Numis Securities analyst Andy Davidson initiated coverage on Pan African Resources (LON:PAF) in a note entitled: “Platinum-tipped gold...with a yield”.
The analyst rates the stock as a ‘Buy’ with a 16p target.
“We believe that PAF is trading well below fair value,” Davidson said. “In our view, PAF is also attractive for its strong gold price leverage, potential for acquisitions and for its dividend payment - a rarity amongst gold miners.”
Davidson highlighted PAF’s established and solid production base, as well as its exploration upside and M&A potential.
The analyst emphasised that the Barberton mine, in South Africa, provides a solid production base of 100,000 ounces per year.
Davidson said that PAF has a strong sensitivity to the gold price, and with a bullish outlook for gold, he sees this as a positive.
Furthermore the analyst also expects the Phoenix chrome tailings re-treatment project to be commissioned at the start of 2012.
“Although production will be relatively modest - we expect up to 20koz p.a. of 4E platinum group metal (PGM) production - the unit costs are very low and returns are very attractive”, Davidson said.
“We believe there is good upside potential from expansion at Barberton with the recent discovery of a new, potentially low cost, resource at the Royal Sheba ore zone. We also see potential to expand at Phoenix with additional resources.”
Davidson believes that PAF is undervalued.
“PAF is currently trading firmly in the lower half of its peer group at around 0.7x NAV versus the average 1.2x; making it, in our view, strongly undervalued.”