Pan African Resources — Taking the rough with the smooth

Metals & Mining

Pan African Resources

Taking the rough with the smooth

Operational update

Metals and mining

30 May 2023

Price	13.50p
Market cap	£259m
ZAR24.3107/£, ZAR19.7255/US$, US$1.2322/£
Net debt (US$m) at end-December 2022		53.7

Shares in issue (effective 1,916.5m postconsolidation, excluding treasury)			2,222.9m
Free float		85%
Code		PAF

Primary exchange	AIM/JSE
Secondary exchanges	Level 1 ADR, OTCQX Best Market and A2X

Share price performance

%	1m	3m	12m
Abs	(23.7)	(0.4)	(30.8)
Rel (local)	(22.7)	3.8	(32.3)

52-week high/low

21.2p

12.8p

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 30koz, rising to >100koz).

Next events

FY23 results	13 September 2023
AGM	November 2023
Ex-dividend date	November 2023
FY23 dividend payment	December 2023

Analyst

Lord Ashbourne

+44 (0)20 3077 5700

mining@edisongroup.com

Edison profile page

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

In its operational update, released last week, Pan African Resources (PAF) reduced its production guidance for FY23 by c 12.5% from 195–205koz to 175koz. The reduction was due to instability and disruptions in the electricity supply to PAF’s operations (c 10koz), a slower ramp up to continuous operations at Barberton and faulting at the Kimberley reef at Evander, coupled with a delay in transitioning to full production at 24 Level. In addition, we anticipate that PAF will record a small loss of US$5.3m on account of the synthetic forward sale of ounces announced in February regarding its Mintails financing. However, these effects have also been mitigated by a weak rand and a strong gold price such that, while we have reduced our FY23 normalised EPS forecast by 8.4% (from 4.17c/share to 3.82c/share) our core valuation of PAF has risen by 4.8% (see below).

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	3.7	7.6
06/22	376.4	117.2	4.44	1.04	3.7	6.3
06/23e	314.9	97.4	3.82	0.91	4.4	5.5
06/24e	325.0	105.0	4.71	0.91	3.5	5.5

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

Lower production guidance but net debt reduction

Net senior debt is anticipated by PAF to decrease to US$25–35m in FY23 (cf US$49.9m in H123), which we interpret to reflect tight control of capital and operating expenditure in H223. As per its announcement of 15 May 2023, PAF is aggressively rolling out its renewable energy plans in order to mitigate the impact of an inconsistent electricity supply on output. In deference to the current situation, it has reduced its production guidance for FY24 by 10.2%, from 205koz to 178–190koz, which has caused us to reduce our forecast from 199.6koz to 189.7koz. With Mintails still targeting commissioning in H125, however, we are still anticipating a material increase in group production in FY25 towards 250koz.

Valuation: Still closer to 30p than 20p

Notwithstanding our earnings forecast reduction, PAF remains cheap relative to both its historical trading record and its peers. Our core (absolute) valuation of the company has risen by 4.8% to 34.17c (cf 32.59c previously), based on projects either sanctioned or already in production, with all of the increase effectively attributable to the recent decline in the value of the rand against the US dollar. Moreover, this valuation rises by a further 17.06–22.08c (16.09–21.11c preciously) once other assets (eg Egoli) are also taken into account. Alternatively, if PAF’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 26.56p in FY23 (cf 29.53p previously), followed by one of 32.74p in FY24. As such, PAF’s current share price of 13.50p could be interpreted as discounting normalised HEPS falling to 1.94c per share in FY23. 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, which collectively imply a share price of 35.06p in FY23 and one of 35.09p in FY24. Finally, we estimate that PAF still has the 13th highest dividend yield of any precious metals mining company, globally.

HY23 and FY23 operational results

In the light of PAF’s announcement, a summary of our updated half year production expectations for the period to end-June relative to our prior expectations is provided in the exhibit below:

Exhibit 1: Pan African production, H220–H223e (oz)

Operation	H220	H121	H221	H122	H222	H123	H223e (prior)	H223e	FY23e	FY23e (prior)	Change (%)	Change (oz)
Barberton UG	31,392	42,350	42,476	39,991	35,747	32,022	41,500	31,978	64,000	73,522	-13.0	-9,522
BTRP	9,516	10,004	8,235	9,126	10,434	10,012	11,000	8,988	19,000	21,012	-9.6	-2,012
Barberton	40,908	52,354	50,711	49,117	46,181	42,034	52,500	40,966	83,000	94,534	-12.2	-11,534
Evander UG	9,117	12,607	23,409	27,312	21,538	19,173	21,950	11,701	30.874	41,123	-24.9	-10,249
Evander surface	6,176	6,560	4,677	5,756	3,564	5,270	5,856	5,856	11,126	11,126	0.0	0
Evander	15,293	19,169	28,086	33,068	25,102	24,443	27,806	17,557	42,000	52,249	-19.6	-10,249
Elikhulu	30,315	26,863	24,596	25,900	26,320	25,830	28,000	24,170	50,000	53,830	-7.1	-3,830
Total	86,516	98,386	103,391	108,085	97,603	92,307	108,306	82,693	175,000	200,613	-12.8	-25,613

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

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$1,835/oz previously (see our note, Forecast upgrade, published on 16 February 2023) to US$1,940/oz (ie that prevailing at the time of writing).

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

■

From ZAR21.7126/£ to ZAR24.3107/£ (+12.0%)

■

From ZAR17.9554/US$ to ZAR19.7255/US$ (+9.9%)

■

From US$1.2096/£ to US$1.2322/£ (+1.9%)

Updated FY23 financial forecasts

In the light of these changes, our revised forecasts for the group for H223 and FY23 are as follows:

Exhibit 2: Pan African P&L statement by half year (H220–H223e)

US$000s*	H220	H121	H221	H122	H222	H123	H223e (prior)	H223e	FY23e	FY23e (prior)
Revenue	141,258	183,751	185,164	193,574	182,797	156,489	198,497	158,439	314,928	354,986
Cost of production	(71,956)	(98,245)	(110,570)	(108,368)	(118,077)	(99,282)	(103,185)	(80,355)	(179,637)	(202,467)
Depreciation	(10,977)	(12,741)	(19,333)	(13,268)	(13,160)	(11,122)	(18,336)	(15,705)	(26,827)	(29,458)
Mining profit	58,325	72,766	55,260	71,938	51,560	46,085	76,976	62,379	108,464	123,061
Other income/(expenses)	(27,720)	(6,704)	(6,115)	(7,711)	(2,117)	(3,610)	(3,610)	(5,330)	(8,940)	(7,220)
Loss in associate etc	0	0	0	0	0	0	0	0	0	0
Loss on disposals	0	0	0	0	0	0	0	0	0	0
Impairments	(20)	0	0	0	(467)	0	0	0	0	0
Royalty costs	(266)	(2,404)	(1,050)	(1,316)	(780)	(468)	(7,530)	(4,580)	(5,048)	(7,998)
Net income before finance	30,319	63,657	48,096	62,910	48,197	42,007	65,836	52,469	94,476	107,843
Finance income	258	300	456	661	434	456
Finance costs	(5,587)	(3,946)	(3,729)	(1,945)	(3,381)	(3,464)
Net finance income	(5,329)	(3,646)	(3,273)	(1,285)	(2,946)	(3,008)	(3,007)	(3,007)	(6,015)	(6,015)
Profit before taxation	24,990	60,011	44,823	61,626	45,250	38,999	62,829	49,462	88,461	101,828
Taxation	(2,602)	(19,239)	(10,903)	(15,573)	(16,351)	(10,063)	(19,187)	(14,248)	(24,311)	(29,250)
Effective tax rate (%)	10.4	32.1	24.3	25.3	36.1	25.8	30.5	28.8	27.5	28.7
PAT (continuing ops)	22,388	40,773	33,920	46,053	28,899	28,936	43,642	35,213	64,150	72,578
Minority interest					(185)	(136)	0	0	(136)	(136)
Ditto (%)					(0.6)	(0.5)	0.0	0.0	(0.2)	(0.2)
Attributable profit					29,084	29,072	43,642	35,213	64,286	72,714

Headline earnings	22,416	40,772	33,919	46,053	29,551	29,072	43,642	35,214	64,286	72,714
Est. normalised headline earnings	50,136	47,476	40,034	53,764.1	31,668	32,682	47,252	40,544	73,226	79,934

EPS (c)	1.16	2.11	1.76	2.39	1.51	1.52	2.28	1.84	3.35	3.79
HEPS** (c)	1.16	2.11	1.76	2.39	1.54	1.52	2.28	1.84	3.35	3.79
Normalised HEPS (c)	2.60	2.46	2.08	2.79	1.65	1.71	2.47	2.12	3.82	4.17

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

Once again, we expect deferred taxes to account for the majority (81%) of the total tax charge for the year, with cash taxes paid amounting to less than half the total tax charge.

Growth projects

Following completion of its transaction to buy Mintails’ assets last October, PAF has at least two immediate organic growth projects in prospect (namely the Mintails’ Soweto Cluster and Royal Sheba) 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.

Mintails

The group has been informed by the South African Department of Mineral Resources and Energy that the issuing of the Mintails project’s integrated environmental authorisation is imminent. The start of plant construction is therefore expected in the next month and ground clearing activities have commenced to this end, with steady state production expected by December 2024.

Royal Sheba

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 the life of the project, with the orebody still open at depth. 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 Barberton Tailings Retreatment Project (BTRP). The processing plant’s feasibility study and the project’s financial model is 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 twelve 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 to be completed once production rates reach 45,000t per month. The internal feasibility study for the project is expected to be completed later in CY23.

Blyvoor

The due diligence and fulfilment of other conditions precedent for the acquisition of the Blyvoor Gold Operations Proprietary Limited historical tailings storage facilities was not completed within the required timeframe, and this transaction has therefore lapsed. Although PAF is currently focused on the construction of the Mintails Project, it continues to engage with the current owners of Blyvoor Gold Operations to evaluate options to further develop this project.

Group

In the light of these developments, we continue to forecast that group production at PAF will reach c 250koz pa in 2026 and push normalised HEPS to around 6.00c per share.

Exhibit 3: Estimated Pan African group gold production profile, FY18–FY29e

Source: Edison Investment Research, Pan African Resources

Updated (absolute) valuation

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) is 34.17c (cf 32.59c previously), 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).

Exhibit 4: Pan African estimated life of operations’ diluted EPS and (maximum potential*) DPS

Source: Pan African Resources, Edison Investment Research. Note: *From FY25. Excludes discretionary exploration investment.

Stated alternatively, based on our long-term dividend forecasts, we calculate that an investment in PAF’s shares at a price of 13.50p offers investors an internal rate of return of 22.5% per annum in US dollar terms to at least the end of FY39.

A summary of the changes to both Edison’s valuation and our FY23 earnings forecasts according to each factor considered in our analysis is as follows:

Exhibit 5: PAF valuation and EPS change summary

Factor	Valuation (US$/share)	FY23e earnings forecast (US$/share)
Initial	32.59	4.17
Forex	+2.30	+0.09
FY23e gold price	+0.30	+0.28
FY23e production	-1.14	-0.97
FY24 production	-0.22	-
Other	+0.34	+0.25
Final	34.17	3.82

Source: Edison Investment Research

Note that Edison’s normalised EPS forecast for FY24 has increased by 9.5%, from 4.31c per share to 4.71c per share as a result of the changes considered, with the 9.9% decline in the value of the rand against the US dollar since our last note for the whole of FY24 more than offsetting the 5.0% decline in forecast production.

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

Exhibit 6: 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)	34.17	32.59
FY22 dividend	N/A	N/A
Fairview Sub-Vertical Shaft project	0.75	0.76
Royal Sheba (resource-based valuation)	0.53	0.58
MC Mining shares	0.07	0.12
Sub-total	35.53	34.05
EGM underground resource	0.22–5.24	0.22–5.24
Sub-total	35.75–40.77	34.27–39.29
Egoli	14.07	13.36
MSC	1.30	1.05
Total	51.12–56.14	48.68–53.70

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

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 7 below depicts PAF’s average share price in each of its financial years from FY10 to FY22 and compares this with HEPS in the same year. For FY23e and FY24e, the current share price (13.50p) is compared with our forecast normalised HEPS for those years. As is apparent from the graph, PAF’s price to normalised HEPS ratios of 4.4x and 3.5x for FY23 and FY24 respectively (based on our forecasts, see Exhibits 2 and 9) remains at or below the bottom of the range of recent historical P/E ratios of 4.1–14.8x for the period FY10–22:

Exhibit 7: 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.

If PAF’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 PAF of 26.56p in FY23 (cf 29.53p previously) followed by one of 32.74p in FY24. Stated alternatively, PAF’s current share price of 13.50p, at prevailing forex rates, appears to be discounting FY23 and/or FY24 normalised HEPS falling to 1.94c per share (cf 4.44c reported in FY22 and 3.82c and 4.71c forecast in FY23 and FY24, respectively).

Relative peer group valuation

In the meantime, it may be seen that PAF remains cheaper than its London- and South Africanlisted gold mining peers on at least 88% of comparable common valuation measures (32 out of 36 individual measures in the table below) if Edison forecasts are used or 83% if consensus forecasts are used (30 out of 36 individual measures).

Exhibit 8: Comparative valuation of Pan African with South African and London peers

Company	EV/EBITDA (x)		P/E (x)		Yield (%)
Company	Year 1	Year 2	Year 1	Year 2	Year 1	Year 2
AngloGold Ashanti	5.9	5.0	12.1	9.8	1.3	1.9
Gold Fields	6.6	5.0	15.4	10.1	2.5	3.3
Sibanye Stillwater	1.9	2.0	4.4	3.9	8.1	9.6
Harmony	5.4	3.7	10.6	5.6	0.5	1.8
Centamin	3.5	3.5	10.4	11.4	3.5	4.3
Endeavour Mining (consensus)	4.8	4.7	14.9	14.3	3.8	3.8
Average (excluding PAF)	4.7	4.0	11.3	9.2	3.3	4.1
PAF (Edison)	2.9	2.9	4.4	3.5	5.5	5.5
PAF (consensus)	3.3	2.9	5.5	4.6	5.0	4.4

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 26 May 2023.

Alternatively, applying PAF’s peers’ average year one P/E ratio of 11.3x to our forecast normalised HEPS forecast of 3.82c per share for FY23 implies a share price for the company of 35.06p at prevailing forex rates. Applying its peers’ average year two P/E ratio of 9.2x to our forecast normalised HEPS forecast of 4.71c per share implies a share price of 35.09p.

Exhibit 9: 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	314,928	325,008	405,847
Cost of sales		(107,140)	(152,980)	(158,457)	(208,815)	(226,445)	(179,637)	(190,716)	(211,111)
Gross profit		38,689	65,838	115,650	160,100	149,926	135,291	134,291	194,736
EBITDA		38,131	65,484	115,176	156,646	147,830	130,243	130,682	188,919
Operating profit (before GW and except.)		31,506	49,256	93,673	124,572	121,402	103,416	108,345	158,218
Intangible amortisation		0	0	0	0	0	0	0	0
Exceptionals		(16,521)	10,596	(28,593)	(12,819)	(10,295)	(8,940)	456	1,720
Other		0	0	0	0	0	0	0	0
Operating profit		14,985	59,852	65,079	111,753	111,107	94,476	108,801	159,938
Net interest		(2,222)	(12,192)	(12,881)	(6,919)	(4,231)	(6,015)	(3,347)	(9,988)
Profit before tax (norm)		29,284	37,064	80,791	117,653	117,171	97,401	104,998	148,230
Profit before tax (FRS 3)		12,763	47,660	52,198	104,834	106,876	88,461	105,454	149,950
Tax		2,826	(8,174)	(7,905)	(30,141)	(31,924)	(24,311)	(14,718)	(19,259)
Profit after tax (norm)		32,110	28,890	72,887	87,511	85,247	73,090	90,280	128,971
Profit after tax (FRS 3)		15,589	39,486	44,293	74,692	74,952	64,150	90,736	130,691

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	4.71	6.73
EPS - FRS 3 (c)		0.87	2.05	2.30	3.87	3.90	3.35	4.73	6.82
Dividend per share (c)		0.00	0.15	0.84	1.27	1.04	0.91	0.91	1.83

Gross margin (%)		26.5	30.1	42.2	43.4	39.8	43.0	41.3	48.0
EBITDA margin (%)		26.1	29.9	42.0	42.5	39.3	41.4	40.2	46.5
Operating margin (before GW and except.) (%)		21.6	22.5	34.2	33.8	32.3	32.8	33.3	39.0

BALANCE SHEET
Fixed assets		315,279	361,529	314,968	398,533	401,139	468,002	617,295	599,367
Intangible assets		56,899	49,372	43,466	50,548	44,210	46,243	48,382	50,522
Tangible assets		254,247	305,355	270,286	346,922	355,802	420,632	567,786	547,719
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	58,190	35,448	103,333
Stocks		4,310	6,323	7,626	11,356	9,977	10,546	10,842	13,539
Debtors		22,577	18,048	11,245	37,211	17,546	22,537	23,169	28,932
Cash		922	5,341	33,530	35,133	26,993	23,670	0	59,425
Current liabilities		(44,395)	(63,855)	(78,722)	(105,978)	(58,989)	(59,295)	(111,658)	(64,244)
Creditors		(37,968)	(39,707)	(62,806)	(75,303)	(57,117)	(57,423)	(59,670)	(63,804)
Short-term borrowings		(6,426)	(24,148)	(15,916)	(30,675)	(1,872)	(1,872)	(51,989)	(440)
Long-term liabilities		(152,906)	(145,693)	(106,276)	(93,482)	(103,494)	(125,626)	(126,567)	(128,241)
Long-term borrowings		(112,827)	(109,618)	(73,333)	(28,011)	(37,088)	(58,985)	(58,985)	(58,985)
Other long-term liabilities		(40,078)	(36,076)	(32,943)	(65,471)	(66,406)	(66,641)	(67,582)	(69,256)
Net assets		146,988	183,582	183,620	283,632	294,609	341,270	414,518	510,215

CASH FLOW
Operating cash flow		5,345	59,822	73,399	124,549	142,879	101,939	132,456	186,314
Net Interest		(6,076)	(14,685)	(10,834)	(5,623)	(2,794)	(6,015)	(3,347)	(9,988)
Tax		(1,634)	(4,497)	(5,804)	(18,902)	(8,520)	(4,354)	(13,777)	(17,585)
Capex		(127,279)	(52,261)	(30,849)	(44,151)	(81,951)	(93,690)	(171,630)	(12,774)
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)	(17,489)	(34,994)
Net cash flow		(122,411)	(14,088)	23,186	38,095	25,396	(25,220)	(73,787)	110,974
Opening net debt/(cash)		3,138	118,332	128,424	55,719	23,553	11,967	37,187	110,974
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	37,187	110,974	0

Source: Company sources, Edison Investment Research. Note: *2,222.9m shares in issue, of which 306.4m held in treasury after share buyback programme, such that a net 1,916.5m are in issue post-consolidation.

General disclaimer and copyright

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General disclaimer and copyright

Australia

New Zealand

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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

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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