Village, market cap R530m, targets R300m annual profit. Great value? You bet.

I was delighted to see Village's CEO Ferdi Dippenaar in the CNBC Africa Power Lunch studio on Friday. Apart from Moneyweb, iy's my only other JSE-listed share investment. When the price hit 33c  a few months back, the shares were too tempting to pass. At 52c, the price is still under half a conservatively stated net asset value (119c a share). And with Dippenaar as CEO and his former Harmony Gold colleague Bernard Swanepoel as chairman, the business has the kind of custodians anyone should be happy to entrust money to. The numbers for the half year to end December, show Village has delivered on its promise to shed the two loss-making operations and despite a depressed gold price, it is now generating healthy cash. And likely to continue doing so for some time. Dippenaar says the immediate priority is to rebuild Village's balance sheet. With a potential R300m a year in profit, it shouldn't be long before that objective is achieved. – AH 

ALEC HOGG:  Village Main Reef released its interim results today.  Company Chief Executive Ferdi Dippenaar is with us in the studio.  Well Ferdi, I've put my cards on the table.  I bought these shares at thirty-three cents, told the whole world, told the whole continent including Gugulethu who said 'no, that's too expensive – R330.00 for 1 000 shares'.  Now she's sorry…fifty-two cents…but Ferdi, markets really started rerating your share only from a couple of months ago.

FERDI DIPPENAAR:  Yes, we've had a tough time.  I think if you go back to the last six, nine, or even 12 months with the acquisition of Blyvoor, the problems we had with Blyvoor, how it was incorporated, and the losses we incurred.  Buffels of course, was a similar situation – decrease in gold price – so there were some real concerns about the ability of Village to survive through the difficult times, so we took a few tough decisions.  In May, we took a decision around Buffels to basically prepare for care of maintenance.

ALEC HOGG:  What does that mean?

FERDI DIPPENAAR:  Well effectively – sadly – it meant that we stopped underground operations, retrenched many people, and then started reclaiming some of the equipment in preparation for rehab and the final closure.  Buffels has been around for a number of years.  I think the first bit of gold mined at Buffels was in 1945 and it has finite resources.  It has a finite reserve.  It just got to the stage that basically, everything that could possibly have been mined profitably had been mined.  We therefore took the decision to close that.  Of course Blyvoor, which was a cash drain on the company…we elected to stop funding in about August.  We informed the board of Blyvoor and they elected to put it into provisional liquidation.  Many of the risks associated with Village were dealt with.

ALEC HOGG:  And the cash outflows – my goodness…  You mentioned in today's results that R126m cash outflow in the last quarter because of those two mines you've mentioned (Blyvoor and Buffels).

FERDI DIPPENAAR:  Exactly.  The cost of restructuring, cost of retrenchment at Buffels, and then the cost of just getting everything down to a level where you can say Buffels now has a decent carrying cost and we've been working on dropping that carrying cost even further.  Of course, the deconsolidation of Blyvoor after we lost control of it, when it was taken over by the liquidator: I think that in itself, has given many of the shareholders and the market a bit of a comfort that 'maybe Village will definitely survive this bit of a downturn'.

GUGULETHU MFUPHI:  So where to now?

FERDI DIPPENAAR:  We have Tau Lekoa.  We have Cons Murch.  Tau makes good money, even at a gold price of R425,000 per kilo at a profit margin of 24 percent.  At the current gold price of R460 000/kg, it's even better, so I'd like to see a steady Tau. At Cons, we had our unprotected strike in July.  It has made a good recovery.  We had losses of R56m in the previous quarter and profit before depreciation of R8m for this quarter, so it's a nice recovery.  Obviously, it's getting back to consistent performance and ultimately, from two operations – restoring our balance sheet, really strengthening it and then looking at these opportunities that might present themselves in the market.

ALEC HOGG:  How do you do that?  How do you restore the balance sheet – raise capital?

FERDI DIPPENAAR:  No, we won't be raising capital, but making good money.  I think if you have a look at Tau in the last six months: cash operating profit in excess of R150m in the September quarter.  This quarter it was slightly less – about R80m – but that's more the average performance.  We said about R300m for the year, and then Cons just contributing over and above…  Let's assume Cons contributes R30/40m.  All of a sudden, there's an ability to within a year, strengthen up the balance sheet and drive the reinvestment.  In an asset like Tau, we initiated a drilling program, which could see its life being extended, or looking at some other assets to broaden the portfolio.

ALEC HOGG:  Ferdi, this is a point that Gugu and I have been tapping into over the past couple of weeks: the technology, the change in mining techniques, in new technology, so you can get to areas perhaps, that human beings can't, and you can go deeper as well.  Isn't that kind of a deep-level mine an opportunity for you?

FERDI DIPPENAAR:  Well, it's not really a deep-level mine if you compare it to some of the other mines in the areas.

ALEC HOGG:  It's not four kilometres.

FERDI DIPPENAAR:  It's definitely not four kilometres, so you're talking between 1600m and 1800m below surface.  Technically – yes, it's deep, but it's an easy mine.  I think if you go and have a look at Tau and the nature of its ore body…  This isn't a seriously thin channel with a reef that requires that type of thing.  The other thing is, it's also well established, fairly mature, easy mining, and that's why you can operate it at a profit margin of 24 percent.  If there was a new mine, or a new mining area, which you could introduce technology to…I think that's the way to go – definitely.  It does come at a cost.

ALEC HOGG:  But you and Bernard Swanepoel; you're looking for ways to innovate.  Isn't this the next frontier for you?

FERDI DIPPENAAR:  We'll give it a bit of thought.  How's that, Alec?  We'll give it a bit of thought.  Maybe the maturity of Tau won't allow it.  Maybe it will, but we'll take it on board.

ALEC HOGG:  As a shareholder, I'm very happy with what you've done recently.  Thank you Mr Chief Executive.  That was Ferdi Dippenaar.  He is the CEO of Village Main Reef.  Hopefully, next quarter we will be able to bring Gugu in, too, as a shareholder.