Numis Securities has reiterated a ‘buy’ stance Pan African Resources plc (LON:PAF) after the firm announced that the pouring of first gold at its Elikhulu tailings retreatment plant in South Africa was “on budget and ahead of schedule”.
The project’s commissioning phase is scheduled to be completed next month, with steady state production of approximately 55,000 ounces of gold per annum at an all-in sustaining cost of between US$650/oz and 700/oz.
Once the Evander Tailings Retreatment Plant, which has a throughput of 200,000 tonnes per month, comes on stream in December, production is expected to rise to 70,000oz.
Over the life of the Project, Elikhulu is expected to produce 674,000oz of gold, with a value of approximately 11.5bn Rand (£622mln) at a gold price of 550,000 Rand/kg (£29,800/kg).
In a note to clients, the Numis analysts said: “This is a good result for PAF, which should also benefit from the recent weakening of the ZAR vs the USD that should offset some of the impact of the weaker gold price.”
They added: “PAF has faced challenges with the Evander underground mine, which has now been closed, and the start of production at Elikhulu marks a key point in the transition to a lower risk, lower cost business model.”
The analysts noted that given Pan African’s guidance for full-year 2019 is for production of 170,000 ounces, they expect group cash costs to decline from US$1,045 per ounce in full-year 2018 to US$657 per ounce in full-year 2019 as Elikhulu ramps up.
Royal Sheba feasibility study next major catalyst
The analysts pointed out: “The next major catalyst for the shares should be the publication of the feasibility study for the Royal Sheba orebody at Barberton in September.”
They added that financial results for full-year 2018 should be published on September 19, which is “likely to be noisy with one-offs, due to the closure process at Evander, and we expect underlying EPS of £0.002/share”.
They pointed out that a weaker South African Rand (ZAR) also provides support for the group, with the currency having back pulled back from a year-to-date high of R11.55 per US dollar to R14.43.
The analysts noted: “In ZAR terms, the gold price has increased from R16,000/oz (R514,000/kg) at the beginning of August to R17,025/oz (R547,000/kg) at present, as the weakening of the ZAR has outweighed the pullback in the USD gold price over the same period.
“Over the short term, this should be supportive for PAF, which has ZAR denominated costs, although over the longer term the benefit should be tempered by higher inflation in South Africa.”
The City broker repeated a 16p target price on Pan African Resource shares, with the stock currently changing hands at 7.31p.