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Drooy - Prime Acquisition Target

October 22, 2000

What is the most common denominator to all industries today? There is ONLY ONE: An overtly aggressive effort by industry captains to become much bigger via ACQUISITON and/or MERGER. It is pervasive across all industries - WORLDWIDE.

It is their belief that Bigger is definitely BETTER. Even the gold industry is hell bent for leather in gobbling up smaller gold miners to create even larger behemoths. Whether there is commercial merit in acquisition/merger activities is not within the scope of this report. Rather, this writer will focus on the choicest and most apt candidate for acquisition by its giant peers.

Before naming the prime target for acquisition, this writer thinks it meaningful to view a comparative chart demonstrating the relative market performance of numerous gold mining stocks during the last three months. The period was purposely selected because the numerical analysis is based upon data recorded in July of this year. It is my objective to match market performance to relatively current data -- which indeed may be relevant. The gold stocks in the comparison are Anglogold (AU), Barrick Gold (ABX), Durban Deep (DROOY), Gold Fields Ltd. (GOLD), Harmony Gold, Newmont Mining (NEM) and Placer Dome (PDG).

A cursory glance reveals that the smallest of the six gold companies produced the best results. Specifically, Durban Deep declined a moderate 9%, while its behemoth brothers fell 12% to 27% in the latest three month period. For some unseen reason DROOY is showing excellent relative strength. This implies that DROOY may well be subject to institutional buying. This may include Gold Mutual Funds and/or one or more global gold producers in search of annual gold production and enticing gold reserves. That is to say a major gold mining company wants to beef up its yearly production and listed reserves at a bargain basement price. And Durban Deep fits these objectives to a "T."

Acquisition Analysis

Undoubtedly, there are many analytical methods employed in selecting a target suitable for acquisition. Many of these methods are quite sophisticated, and therefore very difficult to understand. However, this writer will use just 'common sense' methods, understandable by the layman. This report will outline two methods: Acquisition Cost of Production and Acquisition Cost of Reserves. Simply stated:

- How much must I pay to buy each ounce of annual production?

- How much must I pay to buy each ounce of total gold reserves?

  - P r o d u c t I o n - -- R e s e r v e s --
Company Prod (oz/Yr) Acq Cost ($/oz) Total Res (oz) Acq Cost ($/oz)
Gold Fields
Placer Dome
Durban Deep




Above data extracted from

Listed above are eight gold mining companies that are considered major gold producers (i.e. production of more than 1,000,000 oz/year). Among the eight there are TWO that stand out conspicuously. One because it is outrageously priced, and the other because it is so CHEAPLY PRICED. Obviously, the first is Barrick Gold, which sports a market cap much more than its weight in gold (pardon the pun). But Barrick is not the focus of this writer's attention. Rather, one should zero in on Durban Deep (DROOY), precisely because its market cap/oz of production and cost of reserves/oz are SO INEXPENSIVE.

DROOY Acquisition vis-à-vis the Price of Gold

In recent weeks the price of gold has been range bound around $275/oz. Let's compare DROOY's acquisition price to the current gold value. Per the above data one can purchase 1,134,000 ounces of yearly production for only $105/oz vis-à-vis a $275/oz market price. That's equivalent to a discount of 61% off the market price!! HOWEVER, THAT'S NOT THE BIG BARGAIN.

Everyone well knows that the secret to survival of any mining company is RESERVES. Well, DROOY is very long on GOLD RESERVES. It's total reserves are 58.400,000* ounces…and they are literally selling for PITTANCE! Two Bucks Per Ounce! Compare this to Barrick's cost of reserves at an obscene $104/oz -- or Franco-Nevada's $112/oz.

Under comparison here are eight major gold mining companies - seven of them known aggressive acquirers of promising gold mining properties. Whereas Durban Deep has in the past aspired to also be An Acquirer, it really never had the financial muscle to compete with the seven gold 'heavy weights.' Therefore, DROOY is a prime acquisition target of the Big Seven.

Which of the Seven Might Be the Acquirer?

The following is just this writer's common sense analytical approach to determine which of the majors is the most likely 'suitor' of DROOY. To narrow the field of who are the most likely Acquirers, this writer discards out of hand Anglogold, Barrick Gold and Placer Dome - for the following reasons. Anglogold has literally no peer in the gold universe…nor even a likely contender. Anglogold has too little to gain. On the other hand both Barrick and Placer Dome could gain a great deal. However, few current DROOY stockholders would allow a peaceful tender for its shares from Barrick. And whereas Placer Dome is a more compatible suitor for DROOY, PDG is entangled in too many legal difficulties with previous acquisition attempts (e.g. Las Cristinas mines in Venezuela). This leaves four that are eminently suitable for a 'marriage' with DROOY. The four are ranked in order of acquisition probability - highest first.

1. Harmony Gold
This has the highest probability based upon the accrued benefits of acquisition. Firstly, Harmony's yearly gold production would immediately increase by 72% to nearly 2.7 million ounces. It would then be ranked as the world's 7th largest gold producer. Furthermore, its total reserves would jump 277% to 79.5 million ounces - ranking it 3rd in the world. Moreover, Harmony Gold's president, Bernard Swanepoel, was once in Durban Deep's top-management. He knows Durban's operations from the inside. Also, there just might be a personal victory motive at work here. (This can provide powerful motivation) To reduce the possible and material dilution effect of a stock swap merger, Harmony's excellent operational and market performance may persuade bankers to lend the funds for acquisition. In this writer's opinion, it would be an exemplary managerial 'coup' for Swanepoel to acquire his former employer.

2. Gold Fields Ltd.
Very recently, the South government put the kibosh on the highly touted marriage between Gold Fields and Franco-Nevada. This put a serious dent in GOLD president's plans of accelerated growth through aggressive acquisition. Mr. Chris Thompson desperately seeks to be a major world gold force. However, his own government has gravely delayed his time table. Moreover, many felt he was paying too dearly for Franco-Nevada's 1.0 million ounces of annual gold production. By acquiring DROOY, Mr. Thompson will have pulled his ambitious plans out of the fire - so to speak. He will obtain 28% more yearly production and increase total gold reserves by nearly a third…all at just fraction of the cost he was willing to fork our for Franco-Nevada. Indeed, Mr. Thompson will demonstrate enviable resiliency by rising up from a seemingly "knockout" punch from the government of South Africa. A DROOY acquisition would qualify GOLD solidly as the world's second largest gold producer. In a stock swap, GOLD's dilution would be 'digestible' as its market cap is far greater than DROOY's. Last but not least, GOLD is quite familiar with DROOY's operations, since both operate primarily in South Africa.

3. Newmont Mining
This company is the world's 2cd largest gold producer, but is the 1st in North America (with Barrick gold breathing down its neck). Both these companies are very aggressive in acquiring gold mining companies around the world. Were NEM to takeover DROOY, it would solidify its position as number 2 in the world with a combined annual production of 5.3 million ounces - an increase of 27%. However, its total reserves would leap 77% to 133.9 million ounces…all for PITTANCE. In light of NEM's financial solvency, it probably could finance the entire DROOY purchase, which translates to Zero Dilution to its stockholders.

4. Franco-Nevada
Although an acquisition by FN is feasible, it is the least likely of the four under consideration to consummate the DROOY marriage. It certainly has the cash to do it. FN could literally buy DROOY lock, stock and barrel for cash. But FN lacks the operational management experience to pull it off successfully. Nonetheless, as a Gold Holding company FN could just add DROOY to its investment portfolio - into the gold stable it now possesses.


Any reasonably analytical person evaluating the numbers is forced to conclude that DROOY is a prime candidate for acquisition. To be sure, Its stock performance during the last three months demonstrates that it is basing at about $1/share.

There is little probability that any Acquirer could gain control of DROOY for only a buck a share. Although recent relative price stability would suggest that one or more institutional investors may well be snapping up all the shares it can get at that price. This writer believes that any serious tender buy-offer must be make substantially above DROOY's market price in order to fully valuate its current 1.1 million ounce yearly production and its 58.4 million ounces of reserves.

This begs the question: "what would be a fair price for DROOY shares?"

The following estimate of an acquisition price is the personal opinion of this writer. It is based upon the numbers of DROOY's prime suitors. It is a simple layman's practical, common sense method to valuation of a business.

I think of DROOY as a going business. Understandably, if I were to buy this business I am interested in just two factors:

- How much current yearly production may I count upon, and
- What are the total gold reserves that I may mine in the coming years?

All other factors are of secondary importance in determining how much I will be willing to pay for this company. I will use as a template the average market valuation of its Four Acquiring Candidates (as mentioned above).

Methodology Used

The basic premise of my methodology assumes that DROOY should be priced at an equivalent of the average of the Four Acquiring Candidates.However, the final valuation is necessarily a function of two factors: the value of current production and the value of unmined reserves (future production).

Firstly, I will calculate the average Acquisition Cost of Production ($/oz). Then I will calculate the average Acquisition Cost of Reserves ($/oz). Since current production is eminently more commercially significant, I will weight it with 75% of the total price valuation. Correspondingly, reserves valuation will be 25%.

  • Average Acquisition Cost of Production of the Four Acquiring Candidates applied to DROOY is $8.87. And weighted at 75% is equivalent to $6.65.
  • Average Acquisition Cost of Reserves of the Four Acquiring Candidates applied to DROOY is $25.11. And weighted at 25% is equivalent to $6.28.

THEREFORE, per my valuation method the practical acquisition value of DROOY is $12.93/share (6.65 + 6.28)… rounded to $13/share.


Assuming that all the numbers shown above are correct, one is forced to conclude that the market is too dearly under-valuating DROOY's shares in comparison to its peers. DROOY's price on the NASDAQ is about a dollar (US) per share (plus or minus a few cents). Nonetheless, if DROOY were afforded a valuation based on production and reserves at just the average of the Four Acquiring Candidates, its market price would be 13 TIMES GREATER.

With a current market cap of a mere $106,000,000 (US), and in light of its 1.1 million yearly production and vast total gold reserves, DROOY is a PRIME TARGET FOR ACQUISTION BY ONE OF THE Four Acquiring Candidates. Whereas they might not be willing pay up to what I feel is DROOY's true market value, any serious suitor will inevitably be obliged to pay much more than today's $1/share market price.

Were I a member of DROOY's Board of Directors, I would insist upon a trade price based on an equivalent to AT LEAST the Average Acquisition Cost of Production of the Four Acquiring Candidates, weighted at 75%…$6.65/share.


The information shared here is not investment advice, just my personal opinion. Each person is responsible for his/her own investment actions. Do your own due diligence before you invest in any security.


(*) Total Reserves = P&P + M&I + GEO

P&P (minable): Proven and Probable
M&I: Measure and Indicated resource means the estimated quantity and grade of that part of a deposit for which the continuity of grade, together with the extent and shape, are so established that a reliable estimate of grade and tonnage can be made.
GEO: Inferred resource means the estimated quantity and grade of a deposit, or a part thereof, that is determined on the basis of limited sampling, but for which there is sufficient geological information and a reasonable understanding of the continuity and distribution of metal values to outline a deposit of potential economic merit.

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