Pan African Resources Share Discussion Threads

[stonedyou] 31/8/2022 09:45

Valuation: Up c 22% to (potentially) 65.36c/share

Pan African is cheap relative to both its historical trading record and its peers.

Our core valuation of the company is 44.67c/share (37.18p/share), based on projects

either sanctioned or already in production, including Mogale. However, this rises by

a further 15.67–20.69c (13.04–17.22p) once other assets (eg Egoli) are also taken

into account. Alternatively, if Pan African’s historical average price to normalised

EPS ratio of 8.9x in the period FY10–21 is applied to our FY22 and FY23 forecasts,

it implies a share price of 37.83p in FY22, followed by 40.78p in FY23. In the

meantime, it remains cheaper than its principal London- and JSE-listed peers on at

least 69% of commonly used valuation measures.

[lovewinshatelosses] 30/8/2022 18:18

Stone: You are preaching to the choir! My current holdings include FRES, Barrick, Newmont and POLY. I have been here previously and no doubt will return soon. Also got my eye on GDX, but waiting to see if we get a proper capitulation point before I buy that one. Long term I am very bullish PM's. Short term I am actually quite bearish. Not trading on margin, so not concerned about that really - but obviously want to try and pay as little as possible for quality stocks sometimes!

[stonedyou] 30/8/2022 18:10

Love - :-)


Notable Quotable

Posted on August 30, 2022 by Notable Quotable
–––;––̵1;––R11;––211;–––––––––––;––̵1;––R11;––211;–––––––––––;––̵1;––R11;––211;–––––––––––;––̵1;––R11;––211;–––––––

“Why own gold? Because it makes sense, within a properly diversified portfolio, to have portfolio insurance. If you own a home, it makes sense to have fire insurance. Your investments are no different. And gold is now back, more relevant than ever. Since the start of the millennium gold, as expressed across a wide variety of currencies, has generated average annualised returns of over 9%.”

Tim Price

Master Investor

[lovewinshatelosses] 30/8/2022 15:51

Slow down on the Red Bull, stonedyou :)

[stonedyou] 30/8/2022 15:41

CASH FLOW

Operating cash flow





5,345

59,822

73,399

124,549

156,341

178,858

Net Interest

(6,076)

(14,685)

(10,834)

(5,623)

(2,344)

(298)

Tax

(1,634)

(4,497)

(5,804)

(18,902)

(13,588)

(13,510)

Capex

(127,279)

(52,261)

(30,849)

(44,151)

(88,474)

(80,488)

Acquisitions/disposals

6,319

466

207

3

0

0

Financing

11,944

(0)

0

0

(3,393)

0

Dividends

(11,030)

(2,933)

(2,933)

(17,782)

(28,300)

(22,688)

Net cash flow

(122,411)

(14,088)

23,186

38,095

20,242

61,874

[stonedyou] 30/8/2022 15:38

PROFIT & LOSS

Revenue





145,829

218,818

274,107

368,915

371,949

365,271

Cost of sales

(107,140)

(152,980)

(158,457)

(208,815)

(198,078)

(169,586)

Gross profit

38,689

65,838

115,650

160,100

173,871

195,685

EBITDA





38,131

65,484

115,176

156,646

167,603

191,000

Operating profit (before GW and except.)





31,506

49,256

93,673

124,572

136,701

158,206

[stonedyou] 30/8/2022 15:34

Financials

Pan African reported cash flow from operating activities in excess of US$100m in both

FY20 and FY21 and we forecast that it will continue generating cash at or above these

levels into the foreseeable future. At the same time, it reported net debt to

financial institutions of only US$13.3m at end-December 2021, which equated to a

gearing ratio (net debt/equity) of only 4.9% and a leverage ratio (net debt/[net

debt+equity]) of just 4.6%. Notwithstanding its capex (now including Mogale), share

buyback and dividend commitments over the course of the next two years, we are

continuing to forecast that the company will be, to all intents and purposes, free

of net debt to financial institutions by the end of FY22 and will remain so by the

end of FY24, when capex relating to Mogale is scheduled to decline sharply:

[stonedyou] 30/8/2022 15:31

Share buyback programme

According to our estimates, Pan African will have the 16th highest dividend yield of any precious metals mining company in the world in FY22, rising to 12th highest in FY23. To broaden its strategy to return value to shareholders and given the quality and profitability of its existing operations and growth projects, on 1 April, Pan African announced the initiation of phase one of a share buyback programme to purchase up to ZAR50m (then c £2.6m) of ordinary shares of the company over the course of the month, starting on 1 April 2022. The shares were to be repurchased at a price (excluding expenses) that did not exceed the last independent trade or the highest current independent bid on the relevant trading platform and were to be cancelled as soon as practicable thereafter. It was the company’s intention that the repurchases would occur on the London Stock Exchange (LSE) and the Johannesburg Stock Exchange (JSE) in approximately equal aggregate amounts.

Subsequently, on 12 May, the company announced that it had completed Phase 1 of its share buyback programme, repurchasing a total of 11.8m shares for a total consideration of ZAR50.3m (c £2.55m). A total of 7.6m of these were bought back on the LSE at a volume weighted average price of 21.67p per share, while a total of 4.3m were bought back on the JSE at a volume weighted average price of 418.21 South African cents per share. All shares purchased under the programme were subsequently cancelled, such that the company now has 2,222,862,046 ordinary shares in issue, of which 306,358,058 ordinary shares are held in treasury to result in a post-consolidation figure for shares outstanding of 1,916,503,988 shares.

Although small in initial scale (0.5% of shares in issue prior to the announcement), this initiative nevertheless signalled the company’s preparedness to consider share buybacks as a means of retuning capital to shareholders as and when it is appropriate to do so.

[stonedyou] 30/8/2022 15:30

Relative peer group valuation

In the meantime, it may be seen that Pan African remains cheaper than its South

Africa- and London-listed gold mining peers on 72% of comparable common valuation

measures (26 out of 36 individual measures in the table below) if our forecasts are

applied or 69% (25 out of 36 individual measures) if consensus forecasts are
applied.

Alternatively, applying Pan African’s peers’ average year one P/E ratio of 8.6x to

our forecast normalised HEPS forecast of 5.20c/share for FY22 implies a share price

for the company of 36.9p at prevailing forex rates. Applying its peers’ average year

two P/E ratio of 7.4x to our forecast normalised HEPS forecast of 5.54c/share

implies a share price of 33.7p.

[stonedyou] 30/8/2022 15:28

Historical relative valuation

Exhibit 11 below depicts Pan African’s average share price in each of its financial

years from FY10 to FY21 and compares this with normalised headline earnings per share

(HEPS) in the same year. For FY22 and FY23, the current share price (19.60p) is

compared with our forecast normalised HEPS for FY22 to FY23. As is apparent from the

graph, Pan African’s price to normalised HEPS ratios of 5.2x and 5.5x for FY22 and

FY23, respectively, (based on our forecasts, see Exhibit 15) are very close to the

bottom of its recent historical range of 4.1–14.8x for the period FY10–21:

Stated alternatively, if Pan African’s average year one price to normalised EPS ratio of 8.9x for FY10–21 is

applied to our normalised earnings forecasts, then it implies a share price for Pan African of c 37.83p in

FY22 followed by 40.78p in FY23.

[stonedyou] 30/8/2022 15:27

Notable within the context of the above bridge chart is the material effect of forex on our valuation under the influence of a weak rand and an even weaker sterling versus the US dollar compared with our last note (in particular, the rand-dollar rate has increased by 13.0%, from ZAR14.5595/US$ in April to ZAR16.4531/US$ currently). Including all of its other growth projects and assets as well, our updated total valuation of Pan African as a whole is as follows:




Exhibit 10: Pan African absolute valuation summary (US cents per share)

Project

Current valuation
(cents/share)

Previous valuation
(cents/share)

Existing producing assets (inc 24 Level and 25 & 26 Level and Mogale projects)

*44.67

33.79

FY22 dividend

1.20

N/A

Fairview Sub-Vertical Shaft project

0.76

0.76

Royal Sheba (resource-based valuation)

0.79

0.86

Mintails/Mogale*

N/A

2.77

MC Mining shares

0.06

0.06

Sub-total

47.48

38.24

EGM underground resource

0.22–5.24

0.22–5.24

Sub-total

47.70–52.72

38.46–43.48

Egoli

12.64

10.40

Total

60.34–65.36

48.86–53.88

[stonedyou] 30/8/2022 15:26

Updated (absolute) valuation

In the light of our inclusion of Mogale into the Pan African production profile (as

well as revised external factors such as the gold price and forex rates), our

absolute value of Pan African (based on its existing four producing assets including

the 24 Level and 25 & 26 Level projects and Mogale) has increased by 10.78c (or

31.9%) from 33.79c/share to 44.67c (albeit excluding any contribution from Egoli,

which we are valuing separately, for the moment, as a standalone project at

12.64c/share), on the basis of the present value of our estimated maximum potential

stream of dividends payable to shareholders over the life of its mining operations

(applying a 10% discount rate):

[stonedyou] 30/8/2022 15:25

ESG/social impact

As part of the DFS, the Pan African has already conducted extensive engagements with community representatives and other interested organisations from the affected area, including regulatory authorities. This information and the associated Environmental Management Programme Report (EMPR) is being used to compile an action plan to remediate past environmental damage and restore the surface for productive land use, while at the same time investigating effective socio-economic development projects to stimulate the local economy.

PAF will also conduct feasibility studies into the merits of using renewable energy for the new tailings retreatment plant’s energy requirements (as at Elikhulu).

Group production profile

As a result of the inclusion of Mogale’s production profile into our group financial model, whereas we had forecast that group production at Pan African would reach 235.8koz in FY26 previously, we now forecast that it will reach 288.6koz and remain at approximately this level until at least FY30 (with production from Egoli still pending):

[stonedyou] 30/8/2022 15:24

Timelines

Pan African reports that it has received a number of offers from financing institutions and third-party financiers for project funding and expects to finalise a funding package for Mogale later this year. Following in-principle approval by Pan African’s board to further progress the project, the company will commence with the environmental authorisation process and stakeholder engagements. Other critical path timelines are anticipated to be achieved approximately as follows:


Exhibit 6: Mogale timeline to commissioning

Activity

Approximate date

Engineering optimisation activities

June – August 2022

Likely project commencement

September 2022

Detailed engineering study

September 2022 – March 2023

Funding package finalised

October/November 2022

Environmental approvals

March 2023

Construction commences

April 2023

Commissioning

July – December 2024

[stonedyou] 30/8/2022 15:23

Comparison with Elikhulu

Mintails’ and Mogale’s aggregate resource of 2.36Moz compares favourably to Elikhulu’s original resource of 1.7Moz and its initial reserve of 1.5Moz, albeit at a fractionally higher grade of 0.30g/t (cf Elikhulu’s 0.29g/t).

By way of comparison, Pan African announced the results of an independent DFS on Elikhulu on 5 December 2016, which demonstrated an NPV9 of US$75.9m (or, then, 5.0c/share, or US$40.95 per resource ounce) at a gold price of US$1,180/oz and a forex rate of ZAR14.50/US$. At the time, we estimated Elikhulu to be worth US$69.9m (or 4.6c/share) at a 10% discount rate and to be capable of adding 1.33p to EPS in the first eight years of its operation (albeit there are now 27% more shares in issue). Now, however, with capex having been expended (albeit with not all associated debt having quite been repaid), we estimate a valuation for Elikhulu of c US$145.97 per initial resource ounce or US$213.19 per remaining resource ounce. As such, and with appropriate caveats, Pan African could acquire for US$2.55/oz (for Mogale alone) an asset that should be worth US$9.88/oz as an in-situ resource (see Gold stars and black holes, published in January 2019), could be worth US$53.11/oz (pre-development) and may be worth up to US$171.05 per remaining ounce (see Exhibit 4) or US$94.09 per initial ounce, post-initial capex and debt repayment; that is, it could be worth approximately an additional c 75% of Elikhulu to the company on the basis of the development of only half the resource and with the remaining (MSC) half providing additional valuation optionality (potentially of the same order of magnitude as Mogale) around subsequent development.

[stonedyou] 30/8/2022 15:22

Note that, at the currently prevailing (real) gold price of US$1,761/oz, we calculate a value for Mogale of US$107.8m, or 5.62 US cents per share, which equates to US$91.66 per Mogale resource ounce, US$94.53 per reserve ounce, US$102.58 per ounce of gold mined and US$188.35 per ounce of gold recovered (ie an uplift of 72.5%).

■
At the end of operations, reserves will have been, to all intents and purposes, fully depleted. We estimate that 37,622oz of resources (ie less than one year’s worth of production) will remain unmined. The gold content of re-deposited tailings will amount to 478,472oz.

■
On this basis, we calculate that the project will enhance Pan African’s earnings per share by an average 1.76 US cents per share in (production) years one to five of the operation and by an average 0.45 US cents per share in years six to 10. Over the first 10 years of operations, it will enhance EPS by an average 1.10 US cents per share, as shown below:

[stonedyou] 30/8/2022 15:18

Mogale DFS

On 6 November 2020, Pan African announced it had entered into a conditional agreement with the liquidator of the Mintails group for the purchase of the total share capital and associated loans of Mogale Gold and Mintails SA Soweto Cluster (MSC), comprising a number of tailings storage facilities (TSFs) to the west of Johannesburg, for ZAR50.0m (US$3.0m at prevailing forex rates) and the assumption of a closure environmental liability of c ZAR120m. Since then, Pan African has successfully concluded both a fatal flaw analysis and a high-level financial evaluation of the project (which is similar in nature to Pan African’s flagship Elikhulu project at Evander). In July 2021, it subsequently completed a pre-feasibility study (PFS) on the Mogale Gold assets. On 30 June 2022, it announced that it had successfully completed a DFS on the same assets. Highlights of the DFS were as follows:

■
The project has the potential to increase the group’s gold production by c 50koz pa (or c 25% of current group production) over a 13 year life.

■
A pre-tax NPV (at a 9.5% real discount rate) of ZAR1,006m (US$64.9m, or 3.3c or 2.8p per share) and a real internal rate of return of 20.1% at a gold price of US$1,750/oz and a forex rate of ZAR15.50/US$.

■
A forecast all-in sustaining cost (AISC) of c US$914/oz and a (nominal) operating cost of c ZAR78/t (c US$5/t).

■
Construction capex of c ZAR2.5bn (US$157.8m).

■
A payback period of 3.5 years.

The operation would use a combination of proven low-cost hydro-mining coupled with a 0.8Mtpm carbon-in-leach (CIL) plant, similar in principle to that used at Elikhulu, albeit slightly smaller (cf Elikhulu’s 1.2Mptm throughput rate, for example). In general, the results of the DFS were similar to, or slightly better than, those of its prior PFS (see below):

[stonedyou] 30/8/2022 15:17

Valuation: Up c 22% to (potentially) 65.36c/share

Pan African is cheap relative to both its historical trading record and its peers.

Our core valuation of the company is 44.67c/share (37.18p/share), based on projects

either sanctioned or already in production, including Mogale. However, this rises by

a further 15.67–20.69c (13.04–17.22p) once other assets (eg Egoli) are also taken

into account. Alternatively, if Pan African’s historical average price to normalised

EPS ratio of 8.9x in the period FY10–21 is applied to our FY22 and FY23 forecasts,

it implies a share price of 37.83p in FY22, followed by 40.78p in FY23. In the

meantime, it remains cheaper than its principal London- and JSE-listed peers on at

least 69% of commonly used valuation measures.