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By Liu-Yue (Louie) Lam, Co-Founder, CEO, & Chief Investment Strategist, Oxstone Capital Management,

DROOY, DRDGOLD Ltd.  – South Africa, $4.47, 1/28/11

DROOY is one of the largest South African gold mining companies.  DROOY has a long operating history; established in 1895.  This shows the sustainability of DROOY as an ongoing business.

DROOY is considered a small cap stock with a current market cap at $185mm.  This is a terrific advantage for the astute international investor as frontier small cap stocks are underfollowed by Wall Street analysts.  I believe frontier small caps possess the most fertile grounds for finding ‘potential oxstones’ due to market inefficiencies that individual investors can exploit by buying undervalued, underfollowed stocks and then waiting patiently to benefit once big boys finally notices and joins the party.   Current institutional ownership of DROOY is still under the radar at 6.9%.

DROOY is extremely cheap with a PE Ratio of only 4.8x and a price to sales ratio of .58.  DROOY is already trading at a significantly lower price/earnings and price/sales than the majority of publicly traded gold mining companies.  To top it off, DROOY also pays you an attractive dividend yield of 1.3% and payout is just 8% of earnings with plenty of room to grow.  DROOY also has a very strong balance sheet with positive net cash and almost no debt.  Incredibly, DROOY is trading at a significant discount – 82% of its book value.  The company is well managed as shown by its high ROE of 17% with almost no leverage.  Its ROA is 3.6%. Revenue grew 40%; benefitting from the surge in gold prices.  DROOY also has positive technical trends.  What’s not to like?

DROOY was originally established to exploit the Witwatersrand Basin – the world’s richest gold deposit (40% of the gold ever produced).  The major concern for DROOY and other gold mining companies in South Africa are the increasing strength and wage demands of unionized labor.  This has led to higher costs and DROOY already has one of the largest gold production costs in the business.  However, this concern is mitigated if you believe gold is indeed in a long term secular boom, then gold prices should continue to rise and any production by DROOY will only add to the bottom line.
DROOY is already closing less efficient mines and refocusing efforts on the better opportunities at alternative sites.  DROOY also has the world’s largest gold surface retreatment facility.

I believe DROOY has tremendous upside potential at its current depressed price of $4.47. It is already trading at multi-year lows.   I expect as gold prices continue its historic secular bull-run and global liquidity turn inflationary, it should push up stock prices of all gold miners, which are leverage plays on gold.  South Africa is one of the top frontier markets in the world.  For any investor who wants emerging markets exposure and   looking for the next top emerging economy to invest in after BRIC; should definitely consider Africa.   It is still the land of untapped potential.  And one of the few remaining places on earth where you can still find ‘potential oxstones’.

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