Peter Major has a bad day: Takes roundhouse swings at Eskom and DRD Gold

Those who've known mining investment analyst Peter Major for a while appreciate that while his assertions may be rough, they're without agenda. On CNBC Africa's Power Lunch today he didn't hold back. Niel Pretorius's DRD Gold got it in the neck for a continuously sliding share price, attracting Major's withering contention that the company is not an investment but simply "a lifestyle business" for Pretorius and his fellow directors. That was mild compared with the blasting Major gave Eskom. Love him or hate him, this is a man you cannot ignore. With his excellent track record, even Major's enemies pay attention. – AH

ALEC HOGG: Welcome back to Power Lunch. DRD Gold reported a nine percent decline in gold production in its full year to the end of June. Between the third and fourth quarters though, it did manage to improve. That was up by 13 percent – those figures just out today. CNBC Africa's open exchange spoke to the company's CEO and asked him to make some sense of these numbers.

DANIêL PRETORIUS: This was one of our more challenging years. We wanted to commission. We did commission and wanted to successfully operate the new plant at our key operations (Ergo) out in the far East Rand. It didn't work at all. We had to suspend operation toward the end of the third quarter. We had hoped for it to be adding to gold production when in fact, it didn't. It was a three-and-a-half/four month process, just to get it to that particular point so for us the last quarter was really about recovery and about stabilising the business again. We've repositioned ourselves. We think that we can successfully go into test work with this new technology, and that will give us the returns that we'd been looking for, and assist us in delivering the expectations that we'd hoped to deliver.

Whilst the year-on-year numbers are certainly not what we had in mind, it's really a reflection of the middle and we're rather encouraged by the recovery and the sound platform that the last quarter's performance has given us. To give you an idea, our EBITDA, quarter-on-quarter, was better by 650 percent and headline earnings by 250 percent, so it was a remarkable recovery back to the levels that we'd gotten accustomed to prior to the commissioning of this, and we think we'll get it right this time around.

INTERVIEWER: Niël, am I wrong in thinking that it's taken you a bit longer than you expected? The last time we spoke, you said there'd been problems and it seems to have taken a bit longer. You also had the disposable R220m, long statements about ERPM etcetera, so what effect has that had? Are you ready now? It sounds as though you've cleared this stuff out of the way and are ready to work.

DANIêL PRETORIUS: Yes, we had to. It's like when you hit Ctrl + Alt + Del on your computer: that's what we did in the beginning of April because we were running really hard toward a particular point in time, to deliver to a certain expectation and we just didn't make it. It took much longer and it cost much more than what we had hoped to achieve. For us, it was really a matter of getting back to basics, suspending the operation of this new technology, (which is the flotation and the fine line technology), and make sure that we address all of those issues, which we thought at the time contributed towards its poor performance. We therefore gave ourselves slightly more time than what we probably needed in order to get it back up and running again, but we also wanted to make sure that we go through the 'winter Eskom tariff period' where we pay sixty percent more for electricity.

We avoided those costs because other costs were part of our reality for the next three months. We started up the new section ahead of time. We're running one-third of it now as part of a test-work program, but essentially, we're about nine months behind where we wanted to be. We're now where we wanted to be nine months ago: hopefully, a little bit better prepared and certainly, understanding the mechanics and the dynamics of this plant quite a lot better.

INTERVIEWER: Reuben, perhaps you could come in there. It sounds to me as if what Niël's been talking about…all things considered, they haven't done too badly. Any points there on DRD Gold and indeed, the gold sector?

REUBEN: Yes, it's just interesting to me, listening to the conversation. If one compares this company, relative to the entire sector, we've had major labour problems in the sector as a whole. I think DRD Gold is less exposed to labour but has almost a mechanised operation and it's interesting to see that you can also have problems in mechanised operations. My preference would be for mechanisation when you do have a problem, it's possible to correct it. Less emotions are involved (more rational) so yes, I think there's an opportunity going forward and they certainly do seem able to get the production back on line.

ALEC HOGG: Mining analyst, Peter Major, from Cadiz Corporate Solutions is with us here in our JSE studio. I think Ruben has made some good points there at the end. This was supposed to be the gold factory. This was supposed to be the play on the gold price, the Rand gold price, but my goodness, since January last year, seven Rand a share, it is down to two-rand-eighty. If you've been playing here, you got pretty sore.

PETER MAJOR: Look, I think that was the story of buying these kind of gold shares, decades ago, you know when we were young, and we were told Aesop's Fables. About buy a marginal gold buy in and boy if they just increase production or improve the grade or if the gold price goes up, or if the Rand weakens, you'll make multiples on your money and that's how it looks on paper. When you do your first spreadsheet, you can prove to your boss, this thing will make money, if each of these factors changes.   The reality is, as you said Alec, these are lifestyle companies. It is almost like the main purpose of this company is to keep its Managers in the lifestyle they've grown accustomed to all these years. If you take a look at the executive's salaries in this company, if you take a look at executive bonuses, expenses, take a look at that heavy duty Board they've got, add up all the kind of senior personnel costs here, and compare it with what they've delivered.

What have they delivered? I think if you start 30 years ago, the share price is down 99 percent. If you start ten years ago, the share price is down about 90. If you start a year or five years ago, like you said, it is only down 50, so you say the trend is your friend. It's pretty much a lifestyle company. If you want gearing on the gold price, buy some Futures.

ALEC HOGG: DRD then not one that's going to be in the Major portfolio, I see.

PETER MAJOR: No, it won't be in my portfolio.

ALEC HOGG: But they're doing nice stuff. They're bringing in the kids from Grade 12 and teaching them about math and science, I see that made it into the commentary, for the results.

PETER MAJOR: Yes, they're good for breaking in new fund managers.

ALEC HOGG: Peter, what about Eskom? Seriously, we had a very interesting discussion yesterday with Andrew Etzinger. Again, this morning, where Dennis Dykes was saying Eskom has really blown it in the last five years. That's got to have an impact, specifically on the mining sector.

PETER MAJOR: It really does. It is heavier than people realise but it goes alongside the Government regulation, and the union trouble, and the social labour trouble we've had. It's another big spike in the coffin. It's not a nail. It's not a thumbtack. It's a big spike, so it means even if you could solve relations with Government and legislation and the Mineral's Bill, BEE, Social Labour Plan and the unions… Even if you've solved all that, even if the gold price turned around, electricity will still crucify you trying to build and run a proper gold mine in South Africa. I think that hour program we have every Sunday night, Carte Blanche, they had a wonderful summary, a real succinct summary. Iraj Abedian spoke so well and really summarised, succinctly, the trouble Eskom is in. This isn't a management problem at the top. You're not going to fix this changing the top five managers.

This is in their DNA now. It's been getting worse and worse, for 20 years. There is no quick fix. You need everybody to come on board. All the management, all the employers and finances, and we've taken what was really a premium…I think it was the number one utility on the planet. Many countries…that was their role model, Eskom, South Africa's Eskom, and you look at it now, it is so far down, and weak, wounded, and dying, I don't know if they're going to…

ALEC HOGG: And the new CEO? Has he got it in him to turn it around?

PETER MAJOR: I honestly don't think Moses or Noah could turn this around. I don't think any human being here. You could get Jack Welch in his better days. I think it's the environment Alec, yeah. The whole environment surrounding Eskom and as A Raj pointed out, they are short on people and they are short on the right people. They have bad practices built in. Their maintenance is way behind. They are robbing Peter to pay Paul. Their new plants are costing four-times what they should but the availability of the existing plants is down to 70/75 percent, instead of their 90/95 percent.

ALEC HOGG: What would you do if you were Andrew Etzinger, who takes the barbs? That man is an optimist and he's also brave. He is out there. He's the spokesman for Eskom. He's always trying to put the bright face on it. Would you resign? Is there a 'no hope' here with Eskom?

PETER MAJOR: Until people admit the problem, yes there is no hope. If you're a full-blown alcoholic and you don't think you've got any kind of problem at all then there is no hope.

ALEC HOGG: So the alcoholics have taken over at Eskom.

PETER MAJOR: Yes, the alcoholics are running AA right now, if you look at Eskom. Yeah, what would I do if I were President? It's too big a load for Eskom to handle, so I would bring in the private sector. I would rapidly increase private sector involvement, to say Eskom can't save this country. Eskom can't generate enough electricity for everybody who needs it now. We've got to get in and help, and you know what, I might even let somebody build another nuclear reactor. I might even let the Chinese come in and do a solar panel over half of the Northern Cape Province. It might be crazy but I think, right now if the ship is sinking just let people come in and generate some electricity to take the load of Eskom. They're trying to do it all on their own and you see, now they're burning diesel in these open cycle turbines that's like a jet engine stuck on full throttle, the cost of those things is, probably five-times or six-times what a normal coal plant is, yes.

ALEC HOGG: Peter Major, our happy face on a Tuesday. Unfortunately, Eskom is no joking matter though. In fact, a little bit earlier when Walter Hill was here in the studio from Eqstra, he shook his head and said he cannot believe what's going on there. He spent 20 years of his life at that organisation, and he too is deeply distressed as to what's happening at South Africa's power utility. That was Mining Analyst, Peter Major; he's from Cadiz Corporate Solutions.