Better than expected

Pan African Resources 25 February 2016 Update

Pan African Resources

Better than expected

H116 results

Metals & mining

25 February 2016

Price

13.25p

Market cap

£243m

Net debt (£m) at end Dec 2015

16.2

Shares in issue

1,831.5m

Free float

74%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

50.4

87.9

17.8

Rel (local)

51.1

100.4

36.6

52-week high/low

13.5p

6.3p

Business description

Pan African (PAF) has five major assets in South Africa: Barberton Mines (target output 95koz Au pa), the Barberton Tailings Retreatment Project (20koz), Evander Gold Mines (95koz), the Evander Tailings Retreatment Project (ETRP 10koz + expansion potential) and Phoenix Platinum (12koz).

Next event

FY16 results

September 2016

Analyst

Charles Gibson

+44 (0)20 3077 5724

Pan African Resources is a research client of Edison Investment Research Limited

Pan African’s (PAF) half-year results to 31 December 2015 were ahead of our expectations, with strong performances at both of its tailings retreatment operations complementing a solid recovery in the underground head grade at Evander, which effectively portends its exit from the low-grade mining cycle. We have adjusted our FY16 PBT and EPS forecasts (which nevertheless remain under further review) slightly to reflect flat (rather than declining) unit costs in H216, although PAF will clearly benefit from continued rand weakness and gold price strength in H216, while maintaining longer-term expansion options in the form of Elikhulu and Evander South (among others).

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/14

154.2

34.0

1.46

0.82

9.1

6.2

06/15

140.4

16.0

0.64

0.54

20.7

4.1

06/16e

167.0

43.3

1.70

0.54

7.8

4.1

06/17e

202.1

91.3

3.58

0.82

3.7

6.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

Production up, costs down

PAF reported H116 EPS of 0.60p per share, cf our forecast of 0.50p. Gold sold increased by 17.4% cf H115 to 101,797oz. In general, however, total costs were lower than our expectations – pointing to good cost control and rand depreciation – with cash costs of production declining 25.7% to US$740/oz.

Evander grade shows recovery from low-grade cycle

The results were characterised by strong operational performances at PAF’s tailings retreatment operations (BTRP and ETRP), which both reported higher than expected head grades and, therefore, also metallurgical recoveries. In the meantime, the underground grade at Evander increased from 4.3g/t to 5.8g/t – ahead of management’s expectations (indicating a solid recovery from its low-grade mining cycle), if not quite as high as our hopes (see our 11 February note).

Debt diminishing

Finally, net debt declined from £18.0m at end-June to £16.2m at end-Dec (our calculation), indicating c £11.5m of cash inflows for the period before a dividend payment of £9.7m for FY15. A similar performance in H216 would clearly leave PAF substantially debt-free ahead of the dividend payment for FY16 (currently estimated at £9.9m) and ZAR200m Uitkomst acquisition (£9.4m at current FX rates).

Revisiting our forecasts in due course

In addition to the H116 results, PAF also announced a proposed acquisition of an interest in Shanduka Gold (for which details are not yet available), which should be earnings enhancing. We will review our assumptions and forecasts in more detail in a subsequent note.

Exhibit 1: Financial summary

£000s

2008

2009

2010

2011

2012

2013

2014

2015

2016e

2017e

Year-end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

39,148

52,860

68,344

79,051

100,905

133,308

154,202

140,386

166,982

202,119

Cost of sales

(25,164)

(28,505)

(40,554)

(45,345)

(46,123)

(71,181)

(106,394)

(110,413)

(104,861)

(97,338)

Gross profit

13,985

24,355

27,790

33,705

54,783

62,127

47,808

29,973

62,121

104,781

EBITDA

 

 

13,711

22,890

25,023

28,540

45,018

53,276

44,165

28,448

57,390

100,301

Operating profit (before GW and except.)

11,745

20,529

21,897

25,655

41,759

47,278

34,142

18,110

44,914

91,306

Intangible amortisation

0

0

0

0

0

0

0

0

0

0

Exceptionals

0

(5,025)

(335)

0

(48)

7,232

(12)

(198)

0

0

Other

0

0

0

0

0

0

0

0

0

0

Operating profit

11,745

15,504

21,562

25,655

41,711

54,510

34,130

17,912

44,914

91,306

Net interest

200

807

594

762

516

197

(191)

(2,109)

(1,623)

12

Profit before tax (norm)

 

 

11,945

21,336

22,491

26,417

42,274

47,475

33,951

16,001

43,291

91,318

Profit before tax (FRS 3)

 

 

11,945

16,311

22,156

26,417

42,226

54,707

33,939

15,803

43,291

91,318

Tax

(4,367)

(8,219)

(7,656)

(9,248)

(12,985)

(12,133)

(7,155)

(4,133)

(12,134)

(25,781)

Profit after tax (norm)

7,579

13,117

14,835

17,169

29,290

35,342

26,796

11,868

31,157

65,537

Profit after tax (FRS 3)

7,579

8,091

14,500

17,169

29,242

42,574

26,785

11,670

31,157

65,537

Average number of shares outstanding (m)

1,043.8

1,104.4

1,366.3

1,432.7

1,445.2

1,619.8

1,827.2

1,830.4

1,832.1

1,832.1

EPS - normalised (p)

 

 

0.52

0.85

1.07

1.20

2.03

2.18

1.46

0.64

1.70

3.58

EPS - FRS 3 (p)

 

 

0.52

0.40

1.04

1.20

2.02

2.63

1.47

0.64

1.70

3.58

Dividend per share (p)

0.00

0.26

0.37

0.51

0.00

0.83

0.82

0.54

0.54

0.82

Gross margin (%)

35.7

46.1

40.7

42.6

54.3

46.6

31.0

21.4

37.2

51.8

EBITDA margin (%)

35.0

43.3

36.6

36.1

44.6

40.0

28.6

20.3

34.4

49.6

Operating margin (before GW and except.) (%)

30.0

38.8

32.0

32.5

41.4

35.5

22.1

12.9

26.9

45.2

BALANCE SHEET

Fixed assets

 

 

55,647

67,198

74,324

97,281

86,075

249,316

223,425

220,150

220,677

220,499

Intangible assets

35,577

35,397

36,829

38,229

23,664

38,628

37,040

37,713

39,449

41,186

Tangible assets

20,070

31,801

37,495

59,052

62,412

209,490

185,376

181,533

180,323

178,409

Investments

0

0

0

0

0

1,199

1,010

905

905

905

Current assets

 

 

8,770

4,949

17,677

15,835

41,614

26,962

23,510

17,218

39,200

90,115

Stocks

378

358

1,126

1,457

1,869

6,596

5,341

3,503

5,572

6,744

Debtors

2,973

2,201

3,795

4,254

6,828

15,384

12,551

10,386

11,449

13,858

Cash

5,419

2,389

12,756

10,124

19,782

4,769

5,618

3,329

22,179

69,512

Current liabilities

 

 

(6,611)

(6,101)

(7,084)

(8,960)

(11,062)

(24,066)

(24,012)

(22,350)

(22,790)

(21,553)

Creditors

(6,521)

(6,080)

(7,084)

(8,960)

(11,062)

(23,202)

(19,257)

(17,301)

(17,741)

(16,505)

Short-term borrowings

(89)

(21)

0

0

0

(864)

(4,755)

(5,049)

(5,049)

(5,049)

Long-term liabilities

 

 

(7,438)

(9,686)

(11,431)

(13,410)

(14,001)

(80,004)

(63,528)

(67,850)

(68,648)

(70,108)

Long-term borrowings

(17)

0

0

(181)

(869)

(11,133)

(8,141)

(16,313)

(16,313)

(16,313)

Other long-term liabilities

(7,421)

(9,686)

(11,431)

(13,228)

(13,132)

(68,871)

(55,387)

(51,537)

(52,335)

(53,795)

Net assets

 

 

50,369

56,360

73,487

90,746

102,626

172,208

159,396

147,167

168,438

218,952

CASH FLOW

Operating cash flow

 

 

12,762

25,420

25,207

31,968

49,092

61,618

45,996

25,959

51,123

95,482

Net Interest

200

807

594

762

516

314

(606)

(2,109)

(1,623)

12

Tax

(1,723)

(10,886)

(7,476)

(10,743)

(11,616)

(13,666)

(8,536)

(3,479)

(11,336)

(24,321)

Capex

(5,680)

(5,705)

(6,764)

(21,712)

(17,814)

(27,197)

(21,355)

(19,554)

(9,428)

(8,817)

Acquisitions/disposals

226

(4,205)

0

0

(1,549)

(96,006)

0

(760)

0

0

Financing

785

0

48

1,545

259

47,112

349

(235)

0

0

Dividends

0

(6,774)

0

(5,376)

(7,416)

0

(14,684)

(15,006)

(9,886)

(15,023)

Net cash flow

6,571

(1,343)

11,609

(3,557)

11,471

(27,826)

1,164

(15,184)

18,850

47,333

Opening net debt/(cash)

 

 

(136)

(5,313)

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

(817)

Exchange rate movements

(1,394)

(2,642)

(281)

925

(1,813)

594

(839)

(276)

0

0

Other

0

1,041

(940)

(181)

(688)

1,090

(375)

4,705

0

0

Closing net debt/(cash)

 

 

(5,313)

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

(817)

(48,150)

Source: Company sources, Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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