Company built on two pillars
The company’s current production is split fairly evenly between two main operations; the Evander mine, which used to be owned by Harmony Gold (JSE:HAR), and the Barberton mines, which are some of the oldest and most historic gold mines in the country.
The latest numbers show that despite disruptions at Evander and Barberton hitting production slightly, the two projects are still on track to produce an annualised 180,000oz or so of gold for the full-year.
The slightly weaker first half production did push up the all in sustained costs (AISC) to US$1,014 per ounce, although this still stacks up well against a spot gold price currently of US$1,200.
For its part, Barberton remains a central pillar of the company, with twenty years’ worth of reserves still ahead of it.
Barberton was acquired when Pan African bought Metorex back in 2007, at which time it was averaging production of around 100,000 ounces per year.
Elikhulu: The new kid on the block
While Evander and Barberton underpin the business, chief executive Cobus Loots and his team reckon the “most attractive growth opportunity” comes from its Elikhulu Tailings Retreatment project.
“I have to say that Elikhulu really is an excellent project. It’s low risk, very quick to cash flow and the payback is very quick; we’re forecasting less than four years,” explains Loots.
First gold from the plant is expected towards the end of 2018 and Pan African is forecasting production of about 56,000oz of gold per annum during the first eight years. After then, the number will drop to around 45,000oz a year.
“This production profile does not include the 200,000oz that’s in the resource category which sits below the tailings in the soil, so there’s potential to extend the life of this plant,” adds Loots.
Elikhulu will make a material difference to the group’s output as a whole and is expected to add 25% to Pan African’s current gold production numbers once it’s fully up-and-running.
The initial capital forecast in the definitive feasibility study (DFS) is around US$130mln (1.7bn rand) and the group says it’s making “great progress” on the financing side of the project.
“We have a conditional underwritten facility from Rand Merchant Bank for 1bn rand (US$76mln), so arguably we are looking for 700mln rand (US$53mln) and we would hope to finalise that funding in the next month or so,” says Loots.
The boss said he wouldn’t rule out a “small fundraise from shareholders” as a way of raising part of the extra US$53mln or so.
Platinum an extra kicker
This is a smaller scale operation that is designed to produce 211,000 ounces over a 17 year life, but which has been held back somewhat by weakness in platinum and platinum group metals prices over the past couple of years.
Platinum has been on a rally recently though, with prices adding more than 20% over the past 12 months or so to around US1,000 per ounce. At one point last summer, that price was up to the US$1,100 level.
Revenues from Phoenix grew a shade over 8% in 2016 to US$3.25mln and production of PGE (platinum group) metals increased by 2% to 4,574oz.
As Pan African often tells investors, gold is the group’s key focus, but having a platinum side project that helps to boost the coffers is an added bonus.
What the broker says
“The interim performance was strong against the comparative period but is weaker than our original expectations,” said Michael Stoner of house broker Peel Hunt.
“We must now look forward and it is important to note that the production disruptions are far from breaking the balance sheet with cash at 68.4mln rand (£4mln) and net debt at 497mln rand (£30mln), meaning gearing ratios remain low.
“These results do little to change our view on the company, the optimisation potential at Evander and the case for developing the low cost Elikhulu project remain intact.
“The group must now focus on recommencing underground operations at Evander and advancing Elikhulu which has been approved by the board and only awaits final confirmation of the best funding mix for the project.”
The share price
The Pan African share price has been on something of a run in 2017 so far, having added more than 11% since the beginning of the year.
Shares are currently changing hands for around 17.2p, giving the company a market capitalisation of around £335mln.