Pan African Resources — An accounting storm in a legal teacup

Pan African Resources (AIM: PAF)

Last close As at 18/06/2024

GBP0.26

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Research: Metals & Mining

Pan African Resources — An accounting storm in a legal teacup

This morning, Pan African announced that it may have been in technical breach of the net asset test when it paid out dividends to shareholders in the five years from FY19–23 and also when it instigated its share buyback programme in 2022. As attested to by the fact that it took five years to be noticed, the apparent breach arises from the nexus of an arcane bit of legislation and a curious distinction between the presentation currency of the group (the US dollar) and its functional currency (the South African rand) and the effect of the depreciation of the latter against the former on the distributable versus undistributable reserves of Pan African Resources. Fortunately, there is a relatively simple remedy that involves a court sanctioned capital reduction process via a clever reserve juggling act. There will be no change to the number of Pan African shares in issue. However, it will require shareholder assent, which is the reason for PAF’s announcement. We believe it is in shareholders’ interest to vote in favour of these resolutions at its forthcoming general meeting on 10 June.

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

Metals & Mining

Pan African Resources

An accounting storm in a legal teacup

Capital reduction proposal

Metals and mining

24 May 2024

Price

25.10p

Market cap

£481m

ZAR23.0097/£, ZAR18.3215/US$, US$1.2554/£

Net debt (US$m) at end-December 2023

61.7

Shares in issue

(effective 1,916.5m postconsolidation, excluding treasury)

2,222.9m

Free float

85%

Code

PAF

Primary exchanges

AIM/JSE

Secondary exchanges

Level 1 ADR, OTCQX Best Market and A2X

Share price performance

%

1m

3m

12m

Abs

5.5

39.0

49.2

Rel (local)

1.6

28.6

38.9

52-week high/low

26.3p

12.0p

Business description

Pan African Resources has four major producing precious metals assets in South Africa: Barberton (target output 95koz Au pa), the Barberton Tailings Retreatment Project, or BTRP (20koz), Elikhulu (55koz) and Evander underground, incorporating Egoli (currently 30koz, rising to >100koz).

Next events

General meeting record date

6 June 2024

General meeting

10 June 2024

Capital reduction

c 3 July 2024

FY24 results

September 2024

Analyst

Lord Ashbourne

+44 (0)20 3077 5700

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

This morning, Pan African announced that it may have been in technical breach of the net asset test when it paid out dividends to shareholders in the five years from FY19–23 and also when it instigated its share buyback programme in 2022. As attested to by the fact that it took five years to be noticed, the apparent breach arises from the nexus of an arcane bit of legislation and a curious distinction between the presentation currency of the group (the US dollar) and its functional currency (the South African rand) and the effect of the depreciation of the latter against the former on the distributable versus undistributable reserves of Pan African Resources. Fortunately, there is a relatively simple remedy that involves a court sanctioned capital reduction process via a clever reserve juggling act. There will be no change to the number of Pan African shares in issue. However, it will require shareholder assent, which is the reason for PAF’s announcement. We believe it is in shareholders’ interest to vote in favour of these resolutions at its forthcoming general meeting on 10 June.

Year
end

Revenue
(US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/22

376.4

117.2

4.44

1.04

7.1

3.3

06/23

321.6

92.9

3.54

0.95

8.9

3.0

06/24e

390.3

141.7

5.73

0.99

5.5

3.1

06/25e

420.8

162.4

6.28

0.98

5.0

3.1

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

Section 831 of the Companies Act 2006

The capital reduction is expected to be a formality and will have the effect of remedying the NAV test and allowing Pan African to pay dividends in future. It will also relieve and indemnify all parties from any liability connected with the breaches. While Edison would not wish to overtly criticise the Companies Act 2006 in general, we would venture to suggest that this interpretation of the NAV test is unlikely to have been intended to be applied to a company of Pan African’s profile (ie mature with foreign assets), indebtedness (not much) or profitability (positive).

Valuation: Nosing in towards 40p

In the light of the above, Edison’s core (absolute) valuation of Pan African remains unchanged at 48.08c/share (38.30p), based on projects either sanctioned or already in production. This valuation rises by a further 22.17–27.19c if other assets (eg Egoli and the Soweto cluster) are also taken into account. Alternatively, if PAF’s historical average price to normalised headline earnings per share (HEPS) ratio of 8.4x in the period FY10–23 is applied to our FY24 and FY25 forecasts, it implies a value of 38.30p in FY24, followed by one of 41.94p in FY25. In the meantime, PAF remains cheaper than its principal London- and South African-listed gold mining peers on 66% of commonly used valuation measures, which collectively imply a valuation for PAF of 63.21p based on our year one EPS estimate and one of 48.06p based on our year two EPS estimate.

Exhibit 1: Financial summary

US$'000s

2022

2023

2024e

2025e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

376,371

321,606

390,323

420,772

Cost of sales

(226,445)

(198,790)

(208,987)

(209,567)

Gross profit

149,926

122,816

181,336

211,204

EBITDA

 

 

147,830

121,853

177,634

206,608

Operating profit (before amort. and excepts.)

 

 

121,402

101,454

155,720

170,820

Intangible amortisation

0

0

0

0

Exceptionals

(10,295)

(7,347)

(30,951)

(7,908)

Other

0

0

0

0

Operating profit

111,107

94,107

124,768

162,913

Net interest

(4,231)

(8,553)

(14,035)

(8,446)

Profit Before Tax (norm)

 

 

117,171

92,901

141,685

162,374

Profit before tax (FRS 3)

 

 

106,876

85,554

110,734

154,467

Tax

(31,924)

(24,817)

(32,068)

(42,093)

Profit after tax (norm)

85,247

68,084

109,617

120,282

Profit after tax (FRS 3)

74,952

60,737

78,666

112,374

Average Number of Shares Outstanding (m)

1,926.1

1,916.5

1,916.5

1,916.5

EPS - normalised (c)

 

 

4.44

3.54

5.73

6.28

EPS - FRS 3 (c)

 

 

3.90

3.19

4.12

5.86

Dividend per share (c)

1.04

0.95

0.99

0.98

Gross margin (%)

39.8

38.2

46.5

50.2

EBITDA margin (%)

39.3

37.9

45.5

49.1

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

32.3

31.5

39.9

40.6

BALANCE SHEET

Fixed assets

 

 

401,139

439,676

571,678

607,425

Intangible assets

44,210

44,429

46,612

48,792

Tangible assets

355,802

395,247

525,065

558,633

Investments

1,127

0

0

0

Current assets

 

 

55,953

61,263

49,885

120,292

Stocks

9,977

9,567

13,011

14,036

Debtors

17,546

15,182

27,804

29,994

Cash

26,993

34,771

7,327

74,519

Current liabilities

 

 

(58,989)

(77,386)

(93,144)

(111,830)

Creditors

(57,117)

(65,884)

(81,642)

(104,794)

Short-term borrowings

(1,872)

(11,502)

(11,502)

(7,036)

Long-term liabilities

 

 

(103,494)

(128,957)

(173,986)

(167,909)

Long-term borrowings

(37,088)

(45,334)

(89,670)

(82,392)

Other long-term liabilities

(66,406)

(83,623)

(84,316)

(85,517)

Net assets

 

 

294,609

294,596

354,433

447,978

CASH FLOW

Operating Cash Flow

 

 

142,879

132,941

110,250

188,325

Net Interest

(2,794)

(5,121)

(14,035)

(8,446)

Tax

(8,520)

(7,722)

(3,543)

(17,857)

Capex

(81,951)

(109,952)

(153,916)

(71,535)

Acquisitions/disposals

563

(2,779)

0

0

Financing

(3,222)

0

(0)

(0)

Dividends

(21,559)

(19,975)

(21,200)

(18,829)

Net cash flow

25,396

(12,608)

(82,444)

71,658

Opening net debt/(cash)

 

 

23,553

11,967

22,065

93,844

Exchange rate movements

(4,401)

(4,481)

0

0

Other

(9,409)

6,991

10,664

7,277

Closing net debt/(cash)

 

 

11,967

22,065

93,844

14,909

Source: company accounts, Edison Investment Research. Note: *2,222.9m shares in issue, of which 306.4m are held in treasury, such that a net 1,916.5m are in issue post-consolidation.


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 £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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

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

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

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

Copyright: Copyright 2024 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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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

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

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

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

Copyright: Copyright 2024 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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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