Disposals hone investment case

Pan African Resources 24 August 2017 Update
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Pan African Resources

Disposals hone investment case

Operational updates

Metals & mining

24 August 2017

Price

13.5p

Market cap

£301m

ZAR16.8994/£, ZAR13.2076/US$, US$1.2795/£

Net debt (£m) at end December 2016

33.2

Shares in issue

(effective 1,798.3m post consolidation)

2,234.7m

Free float

77%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.5)

(18.8)

(36.6)

Rel (local)

(4.7)

(17.8)

(41.4)

52-week high/low

21.8p

12.5p

Business description

Pan African Resources has five major precious metals assets in South Africa: Barberton (target output 95koz Au pa), the Barberton Tailings Retreatment Project (20koz), Evander (95koz), the Evander Tailings Retreatment Project (10koz) and Elikhulu (53koz).

Next events

FY17 results

21 September

Analysts

Charles Gibson

+44 (0)20 3077 5724

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

Pan African (PAF) has made a number of announcements since Edison’s last note in May, including an operational update, the conclusion of the Uitkomst disposal and the disposal of Phoenix Platinum to Sylvania for a total cash consideration of ZAR89m (£5.2m, US$6.8m or US$10.80/oz of Phoenix resource), which is actually accretive relative to PAF’s current group-wide resource multiple of US$8.40/oz. Most recently, on 18 August, it released its customary JSE listing requirement paragraph 3.4b announcement indicating annual EPS in the range 1.07-1.22p for FY17.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/15

140.4

16.0

0.64

0.54

21.1

4.0

06/16

168.4

45.9

2.08

0.88

6.5

6.5

06/17e

193.1

22.5

1.01

0.49

13.3

3.6

06/18e

196.7

52.1

1.95

1.14

6.9

8.4

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

Operational update

Confirmation that 173koz of gold was produced in FY17 was attributed to “the slower than anticipated restart of the underground mine at Evander…and operational challenges experienced at Barberton…which have now been remedied.” Production guidance for FY18 is in excess of 190koz of gold and compares with Edison’s expectation of 197koz (a variance of just 3.7%). While a degree of risk must be associated with respect to our expectations for production at PAF’s underground operations in FY18, this is balanced roughly equally by the opportunity (or upside risk) presented at its tailings retreatment operations, which anyway typically carry a higher margin. In the longer term, the development of Elikhulu (which is now underway and fully funded) should increase output to c 250koz from FY20, which underpins our longer-term earnings expectations.

Two more growth projects in the pipeline

In addition to Elikhulu, which “is progressing according to plan with project completion and first gold expected in the last quarter of the 2018 calendar year”, Pan African has two other significant growth projects, namely the Barberton Mines Sub-Vertical Shaft Project at Fairview, which could add 7-10koz to PAF’s production profile and the Evander Mines 7 Shaft No. 3 Decline & 2010 Pay Channel project.

Valuation: 57% premium to PAF’s current share price

Updating our long-term forecasts to reflect PAF’s disposal of both Uitkomst and Phoenix Platinum, our absolute value of PAF has increased by 5%, from 20.22p/share to 21.22p/share. More immediately, trading at 6.9x FY18 normalised HEPS, Pan African’s shares remain well below their historic share price multiples (with the exception of FY13), while also trading at more general ratios that are lower than its peers in at least 70% of cases in which P/E, yield and EV/EBITDA measures are considered (whether using Edison or consensus forecasts). Finally, PAF also has the second highest (consensus) forecast dividend yield of any dividend-paying gold company, globally.

Investment summary

Pan African has made a number of announcements since Edison’s last note in May, including an operational update, the conclusion of the Uitkomst disposal and the disposal of Phoenix Platinum, which are considered in the current report.

Operational update

On 20 July, Pan African provided an operational update, including production data for FY17, plus its expectations for gold output in FY18. The salient features of the update were as follows:

173koz of gold produced in FY17.

Evander Mines’ 7 shaft refurbishment completed and restructuring programme materially complete.

Elikhulu construction on track.

Feasibility study completed for a sub-vertical shaft at the high grade Fairview mining operation at Barberton, with an estimated capex of ZAR105m to be spent over a two year period to yield an additional 7-10koz gold per annum.

High grade drill results at Evander’s 2010 Pay Channel, which has prompted a feasibility study to assess the economic viability of expanding operations to exploit this orebody.

Net debt of ZAR66.7m as at 30 June 2017 (excluding paper investments).

Production guidance for FY18 of >190koz.

Phoenix Platinum disposal

Subsequent to its operational update, on 31 July, PAF further announced that it had successfully concluded a conditional agreement with Sylvania Platinum whereby Pan African will dispose of all of its shares and loan accounts with its wholly-owned subsidiary, Phoenix Platinum, to Sylvania for a total cash consideration of ZAR89m (£5.2m, US$6.8m or US$10.80 per Phoenix resource ounce). Note that this resource multiple of US$10.80/oz is actually accretive relative to PAF’s current group-wide resource multiple of US$8.40/oz. The deal is subject to due diligence and the other conditions precedent typical for such a transaction, but is nevertheless expected to be finalised by 31 October. More significantly, it will allow Pan African to focus on its remaining five core assets (having already sold its Uitkomst colliery earlier in the year), as well as further improving its financial position prior to incurring the major portion of the capex (ZAR869.6m) relating to Elikhulu over the course of CY19.

Short-term forecasts

Confirmation that 173koz of gold was produced in FY17 compared with prior guidance of 181koz and Edison’s prior expectation of 183.8koz and was attributed to “the slower than anticipated restart of the underground mine at Evander…and operational challenges experienced at Barberton…which have now been remedied.” For the purposes of Edison’s financial modelling, it has been assumed that the difference between actual and expected output was equally apportioned between Barberton and Evander, but that the Barberton variance was attributed to grade, while the Evander variance was attributed to gold lock up when the plant was restarted.

In addition, on 26 June, Pan African announced that all conditions precedent relating to the disposal of its interest in the Uitkomst colliery had been fulfilled and that the effective date of the transaction would be 30 June 2017, when Coal of Africa would take ownership, control and management of PAR Coal and Uitkomst (vs Edison’s prior expectation of 1 July). Note that the effective date of the transaction is consistent with PAF’s past practice of timing major corporate transactions to coincide with an appropriate quarter’s end. At the same time, Pan African also received its consideration, namely:

ZAR125m in cash

ZAR125m via the issue of 261.3m Coal of Africa shares to give PAF a 9.3% stake in the company

ZAR25m in interest-bearing, deferred consideration instruments, which may be paid by CoAL at any time prior to the second anniversary of the effective date (ie 30 June 2019).

As a result, we have brought the cash-flow and £3.9m estimated exceptional gain occasioned by this disposal forward, such that it now appears in FY17’s accounts (included in ‘Profit/(loss) on group disposal’ in Exhibit 1, below), rather than FY18’s as previously.

Finally, with respect to its Phoenix Platinum transaction, we have assumed that the effective date of the disposal will be early in the first half, such that Phoenix will make no material contribution to PAF’s income statement from FY18 onwards. In the meantime, we estimate that the sale is likely to crystallise a loss for Pan African relative to book value. Pan African’s carrying value for Phoenix in FY16 was £9.1m in net assets. As such, we estimate that a cash consideration of £5.2m for this asset will lead to an impairment of £3.9m in the financial results for FY17. We have also adjusted for recent movements in foreign exchange rates. Finally, Pan African’s strategy is not to hedge its gold production forward, except in specific circumstances and to provide protection against specific risks. In July 2015 however, in order to protect its operational revenue, Barberton Mines entered into a short-medium zero cost collar via the following instruments:

A put option over 50,000oz of gold at a strike price of ZAR450,000/kg

A call option over 25,000oz of gold at a strike price of ZAR505,000/kg

The decline in the price of gold, from ZAR625,886/kg on 30 June 2016 to ZAR506,917/kg on 31 December 2016, resulted in a mark-to-market fair value profit of ZAR90.0m (£5.3m) in H117, which was included in ‘other’ income in PAF’s income statement. As at 30 June 2017 the rand price of gold was ZAR521,661/kg and consequently we expect the contribution to ‘other’ income from hedging in H217to be negligible.

Exhibit 1: Pan African underlying P&L statement by half-year (H116-H218e) actual and expected

£000s (unless otherwise indicated)

H116

H216

H117

H217e

(previous)

FY17e

(previous)

H217e

(new)

FY17e

(new)

FY18e

(previous)

FY18e

(new)

Mineral sales

75,632

93,728

105,046

101,256

206,303

89,974

195,020

205,021

196,981

Realisation costs

(269)

(687)

(1,548)

(1,346)

(2,894)

(400)

(1,949)

(235)

(235)

Realisation costs (%)

0.36

0.73

1.47

1.47

1.40

0.50

1.00

0.12

0.12

On-mine revenue

75,363

93,041

103,498

99,911

203,409

89,573

193,071

204,785

196,745

Gold cost of production

(48,935)

(51,102)

(65,188)

(71,856)

(67,230)

Pt cost of production

(1,651)

(1,796)

(2,300)

(2,529)

(2,471)

Coal cost of production

(10,568)

(5,972)

(5,835)

Cost of production

(50,586)

(57,637)

(78,056)

(80,357)

(158,414)

(75,537)

(153,593)

(133,356)

(131,562)

Depreciation

(5,277)

(5,180)

(6,450)

(8,032)

(14,482)

(7,008)

(13,457)

(10,770)

(10,005)

Mining profit

19,500

30,225

18,992

11,521

30,513

7,029

26,021

60,660

55,179

Other income/(expenses)

(3,486)

(8,697)

2,175

(2,302)

(127)

2,175

(1,082)

(1,293)

Profit/(loss) on group disposal

0

0

256

0

256

3,913

4,169

*3,913

Loss in associate etc

0

0

0

0

0

0

Impairment costs

0

0

0

0

0

(3,900)

(3,900)

0

Royalty costs

(1,194)

(1,606)

(968)

(1,508)

(2,477)

(1,077)

(2,045)

(3,138)

(3,138)

Net income before finance items

14,819

19,923

20,455

7,711

28,166

5,965

26,420

60,353

50,748

Finances income

144

299

70

 

 

Finance costs

(558)

(891)

(1,079)

 

 

Net finance income

(414)

(592)

(1,009)

(1,025)

(2,034)

(513)

(1,522)

176

54

Profit before taxation

14,405

19,331

19,446

6,686

26,131

5,452

24,898

60,529

50,802

Taxation

(3,480)

(4,754)

(5,475)

(1,868)

(7,343)

(1,114)

(6,589)

(18,758)

(17,009)

Marginal tax rate (%)

24

26

28

28

28

20

26

31

33

Deferred tax

Profit after taxation

10,925

14,577

13,970

4,818

18,788

4,338

18,309

41,771

33,793

EPS (p)

0.60

0.82

0.93

0.30

1.20

0.27

1.17

2.32

1.88

HEPS** (p)

0.60

0.82

0.91

0.30

1.20

0.27

1.15

2.32

1.88

Diluted EPS (p)

0.60

0.80

0.93

0.30

1.17

0.27

1.14

2.27

1.83

Diluted HEPS* (p)

0.60

0.80

0.91

0.30

1.17

0.27

1.12

2.27

1.83

Normalised HEPS (p)

0.27

1.01

1.95

Diluted normalised HEPS (p)

0.27

0.99

1.90

Source: Pan African Resources, Edison Investment Research. Note: As reported basis; *Profit re Uitkomst sale; **HEPS = headline earnings per share (company adjusted basis).

Note that Edison’s forecasts are based on a gold price of US$1,239/oz in H217 and US$1,248/oz in FY18. They compare with consensus EPS forecasts (source Bloomberg, 23 August 2017), as follows:

Exhibit 2: Pan African consensus EPS estimates, FY17 and FY18 (p/share)

Year

Mean

Median

Range

FY17

1.711

1.400

1.000-2.660

FY18

2.146

2.160

1.390-2.600

Source: Bloomberg (23 August 2017)

Valuation: 21.22p/share, rising to 24.26p in FY22

Ultimately, Edison’s valuation is based on the present value of our estimate of the maximum potential stream of dividends payable to shareholders over the life of PAF’s mining operations. After producing 173koz of gold in FY17, management has now indicated that it expects production of gold in FY18 in excess of 190koz. Edison’s group-wide production estimate is 197koz in FY18, apportioned between its four remaining producing operations (ie excluding Phoenix), as follows:

Exhibit 3: Pan African group-wide production, actual and forecast, FY14-FY18e

Operation

FY14

FY15

FY16

FY17

FY18e

Barberton

88,738

81,493

84,690

71,520

94,641

Evander

76,556

63,558

73,496

43,544

72,700

BTRP

22,885

24,283

28,591

32,609

20,000

ETRP

0

6,523

18,151

25,369

10,000

Total

188,179

175,857

204,928

173,042

197,341

Source: Edison Investment Research, Pan African

Clearly, within the historical context, there must be a degree of risk attached to our production forecasts with respect to PAF’s underground operations (Barberton and Evander). However, this is balanced (in our opinion roughly equally) by the opportunity (or upside risk) presented at its tailings retreatment operations. More significantly, the development of Elikhulu (which is now underway and fully funded) should increase output to c 250koz over the course of the next two financial years, which will underpin our longer-term earnings and cash-flow expectations:

Exhibit 4: Edison estimate of PAF production, FY18e-FY20e (oz)

Source: Edison Investment Research

In the aftermath of the empirical factors considered, our valuation has risen by 1.00p to 21.22p cum-FY17 final dividend (at Edison’s standard 10% discount rate) cf 20.22p previously.

Exhibit 5: PAF estimated life of operations diluted EPS and (maximum potential) DPS

Source: Edison Investment Research, Pan African Resources

In the meantime, its shares remain noticeably cheap, within the historical context, when considered relative to our forecasts of normalised headline EPS in FY18 compared to prior years:

Exhibit 6: Pan African historical current year price to normalised HEPS ratio

Source: Edison Investment Research, Bloomberg. Note: *Completed historic years calculated with respect to average share price within the year shown and normalised HEPS; zero normalisation assumed prior to 2016.

In relative terms, it also remains cheaper than its South African and London-listed peers on at least 70% of valuation measures (ie 21 out of 30 measures in the table below on an individual company basis) regardless of whether consensus or Edison forecasts are used:

Exhibit 7: Comparative valuation of PAF with respect to South African peers

EV/EBITDA (x)

P/E (x)

Yield (%)

 

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

AngloGold Ashanti

4.9

3.8

36.6

6.6

1.7

2.1

Gold Fields

4.6

4.3

27.5

24.6

1.3

1.6

Sibanye

5.4

3.6

113.1

10.8

2.8

4.2

Harmony

2.9

2.6

10.9

12.4

2.6

1.7

Randgold Resources

13.0

12.6

29.7

24.9

2.0

2.4

Average (excluding PAF)

6.2

5.4

43.6

15.9

2.1

2.4

Pan African (Edison)

6.4

3.9

13.3

6.9

3.6

8.4

Pan African (consensus)

6.7

4.7

8.1

6.6

5.1

6.6

Source: Edison Investment Research, Bloomberg. Note: Priced at 23 August 2017.

Finally, it has the second-highest consensus, forecast dividend yield of the 57 precious metal mining companies paying dividends to shareholders, globally (including selected royalty companies):

Exhibit 8: Global gold mining companies ranked by forecast dividend yield (%)

Source: Bloomberg. Note: Prices as at 23 August 2017.

Note that, in this respect, Pan African’s forecast dividend yield is 2.49 standard deviations above the average yield of the population of 2.32%.

Growth projects

In addition to Elikhulu, which ‘is progressing according to plan with project completion and first gold expected in the last quarter of the 2018 calendar year’, Pan African has two significant growth projects, namely the Barberton Mines Sub-Vertical Shaft Project at Fairview and the Evander Mines 7 Shaft Number 3 Decline and 2010 Pay Channel project.

Barberton Mines Sub-Vertical Shaft Project at Fairview

The Fairview mining operation is currently restricted by the hoisting capacity of its No. 3 Decline, which is used to access workings below 42 Level. This decline is currently used to transport employees, material and for rock hoisting and, with no modifications, future mining at depth will be compromised by increased travelling distances, reduced employee face time and a lack of sufficient capacity to ensure both adequate ore replacement and exploration development. With this in mind, Pan African has now completed a study with DRA to investigate the feasibility of constructing a raise-bored, sub-vertical shaft from Fairview’s 42 Level to 64 Level and, potentially, in future, to 68 Level. The sub-vertical shaft will then be used to transport employees and material to the working areas, while No. 3 Decline will be used exclusively for rock hoisting, thereby significantly increasing overall capacity and production from this high grade mining area.

Estimated capex for the project (including contingencies) is ZAR105m (£6.1m) and would result in estimated, additional output of 7,000oz gold per annum, which ‘can be optimised further to more than 10,000oz per annum.’

Assuming that construction takes place in CY18 and CY19 and that production begins in CY20 with cash costs of c US$800/oz over 15 years, we estimate that this project could be worth in the order of US$29.3m (1.32p/share) to Pan African, rising to US$42.8m (1.95p/share) in the event of optimisation (at Edison’s standard 10% discount rate) – which compares with a current valuation in the order of US$1.0m if valued at PAF’s current group-wide resource multiple.

Evander Mines 7 Shaft No. 3 Decline and 2010 Pay Channel

The 2010 Pay Channel contains an estimated 2.19Moz of resources and is c 3km in tramming distance from 7 Shaft, which is currently used by EGM for hoisting to the Kinross metallurgical plant (cf 8 Shaft, which is c 10km distant). Harmony Gold Mining had previously developed the 7 Shaft mine working towards the 2010 Pay Channel, but discontinued the initiative in 2009, allowing the controlled flooding of the development ends and 7 Shaft’s No. 3 Decline, from 22 Level to 18 Level.

To date, two boreholes have successfully been drilled into the 2010 Pay Channel, intersecting the Kimberley reef at a depth of c 2km. The first yielded a reef intersection with a width of 49cm and a grade of 36.04g/t (a metal content factor of 1,766cm.g/t), while the more recent recorded a width of 6cm and a grade of 36.8g/t (a metal content factor of 221cm.g/t). Additional drilling deflections will be performed to further delineate the orebody. In the meantime, in order for mining to commence, the infrastructure would need to be dewatered and only standard footwall and on-reef development (with associated engineering infrastructure) completed. With this in mind, a Pan African project team has been created and has commenced a feasibility study relating to the 7 Shaft No. 3 Decline and 2010 Pay Channel resource, which will initially consider the following issues:

Collation of geological data from drill hole intersections and deflections.

The cost and timing of dewatering and re-equipping the 7 Shaft No. 3 Decline from 18 Level to 22 Level.

The development cost and timing to access the 2010 Pay Channel.

The economic viability of the project.

The feasibility study is expected to be completed in the first quarter of the 2018 calendar year (ie H218). In the meantime, Pan African’s management is of the opinion that, ‘The 2010 Pay Channel can potentially increase Evander Mines’ underground gold production significantly at a relatively low capital cost, using Evander Mines’ established shaft and metallurgical facilities.’

Pro-rata to its resource of 2.19Moz, at Pan African’s group-wide average resource multiple, the 2010 Pay Channel project should be worth in the order of US$18.3m, or c 1.02 US cents per share. In all probability, management would probably hope and expect that this project would yield an NPV10 to the company of several times this value in the event that its development is sanctioned by the board, subject to capex, opex etc.

South African Mining Charter 3

On 15 June 2017, the South African minister of mineral resources, Mosebenzi Zwane, announced the latest version of South Africa’s Mining Charter, which became effective immediately. The charter has been championed by the South African President, Jacob Zuma, who has described it as representing “radical economic transformation”, although others have interpreted his support as an attempt to distract observers and voters from a growing spate of corruption scandals. Either way, within hours of its gazetting, the Chamber of Mines of South Africa issued a public statement to the effect that the process followed by the Department of Mineral Resources in drawing up the charter was seriously flawed and, consequently, that it rejected its unilateral imposition on the industry. The Chamber confirmed that it would seek an interdict to suspend its implementation and that it will also seek a court declaration on the ‘once empowered, always empowered’ principle.

Charter detail

Details of the charter are, inter alia: 1) new prospecting rights will be granted only to entities that are majority black-owned, 2) new mining rights will be granted only to entities that are 30% black-owned in prescribed categories of shareholders, 3) existing prospecting right and mining right holders top up to 30% black-ownership in 12 months, 4) 80% of total spend on services and holders to top up to 30% black-ownership in 12 months, 4) 80% of total spend on services and 70% of total spend on mining goods is to be sourced from prescribed categories of South African-based companies; and 5) increased employment quotas. Other requirements are that new mining rights’ holders must pay 1% of turnover to their black shareholders on top of any dividends enjoyed by all shareholders and that 8% of black empowerment shares must be held on behalf of communities in a new agency called the Mining Transformation & Development Agency. This agency will also receive 2% of mining companies’ payrolls as part of the 5% of payrolls that must be allocated for skills development. Non-compliance with certain of the targets will be regarded as a breach of the Mineral & Petroleum Resources Act, which could entitle the minister to suspend mining operations and to cancel rights granted and to pursue a criminal prosecution.

Recriminations

Since the publication of the charter, charges and recriminations have flown on both sides, with questions being raised about the extent to which the Chamber of Mines had been consulted as well as the ANC’s own internal Economic Transformation Committee. A number of corporate executives have said that they believe that the charter is “contradictory to company law”. No lesser personage than the Deputy President (and former General Secretary of the NUM) Cyril Ramaphosa has called for the charter to be reconsidered and the African National Congress has noted that the legislation may cause job losses. The minister responded by saying that, “Those who have made it their mission to preserve middle-class interests at all costs will oppose attempts to deepen transformation in the mining sector.”

Latest…

Earlier in July, the Chamber of Mines said that it would apply to the high court to stop the implementation of the new charter. Describing aspects of it as “illegal” and “unconstitutional”, it went on to say that it “represented a most egregious case of regulatory over-reach” and that it amounted to “law-making without going through the legislative process”. In the short term, the submission requests that an urgent intervention be made in order to protect the industry and that, to this end, the charter be set aside as an unlawful exercise of power and then be interdicted while the High Court considers the merits of the review.

As such, there are two legal processes running concurrently – one being an application for an interdict and the other being an application for a judicial review (widely seen as the Chamber of Mines’ ultimate goal). The intention of the interdict is to halt the implementation of the charter pending the outcome of the Chamber of Mines’ application for judicial review of the charter. Both the DMR and the CoM have agreed to ask for the interdict application to be heard in September, which will give the former time to file its answering affidavit in opposition to the interdict application. In the meantime, DMR has agreed not to take any steps to actually implement the charter. As a result, on 14 July, the minister Mosebenzi Zwane said that he would be suspending the implementation of the charter pending the court case.

If the court grants the interdict, implementation of the charter will remain suspended until the review process is completed. If the interdict is not granted, the department could technically go ahead with implementation, although professional opinion appears to incline against this before the conclusion of the review.

With respect to the review, the court could declare invalid the minister’s decision to promulgate the charter on a variety of grounds. If this is the case, it could order him to reconsider his decision or possibly even replace it with the court’s own decision. If it does find that the Mining Charter is the result of unjust administrative action however, professional opinion appears to be that it will most likely order him to reconsider the decision and begin the process of consultation all over again.

No sooner had the minister announced that he was suspending implementation of the charter pending the court case however, than the NUM said that it would go to court in an attempt to force the DMR to implement the charter as planned on the basis that it will immediately benefit workers and related mining communities.

Effect on Pan African

Pan African is currently empowered via PAR Gold (formerly Shanduka Gold), which has a 19.53% headline stake in the company, plus its employee share ownership schemes. Self-evidently, this arrangement could be expanded and/or restructured. Nevertheless, the share prices of South African mining shares have fallen by an average 7.7% (on an unweighted arithmetic basis for the sample of six mining companies shown in Exhibit 9, below), after having fallen by as much as 13.3% in the 18 days immediately following the announcement of the new charter. Moody’s has inveighed that the proposals are credit negative for mining companies and stated that ‘…current shareholders are unlikely to support a further dilution of their equity interests’.

Exhibit 9: Pan African share price vs peers, 14 June to present, rebased (underlying US$)

Source: Thomson Reuters Datastream, Edison Investment Research

As can be seen from the above graph, Pan African was initially one of the best performing South African mining shares in the immediate aftermath of the announcement of the charter, although it has arguably been slower to recover since mid-July with the exception of AngloGold Ashanti.

Financials

In its operational update, Pan African reported that it had net debt of ZAR66.7m (£3.9m) as at 30 June 2017 cf £33.2m as at 31 December 2016. However, this excludes ZAR127.5m (£7.5m) of financial investments in the form of Coal of Africa shares which were issued to PAF in consideration of its sale of the Uitkomst colliery to CoAL on 30 June. Note that, for the purposes of Edison’s financial forecasts, these are included in cash, such that we estimate that PAF had net cash of £3.6m as at 30 June.

From here, our forecasts for Pan African’s immediate capital expenditure commitments related to Elikhulu by financial year are as follows:

Exhibit 10: Estimated Elikhulu capex requirements by financial year

£000s

FY18

FY19

FY20

FY21

FY22

FY23

Total capex*

54,236

33,935

8,626

18,391

18,391

**6,382

Source: Pan African Resources, Edison Investment Research. Note: *Includes sustaining capex, but excludes Phase 3 capex, which commences in FY26; **no development capex, sustaining capex only.

Elikhulu’s permitting process is reported to be progressing well. In the meantime, maintaining a dividend policy of 40% of free cash flows less sustaining capital, debt repayments and exceptional items, we estimate that Pan African’s funding requirement will evolve during the period in which Elikhulu is being developed from FY16 to FY21, as follows:

Exhibit 11: Pan African estimated funding requirement, FY16 to FY21e

Source: Edison Investment Research, Pan African Resources

Note that PAF’s maximum group net funding requirement of £17.8m in FY19, based on our estimates, equates to ZAR304m at prevailing forex rates, or gearing (debt/equity) of 7.8% and leverage (debt/[debt+equity]) of 7.3% - and is self-evidently well covered by PAF’s existing debt facilities of ZAR880.2m (as at 30 June 2017), including a ZAR800m revolving credit facility (which can anyway be expanded to ZAR1,100m) as well as its new ZAR1.0bn underwritten seven-year debt facility with Rand Merchant Bank specifically relating to the development of Elikhulu.

Exhibit 12: Financial summary

£'000s

2009

2010

2011

2012

2013

2014

2015

2016

2017e

2018e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

52,860

68,344

79,051

100,905

133,308

154,202

140,386

168,404

193,071

196,745

Cost of sales

(28,505)

(40,554)

(45,345)

(46,123)

(71,181)

(106,394)

(110,413)

(108,223)

(153,593)

(131,562)

Gross profit

24,355

27,790

33,705

54,783

62,127

47,808

29,973

60,181

39,478

65,183

EBITDA

 

 

22,890

25,023

28,540

45,018

53,276

44,165

28,448

57,381

37,433

62,046

Operating profit (before GW and except.)

20,529

21,897

25,655

41,759

47,278

34,142

18,110

46,925

23,976

52,041

Intangible amortisation

0

0

0

0

0

0

0

0

0

0

Exceptionals

(5,025)

(335)

0

(48)

7,232

(12)

(198)

(12,183)

2,444

(1,293)

Other

0

0

0

0

0

0

0

0

0

0

Operating profit

15,504

21,562

25,655

41,711

54,510

34,130

17,912

34,742

26,420

50,748

Net interest

807

594

762

516

197

(191)

(2,109)

(1,006)

(1,522)

54

Profit before tax (norm)

 

 

21,336

22,491

26,417

42,274

47,475

33,951

16,001

45,919

22,454

52,095

Profit before tax (FRS 3)

 

 

16,311

22,156

26,417

42,226

54,707

33,939

15,803

33,736

24,898

50,802

Tax

(8,219)

(7,656)

(9,248)

(12,985)

(12,133)

(7,155)

(4,133)

(8,234)

(6,589)

(17,009)

Profit after tax (norm)

13,117

14,835

17,169

29,290

35,342

26,796

11,868

37,685

15,865

35,086

Profit after tax (FRS 3)

8,091

14,500

17,169

29,242

42,574

26,785

11,670

25,502

18,309

33,793

Average number of shares outstanding (m)

1,104.4

1,366.3

1,432.7

1,445.2

1,619.8

1,827.2

1,830.4

1,811.4

1,564.3

1,798.3

EPS - normalised (p)

 

 

0.85

1.07

1.20

2.03

2.18

1.46

0.64

2.08

1.01

1.95

EPS - FRS 3 (p)

 

 

0.40

1.04

1.20

2.02

2.63

1.47

0.64

1.41

1.17

1.88

Dividend per share (p)

0.26

0.37

0.51

0.00

0.83

0.82

0.54

0.88

0.49

1.14

Gross margin (%)

46.1

40.7

42.6

54.3

46.6

31.0

21.4

35.7

20.4

33.1

EBITDA margin (%)

43.3

36.6

36.1

44.6

40.0

28.6

20.3

34.1

19.4

31.5

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

38.8

32.0

32.5

41.4

35.5

22.1

12.9

27.9

12.4

26.5

BALANCE SHEET

Fixed assets

 

 

67,198

74,324

97,281

86,075

249,316

223,425

220,150

230,676

234,571

285,253

Intangible assets

35,397

36,829

38,229

23,664

38,628

37,040

37,713

38,682

40,418

42,154

Tangible assets

31,801

37,495

59,052

62,412

209,490

185,376

181,533

190,725

192,884

241,830

Investments

0

0

0

0

1,199

1,010

905

1,269

1,269

1,269

Current assets

 

 

4,949

17,677

15,835

41,614

26,962

23,510

17,218

22,016

49,045

30,703

Stocks

358

1,126

1,457

1,869

6,596

5,341

3,503

4,399

11,233

6,156

Debtors

2,201

3,795

4,254

6,828

15,384

12,551

10,386

14,891

20,171

18,619

Cash

2,389

12,756

10,124

19,782

4,769

5,618

3,329

2,659

17,575

5,862

Current liabilities

 

 

(6,101)

(7,084)

(8,960)

(11,062)

(24,066)

(24,012)

(22,350)

(32,211)

(18,450)

(36,150)

Creditors

(6,080)

(7,084)

(8,960)

(11,062)

(23,202)

(19,257)

(17,301)

(25,230)

(18,450)

(36,150)

Short-term borrowings

(21)

0

0

0

(864)

(4,755)

(5,049)

(6,981)

0

0

Long-term liabilities

 

 

(9,686)

(11,431)

(13,410)

(14,001)

(80,004)

(63,528)

(67,850)

(69,506)

(66,395)

(67,750)

Long-term borrowings

0

0

(181)

(869)

(11,133)

(8,141)

(16,313)

(18,456)

(13,975)

(13,975)

Other long-term liabilities

(9,686)

(11,431)

(13,228)

(13,132)

(68,871)

(55,387)

(51,537)

(51,049)

(52,420)

(53,775)

Net assets

 

 

56,360

73,487

90,746

102,626

172,208

159,396

147,167

150,975

198,772

212,056

CASH FLOW

Operating cash flow

 

 

25,420

25,207

31,968

49,092

61,618

45,996

26,423

47,130

25,204

73,323

Net Interest

807

594

762

516

314

(606)

(2,109)

(1,006)

(1,522)

54

Tax

(10,886)

(7,476)

(10,743)

(11,616)

(13,666)

(8,536)

(3,943)

(7,777)

(5,218)

(15,653)

Capex

(5,705)

(6,764)

(21,712)

(17,814)

(27,197)

(21,355)

(19,554)

(14,097)

(33,386)

(65,898)

Acquisitions/disposals

(4,205)

0

0

(1,549)

(96,006)

0

(760)

(30,999)

16,303

5,210

Financing

0

48

1,545

259

47,112

349

(235)

15,207

38,236

0

Dividends

(6,774)

0

(5,376)

(7,416)

0

(14,684)

(15,006)

(9,882)

(13,239)

(8,749)

Net cash flow

(1,343)

11,609

(3,557)

11,471

(27,826)

1,164

(15,184)

(1,425)

26,378

(11,713)

Opening net debt/(cash)

 

 

(5,313)

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

22,778

(3,600)

Exchange rate movements

(2,642)

(281)

925

(1,813)

594

(839)

(276)

812

0

0

Other

1,041

(940)

(181)

(688)

1,090

(375)

4,705

(4,131)

0

0

Closing net debt/(cash)

 

 

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

22,778

(3,600)

8,113

Source: Company sources, Edison Investment Research


Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Pan African Resources and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

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Level 12, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Pan African Resources and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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