Pan African Resources — Building steam

Pan African Resources (AIM: PAF)

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Research: Metals & Mining

Pan African Resources — Building steam

On 30 June 2022, Pan African announced that it had successfully completed a definitive feasibility study (DFS) on the Mogale assets that it is in the process of acquiring. Highlights from the DFS were that the project has the potential to increase the group’s gold production by c 50koz pa (or c 25% of current group production) over a 13-year life at a capital cost of ZAR2.5bn (US$157.8m) and an all-in sustaining cost US$914/oz, to result in a pre-tax project NPV9.5 of ZAR1,006m (US$64.9m, or 3.3c or 2.8p per share) and a real internal rate of return of 20.1% at a gold price of US$1,750/oz and a forex rate of ZAR15.50/US$. We have now incorporated the results of the DFS into our model, as well as updating our forecasts to reflect recent moves in the gold price and forex rates (only).

Lord Ashbourne

Written by

Lord Ashbourne

Director, Energy & Resources

Metals & Mining

Pan African Resources

Building steam

Mogale DFS

Metals and mining

7 July 2022

Price

19.60p

Market cap

£436m

ZAR19.7634/£, ZAR16.4531/US$, US$1.2014/£

Net debt (US$m) at end December 2021

28.2

Shares in issue, effective 1,916.5m post-consolidation

2,222.9m

Free float

86%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

Level 1 ADR, OTCQX Best Market and A2X

Share price performance

%

1m

3m

12m

Abs

(8.8)

(18.8)

6.4

Rel (local)

(1.9)

(12.4)

10.5

52-week high/low

24.0p

15.1p

Business description

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

Next events

Mintails/Mogale due diligence

Until 31 August 2022

FY22 results

September 2022

AGM

November/December 2022

FY22 dividend payment

December 2022

Analyst

Lord Ashbourne

+44 (0)20 3077 5724

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

On 30 June 2022, Pan African announced that it had successfully completed a definitive feasibility study (DFS) on the Mogale assets that it is in the process of acquiring. Highlights from the DFS were that the project has the potential to increase the group’s gold production by c 50koz pa (or c 25% of current group production) over a 13-year life at a capital cost of ZAR2.5bn (US$157.8m) and an all-in sustaining cost US$914/oz, to result in a pre-tax project NPV9.5 of ZAR1,006m (US$64.9m, or 3.3c or 2.8p per share) and a real internal rate of return of 20.1% at a gold price of US$1,750/oz and a forex rate of ZAR15.50/US$. We have now incorporated the results of the DFS into our model, as well as updating our forecasts to reflect recent moves in the gold price and forex rates (only).

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/20

274.1

80.8

3.78

0.84

6.2

3.6

06/21

368.9

117.7

4.54

1.27

5.2

5.4

06/22e

371.9

134.4

5.20

1.18

4.5

5.0

06/23e

365.3

157.9

5.54

1.76

4.3

7.5

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

Adding value and enhancing EPS

At Edison’s long-term gold prices and prevailing forex rates, we estimate that Mogale has the potential to add an immediate 2.26c to our valuation of Pan African (post-tax and net of acquisition costs) and to enhance its earnings per share by an average 1.76 US cents per share in FY25–29 and by an average 0.45 US cents per share in FY30–34.

Upside and optionality

As far as investors are concerned, Mogale is potentially another Elikhulu for Pan African. As such, PAF is in a position to acquire for US$2.55/oz (for Mogale alone) an asset that should be worth US$9.88/oz in-situ, could be worth US$53.11/oz (pre-development) and may be worth up to US$94.09/oz, post-initial capex and debt repayment. Additional valuation optionality (potentially of the same order of magnitude – ie 2.26c/share) is then provided by the other half of the resource to be acquired (MSC) for which there is currently no immediate development plan.

Valuation: Up c 22% to (potentially) 65.36c/share

Pan African is cheap relative to both its historical trading record and its peers. Our core valuation of the company is 44.67c/share (37.18p/share), based on projects either sanctioned or already in production, including Mogale. However, this rises by a further 15.67–20.69c (13.04–17.22p) once other assets (eg Egoli) are also taken into account. Alternatively, if Pan African’s historical average price to normalised EPS ratio of 8.9x in the period FY10–21 is applied to our FY22 and FY23 forecasts, it implies a share price of 37.83p in FY22, followed by 40.78p in FY23. In the meantime, it remains cheaper than its principal London- and JSE-listed peers on at least 69% of commonly used valuation measures.

Mogale DFS

On 6 November 2020, Pan African announced it had entered into a conditional agreement with the liquidator of the Mintails group for the purchase of the total share capital and associated loans of Mogale Gold and Mintails SA Soweto Cluster (MSC), comprising a number of tailings storage facilities (TSFs) to the west of Johannesburg, for ZAR50.0m (US$3.0m at prevailing forex rates) and the assumption of a closure environmental liability of c ZAR120m. Since then, Pan African has successfully concluded both a fatal flaw analysis and a high-level financial evaluation of the project (which is similar in nature to Pan African’s flagship Elikhulu project at Evander). In July 2021, it subsequently completed a pre-feasibility study (PFS) on the Mogale Gold assets. On 30 June 2022, it announced that it had successfully completed a DFS on the same assets. Highlights of the DFS were as follows:

The project has the potential to increase the group’s gold production by c 50koz pa (or c 25% of current group production) over a 13 year life.

A pre-tax NPV (at a 9.5% real discount rate) of ZAR1,006m (US$64.9m, or 3.3c or 2.8p per share) and a real internal rate of return of 20.1% at a gold price of US$1,750/oz and a forex rate of ZAR15.50/US$.

A forecast all-in sustaining cost (AISC) of c US$914/oz and a (nominal) operating cost of c ZAR78/t (c US$5/t).

Construction capex of c ZAR2.5bn (US$157.8m).

A payback period of 3.5 years.

The operation would use a combination of proven low-cost hydro-mining coupled with a 0.8Mtpm carbon-in-leach (CIL) plant, similar in principle to that used at Elikhulu, albeit slightly smaller (cf Elikhulu’s 1.2Mptm throughput rate, for example). In general, the results of the DFS were similar to, or slightly better than, those of its prior PFS (see below):

Exhibit 1: Mogale gold assets DFS results cf PFS results

DFS*

PFS**

Throughput rate (Mtpm)

0.8

0.8

Pre-tax NPV

ZAR1,006m

ZAR849m

US$64.9

US$56.6m

Pre-tax NPV/share

ZAR0.53/share

ZAR0.44/share

US$0.033/share

US$0.029/share

£0.028/share

£0.022/share

Production (koz pa)

c 50

40-50

AISC (US$/oz)

914

1,087

Life of mine (years)

13

11

Real pre-tax IRR (%)

20.1

22

Initial capex

ZAR2,460m

ZAR1,991m

US$158.7m

US$132.7m

Life of mine capex

ZAR3,301m

ZAR3,022m

US$213.0m

US$201.5m

Source: Pan African Resources, Edison Investment Research. Note: *Conducted in June 2022 at a gold price of US$1,750/oz, a forex rate of ZAR15.50/US$ and a discount rate of 9.5%. **Conducted in July 2021 at a gold price of US$1,690/oz, a forex rate of ZAR15.00/US$ and a discount rate of 10.71%.

PAF’s due diligence on the project has been extended to 31 August. Assuming no impediments and that the project is sanctioned in September, PAF would hope to bring the Mogale TSFs into production 18–24 months from the start of construction between July and December 2024. Addition of Mintails’ wider Soweto Cluster of resources into the project also has the potential to extend the life of the operation from 13 years to 21 years and further increase annual gold production.

Mogale DFS detail and assumptions

On 6 November 2020, PAF announced that it was to acquire 100% of Mogale Gold and MSC from the liquidator of the Mintails group for ZAR50.0m (then US$3.2m, now US$3.0m) and the assumption of a closure environmental liability of c ZAR120m. The deadline for fulfilment of the conditions to conclude the transaction (originally six to nine months) was later extended to August 2022 and included the completion of a fatal flaw analysis, PFS and DFS (compiled by DRA).

In addition to the technical outcome of the DFS, the due diligence process has also sought to update Mintails and Mogale’s 7 February 2013 mineral resource declaration, to which end the following work was completed:

a highly accurate light detection and ranging (LIDAR) survey of the entire project area to ascertain available tonnages,

twinning of 25 of the historical holes to verify grades previously reported, and

the drilling of 82 new boreholes in areas with sparse or no data.

Combined drilling totalled 2,761m and resulted in 1,877 samples and 187 control samples and the re-modelling of all available resources as shown below:

Exhibit 2: Mogale and Mintails Soweto Cluster (MSC) reserve and resource estimates

Asset/category

Resources

Reserves

Conversion

Tonnage
(Mt)

Grade
(g/t)

Contained gold (koz)

Category

Tonnage
(Mt)

Grade
(g/t)

Contained gold (koz)

Tonnage
(%)

Grade
(%)

Contained gold (%)

Mogale

Measured

0.00

0.00

0

Proven

0.00

0.00

0

N/A

N/A

N/A

Indicated

121.62

0.29

1,127

Probable

123.58

0.29

1,140

101.6

100.0

101.2

Inferred

4.64

0.33

49

Possible*

0.00

0.00

0

0.0

0.0

0.0

Total

126.26

0.29

1,176

Total

123.58

0.29

1,140

97.9

100.0

96.9

Mintails Soweto Cluster (MSC)

Measured

0.00

0.00

0

Indicated

0.00

0.00

0

Inferred

119.00

0.31

1,186

Total

119.00

0.31

1,186

Total

Measured

0.00

0.00

0

Proven

0.00

0.00

0

Indicated

121.62

0.29

1,127

Probable

123.58

0.29

1,140

Inferred

123.64

0.31

1,235

Possible*

0.00

0.00

0

Total

245.26

0.30

2.362

Total

123.58

0.29

1,140

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

While the overall size of the resource was barely changed as a result of the re-modelling, confidence in the resource in terms of its categorisation (ie 95.8% of the Mogale resource being in the indicated category), increased markedly. In the meantime, further technical work is being undertaken on the MSC TSFs.

The Mogale DFS envisages hydro-mining the larger dumps, using hydraulic guns of similar specification to those used at Elikhulu, cutting mine widths of 15m wide and 20m deep. By contrast, the smaller dumps (the North Sands and South Sands dumps) will be mined by load-and-haul techniques. The re-mined tailings will then be processed in an 800–900ktpm CIL plant similar in design to Elikhulu, with the addition of a water treatment section to limit corrosion and potentially improve recoveries.

For the purposes of our analysis of Mogale, we have made the following main (real terms) assumptions regarding throughput, costs, capex etc:

Exhibit 3: Mogale valuation assumptions

FY23e

FY24e

FY25e

FY26e

FY27e

FY28e

FY29e

FY30e

FY31e

FY32e

FY33e

FY34e

Throughput (kt)

8,131

9,467

9,461

9,572

9,569

9,597

9,466

9,481

9,609

9,529

Grade (g/t)

0.32

0.32

0.34

0.32

0.32

0.28

0.27

0.26

0.27

0.26

Recovery (%)

54.6

54.7

54.9

57.5

58.0

58.1

57.3

54.6

53.7

54.5

Gold produced (oz)

45,247

52,849

57,156

56,134

56,272

49,596

46,260

43,457

44,655

43,913

Gold price (US$/oz)

1,649

1,585

1,539

1,524

1,524

1,524

1,524

1,524

1,524

1,524

Unit costs (ZAR/t)

56.72

53.81

53.70

60.38

61.83

62.47

65.65

69.02

66.42

66.26

Capex (ZAR000s)

615,332

1,845,126

133,981

103,879

351,166

282,273

88,836

189,391

195,644

108,019

78,080

91,945

Source: Edison Investment Research, Pan African Resources

Readers should be aware that the schedule presented in Exhibit 3 does not reflect the full life of operations at Mogale owing to space constraints, but only the first 10 of 13 years.

Tax is assumed to be levied according to the standard mining tax formula in South Africa:
Y = 34 - 170/x, where Y is the tax rate to be determined and x is the ratio of taxable income to the total income (expressed as a percentage). Note that these tailings dumps are largely pre-1 May 2004 dumps and, as such, are exempt from royalties.

Assets are presumed to depreciate in a straight line over the life of operations.

Mogale valuation

On the basis of the above assumptions, Edison has calculated the following valuation and financial parameters with respect to Mogale:

A valuation – based on the net present value of dividends payable to Pan African from the Mogale operation discounted at Edison’s customary rate of 10% pa – of US$62.5m, or 3.26 US cents per share, which equates to US$53.11 per Mogale resource ounce, US$54.77 per reserve ounce, US$59.44 per ounce of gold mined and US$109.14 per ounce of gold recovered. The profile of value evolution over the period of Mogale’s operational life is presented in the graph below:

Exhibit 4: Mogale life of mine free cash flow and dividend NPV (US$000s and US$ per residual resource oz)

Source: Edison Investment Research

Note that, at the currently prevailing (real) gold price of US$1,761/oz, we calculate a value for Mogale of US$107.8m, or 5.62 US cents per share, which equates to US$91.66 per Mogale resource ounce, US$94.53 per reserve ounce, US$102.58 per ounce of gold mined and US$188.35 per ounce of gold recovered (ie an uplift of 72.5%).

At the end of operations, reserves will have been, to all intents and purposes, fully depleted. We estimate that 37,622oz of resources (ie less than one year’s worth of production) will remain unmined. The gold content of re-deposited tailings will amount to 478,472oz.

On this basis, we calculate that the project will enhance Pan African’s earnings per share by an average 1.76 US cents per share in (production) years one to five of the operation and by an average 0.45 US cents per share in years six to 10. Over the first 10 years of operations, it will enhance EPS by an average 1.10 US cents per share, as shown below:

Exhibit 5: Mogale life of mine contribution to PAF EPS and valuation (US cents per share)

Source: Edison Investment Research

Note that, although we calculate a negative EPS contribution from Mogale in FY36–38, we also calculate that it will be cash flow positive during this period.

Although Pan African does not currently include MSC mineral resources in the Mogale mine schedule, a conceptual production schedule for this project was applied, based on available information, entailing the processing of reserves of the combined Mogale and MSC TSFs and demonstrated a more robust recovered ounce profile and an extended life of mine for the project in excess of 20 years. The conceptual MSC TSF model increased production by an average of 11koz pa from years six to 13, giving rise to a production profile of an average 54koz pa from year 14 to 20. However, confirmation of the feasibility of including the MSC dumps in the Mogale mine schedule will require further technical studies to be completed and no attempt has therefore been made to model this contingency in this report.

Comparison with Elikhulu

Mintails’ and Mogale’s aggregate resource of 2.36Moz compares favourably to Elikhulu’s original resource of 1.7Moz and its initial reserve of 1.5Moz, albeit at a fractionally higher grade of 0.30g/t (cf Elikhulu’s 0.29g/t).

By way of comparison, Pan African announced the results of an independent DFS on Elikhulu on 5 December 2016, which demonstrated an NPV9 of US$75.9m (or, then, 5.0c/share, or US$40.95 per resource ounce) at a gold price of US$1,180/oz and a forex rate of ZAR14.50/US$. At the time, we estimated Elikhulu to be worth US$69.9m (or 4.6c/share) at a 10% discount rate and to be capable of adding 1.33p to EPS in the first eight years of its operation (albeit there are now 27% more shares in issue). Now, however, with capex having been expended (albeit with not all associated debt having quite been repaid), we estimate a valuation for Elikhulu of c US$145.97 per initial resource ounce or US$213.19 per remaining resource ounce. As such, and with appropriate caveats, Pan African could acquire for US$2.55/oz (for Mogale alone) an asset that should be worth US$9.88/oz as an in-situ resource (see Gold stars and black holes, published in January 2019), could be worth US$53.11/oz (pre-development) and may be worth up to US$171.05 per remaining ounce (see Exhibit 4) or US$94.09 per initial ounce, post-initial capex and debt repayment; that is, it could be worth approximately an additional c 75% of Elikhulu to the company on the basis of the development of only half the resource and with the remaining (MSC) half providing additional valuation optionality (potentially of the same order of magnitude as Mogale) around subsequent development.

Timelines

Pan African reports that it has received a number of offers from financing institutions and third-party financiers for project funding and expects to finalise a funding package for Mogale later this year. Following in-principle approval by Pan African’s board to further progress the project, the company will commence with the environmental authorisation process and stakeholder engagements. Other critical path timelines are anticipated to be achieved approximately as follows:

Exhibit 6: Mogale timeline to commissioning

Activity

Approximate date

Engineering optimisation activities

June – August 2022

Likely project commencement

September 2022

Detailed engineering study

September 2022 – March 2023

Funding package finalised

October/November 2022

Environmental approvals

March 2023

Construction commences

April 2023

Commissioning

July – December 2024

Activity

Engineering optimisation activities

Likely project commencement

Detailed engineering study

Funding package finalised

Environmental approvals

Construction commences

Commissioning

Approximate date

June – August 2022

September 2022

September 2022 – March 2023

October/November 2022

March 2023

April 2023

July – December 2024

Source: Pan African Resources, Edison Investment Research

ESG/social impact

As part of the DFS, the Pan African has already conducted extensive engagements with community representatives and other interested organisations from the affected area, including regulatory authorities. This information and the associated Environmental Management Programme Report (EMPR) is being used to compile an action plan to remediate past environmental damage and restore the surface for productive land use, while at the same time investigating effective socio-economic development projects to stimulate the local economy.

PAF will also conduct feasibility studies into the merits of using renewable energy for the new tailings retreatment plant’s energy requirements (as at Elikhulu).

Group production profile

As a result of the inclusion of Mogale’s production profile into our group financial model, whereas we had forecast that group production at Pan African would reach 235.8koz in FY26 previously, we now forecast that it will reach 288.6koz and remain at approximately this level until at least FY30 (with production from Egoli still pending):

Exhibit 7: Estimated Pan African group gold production profile, FY18–26e

Source: Edison Investment Research, Pan African Resources

Updated (absolute) valuation

In the light of our inclusion of Mogale into the Pan African production profile (as well as revised external factors such as the gold price and forex rates), our absolute value of Pan African (based on its existing four producing assets including the 24 Level and 25 & 26 Level projects and Mogale) has increased by 10.78c (or 31.9%) from 33.79c/share to 44.67c (albeit excluding any contribution from Egoli, which we are valuing separately, for the moment, as a standalone project at 12.64c/share), on the basis of the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of its mining operations (applying a 10% discount rate):

Exhibit 8: Pan African estimated life of operations’ diluted EPS and (maximum potential*) DPS

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

A bridge chart of the evolution in our valuation is as follows:

Exhibit 9: Bridge chart of PAF valuation evolution, April 2022 to July 2022 (US cents per share)

Source: Edison Investment Research.

Notable within the context of the above bridge chart is the material effect of forex on our valuation under the influence of a weak rand and an even weaker sterling versus the US dollar compared with our last note (in particular, the rand-dollar rate has increased by 13.0%, from ZAR14.5595/US$ in April to ZAR16.4531/US$ currently). Including all of its other growth projects and assets as well, our updated total valuation of Pan African as a whole is as follows:

Exhibit 10: Pan African absolute valuation summary (US cents per share)

Project

Current valuation
(cents/share)

Previous valuation
(cents/share)

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

*44.67

33.79

FY22 dividend

1.20

N/A

Fairview Sub-Vertical Shaft project

0.76

0.76

Royal Sheba (resource-based valuation)

0.79

0.86

Mintails/Mogale*

N/A

2.77

MC Mining shares

0.06

0.06

Sub-total

47.48

38.24

EGM underground resource

0.22–5.24

0.22–5.24

Sub-total

47.70–52.72

38.46–43.48

Egoli

12.64

10.40

Total

60.34–65.36

48.86–53.88

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

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 11 below depicts Pan African’s average share price in each of its financial years from FY10 to FY21 and compares this with normalised headline earnings per share (HEPS) in the same year. For FY22 and FY23, the current share price (19.60p) is compared with our forecast normalised HEPS for FY22 to FY23. As is apparent from the graph, Pan African’s price to normalised HEPS ratios of 5.2x and 5.5x for FY22 and FY23, respectively, (based on our forecasts, see Exhibit 15) are very close to the bottom of its recent historical range of 4.1–14.8x for the period FY10–21:

Exhibit 11: Pan African historical price to normalised HEPS** ratio, FY10–FY23e

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

Stated alternatively, if Pan African’s average year one price to normalised EPS ratio of 8.9x for FY10–21 is applied to our normalised earnings forecasts, then it implies a share price for Pan African of c 37.83p in FY22 followed by 40.78p in FY23.

Relative peer group valuation

In the meantime, it may be seen that Pan African remains cheaper than its South Africa- and London-listed gold mining peers on 72% of comparable common valuation measures (26 out of 36 individual measures in the table below) if our forecasts are applied or 69% (25 out of 36 individual measures) if consensus forecasts are applied.

Exhibit 12: Comparative valuation of Pan African with South African and London peers

Company

EV/EBITDA (x)

P/E (x)

Yield (%)

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

AngloGold Ashanti

3.8

3.2

8.0

6.3

2.2

2.7

Gold Fields

3.9

3.5

8.7

8.8

3.8

3.4

Sibanye

2.0

1.9

3.3

3.0

10.7

12.2

Harmony

3.9

2.9

8.6

6.5

0.9

1.6

Centamin

2.6

2.1

10.7

8.9

6.0

7.5

Endeavour Mining (consensus)

7.3

8.0

12.3

11.0

3.0

3.3

Average (excluding Pan African)

3.9

3.6

8.6

7.4

4.4

5.1

Pan African (Edison)

2.9

2.5

4.5

4.3

5.0

7.5

Pan African (consensus)

3.7

3.1

5.6

4.3

5.2

7.0

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 5 July 2022.

Alternatively, applying Pan African’s peers’ average year one P/E ratio of 8.6x to our forecast normalised HEPS forecast of 5.20c/share for FY22 implies a share price for the company of 36.9p at prevailing forex rates. Applying its peers’ average year two P/E ratio of 7.4x to our forecast normalised HEPS forecast of 5.54c/share implies a share price of 33.7p.

Share buyback programme

According to our estimates, Pan African will have the 16th highest dividend yield of any precious metals mining company in the world in FY22, rising to 12th highest in FY23. To broaden its strategy to return value to shareholders and given the quality and profitability of its existing operations and growth projects, on 1 April, Pan African announced the initiation of phase one of a share buyback programme to purchase up to ZAR50m (then c £2.6m) of ordinary shares of the company over the course of the month, starting on 1 April 2022. The shares were to be repurchased at a price (excluding expenses) that did not exceed the last independent trade or the highest current independent bid on the relevant trading platform and were to be cancelled as soon as practicable thereafter. It was the company’s intention that the repurchases would occur on the London Stock Exchange (LSE) and the Johannesburg Stock Exchange (JSE) in approximately equal aggregate amounts.

Subsequently, on 12 May, the company announced that it had completed Phase 1 of its share buyback programme, repurchasing a total of 11.8m shares for a total consideration of ZAR50.3m (c £2.55m). A total of 7.6m of these were bought back on the LSE at a volume weighted average price of 21.67p per share, while a total of 4.3m were bought back on the JSE at a volume weighted average price of 418.21 South African cents per share. All shares purchased under the programme were subsequently cancelled, such that the company now has 2,222,862,046 ordinary shares in issue, of which 306,358,058 ordinary shares are held in treasury to result in a post-consolidation figure for shares outstanding of 1,916,503,988 shares.

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

Financials

Pan African reported cash flow from operating activities in excess of US$100m in both FY20 and FY21 and we forecast that it will continue generating cash at or above these levels into the foreseeable future. At the same time, it reported net debt to financial institutions of only US$13.3m at end-December 2021, which equated to a gearing ratio (net debt/equity) of only 4.9% and a leverage ratio (net debt/[net debt+equity]) of just 4.6%. Notwithstanding its capex (now including Mogale), share buyback and dividend commitments over the course of the next two years, we are continuing to forecast that the company will be, to all intents and purposes, free of net debt to financial institutions by the end of FY22 and will remain so by the end of FY24, when capex relating to Mogale is scheduled to decline sharply:

Exhibit 13: Pan African previous estimated net debt* profile forecast, FY17 to FY24e (US$000)

Exhibit 14: Pan African current net debt* profile forecast, FY17 to FY24e (US$000)

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

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

Exhibit 13: Pan African previous estimated net debt* profile forecast, FY17 to FY24e (US$000)

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

Exhibit 14: Pan African current net debt* profile forecast, FY17 to FY24e (US$000)

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

Note that, including all other components, total net debt as at end-December 2021 amounted to US$28.2m.

Exhibit 15: Financial summary

US$'000s

2018

2019

2020

2021

2022e

2023e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

145,829

218,818

274,107

368,915

371,949

365,271

Cost of sales

(107,140)

(152,980)

(158,457)

(208,815)

(198,078)

(169,586)

Gross profit

38,689

65,838

115,650

160,100

173,871

195,685

EBITDA

 

 

38,131

65,484

115,176

156,646

167,603

191,000

Operating profit (before GW and except.)

 

 

31,506

49,256

93,673

124,572

136,701

158,206

Intangible amortisation

0

0

0

0

0

0

Exceptionals

(16,521)

10,596

(28,593)

(12,819)

(11,911)

(1,504)

Other

0

0

0

0

0

0

Operating profit

14,985

59,852

65,079

111,753

124,790

156,703

Net interest

(2,222)

(12,192)

(12,881)

(6,919)

(2,344)

(298)

Profit before tax (norm)

 

 

29,284

37,064

80,791

117,653

134,356

157,909

Profit before tax (FRS 3)

 

 

12,763

47,660

52,198

104,834

122,445

156,405

Tax

2,826

(8,174)

(7,905)

(30,141)

(34,152)

(51,818)

Profit after tax (norm)

32,110

28,890

72,887

87,511

100,204

106,090

Profit after tax (FRS 3)

15,589

39,486

44,293

74,692

88,293

104,586

Average number of shares outstanding (m)

1,809.7

1,928.3

1,928.3

1,928.3

1,925.4

1,916.5

EPS - normalised (c)

 

 

1.31

1.64

3.78

4.54

5.20

5.54

EPS - FRS 3 (c)

 

 

0.87

2.05

2.30

3.87

4.59

5.46

Dividend per share (c)

0.00

0.15

0.84

1.27

1.18

1.76

Gross margin (%)

26.5

30.1

42.2

43.4

46.7

53.6

EBITDA margin (%)

26.1

29.9

42.0

42.5

45.1

52.3

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

21.6

22.5

34.2

33.8

36.8

43.3

BALANCE SHEET

Fixed assets

 

 

315,279

361,529

314,968

398,533

456,105

503,799

Intangible assets

56,899

49,372

43,466

50,548

51,703

53,789

Tangible assets

254,247

305,355

270,286

346,922

403,338

448,946

Investments

4,134

6,802

1,216

1,064

1,064

1,064

Current assets

 

 

29,009

31,601

53,648

84,558

95,298

145,236

Stocks

4,310

6,323

7,626

11,356

12,453

12,186

Debtors

22,577

18,048

11,245

37,211

26,612

26,042

Cash

922

5,341

33,530

35,133

55,375

106,150

Current liabilities

 

 

(44,395)

(63,855)

(78,722)

(105,978)

(111,044)

(136,644)

Creditors

(37,968)

(39,707)

(62,806)

(75,303)

(80,370)

(117,069)

Short-term borrowings

(6,426)

(24,148)

(15,916)

(30,675)

(30,675)

(19,575)

Long-term liabilities

 

 

(152,906)

(145,693)

(106,276)

(93,482)

(94,515)

(95,786)

Long-term borrowings

(112,827)

(109,618)

(73,333)

(28,011)

(28,011)

(28,011)

Other long-term liabilities

(40,078)

(36,076)

(32,943)

(65,471)

(66,504)

(67,774)

Net assets

 

 

146,988

183,582

183,620

283,632

345,844

416,605

CASH FLOW

Operating cash flow

 

 

5,345

59,822

73,399

124,549

156,341

178,858

Net Interest

(6,076)

(14,685)

(10,834)

(5,623)

(2,344)

(298)

Tax

(1,634)

(4,497)

(5,804)

(18,902)

(13,588)

(13,510)

Capex

(127,279)

(52,261)

(30,849)

(44,151)

(88,474)

(80,488)

Acquisitions/disposals

6,319

466

207

3

0

0

Financing

11,944

(0)

0

0

(3,393)

0

Dividends

(11,030)

(2,933)

(2,933)

(17,782)

(28,300)

(22,688)

Net cash flow

(122,411)

(14,088)

23,186

38,095

20,242

61,874

Opening net debt/(cash)

 

 

3,138

118,332

128,424

55,719

23,553

3,311

Exchange rate movements

(619)

537

1,663

7,979

0

0

Other

7,836

3,459

47,856

(13,907)

0

0

Closing net debt/(cash)

 

 

118,332

128,424

55,719

23,553

3,311

(58,564)

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

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

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

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

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

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

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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.

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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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London +44 (0)20 3077 5700

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New York +1 646 653 7026

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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General disclaimer and copyright

This report has been commissioned by Pan African Resources and prepared and issued by Edison, in consideration of a fee payable by Pan 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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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