Pan African Resources PLC (LON: PAF) - Strong performance delivered during the pandemic

Pan African Resources is a UK based company that is engaged in the business of gold production. It performs surface and underground mining operations. The Company has five operating assets in South Africa. Barberton Mines, which includes three underground mines: Fairview, Sheba and New Consort. Barberton Tailings Retreatment Plant is located in Barberton mines, and it has been producing gold since June 2013. Elikhulu Tailings Retreatment Plant is used in pre-existing gold tailings deposited in Kinross. Evander Mine’s 8 shaft Pillar Mining is expected to produce close to 20,000 ounces to 30,000 ounces per annum of gold for three years. The Company is listed on FTSE AIM UK 50 Index.

Pan African Resources will release the interim results on 16 February 2021.

Sustainability Model of Pan African Resources

  (Source: Company website)

Growth Prospects and Risk Assessment

The Company is currently focussed on the Egoli project, which is a standalone underground project with a low capital cost. The project will leverage Evander Mine’s established shaft and metallurgical facilities. The gold production from this project is expected to be more than 70,000 ounces, and the life of the mine is expected to be in between 9 to 14 years.

(Source: Company website)

The Company is currently performing the feasibility study of the mine, and it is believed that capital investment for Egoli project is lesser as compared to similar projects under development. Pan African expects the payback period to be around 3.8 years, and an IRR of 50.1% can be generated post-tax. Scheduling and planning of the project are expected to be complete in H1 FY21. The Company will fund the project through debt financing from SA Bank.

  

The Company is engaged in the business of gold mining, and the operations could impact the environment and the local communities. The increased carbon emission from the production plants and usage of water resources are the key risk elements. The strikes at the mines for an extended period could halt production. The Company generates revenue through the sale of gold, and if the gold prices remain volatile and low, then it could impact sales. The civil disruption or any turmoil in the political situation where the Company operates its mines could impact the operational activity.

Industry Outlook Dynamics

The gold prices are directly influenced by the macroeconomic events, and in an uncertain macroeconomic environment, investors turn to gold as it is considered as a safe haven. Gold is often used as a hedge commodity in the event of volatility. Some of the drivers for demand are jewellery, industrial, source of investment such as ETF, gold coin and the central bank purchase.  The gold futures price touched a high of USD 2,069.40 per ounce in August 2020, but after that, the price picked a downward trajectory, and it is currently trading at USD 1,887.15 per ounce as on 2 November 2020 (at 9:20 AM GMT).

 (Source: Refinitiv, chart created by Kalkine Group)

The gold prices have been affected by the missing clarity over the decision of the stimulus package. The yellow metal, which is used for hedging against inflation and the US dollar, has gained 21.7% this year. The massive stimulus across the globe supported the gold price. If the US announces the stimulus package, it can support the gold price. As per the industry expert’s, it is believed that if Democrats win the US Presidential election the incentive for holding gold will increase as the probability of a new stimulus package would increase if the talks for current stimulus package falls apart. 

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Pan African Resources Plc

 

A Glimpse of Business Segments

The reportable operating segments derive their revenue primarily from mining, production, extraction and selling commodities.

Recent News

On 23 October 2020: The Company announced that Pan African’s American Depository Receipt programme has been approved and upgraded to trade on the OTCQX Best Market in the US, with an immediate effect.

On 17 September 2020: The Remuneration Committee of Pan African has proposed to the Board regarding the restructuring of some of the Group's long-term incentive schemes. 

Financial Highlights (for the year ended 30 June 2020 (FY20), as on 16 September 2020)

(Source: Company Website)

• The Company reported excellent financial results for the financial year 2020, supported by higher gold prices, and increased gold production.
• The revenue increased by 25.9% year-on-year predominantly due to an uptick in gold sales by 1.3% year-on-year, and the average US$ gold price received increased by 24.3% year-on-year.
• Despite a 32.5% increase in mining depreciation and amortisation and a 3.6% increase in the cost of production, the mining profit margin surged to 34.3% in FY20 from 22.4% in FY19.
• The Company’s net debt decreased by US$53.5 million year-on-year, while the net debt to net adjusted EBITDA ratio improved to 0.7x from 2.2x.
• The Company’s cash holdings for FY20 has improved to US$33.5 million as compared with the previous year (2019: US$5.3 million).
• Pan African’s liquidity remains healthy, with liquid resources of US$41.2 million and the intention of being a debt-free Company within next 12 months.

• The Company’s net assets remained constant at US$183.6 million, influenced by increased profit for FY20 though offset by dividend payments of US$2.9 million to shareholders, fair value loss through other comprehensive income of US$3.0 million and foreign currency translation loss of US$38.6 million.
• Moreover, the cash generated by operations has improved to US$53.8 million. 

Operational Performance (FY20)

• After final refinery adjustments, the total gold production increased by 4.1% year-on-year to 179,457oz, and it is also exceeding the revised full-year production guidance of 176,000 oz.
• In Barberton Mines, Gold sales and Mining operations production were down by 11.2% and 9.6% (year-on-year), respectively. However, it has achieved 3 million fatality-free shifts in June 2020 and also improved the total recordable injury frequency rate and lost-time injury frequency rate (per million-man hours).
• Total capital expenditure in Barberton Mines surged by 16.7% year-on-year to US$18.9 million, with sustaining capital expenditure of US$11.9 million and expansion capital expenditure of US$7.0 million.
• In Evander Mines, AISC (All-in sustaining costs) per ounce for mining operations increased by 41.7% year-on-year, and gold sales decreased by 3.3% year-on-year in FY20.
• Overall, the Gold production from Elikhulu and the Barberton Tailings Retreatment Plant, the low-cost surface retreatment operations, have demonstrated the benefit of multiple producing operations and contributed significantly to the profitability of the Company. 

Financial Ratios (FY2020 ended 30 June)

Share Price Performance Analysis

 

On 2 November 2020, at the time of writing (before the market close, at 9:15 AM GMT), Pan African Resources Plc shares were trading at GBX 19.90, up by 1.79% against the previous day closing price. Stock 52-week High was GBX 28.15 and Low of GBX 8.32, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 200-day (GBX 17.44) simple moving average price, which reflects a bullish signal for the stock. Also, 14-day RSI (around 26.00 level) seems a good signal for the stock as it is in the oversold zone. The Company’s stock has delivered a positive return of around 44% in the last six months and approximately 50% in the last nine months.

Based on 1-year performance, PAF has outperformed the FTSE All-Share Mining Index and FTSE AIM UK 50 Index. PAF had generated a return of around 67.4%, whereas FTSE All-Share Mining Index return was about -7.35% and FTSE AIM UK 50 Index return was close to 5.8%

Business Outlook Scenario

In FY20, the Company produced 179,457 ounces of gold and sold close to 173,864 ounces of gold at an average gold price of USD 1,574 per ounces. In FY21, the Company expects to produce close to 190,000 ounces of gold. The Company would focus on asset optimization, and it plans to bring down the all-in sustaining costs to USD 1,000 per ounces. The other key targets for FY21 would be deleveraging the balance sheet and increasing the dividend payout to the shareholders. The Egoli project is expected to start production by 2022.

(Source: Company website) 

In the past five years, the Company has reported decent profits, underpinned by strong operational performance and higher gold prices. Considering the robust operational and financial performance, positive outlook for the year, higher profitability margins, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Pan African Resources at the current price of GBX 19.90 (as on 2 November 2020, before the market close at 9:15 AM GMT), with lower-double digit upside potential based on 5.23x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

(Source: Company Website)

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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