Mintails financing facility concluded

Pan African’s contract liability relating to the fixed-price forward sales associated with its ZAR400m financing facility for Mintails concluded in February. Similarly, its zero-cost collars expire this month. Hereafter, PAF will be fully exposed to the prevailing price of gold at exactly the moment its output increases into the 250–350koz pa range from FY26.

Valuation: Steady with much potential upside

Our core valuation of Pan African has risen by 0.5% to 38.99c per share (cf 38.80c previously), based on its six producing mines. However, this uses a relatively conservative gold price ( US$2,124/oz nominal on average for the period FY26–30). It rises by a further 23.69–28.71c (17.42–21.12p) to 62.67–67.69c (46.09–49.79p) if other assets, such as Egoli and the Soweto Cluster, are included. It more than doubles, to 127.98c (94.13p), at the price of gold of US$3,300/oz at the time of writing. Alternatively, if PAF’s historical average price-to-normalised HEPS ratio of 8.2x for the FY10–24 is applied to our FY25 and FY26 forecasts, it implies values of 48.88p and 71.15p, respectively. In the meantime, it remains cheaper than its principal London- and South African-listed gold mining peers on at least 63% of commonly used valuation measures (Exhibit 11), which imply comparable valuations for PAF of 62.69p based on our year-one EPS estimate and 72.61p based on our year-two EPS estimate. This is validated by a valuation of 96.10p on a cash-flow and terminal multiple-type analysis (on an ex-real growth assumption), rising to 199.54p/share assuming real cash-flow growth of 3.6% per year (which is the average real return of the gold price from 1967 to 2024).

FY25/H225 guidance and forecasts

On 11 June, Pan African announced an operational update for the six-month period from 1 January to 30 June. From an operational and financial perspective, the main features of the announcement were:

• Record half-year gold production in H225 of c 112koz to yield a total of c 197koz for FY25 – 3.9% below the bottom end of the prior guidance range of 205–215koz, but nevertheless almost one-third higher than production in H125 of 84.7koz.
• All-in sustaining costs (AISC) of US$1,525–1,550/oz in H225 (c 4% above prior guidance of US$1,450–1,500/oz) to give a full-year figure in the range US$1,550–1,575/oz (c 6% above prior guidance of US$1,450–1,500/oz), including a c US$25/oz contribution from losses associated with zero-cost collar hedges.
• A c 32% reduction in net gearing, from US$228.5m at the interim stage to an estimated US$155m at end-June.
• Production guidance of 275–292koz for FY26, honed and narrowed from the prior range of 270–308koz.

In addition, Pan African’s board approved a share buyback programme, whereby the company may purchase up to 144.5m ordinary shares in the company for a consideration of ZAR200m (c US$11.1m) in the secondary marketplace.

In terms of production, our interpretation of PAF’s announcement relative to our prior expectations is provided in Exhibit 1 below.

While Barberton outperformed our expectations (owing to an improvement in output at all operations in the wake of its restructuring and 20% workforce reduction), it was offset by a shortfall at Evander (due to a slower than expected ramp up after the commissioning of the subvertical shaft in January), while Nobles missed what was otherwise a relatively aggressive production target.

Since the completion of its commissioning, however, the sub-vertical shaft’s full 700t/day hoisting capacity at Evander has become available since April. In combination with the establishment of the high-grade 24 Level B-Line raise in Q325, face length and mining flexibility have therefore improved to such an extent that output should average c 3,850oz pm in May and June (46,200oz per year annualised).

In the meantime, at Barberton, high-grade areas of the 262 Platform at Fairview Mine, indicated by drill intersections of up to 80g/t Au, have been accessed, while underground sampling at Consort has confirmed high-grade mineral reserve areas below 41 Level in the Prince Consort shaft area (which has now been rehabilitated).

Concurrently, in Australia, construction at Tennant Mines’ Nobles operation (at a cost of US$36m) was completed with successful hot commissioning in April. After an inaugural gold pour in May, however, production ramp up was slower than expected owing to a delay in the commissioning of the filter presses associated with the dry stack landforms (required for tailings deposition). Nevertheless, steady-state throughput at an annualised rate of c 50,000oz per year is still expected to be
achieved in Q126.

While production in FY25 was c 4.2% below our expectations (outlined in our note of 25 April), the gold price has comfortably outperformed our forecast US$3,157/oz ‘for the remainder of the financial year’, averaging US$3,223/oz in April, US$3,289/oz in May and US$3,361/oz so far in June.

In addition to changes to our immediate production and gold price assumptions, we have also revised our estimate of forex rates to reflect the recent (slightly unusual) strength of the rand against both the US dollar and sterling:

• from ZAR25.3436/£ to ZAR24.1513/£ (-4.7%),
• from ZAR19.3243/US$ to ZAR17.7650/US$ (-8.1%), and
• from US$1.3115/£ to US$1.3596/£ (+3.7%).

In tandem with its updated cost guidance, we have therefore revised our operational forecasts for Pan African’s mines for H225 to those shown in Exhibit 2 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, have not been offset by a depreciating rand. Although reagent prices now appear to have stabilised, relative to H1, for example, electricity costs in H2 (c 15% of total costs) will have risen by c 12–13% as a consequence of regulator-endorsed tariff increases. In addition, it will have inherited, even if only temporarily, a full suite of centralised, head office costs from Tennant Creek (TCMG).

As a result, we have upgraded our FY25 financial estimates for the group to those shown in Exhibit 3 below.

H225 will be the last time in which the contract liability related to the fixed-price forward sales associated with Pan African’s ZAR400m Mintails financing facility will feature in PAF’s results as the last delivery of gold under this structure was made in February. As per our normal practice, we show profits/losses from this contract liability in the ‘Other income/(expenses)’ line of the profit and 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 are otherwise more strictly included in the revenue line for the effective synthetic forward sales.

A comparison between Edison and consensus forecasts for FY25 and FY26 is provided in Exhibit 4. All other things being equal, our normalised HEPS forecast increases by c 45.6% in FY26 compared to FY25 and increases again to as high as 17.97c per share if the gold price stays at its current level of US$3,300/oz for the whole financial year.

Group production

Apart from changes to FY25 and FY26, the only other change that we have made to our long-term production forecasts relates to the 25% expansion of the MTR/Mogale plant from 800ktpm to 1Mtpm at a total cost of US$6.5m in order to increase production from 50koz pa to c 60koz pa. Whereas we had assumed this expansion to be academic at the time of our last note, we now assume it to be a work in progress, expected to be completed over the course of the next 12 months, setting Pan African on the road to peak production (under current mine plans) of 344.4koz in FY31, as shown below:

Once the MTR/Mogale plant expansion has been executed, PAF has a number of other potential organic growth projects to choose from, 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 standalone operation also producing c 50,000oz pa plus the option to include additional proximal 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 standalone 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 standalone 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 facilities such as offices, the smelt house etc. A feasibility study to this effect is underway and is expected to be completed by September 2025.
• Fast-tracking the wholly owned Warrego Copper Gold project at TCMG with the objective of budgeting first production in 2029/30.
• 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

Valuation

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 six producing assets and Edison’s long-term gold price of US$1,794/oz in real terms) has risen by 0.5% to 38.99c (cf 38.80c previously).

A summary of the major components in the change to our valuation is provided in the graph below.

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$3,300/oz, all other things being equal, our valuation more than doubles to 127.98c (94.13p):

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 62.67–67.69c (46.09–49.79p):

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 to secure the return on its initial investment. However, we will only include such contracts in our forecasts once they are actually in place.

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 10 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 (as per the paragraph below the exhibit). As the chart shows, PAF’s price to normalised HEPS ratios of 5.3x for FY26 remains well in the lower half of its recent historical range of 4.1–14.8x for FY10–24.

If PAF’s average year-one price to normalised EPS ratio of 8.2x for FY10–24 is applied to our updated normalised earnings forecasts, it implies a share price for PAF of 48.88p in FY25 followed by one of 71.15p in FY26 (as shown Exhibit 10). Stated alternatively, PAF’s current share price of 46.15p, at prevailing foreign exchange rates, appears to be discounting FY25 and/or FY26 normalised HEPS of 7.70c per share (vs our forecasts of 8.15c and 11.87c, respectively).

Relative peer group valuation

In the meantime, PAF appears to remain cheap relative to its London- and South African-listed gold mining peers on 83% of comparable common valuation measures (30 out of 36 individual measures in the table below) if Edison forecasts are used or 63% (23 out of 36 of the same measures) if consensus forecasts are used.

Alternatively, applying PAF’s peers’ average year one P/E ratio of 10.5x to our normalised HEPS forecast of 8.15c per share for FY25 implies a share price for the company of 62.69p at prevailing foreign exchange rates. Applying its peers’ average year two P/E ratio of 8.3x to our normalised HEPS forecast of 11.87c per share for FY26 implies a share price of 72.61p.

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 (vs 1 July 2025 previously), 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 7.46c (at a real gold price of US$1,794/oz in current money terms). Applying a (real) discount rate of 5.94% (calculated from a nominal expected equity return of 9% and increased long-term inflation expectations of 2.2890% (vs 2.1361% previously), as defined by the US 30-year break-even inflation rate (source: Bloomberg, 19 June) to this estimate of cash-flows, our valuation of the company has risen to 96.10p/share in FY26 (vs 73.24p/share in FY25 previously) assuming zero long-term cash-flow per share growth beyond FY30.

At this point (FY31), production is anticipated to be c 334koz. If PAF is able to maintain this level of cash-flows per share via organic investment, its valuation will flatten out at 92.38p/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 238.60p/share and its current valuation to 199.54p/share (vs 131.38p/share in FY25 previously).

Financials

Pan African reported net debt of US$228.5m on its balance sheet as at end-December 2024 (vs US$104.4m at end-June 2024, US$61.7m at end-December 2023 and US$22.1m at end-June 2023), which equated to a gearing ratio (net debt/equity) of 54.2% (vs 28.6% at end-June 2024, 18.8% at end-December 2023 and 7.5% at end-June 2023) and a leverage ratio (net debt/[net debt+equity]) of 35.1% (vs 22.2% at end-June 2024, 15.8% at end-December 2023 and 7.0% at end-June 2023), after cash flow from operating activities of US$12.0m before dividends (vs 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). 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%.

In its operational update, PAF estimated net debt of US$155m as at end-June, representing a c 32% reduction in net gearing relative to end-December. This is consistent with our prior forecast of US$138.9m and suggests year-end gearing in the order of 29.4% and leverage of 22.7%. Beyond that, we forecast that PAF will continue to generate cash from operations comfortably above US$100m per year (and potentially around US$200m per year), such that net debt is eliminated towards the middle of FY26, by which time capex will once again have returned to sustaining levels (assuming no new project developments which, actually, we think is unlikely).