Pan African Resources — Honing FY25e forecasts

Since our last note on the company, on 14 November, Pan African has advised the market of the completion of the Tennant Consolidated (TCGM) acquisition and provided a production update for its operations for H125 plus guidance for FY25 and FY26.

As a result of Pan African’s updated guidance, Edison has revised its production forecasts for the group to those shown in Exhibit 1, below.

Overall, therefore, Edison has increased its (albeit conservative) FY25 production forecast by 3,130oz (1.5%), with all of the increase effectively being accounted for by the seamless commissioning and ramp-up of the MTR project.

In addition to changes to our immediate output assumptions, we have revised our estimate of the gold price for the remainder of the financial year to June up to US$2,682/oz (ie that prevailing at the time of writing). At the same time, we have adjusted our foreign exchange rates to reflect the renewed strength of the rand against both the US dollar and sterling:

All told, however, the net effect of these changes on our financial forecasts for FY25 and FY26 has been modest, as shown in Exhibit 2, below:

Our forecast for mining profit for FY25e has therefore actually risen relative to our prior estimate and the decline in our EPS and HEPS forecasts for FY25e may be largely attributed to the increase in our forecast for the contract liability related to the fixed-price forward sales associated with Pan African’s ZAR400m Mintails financing facility, which, readers will recall, Edison shows 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, which would otherwise be more strictly included in the revenue line. Otherwise, the 4.2% decline in our forecast for normalised EPS is broadly in line with the 3.0% decline in the dollar/rand forex rate since the time of our last note. Readers will also note that Edison’s forecasts for PAF’s royalty costs and its effective tax rate (which are driven by formulae) are high within the historical context and, with respect to these measures, they may therefore be considered conservative. This may be seen in a comparison between Edison and consensus forecasts for the periods in question:

In the light of these developments, we are continuing to forecast that group production from FY26 onwards will easily exceed 250koz per year with a material contribution from TCGM’s assets and may approach 400koz pa in FY29, when all of PAF’s mines are operating at close to capacity, pushing normalised headline EPS (HEPS) as high as 9c per share (see Exhibit 5).

In the aftermath of these changes, our absolute valuation of PAF (based on its existing four producing assets plus the 25 and 26 Level project, Mogale and Nobles) has fallen by a modest 3.7% to 39.49c (cf 41.01c previously), which is 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). This is approximately the result that would be expected given a 3.0% appreciation in the rand/dollar forex rate.

However, readers should note that this valuation is conducted at Edison’s relatively conservative gold price assumptions of US$2,124/oz (nominal) average for the period FY26–30. At the current gold price of US$2,682/oz, all other things being equal, our valuation more than doubles to 87.71c (68.97p).

Even so, including its other growth projects and assets, our updated total valuation of PAF as a whole rises to 62.05–67.07c (48.79–52.74p).

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 model these into PAF’s accounts once the contracts are actually in place.

Exhibit 7 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 (see paragraph below Exhibit 7). As is apparent from the chart, PAF’s price to normalised HEPS ratios of 7.0x and 6.6x for FY25 and FY26, respectively, remain 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 43.60p in FY25 followed by one of 46.64p in FY26 (as shown Exhibit 7). Stated alternatively, PAF’s current share price of 37.45p, at prevailing foreign exchange rates, appears to be discounting FY25 and/or FY26 normalised HEPS of 5.83c per share (cf our forecasts of 6.79c and 7.26c, respectively).

In the meantime, it may be seen that PAF remains cheap relative to its London- and South African-listed gold mining peers on 63% of comparable common valuation measures (23 out of 36 individual measures in the table below) if Edison forecasts are used or 88% of valuation measures (32 out of 36 individual measures) if consensus forecasts are used.

Alternatively, applying PAF’s peers’ average year one P/E ratio of 9.4x to our normalised HEPS forecast of 6.79c per share for FY25 implies a share price for the company of 50.32p at prevailing foreign exchange rates. Applying its peers’ average year two P/E ratio of 7.0x to our normalised HEPS forecast of 7.26c per share for FY26 implies a share price of 39.88p.

Pan African reported net debt of US$104.4m on its balance sheet as at end-June 2024 (cf 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 28.6% (cf 18.8% at end-December 2023 and 7.5% at end-June 2023) and a leverage ratio (net debt/[net debt+equity]) of just 22.2% (cf 15.8% at end-December 2023 and 7.0% at end-June 2023), after cash flow from operating activities of US$109.1m before dividends (cf US$45.5m in H124, US$88.5m in H223 and US$31.6m in H123). Capex guidance for FY25 is ZAR2.27bn (c US$124.1m at prevailing foreign exchange rates). 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) into the foreseeable future, 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.

Even so, we calculate that Pan African’s maximum net debt requirement of US$142.2m at end-FY25 will equate to no more than 28.9% gearing (defined as net debt/equity) or 22.4% leverage (defined as net debt/[net debt+equity]). Owing to the passage of time and the building up of equity in the form of retained income, however, this is a much lower debt burden on the company than the equivalent time when net debt was similarly high, at US$128.4m in FY19, when gearing amounted to 70.0% and leverage amounted to 41.2%.