Mintails financing facility concluded

H225 will be the last time in which the contract liability related to the fixed-price forward sales associated with Pan African’s ZAR400m Mintails financing facility will feature in its results. From the start of FY26, PAF will be fully exposed to the prevailing price of gold at exactly the moment its output increases into the 250–350koz pa range.

Valuation: Rising with production and the gold price

Our core valuation of Pan African remains essentially unchanged at 38.80c per share (to 1 July 2024), based on its five producing mines in FY25. However, this uses a relatively conservative gold price (US$2,124/oz nominal on average for the period FY26–30). It rises by a further 24.19–29.21c (18.44–22.27p) to 62.99–68.01c (48.02–51.86p) if other assets, such as Egoli and the Soweto Cluster, are included. It more than doubles, to 111.22c (84.80p), at the current price of gold of US$3,157/oz at the time of writing. Alternatively, if PAF’s historical average price-to-normalised HEPS ratio of 8.2x for the period FY10–24 is applied to our FY25 and FY26 forecasts, it implies a value of 42.19p in FY25, followed by 69.52p in FY26. Stated alternatively, PAF’s current share price of 44.85p could be seen as discounting normalised HEPS rising to only 7.22c per share in FY26 (cf 5.27c ‘adjusted’ in FY24 and our forecasts of 6.79c and 11.19c in FY25 and FY26, respectively). Meanwhile, PAF remains cheaper than its principal London- and South African-listed gold mining peers on at least 66% of commonly used valuation measures (Exhibit 12). Performing a relative valuation analysis, its peers imply a comparable valuation for PAF of 51.46p based on our year one EPS estimate and 72.43p based on our year two EPS estimate. This is validated by a valuation of 73.24p on a cash-flow and terminal multiple-type analysis (on an ex-real growth assumption), rising to 131.38p/share assuming 3.6% of real growth pa (which is the average real return of the gold price alone from 1967 to 2024).

H125 results and H225 guidance and forecasts

Pan African’s production in H125 was in line with both our expectations and prior guidance (provided in its Operational update of 12 December). In addition, management reiterated guidance for FY25 of c 215,000oz and provided detailed numbers for H225 and FY26, which are shown in Exhibit 1, below, relative to both our prior and updated expectations.

Having produced 84,705oz in H125, PAF will need to produce at the top of its H225 guidance range to meet its full-year number of 215,000oz. Edison’s current forecast is for output slightly below this level in absolute terms, but still of the same order of magnitude and still more than 10% higher than in FY24, with upside optionality being provided by its newly acquired Nobles project in Australia.

From a financial perspective, there were three particularly notable features of PAF’s results in H125:

• On average, Pan African sold its gold for US$2,359/oz. This compares with an average price during the period of US$2,568/oz (source: Bloomberg); that is, the company sold its gold, on average, at a US$209/oz (or 8.1%) discount to the prevailing price in the marketplace. As noted in previous Edison reports, this discount arose from the opportunity cost that resulted from the synthetic gold forward sale transaction used by the company to part fund the construction of the Mogale Tailings Retreatment (MTR) operation. This opportunity loss falls disproportionately on PAF’s Evander underground operations (see Exhibit 4). Quantitatively however, this will have reduced PAF’s revenue by c US$16.7m (79,926oz sold at a US$209/oz discount) and compares with the US$17.4m disclosed in Pan African’s results announcement (note that, for the purposes of our analysis of PAF’s H125 results – see Exhibit 2, below – we have used the disclosed figure of US$17.4m to restate the numbers to show the company’s performance on an underlying, or normalised, basis, rather than our US$16.7m number; the difference between the two, in this case, being deemed ‘immaterial’).
• Whereas Pan African produced 84,705oz in H125, it only sold 79,926oz. We estimate that this under-sale of 4,779oz (or 5.6%) relative to production will have similarly cost the company a further c US$12.3m in foregone revenue (4,779oz x US$2,528/oz). Although this will probably be recouped in subsequent accounting periods, its absence will have preternaturally depressed revenue (and, to some extent, related costs) in H125.
• Included in earnings in the reporting period was a gain on acquisition of US$25.2m (party offset by a US$3.0m impairment regarding its Sudanese exploration assets) relating to PAF’s purchase of the Tennant Consolidated Mining Group (TCMG; announced on 5 November 2024), which is included in its EPS calculation, but excluded from HEPS. Note that Edison declined to attempt to quantify either in its prior forecasts of PAF’s H125 results.

Exhibit 2, below, summarises PAF’s H125 results, relative to our prior expectations. It also adjusts H125 results (but not prior results) to take account of the considerations noted above:

• In the first instance (denoted adjusted¹) we adjust the US$17.4m opportunity cost resulting from the synthetic gold forward sale relating to its Mintails’ funding back into the ‘Other income/(expenses)’ line (ie to show it as if this cost were a hedging cost, rather than a cost to revenue). This adjustment makes no difference to the income statement beyond ‘Net income before finance’ but adds US$17.4m to revenue (as would have been the case if all Pan African’s gold were sold at the market rate in H125, rather than its discounted rate) and increases the hedging loss by a similar amount, thereby increasing HEPS, but not EPS.
• The second adjustment (adjusted²) is more subjective, but seeks to represent PAF’s results as if all of the gold produced in the period were also sold. This adds US$12.3m to revenue. However, it would also add the corresponding cost of the unsold gold to the ‘cost of production’ as well as depreciation. The under-sales were approximately equally attributable to one higher-cost operation (Barberton) and two lower-cost ones (Elikhulu and Mogale). For simplicity however, in making this adjustment, Edison has merely maintained the gross mining profit margin at the same level as the adjusted¹ case (of 34.5%), the effective tax rate at 20.4% and the minority interest at -1.8%.

The effect of these adjustments is to show that, while Pan African reported HEPS of 1.20c/share in H125, on a ‘normalised’ basis this would have been 2.60c/share without the Mintails contract liability and c 2.78c/share if all of its produced gold had been sold during the period; that is, to all intents and purposes, in line with our prior forecast of 2.79c/share.

Operationally, the Mogale Retreatment operation (MTR) announced its first gold pour in early October and its first commercial set of results in H125 for a capital cost ZAR100–150m less than originally budgeted. Management estimates FY25 production of c 33,000oz at an AISC of under US$1,000/oz.

Evander was adversely affected by a delay in commissioning its sub-vertical shaft, which similarly delayed ramp-up from 24 to 25 Level operations at 8 Shaft. As a result, while profitability was broadly static relative to the prior six-month period at Elikhulu, Barberton and the Barberton Tailings Retreatment Project (BTRP), adjusted EBITDA at Evander declined to c US$0.3m (albeit more than made up for by the performance of MTR – see Exhibit 3, below). As noted previously however, Evander is Pan African’s operation most adversely affected by the effect of the Mintails funding structure on its received gold price. In the absence of this structure, we estimate that Evander would have instead recorded adjusted EBITDA of c US$7.7m in H125.

Since its performance problems were resolved with commissioning in December however, the sub-vertical shaft’s full 700t/day hoisting capacity has become available to Evander. In combination with the establishment of the high-grade 24 Level B-Line raise in Q325, face length and mining flexibility will therefore improve in H225 and contribute to an increase in the average grade expected from 6.0g/t to 7.5g/t.

At the same time, Phases 3 and 4 of the new tailings dam construction were completed ahead of schedule at Elikhulu. However, multiple Eskom transformer failures at Barberton Mines’ Fairview and Sheba operations negatively affected production for 10 days in November (to the tune of c 2,250oz), with the Eskom power utility’s back-up units also failing as a result of ageing infrastructure. In mitigation, further contingencies are being implemented to prevent these failures from recurring, with additional spare transformers being kept on site. Moreover, high-grade areas of the 262 Platform at Fairview Mine, indicated by drill intersections of up to 80g/t Au, are in the process of being accessed in the current quarter as development rates are accelerated, while underground sampling at Consort has confirmed high-grade mineral reserve areas below 41 Level in the Prince Consort shaft area. Rehabilitation work on this shaft has now been largely completed, allowing operations to recommence.

In addition to changes to our immediate production assumptions, we have revised our estimate of the gold price for the remainder of the financial year to June up to US$3,157/oz (cf US$2,682/oz previously). At the same time, we have adjusted our foreign exchange rates to reflect the renewed weakness of the rand against both the US dollar and sterling:

• from ZAR22.5670/£ to ZAR25.3436/£ (+12.3%),
• from ZAR17.7435/US$ to ZAR19.3243/US$ (+8.9%), and
• from US$1.2718/£ to US$1.3115/£ (+3.1%).

As a result, we have revised our operational forecasts for the group for FY25 to those shown in Exhibit 4, below:

One general feature of PAF’s operational results in H125 was the effect of inflationary pressures in South Africa, which, in the period under review, were not offset by a depreciating rand. A large proportion of this effect could be traced to electricity and reagent costs. In H125, the former increased by 9.5%, following a 12.7% regulatory increase and a 10.0% increase owing to the start of commercial operations at MTR, offset by the use of solar energy at the Evander Mines’ and Fairview solar plants (resulting in a saving of 10.1%) and the discontinuation of production from surface sources at Evander (resulting in a 3.6% saving). While electricity costs are expected to increase by an additional 12–13% in H225 as a consequence of regulator-endorsed tariff increases, management reports that reagent prices now appear to have stabilised. For the purposes of our forecasts, we have assumed that costs at Barberton, Evander and the BTRP will moderate in rand/tonne terms as the volume of tonnes processed at all three recovers. Simultaneously, we assume that unit costs at Elikhulu will remain under control after an excellent performance in H125 when they fell 13.2% relative to H224.

As a result, we have revised our financial forecasts for the group for FY25 to those shown in Exhibit 5, below.

Notwithstanding the 3,963oz reduction in our production estimate for H225 (see Exhibit 1), our revised estimate for normalised HEPS for FY25 remains unchanged - albeit this is subject to the requirement that the gold price averages US$3,157/oz for the remainder of H225.

More significantly, readers should note that H225 will be the last time in which the contract liability related to the fixed-price forward sales associated with Pan African’s ZAR400m Mintails financing facility will feature in PAF’s results as the last delivery of gold under this structure has now been made. Readers will recall that Edison shows profits/losses from this contract liability in the ‘Other income/(expenses)’ line of the profit & loss statement. Although this is not in accordance with accounting standards, it allows the underlying performance of the operating company to be distinguished from the volatility created by derivative-type profits and losses (in this case an effective synthetic forward sale), which are otherwise more strictly included in the revenue line.

A comparison between Edison and consensus forecasts for FY25 and FY26 is provided in Exhibit 6. Of note is the extent to which Edison’s forecasts for H225 remain conservative within the sample group. All other things being equal however, our normalised HEPS forecast for FY26 increases by c 64.8% in FY26 compared to FY25 and increases again to as high as 18.02c/share in the event that the gold price remains at its current level of US$3,157/oz for the whole of the financial year.

Group production

In addition to the changes to our short-term forecasts, we have brought our longer-term forecasts for production from TCMG’s Nobles project into line with updated management guidance, which has had the effect of smoothing group production expectations on a slowly growing profile until at least FY30 in the range 250–350koz pa, as shown below:

Additional expansion projects over and above the production profile shown above include:

• The potential to increase annual production from MTR/Mogale from 50,000oz to 60,000oz pa via:
  • The installation of additional reactors to further improve recoveries.
  • The addition of two carbon-in-leach (CIL) tanks to increase throughput from 800ktpm to 1Mtpm, at a limited estimated capital cost of ZAR70m (US$3.9m).
  • The inclusion of a hard rock crushing circuit to enable the processing of nearby remnant hard rock sources (for which a pre-feasibility study is expected in the next three months).
• The potential to accelerate production from the Soweto Cluster by focusing on the possibility of constructing a new processing facility in closer proximity to the Soweto Cluster tailings storage facilities (TSFs), which would be a standalone operation also producing c 50,000oz pa plus the option to include additional proximal TSF resources that will add to the project’s life. This is in contrast to the base-case plan currently modelled by Edison to feed Soweto Cluster material through the MTR/Mogale plant once the latter’s feedstock is near exhaustion at the end of its life and arises from the observation that the capital cost of constructing a standalone processing plant near the Soweto Cluster would be little more than that required for the infrastructure to pump Soweto Cluster material to the MTR/Mogale plant alone. A feasibility study to this effect is underway and is expected to be completed by September 2025.
• Fast-tracking the wholly owned Warrego Copper Gold project at TCMG with the objective of budgeting first production in year five (2029/30).
• Once the BTRP’s tailings resources are depleted, it is planned to convert the plant to process hard rock feedstock from the Sheba Fault project (comprising the Western Cross and Royal Sheba orebodies), which has a current estimated mine life of nine years, with both orebodies open at depth.

For the purposes of our valuation, below, we have also increased our average long-term AISC forecast for Evander from c US$1,000/oz to c US$1,450/oz in line with updated management guidance.

Updated (absolute) valuation

Valuation

Based on the present value of the estimated potential dividend stream payable to shareholders over the life of its mining operations (applying a 10% discount rate to US dollar dividends), our absolute valuation of PAF (based on its existing six producing assets in FY25) has remained steady at 38.80c (cf 39.49c previously).

However, readers should note that this valuation is conducted at Edison’s relatively conservative gold price assumption of a US$2,124/oz (nominal) average for the period FY26–30. At the current gold price of US$3,157/oz, all other things being equal, our valuation more than doubles to 111.22c (84.80p):

Even so, including its other growth projects and assets, our updated total valuation of PAF as a whole rises to 62.99-68.01c (48.02–51.86p).

Note that, for the purposes of our forecasts and valuation, we have not yet included any additional hedging in our estimates. Pan African has stated that it has approved lines in place to hedge approximately 75% of TCMG production for the first two years of operation in order to secure the return on its initial investment. Indicative pricing at a spot gold price of A$3,947/oz (US$2,644/oz at US$0.67/A$) for a zero-cost collar structure is a floor price of A$3,600/oz (US$2,412/oz) and a cap price of A$4,800/oz (US$3,216/oz). However, we will only include these in our forecasts once the contracts are actually in place.

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 11 below depicts PAF’s average share price in each of the financial years from FY10 to FY24 and compares this with HEPS in the same year. For FY25 and FY26, the predicted share price is shown, given our forecast normalised HEPS for those years (as per the paragraph below Exhibit 11). As is apparent from the chart, PAF’s price to normalised HEPS ratios of 5.3x for FY26, in particular, remains in the lower half of its recent historical range of 4.1–14.8x for the period FY10–24:

If PAF’s average year one price to normalised EPS ratio of 8.2x for the period FY10–24 is applied to our updated normalised earnings forecasts, it implies a share price for PAF of 42.19p in FY25 followed by one of 69.52p in FY26 (as shown Exhibit 11). Stated alternatively, PAF’s current share price of 44.85p, at prevailing foreign exchange rates, appears to be discounting FY25 and/or FY26 normalised HEPS of 7.22c per share (cf our forecasts of 6.79c and 11.19c, respectively).

Relative peer group valuation

In the meantime, it may be seen that PAF remains cheap relative to its London- and South African-listed gold mining peers on 66% of comparable common valuation measures (24 out of 36 individual measures in the table below) if Edison forecasts are used or 72% (26 out of 36 measures) if consensus forecasts are used.

Alternatively, applying PAF’s peers’ average year one P/E ratio of 9.9x to our normalised HEPS forecast of 6.79c per share for FY25 implies a share price for the company of 51.46p at prevailing foreign exchange rates. Applying its peers’ average year two P/E ratio of 8.5x to our normalised HEPS forecast of 11.19c per share for FY26 implies a share price of 72.43p.

Valuing blue sky upside

Pan African is a multi-asset company that has shown a willingness and ability to grow production both organically and by acquiring assets in order to maximise shareholder returns. As a result, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY25, in the case of Pan African, we can alternatively discount forecast cash flows back over five years to the start of FY25 and then apply an ex-growth terminal multiple to forecast cash flows in that year (FY30) based on the appropriate discount rate.

In this case, our estimate of PAF’s pre-financing terminal cash flow in FY30 is 6.31c (at a real gold price of US$1,794/oz in current money terms). Applying a (real) discount rate of 6.72% (calculated from a nominal expected equity return of 9% and long-term inflation expectations of 2.1361%, as defined by the US 30-year break-even inflation rate; source: Bloomberg, 11 April) to this estimate of cash-flows, our valuation of the company is 73.24p/share in FY25 assuming zero long-term cash-flow per share growth beyond FY30.

At this point (FY30), production is anticipated to be in the order of 331koz. If PAF is able to maintain this level of cash-flows per share via organic investment, its valuation will flatten out at 71.55p/share in real terms on an ex-growth basis. However, the gold price alone should afford an additional 3.6% per annum in real terms (the compound average annual real appreciation rate in its price from 1967 to 2024), in which case, PAF’s terminal valuation more than doubles to 157.44p/share and its current valuation to 131.38p/share.

Financials

Pan African reported net debt of US$228.5m on its balance sheet as at end-December 2024 (cf US$104.4m as at end-June 2024, US$61.7m as at end-December 2023 and US$22.1m as at end-June 2023), which equated to a gearing ratio (net debt/equity) of 54.2% (cf 28.6% at end-June 2024, 18.8% at end-December 2023 and 7.5% at end-June 2023) and a leverage ratio (net debt/[net debt+equity]) of 35.1% (cf 22.2% at end-June 2024, 15.8% at end-December 2023 and 7.0% at end-June 2023), after cash flow from operating activities of US$12.0m before dividends (cf US$109.1m in FY24, US$63.6m in H224, US$45.5m in H124, US$88.5m in H223 and US$31.6m in H123). Nevertheless, owing to the passage of time and the accumulation of equity in the form of retained income, this is a much lower debt burden on the company than the last time net debt peaked, at US$128.4m in FY19, when gearing amounted to 70.0% and leverage amounted to 41.2%.

In the immediate future, we calculate that Pan African’s forecast net debt requirement of US$138.9m at end-FY25 will equate to no more than 27.2% gearing (defined as net debt/equity) or 21.4% leverage (defined as net debt/[net debt+equity]). Beyond that, we forecast that PAF will continue to generate cash from operations comfortably above the US$100m pa level (and potentially around the US$200m pa level), such that net debt is eliminated late in FY26, by which time we assume that capex will once again have returned to near-sustaining levels.

Including all other components, total net debt as at end-December was US$228.5m (cf US$106.4m at end-June, US$64.3m at end-December 2023, US$22.0m at end-June 2023 and US$53.7m at end-December 2022), as shown below:

Nevertheless, the group remains very comfortably within its senior debt covenants: