Business model innovation ensuring success for DRDGOLD in the declining gold mining industry

Heiser, Jens Helmuth (2014-12)

Thesis (MBA)--Stellenbosch University, 2014.


ENGLISH ABSTRACT: DRDGOLD is a mining company forming part of the declining South African gold industry. During the turn of the century, the opportunity to innovate the business model arose. Without proactive intent, DRDGOLD tapped into the opportunity and revised their business model with great success. The success is evident in the improvement of headline earnings from 2002 to 2012. To discuss the changes to the business model, the author conducted a literature review on business models and innovation. From the review, the author selected the Osterwalder Business Model Canvas as the most suitable framework to discuss the changes of the business model. The Osterwalder Business Model includes the business-centric approach and is thus favoured for this discussion. First, the business model was populated with the information to have a comprehensible business model, and secondly, the changes to the business model were identified. The information for the study was sourced from public company documentation, mainly annual reports, secondary sources like Datamonitor, and interviews with four members of the leadership team. The four interviewees were Niel Pretorius, chief executive officer (CEO), Kobus Dissel group financial manager, Charles Symons, chief operating officer (COO), and Craig Barnes, chief financial officer (CFO). The four members had a long-standing relationship with the company and were part of the change process that took place at the company. The period before the study made the business model innovation possible. Firstly, the long mining history around Johannesburg produced the mine dumps that formed the core resource of the operations. Secondly, the craze to buy anything that looks like gold during the end of the 1990s introduced DRDGOLD to the surface retreatment operations with the purchase of Crown. The environment of the operations started to change, not only the operating environment, but also the other stakeholders. The importance of the community grew, the dividend yield to the shareholder increased in importance, the engagement with the regulators changed to a proactive engagement, and the environment was managed for a long-term perspective. The risks and returns for DRDGOLD started to misalign. The risk of pursuing the underground operations further increased considerably and unintentionally drove the costs up. Within the context of South Africa, the returns of underground operations started to erode as unscheduled stoppages increased. These stoppages were caused by events outside the control of the company, for example power failures, seismic activities and labour unrest. DRDGOLD repositioned itself as a factory that has a high throughput in material on a 24/7-operation rooster. The yields are significantly lower than the underground operations, but the risk of the new setup is also reduced greatly. Seismic activity does not impact the operations anymore. The production time of the operations has increased with less unscheduled stoppages. DRDGOLD changed to have itself valued on the discounted cash flow (DCF) method. The company’s share price is now valued on the DCF method based on the operational revenues. This is contrary to the gold mining industry valuation of South African mines. These mines are mainly valued on the reserves statement multiplied by the commodity price. The share price of DRDGOLD is heavily leveraged on the spot price of gold and the exchange rate of the South African Rand (ZAR) to the United States Dollar (US$). Any movement in these two indicators will have a significant impact on the share price.

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