.
But nothing could have prepared any
of us for the vilification we faced, and
the singular lack of support from
virtually any quarter, when – to save
our company for the sake of most of
its employees, all of its shareholders
and many, many other stakeholders –
we took the heart-breaking decision
to seek provisional liquidation of the
North West Operations.
Twenty months later, I confess that
it is still difficult for me personally to
look dispassionately on the weeks
and months of unpleasantness that
followed. But I firmly believe that the
concept of ‘closure’ is important to
people and organizations alike, and
it was for this reason that I asked
independent writer Kerry Swift to
research and write about the demise
of the North West Operations as
he deemed fit. This is his account….
Mark Wellesley-Wood
31 October 2006
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www.drdgold.com
“… a landscape pockmarked with problems”
Paseka Ncholo, then non-executive
chairman of DRDGOLD Limited, must
have sweated buckets over his annual
report to shareholders covering the
financial year June 2004 to June 2005.
To put it mildly, it had been a tough
year at the office.
Ncholo had only been appointed to
the position in February 2005 and the
kingdom he inherited was a landscape
pockmarked with problems. No doubt
that’s why he prefaced his comments
by saying he had become chairman
“in what must surely be one of the
most challenging environments
(DRDGOLD) has had to contend with
in its 110-year history”.
He wasn’t kidding. For one thing this
was a company damaged by the
dealings of its former executive
chairman, Roger Kebble. Although the
Kebble family had been out of the
DRDGOLD frame for almost three years,
some R122 million had been spirited
from DRDGOLD under Roger Kebble’s
stewardship in what turned out to be
just a small part of one of the largest
corporate plunders in South African
corporate history.
There were other concerns. DRDGOLD’s
North West Operations’ two mines
– Hartebeesfontein and Buffelsfontein
– in the Stilfontein area some 125 miles
south of Johannesburg – had been
subject to seismicity. On 9 March 2005,
a major earthquake in the
Klerksdorp/Stilfontein area destroyed
the No. 5 Shaft at Hartebeesfontein
and much of the haulages and mining
areas, while greatly increasing the
operational safety hazards of continued
mining operations at nearby
Buffelsfontein mine. Two miners died
and 23 were injured at Hartebeesfontein as a result of the ’quake, while
the town of Stilfontein suffered severe
damage to buildings and infrastructure.
Within two weeks of the earthquake,
DRDGOLD sought provisional
liquidation for its North West
Operations. DRDGOLD’s North West
Operations accounted for 54% of the
company’s South African production
and 34% of its total output. This drastic
step came on the back of the
earthquake and mounting losses at
Hartebeesfontein and Buffelsfontein.
The mines were losing an estimated
R20 million a month and management
was already engaged in negotiations
Added to this, the company’s South
African assets were considered
marginal, with its underground assets
being difficult to mine. Historically,
these mines required heavy capital
expenditure to maintain production and
a low gold price/high Rand
combination at the time meant the
company was bleeding profusely.
By the end of financial 2004, the
company was losing in the order of
R70-80 million a quarter.
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with stakeholders to restructure the
North West Operations mines when
the ’quake hit.
Closure of the two mines created a
largely negative, and at times
openly hostile media environment
for DRDGOLD and its CEO,
Mark Wellesley-Wood, as the
resulting hardships faced by
employees retrenched through the
closures and the trauma of
communities built around the mines
were given extensive coverage by
local and mainsteam media.
Compounding the company’s difficulties,
it became embroiled in litigation over
the issue of water removal from the
mines it had closed down. Other mining
companies operating in the Stilfontein
area were piqued that, after the
closures, they might have to pick up the
ball for what they viewed as DRDGOLD’s
environmental responsibility.
Government, for its part, launched
an investigation through its regulatory
body, the Department of Water Affairs
and Forestry, to establish responsibility
for water pumping among the various
mining companies operating in the area.
It goes without saying that the closures
provoked the wrath of organised labour
in the form of the National Union of
Mineworkers (NUM), South Africa’s
largest labour union, which blamed the
company for the seismic event. NUM’s
General Secretary at the time, Gwede
Matashe, issued a media statement
saying, “This situation further
emphasises and strengthens the call
the union made that the Ministry and
Department of Minerals and Energy
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should take away the mining licence of
this company,” claiming DRDGOLD had
“atrocious labour and working
relations” and “a terrible health and
safety record”.
NUM argued that underground tremors
in the Stilfontein area were not natural
and had something to do with
management negligence. “It is not
enough for companies to continue
proclaiming that seismicity is a natural
act because there exists equipment to
detect if and when there is a shift of
movement in the earth underground.”
Meanwhile, DRDGOLD’s other
South African mining operations
– Blyvooruitzicht, ERPM and Crown
– were under the cosh from a rampant
Rand and a severely depressed gold
price (at that time, the Rand gold
price had fallen to levels not seen
since 1931).
The company was also battling to bed
down its recently acquired offshore
mining interests on the Pacific Rim
while shareholders – a majority of
them offshore investors – were
becoming vocal about the company’s
offshore assets subsidising what they
saw as DRDGOLD’s haemorrhaging
South African operations.
And all of this was taking place against
a broader political backdrop in which
DRDGOLD, along with other South
African-based mining companies, was
grappling with black economic
empowerment issues under a Mining
Charter holding mining companies to
black ownership quotas, the principle
being that that by sharing ownership,
formerly disadvantaged black South
Africans could get a stake in the
mineral wealth of the country.
www.drdgold.com
on things: “Looking ahead we need
to be mindful that we continue to
face considerable challenges ….
Having substantially restructured
our South African operations for the
future, we must secure continuing
stakeholder support for what we
want to do, not least from labour and
government. There is an element of
‘chicken and egg’ in this – to deliver
on expectations we need support and
yet, to secure support, we must deliver
on expectations”.
Ncholo was making a plaintive call
for DRDGOLD stakeholders to stay the
course and give the company the
support and space it needed to
recover from its series of setbacks
and the negative circumstances that
it found itself in. The market
It entered the next millennium as
something of a Cinderella company,
operating marginal mines in South
Africa but with a foothold in
Australasia through its holdings in
three higher-grade gold mines in
Papua New Guinea and Fiji.
DRDGOLD never set itself up to be
something it was not and while it sailed
close to the wind it relied on the
unshakable belief that gold is a longterm certainty, even though the
company’s South African mining
operations would always be at the
mercy of escalating extraction costs
“… not a pretty picture”
certainly wasn’t listening as
DRDGOLD’s share price dropped
some 40% after the liquidation.
Although DRDGOLD’s problems seemed
overwhelming at the end of financial
2005, the company has a long history
of overcoming such trials and
tribulations. It was established in 1895
as Durban Roodepoort Deep – less
than 10 years after the discovery of the
world’s richest known gold deposit, the
Witwatersrand Basin – and its shares
were listed on the Johannesburg Stock
Exchange in the same year. Milling
operations began in 1898 with
30 stamp mills and the company
Overall it was not a pretty picture, yet
Ncholo managed to put a brave face
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treated 38 728 tonnes of ore and
produced 22 958 ounces of gold
during that year. By 1915 it had
mined one million ounces of gold.
| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
and the vagaries of the Rand/Dollar
exchange rate. It also relied on the
enterprise and resilience of its
management team, headed by CEO
Mark Wellesley-Wood.
The South African gold mining industry
has traditionally thrown up strong and
colourful personalities. One need look
no further than the early ‘Randlord’
pioneers, among them Cecil John
Rhodes, Barney Barnato, Abe Bailey
and Alfred Beit – all swashbuckling
characters in their own right. When the
English mining engineer and investment
banker, Mark Wellesley-Wood, was
drafted into DRDGOLD by executive
chairman Roger Kebble as his 2IC in
May 2002 – while admittedly a small-bit
player in South African mining terms –
another colourful presence was
introduced to the panoply of South
African mining executives.
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Wellesley-Wood was certainly nobody’s
poodle – bulldog would be a better
description – and mandated to deal,
among other things, with governance
issues, he soon set the tone for
DRDGOLD with the motto: “We do what
we say”. He was well equipped for the
job. He has a BSc degree in Mining
Engineering from the Royal School of
Mines, Imperial College, London and a
Postgraduate Diploma in Business
Studies from London Metropolitan
University. A chartered engineer, he is a
member of the Institute of Mining and
Metallurgy, a former member of the
London Stock Exchange, a fellow of the
Securities Institute and a Member of the
Society of Investment Professionals.
Wellesley-Wood soon made his
presence felt in the DRDGOLD
boardroom. Once he was fully apprised
of the extent to which the Kebbles were
using the company as a private honey
pot, he turned on them. In a nasty and
acrimonious battle he purged
DRDGOLD of Kebble family influence
and entered into a long and debilitating
legal battle to recover the estimated
R122 million that the Kebbles allegedly
spirited from the company during
Roger Kebble’s stewardship. This is the
guy who, stung by the seemingly neverending criticism of his company,
instructed his PR firm to produce Tshirts for a quarterly presentation to
shareholders with ‘I don’t work for
Crapco!’ emblazoned on the front.
Wellesley-Wood may not be universally
loved, but industry insiders describe
him as “decisive”, “straight-talking”
and “smart” – not bad attributes for
the tough-as-teak South African
mining industry.
www.drdgold.com
By the end of financial 2004 under
Wellesley-Wood’s stewardship the
company appeared to be getting to
grips with its core issues. The negative
impact of Rand strength on revenue,
coupled with the challenges of mining
marginal assets in South Africa, had
prompted an intensive restructuring
programme of the loss-making North
West Operations and DRDGOLD had
acquired what it believed were
promising offshore assets in Papua
New Guinea and Fiji as a hedge
against its mature and declining
Rand-based assets.
At the time, the company’s South
African operations consisted of the
North West Operations’ two mines,
Hartebeesfontein and Buffelsfontein;
Blyvooruitzicht Gold Mining Company
Limited (Blyvoor); Crown Gold
Recoveries (Pty) Limited (Crown); and
East Rand Proprietary Mines Limited
(ERPM). In Papua New Guinea its
holdings comprised Tolukuma Gold
Mines Limited (Tolukuma), and a 20%
participation in the operations of the
Porgera Joint Venture (Porgera),
through its holding in DRD (Porgera)
Limited. In Fiji, it had a 19,78% stake in
Emperor Mines Limited (Emperor),
which owned and operated the
Vatukoula mine.
“… an optimistic note …”
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| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
In the company’s annual report for the
period July ’03 to June ’04, WellesleyWood struck a generally optimistic note
to shareholders. “The combination of
risk reduction, improving
competitiveness and high-scale
liquidity has defined our niche as a
mid-cap, growing gold investment.
While there has been considerable
consolidation in the industry, I believe
that DRDGOLD now represents a
unique proposition capable of
outperforming its larger peers…. I am
looking forward to the rest of our
journey and hope all our stakeholders
will travel it with us.”
In the 2004 financial year, gold
production from DRDGOLD’s total
portfolio of underground opencast and
surface re-treatment operations was
905 023 ounces and some 26%, or 233
190 ounces, of this came from its
offshore mining interests. The South
African interests accounted for 74% of
total production, compared with more
than 92% in the previous year. The
company appeared to be moving
decisively on its South African laggards
and was establishing its offshore
bridgehead to safeguard shareholder
interest by hedging against diminishing
asset value in South Africa.
Although never a serious corporate
social investment (CSI) player, the
company was also getting to grips with
the soft issues. There was a hint of
pride in Wellesley-Wood’s report on CSI
issues to shareholders in 2004:
“DRD’s interactions with
the communities in which it operates
have both increased in scope and
improved in substance. At Tolukuma
we have been able to help residents
of surrounding villages with crop
development and marketing, in
particular with the export of locally
grown coffee. In addition, we have
assisted with the provision of water
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www.drdgold.com
“… reasonably well placed to move ahead …”
pumps and health and education
infrastructure. We have made good
progress with our localisation
programme and now more than
90% of our workers are Papua New
Guinea nationals.”
In South Africa he reported (somewhat
prematurely as it turned out) that the
company had been brought closer to the
communities in which DRDGOLD
operated through the various
consultation processes accompanying its
restructuring initiatives. “At the North
West Operations and at ERPM, we have
worked closely with all of the
stakeholders to develop and implement
social plans that seek to manage and
thus minimise the inevitable social
impacts of downsizing. Our Adult Basic
Education and Training programme
continues to expand and complements
our new ‘Train for the Nation’ initiative
designed to identify, develop and retrain
historically disadvantaged South
Africans. We are also making good
progress with the conversion of singlesex hostel accommodation to family
units and are engaged with various local
authorities in discussions on the transfer
of surplus mine social infrastructures,
such as clinics and recreational facilities,
for community use.”
Reviewing the company’s operations at
the end of financial 2004 Ian Murray,
CEO of DRDGOLD at the time, wrote
that the company continued to make
good progress on several fronts as it
repositioned itself for the future,
highlighting the company’s safety
record and its focus on health and
educational programmes for its
workforce. Production levels had
5
been “satisfactory” and with
905 023 ounces of gold mined the
company retained its position as the
world’s ninth largest primary gold
producer. Costs had been “well
contained” and cash operating
profits for the company overall
were “satisfactory”.
The general optimism was based on
the company’s unshakable confidence
in the long-term strength of the gold
market. Putting its money where its
mouth was, it had invested heavily in
buying back historical hedge positions
in order to present itself to the
investing community as an unhedged,
single commodity gold producer, thus
providing full exposure to gold price
movements. As a commitment to its
faith in the value of gold as a form
of currency, DRDGOLD had also
acquired a strategic 50,25% interest
in Net-Gold Services Limited, a
subsidiary of the internet-based gold
investment company, GM Network
Limited (GoldMoney.com).
DRDGOLD’s total attributable mineral
resource base as at 30 June 2004 was
57,7 million ounces and its total
attributable ore reserves were 11,7
million ounces, including 40% of its
associate Crown and ERPM, 20% of the
Porgera Joint Venture and 19,78% of
Emperor. This meant attributable ore
reserves from offshore assets
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constituted 16% of the total reserve
base of the group, compared to less
than 1% in the previous year.
As part of its restructuring efforts,
in November 2004 the company’s
name was changed from Durban
Roodepoort Deep to DRDGOLD Limited
to more accurately reflect its focus on
gold. It was listed on the Johannesburg
and Australian stock exchanges with
secondary listings on the NASDAQ
SmallCap Market and the London and
Port Moresby stock exchanges.
Further developing the new focus,
DRDGOLD South Africa was formed
in 2005 to consolidate the company’s
operations in the country and on the
African continent, while the company
announced that its offshore assets
would be sold to Emperor Mines
Limited to enable DRDGOLD to hold all
of its offshore assets in a single listed
venture. Both arms of DRDGOLD
Limited, ‘South Africa’ and ‘Australasia’,
now had their own boards.
So – although hardly a stellar
performer by global standards – the
company seemed reasonably well
placed to move ahead with some
prospect of success in 2005.
The future, however, was soon to be
swallowed up by the present through a
convergence – tsunami would be a
better description – of events that
almost saw the company go belly up.
These events involved Wellesley-Wood
in a titanic struggle to keep the
company afloat and a swirl of negative
publicity that would have sunk lesser
men. It were as if the restructuring of
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this century-old mining company
somehow unleashed a malignant genie
from the bottle. Putting the cork back
has consumed most of Wellesley-Wood
and his executive team’s energies and
it is only now, with the worst
seemingly over, that the embattled
CEO can look back and give his own
version of events, because, in his view,
he has been victim of a “sustained and
well-orchestrated campaign to
discredit DRDGOLD, its directors and
myself in particular”.
The story turns primarily on the
seismic events that affected the
company’s North West Operations.
A sizable tremor in the Stilfontein area
late in 2004 forced DRDGOLD
management, or the company’s
auditors, to impair the full value of
Hartebeesfontein mine and issue
review notices to labour unions,
heralding future retrenchments. By the
end of 2004 negotiations with various
stakeholders were well under way on
cutbacks at the company’s North West
Operations’ mines. Perhaps the
seismic activity at Stilfontein was a
cosmic warning of worse to come.
Then, at noon on 9 March 2005, tremors
turned to real trauma as an earthquake
measuring 5,3 on the Richter Scale
rocked the Klerksdorp/Stilfontein
area trapping 42 miners 2 300 metres
(1,5 miles) underground at
Hartebeesfontein mine and damaging
buildings and infrastructure and causing
35 minor injuries in the nearby town of
Stilfontein. The ’quake was of a
magnitude that it was felt as far away as
the capital city of Pretoria. It was the
largest seismic event of its kind in South
Africa since an earthquake measuring 6,1
on the Richter Scale struck the Western
Cape area of Ceres back in 1969.
www.drdgold.com
“… a swirl of negative publicity …”
alive all but two of the 3 200 miners
who were underground at the time of
the incident back to the surface;
23 were injured. For the town of
Stilfontein the ‘quake was a major
calamity as buildings collapsed and
infrastructure was damaged. Although
nobody was killed in the town, the
community was severely traumatised.
Speculation as to the cause of the
earthquake arose immediately after the
event, much of it pointing to mining
operations in the area and more
particularly blaming DRDGOLD.
However, in an interview with
Johannesburg-based Radio 702, the
Council for Geoscience’s Dr André Kijko
said: “It’s the largest mining-related
event ever recorded in South Africa’s
history. But it doesn’t mean that it was
caused by mining activities. In fact,
this is a bit technical. In the South
African context, it’s one of the severe
mining-related incidents. It is almost
impossible to say it was induced
by mining.”
Ian Saunders, Project Leader at the SA
Seismograph Network at the Council of
Working around the clock, DRDGOLD
emergency services managed to rescue
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| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
Geoscience in Pretoria told Radio Algoa
that the event most likely resulted due
to a reactivation of an existing fault line
“which is natural and cannot be
blamed on human error”.
Either way, DRDGOLD became the
villain of the piece, not helped by the
technical terminology ‘mining-related’
which did little to temper the
perception that the company was
somehow directly responsible for the
event, a claim the company has always
rejected. At the time, Strategic
Development Officer at DRDGOLD Ilja
Graulich put the company’s position in
an interview with the national
broadcaster, SAfm: “… There’s no way
to prove whether this was mining
related or not and this is something
that is highly speculative. I think before
a full investigation is completed it
would be premature to comment …
Our monitoring system monitors
underground every five minutes at a
number of points and you can see from
the seismic picture that there may be
stresses building up…. This was a
tremor completely out of the blue and,
given the magnitude of the tremor, sort
of underpins our view that it was very
much a natural event.”
Government, through its regulatory
body, the Department of Minerals and
Energy, set up an inquiry that
subsequently reported: “it is probable
that the seismic event was triggered
by strain changes in the rock mass
caused by extensive mining in the
region”. A further DME-instituted
investigation, which reported on its
findings more than 18 months later,
affirmed the inquiry’s finding.
COMMUNICATION TO SHAREHOLDERS
It didn’t help the company’s image, in
the wake of the earthquake, that it
decided to tough it out when it came to
company assistance beyond standard
retrenchment packages for employees
affected by the mine closures or
support for victims of the earthquake
in Stilfontein. It’s not that WellesleyWood and his executive team were
necessarily unsympathetic (indeed,
what was never reported was that
some DRDGOLD executives – WellesleyWood among them – made private,
compassionate payments to ’quake
victims) but they were under legal
advice not to make any extra-legal
payouts because of pending insurance
claims. If DRDGOLD had made formal
compassionate payouts to victims, the
company may well have established
legal liability for the event.
www.drdgold.com
out more than that in the first six weeks
in post-liquidation costs to support the
liquidators.” Beer, who is no shrinking
violet himself, turned up the heat,
taking the liquidator’s fight to the
insurers. “It was all about getting into
the trench with a fixed bayonet and
challenging the insurers’ assumptions
about DRD.” In the ensuing battle their
offer grudgingly crept up until it
reached R104 million, which was the
final accepted settlement offer.
Beer says DRDGOLD was non-beneficial
in the whole process. “The only
beneficiaries were the creditors. We
could simply have accepted the
R14 million and walked away. Instead,
we used our already stretched
resources to take on the insurers
because we believed we had a moral
“… an absurd offer …”
While it may have been coy on that
particular front, it was much more
assertive on the insurance front.
Local and UK-based insurers had a
potential liability of R500 million in
terms of the insurance cover DRDGOLD
held over its Stilfontein assets and the
company hoped its insurance claim
after the earthquake could float its
North West Operations out of
provisional liquidation. It estimated
that R150 million would be sufficient
to expedite the restructuring and
settle creditors.
The insurers’ first offer was a paltry
R14 million. Bill Beer, DRDGOLD’s
Regional General Manager: Assets and
Commercial, had been mandated by
Wellesley-Wood to handle issues
arising from the liquidation. “It was an
absurd offer,” says Beer. “We had paid
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obligation to get the best outcome for
our creditors. I think that says quite a
lot about the attitude of the senior
management of this organisation,
considering we were in the middle of
a firestorm at the time.” However, it
still took almost a year before the
R104 million was paid over to the
liquidators. All the speculation and
loose talk about massive insurance
payouts to DRDGOLD was just that,
loose talk. The battle with insurers and
the late payment of the insurance claim
sunk any chance DRDGOLD had of
getting its North West Operations out
of provisional liquidation and of
keeping the mines under its wing.
| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
Niel Pretorius, who provided legal
counsel at the time and is now CEO of
DRDGOLD SA, believes that if the
insurance claim had been settled within
three months, it would have been
possible to lift the provisional
liquidation, pay creditors and
restructure the North West Operations.
“In the expectation of a quick
resolution of the insurance claim,
DRDGOLD made plans to re-open its
Buffelsfontein mine. In view of the
destruction wrought by the earthquake,
the mine would be run as a smaller
operation, focused on mining particular
areas at certain pay limits. The
workforce would have to be halved and
it seemed likely that the terms of
employment would have to change.
Nevertheless, 3 500 people would have
jobs and local suppliers would have
benefited from having a functioning
business in the area. Unfortunately, the
insurance claim was not settled
promptly which meant that DRDGOLD
could not implement the plan. It is
important to note that during the
period between the earthquake and the
final settlement of the insurance claim,
DRDGOLD spent some R40 million on
salaries and wages and on
maintenance work to preserve the
assets. This included the costs of
pumping water,” says Pretorius.
On March 25, 16 days after the
earthquake, Wellesley-Wood wrote to
DRDGOLD shareholders saying that the
decision to provisionally liquidate the
North West Operations was “one of the
toughest I have ever been party to as a
chief executive”.
“My Board and I believe emphatically
that it was the right decision and that
DRDGOLD and all of its stakeholders
will emerge the stronger for it,” adding
somewhat prophetically, “We will be
well placed to take advantage of what
COMMUNICATION TO SHAREHOLDERS
we still see as just the beginning of a
gold bull run.”
He said it was disappointing that the
company had been attacked from
various quarters during its attempts
to resolve the North West Operations’
difficulties and for its decision to
liquidate.
“It would be easy to turn the other
cheek but I am concerned that there
are shareholders at some remove from
the heat so to speak who may be
disconcerted by the vitriol, which is
simply not supported by fact.
“The National Union of Mineworkers,
representative of most of our
employees, has castigated us in the
South African media for our safety
record. The fact is, official government
statistics prove that DRDGOLD
recorded the lowest fatality rate in the
whole of the South African gold mining
industry last year … Blyvooruitzicht
mine has just won, for the seventh time
in a row, the West Rand Mine
Managers’ Inter-mine Safety
Competition. Such awards and
achievements do not come easily, but
are the result of hard work and
dedication by all of our employees.
“I must restate, in this context, a
primary motivation for our provisional
liquidation of the North West
Operations: that is, our firm conviction
that continued exploitation of highgrade pillar panels amid continuing
incidences of seismicity was simply
untenable from a safety point of view.
www.drdgold.com
“The NUM has accused us of being
the worst payer in the South African
mining industry. The fact is our pay
scales are absolutely in line with
those of the rest of industry. More
specifically, our minimum wage rates,
signed off by our primary detractor in
this, are the same as those of our
competitors. In fact, our workforce at
the Harties section of the provisionally
liquidated North West Operations was
the second highest paid in the country.
“The North West Operations’
provisional liquidation has served as
yet another opportunity for our
detractors to question our patriotism
and commitment to South Africa
while they continue to ignore the simple
unsustainability of a business that
has continued to lose more than
R20 million a month – a business in
which DRDGOLD in recent months for
many reasons … has invested more than
R280 million with absolutely no return.
“They choose also to ignore the
investment we have taken in the
country, averaging over R120 million a
year in new capital expenditure over
the last five years, sustaining profitable
gold production of over 400 000
ounces a year and securing 6 500 jobs.
“When everyone else, including the
South African Government, had turned
its back on one of the South African
gold mining industry’s most notorious
“… vitriol, which simply isn’t
supported by fact.”
8
| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
of ‘Cinderellas’ – East Rand Proprietary
Mines, it was DRDGOLD and its Black
Economic Empowerment (BEE) partner,
Khumo Bathong Holdings, that came to
the final rescue. Together, we have
nursed the mine through fires,
seismicity, industrial action and general
pariah status, back to profitability. And
all for a total investment of R160
million that has ultimately secured
some 2 300 jobs.
“We’re proud, too, that we were the
first South African mining company to
secure a BEE transaction. (In July 2002
Khumo Bathong Holdings (Pty) Limited
(KBH) became DRDGOLD’s black
empowerment partner when it acquired
60% of the entire issued share capital
of Crown Gold Recoveries (Pty) Limited.
“Wherein, then, lies the substance for
accusations of unpatriotic behaviour
and lack of commitment to South
Africa? Because we have diversified our
mining activities to Australasia? Surely
this should be a source of national
pride, not denigration. Were it not for
the profits generated by these overseas
assets, our South African assets would
have been considerably worse off as
they struggle to cope with the strong
Rand and consequent low Rand gold
price inflicted upon them.
“Enough said. I hope the foregoing helps
allay any concerns you may have about
the current storm that surrounds us.”
When it was clear that the insurance
claim would not be settled promptly,
DRDGOLD had to abandon its plan to
re-open Buffelsfontein and the
liquidators then called for bids for the
sale of DRDGOLD’s North West
Operations. Says Neil Pretorius: “The
fact that Buffelsfontein had been kept
in a state where it would be possible
for another company to take it over and
start it up again in the shortest time
COMMUNICATION TO SHAREHOLDERS
www.drdgold.com
“… DRDGOLD had walked the talk on safety …”
possible was an important factor in
attracting would-be buyers. Simmer &
Jack emerged as the leading contender
and discussions got under way. Initially
Simmer only wanted to buy the assets
but the company eventually agreed to
a Scheme of Arrangement which would
enable Buffelsfontein to be restarted.
The model adopted by Simmer was
very similar to the one DRDGOLD
devised when it was hoping to re-open
the mine”.
He says that, in terms of the
agreement, Simmer did not take on all
existing liabilities. “It was DRDGOLD
that facilitated discussions with the
unions and undertook to provide funds
for the retraining of the 3 500 people
who would not be re-employed at
Buffelsfontein mine. The company
spent R2 million on this programme.
Simmer would not take on
responsibility for water pumping that
DRDGOLD had shouldered in the past,
but was prepared to take over
DRDGOLD’s share of the costs involved
in terms of a directive from the
Department of Forestry and Water
Affairs that held all the mines in the
area responsible to keep pumping
water. The way was now clear for the
ownership of Buffelsfontien to be
transferred from DRDGOLD to Simmer
& Jack. During the eight-year period
that DRDGOLD owned Buffelsfontein, it
had lent the mine R1 billion for
capitalisation and restructuring. When
Buffelsfontein was in liquidation,
DRDGOLD could have put in a claim for
the recovery of part of this amount.
However, we took the decision not to
compete against the other creditors
which meant they obtained a higher
9
proportion of their claims than would
otherwise have been the case.”
Wellesley-Wood still believes that the
events that led to the North West
Operations closures have never been
put into proper perspective because of
the welter of negative publicity that
accompanied the event and that what
followed buried the broader picture of
corporate responsibility. He believes
DRDGOLD had walked the talk on
safety before the earthquake and that
it acted in the best interests of the
company and its stakeholders by
closing its North West Operations and
putting them into liquidation.
His premise is that the North West
Operations were very marginal mines in
the first place. Hartebeesfontein was a
rapidly diminishing asset with a poor
safety record by the time DRDGOLD
took it over from Avgold in 1999.
Originally a large and high-grade mine
– it had three plants and 10 shafts
producing around 350 000 ounces of
gold a year – the grade of gold-bearing
ore was rapidly diminishing when
DRDGOLD took control. To stay
productive someone had to go in and
dramatically downsize and re-organise
the mine. In short, DRDGOLD’s
acquisition of Hartebeesfontein from
| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
Avgold was a rescue operation that
only a company with experience of
marginal mining could attempt to pull
off. However, while DRDGOLD would
make no concession to cost cutting to
keep the mine operating, employee
safety, in Wellesley-Wood’s words has
always been “non-negotiable”.
Addressing the safety issue, he says
seismicity is a big issue for the South
African mining industry as a whole.
“Under the old regime it was more or
less accepted that occasional
underground rock bursts would cost
lives and South African mining is still a
long way from global best mining
practice of ‘zero harm’. The fatalities
record at Hartebeesfontein was
horrendous when we took over in 1999.
In one year, we had to close one of the
shafts because there were nine
fatalities in three months. One of the
main reasons Harties was sold was
because of seismicity, which was
associated with the mine well before we
even got there. For example, a seismic
event at the mine in 1996 lost the
bottom of 6 Shaft and gave the Avgold
board a nasty shock. Even under our
stewardship, the fatality record at
Harties was running at unacceptable
levels. In short, we were extremely
conscious of seismicity.
“Shortly before the 2004 earthquake
stuck, I had personally been involved in
presentations from our rock mechanics
on site at the mine to assess risks and
the trends. The stress patterns had to
be monitored very carefully and we had
systems in place to do that. I had
already closed 2 Shaft unilaterally
because of seismicity until such time as
COMMUNICATION TO SHAREHOLDERS
I could get a satisfactory risk
assessment saying everything was
safe. The rock mechanics were in
charge and we put the whole mine on
rapidly yielding hydraulic props. When
the earthquake struck on March 9 it is
significant there were no injuries in the
work places within the mine. Every
stope at Harties stayed open. In fact,
about the safest place in the mine
when the ‘quake hit was in the stopes.
Our hydraulic propping system worked
exceptionally well.
“Of course, people were quick to blame
the mine for the event, but the US
Geological Survey, which operates the
most advanced satellite monitoring
system on earth, released a report
indicating that this was a natural
earthquake and not caused by the
mine. It put the epicentre of the
earthquake some 5km underground
and nowhere near any of the current
workings, either in location or depth. In
its view, it was a fluke, a freak of
nature. The energy release was felt in
Pretoria and there is no possible way
that a bump underground would be felt
that far away. The ‘quake was a once in
40- to 50-year event. Clearly, something
other than the mine had caused it,
although you could say mining in the
area made it worse than it might have
been had there been no mining
activities. The energy released below
the mine came straight up into our
workings and that’s why most of the
damage was caused to 5 Shaft. The
shaft took most of the impact while the
stopes were relatively unaffected. That’s
why we had so few fatalities. The truth
is that the steps we had taken to ensure
the mine’s safety actually worked.
www.drdgold.com
was a bump. Consequently we have
changed the whole mining plan for
Blyvoor. There has never been any
question of accepting risk exposure
of employees to seismicity. Employee
safety is absolutely non-negotiable
and it’s ironic that we get as much
criticism from the market for the high
costs of safety measures as we do from
people questioning safety on our
mines. It’s a case of damned if you do,
damned if you don’t.”
Wellesley-Wood sees the period
between the earthquake and the
liquidation as unique in South African
mining and corporate history and raises
the issue of balancing risk and
responsibility. The issue of directors’
responsibility received considerable
The earthquake and subsequent events
also raised issues around other
stakeholders’ responsibilities. In this
instance Wellesley-Wood talks about
‘bad neighbours’.
“… people were quick to blame …”
media play at the time with critics saying
Wellesley-Wood and his board acted
irresponsibly in liquidating the mine.
His response? “Actually we did what
prudent directors are supposed to do.
“After the earthquake I couldn’t find
anyone – including the scientists – who
could give me a plausible reason why a
similar event might not happen the
following day or the following week.
Nobody had an answer. So, as a board
of directors we had employees at risk.
We could have gone to prison – and
“Since the earthquake we have been
even more conscious of seismicity. At
Blyvoor last year, for example, the rock
mechanics saw a build-up in stress. We
pulled people out of the mine and there
10
quite rightly – if we had not responded
to that risk. On the other side of the
coin, we had a mine that was losing
money and to continue would have
been reckless. The law in such cases
says ‘stop it, you don’t have a mandate
to go on’. And that’s exactly what
liquidations are for. Directors have
limited liability under corporate law
but that only extends to acting
responsibly. As soon as they start acting
irresponsibly they become personally
liable and with the best will in the world
nobody is going to go there.”
| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
“Usually when someone is confronted
by disaster, people rally round. In the
case of a death, for example, family
and friends are usually supportive and
sympathetic. We experienced the
opposite effect. I describe it as having
bad neighbours. The looking away by
our neighbours in the case of the
earthquake was absolutely disgraceful
and irresponsible and it explains where
people were and where they were
coming from.”
The first of the ‘bad neighbours’ in
Wellesley-Wood’s book were North
West Operations employees. “At that
time we were trying to negotiate with
the union some kind of economic
model for the mine. Harties was a highcost mine – 60% of its costs were
labour compared to an industry
average of around 45% – grades
were falling, we were losing around
COMMUNICATION TO SHAREHOLDERS
R20 million a month. It was a problem
mine and the unwillingness of
employees to accept any short-term
plan left us with very little room to
manoeuvre.
“The same thing happened with regard
to safety. Safety was seen as solely
management’s problem and the NUM
would take no responsibility for safety
initiatives. They preferred to sit on the
sidelines and reserve the right to
criticise. In meetings after the
earthquake it was also clear that state
mining officials were easily swayed by
the unions and were happy to play to
the gallery. The culture of blame kicked
in immediately and inevitably the
earthquake became the mine’s fault. For
the people of Stilfontein, who equally
bore the brunt of the ’quake, there was
no systematic relief. We did what we
could to provide alternative housing for
displaced people, but there was no coordinated disaster relief. It was just
assumed that it was all the mine’s fault
and therefore the mine should pay.”
Other ‘bad neighbours’, says WellesleyWood, were neighbouring mining
companies as the closures raised the
spectre of who was going to pump water
from the closed DRDGOLD mines.
Pumping is necessary to prevent the flow
of underground water from mines at the
higher location within the mining areas
to lower-lying mines and to keep the
mines at the higher location dry for their
own operating purposes. The designs of
higher-lying and shallower mines, such
as Hartebeesfontein, Buffelsfontein and
Margaret, took account of the challenges
posed by large volumes of water, unlike
the deeper shafts owned by AngloGold
Ashanti and Harmony, which do not
encounter such volumes.
AngloGold Ashanti, which had lowerlying mining operations in area, made
its case against DRDGOLD in its 2005
11
www.drdgold.com
Report to Society in which the company
said it found itself in “unchartered legal
territory” with regard to water
management issues following a
“dispute over responsibility for
pumping underground water when
DRDGOLD placed its North West
Operations into provisional liquidation
on 22 March 2005”.
“Prior to this,” reported AngloGold
Ashanti, “dewatering of mines in the
area was conducted by each mining
company at their own mine shafts –
DRDGOLD Limited, Harmony Gold
Mining Company and AngloGold
Ashanti – and Stilfontein Gold Mining
Company, which, though closed,
contracted the dewatering of its
Margaret shaft to Hartebeesfontein.
“Once DRDGOLD abrogated its
responsibilities to continue pumping
natural underground water, the ensuing
debate highlighted a crucial area,
namely, on whose shoulders the
pumping responsibility should lie when
one mine closed down before another.
The South African statutory law, in the
opinion of AngloGold Ashanti, is clear
in this regard, the mine in whose area
the underground water occurs has the
obligation to manage such water.
“When DRDGOLD left responsibility for
pumping with its liquidators, mines
operated by AngloGold Ashanti and
Harmony, lying as they do on the down
dip of DRDGOLD’s North West
Operations, were at risk of flooding
with a number of possible impacts:
cessation of operations, loss of a
valuable resource, and resultant job
losses affecting the social and
economic fabric of the areas.”
On 13 April, AngloGold Ashanti
launched an interdict to request the
court to order DRDGOLD to continue
dewatering at its operations. As a
result, the Department of Water and
Forestry Affairs issued a directive to
mining companies to formulate a
proposal on how to handle the
dewatering issue. AngloGold Ashanti
wanted DRDGOLD to continue
dewatering, but Wellesley-Wood has a
different take on the issue.
For years, he says, DRDGOLD’s
Hartebeesfontein mine pumped water
from the Stilfontein mine which lay
above it on the incline and which had
long ceased operations. DRDGOLD
pumped Stilfontein’s water because it
had to be pumped to prevent flooding
at its North West Operations mines and
because “nobody else was putting up
their hand”.
With regard to the pumping dispute,
Wellesley-Wood believes underground
water is a joint responsibility to be
shared by all mines in the area. It should
either be shared equally or some
proportional formula should be worked
out taking the value of gold mined in the
area into account.
“… I describe it as having bad
neighbours.”
| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
COMMUNICATION TO SHAREHOLDERS
www.drdgold.com
“… on track to recovery.”
“This is a shared basin,” says
Wellesley-Wood, “and this is where
we had a different view about life
from that of our mining neighbours.
Eighty per cent of the water pumped
by our Harties mine was from the old
Stilfontein mine above us. Because
we were next in line down the incline
we got their water. We were losing
around R20 million a month at Harties
and dewatering accounted for about
R8 million of that loss. We had
repeated conversations about water
pumping responsibilities with the
neighbouring mines but we never
reached any agreement. AngloGold,
which is by far the biggest player in
the area, said it wouldn’t pay a penny
and besides, its view was that water
pumping is a national issue and
government should pay.”
The next group of ‘bad neighbours’ in
Wellesley-Woods’ book were among
DRDGOLD’s creditors, many of whom
put the company on cash-on-delivery
terms after the earthquake struck.
“As a result the liquidity squeeze on
the company only got worse. Again
as directors we ran the risk under the
Companies Act of trading recklessly
by knowingly incurring more credit.
After the ‘quake we had lost gold
production at the North West
Operations and we had real safety
concerns. I mean, do you put people
back into potentially unsafe mines to
pay creditors? Of course, the answer
is: you don’t. So in the main creditors
did little to help the situation by their
irresponsible actions.” It is fair to say,
however, that some creditors went to
considerable lengths to cut the
company some slack, bearing in mind
12
that DRDGOLD had other mines in
operation and there were
long-standing and ongoing
relationships with significant
creditors and suppliers who did
see the bigger picture.
“KPMG took a very hard and detailed
look at our accounts to decide
whether or not to qualify them (which
they didn’t). If the share had been
suspended, the chances of getting
refinancing would have been nil and
the chances of paying creditors
would have been even less than nil,”
Wellesley-Wood concludes.
While his ‘bad neighbours’ list is
not exhaustive, it provides an insight
into the conflicting pressures that
fall on directors in times of crisis.
“Given where we were at the time,
we really had no option. Basically
we were forced into liquidation
because there was just no time to
come to a satisfactory outcome.
Our insurance claim was in the
pipeline, but that wasn’t going to
pay the next week’s wages.”
Despite the many setbacks, WellesleyWood and his team feel the worst is
behind them and, although they
concede there is some way to go, they
believe they are on track to recovery.
DRDGOLD SA CEO Niel Pretorius says
that, coming out of its difficulties, the
| CO MM U N IC AT ION TO S HA R E HOLDE RS | D R DGOLD LI M ITE D
company needs to establish itself as
a serious player. “We have the
benefit of a good mix of assets. We
have large surface resources and
reserves which are low-cost assets
and we’re engaged in acquiring more,
both in our own right and through
commercial relations with other
mining entities. Surface assets
provide a safety net when a low gold
price puts pressure on high-cost
underground assets. So, we have a
good measure of flexibility and this
will ensure we are less exposed in
times of low gold price levels. On the
underground front, we will be
spending on infrastructure to
increase efficiencies. We want to be
in a position where it costs us less
to take out more and you do that
by spending on infrastructure.
Now that the battle for survival is
over, we are moving ahead on
these initiatives.”
He believes DRDGOLD will be well
placed to benefit from a future in
which the gold price takes off to
record levels. “The logic is that there
are more gold consumers than
producers. The ability of the bullion
banks to lean on the gold price is
diminishing each year and consumer
demand is going to be a bigger player
in determining the gold price. Once
consumer demand is the dominant
driver there is no reason why gold
won’t follow the same pattern as
platinum because the same
mechanics apply. We intend to be
ready to take full advantage of gold
breaking loose, which we believe will
happen in the next four to five years.
We are cautiously confident.”