New dividend policy unveiled

Pan African Resources 28 September 2016 Update

Pan African Resources

New dividend policy unveiled

FY16 results

Metals & mining

28 September 2016

Price

20.0p

Market cap*

£301m

US$1.3001/£

ZAR17.8199/£

ZAR13.7068/US$

Net debt (£m) at end June 2016

22.8

Shares in issue*

1,506.8m

*Post-Shanduka transaction.

Free float

76%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.6

14.3

172.1

Rel (local)

3.2

(0.2)

146.8

52-week high/low

24.25p

6.9p

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

AGM

25 November 2016

Elikhulu DFS

November 2016

Dividend payment date

22 December 2016

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Pan African’s FY16 results were closely in line with Edison’s expectations. Excluding Uitkomst, revenue of £164.7m compared with our forecast of £165.1m and costs of £103.9m compared with our forecast of £104.6m; precious metal mining profit was therefore £49.3m vs our expectation of £48.9m. The only material negative variance was in ‘other expenses’, where a loss of £12.2m (largely attributable to a mark-to-market loss on its small hedge position) compared with our expectation of an £8.9m loss, with the result that actual earnings were £25.5m (or 1.41p for EPS and HEPS) vs our expectation of 1.48p/share. Normalised HEPS and EPS were reported to be ZAR0.4424/share, or 2.08p/share (Edison conversion).

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/15

140.4

16.0

0.64

0.54

31.3

2.7

06/16

168.4

45.9

2.08

0.82

9.6

4.1

06/17e

211.5

68.3

3.07

1.23

6.5

6.2

06/18e

215.8

76.4

3.47

1.37

5.8

6.9

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

Operations

FY16 was a record year for gold production at Pan African, with Barberton contributing 113,281oz at a cash cost of US$881/oz (including the BTRP) and Evander contributing 91,647oz at US$599/oz (including the ETRP). To achieve this, Edison calculates that the H216 underground head grade at Evander must have been c 5.9g/t. Management avers that there is scope to increase this further, to 6.5-7.0g/t, depending on the balance of production and development.

Updated forecasts and new dividend policy

At this stage, Edison’s forecasts have been updated to reflect updated forex rates and, in particular, the continued strength in the rand. They have also been updated to reflect Pan African’s new dividend policy of distributing 40% of operational cash flow to shareholders, less sustaining capital, debt repayments and exceptionals. Note that PAF’s ongoing hedge of 25,000oz of gold at ZAR625,000/kg is fully accounted and ‘in the money’ at a gold price of ZAR583,395/kg, currently.

Valuation: 26.03p

Over the life of operations, our absolute value of PAF has increased to 26.03p cum-dividend (vs 23.59p in August). This valuation assumes that the grade profile at Evander averages 6.43g/t from FY17-30 and that the gold price is US$1,372/oz in FY17 and US$1,378/oz in FY18 and averages US$1,454/oz (real) during FY17-39. Notwithstanding recent rises, at 9.6x Pan African’s shares remain below their recent peak price to normalised HEPS ratio of 14.83x in FY15 and on a par with FY14 and FY11. In the meantime, PAF is cheaper than its peers in at least 75% of cases in which P/E, yield and EV/EBITDA measures are considered (whether using Edison or consensus forecasts). It also has the third highest (consensus) forecast dividend yield of any dividend-paying gold company, globally.

Financial summary

Outlook and expansion

Pan African has a number of expansion opportunities, the most immediate of which is its Elikhulu tailings retreatment project at Evander, comprising a resource of 178.7Mt at a grade of 0.29g/t, containing 1.7Moz gold. A definitive feasibility study on the project is scheduled for completion in November 2016. In the meantime, the project pre-feasibility study envisages a 1Mtpm operation producing 45-50koz gold per annum after 45-50% metallurgical recoveries. At a forecast all-in sustaining cost of ZAR300,000/kg, or US$650/oz (implying a forex rate of ZAR14.35/US$), the project generates an internal rate of return to investors of 28.6% over a 14 year life with a payback period of 3-4 years on an initial capital investment of ZAR1.7bn.

Power and water infrastructure to the site is already well developed. Elikhulu will require 20MW of power, while water will be supplied from existing operations and the Leeuwpan dam. A new CIL plant will be located just to the north of the existing Kinross tailings storage facility (TSF), while the TSF will be located just to the south of, and adjacent to, it (NB the existing Kinross TSF footprint will be re-used).

A final investment decision will be made once the DFS is complete in November and environmental applications will be completed and submitted by November 2017. After a two year construction and commissioning process, first gold is therefore currently anticipated to be poured in November 2018.

On the basis of the parameters described above (and subject to the release of the DFS in November), Edison estimates that Elikhulu could add 0.90p/sh to earnings, annually, and is worth 4.0p/sh to Pan African, overall on a dividend discount basis, using a 10% discount rate – equivalent to US$45.69 per Elikhulu resource oz.

Exhibit 1: Financial summary

£000s

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017e

2018e

Year end 30 June

IFRS

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

168,404

211,462

215,784

Cost of sales

(25,164)

(28,505)

(40,554)

(45,345)

(46,123)

(71,181)

(106,394)

(110,413)

(108,223)

(127,767)

(125,613)

Gross profit

13,985

24,355

27,790

33,705

54,783

62,127

47,808

29,973

60,181

83,696

90,171

EBITDA

 

 

13,711

22,890

25,023

28,540

45,018

53,276

44,165

28,448

57,381

80,110

86,545

Operating profit (before GW and except.)

11,745

20,529

21,897

25,655

41,759

47,278

34,142

18,110

46,925

70,339

76,313

Intangible amortisation

0

0

0

0

0

0

0

0

0

0

0

Exceptionals

0

(5,025)

(335)

0

(48)

7,232

(12)

(198)

(12,183)

(2,413)

(1,287)

Other

0

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

34,742

67,926

75,026

Net interest

200

807

594

762

516

197

(191)

(2,109)

(1,006)

(2,050)

74

Profit before tax (norm)

 

 

11,945

21,336

22,491

26,417

42,274

47,475

33,951

16,001

45,919

68,289

76,387

Profit before tax (FRS 3)

 

 

11,945

16,311

22,156

26,417

42,226

54,707

33,939

15,803

33,736

65,876

75,100

Tax

(4,367)

(8,219)

(7,656)

(9,248)

(12,985)

(12,133)

(7,155)

(4,133)

(8,234)

(22,015)

(24,172)

Profit after tax (norm)

7,579

13,117

14,835

17,169

29,290

35,342

26,796

11,868

37,685

46,274

52,215

Profit after tax (FRS 3)

7,579

8,091

14,500

17,169

29,242

42,574

26,785

11,670

25,502

43,861

50,928

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

1,811.4

1,506.8

1,506.8

EPS - normalised (p)

 

 

0.52

0.85

1.07

1.20

2.03

2.18

1.46

0.64

2.08

3.07

3.47

EPS - FRS 3 (p)

 

 

0.52

0.40

1.04

1.20

2.02

2.63

1.47

0.64

1.41

2.91

3.38

Dividend per share (p)

0.00

0.26

0.37

0.51

0.00

0.83

0.82

0.54

0.82

1.23

1.37

Gross margin (%)

35.7

46.1

40.7

42.6

54.3

46.6

31.0

21.4

35.7

39.6

41.8

EBITDA margin (%)

35.0

43.3

36.6

36.1

44.6

40.0

28.6

20.3

34.1

37.9

40.1

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

30.0

38.8

32.0

32.5

41.4

35.5

22.1

12.9

27.9

33.3

35.4

BALANCE SHEET

Fixed assets

 

 

55,647

67,198

74,324

97,281

86,075

249,316

223,425

220,150

230,676

231,074

231,418

Intangible assets

35,577

35,397

36,829

38,229

23,664

38,628

37,040

37,713

38,682

40,418

42,154

Tangible assets

20,070

31,801

37,495

59,052

62,412

209,490

185,376

181,533

190,725

189,387

187,995

Investments

0

0

0

0

0

1,199

1,010

905

1,269

1,269

1,269

Current assets

 

 

8,770

4,949

17,677

15,835

41,614

26,962

23,510

17,218

22,016

52,010

83,314

Stocks

378

358

1,126

1,457

1,869

6,596

5,341

3,503

4,399

7,057

7,201

Debtors

2,973

2,201

3,795

4,254

6,828

15,384

12,551

10,386

14,891

14,501

14,797

Cash

5,419

2,389

12,756

10,124

19,782

4,769

5,618

3,329

2,659

30,385

61,250

Current liabilities

 

 

(6,611)

(6,101)

(7,084)

(8,960)

(11,062)

(24,066)

(24,012)

(22,350)

(32,211)

(35,632)

(35,313)

Creditors

(6,521)

(6,080)

(7,084)

(8,960)

(11,062)

(23,202)

(19,257)

(17,301)

(25,230)

(28,652)

(28,333)

Short-term borrowings

(89)

(21)

0

0

0

(864)

(4,755)

(5,049)

(6,981)

(6,981)

(6,981)

Long-term liabilities

 

 

(7,438)

(9,686)

(11,431)

(13,410)

(14,001)

(80,004)

(63,528)

(67,850)

(69,506)

(71,100)

(72,716)

Long-term borrowings

(17)

0

0

(181)

(869)

(11,133)

(8,141)

(16,313)

(18,456)

(18,456)

(18,456)

Other long-term liabilities

(7,421)

(9,686)

(11,431)

(13,228)

(13,132)

(68,871)

(55,387)

(51,537)

(51,049)

(52,644)

(54,260)

Net assets

 

 

50,369

56,360

73,487

90,746

102,626

172,208

159,396

147,167

150,975

176,352

206,703

CASH FLOW

Operating cash flow

 

 

12,762

25,420

25,207

31,968

49,092

61,618

45,996

26,423

47,130

78,850

84,499

Net Interest

200

807

594

762

516

314

(606)

(2,109)

(1,006)

(2,050)

74

Tax

(1,723)

(10,886)

(7,476)

(10,743)

(11,616)

(13,666)

(8,536)

(3,943)

(7,777)

(20,420)

(22,557)

Capex

(5,680)

(5,705)

(6,764)

(21,712)

(17,814)

(27,197)

(21,355)

(19,554)

(14,097)

(10,169)

(10,576)

Acquisitions/disposals

226

(4,205)

0

0

(1,549)

(96,006)

0

(760)

(30,999)

0

0

Financing

785

0

48

1,545

259

47,112

349

(235)

15,207

0

0

Dividends

0

(6,774)

0

(5,376)

(7,416)

0

(14,684)

(15,006)

(9,882)

(18,484)

(20,576)

Net cash flow

6,571

(1,343)

11,609

(3,557)

11,471

(27,826)

1,164

(15,184)

(1,425)

27,726

30,864

Opening net debt/(cash)

 

 

(136)

(5,313)

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

22,778

(4,948)

Exchange rate movements

(1,394)

(2,642)

(281)

925

(1,813)

594

(839)

(276)

812

0

0

Other

0

1,041

(940)

(181)

(688)

1,090

(375)

4,705

(4,131)

0

0

Closing net debt/(cash)

 

 

(5,313)

(2,369)

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

22,778

(4,948)

(35,813)

Source: Pan African Resources accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “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.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “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.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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