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Pan African Resources to pay out a record £17mln to investors as first-half profits improve

The company said it would hand back a record £17.1mln in dividend payments
Pan African Resources to pay out a record £17mln to investors as first-half profits improve
Pan African workers ready to get the second-half underway
South Africa-focused gold miner Pan African Resources plc (LON:PAF) boosted earnings and said it would pay a record dividend even after a fall in production and small rise in costs in the first half.
The owner of the Barberton Mines area in Mpumalanga Province also confirmed plans are still in train to significantly boost output with the development of the Elikhulu Tailings Retreatment Project.
Subject to funding, the operation should get underway towards the end of next year, adding around 56,000 ounces of the yellow metal annually and lowering the all-in sustaining costs of the business.
An increase to the gold price was behind the strong performance of the business in the six months to December 31. 
In rand terms, after-tax profits rose 9.8%. Converting that to sterling the figure was £14mln for an increase of 28% with the South African currency even weaker than the pound.
Production was down 10% in the first-half to 91,613 ounces of gold, mainly as a result of disruption.
The company said it would hand back a record £17.1mln in dividend payments, which equates to 0.88p a share (up from 0.53p).
Ongoing, the plan is to pay out 40% cash generated from operating activities.
"This measure aligns dividend distributions with the cash generation potential of the business," Pan African told investors.
Looking ahead, the firm said it would restart operations at the Evander Mines after infrastructure upgrades.
It also wants to improve operational performance in order to hit its full-year production guidance.
Pan African said it might make bolt-on purchases. "Any acquisition considered will, however, be subject to the group’s stringent capital allocation and low cost production criteria, delivering the requisite returns to our shareholders within a short- to medium-term timeframe," it added. 
The medium-term plan is to generate production of 250,000 ounces of gold from the current portfolio of assets.

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

The company also has a platinum tailings re-treatment operation at Phoenix, in close proximity to a chrome mine controlled by the struggling International Ferro Metals Limited (LON:IFL).

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.


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