gold flake

Quietly getting the job done in South Africa

Pan African Resources 8 April 2022 Update
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Pan African Resources

Quietly getting the job done in South Africa

Interim results

Metals & mining

8 April 2022

Price

22.80p

Market cap

£509m

ZAR19.1791/£, ZAR14.5595/US$, US$1.3173/£

Net debt (US$m) at end December 2021

28.2

Shares in issue, effective 1,928.3m post-consolidation

2,234.3m

Free float

86%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

Level 1 ADR, OTCQX Best Market and A2X

Share price performance

%

1m

3m

12m

Abs

(0.9)

29.8

32.9

Rel (local)

(8.8)

31.4

24.4

52-week high/low

23.6p

15.1p

Business description

Pan African Resources has four major producing precious metals assets in South Africa: Barberton (target output 95koz Au pa), the Barberton Tailings Retreatment Project, or BTRP (20koz), Elikhulu (55koz) and Evander underground, incorporating Egoli (currently 36koz, rising to >100koz).

Next events

FY22 results

September 2022

Mintails/Mogale due diligence

Until 31 August 2022

AGM

Nov/Dec 2022

FY22 dividend payment

December 2022

Analyst

Lord Ashbourne

(formerly Charles Gibson)

+44 (0)20 3077 5724

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

Pan African produced 108,085oz gold in H122 (at an all-in sustaining cost (AISC) of US$1,173/oz), which was 4.5% more than in H221, 9.9% more than H121 and 8.1% above its (albeit increased) pro rata guidance of 200,000oz for the full year. Performance was driven by an exceptional result underground at Evander, which reported record adjusted EBITDA for the period in which it has been under Pan African’s management, thereby becoming the largest single contributor to group adjusted EBITDA (see Exhibit 2). Even allowing for a slowdown in output in H222, we expect Pan African to outperform its guidance and have modestly increased our earnings forecasts for FY22 as a result.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/20

274.1

80.8

3.78

0.84

7.9

2.8

06/21

368.9

117.7

4.54

1.27

6.6

4.2

06/22e

374.2

133.9

5.18

1.18

5.8

3.9

06/23e

359.5

138.3

4.91

2.19

6.1

7.3

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

Solid ESG credentials

Pan African has achieved a COVID-19 vaccination rate of its workforce of 81% (as at end-January) and continues to implement and maintain stringent policies and protocols to mitigate the effects of the ongoing pandemic on employees and operations. At the same time, it has commissioned a 9.975MW solar photovoltaic renewable energy plant and constructed a water retreatment plant at Evander and continues to maintain an industry-leading safety performance.

Board sanctions 25 and 26 Level project at Evander

After the exceptional performance recorded at Evander, management has given the green light for the development of the 25 & 26 Level project. The project will produce c 65,000oz Au per annum at an AISC of c US$1,206/oz and initial capex of ZAR934m (c US$64.2m). Owing to higher, earlier capital expenditure, we have reduced our FY22 dividend forecast to (effectively) flat on FY21. That still leaves Pan African as the fourteenth-highest yielding stock in the precious metals mining sector, globally, however. It has also begun a new share buyback programme.

Valuation: 30p per share in prospect

Pan African is cheap relative to both its historical trading record and its peers. Our core valuation of the company is 33.79c/share (25.65p/share), based on projects either sanctioned or already in production. However, this rises by a further 15.07–20.09c (11.44–15.25p) once other assets (eg Mintails/Mogale, Egoli etc) are also taken into account. Alternatively, if Pan African’s historical average price to normalised EPS ratio of 8.9x in the period FY10–21 is applied to our FY22 and FY23 forecasts, it implies a share price of 34.83p in FY22, followed by 33.00p in FY23. In the meantime, it remains cheaper than its principal London and JSE-listed peers on at least 69% of commonly used valuation measures.

H122 production results

Pan African announced its H121 financial results within the context of known production results, which were released to the market on 19 January. Overall, production in H122 was 9,699oz (9.9%) higher than H121 and 4,694oz (4.5%) higher than in H221. Together with our production forecasts for H222, this result in H122 also implies that Pan African will exceed its (updated and upgraded) production guidance for the year by c 4,042oz (2.0%):

Exhibit 1: Pan African production, H118–H222e (oz)

Operation

H118

H218

H119

H219

H120

H220

H121

H221

H122

Change

(%)*

H222e

FY22e

Barberton UG

32,159

40,966

38,550

36,806

36,737

31,392

42,350

42,476

39,991

-5.9

37,009

77,000

BTRP

8,452

9,052

12,006

12,001

10,619

9,516

10,004

8,235

9,126

+10.8

10,874

20,000

Barberton

40,611

50,018

50,556

48,807

47,356

40,908

52,354

50,711

49,117

-3.1

47,883

97,000

Evander UG

32,734

15,831

8,821

8,058

11,553

9,117

12,607

23,409

27,312

+16.7

18,230

45,542

Evander surface

11,937

9,313

6,345

3,654

4,731

6,176

6,560

4,677

5,756

+23.1

4,244

10,000

Evander

44,671

25,144

15,166

11,712

16,284

15,293

19,169

28,086

33,068

+17.7

22,474

55,542

Elikhulu

0

0

15,292

30,909

29,301

30,315

26,863

24,596

25,900

+5.3

25,600

51,500

Total

85,282

75,139

81,014

91,428

92,941

86,516

98,386

103,391

108,085

+4.5

95,957

204,042

Source: Edison Investment Research, Pan African Resources. Note: *H122 versus H221. Totals may not add up owing to rounding. UG = underground.

In general, Pan African’s outperformance in the first half could once again be attributed to operations at Evander underground, which reported its largest single adjusted EBITDA in a six-month period under Pan African stewardship and contributed more to the group than any other single business division, despite (for example) production being little more than half its level in H213:

Exhibit 2: Pan African adjusted EBITDA, by business unit, H115–H122

Source: Pan African Resources, Edison Investment Research

Elsewhere, gold production at Barberton was in line with the mine plan. Production from Elikhulu decreased by 3.6% relative to the prior year period, primarily as a result of above average rainfall and lightning storms in November and December 2021, which prevented increasing throughput from mitigating a reduction in plant recoveries due to higher than average concentrations of carbonaceous material in the lower benches of the Kinross dam.

H122 financial results and H222 expectations

Exhibit 3 presents our updated expectations for H222 both in light of Pan African’s H122 results and recent historical results. In general, both earnings and headline earnings were consistent with our prior FY22 forecasts. Two notable features were a decline in the depreciation charge relative to H221 as a result of the extension of the projected life of Evander’s underground operations with the sanctioning of the 24 Level project (given that Pan African depreciates on a ‘units of production’ basis) and the continuation of ‘other expenses’ at relatively high historical levels owing to growth in business development expenditure (albeit this is anticipated to abate in the future). Elsewhere, the tax charge decreased to US$15.6m, or an effective tax rate of 25.3%, owing to the reversal of temporary deferred tax differences relating to the settlement of certain long-term incentive share schemes.

Exhibit 3: Pan African P&L statement by half-year (H119–H222e)

US$000s
(unless otherwise indicated)

H119*

H219

FY19

H120

H220

FY20

H121

H221

FY21

H122

H222e

Revenue

97,531

121,287

218,818

132,849

141,258

274,107

183,751

185,164

368,915

193,574

180,657

Cost of production

(70,847)

(82,133)

(152,980)

(86,501)

(71,956)

(158,457)

(98,245)

(110,570)

(208,815)

(108,368)

(92,477)

Depreciation

(6,840)

(9,388)

(16,228)

(10,526)

(10,977)

(21,503)

(12,741)

(19,333)

(32,074)

(13,268)

(17,634)

Mining profit

19,844

29,767

49,611

35,821

58,325

94,146

72,766

55,260

128,026

71,938

70,545

Other income/(expenses)

(2,077)

(5,181)

(7,258)

(962)

(27,720)

(28,682)

(6,704)

(6,115)

(12,819)

(7,711)

(4,200)

Loss in associate etc

0

0

0

0

0

0

0

0

0

0

Loss on disposals

0

0

0

0

0

0

0

0

0

0

Impairments

0

17,854

17,854

109

(20)

89

0

0

0

0

Royalty costs

(474)

120

(354)

(208)

(266)

(474)

(2,404)

(1,050)

(3,454)

(1,316)

(4,874)

Net income before finance

17,293

42,559

59,852

34,761

30,319

65,079

63,657

48,096

111,753

62,910

61,471

Finances income

443

407

850

207

258

465

300

456

756

661

Finance costs

(5,699)

(7,343)

(13,042)

(7,760)

(5,587)

(13,346)

(3,946)

(3,729)

(7,675)

(1,945)

Net finance income

(5,256)

(6,936)

(12,192)

(7,553)

(5,329)

(12,881)

(3,646)

(3,273)

(6,919)

(1,285)

(1,060)

Profit before taxation

12,037

35,623

47,660

27,208

24,990

52,198

60,011

44,823

104,834

61,626

60,411

Taxation

(2,325)

(5,850)

(8,174)

(5,303)

(2,602)

(7,905)

(19,239)

(10,903)

(30,141)

(15,573)

(18,416)

Effective tax rate (%)

19.3

16.4

17.2

19.5

10.4

15.1

32.1

24.3

28.8

25.3

30.5

PAT (continuing ops)

9,712

29,774

39,486

21,906

22,388

44,293

40,773

33,920

74,692

46,053

41,995

Headline earnings

9,712

14,586

24,298

21,742

22,416

44,158

40,772

33,919

74,691

46,053

41,995

Est. normalised headline earnings

11,789

19,766

31,556

22,704

50,136

72,840

47,476

40,034

87,510

53,764.1

46,195

EPS (c)

0.50

1.54

2.05

1.14

1.16

2.30

2.11

1.76

3.87

2.39

2.18

HEPS** (c)

0.50

0.76

1.26

1.13

1.16

2.29

2.11

1.76

3.87

2.39

2.40

Normalised HEPS (c)

0.61

1.03

1.64

1.18

2.60

3.78

2.46

2.08

4.54

2.79

2.40

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

Once again, deferred taxes accounted for the majority (75%) of the total tax charge for the six-month period. Cash taxes paid amounted to only 23% of the total tax charge.

H122 operational analysis

Barberton underground (37% of production; 27% of adjusted EBITDA)

Barberton continued to reap the benefits of increased mining flexibility in H122 with the establishment of four platforms from which to cycle high-grade production at the Main Reef Complex (MRC) orebody. Notwithstanding being in line with Barberton’s mine plan, gold production was nevertheless 6% lower than in both H121 and H221 as a result of:

Reduced mining rates at the high-grade 42 Level block within New Consort Mine’s Prince Consort (PC) Shaft project area while additional access points to the down-dip extension on 43 Level were being established.

Sheba Mine’s Zwartkoppie (ZK) Shaft hoisting being switched to a newly commissioned winder that required the sheath wheels to be realigned and the steel frame headgear to be stabilised. This resulted in the suspension of ore hoisting for a seven-day period while this changeover was effected.

Waste development at Fairview Mine to access the high grade 259 platform within the MRC orebody; however, high grade ore on the 259 platform elevation was intersected (as expected) in Q1 CY22.

As a result, although adjusted EBITDA at Barberton decreased relative to H121, the decrease was relative to a record high and it nevertheless more than covered capex of ZAR183.3m. In addition, the improved flexibility resulting from accelerated underground development programmes has now increased the face length available for mining to over 200m (cf 130m at end-FY20) while, at the 257 platform, geological mapping and reserve delineation drilling have identified mineralised widths in excess of 15m (cf the usual 7m ordinarily encountered on the upper platforms).

Exhibit 4: Barberton underground operational statistics and estimates, H118–H222e

H118

H218

H119

H219

H120

H220

H121

H221

H122

H122 vs H221 (%)

H222e

Tonnes milled underground (t)

124,969

112,862

127,858

119,777

117,545

116,035

122,199

133,473

125,257

-6.2

126,228

Head grade underground (g/t)

8.70

12.07

9.60

9.88

*9.70

*8.79

11.25

*10.42

*10.46

0.4

9.62

Underground gold contained (oz)

34,956

43,803

39,463

38,052

36,648

32,791

44,195

44,724

42,125

-5.8

39,057

Tonnes milled surface (t)

0

0

12,471

33,158

47,231

56,593

39,267

30,078

27,740

-7.8

30,379

Head grade surface (g/t)

0.00

0.00

2.30

1.62

*2.16

*0.73

1.06

*0.98

*0.98

0.1

0.98

Surface gold contained (oz)

0

0

922

1,729

3,283

1,331

1,343

949

876

-7.7

957

Tons milled (t)

124,969

112,862

140,329

152,935

164,776

172,628

161,466

163,551

152,997

-6.5

156,607

Head grade (g/t)

8.70

12.07

8.95

8.09

7.54

6.15

8.77

8.69

8.74

0.6

7.95

Contained gold (oz)

34,956

43,803

40,386

39,780

39,932

34,122

45,538

45,673

43,001

-5.9

40,014

Recovery (%)

93.0

93.5

94.0

92.5

92.0

92.0

93.0

93.0

93.0

0.0

92.5

Production underground (oz)

32,159

40,966

37,735

35,129

36,737

31,392

42,350

42,476

39,991

-5.9

37,009

Production calcine dumps/surface ops (oz)

0

0

815

1,677

0

0

0

0

0

Total production (oz)

32,159

40,966

38,550

36,806

36,737

31,392

42,350

42,476

39,991

-5.9

37,009

Recovered grade (g/t)

8.00

11.29

8.54

7.49

6.93

5.66

8.16

8.08

8.13

0.6

7.35

Gold sold (oz)

32,159

40,966

37,829

37,527

36,737

31,392

42,350

42,476

39,308

-7.5

37,009

Average spot price (US$/oz)

1,288

1,317

1,220

1,306

1,477

1,647

1,877

1,805

1,792

-0.7

1,900

Average spot price (ZAR/kg)

554,361

521,029

556,770

596,180

698,031

882,504

981,381

843,828

866,671

2.7

911,016

Total cash cost (US$/oz)

1,145

981

996

1,097

1,159

1,053

997

1,150

1,227

6.7

1,283

Total cash cost (ZAR/kg)

492,826

390,220

454,164

500,214

547,594

572,432

521,351

542,629

593,380

9.4

615,160

Total cash cost (US$/t)

294.62

356.03

268.42

269.10

258.39

191.44

261.64

298.72

315.34

5.6

303.19

Total cash cost (ZAR/t)

3,945.00

4,405.46

3,860.00

3,817.67

3,797.00

3,237.70

4,253.00

4,383.29

4,742.00

8.2

4,521.57

Implied revenue (US$000)

41,421

53,057

46,151

49,325

54,261

53,724

79,491

76,250

70,440

-7.6

70,317

Implied revenue (ZAR000)

554,499

660,698

655,098

699,398

797,598

893,997

1,292,694

1,105,899

1,059,597

-4.2

1,048,671

Implied revenue (£000)

31,422

38,722

35,652

38,120

43,061

42,614

60,824

54,762

51,680

-5.6

52,856

Implied cash costs (US$000)

36,819

40,182

37,667

41,155

42,576

33,047

42,246

48,857

48,246

-1.3

47,481

Implied cash costs (ZAR000)

493,003

497,209

534,400

583,855

625,654

558,918

686,715

716,891

725,512

1.2

708,111

Implied cash costs (£000)

27,900

29,269

29,102

31,803

33,796

26,203

32,349

35,265

35,413

0.4

35,682

Reported adjusted EBITDA (ZAR000)

72,300

174,700

137,200

140,700

205,100

262,200

543,900

421,700

341,000

-19.1

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

Although the increase in Barberton’s unit working costs of 8.2% (in ZAR/t terms) was above average group, it should be seen within the context of the following company-wide increases in costs:

Salaries and wages (representing 26.7% of the total cost of production) increased by 14.2% in US dollar terms and by 5.7% in rand terms. After the end of FY21, Pan African announced a three-year wage agreement with the National Union of Mineworkers (NUM) and a five-year wage agreement with the United Association of South Africa union (UASA). While there were a number of conditions to the agreements, the substantive points were that the NUM deal provided for an average annual wage increase of c 5.6% for three years ending 30 June 2024, while the UASA deal provided for 5.0% increases for the five years to end June 2026, but with the potential to be higher or lower increases depending on the rate of South African consumer price inflation. At the time, the blended average annual increase was expected to be 5.4% compound annually for the initial three-year period of the agreements, compared with which the actual level in the period under review was 5.0% in year-on-year terms (note that the consumer price inflation level in South Africa in December was 5.9%).

Mining and processing costs (representing 41.2% of the total cost of production) increased by 12.3% in US dollar terms and 3.9% in rand terms, but with an above average increase being experienced at Barberton owing to increased support installed in working areas with challenging ground conditions.

Electricity costs (representing 15.8% of the total cost of production) increased by 10.3% in US dollar terms and 2.4% in rand terms, but which compared to a 15.63% increase in the regulated tariff.

Engineering and technical costs (representing 9.2% of the cost of production) increased by 20.5% in US dollar terms and 11.8% in rand terms owing to increased secondary support installed in working areas with challenging ground conditions and an increase in the engineering cost for repairs and maintenance carried out on the load haul drivers at Barberton.

Security costs (representing 3.6% of the cost of production) increased by 2.6% in US dollar terms but decreased by 3.3% in rand terms as a result of cost reduction initiatives.

The PC Shaft Level 42 project at Barberton’s New Consort operation contributed significantly to production in the prior year period. Following this performance, a cemented backfill grout plant was commissioned at New Consort to assist in supporting the poor ground conditions associated with the highly altered (but high grade) schistose orebody and also volume extraction. Secondary support on the strike and down-dip extensions of the orebody is being installed, while the final cuts of the 42 Level block are extracted, albeit at a slower rate owing to unfavourable ground conditions. It is envisaged that the down-dip extension of the orebody will then be accessed during the fourth quarter of FY22. Further high-grade mineralisation has also been identified on the PC Shaft’s 20 Level, where exploration and establishment activities are underway.

In the meantime, mining of the high-grade Thomas and Verster orebodies at Sheba has assisted in maintaining the mine’s production profile over the past two reporting periods. Development on the 37 Level haulage in the ZK orebody has intersected high-grade cross-fractures, which are currently being explored and also prepared for mining activities. Elsewhere, Project Dibanisa (which effectively connects the underground workings of the Fairview and Sheba mines), is progressing on schedule. This project is aimed at decreasing the operational cost of the Sheba operation by hoisting the ore from Sheba Mine’s MRC Shaft, utilising Fairview Mine’s infrastructure above 2 decline and is scheduled for completion by the end of FY22, with the first Sheba ore expected to be hoisted at Fairview in FY23. It will also create further capacity at Sheba Mine’s ZK Shaft for the hoisting of Royal Sheba ore from 23 Level, when the 23 Level development intersects the Royal Sheba lowers, which will significantly reduce Royal Sheba’s capital requirements.

In the period under review, Barberton Mines conducted 5,003m of near-mine and exploration drilling (cf 3,502m in H121) in order to delineate and de-risk the near-term mine schedule. Plans for the next six months at Barberton Mines include an increase in near-mine and broader-scale exploration drilling, with exploration targets including the Hope Reef, MRC, Consort Contact Reef and Main Muiden Reef. Desktop studies are also being conducted on various other known but unmined lower-grade resource blocks.

Elikhulu (24% of production; 29% of adjusted EBITDA)

Gold production at Elikhulu increased by 5.3% in H122 cf H221 as a result of a 16.8% increase in the grade in the material mined and despite a 13.2% decline in plant recoveries as a result of higher than expected concentrations of historically processed fine carbon in the lower benches of the Kinross tailings storage facility (TSF), which adversely affected metallurgical recoveries, compounded by the mining of the coarser but high-grade outer wall of the Kinross TSF, which also acted to reduce recoveries. In addition, operations were disrupted by above average rainfall and associated thunder storms in November and December.

As a result, whereas we calculated that Elikhulu accounted for 47% of group-wide H120 adjusted EBITDA, 91% of H220 adjusted EBITDA and 68% of FY20 adjusted EBITDA, since then we estimate that it accounted for 39% of H121 adjusted EBITDA, 27% of H221 adjusted EBITDA, 33% of FY21 adjusted EBITDA and 29% of H122 adjusted EBITDA. Nevertheless, while adjusted EBITDA at Elikhulu was comparable in magnitude to that of both Barberton and Evander (see Exhibit 2), its capex was still an order of magnitude lower (eg ZAR28.9m cf c ZAR160m), such that it almost certainly remained the largest contributor to the group’s operational cash flow.

Exhibit 5: Elikhulu operational statistics and estimates, H119–H222e

H119

H219

H120

H220

H121

H221

H122

H122 cf H221 (%)

H222e

Tonnes processed tailings (t)

3,534,278

7,313,931

6,211,028

6,882,546

6,278,191

6,776,576

6,442,397

-4.9

6,702,545

Head grade tailings (g/t)

0.30

0.26

*0.28

0.32

0.31

0.29

0.34

16.8

0.25

Tailings gold contained (oz)

34,089

60,199

56,348

70,494

62,472

63,038

70,000

11.0

53,590

Recovery (%)

44.0

51.3

52.0

43.0

43.0

42.6

37.0

-13.2

47.8

Production tailings (oz)

15,292

30,909

29,301

30,315

26,863

24,596

25,900

5.3

25,600

Total production (oz)

15,292

30,909

29,301

30,315

26,863

24,596

25,900

5.3

25,600

Recovered grade (g/t)

0.13

0.13

0.15

0.14

0.13

0.11

0.13

10.8

0.12

Gold sold (oz)

15,292

30,173

29,301

30,315

26,863

24,596

25,900

5.3

25,600

Average spot price (US$/oz)

1,216

1,306

1,451

1,647

1,852

1,805

1,813

0.4

1,900

Average spot price (ZAR/kg)

563,250

596,180

685,680

882,504

968,130

843,828

876,640

3.9

911,016

Total cash cost (US$/oz)

517

575

621

495

656

849

806

-5.0

772

Total cash cost (ZAR/kg)

239,639

262,650

293,608

265,166

342,917

396,698

389,660

-1.8

370,380

Total cash cost (US$/t)

2.24

2.43

2.93

2.15

2.81

3.05

3.24

6.3

2.95

Total cash cost (ZAR/t)

32.00

33.70

43.00

36.33

45.63

44.78

48.72

8.8

44.00

Implied revenue (US$000)

18,595

39,009

42,516

50,783

49,750

43,442

46,957

8.1

48,640

Implied revenue (ZAR000)

267,899

554,999

624,898

837,196

808,898

626,289

706,198

12.8

725,390

Implied revenue (£000)

14,365

30,145

33,740

40,283

38,067

31,097

34,451

10.8

36,562

Implied cash costs (US$000)

7,912

17,742

18,209

14,818

17,626

20,657

20,874

1.1

19,775

Implied cash costs (ZAR000)

114,000

246,492

267,600

250,023

286,500

303,480

313,900

3.4

294,912

Implied cash costs (£000)

6,208

13,421

14,455

11,784

13,496

14,986

15,322

2.2

14,861

Adjusted EBITDA (ZAR000)

145,100

296,300

333,100

564,000

484,800

301,200

367,000

21.8

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

Elikhulu’s AISC increased by 27.1% to US$937/oz relative to the prior year period, mainly owing to an increase in salary costs as a result of a change in the incentive structure, an increase in headcount and a decrease in recoveries and production.

Capex at Elikhulu will continue to increase in FY22 as it transitions from Phase 1 of its operations (the re-mining of Kinross tailings) to Phase 2 (the re-mining of Leslie and Bracken tailings), necessitating the installation of approximately 6km of piping and a pump station between the plant and the areas to be mined. Thereafter, it is expected to produce approximately 60,000oz gold pa until FY26. For the final seven years of operation, as re-mining transitions to the Winkelhaak tailings storage facility (TSF), Elikhulu is expected to produce c 50,000oz gold pa (excluding c 102,000oz inferred mineral resources delineated in the soil material beneath the existing TSFs).

In the current year, we expect Elikhulu to produce 51,500oz gold (see Exhibit 1), with improved throughput and higher recoveries from the planned re-mining of areas on the upper benches of the number three Kinross TSF dam (in line with its mine plan from the start of production).

Evander underground (25% of production; 32% of adjusted EBITDA)

Relative to prior periods, underground operations at Evander in H221 recorded a vastly improved performance, with both tonnes processed and grades increasing materially at the same time that unit costs (measured in ZAR/t) decreased materially, to result in a near seven-fold increase in adjusted EBITDA (cf H121) to a level that is a record for underground operations at Evander since they came under Pan African ownership and management in H213.

Exhibit 6: Evander operational statistics and estimates, H119–H222e

H119

H219

H120

H220

H121

H221

H122

Change
(%)*

H222e

Tonnes milled (t)

37,347

26,624

30,044

21,392

50,634

69,812

69,790

0.0

70,000

Head grade (g/t)

7.82

10.01

12.59

5.16

8.51

10.56

12.55

18.8

8.27

Contained gold (oz)

9,384

8,572

12,161

3,549

13,854

23,709

28,157

18.8

18,602

Recovery (%)

94

94

95

94

91

99

97

-1.8

98

Underground production (oz)

8,821

8,058

11,553

9,117

12,607

23,409

27,312

16.7

18,230

Production from surface sources (oz)

0

0

0

0

Total production (oz)

8,821

8,058

11,553

9,117

12,607

23,409

27,312

16.7

18,230

Recovered grade (g/t)

7.35

9.41

11.96

13.26

7.74

10.43

12.17

16.7

8.10

Gold sold (oz)

8,821

8,058

9,214

5,863

12,607

23,409

27,312

16.7

18,230

Average spot price (US$/oz)

1,214

1,306

1,451

1,647

1,852

1,805

1,813

0.4

1,900

Average spot price (ZAR/kg)

565,367

596,180

685,658

882,504

968,072

843,828

876,639

3.9

911,016

Total cash cost (US$/oz)

1,711

1,814

1,420

1,241

1,604

1,030

915

-11.2

902

Total cash cost (ZAR/kg)

780,357

828,170

671,299

665,209

838,665

481,582

442,226

-8.2

432,397

Total cash cost (US$/t)

404.07

549.62

546.00

169.14

399.31

342.36

357.95

4.6

234.85

Total cash cost (ZAR/t)

5,733

7,796

6,404

5,671

6,496

5,023

5,383

7.2

3,502

Implied revenue (US$000)

10,709

10,525

13,370

9,879

23,348

41,877

49,517

18.2

34,636

Implied revenue (ZAR000)

155,115

146,084

196,499

167,699

379,599

624,798

744,697

19.2

516,546

Implied revenue (£000)

8,272

8,134

10,610

7,836

17,865

30,543

36,329

18.9

26,035

Implied cash costs (US$000)

15,091

14,633

16,404

3,618

20,218

23,901

24,981

4.5

16,439

Implied cash costs (ZAR000)

214,100

207,564

192,402

121,306

328,918

350,638

375,680

7.1

245,169

Implied cash costs (£000)

11,659

11,301

10,393

5,509

15,495

17,312

18,337

5.9

12,354

Adjusted EBITDA (ZAR000)

(58,985)

26,085

64,900

(345,600)

49,000

331,000

408,500

23.4

Source: Pan African Resources, Edison Investment Research. Note: *H122 cf H221.

The increase in unit working costs at Evander could be attributed to:

Production incentives paid in relation to increased production.

Increased support costs relating to the 8 Shaft pillar.

A 5.6% average increase in reagent costs.

The capitalisation of electricity costs associated with the 24 Level development leading to a decrease of 9.3% in Evander Mines’ underground electricity costs.

Gold production from the 8 Shaft pillar is expected to reduce in H222 as mining progresses to areas with lower estimated grades. As per its mine plan, the 8 Shaft pillar now has a remaining life of approximately one and a half years, during which time it is expected to produce c 60,000oz gold at a rate of c 40,000oz pa. Mining at 24 Level will then extend 8 Shaft’s production profile, post cessation of the 8 Shaft pillar mining, for an additional two and a half years and maintain annual production at c 34,000oz pa. Mining from this level is anticipated to commence in FY23, as the current pillar mining reaches completion, after which the board has also now approved the development capital for Evander’s 25 and 26 Level project, which is expected to increase the 8 Shaft’s life of mine to 13 years at an expected annual production rate of approximately 65,000oz.

Growth projects

Pan African has at least two immediate organic growth projects plus two further corporate growth projects in prospect for development over the course of the next four years. Further into the future, it also has at least the Fairview sub-vertical shaft, Rolspruit, Poplar and Evander South assets available for potential development.

Corporate growth projects

Mintails/Mogale

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

On 6 November 2020, Pan African announced it had entered into a conditional agreement with the liquidator of Mintails’ assets for the purchase of the total share capital and associated loans of Mogale Gold and Mintails SA Soweto Cluster. Due diligence has been extended until 31 August 2022. In the meantime, Pan African has successfully concluded both a fatal flaw analysis and a high-level financial evaluation of the project (which would be similar in nature to Pan African’s flagship Elikhulu project). In July, it subsequently completed a pre-feasibility study (PFS) on the Mogale Gold assets. Key outcomes of the PFS (cf the financial evaluation) are as follows:

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

An AISC of US$1,087/oz (cf US$800/oz).

An NPV10.71 of ZAR849m, or US$56.6m, at a gold price of US$1,690/oz and a forex rate of ZAR15.00/US$ (cf ZAR1,469m, or US$101.3m, at a gold price of US$1,770/oz and a forex rate of ZAR14.50/US$); this equates to ZAR0.44/share (cf ZAR0.76/share), US$0.029/share (cf US$0.053/share) or £0.022 (cf £0.038/share).

Initial project capital of ZAR1,991m, or US$132.7m at ZAR15.00/US$, and life of mine capital of ZAR3,022m, or US$201.5m (cf ZAR1,000m, or US$68.9m at ZAR14.50/US$, and life of mine capital of ZAR1,700m, or US$117.2m).

Average annual production of 40–50koz pa (cf 44.4koz pa).

An 11-year life of mine (cf 12 years).

A real pre-tax internal rate of return of 22% (cf a post-tax internal rate of return of 42.8%).

While not explicitly reported in the results of the PFS, metallurgical recoveries were estimated to be c 53% in the initial financial evaluation (cf Elikhulu’s 48%). In the meantime, by way of comparison, investors should note that Mintails’ and Mogale’s aggregate resource of 2.36Moz compares favourably to Elikhulu’s original resource of 1.7Moz and its initial reserve of 1.5Moz, but at a fractionally higher grade of 0.30g/t (cf Elikhulu’s 0.29g/t). Pan African announced the results of an independent definitive feasibility study (DFS) on Elikhulu on 5 December 2016, which demonstrated an NPV9 of US$75.9m (or, then, 5.0c/share, or US$40.95 per resource ounce) at a gold price of US$1,180/oz and a forex rate of ZAR14.50/US$. At the time, we estimated Elikhulu to be worth US$69.9m (or 4.6c/share) at a 10% discount rate and to be capable of adding 1.33p to EPS in the first eight years of its operation (albeit there are now 28.0% more shares in issue). Now, however, with capex having been expended (albeit with not all associated debt having quite been repaid), we estimate a valuation for Elikhulu of c US$139.25 per initial resource ounce or US$182.92 per remaining resource ounce. As such, and albeit with suitable caveats such as the Mintails/Mogale assets developing in a similar fashion to Elikhulu, Pan African could acquire for US$1.31/oz an asset that should be worth US$9.88/oz as an in-situ resource (see Gold stars and black holes, published in January 2019), could be worth US$23.98/oz (pre-development) and may be worth up to US$206.60 per remaining ounce (or US$124.48 per initial ounce), post-initial capex and debt repayment.

Blyvoor tailings

On 15 December 2021, Pan African announced that it had entered into a conditional agreement to acquire the entire issued share capital of Blyvoor Gold Operations, subject to due diligence, for a cash consideration of ZAR110m (currently US$7.6m). The principal assets of Blyvoor Gold Operations are six historical TSFs with a total mineral resource of 1.4Moz gold at a grade of 0.31g/t and a mineral reserve (as at 1 December 2020) of 0.8Moz gold at a grade of 0.30g/t. A recent (2020) technical study completed to pre-feasibility standards indicated the potential to process c 6Mt of tailings annually by hydro-mining (ie similar to Elikhulu) to produce c 25–30koz gold annually over a life of 15 years (extendable to 25 years) at an expected carbon-in-leach metallurgical recovery of c 54%.

Having concluded an initial ‘fatal flaw’ due diligence process, Pan African is now proceeding with a DFS until December 2022. In the meantime, by way of comparison, investors should note that Blyvoor’s resource of 1.4Moz is similar to Elikhulu’s original resource of 1.7Moz, its initial reserve of 0.8Moz is approximately half the size of Elikulu’s of 1.5Moz, albeit at a fractionally higher grade of 0.30g/t (cf Elikhulu’s 0.29g/t). Pan African announced the results of an independent DFS on Elikhulu on 5 December 2016, which demonstrated an NPV9 of US$75.9m (or, then, 5.0c/share, or US$40.95 per resource ounce) at a gold price of US$1,180/oz and a forex rate of ZAR14.50/US$. At the time, we estimated Elikhulu to be worth US$69.9m (or 4.6c/share) at a 10% discount rate and to be capable of adding 1.33p to EPS in the first eight years of its operation (albeit there are now 28.0% more shares in issue). Now, however, with capex having been expended (albeit with not all associated debt having quite been repaid), we estimate a valuation for Elikhulu of c US$139.25 per initial resource ounce or US$182.92 per remaining resource ounce. As with Mintails/Mogale (above), and albeit with suitable caveats, Pan African could therefore be on the cusp of acquiring for US$5.40/oz an asset that should be worth US$9.88/oz as an in-situ resource (see Gold stars and black holes, published in January 2019) and may be worth up to a peak of US$206.60 per remaining ounce (or US$124.48 per initial ounce), at steady-state production after initial capex and debt repayment.

Organic growth projects

8 Shaft number 2 decline Phase 2 25 and 26 Level project

After previously sanctioning the development of Phase 1 of the number 2 decline on 24 Level at 8 Shaft, Pan African’s board has also now approved the capital required for the development of the 25 and 26 Level project.

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

Exhibit 7: Evander underground challenges and mitigations

Risk

Mitigation

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

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

Ore and waste separation

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

Limited face time owing to long underground travelling times and distances

Installation of a man carriage on 24 Level

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

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

Risk

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

Ore and waste separation

Limited face time owing to long underground travelling times and distances

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

Mitigation

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

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

Installation of a man carriage on 24 Level

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

Source: Pan African Resources, Edison Investment Research

Development leading from the existing 24 Level footwall infrastructure will then allow access to both the 25 and 26 Levels, with an on-reef decline layout. The mining of 25 and 26 Levels will extend 8 Shaft’s production profile for an additional eight years after the completion of the 24 Level project at an annual production rate of c 65,000oz pa. A summary of the salient features of the 25 and 26 Level project is as follows:

A net present value – using a real discount rate of 10.7% – of ZAR1,239.1m (US$79.9m), or ZAR0.643 (US$0.041) per share, and a real, post-tax internal rate of return of 45% at a gold price of US$1,770/oz and an exchange rate of ZAR15.50/US$.

Pre-commissioning project capital of approximately ZAR934.0m and peak funding of approximately ZAR807.0m to be funded internally and from existing facilities.

Years one to three capex of ZAR2.0m, ZAR23.0m and ZAR566.6m respectively.

AISC of ZAR601,054/kg (US$1,206/oz at ZAR15.50/US$).

Life of mine gold production of 18,257kg (586,984oz) until FY35.

The existing 24 Level footwall infrastructure will intersect the reef horizon on 25 Level. The project development plan is then to access the higher-grade ore extending deeper and to the northwest of the current 24 Level mining area via a twin-barrel, on-reef decline system. Owing to the shallower dip in the area, sub-levels will be introduced to limit mining back-lengths to around 150m. In the meantime, the mining method employed at 25 and 26 Levels will be a hybrid of conventional breast mining and mechanised trackless on-reef development. Stope faces will be drilled using traditional handheld pneumatically driven air leg-assisted rock drills. Blasted ore will be cleaned by means of a series of scraper winches from the face into strike and centre gullies. Ore will be collected in ore loading bays at the bottom of the raise and then loaded with diesel-driven load haul drivers and tipped onto strike conveyors running along the sublevel strike drives. The strike conveyors will deposit the ore onto the decline dip conveyor, which will tip the ore into ore silos between 24 and 25 Levels. Ore will then be drawn on 25 Level and transferred by diesel locomotive to the existing 2 decline conveyor on 25 Level. As a result of the on-reef development layout, limited waste from 25 and 26 Levels will be blended with the ore stream prior to processing at the Kinross metallurgical plant.

Among other things, the development of the Evander mine’s 24, 25 and 26 Levels from existing 8 Shaft infrastructure is expected to result in a materially reduced capital outlay for Egoli when compared to its earlier standalone development plan. As a consequence, Egoli will now be developed in a phased approach, with dewatering expected to start before the end of the current financial year, followed by mineral reserve delineation drilling to accurately define the pay-shoot prior to mining.

Royal Sheba

Royal Sheba is a world class orogenic greenstone gold deposit, where historical mining has enabled high resolution modelling of the orebody to be completed and a resource of over 1Moz Au to be delineated at an average grade of c 2g/t over mineralised widths averaging 10m to 150m below surface over a strike extent in excess of 850m.

Historically, Royal Sheba material was treated at Barberton’s Sheba metallurgical plant and existing Barberton milling capacities (especially at the BTRP) are sufficient to cater for a throughput of c 40ktpm of run-of-mine production from Royal Sheba, while grade control drilling results have confirmed expected recoveries. The down-dip extent of the ore body has been proven up to 650m below surface and may be accessed from the 23 Level development at Sheba Mine’s ZK Shaft, but is open beyond that.

Recent development at Royal Sheba commenced in May 2021 via an already established surface adit located approximately 1.2km to the east of the existing Sheba metallurgical plant. The decline and associated cross-cut will provide access for the extraction of a 10,000t bulk sample in 2022. To date, the development has progressed through the historically mined voids, filling them with waste rock followed by capping with steel beams and sets, while aerated cement was used to stabilise workings. The ore extracted from the bulk sample area will be treated at the New Consort and Sheba metallurgical plants. If fully approved by the board, first ore from Royal Sheba could be produced as early as FY23.

Asset development and assumptions

The 24 Level project at Evander underground has been included in our forecasts since the time of our last note (see Everything falling into place, published on 28 October 2021). In the light of the announcement of the board’s recent approval of the project however, for the purposes of our financial forecasting, we have also included production and costs from the 25 and 26 Level project now as well, as follows:

Exhibit 8: 25 and 26 Level project cost and production assumptions

FY22

FY23

FY24

FY25

FY26

FY27

FY28

FY29

FY30

FY31

FY32

FY33

FY34

Gold produced (oz)

0

0

6,300

26,913

68,498

73,089

64,866

77,788

75,546

67,142

54,735

50,366

28,706

Opex (ZAR/t)*

N/A

N/A

2,423

2,367

3,338

3,715

3,586

3,575

3,903

4,022

4,135

5,071

4,873

Capex (ZAR000s)*

1,639

23,376

566,574

342,369

113,764

87,959

86,509

81,450

81,450

81,450

81,450

81,450

8,168

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

Offsetting this to some extent however, we have now removed the Egoli project from our forecasts, not because we do not believe that it will be developed but owing to the uncertainty surrounding the timing of its development. As noted previously, Pan African will implement a phased approach to the development of Egoli. Whereas we had previously assumed that capex for Egoil would be expended in FY21–23 with production beginning in FY23, we are now assuming that Pan African will develop and mine the 24 Level project in FY22–26 and will then phase in the 25 and 26 Level project in FY22–25, before embarking on Egoli, albeit this later timing will allow it to be funded from 24 Level and 25 and 26 Level project cash flows, rather than requiring third-party debt finance. In the event that the 25 and 26 Level project is developed however, there will be scope to significantly reduce the upfront capital expenditure uniquely associated with Egoli, though to date, this remains unquantified. In addition, the prior development of the 24 Level and 25 and 26 Level projects will allow Egoli access to both ‘white areas’ and inferred resources that will be mined during the dovetailing of the three projects.

As a result of the above changes to our assumptions (particularly the deferral of the development of Egoli), whereas we had forecast that group production at Pan African would reach 214.0koz in FY26 previously, we now forecast that it will reach 235.8koz (with production from Egoli still pending):

Exhibit 9: Estimated Pan African group gold production, FY18–FY26e

Source: Edison Investment Research, Pan African Resources.

Updated (absolute) valuation

In the light of Pan African’s H122 results and reprioritised development plans (and fractionally revised external factors such as the gold price and forex rates), our absolute value of the company (based on its existing four producing assets including the 24 Level and 25 and 26 Level projects) has decreased by 8c from 41.79c/share to 33.79c (albeit excluding any contribution from Egoli, which are we now valuing separately, for the moment, as a standalone project at 10.40c/share), on the basis of the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of its mining operations (applying a 10% discount rate):

Exhibit 10: Pan African estimated life of operations’ diluted EPS and (maximum potential) DPS*

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

Including its other growth projects and assets, our updated total valuation of Pan African is therefore as follows:

Exhibit 11: Pan African absolute valuation summary (US cents per share)

Project

Current valuation
(cents/share)

Previous valuation
(cents/share)

Existing producing assets (inc 24 Level and 25 and 26 Level projects)

33.79

**41.79

FY21 dividend

N/A

1.20

Fairview Sub-Vertical Shaft project

0.76

0.76

Royal Sheba (resource-based valuation)

0.86

0.69

Mintails/Mogale*

2.77

2.94

MC Mining shares

0.06

0.06

Sub-total

38.24

47.43

EGM underground resource

0.22–5.24

0.22–5.24

Sub-total

38.46–43.48

47.65–52.67

Egoli

10.40

-

Total

48.86–53.88

47.65–52.67

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

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 12 below depicts Pan African’s average share price in each of its financial years from FY10 to FY21 and compares this with normalised headline earnings per share (HEPS) in the same year. For FY22 and FY23, the current share price (22.80p) is compared with our forecast normalised HEPS for FY22 to FY23. As is apparent from the graph, Pan African’s price to normalised HEPS ratios of 5.8x and 6.1x for FY22 and FY23, respectively (based on our forecasts, see Exhibit 18) are close to the bottom of its recent historical range of 4.1–14.8x for the period FY10–21:

Exhibit 12: Pan African historical price to normalised HEPS** ratio, FY10–FY23e

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 Pan African’s average year 1 price to normalised EPS ratio of 8.9x for FY10–21 is applied to our normalised earnings forecasts, then it implies a share price for Pan African of c 34.83p in FY22 followed by 33.00p in FY23.

Relative peer group valuation

In the meantime, it may be seen that Pan African remains cheaper than its South Africa- and London-listed gold mining peers on 75% of comparable common valuation measures (27 out of 36 individual measures in the table below) if our forecasts are applied or 69% (25 out of 36 individual measures) if consensus forecasts are applied.

Exhibit 13: Comparative valuation of Pan African 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

5.3

4.6

11.3

9.5

1.3

1.9

Gold Fields

6.5

5.9

14.2

12.9

2.4

2.6

Sibanye

2.4

2.6

3.7

3.6

9.1

7.6

Harmony

4.8

3.8

10.7

7.7

0.7

1.3

Centamin

3.5

2.9

13.0

11.2

5.2

5.8

Endeavour Mining (consensus)

5.0

5.2

13.0

13.1

2.5

2.4

Average (excluding Pan African)

4.6

4.2

11.0

9.6

3.5

3.6

Pan African (Edison)

3.6

3.5

5.8

6.1

3.9

7.3

Pan African (consensus)

4.4

4.1

6.0

5.4

4.6

4.9

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 8 April 2022.

Alternatively, applying Pan African’s peers’ average year 1 P/E ratio of 11.0x to our forecast normalised HEPS forecast of 5.18c/share for FY22 implies a share price for the company of 43.3p at prevailing forex rates. Applying its peers’ average year 2 P/E ratio of 9.6x to our forecast normalised HEPS forecast of 4.91c/share implies a share price of 36.0p.

Share buyback programme

In order to broaden its strategy to return value to shareholders and given the quality and profitability of its existing operations and growth projects, on 1 April, Pan African announced the initiation of phase one of a share buyback programme to purchase up to ZAR50m (c £2.6m) of ordinary shares of the company over the course of the month, starting on 1 April 2022. The shares will be repurchased at a price (excluding expenses) that does not exceed the last independent trade or the highest current independent bid on the relevant trading platform and will be cancelled as soon as practicable thereafter. It is the company’s intention that the repurchases will occur on the LSE and the JSE in approximately equal aggregate amounts. Since its announcement, Pan African has repurchased two tranches of shares:

381,510 shares on 1 April at a volume weighted average price of 22.376p per share

37,481 shares on 6 April at a volume weighted average price of ZAR4.25 per share

These two transactions have now been included in our financial forecasts in Exhibit 18, below.

Although small in initial scale (c 11.4m shares, or 0.5% of those in issue prior to the announcement), this initiative nevertheless signals the company’s preparedness to consider share buybacks as a means of retuning capital to shareholders as and when it is appropriate to do so.

Financials

Pan African reported net debt to financial institutions of only US$13.3m at end-December 2021 (see Exhibit 16), which equates to a gearing ratio (net debt/equity) of only 4.9% and a leverage ratio (net debt/[net debt+equity]) of just 4.6%. Notwithstanding its capex, share buyback and dividend commitments over the course of the next two years, we are continuing to forecast the company will be, to all intents and purposes, free of net debt to financial institutions by the end of FY22 and will remain so by the end of FY24:

Exhibit 14: Pan African previous estimated net debt* profile forecast, FY17 to FY22e (US$000)

Exhibit 15: Pan African current net debt* profile forecast, FY17 to FY24e (US$000)

Source: Edison Investment Research, Pan African Resources. Note: *To financial institutions.

Source: Edison Investment Research, Pan African Resources. Note: *To financial institutions.

Exhibit 14: Pan African previous estimated net debt* profile forecast, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources. Note: *To financial institutions.

Exhibit 15: Pan African current net debt* profile forecast, FY17 to FY24e (US$000)

Source: Edison Investment Research, Pan African Resources. Note: *To financial institutions.

Including all other components, total net debt amounted to US$28.2m, made up of the following components:

Exhibit 16: Pan African components of total net debt

Item

H122

(US$m)

FY21
(US$m)

H121

FY20

Long-term debt to financial institutions

48.2

28.0

Short-term debt to financial institutions

0.3

30.7

Total debt to financial institutions

48.5

58.7

87.8

89.2

Cash

35.2

35.1

28.0

33.5

Net debt to financial institutions

13.3

23.6

59.8

55.7

Redink Rentals loan facility

8.9

9.9

Other

1.7

0.2

0.3

6.6

Net senior debt

23.9

33.7

60.1

62.3

Lease liabilities

4.5

5.3

5.0

14.1

Other

(0.2)

0.0

0.0

0.0

Total net debt

28.2

39.0

65.2

76.4

Source: Pan African Resources. Note: Totals may not add up owing to rounding.

This US$28.2m (cf US$39.0m previously) level of net debt equates to a gearing ratio (net debt/equity) of 10.3% (cf 13.8% previously) and a leverage ratio (net debt/[net debt+equity]) of 9.3% (cf 12.1% previously).

Readers are reminded that Pan African’s liability to Redink Rentals relates to its funding of the solar photovoltaic renewable energy plant located at Evander Mines. For the purposes of our financial modelling, debts to non-financial institutions, such as lease liabilities, are included in ‘Other long-term liabilities’ in Exhibit 18, below.

In the meantime, the group remains very comfortably within its revolving credit facility debt covenants to the point at which they are now, to all intents and purposes, irrelevant:

Exhibit 17: Pan African group debt covenants

Measurement

Constraint (updated)

H122

FY21

H121

FY20

H120

FY19

H119

FY18*

H118

FY17
(restated)

Net debt:equity

Must be less than 1:1

0.1

0.1

0.3

0.4

0.6

0.71

0.85

0.78

0.19

0.02

Net debt:EBITDA

Must be less than 2.0:1 falling to 1.5:1 by June 2022

0.2

0.3

0.5

0.7

1.6

2.2

3.24

3.73

2.25

0.08

Interest cover ratio

Must be greater than 4x

29.0

23.0

17.7

10.1

5.8

4.1

3.64

4.61

4.62

19.32

Debt service cover ratio

Must be greater than 1.3:1

3.0

3.0

3.3

3.4

3.0

1.4

2.85

3.84

1.85

9.11

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

Exhibit 18: Financial summary

US$'000s

2018

2019

2020

2021

2022e

2023e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

145,829

218,818

274,107

368,915

374,231

359,539

Cost of sales

(107,140)

(152,980)

(158,457)

(208,815)

(200,846)

(181,082)

Gross profit

38,689

65,838

115,650

160,100

173,385

178,457

EBITDA

 

 

38,131

65,484

115,176

156,646

167,194

174,662

Operating profit (before GW and except.)

 

 

31,506

49,256

93,673

124,572

136,292

138,339

Intangible amortisation

0

0

0

0

0

0

Exceptionals

(16,521)

10,596

(28,593)

(12,819)

(11,911)

(1,649)

Other

0

0

0

0

0

0

Operating profit

14,985

59,852

65,079

111,753

124,381

136,690

Net interest

(2,222)

(12,192)

(12,881)

(6,919)

(2,344)

(2)

Profit before tax (norm)

 

 

29,284

37,064

80,791

117,653

133,948

138,337

Profit before tax (FRS 3)

 

 

12,763

47,660

52,198

104,834

122,037

136,688

Tax

2,826

(8,174)

(7,905)

(30,141)

(33,989)

(43,651)

Profit after tax (norm)

32,110

28,890

72,887

87,511

99,959

94,687

Profit after tax (FRS 3)

15,589

39,486

44,293

74,692

88,048

93,038

Average number of shares outstanding (m)

1,809.7

1,928.3

1,928.3

1,928.3

1,928.2

1,927.9

EPS - normalised (c)

 

 

1.31

1.64

3.78

4.54

5.18

4.91

EPS - FRS 3 (c)

 

 

0.87

2.05

2.30

3.87

4.57

4.83

Dividend per share (c)

0.00

0.15

0.84

1.27

1.18

2.19

Gross margin (%)

26.5

30.1

42.2

43.4

46.3

49.6

EBITDA margin (%)

26.1

29.9

42.0

42.5

44.7

48.6

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

21.6

22.5

34.2

33.8

36.4

38.5

BALANCE SHEET

Fixed assets

 

 

315,279

361,529

314,968

398,533

456,119

469,806

Intangible assets

56,899

49,372

43,466

50,548

51,717

54,004

Tangible assets

254,247

305,355

270,286

346,922

403,338

414,738

Investments

4,134

6,802

1,216

1,064

1,064

1,064

Current assets

 

 

29,009

31,601

53,648

84,558

98,826

168,665

Stocks

4,310

6,323

7,626

11,356

12,530

11,994

Debtors

22,577

18,048

11,245

37,211

26,776

25,632

Cash

922

5,341

33,530

35,133

58,663

130,181

Current liabilities

 

 

(44,395)

(63,855)

(78,722)

(105,978)

(111,726)

(143,538)

Creditors

(37,968)

(39,707)

(62,806)

(75,303)

(81,051)

(123,963)

Short-term borrowings

(6,426)

(24,148)

(15,916)

(30,675)

(30,675)

(19,575)

Long-term liabilities

 

 

(152,906)

(145,693)

(106,276)

(93,482)

(94,459)

(95,301)

Long-term borrowings

(112,827)

(109,618)

(73,333)

(28,011)

(28,011)

(28,011)

Other long-term liabilities

(40,078)

(36,076)

(32,943)

(65,471)

(66,448)

(67,290)

Net assets

 

 

146,988

183,582

183,620

283,632

348,760

399,632

CASH FLOW

Operating cash flow

 

 

5,345

59,822

73,399

124,549

156,333

164,907

Net Interest

(6,076)

(14,685)

(10,834)

(5,623)

(2,344)

(2)

Tax

(1,634)

(4,497)

(5,804)

(18,902)

(13,549)

(9,482)

Capex

(127,279)

(52,261)

(30,849)

(44,151)

(88,488)

(50,009)

Acquisitions/disposals

6,319

466

207

3

0

0

Financing

11,944

(0)

0

0

(123)

0

Dividends

(11,030)

(2,933)

(2,933)

(17,782)

(28,300)

(22,796)

Net cash flow

(122,411)

(14,088)

23,186

38,095

23,529

82,618

Opening net debt/(cash)

 

 

3,138

118,332

128,424

55,719

23,553

23

Exchange rate movements

(619)

537

1,663

7,979

0

0

Other

7,836

3,459

47,856

(13,907)

0

0

Closing net debt/(cash)

 

 

118,332

128,424

55,719

23,553

23

(82,595)

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 Efrican Resources. Edison Investment Research standard fees are £60,000 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 2022 Edison Investment Research Limited (Edison).

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

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New York +1 646 653 7026

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

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1185 Avenue of the Americas

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United States of America

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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 Efrican Resources. Edison Investment Research standard fees are £60,000 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 2022 Edison Investment Research Limited (Edison).

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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