Pan African Resources — A happy valentine

Pan African’s financial results, released on 14 February, were announced in the context of already known production of 98,458oz gold in H124 (cf 93,307oz in H123), which was made public on 22 January and exceeded both our prior expectation – of 96,000oz – and prior market guidance of 94,000–98,000oz. In addition, the group reported:

A comparison of the performance of each of PAF’s major assets, relative to our prior forecasts, is provided in the table below. In general, tonnes milled and processed at PAF’s operations during the six-month period exceeded our forecasts, albeit at slightly lower grades, to result in the higher production, albeit at slightly higher than forecast aggregate costs.

Together with lower-than-expected effective tax and royalty rates, these two effects (revenues and costs) approximately cancelled one another out to result in earnings (and headline earnings) that were within 1.5% of our prior forecast and normalised headline earnings that were within 1.2% of our prior forecast (see Exhibit 4, below).

While only one asset (BTRP) achieved record adjusted EBITDA, all of PAF’s three other main assets recorded adjusted EBITDA numbers that were close to record levels in rand terms (see Exhibit 2, below), to result in a record adjusted EBITDA outcome for the group as a whole in a six-month period of ZAR1,512.6m – 20.2% above H222 and a comfortable 19.6% above the next highest number, or ZAR1,264.8m, set in H122.

Barberton Mines, in particular, benefited from the implementation of continuous operations, which contributed to increases in mined tonnage and grade relative to H123 (when output was 32,022oz), while Evander Mines (underground) successfully ramped up mining operations at 24 Level to replace the depletion of 8 Shaft pillar ore resources (consistent with its mine plan). In the meantime, equipping the ventilation shaft to hoist ore and waste from 24 to 26 Levels – which will significantly reduce the use of EGM’s ageing conveyor belt infrastructure – remains on track for commissioning in the near future.

A summary of each of PAF’s assets’ production figures in H124 together with our updated expectations for H224 and FY24, in the light of PAF’s unchanged production guidance of 180,000–190,000oz for the full year (albeit with the proviso that ‘increased guidance may be considered in due course’) is as follows:

For the moment, Edison’s production forecasts for FY24 remain broadly consistent with PAF’s guidance, with the result that our H224 estimates appear conservative for Elikhulu and the BTRP, in particular, in the light of their H124 performances. At the same time, our forecast for Barberton in H224, while consistent with guidance, appears to leave little room for additional improvements as a result of the implementation of continuous operations at Fairview and Sheba (which are expected) and contractor mining at Consort. As such, we believe that production guidance at all of these assets could increase in the future.

In the light of these changes, our detailed financial forecasts for FY24 (plus PAF’s H124 performance relative to our prior expectations) are shown below.

In this case, our updated AISC forecast for FY24 is US$1,315/oz (at an average forex rate for the year of ZAR18.82/US$) after achieving US$1,348/oz in H224.

Otherwise, readers should note the greater declines in our forecast EPS and HEPS in H224 relative to normalised HEPS. We attribute these declines to a contract liability for the ZAR400m upfront payment that we estimate PAF will incur at a rand gold price in excess of ZAR1,025,000/kg as a result of its Mintails stream (see our note Innovative funding avoids dilution, published on 17 March 2023) – notwithstanding the fact that we continue to regard it as a materially beneficial form of funding for PAF – which, owing to its nature, we define as being ‘exceptional’ in nature.

PAF has two organic growth projects currently underway (namely the MTR project within the Mintails Soweto Cluster and the Evander 24 to 26 Level expansion project) and one more immediately in prospect (the Sheba Fault project). Beyond these, it has at least the Fairview sub-vertical shaft, Egoli, Rolspruit, Poplar and Evander South assets also available for development.

On 1 August 2023, PAF announced that all conditions precedent for its ZAR1.3bn senior debt facility, designated for funding the group’s MTR project, had been fulfilled, thereby completing the full upfront funding package of ZAR2.5bn. Since then, PAF reports that significant progress has been made with the MTR plant at Mogale, with commissioning still on track for the latter half of CY24. Within that:

Progress at Evander’s 24 to 26 Level underground expansion project remains on track, with the following notable achievements during H124:

At the same time, the Egoli project’s 7 Shaft number 3 Decline has been dewatered to below 20 Level, where permanent pumping infrastructure will be installed together with a drilling platform for long, inclined borehole drilling into the resource block to improve reserve delineation and further define the ore pay-shoot and its grade variability.

The remaining life of mine from the BTRP’s current tailings sources is estimated at two years and will then be supplemented with the Sheba Fault project first from Royal Sheba and then Western Cross, where the extraction and processing of a 10,000t bulk sample was recently, and successfully, completed.

In the wake of the company’s production update, our longer-term forecasts remain, to all intents and purposes, unchanged. As such, we are continuing to forecast that group production at PAF will reach c 250koz per year in 2026 and drive normalised HEPS beyond 6.00c per share and potentially as high as 9.00c per share (see Exhibit 6).

Given our updated expectations for H124 and FY24, our absolute valuation of Pan African (based on its existing four producing assets plus the Evander 24 to 26 Level project and Mogale) remains little changed at 41.15c (cf 42.27c previously), based on the present value of the estimated maximum potential dividend stream payable to shareholders over the life of its mining operations (applying a 10% discount rate to US dollar dividends).

Stated alternatively, based on our long-term dividend forecasts, we calculate that an investment in PAF’s shares at a price of 17.20p today (ex-dividend) offers investors a (real) internal rate of return of 21.9% per year in US dollar terms to at least the end of FY39.

Including its other growth projects and assets, our updated total valuation of PAF as a whole is as follows:

Exhibit 8 below depicts PAF’s average share price in each of the financial years from FY10 to FY23 and compares this with HEPS in the same year. For FY24 and FY25, the current share price (17.20p) is compared with our forecast normalised HEPS for those years. As is apparent from the chart, PAF’s price to normalised HEPS ratios of 4.5x and 3.7x for FY24 and FY25, respectively, are close to and below the bottom of the range of recent historical P/E ratios of 4.1–14.8x for the period FY10–23:

If PAF’s average year one price to normalised EPS ratio of 8.4x for the period FY10–23 is applied to our normalised earnings forecasts, it implies a share price for PAF of 32.02p in FY24, followed by one of 38.72p in FY25. Stated alternatively, PAF’s current share price of 17.20p, at prevailing foreign exchange rates, appears to be discounting FY24 and/or FY25 normalised HEPS falling to 2.58c per share, whereas we are forecasting it to rise, to 4.81c and 5.81c, respectively.

Simultaneously, PAF remains cheaper than its London- and South Africanlisted gold mining peers on at least 91% of comparable common valuation measures (33 out of 36 individual measures in the table below) regardless of whether Edison or consensus forecasts are used:

Alternatively, applying PAF’s peer average year one P/E ratio of 11.5x (cf 12.1x at the time of our last note in January) to our normalised HEPS forecast of 4.81c per share for FY24 implies a share price for the company of 44.01p. Applying its peer average year two P/E ratio of 8.9x to our normalised HEPS forecast of 5.81c per share implies a share price of 41.03p.

Readers’ attention is drawn to the market’s year two dividend yield forecast of 15.1%. We are reasonably confident that this figure is incorrect and arises from a confusion as to whether certain estimates are expressed in US$/share or US cents per share.

Pan African reported net debt of US$61.7m on its balance sheet as at end-December 2023 (cf US$22.1m as at end-June 2023 and US$53.7m as at end-December 2022), which equated to a gearing ratio (net debt/equity) of 18.8% (cf 7.5% at end-June 2023) and a leverage ratio (net debt/[net debt+equity]) of just 15.8% (cf 7.0%), after cash flow from operating activities of US$45.5m before dividends (cf US$88.5m in H223 and US$31.6m in H123). Capex guidance for FY24 is ZAR2.9bn (c US$152.8m at prevailing foreign exchange rates). Beyond that, we forecast that PAF will continue to generate cash from operations comfortably above the US$100m pa level into the foreseeable future, such that net debt peaks at end-FY24 (in reality at end-December 2024) at US$105.6m (excluding its ZAR350m, or c US$18.4m, Renewable Energy Green Loan facility), equating to a gearing ratio of 30.6% and a leverage ratio of 23.5%, before being eliminated in FY26 by which time we assume that capex will once again have returned to near-sustaining levels.

Within this context, we have, for the moment, decided to leave our dividend forecasts flat in rand terms in FY24 and FY25. However, we will keep this assumption under review.

Including all other components, total net debt as at end-December was US$64.3m (cf US$22.0m at end-June and US$53.7m at end-December 2022), as shown below:

The difference between net debt, as apparent on PAF’s interim balance sheet of US$61.7m, and its net debt of US$64.3m as per Exhibit 11 is accounted for by the aggregate US$2.5m in ‘other’ items.

In the meantime, the group remains very comfortably within its revolving credit facility debt covenants: