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Pan African (PAF) announced its operational results for the year ended 30 June 2021 on 13 July, with output for the full year 6,609oz (3.4%) higher than PAF’s own guidance of 195,000oz from as recently as May 2021 and 7,383oz (3.8%) above Edison’s forecast. All of the substantive outperformance could be attributed to operations at Evander underground, which more than made up for an early shortfall in production in H121. Otherwise, group net senior debt was reported to be very close to Edison’s prior forecast, at US$33.8m, and production guidance for FY22 was confirmed at 195koz.
Pan African Resources |
Exceeding expectations (as usual) |
FY21 production results |
Metals & mining |
21 July 2021 |
Share price performance
Business description
Next events
Analyst
Pan African Resources is a research client of Edison Investment Research Limited |
Pan African (PAF) announced its operational results for the year ended 30 June 2021 on 13 July, with output for the full year 6,609oz (3.4%) higher than PAF’s own guidance of 195,000oz from as recently as May 2021 and 7,383oz (3.8%) above Edison’s forecast. All of the substantive outperformance could be attributed to operations at Evander underground, which more than made up for an early shortfall in production in H121. Otherwise, group net senior debt was reported to be very close to Edison’s prior forecast, at US$33.8m, and production guidance for FY22 was confirmed at 195koz.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/19 |
218.8 |
37.1 |
1.64 |
0.15 |
14.1 |
0.6 |
06/20 |
274.1 |
80.8 |
3.78 |
0.84 |
6.1 |
3.6 |
06/21e |
369.0 |
122.4 |
4.24 |
1.01 |
5.4 |
4.4 |
06/22e |
340.9 |
144.0 |
5.18 |
1.04 |
4.4 |
4.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
Output at Evander underground surges
While production from Evander underground surged in H221, production at Barberton underground benefited from increased mining footprints on four cycling production platforms. Simultaneously however, production was restrained at Elikhulu as a result of unexpected concentrations of carbonaceous material in the lower benches of the Kinross dam that we estimate probably reduced gold recoveries from c 47.8% to c 42.6% (nevertheless in line with H220 and H121).
Two new growth projects
Recent initiatives have resulted in the addition of two new assets to PAF’s portfolio of growth projects in the form of Mintails/Mogale and the 8 Shaft decline 24 Level project. Early indications suggest that these could be worth in the order of 5.3c (3.8p) and 0.5c (0.3p) in value to PAF’s shares, respectively, as a result of which it has reprioritised its capex commitments to implement a phased approach to the development of Egoli in such a way as to minimise upfront capex and thereby materially reduce the requirement to raise debt to fund the project.
Valuation: Eyeing 43.84c (31.72p) per share plus
On a like-for-like basis, our forecasts and core valuation of PAF have risen a modest 1.5% to 38.76c/share based on the production update. However, the valuation stands to rise by an additional 13.1%, to 43.84c/share, in the event of the successful development of Mintails/Mogale and the 8 Shaft decline 24 Level project (see Exhibit 6). To this must then be added the value of c 19.2m underground Witwatersrand ounces, which we estimate could lie anywhere in the range of 0.22–5.24c to take the total to 44.06–49.08c/share. Alternatively, if PAF’s historical average price to normalised EPS ratio of 9.1x in the period FY10–20 is applied to our FY21 and FY22 forecasts, it implies a share price of 27.9p in FY21 followed by 34.0p in FY22.
FY21 production results
Pan African announced its operational results for the year ended 30 June 2021 on 13 July. Production in H121 was already known; nevertheless, production for the full year was 6,609oz (3.4%) higher than PAF’s own guidance of 195,000oz from as recently as May 2021, and 7,383oz (3.8%) above Edison’s forecast for the year. As a result, the group’s production profile grew, rather than declined, in H221 compared to H121. In percentage terms, the increase was enhanced when analysed on a half year basis, as shown in the exhibit below.
Exhibit 1: PAF production, FY18–21 (oz)
Operation |
H118 |
H218 |
H119 |
H219 |
H120 |
H220 |
H121 |
H221e (previous) |
H221a |
Change* (%) |
Variance** (%) |
FY21a |
FY21e (previous) |
Barberton UG |
32,159 |
40,966 |
38,550 |
36,806 |
36,737 |
31,392 |
42,350 |
41,551 |
42,469 |
+0.3 |
+2.2 |
84,819 |
83,901 |
BTRP |
8,452 |
9,052 |
12,006 |
12,001 |
10,619 |
9,516 |
10,004 |
9,393 |
8,231 |
-17.7 |
-12.4 |
18,235 |
19,397 |
Barberton |
40,611 |
50,018 |
50,556 |
48,807 |
47,356 |
40,908 |
52,354 |
50,944 |
50,700 |
-3.2 |
-0.5 |
103,054 |
103,298 |
Evander UG |
32,734 |
15,831 |
8,821 |
8,058 |
11,553 |
9,117 |
12,607 |
17,314 |
23,352 |
+85.2 |
+34.9 |
35,959 |
29,921 |
ETRP |
11,937 |
9,313 |
6,345 |
3,654 |
4,731 |
6,176 |
6,560 |
0 |
4,561 |
N/A |
N/A |
11,121 |
6,560 |
Evander |
44,671 |
25,144 |
15,166 |
11,712 |
16,284 |
15,293 |
19,169 |
17,314 |
27,913 |
+45.6 |
+61.2 |
47,080 |
36,483 |
Elikhulu |
0 |
0 |
15,292 |
30,909 |
29,301 |
30,315 |
26,863 |
27,582 |
24,610 |
-8.4 |
-10.8 |
51,473 |
54,445 |
Total |
85,282 |
75,139 |
81,014 |
91,428 |
92,941 |
86,516 |
98,386 |
95,840 |
103,223 |
+4.9 |
+7.7 |
201,608 |
194,226 |
Source: Edison Investment Research, Pan African Resources. Note: *H221 cf H121; **H221a cf H221e. Totals may not add up owing to rounding. UG = underground.
While production from the Barberton complex was broadly in line with our expectations and that from Elikhulu was slightly below, all of the outperformance could be attributed to operations at Evander underground. Output at Evander underground was restrained by a ventilation shaft lining fracture in H121 as well as technical difficulties relating to the pseudo packs used for ground support (now overcome) and lower than usual metallurgical recoveries (although this was, to some extent, counterbalanced by head grade, which, at an estimated 8.51g/t, was 11.0% above our prior forecast of 7.67g/t). In the event, however, Evander’s performance in H221 not only returned output levels to those expected for the six-month period, but also more than made up for the shortfall in the first half as well. Over the same period, production at Barberton underground benefited from increased mining footprints on the 256, 257, 258 and 358 platforms, thereby engendering greater mining flexibility. Throughput at Elikhulu was restricted on account of remedial work on the its tailing storage facility’s lower compartment. This was largely anticipated in our note at the time of the company’s interim results (see Record interim profitability, published on 3 March 2021). In addition, however, unexpected concentrations of carbonaceous material in the lower benches of the Kinross dam negatively affected gold recoveries, which we estimate must have been in the order of 42.6% (in line with H220 and H121 but below our prior expectation of 47.8% for H221).
Updated H221e and FY21e forecasts
We have updated our forecasts for H221 and FY21 in the light of the production results reported by Pan African as well as a slightly lower gold price during H221 (US$1,805/oz cf our previous forecast of US$1,828/oz) and a slightly stronger rand against the US dollar, in particular (ZAR14.54/US$ cf our previous forecast of ZAR14.60/US$). While our estimate of full-year revenue has increased by US$12.1m to reflect higher than expected production during the year and half year, this increase was counterbalanced by an only slightly smaller increase in cash costs as higher-margin production from Elikhulu was supplanted by lower-margin production from Evander to leave our earnings expectations, to all intents and purposes, unchanged – albeit at levels for the half year that are more akin to those typically earned within a full financial year historically.
Exhibit 2: PAF P&L statement by half-year (H119–H221e)
US$000s |
H119 |
H219 |
FY19 |
H120 |
H220 |
FY20 |
H121 |
H221e (previous) |
H221e (current) |
FY21e |
FY21e |
Revenue |
97,531 |
121,287 |
218,818 |
132,849 |
141,258 |
274,107 |
183,751 |
173,216 |
185,269 |
369,020 |
356,967 |
Cost of production |
(70,847) |
(82,133) |
(152,980) |
(86,501) |
(71,956) |
(158,457) |
(98,245) |
(97,564) |
(109,312) |
(207,557) |
(195,808) |
Depreciation |
(6,840) |
(9,388) |
(16,228) |
(10,526) |
(10,977) |
(21,503) |
(12,741) |
(16,012) |
(16,020) |
(28,761) |
(28,753) |
Mining profit |
19,844 |
29,767 |
49,611 |
35,821 |
58,325 |
94,146 |
72,766 |
59,640 |
59,937 |
132,703 |
132,406 |
Other income/(expenses) |
(2,077) |
(5,181) |
(7,258) |
(962) |
(27,720) |
(28,682) |
(6,704) |
0 |
0 |
(6,704) |
(6,704) |
Loss in associate etc |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Loss on disposals |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Impairments |
0 |
17,854 |
17,854 |
109 |
(20) |
89 |
0 |
0 |
0 |
0 |
0 |
Royalty costs |
(474) |
120 |
(354) |
(208) |
(266) |
(474) |
(2,404) |
(1,678) |
(1,778) |
(4,183) |
(4,083) |
Net income before finance |
17,293 |
42,559 |
59,852 |
34,761 |
30,319 |
65,079 |
63,657 |
57,962 |
58,159 |
121,816 |
121,619 |
Finances income |
443 |
407 |
850 |
207 |
258 |
465 |
300 |
||||
Finance costs |
(5,699) |
(7,343) |
(13,042) |
(7,760) |
(5,587) |
(13,346) |
(3,946) |
||||
Net finance income |
(5,256) |
(6,936) |
(12,192) |
(7,553) |
(5,329) |
(12,881) |
(3,646) |
(2,507) |
(2,507) |
(6,153) |
(6,153) |
Profit before taxation |
12,037 |
35,623 |
47,660 |
27,208 |
24,990 |
52,198 |
60,011 |
55,455 |
55,651 |
115,662 |
115,466 |
Taxation |
(2,325) |
(5,850) |
(8,174) |
(5,303) |
(2,602) |
(7,905) |
(19,239) |
(21,224) |
(21,275) |
(40,513) |
(40,462) |
Effective tax rate (%) |
19.3 |
16.4 |
17.2 |
19.5 |
10.4 |
15.1 |
32.1 |
38.3 |
38.2 |
35.0 |
35.0 |
PAT (continuing ops) |
9,712 |
29,774 |
39,486 |
21,906 |
22,388 |
44,293 |
40,773 |
34,231 |
34,376 |
75,149 |
75,004 |
Loss from discontinued ops |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
N/A |
Profit after tax |
9,712 |
29,774 |
39,486 |
21,906 |
22,388 |
44,293 |
40,773 |
34,231 |
34,376 |
75,149 |
75,004 |
Headline earnings |
9,712 |
14,586 |
24,298 |
21,742 |
22,416 |
44,158 |
40,772 |
34,231 |
34,376 |
75,148 |
75,003 |
Est. normalised headline earnings |
11,789 |
19,766 |
31,556 |
22,704 |
50,136 |
72,840 |
47,476 |
34,231 |
34,376 |
81,852 |
81,708 |
EPS (c) |
0.50 |
1.54 |
2.05 |
1.14 |
1.16 |
2.30 |
2.11 |
1.78 |
1.78 |
3.90 |
3.89 |
HEPS* (c) |
0.50 |
0.76 |
1.26 |
1.13 |
1.16 |
2.29 |
2.11 |
1.78 |
1.78 |
3.90 |
3.89 |
Normalised HEPS (c) |
0.61 |
1.03 |
1.64 |
1.18 |
2.60 |
3.78 |
2.46 |
1.78 |
1.78 |
4.24 |
4.24 |
EPS from continuing ops (c) |
0.50 |
1.54 |
2.05 |
1.14 |
1.16 |
2.30 |
2.11 |
1.78 |
1.78 |
3.90 |
3.89 |
Source: Pan African Resources, Edison Investment Research. Note: As reported basis. *HEPS = headline earnings per share (company adjusted basis).
In the context of the above forecasts, readers should note that we estimate that US$23.1m (or 57.0%) of our estimated full-year tax charge for FY21 will have been in the form of deferred taxes and that cash taxes will have accounted for only US$17.4m (or 43.0%) of the total tax charge of US$40.5m.
Our updated normalised FY21 headline earnings per share (HEPS) forecast of 4.24c/share compares with a range of analysts’ expectations from 3.01–3.72p/share, or 4.16–5.14c/share (source: Refinitiv, 21 July 2021).
Updated guidance
In addition to its production results for FY21, Pan African also confirmed guidance for production from the group for FY22 of 195,000oz, including 55,000oz from Elikhulu. Edison has interpreted this guidance as implying the following levels of production from each of the group’s mines during the course of the year, which we have compared to FY21 and our prior expectations for FY22, as follows:
Exhibit 3: PAF production, FY18–22e (oz)
Operation |
FY18 |
FY19 |
FY20 |
FY21 |
FY22 |
FY22 |
Change* |
Change* |
Variance** |
Variance** |
Barberton UG |
73,125 |
75,356 |
68,129 |
84,819 |
81,487 |
86,247 |
+1,428 |
+1.7 |
+4,760 |
+5.8 |
BTRP |
17,504 |
24,007 |
20,135 |
18,235 |
19,397 |
18,235 |
0 |
0.0 |
-1,162 |
-6.0 |
Barberton |
90,629 |
99,363 |
88,264 |
103,054 |
100,884 |
104,482 |
+1,428 |
+1.4 |
+3,598 |
+3.6 |
Evander UG |
48,565 |
16,879 |
20,670 |
35,959 |
26,400 |
26,400 |
-9,559 |
-26.6 |
0 |
0.0 |
ETRP |
21,250 |
9,999 |
10,907 |
11,121 |
0 |
9,118 |
-2,003 |
-18.0 |
+9,118 |
N/A |
Evander |
69,815 |
26,878 |
31,577 |
47,080 |
26,400 |
35,518 |
-11,562 |
-24.6 |
+9,118 |
+34.5 |
Elikhulu |
0 |
46,201 |
59,616 |
51,473 |
65,116 |
55,000 |
+3,527 |
+6.9 |
-10,116 |
-15.5 |
Total |
160,444 |
172,442 |
179,457 |
201,608 |
192,400 |
195,000 |
-6,607 |
-3.3 |
+2,600 |
+1.4 |
Source: Edison Investment Research, Pan African Resources. Note: *FY22e cf FY21; **FY22e (current) cf FY22e (previous). Numbers may not add up owing to rounding. UG = underground.
We have now adjusted our financial model to reflect PAF’s guidance. While this has involved an increase in forecast production in FY22, guidance for FY22 appears somewhat conservative in the context of production in FY21. Moreover, there is probably a degree of uncertainty regarding likely output from Evander in FY22. For the moment, we have retained production from Evander underground at 26,400oz reflecting solely anticipated output from the 8 Shaft Pillar project, in this case, supplemented by production of 9,118oz from tolling from surface sources through the ETRP plant to result in total output from Evander of 35,518oz. However, it is possible that production from Evander underground will be augmented by the execution of the 8 Shaft decline project (see below) to maintain production at approximately 34,000oz per annum for the Evander 8 Shaft complex as a whole. In this case, any additional production from tolling from surface sources (historically of the order of 10,000oz pa) through the ETRP is likely to result in overall output from Evander in excess of 35,518oz. The effect of Edison’s adjustments to its model has resulted in a modest, 4.6% decline in normalised earnings in FY22 to US$99.9m (cf US$104.6m previously) and a similar decline in normalised HEPS from 5.43c/share to 5.18c/share, albeit with the production caveat noted above and the observation that this will still represent an increase relative to FY21 and therefore record earnings and profitability for the group. This compares with a range of analysts’ expectations of 3.60–4.93p/share, or 4.98–6.81c/share (source: Refinitiv, 21 July 2021).
Growth projects
Pan African has recently added two new projects to its existing portfolio of growth projects (already including Royal Sheba, the Fairview sub-vertical shaft, Rolspruit, Poplar, Evander South etc) in the form of the Mintails/Mogale project and the 8 Shaft decline 24 Level project.
Mintails/Mogale
One of the assets with the most immediate optionality in the company’s portfolio is Mintails/Mogale, which could yet prove very similar in nature to Elikhulu, and into which PAF is currently conducting due diligence with a view to acquiring.
On 6 November 2020, PAF announced that it had entered into a conditional agreement with the liquidator of Mintails’ assets for the purchase of the total share capital and associated loans of Mogale Gold Pty Ltd and Mintails SA Soweto Cluster Pty Ltd. Due diligence has been extended until January 2022. In the meantime, PAF has successfully concluded both a fatal flaw analysis and a high-level financial evaluation of the project, which would be similar in nature to Pan African’s flagship Elikhulu project. Key outcomes of the financial evaluation are as follows:
■
An optimal throughput feed of c 0.8Mtpm (cf Elikhulu’s 1.2Mtpm).
■
Metallurgical recoveries of c 53% (cf Elikhulu’s 48%).
■
An all-in sustaining cost (AISC) of c US$800/oz.
■
An NPV10.71 of ZAR1,469m, or US$101.3m at a gold price of US$1,770/oz and a forex rate of ZAR14.50/US$, or ZAR0.762/share, US$0.053/share or £0.038/share.
■
Initial project capital of ZAR1,000m (US$68.9m at ZAR14.50/US$) and life of mine capital of ZAR1,700m (US$117.2m).
■
Average annual production of 44,400oz pa.
■
A 12-year life of mine.
■
A real post-tax internal rate of return of 42.8%.
The concept study did, however, identify areas that will require further evaluation, including:
■
Tailings storage facility deposition capacity constraints.
■
The availability of water sources in the area to support re-mining operations.
■
Additional test work to confirm metallurgical recoveries.
In the meantime however, by way of comparison, investors should note that 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, but at a fractionally higher grade of 0.30g/t (cf Elikhulu’s 0.29g/t). PAF announced the results of an independent definitive feasibility study (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, Edison 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 28.0% more shares in issue). Now however, with capex having been expended (but with not all associated debt having been repaid), we estimate a current valuation for Elikhulu of c US$136.32 per initial resource ounce or US$179.08 per residual resource ounce. As such, and albeit with suitable caveats such as the Mintails/Mogale assets developing in a similar fashion to Elikhulu, PAF could acquire for US$1.31/oz 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$40.95/oz (pre-production) and may be worth up to US$191.94/oz (post-initial capex and debt repayment).
8 Shaft no. 2 decline 24 Level project
Pan African has continued to maintain the integrity of the underground infrastructure at Evander even after the end of high-volume, deep-level underground mining in May 2018. While limited vamping operations have continued since then, PAF has now concluded an internal technical and economic study into the merits of mining the number 2 decline on 24 Level at 8 Shaft (Phase 1 of the project) with an option to extend mining to levels 25 and 26 at a later date (Phase 2).
An integral component of the Phase 1 study was the identification of pre-May 2018 problems at Evander underground and appropriate mitigation of the major challenges encountered during the mining of the Kinross orebody. These included:
Exhibit 4: Evander underground challenges and mitigations
Risk |
Mitigation |
Low efficiencies owing to high temperatures as a result of inadequate refrigeration capacity |
Installation of a new refrigeration plant for a capital investment of c ZAR170m (US$22.1m at ZAR14.50/US$) |
Ore and waste separation |
Underground waste handling and storage facilities to be installed at a capital cost of c ZAR60m (US$4.1m) |
Limited face time owing to long underground travelling times and distances |
Installation of a man carriage on 24 Level |
Labour intensive ore handling infrastructure based on a continually rotating three-shift pattern |
Reduced tonnage profile requiring only one shift to be manned in order to meet production targets |
Risk |
Low efficiencies owing to high temperatures as a result of inadequate refrigeration capacity |
Ore and waste separation |
Limited face time owing to long underground travelling times and distances |
Labour intensive ore handling infrastructure based on a continually rotating three-shift pattern |
Mitigation |
Installation of a new refrigeration plant for a capital investment of c ZAR170m (US$22.1m at ZAR14.50/US$) |
Underground waste handling and storage facilities to be installed at a capital cost of c ZAR60m (US$4.1m) |
Installation of a man carriage on 24 Level |
Reduced tonnage profile requiring only one shift to be manned in order to meet production targets |
Source: Pan African Resources, Edison Investment Research.
To date, the study has yielded the following results for the project:
■
An NPV10.71 of ZAR126.1m, or US$8.7m at a gold price of US$1,770/oz and a forex rate of ZAR14.50/US$, or ZAR0.063/share, US$0.005/share or £0.003/share.
■
Project capital of ZAR320m (US$22.1m at ZAR14.50/US$) to be funded internally and from existing facilities.
■
A real, post-tax internal rate of return of 26.6% (based on Phase 1 cash-flows only).
While not large by the standards of some of Pan African’s other recent projects, the 8 Shaft no. 2 decline 24 Level project will extend the 8 Shaft Pillar project’s 2.5-year life by a minimum of another 2.5 years at approximately the same level of production of c 34,000oz per annum.
As a consequence of the positive concept study on Mintails/Mogale and the group’s assessment of the opportunity provided by the 24 Level project at Evander, Pan African has now reprioritised its capital expenditure programmes as follows:
■
It will now implement a phased approach to the development of the Egoli project, entailing significantly reduced upfront capital expenditure and thereby materially reducing the requirement to raise debt to fund the project.
■
It will complete a pre-feasibility study (PFS) on the Mintails’ assets in Q3 of CY21 and a definitive feasibility study in Q1 of CY22.
■
It has commenced preparatory work for the mining of the 24 Level project.
Full details regarding Pan African’s growth projects will be released in due course, in particular with respect to the phasing of the development of the Egoli project. Until such time as these details are known, Edison is maintaining its valuation of Pan African (below) based on its prior assumptions regarding its growth projects’ developments. However, it is not unreasonable to assume that any refinements to the projects’ timings and developments should be value adding and, in that respect, Edison’s valuation (below) could be regarded as being conservative.
Updated (absolute) valuation
In the light of PAF’s operational update for FY21 and fractionally revised external factors such as the gold price and forex rates, our absolute value of the company (based on its existing four producing assets plus Egoli) has increased very slightly to 36.52c/share (cf 36.42c previously), 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 5: PAF estimated life of operations’ diluted EPS and (maximum potential) DPS* |
Source: Pan African Resources, Edison Investment Research. Note: *From FY24. Excludes discretionary exploration investment. |
Including its other potential growth projects and assets (ie the residual Evander underground resource and its shareholding in MC Mining), our updated total valuation of PAF is as follows:
Exhibit 6: PAF absolute valuation summary
Project |
Current valuation |
Previous valuation |
Existing producing assets (including Egoli) |
36.52 |
36.42 |
Fairview Sub-Vertical Shaft project |
1.13 |
1.13 |
Royal Sheba (resource-based valuation) |
0.43 |
0.40 |
Mintails/Mogale purchase consideration* |
0.17 |
0.17 |
8 Shaft no. 2 decline 24 Level project |
0.45 |
0.00 |
MC Mining shares |
0.06 |
0.07 |
Sub-total |
38.76 |
38.19 |
EGM underground resource |
0.22–5.24 |
0.22–5.24 |
Sub-total |
38.98–44.00 |
38.41–43.43 |
Mintails/Mogale project execution upside |
5.08 |
N/A |
Total |
44.06–49.08 |
38.41–43.43 |
Source: Edison Investment Research. Note: Numbers may not add up owing to rounding.*Acquisition of Mintails/Mogale is agreed, subject to due diligence
Of particular note to readers is the increase in the valuation of Pan African’s interest in Mintails/Mogale on the basis of its fatal flaw analysis and high-level financial evaluation of the project (see above). Self-evidently, this valuation is contingent upon Pan African concluding its agreed acquisition of these assets and its subsequent development of them.
Historical relative and current peer group valuation
Historical relative valuation
Exhibit 7, below, depicts PAF’s average share price in each of its financial years from FY10 to FY20, and compares this with normalised HEPS in the same year. For FY21 and FY22, the current share price (of 16.66p) is compared with our forecast normalised HEPS for FY21 to FY22. As is apparent from the graph, PAF’s price to normalised HEPS ratio of 5.4x and 4.4x for FY21 and FY22, respectively (based on our forecasts – see Exhibit 13, below) is very close to the bottom of its recent historical range of 4.1–14.8x for the period FY10–20:
Exhibit 7: PAF historical price to normalised HEPS** ratio, FY10–FY22e |
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 PAF’s average contemporary price to normalised EPS ratio of 9.1x in the period FY10–20 is applied to our normalised earnings forecasts, then it implies a share price for PAF of c 27.9p in FY21 and 34.0p in FY22.
Relative peer group valuation
Over the next two years, PAF remains cheaper than its South Africa- and London-listed gold mining peers on 66.7% of comparable common valuation measures (20 out of 30 individual measures in the table below) if Edison forecasts are applied or 50% if consensus forecasts are applied.
Exhibit 8: Comparative valuation of PAF with South African and London peers
|
EV/EBITDA (x) |
P/E (x) |
Yield (%) |
|||
Year 1 |
Year 2 |
Year 1 |
Year 2 |
Year 1 |
Year 2 |
|
AngloGold Ashanti |
4.1 |
3.9 |
7.8 |
6.9 |
1.9 |
2.1 |
Gold Fields |
4.1 |
4.2 |
8.8 |
8.6 |
3.5 |
3.4 |
Sibanye |
2.2 |
2.6 |
3.8 |
4.8 |
7.9 |
6.6 |
Harmony |
2.9 |
2.8 |
4.7 |
5.5 |
2.5 |
2.8 |
Centamin |
3.8 |
3.5 |
11.7 |
12.3 |
6.3 |
4.7 |
Average (excluding PAF) |
3.4 |
3.4 |
7.3 |
7.6 |
4.4 |
3.9 |
PAF (Edison) |
3.0 |
2.8 |
5.4 |
4.4 |
4.4 |
4.5 |
PAF (consensus) |
2.7 |
2.3 |
8.9 |
6.6 |
2.3 |
2.3 |
Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 14 July 2021.
Readers should note that PAF’s P/E ratio and dividend yield, calculated on the basis of consensus forecasts, appear to suggest that EPS and DPS will both fall in FY21 relative to FY20, which we believe is unusually pessimistic and especially so in the context of the company’s interim results (see Exhibit 2).
Otherwise, applying PAF’s peers’ average year 1 P/E ratio of 7.3x to Edison’s forecast normalised HEPS forecast of 4.24c/share for FY21 implies a share price for the company of 22.6p at prevailing forex rates, while applying its peers’ average year 2 P/E ratio of 7.6x to our forecast normalised HEPS forecast of 5.18c/share implies a share price of 28.5p.
Financials
PAF reported that group net senior debt had decreased by 45.5%, from US$62.0m at end-June 2020 to US$33.8m at end-June 2021, a decline of US$28.2m over the course of the full 12-month period, but a decline of US$26.1m in H221 alone. We estimate that this level of debt equates to a gearing ratio (net debt/equity) of 14.1% (cf 24.5% at the interim stage) and a leverage ratio (net debt/[net debt+equity]) of 12.4% (cf 19.7%). This figure is probably not complete in that it will exclude IFRS 16 lease liabilities of c US$5.0m and an (albeit negligible) instalment sale liability. However, it does nevertheless represent the vast majority of the group’s net debt, as shown in the table below:
Exhibit 9: Pan African net debt, by type (US$m)
Type |
H221 |
H121 |
FY20 |
Gross debt |
89.2 |
87.8 |
89.2 |
Cash & restricted cash |
(55.4) |
(28.0) |
(33.5) |
Net senior debt (sub-total) |
33.8 |
59.8 |
55.7 |
Restricted cash |
0.0 |
0.1 |
0.4 |
Gold loan |
0 |
0 |
5.7 |
Less refinance adjustment |
0 |
0 |
(0.3) |
Arranging fees |
0 |
0 |
0.5 |
Sub-total |
33.8 |
59.9 |
62.0 |
Derivative financial liability |
0 |
9.6 |
|
IFRS 16 lease |
5.0 |
4.5 |
|
Instalment sale liability |
0.2 |
0.3 |
|
Sub-total |
65.2 |
76.4 |
Source: Pan African Resources, Edison Investment Research. Note: Totals may not add up owing to rounding.
Most notable within the context of the above table is the extinction of the liabilities relating to PAF’s gold loan and derivative financial instruments in H121, which represented the last vestiges of the company’s revenue protection hedging contracts, which have now all been terminated.
PAF’s reported year-end net senior debt of US$33.8m is also very close to our prior forecast of US$29.8m, with the difference being easily attributable to changes in working capital. Notwithstanding capex commitments, we are therefore continuing to forecast that the company will achieve net debt free status during the FY22 financial year:
Exhibit 10: PAF previous estimated net debt profile forecast, FY17 to FY22e (US$000) |
Exhibit 11: PAF current net debt profile forecast, FY17 to FY22e (US$000) |
Source: Edison Investment Research, Pan African Resources |
Source: Edison Investment Research, Pan African Resources |
Exhibit 10: PAF previous estimated net debt profile forecast, FY17 to FY22e (US$000) |
Source: Edison Investment Research, Pan African Resources |
Exhibit 11: PAF current net debt profile forecast, FY17 to FY22e (US$000) |
Source: Edison Investment Research, Pan African Resources |
In the meantime, the group’s revolving credit facility (RCF) debt covenants and their actual recorded levels within recent history are as follows:
Exhibit 12: PAF group debt covenants
Measurement |
Constraint |
H121 |
FY20 |
H120 |
FY19 |
H119 |
FY18* |
H118 |
FY17 |
Net debt:equity |
Must be less than 1:1 |
0.3 |
0.4 |
0.6 |
0.71 |
0.85 |
0.78 |
0.19 |
0.02 |
Net debt:EBITDA |
Must be less than 2.5:1 falling to 1.5:1 by December 2022 |
0.5 |
0.7 |
1.6 |
2.2 |
3.24 |
3.73 |
2.25 |
0.08 |
Interest cover ratio |
Must be greater than 4 times rising to 5.1 times by December 2022 |
17.7 |
10.1 |
5.8 |
4.1 |
3.64 |
4.61 |
4.62 |
19.32 |
Debt service cover ratio |
Must be greater than 1.3:1 |
3.3 |
3.4 |
3.0 |
1.4 |
2.85 |
3.84 |
1.85 |
9.11 |
Source: Pan African Resources. Note: *Subsequently restated.
Exhibit 13: Financial summary
US$'000s |
2018 |
2019 |
2020 |
2021e |
2022e |
2023e |
||
Year end 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
145,829 |
218,818 |
274,107 |
369,020 |
340,870 |
364,948 |
Cost of sales |
(107,140) |
(152,980) |
(158,457) |
(207,557) |
(165,540) |
(171,018) |
||
Gross profit |
38,689 |
65,838 |
115,650 |
161,464 |
175,331 |
193,931 |
||
EBITDA |
|
|
38,131 |
65,484 |
115,176 |
157,281 |
170,116 |
187,681 |
Operating profit (before GW and except.) |
|
31,506 |
49,256 |
93,673 |
128,520 |
146,996 |
155,924 |
|
Intangible amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(16,521) |
10,596 |
(28,593) |
(6,704) |
(1,730) |
(1,730) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating profit |
14,985 |
59,852 |
65,079 |
121,816 |
145,266 |
154,194 |
||
Net interest |
(2,222) |
(12,192) |
(12,881) |
(6,153) |
(3,042) |
391 |
||
Profit before tax (norm) |
|
|
29,284 |
37,064 |
80,791 |
122,367 |
143,954 |
156,315 |
Profit before tax (FRS 3) |
|
|
12,763 |
47,660 |
52,198 |
115,662 |
142,224 |
154,585 |
Tax |
2,826 |
(8,174) |
(7,905) |
(40,513) |
(44,082) |
(47,266) |
||
Profit after tax (norm) |
32,110 |
28,890 |
72,887 |
81,853 |
99,871 |
109,049 |
||
Profit after tax (FRS 3) |
15,589 |
39,486 |
44,293 |
75,149 |
98,141 |
107,319 |
||
Average number of shares outstanding (m) |
1,809.7 |
1,928.3 |
1,928.3 |
1,928.3 |
1,928.3 |
1,928.3 |
||
EPS - normalised (c) |
|
|
1.31 |
1.64 |
3.78 |
4.24 |
5.18 |
5.66 |
EPS - FRS 3 (c) |
|
|
0.87 |
2.05 |
2.30 |
3.90 |
5.09 |
5.57 |
Dividend per share (c) |
0.00 |
0.15 |
0.84 |
1.01 |
1.04 |
2.50 |
||
Gross margin (%) |
26.5 |
30.1 |
42.2 |
43.8 |
51.4 |
53.1 |
||
EBITDA margin (%) |
26.1 |
29.9 |
42.0 |
42.6 |
49.9 |
51.4 |
||
Operating margin (before GW and except.) (%) |
21.6 |
22.5 |
34.2 |
34.8 |
43.1 |
42.7 |
||
BALANCE SHEET |
||||||||
Fixed assets |
|
|
315,279 |
361,529 |
314,968 |
354,131 |
396,647 |
407,980 |
Intangible assets |
56,899 |
49,372 |
43,466 |
45,806 |
48,206 |
50,606 |
||
Tangible assets |
254,247 |
305,355 |
270,286 |
307,108 |
347,225 |
356,159 |
||
Investments |
4,134 |
6,802 |
1,216 |
1,216 |
1,216 |
1,216 |
||
Current assets |
|
|
29,009 |
31,601 |
53,648 |
95,461 |
112,239 |
215,071 |
Stocks |
4,310 |
6,323 |
7,626 |
12,357 |
11,372 |
12,175 |
||
Debtors |
22,577 |
18,048 |
11,245 |
26,408 |
24,301 |
26,018 |
||
Cash |
922 |
5,341 |
33,530 |
55,449 |
75,319 |
175,631 |
||
Current liabilities |
|
|
(44,395) |
(63,855) |
(78,722) |
(104,074) |
(84,082) |
(137,509) |
Creditors |
(37,968) |
(39,707) |
(62,806) |
(88,158) |
(108,166) |
(161,593) |
||
Short-term borrowings |
(6,426) |
(24,148) |
(15,916) |
(15,916) |
24,084 |
24,084 |
||
Long-term liabilities |
|
|
(152,906) |
(145,693) |
(106,276) |
(106,293) |
(107,579) |
(109,180) |
Long-term borrowings |
(112,827) |
(109,618) |
(73,333) |
(73,333) |
(73,333) |
(73,333) |
||
Other long-term liabilities |
(40,078) |
(36,076) |
(32,943) |
(32,961) |
(34,247) |
(35,847) |
||
Net assets |
|
|
146,988 |
183,582 |
183,620 |
239,224 |
317,225 |
376,362 |
CASH FLOW |
||||||||
Operating cash flow |
|
|
5,345 |
59,822 |
73,399 |
132,114 |
168,427 |
184,541 |
Net Interest |
(6,076) |
(14,685) |
(10,834) |
(6,153) |
(3,042) |
391 |
||
Tax |
(1,634) |
(4,497) |
(5,804) |
(17,418) |
(20,334) |
(21,388) |
||
Capex |
(127,279) |
(52,261) |
(30,849) |
(67,924) |
(65,636) |
(43,090) |
||
Acquisitions/disposals |
6,319 |
466 |
207 |
0 |
0 |
0 |
||
Financing |
11,944 |
(0) |
0 |
0 |
(0) |
0 |
||
Dividends |
(11,030) |
(2,933) |
(2,933) |
(18,700) |
(19,544) |
(20,141) |
||
Net cash flow |
(122,411) |
(14,088) |
23,186 |
21,919 |
59,870 |
100,312 |
||
Opening net debt/(cash) |
|
|
3,138 |
118,332 |
128,424 |
55,719 |
33,800 |
(26,070) |
Exchange rate movements |
(619) |
537 |
1,663 |
0 |
0 |
0 |
||
Other |
7,836 |
3,459 |
47,856 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
118,332 |
128,424 |
55,719 |
33,800 |
(26,070) |
(126,382) |
Source: Company sources, Edison Investment Research
|
|
Research: Real Estate
The results for the year ended 31 March 2021 (FY21) provided the detail on Civitas Social Housing’s resilient performance through the pandemic. The portfolio continued to perform in line with expectations, operationally and financially, delivering consistent positive returns. With rents indexed to inflation and gearing in place to fund accretive portfolio acquisitions, we forecast further consistent growth in earnings and DPS.
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