Pan African can make Evander deal work, says broker

Pan African Resources (LON:PAF) has a good chance to make the proposed acquisition of the Evander gold mine in South Africa  work, according to broker Collins Stewart.

Pan African announced yesterday it is to buy Evander from Harmony Gold for £139 million (R1.7 billion) in a 50:50 deal with South African miner Wits Gold.

Pan African said it will increase its gold production profile from 95,000 to around 140,000 ounces a year.

The joint venture intends to use a combination of debt, equity and operating cash flows to cover the acquisition cost.

Collins Stewart said the deal looks attractive for Pan African on a production and resource basis as it brings in an attributable 45,000 ounces of gold production or a 47% increase on existing production at a cost of 28% of the group’s market value.

Evander will add an attributable 16.3Moz of resources and 3.8Moz of reserves.

“The acquisition price on an EV/Reserve and EV/Resource basis is $29/oz and $6.8/oz respectively, representing a 90-95% discount against a sector average,” the broker added.

Against Pan African’s gold equivalent reserves and resources, the acquisition represents a near 5-fold increase in reserves and will take the resources up 187% to 25Moz,said the broker.

“Pan African’s gold equivalent reserve and resource base currently trades on $328/oz and $38/oz respectively, demonstrating that the acquisition is highly accretive on this measure,” it said.

“We believe Pan African is a solid operator that has good potential to make this acquisition work. We expect Pan African will continue to be seen in the sector as an attractive gold producer, paying one of the highest yields in the sector at c.5%,” Collins Stewart concluded.

The Evander operations are in Mpumalanga, South Africa, and comprise the operating Evander 8 shaft, and several significant development projects namely Rolspruit, Poplar, Evander South, Libra, a surface tailings resource and the Kinross metallurgical processing plant.

The total underground resource represents 32.5 million ounces and a reserve of 7.6 million ounces.

The Evander 8 shaft currently has an expected life of mine of more than ten years.

Evander is expected to produce between 85,000 and 95,000 ounces per year and the deal adds significantly to the firm's reserve and resource base, and provides an annual attributable share of production of around 45,000 ounces per annum, said Pan African.

Some £115 million is due in cash on the closing date of the transaction while four payments of £2 million each will be payable quarterly - beginning three months after the closing date.

The final £16 million is payable in two stages depending on movements in the gold price.

Pan African chief executive Jan Nelson said yesterday: "Evander meets our investment criteria in all aspects and has the same ability to yield high margins as our Barberton mining operations.”

“The Evander 8 Shaft orebody has gold grades in excess of 14g /t in the measured and indicated resource category, an extremely experienced management team and workforce, as well as good infrastructure.”

"Together with Barberton, Evander will respectively increase our resource by 304 per cent to 22.9Moz and our reserve by 390 per cent or 4.9Moz."

He added: "The smart solution of a partnership with Wits Gold gives us the necessary momentum to continue to deliver profitable sustainable stakeholder growth and returns and represents a first in the junior gold sector in South Africa."