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Research: Metals & Mining
Since our last update note, Pan African Resources (PAF) has announced the disposal of its 91% interest in its coal asset, Uitkomst, for ZAR275m (£16.3m, or US$20.9m), a placing to raise ZAR705m (£41m, or US$51m) and an update on progress at its Evander underground refurbishment. As well as returning an exceptional profit to the company, the disposal self-evidently returns Pan African to its core competency of gold mining. It also materially reduces risk in the form of its net funding requirement while developing Elikulu.
Pan African Resources |
Canning coal |
Disposal and financing |
Metals & mining |
17 May 2017 |
Share price performance
Business description
Next event
Analyst
Pan African Resources is a research client of Edison Investment Research Limited |
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Since our last update note, Pan African Resources (PAF) has announced the disposal of its 91% interest in its coal asset, Uitkomst, for ZAR275m (£16.3m, or US$20.9m), a placing to raise ZAR705m (£41m, or US$51m) and an update on progress at its Evander underground refurbishment. As well as returning an exceptional profit to the company, the disposal self-evidently returns Pan African to its core competency of gold mining. It also materially reduces risk in the form of its net funding requirement while developing Elikulu.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/15 |
140.4 |
16.0 |
0.64 |
0.54 |
25.4 |
3.3 |
06/16 |
168.4 |
45.9 |
2.08 |
0.88 |
7.8 |
5.4 |
06/17e |
203.4 |
26.0 |
1.19 |
0.58 |
13.7 |
3.6 |
06/18e |
204.8 |
57.7 |
2.16 |
1.12 |
7.5 |
6.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
Uitkomst sale
PAF announced the disposal of Uitkomst on 5 April for ZAR275m, representing capital appreciation of ZAR127m over its purchase price of ZAR148m (excluding working capital) in March/April 2016. Moreover, this appreciation was amplified by forex movements, from c ZAR21.0535/£ in March/April 2016, to ZAR16.8680/£ currently, which translates to an acquisition price of £7.0m and a disposal price of £16.3m in sterling terms. In addition, PAF received a ZAR30m dividend from Uitkomst during the period of its ownership. The sale is subject to the usual conditions precedent. The transaction value represents a multiple of 1.4x Uitkomst’s net asset value and 7.1x annualised current year profits after taxation (on a 100% basis). Consideration for PAF’s 91% interest is to be settled in cash (ZAR125m plus ZAR25m deferred) and unrestricted Coal of Africa shares (261.3m valued at ZAR125m, including an 8% discount to CoAL’s 30 day VWAP).
Elikhulu fully funded
As a consequence of the Uitkomst sale and its April share sale, we estimate that PAF’s maximum group net funding requirement over the period of Elikhulu’s development will now be a mere £20.4m in FY19 (cf £71.6m previously), which is self-evidently well covered by both PAF’s existing ZAR800m revolving credit facility and a new ZAR1.0bn facility with Rand Merchant Bank.
Valuation: 20.22p/share, rising to 25.23p in FY22
Updating our long-term forecasts to reflect Uitkomst’s disposal and the April share placing, our absolute value of PAF decreases by a mere 5.4%, from 21.38p/share to 20.22p/share. The decrease is almost exclusively attributable to the 19.3% increase in the effective number of shares in issue, but also, in part, as a result of the relative strength in the value of the rand against both sterling and the US dollar after a period of hubris in March and April. In the meantime, PAF’s shares are noticeably cheap, within the historical context, when considered relative to our forecasts of normalised HEPS in FY18 compared to prior years (see page 4).
Disposal & Elikhulu financing
The timing of the Uitkomst sale is with respect to an ‘effective date’, which has yet to be determined. For simplicity however, we have assumed that the ‘effective date’ falls on, or soon after 1 July 2018 (being the first day of PAF’s next financial year, FY18). As a result, our forecasts for FY17 (which include a full contribution from Uitkomst) remain largely unchanged relative to our last note (excepting an adjustment to costs at Evander – see below). Our forecasts for FY18 now include an assumed £3.9m profit on the disposal of Uitkomst (included in ‘Loss in associate etc’ in Exhibit 1, below):
Exhibit 1: Pan African underlying P&L statement by half-year (H114-H218e) actual and expected
£000s (unless otherwise indicated) |
H114 |
H214 |
H115 |
H215 |
H116 |
H216 |
H117 |
H217e |
FY17e |
FY18e |
|
Mineral sales |
84,637 |
69,914 |
68,126 |
72,951 |
75,632 |
93,728 |
105,046 |
101,256 |
206,303 |
205,021 |
|
Realisation costs |
(191) |
(159) |
(295) |
(396) |
(269) |
(687) |
(1,548) |
(1,346) |
(2,894) |
(235) |
|
Realisation costs (%) |
0.23 |
0.23 |
0.43 |
0.54 |
0.36 |
0.73 |
1.47 |
1.47 |
1.40 |
0.12 |
|
On-mine revenue |
84,447 |
69,755 |
67,831 |
72,555 |
75,363 |
93,041 |
103,498 |
99,911 |
203,409 |
204,785 |
|
Gold cost of production |
(52,519) |
(52,727) |
(48,935) |
(51,102) |
(65,188) |
(71,856) |
|||||
Pt cost of production |
(1,590) |
(1,797) |
(1,651) |
(1,796) |
(2,300) |
(2,529) |
|||||
Coal cost of production |
(10,568) |
(5,972) |
|||||||||
Cost of production |
(54,109) |
(52,285) |
(54,524) |
(55,889) |
(50,586) |
(57,637) |
(78,056) |
(80,357) |
(158,414) |
(133,356) |
|
Depreciation |
(5,088) |
(4,935) |
(4,676) |
(5,661) |
(5,277) |
(5,180) |
(6,450) |
(8,032) |
(14,482) |
(10,770) |
|
Mining profit |
25,249 |
12,535 |
8,631 |
11,005 |
19,500 |
30,225 |
18,992 |
11,521 |
30,513 |
60,660 |
|
Other income/(expenses) |
(223) |
(1,227) |
523 |
(273) |
(3,486) |
(8,697) |
2,175 |
(2,302) |
(127) |
(1,082) |
|
Loss in associate etc |
(89) |
(84) |
(128) |
0 |
0 |
0 |
256 |
0 |
256 |
3,913 |
|
(Loss)/profit on group disposal |
(140) |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Impairment costs |
0 |
(12) |
(56) |
(2) |
0 |
0 |
0 |
0 |
0 |
0 |
|
Royalty costs |
(1,747) |
(272) |
(795) |
(852) |
(1,194) |
(1,606) |
(968) |
(1,508) |
(2,477) |
(3,138) |
|
Net income before finance items |
23,191 |
10,940 |
8,034 |
9,878 |
14,819 |
19,923 |
20,455 |
7,711 |
28,166 |
60,353 |
|
Finances income |
381 |
306 |
321 |
28 |
144 |
299 |
70 |
|
|||
Finance costs |
(725) |
(153) |
(498) |
(1,960) |
(558) |
(891) |
(1,079) |
|
|||
Net finance income |
(344) |
153 |
(177) |
(1,932) |
(414) |
(592) |
(1,009) |
(1,025) |
(2,034) |
176 |
|
Profit before taxation |
22,847 |
11,093 |
7,857 |
7,946 |
14,405 |
19,331 |
19,446 |
6,686 |
26,131 |
60,529 |
|
Taxation |
(5,537) |
(1,618) |
(2,310) |
(1,823) |
(3,480) |
(4,754) |
(5,475) |
(1,868) |
(7,343) |
(18,758) |
|
Marginal tax rate (%) |
24 |
15 |
29 |
23 |
24 |
26 |
28 |
28 |
28 |
31 |
|
Deferred tax |
|
|
|||||||||
Profit after taxation |
17,310 |
9,475 |
5,548 |
6,122 |
10,925 |
14,577 |
13,970 |
4,818 |
18,788 |
41,771 |
|
EPS (p) |
0.95 |
0.52 |
0.30 |
0.33 |
0.60 |
0.82 |
0.93 |
0.30 |
1.20 |
2.32 |
|
HEPS** (p) |
0.95 |
0.52 |
0.31 |
0.33 |
0.60 |
0.82 |
0.91 |
0.30 |
1.20 |
2.32 |
|
Diluted EPS (p) |
0.95 |
0.52 |
0.30 |
0.33 |
0.60 |
0.80 |
0.93 |
0.30 |
1.17 |
2.27 |
|
Diluted HEPS* (p) |
0.95 |
0.52 |
0.31 |
0.33 |
0.60 |
0.80 |
0.91 |
0.30 |
1.17 |
2.27 |
|
Source: Pan African Resources, Edison Investment Research. Note: As reported basis; *Profit re Uitkomst sale; **HEPS = headline earnings per share (company adjusted basis).
Note that our group-wide forecasts for PAF are for production of 183.8koz of gold in FY17 compared to management’s guidance of 181koz.
Share placing
On 12 April, Pan African announced its proposed funding package for its Elikhulu tailings project, comprising:
■
A placing to existing and new institutional investors of 291.5m new ordinary shares at an issue price of 14p per placing share to raise £41m, or ZAR705m or US$51m.
■
A ZAR1.0bn (US$76m or £59m at prevailing forex rates) underwritten seven-year debt facility, which has been agreed in principle with Rand Merchant Bank (a division of FirstRand Bank Limited). The debt facility has credit approval, but remains subject to finalisation of definitive legal agreements and the fulfilment of conditions precedent, including licensing approvals and other conditions typical and/or customary for such a facility. Capital is to be repaid through equal quarterly repayments after a grace period of two years. Note that, as part of the credit approval process, RMB appointed Mineral Corporation as its independent technical advisor with a remit to review the Elikhulu DFS for fatal flaws, which it did, but did not identify any such flaws.
Following the placing, Pan African has 2,234.7m shares in issue. However, this includes 436.4m shares that are held by PAR Gold Proprietary Limited (formerly known as Shanduka Gold) and which are treated as treasury shares on consolidation. For accounting and reporting purposes therefore, following the placing, Pan African now has 1,798.3m effective shares in issue (cf 1,506.8m previously).
The decline in Edison’s FY17 EPS forecast from 1.36p per share previously to 1.20p/share currently (on an “as reported” basis – see Exhibit 1) arises, in part, as a result of this increase in the average number of shares in issue during the period and, in part, in anticipation of higher costs than previously expected at Evander to reflect the time period over which the retrenchment process (communicated to shareholders on 10 March) has been implemented. Note that our FY17 EPS forecast of 1.20p per share compares with a mean consensus estimate of 1.94p, within the range 1.40-2.66p, excluding Edison (source: Bloomberg, 15 May 2017).
Similarly, the mining aspects of our FY18 forecasts remain unchanged, with our current forecast varying from our previous forecast only as a result of changes in the average number of shares in issue, the net interest charge and the inclusion of the profit as a result of the Uitkomst colliery disposal. Within this context, note that our forecast EPS of 2.32p/share assumes a gold price for the year of US$1,248/oz and compares with a mean consensus of 2.42p within the range 2.00-2.92p.
Valuation
Updating our long-term forecasts to reflect these changes, our absolute value of PAF decreases by just 5.4%, from 21.38p/share to 20.22p/share. This is almost exclusively attributable to the 19.3% increase in the effective number of shares in issue, but also, in part, as a result of the continuing strength in the value of the rand against both sterling and the US dollar, having largely recovered from the hubris created by the removal from office of the Finance Minister, Pravin Gordhan, by the President, Jacob Zuma, in March.
Our valuation is based on the present value of our estimate of the maximum potential stream of dividends payable to shareholders over the life of PAF’s mining operations (applying a 10% discount rate).
|
Exhibit 2: PAF estimated life of operations diluted EPS and (maximum potential) DPS |
|
|
Source: Edison Investment Research, Pan African Resources |
In addition however, at their current price, Pan African’s shares are noticeably cheap, within the historical context, when considered relative to our forecasts of normalised HEPS in FY18 compared to prior years:
|
Exhibit 3: Pan African historical current year price:normalised HEPS ratio |
|
|
Source: Edison Investment Research, Bloomberg. Note: *Calculated with respect to average share price within the year shown and normalised HEPS; zero normalisation assumed prior to 2016. |
Financials
Pan African had £33.2m in net debt on its balance sheet as at 31 December 2016 after the payment of a £17.1m final dividend in late December (cf £22.8m as at 30 June 2016, £16.2m as at 31 December 2015 and £18.0m as at 30 June 2015). As at that date therefore, net debt equated to a gearing (net debt/equity) ratio of 16.7% and a leverage (net debt/[net debt + equity]) ratio of 14.3%. However, that net debt position should now have reversed into a net cash position after the April share placing plus six additional months of cash-inflows from operations.
Our forecasts for Pan African’s immediate capital expenditure commitments related to Elikhulu by financial year are as follows:
Exhibit 4: Estimated Elikhulu capex requirements by financial year
£000s |
FY17 |
FY18 |
FY19 |
FY20 |
FY21 |
FY22 |
Total capex* |
20,492 |
54,236 |
33,935 |
8,626 |
18,391 |
18,391 |
Source: Pan African Resources, Edison Investment Research. Note: *Includes sustaining capex, but excludes phase 3 capex, which commences in FY26.
Elikhulu’s permitting process is reported to be progressing well. In the meantime, maintaining a dividend policy of 40% of free cash flows less sustaining capital, debt repayments and exceptional items, Pan African’s funding requirement, on our estimates, will evolve during the period in which Elikhulu is being developed from FY16 to FY21, as follows:
|
Exhibit 5: Pan African estimated funding requirement, FY16 to FY21e |
|
|
Source: Edison Investment Research, Pan African Resources |
Whereas we had previously been expecting PAF to be net debt free by the end of FY21, following the £41m share placing in April, we now expect this to be brought forward to FY20.
Note that PAF’s maximum group net funding requirement of £20.4m in FY19 (cf £71.6m in FY19 previously), based on our estimates, equates to ZAR344m at prevailing forex rates, or gearing (debt/equity) of 8.6% and leverage (debt/[debt+equity]) of 7.9% - and is self-evidently well covered by either PAF’s existing ZAR800m revolving credit facility (which can anyway be expanded to ZAR1,100m) or its new ZAR1.0bn underwritten seven-year debt facility with Rand Merchant Bank.
Note that the group’s revolving credit facility (RCF) debt covenants and their actual recorded levels within recent history are as follows:
Exhibit 6: Pan African group debt covenants
Measurement |
Covenant |
31 December 2016 (actual) |
30 June 2016 (actual) |
31 December 2015 (actual) |
Net debt:equity |
Must be less than 100% |
17% |
35% |
50% |
Net debt:EBITDA |
Must be less than 2.5x |
0.48x |
0.12x |
0.13x |
Interest cover ratio |
Must be greater than four times |
21.99x |
23.98x |
18.08x |
Source: Pan African Resources
Exhibit 7: Financial summary
£'000s |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017e |
2018e |
||
Year end 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
79,051 |
100,905 |
133,308 |
154,202 |
140,386 |
168,404 |
203,409 |
204,785 |
Cost of sales |
(45,345) |
(46,123) |
(71,181) |
(106,394) |
(110,413) |
(108,223) |
(158,414) |
(133,356) |
||
Gross profit |
33,705 |
54,783 |
62,127 |
47,808 |
29,973 |
60,181 |
44,995 |
71,430 |
||
EBITDA |
|
|
28,540 |
45,018 |
53,276 |
44,165 |
28,448 |
57,381 |
42,519 |
68,292 |
Operating profit (before GW and except.) |
25,655 |
41,759 |
47,278 |
34,142 |
18,110 |
46,925 |
28,037 |
57,522 |
||
Intangible amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
(48) |
7,232 |
(12) |
(198) |
(12,183) |
129 |
2,831 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating profit |
25,655 |
41,711 |
54,510 |
34,130 |
17,912 |
34,742 |
28,166 |
60,353 |
||
Net interest |
762 |
516 |
197 |
(191) |
(2,109) |
(1,006) |
(2,034) |
160 |
||
Profit before tax (norm) |
|
|
26,417 |
42,274 |
47,475 |
33,951 |
16,001 |
45,919 |
26,002 |
57,683 |
Profit before tax (FRS 3) |
|
|
26,417 |
42,226 |
54,707 |
33,939 |
15,803 |
33,736 |
26,131 |
60,513 |
Tax |
(9,248) |
(12,985) |
(12,133) |
(7,155) |
(4,133) |
(8,234) |
(7,343) |
(18,758) |
||
Profit after tax (norm) |
17,169 |
29,290 |
35,342 |
26,796 |
11,868 |
37,685 |
18,659 |
38,924 |
||
Profit after tax (FRS 3) |
17,169 |
29,242 |
42,574 |
26,785 |
11,670 |
25,502 |
18,788 |
41,755 |
||
Average number of shares outstanding (m) |
1,432.7 |
1,445.2 |
1,619.8 |
1,827.2 |
1,830.4 |
1,811.4 |
1,567.6 |
1,798.3 |
||
EPS - normalised (p) |
|
|
1.20 |
2.03 |
2.18 |
1.46 |
0.64 |
2.08 |
1.19 |
2.16 |
EPS - FRS 3 (p) |
|
|
1.20 |
2.02 |
2.63 |
1.47 |
0.64 |
1.41 |
1.20 |
2.32 |
Dividend per share (p) |
0.51 |
0.00 |
0.83 |
0.82 |
0.54 |
0.88 |
0.58 |
1.12 |
||
Gross margin (%) |
42.6 |
54.3 |
46.6 |
31.0 |
21.4 |
35.7 |
22.1 |
34.9 |
||
EBITDA margin (%) |
36.1 |
44.6 |
40.0 |
28.6 |
20.3 |
34.1 |
20.9 |
33.3 |
||
Operating margin (before GW and except.) (%) |
32.5 |
41.4 |
35.5 |
22.1 |
12.9 |
27.9 |
13.8 |
28.1 |
||
BALANCE SHEET |
||||||||||
Fixed assets |
|
|
97,281 |
86,075 |
249,316 |
223,425 |
220,150 |
230,676 |
249,580 |
292,317 |
Intangible assets |
38,229 |
23,664 |
38,628 |
37,040 |
37,713 |
38,682 |
40,418 |
42,154 |
||
Tangible assets |
59,052 |
62,412 |
209,490 |
185,376 |
181,533 |
190,725 |
207,893 |
248,894 |
||
Investments |
0 |
0 |
1,199 |
1,010 |
905 |
1,269 |
1,269 |
1,269 |
||
Current assets |
|
|
15,835 |
41,614 |
26,962 |
23,510 |
17,218 |
22,016 |
57,199 |
33,103 |
Stocks |
1,457 |
1,869 |
6,596 |
5,341 |
3,503 |
4,399 |
6,877 |
6,834 |
||
Debtors |
4,254 |
6,828 |
15,384 |
12,551 |
10,386 |
14,891 |
14,130 |
14,043 |
||
Cash |
10,124 |
19,782 |
4,769 |
5,618 |
3,329 |
2,659 |
36,125 |
12,160 |
||
Current liabilities |
|
|
(8,960) |
(11,062) |
(24,066) |
(24,012) |
(22,350) |
(32,211) |
(38,384) |
(34,095) |
Creditors |
(8,960) |
(11,062) |
(23,202) |
(19,257) |
(17,301) |
(25,230) |
(31,403) |
(27,114) |
||
Short-term borrowings |
0 |
0 |
(864) |
(4,755) |
(5,049) |
(6,981) |
(6,981) |
(6,981) |
||
Long-term liabilities |
|
|
(13,410) |
(14,001) |
(80,004) |
(63,528) |
(67,850) |
(69,506) |
(70,876) |
(72,232) |
Long-term borrowings |
(181) |
(869) |
(11,133) |
(8,141) |
(16,313) |
(18,456) |
(18,456) |
(18,456) |
||
Other long-term liabilities |
(13,228) |
(13,132) |
(68,871) |
(55,387) |
(51,537) |
(51,049) |
(52,420) |
(53,775) |
||
Net assets |
|
|
90,746 |
102,626 |
172,208 |
159,396 |
147,167 |
150,975 |
197,519 |
219,094 |
CASH FLOW |
||||||||||
Operating cash flow |
|
|
31,968 |
49,092 |
61,618 |
45,996 |
26,423 |
47,130 |
47,104 |
63,052 |
Net Interest |
762 |
516 |
314 |
(606) |
(2,109) |
(1,006) |
(2,034) |
160 |
||
Tax |
(10,743) |
(11,616) |
(13,666) |
(8,536) |
(3,943) |
(7,777) |
(5,972) |
(17,403) |
||
Capex |
(21,712) |
(17,814) |
(27,197) |
(21,355) |
(19,554) |
(14,097) |
(33,386) |
(65,898) |
||
Acquisitions/disposals |
0 |
(1,549) |
(96,006) |
0 |
(760) |
(30,999) |
0 |
16,303 |
||
Financing |
1,545 |
259 |
47,112 |
349 |
(235) |
15,207 |
38,236 |
(0) |
||
Dividends |
(5,376) |
(7,416) |
0 |
(14,684) |
(15,006) |
(9,882) |
(10,481) |
(20,181) |
||
Net cash flow |
(3,557) |
11,471 |
(27,826) |
1,164 |
(15,184) |
(1,425) |
33,466 |
(23,965) |
||
Opening net debt/(cash) |
|
|
(12,756) |
(9,943) |
(18,913) |
7,228 |
7,278 |
18,033 |
22,778 |
(10,688) |
Exchange rate movements |
925 |
(1,813) |
594 |
(839) |
(276) |
812 |
0 |
0 |
||
Other |
(181) |
(688) |
1,090 |
(375) |
4,705 |
(4,131) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(9,943) |
(18,913) |
7,228 |
7,278 |
18,033 |
22,778 |
(10,688) |
13,277 |
Source: Company sources, Edison Investment Research
|
|
After experiencing a drop in sequential sales for the December quarter, Yowie returned to sequential sales growth in the March quarter. However, the company is taking a more modest approach to sales guidance to ensure it can fulfill customer (and investor) expectations. We are maintaining our revenue forecasts, but cutting our profitability estimates for FY17-19 due to higher than expected stock compensation costs in H117. Separately, on 27 February, Wayne Loxton tendered his resignation as executive chairman. With a strong senior team now in place, Loxton had hinted that he would eventually step back from an executive role, however we believed he would wait until FY18 once the publishing and other brand extension businesses had been launched.
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