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Pan African Resources plc: THE INVESTMENT CASE

Pan African Resources on recovery track

Pan African hopes to be in production at Elikhulu in the final quarter of next year.
molten gold being poured
INVESTMENT OVERVIEW: PAF The Big Picture
The first gold should be poured late next year

After a tough twelve months, South African gold miner Pan African Resources plc (LON:PAF) looks to be back on an even keel.

A one-year wage deal has just been agreed with the National Union of Mineworkers at its Barberton mine.

That follows on a three-year agreement with the other main union at the mine.

Pan African said the average wage increase for all Barberton Mines employees will amount to around 8% a year, effective from 1 July 2017.

Production rebound

Industrial problems were one of the reasons why production fell short of expectations in its trading year to June, but the miner had already predicted a rebound before the wage deal.

WATCH:Pan African's Cobus Loots confident after overcoming setbacks at key mines

READ: Pan African in demand as it secures final regulatory approvals for construction of Elikhulu

In September, Cobus Loots, chief executive, said: “Remedial actions successfully implemented by management are delivering the expected results.”

Shaft repairs had been completed at Pan African’s other main mine, Evander, with a substantial increase in gold production expected.

Barberton, meanwhile, has moved into a new high grade gold area.

Production guidance overall is 190,000oz gold equivalent for the 2018 financial year.

Elikhulu on stream this year

Gold produced should include a first contribution from Elikhulu tailings project in the final quarter of the year.

“The Elikhulu project is expected to deliver a robust return on investment and diversify the company’s production portfolio,” said Coots.

WATCH: Pan African boss on "very attractive" Elikhulu project ...

The US$120mln development, near its Evander operation in Mpumalanga province, will produce 56,000 ounces of gold a year in the first eight years and 45,000 a year for remaining five.

The yellow metal will be mined at an all-in sustaining cost of US$523 an ounce – which puts on the very bottom of the international cost curve.

Key milestone 

 “Elikhulu is expected to deliver low-risk and low-cost gold production within a relatively short timeframe. 

“This initiative, together with our recently announced coal disposal, is consistent with our strategy of pursuing and executing value accretive opportunities both within and outside of South Africa.” 

The mineral resource estimated to be contained over three dumps is put at 1.8mln ounces in the ‘indicated’ category, with another 244,000 ounces inferred.

A definitive feasibility study at Elikhulu came up with a net present value for the project of just under US$76mln at 9% discount rate and a gold price of US$1,180 an ounce.

2017 production lower

Gold ounces sold in the year to June 2017 fell 15% to 173,000, which cut revenues in rand terms by a similar amount to 2.93bn though currency movements meant sterling income rose 5% to £169.6mln.

Net earnings fell 43% in rand terms to 310mln and by 30% to £17.9mln. The final dividend for the year was reduced to 0.487p from 0.88p.

Two pillars

Evander used to be owned by Harmony (JSE:HAR) while Barberton contains some of the oldest and most historic gold mines in South Africa.

Barberton was acquired when Pan African bought Metorex back in 2007 when it was averaging production of around 100,000 ounces per year and has about twenty years of reserves.

Platinum an extra kicker

The company also has a platinum tailings re-treatment operation at Phoenix. This is a smaller scale operation that is designed to produce 211,000 ounces over a 17 year life.

At 13.25p Pan African is worth £247mln.

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