Pan African H1 revenues up 16.5%, profit held back by successful security push at Barberton Mines

Pan African Resources (AIM: PAF) said its interim revenues rose 16.5% year-on-year, but the effect on profits was offset by higher costs incurred as a result of a successful security push at Barberton Mines aimed at curbing illegal gold mining at the site.

Revenues for the six months to 31 December rose to £29 million, while EBITDA (earnings before taxes, depreciation and amortisation) stayed virtually unchanged £8.6 million and attributable profit jumped from £2.6 million to £4.5 million as a result of the increase of Pan African’s holding in Barberton Mines from 74% to 100%. However, these gains were offset by a higher cost of production, which increased from £14.1 million to £18.9 million as security costs jumped 68%, electricity costs were up 35% and salaries and wages were 19% higher.

Illegal mining activity increased significantly at Barberton in South Africa both in frequency and in severity during the first months of the period under review, jeopardising the safety of employees and operations. Management therefore made a deliberate decision to temporarily cease production in certain sections of the mine over a two-week period in order to directly address the issue.

Starting at the beginning of December the mine initiated a systematic underground sweep of workings, utilising specialised contract security forces, in co-operation with local and regional law enforcement. In conjunction with the underground initiative, the contract security presence on surface was also increased to restrict access to mine property.

Management estimates financial losses due to gold theft to be significantly higher than the costs of increased security efforts, and the recent security initiatives are expected to improve gold output and profits from the mine.

The security push has been a resounding success and illegal mining activity has been significantly reduced, the group said. In December alone, 326 illegal miners were arrested and a total of 509 were arrested for the period under review, up from 370 in the previous first half.

Pan African has appointed an executive solely dedicated to security at Barberton Mines, and the current approach to security will be maintained and further improved to ensure illegal activity is kept to a minimum.

During the first half, a total of 45,971 oz (ounces) of gold was sold from Barberton Mines, which is 10% less than 51,186 oz sold in the comparable period of the previous year, while total underground production declined by 4.7% to 45,385 oz and tonnes milled decreased 4.6% to 152,584.

Earnings per share rose from 0.23 pence to 0.34 pence due to a reduced impairment charge for the period of £0.349 million compared to £1.3 million in 2008 and the group’s consolidating 100% of the profits of Barberton Mines from the acquisition in August.

The company also provided an update from its 100% owned Phoenix Platinum Mining, whose resource base has increased by 12.5% to 405,000 oz of platinum, while metallurgical test work indicated recoveries of up to 50% and concentrate grades of 150 g/t (grammes per tonne. Pan African is in the process of negotiating a preferred chrome tailings retreatment plant location. If completed by Q3 2010 this will allow production to commence in the second half of 2011.

Pan African is also continuing an investigation into the feasibility of a heap leach operation to exploit the oxide resource at Manica gold project in Mozambique. The focus during the first half of 2010 is to complete the necessary test work to ascertain the viability of a heap leach operation at Manica, which will be followed by an assessment of feasibility of a small scale heap-leach gold mine.