Four cylinders firing at once

Pan African Resources 11 February 2016 Update

Pan African Resources

Four cylinders firing at once

Updated H115 guidance

Metals & mining

11 February 2016

Price

13.25p

Market cap

£243m

US$1.4440/£

ZAR23.2377/£

ZAR16.0830/US$

Net debt (£m) at end June 2015

18

Shares in issue

1,831.5m

Free float

74%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

56.3

65.6

12.8

Rel (local)

64.1

82.9

32.7

52-week high/low

13.2p

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 event

H115 results

23 February 2016

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

On 8 February, Pan African (PAF) updated its earnings guidance for H115, which had been in existence since 26 November. Ostensibly to reflect the material changes in forex rates since early December (eg ZAR/GBP -7.8%, ZAR/USD -13.2% & GBP/USD -4.8%), the update nevertheless also provided production guidance for PAF’s major operating units, indicating production 5.5% ahead of our expectations and thus resulting in an earnings upgrade for both H116 and FY16.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/14

154.2

34.0

1.46

0.82

9.1

6.2

06/15

140.4

16.0

0.64

0.54

20.7

4.1

06/16e

167.0

47.3

1.92

0.54

6.9

4.1

06/17e

202.1

91.4

3.58

0.82

3.7

6.2

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

Actual production and earnings guidance

In its updated trading statement, PAF indicated that EPS for H116 will be in the range 0.57-0.63p per share, which compares with guidance of at least 0.51p/share (including an estimated 0.12p in exceptional hedging profits), indicated at the time of its November statement. As well as continued depreciation of the relevant currencies (ie the rand and sterling), management provided production figures for the six-month period, which demonstrated that production during the period was an aggregate 5,583oz of precious metals above our expectations, among other things, implying that Evander is experiencing a more rapid recovery from its low-grade cycle than had been anticipated at the time of the company’s FY15 results in September.

Valuation: FY16 HEPS and EPS increased 34.3%

All other things being equal, we estimate that the depreciation of the rand and sterling since early December 2015 would increase Pan African’s HEPS and EPS by 0.46p to June 2016, while its operational outperformance relative to our production expectations would add a further 0.25pp. However, the currency depreciation is also likely to have increased selective dollar-denominated costs, which will have limited the scope for cost reductions in rand terms, such that we estimate that the total increase in HEPS and EPS in FY16 will be limited to 0.48pp to give a total of 1.92pp for the full year (note: at US$1,225/oz Au in H2). This moderates to 1.73pp if gold averages US$1,174/oz in H216 – but is nevertheless still 0.3pp, or 21%, above our previous forecast of 1.43pp and towards the top of the analysts’ range of 1.2-2.0pp. Over the life of operations, our absolute value of PAF has increased slightly, to 25.2p (at our long-term gold price forecasts), or 14.0p at the current spot price of gold. In the meantime, Pan African remains consistently cheaper than its South African peers (on both consensus and our forecasts) in terms of yield (100% of instances considered), P/E ratio (100% of instances considered) and EV/EBITDA (at least 87.5% of instances considered).

Updated trading statement

Further to its trading statement on 26 November 2015, Pan African (PAF) has now released an updated trading statement under paragraph 3.4 (b) of the JSE listing requirements to the effect that, principally as a result of rand depreciation since Nov/Dec 2015, H115 headline EPS (HEPS) and EPS will be in the range 0.57-0.63p per share cf at least 0.51p/share (including an estimated 0.12p in exceptional hedging profits), indicated at the time of its November statement.

In addition to its earnings guidance, Pan African also announced production results for the Barberton and Evander complexes, as well for as Phoenix Platinum.

Exhibit 1: H115 PAF guidance vs previous Edison forecast

Operation

PAF Feb 2016 guidance

Previous Edison forecast

Variance

Traditional

Tailings retreatment

Total

(oz)

(%)

Barberton (gold oz)

56,447

42,496

9,061

51,557

4,890

9.5

Evander (gold oz)

45,350

35,773

5,333

41,106

4,244

10.3

Phoenix (PGE oz)

4,493

8,044

N/A

8,044

-3,551

-44.1

Total precious metals

106,290

86,313

14,394

100,707

5,583

5.5

Source: Pan African, Edison Investment Research. Note: PGE = platinum group elements.

Given that there is relatively little scope for variance in actual vs expected output from its tailings retreatment operations (and certainly not of such an order of magnitude), the implication of these production figures must be that output from Barberton’s and Evander’s traditional (ostensibly underground) operations must have been similarly higher than expected (see below).

In the meantime (albeit our forecasts were probably overoptimistic in that they exceeded guidance and depended on a continuation of a very strong implied H215 performance), the production figures for Phoenix Platinum appear to indicate that it has nevertheless been negatively affected by International Ferro Metals’ (IFM) business rescue process. Phoenix Platinum is located on IFM’s property and a portion of the feedstock for its operation (recently c 20%) originated from tailings arising from IFM’s processing activities. It also sources electricity, water and certain other services from IFM. On 27 August 2015, IFM announced that, as a result of deteriorating business conditions, its South African subsidiary had entered a Business Rescue programme – a statutory means of enabling a financially distressed company to continue business under the supervision of a Business Rescue Practitioner, protected from its creditors – and that it would be ceasing mining activity in South Africa. At the time of its FY15 results in mid-September 2015, PAF’s management stated that it was "not in a position to fully assess the impact of the Business Rescue proceedings" on Phoenix Platinum. At the time, Phoenix was (among other initiatives) investigating the feasibility of sourcing material from its Elandskraal and Kroondal tailings dams to maintain production and to mitigate any shortfalls arising from IFM (note that on 29 June it signed an agreement to secure the PGE rights to the Elandskraal surface resource).However, assuming approximately stable throughput and grades, Phoenix’s H1 production result appears consistent with a plant recovery of 30% – implying that it is once again processing oxide, rather than sulphide, material. On a group level, however, the difference is not material to PAF, accounting for only £1.5m (or 4.3%) of attributable earnings on an annualised basis, or 0.08p/share of HEPS and EPS.

Note that, 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.

Implications of HEPS and EPS revisions

Before this month’s updated trading statement, we were forecasting underlying H116 HEPS and EPS (ie excluding hedging profits) of 0.44pp and H2 HEPS and EPS of 0.99p to give a total for the year of 1.43pp. Adjusting for the final ZARGBP, ZARUSD and GBPUSD forex rates alone increases these estimates to 0.47pp and 1.00pp, respectively.

In addition, ‘traditional’ Barberton output (ie excluding the Barberton Tailings Retreatment Project [BTRP]) of 47,386oz would suggest a mill head grade of 11.32g/t vs a prior expectation of 10.26g/t. Similarly, ‘traditional’ Evander output (ie excluding the ETRP) of 40,017oz would suggest a mill head grade of 6.35g/t vs a prior expectation (based on guidance at the time of FY15 results in August) of 5.68g/t – indicating a sharper recovery from the low grade cycle than anticipated. Adjusting for this updated production guidance alone would increase our HEPS and EPS forecasts to 0.67pp in H1 and 1.05pp in H2, to give a total of 1.72pp for the full year. Inasmuch as 0.67pp is in excess of PAF’s guidance however, this suggests that costs were also higher than expected – eg Evander ZAR2,380/t for underground ore (vs an estimated ZAR2,376/t in H215) and Barberton ZAR3,535/t (vs ZAR3,206/t prior Edison forecast) to give underlying HEPS and EPS of 0.48pp in H1 (as expected) and 1.01pp in H2, to give a total of 1.49pp for the full year.

Estimates for FY16 increase once again, to 1.92pp, once likely H216 forex rates of ZAR23.2764/GBP, ZAR16.1133/USD and USD1.4439/GBP are applied (see Exhibit 6).

Finally, investors should note that all of the above calculations are performed at an assumed H216 gold price of US$1,225/oz. A spot gold price of US$1,141/oz for H216, by contrast, would suggest underlying, full-year HEPS and EPS of 1.60pp. Alternatively, a spot gold price of US$1,174/oz for H216 would suggest underlying, full-year HEPS and EPS of 1.73pp (as shown below in Exhibit 2).

Exhibit 2: Pan African underlying P&L statement by half year (H114-H216e) actual and expected

£000s (unless otherwise indicated)

H114

H214

FY14

H115

H215

FY15

H116e

H216e (at US$1,174/oz)

FY16e

Precious metal sales

84,637

69,914

154,551

68,126

72,951

141,077

76,392

87,131

163,523

Realisation costs

(191)

(159)

(349)

(295)

(396)

(691)

(81)

(92)

(173)

Realisation costs (%)

0.23

0.23

0.23

0.43

0.54

0.49

0.11

0.11

0.11

On-mine revenue

84,447

69,755

154,202

67,831

72,555

140,386

76,311

87,038

163,350

Gold cost of production

(52,519)

(52,727)

(52,799)

(44,657)

Pt cost of production

(1,590)

(1,797)

(1,780)

(1,641)

Cost of production

(54,109)

(52,285)

(106,394)

(54,524)

(55,889)

(110,413)

(54,578)

(46,299)

(100,877)

Depreciation

(5,088)

(4,935)

(10,023)

(4,676)

(5,661)

(10,337)

(6,045)

(6,430)

(12,476)

Mining profit

25,249

12,535

37,784

8,631

11,005

19,636

15,688

34,310

49,997

Other income/(expenses)

(223)

(1,227)

(1,450)

523

(273)

250

Loss in associate

(89)

(84)

(173)

(128)

0

(128)

Loss on associate disposal

(140)

(140)

Impairment costs

0

(12)

(12)

(56)

(2)

(58)

Royalty costs

(1,747)

(272)

(2,019)

(795)

(852)

(1,647)

(2,162)

(2,466)

(4,629)

Net income before finance items

23,191

10,940

34,130

8,034

9,878

17,912

13,525

31,843

45,368

Finances income

381

306

687

321

28

349

Finance costs

(725)

(153)

(878)

(498)

(1,960)

(2,458)

Net finance income

(344)

153

(191)

(177)

(1,932)

(2,109)

(811)

(811)

(1,623)

Profit before taxation

22,847

11,093

33,939

7,857

7,946

15,803

12,714

31,032

43,746

Taxation

(5,537)

(1,618)

(7,155)

(2,310)

(1,823)

(4,133)

(3,527)

(8,608)

(12,134)

Marginal tax rate (%)

24

15

21

29

23

26

28

28

28

Deferred tax

 

 

Profit after taxation

17,310

9,475

26,785

5,548

6,122

11,670

9,187

22,424

31,611

EPS (p)

0.95

0.52

1.47

0.30

0.33

0.64

0.50

1.22

1.73

HEPS* (p)

0.95

0.52

1.47

0.31

0.33

0.65

0.50

1.22

1.73

Diluted EPS (p)

0.95

0.52

1.46

0.30

0.33

0.64

0.49

1.19

1.68

Diluted HEPS* (p)

0.95

0.52

1.46

0.31

0.33

0.65

0.49

1.19

1.68

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

According to Bloomberg (8 February 2016), the mean consensus EPS estimate for PAF for FY16 is 1.507pp, within a range 1.2-2.0pp. Note that our forecasts continue to exclude the Uitkomst colliery.

Valuation

Updating our long-term forecasts to reflect the above changes, our absolute value of PAF increases from 25.05p to 25.24p, based on the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of its mines’ operations (applying a 10% discount rate).

Exhibit 3: PAF estimated life of operations diluted EPS and (maximum potential) DPS

Source: Edison Investment Research, Pan African Resources

Note that the above profile assumes that the grade profile at Evander will increase to in excess of 7.00g/t from FY17. We assume gold prices of US$1,372/oz in FY17 and US$1,378/oz in FY18.

Sensitivities

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

If the gold price remains at US$1,091/oz in real terms, however, our absolute valuation of PAF reduces from 25.2p to 14.0p (all other things being equal), as shown in the chart below.

Exhibit 4: PAF estimated lifetime diluted EPS and (maximum potential) DPS at US$1,091/oz

Source: Edison Investment Research, Pan African Resources

In this case, we estimate that HEPS would average 1.79p/share in the period FY18-28 (vs 3.28pp at our long-term gold prices, above).

Relative valuation

Of as much significance as its absolute valuation is PAF’s relative valuation. In this case, PAF remains notably cheap (based on our updated estimates) when compared with its South African peers in Exhibit 5, below.

Exhibit 5: Comparative valuation of PAF with respect to South African peers

EV/EBITDA (x)

P/E (x)

Yield (%)

P/CF (x)

 

Yr 1

Yr 2

Yr 1

Yr 2

Yr 1

Yr 2

Yr 1

Yr 2

AngloGold Ashanti

6.0

5.3

101.3

15.2

0.0

0.0

5.0

4.2

Gold Fields

5.2

4.4

52.7

22.3

0.6

1.5

5.4

4.5

Sibanye

7.0

4.2

31.2

11.7

1.3

2.5

8.9

5.7

Harmony

5.5

3.4

28.6

8.4

0.0

1.7

5.3

3.5

Average

5.9

4.3

53.4

14.4

0.5

1.4

6.1

4.5

Pan African (Edison)

3.7

2.2

5.9

3.1

4.8

7.3

6.4

3.3

Pan African (consensus)

5.0

3.7

8.8

6.3

5.3

6.0

6.6

5.1

Source: Edison Investment Research, Bloomberg. Note: Priced at 9 February 2016.

Therefore, on both consensus and our forecasts, Pan African is consistently cheaper than its peers in terms of yield (100% of instances considered over the two years), P/E ratio (100% of instances considered) and EV/EBITDA (at least 87.5% of instances considered).

Financials

Pan African had £18.0m in net debt at 30 June 2015, which equated to a gearing (net debt/equity) ratio of 12.3% and a leverage (net debt/[net debt+equity]) ratio of 10.9%. Debt is financed via a ZAR800m revolving credit facility (£34.4m at current exchange rates), which can be expanded to ZAR1,100m (£47.3m). All other things being equal however, net debt is forecast to be ostensibly eradicated by June 2016, under the influence of the improved cash flows engendered by the improved operational performance described above, although before consideration relating to the acquisition of Uitkomst (assuming DMR approval) of ZAR200m (£8.6m at current exchange rates).


Exhibit 6: 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

166,982

202,119

Cost of sales

(25,164)

(28,505)

(40,554)

(45,345)

(46,123)

(71,181)

(106,394)

(110,413)

(100,877)

(97,338)

Gross profit

13,985

24,355

27,790

33,705

54,783

62,127

47,808

29,973

66,105

104,781

EBITDA

 

 

13,711

22,890

25,023

28,540

45,018

53,276

44,165

28,448

61,374

100,301

Operating profit (before GW and except.)

11,745

20,529

21,897

25,655

41,759

47,278

34,142

18,110

48,898

91,306

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

48,898

91,306

Net interest

200

807

594

762

516

197

(191)

(2,109)

(1,623)

62

Profit before tax (norm)

 

 

11,945

21,336

22,491

26,417

42,274

47,475

33,951

16,001

47,275

91,368

Profit before tax (FRS 3)

 

 

11,945

16,311

22,156

26,417

42,226

54,707

33,939

15,803

47,275

91,368

Tax

(4,367)

(8,219)

(7,656)

(9,248)

(12,985)

(12,133)

(7,155)

(4,133)

(12,134)

(25,781)

Profit after tax (norm)

7,579

13,117

14,835

17,169

29,290

35,342

26,796

11,868

35,141

65,587

Profit after tax (FRS 3)

7,579

8,091

14,500

17,169

29,242

42,574

26,785

11,670

35,141

65,587

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

1,832.1

1,832.1

EPS - normalised (p)

 

 

0.52

0.85

1.07

1.20

2.03

2.18

1.46

0.64

1.92

3.58

EPS - FRS 3 (p)

 

 

0.52

0.40

1.04

1.20

2.02

2.63

1.47

0.64

1.92

3.58

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

39.6

51.8

EBITDA margin (%)

35.0

43.3

36.6

36.1

44.6

40.0

28.6

20.3

36.8

49.6

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

30.0

38.8

32.0

32.5

41.4

35.5

22.1

12.9

29.3

45.2

BALANCE SHEET

Fixed assets

 

 

55,647

67,198

74,324

97,281

86,075

249,316

223,425

220,150

220,677

220,499

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

178,409

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

42,529

94,149

Stocks

378

358

1,126

1,457

1,869

6,596

5,341

3,503

5,572

6,744

Debtors

2,973

2,201

3,795

4,254

6,828

15,384

12,551

10,386

11,449

13,858

Cash

5,419

2,389

12,756

10,124

19,782

4,769

5,618

3,329

25,508

73,546

Current liabilities

 

 

(6,611)

(6,101)

(7,084)

(8,960)

(11,062)

(24,066)

(24,012)

(22,350)

(22,135)

(21,553)

Creditors

(6,521)

(6,080)

(7,084)

(8,960)

(11,062)

(23,202)

(19,257)

(17,301)

(17,086)

(16,505)

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)

(70,108)

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)

(53,795)

Net assets

 

 

50,369

56,360

73,487

90,746

102,626

172,208

159,396

147,167

172,423

222,986

CASH FLOW

Operating cash flow

 

 

12,762

25,420

25,207

31,968

49,092

61,618

45,996

25,959

54,452

96,137

Net Interest

200

807

594

762

516

314

(606)

(2,109)

(1,623)

62

Tax

(1,723)

(10,886)

(7,476)

(10,743)

(11,616)

(13,666)

(8,536)

(3,479)

(11,336)

(24,321)

Capex

(5,680)

(5,705)

(6,764)

(21,712)

(17,814)

(27,197)

(21,355)

(19,554)

(9,428)

(8,817)

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)

(9,886)

(15,023)

Net cash flow

6,571

(1,343)

11,609

(3,557)

11,471

(27,826)

1,164

(15,184)

22,179

48,038

Opening net debt/(cash)

 

 

(136)

(5,313)

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

(4,146)

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

(4,146)

(52,185)

Source: Company sources, Edison Investment Research

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