Pan African storms back but investors sit on sidelines

Cobus Loots, CEO, Pan African Resources PAN African Resources CEO…

Cobus Loots Arms Crossed e1706003782404
Cobus Loots, CEO, Pan African Resources

PAN African Resources CEO Cobus Loots rowed back on comments the company could produce more gold than forecast saying on Wednesday current guidance of 180,000 ounces for the 12 months ended June would represent “an excellent performance”.

Gold production for the six months was 6.7% higher year-on-year at some 98,458 oz, higher than a 94,000 to 98,000 oz estimate the firm made in November. While it has kept full year guidance to between 180,000 and 190,000 oz, it said in January that “revised guidance may be considered in due course”.

Nearly all of Pan African’s assets, all in Mpumalanga province except its Mintails project, performed in the six months following some poor performances in the 2023 financial year ended June 30. Only Consort, a section of Barberton Mines, remained under significiant pressure. (Loots said he would persevere with Consort as it had contributed in the past).

Higher output year-on-year contributed towards an improvement in all-in sustaining costs for the period which actually fell 0.3% to $1,287/oz.

These strong production metrics were met with equally robust market conditions. The rand weakened while the dollar gold price gained 13.7%.

The outcome was the reassertion of good old fashioned rand gold leverage – the rand gold price was 22% to average R1.18m per kilogram – and is the reason the global gold market flocks to South African gold mines at such times.

Ebitda was $75.2m for the six months, an increase of 41% year-on-year. Earnings consequently came in 41.6% higher at $2.22 per share. During the period under review, the company said a $22m dividend in respect of the 2023 financial year.

Loots said the commissioning of Mintails, situated near Krugersdorp, west of Johannesburg, at the end of the year would take annualised production in the second half of the 2025 financial year to 250,000 oz – a development he described as “spectacular”.

Yet for all these positive markers, Pan African’s share price has remained stubbornly unresponsive. The stock actually fell today marginally and is up only 2.5% this year. On a 12 month basis the stock is 25% higher but pales against Harmony Gold’s 73% improvement. Loots voiced a note of frustration.

“We were the ninth best performing share on the JSE over a five year period in 2022 and then had a bad year in 2023 so it comes and goes,” he said of the share price. “Analysts are saying the price should be between 20% to 50% higher than it is now but it’s not my business to manage the share price,” he said.

One analyst in favour of the share’s prospects is Arnold van Graan of Nedbank Securities. “Pan African’s operational trajectory has been on the up over the past couple of quarters and these results build on that positive momentum, in our view,” he said in a note to clients. “This supports our ‘overweight’ recommendation.”

Large projects can wreck the fortunes of small to mid-cap mining projects when they go wrong, but Loots said 80% of Mintail’s R2.5bn capital bill was locked into fixed contracts. “You also need to look at our track record since 2013,” he said. Since that time, Pan African has developed three projects totalling R2.8bn in spend each with payback periods of between two and three years, he said.

There may be concerns about Pan African’s balance sheet. Mintails will take debt to over R3.45bn while gearing will be between 50% to 55% which is high against industry averages. But Loots said the company estimates debt will be reduced to about R2bn, down 43%, after one year of production from Mintails in 2025.

Another possible drag on Pan African is that it hedged 3,617 kg (128,000 oz) of production for two years – equal to 30% of output over the time – at about R1.14m/kg. That means there is an opportunity cost against spot which is R1.22m/kg.

Loots said this was the price of not putting equity into the project. In any event, Mintails would return “enormous value” when it started production partly financed by the R400m it raised in the hedging structure.

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