Pan African Resources — Upgraded FY24 production guidance

On 9 May, Pan African announced that it was narrowing its production guidance for the year ending 30 June to 186–190koz (cf 180–190koz), notwithstanding the end of processing marginal surface sources at Evander during H224. Nonetheless, group all-in sustaining cost (AISC) guidance was maintained at US$1,325–1,350/oz (at an assumed exchange rate of ZAR18.50/US$). Production guidance was also provided for FY25 of 215–225koz, which compares with Edison’s unchanged (and, in the event, relatively conservative) forecast of 216.6koz.

In the light of PAF’s announcement, we have updated our half year and full year production expectations for FY24 to those shown below:

In addition to changes to our immediate output assumptions, we have increased our estimate of the gold price for the remainder of the financial year to June from US$2,017/oz previously (see our note A happy valentine, published on 20 February 2024) to US$2,347/oz (ie that prevailing at the time of writing).

At the same time, we have adjusted our foreign exchange rates to reflect the recent relative strength of the rand against both the US dollar and sterling:

Relative to our prior forecast for H224e – and all other things being equal – we expect these changes to result in a positive variance to revenue of US$20.6m, partially offset by an additional US$6.6m in ‘other’ expenses (in this case, a contract liability for the ZAR400m upfront payment that PAF received in March 2023 for its Mintails funding at rand gold prices in excess of ZAR1,025,000/kg – see our note Innovative funding avoids dilution, published on 17 March 2023) and a US$5.5m negative variance in tax to result in a positive variance of US$11.2m, or 44.4%, at the post-tax level:

Once again, we expect deferred taxes to account for the majority of the total tax charge for the year, with cash taxes paid amounting to less than half the total tax charge.

PAF has two organic growth projects currently underway (namely the MTR project within the Mintails Soweto Cluster and the Evander 24 to 26 Level expansion project) and one more immediately in prospect (the Sheba Fault project). Beyond these, it has the Egoli and Fairview sub-vertical shaft projects at feasibility study stage followed by Rolspruit, Poplar and Evander South also available for development.

On 1 August 2023, PAF announced that all conditions precedent for its ZAR1.3bn senior debt facility, designated for funding the group’s MTR project, had been fulfilled, thereby completing the full upfront funding package of ZAR2.5bn. Since then, PAF reports that construction is progressing on time and within budget, with commissioning and steady state production on track for December 2024.

In addition, PAF reported that it had updated its financial model (relative to the initial definitive feasibility study model) to reflect the latest operating cost updates, as well as a ZAR19.00/US$ forex rate and a US$2,200/oz gold price. Given these changes, the pertinent results of the updated financial model were:

In addition to its update on the MTR, PAF announced the results of an internal pre-feasibility study (PFS) for the Soweto cluster that was completed in March 2024, based on drill results from the 2L16 and 2L24 tailings storage facilities. The PFS considered a number of options, of which the most feasible was considered to be the processing of the Soweto cluster material at the MTR plant. In this case, the MTR plant’s capacity could be expanded to process 1Mtpm of feed material (cf the current design capacity of 800ktpm) to result in a mine life of 21 years for the combined Mogale and Soweto cluster resources (NB this scenario was already broadly assumed in our prior valuation of the project). The resultant tailings could then be deposited into the expanded Mogale tailings storage facility (TSF) at the West Wits pit and 1L23-25 footprint.

Other specific results of the PFS were as follows:

We have now updated our financial model for the disclosures noted above – and, in particular, the timing of capex – and incorporated this into our valuation of the project. In the meantime, Pan African is proceeding with the necessary permitting and servitudes required for the re-mining and processing of the Soweto cluster, with a final investment decision anticipated ‘in due course.’

Progress at Evander’s 24 to 26 Level underground expansion project remains on track, with the following notable achievements during H124:

At the same time, the Egoli project’s 7 Shaft number 3 Decline has been dewatered to below 20 Level, where permanent pumping infrastructure will be installed together with a drilling platform for long, inclined borehole drilling into the resource block to improve reserve delineation and further define the ore pay-shoot and its grade variability.

The remaining life of mine from the BTRP’s current tailings sources is estimated at two years and will then be supplemented with the Sheba Fault project, first from Royal Sheba and then Western Cross, where the extraction and processing of a 10,000t bulk sample was recently successfully completed.

In the wake of the company’s production update, our longer-term forecasts remain, to all intents and purposes, unchanged. As such, we are continuing to forecast that group production at PAF will reach c 250koz per year in 2026 and drive normalised HEPS beyond 6.00c per share and potentially as high as 9.00c per share (see Exhibit 4).

In the light of PAF’s updated guidance (as well as revised external factors such as the gold price and forex rates, above), our absolute valuation of PAF (based on its existing four producing assets plus the 25 and 26 Level project and Mogale) has increased from 41.15c (discounted to 1 July 2023) previously to 48.08c (discounted to 1 July 2024) currently, which is based on the present value of the estimated maximum potential stream of dividends payable to shareholders over the life of its mining operations (applying a 10% discount rate).

A summary of the changes to both our valuation and our FY24 earnings forecasts according to each factor considered in our analysis is as follows:

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

Exhibit 7 below depicts PAF’s average share price in each of its financial years from FY10 to FY23 and compares this with HEPS in the same year. For FY24e and FY25e, the current share price (26.70p) is compared with our forecast normalised HEPS for those years. As is apparent from the graph, PAF’s price to normalised HEPS ratios of 5.8x and 5.3x for FY24 and FY25 respectively (based on our forecasts, see Exhibits 2 and 9) remain firmly towards the bottom of the range of recent historical P/E ratios of 4.1x (in FY20) to 14.8x (in FY15) for the period FY10–23:

If PAF’s average year one price to normalised EPS ratio of 8.4x for the period FY10–23 is applied to our normalised earnings forecasts, it implies a share price for PAF of 38.30p in FY24 (cf 32.02p previously) followed by one of 41.94p in FY25 (cf 38.72p previously). Stated alternatively, PAF’s current share price of 26.70p, at prevailing forex rates, appears to be discounting FY24 and/or FY25 normalised HEPS of 4.00c per share (cf 3.54c reported in FY23 and 5.73c and 6.28c forecast in FY24 and FY25, respectively).

In the meantime, it may be seen that PAF remains cheaper than its London- and South Africanlisted gold mining peers on at least 66% of comparable common valuation measures (16 out of 24 individual measures in the table below) regardless of whether Edison or consensus forecasts are used:

Stated alternatively, applying PAF’s peers’ average year one P/E ratio of 13.8x to our forecast normalised HEPS forecast of 5.73c per share for FY24 implies a share price for the company of 63.21p at prevailing forex rates. Applying its peers’ average year two P/E ratio of 9.6x to our forecast normalised HEPS forecast of 6.28c per share implies a share price of 48.06p.