Pan African Resources Plc

Pan African Resources Plc (LON: PAF) is a UK based company that is engaged in the business of gold production. On 15 September 2021, the Company will release its 2021 financial results.

Rationale for Valuation – Speculative Buy at GBX 17.25

• The Company delivered a strong operational and financial performance during the period, with net debt decreased by 47.3% and Record rand dividend payment in December 2020 of US$17.8 million.
• Gold production was in line with the 2021 full-year production guidance.
• In 2020, the Company has decent fundamental metrics as it has maintained a Net margin and ROE above the industry median.
• As per valuation metrics, Price/Cash Flow, EV/Sales and EV/EBITDA multiples are currently lower than the Metals & Mining industry multiples.
• From the technical standpoint, 90-day RSI stood at around 41.05, which is supporting the upside movement.

Key Risks

• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.
• 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 increased carbon emission from the production plants and usage of water resources are the key risk elements.

Financial Highlights (for the six months to 31 December 2020, as on 16 February 2021)

• Group gold production surged by 5.9% YoY, with robust operational performance from Barberton Mines.
• Net cash generated by operating activities rose by 178.2% YoY, with a reduction in net debt of 47.3% YoY.
• During the period, the adjusted EBITDA was up by 72.9% YoY, and earnings per share increased by 85.1% YoY.
• In December 2020, the Company made a record rand dividend payment of USD 17.8 million to shareholders.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In the six months ended 31 December 2020, the Company saw an improvement in operational and financial performance, mainly Barberton Mines. Group all-in sustaining costs (AISC) surged marginally to USD 1,252/oz. ESG projects are on track for commissioning in Q3 FY21. For the financial year ending 30 June 2021, the Company stays on track to deliver approximately 190,000oz of gold, which shows a substantial increase against the actual production of 179,457oz in FY20. 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.  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 17.25 (as on 26 February 2021, before the market close at 08:20 AM GMT), with lower double-digit upside potential based on 12.30x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Trans-Siberian Gold Plc

Trans-Siberian Gold PLC (LON: TSG) is a FTSE AIM All-Share listed Company, which delivers stable gold production and high-grade mining operations from its wholly-owned Asacha Gold Mine in Far East Russia.

In April 2021, the Company expects to report first-quarter 2021 gold production from the Asacha Gold Mine.

Rationale for Valuation – Speculative Buy at GBX 93.03

• The Company delivered an improvement in gold production, with the highest quarterly gold grade achieved during the fourth quarter.
• It also exceeded the revised guidance's upper limit, with a strong balance sheet and available liquidity.
• The company's debt/equity ratio in the past two years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 0.26x.
• From the technical standpoint, 90-day RSI stood at around 48.33, which is supporting the upside movement.

Key Risks

• The Company is exposed to financial risk with fluctuations in Gold price and exchange rates.
• Furthermore, the unavailability of adequate working capital can impact regular revenue and cash flow.
• The Global Covid-19 pandemic could result in the suspension of operations and increase labour absenteeism, and thus, the operation costs.

Recent News

On 26 February 2021, the Company announced a share buyback programme for an aggregate amount of £1 million.

On 19 February 2021, the Company provided the update of the rodnikova project scoping study. It has delivered viable project economics, while there is a significant amount of work to be completed before a definitive investment decision can be made.

On 3 February 2021, the Company has appointed Panmure Gordon (UK) Limited as Joint Corporate Broker to Trans-Siberian Gold and Canaccord Genuity Limited as Nominated Adviser and Joint Corporate Broker to TSG.

Q4 FY20 & FY20 Production & Operations Update (for the period ended 31 December 2020, as on 19 January 2021)

• Record quarterly gold doré production increased by 31.5% QoQ, while all-time record annual gold doré production for FY20 surged by 3.6% YoY.
• In FY20, the annual revenue increased by 28.3% YoY, with a significant increase in the estimated average realised gold price and average gold grades of 7.7 g/t.
• In the last quarter of 2020, Gold revenue rose by 39% QoQ, with an average realised gold price of USD 1,873/oz.
• On 31 December 2020, the cash stood at USD 22 million.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company witnessed a growth in 2020 gold production at the Asacha Gold Mine, with a record quarterly performance in Q4. This year was the fifth consecutive year of surged YoY gold production. Subsequently, the operational performance was robust. Moreover, the Company has a high liquidity position and low leverage, reflecting the ability to pursue upcoming market opportunities. Furthermore, FY20 has been a year of transition to the East Zone from the Main Zone of the Asacha Gold Mine, which holds significant potential to process high-grade ore and generate attractive free cash flow from operations. In terms of dividend, the Company has a proven track record of returning considerable capital to its shareholders. Overall, TSG seems to be well-positioned for future growth, with a strong balance sheet.

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 Trans-Siberian Gold at the current market price of GBX 93.03 (as on 26 February 2021, before the market close at 08:02 AM GMT), with lower double-digit upside potential based on 6.20x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

* The dividend yield is subject to change as per the stock price movement.

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