MTR/Mogale financing facility concluded

Pan African’s contract liability relating to the fixed-price forward sales associated with its ZAR400m Mintails financing facility has now concluded, as have its zero-cost collars. Hereafter, PAF will be fully exposed to the prevailing price of gold at exactly the moment its output increases into the 250–300koz per year range.

Valuation: Next target 109p

In light of its FY25 financial results, our core valuation of Pan African has changed by less than 5%, to 37.31c per share cum-div (cf 38.99c previously), based on its seven producing assets. Including other assets (eg Egoli and the Soweto Cluster), it rises by a further 29.64–34.66c to 66.95–71.97c (cf 62.67–67.69c previously). However, all these use a relatively conservative gold price of US$2,148/oz nominal on average for the period CY26–30. The valuation quadruples, to 147.24c (108.87p), at the current price of gold ( US$3,645/oz). Alternatively, if PAF’s historical average price-to-normalised HEPS ratio of 8.2x for the period FY10–25 is applied to our FY26 normalised HEPS forecast, it implies an average share price of 80.05p this year. In the meantime, PAF remains cheaper than its principal London- and South African-listed gold mining peers on 38% of commonly used valuation measures if Edison forecasts are used and 77% if consensus forecasts are used. However, if the current price of gold is used for forecasting, it is cheaper on 100% of valuation measures (Exhibit 10). Even at Edison’s relatively conservative gold price forecasts, its peers imply a share price for PAF of 110.16p/share in FY26. On a CAPM-type valuation basis, it is valued at 81.54p currently, assuming zero growth in cash flows per share beyond FY31 (unlikely), or 149.12p, assuming 3.6% per year long-term cash flow growth in real terms (ie gold’s performance from 1967 to 2024).

FY25/H225 results

Pan African’s full-year results to 30 June 2025 were characterised by record output, record EPS and a record dividend. Compared with H125, production was almost one-third higher, albeit very closely in line with our expectations and also its operational update of 11 June, as shown in Exhibit 1, below:

On a like-for-like basis, once the effect of PAF’s synthetic forward sales relating to its financing of MTR is reallocated from revenue into ‘other expenses’ (the ‘adjusted’ columns in the table below), revenue was US$15.7m (or 2.7%) ahead of our expectations. On the face of it, this increase was more than offset by cost increases and, in particular, a US$18.4m negative variance in ‘other expenses’ (now containing both synthetic forward sales and zero-cost collar hedges). Once this is adjusted out however, estimated normalised headline earnings were 4.4% (or US$7.2m) above our forecasts. Relative to H125, normalised headline earnings more than doubled. Normalised HEPS were 7.0% above our forecasts, as we had assumed the Tennant Mines acquisition pro forma from 30 June 2024 and therefore an elevated number of shares in issue for the full year relative to the actual outcome.

A full analysis of PAF’s financial results, relative to both the prior period and our prior forecasts, is provided below:

H225 will be the last period in which the contract liability related to the fixed-price forward sales associated with Pan African’s ZAR400m Mintails financing facility will have featured in PAF’s results as the last delivery of gold under this structure was made in February, while all zero-cost collar contracts expired in June.

H2 also marked the inaugural contribution from Tennant Mines (Nobles) to PAF, as well as MTR/Mogale achieving steady-state production.

Elsewhere, significant capex was invested at Evander to develop the 24 and 25 Level project. The sub-vertical hoisting shaft commissioning process was completed in January, with ramp-up to its expected hoisting capacity of 700t/day in April, thereby enabling full production of c 3,850oz/month in May and June to be realised (46,200oz annualised). To this end, development of the 24 and 25 Level mining areas has been accelerated, with:

• Ramped-up mining operations in the high-grade D line and F line on 24 Level.
• Holing of the 24 Level B raise line enabling ledging to commence, followed by stoping in the high-grade portion of the Kimberley Reef payshoot. This high-grade portion extends further to the east and development in the A line has already commenced with ledging planned towards the end of FY26.
• Access to the 25 Level was achieved through an on-reef decline layout from 24 Level footwall infrastructure and development of the underground workshop on 24 Level has started, with mechanised development towards 25 Level commencing soon. Note that mining below 24 Level is planned as a hybrid mining method with conventional stoping and mechanised on-reef development.
• First reef intersections from the 24 Level long-inclined borehole drilling on the 25 Level reef horizon were achieved during January 2025 and exceeded the expected grades, including 49g/t over 76.3cm (or 3,725cm.g/t) and 63.7g/t over 17.2cm (or 1,096cm.g/t).

Mining at Barberton was disrupted by the failure of multiple Eskom transformers, particularly in H1. Electricity backup systems have now been put in place to mitigate this risk. At the same time, mining flexibility has been improved with multiple platforms active on the Main Reef Complex (MRC), which supply the majority of the high-grade ore (>20g/t) to the plant. At Fairview (Barberton), mining operations continued to be conducted on the 260, 261 and 262 platforms within the MRC orebody, albeit within the context of a c 20% reduction in the overall workforce as a result of the restructuring of underground operations, which was completed in May. At the same time, development towards the 263 platform is reported to be on track, while optimisation of mining methodology at the Rossiter Reef has led to improved production, reduced dilution and improved ore grades. Currently, the focus of operations is on the down-dip extensions of both the MRC and Rossiter orebodies. At Consort, the Prince Consort (PC) shaft has been rehabilitated, enabling a return to higher-grade areas and a revised mine plan has been implemented to access higher-grade mining areas below 37 Level, which led to a significantly enhanced performance. Within this context, crews commenced mining within the Main Muiden Reef (MMR) Shaft 17 Level and PC Shaft 33 Level, and deeper raise development and equipping within the MMR section remain on track to increase run-of-mine tonnage.

An analysis of PAF’s operations’ performances, relative to our prior expectations, is provided below:

One general feature of our updated cost forecasts for PAF’s operations in H225 has been the effect of persistent inflationary pressures in South Africa, which, in the period under review, was not offset by a depreciating rand. Although reagent prices now appear to have stabilised, for example, electricity costs in H2 (c 15% of total costs) were 12–13% higher than in H1 as a result of regulator-endorsed tariff increases. While the cost environment is common to all of South Africa’s mining industry, for Pan African, it has been mitigated by the low absolute cost of production at its surface retreatment operations, which now account for c 60% of group production, increased cost savings from the extensive use of solar energy at Evander and Barberton and multi-year wage agreements with the National Union of Mineworkers for 5.3% wage increases per year out to June 2029, representing the majority of employees at Barberton.

As in every year at the time of full-year results, we have adjusted our unit costs higher to recognise the evolution of our financial model from 2024 US dollar terms to 2025 US dollar terms. We have also adjusted our capital expenditure forecasts to match guidance from the company for FY26. Similarly, we have brought our forex assumptions in line with prevailing conditions in the marketplace, reflecting, among other things, the continuing strength of the rand versus both the US dollar and sterling, as follows:

• from ZAR24.1513/£ to ZAR23.7531/£ (-1.6%),
• from ZAR17.7650/US$ to ZAR17.5585/US$ (-1.2%), and
• from US$1.3596/£ to US$1.3525/£ (-0.5%).

Group production and growth

Finally, we have adjusted our production expectations for Tennant (Nobles) and the 24 and 25 Level project to dovetail with revised guidance from management, as set out in the presentation accompanying the company’s FY25 results, demonstrating PAF’s path to output of 345.5koz in FY31, as shown below:

PAF is in the process of expanding the MTR/Mogale plant from 800ktpm to 1Mtpm via the addition of two carbon-in-leach (CIL) tanks, together with the installation of reactors to further improve recoveries for a capital cost of US$6.5m. This will result in an increase in production from 50,000oz to c 60,000oz per year from FY26. Thereafter, PAF has a number of other potential organic growth projects in prospect, including:

• The potential to accelerate production from the Soweto Cluster by focusing on the possibility of constructing a new processing facility close to the MTR/Mogale plant, which would be a stand-alone operation also producing c 50,000oz per year (for approximately 10 years) plus the option to include additional proximal tailings storage facility (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 stand-alone 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. Constructing a stand-alone plant close to MTR/Mogale will have the advantage of locating it close to the redeposition site on land already owned by Pan African, as well as allowing the two to share central facilities such as offices, the smelt house etc. A feasibility study to this effect is underway and is expected to be completed this month.
• Fast-tracking the wholly owned Warrego gold and copper project at Tennant Mines with the objective of budgeting first production in 2029/30. The subject of a recent feasibility study, the Warrego project is targeting output of c 100,000oz gold per year and 10,000–15,000t copper per year over more than 10 years at a capital cost of US$40–45m. Regional gold and copper deposits owned by third parties could also supply additional supplementary feed and a feasibility study to this end is currently in progress.
• A further potential project arising from the Tennant Mines acquisition is the White Devil project, where a recent scoping study commissioned by joint venture partner Emmerson Resources was reported to have delivered ‘encouraging results’, confirming an updated mineral resource of 4.6Mt at 4.2g/t gold, for 611,000oz contained gold, of which 87% is in the indicated category and therefore eligible for upgrade into reserves.
• 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 an estimated mine life of nine years, with both orebodies open at depth.

Updated (absolute) valuation

Relative to our last note, the principal changes to our financial model – and therefore, valuation – include:

• Increasing our long-term gold price from US$1,794/oz to US$1,866/oz to reflect the presentation of our model in real FY25 US dollars (rather than FY24 dollars previously).
• Adjusting long-term costs into FY25 US dollar terms (note that this and item 1 should approximately negate each other).
• The adjustment of the Nobles and Evander 24 and 25 Level project life of mine production profiles in order to reconcile with Pan African’s guidance.
• FY26 capital expenditure of US$146m in order to reconcile with guidance (albeit a significant portion of this figure reflects accelerated, rather than increased, capital expenditure).
• Updated foreign exchange rates (as above).

Valuation

In light of these changes, and 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 seven producing assets) is 35.21c. To this total must then be added PAF’s FY25 final dividend of 2.10c/share to give a total valuation of 37.31c/share (cf 38.99c/share previously).

A bridge chart of the major components in the change to our valuation is as follows:

However, readers should note that this valuation is conducted at our 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$3,645/oz, all other things being equal, our valuation quadruples to 147.24c (108.87p):

Even at our lower long-term gold price, however, including its other growth projects and assets, our updated total valuation of PAF as a whole rises to 66.95–71.97c (49.50–53.21p):

For the purposes of our forecasts and valuation, we have not yet included any additional hedging in our estimates.

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 9 below depicts PAF’s average share price in each of the financial years from FY10 to FY25 and compares this with HEPS in the same year. In this case, if PAF’s average year-one price to normalised HEPS ratio of 8.2x for FY10–25 is applied to our updated normalised earnings forecasts for FY26, it implies a share price for PAF of 80.05p (as shown in the exhibit).

In the meantime, PAF’s price to normalised HEPS ratio of 8.1x for FY26 remains within the lower half of its recent historical range of 4.1–14.8x for FY10–25.

Relative peer group valuation

Using Edison’s estimates, PAF appears to remain cheap relative to its London- and South African-listed gold mining peers on 38% of comparable common valuation measures (14 out of 36 individual measures in the table below) and 77% (28 out of 36 measures) if consensus forecasts are used.

If Edison’s forecasts are used at the same time as the gold price is held constant at a real level of US$3,645/oz however, then Pan African is cheap relative its peers on 100% of the valuation measures below:

Alternatively, applying PAF’s peers’ average year-one P/E ratio of 11.3x to our normalised HEPS forecast of 13.21c per share for FY26 implies a share price for the company of 110.16p at prevailing foreign exchange rates.

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 to maximise shareholder returns. As a result, rather than our customary method of discounting maximum potential dividends over the life of operations back to 1 July 2026, in the case of Pan African we can alternatively discount forecast cash flows back over five years to the start of FY26 and then apply an ex-growth terminal multiple to forecast cash flows in that year (FY31) based on the appropriate discount rate.

In this case, our estimate of PAF’s pre-financing terminal cash flow in FY31 is 7.09c (at a real gold price of US$1,866/oz in current money terms). Applying a (real) discount rate of 6.6% (calculated from a nominal expected equity return of 9% and long-term inflation expectations of 2.2540%, as defined by the US 30-year break-even inflation rate (source: Bloomberg, 15 September)) to this estimate of cash flows, our valuation of the company is 81.54p/share in FY26 assuming zero long-term cash flow per share growth beyond FY31.

At this point (FY31), production is anticipated to be c 335koz. If PAF is able to maintain this level of cash flows per share via organic investment, its valuation will flatten out at 79.48p/share in real terms on an ex-growth basis. However, the gold price alone should afford an additional 3.6% per year to cash flows 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 178.63p/share and its current valuation to 149.12p/share.

Financials

Pan African reported net debt of US$150.5m on its balance sheet as at end-June, which equated to a gearing ratio (net debt/equity) of 27.4% and a leverage ratio (net debt/[net debt+equity]) of 21.5%, after cash flow from operating activities of US$178.5m before dividends (cf US$12.0m in H125, 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). This level of net debt was almost exactly in line with our prior forecast of US$154.6m (and that estimated by PAF in its operational update of 11 June). 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%.

Note that the reported level of net debt of US$150.5m differs to the US$144.1m shown by Edison in its financial summary below (Exhibit 15), by US$6.4m, which is made up of an aggregate US$6.1m of ‘other’ liabilities, US$0.2m in lease liabilities and US$0.1m in rounding:

Henceforward, even at Edison’s distinctly conservative gold price forecasts, we estimate that PAF will continue to generate cash from operations comfortably above US$100m per year (and potentially above US$300m per year), such that net debt is eliminated towards the middle of FY26, by which time capex will be on a downward trajectory towards sustaining levels (assuming no new project developments, which, actually, we think is unlikely).

In the meantime, the company remains comfortably within its debt covenants: