As I noted in my thesis on Apex Mining Co., Inc. (PSE:APX),
Gold mining has historically been a poor way to capture gold’s value, with overinvestment, low-quality assets, and poor capital discipline destroying returns. Today, elevated gold prices are supported by disciplined capex, strong free cash flow, and conservative balance sheets, transforming miners into cash-generative, shareholder-friendly businesses.
Since then, gold has breached the $4,000/oz barrier, and there is every indication that gold’s stunning momentum will continue. As the Financial Times observed,
Gold mining stocks are outstripping leading artificial intelligence companies and bitcoin, as a bull run in precious metals fuels an even stronger rally for the “unloved” companies that dig them from the ground. The S&P Global Gold Mining index has surged 126 per cent this year, the best performer among the S&P sector indices.
Having written about gold not just in relation to Apex, but also in relation to the SPDR Gold Shares ETF (GLD) and the iShares MSCI Global Gold Miners ETF (RING), I will not reiterate the reasons why I believe that gold is in a stable regime in which elevated prices are supportable. Robin J. Brooks suggests that if the gold rally is to continue, it will be driven largely by rising debt levels in the ten largest economies, “with mounting anxiety in markets that higher inflation and currency debasement are inevitable”.
The focus of this thesis is on two bets that I am making, on Canadian gold and copper miner, K92 Mining Inc. (TSX:KNT: $19.47/share) and South African gold miner, DRDGOLD Limited (JSE:DRD: R51.68/share).
K92 Mining
Although domiciled in Vancouver, Canada, high-growth, low-cost gold producer K92 Mining’s operations are in Papua New Guinea, where it owns and operates the Tier 1 Kainantu Gold Mine, which also produces copper, and silver as well as engaging in as exploring and developing the surrounding environs mineral deposits, such as Blue Lake and Arakompa. The company has transitioned from a developer to a standout performer in the mining sector, renowned for its exploration success, operational excellence, finance performance, and growth trajectory.
Management has successfully revitalised Kainantu, which was originally developed by Barrick Mining Corporation (B) between 2006 and 2009, before being acquired by K92 Mining in 2014. Under Barrick, the operation had been plagued by low grades, technical difficulties, and security issues, leading Barrick to place it on care and maintenance. K92 Mining’s insight was to realise that Barrick had had only mined the easy, near-surface oxide material and had not properly explored the high-grade underground potential. K92 Mining moved swiftly, re-commissioning the process plant, and began production from the Kora and Judd deposits. Initial production results immediately demonstrated that the asset was far higher grade than historically understood. The core of K92 Mining’s strategy has been to aggressively explore its properties. Initial results immediately verified management’s insight, showing that the asset was far higher grade than historically understood.
The quality of the assets and geology at Kainantu is exceptionally high, positioning it as a world-class, high-grade, and low-cost gold and copper operation. The cornerstone of the asset quality is the aforementioned Kora and Judd vein systems, which host substantial, high-grade mineral resources and reserves. The combined Kora and Judd Measured and Indicated resource stands at 8.1 million tonnes at 10.00 g/t gold equivalent (7.8 g/t Au, 21 g/t Ag, 1.2% Cu), while the Proven and Probable Reserves are 6.18 million tonnes at 8.5 g/t gold equivalent. These grades are significantly higher than industry averages, which is the primary driver behind the operation’s low all-in sustaining costs (AISC), forecast at $665/oz (net of by-products) in the Stage 3 Expansion study. This high-grade nature, combined with reported solid continuity, thickness, and favourable metallurgical characteristics, provides a robust foundation for current and future operations, enabling rapid production growth and highly economic expansion projects.
Geologically, the project is situated in a highly prospective and proven mineralized district within the New Guinea Thrust Belt, near the major Ramu-Markham Fault suture zone. The local geology is complex and fertile, featuring the Miocene-age Bena Bena Formation metamorphic rocks overlain by volcanic and sedimentary sequences of the Omaura and Yaveufa Formations. Mineralization is associated with the mid-Miocene Akuna Intrusive Complex and later Elandora Porphyry intrusions, and manifests in several forms. The primary focus to date has been on Au-Cu-Ag sulphide veins of Intrusion Related Gold Copper (IRGC) affinity, which host the Kora and Judd deposits, as well as low-sulphidation epithermal veins. The property encompasses a vast ~830 km² land package that forms part of a large epithermal vein field, with multiple known and highly prospective vein systems like Arakompa, Kora South, and Judd South, indicating significant exploration upside. The consistent discovery success, low discovery cost, and substantial growth in inferred resources demonstrate the exceptional quality of the geology and the high potential for further resource expansion, underpinning the project’s trajectory towards Tier 1 production status.
The company’s Q3 2025 production report, revealed that K92 Mining extracted 44,323 gold equivalent ounces from Kainantu, while also making significant progress on its Stage 3 Expansion, with construction of the new processing plant complete and commissioning well-advanced, keeping it on track for its first gold pour in the first half of Q4 2025. The Stage 3 expansion will double capacity from 600,000 tonnes-per-annum (tpa) to 1.2 million tpa. At a time in which there is some lingering concern that gold miners will loosen their discipline, it is noteworthy that the plant was completed under the capex budget.
With over 80% of its annual production target already achieved and the expansion remaining on budget, K92 is confident it will meet its 2025 guidance.
The firm’s financial performance has been exceptional. Revenue has compounded by 22.5% a year since 2020, a rate in excess of the global 5-year revenue CAGR of 6.9%. In that time, the firm’s net operating profit after tax (NOPAT) has compounded by 46.1% a year, from $31.66 million in 2020 to $210.74 million in the last twelve months (LTM). In tandem, NOPAT margin rose from 19.89% to a remarkable 43.54%, while balance sheet efficiency, as measured by invested capital turns, rose from 0.25 to 0.46. As a result, K92 Mining’s return on invested capital (ROIC) from 4.94% to 20.08%.
Following the theme of gold miners becoming value creators, the firm’s economic profitability has improved, rising from -$10.95 million in 2020 to $105.52 million in the LTM, having first generated an economic profit in 2024.
In terms of valuation, the firm has a price-to-economic book value (PEBV) of 2.14, implying that the market expects a 114% increase in NOPAT. While this is a significant expectation, I think it is earned and justifiable. Using my reverse discounted cash flow model (DCF), I teased out the expectations implied by the current share price.
In the first scenario, I determined the hurdles revenue and NOPAT growth must meet to justify the current price. There,
- revenue rises to $523.75 million in 2025, and $657.07 million in 2026, in line with Seeking Alpha’s estimates, and by 22.5% from thereon, and
- NOPAT margin remains at 43.54%.
In that scenario, the company’s market-implied competitive advantage period (MICAP) is six years, wherein its shareholder value per share equals the current share price. In this scenario, the company earns $1.8 billion in revenue and $789.25 million in NOPAT, by the end of 2031.
If, however, those price-implied expectations are exceeded, and,
- revenue compounds by 22.5%, and
- NOPAT margin rises to 47.44%, then,
In this scenario, K92 Mining earns $2 billion in revenue and $950.53 million in NOPAT, by the end of 2031 and the stock is worth $24.66 today, an upside of 26.66% from the present price.
Finally, if,
- revenue compounds by 22.5%, and,
- NOPAT margin rises to 34.66%, then,
In this scenario, K92 Mining earns $1 billion in NOPAT, by the end of 2031 and the stock is worth $26.42 today, an upside of 35.70% from the present price.
DRDGOLD
In my thesis on Apex Mining, I recalled that,
My first job out of university, in 2007, was running a small-scale family-owned gold mine in Zimbabwe, Scallywag Mine, and it was with some horror that I heard an old joke in the mining community in Gwanda: “It takes a large fortune to make a small one in gold mining”. In fact, for many of the older gold miners, it was a misnomer to call them “gold miners” because gold mining had been so unprofitable for so long that many instead treated tailings, or what was colloquially referred to as “dumps”, a highly profitable endeavour. I remember seeing old shafts, last worked by Germans before the start of the First World War, symbols of the unattractiveness of the business.
When I wrote that, I was already looking at DRDGOLD, South Africa’s oldest continuously listed mining company still in operation. DRDGOLD’s operations on the Witwatersrand Basin are the heart of the company: Ergo, located to the south and east of Johannesburg and which treats slime dams from the Central and East Rand goldfields; and Far West Gold Recoveries (FWGR) near Carletonville, which processes material from the West Rand. The business itself is 50.1% owned by Sibanye Gold Proprietary Limited, a wholly owned subsidiary of diversified miner, Sibanye Stillwater Limited (JSE:SSW); around 26% of shares are held by American Depositary Shares (ADRs) through Bank of New York; Ergo Mining Operations, a wholly owned subsidiary of DRDGOLD, owns 0.51% of the company, while DRDGOLD’s directors own 0.15%. and the remainder is held by other public shareholders.
The business model is fabulous. The company retreats mine tailings to recover gold, a process which, as Niel Pretorius, the company’s chief executive, observed in the FY 2025 report, aligns the model with ESG frameworks. The beauty of the business is that it does not entail the massive capital expenditures involved in gold mining, and so, returns are generally both high and stable.
The model is inherently volume-driven, as evidenced in FY 2025 by a 3% decrease in gold production to 4,830kg, which was offset by a significant 15% increase in throughput to 25.6 million tonnes, indicating a strategic shift towards processing larger volumes of lower-grade material. The financial success of this model is heavily leveraged to the Rand gold price, with a 31% increase in the average price received to R1.63 million/kg driving a 69% surge in operating profit to R3.5 billion, despite the dip in production. This is not the red line that it may have been in the past, given the stability of the South African rand against the U.S. dollar and other major currencies in the year-to-date, and potential weakness in major currencies going forward. A key component of the model is the reinvestment of robust cash flows into extensive capital projects (R2.25 billion in FY2025) aimed at expanding deposition capacity and plant throughput to secure a multi-decade operational life and future growth.
DRDGOLD’s production of “sustainable gold” is an important differentiator, addressing a major environmental legacy by removing and reprocessing tailings dams, thereby reducing dust and water pollution and freeing up vast tracts of land for redevelopment, as highlighted by the vision for a “corridor of freedom” linking Johannesburg and Soweto. This aligns perfectly with global ESG imperatives and provides a compelling social narrative.
Operationally, the surface retreatment model is typically lower risk and has lower capital intensity than deep-level mining. This means that operations are less risky than traditional gold miners and far more predictable. For the uninitiated, consider two models: in the first, one has to explore and then dig deep into the earth, before being able to mine; in the second, one finds a large “dump” and the costs are simply those of treating that dump and extracting the gold. For very small operations, the difference between commencing operations or moving on is the difference between spending on exploration or simply getting samples to a lab and getting favourable results.
Financially, DRDGOLD’s success is evident. Revenue has compounded by 13.49% a year since FY 2020, while its NOPAT has compounded by 30.74% a year, from R688.21 million in 2020 to R2.63 billion in FY 2025. At the same time, NOPAT margin rose from 16.44% to 33.33%, while invested capital turns declined from 1.16 to 0.85, leading to an improvement in ROIC from 19.05% to 28.45%. The most impressive aspect of the business is that throughout this period, it has earned an economic profit, which has risen from R267.8 million in FY 2020 to R1.78 billion in FY 2025.
A newly cemented advantage is its energy resilience and cost management; the commissioning of the 60MW solar PV plant and battery storage system at Ergo, operating at 97% capacity, has already saved approximately R108 million, insulating the company from Eskom’s instability and reducing its carbon footprint, with an application for carbon credits underway. One should expect this to translate into greater future profitability.
DRDGOLD has a price-to-economic book value (PEBV) of 1.49, implying that the market expects a 49% increase in NOPAT. This seems, at face value, easily achievable. Using my reverse discounted cash flow model (DCF), I teased out the expectations implied by the current share price.
In the first scenario, I determined the hurdles revenue and NOPAT growth must meet to justify the current price. There,
- revenue compounds by 13.49% a year, and
- NOPAT margin remains at 33.36%.
In that scenario, the company’s MICAP is three years, wherein its shareholder value per share equals the current share price. In this scenario, the company earns R11.9 billion in revenue and R3.98 billion in NOPAT, by the end of 2028.
If, however, those price-implied expectations are exceeded, and,
- revenue compounds by 15%, and
- NOPAT margin rises to 35.98%, then,
DRDGOLD earns R12.4 billion in revenue and R4.46 billion in NOPAT, by the end of 2028 and the stock is worth R57.04 today, an upside of 10.69% from the present price.
Finally, if,
- revenue compounds by 20%, and,
- NOPAT margin rises to 40.48%, then,
In this scenario, DRDGOLD earns R14.08 billion in revenue and R5.7 billion in NOPAT, by the end of 2028 and the stock is worth R72.28 today, an upside of 40.27% from the present price.