DRD update including valuation analysis

It's no secret that I like DRD gold at these levels.  It went through the high flier stage years ago and has now worked off all of the excesses, sold the riskier assets of those days.  It is also putting the finishing touches on a new mill that will greatly improve gold recovery.  So now it is time to look at the close in chart and see what the model says.  In this sequence, the 3rd wave is extended.  The height of the blue bar to the upper left measures what I modeled as wave 1.  Wave 5 should be about the same length.  The blue bar lower right is a clone of the upper left.  This suggests the possibility of a move to somewhat lower prices. 

Whatever it is will likely not last very long nor dip very deeply because of the high value of this company (shown below) at these great depression prices. I think the big bounce will begin somewhere within the red oblong.  So if it fell to $2.50 I would not be shocked.  Neither would I be shocked if the 14 year decline actually turns out to have finished literally today.  I've always had trouble catching the 5th of 5th of C/5th.  That's a pretty clear gap in 3 of 5 of C below that took the shares to $2.71.  Then there is a clear bounce to $2.82.  today we had a lower low than 2.70.  The question is whether this is 5 of 5 of C or just the end of 3 of 5 of C.  If the former then this thing should begin to bounce very soon.  If the latter then it will move back up into the $2.82 range and then fall again probably to the $2.65 area before being completely done.

I could try to trade the turns on this but I don't think that I will.  Instead I will just buy more if it goes significantly lower and I will be considering it a long term hold.  Why?  Because the goal of this company is to pay 30% of its profits as dividends.  That means I am buying a portion of their labor at very, very depressed valuations.  Below are the current numbers on DRD now that the shares have fallen to these low prices.  These are literally great depression valuations, exactly the type that Prechter talked about in his book that would allow you to buy "an $18 stock for 50 cents" (close paraphrase from memory). 

If I recall correctly, he wrote that we will be able to find companies trading with P/E of 0.5 and (more important to him) P/B (price to book value) of about the same.  These companies would be paying dividends of 6-7%.  DRD's metrics are almost spot on to these great depression specs.

Prechter isn't a big fan of P/E as a metric because E can be manipulated by deferring or pulling in expenses in order to match earnings revenue expectations.  But I think that gold mining is one of the industries where these numbers are actually meaningful since the cost of gold production is well documents and the price of gold does not depend on clever slogans and tricky marketing or even vendor finance scams.  Gold mining is really a unique industry because its really just digging money up out of the ground.  There is ALWAYS a global gold market.  It cannot go out of style.

Prechter likes P/B as a real metric because book value is supposed to tell you what it would cost to replace the assets of the company.  You you are buying a company for less than it would cost to start a new company to replace them then you are getting great value.  Even if gold prices don't go up much, DRD could still quadruple in the form of PE and PB expansion.  In other words, investors start looking for dividend payers and DRD pays dividends.  With only 38 million shares outstanding it will not take much buying interest in order to expand the PE and PB numbers from here.  Note that the vast majority of the shares are in the float (not in the company treasury) so we don't have to worry about the company needing cash in a pinch and dumping shares onto the market in order to raise it.  In other words, no latent dilution to worry about.

While the annual dividend here is a very Prechter-esque and respectable 7.2%, the payout ratio of > 100 says that part of the divvy is being paid for out of cash on hand (i.e. past earnings, not ongoing earnings).  That is not a long term sustainable position so it is a flag to consider.  However, it could also just be that the company has plenty of cash on hand and it anticipates that the recent issues with the new mill will be fixed and so it wants to start compensating loyal shareholders who have stuck it out with a short term payout.  You can see that it was actually increased from the 4.9% dividend paid out last year.  Their goal is to pay out 30% of their profits in the form of dividends which are taxed in the US at a scant 15%.   Finally, their cash to debt position looks good, especially given that they are just now finishing up their big new capacity improvement programs.

If DRD share price goes lower,  I will add to my current position. I don't think many things should be a long term hold but with the gold miners at a multi-year low and DRD at a 14 year low I think a small amount of money like $2500 can be put into this one with a very good chance of getting a 10 bagger return on the overall investment (which would include share price increases along with dividends paid).