gold flake

Exceeding expectations (as usual)

Pan African Resources 21 July 2021 Update
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Pan African Resources

Exceeding expectations (as usual)

FY21 production results

Metals & mining

21 July 2021

Price

16.66p

Market cap

£372m

ZAR19.7861/£, ZAR14.3087/US$, US$1.3821/£

Net debt (US$m) at end June 2021*

33.8

*Excludes c US$5.0m in IFRS 16 lease liabilities

Shares in issue

2,234.7m

*Effective 1,928.3m post-consolidation

Free float

86%

Code

PAF

Primary exchanges

AIM/JSE

Secondary exchange

OTCQX Best Market

Share price performance

%

1m

3m

12m

Abs

(6.9)

(8.1)

(30.2)

Rel (local)

(5.3)

(8.4)

(38.6)

52-week high/low

27.1p

15.4p

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

Egoli investment decision

Mid-CY21

FY21 results

September 2021

FY21 dividend payment date

December 2021

Mintails/Mogale due diligence

Until January 2022

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Pan African (PAF) announced its operational results for the year ended 30 June 2021 on 13 July, with output for the full year 6,609oz (3.4%) higher than PAF’s own guidance of 195,000oz from as recently as May 2021 and 7,383oz (3.8%) above Edison’s forecast. All of the substantive outperformance could be attributed to operations at Evander underground, which more than made up for an early shortfall in production in H121. Otherwise, group net senior debt was reported to be very close to Edison’s prior forecast, at US$33.8m, and production guidance for FY22 was confirmed at 195koz.

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

14.1

0.6

06/20

274.1

80.8

3.78

0.84

6.1

3.6

06/21e

369.0

122.4

4.24

1.01

5.4

4.4

06/22e

340.9

144.0

5.18

1.04

4.4

4.5

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

Output at Evander underground surges

While production from Evander underground surged in H221, production at Barberton underground benefited from increased mining footprints on four cycling production platforms. Simultaneously however, production was restrained at Elikhulu as a result of unexpected concentrations of carbonaceous material in the lower benches of the Kinross dam that we estimate probably reduced gold recoveries from c 47.8% to c 42.6% (nevertheless in line with H220 and H121).

Two new growth projects

Recent initiatives have resulted in the addition of two new assets to PAF’s portfolio of growth projects in the form of Mintails/Mogale and the 8 Shaft decline 24 Level project. Early indications suggest that these could be worth in the order of 5.3c (3.8p) and 0.5c (0.3p) in value to PAF’s shares, respectively, as a result of which it has reprioritised its capex commitments to implement a phased approach to the development of Egoli in such a way as to minimise upfront capex and thereby materially reduce the requirement to raise debt to fund the project.

Valuation: Eyeing 43.84c (31.72p) per share plus

On a like-for-like basis, our forecasts and core valuation of PAF have risen a modest 1.5% to 38.76c/share based on the production update. However, the valuation stands to rise by an additional 13.1%, to 43.84c/share, in the event of the successful development of Mintails/Mogale and the 8 Shaft decline 24 Level project (see Exhibit 6). 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 to take the total to 44.06–49.08c/share. Alternatively, if PAF’s historical average price to normalised EPS ratio of 9.1x in the period FY10–20 is applied to our FY21 and FY22 forecasts, it implies a share price of 27.9p in FY21 followed by 34.0p in FY22.

FY21 production results

Pan African announced its operational results for the year ended 30 June 2021 on 13 July. Production in H121 was already known; nevertheless, production for the full year was 6,609oz (3.4%) higher than PAF’s own guidance of 195,000oz from as recently as May 2021, and 7,383oz (3.8%) above Edison’s forecast for the year. As a result, the group’s production profile grew, rather than declined, in H221 compared to H121. In percentage terms, the increase was enhanced when analysed on a half year basis, as shown in the exhibit below.

Exhibit 1: PAF production, FY18–21 (oz)

Operation

H118

H218

H119

H219

H120

H220

H121

H221e

(previous)

H221a

Change*

(%)

Variance**

(%)

FY21a

FY21e

(previous)

Barberton UG

32,159

40,966

38,550

36,806

36,737

31,392

42,350

41,551

42,469

+0.3

+2.2

84,819

83,901

BTRP

8,452

9,052

12,006

12,001

10,619

9,516

10,004

9,393

8,231

-17.7

-12.4

18,235

19,397

Barberton

40,611

50,018

50,556

48,807

47,356

40,908

52,354

50,944

50,700

-3.2

-0.5

103,054

103,298

Evander UG

32,734

15,831

8,821

8,058

11,553

9,117

12,607

17,314

23,352

+85.2

+34.9

35,959

29,921

ETRP

11,937

9,313

6,345

3,654

4,731

6,176

6,560

0

4,561

N/A

N/A

11,121

6,560

Evander

44,671

25,144

15,166

11,712

16,284

15,293

19,169

17,314

27,913

+45.6

+61.2

47,080

36,483

Elikhulu

0

0

15,292

30,909

29,301

30,315

26,863

27,582

24,610

-8.4

-10.8

51,473

54,445

Total

85,282

75,139

81,014

91,428

92,941

86,516

98,386

95,840

103,223

+4.9

+7.7

201,608

194,226

Source: Edison Investment Research, Pan African Resources. Note: *H221 cf H121; **H221a cf H221e. Totals may not add up owing to rounding. UG = underground.

While production from the Barberton complex was broadly in line with our expectations and that from Elikhulu was slightly below, all of the outperformance could be attributed to operations at Evander underground. Output at Evander underground was restrained by a ventilation shaft lining fracture in H121 as well as technical difficulties relating to the pseudo packs used for ground support (now overcome) and lower than usual metallurgical recoveries (although this was, to some extent, counterbalanced by head grade, which, at an estimated 8.51g/t, was 11.0% above our prior forecast of 7.67g/t). In the event, however, Evander’s performance in H221 not only returned output levels to those expected for the six-month period, but also more than made up for the shortfall in the first half as well. Over the same period, production at Barberton underground benefited from increased mining footprints on the 256, 257, 258 and 358 platforms, thereby engendering greater mining flexibility. Throughput at Elikhulu was restricted on account of remedial work on the its tailing storage facility’s lower compartment. This was largely anticipated in our note at the time of the company’s interim results (see Record interim profitability, published on 3 March 2021). In addition, however, unexpected concentrations of carbonaceous material in the lower benches of the Kinross dam negatively affected gold recoveries, which we estimate must have been in the order of 42.6% (in line with H220 and H121 but below our prior expectation of 47.8% for H221).

Updated H221e and FY21e forecasts

We have updated our forecasts for H221 and FY21 in the light of the production results reported by Pan African as well as a slightly lower gold price during H221 (US$1,805/oz cf our previous forecast of US$1,828/oz) and a slightly stronger rand against the US dollar, in particular (ZAR14.54/US$ cf our previous forecast of ZAR14.60/US$). While our estimate of full-year revenue has increased by US$12.1m to reflect higher than expected production during the year and half year, this increase was counterbalanced by an only slightly smaller increase in cash costs as higher-margin production from Elikhulu was supplanted by lower-margin production from Evander to leave our earnings expectations, to all intents and purposes, unchanged – albeit at levels for the half year that are more akin to those typically earned within a full financial year historically.

Exhibit 2: PAF P&L statement by half-year (H119–H221e)

US$000s
(unless otherwise indicated)

H119
(restated)

H219

FY19

H120

H220

FY20

H121

H221e

(previous)

H221e

(current)

FY21e

FY21e
(previous)

Revenue

97,531

121,287

218,818

132,849

141,258

274,107

183,751

173,216

185,269

369,020

356,967

Cost of production

(70,847)

(82,133)

(152,980)

(86,501)

(71,956)

(158,457)

(98,245)

(97,564)

(109,312)

(207,557)

(195,808)

Depreciation

(6,840)

(9,388)

(16,228)

(10,526)

(10,977)

(21,503)

(12,741)

(16,012)

(16,020)

(28,761)

(28,753)

Mining profit

19,844

29,767

49,611

35,821

58,325

94,146

72,766

59,640

59,937

132,703

132,406

Other income/(expenses)

(2,077)

(5,181)

(7,258)

(962)

(27,720)

(28,682)

(6,704)

0

0

(6,704)

(6,704)

Loss in associate etc

0

0

0

0

0

0

0

0

0

0

0

Loss on disposals

0

0

0

0

0

0

0

0

0

0

0

Impairments

0

17,854

17,854

109

(20)

89

0

0

0

0

0

Royalty costs

(474)

120

(354)

(208)

(266)

(474)

(2,404)

(1,678)

(1,778)

(4,183)

(4,083)

Net income before finance

17,293

42,559

59,852

34,761

30,319

65,079

63,657

57,962

58,159

121,816

121,619

Finances income

443

407

850

207

258

465

300

Finance costs

(5,699)

(7,343)

(13,042)

(7,760)

(5,587)

(13,346)

(3,946)

Net finance income

(5,256)

(6,936)

(12,192)

(7,553)

(5,329)

(12,881)

(3,646)

(2,507)

(2,507)

(6,153)

(6,153)

Profit before taxation

12,037

35,623

47,660

27,208

24,990

52,198

60,011

55,455

55,651

115,662

115,466

Taxation

(2,325)

(5,850)

(8,174)

(5,303)

(2,602)

(7,905)

(19,239)

(21,224)

(21,275)

(40,513)

(40,462)

Effective tax rate (%)

19.3

16.4

17.2

19.5

10.4

15.1

32.1

38.3

38.2

35.0

35.0

PAT (continuing ops)

9,712

29,774

39,486

21,906

22,388

44,293

40,773

34,231

34,376

75,149

75,004

Loss from discontinued ops

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Profit after tax

9,712

29,774

39,486

21,906

22,388

44,293

40,773

34,231

34,376

75,149

75,004

Headline earnings

9,712

14,586

24,298

21,742

22,416

44,158

40,772

34,231

34,376

75,148

75,003

Est. normalised headline earnings

11,789

19,766

31,556

22,704

50,136

72,840

47,476

34,231

34,376

81,852

81,708

EPS (c)

0.50

1.54

2.05

1.14

1.16

2.30

2.11

1.78

1.78

3.90

3.89

HEPS* (c)

0.50

0.76

1.26

1.13

1.16

2.29

2.11

1.78

1.78

3.90

3.89

Normalised HEPS (c)

0.61

1.03

1.64

1.18

2.60

3.78

2.46

1.78

1.78

4.24

4.24

EPS from continuing ops (c)

0.50

1.54

2.05

1.14

1.16

2.30

2.11

1.78

1.78

3.90

3.89

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

In the context of the above forecasts, readers should note that we estimate that US$23.1m (or 57.0%) of our estimated full-year tax charge for FY21 will have been in the form of deferred taxes and that cash taxes will have accounted for only US$17.4m (or 43.0%) of the total tax charge of US$40.5m.

Our updated normalised FY21 headline earnings per share (HEPS) forecast of 4.24c/share compares with a range of analysts’ expectations from 3.01–3.72p/share, or 4.16–5.14c/share (source: Refinitiv, 21 July 2021).

Updated guidance

In addition to its production results for FY21, Pan African also confirmed guidance for production from the group for FY22 of 195,000oz, including 55,000oz from Elikhulu. Edison has interpreted this guidance as implying the following levels of production from each of the group’s mines during the course of the year, which we have compared to FY21 and our prior expectations for FY22, as follows:

Exhibit 3: PAF production, FY18–22e (oz)

Operation

FY18

FY19

FY20

FY21

FY22
(previous)

FY22
(current)

Change*
(oz)

Change*
(%)

Variance**
(oz)

Variance**
(%)

Barberton UG

73,125

75,356

68,129

84,819

81,487

86,247

+1,428

+1.7

+4,760

+5.8

BTRP

17,504

24,007

20,135

18,235

19,397

18,235

0

0.0

-1,162

-6.0

Barberton

90,629

99,363

88,264

103,054

100,884

104,482

+1,428

+1.4

+3,598

+3.6

Evander UG

48,565

16,879

20,670

35,959

26,400

26,400

-9,559

-26.6

0

0.0

ETRP

21,250

9,999

10,907

11,121

0

9,118

-2,003

-18.0

+9,118

N/A

Evander

69,815

26,878

31,577

47,080

26,400

35,518

-11,562

-24.6

+9,118

+34.5

Elikhulu

0

46,201

59,616

51,473

65,116

55,000

+3,527

+6.9

-10,116

-15.5

Total

160,444

172,442

179,457

201,608

192,400

195,000

-6,607

-3.3

+2,600

+1.4

Source: Edison Investment Research, Pan African Resources. Note: *FY22e cf FY21; **FY22e (current) cf FY22e (previous). Numbers may not add up owing to rounding. UG = underground.

We have now adjusted our financial model to reflect PAF’s guidance. While this has involved an increase in forecast production in FY22, guidance for FY22 appears somewhat conservative in the context of production in FY21. Moreover, there is probably a degree of uncertainty regarding likely output from Evander in FY22. For the moment, we have retained production from Evander underground at 26,400oz reflecting solely anticipated output from the 8 Shaft Pillar project, in this case, supplemented by production of 9,118oz from tolling from surface sources through the ETRP plant to result in total output from Evander of 35,518oz. However, it is possible that production from Evander underground will be augmented by the execution of the 8 Shaft decline project (see below) to maintain production at approximately 34,000oz per annum for the Evander 8 Shaft complex as a whole. In this case, any additional production from tolling from surface sources (historically of the order of 10,000oz pa) through the ETRP is likely to result in overall output from Evander in excess of 35,518oz. The effect of Edison’s adjustments to its model has resulted in a modest, 4.6% decline in normalised earnings in FY22 to US$99.9m (cf US$104.6m previously) and a similar decline in normalised HEPS from 5.43c/share to 5.18c/share, albeit with the production caveat noted above and the observation that this will still represent an increase relative to FY21 and therefore record earnings and profitability for the group. This compares with a range of analysts’ expectations of 3.60–4.93p/share, or 4.98–6.81c/share (source: Refinitiv, 21 July 2021).

Growth projects

Pan African has recently added two new projects to its existing portfolio of growth projects (already including Royal Sheba, the Fairview sub-vertical shaft, Rolspruit, Poplar, Evander South etc) in the form of the Mintails/Mogale project and the 8 Shaft decline 24 Level project.

Mintails/Mogale

One of the assets with the most immediate optionality in the company’s portfolio is Mintails/Mogale, which could yet prove very similar in nature to Elikhulu, and into which PAF is currently conducting due diligence with a view to acquiring.

On 6 November 2020, PAF announced that it had entered into a conditional agreement with the liquidator of Mintails’ assets for the purchase of the total share capital and associated loans of Mogale Gold Pty Ltd and Mintails SA Soweto Cluster Pty Ltd. Due diligence has been extended until January 2022. In the meantime, PAF has successfully concluded both a fatal flaw analysis and a high-level financial evaluation of the project, which would be similar in nature to Pan African’s flagship Elikhulu project. Key outcomes of the financial evaluation are as follows:

An optimal throughput feed of c 0.8Mtpm (cf Elikhulu’s 1.2Mtpm).

Metallurgical recoveries of c 53% (cf Elikhulu’s 48%).

An all-in sustaining cost (AISC) of c US$800/oz.

An NPV10.71 of ZAR1,469m, or US$101.3m at a gold price of US$1,770/oz and a forex rate of ZAR14.50/US$, or ZAR0.762/share, US$0.053/share or £0.038/share.

Initial project capital of ZAR1,000m (US$68.9m at ZAR14.50/US$) and life of mine capital of ZAR1,700m (US$117.2m).

Average annual production of 44,400oz pa.

A 12-year life of mine.

A real post-tax internal rate of return of 42.8%.

The concept study did, however, identify areas that will require further evaluation, including:

Tailings storage facility deposition capacity constraints.

The availability of water sources in the area to support re-mining operations.

Additional test work to confirm metallurgical recoveries.

In the meantime however, by way of comparison, investors should note that 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, 5.0c/share, or US$40.95 per resource ounce) 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 4.6c/share) 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 having been repaid), we estimate a current valuation for Elikhulu of c US$136.32 per initial resource ounce or US$179.08 per residual resource ounce. As such, and albeit with suitable caveats such as the Mintails/Mogale assets developing in a similar fashion to Elikhulu, PAF could acquire for US$1.31/oz an asset that should be worth US$9.88/oz as an in-situ resource (see Gold stars and black holes, published in January 2019), could be worth US$40.95/oz (pre-production) and may be worth up to US$191.94/oz (post-initial capex and debt repayment).

8 Shaft no. 2 decline 24 Level project

Pan African has continued to maintain the integrity of the underground infrastructure at Evander even after the end of high-volume, deep-level underground mining in May 2018. While limited vamping operations have continued since then, PAF has now concluded an internal technical and economic study into the merits of mining the number 2 decline on 24 Level at 8 Shaft (Phase 1 of the project) with an option to extend mining to levels 25 and 26 at a later date (Phase 2).

An integral component of the Phase 1 study was the identification of pre-May 2018 problems at Evander underground and appropriate mitigation of the major challenges encountered during the mining of the Kinross orebody. These included:

Exhibit 4: Evander underground challenges and mitigations

Risk

Mitigation

Low efficiencies owing to high temperatures as a result of inadequate refrigeration capacity

Installation of a new refrigeration plant for a capital investment of c ZAR170m (US$22.1m at ZAR14.50/US$)

Ore and waste separation

Underground waste handling and storage facilities to be installed at a capital cost of c ZAR60m (US$4.1m)

Limited face time owing to long underground travelling times and distances

Installation of a man carriage on 24 Level

Labour intensive ore handling infrastructure based on a continually rotating three-shift pattern

Reduced tonnage profile requiring only one shift to be manned in order to meet production targets

Risk

Low efficiencies owing to high temperatures as a result of inadequate refrigeration capacity

Ore and waste separation

Limited face time owing to long underground travelling times and distances

Labour intensive ore handling infrastructure based on a continually rotating three-shift pattern

Mitigation

Installation of a new refrigeration plant for a capital investment of c ZAR170m (US$22.1m at ZAR14.50/US$)

Underground waste handling and storage facilities to be installed at a capital cost of c ZAR60m (US$4.1m)

Installation of a man carriage on 24 Level

Reduced tonnage profile requiring only one shift to be manned in order to meet production targets

Source: Pan African Resources, Edison Investment Research.

To date, the study has yielded the following results for the project:

An NPV10.71 of ZAR126.1m, or US$8.7m at a gold price of US$1,770/oz and a forex rate of ZAR14.50/US$, or ZAR0.063/share, US$0.005/share or £0.003/share.

Project capital of ZAR320m (US$22.1m at ZAR14.50/US$) to be funded internally and from existing facilities.

A real, post-tax internal rate of return of 26.6% (based on Phase 1 cash-flows only).

While not large by the standards of some of Pan African’s other recent projects, the 8 Shaft no. 2 decline 24 Level project will extend the 8 Shaft Pillar project’s 2.5-year life by a minimum of another 2.5 years at approximately the same level of production of c 34,000oz per annum.

As a consequence of the positive concept study on Mintails/Mogale and the group’s assessment of the opportunity provided by the 24 Level project at Evander, Pan African has now reprioritised its capital expenditure programmes as follows:

It will now implement a phased approach to the development of the Egoli project, entailing significantly reduced upfront capital expenditure and thereby materially reducing the requirement to raise debt to fund the project.

It will complete a pre-feasibility study (PFS) on the Mintails’ assets in Q3 of CY21 and a definitive feasibility study in Q1 of CY22.

It has commenced preparatory work for the mining of the 24 Level project.

Full details regarding Pan African’s growth projects will be released in due course, in particular with respect to the phasing of the development of the Egoli project. Until such time as these details are known, Edison is maintaining its valuation of Pan African (below) based on its prior assumptions regarding its growth projects’ developments. However, it is not unreasonable to assume that any refinements to the projects’ timings and developments should be value adding and, in that respect, Edison’s valuation (below) could be regarded as being conservative.

Updated (absolute) valuation

In the light of PAF’s operational update for FY21 and fractionally revised external factors such as the gold price and forex rates, our absolute value of the company (based on its existing four producing assets plus Egoli) has increased very slightly to 36.52c/share (cf 36.42c previously), on the basis of 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 5: PAF estimated life of operations’ diluted EPS and (maximum potential) DPS*

Source: Pan African Resources, Edison Investment Research. Note: *From FY24. Excludes discretionary exploration investment.

Including its other potential growth projects and assets (ie the residual Evander underground resource and its shareholding in MC Mining), our updated total valuation of PAF is as follows:

Exhibit 6: PAF absolute valuation summary

Project

Current valuation
(cents/share)

Previous valuation
(cents/share)

Existing producing assets (including Egoli)

36.52

36.42

Fairview Sub-Vertical Shaft project

1.13

1.13

Royal Sheba (resource-based valuation)

0.43

0.40

Mintails/Mogale purchase consideration*

0.17

0.17

8 Shaft no. 2 decline 24 Level project

0.45

0.00

MC Mining shares

0.06

0.07

Sub-total

38.76

38.19

EGM underground resource

0.22–5.24

0.22–5.24

Sub-total

38.98–44.00

38.41–43.43

Mintails/Mogale project execution upside

5.08

N/A

Total

44.06–49.08

38.41–43.43

Source: Edison Investment Research. Note: Numbers may not add up owing to rounding.*Acquisition of Mintails/Mogale is agreed, subject to due diligence

Of particular note to readers is the increase in the valuation of Pan African’s interest in Mintails/Mogale on the basis of its fatal flaw analysis and high-level financial evaluation of the project (see above). Self-evidently, this valuation is contingent upon Pan African concluding its agreed acquisition of these assets and its subsequent development of them.

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 7, below, depicts PAF’s average share price in each of its financial years from FY10 to FY20, and compares this with normalised HEPS in the same year. For FY21 and FY22, the current share price (of 16.66p) is compared with our forecast normalised HEPS for FY21 to FY22. As is apparent from the graph, PAF’s price to normalised HEPS ratio of 5.4x and 4.4x for FY21 and FY22, respectively (based on our forecasts – see Exhibit 13, below) is very close to the bottom of its recent historical range of 4.1–14.8x for the period FY10–20:

Exhibit 7: PAF historical price to normalised HEPS** ratio, FY10–FY22e

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. **HEPS shown in pence prior to 2018 and US cents thereafter.

Stated alternatively, if PAF’s average contemporary price to normalised EPS ratio of 9.1x in the period FY10–20 is applied to our normalised earnings forecasts, then it implies a share price for PAF of c 27.9p in FY21 and 34.0p in FY22.

Relative peer group valuation

Over the next two years, PAF remains cheaper than its South Africa- and London-listed gold mining peers on 66.7% of comparable common valuation measures (20 out of 30 individual measures in the table below) if Edison forecasts are applied or 50% if consensus forecasts are applied.

Exhibit 8: 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

4.1

3.9

7.8

6.9

1.9

2.1

Gold Fields

4.1

4.2

8.8

8.6

3.5

3.4

Sibanye

2.2

2.6

3.8

4.8

7.9

6.6

Harmony

2.9

2.8

4.7

5.5

2.5

2.8

Centamin

3.8

3.5

11.7

12.3

6.3

4.7

Average (excluding PAF)

3.4

3.4

7.3

7.6

4.4

3.9

PAF (Edison)

3.0

2.8

5.4

4.4

4.4

4.5

PAF (consensus)

2.7

2.3

8.9

6.6

2.3

2.3

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 14 July 2021.

Readers should note that PAF’s P/E ratio and dividend yield, calculated on the basis of consensus forecasts, appear to suggest that EPS and DPS will both fall in FY21 relative to FY20, which we believe is unusually pessimistic and especially so in the context of the company’s interim results (see Exhibit 2).

Otherwise, applying PAF’s peers’ average year 1 P/E ratio of 7.3x to Edison’s forecast normalised HEPS forecast of 4.24c/share for FY21 implies a share price for the company of 22.6p at prevailing forex rates, while applying its peers’ average year 2 P/E ratio of 7.6x to our forecast normalised HEPS forecast of 5.18c/share implies a share price of 28.5p.

Financials

PAF reported that group net senior debt had decreased by 45.5%, from US$62.0m at end-June 2020 to US$33.8m at end-June 2021, a decline of US$28.2m over the course of the full 12-month period, but a decline of US$26.1m in H221 alone. We estimate that this level of debt equates to a gearing ratio (net debt/equity) of 14.1% (cf 24.5% at the interim stage) and a leverage ratio (net debt/[net debt+equity]) of 12.4% (cf 19.7%). This figure is probably not complete in that it will exclude IFRS 16 lease liabilities of c US$5.0m and an (albeit negligible) instalment sale liability. However, it does nevertheless represent the vast majority of the group’s net debt, as shown in the table below:

Exhibit 9: Pan African net debt, by type (US$m)

Type

H221

H121

FY20

Gross debt

89.2

87.8

89.2

Cash & restricted cash

(55.4)

(28.0)

(33.5)

Net senior debt (sub-total)

33.8

59.8

55.7

Restricted cash

0.0

0.1

0.4

Gold loan

0

0

5.7

Less refinance adjustment

0

0

(0.3)

Arranging fees

0

0

0.5

Sub-total

33.8

59.9

62.0

Derivative financial liability

0

9.6

IFRS 16 lease

5.0

4.5

Instalment sale liability

0.2

0.3

Sub-total

65.2

76.4

Source: Pan African Resources, Edison Investment Research. Note: Totals may not add up owing to rounding.

Most notable within the context of the above table is the extinction of the liabilities relating to PAF’s gold loan and derivative financial instruments in H121, which represented the last vestiges of the company’s revenue protection hedging contracts, which have now all been terminated.

PAF’s reported year-end net senior debt of US$33.8m is also very close to our prior forecast of US$29.8m, with the difference being easily attributable to changes in working capital. Notwithstanding capex commitments, we are therefore continuing to forecast that the company will achieve net debt free status during the FY22 financial year:

Exhibit 10: PAF previous estimated net debt profile forecast, FY17 to FY22e (US$000)

Exhibit 11: PAF current net debt profile forecast, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources

Source: Edison Investment Research, Pan African Resources

Exhibit 10: PAF previous estimated net debt profile forecast, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources

Exhibit 11: PAF current net debt profile forecast, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources

In the meantime, the group’s revolving credit facility (RCF) debt covenants and their actual recorded levels within recent history are as follows:

Exhibit 12: PAF group debt covenants

Measurement

Constraint

H121

FY20

H120

FY19
(actual)

H119
(actual)

FY18*
(actual)

H118
(actual)

FY17
(restated)

Net debt:equity

Must be less than 1:1

0.3

0.4

0.6

0.71

0.85

0.78

0.19

0.02

Net debt:EBITDA

Must be less than 2.5:1 falling to 1.5:1 by December 2022

0.5

0.7

1.6

2.2

3.24

3.73

2.25

0.08

Interest cover ratio

Must be greater than 4 times rising to 5.1 times by December 2022

17.7

10.1

5.8

4.1

3.64

4.61

4.62

19.32

Debt service cover ratio

Must be greater than 1.3:1

3.3

3.4

3.0

1.4

2.85

3.84

1.85

9.11

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

Exhibit 13: Financial summary

US$'000s

2018

2019

2020

2021e

2022e

2023e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

145,829

218,818

274,107

369,020

340,870

364,948

Cost of sales

(107,140)

(152,980)

(158,457)

(207,557)

(165,540)

(171,018)

Gross profit

38,689

65,838

115,650

161,464

175,331

193,931

EBITDA

 

 

38,131

65,484

115,176

157,281

170,116

187,681

Operating profit (before GW and except.)

 

31,506

49,256

93,673

128,520

146,996

155,924

Intangible amortisation

0

0

0

0

0

0

Exceptionals

(16,521)

10,596

(28,593)

(6,704)

(1,730)

(1,730)

Other

0

0

0

0

0

0

Operating profit

14,985

59,852

65,079

121,816

145,266

154,194

Net interest

(2,222)

(12,192)

(12,881)

(6,153)

(3,042)

391

Profit before tax (norm)

 

 

29,284

37,064

80,791

122,367

143,954

156,315

Profit before tax (FRS 3)

 

 

12,763

47,660

52,198

115,662

142,224

154,585

Tax

2,826

(8,174)

(7,905)

(40,513)

(44,082)

(47,266)

Profit after tax (norm)

32,110

28,890

72,887

81,853

99,871

109,049

Profit after tax (FRS 3)

15,589

39,486

44,293

75,149

98,141

107,319

Average number of shares outstanding (m)

1,809.7

1,928.3

1,928.3

1,928.3

1,928.3

1,928.3

EPS - normalised (c)

 

 

1.31

1.64

3.78

4.24

5.18

5.66

EPS - FRS 3 (c)

 

 

0.87

2.05

2.30

3.90

5.09

5.57

Dividend per share (c)

0.00

0.15

0.84

1.01

1.04

2.50

Gross margin (%)

26.5

30.1

42.2

43.8

51.4

53.1

EBITDA margin (%)

26.1

29.9

42.0

42.6

49.9

51.4

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

21.6

22.5

34.2

34.8

43.1

42.7

BALANCE SHEET

Fixed assets

 

 

315,279

361,529

314,968

354,131

396,647

407,980

Intangible assets

56,899

49,372

43,466

45,806

48,206

50,606

Tangible assets

254,247

305,355

270,286

307,108

347,225

356,159

Investments

4,134

6,802

1,216

1,216

1,216

1,216

Current assets

 

 

29,009

31,601

53,648

95,461

112,239

215,071

Stocks

4,310

6,323

7,626

12,357

11,372

12,175

Debtors

22,577

18,048

11,245

26,408

24,301

26,018

Cash

922

5,341

33,530

55,449

75,319

175,631

Current liabilities

 

 

(44,395)

(63,855)

(78,722)

(104,074)

(84,082)

(137,509)

Creditors

(37,968)

(39,707)

(62,806)

(88,158)

(108,166)

(161,593)

Short-term borrowings

(6,426)

(24,148)

(15,916)

(15,916)

24,084

24,084

Long-term liabilities

 

 

(152,906)

(145,693)

(106,276)

(106,293)

(107,579)

(109,180)

Long-term borrowings

(112,827)

(109,618)

(73,333)

(73,333)

(73,333)

(73,333)

Other long-term liabilities

(40,078)

(36,076)

(32,943)

(32,961)

(34,247)

(35,847)

Net assets

 

 

146,988

183,582

183,620

239,224

317,225

376,362

CASH FLOW

Operating cash flow

 

 

5,345

59,822

73,399

132,114

168,427

184,541

Net Interest

(6,076)

(14,685)

(10,834)

(6,153)

(3,042)

391

Tax

(1,634)

(4,497)

(5,804)

(17,418)

(20,334)

(21,388)

Capex

(127,279)

(52,261)

(30,849)

(67,924)

(65,636)

(43,090)

Acquisitions/disposals

6,319

466

207

0

0

0

Financing

11,944

(0)

0

0

(0)

0

Dividends

(11,030)

(2,933)

(2,933)

(18,700)

(19,544)

(20,141)

Net cash flow

(122,411)

(14,088)

23,186

21,919

59,870

100,312

Opening net debt/(cash)

 

 

3,138

118,332

128,424

55,719

33,800

(26,070)

Exchange rate movements

(619)

537

1,663

0

0

0

Other

7,836

3,459

47,856

0

0

0

Closing net debt/(cash)

 

 

118,332

128,424

55,719

33,800

(26,070)

(126,382)

Source: Company sources, Edison Investment Research


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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 2021 Edison Investment Research Limited (Edison).

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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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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 2021 Edison Investment Research Limited (Edison).

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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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