Gold at a three year high has put a strong wind in the sails of Pan African Resources plc (LON:PAF).
Earnings for the year to June will be at least double last year with production also ahead of target it said in August in a mandatory statement prompted by the likelihood of exceeding market forecast by more than 20%.
But there is no shortage of other good news at the moment for the South Africa-based underground gold miner.
The combination of higher output from its two mines (Barberton and Evander) and a higher gold price is seeing cash pour in, for instance.
Currency benefits from paying costs out in rand and being paid for gold in US dollars have added to the momentum.
How long the win-win conditions last is unpredictable, but while they do Pan African is sensibly tidying up some loose ends as well as also laying the groundwork for the future.
Indeed, Pan African has been able to complete a very attractive R182mln share buyback deal with black empowerment partner Shanduka, guarantee coal supplies by buying its own colliery (Ultkomst) for R148mln and pay a R210mln dividend in December and still debt fall sharply.
New tailings plans
A definitive feasibility study meanwhile is due to be completed this quarter on a new tailings treatment plant at Evander.
If the numbers stack up, and with costs at a current small tailings operation at Evander around US$600 per oz currently it’s hard to see why they won’t, production from the mine could rise by 40,000-50,000 oz per year or 50% at the top.
That’s a big increase for a mid-tier producer like Pan African and likely to be at a relatively low capital cost.
Company built on two pillars
The company’s current production is split fairly evenly between two main operations 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 together the mines continue to produce at around an annualised 200,000 ounces per year at all-in sustaining costs of US$908 per ounce, which stacks up well against a spot gold price currently of US$1,350 per ounce.
Head grades at Evander are about 5.8 grams of gold per tonne, while high grade Barberton is at 10.9 grams per tonne.
Evander’s new tailings re-treatment facility contributed 3,708 ounces of gold during its first six months of production.
But what was especially nice was that recoveries came in much higher than expected, at 49% as against the 42% that had been anticipated.
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.
Pan African initially acquired a 74% stake in Barberton, to comply with South Africa’s Black Economic Empowerment laws.
But Metorex’s black economic empowerment partner at the time, Shanduka, remains to this day Pan African’s black empowerment partner.
And the strength of the relationship that was created back then is clear from more recent developments: the current Pan African chief executive Cobus Loots is drawn from Shanduka’s ranks.
Closer links with local partner
Even more recently still, Pan African agreed to acquire a stake in Shanduka itself.
This cross-holding arrangement is somewhat unusual but it speaks of a company that is at ease with its social and commercial responsibilities and more than able to combine the two into a workable solution, in what is not always an easy political environment.
Workers at both Barberton and Evander are unionised but haven’t shown a greater tendency to industrial action than any other workers in the sector, and Loots has worked hard to ensure that Pan African enjoys relatively stable industrial relations.
Platinum a potential 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 recent weakness in platinum and platinum group metals prices.
Platinum now looks like it might be about to turn around and start to follow the upward trajectory that gold has set since the beginning of 2016.
If that turns out to be the case then Phoenix will at last come into its own and add significant cashflow and value to the company.