Peel Hunt has maintained a bullish stance on Pan African Resources plc (LON:PAF) after a visit to its Evander gold mine in South Africa, though its rating has been lowered.
Evander is a deep mine and has the highest costs of Pan African’s South African operations, but Peel Hunt says that means there is still scope for substantial optimisation improvements.
PAF acquired the mine in 2013 and has worked hard to improve its performance since then but there was a fatal accident recently, which will shut it for 55 days while infrastructure is upgraded.
The costs are expected to be US$3mln, which will not have a material effect on the group suggests the broker, with surface and tailings operations helping to mitigate lost production underground.
“The optimisation potential at Evander and the case for developing the low cost Elikhulu project [tailings] remain the key attraction and dwarf the short-term impact of these disruptions.
“The group is now focused 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.
“We now see potential for Evander to exit this suspension of underground operations on a stronger footing.”
Production guidance has been scaled back to 181,000 ounces this year, while reports recently have suggested substantial cut backs in the work force are on the way though the company has not confirmed numbers.
“We expect the optimisation process to continue over the coming years,” said Peel Hunt.
“This should deliver a rising production profile and lower unit costs.”
Allied to the Elikhulu tailings retreatment project this should ensure “continued improvement of the group margins and therefore the dividend on a two-year view.”
Even so, the rating is now add from buy, though Peel Hunt has upped its share price target to 19p from 18p.