Entering harvest mode

Pan African Resources 2 October 2019 Update
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Pan African Resources

Entering harvest mode

FY19 results

Metals & mining

2 October 2019

Price

11.30p

Market cap

£253m

ZAR18.4378/£, ZAR14.7635/US$, US$1.2488/£

Net debt (US$m) at end-June 2019 excluding estimated ZAR82.0m (US$5.7m) of MC Mining shares (formerly Coal of Africa)

132.5

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

(19.3)

11.4

41.4

Rel (local)

(20.3)

13.0

44.4

52-week high/low

14.5p

7.9p

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

28 November 2019

LSE ex-dividend date

12 December 2019

JSE & LSE record date

13 December 2019

Dividend payment date

30 December 2019

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Headline earnings for Pan African Resources (PAF) in FY19 were within US$0.14m of our prior expectations, after a 54% increase in gold produced from continuing operations combined with a 27% decline in AISC to result in a 75.3% increase in underlying EBITDA. Guidance for FY20 remains unchanged at 185,000 (albeit higher margin) ounces cf guidance of 170koz until May, supporting our headline EPS forecast of 2.46 US cents per share (cf 1.88p/share previously). Investors should note the change in PAF’s accounts from sterling to US dollars.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/18

145.8

29.3

1.31

0.00

10.8

N/A

06/19

217.4

35.6

1.56

0.15

9.0

1.1

06/20e

274.6

83.4

2.46

0.46

5.7

3.3

06/21e

309.9

120.3

3.75

1.47

3.8

10.4

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

Guidance appears solid

Group-wide production of 48,671oz in Q419 was materially stronger than any of the other quarters in FY19 and, alone, would imply c 195koz of production on an annualised basis. In the meantime, PAF’s production guidance of 185,000oz for FY20 is supported by a full year’s contribution from Elikhulu, which will add an additional c 16,132–18,799oz to group production, plus a c 20,000oz maiden contribution from the Evander 8 Shaft pillar project, replacing 16,879oz of low/negative margin production from sweeping and vamping operations.

Dividend to increase as PAF ‘harvests’ profits

Pre-financing cash flow turned positive in H219 as capex more than halved (from ZAR585.9m in H119 to ZAR216.1m in H219) and we also expect it to halve in FY20 cf FY19. As a result, henceforward, we expect PAF to become strongly cash-generative, such that it will pay down net debt at the same time as increasing dividend distributions.

Valuation: 24.07 US cents plus 19.2Moz

Including the Evander 8 Shaft pillar project, our headline absolute valuation of PAF has increased from 14.05p/share to 17.89c/share. This increases to 24.07c/share (cf 19.00p previously) once growth projects and other assets have been taken into account, plus the value of c 19.2m underground Witwatersrand ounces, which could lie anywhere in the range of 0.22–5.24c per share, depending on market conditions. In the meantime, if PAF’s historical average price to normalised EPS ratio of 9.6x in the period FY10–19 is applied to our respective forecasts, its share price could be expected to be 18.9p in FY20, rising to 28.9p in FY21. Pan African also remains cheaper than its South African- and London-listed gold mining peers on at least 83% of common valuation measures regardless of whether Edison or consensus forecasts are used. Finally, based on our assumptions, its dividend yield in FY20 should be within the top third of the 52 precious metals companies expected to pay a dividend over the next 12 months (see Exhibit 12 on page 11), rising again in FY21.

FY results to 30 June 2019

Pan African’s results for the full year to end-June 2019 were reported within the context of the group having outperformed its own production guidance (and Edison’s prior expectations) by 1.4% in aggregate, after especially strong performances at Barberton and Evander’s underground operations:

Exhibit 1: PAF group-wide production, actual and forecast, H118–FY19e (oz)

Operation

FY15

FY16

FY17

H118

H218

FY18

H119

H219e
(previous)

H219

Variance

(%)

FY19e
(previous)

FY19

Variance

(%)

Barberton UG

81,493

84,690

71,763

32,159

40,966

73,125

38,550

34,247

36,806

+7.5

72,797

75,356

+3.5

BTRP

24,283

28,591

26,745

8,452

9,052

17,504

12,006

12,110

12,001

-0.9

24,116

24,007

-0.5

Barberton

105,776

113,281

98,508

40,611

50,018

90,629

50,556

46,357

48,807

+5.3

96,913

99,363

+2.5

Evander UG

63,558

73,496

43,304

32,734

15,831

48,565

8,821

10,752

8,058

-25.1

19,573

16,879

-13.8

ETRP

6,523

18,151

29,473

11,937

9,313

21,250

6,345

**0

**3,654

+N/A

**6,345

9,999

+57.6

Evander

70,081

91,647

72,777

44,671

25,144

69,815

15,166

10,752

11,712

-0.3

25,918

26,878

+3.7

Elikhulu

0

0

0

0

0

0

15,292

31,878

30,909

-3.0

**47,170

46,201

-2.1

Total

175,857

204,928

173,285

85,282

75,139

160,444

81,014

88,987

91,428

+2.7

170,000

172,442

+1.4

Source: Edison Investment Research, Pan African Resources. Note: Numbers may not add up owing to rounding. UG = underground. *Includes 736oz of capitalised pre-production output in August. **ETRP (Evander Tailings Retreatment Project) throughput processed via Elikhulu plant from H219 onwards.

While overall production did not match the record performance reported in FY16, it was consistent with FY15 and FY17 and 7.5% higher than FY18, after only a partial contribution from Elikhulu – thereby confirming management’s assertion of a year ago that production from Elikhulu would largely make up for production lost from the closure of large-scale underground operations at Evander. Highlights for the period were as follows:

A 54.1% increase in the production of gold from continuing operations.

A 2.7% decline in the average price of gold received by the group in US dollar terms, from US$1,301/oz to US$1,266/oz.

A 10.4% decline in the US$/ZAR exchange rate, from ZAR12.85/US$ to ZAR14.19/US$.

A 15.4% decline in cash costs in rand terms, from ZAR480,439/kg to ZAR406,466/kg, which translated into a 23.3% decline in dollar terms, from US$1,162/oz to US$891/oz.

A sharp decline in capex, from ZAR585.9m (US$41.3m) in H119 to ZAR216.1m (US$15.2m) in H219.

A US$17.9m reversal of a total impairment charge of US$140.3m made in May 2018, relating to Evander Mines’ 8 Shaft infrastructure following the decision to implement the 8 Shaft pillar project.

Throughput of 1.3Mt in the month of March at Elikhulu (100,000t above nameplate capacity), while total cash costs for the year were within 10% of those projected in the feasibility study, at US$555/oz.

Production at the Barberton Tailings Retreatment Project (BTRP) increased by 37.2% compared to FY18, taking output back to levels that were typical in FY15–17, following the successful commissioning of the 1.7MW BTRP regrind mill in May 2018 that has allowed it to efficiently treat coarser fraction tailings, such as the older (albeit lower-grade) Harper dumps for processing.

Zero fatalities in FY19 (as well) as FY18, with 1 million fatality free shifts at Fairview and 2 million fatality free shifts at Barberton, while the group’s lost-time injury frequency rate improved substantially, to 1.62 per million man hours (cf 3.73 in FY18, 1.75 in H119 and 3.79 in H118), and its reportable injury frequency rate improved to 0.51 per million man hours (cf 1.08 in FY18, 0.58 in H119 and 1.17 in H118).

A sharp increase in underground production at Barberton in Q4 in particular (see Exhibit 2, below) under the influence of three cycling production platforms, which, in conjunction with a concurrent increase in development rates, have materially increased mining flexibility.

A resumption of dividend payments after a hiatus in FY18 (and subject to approval at the company’s AGM on 28 November), with the board proposing a final dividend of ZAR50m for FY19, or approximately US$3.4m, ZAR0.0223745/share, or 0.15169 US cents per share, or 0.12660p per share.

A summary of PAF’s production profile, by quarter, is as follows:

Exhibit 2: PAF group-wide production, actual and forecast, FY19, by quarter (oz)

Operation

Q119

Q219
(implied)

Q319
(implied)

Q1-Q319

Q419e

(previous)

Q419

(implied)

Change*

(%)

Variance

(%)

H219e
(previous)

H219
(implied)

Change**

(%)

FY19

Barberton UG

21,278

17,272

16,307

54,857

17,940

20,499

+25.7

+14.3

34,247

36,806

+7.5

75,356

BTRP

5,923

6,083

6,081

18,087

6,029

5,920

-2.6

-1.8

12,110

12,001

-0.9

24,007

Barberton

27,201

23,355

22,388

72,944

23,969

26,419

+18.0

+10.2

46,357

48,807

+5.3

99,363

Evander UG

3,815

5,006

2,126

10,947

4,972

5,932

+179.0

+19.3

10,752

8,058

-8.6

16,879

ETRP

3,819

2,526

****3,654

****9,999

****0

****0

-100.0

0.0

****0

****3,654

-42.4

9,999

Evander

7,634

7,532

5,780

20,946

4,972

5,932

+2.6

+19.3

10,752

11,712

+8.9

26,878

Elikhulu

***2,894

13,134

****14,589

****29,881

****17,289

****16,320

+11.9

-5.6

31,878

30,909

-3.1

46,201

Total

37,729

44,021

42,757

123,771

46,230

48,671

+13.8

+5.3

88,987

91,428

+2.7

172,442

Source: Edison Investment Research, Pan African Resources. Note: Numbers may not add up owing to rounding. UG = underground. *Change is Q419/Q319. **Change is H219/H119. ***Includes 736oz of capitalised pre-production output in August 2018. ****ETRP throughput processed via Elikhulu plant from H219 onwards.

Investors should note that four quarters of production at the Q4 level of 48,671oz per quarter would imply group production in FY20 of 194,684oz – ie 5.2% above current management guidance (see below).


FY19 actual versus expected

Consistent with a number of statements throughout the year, Pan African changed its reporting currency in the year to end-June 2019 from pounds sterling to US dollars. The table below converts PAF’s results back into sterling terms for the purposes of comparison with our prior forecasts and FY18 in particular.

Exhibit 3: PAF underlying P&L statement by half-year (H118–H219) actual and expected

£000s
(unless otherwise indicated)

H118
(as reported)

H218
(implied)

FY18

FY18
(underlying)

FY18
(as reported)

H119

H219e

FY19e

H219

FY19

Mineral sales

82,900

74,000

156,900

108,500

108,500

75,300

89,234

164,534

*93,463

*168,763

Realisation costs

(1,500)

(1,200)

(2,700)

(2,000)

(2,000)

(600)

(813)

(1,413)

*(514)

*(1,114)

Realisation costs (%)

1.81

1.62

1.72

1.84

1.84

0.80

0.91

0.86

*0.55

*0.66

On-mine revenue

81,400

72,800

154,200

106,500

106,500

74,700

88,422

163,122

92,950

167,650

Cost of production

(69,600)

(69,200)

(138,800)

(77,700)

(77,700)

(54,200)

(59,647)

(113,847)

(63,786)

(117,986)

Depreciation

(5,900)

(5,100)

(11,000)

(4,900)

(4,900)

(5,300)

(5,778)

(11,078)

(7,216)

(12,516)

Mining profit

5,900

(1,500)

4,400

23,900

23,900

15,200

22,997

38,197

21,949

37,149

Other income/(expenses)

(800)

(14,900)

(15,700)

(4,200)

(4,200)

(1,400)

0

(1,400)

(4,198)

(5,598)

Loss in associate etc

(400)

400

0

***0

***0

0

0

0

0

0

Loss on disposals

0

(300)

(300)

0

0

0

0

0

0

0

Impairment costs

0

(106,300)

(106,300)

Excl.

(8,200)

0

0

0

13,769

13,769

Royalty costs

(300)

(300)

(600)

(400)

(400)

(400)

(2,265)

(2,665)

127

(273)

Net income before finance

4,400

(122,900)

(118,500)

19,300

11,100

13,400

20,732

34,132

31,647

45,047

Finances income

700

1,300

2,000

1,500

1,500

300

 

355

655

Finance costs

(800)

(2,600)

(3,400)

(3,200)

(3,200)

(4,400)

 

(5,658)

(10,058)

Net finance income

(100)

(1,300)

(1,400)

(1,700)

(1,700)

(4,100)

(5,455)

(9,555)

(5,303)

(9,403)

Profit before taxation

4,300

(124,200)

(119,900)

17,600

9,400

9,300

15,277

24,577

26,344

35,644

Taxation

(1,000)

27,600

26,600

2,100

2,100

(1,800)

(5,044)

(6,844)

(4,504)

(6,304)

Marginal tax rate (%)

23.3

22.2 

22.2

(11.9)

(22.3)

19.4

33.0

27.8

17.1

17.7

PAT (continuing ops)

3,300

(96,600)

(93,300)

19,600

11,500

7,500

10,233

17,733

21,840

29,340

Loss from discontinued ops

N/A

N/A 

N/A

(6,700)

(104,800)

N/A

 

0

Profit after tax

3,300

(96,600)

(93,300)

12,900

(93,300)

7,500

10,233

17,733

21,840

29,340

Headline earnings

3,300

10,000

13,300

13,300

13,300

7,500

10,233

17,733

10,126

17,626

EPS (p)

0.18

(5.31)

(5.15)

0.71

(5.15)

0.39

0.53

0.92

1.13

1.52

HEPS** (p)

0.20

0.55

0.73

0.73

0.73

0.39

0.53

0.92

0.52

0.91

Normalised HEPS (p)

0.23

1.37

1.60

0.97

0.97

0.46

0.53

0.99

0.74

1.20

EPS from continuing ops (p)

1.08

0.39

0.53

0.92

0.52

0.91

Source: Pan African Resources, Edison Investment Research. Note: As reported basis. *Estimated. **HEPS = headline earnings per share (company adjusted basis). ***Loss on assets held for sale reclassified into loss from discontinued operations.

The table below, by contrast, presents PAF’s results, as reported, with FY18 results (and our prior expectations) converted from sterling to US dollar terms:

Exhibit 4: PAF underlying P&L statement by half-year (H118–H219e) actual and expected

US$000s
(unless otherwise indicated)

H118
(as reported)

H218
(implied)

FY18

FY18
(underlying)

FY18
(as reported)

H119

H219e

FY19e

H219

FY19

Mineral sales

109,279

101,802

211,329

146,139

146,139

97,476

115,326

213,335

*121,343

*218,818

Realisation costs

(1,977)

(1,651)

(3,637)

(2,694)

(2,694)

(777)

(1,051)

(1,832)

*(667)

*(1,444)

Realisation costs (%)

1.81

1.62

1.72

1.84

1.84

0.80

0.91

0.86

*0.55

*0.66

On-mine revenue

107,301

100,151

207,692

143,445

143,445

96,699

114,277

211,504

120,675

217,375

Cost of production

(91,747)

(95,198)

(186,950)

(104,654)

(104,654)

(70,162)

(77,088)

(147,614)

(82,818)

(152,980)

Depreciation

(7,777)

(7,016)

(14,816)

(6,600)

(6,600)

(6,861)

(7,467)

(14,364)

(9,367)

(16,228)

Mining profit

7,777

(2,064)

5,926

32,191

32,191

19,676

29,721

49,526

28,490

48,167

Other income/(expenses)

(1,055)

(20,498)

(21,146)

(5,657)

(5,657)

(1,812)

0

(1,815)

(5,446)

(7,258)

Loss in associate etc

(527)

550

0

***0

***0

0

0

0

0

0

Loss on disposals

0

(413)

(404)

0

0

0

0

0

0

0

Impairment costs

0

(146,237)

(143,175)

Excl.

(11,045)

0

0

0

17,854

17,854

Royalty costs

(395)

(413)

(808)

(539)

(539)

(518)

(2,927)

(3,455)

164

(354)

Net income before finance

5,800

(169,074)

(159,608)

25,995

14,951

17,346

26,794

44,256

41,062

58,408

Finances income

923

1,788

2,694

2,020

2,020

388

0

0

461

850

Finance costs

(1,055)

(3,577)

(4,579)

(4,310)

(4,310)

(5,696)

0

0

(7,346)

(13,042)

Net finance income

(132)

(1,788)

(1,886)

(2,290)

(2,290)

(5,307)

(7,050)

(12,389)

(6,885)

(12,192)

Profit before taxation

5,668

(170,862)

(161,493)

23,705

12,661

12,039

19,744

31,867

34,177

46,216

Taxation

(1,318)

37,969

35,828

2,828

2,828

(2,330)

(6,519)

(8,874)

(5,844)

(8,174)

Marginal tax rate (%)

23.3

22.2

22.2

(11.9)

(22.3)

19.4

33.0

27.8

17.1

17.7

PAT (continuing ops)

4,350

(132,893)

(125,666)

26,399

15,489

9,709

13,225

22,993

28,333

38,042

Loss from discontinued ops

N/A

N/A

N/A

(9,024)

(141,155)

N/A

0

0

0

0

Profit after tax

4,350

(132,893)

(125,666)

17,375

(125,666)

9,709

13,225

22,993

28,333

38,042

Headline earnings

4,350

13,757

17,914

17,914

17,914

9,709

13,225

22,993

13,145

22,854

EPS (c)

0.24

(7.30)

(6.94)

0.96

(6.94)

0.50

0.68

1.19

1.47

1.97

HEPS** (c)

0.26

0.76

0.98

0.98

0.98

0.50

0.68

1.19

0.68

1.19

Normalised HEPS (c)

0.30

1.88

2.16

1.31

1.31

0.60

0.68

1.28

0.97

1.56

EPS from continuing ops (c)

1.45

0.50

0.68

1.19

0.68

1.19

Source: Pan African Resources, Edison Investment Research. Note: As reported basis. *Estimated. **HEPS = headline earnings per share (company adjusted basis). ***Loss on assets held for sale reclassified into loss from discontinued operations.

In both cases the main differences between our forecasts and the actual outcome for FY19 were the US$17.9m impairment reversal relating to Evander Mines’ 8 Shaft infrastructure and ‘other’ expenses, which included the group’s cash-settled share option costs (which Edison typically declines to attempt to forecast). Excluding exceptional and one-off items, Edison’s HEPS forecasts for H219 and FY19 (highlighted) were within £150,000 of those actually reported.

Inflation (or not)

Relative to the 54.1% increase in its gold production from continuing mining operations, the group’s cost of production from continuing operations (see columns entitled ‘FY18 (underlying)’ and ‘FY18 (as reported)’ in Exhibit 4) increased by only 42.9% in US dollar terms. Within this:

Salaries & wages (30.3% of the total) increased by 11.5%.

Mining & processing (41.1% of the total) increased by 74.4%, among other things, reflecting a 277% increase in the total tonnage of material milled and processed.

Electricity (12.0% of the total) increased by 77.7%.

Engineering & technical costs (7.8% of the total) increased by 56.9%.

Security costs (4.7% of the total) increased by 71.4%, owing to an increased focus on combating illegal mining activities and one-off costs incurred during instances of community unrest.

H219 vs H119 analysis and beyond

In the wake of the closure of large-scale underground mining operations at Evander in May 2018, Pan African’s two most important producing assets are Barberton underground (42% of Q419 production) and Elikhulu (34%).

An analysis of Barberton underground’s H219 performance, relative to H1 plus our expectations for FY20, by half-year, is provided in Exhibit 5, below. Of note, within this context, is the decline in underground tonnes milled in H219. This was augmented by tonnes milled from surface sources and PAF indicates that c 5,000oz will be produced from surface sources in FY20. The inclusion of surface sources also helped to keep cash costs (measured in ZAR/t) low in H219. Nevertheless, after an implied ZAR132.5m in capex, it is likely that Barberton’s net cash flow in H219 was negative. Our forecasts for FY20 assume that underground operations at Barberton return to their previous levels in terms of both tonnes milled and head grade. This is consistent with production in Q419 (see Exhibit 2, above), but is slightly ahead of official guidance of 80,000oz of production for FY20 – albeit this is balanced by our expectations at Elikhulu (see below).

Exhibit 5: Barberton underground operational statistics, H215–H220e

H215

H116

H216

H117

H217

H118

H218

H119

H219

H120e

H220e

Tonnes milled underground (t)

130,488

133,890

124,515

123,168

123,747

124,969

112,862

127,858

119,777

126,195

126,195

Head grade underground (g/t)

10.23

10.90

11.11

9.40

10.20

8.70

12.07

9.60

9.88

10.26

10.26

Underground gold contained (oz)

42,934

46,921

44,467

37,224

40,574

34,956

43,803

39,463

38,052

41,626

41,626

Tonnes milled surface (t)

3,548

5,540

4,438

0

0

0

0

12,471

33,158

38,879

38,879

Head grade surface (g/t)

1.40

1.10

1.32

0.00

0.00

0.00

0.00

2.30

1.62

2.16

2.16

Surface gold contained (oz)

160

196

189

0

0

0

0

922

1,729

2,703

2,703

Tons milled (t)

134,036

139,430

128,953

123,168

123,747

124,969

112,862

140,329

152,935

165,074

165,074

Head grade (g/t)

10.00

10.60

10.77

9.40

10.20

8.70

12.07

8.95

8.09

8.35

8.35

Contained gold (oz)

43,080

47,117

44,656

37,224

40,574

34,956

43,803

40,386

39,780

44,329

44,329

Recovery (%)

90.0

92.0

92.0

93.0

91.9

93.0

93.5

94.0

92.5

92.5

92.5

Production underground (oz)

38,649

43,487

40,941

34,471

37,292

32,159

40,966

37,735

35,129

41,000

41,000

Production calcine dumps/surface ops (oz)

102

130

132

0

0

0

0

815

1,677

Total production (oz)

38,751

43,617

41,073

34,471

37,292

32,159

40,966

38,550

36,806

41,000

41,000

Recovered grade (g/t)

8.99

9.73

9.91

8.70

9.37

8.00

11.29

8.54

7.49

7.73

7.73

Gold sold (oz)

40,261

43,617

41,073

34,471

37,292

32,159

40,966

37,829

37,527

41,000

41,000

Average spot price (US$/oz)

1,206

1,113

1,221

1,268

1,239

1,288

1,317

1,220

1,306

1,482

1,572

Average spot price (ZAR/kg)

461,891

486,567

605,265

570,251

526,341

554,361

521,029

556,770

596,180

700,417

746,271

Total cash cost (US$/oz)

825

681

708

967

940

1,145

981

996

1,097

1,045

1,169

Total cash cost (ZAR/kg)

318,061

297,877

351,358

434,999

399,081

492,826

390,220

454,164

500,214

494,183

554,814

Total cash cost (US$/t)

238.62

213.09

225.38

270.74

283.19

294.62

356.03

268.42

269.10

259.62

290.31

Total cash cost (ZAR/t)

2,860.08

2,898.00

3,480.81

3,787.00

3,740.66

3,945.00

4,405.46

3,860.00

3,817.67

3,817.67

4,286.06

Implied revenue (US$000)

48,095

48,546

50,288

43,709

46,640

41,421

53,057

46,151

49,325

60,742

64,461

Implied revenue (ZAR000)

574,798

660,091

774,505

611,400

616,296

554,499

660,698

655,098

699,398

893,195

951,669

Implied revenue (£000)

31,559

31,671

34,950

34,207

37,008

31,422

38,722

35,652

38,120

48,985

51,618

Implied cash costs (US$000)

31,983

29,711

29,064

33,347

35,043

36,819

40,182

37,667

41,155

42,856

47,923

Implied cash costs (ZAR000)

383,353

404,068

448,861

466,437

462,895

493,003

497,209

534,400

583,855

630,198

707,516

Implied cash costs (£000)

21,043

19,398

20,221

26,091

27,814

27,900

29,269

29,102

31,803

34,566

38,373

Source: Pan African Resources, Edison Investment Research.

Exhibit 6 similarly provides our analysis of Elikhulu’s H219 performance compared with H1 and also our expectations for H120 and H220. Of note is the above-nameplate throughput in H219 and the higher than expected metallurgical recoveries, but slightly lower head grade. We expect FY20 to be characterised by full-capacity throughput, a recovery in grade and a small decline in total cash costs (in ZAR/t terms). For the moment, we are assuming a return to the average levels of metallurgical recovery anticipated in the project’s feasibility study, such that output is 62,334oz for the 12-month period. This is slightly lower than official guidance of 65,000oz for the complex for the year, but may be easily made up by either a higher metallurgical recovery (eg in line with H219) or a higher head grade (eg in line with H119). Investors should note that, inasmuch as our output expectations for Elikhulu are slightly below official guidance, they are balanced by output expectations that are slightly above official guidance at Barberton (above) and, in aggregate, are conservative in that they assume higher production from the lower margin operation and vice versa.

Exhibit 6: Elikhulu operational statistics, H119-H220e

H119

H219

H120e

H220e

Tonnes processed tailings (t)

3,534,278

7,313,931

7,200,000

7,200,000

Head grade tailings (g/t)

0.30

0.26

0.28

0.28

Tailings gold contained (oz)

34,089

60,199

65,243

65,243

Recovery (%)

44.0

51.3

47.8

47.8

Production tailings (oz)

15,292

30,909

31,167

31,167

Total production (oz)

15,292

30,909

31,167

31,167

Recovered grade (g/t)

0.13

0.13

0.13

0.13

Gold sold (oz)

15,292

30,173

31,167

31,167

Average spot price (US$/oz)

1,216

1,306

1,482

1,572

Average spot price (ZAR/kg)

563,250

596,180

700,417

746,271

Total cash cost (US$/oz)

517

575

518

516

Total cash cost (ZAR/kg)

239,639

262,650

245,104

245,104

Total cash cost (US$/t)

2.24

2.43

2.24

2.24

Total cash cost (ZAR/t)

32.00

33.70

33.00

33.00

Implied revenue (US$000)

18,595

39,009

46,173

49,001

Implied revenue (ZAR000)

267,899

554,999

678,973

723,424

Implied revenue (£000)

14,365

30,145

37,237

39,238

Implied cash costs (US$000)

7,912

17,742

16,158

16,094

Implied cash costs (ZAR000)

114,000

246,492

237,600

237,600

Implied cash costs (£000)

6,208

13,421

13,032

12,887

Source: Pan African Resources, Edison Investment Research.

Apart from Barberton and Elikhulu, the BTRP (12% of production in Q419) performed closely in line with both our expectations and H119 (but materially ahead of FY18 and most previous years of operation), following the successful commissioning of a 1.7MW BTRP regrind mill in May 2018 that has allowed it to efficiently treat coarser fraction tailings, such as the older (albeit lower-grade) Harper dumps for processing. At the same time, we estimate that 85.4kt of material from surface feedstocks was treated through ETRP infrastructure in H219, which, at a head grade of 2.62g/t and after metallurgical recovery of 50.9%, resulted in the production of 3,654oz gold – demonstrating, among other things, the flexibility that Pan African has developed in processing such feedstocks (from either internal or external sources) now that the ETRP’s primary material stream has been diverted through the expanded Elikhulu plant.

Evander 8 Shaft pillar project

In its operational update for the nine months ended 31 March 2019, released on 17 May, Pan African confirmed that the feasibility study on the Evander 8 Shaft pillar project had been completed and that the board of directors had sanctioned its development. Whereas Edison had originally assumed that commercial production from this project would not be achieved until after the end of FY20, in fact development and equipping of this area of the mine is now in progress and first gold has already been poured – effectively replacing production from the remnant underground mining and vamping operations that had been ongoing at Evander since the decision to close large-scale operations there in May 2018 (see Exhibit 1). PAF expects the 8 Shaft pillar project to contribute, on average, 30,000oz of production per annum to the group over the next three financial years, including c 20,000oz in FY20.

A summary of the (updated) results of the Evander 8 Shaft pillar project feasibility study are as follows:

initial capex of ZAR40.0m;

total capex of ZAR70.0m;

throughput rate of 11.5ktpm producing 30koz per annum, on average, with peak production of 39koz in the second year of operations;

an average all-in sustaining cost (AISC) of approximately ZAR415,000/kg, or US$900/oz over the life of the project (assuming a forex rate of ZAR14.30/US$);

a three-year life-of-mine; and

a project pre-tax NPV of US$25.8m, or 1.3 US cents per share, at a 10% real discount rate and an assumed gold price of ZAR600,000/kg, or US$1,305/oz.

Critical to the success of the project is the requirement to de-stress the orebody while mining is underway, to which end Pan African has already commissioned a backfill plant at surface with the ability to pump a mixture of concrete and waste rock underground to selectively support areas of the orebody.

FY20

A comparison of Edison’s forecasts for FY20 compared with official guidance is as follows:

Exhibit 7: Edison production forecasts for PAF in FY20 vs official guidance

Production asset

Official guidance

(oz)

Edison forecast

(oz)

Variance

(%)

Previous Edison forecast (oz)

BTRP

20,000

20,000

u/c

20,000

Elikhulu/ETRP

65,000

62,333

-4.1

66,000

Barberton underground

80,000

82,000

+2.5

79,000

Evander underground & 8 Shaft pillar

20,000

20,667

+3.3

20,667

Total

185,000

185,000

u/c

185,667

Source: Pan African Resources, Edison Investment Research

As noted previously, inasmuch as our output expectations for Elikhulu are slightly below official guidance, they are balanced by output expectations that are slightly above official guidance at Barberton (above) and, from a financial perspective, may be considered conservative in that they assume higher production from the lower-margin operation and vice versa.

Gold price

In addition to our output forecasts, we have also adjusted our gold price assumptions to those set out in our recent report, Portents of economic weakness: Gold – doves in the ascendant, published on 14 August 2019. The principal near-term changes to our forecasts are provided in Exhibit 8 below:

Exhibit 8: Updated Edison gold price forecasts*

Calendar year

2020

2021

2022

2023

Updated real gold price forecast (US$/oz)

1,572

1,395

1,387

1,350

Previous real gold price forecast (US$/oz)

1,482

1,437

1,304

1,303

Source: Edison Investment Research. *See Portents of economic weakness: Gold – doves in the ascendant, published on 14 August 2019.

Debt service and covenant compliance guarantees

Pan African has two forms of relatively modest hedging contracts currently in place solely for the purposes of guaranteeing debt serviceability and covenant compliance. The first is a gold loan of 20,000oz that locks in a gold price of approximately ZAR633,347/kg (US$1,415/oz), representing approximately 11% of the group’s anticipated production for the 2020 financial year. The second is a series of zero cost collar contracts over 29,550oz gold in H120 and 50,400oz gold in H220 that cap the likely gold price received by Pan African at ZAR666,000/kg (c US$1,403/oz) and ZAR836,000/kg (c US$1,761/oz), respectively, but also floor it at ZAR604,000/kg (c US$1,272/oz) and ZAR655,000/kg (c US$1,379/oz), respectively.

Given our current gold price expectations (see Exhibit 8), we do not expect the call options written at ZAR836,000/kg to be exercised in H220. However, we do expect the ones written at ZAR666,000/kg to be exercised, which, together with the gold loan, we expect to result in a loss of US$4.6m in FY20, which we have included in ‘other income/(expenses)’.

Updated valuation

As noted previously, Pan African changed its reporting currency in the year to end-June 2019 from pounds sterling to US dollars. As a result, all of Edison’s historical results and future forecasts have been restated into US dollars, and should therefore not be directly compared with previous notes on the company except via the application of the appropriate foreign exchange rate.

Updating our long-term forecasts to reflect our revised gold prices and prevailing forex rates in particular, our normalised headline earnings per share (HEPS) forecast has risen fractionally, to 2.46c/share (cf 1.88p/share previously). This compares with a consensus EPS forecast of 3.47c/share, within a range 2.31–5.15c/share (source: Refinitiv, 2 October 2019). At the same time, we have introduced formal forecasts for FY21 for the first time, based on production of 216.3koz, including 94.6koz for Barberton underground and 36.7koz from the Evander 8 Shaft pillar project. In this case, our normalised HEPS forecast for FY21 is 3.75 US cents and compares with a consensus of 3.73c, within a range 2.95–4.54c (source: Refinitiv, 2 October 2019).

In the meantime, our absolute value of PAF (based on its existing four producing assets only) has increased from 14.05p/share in June to 17.89c/share (ex-div) currently, based on the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of its mining operations (applying a 10% discount rate):

Exhibit 9: PAF estimated life of operations’ diluted EPS and (maximum potential) DPS*

Source: Pan African Resources, Edison Investment Research. Note: *From FY23. Excludes discretionary exploration investment.

Note that, all other things being equal, this valuation may be expected to rise to 20.29c/share in FY23 (the ‘discounted dividend valuation line’ in Exhibit 9, above).

Including its other potential growth projects (ie the Fairview sub-vertical shaft project and Egoli) and assets (ie the residual Evander underground resource and its shareholding in MC Mining), a summary of our updated valuation of Pan African is as follows:

Exhibit 10: PAF absolute valuation summary

Project

Current valuation
(cents/share)

Previous valuation
(pence/share)

Existing producing assets (now including Evander 8 Shaft pillar project)

17.89

14.05

Egoli

4.64

3.80

Fairview Sub-Vertical Shaft Project

0.63

0.49

Royal Sheba (resource-based valuation)

0.46

0.34

MC Mining shares

0.30

0.31

FY19 dividend

0.15

N/A

Sub-total

24.07

19.00

EGM underground resource

0.22–5.24

0.17–4.15

Total

24.29–29.31

19.17–23.15

Source: Edison Investment Research

Relative to our previous valuation in June, the decline in the value of PAF’s shareholding of 13.1m MC Mining shares reflects merely the fall in the latter’s share price from ZAR8.49/share to ZAR6.28/share currently (adjusted into sterling at the appropriate FX rate).

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 11, below, depicts PAF’s average share price in each of its financial years from FY10 to FY19, and compares this with normalised HEPS in the same year. For FY20 to FY21, the current share price (of 11.3p) is compared with Edison’s forecast normalised HEPS for FY20 to FY21. As is apparent from the graph, PAF’s price to normalised HEPS ratio of 5.7x for FY20 (based on our forecasts – see Exhibit 18, below) is already below the bottom of its recent historical range of 6.7–14.8x for the period from FY10–19. Moreover, assuming it meets Edison’s (and consensus) earnings expectations, this measure of value is set to fall further to a new record low of just 3.8x for FY21 (see below):

Exhibit 11: PAF historical price to normalised HEPS ratio, FY10–FY21e

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

Stated alternatively, if PAF’s average contemporary price to normalised EPS ratio of 9.6x in the period FY10–19 is deemed ‘correct’ then, given our normalised earnings forecasts, its share price should be 18.9p in FY20 (cf 17.6p previously) and 28.9p in FY20.

Dividend

PAF has a target dividend pay-out ratio of 40% of net cash generated by operating activities, after allowing for the effect of sustaining capital on cash flow, contractual debt repayments and one-off items. After sustaining the costs related to the Evander underground closure in FY18, the Pan African board elected not to recommend a final dividend for that year. However, it stated that recommencing distributions to shareholders was a priority for the future.

At the time of our last note (see Solid push towards year end, published on 19 June 2019), we estimated that there was scope for the board to recommend a dividend of up to 0.30p/share for FY20. In the event, the board recommended a dividend of ZAR50m, or approximately US$3.4m, which equated to ZAR0.022375 or c 0.12660p or 0.15169 US cents per share, which it described as a ‘signal’ of its intent to resume more meaningful distributions to shareholders in the future. As pre-financing cash flows increase however at the same time as capex reduces, we believe that there will be ample scope to increase the dividend in future years, notwithstanding the group’s debt repayment schedule. In the first instance, we estimate that this could include a dividend of as much as 0.46c/share in FY20. If this proves to be correct, then Pan African will have a dividend yield in the top third of the 52 ostensibly precious metals companies paying dividends to shareholders over the course of the next 12 months.

Exhibit 12: Global precious metal mining companies ranked by forecast dividend yield, PAF highlighted (%)

Source: Refinitiv for peers and PAF (consensus), Edison Investment Research for PAF FY20. Note: Consensus data for peers priced 25 September 2019.

Relative peer group valuation

In the meantime, over the next two years PAF remains cheaper than its South Africa- and London-listed gold mining peers on at least 83% of common valuation measures (25 out of 30 individual measures in the table below), regardless of whether Edison or consensus forecasts are used.

Exhibit 13: Comparative valuation of PAF with South African and London peers

EV/EBITDA (x)

P/E (x)

Yield (%)

 

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

AngloGold Ashanti

6.1

5.1

13.9

9.2

0.7

0.9

Gold Fields

5.2

4.5

21.5

13.7

1.6

2.2

Sibanye

5.8

2.7

28.6

5.0

0.0

5.7

Harmony

2.9

2.9

5.5

6.4

2.1

3.8

Centamin

5.0

4.2

20.3

16.7

4.9

6.1

Average (excluding PAF)

5.0

3.9

18.0

10.2

1.9

3.7

PAF (Edison)

3.5

2.7

5.7

3.8

3.3

10.4

PAF (consensus)

3.5

3.3

3.9

3.6

2.8

5.8

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 2 October 2019.

Financials

PAF’s cash outflow before financing activities was US$14.1m in FY19 after an outflow of £14.3m (US$18.5m at the then prevailing foreign exchange rates) in H119, thereby implying a cash inflow of c US$4.4m in the second half of the financial year, under the influence of reduced capex, an improved operating performance, a better gold price and a steady rand.

Including its liabilities to non-financial institutions, PAF had net debt of US$132.5m (US$128.4m excluding non-financial institutions) on its balance sheet as at 30 June 2019 (cf £102.7m as at 31 December 2018, £91.0m/US$120.0m as at June 2018, £42.2m as at December 2017 and £7.0m/US$9.1m as at June 2017). As such, net debt equated to a gearing (net debt/equity) ratio of 72.2% (cf 82.2% as at H119 and 78.6% as at end-FY18) and a leverage (net debt/[net debt + equity]) ratio of 41.9% (cf 45.1% as at H119 and 44.0% as at end-FY18).

As of the current time, the most intense phase of capex relating to Elikhulu has now been completed and we expect group capex to more than half, from ZAR802.0m in FY19 to ZAR385.5m in FY20 (NB capex has already more than halved from ZAR585.9m in H119 to ZAR216.1m in H219), notwithstanding the development of the Evander 8 Shaft pillar project. As a result, henceforward, we expect Pan African to become strongly cash-generative, such that it will pay down net debt at a rate in excess of US$20m per annum (before dividend distributions). As a consequence, we predict that Pan African will be net debt free by the end of FY23, even allowing for dividend distributions at the levels predicted, above):

Exhibit 14: PAF estimated funding requirement, FY17 to FY24e (US$000, current)

Exhibit 15: PAF estimated funding requirement, FY16 to FY24e (£000, previous)

Source: Edison Investment Research, Pan African Resources

Source: Edison Investment Research, Pan African Resources

Exhibit 14: PAF estimated funding requirement, FY17 to FY24e (US$000, current)

Source: Edison Investment Research, Pan African Resources

Exhibit 15: PAF estimated funding requirement, FY16 to FY24e (£000, previous)

Source: Edison Investment Research, Pan African Resources

Debt is principally financed via a ZAR1bn revolving credit facility US$67.7m at current exchange rates) plus a ZAR1bn term loan facility relating to the Elikhulu project and a banking facility. Principal on the Elikhulu facility is payable in equal instalments until maturity in June 2024, while the revolving credit facility (RCF) itself has been restructured to extend its maturity from mid-2020 previously to at least beyond mid-2024 currently. The group’s RCF debt covenants and their actual recorded levels within recent history are as follows:

Exhibit 16: PAF group debt covenants

Measurement

Constraint

FY19
(actual)

H119
(actual)

FY18*
(actual)

H118
(actual)

FY17
(restated)

FY17
(actual)

H117
(actual)

FY16*
(actual)

H116
(actual)

Net debt:equity

Must be less than 1:1

0.71

0.85

0.78

0.19

0.02

0.01

0.17

0.35

0.50

Net debt:EBITDA

Must be less than 2.5:1

2.2

3.24

3.73

2.25

0.08

0.05

0.48

0.12

0.13

Interest cover ratio

Must be greater than four times

4.1

3.64

4.61

4.62

19.32

10.00

21.99

23.98

18.08

Debt service cover ratio

Must be greater than 1.3:1

1.4

2.85

3.84

1.85

9.11

N/A

N/A

N/A

N/A

Source: Pan African Resources. Note: *Subsequently restated.

Note that, with the agreement of its bankers, PAF’s net debt:EBITDA covenant is measurable only on 31 December 2019 to accommodate the construction of the Elikhulu project, while the interest cover ratio was reduced to 2.3:1 as at December 2018 (with the requirement that it be 4:1 thereafter).

Potential future organic growth

Pan African has four potential organic growth projects at various stages of development, namely the Fairview sub-vertical shaft project (adding 7–10koz to production pa), the Royal Sheba project (c 30koz pa), Egoli (optimised 34% IRR and ZAR1.04bn pre-tax NPV) and the 8 Shaft pillar project (US$25.8m pre-tax NPV). Two – the 8 Shaft pillar project and the Fairview sub-vertical shaft – are already in development.

Royal Sheba

At the same time that it approved the Evander 8 Shaft pillar project, the group concluded that it would not pursue mining the near-surface Royal Sheba resource on a standalone basis, but that it would instead upgrade the existing Barberton Mines processing plant infrastructure to take Royal Sheba ore. Development of the orebody will be in two phases:

Phase 1: via an existing adit to exploit the orebody using long-hole opening stoping at a capital cost of US$3–4m.

Phase 2: developing from the Sheba side of the orebody at 23 Level (currently 600m from interception) at a capital cost of c ZAR30m.

At the same time, the Dibanisa project will integrate Sheba and Fairview infrastructure, such that Fairview will be able to accommodate Royal Shaba ore. Tailings from the Royal Sheba operation will then be available for processing via BTRP infrastructure in addition to the latter’s traditional sources. Among other things, this method of development will help to expedite the environmental licensing process, shorten the timeline to production, enhance returns and negate the need for external capital funding.

Egoli

In contrast to the other three projects, Egoli (formerly the 2010 Pay Channel project) – with a peak funding requirement of ZAR862m (US$58.4m at prevailing forex rates) – will require external funding. The project involves extracting c 1Moz of gold at a rate of c 100koz per annum at a total cash cost of c ZAR300,000/kg (US$632/oz at prevailing rates). While superficially comparable to former underground operations at Evander 8 Shaft however, there are a number of important differences, which are summarised below:

Exhibit 17: Egoli vs former 8 Shaft operating parameters

Parameter

Egoli

Former 8 Shaft operations

Depth

1,900m

~2,500

Access

Directly from 7 Shaft (twin shaft) with one decline

Vertical access via 8 Shaft, mid-shaft hoisting, cross tramming to 7 Shaft via series of declines

Tramming/travelling distance

3km from shaft

13km

Transfer points

6

20

Waste and reef

Separate waste and reef handling

Waste and reef combined – thereby limiting ability to develop and diluting grade

Head grade (g/t)

6.64

5.7

Mine call factor

85%

73.5%

Employees

~800 employees

1,800 employees plus 500 contractors

Source: Pan African Resources.

In the light of the requirement for external funding, Pan African is studying a range of development options, including ring-fencing the operation in a separate vehicle. In the meantime, a final, optimised feasibility study on the project is expected to be completed imminently.

Exhibit 18: Financial summary

US$000s

2018

2019

2020e

2021e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

145,829

217,375

274,641

309,906

Cost of sales

(107,140)

(152,980)

(156,545)

(155,661)

Gross profit

38,689

64,395

118,096

154,245

EBITDA

 

 

38,131

64,041

114,754

149,839

Operating profit (before GW and except.)

31,506

47,813

97,317

130,547

Intangible amortisation

0

0

0

0

Exceptionals

(16,521)

10,596

(6,111)

(1,563)

Other

0

0

0

0

Operating profit

14,985

58,408

91,206

128,984

Net interest

(2,222)

(12,192)

(13,917)

(10,224)

Profit before tax (norm)

 

 

29,284

35,621

83,400

120,324

Profit before tax (FRS 3)

 

 

12,763

46,216

77,289

118,761

Tax

2,826

(8,174)

(35,894)

(47,948)

Profit after tax (norm)

32,110

27,447

47,506

72,376

Profit after tax (FRS 3)

15,589

38,042

41,395

70,813

Average number of shares outstanding (m)

1,809.7

1,928.3

1,928.3

1,928.3

EPS - normalised (c)

 

 

1.31

1.56

2.46

3.75

EPS - FRS 3 (c)

 

 

0.87

1.97

2.15

3.67

Dividend per share (c)

0.00

0.15

0.46

1.47

Gross margin (%)

26.5

29.6

43.0

49.8

EBITDA margin (%)

26.1

29.5

41.8

48.3

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

21.6

22.0

35.4

42.1

BALANCE SHEET

Fixed assets

 

 

315,279

361,529

373,115

381,455

Intangible assets

56,899

49,372

51,533

53,701

Tangible assets

254,247

305,355

314,780

320,952

Investments

4,134

6,802

6,802

6,802

Current assets

 

 

29,009

31,601

30,920

85,760

Stocks

4,310

6,323

9,162

10,340

Debtors

22,577

18,048

19,580

22,095

Cash

922

5,341

289

51,436

Current liabilities

 

 

(44,395)

(63,855)

(41,210)

(60,368)

Creditors

(37,577)

(37,316)

(38,671)

(57,830)

Short-term borrowings

(6,817)

(26,539)

(2,539)

(2,539)

Long-term liabilities

 

 

(152,906)

(145,693)

(146,787)

(148,272)

Long-term borrowings

(114,065)

(111,345)

(111,345)

(111,345)

Other long-term liabilities

(38,841)

(34,348)

(35,442)

(36,928)

Net assets

 

 

146,988

183,582

216,038

258,574

CASH FLOW

Operating cash flow

 

 

5,345

56,889

100,088

144,404

Net Interest

(6,076)

(14,685)

(13,917)

(10,224)

Tax

(1,634)

(4,497)

(34,801)

(46,462)

Capex

(127,279)

(52,261)

(29,023)

(27,632)

Acquisitions/disposals

6,319

466

0

0

Financing

11,944

(0)

(0)

(0)

Dividends

(11,030)

0

(3,400)

(8,939)

Net cash flow

(122,411)

(14,088)

18,947

51,148

Opening net debt/(cash)

 

 

9,083

119,960

132,542

113,595

Exchange rate movements

(619)

537

0

0

Other

12,152

969

(0)

0

Closing net debt/(cash)

 

 

119,960

132,542

113,595

62,447

Source: Company sources, Edison Investment Research. Note: Functional currency of results changed to US dollars, from pounds sterling, for the first time in FY19 results. FY18 restated.


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.

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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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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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

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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.

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Frankfurt +49 (0)69 78 8076 960

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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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

1,185 Avenue of the Americas

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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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