H120 confirms FY20 forecasts

Pan African Resources 2 March 2020 Update
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Pan African Resources

H120 confirms FY20 forecasts

H119 results

Metals & mining

2 March 2020

Price

11.66p

Market cap

£261m

ZAR19.2691/£, ZAR14.8592/US$, US$1.2968/£

Net debt (US$m) at end-December 2019 excluding estimated ZAR71.7m (US$4.8m) of MC Mining shares (formerly Coal of Africa)

130.7

Shares in issue*

2,234.7m

*Effective 1,928.3m post-consolidation

Free float

86%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.4

16.0

23.0

Rel (local)

16.9

29.7

30.2

52-week high/low

14.5p

8.7p

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

FY20 operational update

July 2020

FY20 results

September 2020

AGM

November 2020

Dividend payment date

December 2020

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Pan African’s (PAF) H120 results were released on 18 February in the context of known production of 92,941oz (from its 24 January operational update) and a strongly indicated EPS range (via its 31 January trading statement). Within this context, PAF reported a near doubling in adjusted EBITDA and a 126.0% increase in pre-tax profit at the same time as a sharp (-63.9%) decline in capex relative to H119, resulting in the first decline in the group’s net debt since the development of Elikhulu, despite having to manage intermittent community unrest, Eskom load-shedding and challenging geology at Barberton. More than anything however, normalised headline EPS of 1.18c/share have caused us to upgrade our full-year forecasts for FY20 to in excess of 3.0c/share (cf a consensus of 2.0c/share, within a range 1.2–2.7c/share), putting the shares on a 5.0x prospective P/E multiple (cf an historic range of 6.7–14.8x since 2010).

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/18

145.8

29.3

1.31

0.00

11.5

N/A

06/19

218.8

37.1

1.64

0.15

9.2

1.0

06/20e

284.3

68.9

3.02

0.86

5.0

5.8

06/21e

308.4

118.5

5.32

2.03

2.8

13.5

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

More growth and efficiencies in H220

Surface sources accounted for 48% of gold produced by Pan African during the half-year period and 62% of adjusted EBITDA. Together with excess plant capacity, this renders PAF less exposed to Eskom load-shedding than many of its South African peers, which employ large refrigeration plants. All-in sustaining costs (AISC) in the period were US$1,113/oz, although this would have been lower (US$975/oz) if PAF’s higher-cost Consort and Evander underground operation were excluded and a mere US$769/oz if only its surface operations were considered. With a suite of development projects and efficiency initiatives in the pipeline, PAF has a target AISC of less than US$1,000/oz for the full-year and we believe a good chance of beating its full-year production guidance of 185,000oz (see Exhibit 6 on page 8).

Valuation: 28.28c (21.81p) per share plus upside

In the aftermath of its interim results, our absolute valuation of PAF has increased materially to 28.28c/share (cf 24.07c previously). To this must then be added the value of c 19.2m underground Witwatersrand ounces, which could lie anywhere in the range of 0.22–5.24c per share, depending on market conditions. In the meantime, if PAF’s historical average price to normalised EPS ratio of 9.6x in the period FY10–19 is applied to our respective forecasts, its share price could be expected to be 22.3p in FY20, rising to 39.2p in FY21. Pan African also remains cheaper than its South African- and London-listed gold mining peers on at least 73% of common valuation measures regardless of whether Edison or consensus forecasts are used. Finally, based on our assumptions, its dividend yield in FY20 should be well within the top ten of the 52 precious metals companies expected to pay a dividend over the next 12 months (see Exhibit 11 on page 11), with the potential to rise again in FY21.

H120 production and highlights

Pan African’s results for the half year to end-December 2019 were reported in the context of known production (from the group’s operational update of 24 January), and indicated EPS and headline earnings per share (HEPS) ranges (from its trading statement of 31 January).

Exhibit 1: PAF group-wide production, actual and forecast, FY15–H120 (oz)

Operation

FY15

FY16

FY17

H118

H218

FY18

H119

H219

FY19

H120

H120/H119

(%)

H120/H219

(%)

Barberton UG

81,493

84,690

71,763

32,159

40,966

73,125

38,550

36,806

75,356

36,737

-4.7

-0.2

BTRP

24,283

28,591

26,745

8,452

9,052

17,504

12,006

12,001

24,007

10,619

-11.6

-11.5

Barberton

105,776

113,281

98,508

40,611

50,018

90,629

50,556

48,807

99,363

47,356

-6.3

-3.0

Evander UG

63,558

73,496

43,304

32,734

15,831

48,565

8,821

8,058

16,879

11,553

+31.0

+43.4

ETRP

6,523

18,151

29,473

11,937

9,313

21,250

6,345

3,654

9,999

4,731

-25.4

+29.5

Evander

70,081

91,647

72,777

44,671

25,144

69,815

15,166

11,712

26,878

16,284

+7.4

+39.0

Elikhulu

0

0

0

0

0

0

15,292

30,909

46,201

29,301

+91.6

-5.2

Total

175,857

204,928

173,285

85,282

75,139

160,444

81,014

91,428

172,442

92,941

+14.7

+1.7

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

While 14.7% higher than in the prior year period, production in H120 was comparable to production in H219, despite challenges including electricity supply constraints and illegal mining activities at its operations. Otherwise, highlights for H120 compared with H119 were as follows:

A 19.8% increase in the US dollar price of gold, from US$1,222/oz in H119 to US$1,464/oz in H120.

A 3.6% decline in the US$/ZAR exchange rate, from ZAR14.19/US$ to ZAR14.70/US$.

A consequent 24.1% increase in the rand price of gold, from ZAR557,446/kg in H119 to ZAR692,045/kg in H120.

A 7.5% increase in cash costs in US dollar terms, from US$888/oz to US$955/oz.

An almost doubling of adjusted EBITDA, from ZAR389.8m to ZAR712.1m.

A 126.0% increase in pre-tax profit, from US$12.0m to US$27.2m.

A sharp decline in capex, from ZAR585.8m (US$41.3m) in H119 to ZAR211.5m (US$14.4m) in H120. Note that this compares with an equivalent number of ZAR216.1m (US$15.2m) in H219.

Zero fatalities in H120, as was also the case in H119 as well as both FY19 and FY18, while the group’s lost-time injury frequency rate improved compared to H119, to 1.69 per million man hours (cf 1.62 in FY19, 3.73 in FY18, 1.77 in H119 and 3.79 in H118), although its reportable injury frequency rate regressed to 0.85 per million man hours (cf 0.51 in FY19, 1.08 in FY18, 0.58 in H119 and 1.17 in H118). The regression in the group’s reportable injury frequency rate could be entirely attributed to an increase in the rate at Evander Mines (excluding Elikhulu) from 2.41 to 3.71. Barberton maintained its excellent reportable injury frequency rate of 0.00 in H120 (cf 0.26 in H119).

As a result, Pan African has reconfirmed its production guidance for the year of 185,000oz for FY20, including 100,000oz from the Barberton complex (underground plus BTRP) – implying, inter alia, production from Barberton underground of c 42,644oz in H220.


H120 vs H119 and H219 and FY20 by half-year

The table below presents PAF’s H120 results compared with both H119 and H219 (implied) and also Edison’s updated expectations for FY20 in the light of the interim results reported:

Exhibit 2: PAF underlying P&L statement by half-year (H118–H219e) actual and expected

US$000s
(unless otherwise indicated)

FY18

FY18
(underlying)

FY18
(as reported)

H119

H119
(restated)

H219
(implied)

FY19

H120

H220e

FY20e

On-mine revenue

207,692

143,445

143,445

96,699

97,531

121,287

218,818

132,849

151,432

284,281

Cost of production

(186,950)

(104,654)

(104,654)

(70,162)

(70,847)

(82,133)

(152,980)

(86,501)

(91,233)

(177,735)

Depreciation

(14,816)

(6,600)

(6,600)

(6,861)

(6,840)

(9,388)

(16,228)

(10,526)

(11,980)

(22,506)

Mining profit

5,926

32,191

32,191

19,676

19,844

29,767

49,611

35,821

48,219

84,040

Other income/(expenses)

(21,146)

(5,657)

(5,657)

(1,812)

(2,077)

(5,181)

(7,258)

(962)

(2,398)

(3,359)

Loss in associate etc

0

***0

***0

0

0

0

0

0

0

0

Loss on disposals

(404)

0

0

0

0

0

0

0

0

0

Impairments

(143,175)

Excl.

(11,045)

0

0

17,854

17,854

109

0

109

Royalty costs

(808)

(539)

(539)

(518)

(474)

120

(354)

(208)

(397)

(606)

Net income before finance

(159,608)

25,995

14,951

17,346

17,293

42,559

59,852

34,761

45,424

80,184

Finances income

2,694

2,020

2,020

388

443

407

850

207

Finance costs

(4,579)

(4,310)

(4,310)

(5,696)

(5,699)

(7,343)

(13,042)

(7,760)

Net finance income

(1,886)

(2,290)

(2,290)

(5,307)

(5,256)

(6,936)

(12,192)

(7,553)

(6,958)

(14,511)

Profit before taxation

(161,493)

23,705

12,661

12,039

12,037

35,623

47,660

27,208

38,465

65,673

Taxation

35,828

2,828

2,828

(2,330)

(2,325)

(5,850)

(8,174)

(5,303)

(5,348)

(10,651)

Marginal tax rate (%)

22.2

(11.9)

(22.3)

19.4

19.3

16.4

17.2

19.5

13.9

16.2

PAT (continuing ops)

(125,666)

26,399

15,489

9,709

9,712

29,774

39,486

21,906

33,117

55,022

Loss from discontinued ops

N/A

(9,024)

(141,155)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Profit after tax

(125,666)

17,375

(125,666)

9,709

9,712

29,774

39,486

21,906

33,117

55,022

Headline earnings

17,914

17,914

17,914

9,709

9,712

14,586

24,298

21,742

33,117

54,859

EPS (c)

(6.94)

0.96

(6.94)

0.50

0.50

1.54

2.05

1.14

1.72

2.85

HEPS** (c)

0.98

0.98

0.98

0.50

0.50

0.76

1.26

1.13

1.72

2.84

Normalised HEPS (c)

2.16

1.31

1.31

0.60

0.61

1.03

1.64

1.18

1.84

3.02

EPS from continuing ops (c)

1.45

0.50

0.50

1.54

2.05

1.14

1.72

2.85

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

As a group, Pan African sold 2,339oz less than it produced in H120. Should this be sold in H220, it would add c US$3.7m to revenue. Note that Edison has included a notional loss of US$2.4m in H220 from PAF’s derivative contracts (and in particular its gold loan – see below) within ‘other income/(expenses). Otherwise, the principal operational assumptions on which the above forecasts are based are set out in the ‘H120 analysis’, below.

H120 costs of production

Relative to the group’s 14.7% increase in gold production and its 32.8% increase in tonnes milled and processed (H120 vs H119), the group’s cost of production increased by 26.5% in rand terms and 22.1% in US dollar terms. Within this:

Salaries & wages (27.6% of the total cost of production) increased by 9.0% year-on-year in rand terms and 5.3% in US dollar terms, albeit this included a full period of Elikhulu salary costs.

Mining & processing (37.3% of the total) increased by 11.3% in rand terms and 7.7% in US dollar terms as a direct result of toll treating additional surface material in order to maximise available plant capacity.

Electricity (15.9% of the total) increased by 67.9% in rand terms owing to a 13.9% regulatory increase in prices, a full contribution from Elikhulu compared with the prior year period and cost increases at Evander underground. In US dollar terms, aggregate electricity costs rose 62.4%.

Engineering & technical costs (10.3% of the total) increased by 129.9% in rand terms and 122.5% in US dollar terms owing to post-commissioning optimisation work at Elikhulu.

Security costs (3.9% of the total) increased by 6.6% in rand terms and 3.0% in US dollar terms, owing to the modernisation of PAF’s security apparatus, an increased focus on combating illegal mining activities, the implementation of intensive targeted crime combating operations and one-off costs incurred during instances of community unrest.

H120 analysis

In the wake of the closure of large-scale underground mining operations at Evander in May 2018, Pan African’s two most important producing assets are Barberton underground (41% of production in H120) and Elikhulu (32%).

Barberton underground

An analysis of Barberton underground’s H120 performance plus our expectations for FY20, by half-year, is provided in Exhibit 3, below. Of note is the fact that the operation recorded its highest level of tonnes milled during a six-month period since at least H112. In addition, it recorded its highest adjusted EBITDA number since H117 and easily covered capex of ZAR107.0m, despite facing challenging geological conditions at Fairview and the need to put enhanced security initiatives in place in order to curtail illegal mining activities.

Exhibit 3: Barberton underground operational statistics, H116-H220e

H116

H216

H117

H217

H118

H218

H119

H219

H120e

H120

H220e

Tonnes milled underground (t)

133,890

124,515

123,168

123,747

124,969

112,862

127,858

119,777

126,195

117,545

126,195

Head grade underground (g/t)

10.90

11.11

9.40

10.20

8.70

12.07

9.60

9.88

10.26

*9.70

10.26

Underground gold contained (oz)

46,921

44,467

37,224

40,574

34,956

43,803

39,463

38,052

41,626

36,648

41,626

Tonnes milled surface (t)

5,540

4,438

0

0

0

0

12,471

33,158

38,879

47,231

38,879

Head grade surface (g/t)

1.10

1.32

0.00

0.00

0.00

0.00

2.30

1.62

2.16

*2.16

2.16

Surface gold contained (oz)

196

189

0

0

0

0

922

1,729

2,703

3,283

2,703

Tons milled (t)

139,430

128,953

123,168

123,747

124,969

112,862

140,329

152,935

165,074

164,776

165,074

Head grade (g/t)

10.60

10.77

9.40

10.20

8.70

12.07

8.95

8.09

8.35

7.54

8.35

Contained gold (oz)

47,117

44,656

37,224

40,574

34,956

43,803

40,386

39,780

44,329

39,932

44,329

Recovery (%)

92.0

92.0

93.0

91.9

93.0

93.5

94.0

92.5

92.5

92.0

92.5

Production underground (oz)

43,487

40,941

34,471

37,292

32,159

40,966

37,735

35,129

41,000

36,737

41,000

Production calcine dumps/surface ops (oz)

130

132

0

0

0

0

815

1,677

0

0

Total production (oz)

43,617

41,073

34,471

37,292

32,159

40,966

38,550

36,806

41,000

36,737

41,000

Recovered grade (g/t)

9.73

9.91

8.70

9.37

8.00

11.29

8.54

7.49

7.73

6.93

7.73

Gold sold (oz)

43,617

41,073

34,471

37,292

32,159

40,966

37,829

37,527

41,000

36,737

41,000

Average spot price (US$/oz)

1,113

1,221

1,268

1,239

1,288

1,317

1,220

1,306

1,482

1,477

1,565

Average spot price (ZAR/kg)

486,567

605,265

570,251

526,341

554,361

521,029

556,770

596,180

700,417

698,031

743,438

Total cash cost (US$/oz)

681

708

967

940

1,145

981

996

1,097

1,045

1,159

1,201

Total cash cost (ZAR/kg)

297,877

351,358

434,999

399,081

492,826

390,220

454,164

500,214

494,183

547,594

570,396

Total cash cost (US$/t)

213.09

225.38

270.74

283.19

294.62

356.03

268.42

269.10

259.62

258.39

298.18

Total cash cost (ZAR/t)

2,898.00

3,480.81

3,787.00

3,740.66

3,945.00

4,405.46

3,860.00

3,817.67

3,817.67

3,797.00

4,406.44

Implied revenue (US$000)

48,546

50,288

43,709

46,640

41,421

53,057

46,151

49,325

60,742

54,261

64,155

Implied revenue (ZAR000)

660,091

774,505

611,400

616,296

554,499

660,698

655,098

699,398

893,195

797,598

948,056

Implied revenue (£000)

31,671

34,950

34,207

37,008

31,422

38,722

35,652

38,120

48,985

43,061

49,391

Implied cash costs (US$000)

29,711

29,064

33,347

35,043

36,819

40,182

37,667

41,155

42,856

42,576

49,222

Implied cash costs (ZAR000)

404,068

448,861

466,437

462,895

493,003

497,209

534,400

583,855

630,198

625,654

727,388

Implied cash costs (£000)

19,398

20,221

26,091

27,814

27,900

29,269

29,102

31,803

34,566

33,796

37,899

Adjusted EBITDA (ZAR000)

180,000

242,400

240,300

168,300

72,300

174,700

137,200

140,700

205,100

Source: Pan African Resources, Edison Investment Research. Note: *Estimated.

Our forecasts for FY20 assume that underground operations at Barberton return to their previous levels in H220 in terms of both tonnes milled and head grade (Exhibit 3), albeit this will leave output for the full year of 77,737oz probably causing it to just miss its guidance of 100,000oz for the complex for the year (including 20,619oz from the BTRP). Readers should note that our forecasts for Barberton for H220 are inherently conservative in terms of costs – especially given our assumption of continued production from surface sources (which tends to depress average ZAR costs per tonne milled) and also in light of the costs achieved in H119, H219 and H120. Underground operations at Barberton will also benefit from the establishment of the 257 platform, thereby allowing three platforms to cycle production on the high-grade MRC orebody.

Elikhulu and other tailings operations

Exhibit 4 similarly provides our analysis of Elikhulu’s H120 performance. Notwithstanding the fact that it produced c 32% of Pan African’s gold during the period under review, it accounted for 47% of group adjusted EBITDA of ZAR712.1m and was the largest single contributor to the same, while simultaneously accounting for only a very small fraction (7%, or ZAR13.8m) of group capital expenditure. Of note was the continued high level of metallurgical recoveries in H120, despite operations being severely affected by heavy rains (eg 36cm/14” in two days) in December. Nevertheless, a new satellite pump station was successfully commissioned at the end of 2019, which is expected to increase plant feed grades and plant feed rates for the remainder of the financial year. We therefore expect H220 to be characterised by full-capacity throughput as it (re-)mines through a high-grade area of its dumps to result in full year production of 60,468oz (65,199oz in conjunction with surface material treated via the former ETRP infrastructure). In this context, it is notable that PAF reported that January had been a month of record production at Elikhulu, with output of almost 180kg (5,787oz) of gold which, pro-rata, would imply H220 production from Elikhulu alone of 34,723oz. As such, our forecasts for production (see Exhibits 4 and 6) may still prove conservative. In addition, our forecasts for H220 are conservative inasmuch as they assume a decline to life-of-mine metallurgical recoveries, whereas higher metallurgical recoveries are typically coincident with higher grades.

Exhibit 4: Elikhulu operational statistics, H119–H220e

H119

H219

H120e

H120

H220e

Tonnes processed tailings (t)

3,534,278

7,313,931

7,200,000

6,211,028

7,200,000

Head grade tailings (g/t)

0.30

0.26

0.28

*0.28

0.28

Tailings gold contained (oz)

34,089

60,199

65,243

56,348

65,243

Recovery (%)

44.0

51.3

47.8

52.0

47.8

Production tailings (oz)

15,292

30,909

31,167

29,301

31,167

Total production (oz)

15,292

30,909

31,167

29,301

31,167

Recovered grade (g/t)

0.13

0.13

0.13

0.15

0.13

Gold sold (oz)

15,292

30,173

31,167

29,301

31,167

Average spot price (US$/oz)

1,216

1,306

1,482

1,451

1,565

Average spot price (ZAR/kg)

563,250

596,180

700,417

685,680

743,438

Total cash cost (US$/oz)

517

575

518

621

516

Total cash cost (ZAR/kg)

239,639

262,650

245,104

293,608

245,155

Total cash cost (US$/t)

2.24

2.43

2.24

2.93

2.23

Total cash cost (ZAR/t)

32.00

33.70

33.00

43.00

33.01

Implied revenue (US$000)

18,595

39,009

46,173

42,516

48,768

Implied revenue (ZAR000)

267,899

554,999

678,973

624,898

720,677

Implied revenue (£000)

14,365

30,145

37,237

33,740

37,545

Implied cash costs (US$000)

7,912

17,742

16,158

18,209

16,082

Implied cash costs (ZAR000)

114,000

246,492

237,600

267,600

237,650

Implied cash costs (£000)

6,208

13,421

13,032

14,455

12,382

Adjusted EBITDA (ZAR000)

145,100

296,300

333,100

Source: Pan African Resources, Edison Investment Research. Note: *Estimate.

Apart from Barberton and Elikhulu, the BTRP (11% of production in H120) performed closely in line with our expectations, guidance and the mine plan. At the same time, 123.9kt of material from surface feedstocks was treated through ETRP infrastructure, which, at an estimated head grade of 2.25g/t and after metallurgical recovery of 53.0%, resulted in the production of 4,731oz gold in H120 – demonstrating, among other things, the flexibility that Pan African has developed in processing such feedstocks (from either internal or external sources) now that the ETRP’s primary material stream has been diverted through the expanded Elikhulu plant.

Evander underground

Also at Evander, access development at the 8 Shaft Pillar has now been completed with the project producing its first gold in August 2019. To date, the 8 Shaft Pillar is reported to have produced 2,335oz gold, albeit the revenue and costs associated with the project are being capitalised until steady-state production is achieved next month.

By the end of FY20 all nine underground stoping crews will have been migrated to the 8 Shaft Pillar and PAF expects the project to contribute, on average, 30,000oz of production per annum to the group over the next three financial years at materially higher margins (see H220e column in Exhibit 5, below, which demonstrates the first effect of this) than the current remnant underground mining and vamping operations.

Exhibit 5: Evander operational statistics, H119-H220e

H119

H219

H120

H220e

Tonnes milled (t)

37,347

26,624

30,044

69,000

Head grade (g/t)

7.82

10.01

*12.59

7.13

Contained gold (oz)

9,384

8,572

12,161

15,816

Recovery (%)

94

94

95

98

Underground production (oz)

8,821

8,058

11,553

15,500

Production from surface sources (oz)

0

0

0

0

Total production (oz)

8,821

8,058

11,553

15,500

Recovered grade (g/t)

7.35

9.41

11.96

6.99

Gold sold (oz)

8,821

8,058

9,214

15,500

Average spot price (US$/oz)

1,214

1,306

1,451

1,565

Average spot price (ZAR/kg)

565,367

596,180

685,658

743,438

Total cash cost (US$/oz)

1,711

1,814

1,420

1,200

Total cash cost (ZAR/kg)

780,357

828,170

671,299

570,000

Total cash cost (US$/t)

404.07

549.62

546.00

269.50

Total cash cost (ZAR/t)

5,733

7,796

6,404

3,983

Implied revenue (US$000)

10,709

10,525

13,370

24,254

Implied revenue (ZAR000)

155,115

146,084

196,499

358,412

Implied revenue (£000)

8,272

8,134

10,610

18,672

Implied cash costs (US$000)

15,091

14,633

16,404

18,595

Implied cash costs (ZAR000)

214,100

207,564

192,402

274,797

Implied cash costs (£000)

11,659

11,301

10,393

14,318

Adjusted EBITDA (ZAR000)

-58,985

26,085

64,900

Source: Pan African Resources, Edison Investment Research. Note: *Estimate.

A summary of the results of the Evander 8 Shaft Pillar project feasibility study are provided below:

initial capex of ZAR40.0m;

total capex of ZAR70.0m;

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

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

a three-year life-of-mine; and

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

Critical to the success of the project is the requirement to de-stress the orebody while mining is underway, to which end Pan African has already commissioned a grout plant at surface with the ability to pump a mixture of concrete and waste rock underground to selectively support areas of the orebody. At a recent site visit to the 8 Shaft Pillar project, attended by Edison, the short distance between the shaft bottom and the stoping areas was immediately apparent (ie 10 minutes – in sharp contrast to PAF's previous operations at 24 Level at 8 Shaft, which had an approximate 100 minute commute to the working faces), which will allow miners increased face time. In addition, the working faces are close to an intake airway (negating the need for refrigeration) and the ore will only need to be handled about four times before reaching surface (cf 22 times previously) and will require only c 4km of tramming (cf c 14km previously). This last point is significant in that Evander has a high percentage of fine gold in its ore and, historically, it has been estimated that up to 1% of this gold is lost per kilometre of distance trammed. This combination of fewer transport points and systems is therefore anticipated to have a materially beneficial effect on the overall operation’s mine call factor. The other thing that was very apparent during the site visit was the development in technology around pillar mining and especially the use of pseudo-packs and rapid reaction pit props (rather than the matt packs of old) for 'intelligent' rather than passive ground support – thereby materially de-risking the operation from both an environmental, social and governance (ESG) and a financial perspective.

FY20

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

Exhibit 6: Edison production forecasts for PAF in FY20 vs official guidance

Production asset

Guidance

(oz)

Edison forecast

(oz)

Variance

(%)

Previous Edison forecast (oz)

Change

(%)

BTRP

20,000

20,619

+3.1

20,000

+3.1

Elikhulu & ETRP infrastructure

65,000

65,199

+0.3

62,333

+4.6

Barberton underground

80,000

77,737

-2.8

82,000

-5.2

Evander underground & 8 Shaft pillar

20,000

27,053

+35.3

20,667

+30.9

Total

185,000

190,608

+3.0

185,000

+3.0

Source: Pan African Resources, Edison Investment Research

Gold price

Our gold price forecast for H1 CY20 (or H220) is US$1,565/oz. Our longer-term gold price forecasts were set out in our recent report, Portents of economic weakness: Gold – doves in the ascendant, published on 14 August 2019, and are summarised in the table below:

Exhibit 7: Updated Edison gold price forecasts*

Calendar year

H1 CY20

CY20

CY21

CY22

CY23

Real gold price forecast (US$/oz)

1,565

1,572

1,395

1,387

1,350

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

Debt service and covenant compliance guarantees

Pan African has two forms of relatively modest hedging contracts currently in place solely for the purposes of guaranteeing debt serviceability and covenant compliance. The first is a gold loan of 20,000oz that locks in a gold price of approximately ZAR633,347/kg (US$1,326/oz at current forex rates), representing approximately 10% of the group’s anticipated production for the 2020 financial year. The second is a series of zero cost collar contracts over 50,460oz gold in H220 that cap the likely gold price received by Pan African at ZAR836,000/kg (c US$1,750/oz), but also floor it at ZAR655,000/kg (c US$1,371/oz).

Given our current gold price expectations (see Exhibit 7), we do not expect the call options written at ZAR836,000/kg to be exercised in H220. However, we estimate that the gold loan will result in a notional loss of US$2.4m in H220, which we have included in ‘other income/(expenses)’ in our forecasts (NB Pan African reported ZAR29m, or US$2.0m, in realised hedging losses in H120).

Updated valuation

Updating our long-term forecasts to reflect interim results, the gold price and prevailing forex rates in particular, our normalised headline earnings per share (HEPS) forecast remains substantially unchanged at 3.02c/share (cf 2.46c/share previously). This compares with a consensus EPS forecast of 2.0c/share, within a range 1.2–2.7c/share (source: Refinitiv, 2 March 2020). Our forecasts for FY21 remain substantially unchanged, based on production of 216.3koz, including 94.6koz for Barberton underground and 35.7koz from the Evander 8 Shaft pillar project. In this case, our normalised HEPS forecast of 5.32 US cents and compares with a consensus of 3.3c, within a range 2.9–3.8c (source: Refinitiv, 2 March 2020).

As a result, our absolute value of PAF (based on its existing four producing assets only) has also risen, to 22.43c/share (cf 17.89c/share previously), based on the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of its mining operations (applying a 10% discount rate):

Exhibit 8: PAF estimated life of operations’ diluted EPS and (maximum potential) DPS*

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

Note that, all other things being equal, this valuation may be expected to rise to 24.69c/share in FY23 (the ‘discounted dividend valuation line’ in Exhibit 8, above).

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

Exhibit 9: PAF absolute valuation summary

Project

Current valuation
(cents/share)

Previous valuation
(cents/share)

Existing producing assets (including Evander 8 Shaft pillar project)

22.43

17.89

Egoli

4.67

4.64

Fairview Sub-Vertical Shaft Project

0.63

0.63

Royal Sheba (resource-based valuation)

0.40

0.46

MC Mining shares

0.15

0.30

FY19 dividend

0.00 

0.15

Sub-total

28.28

24.07

EGM underground resource

0.22-5.24

0.22–5.24

Total

28.50-33.52

24.29–29.31

Source: Edison Investment Research

Relative to our previous valuation in October, the decline in the value of PAF’s shareholding of 13.1m MC Mining shares reflects merely the fall in the latter’s share price from ZAR6.28/share to ZAR3.20/share currently (adjusted into US dollars at the appropriate FX rate).

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 10, below, depicts PAF’s average share price in each of its financial years from FY10 to FY19, and compares this with normalised HEPS in the same year. For FY20 to FY21, the current share price (of 11.66p) is compared with Edison’s forecast normalised HEPS for FY20 to FY21. As is apparent from the graph, PAF’s price to normalised HEPS ratio of 5.0x for FY20 (based on our forecasts – see Exhibit 16, below) is already below the bottom of its recent historical range of 6.7–14.8x for the period from FY10–19. Moreover, assuming it meets Edison’s (and consensus) earnings expectations, this measure of value is set to fall further to a new record low of just 2.8x for FY21 (see below):

Exhibit 10: PAF historical price to normalised HEPS** ratio, FY10–FY21e

Source: Edison Investment Research. Note: *Completed historical years calculated with respect to average share price within the year shown and normalised HEPS; zero normalisation assumed before 2016; **HEPS shown in pence prior to 2018 and US cents thereafter.

Stated alternatively, if PAF’s average contemporary price to normalised EPS ratio of 9.6x in the period FY10–19 is deemed ‘correct’ then, given our normalised earnings forecasts, its share price might be expected to be 22.3p in FY20 and 39.2p in FY20.

Dividend

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

This duly occurred when the board recommended a final dividend of ZAR50m, or approximately US$3.4m for FY19, which equated to ZAR0.022375 or c 0.11725p or 0.15179 US cents per share, which it described as a ‘signal’ of its intent to resume more meaningful distributions to shareholders in the future. As pre-financing cash flows increase, however, at the same time as capex reduces, we believe that there will be ample scope to increase the dividend in future years, notwithstanding the group’s debt repayment schedule. In the first instance, we estimate that this could include a dividend of as much as 0.86c/share in FY20 (cf 0.46c/share previously). If this proves to be correct, then Pan African will once again have a dividend yield well inside the top ten of the 52 precious metals companies paying dividends to shareholders over the course of the next 12 months (based on either Edison or consensus market forecasts).

Exhibit 11: Global precious metal mining companies ranked by forecast dividend yield, PAF highlighted (%)

Source: Refinitiv for peers and PAF (consensus), Edison Investment Research for PAF FY20. Note: Consensus data for peers priced 19 February 2020.

Relative peer group valuation

In the meantime, over the next two years PAF remains cheaper than its South Africa- and London-listed gold mining peers on at least 96% of common valuation measures (29 out of 30 individual measures in the table below) on the basis of Edison’s forecasts and at least 73% of the same measures on the basis of consensus forecasts.

Exhibit 12: Comparative valuation of PAF with South African and London peers

 

EV/EBITDA (x)

P/E (x)

Yield (%)

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

AngloGold Ashanti

6.3

4.5

17.6

8.8

0.7

1.3

Gold Fields

4.3

4.1

12.5

9.8

2.4

2.4

Sibanye

8.9

3.0

25.4

4.7

0.0

5.7

Harmony

3.5

3.1

7.8

6.2

1.1

1.0

Centamin

6.2

4.7

26.4

16.4

4.9

4.4

Average (excluding PAF)

5.8

3.9

17.9

9.2

1.8

3.0

PAF (Edison)

4.0

2.9

5.0

2.8

5.8

13.5

PAF (consensus)

3.9

3.2

5.6

4.9

1.8

4.4

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 19 February 2020.

Financials

Including its liabilities to non-financial institutions, PAF had net debt of US$130.7m on its balance sheet as at 31 December 2019, compared to US$132.5m as at 30 June 2019. This compares with historical net debt numbers of US$133.2m/£102.7m as at 31 December 2018 (restated), £91.0m/US$120.0m as at June 2018, £42.2m as at December 2017 and £7.0m/US$9.1m as at June 2017. As such, net debt equated to a gearing (net debt/equity) ratio of 64.8% as at end-H120 (cf 72.2% as at end-FY19, 86.7% as at H119 (restated) and 78.6% as at end-FY18) and a leverage (net debt/(net debt + equity)) ratio of 39.3% (cf 41.9% as at FY19, 46.4% as at H119 (restated) and 44.0% as at end-FY18).

While the decline in net debt on this basis may seem modest, it was adversely affected by two one-off movements in working capital, relating to payables and inventories, which had an aggregate (negative) effect on cash flows in the sum of US$8.7m. According to our calculations, the amount of inventory on PAF’s balance sheet has expanded to 11.1 days (H120 annualised basis), while the amount of payables has declined to 62.0 days (similar basis). As such, the number of inventory days is now almost double its historical average of 6.3 since 2010, while its payable days are 9.1% below their historical average of 68.2, suggesting that, while there is only modest scope for payables to increase in the future, there is considerable scope to bear down on inventory levels. We calculate that a return to historical averages for both measures would result in a future one-off net benefit to PAF’s cash flow in the order of US$6.4m.

Excluding non-financial institutions, Pan African had net debt of US$105.7m, cf US$128.4m as at end-June.

As of the current time, the most intense phase of capex relating to Elikhulu has now been completed and we expect group capex to more than halve, from ZAR802.0m in FY19 to ZAR364.6m in FY20 (NB capex has already more than halved from ZAR585.9m in H119 to ZAR211.5m in H120), notwithstanding the development of the Evander 8 Shaft pillar project. As a result, henceforward, we expect Pan African to become strongly cash-generative, such that it will pay down net debt at a rate in excess of US$25m per annum. Consequently, we now predict that Pan African will be net debt free in FY22, even allowing for dividend distributions at the levels predicted (above):

Exhibit 13: PAF previous estimated funding requirement, FY17 to FY24e (US$000)

Exhibit 14: PAF current estimated funding requirement, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources

Source: Edison Investment Research, Pan African Resources

Exhibit 13: PAF previous estimated funding requirement, FY17 to FY24e (US$000)

Source: Edison Investment Research, Pan African Resources

Exhibit 14: PAF current estimated funding requirement, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources

Debt is principally financed via a ZAR0.7bn (US$49.7m) term loan facility plus a similar-sized revolving credit facility and a ZAR121.5m general banking facility. As at 31 December 2019, approximately ZAR424.5m (US$30.1m) remained available to Pan African under its banking agreements.

Principal on the Elikhulu facility is payable in equal instalments until maturity in June 2024, while the revolving credit facility (RCF) itself has been restructured to extend its maturity from mid-2020 previously to at least beyond mid-2024 currently. The group’s RCF debt covenants and their actual recorded levels within recent history are as follows:

Exhibit 15: PAF group debt covenants

Measurement

Constraint

H120

FY19
(actual)

H119
(actual)

FY18*
(actual)

H118
(actual)

FY17
(restated)

Net debt:equity

Must be less than 1:1

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 Dec ’22

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 Dec ’22

5.8

4.1

3.64

4.61

4.62

19.32

Debt service cover ratio

Must be greater than 1.3:1

3.0

1.4

2.85

3.84

1.85

9.11

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

Potential future organic growth

Pan African has five potential organic growth projects at various stages of development, namely the Fairview sub-vertical shaft project (adding 7–10koz to production pa), the Royal Sheba project (c 30koz pa), Egoli (optimised 34% IRR and ZAR1.04bn pre-tax NPV), the 8 Shaft pillar project (US$25.8m pre-tax NPV) and the extraction of the Prince Consort shaft pillar (3,900-7,800oz pa). Two – the 8 Shaft pillar project and the Fairview sub-vertical shaft – are already in development.

Royal Sheba

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

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

Phase 2: developing the lower levels of the orebody from the Sheba side at 23 Level at a capital cost of c ZAR30m.

At the same time, the Dibanisa project – scheduled to be completed in FY21 – will integrate Sheba and Fairview infrastructure, such that Fairview will be able to accommodate Royal Sheba ore. One of the immediate advantages of this will be that additional available shaft-time will assist with the development and mining of Royal Sheba. Once in production, the Sheba plant will be available to process both surface material and Royal Sheba uppers (ie Phase 1). Tailings from the Royal Sheba operation will then be available for processing via BTRP infrastructure in addition to the latter’s traditional sources. Among other things, this method of development will help to expedite the environmental licensing process, shorten the timeline to production, enhance returns and negate the need for external capital funding. Development of Royal Sheba will extend operations at Sheba by 10 years to 19 years in total. In addition, optimised usage of infrastructure is also anticipated to reduce all-in sustaining costs to c US$1,000/oz (management estimate). Design has been completed for the early extraction of the western block in Phase 1 (above the historical workings). In the meantime, development from the Sheba ZK shaft on 23 Level is only 390m away from Phase 2 reef intersection and a preliminary economic assessment for Phase 2 is underway and expected to be completed in Q420. Management has indicated that it would require an internal rate of return in excess of 20% in order to proceed with the project. In this event, it anticipates that it would take approximately one year to open and develop the orebody, such that mining of the uppers (Phase 1) would commence in c 12 months’ time and the mining of the lowers (Phase 2) in c 18 months’ time.

Egoli

In contrast to the other five projects, Egoli (formerly the 2010 Pay Channel project) – with a peak funding requirement of ZAR862m (US$58.0m at prevailing forex rates) – will require external funding. Following dewatering, standard footwall development, further deepening of the decline and on-reef development and associated engineering is required before mining can commence. Once in production however, the project involves extracting c 1Moz of gold at a rate of c 90koz per annum at a total cash cost of c ZAR300,000/kg (US$628/oz at prevailing rates). While superficially comparable to former underground operations at Evander 8 Shaft however, there are a number of important differences, which are summarised below:

Exhibit 16: Egoli vs former 8 Shaft operating parameters

Parameter

Egoli

Former 8 Shaft operations

Depth

1,900m

~2,500

Access

Directly from 7 Shaft (twin shaft) with one decline

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

Tramming/travelling distance

3km from shaft

13km

Transfer points

6

20

Waste and reef

Separate waste and reef handling

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

Head grade (g/t)

6.64

5.7

Mine call factor

85%

73.5%

Employees

~800 employees

1,800 employees plus 500 contractors

Source: Pan African Resources

As with the 8 Shaft Pillar project, the lower number of transport points and systems is significant given that a high percentage of gold in the Evander ore is in the form of fine gold, which is otherwise estimated to be lost a rate of 1% per kilometre of tramming distance.

In the light of the requirement for external funding, Pan African is studying a range of development options, including equity partners, gold streaming and ring-fencing the operation in a separate vehicle. An optimised mining feasibility study on the project was completed at the end of 2019 and PAF is currently in the process of finalising a definitive feasibility study, including a third-party independent review.

Prince Consort shaft pillar extraction

Despite historically being the highest grading operation at Barberton, the Consort mine has recently also become one of its highest cost operations. In order to address this, management has determined on an immediate initiative to mine the Prince Consort (PC) Shaft pillar, which boasts a mineral resource of 48.82kt at a grade of 25.54g/t (0.82oz/t), containing 40koz gold. At the same time, it will explore the 36 exploration targets that have been identified at New Consort for potential future exploitation.

Development towards the PC Shaft pillar is on track completion during April 2020, after which the operation will produce at a rate of 3,900–7,800oz per annum at a targeted all-in sustaining cost (AISC) of c US$1,200/oz over a period of approximately three years. In addition to underground ore, additional material from surface stockpiles at Consort will maximise and extend plant capacity.

Miscellaneous

Tenure

Evander mining rights (which account for 48.5% of PAF’s gold production and 57.4% of its adjusted EBITDA) are valid until 2038. Barberton’s (from which it derived 51.5% of its gold in H120 and 42.6% of its adjusted EBITDA) are scheduled to formally expire in 2021, in respect of which Pan African has already submitted a renewal application, which is currently being processed via South Africa’s Department of Mineral Resources (DMR).

According to section 24, sub-section 25 of South Africa’s Mineral & Petroleum Resources Development Act, “A mining right in respect of which an application for renewal has been lodged shall despite its expiry date remain in force until such time as such application has been granted or refused.”

Pan African has lodged all documents required for the renewal of its mining rights. From now on therefore, the process of renewal is a purely bureaucratic and administrative matter. By law, as long as Pan African has complied with its obligations, the mining rights have to be renewed.

Electricity supply

While Pan African is less exposed to load-shedding than its deep level South African peers by virtue of 48% of its gold being derived from tailings and other surface sources and its having spare plant capacity in general, recent outages have nevertheless had a disruptive effect on operations at Elikhulu, which has been operating close to 100% of capacity since June 2019. The plant requires 10MVA of power and, in order to address potential future disruption, management has completed a bankable feasibility study on a 10MVA solar plant at Evander (actually 9.99MWA so as to avoid the need for NERSA regulatory approval) and is exploring non-dilutive funding options for such a plant’s development.

Exhibit 17: Financial summary

US$'000s

2018

2019

2020e

2021e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

145,829

218,818

284,281

308,365

Cost of sales

(107,140)

(152,980)

(177,735)

(157,872)

Gross profit

38,689

65,838

106,546

150,493

EBITDA

 

 

38,131

65,484

105,941

146,346

Operating profit (before GW and except.)

31,506

49,256

83,434

126,975

Intangible amortisation

0

0

0

0

Exceptionals

(16,521)

10,596

(3,250)

(1,623)

Other

0

0

0

0

Operating profit

14,985

59,852

80,184

125,352

Net interest

(2,222)

(12,192)

(14,511)

(8,498)

Profit before tax (norm)

 

 

29,284

37,064

68,923

118,477

Profit before tax (FRS 3)

 

 

12,763

47,660

65,673

116,854

Tax

2,826

(8,174)

(10,651)

(15,937)

Profit after tax (norm)

32,110

28,890

58,272

102,541

Profit after tax (FRS 3)

15,589

39,486

55,022

100,917

Average number of shares outstanding (m)

1,809.7

1,928.3

1,928.3

1,928.3

EPS - normalised (c)

 

 

1.31

1.64

3.02

5.32

EPS - FRS 3 (c)

 

 

0.87

2.05

2.85

5.23

Dividend per share (c)

0.00

0.15

0.86

2.03

Gross margin (%)

26.5

30.1

37.5

48.8

EBITDA margin (%)

26.1

29.9

37.3

47.5

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

21.6

22.5

29.3

41.2

BALANCE SHEET

Fixed assets

 

 

315,279

361,529

370,420

378,419

Intangible assets

56,899

49,372

51,593

53,845

Tangible assets

254,247

305,355

311,916

317,663

Investments

4,134

6,802

6,911

6,911

Current assets

 

 

29,009

31,601

51,222

124,543

Stocks

4,310

6,323

9,522

10,288

Debtors

22,577

18,048

20,349

21,985

Cash

922

5,341

19,462

90,382

Current liabilities

 

 

(44,395)

(63,855)

(53,175)

(71,766)

Creditors

(37,577)

(37,316)

(50,637)

(69,227)

Short-term borrowings

(6,817)

(26,539)

(2,539)

(2,539)

Long-term liabilities

 

 

(152,906)

(145,693)

(146,471)

(147,509)

Long-term borrowings

(114,065)

(111,345)

(111,345)

(111,345)

Other long-term liabilities

(38,841)

(34,348)

(35,126)

(36,164)

Net assets

 

 

146,988

183,582

221,996

283,688

CASH FLOW

Operating cash flow

 

 

5,345

59,822

97,193

138,294

Net Interest

(6,076)

(14,685)

(14,511)

(8,498)

Tax

(1,634)

(4,497)

(9,873)

(14,899)

Capex

(127,279)

(52,261)

(31,288)

(27,370)

Acquisitions/disposals

6,319

466

0

0

Financing

11,944

(0)

(0)

0

Dividends

(11,030)

(2,933)

(3,400)

(16,608)

Net cash flow

(122,411)

(14,088)

38,121

70,920

Opening net debt/(cash)

 

 

9,083

119,960

132,542

94,421

Exchange rate movements

(619)

537

0

0

Other

12,152

969

0

0

Closing net debt/(cash)

 

 

119,960

132,542

94,421

23,502

Source: Company sources, Edison Investment Research.

General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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

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

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

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United Kingdom

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General disclaimer and copyright

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

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

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

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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

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

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

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United States of America

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Level 4, Office 1205

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NSW 2000, Australia

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