Entailed

Pan African Resources 17 November 2020 Update
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Pan African Resources

Entailed

Mogale and Mintails acquisition

Metals & mining

17 November 2020

Price

22.50p

Market cap

£503m

ZAR20.6236/£, ZAR15.6618/US$, US$1.3169/£

Net debt (US$m) at end June 2020 excluding estimated ZAR16.9m (US$1.0m) of MC Mining shares (formerly Coal of Africa)

55.7

Shares in issue*

2,234.7m

*Effective 1,928.3m post-consolidation

Free float

86%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.5)

(13.1)

99.8

Rel (local)

(12.2)

(18.4)

122.6

52-week high/low

27.1p

9.0p

Business description

Pan African Resources has three major producing precious metals assets in South Africa: Barberton (target output 95koz Au pa), the Barberton Tailings Retreatment Project, or BTRP (20koz), and Elikhulu (55koz), now incorporating the Evander Tailings Retreatment Project, or ETRP (10koz).

Next events

AGM

26 November 2020

Ex-dividend LSE date

3 December 2020

Dividend payment date

15 December 2020

H121 results

February 2021

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Pan African Resources (PAF) has announced that it is to acquire 100% of Mogale Gold and Mintails SA Soweto Cluster from Mintails’ liquidator for ZAR50.0m (US$3.2m). Combined, the two assets host a mineral resource of 243Mt (in tailings), containing 2.36Moz gold. As such, consideration equates to US$1.31 per oz of contained gold cf an average valuation of US$9.88/oz for London-listed pre-production gold assets (see Gold stars and black holes, published in January 2019). Closure of the deal is subject to the usual due diligence, including the evaluation the assets’ amenability to retreatment.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/19

218.8

37.1

1.64

0.15

18.1

0.5

06/20

274.1

80.8

3.78

0.84

7.8

2.8

06/21e

307.9

129.5

6.42

1.36

4.6

4.6

06/22e

316.0

142.1

6.42

1.20

4.6

4.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. Note: Our estimates have changed only marginally as a result of the proposed Mogale/Mintails transaction to reflect capex in FY21 and net interest in FY22.

Perhaps a second Elikhulu (also tailings retreatment)

Mintails’ and Mogale’s aggregate resource of 2.36Moz compares favourably to Elikhulu’s original resource of 1.7Moz and its initial reserve of 1.5Moz, but at a fractionally higher grade of 0.30g/t (cf Elikhulu’s 0.29g/t). PAF announced the results of an independent definitive feasibility study (DFS) on Elikhulu on 5 December 2016, which demonstrated an NPV9 of US$75.9m (or, then, 5.0cps, or US$40.95 per resource oz) at a gold price of US$1,180/oz and a forex rate of ZAR14.50/US$. At the time, Edison estimated Elikhulu to be worth US$69.9m (or 4.6cps) at a 10% discount rate and to be capable of adding 1.33p to EPS in the first eight years of its operation (albeit there are now 28.0% more shares in issue). Now however, with capex having been expended (but with not all associated debt repaid), we estimate a valuation for Elikhulu of US$286.5m, or 14.9cps, or US$151.32 per initial resource oz or US$184.08 per remaining resource oz. As such, PAF has acquired for US$1.31/oz an asset that might be worth US$9.88/oz, could be worth US$40.95/oz (pre-production) and may be worth US$159.33/oz (post-debt repayment – albeit after c US$71/oz in initial capex).

Valuation: Steady at 40.48cps plus Mintails/Mogale

For the moment, we have left our absolute valuation of PAF unchanged at 40.48c (31.31p) per share based on its four main currently producing assets plus Egoli. To this must then be added the value of c 19.2m underground Witwatersrand ounces which we estimate could lie anywhere in the range of 0.22–5.24c per share, depending on market conditions and the value of Mintails/Mogale as discussed above. As an alternative means of valuation, if PAF’s historical average price to normalised EPS ratio of 9.1x in the period FY10–20 is applied to our FY21 forecasts, then it implies a share price potentially as high as 45p in the current financial year. In the meantime, on the basis of its FY20 dividend, PAF is among the top 20 yielding precious metals companies globally. Based on our forecasts, we believe that this could improve to within the top 10 in FY21.

Exhibit 1: Financial summary

US$'000s

2018

2019

2020

2021e

2022e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

145,829

218,818

274,107

307,883

316,019

Cost of sales

(107,140)

(152,980)

(158,457)

(152,913)

(146,967)

Gross profit

38,689

65,838

115,650

154,969

169,052

EBITDA

 

 

38,131

65,484

115,176

153,552

164,506

Operating profit (before GW and except.)

31,506

49,256

93,673

134,555

143,589

Intangible amortisation

0

0

0

0

0

Exceptionals

(16,521)

10,596

(28,593)

(8,905)

(1,618)

Other

0

0

0

0

0

Operating profit

14,985

59,852

65,079

125,649

141,971

Net interest

(2,222)

(12,192)

(12,881)

(5,015)

(1,483)

Profit before tax (norm)

 

 

29,284

37,064

80,791

129,540

142,106

Profit before tax (FRS 3)

 

 

12,763

47,660

52,198

120,635

140,488

Tax

2,826

(8,174)

(7,905)

(5,709)

(18,338)

Profit after tax (norm)

32,110

28,890

72,887

123,831

123,768

Profit after tax (FRS 3)

15,589

39,486

44,293

114,926

122,149

Average number of shares outstanding (m)

1,809.7

1,928.3

1,928.3

1,928.3

1,928.3

EPS - normalised (c)

 

 

1.31

1.64

3.78

6.42

6.42

EPS - FRS 3 (c)

 

 

0.87

2.05

2.30

5.96

6.33

Dividend per share (c)

0.00

0.15

0.84

1.36

1.20

Gross margin (%)

26.5

30.1

42.2

50.3

53.5

EBITDA margin (%)

26.1

29.9

42.0

49.9

52.1

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

21.6

22.5

34.2

43.7

45.4

BALANCE SHEET

Fixed assets

 

 

315,279

361,529

314,968

354,533

387,383

Intangible assets

56,899

49,372

43,466

45,710

47,955

Tangible assets

254,247

305,355

270,286

307,606

338,211

Investments

4,134

6,802

1,216

1,216

1,216

Current assets

 

 

29,009

31,601

53,648

106,239

129,286

Stocks

4,310

6,323

7,626

10,271

10,543

Debtors

22,577

18,048

11,245

21,948

22,530

Cash

922

5,341

33,530

72,773

94,966

Current liabilities

 

 

(44,395)

(63,855)

(78,722)

(82,076)

(37,799)

Creditors

(37,968)

(39,707)

(62,806)

(66,160)

(61,883)

Short-term borrowings

(6,426)

(24,148)

(15,916)

(15,916)

24,084

Long-term liabilities

 

 

(152,906)

(145,693)

(106,276)

(106,385)

(107,573)

Long-term borrowings

(112,827)

(109,618)

(73,333)

(73,333)

(73,333)

Other long-term liabilities

(40,078)

(36,076)

(32,943)

(33,052)

(34,241)

Net assets

 

 

146,988

183,582

183,620

272,311

371,296

CASH FLOW

Operating cash flow

 

 

5,345

59,822

73,399

127,119

160,828

Net Interest

(6,076)

(14,685)

(10,834)

(5,015)

(1,483)

Tax

(1,634)

(4,497)

(5,804)

(5,600)

(17,150)

Capex

(127,279)

(52,261)

(30,849)

(58,561)

(53,767)

Acquisitions/disposals

6,319

466

207

0

0

Financing

11,944

(0)

0

(0)

0

Dividends

(11,030)

(2,933)

(2,933)

(18,700)

(26,235)

Net cash flow

(122,411)

(14,088)

23,186

39,244

62,193

Opening net debt/(cash)

 

 

3,138

118,332

128,424

55,719

16,475

Exchange rate movements

(619)

537

1,663

0

0

Other

7,836

3,459

47,856

0

0

Closing net debt/(cash)

 

 

118,332

128,424

55,719

16,475

(45,717)

Source: Company sources, Edison Investment Research.


General disclaimer and copyright

This report has been commissioned by Pan African Resources and prepared and issued by Edison, in consideration of a fee payable by Pan African Resources. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Pan African Resources and prepared and issued by Edison, in consideration of a fee payable by Pan African Resources. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: 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 and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. 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, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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. 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 (i.e. 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.

United Kingdom

This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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