Return to dividend paying status in FY19 a priority

Pan African Resources 11 October 2018 Update
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Pan African Resources

Return to dividend paying status in FY19 a priority

FY18 results

Metals & mining

11 October 2018

Price

7.90p

Market cap

£177m

ZAR19.0312/£, ZAR14.3813/US$, US$1.3236/£

Net debt at end-June 2018 (£m) excluding ZAR58.8m (£3.1m) of MC Mining shares (formerly Coal of Africa)

91.0

Shares in issue*

2,234.7m

*Effective 1,928.3m post-consolidation

Free float

86%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.7)

12.9

(36.6)

Rel (local)

(0.6)

19.8

(34.4)

52-week high/low

15.8p

6.5p

Business description

Pan African Resources has four major producing or near-producing precious metals assets in South Africa: Barberton (target output 95koz Au pa), the Barberton Tailings Retreatment Project (20koz), the Evander Tailings Retreatment Project (10koz) and Elikhulu (55koz).

Next events

Elikhulu commercial production

Imminent

AGM

November 2018

H119 results

February 2019

Analysts

Charles Gibson

+44 (0)20 3077 5724

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

While Pan African Resources’ (PAF) pre-tax profit for the year to end-June 2018 was within 5% of our prior forecast (on an underlying basis, excluding impairments), bottom-line results were significantly ahead of our expectations as a result of a material tax credit applied to Evander. While FY18 was a challenging year, in which the board elected not to recommend a final dividend (as expected), an idea of its future financial potential may be gleaned from the fact that underlying earnings from continuing operations nevertheless amounted to £19.6m, or 1.08p per share (1.60p excluding ‘other’ items).

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/17

167.8

19.4

1.22

0.45

6.5

5.7

06/18

154.2

2.4

1.60

0.00

4.9

N/A

06/19e

160.1

31.8

1.09

0.47

7.3

5.9

06/20e

187.1

58.2

1.83

0.86

4.3

10.9

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

Elikhulu continues accelerated track to production

Management reiterated its production guidance of 170,000oz in FY19, reflecting the fact that commissioning at Elikhulu is progressing “very well”, with 56kg (1,800oz) of gold produced from 1–19 of September and with a forecast of 90–100kg (2,894–3,215oz) for the month as a whole. By November, the plant is expected to be operating close to capacity of 1Mt and 145kg (4,600oz) gold per month.

Gold weakness not (yet) offset by rand

At the same time, however, the price of gold has fallen by 8.2%, or more than US$100/oz, from over US$1,300/oz in the first five months of CY18 to under US$1,200/oz at the time of writing – only partially offset by a 5.3% decline in the value of the South African rand relative to its FY18 average. As a result, we have reduced our gold price forecast for H119, from US$1,320/oz to US$1,225/oz, which has reduced our earnings and cash flow expectations for FY19.

Valuation: 17.01p plus 20.1m underground Wits oz

Updating our long-term forecasts to reflect the mid-year decline in the gold price, our headline absolute valuation of PAF has eased by just 3.9% to 12.50p. Including new projects and other assets, however, this increases to 17.01p plus the value of c 20.1m underground Witwatersrand ounces, which could lie anywhere in the range of 0.17–4.15p per share, depending on market conditions. At the same time, if PAF’s average price to normalised current year EPS ratio of 9.4x in the period FY10–18 is applied to our forecasts, then its share price could be expected to be 10.2p in FY19 and 17.2p in FY20. In the meantime, it remains cheaper than its South African- and London-listed gold mining peers on at least 91% of valuation measures on the basis of our forecasts, or 94% on the basis of consensus forecasts (see Exhibit 9). Finally, based on our assumptions, PAF’s dividend yield is also the eighth-highest of the 65 precious metals’ companies expected to pay a dividend over the course of the next 12 months (see Exhibit 10).

FY18

While Pan African’s pre-tax profit for the year to end-June 2018 was within 5% of our prior forecast (on an underlying basis, excluding impairments), bottom-line results were materially ahead of our expectations as a result of a tax credit applied not only to the Evander underground operation, which was closed during the period, but also to Evander Mine’s continuing operations. Results were otherwise dominated by the decision to close Evander underground operations during the period – leading to an impairment of £106.3m (cf £177.2m of group net assets attributable to Evander, excluding goodwill, as at 31 December 2017), the fact that Barberton Gold Mines suffered 58 days of lost production owing to industrial action and community unrest, and a strong rand leading to a weak gold price in local currency terms. As expected, the board elected not to recommend a final dividend this year. While FY18 was thus a challenging year for Pan African, an idea of its future financial potential may be gleaned from the fact that underlying earnings from continuing operations nevertheless amounted to £19.6m, or 1.08p per share. In addition, Barberton recorded one million fatality-free shifts and there were no fatalities across the group over the entire 12-month period. Results for the full year, on a variety of different reporting bases and in conjunction with Edison’s prior expectations, are shown in the table below:

Exhibit 1: PAF underlying P&L statement by half-year (H115–H218e) actual and expected

£000s
(unless otherwise indicated)

H118

H218e

FY18e

H218
(implied)

FY18

FY18e (excl Evander)

FY18

(underlying)

FY18 underlying vs FY18e (excl Evander)
(%)

FY18 (as reported)

Mineral sales

82,900

71,933

154,833

74,000

156,900

104,410

108,500

3.9

108,500

Realisation costs

(1,500)

(800)

(2,300)

(1,200)

(2,700)

(1,551)

(2,000)

28.9

(2,000)

Realisation costs (%)

1.81

1.11

1.49

1.62

1.72

1.49

1.84

23.5

1.84

On-mine revenue

81,400

71,133

152,533

72,800

154,200

102,860

106,500

3.5

106,500

Cost of production

(69,600)

(63,400)

(133,000)

(69,200)

(138,800)

(74,346)

(77,700)

4.5

(77,700)

Depreciation

(5,900)

(9,277)

(15,177)

(5,100)

(11,000)

(9,433)

(4,900)

-48.1

(4,900)

Mining profit

5,900

(1,544)

4,356

(1,500)

4,400

19,081

23,900

25.3

23,900

Other income/(expenses)

(800)

(9,486)

(10,286)

(14,900)

(15,700)

(800)

(4,200)

425.0

(4,200)

Loss in associate etc

(400)

0

(400)

400

0

**0

**0

N/A

**0

Loss on disposals

0

0

0

(300)

(300)

0

0

N/A

0

Impairment costs

0

N/A

N/A

(106,300)

(106,300)

N/A

Excl.

N/A

(8,200)

Royalty costs

(300)

(234)

(534)

(300)

(600)

(875)

(400)

-54.3

(400)

Net income before finance

4,400

(11,263)

(6,863)

(122,900)

(118,500)

17,406

19,300

10.9

11,100

Finances income

700

 

1,300

2,000

1,500

N/A

1,500

Finance costs

(800)

 

(2,600)

(3,400)

(3,200)

N/A

(3,200)

Net finance income

(100)

(529)

(629)

(1,300)

(1,400)

(629)

(1,700)

170.3

(1,700)

Profit before taxation

4,300

(11,792)

(7,492)

(124,200)

(119,900)

16,777

17,600

4.9

9,400

Taxation

(1,000)

2,688

1,688

27,600

26,600

(10,092)

2,100

-120.8

2,100

Marginal tax rate (%)

23.3

22.8

22.5

22.2 

22.2

61.6

(11.9)

-119.3

(11.9)

PAT (continuing ops)

3,300

(9,104)

(5,804)

(96,600)

(93,300)

6,685

19,600

193.2

11,500

Loss from discontinued ops

N/A

N/A

N/A

N/A 

N/A

(12,490)

(6,700)

-46.4

(104,800)

Profit after tax

3,300

(9,104)

(5,804)

(96,600)

(93,300)

(5,804)

12,900

-322.3

(93,300)

 

Headline earnings

3,300

(9,104)

(5,804)

10,000

13,300

(5,804)

13,300

-329.2

13,300

 

EPS (p)

0.18

(0.50)

(0.32)

(5.31)

(5.15)

(0.32)

0.71

-322.3

(5.15)

HEPS* (p)

0.20

(0.50)

(0.32)

0.55

0.73

(0.32)

0.73

-329.2

0.73

EPS from continuing ops (p)

0.35

1.08

208.6

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

Note that Exhibit 14 is presented on the basis of the FY18 column (column 6, above) where ‘discontinued operations’ are fully consolidated. Normalised profit before tax of £2.4m in Exhibit 14 may be reconciled to the above table from FY18 mining profit of £4.4m (column 6) less £0.6m in royalties and a further £1.4m of net interest. The difference in PAF’s underlying profit after tax of £12.9m (column 8 of the above table) and headline earnings of £13.3m is a £0.3m “adjustment on sale of asset held for sale” and a £0.1m rounding difference.

Otherwise, costs of production for continuing operations (including realisation costs) increased by 4.4% in rand terms, the main contributors being as follows:

salaries and wages (38.9% of the total) +7.6%

electricity (9.6% of the total) +9.6%

mining and processing (33.7% of the total) -9.6%

engineering and technical (6.7% of the total) +13.0%

The other major feature of the company’s results was a higher than expected capex number and therefore a higher level of net debt at the year-end, as capital expenditure relating to the Elikhulu project, in particular, accelerated in line with the project’s development timeline from FY19 into FY18. Whereas we had been expecting ZAR902.1m in capex related to the Elikhulu project to be expended in FY18 therefore, in fact ZAR1,256.1m was expended. As a result, instead of ZAR537.8m being expended in FY19, we are now expecting this figure to reduce to ZAR300.0m – notwithstanding the decision to increase the project’s throughput by 200ktpm in December in order to incorporate the existing ETRP throughput to benefit from the larger project’s economies of scale.

In the meantime, management is reviewing the merits of mining the Evander 8 Shaft pillar, which may extend the final closure date of the shaft, generate positive cash flows and provide further employment opportunities for those affected by the Evander Section 189 retrenchment process.

FY19 guidance

Management reiterated its production guidance of 170,000oz in FY19, reflecting the fact that commissioning at Elikhulu is reported to be progressing “very well”, with 56kg (1,800oz) of gold produced from 1–19 of September and with a forecast of 90–100kg (2,894–3,215oz) for the month as a whole. By November, the plant is expected to be operating close to 1Mt, producing 145kg (4,600oz) gold, per month. Otherwise, underground operations at Barberton met their production targets towards the end of the financial year under the influence of two (cycling) production platforms. Management is now in the process of establishing a third such platform, which will increase underground mining flexibility still further and intends to increase underground development rates by c 60%. Finally, a 1.7MW re-grind mill has successfully been installed at the BTRP, which will allow it to efficiently treat coarser fraction tailings and open up the older, (albeit lower grade) Harper dumps for processing. A summary of our (unchanged) production expectations, by business segment is as follows:

Exhibit 2: PAF group-wide production, actual and forecast, FY14–FY19e (oz)

Operation

FY14

FY15

FY16

FY17

H118

H218

FY18

FY19e (current)

Barberton

88,738

81,493

84,690

71,763

32,159

40,966

73,125

84,641

Evander

76,556

63,558

73,496

43,304

32,734

15,831

48,565

0

BTRP

22,885

24,283

28,591

26,745

8,452

9,052

17,504

20,000

ETRP

0

6,523

18,151

29,473

11,937

9,313

21,250

20,000

Elikhulu

0

0

0

0

0

0

0

45,359

Total

188,179

175,857

204,928

173,285

85,282

75,139

160,444

170,000

Source: Edison Investment Research, Pan African Resources. Note: Numbers may not add up owing to rounding.

Note that, all other things being equal, the level of production implied from Elikhulu for FY19 suggests 81% capacity utilisation during the year or, alternatively, that it will operate at the equivalent of full capacity for 9.7 months out of the 12-month period.

Forecasts and valuation

Four producing assets again

The development of Elikhulu should increase group-wide output at Pan African to c 181koz in FY20 and will largely replace production lost from Evander underground, albeit at a much higher margin – which underpins our longer-term earnings and cash-flow expectations.

Exhibit 3: Edison estimate of PAF production, FY17–FY20e (oz)

Source: Edison Investment Research

At the same time, however, the price of gold has fallen by 8.2%, or more than US$100/oz, from over US$1,300/oz in the first five months of CY18 to under US$1,200/oz at the time of writing – only partially offset by a 5.3% decline in the value of the South African rand relative to its FY18 average. As a result, we have reduced our gold price forecast for H119, which has reduced our earnings and cash-flow expectations (all other things being equal) and, consequently, our absolute value of PAF (based on its four producing assets) from 13.01p per share (see EGM’s Parthian shot, published on 19 July 2018) to 12.50p per share, based on the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of its mining operations (applying a 10% discount rate).

Exhibit 4: PAF estimated life of operations diluted EPS and (maximum potential) DPS

Source: Edison Investment Research, Pan African Resources

Note that Edison’s EPS updated forecast of 1.09p in FY19 compares to a mean consensus forecast of 1.172p within a range 0.000–1.700p (source: Bloomberg 11 October), while its FY20 forecast of 1.83p compares to a mean consensus of 1.940p within a range 1.3–2.8p.

Other assets

In the wake of the Evander underground closure, PAF could deem the Evander underground resource to be one of its assets, albeit one that should now be valued as an in-situ resource, rather than, as previously, on the basis of future earnings, cash flows, dividends, etc. At the current time, we estimate the underground resource at Evander (including 7 Shaft vamping, Rolspruit, Poplar and Evander South, but excluding 8 Shaft and Egoli, which is valued separately – see Exhibit 7) to be 20.1Moz, categorised as follows:

Exhibit 5: Evander underground resource estimate

Resources

Tonnes (kt)

Grade (g/t)

Moz

Measured

0

0.00

0.000

Indicated

48,276

10.24

15.892

Inferred

18,350

7.18

4.236

Total

66,626

9.40

20.127

Source: Pan African Resources, Edison Investment Research

The value of Witwatersrand basin resources (where Evander is located) has proven to be persistently difficult to place within a global context – a problem exacerbated by an absence of pure Wits basin exploration companies. PAF bought Evander from Harmony in mid-2012 at a price equivalent to US$5.26 per resource ounce (albeit the gold price was then materially higher, averaging US$1,668/oz in that year). Since then, we estimate that PAF has mined 415,840oz from Evander excluding the ETRP (389,229oz from underground sources), ie implying only 1.2% depletion relative to the acquired underground resource of 32.52Moz. More recently, Sibanye acquired Wits Gold (although not then a pure exploration company) at a price equivalent to US$0.22/oz, at a time when the gold price was c US$1,225/oz. Otherwise, a value for in-situ Witwatersrand gold ounces may be imputed from the US$2.78/oz value calculated by us for Bushveld platinum equivalent ounces (there still being pure platinum explorers in South Africa) in our report, Mining overview: Unlocking the price to NPV discount, published in November 2017 – contingent on investors accepting the similarities between Bushveld and Witwatersrand geology in terms of depth, reef width and continuity, mining methods, etc. On the basis of these three valuation points, the in-situ value of the Evander underground assets could range from 0.23–5.49 US cents per PAF share, as shown below:

Exhibit 6: EGM underground

Valuation basis

Wits Gold acquisition in December 2012

Bushveld PtE exploration oz (Edison November 2017)

PAF acquisition of EGM in 2012

In-situ value (US$/oz)

0.22

2.78

5.26

Implied EGM underground valuation (US$m)

4.4

56.0

105.9

Ditto (US cents per share)

0.23

2.90

5.49

Ditto (pence per share)

0.17

2.19

4.15

Source: Edison Investment Research

Note that, relative to the equivalent valuation in our report entitled Pan African Resources: EGM’s Parthian shot, published on 19 July 2018, the only change in our valuation in Exhibit 6 reflects changes in prevailing forex rates.

Other major assets attributable to Pan African include the Egoli project (formerly the 2010 pay channel project) at Evander, the Fairview sub-vertical shaft project and the Royal Sheba project.

The results of a recent optimisation study based on an earlier DRA Global feasibility study on Egoli are:

initial capex of ZAR870m (vs ZAR572m previously);

a pre-tax internal rate of return of 34% based on a gold price of ZAR547,000/kg (cf 46% previously);

a project pre-tax NPV of ZAR1.04bn at a 12.4% real discount rate or ZAR1.354m at a 10% discount rate (cf ZAR1.74bn at a 10% discount rate, previously); and

an incremental all-in sustaining cost of c ZAR300,000/kg over the life of the mine (cf ZAR275,000/kg previously).

Adjusting our existing model (see our note Pan African Resources: A second glance at the first half, published on 23 April 2018) to incorporate the higher capex and opex than previously forecast, we calculate an NPV for potential dividends payable by Egoli to investors of £68.0m, at its customary 10% discount rate, or 3.53p/share. Readers should note, however, that while still attractive, management is not making the Egoli project a priority in the foreseeable future owing to its deep level ‘Witwatersrand’ nature.

Recent drilling at Royal Sheba has increased resources once again, most recently from 720koz to 899koz – 39% of which is at or near surface at a grade of 3.81g/t. The mineralisation is encapsulated in a shear envelope of the Sheba Fault, ranging in width from 5–25m, with gold occurring in sulphide minerals and as native gold. In-situ grades range from 0.5g/t to 174g/t. Significantly, however, the mineralisation is non-refractory and amenable to processing via normal CIL methods and, as a result, could increase gold production from Barberton “significantly” in future years by a means of an open pit and a simple expansion of processing capacity. Management expects to finalise a definitive feasibility study for Royal Sheba by February 2019. However, it is expected that this project will be financeable from debt and cash flows only, without recourse to the equity market. In the meantime, at Pan African’s prevailing enterprise value rating of US$10.13 per resource ounce, Royal Sheba’s resources are worth a pro-rata US$9.1m, or 0.47 US cents, or 0.36p, per share.

Following the success at Royal Sheba, Pan African has also embarked on an extended exploration programme within Barberton Mines’ mining right at both the Sheba and New Consort mines around historical workings and for potential new satellite deposits.

Finally, Pan African has commenced construction of a new sub-vertical shaft at Fairview to bypass the hoisting bottleneck at its No 3 Decline and to facilitate improved access to additional mining platforms below 42 Level at the high grade 11-block of the MRC. Project capex is forecast to be ZAR105m over two to three years. Following commissioning of the shaft, it is expected that productivity improvements will yield an additional 7–10koz of gold per annum owing to the increased hoisting capacity.

Including its growth projects, a summary of our overall valuation of PAF is therefore now as follows:

Exhibit 7: PAF absolute valuation summary

Project

Current valuation

(pence/share)

Previous valuation

(pence/share)

Existing three producing assets plus Elikhulu

12.50

13.01

Egoli

3.53

3.91

Fairview Sub-Vertical Shaft Project

0.46

0.46

Royal Sheba

*0.36

N/A

MC Mining shares*

0.16

0.15

Sub-total

17.01

17.53

EGM underground resource

0.17–4.15

0.17–4.15

Total

17.18–21.16

17.70–21.68

Source: Edison Investment Research. Note: *Provisional pending finalisation of DFS.

Note that the valuation changes to the Fairview Sub-Vertical Shaft project also reflect changes to prevailing foreign exchange rates only.

Historical and relative valuation

Historical

Exhibit 8, below, depicts PAF’s average share price in each of its financial years, from FY10 to FY17 and compares this with normalised HEPS in the same year. For FY19 to FY20, the current share price (of 7.90p) is compared with Edison’s forecast normalised HEPS for FY19 to FY20. As is apparent from the graph, PAF’s price to normalised HEPS ratio for FY19 is already towards the bottom of its recent historical range (based on our forecasts – see Exhibit 14, below), with this ratio having been lower in FY18, FY13 and FY10 only. Moreover, it falls well below the range in FY20, by which time we expect Elikhulu to be operating at full capacity.

Exhibit 8: PAF historical price to normalised HEPS ratio, FY10–FY20e

Source: Edison Investment Research, Bloomberg. Note: *Completed historical years calculated with respect to average share price within the year shown and normalised HEPS; zero normalisation assumed before 2016.

Stated alternatively, if PAF’s average contemporary price to normalised EPS ratio of 9.4x in the period FY10-18 is deemed to be ‘correct’, then its share price should be 10.2p in FY19 and 17.2p in FY20.

Relative

In the meantime, over the next two years PAF remains cheaper than its South African and London-listed gold mining peers on at least 91% of valuation measures (33 out of 36 measures in the table below on an individual company basis) using our forecasts, or 94% of measures (34 out of 36 measures) using consensus forecasts:

Exhibit 9: Comparative valuation of PAF with South African peers

EV/EBITDA (x)

P/E (x)

Yield (%)

 

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

AngloGold Ashanti

4.2

3.5

16.9

10.4

1.0

1.6

Gold Fields

3.5

2.8

42.0

12.1

2.5

5.0

Sibanye

5.1

3.8

29.0

8.4

0.2

1.0

Harmony

2.8

2.8

6.2

6.5

1.3

1.3

Randgold Resources

11.0

9.3

25.3

20.5

3.8

5.3

Centamin

4.3

3.4

16.2

12.7

4.7

6.0

Average (excluding PAF)

5.2

4.3

22.6

11.8

2.2

3.4

PAF (Edison)

3.6

2.5

7.3

4.3

5.9

10.9

PAF (consensus)

3.0

2.4

6.6

4.2

5.0

7.6

Source: Edison Investment Research, Bloomberg. Note: Peers priced at 11 October 2018; Randgold Resources considered as separate entity prior to merger with Barrick (announced 24 September 2018).

Dividend

PAF has a target dividend pay-out ratio of 40% of net cash generated by operating activities, after allowing for the effect of sustaining capital on cash flow, contractual debt repayments and one-off items. As previously forecast by Edison, the Pan African board elected not to recommend a final dividend for the 2018 financial year. However, it stated that recommencing distributions to shareholders is a priority for the future. On the basis of the aforementioned policy, coupled with our expectations, we estimate that the company will be capable of paying a dividend of 0.47p per share in FY19, in which case it will have the eighth highest dividend yield of the 65 ostensibly precious metals’ companies paying dividends to shareholders within the course of the next 12 months:

Exhibit 10: Global gold mining companies ranked by forecast dividend yield (%)

Source: Bloomberg (BEst Div Yld BF12M) for peers, Edison Investment Research for PAF FY19. Note: Consensus data for peers priced 11 October 2018.

Financials

PAF had £91.0m of net debt on its balance sheet as at 30 June 2018 (cf £42.2m as at December 2017, £7.0m as at June 2017 and £33.2m as at December 2016). As such, net debt equated to a gearing (net debt/equity) ratio of 78.6% and a leverage (net debt/[net debt + equity]) ratio of 44.4%.

FY18 net debt was higher than our previous forecast (see Pan African Resources: EGM’s Parthian shot, published on 19 July 2018). However, this merely reflected higher than expected investment in Elikhulu as capex was brought forward from FY19 into FY18 in line with the project’s accelerated timeline. Whereas we had been expecting ZAR902.1m in Elikhulu capex in FY18 therefore, in fact ZAR1,256.1m was expended. As a result, instead of ZAR537.8m being expended in FY19, we are now expecting this figure to reduce to ZAR300.0m – notwithstanding the decision to increase the project’s throughput by 200ktpm in December in order to incorporate the existing ETRP’s throughput to benefit from the larger project’s economies of scale. PAF’s major immediate capital requirements continue to relate to the Elikhulu project. However, as at end-June, the most intense phase of capex has been completed. Including the project to expand Elikulu’s throughput capacity by 200ktpm from December 2018 to incorporate the existing ETRP feed, our forecasts for PAF’s immediate future capital expenditure commitments relating to the project (including sustaining capital) are as follows:

Exhibit 11: Estimated Elikhulu capex requirements by financial year, FY19-23

£000s

FY19

FY20

FY21

FY22

FY23

Total capex*

20,187

5,160

13,384

13,384

3,045

Source: Pan African Resources, Edison Investment Research. Note: *Includes sustaining capex, but excludes Phase 3 capex, which commences in FY26.

After accelerating capex into FY18, from FY19, however, we anticipate that Pan African will record (albeit marginal) positive cash flow in FY19 before taking off thereafter to c £40m per annum thereafter, such that, while maintaining a dividend policy of 40% of free cash flows less sustaining capital, debt repayments and exceptional items, its net debt funding requirement, on our estimates, will evolve as follows in the period from FY16 to FY24e:

Exhibit 12: PAF estimated funding requirement, FY16 to FY24e

Source: Edison Investment Research, Pan African Resources

Debt is financed via a ZAR1bn revolving credit facility (£53.0m at current exchange rates) plus a ZAR1bn facility relating to the Elikhulu project and a banking facility. Principal on the Elikhulu facility is payable in equal instalments until maturity in June 2024, while the RCF itself has been restructured to extend its maturity from mid-2020 previously to at least beyond mid-2024 currently. The group’s revolving credit facility (RCF) debt covenants and their actual recorded levels within recent history are as follows:

Exhibit 13: PAF group debt covenants

Measurement

Constraint

FY18
(actual)

H118
(actual)

FY17
(restated)

FY17
(actual)

H117
(actual)

FY16*
(actual)

H116
(actual)

Net debt:equity

Must be less than 1:1

0.78

0.19:1

0.02:1

0.01:1

0.17:1

0.35:1

0.50:1

Net debt:EBITDA

Must be less than 2.5:1

3.73

2.25:1

0.08:1

0.05:1

0.48:1

0.12:1

0.13:1

Interest cover ratio

Must be greater than four times

4.61:1

4.62:1

19.32:1

10.00

21.99

23.98

18.08

Debt service cover ratio

Must be greater than 1.3:1

3.84:1

1.85:1

9.11:1

N/A

N/A

N/A

N/A

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

Note that the net debt:EBITDA covenant is measurable only on 31 December 2019 in order to accommodate the construction of the Elikhulu project, while the interest cover ratio has temporarily been reduced to 2.3:1 until December 2018.

Post year-end events

On 7 September, PAF announced that Barberton Mines Pty Ltd had successfully concluded a three-year wage agreement with the National Union of Mineworkers (the NUM) and the United Association of South Africa (UASA), which together represent the majority of workers at Barberton. The agreement provides for an average annual wage increase of approximately 6.5% and 5.5% for NUM and UASA members respectively over three years in local currency terms. The negotiations were successfully concluded with no industrial action or work stoppages, which compares with a settlement of +8% per annum after 2.5 days of stoppages in the equivalent negotiations last year.

Exhibit 14: Financial summary

£000s

2011

2012

2013

2014

2015

2016

2017

2018

2019e

2020e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

79,051

100,905

133,308

154,202

140,386

168,404

167,759

154,200

160,111

187,067

Cost of sales

(45,345)

(46,123)

(71,181)

(106,394)

(110,413)

(108,223)

(134,007)

(138,800)

(104,226)

(105,200)

Gross profit

33,705

54,783

62,127

47,808

29,973

60,181

33,752

15,400

55,885

81,867

EBITDA

 

 

28,540

45,018

53,276

44,165

28,448

57,381

32,417

14,800

54,491

79,237

Operating profit (before GW and except.)

25,655

41,759

47,278

34,142

18,110

46,925

21,924

3,800

41,334

66,156

Intangible amortisation

0

0

0

0

0

0

0

0

0

0

Exceptionals

0

(48)

7,232

(12)

(198)

(12,183)

(1,248)

(122,300)

(1,252)

(1,252)

Other

0

0

0

0

0

0

0

0

0

0

Operating profit

25,655

41,711

54,510

34,130

17,912

34,742

20,676

(118,500)

40,082

64,904

Net interest

762

516

197

(191)

(2,109)

(1,006)

(2,523)

(1,400)

(9,555)

(7,988)

Profit before tax (norm)

 

 

26,417

42,274

47,475

33,951

16,001

45,919

19,401

2,400

31,779

58,167

Profit before tax (FRS 3)

 

 

26,417

42,226

54,707

33,939

15,803

33,736

18,153

(119,900)

30,527

56,915

Tax

(9,248)

(12,985)

(12,133)

(7,155)

(4,133)

(8,234)

(243)

26,600

(10,774)

(22,793)

Profit after tax (norm)

17,169

29,290

35,342

26,796

11,868

37,685

19,158

29,000

21,004

35,374

Profit after tax (FRS 3)

17,169

29,242

42,574

26,785

11,670

25,502

17,910

(93,300)

19,753

34,122

Average number of shares outstanding (m)

1,432.7

1,445.2

1,619.8

1,827.2

1,830.4

1,811.4

1,564.3

1,809.2

1,928.3

1,928.3

EPS - normalised (p)

 

 

1.20

2.03

2.18

1.46

0.64

2.08

1.22

1.60

1.09

1.83

EPS - FRS 3 (p)

 

 

1.20

2.02

2.63

1.47

0.64

1.41

1.14

(5.16)

1.02

1.77

Dividend per share (p)

0.51

0.00

0.83

0.82

0.54

0.88

0.45

0.00

0.47

0.86

Gross margin (%)

42.6

54.3

46.6

31.0

21.4

35.7

20.1

10.0

34.9

43.8

EBITDA margin (%)

36.1

44.6

40.0

28.6

20.3

34.1

19.3

9.6

34.0

42.4

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

32.5

41.4

35.5

22.1

12.9

27.9

13.1

2.5

25.8

35.4

BALANCE SHEET

Fixed assets

 

 

97,281

86,075

249,316

223,425

220,150

230,676

273,635

245,100

256,840

253,124

Intangible assets

38,229

23,664

38,628

37,040

37,713

38,682

41,425

49,200

50,936

52,673

Tangible assets

59,052

62,412

209,490

185,376

181,533

190,725

224,687

192,800

202,803

197,352

Investments

0

0

1,199

1,010

905

1,269

7,523

3,100

3,100

3,100

Current assets

 

 

15,835

41,614

26,962

23,510

17,218

22,016

37,090

20,000

21,942

52,037

Stocks

1,457

1,869

6,596

5,341

3,503

4,399

7,583

2,700

5,344

6,244

Debtors

4,254

6,828

15,384

12,551

10,386

14,891

14,813

14,800

11,859

13,856

Cash

10,124

19,782

4,769

5,618

3,329

2,659

9,447

700

2,940

30,138

Current liabilities

 

 

(8,960)

(11,062)

(24,066)

(24,012)

(22,350)

(32,211)

(31,251)

(33,400)

(35,902)

(43,660)

Creditors

(8,960)

(11,062)

(23,202)

(19,257)

(17,301)

(25,230)

(27,105)

(28,200)

(30,702)

(38,460)

Short-term borrowings

0

0

(864)

(4,755)

(5,049)

(6,981)

(4,146)

(5,200)

(5,200)

(5,200)

Long-term liabilities

 

 

(13,410)

(14,001)

(80,004)

(63,528)

(67,850)

(69,506)

(62,893)

(115,900)

(116,298)

(117,329)

Long-term borrowings

(181)

(869)

(11,133)

(8,141)

(16,313)

(18,456)

(12,290)

(86,500)

(86,500)

(86,500)

Other long-term liabilities

(13,228)

(13,132)

(68,871)

(55,387)

(51,537)

(51,049)

(50,603)

(29,400)

(29,798)

(30,829)

Net assets

 

 

90,746

102,626

172,208

159,396

147,167

150,975

216,581

115,800

126,582

144,173

CASH FLOW

Operating cash flow

 

 

31,968

49,092

61,618

45,996

26,423

47,130

29,945

(1,900)

47,068

75,285

Net Interest

762

516

314

(606)

(2,109)

(1,006)

(2,141)

(1,400)

(9,555)

(7,988)

Tax

(10,743)

(11,616)

(13,666)

(8,536)

(3,943)

(7,777)

(8,003)

0

(10,377)

(21,762)

Capex

(21,712)

(17,814)

(27,197)

(21,355)

(19,554)

(14,097)

(36,748)

(94,200)

(24,897)

(9,366)

Acquisitions/disposals

0

(1,549)

(96,006)

0

(760)

(30,999)

8,364

4,400

0

0

Financing

1,545

259

47,112

349

(235)

15,207

34,638

9,800

0

0

Dividends

(5,376)

(7,416)

0

(14,684)

(15,006)

(9,882)

(13,290)

(8,200)

0

(8,971)

Net cash flow

(3,557)

11,471

(27,826)

1,164

(15,184)

(1,425)

12,764

(91,500)

2,240

27,198

Opening net debt/(cash)

 

 

(12,756)

(9,943)

(18,913)

7,228

7,278

18,033

22,778

6,989

91,000

88,760

Exchange rate movements

925

(1,813)

594

(839)

(276)

812

238

(1,447)

0

0

Other

(181)

(688)

1,090

(375)

4,705

(4,131)

2,787

8,936

0

0

Closing net debt/(cash)

 

 

(9,943)

(18,913)

7,228

7,278

18,033

22,778

6,989

91,000

88,760

61,562

Source: Pan African Resources, Edison Investment Research. Note: 2,234.7m shares in issue reduce to 1,928.3m after cancellation of shares effectively held in treasury upon consolidation of PAR Gold (formerly Shanduka Gold).

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 2018. “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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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