The sun rises over Egoli’s city of gold

Pan African Resources 14 October 2020 Update
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Pan African Resources

The sun rises over Egoli’s city of gold

FY20 results and Egoli

Metals & mining

14 October 2020

Price

22.70p

Market cap

£507m

ZAR21.3431/£, ZAR16.5113/US$, US$1.2929/£

Net debt (US$m) at end June 2020 excluding estimated ZAR16.9m (US$1.0m) of MC Mining shares (formerly Coal of Africa)

55.7

Shares in issue*

2,234.7m

*Effective 1,928.3m post-consolidation

Free float

86%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.4)

8.9

97.1

Rel (local)

(5.0)

11.2

134.8

52-week high/low

27.1p

9.0p

Business description

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

Next events

AGM

26 November 2020

Ex-dividend LSE date

3 December 2020

Dividend payment date

15 December 2020

H121 results

February 2021

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Notwithstanding COVID-19, Pan African’s (PAF) normalised financial results for FY20 were materially ahead of our expectations, driven by a US$9.9m positive variance in the direct cost of production (see Exhibit 3). In consequence, the group announced a more than fivefold increase in its proposed dividend for the year in US dollar terms to a record ZAR312.9m, putting it among the top 14 dividend-paying precious metals companies globally in terms of yield (see Exhibit 15). While FY20 represented a step change in PAF’s profitability compared with FY19, we believe that another step change is possible in FY21 under the influence of higher gold prices, close control of costs as new projects come on stream, a benign foreign exchange environment, a rising production profile and the maturity of all remaining hedging contracts prior to December 2020.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/19

218.8

37.1

1.64

0.15

17.9

0.5

06/20

274.1

80.8

3.78

0.84

7.8

2.8

06/21e

307.9

129.5

6.42

1.43

4.6

4.9

06/22

316.0

142.4

6.43

1.21

4.6

4.1

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

Egoli

During the reporting period, consultants DRA completed a feasibility study on the Egoli project (formerly the 2010 Pay Channel underground at Evander) and the project has subsequently been approved by Pan African’s board. The feasibility study demonstrated a post-tax NPV10.71 of US$131.25m (6.8c/share) and a post-tax IRR of 50.1% for a mine producing 90.1koz gold pa at steady state (see Exhibit 9) for a peak funding requirement of ZAR1.2bn and ongoing opex of ZAR1,787/t at a gold price of US$1,650/oz. As a result of the sanctioning of this project, we estimate that PAF’s group output will increase from an estimated 190,818oz in FY21e to 284,509oz in FY25e, with all funding for the project being provided by Rand Merchant Bank in the form of debt.

Valuation: Steady at 40.48c (31.31p) per share

In the wake of its FY20 results, our absolute valuation of PAF has remained steady, at 40.48c (cf 31.31p) per share based on its four main currently producing assets plus Egoli. To this must then be added the value of c 19.2m underground Witwatersrand ounces, which we estimate could lie anywhere in the range of 0.22–5.24c per share, depending on market conditions. As an alternative means of valuation, if PAF’s historical average price to normalised EPS ratio of 9.1x in the period FY10–20 is applied to our FY21 forecasts, then it implies a share price potentially as high as 45p in the current financial year. In relative terms, Pan African remains cheaper than its South Africa- and London-listed gold mining peers on at least 63% of common valuation measures if our forecasts are used, or 76% if consensus forecasts are used. In the meantime, on the basis of its FY20 dividend, PAF is among the 14 top dividend-paying precious metals companies globally. Based on our forecasts for FY21, we believe that this could improve to within the top 10 (see Exhibit 15).

FY20 and H220 production and highlights

A summary of the output of Pan African’s assets during the year, including the production in H220 implied by FY20 and H120 numbers, is provided in the table below.

Exhibit 1: PAF production, FY16–20 (oz)

Operation

FY16

FY17

H118

H218

FY18

H119

H219

FY19

H120

H220

H220/H120
(%)

FY20

Barberton UG

84,690

71,763

32,159

40,966

73,125

38,550

36,806

75,356

36,737

31,392

-14.5

68,129

BTRP

28,591

26,745

8,452

9,052

17,504

12,006

12,001

24,007

10,619

9,516

-10.4

20,135

Barberton

113,281

98,508

40,611

50,018

90,629

50,556

48,807

99,363

47,356

40,908

-13.6

88,264

Evander UG

73,496

43,304

32,734

15,831

48,565

8,821

8,058

16,879

11,553

9,117

-21.1

20,670

ETRP

18,151

29,473

11,937

9,313

21,250

6,345

3,654

9,999

4,731

6,176

+30.5

10,907

Evander

91,647

72,777

44,671

25,144

69,815

15,166

11,712

26,878

16,284

15,293

-6.1

31,577

Elikhulu

0

0

0

0

0

15,292

30,909

46,201

29,301

30,315

+3.5

59,616

Total

204,928

173,285

85,282

75,139

160,444

81,014

91,428

172,442

92,941

86,516

-6.9

179,457

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

UG = underground.

While H220 production overall was 6.9% lower than in H120, FY20 production was nevertheless higher than a) in the previous year, b) updated company guidance (May 2020) and c) our prior expectations. Self-evidently, this performance was achieved during the period in which the most severe coronavirus-related lockdown restrictions were in place in South Africa. Within this context, output at PAF’s Barberton underground mine was particularly notable, outperforming the updated guidance by 4,129oz (or 6.5%) and our forecast for the year by 3,225oz (or 5.0%):

Exhibit 2: Pan African FY20 production cf guidance and Edison forecasts

Production asset

Prior (pre-coronavirus) company guidance (oz)

March 2020 Edison forecast* (oz)

Updated guidance (oz)

May 2020 Edison forecast (oz)

FY20 actual (oz)

FY20a vs updated guidance (%)

BTRP

20,000

20,619

21,000

21,000

20,135

-4.1

Elikhulu

65,000

65,199

59,000

58,992

59,616

+1.0

Barberton underground

80,000

77,737

64,000

64,904

68,129

+6.5

Evander underground & tolling

20,000

27,053

31,000

31,000

31,577

+1.9

Total

185,000

190,608

175,000

175,896

179,457

+2.5

Source: Pan African Resources, Edison Investment Research. Note: Totals may not add up owing to rounding. *See our note, H120 confirms FY20 forecasts, published on 2 March 2020.

H220 and FY20 results vs forecasts

The table overleaf presents PAF’s H220 and FY20 results relative to both historic results and also our prior expectations (albeit within the context of known production from each of its assets). Among other things, readers are reminded that production from Evander’s 8 Shaft Pillar project was capitalised until June, when steady-state production was achieved, whereas our forecasts assumed that 100% of Evander underground production and costs were expensed in the period.

From Exhibit 3, it may be seen that, while normalised earnings and profit after tax were within 5% of our prior expectations, Pan African outperformed Edison’s underlying expectations (as measured by normalised headline earnings per share (HEPS), which excludes other income and expenses – ie zero cost collar losses – in particular) by a material 26.8% in FY20. In crude terms, while other expenses (ie zero cost collar losses) were US$17.3m worse than our prior expectations, this was approximately balanced by costs of production which were US$9.9m better, net finance costs which were US$1.6m better and a tax charge which was US$2.9m better. Excluding other expenses therefore, normalised headline earnings were US$15.3m (approximately the sum of US$9.9m, US$1.6m and US$2.9m), or 26.7%, ahead of our prior forecasts.

Exhibit 3: PAF P&L statement by half-year (H119–H220) actual cf forecast

US$000s
(unless otherwise indicated)

H119

H119
(restated)

H219
(implied)

FY19

H120

H220e

FY20e

H220

FY20

FY20a/
FY20e (%)

On-mine revenue

96,699

97,531

121,287

218,818

132,849

141,387

274,236

141,258

274,107

0.0

Cost of production

(70,162)

(70,847)

(82,133)

(152,980)

(86,501)

(81,882)

(168,384)

(71,956)

(158,457)

-5.9

Depreciation

(6,861)

(6,840)

(9,388)

(16,228)

(10,526)

(11,826)

(22,353)

(10,977)

(21,503)

-3.8

Mining profit

19,676

19,844

29,767

49,611

35,821

47,679

83,500

58,325

94,146

12.7

Other income/(expenses)

(1,812)

(2,077)

(5,181)

(7,258)

(962)

(10,444)

(11,405)

(27,720)

(28,682)

151.5

Loss in associate etc

0

0

0

0

0

0

0

0

0

 

Loss on disposals

0

0

0

0

0

0

0

0

0

 

Impairments

0

0

17,854

17,854

109

0

109

(20)

89

-18.3

Royalty costs

(518)

(474)

120

(354)

(208)

(371)

(579)

(266)

(474)

-18.1

Net income before finance

17,346

17,293

42,559

59,852

34,761

36,864

71,624

30,319

65,079

-9.1

Finances income

388

443

407

850

207

258

465

 

Finance costs

(5,696)

(5,699)

(7,343)

(13,042)

(7,760)

(5,587)

(13,346)

 

Net finance income

(5,307)

(5,256)

(6,936)

(12,192)

(7,553)

(6,958)

(14,511)

(5,329)

(12,881)

-11.2

Profit before taxation

12,039

12,037

35,623

47,660

27,208

29,905

57,113

24,990

52,198

-8.6

Taxation

(2,330)

(2,325)

(5,850)

(8,174)

(5,303)

(5,548)

(10,850)

(2,602)

(7,905)

-27.1

Marginal tax rate (%)

19.4

19.3

16.4

17.2

19.5

29.2

19.0

10.4

15.1

-20.5

PAT (continuing ops)

9,709

9,712

29,774

39,486

21,906

24,358

46,263

22,388

44,293

-4.3

Loss from discontinued ops

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Profit after tax

9,709

9,712

29,774

39,486

21,906

24,358

46,263

22,388

44,293

-4.3

 

Headline earnings

9,709

9,712

14,586

24,298

21,742

24,358

46,100

22,416

44,158

-4.2

Est. normalised headline earnings

11,789

19,766

31,556

22,704

34,801

57,505

50,136

72,840

+26.7

 

EPS (c)

0.50

0.50

1.54

2.05

1.14

1.26

2.40

1.16

2.30

-4.2

HEPS* (c)

0.50

0.50

0.76

1.26

1.13

1.26

2.39

1.16

2.29

-4.2

Normalised HEPS (c)

0.60

0.61

1.03

1.64

1.18

1.80

2.98

2.60

3.78

26.8

EPS from continuing ops (c)

0.50

0.50

1.54

2.05

1.14

1.26

2.40

1.16

2.30

-4.2

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

On the basis that our prior normalised HEPS forecast of 2.98c/share compared with a consensus EPS forecast of 2.72p/share, within a range 2.39–3.04p/share (source: Refinitiv, 27 July 2020), we would infer that actual FY20 results were also materially ahead of consensus forecasts.

In addition, it should be noted that, over the full year, Pan African sold 5,593oz gold less than it produced, implying, among other things, that it sold 3,254oz less than it produced in H220, adding to the 2,339oz less that it sold in H120. At the average gold price received during the year (US$1,574/oz), we estimate that this could have added an additional c US$8.8m to revenue.

Operations

Barberton underground (38% of production; 35% of adjusted EBITDA)

Barberton recorded its highest adjusted EBITDA number since H117 in H120 and easily covered capex of ZAR107.0m, despite facing challenging geological conditions at Fairview and the need to put enhanced security initiatives in place to curtail illegal mining activities. Notwithstanding the challenging operating environment in H220 (January to June), Pan African was successful in increasing both tonnes milled from underground and surface sources to their highest (combined) level since at least H111 – albeit, to some extent, at the expense of the head grade, which declined by 18.4%, from 7.54g/t to 6.15g/t. In particular, the worst depredations of the coronavirus were mitigated by: a) increased reserve delineation drilling on the 256 platform of the high-grade MRC orebody at Fairview in order to increase confidence in, and predictability of, management’s geological models, b) Barberton’s ability to mill ore from surface sources (requiring a lower complement of workers) and c) its ability to focus on higher-grade areas of the orebody after the establishment of the 257 platform, thereby allowing three platforms to cycle (flexible) production on the MRC. The improved flexibility, resulting from accelerated underground development programmes, has now increased the face length available for mining to over 130m. At the 257 platform alone, geological mapping and reserve delineation drilling have identified a mineralised width in excess of 15m (cf the usual 7m width ordinarily encountered on the upper platforms). In the meantime, management is in the process of establishing the 258 platform some 25m below the 257 platform, which is scheduled to enter production in Q221, at which point Barberton/Fairview will have four platforms to cycle high-grade (flexible) production on the MRC.

At the same time, costs were also extremely well controlled, with unit operating costs declining 14.7% in H220 in local currency terms (cf H120), to ZAR3,238/t – the lowest since H116. Aggregate costs in US dollar terms were the lowest since H216, with the result that adjusted EBITDA increased by 27.8% in H220 relative to H120, compared with only an 11.5% increase in the US dollar price of gold.

Exhibit 4: Barberton underground operational statistics and estimates, H116–H220

H117

H217

H118

H218

H119

H219

H120

H220e

H220

H220a vs H220e (%)

FY20

Tonnes milled underground (t)

123,168

123,747

124,969

112,862

127,858

119,777

117,545

84,130

116,035

+37.9

233,580

Head grade underground (g/t)

9.40

10.20

8.70

12.07

9.60

9.88

9.70*

10.59

8.79*

-17.0

9.25

Underground gold contained (oz)

37,224

40,574

34,956

43,803

39,463

38,052

36,648

28,645

32,791

+14.5

69,439

Tonnes milled surface (t)

0

0

0

0

12,471

33,158

47,231

78,879

56,593

-28.3

103,824

Head grade surface (g/t)

0.00

0.00

0.00

0.00

2.30

1.62

2.16*

2.16

0.73*

-66.2

1.38

Surface gold contained (oz)

0

0

0

0

922

1,729

3,283

5,483

1,331

-75.7

4,614

Tons milled (t)

123,168

123,747

124,969

112,862

140,329

152,935

164,776

163,009

172,628

+5.9

337,404

Head grade (g/t)

9.40

10.20

8.70

12.07

8.95

8.09

7.54

6.51

6.15

-5.5

6.83

Contained gold (oz)

37,224

40,574

34,956

43,803

40,386

39,780

39,932

34,128

34,122

-0.0

74,053

Recovery (%)

93.0

91.9

93.0

93.5

94.0

92.5

92.0

92.5

92.0

-0.5

92.00

Production underground (oz)

34,471

37,292

32,159

40,966

37,735

35,129

36,737

31,565

31,392

-0.5

68,129

Production calcine dumps/surface ops (oz)

0

0

0

0

815

1,677

0

0

0

0.0

0

Total production (oz)

34,471

37,292

32,159

40,966

38,550

36,806

36,737

31,565

31,392

-0.5

68,129

Recovered grade (g/t)

8.70

9.37

8.00

11.29

8.54

7.49

6.93

6.02

5.66

-6.0

6.28

Gold sold (oz)

34,471

37,292

32,159

40,966

37,829

37,527

36,737

31,565

31,392

-0.5

68,129

Average spot price (US$/oz)

1,268

1,239

1,288

1,317

1,220

1,306

1,477

1,647

1,647

0.0

1,585

Average spot price (ZAR/kg)

570,251

526,341

554,361

521,029

556,770

596,180

698,031

882,504

882,504

0.0

798,287

Total cash cost (US$/oz)

967

940

1,145

981

996

1,097

1,159

1,242

1,053

-15.2

1,110

Total cash cost (ZAR/kg)

434,999

399,081

492,826

390,220

454,164

500,214

547,594

665,734

572,432

-14.0

559,016

Total cash cost (US$/t)

270.74

283.19

294.62

356.03

268.42

269.10

258.39

240.59

191.44

-20.4

224.13

Total cash cost (ZAR/t)

3,787.00

3,740.66

3,945.00

4,405.46

3,860.00

3,817.67

3,797.00

4,009.60

3,237.70

-19.3

3,510.84

Implied revenue (US$000)

43,709

46,640

41,421

53,057

46,151

49,325

54,261

51,988

53,724

+3.3

107,984

Implied revenue (ZAR000)

611,400

616,296

554,499

660,698

655,098

699,398

797,598

866,419

893,997

+3.2

1,691,595

Implied revenue (£000)

34,207

37,008

31,422

38,722

35,652

38,120

43,061

41,237

42,614

+3.3

85,675

Implied cash costs (US$000)

33,347

35,043

36,819

40,182

37,667

41,155

42,576

39,218

33,047

-15.7

75,623

Implied cash costs (ZAR000)

466,437

462,895

493,003

497,209

534,400

583,855

625,654

653,600

558,918

-14.5

1,184,573

Implied cash costs (£000)

26,091

27,814

27,900

29,269

29,102

31,803

33,796

31,183

26,203

-16.0

59,999

Reported adjusted EBITDA (ZAR000)

240,300

168,300

72,300

174,700

137,200

140,700

205,100

262,200

467,300

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

Elsewhere, development towards the down-dip extension of the ZK orebody has commenced on 62 Level at Fairview, while development relating to the PC Shaft project at the Consort mine was completed in May, during which time initial sampling revealed grades in excess of 300g/t (approximately 10oz/t) and contributed towards a proved mineral reserve of 5,000t at an average grade of 25g/t (approximately 1oz/t). Production from high-grade resource blocks is expected to reduce all-in sustaining costs (AISC) to a target level of US$1,200/oz and to ensure future profitability at the Consort mine over a life of an additional three years. Concurrently, drilling has commenced on priority targets, while advanced techniques are being employed for the generation of new exploration targets for potential future production.

Elikhulu (33% of production; 68% of adjusted EBITDA)

In contrast to much of the South African gold mining industry, where the challenges of COVID-19 have been well documented, Elikhulu has proved to be one of the unsung heroes, with a performance in H220 that was better than both H120 and our prior expectations in all respects, with the single exception of metallurgical recovery (which was nevertheless approximately the anticipated annual average over the life of the mine on a full-year basis after an excellent H120 and regarding which a degree of moderation was inevitably expected). At the same time, the new satellite pump station that was commissioned at the end of 2019 with a view to increasing plant feed grades and rates for the remainder of the financial year was clearly successful. As a result, whereas we calculated that Elikhulu accounted for 47% of H120 adjusted EBITDA and 68% of FY20 adjusted EBITDA, we also estimate that it was responsible for 91% of H220 adjusted EBITDA.

Exhibit 5: Elikhulu operational statistics and estimates, H119–H220

H119

H219

H120

H220e

FY20e

H220

FY20

Tonnes processed tailings (t)

3,534,278

7,313,931

6,211,028

6,465,767

12,676,795

6,882,546

13,093,574

Head grade tailings (g/t)

0.30

0.26

0.28*

0.30

0.29

0.32

0.30

Tailings gold contained (oz)

34,089

60,199

56,348

63,383

119,731

70,494

126,843

Recovery (%)

44.0

51.3

52.0

47.8

49.8

43.0

47.0

Production tailings (oz)

15,292

30,909

29,301

30,278

59,579

30,315

59,616

Total production (oz)

15,292

30,909

29,301

30,278

59,579

30,315

59,616

Recovered grade (g/t)

0.13

0.13

0.15

0.15

0.15

0.14

0.14

Gold sold (oz)

15,292

30,173

29,301

30,278

59,579

30,315

59,616

Average spot price (US$/oz)

1,216

1,306

1,451

1,647

1,551

1,647

1,565

Average spot price (ZAR/kg)

563,250

596,180

685,680

882,504

786,683

882,504

788,510

Total cash cost (US$/oz)

517

575

621

562

590

495

554

Total cash cost (ZAR/kg)

239,639

262,650

293,608

300,933

297,341

265,166

279,155

Total cash cost (US$/t)

2.24

2.43

2.93

2.63

2.78

2.15

2.52

Total cash cost (ZAR/t)

32.00

33.70

43.00

43.83

43.47

36.33

39.53

Implied revenue (US$000)

18,595

39,009

42,516

49,868

92,384

50,783

93,299

Implied revenue (ZAR000)

267,899

554,999

624,898

831,093

1,455,991

837,196

1,462,094

Implied revenue (£000)

14,365

30,145

33,740

39,556

73,296

40,283

74,023

Implied cash costs (US$000)

7,912

17,742

18,209

17,005

35,214

14,818

33,027

Implied cash costs (ZAR000)

114,000

246,492

267,600

283,402

551,002

250,023

517,623

Implied cash costs (£000)

6,208

13,421

14,455

13,521

27,976

11,784

26,239

Adjusted EBITDA (ZAR000)

145,100

296,300

333,100

564,000

897,100

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

Capex at Elikhulu will increase in FY21 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. However, this was no less than was expected at the time that Elikhulu entered production and, at ZAR127m in FY21, will easily be covered by adjusted EBITDA (estimated at a record ZAR564m in H220 alone).

Evander underground (12% of production; 7% of underlying adj. EBITDA)

While superficially the most affected of Pan African’s operations by coronavirus, in fact comparison between Evander underground’s performance in H220 and FY20 relative to prior periods is rendered almost impossible by the fact that the 8 Shaft Pillar project reached steady-state in May and that, therefore, revenues and costs from the project prior to that point were capitalised, rather than expensed, which accounts for the apparent discrepancy in Exhibit 6 between ‘contained gold’, production and ‘gold sold’ (among other things). Separately, production from the 8 Shaft Pillar project was reported to be 1,096oz in May and 3,152oz in June to make a total of at least 4,248oz during the period under review. On the basis of the underlying operational statistics provided, however, it can be seen that the remnant mining and vamping activities operated at slightly above break-even, at a 13.9% gross margin with costs well controlled and, in the event, very close to our prior H220 forecast of ZAR5,670/t. Readers should note that the apparent discrepancy between gross cash profits and the large negative adjusted EBITDA figure implied in H220 may be attributed to ‘other’ expenses, being the zero cost collar contract losses alluded to elsewhere in this note, the majority of which (US$24.8m out of a total of US$28.7m) related to operations at Evander. On an underlying basis, Evander underground had an LBITDA of ZAR280.7m (see Exhibit 6) after ZAR413.7m of hedging losses, ie it had an underlying EBITDA of ZAR133.0m. On the same basis, Pan African as a whole reported EBITDA of ZAR1,328.4m after ZAR478.0m in hedging losses, ie it had an underlying EBITDA of ZAR1,806.4m. On an underlying (as opposed to headline) basis therefore, Evander underground contributed 7% of PAF’s EBITDA.

Exhibit 6: Evander operational statistics and estimates, H119–H220

H119

H219

H120

H220e

FY20e

H220

FY20

H121e

H221e

H122e

Tonnes milled (t)

37,347

26,624

30,044

43,125

73,169

21,392

51,436

69,000

69,000

62,100

Head grade (g/t)

7.82

10.01

12.59*

7.74

9.73

5.16

9.50

7.67

8.74

8.13

Contained gold (oz)

9,384

8,572

12,161

10,733

22,894

3,549

15,710

17,007

19,388

16,224

Recovery (%)

94

94

95

98

96

94

96

98

98

98

Underground production (oz)

8,821

8,058

11,553

10,518

22,071

9,117

20,670

16,667

19,000

15,900

Production from surface sources (oz)

0

0

0

0

0

0

0

Total production (oz)

8,821

8,058

11,553

10,518

22,071

9,117

20,670

16,667

19,000

15,900

Recovered grade (g/t)

7.35

9.41

11.96

7.59

9.38

13.26

9.10

7.51

8.56

7.96

Gold sold (oz)

8,821

8,058

9,214

10,518

19,732

5,863

15,077

16,667

19,000

15,900

Average spot price (US$/oz)

1,214

1,306

1,451

1,647

1,555

1,647

1,542

1,819

1,749

1,749

Average spot price (ZAR/kg)

565,367

596,180

685,658

882,504

790,586

882,504

776,637

977,603

928,415

928,415

Total cash cost (US$/oz)

1,711

1,814

1,420

1,395

1,575

1,241

1,328

961

994

989

Total cash cost (ZAR/kg)

780,357

828,170

671,299

747,435

711,911

665,209

668,927

516,578

527,456

524,776

Total cash cost (US$/t)

404.07

549.62

546.00

340.22

424.71

169.14

389.27

232.17

273.60

253.11

Total cash cost (ZAR/t)

5,733

7,796

6,404

5,670

5,971

5,671

6,099

3,881

4,517

4,179

Implied revenue (US$000)

10,709

10,525

13,370

17,323

30,693

9,879

23,249

30,317

33,229

27,808

Implied revenue (ZAR000)

155,115

146,084

196,499

288,706

485,205

167,699

364,199

506,777

548,658

459,140

Implied revenue (£000)

8,272

8,134

10,610

13,741

24,351

7,836

18,446

23,455

25,701

21,508

Implied cash costs (US$000)

15,091

14,633

16,404

14,672

31,076

3,618

20,022

16,020

18,878

15,718

Implied cash costs (ZAR000)

214,100

207,564

192,402

244,519

436,921

121,306

313,708

267,788

311,706

259,524

Implied cash costs (£000)

11,659

11,301

10,393

11,666

22,059

5,509

15,902

12,395

14,605

12,160

Adjusted EBITDA (ZAR000)

-58,985

26,085

64,900

(345,600)

(280,700)

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

Operationally, shaft tower construction was completed between 14 and 16 Levels and all eight underground stoping crews at Evander have now been migrated over to the 8 Shaft Pillar project. Henceforward, management expects Evander underground to contribute, on average, 30,000oz of production pa to the group over the next three financial years at an AISC of c US$1,000/oz and therefore at materially higher margins than the previous remnant underground mining and vamping operations.

Critical to the success of the 8 Shaft Pillar project is the requirement to de-stress the orebody while mining is underway, to which end Pan African has already commissioned a grout plant at surface with the ability to pump a mixture of concrete and waste rock underground to selectively support areas of the orebody. At a recent site visit to the 8 Shaft Pillar project at the time of the South African Mining Indaba in February, attended by Edison, the short distance between the shaft bottom and the stoping areas was immediately apparent (ie 10 minutes – in sharp contrast to PAF's previous operations at 24 Level at 8 Shaft, which had an approximate 100-minute commute to the working faces). In addition, the working faces are close to an intake airway (negating the need for refrigeration) and the ore will only need to be handled about four times before reaching surface (cf 22 times previously) and will require only c 4km of tramming (cf c 14km previously). This last point is significant since Evander has a high percentage of fine gold in its ore and, historically, it has been estimated that up to 1% of this gold has been lost per kilometre of distance trammed. This combination of fewer transport points and systems is therefore anticipated to have a materially beneficial effect not only on the operation’s cost base (see Exhibit 6), but also on its mine call factor. The other aspect of the visit that was very apparent was the development in technology around pillar mining and especially the use of pseudo-packs and rapid reaction pit props (rather than matt packs) for 'intelligent' rather than passive ground support – thereby de-risking the operation from both an environmental, social and governance (ESG) and a financial perspective.

Other

Pan African’s other two currently producing operations, the BTRP and the ETRP, accounted for 11% and 6% of the group’s annual production and 14% and 4% of its adjusted annual EBITDA, respectively.

Egoli – next out of the blocks

In addition to its existing five producing operations, the next project that PAF has confirmed it will develop is Egoli (formerly the 2010 Pay Channel) underground at Evander.

The Egoli orebody is c 1.75km in tramming distance from No 7 Shaft at Evander, which is currently used to hoist run-of-mine material from the No 8 Shaft Pillar project to the Kinross metallurgical plant. Following dewatering, standard footwall development, further deepening of the decline and on-reef development and associated engineering will be required before mining can commence.

An optimised mining feasibility study on the project was completed at the end of 2019 and this has now been reviewed by consultants DRA and its own independent feasibility study completed. A summary of the salient conclusions of the study is as follows:

Life-of-mine gold produced 17,771kg (570,000oz) at an average recovered grade of 5.21g/t and an AISC of ZAR399,600/kg (US$777/oz).

A post-tax IRR of 50.1% and a post-tax NPV10.71 of ZAR2,010m or US$131.25m (equivalent to ZAR1.042 or 6.8 US cents per share, respectively) at a gold price of ZAR850,000/kg (US$1,650/oz).

A 3.8-year payback period from inception.

While superficially comparable to former underground operations at Evander 8 Shaft, however, there are a number of important differences, which are summarised below:

Exhibit 7: Egoli vs former 8 Shaft operating parameters

Parameter

Egoli

Former 8 Shaft operations

Depth

1,900m

~2,500

Access

Directly from 7 Shaft (twin shaft) with one decline

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

Tramming/travelling distance

c 1.75km from No. 7 shaft

13km

Transfer points

6

20

Waste and reef

Separate waste and reef handling

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

Head grade (g/t)

6.64

5.7

Mine call factor

85%

73.5%

Employees

~800 employees

1,800 employees plus 500 contractors

Source: Pan African Resources

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

While the same project as previously conceived by Edison, nevertheless some of the assumptions and parameters associated with the project have changed since our last note on PAF (see Back to where it belongs, published on 28 July 2020). A summary of the principal changes is as follows:

Exhibit 8: Egoli project parameter changes

Parameter

Updated

Previous

Throughput (ktpa)

521ktpa

257ktpa

Recovered grade (g/t)

6.36g/t

8.28g/t

Steady-state production (oz pa)

90.1koz

65.0koz

Costs (ZAR/t)

Cash costs ZAR1,787/t

AISC ZAR2,360/t

Peak funding requirement (ZARm)

ZAR1,161m

ZAR870m

Capital intensity (US$ per annual steady-state oz production)

US$780/oz

US$810/oz

Life of mine (years)

8yrs

14yrs

Start

CY22/FY23

CY22/FY22

Source: Pan African Resources, Edison Investment Research.

Of note is the average level of expected cash costs of ZAR1,787/t over the life of the mine. While this may seem low relative to ZAR6,099/t for the remnant mining and vamping at 8 Shaft reported in FY20 and also the average ZAR3,838/t expected by Edison over the course of the next two and a half years at the 8 Shaft Pillar project, it is very much in line with the ZAR1,403/t steady-state average reported between H113 and H215 for the original 8 Shaft project.

The peak funding requirement of the project is estimated, in the feasibility study, to be ZAR1.05bn (US$66m) and – consistent with its requirement for non-dilutionary funding – Pan African has now obtained credit approval from Rand Merchant Back (RMB) for the full debt funding of the project’s capital expenditure in two phases:

The first phase entails a tranche of ZAR400m (for which RMB has provided the full commitment) to de-water the number 7 Shaft decline, equip the decline and shaft and conduct the initial mine development.

The second tranche of ZAR800m will be utilised to fund the balance of the project’s development over the remaining term of the two and a half year construction period.

As a result, Pan African has mandated DRA Global, in its capacity as consultants, to complete the detailed project scheduling and planning. It has also now commenced preliminary refurbishment of the relevant project infrastructure in Q121 in the expectation of placing long-lead equipment orders in Q221 and starting underground de-watering and equipping in Q321.

First gold is expected to be produced approximately 20 months after construction commences, with ramp up to steady-state production over the following 16 months. Whereas we had previously valued Egoli on the basis of our estimate of project NPV at a 10% discount rate, we have now formally modelled it into our group earnings and cash flow statement on the basis of the following operating parameters over the next 10 years:

Exhibit 9: Egoli assumed operating parameters by financial year

Parameter

FY21

FY22

FY23

FY24

FY25

FY26

FY27

FY28

FY29

FY30

Tonnes mined (kt)

0

0

283.5

432.6

584.9

562.8

513.1

512.9

478.1

206.2

Grade mined (g/t)

3.30

6.08

6.91

6.74

6.20

6.45

7.02

7.24

Contained gold (koz)

0

0

30.1

84.5

129.9

122.0

102.4

106.4

107.9

48.0

Tonnes milled (kt)

0

0

198.0

399.2

550.3

550.1

513.1

512.9

478.1

206.2

Recovered grade (g/t)

2.99

4.91

5.58

5.44

5.01

5.21

5.67

5.84

Gold produced (koz)

0

0

19.0

63.1

98.7

96.2

82.7

85.9

87.1

38.7

 

Opex costs (ZAR/t)

0

0

1,540

1,837

1,739

1,702

1,762

1,791

1,837

1,973

Capex costs (ZARm)

250.2

490.6

420.2

298.6

182.4

130.2

103.3

68.0

31.2

0.0

Capex costs (US$m)

15.1

29.7

25.5

18.1

11.1

7.9

6.3

4.1

1.9

0.0

Source: Pan African Resources, Edison Investment Research.

In the immediate future, we estimate that the inclusion of Egoli into Pan African’s portfolio of producing assets will increase group production from an estimated 190,818oz in FY21 to 284,509oz in FY25, as follows:

Exhibit 10: Estimated Pan African group gold production, FY21e-FY25e (including Egoli)

Source: Edison Investment Research, Pan African Resources.

Readers should note that the above mine plan in Exhibit 9 excludes an additional c 1.95Moz of inferred resources that will be accessed as underground development proceeds, with the potential to increase Egoli’s mine life from eight to 14 producing (financial) years.

Debt service and covenant compliance guarantees

Pan African’s philosophy towards hedging is to hedge only specific and material exposures arising from operational risks, capital investments and transactional flows that can adversely affect the group’s sustainability. Hedges are short-dated and limited to a maximum of 25% of the group’s estimated annual production unless additional exposure is specifically approved by the board of directors. In the case of FY20, the board considered that volatility in the rand price of gold combined with the group’s US$15.9m in debt redemption commitments warranted managing the group’s gold price risk more fully and therefore the decision was taken to increase hedge levels to approximately 50% of guided production for the year.

As a result, Pan African had two forms of hedging contracts in place in H220 for the purposes of guaranteeing debt serviceability and covenant compliance. The first was a gold loan of 10,000oz (of which 5,000oz remained outstanding as at end FY20) that locked in a gold price of approximately US$1,325/oz (ZAR709,969/kg at average forex rates during H220). The second was a series of zero cost collar contracts over 50,460oz gold in H220 that capped the gold price received by Pan African at ZAR836,000/kg (c US$1,560/oz at average forex rates), but also floored it at ZAR655,000/kg (c US$1,222/oz).

In the event, the gold price averaged ZAR882,504/kg during H220 (Edison calculation) and peaked at ZAR1,063,715/kg – implying a loss during the period of between ZAR46,504/kg and ZAR227,715/kg over the contracted 50,460oz gold, or ZAR73.0-357.4m in aggregate (US$4.4-21.4m at average forex rates). Within this range, Edison’s considered loss estimate was US$10.4m – albeit this estimate was based solely on realised losses and excluded the amortised cost of the options. In the event, Pan African reported a mark-to-market fair value loss of US$22.0m during the full year comprising realised losses of US$12.0m (note: realised losses in H1 were ZAR29m, or US$2.0m at average forex rates) and unrealised losses of US$10.0m.

As at 30 June 2020, Pan African had zero cost collar hedges over 50,000oz gold with an average floor price of ZAR708,000/kg and a ceiling price of ZAR925,829/kg, which will be delivered in H121. Thereafter, it will be unhedged. With due regard for the accuracy of our hedging loss forecasts in H220, our forecast for the same number in FY21 (albeit using a slightly different methodology) is as follows:

Exhibit 11: Estimated Pan African hedging contract losses in H121

H120

H220

FY20

H121e

Gold loan

Ounces

10,000

5,000

5,000

Price (US$/oz)

1,325

1,325

1,325

Notional sales revenue (US$000's)

13,250

6,625

6,625

Spot price of gold (US$/oz)

1,477

1,647

1,819

Notional loss (US$000's)

(1,520)

(1,610)

(3,130)

(2,470)

Zero cost collar

Ounces

29,550

50,460

50,000

Written call exercise price (ZAR/kg)

666,000

836,000

925,829

Forex (US$/ZAR)

17.3512

16.6659

16.7158

Equivalent US$/oz price of gold

1,194

1,560

1,723

Loss per oz (US$)

(283)

(87)

(96)

Notional loss (US$000's)

(8,367)

(4,379)

(12,746)

(4,817)

Total notional loss (US$000's)

(9,887)

(5,989)

(15,876)

(7,287)

Reported loss (US$000’s)

Realised

(2,000)

(10,000)

(12,000)

Unrealised

(10,000)

Total

(22,000)

Source: Edison Investment Research, Pan African Resources.

Our estimated loss of US$7.3m in H121 (Exhibit 11) is included in our estimate of ‘exceptionals’ in Exhibit 22. Note that the above estimates are based on a gold price of US$1,819/oz in H121 and may differ materially to the extent that the gold price exceeds this level – even on an intra-day basis. However, since all options and the gold loan expire in H121, all losses should be ‘realised’ with no ‘unrealised’ component to consider. Again, however, for reasons of practicality, these estimates exclude the amortised cost of the options.

Updated valuation

Assuming a forex rate of ZAR16.5113/US$ for the remainder of the year and a (relatively conservative) short-term (real) gold price of US$1,819/oz in H121 and US$1,749/oz in H221, followed by a flat long-term (nominal) gold price of US$1,892/oz (consistent with our last note and also A golden future, published on 11 June), our absolute value of PAF (based on its existing four producing assets plus Egoli) has risen to 39.03c/share (cf 34.18c/share previously – albeit not including Egoli), 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 12: PAF estimated life of operations’ diluted EPS and (maximum potential) DPS*

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

Including its other potential growth projects (eg the Fairview sub-vertical shaft project) and assets (ie the residual Evander underground resource and its shareholding in MC Mining), our updated total valuation of Pan African is barely changed compared with that in July, as follows:

Exhibit 13: PAF absolute valuation summary

Project

Current valuation
(cents/share)

Previous valuation
(cents/share)

Existing producing assets (including Egoli)

38.19

32.66

FY20 dividend

0.84

1.52

Egoli

 

6.41

Fairview Sub-Vertical Shaft project

1.00

0.91

Royal Sheba (resource-based valuation)

0.40

0.59

MC Mining shares

0.06

0.05

Sub-total

40.48

42.14

EGM underground resource*

0.22-5.24

0.22–5.24

Total

40.70-45.72

42.36–47.38

Source: Edison Investment Research. Note: *Excluding Evander and Egoli.

Note that the increase in the value of PAF’s shareholding of 13.1m MC Mining shares relative to our previous valuation in July reflects merely the rise in the latter’s share price from ZAR1.25/share to ZAR1.38/share currently (adjusted into US dollars at the appropriate forex rate).

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 14, below, depicts PAF’s average share price in each of its financial years from FY10 to FY20, and compares this with normalised HEPS in the same year. For FY21 and FY22, the current share price (of 22.70p) is compared with our forecast normalised HEPS for FY21 to FY22. As is apparent from the graph, PAF’s price to normalised HEPS ratio of 4.6x for FY21 and FY22 (based on our forecasts – see Exhibit 22, below) is only fractionally above the very bottom of its recent historical range of 4.2–14.8x for the period from FY10–20:

Exhibit 14: PAF historical price to normalised HEPS** ratio, FY10–FY22e

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

Stated alternatively, if PAF’s average contemporary price to normalised EPS ratio of 9.1x in the period FY10–20 is deemed ‘correct’ then, given our normalised earnings forecasts, its share price may be expected to be c 45p in FY21 and FY22.

Note that, within this context, our normalised FY21 HEPS forecast of 6.42 US cents compares with a consensus forecast of 5.62c, within a range 4.78–6.47c (source: Refinitiv, 8 October 2020).

Dividend

PAF has reiterated its dividend policy of having a target dividend payout ratio of 40% of net cash generated by operating activities (after allowing for the effect of sustaining capital on cash flow, contractual debt repayments and one-off items). After sustaining the costs related to the Evander underground closure in FY18, the Pan African board elected not to recommend a final dividend for that year. However, it stated that recommencing distributions to shareholders was a priority for the future. This was achieved in FY19 when the board recommended a final dividend of ZAR50m, or c US$3.4m, which equated to ZAR0.022375 or c 0.11725p or 0.15179 US cents per share and which it described as a ‘signal’ of its intent to resume more meaningful distributions to shareholders in the future. In FY20, the dividend was duly increased materially (ie 5.5x) – in this case, to a record of ZAR312.9m, or 0.83582 US cents per share. While this was less than our most extravagant forecast of 1.52c/share (see Back to where it belongs, published on 28 July 2020), it mainly reflected actual versus anticipated changes in working capital, which were not as positive as we had forecast over the period in question. To the extent that there was a shortfall compared with our expectations in FY20 however, this merely sets the company up for further increases in the dividend pay-out in FY21 and beyond, notwithstanding an increased capex profile as a result of the development of the Egoli project (see our forecasts in Exhibit 9). Otherwise, the FY20 dividend was strongly in line with our prior two forecasts, of 0.86c and 0.72c in March and May, respectively.

Based on its current share price, Pan African boasts a dividend yield of 2.8%, on which basis it ranks number 14 of the 63 dividend-paying precious metal companies over the course of the next 12 months. This rises to nearly 5% and a rank within the top 10 dividend paying precious metals on the basis of both consensus and Edison FY21 forecasts (see Exhibits 15 and 16):

Exhibit 15: Global precious metal mining companies ranked by forecast dividend yield, PAF highlighted (%)

Source: Refinitiv for peers and PAF (consensus), Edison Investment Research for PAF FY21. Note: Consensus data for peers priced 7/8 October 2020.

Relative peer group valuation

Over the next two years PAF remains cheaper than its South Africa- and London-listed gold mining peers on at least 63% of comparable common valuation measures (19 out of 30 individual measures in the table below) if Edison forecasts are applied or 76% if consensus forecasts are applied:

Exhibit 16: Comparative valuation of PAF with South African and London peers

 

EV/EBITDA (x)

P/E (x)

Yield (%)

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

AngloGold Ashanti

5.2

4.1

9.9

6.8

1.1

1.7

Gold Fields

6.2

4.4

17.2

8.9

1.7

3.1

Sibanye

3.6

2.5

5.7

3.8

5.3

9.1

Harmony

3.0

2.2

5.2

3.8

2.0

2.9

Centamin

4.2

3.3

12.8

10.1

6.5

7.1

Average (excluding PAF)

4.4

3.3

10.1

6.7

3.3

4.8

PAF (Edison)

4.0

3.5

4.6

4.6

4.9

4.1

PAF (consensus)

3.2

2.9

3.8

4.0

7.2

3.6

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 7 October 2020.

Financials

Including its liabilities to non-financial institutions, PAF had net debt of US$55.7m on its balance sheet as at 30 June 2020 (cf US$130.7m as at 31 December), which equates to a gearing ratio (net debt/equity) of 30.3% and a leverage ratio (net debt/[net debt+equity]) of 23.3% (cf 64.8% and 39.3% as at end December 2019, respectively). This figure includes gross debt and cash and is reflected in our financial summary (see Exhibit 22, below); however, it excludes a number of other items, the majority of which reflect the value of hedging contracts, rather than conventional indebtedness. A full reconciliation of the various contributors to Pan African’s net debt as at end-FY20 is nevertheless as follows:

Exhibit 17: Pan African FY20 net debt, by type (US$m)

Type

US$m

Gross debt

89.2

Cash

33.5

Net debt (sub-total)

55.7

Restricted cash

0.4

Gold loan

5.7

Less refinance adjustment

(0.3)

Arranging fees

0.5

Sub-total

62.0

Derivative financial liability

9.6

IFRS 16 lease

4.5

Instalment sale liability

0.3

Sub-total

76.4

Type

Gross debt

Cash

Net debt (sub-total)

Restricted cash

Gold loan

Less refinance adjustment

Arranging fees

Sub-total

Derivative financial liability

IFRS 16 lease

Instalment sale liability

Sub-total

US$m

89.2

33.5

55.7

0.4

5.7

(0.3)

0.5

62.0

9.6

4.5

0.3

76.4

Source: Pan African Resources

Within this context, the reported decline in net debt to US$62.0m as at end-June 2020 cf US$130.7m as at end-December represents a decline of US$68.7m, or 52.6%, in the space of just six months and implies average net cash inflows of approximately US$11.5m per month. Maintaining this rate of net cash inflow would imply that Pan African could be net debt free as early as December 2020 (excluding dividend pay-outs).

However, while capex relating to Elikhulu has fallen to (effectively) zero in H220, we are now expecting it to be replaced by capex relating to the Egoli project (see Exhibit 9). Although this will slow the rate of debt repayment relative to our previous expectations, all other things being equal, we continue to forecast that the company will achieve net debt free status during the FY22 financial year (NB on a post-FY21 dividend basis – see below):

Exhibit 18: PAF previous estimated net debt profile forecast, FY17 to FY22e (US$000)

Exhibit 19: PAF current net debt profile forecast, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources

Source: Edison Investment Research, Pan African Resources

Exhibit 18: PAF previous estimated net debt profile forecast, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources

Exhibit 19: PAF current net debt profile forecast, FY17 to FY22e (US$000)

Source: Edison Investment Research, Pan African Resources

Debt is principally financed via a US$46.2m term loan facility plus a US$43.3m revolving credit facility and a US$8.1m general banking facility. Principal on the Elikhulu facility is payable in equal instalments until maturity in June 2024, while the revolving credit facility (RCF) has a maturity beyond mid-2024. The group’s RCF debt covenants and their actual recorded levels within recent history are as follows:

Exhibit 20: PAF group debt covenants

Measurement

Constraint

FY20

H120

FY19
(actual)

H119
(actual)

FY18*
(actual)

H118
(actual)

FY17
(restated)

Net debt:equity

Must be less than 1:1

0.4

0.6

0.71

0.85

0.78

0.19

0.02

Net debt:EBITDA

Must be less than 2.5:1 falling to 1.5:1 by December 2022

0.7

1.6

2.2

3.24

3.73

2.25

0.08

Interest cover ratio

Must be greater than 4 times rising to 5.1 times by December 2022

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

3.4

3.0

1.4

2.85

3.84

1.85

9.11

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

Potential future organic growth

In addition to Egoli and the 8 Shaft Pillar project, Pan African has three other near-term organic growth projects, namely the Fairview sub-vertical shaft project (adding 7–10koz to production pa), which is already in development, the Royal Sheba project (c 30koz pa), and the extraction of the Prince Consort shaft pillar (3,900–7,800oz pa), which is also in development. It also has one solar plant initiative to help regulate its electricity supply at Elikhulu, one large-scale agriculture project at Barberton and a number of new agriculture projects on rehabilitated land at Evander.

Royal Sheba

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

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

Phase 2: developing the lower levels of the orebody from the Sheba side at 23 Level at a capital cost of c ZAR30m (US$1.8m at current forex rates).

At the same time, the Dibanisa project – scheduled to be completed in FY21 – will integrate Sheba and Fairview infrastructure, such that Fairview will be able to accommodate Royal Sheba ore. One of the immediate advantages of this will be that additional available shaft time will assist with the development and mining of Royal Sheba. Once in production, the Sheba plant will be available to process both surface material and Royal Sheba uppers (ie Phase 1). Tailings from the Royal Sheba operation will then be available for processing via BTRP infrastructure in addition to the latter’s traditional sources. Among other things, this method of development will help to expedite the environmental licensing process, shorten the timeline to production, enhance returns and negate the need for external capital funding. Development of Royal Sheba will extend operations at Sheba by 10 years to 19 years in total. In addition, optimised usage of infrastructure is also anticipated to reduce AISC to c US$1,000/oz (management estimate). Design has been completed for the early extraction of the western block in Phase 1 (above the historical workings). In the meantime, a preliminary economic assessment for Phase 2 is underway. Management has indicated that it would require an internal rate of return in excess of 20% in order to proceed with the project. In this event, it anticipates that it would take approximately one year to open and develop the orebody, such that mining of the uppers (Phase 1) would commence in approximately March 2021 and the mining of the lowers (Phase 2) in about September 2021.

Prince Consort shaft pillar extraction

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

The orebody was intersected in early May (only one month later than planned, despite coronavirus) and development into the first target block on Level 42 was completed in June, with assayed grades as high as 300g/t (approximately 10oz/t) being reported, including large amounts of visible gold. Since then, New Consort has outperformed its gold production targets by more than 60% (or 11kg/354oz) in the two months after access was gained into the target block and, having achieved steady-state, the operation is now poised to produce at a rate of 3,900–7,800oz pa at a targeted AISC of c US$1,200/oz over a period of approximately three years. In addition to underground ore, additional material from surface stockpiles at Consort will maximise and extend plant capacity.

Elikhulu solar power plant

While Pan African is less exposed to load-shedding than its deep level South African peers by virtue of 52% of its gold being derived from tailings and other surface sources (FY20 Edison estimate) and its having spare plant capacity in general, recent outages have nevertheless had a disruptive effect on operations at Elikhulu. In mitigation, management has completed a bankable feasibility study on a 10MW solar plant at Evander (actually 9.99MW so as to avoid the need for NERSA1 regulatory approval), which was positive and the board has subsequently given its approval for the project to be developed. The solar plant will supply approximately 30% of Elikhulu’s power requirements and will reduce its dependence on both grid power and electricity price inflation (which was 13.9% as a result of regulatory price increases in FY20). Note that none of these potential benefits are yet incorporated into Edison’s financial model on, and valuation of, Pan African. An engineering, procurement and construction management (EPCM) contract for the construction of the solar plant has been awarded and PAF is currently in the process of finalising the necessary legal and contractual agreements for the project, as well as raising the dedicated funding in a fashion that is non-dilutive for PAF shareholders. In due course, the project will also generate carbon credits for Pan African. It may also be replicated at Barberton.

  National Energy Regulator for South Africa

South African national lockdown

South Africa detected its first new coronavirus infection on 5 March. In the following few weeks, the epidemic followed a typical exponential curve and on 15 March, the country’s president, Cyril Ramaphosa, declared a national state of emergency, banning visitors from high-risk countries, stopping large gatherings, closing more than half of its land borders and shutting schools. On 23 March, the South African government made the decision to lock down the country for all but ‘essential services’. On 14 April, it extended the lockdown by two weeks, until 30 April. As an adjunct, however, from 16 April, it allowed underground mining operations to return to 50% capacity from a position of care and maintenance, albeit observing strict health protocols. From 1 May, surface operations were able to return to 100% capacity. Underground mines were required to remain at 50% capacity, albeit subject to the discretion of the mining and energy minister, Gwede Mantashe, who had the authority to sanction production above this level.

As far as Pan African was concerned, during the lockdown ‘essential services’ included security, pumping and ventilation activities, metallurgical plant maintenance, inspection of underground workings, management and monitoring of tailings deposition facilities, waste management and water treatment facilities and other health and safety-related services. As part of essential services, the group undertook to conduct limited surface re-mining and processing activities at its Elikhulu Tailings Retreatment Plant and at its Barberton Tailings Retreatment Plant. As a result, during the lockdown, Pan African’s group surface mining operations operated at c 70% of normal capacity, while Barberton Mines resumed limited operations at certain high-grade sections of its Fairview operation in order to ensure the required minimum feed for its BIOX processing plant. Of the group’s total staff and contractor complement, only 26% (excluding security staff) were involved in essential services. The South African Department of Mineral Resources & Energy (DMRE) approved all of the group’s activities during the period, subject to compliance with, and adherence to, all relevant laws and regulations. Following the easing of lockdown regulations, tailings operations ramped up to full capacity by 1 May 2020, while underground operations were conducted at c 50% of capacity from 27 March until 31 May.

As soon as the lockdown was announced, Pan African suspended its erstwhile production guidance of 185,000oz for FY20. However, on 11 May, it provided an indication of output for its assets for the full year of 176,000oz on the assumption that surface retreatment plants operated at or close to capacity for the remainder of the year and underground mines operated at 50% of capacity. In the event, it produced 179,457oz, with most of the outperformance attributable to operations at Barberton (see Exhibit 2).

The situation now

Initially, as the South African lockdown began to ease, coronavirus cases began to increase rapidly, reaching nearly 14,000 new cases in July, with the epicentre of the epidemic shifting away from Cape Town to Johannesburg. As seasonal weather patterns have shifted however and South Africa has entered its warmer months, from September to March, the number of new daily cases has dropped sharply, from almost 14,000 per day to around 1,000 new cases per day currently.

At the time of writing, the number of cases of COVID-19 in South Africa has increased to 695,000 of whom 18,028 have died. Among other things, this suggests a steadying of the mortality rate at 2.6% cf 2.9% globally and 6.8% in the UK. In part, this may be attributed to South Africa’s relatively youthful population (average age 26.4 years cf average African age 19.7 years and average UK age 40). Whatever the reason however, at the time of writing, the official death toll in South Africa continues to remain an order of magnitude below other badly affected countries (albeit with the proviso that not all deaths may be being captured in the official figures).

Pan African

Pan African has containment and compliance measures in place at all of its operations, including a group COVID-19 steering committee that has been established to enforce and monitor awareness, risk mitigation and prevention strategies. It also undergoes regular DMRE audits.

As at 30 June 2020, PAF had only two positive cases of coronavirus among its workforce complement of c 4,500. As at 14 September, it reported the following coronavirus-related statistics among its personnel:

Exhibit 21: Pan African COVID-19 dashboard

Business centre

Positive

Active

Quarantine

Hospitalisation

Hospitalisation recovery

Recovery rate

(%)

Barberton

64

6

0

5

4

91

Evander

29

1

0

0

0

97

Pan African

93

7

0

5

4

92.5

Source: Pan African Resources

Exhibit 22: Financial summary

US$'000s

2018

2019

2020

2021e

2022e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

145,829

218,818

274,107

307,883

316,019

Cost of sales

(107,140)

(152,980)

(158,457)

(152,913)

(146,967)

Gross profit

38,689

65,838

115,650

154,969

169,052

EBITDA

 

 

38,131

65,484

115,176

153,552

164,506

Operating profit (before GW and except.)

31,506

49,256

93,673

134,555

143,589

Intangible amortisation

0

0

0

0

0

Exceptionals

(16,521)

10,596

(28,593)

(8,905)

(1,618)

Other

0

0

0

0

0

Operating profit

14,985

59,852

65,079

125,649

141,971

Net interest

(2,222)

(12,192)

(12,881)

(5,015)

(1,195)

Profit before tax (norm)

 

 

29,284

37,064

80,791

129,540

142,394

Profit before tax (FRS 3)

 

 

12,763

47,660

52,198

120,635

140,776

Tax

2,826

(8,174)

(7,905)

(5,709)

(18,338)

Profit after tax (norm)

32,110

28,890

72,887

123,831

124,056

Profit after tax (FRS 3)

15,589

39,486

44,293

114,926

122,437

Average number of shares outstanding (m)

1,809.7

1,928.3

1,928.3

1,928.3

1,928.3

EPS - normalised (c)

 

 

1.31

1.64

3.78

6.42

6.43

EPS - FRS 3 (c)

 

 

0.87

2.05

2.30

5.96

6.35

Dividend per share (c)

0.00

0.15

0.84

1.43

1.21

Gross margin (%)

26.5

30.1

42.2

50.3

53.5

EBITDA margin (%)

26.1

29.9

42.0

49.9

52.1

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

21.6

22.5

34.2

43.7

45.4

BALANCE SHEET

Fixed assets

 

 

315,279

361,529

314,968

351,333

384,183

Intangible assets

56,899

49,372

43,466

45,710

47,955

Tangible assets

254,247

305,355

270,286

304,406

335,011

Investments

4,134

6,802

1,216

1,216

1,216

Current assets

 

 

29,009

31,601

53,648

109,439

131,494

Stocks

4,310

6,323

7,626

10,271

10,543

Debtors

22,577

18,048

11,245

21,948

22,530

Cash

922

5,341

33,530

75,973

97,174

Current liabilities

 

 

(44,395)

(63,855)

(78,722)

(83,356)

(37,915)

Creditors

(37,968)

(39,707)

(62,806)

(67,440)

(61,999)

Short-term borrowings

(6,426)

(24,148)

(15,916)

(15,916)

24,084

Long-term liabilities

 

 

(152,906)

(145,693)

(106,276)

(106,385)

(107,573)

Long-term borrowings

(112,827)

(109,618)

(73,333)

(73,333)

(73,333)

Other long-term liabilities

(40,078)

(36,076)

(32,943)

(33,052)

(34,241)

Net assets

 

 

146,988

183,582

183,620

271,031

370,189

CASH FLOW

Operating cash flow

 

 

5,345

59,822

73,399

127,119

160,828

Net Interest

(6,076)

(14,685)

(10,834)

(5,015)

(1,195)

Tax

(1,634)

(4,497)

(5,804)

(5,600)

(17,150)

Capex

(127,279)

(52,261)

(30,849)

(55,361)

(53,767)

Acquisitions/disposals

6,319

466

207

0

0

Financing

11,944

(0)

0

(0)

0

Dividends

(11,030)

(2,933)

(2,933)

(18,700)

(27,515)

Net cash flow

(122,411)

(14,088)

23,186

42,444

61,201

Opening net debt/(cash)

 

 

3,138

118,332

128,424

55,719

13,275

Exchange rate movements

(619)

537

1,663

0

0

Other

7,836

3,459

47,856

0

0

Closing net debt/(cash)

 

 

118,332

128,424

55,719

13,275

(47,925)

Source: Company sources, Edison Investment Research

General disclaimer and copyright

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

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

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

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

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

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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.

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

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

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

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

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

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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

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London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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United States of America

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