Pan African Resources — Valuation up 22.2% with new gold price forecasts

On 22 November, Pan African provided the market with an interim production update, the highlights of which are as follows:

As a consequence of this H124 performance, PAF has increased its FY24 production guidance to 180,000–190,000oz (cf 178,000–190,000oz previously). In the light of PAF’s announcement, a summary of our updated half year production expectations for both H124 and H224 relative to our prior expectations is as follows:

As such, we have increased our production forecast for FY24 by 1.9% to close to the top of PAF’s guidance range. Within that, our forecasts for the BTRP and Elikhulu appear conservative to the tune of c 2,000oz and 5,000oz respectively (on a pro rata basis). However, this is approximately balanced by the assumption of a 6,725oz pick up in production from Evander underground in H224 as a result of first output from the 25 and 26 Level project. However, readers should note that in FY24, we forecast production from the 25 and 26 Level project to be relatively low margin, while production from the BTRP and Elikhulu is forecast to be relatively high margin. To the extent that production at the 25 and 26 Level project is delayed into FY25 and pro rata production comes through from the BTRP and Elikhulu, our financial forecasts below, for FY24, may be considered conservative.

In the light of PAF’s updated group production guidance (and our associated assumptions), our financial forecasts for Pan African for both H124 and H224 have been modified as follows:

As in previous periods, we expect the majority of taxation to be in the form of deferred taxes, with cash taxes paid amounting to less than half the total tax charge in both H124 and FY24.

PAF has at least two organic growth projects in prospect (namely the Mintails Soweto Cluster and Royal Sheba) for development in the immediate future. Beyond these, it also has at least the Fairview sub-vertical shaft, Rolspruit, Poplar and Evander South assets available for development.

On 1 August, PAF announced that all conditions precedent for its ZAR1.3bn senior debt facility, designated for funding the group’s Mintails project, had been fulfilled, thereby completing the full upfront funding package of ZAR2.5bn. Since then, PAF reports that significant progress has been made with the MTR plant at Mogale, with commissioning still on track for the latter half of CY24. Within that:

Mine layout optimisation and scheduling has now been finalised at Royal Sheba and requests for quotations issued for initial development and production activities. Preliminary optimisation work for life-of-mine planning has been completed at a cut-off grade of 1.7g/t, which implies an average mining grade of approximately 3.0g/t and c 235,000oz gold recovered over an eight-year life, with the orebody still open at depth and the potential for further extensions. In the meantime, DRA Global has finalised the feasibility study for placing a crushing and milling circuit at the Royal Sheba Mine site, together with the design to enable slurry pumping from the milling plant at Royal Sheba to the BTRP. The processing plant’s feasibility study and the project’s financial model are being updated and reviewed. A phased approach to capital spending, based on the availability of material to feed the BTRP plant, is also being considered, which will entail the phased development of the decline and production levels as well as the ventilation infrastructure required for initial stoping operations. First stoped ore is planned in 2025 at 5,000t per month, ramping up to 10,000t, 30,000t and 45,000t per month, every 12 months thereafter in line with a set lateral and vertical development schedule. A trucking cost trade-off analysis indicates that the onsite crushing and milling circuit and pipeline will only be required once production rates reach 45,000t per month. In the meantime, the internal feasibility study on the project is expected to be completed later in CY23.

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. In conjunction with higher assumed long-term gold price forecasts. However, we are now forecasting that this could push normalised HEPS beyond 6.00c per share and potentially as high as 9.00c per share (see Exhibit 5, below).

In deriving our updated forecasts and valuation for PAF, over the life of its operations, we have made a number of changes to our assumptions:

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 and Mogale) has risen by 22.2% to 42.27c (cf 34.59c previously), which is based on the present value of the estimated maximum potential dividend stream payable to shareholders over the life of its mining operations (applying a 10% discount rate to US dollar dividends). In this case, ostensibly 100% of the increase in our valuation may be attributed to the increase in our assumed long-term gold prices (above).

Stated alternatively, based on our long-term dividend forecasts, we calculate that an investment in PAF’s shares at a price of 17.32p today offers investors a (real) internal rate of return of 24.4% per year in US dollar terms to at least the end of FY39.

Including its other growth projects and assets, our updated total valuation of PAF as a whole is provided in Exhibit 6, below.

Exhibit 7 below depicts PAF’s average share price in each of the financial years from FY10 to FY23 and compares this with HEPS in the same year. For FY24 and FY25, the current share price (17.32p) is compared with our forecast normalised HEPS for those years. As is apparent from the chart, PAF’s price to normalised HEPS ratios of 4.1x and 3.6x for FY24 and FY25, respectively, are at and below the bottom of the range of recent historical P/E ratios of 4.1–14.8x 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 35.29p in FY24 followed by one of 39.82p in FY25. Stated alternatively, PAF’s current share price of 17.32p, at prevailing foreign exchange rates, appears to be discounting FY24 and/or FY25 normalised HEPS falling to 2.61c per share (cf 5.31c and 6.00c forecast, respectively).

PAF remains cheaper than its London- and South Africanlisted gold mining peers on at least 97% of comparable common valuation measures (35 out of 36 individual measures in the table below) if Edison forecasts are used or 86% if consensus forecasts are used (31 out of 36 individual measures).

Alternatively, applying PAF’s peer average year one P/E ratio of 13.3x to our normalised HEPS forecast of 5.31c per share for FY24 implies a share price for the company of 37.16p at prevailing foreign exchange rates. Applying its peer average year two P/E ratio of 10.3x to our normalised HEPS forecast of 6.00c per share implies a share price of 43.50p. Among other things, readers should note the significant expansion of these multiples since our last note (see Advancing to 250koz in annual output in FY26), published on 18 September 2023.

Readers’ attention is also drawn to the decline evident in the market’s year one yield estimate for PAF, which appears to suggest that it believes the company will cut its dividend in FY24 (or that the rand will fall very sharply versus the US dollar, but that this will not be reflected in the company’s results), which we regard as highly unlikely, except in extenuating circumstances.