After a challenging twelve months South African gold miner Pan African Resources (LON:PAF) is looking forward to a more settled period.
Problems at both its Evander and Barberton complexes will hit profits, while yesterday’s announcement it had bought a thermal coal mine from Shanduka Resources also raised a few eyebrows.
On closer inspection, though, it’s a savvy move by the company.
Having had to push through a low grade patch at Evander, Pan African is making provisions well ahead so that it can deal with potential problems before they happen.
The Uitkmost colliery in South Africa has a coal mineral resource of 25.7mln tonnes and sells approximately 400,000 tonnes of coal per year.
“What this gives us” chief executive Cobus Loots tells Proactive “is a natural hedge against a rising energy price in South Africa, which we see in the future.
“Energy costs will increase and the coal price will increase at the same time, but if you have exposure to coal it gives you that hedge.”
Pan African is to pay Shanduka R200mln (£10.4mln) for Uitkmost.
The move does not mean the company is changing its focus, however, something Loots is quick to point out.
“Pan African remains a gold-focused company. The acquisition of the Uitkomst colliery does not change our focus, but when we see what we believe to be fantastic opportunities in the mining space, it is very difficult to walk away.”
Broker Peel Hunt chipped in on the deal, saying: "The move into coal mining for this precious metals producer may surprise some, but we do not expect this to be the start of a strategy to become a diversified producer, more of an opportunistic move to add cash flow, strengthen the dividend cover and generate value."
So what of its gold business?
Recent drilling at its flagship Fairview Mine in Barberton has yielded extremely positive results confirming the extension of the high grade 11 Block by a further 170 metres.
This extension has extended the life of the mine to in excess of 19 years.
Meanwhile, its Evander tailings retreatment plant has now successfully ramped-up processing to its capacity of 180,000 to 200,000 tonnes per month at 0.31 g/t, leading the company to say gold production is now in line with targets.
More importantly, Pan African expects its performance to improve markedly in 2016 as it tunnels into a new high grade zone at Evander.
“Having implemented corrective strategies, the group is well positioned to deliver an improved performance in 2016,” Loots said.
“We have got Evander’s development to 26 level already, and this development will allow us to mine high grades (of gold) for at least the next year.
It will also mean the miner does not suffer the lack of flexibility that required it to mine lower grade, he added.
Meanwhile the extension of the high grade 11 Block at Barberton’s Fairview mine has added an estimated 317,500oz of gold and added over 19 years to its life.
Loots added that Pan African also remains committed to its dividend.
"We believe the company will maintain its dividend pay-out and industry leading dividend yield,” Loots said.
“Our shareholders want to see a cash return. They have come to expect a good return from Pan Africa and we have listened to them.”
Loots, sufficiently confident, has given the company a self-made target for the first time in years.
Production guidance for the financial year to 30 June 2016 is in excess of 210,000oz gold and approximately 10,000oz of platinum.
Loots said if the company can achieve this goal, it would have had “an exceptional year”.
Peel Hunt said: "We expect the improvements to be delivered shortly, driving a strong start to FY16."
The 2015 results may not make pretty reading, but for 2016 it sees sales climb to £172mln and underlying profits to reach £50.4mln, close to the recent peak seen in 2013.