Pan African Resources Share Discussion Threads

[stonedyou] 10/12/2024 16:25

Egoli

The Egoli project at Evander Mines’ 7 Shaft is a standalone underground operation that will utilise existing mining and metallurgical infrastructure, including 7 Shaft’s hoisting systems and processing facilities at Kinross’s metallurgical plant.

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First phase development, involving the dewatering of the project’s 7 Shaft number 3 Decline to below 20 Level has now been completed and permanent pumping infrastructure installed.

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Egoli will be accessed directly from 7 Shaft’s 15 Level using existing declines to 19 Level, where a new on-reef decline will be established to access the orebody to 23 Level.

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All the required permits for the Egoli project, including Evander Mines’ mining right (valid until 2038) have been approved.

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Leveraging existing infrastructure, Egoli can increase Evander Mines’ production profile for a relatively low capital cost and within a relatively short time frame.

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The second phase of Egoli’s development will involve establishing a drilling platform on 19 Level in Q125, from which long-inclined boreholes will be drilled to accurately define short-term grade variability and geological structures.

[stonedyou] 10/12/2024 16:24

BTRP life of mine extension and Royal Sheba

Following an internal process to consider feedstock sources for the BTRP, final drilling and metallurgical test work results were recently retrieved from Bramber’s dormant tailings storage facility (TSF), which will increase the life of the BTRP from two to seven years.

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The BTRP has deposited its residues on the Bramber dormant footprint since inception (in 2013). In November 2017, a regrind mill was added to the slurry receiving section and, in CY23, phase 2 of the Aachen Assisted Leach (AAL) reactor was commissioned.

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The Bramber dormant TSF contains 6Mt of previously treated BTRP and Fairview Mine residue at an average grade of 1.0g/t.

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The impact on expected gold recoveries following the addition of the regrind mill and AAL was used to test the Bramber dormant mine residue. To date:

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Metallurgical test work indicates that recoveries of 18–27% of the remaining gold content in this resource are achievable.

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Utilising the 90th percentile of the recoveries achieved (25% recovery) in the financial model, Pan African estimated that this source of tailings material will extend the BTRP’s tailings feed life from two to seven years, producing approximately 11,000oz per year at an average real AISC of US$1,485/oz.

In the meantime, Pan African will focus on developing the Sheba Fault decline to access high grade mineral reserves to supplement Barberton Mines’ production in the medium term and longer term. Preliminary optimisation work at Sheba and Western Cross indicates:

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An eight-year lifespan at Royal Sheba, with production of around 235,000oz of gold at an average mining grade of 3g/t over the life of mine, with the potential for further extensions as the orebody remains open at depth. First stoped ore is planned at a rate of 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.

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The Western Cross orebody at the Sheba Mine is a lower-grade (3–4g/t) 10m wide free-milling orebody that is currently accessed via the South Wall Adit and forms part of the mine’s production profile. The orebody is amenable to bulk mining, similar to that planned at Royal Sheba. Drilling in FY25 is planned to update the geological model, confirm available mineral resource blocks and update the existing feasibility study.

[stonedyou] 10/12/2024 16:23

Evander 24 to 26 Level expansion project

Progress at Evander’s 24 to 26 Level underground expansion project remains on track, with the following notable achievements during H224:

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Ramped-up mining operations on 24 Level are continuing.

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Significant capital expenditure has been invested in these mining levels to improve and optimise infrastructure and to ensure sustainable production of approximately 65,000oz annually over the mine’s life of c 11 years.

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Although delayed, equipping of the existing 17 Level underground ventilation shaft to hoist at a rate of up to 40,000tpm is now imminent, improving efficiencies and circumventing the ageing conveyor belt system.

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The newly commissioned 24 Level refrigeration plant will provide chilled water to a bulk air cooler on 24 Level, with a nominal cooling capacity of 3.5MW, to create improved working conditions on both 24 and 25 Levels.

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Development of the existing 24 Level footwall infrastructure to access 25 Level, through an on-reef decline layout, is planned to commence in FY25 (NB access to 25 Level mining areas is expected to be completed in FY26).

[stonedyou] 10/12/2024 16:23

Soweto cluster

In addition to its update on the MTR, in May PAF also 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. The resultant tailings could then be deposited into the expanded Mogale tailings storage facility at the West Wits pit and 1L23-25 footprint.

Other specific results of the PFS were as follows:

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The MTR plant infrastructure could be expanded to treat 1Mtpm from year six of the MTR operation’s mine life (ie approximately 2030).

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The addition of the 110Mt Soweto cluster mineral resource has the potential to increase MTR production to approximately 60koz pa over a 21-year mine life.

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Total additional capex for the project would be US$113m, of which c US$83m would be incurred in years 4–6 of the MTR project timeline and US$29m would be incurred in year 10 of the timeline.

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At US$2,200/oz and a forex rate of ZAR19.00/US$, the pre-tax NPV for the combined Mogale-Soweto cluster is US$283m (or 14.8c, or 11.1p, per share), representing a >50% increase relative to the MTR project alone.

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The real, ungeared internal rate of return of the combined project increases to 44.0% (cf 41.7% for the MTR project alone).

These changes have already been incorporated into our financial model since May. 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’.

[stonedyou] 10/12/2024 16:18

Valuation: Still cheap compared to history and peers

We have pared back our core (absolute) valuation of PAF to its pre-May level of 40.93c per share (31.82p) to reflect both the recent, slightly uncharacteristic ‘above trend’ strength of the rand against both the US dollar and sterling and slightly sticky cost inflation in H224. However, this valuation rises by a further 22.30–27.32c if other assets (eg Egoli and the Soweto cluster) are taken into account. Alternatively, if PAF’s historical average price to normalised HEPS ratio of 8.2x for the period FY10–24 is applied to our FY25 and FY26 forecasts, it implies a value of 44.70p in FY25, followed by 41.17p in FY26. As such, PAF’s current share price of 33.65p could be interpreted as discounting normalised HEPS rising to only 5.48c per share in FY25 and/or FY26 (cf our forecasts of 7.28c and 6.71c, respectively). In the meantime, PAF remains cheaper than its principal London- and South African-listed gold mining peers on at least 80% of commonly used valuation measures, regardless of whether they are based on Edison or consensus forecasts. Performing a relative valuation analysis, its peers imply a comparable valuation for PAF of 61.03p based on our year one EPS estimate and 43.33p based on our year two EPS estimate. Finally, we calculate that PAF is trading at an enterprise value of just US$23.33 per resource ounce of gold.

[stonedyou] 10/12/2024 12:51

Higher production presages higher dividends

As well as increased earnings, PAF increased its dividend for the first time in four years in FY24 and set a target of paying out 40–50% of net cash generated from operating activities to shareholders. As a result, we believe that materially increased dividend payouts are possible in the coming years. Our forecasts are currently in the middle of the range of analysts’ expectations for FY25, but at the top of the range for FY26. If achieved, however, we calculate that PAF would almost certainly have the second highest dividend yield of the 62 precious metals mining companies expected to pay dividends to shareholders globally over the next 12–24 months.

[stonedyou] 10/12/2024 12:50

Pan African Resources — Analysing H224 and looking forward to FY25

Pan African Resources’ (PAF’s) FY24 results, announced on 11 September, were within 1% of our prior forecasts for both EPS (4.14c cf 4.17c) and headline EPS (HEPS; 4.15c cf 4.17c). However, if the contract liability related to its ZAR400m financing facility for Mintails is stripped out, we calculate that PAF would have recorded HEPS of 5.27c, which would have been close to the top of the range of analysts’ expectations and also a record for both 12-month and six-month periods. While arguably academic for FY24, this nevertheless sets the stage for more material EPS and cash flow increases in the future as the Mintails contract liability concludes in February 2025 at the same time that opex stabilises and capex begins to fall away.

[stonedyou] 10/12/2024 12:45

Even so, we calculate that Pan African’s maximum net debt requirement in FY25 of US$125.8m will equate to no more than 24.4% gearing (defined as net debt/equity) or 19.6% leverage (defined as net debt/[net debt+equity]). Owing to the passage of time and the building up of equity in the form of retained income, however, this is a much lower debt burden on the company than the equivalent time when net debt was similarly high in FY19, at US$128.4m, when gearing amounted to 70.0% and leverage amounted to 41.2%.

[stonedyou] 10/12/2024 11:47

Source: Edison Investment Research, LSEG Data & Analytics. Note: Consensus and peers priced at 14 November 2024.

Alternatively, applying PAF’s peer average year one P/E ratio of 19.8x to our normalised HEPS forecast of 7.09c per share for FY25 implies a share price for the company of 110.70p at prevailing foreign exchange rates – albeit this calculates to 58.47p if Sibanye is excluded from the peer group. Applying its peer average year two P/E ratio of 8.4x to our normalised HEPS forecast of 7.51c per share for FY26 implies a share price of 49.52p.

[stonedyou] 10/12/2024 11:44

Gold could become dollar's main competitor in world trade — Sechin

Rosneft CEO added that the US has lost its leadership in science, industry, and finance and has failed to maintain a fair world order

RAS AL-KHAIMAH, December 5. /TASS/. Continued restrictions on dollar settlements in world trade will increase the opportunities for using national currencies and developing new universal instruments. Gold can again become the dollar's main competitor in global trade, Rosneft CEO Igor Sechin said at the Verona Eurasian Economic Forum.

"Using the dollar as an instrument of sanctions is a big mistake, because trade will never stop. Both energy security and life in general depend on it. Alternatives will always be found. Gold will be the dollar's main competitor, which mankind has been using for thousands of years for settlements," Sechin said.

He also added that the US has lost its leadership in science, industry, and finance and has failed to maintain a fair world order. By unleashing various conflicts, the US is trying to create special conditions for its economy at the expense of other market participants.

"It is also obvious that the US has allowed itself to lose its leadership in the scientific, technological, industrial, and financial spheres, which was hard to imagine 20-30 years ago," Sechin noted. According to him, the US has failed to exercise its assumed leadership and has not created the necessary conditions for maintaining a fair world order.

Losing its influence, the US is betting on creating special conditions for its economy at the expense of other market participants, including its allies, Sechin added. "Conflicts are being deliberately aggravated and created in the Middle East, Ukraine, Latin America, and the Asia-Pacific region," he stressed.

At the same time, Sechin believes that the US has lost its leadership in science, industry, and finance and has failed to maintain a fair world order. By unleashing various conflicts, the US is trying to create special conditions for its economy at the expense of other market participants.

[stonedyou] 10/12/2024 11:42

Relative peer group valuation

In the meantime, it may be seen that PAF remains cheap relative to its London- and South African-listed gold mining peers on 83% of comparable common valuation measures (29 out of 36 individual measures in the table below) if Edison forecasts are used or 91% of valuation measures (32 out of 36 individual measures) if consensus forecasts are used.

[stonedyou] 10/12/2024 11:24

However, readers should note that this valuation is conducted at Edison’s relatively conservative gold price assumptions of US$2,124/oz (nominal) average for the period CY25–30. At the current gold price, all other things being equal, our valuation almost doubles to 83.52c (65.92p).

Even so, including its other growth projects and assets, our updated total valuation of PAF as a whole rises to 64.63–69.65c (51.01–54.98p).

[stonedyou] 10/12/2024 11:04

Bid|Ask $2,672.99 $2,673.16

Low|High $2,657.88 %2,676.81

Change $15.03 UP v 0.57%

[stonedyou] 10/12/2024 10:57

Valuation

Otherwise, in addition to including Pan African’s acquisition of TCMG in our future forecasts and estimates, we have also adjusted our long-term foreign exchange rates (in real terms), to reflect the continued recent ‘above trend’ strength of the rand even against a rampant US dollar in the wake of Donald Trump’s victory in the US presidential election and the concomitant relative weakness of sterling.

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, Mogale and now Nobles) has risen by 1.28c to 42.21c (cf 40.93c previously), which is based on the present value of the estimated potential dividend stream payable to shareholders over the life of its mining operations (applying a 10% discount rate to US dollar dividends).

[stonedyou] 10/12/2024 10:43

Accounting considerations

The value of the net assets of TCMG as at 30 June 2023 were reported to be A$44.8m, equating to US$29.9m at the then prevailing forex rate and to US$27.5m for the 92% of TCMG for which PAF is paying US$50.8m. As such, we have assumed US$23.3m in goodwill associated with the acquisition and we have consolidated this into Pan African’s balance sheet alongside TCMG’s net assets (assuming negligible cash) as at 30 June 2024, which we have therefore made the effective date of the acquisition. Simultaneously, we have reallocated PAF’s original 8% investment in TCMG, valued at US$3.4m, into both assets and goodwill pro-rata. Hence the balance sheet shown in Exhibit 14 is effectively a pro forma balance sheet, including the enlarged share capital of the company, although the cash flow and income statements remain unchanged. Thereafter, we have fully consolidated TCMG’s income, cost, depreciation, tax and capex contributions into the group accounts.

However, we have not yet included any additional hedging into our forecasts. Pan African has stated that it has approved lines in place to hedge approximately 75% of the TCMG production for the first two years of operation in order to secure the return on its initial investment. Indicative pricing at a spot gold price of A$3,947/oz (US$2,644/oz at US$0.67/A$) for a zero-cost collar structure is a floor price of A$3,600/oz (US$2,412/oz) and a cap price of A$4,800/oz (US$3,216/oz). However, we will only model these into PAF’s accounts once the contracts are actually in place.

[stonedyou] 10/12/2024 10:40

Blue sky

The fact that its plant will be the largest ever to operate in the region will generate economies of scale for the project. It may also hold out the opportunity for alternative business strategies, such as toll treating third-party ore. Alternative opportunities to expand and extend production exist in an additional three years beyond FY30 of production potential that is still in the permitting process. Otherwise, blue sky exploration potential is provided by:

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Access to an attractive asset portfolio in one of Australia’s highest-grade mineral fields.

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A known geological endowment through historic gold production and current mineral resources of 8Moz Au and c 1.2Mt Cu

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Walk-up brownfields and development drill targets at TCMG’s 100%-owned Warrego, Nobles and Juno assets.

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A region under-explored, with less than 8% of holes drilled below a depth of 150m.

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A significant land position, as TCMG controls 1,700km2 through 100%-owned assets as well as through the Emmerson Resources Limited Joint Venture (ERM-JV), utilising a hub and spoke growth strategy to process multiple deposits

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Potential to significantly expand the mineral resource and mineral reserve base as well as the project life of mine beyond 15 years via a two-staged gold and copper strategy, underpinned by an exploration target with up to an additional 800koz of gold alone.

In the meantime, a prefeasibility study (PFS) on the Warrego copper and gold deposit is scheduled to be completed during Q225, the results of which will dictate the project’s path to development and a possible execution strategy.

[stonedyou] 10/12/2024 10:08

Source: Edison Investment Research

On the basis of the project’s scoping study pre-tax IRR of 108.2%, therefore, the Nobles project could be expected to command a valuation equivalent to 64.7% of its NPV, or US$51.3m (ie almost exactly what Pan African paid for it).

Alternatively, if a multiple regression analysis between IRR and Fraser Institute investment attractiveness scores and a company’s enterprise value/NPV ratio is performed and the resulting equation applied to Nobles, a 70.7% enterprise value/NPV ratio is predicted, which implies a valuation of US$56.1m.

Group production

In the light of these developments, we are now forecasting that group production will easily exceed 250koz per year in FY26 and approach 400koz pa in FY29, when all of PAF’s mines are operating at close to capacity, pushing normalised headline EPS (HEPS) as high as 9c per share (see Exhibit 7).

[stonedyou] 10/12/2024 10:05

Sovereign risk

In our report Gold stars and black holes, we calculated that companies with completed bankable feasibility studies commanded valuations between -10.1% and 133.5% of attributable project NPV, with an average of 30.9% (see Exhibit 166 on page 82 of the report).

The mean Fraser Institute investment attractiveness score for all jurisdictions is 56.56, which is between the scores for Serbia and California in Exhibit 4. If this is deemed to attract an average valuation of 30.9% of attributable NPV, and the top and bottom halves of the sample are presumed to attract valuations with respect to the average and pro rata to their scores, then a company with an average project in the Northern Territory may be expected to attract a valuation of 108.1% of attributable project NPV. For Nobles, this would imply a valuation/consideration of US$85.7m, or 4.5 US cents (3.5p) per share. In paying an aggregate US$54.2m for the company in shares therefore, Pan African may be regarded as having paid a 36.9% discount to ‘fair value’ (all other things being equal). In addition to being in a Tier 1 mining jurisdiction, however, the risk associated with Pan African’s acquisition of TCMG may also be considered to be mitigated by:

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The fact that development capital is fully funded.

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The processing facility is more than 55% complete. As of September 2024, the plant in Cloncurry has been fully dismantled and all equipment transported to the Nobles plant site, with both commissioning and first gold anticipated within the next 12 months.

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Pre-production capex is relatively modest, equating to just US$460 per average annual ounce of production over the five-year life of the operation, or US$42.50 per annual tonne of throughput capacity, or US$86.47 per reserve ounce.

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Production in the first three years of operation will be derived from already mined stockpiles and tailings storage facilities at an AISC of US$1,300/oz.

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Even on Edison’s noticeably more conservative gold price assumptions, the IRR of the project exceeds Pan African’s hurdle rate of 20% (see Exhibits 2 and 3).

Project valuation risked for overall commerciality

In addition, in Gold stars and black holes, we calculated a statistically significant relationship between the valuation of a company and its IRR, which is demonstrated in the graph below.

[stonedyou] 10/12/2024 09:57

In part, the 15% discount rate reflects the stage of development of the project – being in construction, rather than production.

Nobles valuation considerations

Un-risked project valuation

TCMG’s feasibility study calculated a pre-tax IRR on the Nobles project of 108.2% and a post-tax NPV15% of US$79.3m. With an effective 1,915.6m Pan African shares in issue pre-transaction, this post-tax NPV15 equates to 4.1 US cents per share, or 3.3p/share.

Project valuation risked for two factors

Risk associated with the Nobles project may be assumed to comprise sovereign risk, execution risk, geological risk, metallurgical risk, engineering risk, management risk and an overall risk of ‘commerciality’. Three of these risks – sovereign risk, execution risk (in the form of ‘stage of development’ risk) and overall ‘commerciality risk’ – may immediately be adjusted for.

[stonedyou] 10/12/2024 09:55

A note on discount rates

In its financial assessment of the Nobles project, Pan African/TCMG applied a 15% discount rate to cash flows. This is conservative within the context of the fact that approximately half of all studies on mining projects use a discount rate of 8% (see our sector report, Gold stars and black holes, published in January 2019) and about a quarter of all studies are conducted at a discount rate of 5%. It is also conservative within the context of the fact that Pan African has applied a rate of 12.5% for some of its South African assets in the past and the fact that Nobles is located in Australia’s Northern Territory, which is, according to Canada’s Fraser Institute, one of the 10 most attractive jurisdictions for mining investment in the world and notably more attractive than South Africa:

[stonedyou] 10/12/2024 09:34

Source: Pan African Resources, Edison Investment Research. Note: *Simple average.

Aside from the gold price, key assumptions in Edison’s financial model are a 30% mining tax rate, that sustaining capex is minimal and that development capex is incurred for each new, sequential area of production (Eldorado, Juno, Chariot and Golden Forty) in the year before the operation is first mined. At this stage, the effect of working capital during the life of the project is also ignored, except for initial working capital that is included in the initial capex requirement of US$35.7m.

A comparison between the outputs of Edison’s financial model (shown in Exhibit 2) and those published by Pan African in its acquisition announcement are shown in Exhibit 3, below:

[stonedyou] 10/12/2024 09:22

Reported highlights of TCMG’s feasibility study are:

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Expected payback in less than three years (at a gold price of US$2,600/oz).

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Forecast production of c 50koz pa over the initial three years of the life of the operation derived from low-risk surface stockpiles and tailings storage facilities (TSFs).

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Initial all-in sustaining cost (AISC) of US$1,300/oz in the first three years of operation.

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Life of mine free cash flow of US$420m at US$2,600/oz Au.

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Project NPV15 US$129.7m (6.8 US cents, or 5.3p per undiluted Pan African share) and real, ungeared internal rate of return (IRR) of 144%, based on the exploitation of current mineral reserves only and a US$2,600/oz gold price.

The project is reported to be close to existing road and rail infrastructure and in an area that is not considered environmentally sensitive.

Edison does not have access to the proprietary details of TCMG’s feasibility study. However, on the basis of the information made available to the public to date, we have constructed the following financial model of the Nobles project (Exhibit 2). Readers should note that we have necessarily used Edison’s (real) gold price assumptions in this model, as set out in our report, Gold – Shades of the 1970s, published in September 2023. These average US$1,849/oz (June–June) in real terms over the initial five year life of the Nobles mine and are therefore at a material (27.6%) discount to the current spot price of gold of US$2,554/t and also at a material (16.5%) discount to the US$2,214/oz price at which the TCMG feasibility study was conducted. This necessarily depresses Edison’s calculated NPV15 relative to that calculated in the feasibility study. However, readers will readily appreciate that, should the gold price fall to Edison’s level and Edison’s lower NPV thus become more relevant, Pan African’s all scrip consideration will also similarly decline.