Pan African Resources — Tennant Creek acquisition

Pan African Resources (AIM: PAF)

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Research: Metals & Mining

Pan African Resources — Tennant Creek acquisition

On 5 November, Pan African Resources (PAF) announced that it is to acquire privately owned Tennant Consolidated Mining Group (TCMG) in Australia’s Northern Territory for a total consideration of US$54.2m in an all-share deal that involves it issuing an additional 125.4m shares (or 6.5% of its existing share capital). The acquisition price equates to an undemanding US$42.15 per resource ounce of gold or US$139.21 per reserve ounce. While we expect the acquisition to have little effect on PAF’s earnings in FY25 (apart from the increase in share capital), we estimate that it will increase FY26 earnings by US$24.6m (or 19.1%) and FY27 earnings by US$42.6m (or 29.6%) and, on this basis, will undoubtedly be accretive.

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

Metals & Mining

Pan African Resources

Tennant Creek acquisition

TCMG transaction analysis

Metals and mining

14 November 2024

Price

31.95p

Market cap

£712m

ZAR23.1595/£, ZAR18.2858/US$, US$1.2669/£, A$1.5463/US$

Net debt (US$m) at end-June 2024

104.4

Shares in issue
(effective estimated 2,041.9m postacquisition, excluding treasury)

2,222.9m

Free float

85%

Code

PAF

Primary exchanges

AIM, JSE

Secondary exchanges

Level 1 ADR, OTCQX Best Market and A2X

Share price performance

%

1m

3m

12m

Abs

(7.1)

10.0

109.4

Rel (local)

(4.6)

12.7

92.1

52-week high/low

37.80p

15.16p

Business description

Pan African has four major gold producing assets in South Africa: Barberton (target output 80koz pa), the Barberton Tailings Retreatment Project, or BTRP, (20koz), Elikhulu (55koz) and Evander, incorporating Egoli (currently 30koz, rising to >100koz). One more asset (MTR) is scheduled to enter production imminently at 50koz pa.

Next events

AGM

21 November 2024

Ex-div (LSE)

27 November 2024

FY24 dividend payment

10 December 2024

H125 results

February 2025

Analyst

Lord Ashbourne

+44 (0)20 3077 5700

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

On 5 November, Pan African Resources (PAF) announced that it is to acquire privately owned Tennant Consolidated Mining Group (TCMG) in Australia’s Northern Territory for a total consideration of US$54.2m in an all-share deal that involves it issuing an additional 125.4m shares (or 6.5% of its existing share capital). The acquisition price equates to an undemanding US$42.15 per resource ounce of gold or US$139.21 per reserve ounce. While we expect the acquisition to have little effect on PAF’s earnings in FY25 (apart from the increase in share capital), we estimate that it will increase FY26 earnings by US$24.6m (or 19.1%) and FY27 earnings by US$42.6m (or 29.6%) and, on this basis, will undoubtedly be accretive.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

06/23**

321.6

92.9

3.54

0.95

11.3

2.3

06/24**

373.8

119.8

4.68

1.20

8.6

3.0

06/25e

459.3

190.5

7.09

1.42

5.7

3.5

06/26e

597.7

207.1

7.51

5.81

5.4

14.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. **FY23 and FY24 ‘as reported’ and not restated or adjusted.

Unique Tennant characteristics in a Tier 1 jurisdiction

Pan African’s purchase consideration of TCMG of US$54.2m compares with its principal project’s (Noble’s) NPV15 of US$79.3m (4.1c or 3.3p/share pre-dilution) at its feasibility study gold price of US$2,214/oz. At present, it has a relatively short formal life of five years. However, it will add an average of 56,967oz (21.4%) to PAF’s production profile in its first three years of operation and 108,600oz (38.9%) in its final two. Nevertheless, we estimate that it offers an IRR of at least 41.5% under even the most conservative gold price assumptions and could have commanded a valuation as high as US$85.7m based on its Tier 1 jurisdiction alone.

Valuation: Steady but inclined upwards

Our overall valuation of Pan African has risen by 3.1% in the aftermath of the TCMG acquisition, to 42.21c per share (33.32p), albeit this reflects the recent ‘above trend’ strength of the rand against both the US dollar and sterling, as much as anything else. However, this valuation rises by a further 22.42–27.44c (17.70–21.66p) if other assets, such as Egoli and the Soweto cluster, are taken into account. It also reflects Edison’s relatively conservative gold price assumptions (US$2,124/oz nominal on average for the period CY25–30). At the current gold price, all other things being equal, our valuation almost doubles to 83.52c (65.92p). Alternatively, if PAF’s historical average price to normalised HEPS ratio of 8.2x for the period FY10–24 is applied to our FY25 and FY26 forecasts, it implies a value of 45.71p in FY25, followed by 48.44p in FY26. As such, PAF’s current share price of 31.95p could be interpreted as discounting normalised HEPS rising to only 4.95c per share in FY25 and/or FY26 (cf 5.27c ‘adjusted’ in FY24 and our forecasts of 7.09c and 7.51c in FY25 and FY26, respectively). In the meantime, PAF remains cheaper than its principal London- and South African-listed gold mining peers on at least 83% of commonly used valuation measures if Edison forecasts are used or 91% if consensus forecasts are used. Finally, performing a relative valuation analysis, its peers imply a comparable valuation for PAF of 58.47p based on our year one EPS estimate and 49.52p based on our year two EPS estimate.

Tennant Creek acquisition

On 5 November, Pan African announced that it is to acquire privately owned TCMG for a total consideration of US$54.2m in an all-share deal that involves it issuing an additional US$50.8m in shares for the 92% of TCMG that it does not already own. At Pan African’s current price, we calculate that, all other things being equal, this will involve the issue of 125.4m new shares – or 6.5% of the current effective total – to take PAF’s outstanding share capital to 2,041.9m shares (excluding 306.4m shares in treasury).

Tennant Creek is a town located roughly in the geographical centre of the Northern Territory of Australia, approximately 1,000km south of Darwin and c 500km north of Alice Springs.

The Tennant Creek goldfield was discovered in the early 1930s and was mined until the early 2000s when the gold price fell to a monthly low of US$276.80/oz in January 2002, resulting in the termination of large swathes of mines in this region. Prior to that, however, the Tennant Creek goldfield was known as one of the highest-grade goldfields in Australia, with production over the c 70 years of its life yielding 5.5Moz Au, 348kt Cu, 1.9Moz Ag and 21,600t bismuth.

After 30 years of mining at the Nobles underground mine, the crown pillar collapsed in 1967 owing to erosional degradation of the iron oxide lithologies. The broken material was excavated from the failure zone and stockpiled on what is now known as the Crown Pillar Stockpile (CPS), with some of this material being treated while a new plant was being constructed during 1967–68. Thereafter, Nobles was mined as an open pit mine (Australia’s largest until 1985), albeit the balance of the CPS remained untreated.

As a result of past activity, the mineral deposits in the Tennant Creek goldfield are well understood and form part of the hematite and magnetite end members of an iron oxide copper gold (IOCG) style of mineralisation and express themselves as cone-like or blanket-like breccia sheets within granitic margins, or as long ribbon-like breccia or massive iron oxide deposits within faults or shear zones. Continuity of these deposits is proven with strike lengths of more than 50m, widths of 2–24m or more and down-dip extents of hundreds of meters. Typically, these deposits are enriched in copper, gold, cobalt, silver, uranium and bismuth. In addition to brownfields exploration, the goldfield is also very prospective for greenfield discoveries such as the Mauretania and Marathon deposits on the Emmerson Resources exploration joint venture (a JV agreement between TCMG and Emmerson Resources) and the Bluebird deposit. In 2022, realising the consolidation opportunity present in the area, TCMG acquired 100% of the tenements around the historical highest-grade and largest producers of the region, namely, Nobles, Warrego and Juno, with the intent to expedite exploration and increase the conversion of mineral resources into mineral reserves.

Nobles project

The Nobles project currently comprises reserves of 0.4Moz gold contained within a resource of 1.3Moz Au (Exhibit 1). At Pan African’s full consideration price of US$54.2m for TCMG, this equates to a purchase price of US$42.15 per resource ounce of gold or US$139.21 per reserve ounce.

Exhibit 1: Nobles resources and reserves

Resources

Reserves

Conversion

Category

Tonnage

(Mt)

Grade

(g/t)

Contained gold (koz)

Category

Tonnage

(Mt)

Grade

(g/t)

Contained gold (koz)

Tonnage

(%)

Grade

(%)

Contained gold (%)

Measured

0

0

0

Proven

0

0

0

N/A

N/A

N/A

Indicated

10.6

3.06

1,043

Probable

3.9

3.1

389

36.8

101.3

37.3

Inferred

3.5

2.14

241

Possible

0

0

0

0.0

0.0

0.0

Total

14.1

2.83

1,284

Total

3.9

3.10

389

27.7

109.5

30.3

Source: Pan African Resources, Edison Investment Research. Note: In accordance with the guidelines of The Australasian Code for the Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC Code, 2012).

The execution of the Nobles project is based on a feasibility study positing the processing of material through a carbon-in-leach (CIL) gold plant which was purchased from the Great Australian Mine in Cloncurry in Queensland. The plant has been dismantled and is in the process of being reconstructed at Nobles over a 13-month period ending in H1 CY25, with commissioning and first gold anticipated in June 2025. The processing of surface material in the form of the CPS, the Nobles North tailings and Nobles North Waste Rock Dump will form the initial base ore feed of the plant, followed by the Nobles complex pits, Eldorado (pit and underground), Juno, Chariot and Golden Forty underground mines over a period of five years. The processing plant is rated for a throughput of 840ktpa and a gold recovery of 94% and will be the only functioning gold processing plant in the region at present and the largest ever operated in the Tennant Creek goldfield. An additional three years of production is then being targeted by management in the form of near-term, walk-up targets including Mauretania and White Devil. The initial capital cost for commissioning is estimated at US$35.7m and is fully funded via two debt facilities, consisting of US$6.7m from the Northern Territory of Australia and US$31.5m from Keyview Investment Management.

Reported highlights of TCMG’s feasibility study are:

Expected payback in less than three years (at a gold price of US$2,600/oz).

Forecast production of c 50koz pa over the initial three years of the life of the operation derived from low-risk surface stockpiles and tailings storage facilities (TSFs).

Initial all-in sustaining cost (AISC) of US$1,300/oz in the first three years of operation.

Life of mine free cash flow of US$420m at US$2,600/oz Au.

Project NPV15 US$129.7m (6.8 US cents, or 5.3p per undiluted Pan African share) and real, ungeared internal rate of return (IRR) of 144%, based on the exploitation of current mineral reserves only and a US$2,600/oz gold price.

The project is reported to be close to existing road and rail infrastructure and in an area that is not considered environmentally sensitive.

Edison does not have access to the proprietary details of TCMG’s feasibility study. However, on the basis of the information made available to the public to date, we have constructed the following financial model of the Nobles project (Exhibit 2). Readers should note that we have necessarily used Edison’s (real) gold price assumptions in this model, as set out in our report, Gold – Shades of the 1970s, published in September 2023. These average US$1,849/oz (June–June) in real terms over the initial five year life of the Nobles mine and are therefore at a material (27.6%) discount to the current spot price of gold of US$2,554/t and also at a material (16.5%) discount to the US$2,214/oz price at which the TCMG feasibility study was conducted. This necessarily depresses Edison’s calculated NPV15 relative to that calculated in the feasibility study. However, readers will readily appreciate that, should the gold price fall to Edison’s level and Edison’s lower NPV thus become more relevant, Pan African’s all scrip consideration will also similarly decline.

Exhibit 2: Nobles feasibility study results

2025

2026

2027

2028

2029

2030

Totals/averages

Tonnes milled (t)

840,000

840,000

840,000

840,000

840,000

4,200,000

Head grade (g/t)

2.45

2.66

1.62

4.41

4.14

3.06

Contained gold (oz)

66,170

71,915

43,723

119,149

111,915

412,872

Recovery (%)

94.0

94.0

94.0

94.0

94.0

94.0

Gold produced (oz)

62,200

67,600

41,100

112,000

105,200

388,100

Gold price (US$/oz)

1,935

1,966

1,890

1,726

1,727

1,819

Revenue (US$000's)

120,365

132,933

77,666

193,267

181,703

705,934

Working cost (US$/oz)

1,312

901

1,697

1,249

857

*1,203

Working cost (US$000's)

81,606

60,908

69,747

139,888

90,156

442,305

Working cost (US$/t)

97.15

72.51

83.03

166.53

107.33

105.31

AISC (US$/oz)

1,312

901

1,697

1,249

857

1,140

AISC (US$000's)

81,606

60,908

69,747

139,888

90,156

442,305

Gross profit (US$000's)

38,759

72,026

7,920

53,379

91,546

263,629

Depreciation (US$000's)

-11,300

-23,700

-36,200

-50,600

-50,600

-172,400

Pre-tax profit (US$000's)

27,459

48,326

-28,280

2,779

40,946

91,229

Tax (US$000's)

8,238

14,498

0

834

12,284

35,853

Effective tax rate (%)

30

30

30

30

30

39.3

Profit after tax (US$000's)

19,221

33,828

-28,280

1,945

28,662

55,376

Free cash-flow excluding capital cost (US$000's)

30,521

57,528

7,920

52,545

79,262

227,776

Sustaining capex (US000's)

0

0

0

0

0

0

0

Capex (US$000's)

-35,700

-20,800

-49,600

-37,500

-28,800

0

-172,400

Pre-tax free cash flow (US$000's)

-35,700

17,959

22,426

-29,580

24,579

91,546

126,929

Post-tax free cash flow (US$000's)

-35,700

9,721

7,928

-29,580

23,745

79,262

91,076

Pre-tax NPV15 (US$000's)

32,166

Post-tax NPV15 (US$000's)

10,680

Pre-tax IRR (%)

41.5%

Post-tax IRR (%)

23.1%

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

Aside from the gold price, key assumptions in Edison’s financial model are a 30% mining tax rate, that sustaining capex is minimal and that development capex is incurred for each new, sequential area of production (Eldorado, Juno, Chariot and Golden Forty) in the year before the operation is first mined. At this stage, the effect of working capital during the life of the project is also ignored, except for initial working capital that is included in the initial capex requirement of US$35.7m.

A comparison between the outputs of Edison’s financial model (shown in Exhibit 2) and those published by Pan African in its acquisition announcement are shown in Exhibit 3, below:

Exhibit 3: Nobles feasibility study results

Project

Tennant Creek

Edison at Tennant Creek assumptions

Variance

(%)

Tennant Creek at US$2,600/oz Au

Edison at US$2,600/oz Au

Variance

(%)

Edison at Edison assumptions

Life of mine (years)

5.5

5.0

-9.1

**5.5

5.0

-9.1

5.0

Tonnes processed (Mt)

4.4

4.2

-4.5

**4.4

4.2

-4.5

4.2

Gold produced (koz)

390.4

388.1

-0.6

**390.4

388.1

-0.6

388.1

Gold price (US$/oz)

2,214

2,214

0.0

2,600

2,600

0.0

1,819

Working cost (US$/oz)

1,191

*1,203

1.0

**1,191

*1,203

1.0

*1,203

Capital cost (US$m)

171.2

172.4

0.7

**171.2

172.4

0.6

172.4

Free cash flow (excl. capital cost, US$m)

329

331

0.6

420

448

+6.7

228

Pre-tax NPV15 (US$m)

113.2

N/A

196.7

N/A

32.2

Post-tax NPV15 (US$m)

79.3

69.7

-12.1

129.7

130.7

0.8

10.7

Pre-tax IRR (%)

108.2

97.7

-10.5pp

144

164.3

+30.3pp

41.5

Post-tax IRR (%)

63.2

N/A

108.6

23.1

Source: Pan African Resources, Edison Investment Research. Note: *Simple average. **Edison presumption.

In general, it may be observed that there is a close reconciliation between Edison’s financial model and the outputs of TCMG’s feasibility study where the same inputs are used – albeit Edison’s NPV and IRR appear slightly conservative at a gold price of US$2,214/oz and slightly optimistic at a price of US$2,600/oz. Even at Edison’s lower gold prices, however, it is worth noting that both Nobles pre-tax IRR and its post-tax IRR exceed Pan African’s minimum 20% per annum hurdle rate.

A note on discount rates

In its financial assessment of the Nobles project, Pan African/TCMG applied a 15% discount rate to cash flows. This is conservative within the context of the fact that approximately half of all studies on mining projects use a discount rate of 8% (see our sector report, Gold stars and black holes, published in January 2019) and about a quarter of all studies are conducted at a discount rate of 5%. It is also conservative within the context of the fact that Pan African has applied a rate of 12.5% for some of its South African assets in the past and the fact that Nobles is located in Australia’s Northern Territory, which is, according to Canada’s Fraser Institute, one of the 10 most attractive jurisdictions for mining investment in the world and notably more attractive than South Africa:

Exhibit 4: Fraser Institute index of mining investment attractiveness 2023 (Northern Territory and South Africa highlighted)

Source: Fraser Institute

In part, the 15% discount rate reflects the stage of development of the project – being in construction, rather than production.

Nobles valuation considerations

Un-risked project valuation

TCMG’s feasibility study calculated a pre-tax IRR on the Nobles project of 108.2% and a post-tax NPV15% of US$79.3m. With an effective 1,915.6m Pan African shares in issue pre-transaction, this post-tax NPV15 equates to 4.1 US cents per share, or 3.3p/share.

Project valuation risked for two factors

Risk associated with the Nobles project may be assumed to comprise sovereign risk, execution risk, geological risk, metallurgical risk, engineering risk, management risk and an overall risk of ‘commerciality’. Three of these risks – sovereign risk, execution risk (in the form of ‘stage of development’ risk) and overall ‘commerciality risk’ – may immediately be adjusted for.

Sovereign risk

In our report Gold stars and black holes, we calculated that companies with completed bankable feasibility studies commanded valuations between -10.1% and 133.5% of attributable project NPV, with an average of 30.9% (see Exhibit 166 on page 82 of the report).

The mean Fraser Institute investment attractiveness score for all jurisdictions is 56.56, which is between the scores for Serbia and California in Exhibit 4. If this is deemed to attract an average valuation of 30.9% of attributable NPV, and the top and bottom halves of the sample are presumed to attract valuations with respect to the average and pro rata to their scores, then a company with an average project in the Northern Territory may be expected to attract a valuation of 108.1% of attributable project NPV. For Nobles, this would imply a valuation/consideration of US$85.7m, or 4.5 US cents (3.5p) per share. In paying an aggregate US$54.2m for the company in shares therefore, Pan African may be regarded as having paid a 36.9% discount to ‘fair value’ (all other things being equal). In addition to being in a Tier 1 mining jurisdiction, however, the risk associated with Pan African’s acquisition of TCMG may also be considered to be mitigated by:

The fact that development capital is fully funded.

The processing facility is more than 55% complete. As of September 2024, the plant in Cloncurry has been fully dismantled and all equipment transported to the Nobles plant site, with both commissioning and first gold anticipated within the next 12 months.

Pre-production capex is relatively modest, equating to just US$460 per average annual ounce of production over the five-year life of the operation, or US$42.50 per annual tonne of throughput capacity, or US$86.47 per reserve ounce.

Production in the first three years of operation will be derived from already mined stockpiles and tailings storage facilities at an AISC of US$1,300/oz.

Even on Edison’s noticeably more conservative gold price assumptions, the IRR of the project exceeds Pan African’s hurdle rate of 20% (see Exhibits 2 and 3).

Project valuation risked for overall commerciality

In addition, in Gold stars and black holes, we calculated a statistically significant relationship between the valuation of a company and its IRR, which is demonstrated in the graph below.

Exhibit 5: Company enterprise value as percent of attributable project NPV (%) versus project IRR (%)

Source: Edison Investment Research

On the basis of the project’s scoping study pre-tax IRR of 108.2%, therefore, the Nobles project could be expected to command a valuation equivalent to 64.7% of its NPV, or US$51.3m (ie almost exactly what Pan African paid for it).

Alternatively, if a multiple regression analysis between IRR and Fraser Institute investment attractiveness scores and a company’s enterprise value/NPV ratio is performed and the resulting equation applied to Nobles, a 70.7% enterprise value/NPV ratio is predicted, which implies a valuation of US$56.1m.

Group production

In the light of these developments, we are now forecasting that group production will easily exceed 250koz per year in FY26 and approach 400koz pa in FY29, when all of PAF’s mines are operating at close to capacity, pushing normalised headline EPS (HEPS) as high as 9c per share (see Exhibit 7).

Exhibit 6: Estimated Pan African group gold production profile, FY18–30e

Source: Edison Investment Research, Pan African Resources

Blue sky

The fact that its plant will be the largest ever to operate in the region will generate economies of scale for the project. It may also hold out the opportunity for alternative business strategies, such as toll treating third-party ore. Alternative opportunities to expand and extend production exist in an additional three years beyond FY30 of production potential that is still in the permitting process. Otherwise, blue sky exploration potential is provided by:

Access to an attractive asset portfolio in one of Australia’s highest-grade mineral fields.

A known geological endowment through historic gold production and current mineral resources of 8Moz Au and c 1.2Mt Cu

Walk-up brownfields and development drill targets at TCMG’s 100%-owned Warrego, Nobles and Juno assets.

A region under-explored, with less than 8% of holes drilled below a depth of 150m.

A significant land position, as TCMG controls 1,700km2 through 100%-owned assets as well as through the Emmerson Resources Limited Joint Venture (ERM-JV), utilising a hub and spoke growth strategy to process multiple deposits

Potential to significantly expand the mineral resource and mineral reserve base as well as the project life of mine beyond 15 years via a two-staged gold and copper strategy, underpinned by an exploration target with up to an additional 800koz of gold alone.

In the meantime, a prefeasibility study (PFS) on the Warrego copper and gold deposit is scheduled to be completed during Q225, the results of which will dictate the project’s path to development and a possible execution strategy.

Updated (absolute) valuation

Accounting considerations

The value of the net assets of TCMG as at 30 June 2023 were reported to be A$44.8m, equating to US$29.9m at the then prevailing forex rate and to US$27.5m for the 92% of TCMG for which PAF is paying US$50.8m. As such, we have assumed US$23.3m in goodwill associated with the acquisition and we have consolidated this into Pan African’s balance sheet alongside TCMG’s net assets (assuming negligible cash) as at 30 June 2024, which we have therefore made the effective date of the acquisition. Simultaneously, we have reallocated PAF’s original 8% investment in TCMG, valued at US$3.4m, into both assets and goodwill pro-rata. Hence the balance sheet shown in Exhibit 14 is effectively a pro forma balance sheet, including the enlarged share capital of the company, although the cash flow and income statements remain unchanged. Thereafter, we have fully consolidated TCMG’s income, cost, depreciation, tax and capex contributions into the group accounts.

However, we have not yet included any additional hedging into our forecasts. Pan African has stated that it has approved lines in place to hedge approximately 75% of the TCMG production for the first two years of operation in order to secure the return on its initial investment. Indicative pricing at a spot gold price of A$3,947/oz (US$2,644/oz at US$0.67/A$) for a zero-cost collar structure is a floor price of A$3,600/oz (US$2,412/oz) and a cap price of A$4,800/oz (US$3,216/oz). However, we will only model these into PAF’s accounts once the contracts are actually in place.

Valuation

Otherwise, in addition to including Pan African’s acquisition of TCMG in our future forecasts and estimates, we have also adjusted our long-term foreign exchange rates (in real terms), to reflect the continued recent ‘above trend’ strength of the rand even against a rampant US dollar in the wake of Donald Trump’s victory in the US presidential election and the concomitant relative weakness of sterling.

In the aftermath of these changes, our absolute valuation of PAF (based on its existing four producing assets plus the 25 and 26 Level project, Mogale and now Nobles) has risen by 1.28c to 42.21c (cf 40.93c previously), which is based on the present value of the estimated potential dividend stream payable to shareholders over the life of its mining operations (applying a 10% discount rate to US dollar dividends).

Exhibit 7: PAF estimated life of operations diluted EPS and (maximum potential*) DPS

Source: Pan African Resources, Edison Investment Research. Note: *From FY29. Excludes discretionary exploration investment.

However, readers should note that this valuation is conducted at Edison’s relatively conservative gold price assumptions of US$2,124/oz (nominal) average for the period CY25–30. At the current gold price, all other things being equal, our valuation almost doubles to 83.52c (65.92p).

Even so, including its other growth projects and assets, our updated total valuation of PAF as a whole rises to 64.63–69.65c (51.01–54.98p).

Exhibit 8: PAF group absolute valuation summary

Project

Current valuation
(USc/share)

Existing producing assets*

41.01

Cum-FY24 dividend

1.20

Royal Sheba**

1.26

Other**

2.04

Sub-total

45.50

EGM underground resource

0.22–5.24

Sub-total

45.72–50.74

Egoli

16.92

Soweto cluster

1.99

Total

64.63–69.65

Project

Existing producing assets*

Cum-FY24 dividend

Royal Sheba**

Other**

Sub-total

EGM underground resource

Sub-total

Egoli

Soweto cluster

Total

Current valuation
(USc/share)

41.01

1.20

1.26

2.04

45.50

0.22–5.24

45.72–50.74

16.92

1.99

64.63–69.65

Source: Edison Investment Research. Note: *Including 24 Level and 25 & 26 Level, Mogale and Nobles projects. **Resource based valuations. Numbers may not add up owing to rounding.

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 9 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 current share price (31.95p) is compared with our forecast normalised HEPS for those years. As is apparent from the chart, PAF’s price to normalised HEPS ratios of 5.7x and 5.4x for FY25 and FY26, respectively, remain close to the bottom of its recent historical range of 4.1–14.8x for the period FY10–24 and consistent with its range of 4.1–7.0x for the period FY19–24:

Exhibit 9: PAF historical price to normalised HEPS** ratio, FY10–26e

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.

If PAF’s average year one price to normalised EPS ratio of 8.2x for the period FY10–24 is applied to our normalised earnings forecasts, it implies a share price for PAF of 45.71p in FY25 followed by one of 48.44p in FY26. Stated alternatively, PAF’s current share price of 31.95p, at prevailing foreign exchange rates, appears to be discounting FY25 and/or FY26 normalised HEPS of 4.95c per share (cf our forecasts of 7.09c and 7.51c, respectively).

Relative peer group valuation

In the meantime, it may be seen that PAF remains cheap relative to its London- and South African-listed gold mining peers on 83% of comparable common valuation measures (29 out of 36 individual measures in the table below) if Edison forecasts are used or 91% of valuation measures (32 out of 36 individual measures) if consensus forecasts are used.

Exhibit 10: Comparative valuation of PAF 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

4.4

3.8

10.4

8.8

2.1

1.9

Gold Fields

5.0

3.5

10.4

6.3

3.6

5.5

Sibanye Stillwater

4.5

3.1

66.5

5.8

3.3

5.5

Harmony

3.9

3.8

6.9

7.2

2.2

2.7

Centamin

3.2

2.5

8.0

7.1

2.6

4.5

Endeavour Mining (consensus)

8.3

7.9

16.6

15.0

4.6

5.0

Average (excluding PAF)

4.9

4.1

19.8

8.4

3.1

4.2

PAF (Edison)

4.0

3.4

5.7

5.4

3.5

14.3

PAF (consensus)

3.6

2.9

5.4

3.8

4.5

8.1

Source: Edison Investment Research, LSEG Data & Analytics. Note: Consensus and peers priced at 14 November 2024.

Alternatively, applying PAF’s peer average year one P/E ratio of 19.8x to our normalised HEPS forecast of 7.09c per share for FY25 implies a share price for the company of 110.70p at prevailing foreign exchange rates – albeit this calculates to 58.47p if Sibanye is excluded from the peer group. Applying its peer average year two P/E ratio of 8.4x to our normalised HEPS forecast of 7.51c per share for FY26 implies a share price of 49.52p.

Financials

Pan African reported net debt of US$104.4m on its balance sheet as at end-June 2024 (cf US$61.7m as at end-December 2023 and US$22.1m as at end-June 2023), which equated to a gearing ratio (net debt/equity) of 28.6% (cf 18.8% at end-December 2023 and 7.5% at end-June 2023) and a leverage ratio (net debt/[net debt+equity]) of just 22.2% (cf 15.8% at end-December 2023 and 7.0% at end-June 2023), after cash flow from operating activities of US$109.1m before dividends (cf US$45.5m in H124, US$88.5m in H223 and US$31.6m in H123). Capex guidance for FY25 is ZAR2.27bn (c US$124.1m at prevailing foreign exchange rates). Beyond that, we forecast that PAF will continue to generate cash from operations comfortably above the US$100m pa level (and potentially around the US$200m pa level) into the foreseeable future, albeit we calculate that net debt will now peak in FY25 after the TCMG acquisition (cf H125 previously), before being eliminated late in FY26, by which time we assume that capex will once again have returned to near-sustaining levels.

Exhibit 12: Pan African previous estimated net debt* profile forecast, FY17–26e (annually)

Exhibit 13: Pan African current estimated net debt* profile forecast, FY17–26e (annually)

Source: Edison Investment Research, Pan African Resources

Source: Edison Investment Research, Pan African Resources

Exhibit 12: Pan African previous estimated net debt* profile forecast, FY17–26e (annually)

Source: Edison Investment Research, Pan African Resources

Exhibit 13: Pan African current estimated net debt* profile forecast, FY17–26e (annually)

Source: Edison Investment Research, Pan African Resources

Even so, we calculate that Pan African’s maximum net debt requirement in FY25 of US$125.8m will equate to no more than 24.4% gearing (defined as net debt/equity) or 19.6% leverage (defined as net debt/[net debt+equity]). Owing to the passage of time and the building up of equity in the form of retained income, however, this is a much lower debt burden on the company than the equivalent time when net debt was similarly high in FY19, at US$128.4m, when gearing amounted to 70.0% and leverage amounted to 41.2%.

Exhibit 14: Financial summary

US$'000s

2022

2023

2024

2025e

2026e

Year end 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

376,371

321,606

373,796

459,333

597,749

Cost of sales

(226,445)

(198,790)

(221,183)

(216,483)

(316,974)

Gross profit

149,926

122,816

152,613

242,850

280,775

EBITDA

 

 

147,830

121,853

150,926

237,959

276,763

Operating profit (before amort. and excepts.)

 

 

121,402

101,454

129,682

199,902

218,415

Intangible amortisation

0

0

0

0

0

Exceptionals

(10,295)

(7,347)

(10,375)

(16,257)

(1,586)

Other

0

0

0

0

0

Operating profit

111,107

94,107

119,307

183,645

216,829

Net interest

(4,231)

(8,553)

(9,900)

(9,396)

(11,319)

Profit Before Tax (norm)

 

 

117,171

92,901

119,782

190,506

207,096

Profit before tax (FRS 3)

 

 

106,876

85,554

109,407

174,248

205,510

Tax

(31,924)

(24,817)

(30,581)

(45,769)

(53,706)

Profit after tax (norm)

85,247

68,084

89,201

144,736

153,390

Profit after tax (FRS 3)

74,952

60,737

78,826

128,479

151,804

Average Number of Shares Outstanding (m)

1,926.1

1,916.5

1,916.5

2,041.9

2,041.9

EPS - normalised (c)

 

 

4.44

3.54

4.68

7.09

7.51

EPS - FRS 3 (c)

 

 

3.90

3.19

4.14

6.29

7.43

Dividend per share (c)

1.04

0.95

1.20

1.42

5.81

Gross margin (%)

39.8

38.2

40.8

52.9

47.0

EBITDA margin (%)

39.3

37.9

40.4

51.8

46.3

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

32.3

31.5

34.7

43.5

36.5

BALANCE SHEET

Fixed assets

 

 

401,139

439,676

676,478

796,756

782,351

Intangible assets

44,210

44,429

43,994

46,215

48,415

Tangible assets

355,802

395,247

632,484

750,541

733,936

Investments

1,127

0

0

0

0

Current assets

 

 

55,953

61,263

57,938

48,066

76,532

Stocks

9,977

9,567

16,431

15,322

19,935

Debtors

17,546

15,182

15,175

32,743

42,601

Cash

26,993

34,771

26,332

0

13,995

Current liabilities

 

 

(58,989)

(77,386)

(84,864)

(126,549)

(229,549)

Creditors

(57,117)

(65,884)

(79,344)

(94,050)

(224,029)

Short-term borrowings

(1,872)

(11,502)

(5,520)

(32,498)

(5,520)

Long-term liabilities

 

 

(103,494)

(128,957)

(237,104)

(206,380)

(84,187)

Long-term borrowings

(37,088)

(45,334)

(125,214)

(93,271)

29,881

Other long-term liabilities

(66,406)

(83,623)

(111,890)

(113,108)

(114,069)

Net assets

 

 

294,609

294,596

412,448

511,893

545,146

CASH FLOW

Operating Cash Flow

 

 

142,879

132,941

134,310

174,875

281,080

Net Interest

(2,794)

(5,121)

(9,731)

(9,396)

(11,319)

Tax

(8,520)

(7,722)

(15,476)

(18,078)

(32,658)

Capex

(81,951)

(109,952)

(169,521)

(158,336)

(43,943)

Acquisitions/disposals

563

(2,779)

141

0

0

Financing

(3,222)

0

0

0

0

Dividends

(21,559)

(19,975)

(18,302)

(18,302)

(29,034)

Net cash flow

25,396

(12,608)

(78,579)

(29,237)

164,126

Opening net debt/(cash)

 

 

23,553

11,967

22,065

104,402

125,770

Exchange rate movements

(4,401)

(4,481)

1,160

0

0

Other

(9,409)

6,991

(4,918)

7,870

0

Closing net debt/(cash)

 

 

11,967

22,065

104,402

125,770

(38,357)

Source: Company sources, Edison Investment Research. Note: FY24 balance sheet ‘pro forma’ and income statement and cash flow statement ‘as reported’. FY23 ‘as reported’ and not restated as per FY24 results (NB restatement deemed immaterial by Edison).

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 2024 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

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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

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London │ New York │ Frankfurt

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London, WC1R 4PS

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London │ New York │ Frankfurt

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London, WC1R 4PS

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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 2024 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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