Currency in GBP
Last close As at 17/03/2023
GBP0.14
▲ −0.06 (−0.42%)
Market capitalisation
GBP292m
Research: Metals & Mining
On 13 March, Pan African Resources (PAF) announced the completion of the final component in its funding package for its Mintails dump retreatment project outside Johannesburg. The funding is in the form of an innovative transaction with Rand Merchant Bank (RMB) in the style of a synthetic forward sale agreement, whereby Pan African will sell 4,846oz of gold per month to RMB for 24 months, commencing in March at a fixed price of ZAR1,025,000/kg (US$1,750/oz at the prevailing forex rate), in return for an upfront premium of ZAR400m (US$22.0m). Including the upfront premium, the effective price at which the group will sell these ounces (representing c 30% of annual group production) will be ZAR1,135,604/kg (US$1,938/oz at prevailing rates) over the full 24-month period.
Pan African Resources |
Innovative funding avoids dilution |
Project update |
Metals & mining |
17 March 2023 |
Share price performance Business description
Analyst
Pan African Resources is a research client of Edison Investment Research Limited |
On 13 March, Pan African Resources (PAF) announced the completion of the final component in its funding package for its Mintails dump retreatment project outside Johannesburg. The funding is in the form of an innovative transaction with Rand Merchant Bank (RMB) in the style of a synthetic forward sale agreement, whereby Pan African will sell 4,846oz of gold per month to RMB for 24 months, commencing in March at a fixed price of ZAR1,025,000/kg (US$1,750/oz at the prevailing forex rate), in return for an upfront premium of ZAR400m (US$22.0m). Including the upfront premium, the effective price at which the group will sell these ounces (representing c 30% of annual group production) will be ZAR1,135,604/kg (US$1,938/oz at prevailing rates) over the full 24-month period.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/21 |
368.9 |
117.7 |
4.54 |
1.27 |
3.8 |
7.4 |
06/22 |
376.4 |
117.2 |
4.44 |
1.04 |
3.9 |
6.0 |
06/23e |
355.0 |
109.0 |
4.17 |
1.00 |
4.1 |
5.8 |
06/24e |
342.1 |
100.2 |
4.31 |
1.00 |
4.0 |
5.8 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
At a gold price of US$1,750/oz, we estimate that this funding will be free to PAF. At a gold price of US$1,938/oz, we estimate that RMB will recoup its capital. At a gold price of US$1,956/oz, we estimate that it will provide RMB with a 10% (annualised) internal rate of return (in rand terms). As such, we believe that this transaction represents an innovative form of financing for Pan African as well as avoiding unnecessary equity dilution for its shareholders.
PAF is now in the process of finalising detailed engineering optimisation studies for the Mintails Project, with environmental authorisation and related permitting expected within the next four months, commencement of construction by June 2023 (by substantially the same team that developed Elikhulu) and steady state production by December 2024 (as already assumed by Edison).
In our last note on the company, published on 16 February, we noted that Pan African is cheap relative to both its historical trading record and its peers, with a core (absolute) valuation of the company of 32.59c (cf 27.02p), based on projects either sanctioned or already in production. However, this valuation rose by a further 16.09–21.11c (13.34–17.50p) once other assets (eg Egoli) were also taken into account. Since that note, the gold price has been strong and the rand weak. Alternatively, if Pan African’s historical average price to normalised headline earnings per share (HEPS) ratio of 8.6x in the period FY10–22 is applied to our FY23 and FY24 forecasts, it implies a share price of 29.53p in FY23, followed by 30.49p in FY24. As such, PAF’s current share price of 14.32p could be interpreted as discounting normalised HEPS falling to 2.01c/share (cf 4.44c recorded in FY22 and 4.17c forecast in FY23). In the meantime, PAF remains cheaper than its principal London- and JSE-listed gold mining peers on at least 86% of commonly used valuation measures, which collectively imply a share price of c 36.8p in FY23 and 33.3p in FY24. Finally, we estimate that Pan African has the 11th highest dividend yield of any precious metals mining company, globally and calculate that its dividend yield is currently higher than its P/E ratio.
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