Pan African Resources Plc – Operating with strong operational performance

Pan African Resources Plc (LON: PAF) is a UK based company that is engaged in the business of gold production.

On 16 February 2021, the Company will publish the interim results.

Rationale for Valuation – Speculative Buy at GBX 20.40

• As per valuation metrics, Price/Cash Flow, EV/Sales and EV/EBITDA Value multiples are currently lower than the Metals & Mining industry.
• In the last year, the Company has delivered a sparkling return of ~96%, which was higher as compared to the FTSE AIM UK 50 Index.
• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above 15% and 20%, respectively, for the last two years.
• From the technical standpoint, shares were trading well above the short-term support level of 200-day (around GBX 18.34) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• Any failure to generate substantial free cash flow can affect the business prospects of the Company.
• Besides the liquidity risk, the Company operations are subject to regulatory and environmental risk.
• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.
• The increased carbon emission from the production plants and usage of water resources are the key risk elements.

Recent News

On 6 November 2020, the Company announced that it had entered into conditional agreements to acquire the total share capital and associated shareholder loans and other claims of Mintails SA Soweto Cluster Proprietary Limited and Mogale Gold Proprietary Limited. For this proposed transaction, the aggregate cash consideration will be a maximum of ZAR50.0 million.

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.

Financial Highlights (for the year ended 30 June 2020 (FY20), as on 20 October 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.
• 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).
• 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.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

Pan African’s liquidity remains healthy, with liquid resources of US$41.2 million and the intention of being a debt-free Company within the next 12 months. In FY21, the Company expects to produce close to 190,000 ounces of gold. 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. 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. It will also fund the project through debt financing from SA Bank. The stock made a 52-week low and high of GBX 8.32 and GBX 28.15, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Pan African Resources at the current market price of GBX 20.40 (as on 27 November 2020, before the market close at 10:20 AM GMT), with lower double-digit upside potential based on 5.50x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

Serabi Gold Plc- Shown improvement in operating profit

Serabi Gold Plc (LON: SRB) is a mining company based out of London, which is engaged in the activities for production and exploration of gold in the Brazilian region.

Rationale for Valuation – Speculative Buy at GBX 80.10

• For the third quarter of 2020, it has shown a slight improvement compared with the second quarter, with an increase of 100% in operating profit in Q3 FY20.
• As per valuation metrics, Price/Cash Flow, EV/Sales and EV/EBITDA multiples are currently lower than the Metals & Mining industry.
• The Company has decent fundamental metrics as it has maintained a Net margin and ROE above the industry median.
• The debt/equity ratio recorded by the Company in the past two years was considerably below the industry median. In September 2020, the debt/equity ratio was 0.04x.
• In the last two years, the Company has delivered a sparkling return of ~130%, which was higher as compared to the FTSE AIM All-Share Index.
• From the technical standpoint, 14-day RSI stood at around 38.15, which is supporting the upside movement.

Key Risks

• The Company is engaged in the business of gold mining, and the operations could impact the environment and the local communities.
• 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.

Trading Update (for the three and nine-month periods ended 30 September 2020, as on 13 November 2020)

(Source: Company Website)

• The Company has shown a slight improvement in the third quarter of 2020 as compared with the second quarter, with strong cash flow generation.
• Operating profit was at the same level as for the prior quarter and represented an increase of 100% as compared to the same quarter in 2019. Moreover, it represents a 90% improvement in the year to date (till 13 November 2020) against the same period last year.
• For the third quarter of 2020, EBITDA increased by 36% year-on-year to US$6.3 million.
• In 2020, the average gold price of US$1,707 received on gold sales.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

In Q4 FY20, the Company expects production to be approximately 8,000 ounces. For FY20, the production will be approximately 33,000 ounces. The Company has shown a slight improvement in Q3 versus Q2. It has also shown a strong cash flow from operations of US$5.75 million and also represents a 100% improvement in operating profit. However, Gold production for the year to date (till 13 November 2020) has been slightly lower than the originally forecast. By the end of September 2020, operations were returning to something resembling normality, and an aggressive surface and underground drilling programme are underway.

Overall, the Company has demonstrated flexibility, commitment, and resilience to weather the prevailing storm and is in a good position to emerge stronger in the future. However, as Gold has moved sharply higher in the past few months, the price may experience some consolidation in the near term.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Serabi Gold at the current market price of GBX 80.10 (as on 27 November 2020, before the market close at 8:14 AM GMT), with lower double-digit upside potential based on 8.10x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

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

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

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