Firing on four cylinders

Pan African Resources 16 March 2016 Update

Pan African Resources

Firing on four cylinders

H116 review

Metals & mining

16 March 2016

Price

13p

Market cap

£238m

US$1.3883/£

ZAR22.3607/£

ZAR16.1030/US$

Net debt (£m) at end December 2015

16.2

Shares in issue

1,831.5m

Free float

76%

Code

PAF/PAN

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.0)

70.1

8.7

Rel (local)

(7.1)

68.0

17.7

52-week high/low

13.8p

6.3p

Business description

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

Next events

FY16 results

Aug/Sept 2016

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Pan African’s interim figurers were better than Edison’s expectations, despite a 9.8% year-on-year decline in the average price of gold. Compared to the prior year period (ie H115) gold produced and sold increased 17.4% (or 15,122oz), while cash costs of production fell by 25.7%, to US$740/oz, aided by, among other things, a 23.9% decline in the rand exchange rate. In generaltherefore, not only were costs lower than our expectations, but depreciation, royalties and net finance costs were also lower, albeit these were partly offset by £1.8m of hedging losses at Barberton (see Hedge position on page 13). Of particular note was the fact that the actual head grade mined at Evander exceeded management’s expectations (September 2015 guidance) in two of the final three months of the year.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/14

154.2

34.0

1.46

0.82

8.9

6.3

06/15

140.4

16.0

0.64

0.54

20.3

4.2

06/16e

166.7

42.8

1.74

0.54

7.5

4.2

06/17e

198.9

83.0

3.08

0.82

4.2

6.3

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items.

Underlying net debt effectively eliminated by June

Pan African had £16.2m in net debt on its balance sheet as at 31 December, compared to £18.0m as at 30 June, implying c £11.5m of H1 cash inflows before a dividend payment of £9.7m for FY15. As such, net debt equates to gearing (net debt/equity) of 12.7% and leverage (net debt/[net debt + equity]) of 11.3%. Net debt is forecast to be eliminated by end-June before consideration relating to the acquisition of Uitkomst (assuming DMR approval) of ZAR200m (£8.9m) before cash acquired, a full-year dividend of a further £9.9m and the Shanduka Gold transaction consideration. Excepting organic growth (see Expansion opportunities on pages 10-11), thereafter, management’s strategy is to seek value-accretive gold acquisitions within Africa (especially tailings retreatment operations with low fixed costs, low execution risks, 18-24-month lead times and four-to-five-year pay-back periods), while maintaining debt/equity at c 20%.

Valuation: 25.33p at long-term gold or 19.59p at spot

Over the life of operations, our absolute value of PAF remains substantially unchanged at 25.33p, based on the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of its mine operations (applying a 10% discount rate). The above valuation assumes that the grade profile at Evander remains in the range 6.0-7.0g/t from H216. It also assumes an average gold price of US$1,454/oz for FY17-39. If the gold price instead remains at US$1,234/oz in real terms, however, our absolute value of PAF would reduce to 19.59p (all other things being equal). In the meantime, PAF remains consistently cheaper than its South African peers (on both consensus and our own forecasts) in terms of yield and P/E (100% of instances considered) and EV/EBITDA (at least 75% of instances considered) as well as having the third highest forecast dividend yield of any dividend-paying gold counter in the world.

H116 review and FY16 forecasts

Pan African’s interim figures were better than both of the two prior periods (ie H115 and H215) and also Edison’s expectations, reflecting a return to profit at Evander and a return to normal at Barberton and despite a 9.8% year-on-year decline in the average price of gold, to US$1,110/oz (vs US$1,231/oz). Compared to the prior year period (ie H115) gold produced and sold increased 17.4% (or 15,122oz) to 101,797oz, while cash costs of production fell by 25.7%, to US$740/oz, aided by a 23.9% decline in the ZAR/US$ exchange rate and a ZAR25.5m (£1.1m) inventory adjustment at Barberton. Nevertheless, there was little evidence of inflation (or, alternatively, there was solid evidence of diligent costs control). Aggregate underlying costs (ie excluding the Evander Tailings Retreatment Project [ETRP]) rose only 1.4%, from ZAR947.5m to ZAR960.5m in local currency terms, despite the group’s salaries and wages bill (49% of total costs at Barberton, excluding the Barberton Tailings Retreatment Project [BTRP], and 50% of costs at Evander, excluding the ETRP) increasing by 9.4% and its electricity costs (10% of total costs at Barberton, excluding the BTRP, and 22% of costs at Evander, excluding the ETRP) increasing by 11.9%, year-on-year, compared to a 12.7% increase in the NERSA approved electricity tariff over the same period.

In general therefore, not only were costs lower than our expectations, but depreciation, royalties and net finance costs were also lower than our expectations, albeit these were partly offset by an increase in ‘other’ expenses as a result of the inclusion of an unrealised derivative cost collar mark to market fair value adjustment of ZAR40.6m (£1.8m) at Barberton (see page 14).

Exhibit 1: Pan African underlying P&L statement by half-year (H114-H216) actual vs expected

£000s (unless otherwise indicated)

H114

H214

H115

H215

H116e

H116a

H116a vs H116e (%)

H116a vs H215a (%)

H116a vs H116e (units)

Precious metal sales

84,637

69,914

68,126

72,951

76,392

75,632

-1.0

3.7

-760

Realisation costs

(191)

(159)

(295)

(396)

(81)

(269)

232.1

-32.1

-188

Realisation costs (%)

0.23

0.23

0.43

0.54

0.11

0.36

227.3

-33.3

0

On-mine revenue

84,447

69,755

67,831

72,555

76,311

75,363

-1.2

3.9

-948

Gold cost of production

(52,519)

(52,727)

(52,799)

(48,935)

-7.3

N/A

3,864

Platinum cost of production

(1,590)

(1,797)

(1,780)

(1,651)

-7.2

N/A

129

Cost of production

(54,109)

(52,285)

(54,524)

(55,889)

(54,578)

(50,586)

-7.3

-9.5

3,992

Depreciation

(5,088)

(4,935)

(4,676)

(5,661)

(6,045)

(5,277)

-12.7

-6.8

768

Mining profit

25,249

12,535

8,631

11,005

15,688

19,500

24.3

77.2

3,812

Other income/(expenses)

(223)

(1,227)

523

(273)

(3,486)

N/A

1,176.9

-3,486

Loss in associate

(89)

(84)

(128)

0

0

N/A

N/A

0

Loss on associate disposal

(140)

0

0

N/A

N/A

0

Impairment costs

0

(12)

(56)

(2)

0

N/A

-100.0

0

Royalty costs

(1,747)

(272)

(795)

(852)

(2,162)

(1,194)

-44.8

40.1

968

Net income before finance items

23,191

10,940

8,034

9,878

13,525

14,819

9.6

50.0

1,294

Finances income

381

306

321

28

144

N/A

414.3

N/A

Finance costs

(725)

(153)

(498)

(1,960)

(558)

N/A

-71.5

N/A

Net finance income

(344)

153

(177)

(1,932)

(811)

(414)

-49.0

-78.6

397

Profit before taxation

22,847

11,093

7,857

7,946

12,714

14,405

13.3

81.3

1,691

Taxation

(5,537)

(1,618)

(2,310)

(1,823)

(3,527)

(3,480)

-1.3

90.9

47

Marginal tax rate (%)

24.2

14.6

29.4

22.9

27.7

24.2

-12.6

5.7

-3.5

Deferred tax

 

 

 

 

Profit after taxation

17,310

9,475

5,548

6,122

9,187

10,925

18.9

78.5

1,738

 

 

EPS (p)

0.95

0.52

0.30

0.33

0.50

0.60

20.0

81.8

0.10

HEPS* (p)

0.95

0.52

0.31

0.33

0.50

0.60

20.0

81.8

0.10

Diluted EPS (p)

0.95

0.52

0.30

0.33

0.49

0.60

22.4

81.8

0.11

Diluted HEPS* (p)

0.95

0.52

0.31

0.33

0.49

0.60

22.4

81.8

0.11

Source: Pan African Resources, Edison Investment Research. Note: *HEPS = headline earnings per share.

Operations

On 8 February, Pan African (PAF) updated its earnings guidance for H115 to reflect the material changes in forex rates since early December (eg ZAR/£ -7.8%, ZAR/US$ -13.2% and £/US$ -4.8%) and actual vs expected production in H116, which was 5.5%, or 5,583oz, above our expectations. Whereas Edison had expected the outperformance to occur in Pan African’s underground operations however, in general it occurred in its tailings retreatment operations (the BTRP and ETRP). The following analysis therefore compares actual operational results with our expectations of 10 December 2015 and 11 February 2016.

Evander Gold Mines (EGM) back in profit

Evander’s most significant achievement during the period was to return to profitability for the first time since H114 (ie July-December 2013). Throughput was closely aligned with our expectations, suggesting that the earlier underground challenges and infrastructure constraints (especially those relating to conveyor belt availability) had been successfully overcome and, as a result, there was no low-grade ore processed from surface sources. Albeit the (underground) head grade was lower than our (augmented) February 2016 forecast, it was still higher than our December 2015 forecast and, importantly, consistent with Evander exiting its low-grade mining cycle (see below). Unit working costs were ZAR2,450/t milled, which was 2.9% above our February 2016 forecast, but only 3.1% above our H215 underground unit working cost estimate of ZAR2,376/t (cf our target of ZAR2,159/t). As a result, gross total cash costs increased back to the levels of H214 and H115; however, this was more than offset by the increase in revenue as a result of the planned concentration of mining activities on the newly established, higher-grade areas of 25 level.

Exhibit 2: EGM operational results, H114-H216e, actual and forecasts

H114

H214

H115

H215

H116e

(Dec ’15)

H116e

(Feb ’16)

H116a

H216e

FY16e

(updated)

Tonnes milled underground (t)

200,272

194,855

197,879

184,107

200,500

200,500

200,942

200,500

401,442

Head grade underground (g/t)

6.20

4.17

4.30

4.92

5.68

6.35

5.80

6.75

6.27

Underground gold contained (oz)

39,921

26,138

27,357

29,137

36,615

40,959

37,471

43,512

80,983

Tonnes milled surface (t)

111,225

149,676

198,578

67,645

0

0

Head grade surface (g/t)

1.30

1.47

1.40

0.22

0.00

0.00

Surface gold contained (oz)

4,649

7,095

8,938

477

0

0

0

0

0

Tonnes milled (t)

311,497

344,531

396,457

251,752

200,500

200,500

200,942

200,500

401,442

Head grade (g/t)

4.45

3.00

2.85

3.66

5.68

6.35

5.80

6.75

6.27

Contained gold (oz)

44,570

33,233

36,295

29,614

36,615

40,959

37,471

43,512

80,983

Recovery (%)

97

102

93

100

98

98

97

98

97

Production underground (oz)

38,710

27,246

26,024

27,722

35,773

40,017

36,370

42,512

78,882

Production surface (oz)

3,955

6,645

7,831

1,982

0

0

Total production (oz)

42,665

33,891

33,855

29,704

35,773

40,017

36,370

42,512

78,882

Recovered grade (g/t)

4.26

3.06

2.66

3.67

5.55

6.21

5.63

6.59

6.11

Gold sold (oz)

43,164

33,392

33,733

29,825

35,773

40,017

36,370

42,512

78,882

Average spot price (US$/oz)

1,302

1,290

1,233

1,206

1,121

1,121

1,105

1,225

1,169

Average spot price (ZAR/kg)

421,273

443,171

435,376

461,891

484,259

490,846

483,309

559,531

563,958

Total cash cost (US$/oz)

985

1,358

1,317

1,277

901

876

995

717

800

Total cash cost (ZAR/kg)

318,616

466,650

464,955

489,118

389,068

383,460

435,190

327,394

377,100

Total cash cost (US$/t)

134.93

134.43

112.03

149.51

160.69

174.79

180.15

151.98

157.22

Total cash cost (ZAR/t)

1,373.00

1,427.75

1,230.00

1,794.96

2,159.08

2,380.43

2,450.00

2,159.08

2,304.70

Implied revenue (US$000s)

56,200

42,940

41,593

35,694

40,101

44,859

40,189

52,077

92,223

Implied revenue (ZAR000s)

565,576

460,221

456,799

427,794

538,809

610,935

546,731

739,838

1,383,655

Implied revenue (£000s)

35,471

25,504

25,566

23,502

26,080

29,266

26,219

34,333

63,260

Implied cash costs (US$000s)

42,029

46,317

44,415

37,639

32,219

35,045

36,199

30,471

63,114

Implied cash costs (ZAR000s)

422,810

491,905

487,800

451,884

432,896

477,276

492,308

432,896

925,203

Implied cash costs (£000s)

26,527

27,662

27,297

24,917

20,977

22,913

23,635

20,089

42,792

Forex (ZAR/£)

15.9388

17.8279

17.8700

18.1318

20.6370

20.8300

20.8300

21.5487

21.7135

Forex (ZAR/US$)

10.0600

10.6853

10.9827

11.9173

13.4362

13.6190

13.6000

14.2067

14.8421

Forex (US$/£)

1.5844

1.6685

1.6269

1.5186

1.5377

1.5328

1.5328

1.5168

1.4688

Source: Edison Investment Research, Pan African Resources.

Level 25 at 8 shaft has now been firmly established, with the majority of crews working in the high-grade area of the mine. As a result (and significantly), the actual head grade mined at Evander exceeded management’s expectations (September 2015 guidance) in two of the final three months of the year, as shown in Exhibit 3.

Exhibit 3: Evander underground head grade, actual vs expected (July-December 2015)

Source: Pan African Resources, Edison Investment Research

In addition to the head grade, a number of other operational parameters at EGM improved during the period, including the mine call factor (from 59% in H115 to 65% in H116 versus a target of 73%), face advance (from 7.9m in H115 to 8.4m in H116 versus a target of 12m) and stoping width (reduced from 131cm in H115 to 127cm in H116 versus a target of 125cm). By contrast, while throughput matched our expectations, utilisation at 8 shaft remained relatively low at c 78.6% over the six-month period and with only one month in which it achieved its 35-40ktpm capacity. In the short to medium term, management will focus on improving this performance. In the meantime however, the situation in which the majority of crews are focused on the high-grade areas of the mine is expected to pertain for at least the next two years and head grades are therefore expected to remain in the range 6.0-7.0g/t for the next three to five years. In the immediate future, operations at Evander will involve advancing from 25 to 26 level in approximately nine months’ time. This will increase the number of conveyor belts from 11 (over 5km) currently to 12, and proportionately increase the amount of associated maintenance required. However, it will also improve access to more high-grade panels and allow management to manage and blend the ore mined towards achieving its target of 110,000oz of annual gold mined at EGM by selectively reducing mining at the lower-grade extremities of the Kinross pay channel.

In the longer term, management believes that a grade of 7.2g/t is possible. Note that, had an underground head grade of 7.2g/t prevailed in H116 (and applying the group’s H116 marginal tax rate to the incremental profits), we estimate that it would have added c 0.26p to both Pan African’s EPS and headline EPS in H116 (ie 0.52p, or ZAR0.11 per share, on an annualised basis). Had an underground head grade of 7.2g/t prevailed in H116 and a gold price of US$1,234/oz, then we estimate that 0.42p/share would have been added to EPS and HEPS in H116. Had an underground head grade of 7.2g/t prevailed in H116 and a gold price of US$1,466/oz (Edison’s average real, long-term gold price, see pages 15-16), then we estimate that 0.70p/share would have been added to EPS and HEPS in H116.

Barberton Gold Mining Operations (BGMO)

As with Evander, throughput at Barberton was closely aligned with our prior expectations and, while the head grade was not as high as our (augmented) February 2016 estimate, it was still noticeably higher than our December 2015 one and displayed a material increase compared to the (implied) grade in H215. Metallurgical recoveries increased to 92.0%, such that both throughput and recoveries have now returned to levels that are consistent with those pre-dating the contamination of the Biox plant with oil at Fairview in May 2014 (ie H214). Unit working costs were 9.6% and 18.0% below our two prior forecasts, respectively, aided by a ZAR23.5m gold inventory credit adjustment relating to 58kg (1,865oz) of unsold gold inventory concentrates held in the Fairview Biox plant (NB equates to US$811/oz of concentrate). Excluding this credit, unit working costs would have been ZAR3,066.54/t – ie on a par with H115 and therefore once again demonstrating diligent cost control, year-on-year.

Exhibit 4: Barberton operational results, H114-H216e

H114

H214

H115

H215

H116e

(Dec ’15)

H116e

(Feb ’16)

H116a

H216e

FY16e

(updated)

Tonnes milled (t)

149,589

142,532

126,713

134,036

140,768

140,768

139,430

147,500

286,930

Head grade (g/t)

10.45

10.56

11.40

10.00

10.26

11.32

10.60

10.26

10.38

Contained gold (oz)

50,272

48,374

46,443

43,080

46,433

51,234

47,117

48,654

95,771

Recovery (%)

91

96

89

90

92.5

92.5

92.0

92.5

92.4

Production underground (oz)

41,849

46,130

42,666

38,649

42,946

47,386

43,487

45,000

88,487

Production calcine dumps/surface ops (oz)

390

369

76

102

130

130

Total production (oz)

42,239

46,499

42,742

38,751

42,946

47,386

43,617

45,000

88,617

Gold sold (oz)

45,405

43,333

41,232

40,261

42,946

47,386

43,617

45,000

88,617

Average spot price (US$/oz)

1,317

1,290

1,229

1,206

1,121

1,121

1,113

1,225

1,169

Average spot price (ZAR/kg)

426,101

443,171

433,966

461,891

484,259

490,846

486,567

559,531

560,904

Total cash cost (US$/oz)

787

770

885

825

782

771

681

740

653

Total cash cost (ZAR/kg)

254,506

263,029

312,502

318,061

337,869

337,614

297,877

337,869

14,301

Total cash cost (US$/t)

222.22

251.14

287.82

238.62

238.62

259.55

213.09

225.67

201.57

Total cash cost (ZAR/t)

2,403.00

2,668.95

3,161.00

2,860.08

3,206.09

3,534.86

2,898.00

3,206.09

2,984.86

Implied revenue (US$000s)

59,798

56,360

50,674

48,095

48,143

53,120

48,546

55,125

103,626

Implied revenue (ZAR000s)

601,758

600,142

556,300

574,798

646,858

723,437

660,091

783,147

1,546,008

Implied revenue (£000s)

37,743

33,700

31,148

31,559

31,309

34,655

31,671

36,343

70,881

Implied cash costs (US$000s)

33,242

35,796

36,471

31,983

33,589

36,537

29,711

33,287

57,837

Implied cash costs (ZAR000s)

334,362

380,411

400,600

383,353

451,315

497,595

404,068

472,898

856,446

Implied cash costs (£000s)

20,978

21,484

22,417

21,043

21,869

23,888

19,398

21,946

39,418

Forex (ZAR/£)

15.9388

17.8279

17.8700

18.1318

20.637

20.8300

20.8300

21.5487

21.7135

Forex (ZAR/US$)

10.0600

10.6853

10.9827

11.9173

13.4362

13.6190

13.6000

14.2067

14.8421

Forex (US$/£)

1.5844

1.6687

1.6269

1.5186

1.5377

1.5328

1.5328

1.5168

1.4688

Source: Edison Investment Research, Pan African Resources

Principal sources of cost inflation and deflation in rand terms over the year were as follows:

salary and wages: +15.7% (vs +4.7% in FY15) as a result of the 9% wage agreement settlement with the unions (see page 12) coupled with increased production and a new bonus scheme, which gave rise to an increase in production incentives and overtime payments. Note that this forms a welcome contrast with FY15, which exhibited a decrease in the number of employees on the mine and also lower incentivisation payments;

mining costs: +1.0 % (vs +5.3% for FY15), including a 2.7% increase in vamping contractor’s costs. Excluding vamping contractor’s costs, mining costs were unchanged, year-on-year;

processing costs: -10.6% (vs -1.6% for FY15) reflecting lower metallurgical plant repairs and maintenance costs;

engineering and technical services: +24.4% (vs +12.2% for FY15) owing to the need for secondary support at Fairview’s high-grade 11-block in order to access additional high-grade pillars; and

electricity: +9.2% (vs +11.5% for FY15), which is below the 8% NERSA approved, regular tariff increase plus the additional one-off 4.69% tariff increase imposed from 1 April 2015, owing to improved electricity management, including the re-scheduling of processing into lower tariff periods.

Capital expenditure was ZAR55.9m in H116 and was thus consistent with FY15’s figure of ZAR112.6m, almost all of which is now classified as either ‘maintenance’ or ‘development’ after the conclusion of the BTRP’s construction.

Finally, after exploration drilling in FY15 confirmed the down-dip extension of the high-grade 11-block of the MRC orebody by a further 170m, thereby increasing the life of BGMO’s operations by 5.3%, from 19 to 20 years (company estimate), a further two holes are planned again later this year.

Barberton Tailings Retreatment Project (BTRP)

In contrast to BGMO and Evander, PAF’s retreatment operations typically outperformed our expectations. In the case of the BTRP, the head grade was maintained at an elevated level, resulting in materially higher metallurgical recoveries, while costs returned to levels of H214 and H115, resulting in unit costs of production falling to an unprecedented US$367/oz and gross profits increasing in rand, dollar and sterling terms.

Exhibit 5: BTRP operational results, H114-H216e

H114

H214

H115

H215

H116e

(Dec ’15)

H116e

(Feb ’16)

H116a

H216e

FY16e

Tonnes processed tailings (t)

343,137

472,599

484,315

487,312

543,656

543,656

464,179

532,090

996,269

Head grade tailings (g/t)

1.70

1.58

1.50

1.30

1.15

1.15

1.30

1.15

1.22

Tailings gold contained (oz)

18,755

23,208

23,357

20,377

20,135

20,135

19,401

19,707

39,108

Recovery (%)

60

49

51

65

45

45

64

45

55.5

Production tailings (oz)

11,603

11,282

11,710

13,219

9,061

9,061

12,830

8,868

21,698

Production other (oz)

0

0

0

0

0

Total production (oz)

11,603

11,282

11,710

12,573

9,061

9,061

12,830

8,868

21,698

Recovered grade (g/t)

1.05

0.74

0.75

0.80

0.52

0.52

0.86

0.52

0.68

Gold sold (oz)

11,603

11,282

11,710

12,573

9,061

9,061

12,830

8,868

21,698

Average spot price (US$/oz)

1,317

1,290

1,229

1,206

1,121

1,121

1,113

1,224

1,158

Average spot price (ZAR/kg)

426,101

443,171

433,799

461,891

484,259

490,846

486,566

632,956

546,396

Total cash cost (US$/oz)

454

528

459

497

692

683

367

547

441

Total cash cost (ZAR/kg)

146,928

181,511

162,203

190,268

299,051

299,051

160,665

282,631

210,428

Total cash cost (US$/t)

15.36

12.72

11.11

12.88

11.54

11.38

10.15

9.11

9.59

Total cash cost (ZAR/t)

154.53

131.28

121.98

152.69

155.02

155.02

138.00

146.51

142.5461

Implied revenue (US$000s)

15,281

14,584

14,392

15,112

10,157

10,157

14,280

10,855

25,134

Implied revenue (ZAR000s)

153,776

155,425

157,998

179,905

136,476

138,332

194,166

174,587

368,754

Implied revenue (£000s)

9,645

8,723

8,846

9,885

6,606

6,627

9,316

7,727

17,043

Implied cash costs (US$000s)

5,271

6,011

5,379

6,277

6,273

6,188

4,710

4,847

9,557

Implied cash costs (ZAR000s)

53,025

63,693

59,077

74,406

84,280

84,280

64,057

77,958

142,014

Implied cash costs (£000s)

3,327

3,590

3,306

4,111

4,084

4,046

3,075

3,450

6,525

Forex (ZAR/£)

15.9388

17.8279

17.87

18.1318

20.6370

20.8300

20.8300

22.5969

21.7135

Forex (ZAR/US$)

10.0600

10.6853

10.9827

11.9173

13.4362

13.6190

13.6000

16.0841

14.8421

Forex (US$/£)

1.5844

1.6685

1.6269

1.5186

1.5377

1.5328

1.5328

1.4048

1.4688

Capex (US$000s)

3,569

364

100

188

0

0

566

0

566

Capex (ZAR000s)

35,900

4,800

1,100

2,200

0

0

7,700

0

7,700

Capex (£000s)

2,252

159

62

122

0

0

370

0

370

Source: Edison Investment Research, Pan African Resources

Nameplate capacity at the BTRP is 100ktpm and management is expected to work towards achieving this level in H117. For the moment, Edison is continuing to anticipate a moderation in grade and metallurgical recoveries. However, management has also recently been investigating the potential to reduce retention times, while maintaining metallurgical recoveries at relatively high levels. To the extent that it is successful, our forecasts may therefore prove to be relatively conservative.

In the longer term, approximately two-thirds of the tailings being treated at the BTRP originated from the Fairview concentrator at a grade of c 1.6g/t. The remaining third are from the same origin, but are supplemented with material from the Biox plant at a grade of 3-10g/t. As a result, a substantial portion of the resources being treated by BTRP exists at a grade in excess of 1.6g/t and there is therefore ample opportunity for management to pursue higher-grade strategies in order to increase financial returns.

ETRP

The ETRP operated at 74.2% capacity utilisation in H116. However, metallurgical recoveries were materially higher than expected, at 63% (vs 48% expected) on average, which could be attributed to the processing of higher-grade surface material, which achieved a recovery rate of 78.3% vs 52.7% for tailings.

Exhibit 6: ETRP operational results, H115-H216e

H215

H116e

(Dec ’15)

H116e

(Feb ’16)

H116a

H216e

FY16e

Tonnes processed from surface feedstocks (t)

139,723

161,090

140,000

301,090

Head grade surface feedstocks (g/t)

1.10

1.30

1.25

1.28

Surface feedstocks gold contained (oz)

4,941

6,733

5,626

12,359

Tonnes processed tailings (t)

507,444

1,080,000

1,080,000

729,085

764,543

1,493,628

Head grade tailings (g/t)

0.30

0.32

0.32

0.30

0.32

0.31

Tailings gold contained (oz)

4,894

11,111

11,111

7,032

7,866

14,898

Total tonnes processed (t)

647,167

1,080,000

1,080,000

890,175

904,543

1,794,718

Head grade (g/t)

0.47

0.32

0.32

0.48

0.46

0.47

Contained gold (oz)

9,836

11,111

11,111

13,765

13,492

27,257

Recovery (%)

54

48

48

63

48

56.7

Production tailings (oz)

4,029

5,333

5,333

3,708

6,476

10,184

Production surface (oz)

2,494

5,272

5,272

Total production (oz)

6,523

5,333

5,333

8,980

6,476

15,456

Recovered grade (g/t)

0.31

0.15

0.15

0.31

0.22

0.27

Gold sold (oz)

6,523

5,333

5,333

8,980

6,476

15,456

Average spot price (US$/oz)

1,206

1,121

1,121

1,108

1,224

1,157

Average spot price (ZAR/kg)

466,647

484,259

490,846

484,298

632,956

547,267

Total cash cost (US$/oz)

688

567

560

528

625

565

Total cash cost (ZAR/kg)

266,453

245,000

245,000

230,857

323,318

269,640

Total cash cost (US$/t)

6.93

2.80

2.76

5.33

4.48

4.90

Total cash cost (ZAR/t)

83.53

37.63

37.63

72.00

72.00

72.227

Implied revenue (US$000s)

7,260

5,979

5,979

9,950

7,927

17,877

Implied revenue (ZAR000s)

87,403

80,333

81,425

135,268

127,499

262,767

Implied revenue (£000s)

4,609

3,888

3,901

6,491

5,643

12,134

Implied cash costs (US$000s)

4,488

3,025

2,984

4,741

4,049

8,790

Implied cash costs (ZAR000s)

54,060

40,643

40,643

64,500

65,127

129,627

Implied cash costs (£000s)

3,004

1,969

1,951

3,096

2,882

5,979

Forex (ZAR/£)

18.1318

20.6370

20.8300

20.8300

22.5969

21.7135

Forex (ZAR/US$)

12.0400

13.4362

13.6190

13.6000

16.0841

14.8421

Forex (US$/£)

1.5186

1.5377

1.5328

1.5328

1.4048

1.4688

Capex (US$000s)

7,899

0

0

0

0

0

Capex (ZAR000s)

95,100

0

0

0

0

0

Capex (£000s)

5,284

0

0

0

0

0

Source: Edison Investment Research, Pan African Resources

The grade of the dam being re-mined at the ETRP is 0.3g/t. However, the operation is commercially viable given its ability to fill unutilised capacity in the Kinross plant and the fact that it therefore attracts only incremental operating costs (broadly 14 additional employees). Re-mining is being conducted without breaching the dam wall and the tailings are being redeposited at Winkelhaak, thereby simplifying the environmental requirements (ie the Environmental Impact Assessment) with respect to re-filling the Kinross dam at a later date.

Nameplate capacity at the ETRP is 200ktpm and management’s target is to achieve 150-160ktpm (75-80% capacity utilisation on a sustainable, long-term basis). At ambient head grades (0.32g/t) and metallurgical recoveries (45%), this should result in the production of 10,000oz per annum at a total cash cost of US$807/oz (Edison calculation), based on the ETRP’s current cost base of ZAR130m per annum. In the meantime however, management will continue to source toll-treatment material with higher grades than the ETRP’s reserve and resource grades. Note that, in this respect, it is at a commercial advantage in that it is the only retreatment operator in the area and is therefore (effectively) the buyer of choice (or even the buyer of last resort) for tailings assets destined for retreatment in the region. As a result, currently it has approximately 12 months of such surface material on hand to process – a similar quantity to March 2015.

Effectively, the ETRP represents a substantial (10,000oz per year) pilot plant, designed to prove recovery and cost parameters, before a decision is taken on the much larger Elikhulu project, which would process 12Mtpa (cf the ETRP’s 2.16Mtpa) to produce c 50koz per annum, but would require c ZAR1.5bn (US$93.2m, or US$1,863 per annual ounce of production) in third-party capital investment and would need to support an independent cost base (cf the ETRP, which supports only an incremental cost base).

Phoenix Platinum

Phoenix’s performance was transformed in H215 by IFM’s resumption of mining at its underground Lesedi Mine, which provided sulphide material for treatment in the CTRP (vs oxide material from Skychrome previously). This, in combination with an improved reagent suite and the processing of higher sulphide content tailings contained in number 4 dam, resulted in a materially improved plant recovery and financial performance. With the descent of IFM into Business Rescue proceedings (akin to Chapter 11 in the United States) in H116 however, Phoenix’s performance similarly regressed, exacerbated by a shortage of water on account of a drought in the North West province, which resulted in the loss of three weeks of production, and lower platinum group element (PGE) prices.

Exhibit 7: Phoenix Platinum operating and financial performance, H114-H215

H114

H214

H115

H215

H116

Plant feed - total (t)

118,259

132,923

135,963

126,156

117,461

Head grade (g/t)

3.80

3.61

3.16

3.47

3.25

Contained PGE (oz)

14,448

15,432

13,813

14,081

12,274

Plant recovery (%)

24.0

27.3

34.0

53.8

39.0

Recovered PGE (oz)

3,468

4,217

4,697

7,577

4,493

Production and sales of PGE 6E (oz)

2,987

4,217

4,711

5,534

4,493

Basket price received (ZAR/oz)

9,380

10,016

9,815

9,423

8,716

Basket price received (US$/oz)

932

937

894

791

641

Implied revenue (ZAR000s)

28,018

43,934

46,238

52,144

39,161

Implied revenue (£000s)

1,758

2,464

2,587

2,876

1,880

Total cash costs (ZAR/oz)

8,484

9,868

6,817

6,453

7,653

Total cash costs (US$/oz)

843

924

621

542

563

Total cash costs (ZAR/t)

214

313

236

283

293

Implied total cash costs (ZAR000s)

25,307

41,615

32,087

35,713

34,416

Implied total cash costs (£000s)

1,588

2,334

1,796

1,970

1,652

Capex (ZAR000s)

200

200

100

500

800

Source: Edison Investment Research, Pan African Resources


Year-on-year contributors towards upward cost pressures in FY15 were:

Salary and wages: +5.3% (vs +10.7% in FY15), attributable to a 7.5% pay increase awarded to employees but lower production incentive payments under the new incentive scheme linked to productivity and profitability.

Electricity +31.6% (vs +2.8% in FY15 and Eskom’s tariff increase of 12.7%), as a result of adjusting the milling coarseness of Elandskraal’s tailings.

In addition to current arisings from Lesedi (typically c 20% of its feedstock), Phoenix also sources electricity, water and certain other services from IFM. Management maintains that “is not in a position to fully assess the impact of the Business Rescue proceedings” on Phoenix. On a group level, Phoenix’s contribution to Pan African’s profits is small (Edison estimates £0.5m at a gross level in H216). However, in the event that the business rescue proceedings are finalised and the Lesedi mine is put on care and maintenance indefinitely and the current PGE market conditions persist, Phoenix’s effective life would reduce from 28 years to nine to 12 years, in which case “there is a risk of an impairment of Phoenix Platinum’s carry value at financial year end” – albeit, this is clearly a non-cash cost. It will also place on Phoenix a requirement for a new, permanent tailings storage facility (at an estimated cost of c ZAR30-40m). In the meantime however, Phoenix remains a ‘strategic’ investment for Pan African, providing it with an entry into the PGE market. Moreover, on 15 September 2015, the administrator opined that there is a reasonable prospect of rescuing IFM (South Africa) via a sale of its assets/business and/or equity, albeit the process would probably take two to three months, to which end stakeholders are currently considering a bid for the company from Samancor.

Expansion opportunities

In addition to its existing operations, Pan African has four near- to medium-term expansion opportunities: Elikhulu, Uitkomst, Evander South and the Evander 2010 pay channel at 7 shaft.

Elikhulu

The total resource at Elikhulu is 165Mt at a grade of 0.28g/t, containing 1.5Moz, which management envisages is capable of supporting an operation processing 12Mtpa to produce 50,000oz per annum for the first eight years of its life, followed by 38,000oz per annum for the remaining six at a capital cost of c ZAR1.5bn (US$93.2m, or US$1,863 per annual ounce of production), operating costs of less than US$500/oz and with a payback period of less than four years.

PAF is in the process of completing a definitive feasibility study (DFS) to assess the development options for Elikhulu and is scheduled to conduct a review of the project in June/July 2016.

Uitkomst

In June 2015, Pan African entered into agreements to acquire the Uitkomst colliery, near the town of Utrecht in KwaZulu-Natal, from Oakleaf Investments Holding 109 Proprietary and Shanduka Resources for a cash consideration of ZAR200m (US$12.4m, or £8.9m, at current exchange rates vs £9.3m at the time of our December note). The colliery is already operational, at the following rates:

Exhibit 8: Uitkomst operating parameters

Parameter

ZAR

US$

£

Run-of-mine coal mined per annum

600,000t

600,000t

600,000t

Saleable coal produced per annum

408,000t

408,000t

408,000t

Yield

68%

68%

68%

Coal price AP14 price per tonne

806

50.05

36.05

Post-tax profit and cash-flow per annum

35m

2.2m

1.6m

Sustaining capex per annum

10m

0.6m

0.4m

Consideration

200m

12.4m

8.9m

Forecast pay-back period

<4yrs

<4yrs

<4yrs

Resources

25.7Mt

25.7Mt

25.7Mt

Life of mine

28yrs

28yrs

28yrs

Plant employees

110

110

110

Contractors

300

300

300

Source: Pan African, Edison Investment Research

The mine produces high-grade thermal, export-quality coal with metallurgical applications to both the export and domestic markets, including a potential long-term contract with the South African electricity supplier, Eskom.

The acquisition remains subject to Section 11 DMR approval. However, management anticipates it to be immediately earnings- and cash-flow accretive. Moreover, while the headline consideration is ZAR200m, this will include cash of c ZAR25-35m, working capital of a similar figure and a ZAR85m debt facility. As a result, the net cash outflow relating to the transaction from Pan African is forecast by management to be in the order of ZAR80m only (£3.6m at current forex rates).

As with Sibanye’s recent initiatives regarding coal, Uitkomst also effectively provides Pan African with a natural hedge against energy prices in South Africa. Until the transaction closes, however, it remains excluded from our forecasts.

Evander South

Evander South has an estimated mineral resource of 20.1Mt at a grade of 7.7g/t, containing 4.9Moz from a depth of only 300m below surface. Significant technical work has already been completed on the Evander South project and this is now being advanced into a preliminary economic assessment (PEA).

Labour relations

Multi-year wage agreements with both the NUM and UASA

Historically, Pan African has had good relations with the unions. Evander negotiates as part of the collectivised bargaining process, under the auspices of the South African Chamber of Mines, while Barberton negotiates separately.

For the half-year under review, PAF’s salary and wage bill increased by 9.4% to ZAR497.6m, which is consistent with its announcement, on 13 October 2015, that it had concluded multi-year wage agreements with both the NUM and the UASA to the effect that the average Barberton salary and wage bill for FY16 and FY17 will increase by c 9% per year (effective from 1 July 2015) and the average Evander salary and wage bill for FY16, FY17 and FY18 will increase by c 7.8% per year (effective from 1 July 2015).

Electricity

Evander is supplied by only one feeder cable from Eskom (vs four at BGMO). This increases the operational risk of being affected by power outages. However, Evander has also been designated as a ‘key industrial customer’, with the result that it is the last operation to be affected in its region and has never experienced an uncontrolled power cut. Unlike Barberton, however, it lacks the capacity to support itself on self-generated power, with the exception of the winders, emergency pumps and fans.

As has been well documented, South Africa is currently suffering from a shortage of effective generating capacity as older power stations on the historic Eastern Transvaal coalfields approach obsolescence.

In response, Eskom has commissioned two new power stations in South Africa’s Limpopo and Mpumalanga provinces. Known as Medupi and Kusile, respectively, each plant will have a generating gross capacity of c 4,800MW, with Medupi representing the largest investment in Eskom’s 84-year history and the first base-load project to be built in the country in 20 years. The combined output of the plants represents c 23% of the country’s current power generating capacity.

However, the completion of Medupi has faced numerous setbacks, from procurement, technical issues, labour problems, and claims of mismanagement. Whereas Eskom initially estimated that Kusile/Medupi would power up in 2011 and that the total duration of the project would be no longer than four years at the time of its commissioning, commencement of the project was subsequently delayed by two years to 2013 while, to date, only one unit of 794MW capacity has been built (out of six). As a result, Medupi, which witnessed its first unit go online in 2015, will now not see its final unit go live until May 2020:

Exhibit 9: Medupi and Kusile commissioning dates

Medupi

Kusile

Unit

Date of commercial operation

Unit

Date of commercial operation

6

August 2015

1

July 2018

5

March 2018

2

July 2019

4

July 2018

3

August 2020

3

June 2019

4

March 2021

2

December 2019

5

November 2021

1

May 2020

6

September 2022

Source: Eskom, Edison Investment Research

While the news of Medupi’s synchronisation into the grid is positive within the context of South Africa’s electricity tribulations, it represents only one-sixth of design capacity and only 1.9% of Eskom’s current capacity of c 42,000MW. Moreover, capital expenditure on the two new power stations has exceeded the budget, such that Eskom has needed to turn to the South African Treasury for additional funding. As a result, in addition to the three 8% per year increases agreed between Eskom and the regulator, NERSA, in 2013, there was one further increase of 4.69% from 1 April 2015. Nevertheless, at c ZAR0.92-0.97/kWh (c US$0.059/kWh), electricity remains cheap in South Africa relative to the rest of the world – not least as a result of the depreciation of the rand, which has resulted in the equivalent US dollar price falling from US$0.060/kWh in the past three months. In addition, all operations at Pan African are engaged in a process of load shedding and power clipping aimed at minimising electricity consumption wherever possible. Note that the cost of self-generating power at Pan African’s mines is typically 3-4x the cost of grid power.

At least until the two power stations are commissioned and synchronised into the grid, South Africa appears likely to continue to experience intermittent load shedding and power outages. However, this is almost invariably directed towards residential, rather than industrial consumers. By contrast, industrial consumers are typically required to reduce their consumption by 10% or, at worst, 25%. As a consequence of this situation, it is supposed that the South African government will look more favourably on independent power producer-generating solutions for South Africa’s future electricity needs. It will also focus on the previously largely unexploited resources of the Waterberg coalfield in the Limpopo province for its energy source (NB readers are directed to Sibanye’s recent private sector initiative in this region).

In the interim however, Eskom CEO Brian Molefe has expressed confidence in the current strength of South Africa’s power system, saying that the country should not see any load shedding until at least May 2016.

Shanduka transaction

Shanduka Gold is Pan African’s primary black economic empowerment shareholder; its sole asset is a 23.8% interest in Pan African.

On 25 February, Pan African announced that it had entered into an agreement whereby it will acquire a 16.9% interest in Shanduka Gold from The Standard Bank of South Africa Ltd. The acquisition purchase consideration is confidential until after the closing date of the transaction. However, it is reported that the consideration has been calculated at a discount to the prevailing Pan African share price and hence the transaction should therefore be both earnings enhancing and value-enhancing to the company.

Upon completion, the transaction will result in an effective circular holding of Pan African in itself. Prima facie, this would equate to an interest of c 4%. However, given the vendor financing arrangement of Mabindu’s 49.5% interest in Shanduka, this becomes an effective 8% circular interest of Pan African in itself (for accounting purposes) which will then be consolidated out of any subsequent accounts. In the absence of any substantive details to date however, the Shanduka transaction has been excluded from Edison’s detailed forecasts for the moment. In addition, it remains subject to termination at Pan African’s election, until the fulfilment or waiver of the suspensive conditions to the agreement on or before 15 April 2016.

Hedge position

Pan African’s strategy is not to hedge its gold production forward, except in specific circumstances and to provide protection against specific risks.

In July 2015, to protect its operational revenue, Barberton Mines entered into a short-medium zero cost collar via the following instruments:

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

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

As a consequence of the subsequent rise in the gold price to ZAR530,000/kg, there was a mark-to-market fair value adjustment of ZAR40.6m (£1.8m) included in ‘other’ expenses in PAF’s H116 income statement.

In addition, PAF has a gold loan, valued at ZAR110.4m as at 31 December 2015 – equivalent to 6,706oz of gold.

At the time of writing the rand price of gold is ZAR638,824/kg. For the purposes of its financial forecasting, Edison calculates mark-to-market fair value adjustments based on its gold price forecasts for the year in question and the intrinsic value of the option contracts (ie no time value is included). Henceforward, these are included in Edison’s forecasts of ‘other’ expenses in Pan African’s income statements, although obviously to the extent that these reflect a forecast loss, this will be more than offset by increased profits from the remainder of Pan African’s production being sold at higher gold prices.

Forecasts and valuation

We have updated our forecasts for FY16 based on the estimates made for each of the precious metals’ operations highlighted above (as stated above, forecasts exclude both the Uitkomst colliery acquisition and also the Shanduka transaction, pending the disclosure of additional, more detailed, information). Note that, on this basis, Edison’s forecasts are for production of 205koz of gold in FY16 plus 9koz of PGE, compared to management guidance of 200koz of gold plus 9koz PGE. Within this context, our detailed financial forecasts for PAF for H216 and FY16 are as follows.

Exhibit 10: Pan African underlying P&L statement by half-year (H114-H216e) actual and expected

£000s (unless otherwise indicated)

H114

H214

FY14

H115

H215

H116a

H216e
(Dec ’15)

H216e
(Feb ’16)

H216e
(current)

FY16e
(current)

Precious metal sales

84,637

69,914

154,551

68,126

72,951

75,632

86,403

90,763

91,632

167,265

Realisation costs

(191)

(159)

(349)

(295)

(396)

(269)

(95)

(94)

(326)

(596)

Realisation costs (%)

0.23

0.23

0.23

0.43

0.54

0.36

0.11

0.10

0.36

0.36

On-mine revenue

84,447

69,755

154,202

67,831

72,555

75,363

86,308

90,669

91,306

166,669

Gold cost of production

(52,519)

(52,727)

(48,935)

(48,238)

(49,476)

(45,509)

Pt cost of production

(1,590)

(1,797)

(1,651)

(1,773)

(1,641)

(1,524)

Cost of production

(54,109)

(52,285)

(106,394)

(54,524)

(55,889)

(50,586)

(50,011)

(51,118)

(47,032)

(97,618)

Depreciation

(5,088)

(4,935)

(10,023)

(4,676)

(5,661)

(5,277)

(6,430)

(6,430)

(5,661)

(10,938)

Mining profit

25,249

12,535

37,784

8,631

11,005

19,500

29,867

33,122

38,612

58,112

Other income/(expenses)

(223)

(1,227)

(1,450)

523

(273)

(3,486)

(6,773)

(10,259)

Loss in associate

(89)

(84)

(173)

(128)

0

0

0.000

Loss on associate disposal

(140)

0

0.000

Impairment costs

0

(12)

(12)

(56)

(2)

0

Royalty costs

(1,747)

(272)

(2,019)

(795)

(852)

(1,194)

(2,446)

(2,569)

(2,587)

(3,782)

Net income before finance items

23,191

10,940

34,130

8,034

9,878

14,819

27,421

30,552

29,252

44,071

Finances income

381

306

687

321

28

144

Finance costs

(725)

(153)

(878)

(498)

(1,960)

(558)

Net finance income

(344)

153

(191)

(177)

(1,932)

(414)

(811)

(811)

(811)

(1,226)

Profit before taxation

22,847

11,093

33,939

7,857

7,946

14,405

26,610

29,741

28,441

42,845

Taxation

(5,537)

(1,618)

(7,155)

(2,310)

(1,823)

(3,480)

(8,429)

(8,336)

(7,435)

(10,915)

Marginal tax rate (%)

24

15

21

29

23

24

32

28

26

25

Deferred tax

 

 

Profit after taxation

17,310

9,475

26,785

5,548

6,122

10,925

18,181

21,405

21,006

31,930

EPS (p)

0.95

0.52

1.47

0.30

0.33

0.60

0.99

1.17

1.15

1.74

HEPS* (p)

0.95

0.52

1.47

0.31

0.33

0.60

0.99

1.17

1.15

1.74

Diluted EPS (p)

0.95

0.52

1.46

0.30

0.33

0.60

0.97

1.14

1.12

1.70

Diluted HEPS* (p)

0.95

0.52

1.46

0.31

0.33

0.60

0.97

1.14

1.12

1.70

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

Note that our FY16 headline EPS forecast of 1.74p per share compares with a mean consensus estimate of 1.65p, within the range 1.20-2.00p (source: Bloomberg, 16 March 2016). Our forecast of 3.08p for FY17 compares with a mean consensus of 2.27p within the range 1.20-2.70p (excluding Edison); however, this Edison forecast depends on a gold price of US$1,372/oz. In the event that the gold price remains at the prevailing spot price of US$1,234/oz, our forecast declines to 2.54p – albeit this remains near the top of the range of analysts’ forecasts.

Updating our long-term forecasts to reflect these changes, our absolute value of PAF increases from 25.24p in February to 25.33p currently, based on the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of its mine operations (applying a 10% discount rate).

Exhibit 11: PAF estimated life of operations diluted EPS and (maximum potential) DPS

Source: Edison Investment Research, Pan African Resources

The above profile assumes that the grade profile at Evander will average 6.43g/t from FY17-30. We assume gold prices of US$1,372/oz in FY17 and US$1,378/oz in FY18. Note that average EPS from FY17-30 of 3.10p is approximately equal to double H116 EPS of 0.60p plus a 0.70p premium in the event that the Evander underground head grade reaches 7.2g/t and the gold price averages US$1,466/oz.

Sensitivities

In the long term, the key sensitivity affecting our forecasts is the real gold price. Currently, our forecasts for FY17-39 are for an average price of US$1,454/oz and for CY17-39 are for an average price of US$1,466/oz.

If the gold price remains at US$1,234/oz in real terms, however, our absolute value of PAF would reduce from 25.33p to 19.59p (all other things being equal), as shown in the chart below:

Exhibit 12: PAF estimated lifetime diluted EPS and (maximum potential) DPS at US$1,234/oz

Source: Edison Investment Research, Pan African Resources


Relative valuation

In US dollar terms, Pan African remains the second best performer of the London-listed gold miners, since March 2010:

Exhibit 13: PAF share price performance vs gold price and peers, March 2010-present (underlying data US$)

Source: Thomson Datastream, Edison Investment Research

Of as much significance, PAF remains notably cheap (based on our updated estimates) when compared with its South African peers in Exhibit 14, below.

Exhibit 14: Comparative valuation of PAF with respect to South African peers

EV/EBITDA (x)

P/E (x)

Yield (%)

 

Yr 1

Yr 2

Yr 1

Yr 2

Yr 1

Yr 2

AngloGold Ashanti

4.9

4.7

14.3

12.0

0.3

1.6

Gold Fields

4.1

3.7

26.0

13.0

1.6

2.6

Sibanye

4.5

4.1

10.6

11.4

2.9

2.7

Harmony*

6.5

4.4

30.6

11.4

0.0

1.4

Average (excluding PAF)

5.0

4.2

20.4

11.9

1.2

2.1

Pan African (Edison)

4.7

2.8

7.5

4.2

4.2

6.3

Pan African (consensus)

4.7

3.6

7.7

5.7

5.4

6.9

Source: Edison Investment Research, Bloomberg. Note: Priced at 16 March 2016.

As such, Pan African is cheaper than its peers in 100% of cases in which P/E and yield measures are considered (whether using Edison forecasts or consensus forecasts) and at least 75% of cases in which EV/EBITDA measures are considered.

Within the global context, meanwhile, it has the third highest dividend yield of the 36 ostensibly gold counters paying dividends to shareholders (including royalty and streaming companies):

Exhibit 15: Global gold mining companies ranked by forecast dividend yield (%)

Source: Bloomberg (consensus data, priced 16 March 2016), Edison Investment Research

Financials

Pan African had £16.2m in net debt on its balance sheet as at 31 December 2015, compared to £18.0m in net debt at 30 June 2015, implying c £11.5m of cash inflows for the period before a dividend payment of £9.7m for FY15. Net debt currently equates to a gearing (net debt/equity) ratio of 12.7% and a leverage (net debt/[net debt + equity]) ratio of 11.3%. Net debt is forecast to be eliminated under the effect of the improved H216 cash flows engendered by the improved operational performance described above before consideration relating to the acquisition of Uitkomst (assuming DMR approval) of ZAR200m before cash acquired of c ZAR25m (£8.9m at current exchange rates), a full-year dividend of a further £9.9m and the Shanduka Gold transaction consideration. Debt is financed via a ZAR800m revolving credit facility (£36m at current exchange rates), of which ZAR225.2m (£10.1m) is currently drawn down, but which can be expanded to ZAR1,100m (£49.0m), plus a gold loan of ZAR110.4m (£4.9m) and a banking facility of ZAR10.2m (£0.5m).

Exhibit 16: Financial summary

£'000s

2008

2009

2010

2011

2012

2013

2014

2015

2016e

2017e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

39,148

52,860

68,344

79,051

100,905

133,308

154,202

140,386

166,669

198,912

Cost of sales

(25,164)

(28,505)

(40,554)

(45,345)

(46,123)

(71,181)

(106,394)

(110,413)

(97,618)

(98,558)

Gross profit

13,985

24,355

27,790

33,705

54,783

62,127

47,808

29,973

69,050

100,355

EBITDA

 

 

13,711

22,890

25,023

28,540

45,018

53,276

44,165

28,448

55,009

92,090

Operating profit (before GW and except.)

11,745

20,529

21,897

25,655

41,759

47,278

34,142

18,110

44,071

82,998

Intangible amortisation

0

0

0

0

0

0

0

0

0

0

Exceptionals

0

(5,025)

(335)

0

(48)

7,232

(12)

(198)

0

0

Other

0

0

0

0

0

0

0

0

0

0

Operating profit

11,745

15,504

21,562

25,655

41,711

54,510

34,130

17,912

44,071

82,998

Net interest

200

807

594

762

516

197

(191)

(2,109)

(1,226)

6

Profit before tax (norm)

 

 

11,945

21,336

22,491

26,417

42,274

47,475

33,951

16,001

42,845

83,004

Profit before tax (FRS 3)

 

 

11,945

16,311

22,156

26,417

42,226

54,707

33,939

15,803

42,845

83,004

Tax

(4,367)

(8,219)

(7,656)

(9,248)

(12,985)

(12,133)

(7,155)

(4,133)

(10,915)

(26,647)

Profit after tax (norm)

7,579

13,117

14,835

17,169

29,290

35,342

26,796

11,868

31,930

56,357

Profit after tax (FRS 3)

7,579

8,091

14,500

17,169

29,242

42,574

26,785

11,670

31,930

56,357

Average number of shares outstanding (m)

1,043.8

1,104.4

1,366.3

1,432.7

1,445.2

1,619.8

1,827.2

1,830.4

1,831.5

1,831.5

EPS - normalised (p)

 

 

0.52

0.85

1.07

1.20

2.03

2.18

1.46

0.64

1.74

3.08

EPS - FRS 3 (p)

 

 

0.52

0.40

1.04

1.20

2.02

2.63

1.47

0.64

1.74

3.08

Dividend per share (p)

0.00

0.26

0.37

0.51

0.00

0.83

0.82

0.54

0.54

0.82

Gross margin (%)

35.7

46.1

40.7

42.6

54.3

46.6

31.0

21.4

41.4

50.5

EBITDA margin (%)

35.0

43.3

36.6

36.1

44.6

40.0

28.6

20.3

33.0

46.3

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

30.0

38.8

32.0

32.5

41.4

35.5

22.1

12.9

26.4

41.7

BALANCE SHEET

Fixed assets

 

 

55,647

67,198

74,324

97,281

86,075

249,316

223,425

220,150

220,677

220,145

Intangible assets

35,577

35,397

36,829

38,229

23,664

38,628

37,040

37,713

39,449

41,186

Tangible assets

20,070

31,801

37,495

59,052

62,412

209,490

185,376

181,533

180,323

178,054

Investments

0

0

0

0

0

1,199

1,010

905

905

905

Current assets

 

 

8,770

4,949

17,677

15,835

41,614

26,962

23,510

17,218

38,786

82,630

Stocks

378

358

1,126

1,457

1,869

6,596

5,341

3,503

5,575

6,638

Debtors

2,973

2,201

3,795

4,254

6,828

15,384

12,551

10,386

11,456

13,640

Cash

5,419

2,389

12,756

10,124

19,782

4,769

5,618

3,329

21,754

62 ,351

Current liabilities

 

 

(6,611)

(6,101)

(7,084)

(8,960)

(11,062)

(24,066)

(24,012)

(22,350)

(21,600)

(21,754)

Creditors

(6,521)

(6,080)

(7,084)

(8,960)

(11,062)

(23,202)

(19,257)

(17,301)

(16,551)

(16,705)

Short-term borrowings

(89)

(21)

0

0

0

(864)

(4,755)

(5,049)

(5,049)

(5,049)

Long-term liabilities

 

 

(7,438)

(9,686)

(11,431)

(13,410)

(14,001)

(80,004)

(63,528)

(67,850)

(68,648)

(70,466)

Long-term borrowings

(17)

0

0

(181)

(869)

(11,133)

(8,141)

(16,313)

(16,313)

(16,313)

Other long-term liabilities

(7,421)

(9,686)

(11,431)

(13,228)

(13,132)

(68,871)

(55,387)

(51,537)

(52,335)

(54,153)

Net assets

 

 

50,369

56,360

73,487

90,746

102,626

172,208

159,396

147,167

169,216

210,554

CASH FLOW

Operating cash flow

 

 

12,762

25,420

25,207

31,968

49,092

61,618

45,996

25,959

49,078

88,998

Net Interest

200

807

594

762

516

314

(606)

(2,109)

(1,226)

6

Tax

(1,723)

(10,886)

(7,476)

(10,743)

(11,616)

(13,666)

(8,536)

(3,479)

(10,117)

(24,829)

Capex

(5,680)

(5,705)

(6,764)

(21,712)

(17,814)

(27,197)

(21,355)

(19,554)

(9,428)

(8,560)

Acquisitions/disposals

226

(4,205)

0

0

(1,549)

(96,006)

0

(760)

0

0

Financing

785

0

48

1,545

259

47,112

349

(235)

0

(0)

Dividends

0

(6,774)

0

(5,376)

(7,416)

0

(14,684)

(15,006)

(9,882)

(15,018)

Net cash flow

6,571

(1,343)

11,609

(3,557)

11,471

(27,826)

1,164

(15,184)

18,425

40,597

Opening net debt/(cash)

 

 

(136)

(5,313)

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

(392)

Exchange rate movements

(1,394)

(2,642)

(281)

925

(1,813)

594

(839)

(276)

0

0

Other

0

1,041

(940)

(181)

(688)

1,090

(375)

4,705

0

0

Closing net debt/(cash)

 

 

(5,313)

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

(392)

(40,989)

Source: Company sources, Edison Investment Research

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DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Pan African Resources and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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