first majestic silver

DROOY Times Two

April 16, 2002

I first began investing in Durban Roodeport Deep (Drooy) in June of 2001. I did this mainly due to the essays of Adam Hamilton a.k.a. Zelotes). Mr. Hamilton's research and analysis is unsurpassed, in my opinion, and I highly recommend that anyone that really wants to really understand this Gold Mining Company, read his work!

Many people love to pull for the underdog, and respect those that can shake-off life's adversities and come back stronger. Drooy is the mining poster-child of over-coming adversity. If Drooy was a person, we would know that it was destined for greatness. What truly amazes me is it's ability to double its share price in a relatively short period of time. It does this while obstacles are still in its path.

This essay will look at the more recent doublings in share price, and examine some of the conditions under which it was accomplished.

I am going to look at the time period between July 31, 2001 through March 25, 2002. This time period didn't begin with their lowest share price, but in my opinion, it was a time when the future of the company was in doubt, and investor confidence was at an all-time low.

On the start of July 31, 2001 investors didn't know if Durban Roodeport Deep would be in business much longer. Their fiscal year ended on June 30, 2001 with a $0.25 loss per share for the 12 month period. In April 2001 the price of gold had double-bottomed at a 17-year low of around $255/oz. The 2002 fiscal year was ahead of them, and it had a very large hedge book, with most of it due by the end of June 2002. If that wasn't enough, they were locked into intense labor negotiations with the South African miners Union that wanted, among other things, an average 8% wage increase. Durban's profit margin, at that time was extremely small, and any increase in costs would have been a death blow to the company. CEO Wellesley-Wood had stated that if there was a labor strike lasting more that a couple of days, he would be forced to put the company into the hands of liquidators.

The Union was steadfast. Other mines had separately negotiated a new contract, and some had submitted counter-offers to the Union, but nothing was heard from Durban's. The strike was set for midnight on July 31, 2001 in South Africa. In the U.S. the share price had dropped to an intra-day low of $0.75 and closed at $0.79 without word of the strike outcome. Gold was at $266/oz, after trading in the upper $270's/oz in June.

Gold and other Precious Metals were being ignored again as investors in the U.S. were sure of the much anticipated "second half recovery", thanks to all of the aggressive Fed rate cuts. (This of course was one of the classic buying opportunities for Drooy…buy when there is blood in the streets.) On August 1, 2001 we found out that an "eleventh hour" labor agreement was reached, and the demise of Durban Roodeport Deep was at least postponed.

On January 9, 2002 Drooy had an intra-day high of $1.51, doubling in a little over 5 months. From July 31, 2001 to January 9, 2002 gold went from $266/oz to $293/oz , and back down into the $270's/oz in November and December. Gold had reverted back into the "same-o, same-o", as investors were certain that the recession was over, and the "War-on-Terrorism" was being fought away from our shores.

By January 9, 2002 gold was again showing a little life and was trading back into the upper $280's/oz, and looking towards the upper $290's ceiling. Bubble-vision was again ridiculing gold as an investment and safe-haven.

Drooy during this period had released their September 2001 earnings report, and thanks to a depreciating Rand, had posted a $0.02 EPS. The hedge book had improved, but not by much. Management decided early in the December quarter on a goal to completely eliminate the hedge book by the end of the fiscal year of June 30, 2002.

From January 9, 2002 to March 25, 2002 (2 ½ months) Drooy again doubled in share price with an intra-day high of $3.33 and closed at $3.27/share. Gold during this period had broken above $300/oz, and bumped against $310, before being pushed back into the low $290's, then rebounding into the upper $290's. The gold charts were beginning to show a decided up-trend.

Drooy's December 2001 earnings report came out in late January 2002 with an EPS of $0.034, a 70% increase over the September quarter. In the six month period they had reduced their hedge book forwards from about 800,000 ounces to about 600,000 ounces. Only a 25% reduction.

In early March 2002 we were shocked by the news that CEO Wellesley-Wood had been bared from reentering South Africa in an apparent work permit problem. Additional reports came out about internal management power struggles that are reminiscent of the old television show "Dallas".

Since the second doubling on March 25, 2002: Drooy has punched twice into the $4.00/share intra-day level; the work permit problem was resolved; and the internal power struggles appear to be over with the "Good Guys" still in charge and stronger than ever. Gold has again spurted above the $300/oz level, and seems to have firmly dug in its heels, here and is already perched to push to multi-year highs.

The Stock Market is again doubting the recovery story, and war-drums are beating in many parts of the world. Bubble-vision doesn't seem quite as confidant in it's trashing of gold as more and more analysts suggest including gold stocks everyone's portfolio.

Durban Roodeport Deep has been estimated to have lowered their hedge book forwards to about 400,000 oz in the March quarter, a 33% reduction from December 2001, and is a mere three months away from eliminating it's entire hedge book via a pending loan to cover any remaining hedges at the end of June 2002.

Drooy has twice doubled it's share price in the past 8 months, a period replete with significant obstacles. With less than 9 months to go in 2002, gold clearly shows signs of being in the infant stage of a bull market, and Drooy a short 2 ½ months away from being un-hedged, I am looking forward to sitting back and watching Drooy do what Drooy does best in a gold bull market…Double…Double…and…Double again.

One cubic foot of gold weighs more than half a ton (1,306 pounds).
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