Pan African Resources — Setting the scene for FY23 and beyond

Pan African Resources (AIM: PAF)

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Pan African Resources — Setting the scene for FY23 and beyond

Based on adjusted EBITDA, Pan African Resource’s performance in H222 was its third best on record and only fractionally (3.8% or ZAR47.8m) below its record level of ZAR1,264.8m in H122. Despite normalised headline earnings per share (HEPS) being slightly below our prior expectations, this could be attributed to operating costs that stuck at higher levels than we had previously anticipated (in common with much of the global mining industry), which were left unrelieved by only a modest depreciation of the rand versus the US dollar.

Lord Ashbourne

Written by

Lord Ashbourne

Director, Energy & Resources

Pan African Resources

Setting the scene for FY23 and beyond

FY22 results

Metals and mining

14 November 2022

Price

18.94p

Market cap

£421m

ZAR20.3511/£, ZAR17.2319/US$, US$1.1810/£

Net debt (US$m) at end June 2022

13.0

Shares in issue, effective 1,916.5m post-consolidation

2,222.9m

Free float

85%

Code

PAF

Primary exchange

AIM/JSE

Secondary exchange

Level 1 ADR, OTCQX Best Market and A2X

Share price performance

%

1m

3m

12m

Abs

11.2

(9.2)

(3.8)

Rel (local)

3.2

(7.0)

0.4

52-week high/low

24p

16p

Business description

Pan African Resources has four major producing precious metals assets in South Africa: Barberton (target output 95koz Au pa), the Barberton Tailings Retreatment Project, or BTRP (20koz), Elikhulu (55koz) and Evander underground, incorporating Egoli (currently 45koz, rising to >75koz).

Next events

AGM

24 November 2022

Ex-dividend date

30 November 2022

FY22 dividend payment

13 December 2022

H123 results

February 2023

Analyst

Lord Ashbourne

+44 (0)20 3077 5724

Pan African Resources is a research client of Edison Investment Research Limited

Based on adjusted EBITDA, Pan African Resource’s performance in H222 was its third best on record and only fractionally (3.8% or ZAR47.8m) below its record level of ZAR1,264.8m in H122. Despite normalised headline earnings per share (HEPS) being slightly below our prior expectations, this could be attributed to operating costs that stuck at higher levels than we had previously anticipated (in common with much of the global mining industry), which were left unrelieved by only a modest depreciation of the rand versus the US dollar.

Year end

Revenue
(US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/21

368.9

117.7

4.54

1.27

4.9

5.7

06/22

376.4

117.2

4.44

1.04

5.0

4.7

06/23e

352.1

97.4

3.82

1.04

5.9

4.7

06/24e

342.0

96.7

4.10

1.04

5.5

4.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

High grade and millions of ounces

Pan African exploits some of the highest grade gold deposits in the world and also has access to millions of ounces of in-situ gold in near-term expansion opportunities, such as its 25 & 26 Level project at Evander and Mogale.

FY23 forecasts reflect recent gold price falls

Our forecasts and valuation of Pan African are now based on the gold price remaining at US$1,763/oz for the remainder of CY22 before moderating to US$1,749/oz in CY23, then declining in real terms to bottom out at US$1,524/oz (real) in CY27.

Valuation: Three methods imply c 30p/share

Pan African is cheap relative to both its historical trading record and its peers. Our core (absolute) valuation of the company is 31.30c (26.50p), based on projects either sanctioned or already in production. This valuation is lower than our valuation of 44.67c in July 2022, largely due to assumed increases in opex in common with the rest of the mining industry globally, but approximately the same as our valuation of 33.79c in April 2022. However, this valuation rises by a further 16.76–21.78c (14.19–18.44p) once other assets (eg Egoli) are also taken into account. Alternatively, if Pan African’s historical average price to normalised HEPS ratio of 8.6x in the period FY10–22 is applied to our FY23 and FY24 forecasts, it implies a share price of 27.69p in FY23, followed by 29.71p in FY24. As such, its current share price of 18.94p could be interpreted as discounting normalised HEPS falling to 2.61c/share (cf 4.44c recorded in FY22 and 3.82c forecast in FY23). In the meantime, PAF remains cheaper than its principal London- and JSE-listed peers on at least 72% of commonly used valuation measures, which imply a share price of 33.7p in FY23 and one of 34.6p in FY24. Finally, in FY23, it still has the sixteenth highest dividend yield of any precious metals mining company, globally.

FY22 and H222 results

Pan African announced its FY22 financial results within the context of known production results, which were released to the market on 14 July. Overall, production in H222 was 1,646oz (1.7%) higher than our prior expectations to result in production for the year that was 2.5% (or 5,668oz) in excess of the company’s formal guidance of 200,000oz:

Exhibit 1: Pan African production, H118–H222 (oz)

Operation

H119

H219

H120

H220

H121

H221

H122

H222e

H222a

*Variance (%)

FY22a

FY22e

Barberton UG

38,550

36,806

36,737

31,392

42,350

42,476

39,991

37,009

35,747

-3.4

75,738

77,000

BTRP

12,006

12,001

10,619

9,516

10,004

8,235

9,126

10,874

10,434

-4.0

19,560

20,000

Barberton

50,556

48,807

47,356

40,908

52,354

50,711

49,117

47,883

46,181

-3.6

95,298

97,000

Evander UG

8,821

8,058

11,553

9,117

12,607

23,409

27,312

18,230

21,538

+18.1

48,850

45,542

Evander surface

6,345

3,654

4,731

6,176

6,560

4,677

5,756

4,244

3,564

-16.0

9,320

10,000

Evander

15,166

11,712

16,284

15,293

19,169

28,086

33,068

22,474

25,102

+11.7

58,170

55,542

Elikhulu

15,292

30,909

29,301

30,315

26,863

24,596

25,900

25,600

26,320

+2.8

52,220

51,500

Total

81,014

91,428

92,941

86,516

98,386

103,391

108,085

95,957

97,603

+1.7

205,688

204,042

Source: Edison Investment Research, Pan African Resources. Note: *H222a versus H222e. Totals may not add up owing to rounding. UG = underground. BTRP = Barberton Tailings Retreatment Project.

As in H122, Pan African’s outperformance in H222 could once again be largely attributed to operations at Evander underground, which reported its third largest (implied) adjusted EBITDA in a six-month period under Pan African stewardship, continuing its post-H220 renaissance and cementing its position once again as a major contributor to Pan African’s profitability:

Exhibit 2: Pan African adjusted EBITDA, by business unit, H115–H222

Source: Pan African Resources, Edison Investment Research

Readers should note that on this measure of adjusted EBITDA, Pan African’s performance in H222 was its third best on record, after H122 and H121, and only fractionally (3.8% or ZAR47.8m) below its record level of ZAR1,264.8m, which it achieved in H122.

H222 and FY22 financial results

PAF’s normalised HEPS in FY22 were 14.6% below our prior expectations, exclusively as a result of costs in H2 that stuck at higher levels than we had previously anticipated which, in this case, were left unrelieved by only a very modest depreciation of the value of the rand versus the US dollar (and appreciation against sterling):

Exhibit 3: ZAR versus US$ (H113–H222)

Source: Pan African Resources, Bloomberg.

Otherwise, revenue was slightly above and depreciation slightly below our forecasts – the latter as a consequence of the extension of Evander’s underground mine life as a result of the sanctioning of the 25 & 26 Level project (given that Pan African depreciates on a ‘units of production’ basis). While declining, ‘other expenses’ relating to business development expenditure also reduced further and faster than we had expected and are now expected to remain at lower levels into the foreseeable future.

Exhibit 4: Pan African P&L statement by half-year (FY19–H222)

US$000s*

H120

H220

H121

H221

H122

H222e

H222a

FY22

FY22e

**Variance

(%)

Revenue

132,849

141,258

183,751

185,164

193,574

180,657

182,797

376,371

371,949

1.2

Cost of production

(86,501)

(71,956)

(98,245)

(110,570)

(108,368)

(92,477)

(118,077)

(226,445)

(198,078)

14.3

Depreciation

(10,526)

(10,977)

(12,741)

(19,333)

(13,268)

(17,634)

(13,160)

(26,428)

(30,902)

-14.5

Mining profit

35,821

58,325

72,766

55,260

71,938

70,545

51,560

123,498

142,969

-13.6

Other income/(expenses)

(962)

(27,720)

(6,704)

(6,115)

(7,711)

(4,200)

(2,117)

(9,828)

(11,911)

-17.5

Loss in associate etc

0

0

0

0

0

0

0

0

N/A

Loss on disposals

0

0

0

0

0

0

N/A

Impairments

109

(20)

0

0

0

(467)

(467)

0

N/A

Royalty costs

(208)

(266)

(2,404)

(1,050)

(1,316)

(4,874)

(780)

(2,096)

(6,268)

-66.6

Net income before finance

34,761

30,319

63,657

48,096

62,910

61,471

48,197

111,107

124,790

-11.0

Finances income

207

258

300

456

661

434

1,095

N/A

Finance costs

(7,760)

(5,587)

(3,946)

(3,729)

(1,945)

(3,381)

(5,326)

N/A

Net finance income

(7,553)

(5,329)

(3,646)

(3,273)

(1,285)

(1,060)

(2,946)

(4,231)

(2,344)

80.5

Profit before taxation

27,208

24,990

60,011

44,823

61,626

60,411

45,250

106,876

122,445

-12.7

Taxation

(5,303)

(2,602)

(19,239)

(10,903)

(15,573)

(18,416)

(16,351)

(31,924)

(34,152)

-6.5

Effective tax rate (%)

19.5

10.4

32.1

24.3

25.3

30.5

36.1

29.9

27.9

7.2

PAT (continuing ops)

21,906

22,388

40,773

33,920

46,053

41,995

28,899

74,952

88,293

-15.1

Minority interest

-

(185)

(185)

-

N/A

Ditto (%)

-

(0.6)

0.0

-

N/A

Attributable profit

41,995

29,084

75,137

88,293

-14.9

Headline earnings

21,742

22,416

40,772

33,919

46,053

41,995

29,551

75,604

88,293

-14.4

Est. normalised headline earnings

22,704

50,136

47,476

40,034

53,764.1

46,195

31,668

85,432

100,204

-14.7

EPS (c)

1.14

1.16

2.11

1.76

2.39

2.18

1.51

3.90

4.59

-15.0

HEPS*** (c)

1.13

1.16

2.11

1.76

2.39

2.40

1.54

3.93

4.59

-14.4

Normalised HEPS (c)

1.18

2.60

2.46

2.08

2.79

2.40

1.65

4.44

5.20

-14.6

Source: Pan African Resources, Edison Investment Research. As reported basis. Note: *Unless otherwise indicated; **FY22a cf FY22e; ***HEPS = headline earnings per share (company adjusted basis).

Once again, deferred taxes accounted for the majority (79%) of the total tax charge for the year, with cash taxes paid amounting to only 21% of the total tax charge.

FY22 and H222 operational analysis

Barberton underground (37% of production; 33% of adjusted EBITDA)

Full details of Barberton’s performance in FY22 and H222 are available in Pan African’s results announcement. In summary however, Barberton’s Fairview underground operation performed solidly during the second half of the year, mainly as a result of accelerated underground development programmes and a focus on optimising ore extraction and increased mining flexibility at the high grade MRC and Rossiter orebodies, where five large platforms (denoted 256, 257, 258, 259 and 358) are currently available for mining on the former and three on the latter. Nevertheless, in May, it still achieved two million fatality free shifts. Of particular note at Barberton during the second six-month period of the financial year was the close control of costs, with unit working costs declining by 3.9% in rand terms, to ZAR4,555.38/t in H222 cf H122, against a background of otherwise generally rising prices. As a result, adjusted EBITDA at Barberton increased by 16.3% in H222 relative to H121 and was the third highest on record, after H121 and H221 (see Exhibit 2).

A key focus for the year ahead will be the smaller underground operations at Barberton Mines to ensure that these high-grade assets perform to their full potential. In the meantime, management has initiated an exploration programme to define additional gold resources for mining at the Sheba and Consort mines. In the table below we summarise Barberton’s performance in H222 relative to our prior expectations and provide our forecasts for FY23.

Exhibit 5: Barberton underground operational statistics and estimates, H120–FY23e

H220

H121

H221

H122

H222e

H222a

**Variance (%)

FY23e

(prior)

FY23e

Tonnes milled underground (t)

116,035

122,199

133,473

125,257

126,228

126,804

0.5

Head grade underground (g/t)

*8.79

11.25

*10.42

*10.46

9.62

*9.20

-4.4

Underground gold contained (oz)

32,791

44,195

44,724

42,125

39,057

37,515

-3.9

Tonnes milled surface (t)

56,593

39,267

30,078

27,740

30,379

42,237

39.0

Head grade surface (g/t)

*0.73

1.06

*0.98

*0.98

0.98

*0.68

-30.6

Surface gold contained (oz)

1,331

1,343

949

876

957

923

-3.6

Tons milled (t)

172,628

161,466

163,551

152,997

156,607

169,041

7.9

310,211

310,211

Head grade (g/t)

6.15

8.77

8.69

8.74

7.95

7.07

-11.1

9.49

8.24

Contained gold (oz)

34,122

45,538

45,673

43,001

40,014

38,438

-3.9

94,605

82,171

Recovery (%)

92.0

93.0

93.0

93.0

92.5

93.0

0.5

92.5

92.5

Production underground (oz)

31,392

42,350

42,476

39,991

37,009

35,747

-3.4

87,500

76,000

Production calcine dumps/surface ops (oz)

0

0

0

0

N/A

0

0

Total production (oz)

31,392

42,350

42,476

39,991

37,009

35,747

-3.4

87,500

76,000

Recovered grade (g/t)

5.66

8.16

8.08

8.13

7.35

6.58

-10.5

8.77

7.62

Gold sold (oz)

31,392

42,350

42,476

39,308

37,009

36,430

-1.6

87,500

76,000

Average spot price (US$/oz)

1,647

1,877

1,805

1,792

1,876

1,876

0.0

1,784

1,737

Average spot price (ZAR/kg)

882,504

981,381

843,828

866,671

928,970

928,970

0.0

943,691

964,635

Total cash cost (US$/oz)

1,053

997

1,150

1,227

1,247

1,372

10.0

920

1,105

Total cash cost (ZAR/kg)

572,432

521,351

542,629

593,380

617,368

679,598

10.1

486,668

613,586

Total cash cost (US$/t)

191.44

261.64

298.72

315.34

294.63

295.71

0.4

259.50

270.62

Total cash cost (ZAR/t)

3,237.70

4,253.00

4,383.29

4,742.00

4,537.80

4,555.38

0.4

4,269.63

4,675.62

Implied revenue (US$000)

53,724

79,491

76,250

70,440

69,429

68,236

-1.7

156,098

131,982

Implied revenue (ZAR000)

893,997

1,292,694

1,105,899

1,059,597

1,069,337

1,050,996

-1.7

2,568,293

2,280,255

Implied revenue (£000)

42,614

60,824

54,762

51,680

53,477

52,509

-1.8

129,930

112,352

Implied cash costs (US$000)

33,047

42,246

48,857

48,246

46,141

49,987

8.3

80,501

83,950

Implied cash costs (ZAR000)

558,918

686,715

716,891

725,512

710,651

770,046

8.4

1,324,486

1,450,427

Implied cash costs (£000)

26,203

32,349

35,265

35,413

35,563

38,390

7.9

67,017

71,494

Reported adjusted EBITDA (ZAR000)

262,200

543,900

421,700

341,000

396,600

N/A

Source: Pan African Resources, Edison Investment Research. Note: *Estimated. **H222a cf H222e.

H222 relative to H122 aggregate cash costs increased by 3.6%, while tonnes milled increased by 10.5% (leading to the decline in costs per tonne noted). Year-on-year, tonnes milled were almost identical in FY22 to FY21 (a change of just -0.9%), while costs increased by 7.8%, or US$7.1m. Nevertheless, this increase should be interpreted within the context of an increase of 8.4% in the group’s overall cost of production from US$208.8m to US$226.4m in FY22. Within this:

Mining and processing costs (representing 42.5% of the total cost of production) increased by US$0.9m at Barberton owing to increased vamping costs and additional support installed in working areas at the Sheba and Consort mines, as well as the additional operating costs associated with a cemented backfill grout plant, which was commissioned at Consort in FY22 in order to assist in supporting poor ground conditions associated with a highly altered, but high-grade, schistose orebody.

Salaries and wages (representing 25.1% of the total cost of production) increased by more than the group average of 5.8% at Barberton as a result of a combination of the group’s average annual salary increase of c 5.0% plus an increase in employee headcount of 2.4%.

Electricity costs (representing 14.9% of the cost of production) were increased by a statutory 13% by South Africa’s electricity regulator, NERSA.

Engineering and technical costs (representing 9.5% of the cost of production) increased by US$2.9m at Barberton and accounted for substantially all of the group-wide increase in these costs of US$3.3m.

Barberton Mines is maintaining its exploration focus on the down-dip extensions of its existing orebodies in FY23. In FY22, Barberton Mines conducted underground diamond core drilling programmes in excess of 9,000m and exploration metres drilled will remain at these levels in the foreseeable future. Specific focus is being placed on near-mine in-fill drilling, as well as down-dip reserve delineation drilling of underground mineral resources. Drilling into the down-dip extensions of the orebodies was reported to have yielded excellent results and improved the geological understanding of operations at Barberton as well as demonstrating their extent and quality, while continued drilling has also provided the opportunity for the grade control modelling protocols of the various operations to be upgraded to allow for improved mine design and orebody extraction in conjunction with the roll-out of more advanced and interconnected mining-related software packages to further optimise production. In the meantime, broader-scale exploration drilling is focused on the Hope, Main Muiden and Golden Quarry reefs, with desktop studies being conducted on various known but unmined lower-grade blocks in all orebodies.

Elikhulu (27% of production; 43% of adjusted EBITDA)

Production at Elikhulu was characterised by near-record throughput in H222, which recovered from preternaturally high levels of rainfall at the end of H122 and which offset higher than expected concentrations of historically processed fine carbon in the lower benches of the Kinross tailings storage facility (TSF) that continued to adversely affect metallurgical recoveries, compounded by the mining of the coarser but high-grade outer wall of the Kinross TSF.

As a result, Elikhulu’s share of group adjusted EBITDA reverted to over 40% in H222 and easily covered capex of ZAR139.6m, despite the latter increasing sharply (as expected) to effect the switchover of operations from the Kinross to the Leslie and Bracken tailings storage facilities (Phase 2). Notwithstanding its increase, capex at Elikhulu remained a fraction of that at Pan African’s underground operations and, despite peaking at c ZAR405m in FY23, will still only approximate sustaining capex at Barberton. With the completion of the TSF extension and the Leslie/Bracken pump station at Elikhulu during FY23, capital expenditure will once again revert to previous (negligible) levels of sustaining capital thereafter (until the transition to the Winkelhaak TSF in 2026).

A full analysis of Elikhulu’s performance in H222 relative to both previous half-year periods and our prior expectations is provided in the table below, including our expectations for FY23:

Exhibit 6: Elikhulu operational statistics and estimates, H219–H222e

H120

H220

H121

H221

H122

H222e

H222a

**Variance

(%)

FY23e

(prior)

FY23e

Tonnes processed tailings (t)

6,211,028

6,882,546

6,278,191

6,776,576

6,442,397

6,702,545

7,289,750

8.8

14,400,000

14,400,000

Head grade tailings (g/t)

*0.28

0.32

0.31

0.29

0.34

0.25

0.34

36.0

0.31

0.30

Tailings gold contained (oz)

56,348

70,494

62,472

63,038

70,000

53,590

79,200

47.8

144,965

139,474

Recovery (%)

52.0

43.0

43.0

39.0

37.0

47.8

33.2

-30.5

47.8

38.0

Production tailings (oz)

29,301

30,315

26,863

24,596

25,900

25,600

26,320

2.8

69,250

53,000

Total production (oz)

29,301

30,315

26,863

24,596

25,900

25,600

26,320

2.8

69,250

53,000

Recovered grade (g/t)

0.15

0.14

0.13

0.11

0.13

0.12

0.11

-8.3

0.15

0.11

Gold sold (oz)

29,301

30,315

26,863

24,596

25,900

25,600

26,320

2.8

69,250

53,000

Average spot price (US$/oz)

1,451

1,647

1,852

1,805

1,813

1,876

1,876

0.0

1,784

1,719

Average spot price (ZAR/kg)

685,680

882,504

968,130

843,828

876,640

928,970

928,970

0.0

944,865

965,835

Total cash cost (US$/oz)

621

495

656

849

806

748

938

25.4

556

820

Total cash cost (ZAR/kg)

293,608

265,166

342,917

396,698

389,660

370,380

464,514

25.4

294,115

455,637

Total cash cost (US$/t)

2.93

2.15

2.81

3.05

3.24

2.86

3.39

18.5

2.67

3.02

Total cash cost (ZAR/t)

43.00

36.33

45.63

44.78

48.72

44.00

52.16

18.5

43.99

52.16

Implied revenue (US$000)

42,516

50,783

49,750

43,442

46,957

48,026

47,875

-0.3

123,540

92,040

Implied revenue (ZAR000)

624,898

837,196

808,898

626,289

706,198

739,685

736,997

-0.4

2,032,614

1,590,173

Implied revenue (£000)

33,740

40,283

38,067

31,097

34,451

36,991

36,797

-0.5

102,830

78,350

Implied cash costs (US$000)

18,209

14,818

17,626

20,657

20,874

19,148

24,689

28.9

38,503

43,474

Implied cash costs (ZAR000)

267,600

250,023

286,500

303,480

313,900

294,912

380,268

28.9

633,494

751,104

Implied cash costs (£000)

14,455

11,784

13,496

14,986

15,322

14,758

18,978

28.6

32,054

37,023

Adjusted EBITDA (ZAR000)

333,100

564,000

484,800

301,200

367,000

523,900

Source: Pan African Resources, Edison Investment Research. Note: *Estimate.

A new re-mining pump station and related infrastructure has been in place for mining to commence at Leslie/Bracken since September 2022, in consequence of which we have revised our immediate production outlook at Elikhulu to reflect the company’s production profile in its full-year results presentation, as shown below:

Exhibit 7: Elikhulu planned life of mine production profile (oz)

Source: Pan African Resources, Edison Investment Research

In addition, where before we had assumed that unit costs would revert to c ZAR40/t processed, we now assume that they will remain at a permanently higher level of c ZAR52/t in real terms to reflect inflationary pressure in the industry apparent in H222. At Elikhulu specifically in FY22, these included:

An increase in processing costs of US$3.2m, owing to above-inflation increases in reagent costs and additional costs associated with the treatment of buttressing material.

A US$1.1m increase in engineering & technical costs.

Excluding these cost increases, we estimate that unit working costs would have been ZAR45.73/t or 10.3% less than the actual ZAR51/t recorded in FY22.

Evander underground (22% of production; 16% of adjusted EBITDA)

Underground operations at Evander in FY22 recorded a vastly improved performance relative to earlier periods – largely on account of an elevated head grade and albeit slightly tempered by unit cash costs that remained at higher levels and declined to reduce in line with our prior expectations. Although production did decline in H222 cf H122 therefore, it declined by less than our expectations. Similarly, adjusted EBITDA declined in H222 cf H122, but still recorded its third highest level for a six-month period since Evander was acquired by Pan African in February 2013. Nevertheless, Evander Mines’ underground operations achieved a reportable injury free rate of zero during the period (cf 1.32 per million man hours in FY21), despite the increased number of crews deployed underground

Exhibit 8: Evander operational statistics and estimates, H219–H222e

H120

H220

H121

H221

H122

H222e

H222a

*Variance

(%)

FY23e

(prior)

FY23e

Tonnes milled (t)

30,044

21,392

50,634

69,812

69,790

70,000

59,297

-15.3

140,000

140,000

Head grade (g/t)

12.59

5.16

8.51

10.56

12.55

8.27

11.35

37.2

9.95

9.95

Contained gold (oz)

12,161

3,549

13,854

23,709

28,157

18,602

21,647

16.4

44,796

44,796

Recovery (%)

95

94

91

99

97

98

99

1.0

98.0

98.0

Underground production (oz)

11,553

9,117

12,607

23,409

27,312

18,230

21,538

18.1

43,900

43,900

Production from surface sources (oz)

0

0

0

0

Total production (oz)

11,553

9,117

12,607

23,409

27,312

18,230

21,538

18.1

43,900

43,900

Recovered grade (g/t)

11.96

13.26

7.74

10.43

12.17

8.10

11.30

39.5

9.75

9.75

Gold sold (oz)

9,214

5,863

12,607

23,409

27,312

18,230

21,538

18.1

43,900

43,900

Average spot price (US$/oz)

1,451

1,647

1,852

1,805

1,813

1,876

1,876

0.0

1,784

1,719

Average spot price (ZAR/kg)

685,658

882,504

968,072

843,828

876,639

928,970

928,970

0.0

943,691

964,635

Total cash cost (US$/oz)

1,420

1,241

1,604

1,030

915

873

1,184

35.6

786

1,223

Total cash cost (ZAR/kg)

671,299

665,209

838,665

481,582

442,226

432,397

586,318

35.6

415,879

679,156

Total cash cost (US$/t)

546.00

169.14

399.31

342.36

357.95

227.40

429.71

89.0

246.53

383.39

Total cash cost (ZAR/t)

6,404

5,671

6,496

5,023

5,383

3,502

6,624

89.1

4,056

6,623.87

Implied revenue (US$000)

13,370

9,879

23,348

41,877

49,517

34,199

39,244

14.8

78,316

76,236

Implied revenue (ZAR000)

196,499

167,699

379,599

624,798

744,697

526,725

606,299

15.1

1,288,545

1,317,143

Implied revenue (£000)

10,610

7,836

17,865

30,543

36,329

26,341

30,358

15.2

65,188

64,898

Implied cash costs (US$000)

16,404

3,618

20,218

23,901

24,981

15,918

25,481

60.1

34,514

53,674

Implied cash costs (ZAR000)

192,402

121,306

328,918

350,638

375,680

245,169

392,775

60.2

567,855

927,341

Implied cash costs (£000)

10,393

5,509

15,495

17,312

18,337

12,269

19,633

60.0

28,733

45,710

Adjusted EBITDA (ZAR000)

64,900

(345,600)

49,000

331,000

408,500

196,400

Source: Pan African Resources, Edison Investment Research. Note: *H222 cf H222e.

The increase in unit working costs at Evander could be attributed to:

Mining and processing costs increasing by US$3.8m in FY22 as a direct result of a 7.2% increase in tonnes milled from the mines’ underground operations and an increase in the mining contractor’s headcount of 33.7%, from 1,071 to 1,432 employees, coupled with an annual salary increase of approximately 5.0%.

A 6.6% increase in the employee headcount and production bonuses paid for increased production.

Electricity costs increasing by US$2.7m, or 8.3%, to US$33.8m due to a 13% regulatory increase (albeit offset by the capitalisation of electricity costs associated with 24 Level development).

Management implemented a number of energy efficiency and management initiatives at Evander during the year, including high efficiency motors & compressors and pumps, geysers and motors replaced with power-saving models. Similarly, the recycling of underground water continues to reduce the amount of energy consumed.

As per its mine plan, the 8 Shaft pillar now has a remaining life of approximately one year, during which it is expected to produce c 44,000oz gold. Mining at 24 Level will then extend 8 Shaft’s production profile, post cessation of the 8 Shaft pillar mining, for an additional two and a half years from FY23, as the current pillar mining reaches completion, after which the board has also now approved the development capital for Evander’s 25 & 26 Level project, which is expected to increase the 8 Shaft’s mine life to 13 years at an expected annual production rate of approximately c 65,000oz.

For the moment, the 24 Level project remains in its construction phase, with all development and infrastructure placement for mining to progress according to plan. The construction of Phase 1 of the underground refrigeration plant on 24 Level is complete and has been commissioned and will be expanded to provide cooling on 24 Level for steady-state production (Phase 2) in Q423. Phase 1 will allow mining of both the 24 Level F raise line stopes and 24 Level B, C and D raise lines. Phase 2 will allow for additional mining crews to be placed on 24 Level as well as mining on 25 Level in subsequent years. Thereafter, the board has approved the continued mining of the down-dip extent of this orebody on 25 and 26 Levels, using the 24 Level infrastructure. Development leading from the existing 24 Level footwall infrastructure will allow access to both 25 and 26 Levels, with an on-reef decline layout. The mining of 25 and 26 Levels will thereby extend Evander Mines’ 8 Shaft production, post extraction of the 8 Shaft pillar and 24 Level, at an annual production rate of approximately 65,000oz pa. Access development on 25 and 26 Levels is reported to be on schedule. Dewatering on 25 Level is in progress and blasting of development ends will commence in FY23, with mining of the first stope planned for FY25. As with Elikhulu, we have updated our mine plan for the 25 & 26 Level project – particularly in the earlier years – to reflect that anticipated by management in its results presentation, as follows:

Exhibit 9: 25 & 26 Level planned life of mine production profile (oz)

Source: Pan African Resources, Edison Investment Research

In the meantime, preliminary work has commenced on the Egoli project, where dewatering of the Number 3 Decline started in June 2022. This decline is anticipated to be dewatered to below 19 Level in Q323, after which reserve delineation drilling will commence to accurately define the Egoli pay-shoot for early mining.

Capex for the 24 and 25 & 26 Level projects at 8 Shaft and equipping costs for Evander Mines’ 7 Shaft infrastructure is estimated at US$50.6m, including steel work and development costs, which will be funded from existing cash flows.

Group production profile

As a result of the refinements discussed above (as well as inclusion of Mogale’s production profile into our group financial model), whereas we had forecast that group production at Pan African would reach 288.6koz in FY26 previously (from a guided level of 205koz in FY23), we now forecast that it will reach 253.9koz in FY26 and 272.8koz in FY29 and remain at approximately this level until FY33 (with production from Egoli still pending):

Exhibit 10: Estimated Pan African group gold production profile, FY18–FY29e

Source: Edison Investment Research, Pan African Resources

Growth projects

Following completion of its transaction to buy Mintails’ assets, Pan African has at least two immediate organic growth projects plus one further corporate growth project (Blyvoor tailings) in prospect for development in the future. Beyond these, it also has at least the Fairview sub-vertical shaft, Rolspruit, Poplar and Evander South assets available for potential development.

Corporate growth projects

Mintails Soweto Cluster

On 6 November 2020, Pan African announced it had entered into a conditional agreement with the liquidator of the Mintails group for the purchase of the total share capital and associated loans of Mogale Gold and Mintails SA Soweto Cluster (MSC), comprising a number of TSFs to the west of Johannesburg, for ZAR50.0m (US$2.9m at prevailing forex rates) and the assumption of a closure environmental liability of c ZAR120m. As part of its due diligence process, on 30 June 2022, Pan African announced that it had successfully completed a definitive feasibility study (DFS) on the Mogale portion of Mintails’ assets. The study demonstrated compelling economics and the potential to significantly increase group gold production by c 25% over an initial mine life of 13 years and this was the subject of our note, Building steam, published on 7 July. On 6 October, Pan African confirmed that it had successfully closed this transaction and, as such, Mogale is now fully incorporated into our valuation of Pan African (below). However, the MSC assets are not.

Although Pan African does not currently include MSC mineral resources in the Mogale mine schedule, a conceptual production schedule for this project was applied, based on available information, entailing the processing of reserves of the combined Mogale and MSC TSFs and demonstrated a more robust recovered ounce profile and an extended life of mine for the project in excess of 20 years, as shown below:

Exhibit 11: Mogale and conceptual MSC production profile (oz)

Source: Pan African Resources, Edison Investment Research

Confirmation of the feasibility of including the MSC dumps in the Mogale mine schedule will require further technical studies to be completed. In the meantime, however, we have attempted to quantify what MSC’s valuation could be to Pan African. In formulating this valuation, we have made a number of assumptions, which we summarise below:

A grade and recovery profile close to that of Mogale. This seems reasonable, given that the MSC resource (1.186Moz) and the Mogale resource (1.176Moz) are approximately the same size and the average grade of the Soweto Cluster resource is 0.31g/t (albeit in the inferred category of resources) whereas the average grade of the Mogale resource is 0.29g/t (albeit mostly in the indicated category of resources.

A high conversion rate from resources to reserves. Note that Mogale’s conversion rate is 97.9% for tonnage, 100.0% for grade and 96.9% of ounces.

Unit working costs (ZAR64.43/t [real] average over the life of the operation) comparable to those of Mogale (ZAR62.33/t [real] average of the life of the operation).

Capex of ZAR1.8bn, but with negligible upfront capex (on the assumption that this has already been invested in the Mogale processing plant etc) and the majority (sustaining capex) being expended approximately evenly over the life of operations.

Depreciation is assumed to be on a straight line basis over the life of operations.

Tax is assumed to be levied according to the standard mining tax formula in South Africa:
y = 34 - 170/x, where y is the tax rate to be determined and x is the ratio of taxable income to the total income (expressed as a percentage). Note that these tailings dumps are largely pre-1 May 2004 dumps and, as such, are exempt from royalties.

On the basis of the above assumptions, we have calculated the following valuation and financial parameters with respect to MSC:

An immediate valuation – based on the net present value (NPV) of dividends payable to Pan African from the MSC operation discounted at Edison’s customary rate of 10% pa – of US$18.2m, or 0.95 US cents per share (cf US$74.5m, or 3.89c per share for Mogale), which equates to US$15.35 per MSC resource ounce, US$24.10 per ounce of gold mined and US$49.06 per ounce of gold recovered (cf US$63.37/oz, US$65.46/oz and US$122.71/oz for Mogale, respectively). The profile of the estimated value evolution over the period of MSC’s operational life is presented in the graph below:

Exhibit 12: MSC life of mine free cash flow and dividend NPV (US$000s and US$ per residual resource oz)

Source: Edison Investment Research

Note that, at the currently prevailing (real) gold price of US$1,763/oz, we calculate a value for MSC of US$30.8m, or 1.61c per share, which equates to US$25.96 per MSC resource ounce, US$40.78 per ounce of gold mined and US$82.99 per ounce of gold recovered (ie an uplift of 69.2%).

At the end of the life of operations, we estimate that c 755koz of resources at MSC will have been mined, of which c 371koz will have been recovered, 431koz (ie approximately eight years’ worth of production) will have remained unmined and 384koz will have been redeposited in upgraded tailings storage facilities.

On this basis, we calculate that the project will enhance Pan African’s earnings per share by an average 0.43c per share over the life of the operation, as shown below:

Exhibit 13: MSC life of mine contribution to PAF EPS and valuation (US cents per share)

Source: Edison Investment Research

A key sensitivity of our valuation is to the assumption of negligible initial capex. We calculate that the NPV of the project drops to zero in the event that initial capex exceeds US$132.8m, or approximately the same as the estimated initial capex estimate for Mogale (which we therefore think is unlikely).

In the meantime, readers should note that our US$18.2m valuation of MSC as a development asset reconciles tolerably closely with our valuation of it of US$11.7m (or 0.61c per share) as an in-situ resource, based on the average value of in-situ gold resources listed in London of US$9.88/oz calculated in our report Gold stars and black holes, published in January 2019.

Blyvoor tailings

On 15 December 2021, Pan African announced that it had entered into a conditional agreement to acquire the entire issued share capital of Blyvoor Gold Operations from Blyvoor Gold (Pty) Ltd, subject to due diligence, for a cash consideration of ZAR110m (currently c US$6.4m cf US$7.6m previously). The principal assets of Blyvoor Gold Operations are six historical TSFs with a total mineral resource of 1.4Moz gold at a grade of 0.31g/t and a mineral reserve (as at 1 December 2020) of 0.8Moz gold at a grade of 0.30g/t. A recent (2020) technical study completed to pre-feasibility standards indicated the potential to process c 6Mt of tailings annually by hydro-mining (ie similar to Elikhulu) to produce c 25–30koz gold annually over a life of 15 years (extendable to 25 years) at an expected carbon-in-leach metallurgical recovery of c 54%.

Having concluded an initial ‘fatal flaw’ analysis, Pan African, together with its independent consultants, has embarked on a full fatal flaw assessment and gap analysis as part of its due diligence process and has extended the period for completion of the transaction to coincide with the completion a DFS scheduled for December 2022. In the meantime, by way of comparison, investors should note that Blyvoor’s resource of 1.4Moz is similar to Elikhulu’s original resource of 1.7Moz, while its initial reserve of 0.8Moz is approximately half the size of Elikulu’s 1.5Moz, albeit at a fractionally higher grade of 0.30g/t (cf Elikhulu’s 0.29g/t). Pan African announced the results of an independent 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, we 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 27% more shares in issue). Now, however, with capex having been expended, we estimate a valuation for Elikhulu of c US$77.97 per initial resource ounce or US$102.42 per remaining resource ounce. As with Mintails/Mogale (above), and albeit with suitable caveats, Pan African could therefore be on the cusp of acquiring for US$4.56/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) and may be worth up to a peak of US$124.09 per remaining ounce (or US$78.00 per initial ounce), at steady-state production after initial debt repayment.

Royal Sheba

Royal Sheba is a world class orogenic greenstone gold deposit, where historical mining has enabled high resolution modelling of the orebody to be completed and a resource of over 1Moz Au to be defined at an average grade of c 2g/t over mineralised widths averaging 10m delineated by drilling to 150m below surface over a strike extent in excess of 850m.

Historically, Royal Sheba material was treated at Barberton’s Sheba metallurgical plant and existing Barberton milling capacities (especially at the BTRP) are sufficient to cater for a throughput of c 40ktpm of run-of-mine production from Royal Sheba, while grade control drilling results have confirmed expected recoveries. The down-dip extent of the ore body has been proven up to 650m below surface and may be accessed from the 23 Level development at Sheba Mine’s ZK Shaft, but is open beyond that.

Recent development at Royal Sheba commenced in May 2021 via an already established surface adit located approximately 1.2km to the east of the existing Sheba metallurgical plant. The decline and associated cross-cut have provided access for the extraction of a 10,000t bulk sample from historically unmined areas, located 26m below surface, between 6 and 7 Levels, which has now been completed, with an initial 5,000t of the 10,000t sample being processed at the Consort metallurgical plant. An average feed grade of 0.9g/t and metallurgical recoveries of 87% were achieved, relative to the planned 0.7g/t and 85% metallurgical recoveries and results from the remaining 5,000t remain pending. If fully approved by the board, first ore from Royal Sheba could provide feed to the BTRP in FY23, following the installation of a run-of-mine crushing circuit, which will increase its life by an approximate 18 years. To date, the development has progressed through the historically mined voids, filling them with waste rock followed by capping with steel beams and sets, while aerated cement has been used to stabilise workings.

In the meantime, work on the Dibanisa project, which is designed to combine the Fairview and Sheba Mine infrastructures to optimise costs and efficiency, is well advanced. Project Dibanisa aims to connect the underground tramming and hoisting infrastructure of Fairview Mine 38 Level with Sheba Mine 23 Level, allowing underground production below 23 Level from Sheba Mine to be transported to surface using the existing Fairview Mine 2 Decline infrastructure. The hoisted ore will then be processed at Fairview’s metallurgical plant, which will create capacity at Sheba’s metallurgical plant which will initially be used for the treatment of Royal Sheba ore, thereby reducing the initial capital requirements for the Royal Sheba project. All rails and haulages on both the Fairview project and Sheba Mine’s respective sections have been rehabilitated and work currently underway includes the establishment of a series of three ore passes between the 23 Level Sheba haulage and the 38 Level Fairview haulage, which is expected to be completed by December 2022.

Macro assumptions

In recognition of the recent falls in the price of gold, we have adjusted our short-term gold price forecasts from US$1,819/oz in H2 CY22 to US$1,724/oz (note this implicitly assumes that the gold price will remain at US$1,763/oz for the remainder of the year). Thereafter, we assume that it will recover to US$1,749/oz in CY23 before declining in real terms to bottom out at US$1,524/oz (real) in CY27 (unchanged).

At the same time, we have adjusted our foreign exchange rates:

From ZAR19.7634/£ to ZAR20.3511/£ (+3.0%)

From ZAR16.4531/US$ to ZAR17.2319/US$ (+4.7%)

From US$1.2014/£ to US$1.1810/£ (-1.7%)

Updated (absolute) valuation

In the light of our refinements (as well as revised external factors such as the gold price and forex rates), our absolute valuation of Pan African (based on its existing four producing assets plus the 25 & 26 Level project and Mogale) is 31.30c (albeit excluding any contribution from Egoli, which we are valuing separately, for the moment, as a standalone project at 13.03c/share), 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 14: Pan African estimated life of operations’ diluted EPS and (maximum potential*) DPS

Source: Pan African Resources, Edison Investment Research. Note: *From FY26. Excludes discretionary exploration investment.

In general, our forecasts for EPS and DPS have reduced relative to our last note to reflect a lower near-term gold price and higher assumed future costs. As a result, our valuation is lower than our valuation of 44.67c in July 2022. However, it is still approximately the same as our valuation of 33.79c in April 2022, with the major factors behind the change provided in the bridge chart below:

Exhibit 15: Bridge chart of Pan African valuation evolution, July 2022 to November 2022 (US cents per share)

Source: Edison Investment Research

Even so, based on our long-term dividend forecasts, we calculate that an investment in Pan African’s shares at a price of 18.94p offers investors an internal rate of return of 18.2% per annum in US dollar terms to at least the end of FY39.

Including its other growth projects and assets, our updated total valuation of Pan African as a whole is as follows:

Exhibit 16: Pan African absolute valuation summary

Project

Current valuation
(USc/share)

Previous valuation
(USc/share)

Existing producing assets (including 24 Level and 25 & 26 Level and Mogale projects)

31.30

44.67

FY22 dividend

1.04

1.20

Fairview Sub-Vertical Shaft project

0.76

0.76

Royal Sheba (resource-based valuation)

0.66

0.79

MC Mining shares

0.10

0.06

Sub-total

33.86

47.48

EGM underground resource

0.22–5.24

0.22–5.24

Sub-total

34.08–39.10

47.70–52.72

Egoli

13.03

12.64

MSC

0.95

-

Total

48.06–53.08

60.34–65.36

Source: Edison Investment Research. Note: Numbers may not add up owing to rounding.

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 17 below depicts Pan African’s average share price in each of its financial years from FY10 to FY22 and compares this with HEPS in the same year. For FY23 and FY24, the current share price (18.94p) is compared with our forecast normalised HEPS for FY23 to FY24. As is apparent from the graph, Pan African’s price to normalised HEPS ratios of 5.9x and 5.5x for FY23 and FY24 respectively (based on our forecasts, see Exhibit 20) are very close to the bottom of the range of recent historical P/E ratios of 4.1–14.8x for the period FY10–22:

Exhibit 17: Pan African historical price to normalised HEPS** ratio, FY10–FY24e

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 Pan African’s average year one price to normalised EPS ratio of 8.6x for the period FY10–22 is applied to our normalised earnings forecasts, it implies a share price for Pan African of c 27.69p in FY23 followed by 29.71p in FY24. Stated alternatively, Pan African’s current share price of 18.94p, at prevailing forex rates, appears to be discounting FY23 and/or FY24 normalised HEPS falling to 2.61c/share (cf 4.44c reported in FY22 and 3.82c forecast in FY23).

Relative peer group valuation

In the meantime, it may be seen that Pan African remains cheaper than its South African- and London-listed gold mining peers on at least 80% of comparable common valuation measures (29 out of 36 individual measures in the table below) regardless of whether Edison or consensus forecasts are used.

Exhibit 18: Comparative valuation of Pan African with South African and London peers

Company

EV/EBITDA (x)

P/E (x)

Yield (%)

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

AngloGold Ashanti

4.9

4.2

13.1

10.6

2.4

1.8

Gold Fields

4.6

4.8

11.2

11.1

3.0

3.0

Sibanye

2.6

2.3

5.3

4.6

6.9

9.8

Harmony

4.0

3.4

9.1

8.0

1.9

2.5

Centamin

3.9

3.3

10.3

12.4

4.8

4.9

Endeavour Mining (consensus)

4.3

4.7

13.6

13.1

3.7

4.0

Average (excluding Pan African)

4.0

3.8

10.4

10.0

3.8

4.3

Pan African (Edison)

3.3

3.5

5.9

5.5

4.7

4.7

Pan African (consensus)

2.8

3.5

4.6

6.1

5.9

5.3

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 14 November 2022.

Alternatively, applying Pan African’s peers’ average year one P/E ratio of 10.4x to our forecast normalised HEPS forecast of 3.82c/share for FY23 implies a share price for the company of 33.7p at prevailing forex rates. Applying its peers’ average year two P/E ratio of 10.0x to our forecast normalised HEPS forecast of 4.10c/share implies a share price of 34.6p.

Share buyback programme

According to our estimates, Pan African will have the 16th highest dividend yield of any precious metals mining company in the world in FY23. To broaden its strategy to return value to shareholders and given the quality and profitability of its existing operations and growth projects, on 1 April 2022, Pan African announced the initiation of phase one of a share buyback programme to purchase up to ZAR50m (then c £2.6m) of ordinary shares of the company over the course of the month, starting on 1 April on the London Stock Exchange (LSE) and the Johannesburg Stock Exchange (JSE) in approximately equal amounts. Subsequently, on 12 May 2022, Pan African announced that it had completed Phase 1 of its share buyback programme, repurchasing a total of 11.8m shares for a total consideration of ZAR50.3m (c £2.55m), of which a total of 7.6m were repurchased on the LSE at a volume weighted average price of 21.67p and a total of 4.3m were repurchased on the JSE at a volume weighted average price of 418.21 South African cents per share. All shares purchased under the programme were subsequently cancelled, such that the company now has 2,222,862,046 ordinary shares in issue, of which 306,358,058 ordinary shares are held in treasury to result in a post-consolidation figure for shares outstanding of 1,916,503,988 shares.

Although small in initial scale (0.5% of shares in issue prior to the announcement), this initiative nevertheless demonstrates the company’s preparedness to consider share buybacks as a means of returning capital to shareholders as and when it is appropriate to do so.

Financials

Pan African reported net debt of only US$12.0m as at end-June 2022, which equated to a gearing ratio (net debt/equity) of just 4.1% and a leverage ratio (net debt/[net debt+equity]) of just 3.9%, after cash flow from operating activities in excess of US$100m in both FY21 and FY22. The company has provided detailed capex guidance of ZAR1.8bn in FY23, in addition to which we predict that it will also invest capital into its recently acquired Mogale asset. At the same time, we forecast that the company will continue to generate cash from operations at or above the US$100m per annum level, such that net debt peaks at end-FY24 at US$120.3m (equating to a gearing ratio of 29.8% and a leverage ratio of 23.0%), before being repaid in FY25 when we assume that capex will reduce once again to merely ‘sustaining’ levels.

Exhibit 19: Pan African current estimated net debt* profile forecast, FY17–FY25e

Source: Edison Investment Research, Pan African Resources. Note: *Excluding ‘other’ (see Exhibit 20).

Pan African reports that it has received a number of financing offers from financial institutions and third-party financiers with respect to the funding of the Mogale project. Following due consideration, it has agreed a credit-approved and underwritten term sheet with RMB for US$80.0m of senior debt, for part funding of the project’s construction. In the meantime, it reports that it is in the process of evaluating a number of further funding options for the balance of its capital requirement, with the intent of having the funding package finalised by March 2023.

Note that, including all other components, total net debt as at end-June 2022 amounted to US$13.0m, as shown below:

Exhibit 20: Pan African components of total net debt (US$m)

Item

FY20

H121

FY21

H122

FY22

Long-term debt to financial institutions

28.0

48.2

Short-term debt to financial institutions

30.7

0.3

Total debt to financial institutions

89.2

87.8

58.7

48.5

26.2

Cash

33.5

28.0

35.1

35.2

27.0

Net debt to financial institutions

55.7

59.8

23.6

13.3

(0.8)

Redink Rentals loan facility

9.9

8.9

8.4

Other

6.6

0.3

0.2

1.7

1.7

Net senior debt

62.3

60.1

33.7

23.9

9.3

Lease liabilities

14.1

5.0

5.3

4.5

4.4

Other

0.0

0.0

0.0

(0.2)

(0.7)

Total net debt

76.4

65.2

39.0

28.2

13.0

Change

N/A

-11.2

-26.2

-10.8

-15.2

Source: Pan African Resources. Note: Totals may not add up owing to rounding.

Readers are reminded that Pan African’s liability to Redink Rentals relates to its funding of the solar photovoltaic renewable energy plant located at Evander Mines and, as such, is included in long-term and short-term borrowings in Exhibit 22, below, as are (now) leases. The US$1.0m difference in total net debt shown in Exhibit 20, above, compared to that shown in Exhibit 22, below, is accounted for by the ‘other’ entries in Exhibit 20, above, which comprise restricted cash, a refinancing modification adjustment, a facility arrangement fee and derivative financial assets.

In the meantime, the group remains very comfortably within its revolving credit facility debt covenants:

Exhibit 21: Pan African group debt covenants

Measurement

Constraint (updated)

FY17
(restated)

H118

FY18*

H119

FY19

H120

FY20

H121

FY21

H122

FY22

Net debt:equity

Must be less than 1:1

0.02

0.19

0.78

0.85

0.71

0.6

0.4

0.3

0.1

0.1

0.04

Net debt:adjusted EBITDA

Must be less than 2.0:1

0.08

2.25

3.73

3.24

2.2

1.6

0.7

0.5

0.3

0.2

0.1

Interest cover ratio

Must be greater than 4x

19.32

4.62

4.61

3.64

4.1

5.8

10.1

17.7

23.0

29.0

34.1

Debt service cover ratio

Must be greater than 1.3x

9.11

1.85

3.84

2.85

1.4

3.0

3.4

3.3

3.0

3.0

7.3

Source: Pan African Resources. Note: *Subsequently restated.

Exhibit 22: Financial summary

US$'000s

2018

2019

2020

2021

2022

2023e

2024e

2025e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

145,829

218,818

274,107

368,915

376,371

352,119

342,037

405,863

Cost of sales

(107,140)

(152,980)

(158,457)

(208,815)

(226,445)

(217,920)

(209,108)

(225,315)

Gross profit

38,689

65,838

115,650

160,100

149,926

134,199

132,929

180,548

EBITDA

 

 

38,131

65,484

115,176

156,646

147,830

132,295

126,891

174,458

Operating profit (before GW and except.)

 

 

31,506

49,256

93,673

124,572

121,402

98,437

103,491

141,267

Exceptionals

(16,521)

10,596

(28,593)

(12,819)

(10,295)

(1,470)

(1,478)

(1,478)

Operating profit

14,985

59,852

65,079

111,753

111,107

96,966

102,013

139,788

Net interest

(2,222)

(12,192)

(12,881)

(6,919)

(4,231)

(1,077)

(6,778)

(10,824)

Profit before tax (norm)

 

 

29,284

37,064

80,791

117,653

117,171

97,360

96,713

130,443

Profit before tax (FRS 3)

 

 

12,763

47,660

52,198

104,834

106,876

95,889

95,234

128,964

Tax

2,826

(8,174)

(7,905)

(30,141)

(31,924)

(24,176)

(18,195)

(20,340)

Profit after tax (norm)

32,110

28,890

72,887

87,511

85,247

73,184

78,518

110,102

Profit after tax (FRS 3)

15,589

39,486

44,293

74,692

74,952

71,713

77,040

108,624

Average number of shares outstanding (m)

1,809.7

1,928.3

1,928.3

1,928.3

1,926.1

1,916.5

1,916.5

1,916.5

EPS - normalised (c)

 

 

1.31

1.64

3.78

4.54

4.44

3.82

4.10

5.74

EPS - FRS 3 (c)

 

 

0.87

2.05

2.30

3.87

3.90

3.74

4.02

5.67

Dividend per share (c)

0.00

0.15

0.84

1.27

1.04

1.04

1.04

0.30

Gross margin (%)

26.5

30.1

42.2

43.4

39.8

38.1

38.9

44.5

EBITDA margin (%)

26.1

29.9

42.0

42.5

39.3

37.6

37.1

43.0

Operating margin (before GW and except.) (%)

21.6

22.5

34.2

33.8

32.3

28.0

30.3

34.8

BALANCE SHEET

Fixed assets

 

 

315,279

361,529

314,968

398,533

401,139

514,357

617,430

598,463

Intangible assets

56,899

49,372

43,466

50,548

44,210

46,250

48,300

50,351

Tangible assets

254,247

305,355

270,286

346,922

355,802

466,981

568,002

546,985

Investments

4,134

6,802

1,216

1,064

1,127

1,127

1,127

1,127

Current assets

 

 

29,009

31,601

53,648

84,558

55,953

38,286

37,237

43,911

Stocks

4,310

6,323

7,626

11,356

9,977

11,747

11,412

13,540

Debtors

22,577

18,048

11,245

37,211

17,546

25,102

24,388

28,934

Cash

922

5,341

33,530

35,133

26,993

0

0

0

Current liabilities

 

 

(44,395)

(63,855)

(78,722)

(105,978)

(58,989)

(102,571)

(145,738)

(28,755)

Creditors

(37,968)

(39,707)

(62,806)

(75,303)

(57,117)

(64,344)

(62,557)

(65,843)

Short-term borrowings

(6,426)

(24,148)

(15,916)

(30,675)

(1,872)

(38,228)

(83,181)

37,088

Long-term liabilities

 

 

(152,906)

(145,693)

(106,276)

(93,482)

(103,494)

(103,769)

(105,605)

(107,460)

Long-term borrowings

(112,827)

(109,618)

(73,333)

(28,011)

(37,088)

(37,088)

(37,088)

(37,088)

Other long-term liabilities

(40,078)

(36,076)

(32,943)

(65,471)

(66,406)

(66,681)

(68,517)

(70,372)

Net assets

 

 

146,988

183,582

183,620

283,632

294,609

346,303

403,324

506,159

CASH FLOW

Operating cash flow

 

 

5,345

59,822

73,399

124,549

142,879

115,456

124,675

169,591

Net Interest

(6,076)

(14,685)

(10,834)

(5,623)

(2,794)

(1,077)

(6,778)

(10,824)

Tax

(1,634)

(4,497)

(5,804)

(18,902)

(8,520)

(7,551)

(16,359)

(18,485)

Capex

(127,279)

(52,261)

(30,849)

(44,151)

(81,951)

(147,077)

(126,472)

(14,224)

Acquisitions/disposals

6,319

466

207

3

563

0

0

0

Financing

11,944

(0)

0

0

(3,222)

(0)

0

(0)

Dividends

(11,030)

(2,933)

(2,933)

(17,782)

(21,559)

(23,100)

(20,019)

(5,789)

Net cash flow

(122,411)

(14,088)

23,186

38,095

25,396

(63,349)

(44,953)

120,269

Opening net debt/(cash)

 

 

3,138

118,332

128,424

55,719

23,553

11,967

75,316

120,269

Exchange rate movements

(619)

537

1,663

7,979

(4,401)

0

0

0

Other

7,836

3,459

47,856

(13,907)

(9,409)

0

0

0

Closing net debt/(cash)

 

 

118,332

128,424

55,719

23,553

11,967

75,316

120,269

0

Source: Company sources, Edison Investment Research.


General disclaimer and copyright

This report has been commissioned by Pan African Resources and prepared and issued by Edison, in consideration of a fee payable by Pan African Resources. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Pan African Resources and prepared and issued by Edison, in consideration of a fee payable by Pan African Resources. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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