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Research: Metals & Mining
Pan African Resources
Pan African Resources |
New dividend policy unveiled |
FY16 results |
Metals & mining |
28 September 2016 |
Share price performance
Business description
Next events
Analyst
Pan African Resources is a research client of Edison Investment Research Limited |
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Pan African’s FY16 results were closely in line with Edison’s expectations. Excluding Uitkomst, revenue of £164.7m compared with our forecast of £165.1m and costs of £103.9m compared with our forecast of £104.6m; precious metal mining profit was therefore £49.3m vs our expectation of £48.9m. The only material negative variance was in ‘other expenses’, where a loss of £12.2m (largely attributable to a mark-to-market loss on its small hedge position) compared with our expectation of an £8.9m loss, with the result that actual earnings were £25.5m (or 1.41p for EPS and HEPS) vs our expectation of 1.48p/share. Normalised HEPS and EPS were reported to be ZAR0.4424/share, or 2.08p/share (Edison conversion).
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/15 |
140.4 |
16.0 |
0.64 |
0.54 |
31.3 |
2.7 |
06/16 |
168.4 |
45.9 |
2.08 |
0.82 |
9.6 |
4.1 |
06/17e |
211.5 |
68.3 |
3.07 |
1.23 |
6.5 |
6.2 |
06/18e |
215.8 |
76.4 |
3.47 |
1.37 |
5.8 |
6.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
Operations
FY16 was a record year for gold production at Pan African, with Barberton contributing 113,281oz at a cash cost of US$881/oz (including the BTRP) and Evander contributing 91,647oz at US$599/oz (including the ETRP). To achieve this, Edison calculates that the H216 underground head grade at Evander must have been c 5.9g/t. Management avers that there is scope to increase this further, to 6.5-7.0g/t, depending on the balance of production and development.
Updated forecasts and new dividend policy
At this stage, Edison’s forecasts have been updated to reflect updated forex rates and, in particular, the continued strength in the rand. They have also been updated to reflect Pan African’s new dividend policy of distributing 40% of operational cash flow to shareholders, less sustaining capital, debt repayments and exceptionals. Note that PAF’s ongoing hedge of 25,000oz of gold at ZAR625,000/kg is fully accounted and ‘in the money’ at a gold price of ZAR583,395/kg, currently.
Valuation: 26.03p
Over the life of operations, our absolute value of PAF has increased to 26.03p cum-dividend (vs 23.59p in August). This valuation assumes that the grade profile at Evander averages 6.43g/t from FY17-30 and that the gold price is US$1,372/oz in FY17 and US$1,378/oz in FY18 and averages US$1,454/oz (real) during FY17-39. Notwithstanding recent rises, at 9.6x Pan African’s shares remain below their recent peak price to normalised HEPS ratio of 14.83x in FY15 and on a par with FY14 and FY11. In the meantime, PAF is cheaper than its peers in at least 75% of cases in which P/E, yield and EV/EBITDA measures are considered (whether using Edison or consensus forecasts). It also has the third highest (consensus) forecast dividend yield of any dividend-paying gold company, globally.
Financial summary
Outlook and expansion
Pan African has a number of expansion opportunities, the most immediate of which is its Elikhulu tailings retreatment project at Evander, comprising a resource of 178.7Mt at a grade of 0.29g/t, containing 1.7Moz gold. A definitive feasibility study on the project is scheduled for completion in November 2016. In the meantime, the project pre-feasibility study envisages a 1Mtpm operation producing 45-50koz gold per annum after 45-50% metallurgical recoveries. At a forecast all-in sustaining cost of ZAR300,000/kg, or US$650/oz (implying a forex rate of ZAR14.35/US$), the project generates an internal rate of return to investors of 28.6% over a 14 year life with a payback period of 3-4 years on an initial capital investment of ZAR1.7bn.
Power and water infrastructure to the site is already well developed. Elikhulu will require 20MW of power, while water will be supplied from existing operations and the Leeuwpan dam. A new CIL plant will be located just to the north of the existing Kinross tailings storage facility (TSF), while the TSF will be located just to the south of, and adjacent to, it (NB the existing Kinross TSF footprint will be re-used).
A final investment decision will be made once the DFS is complete in November and environmental applications will be completed and submitted by November 2017. After a two year construction and commissioning process, first gold is therefore currently anticipated to be poured in November 2018.
On the basis of the parameters described above (and subject to the release of the DFS in November), Edison estimates that Elikhulu could add 0.90p/sh to earnings, annually, and is worth 4.0p/sh to Pan African, overall on a dividend discount basis, using a 10% discount rate – equivalent to US$45.69 per Elikhulu resource oz.
Exhibit 1: Financial summary
£000s |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017e |
2018e |
||||
Year end 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||||
PROFIT & LOSS |
|||||||||||||||
Revenue |
|
|
39,148 |
52,860 |
68,344 |
79,051 |
100,905 |
133,308 |
154,202 |
140,386 |
168,404 |
211,462 |
215,784 |
||
Cost of sales |
(25,164) |
(28,505) |
(40,554) |
(45,345) |
(46,123) |
(71,181) |
(106,394) |
(110,413) |
(108,223) |
(127,767) |
(125,613) |
||||
Gross profit |
13,985 |
24,355 |
27,790 |
33,705 |
54,783 |
62,127 |
47,808 |
29,973 |
60,181 |
83,696 |
90,171 |
||||
EBITDA |
|
|
13,711 |
22,890 |
25,023 |
28,540 |
45,018 |
53,276 |
44,165 |
28,448 |
57,381 |
80,110 |
86,545 |
||
Operating profit (before GW and except.) |
11,745 |
20,529 |
21,897 |
25,655 |
41,759 |
47,278 |
34,142 |
18,110 |
46,925 |
70,339 |
76,313 |
||||
Intangible amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Exceptionals |
0 |
(5,025) |
(335) |
0 |
(48) |
7,232 |
(12) |
(198) |
(12,183) |
(2,413) |
(1,287) |
||||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||||
Operating profit |
11,745 |
15,504 |
21,562 |
25,655 |
41,711 |
54,510 |
34,130 |
17,912 |
34,742 |
67,926 |
75,026 |
||||
Net interest |
200 |
807 |
594 |
762 |
516 |
197 |
(191) |
(2,109) |
(1,006) |
(2,050) |
74 |
||||
Profit before tax (norm) |
|
|
11,945 |
21,336 |
22,491 |
26,417 |
42,274 |
47,475 |
33,951 |
16,001 |
45,919 |
68,289 |
76,387 |
||
Profit before tax (FRS 3) |
|
|
11,945 |
16,311 |
22,156 |
26,417 |
42,226 |
54,707 |
33,939 |
15,803 |
33,736 |
65,876 |
75,100 |
||
Tax |
(4,367) |
(8,219) |
(7,656) |
(9,248) |
(12,985) |
(12,133) |
(7,155) |
(4,133) |
(8,234) |
(22,015) |
(24,172) |
||||
Profit after tax (norm) |
7,579 |
13,117 |
14,835 |
17,169 |
29,290 |
35,342 |
26,796 |
11,868 |
37,685 |
46,274 |
52,215 |
||||
Profit after tax (FRS 3) |
7,579 |
8,091 |
14,500 |
17,169 |
29,242 |
42,574 |
26,785 |
11,670 |
25,502 |
43,861 |
50,928 |
||||
Average number of shares outstanding (m) |
1,043.8 |
1,104.4 |
1,366.3 |
1,432.7 |
1,445.2 |
1,619.8 |
1,827.2 |
1,830.4 |
1,811.4 |
1,506.8 |
1,506.8 |
||||
EPS - normalised (p) |
|
|
0.52 |
0.85 |
1.07 |
1.20 |
2.03 |
2.18 |
1.46 |
0.64 |
2.08 |
3.07 |
3.47 |
||
EPS - FRS 3 (p) |
|
|
0.52 |
0.40 |
1.04 |
1.20 |
2.02 |
2.63 |
1.47 |
0.64 |
1.41 |
2.91 |
3.38 |
||
Dividend per share (p) |
0.00 |
0.26 |
0.37 |
0.51 |
0.00 |
0.83 |
0.82 |
0.54 |
0.82 |
1.23 |
1.37 |
||||
Gross margin (%) |
35.7 |
46.1 |
40.7 |
42.6 |
54.3 |
46.6 |
31.0 |
21.4 |
35.7 |
39.6 |
41.8 |
||||
EBITDA margin (%) |
35.0 |
43.3 |
36.6 |
36.1 |
44.6 |
40.0 |
28.6 |
20.3 |
34.1 |
37.9 |
40.1 |
||||
Operating margin (before GW and except.) (%) |
30.0 |
38.8 |
32.0 |
32.5 |
41.4 |
35.5 |
22.1 |
12.9 |
27.9 |
33.3 |
35.4 |
||||
BALANCE SHEET |
|||||||||||||||
Fixed assets |
|
|
55,647 |
67,198 |
74,324 |
97,281 |
86,075 |
249,316 |
223,425 |
220,150 |
230,676 |
231,074 |
231,418 |
||
Intangible assets |
35,577 |
35,397 |
36,829 |
38,229 |
23,664 |
38,628 |
37,040 |
37,713 |
38,682 |
40,418 |
42,154 |
||||
Tangible assets |
20,070 |
31,801 |
37,495 |
59,052 |
62,412 |
209,490 |
185,376 |
181,533 |
190,725 |
189,387 |
187,995 |
||||
Investments |
0 |
0 |
0 |
0 |
0 |
1,199 |
1,010 |
905 |
1,269 |
1,269 |
1,269 |
||||
Current assets |
|
|
8,770 |
4,949 |
17,677 |
15,835 |
41,614 |
26,962 |
23,510 |
17,218 |
22,016 |
52,010 |
83,314 |
||
Stocks |
378 |
358 |
1,126 |
1,457 |
1,869 |
6,596 |
5,341 |
3,503 |
4,399 |
7,057 |
7,201 |
||||
Debtors |
2,973 |
2,201 |
3,795 |
4,254 |
6,828 |
15,384 |
12,551 |
10,386 |
14,891 |
14,501 |
14,797 |
||||
Cash |
5,419 |
2,389 |
12,756 |
10,124 |
19,782 |
4,769 |
5,618 |
3,329 |
2,659 |
30,385 |
61,250 |
||||
Current liabilities |
|
|
(6,611) |
(6,101) |
(7,084) |
(8,960) |
(11,062) |
(24,066) |
(24,012) |
(22,350) |
(32,211) |
(35,632) |
(35,313) |
||
Creditors |
(6,521) |
(6,080) |
(7,084) |
(8,960) |
(11,062) |
(23,202) |
(19,257) |
(17,301) |
(25,230) |
(28,652) |
(28,333) |
||||
Short-term borrowings |
(89) |
(21) |
0 |
0 |
0 |
(864) |
(4,755) |
(5,049) |
(6,981) |
(6,981) |
(6,981) |
||||
Long-term liabilities |
|
|
(7,438) |
(9,686) |
(11,431) |
(13,410) |
(14,001) |
(80,004) |
(63,528) |
(67,850) |
(69,506) |
(71,100) |
(72,716) |
||
Long-term borrowings |
(17) |
0 |
0 |
(181) |
(869) |
(11,133) |
(8,141) |
(16,313) |
(18,456) |
(18,456) |
(18,456) |
||||
Other long-term liabilities |
(7,421) |
(9,686) |
(11,431) |
(13,228) |
(13,132) |
(68,871) |
(55,387) |
(51,537) |
(51,049) |
(52,644) |
(54,260) |
||||
Net assets |
|
|
50,369 |
56,360 |
73,487 |
90,746 |
102,626 |
172,208 |
159,396 |
147,167 |
150,975 |
176,352 |
206,703 |
||
CASH FLOW |
|||||||||||||||
Operating cash flow |
|
|
12,762 |
25,420 |
25,207 |
31,968 |
49,092 |
61,618 |
45,996 |
26,423 |
47,130 |
78,850 |
84,499 |
||
Net Interest |
200 |
807 |
594 |
762 |
516 |
314 |
(606) |
(2,109) |
(1,006) |
(2,050) |
74 |
||||
Tax |
(1,723) |
(10,886) |
(7,476) |
(10,743) |
(11,616) |
(13,666) |
(8,536) |
(3,943) |
(7,777) |
(20,420) |
(22,557) |
||||
Capex |
(5,680) |
(5,705) |
(6,764) |
(21,712) |
(17,814) |
(27,197) |
(21,355) |
(19,554) |
(14,097) |
(10,169) |
(10,576) |
||||
Acquisitions/disposals |
226 |
(4,205) |
0 |
0 |
(1,549) |
(96,006) |
0 |
(760) |
(30,999) |
0 |
0 |
||||
Financing |
785 |
0 |
48 |
1,545 |
259 |
47,112 |
349 |
(235) |
15,207 |
0 |
0 |
||||
Dividends |
0 |
(6,774) |
0 |
(5,376) |
(7,416) |
0 |
(14,684) |
(15,006) |
(9,882) |
(18,484) |
(20,576) |
||||
Net cash flow |
6,571 |
(1,343) |
11,609 |
(3,557) |
11,471 |
(27,826) |
1,164 |
(15,184) |
(1,425) |
27,726 |
30,864 |
||||
Opening net debt/(cash) |
|
|
(136) |
(5,313) |
(2,369) |
(12,756) |
(9,943) |
(18,913) |
7,228 |
7,278 |
18,033 |
22,778 |
(4,948) |
||
Exchange rate movements |
(1,394) |
(2,642) |
(281) |
925 |
(1,813) |
594 |
(839) |
(276) |
812 |
0 |
0 |
||||
Other |
0 |
1,041 |
(940) |
(181) |
(688) |
1,090 |
(375) |
4,705 |
(4,131) |
0 |
0 |
||||
Closing net debt/(cash) |
|
|
(5,313) |
(2,369) |
(12,756) |
(9,943) |
(18,913) |
7,228 |
7,278 |
18,033 |
22,778 |
(4,948) |
(35,813) |
||
Source: Pan African Resources accounts, Edison Investment Research
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