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Pan African Resources plc: DEEP DIVE

Pan African Resources has recovered its poise, and is now driving towards an annual production target of 170,000 ounces

Recent production numbers from Pan African's operations give plenty of grounds for encouragement
Pan African Resources has recovered its poise, and is now driving towards an annual production target of 170,000 ounces
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Gold production is on the rise

Pan African Resources plc (LON:PAF)(JSE:PAN) is comfortably on track to achieve its full year target of 170,000 ounces of gold produced from its South African mines.

The company produced just over 50,000 ounces of gold from its Barberton mine during the six months to December 2018, up around 25% on the production figure from the corresponding period a year earlier.

And production from the new operations at Elikhulu amounted to 15,000 ounces of gold as the ramp up there continues.

Two and half months into the second half of the financial year, Pan African chief Cobus Loots is confident that Elikhulu is now producing at roughly around the targeted 70,000 ounces per year annualised rate.

If there’s a shortfall this year from Elikhulu because of lower levels of production during ramp-up, that will be made up for by residual production from the old Evander project, now shut down, which amounted to around 15,000 ounces in the first half of the financial year.

The return of Pan African to such levels of production represents the culmination of much work, after the company took the tough decision to close the underperforming Evander a couple of years ago. Because although it may have been playing havoc with the company’s margins, Evander’s 100,000 ounces per year did at least allow Pan African to punch-in for work at the 200,000 ounce overall production level.

And to some, it seemed doubtful whether Pan African would ever reach that kind of scale again, after surgically removing such a significant amount of production.

Barely two years later, and the company has almost completely dispelled those doubts. To be sure, this year’s 170,000 ounce target isn’t quite up there at the 200,000 mark, but there are other improvements to be taken into consideration, as well as the possibility that mining could get underway again at the 8Shaft pillar at Evander and add to the overall production total.

More importantly, costs now look to be under proper control.

“It’s important for us to position ourselves as a low-cost producer,” says chief executive Coobus Loots.

“In the last six months we came in with all-in sustaining costs at US$975. An there is scope for us to bring those costs down further as Elikhulu ramps up in the current period.”

Indeed the all-in cost profile of the various operations inside Pan African is quite varied. Elikhulu comes in at around US$650 per ounce, while the tailings retreatment portion of Barberton, which accounts for around 25% of production there, boasts all-in costs of just US$500 per ounce.

That leaves Barberton itself as a higher cost centre, but here too Loots is confident that costs can be brought down. He cites two specific sections of the mine as the current areas of focus.

“We are utilising more infrastructure at Fairview,” he says, and this will include the commissioning of a new sub-vertical shaft within two years.

“And at Royal Sheba we will add more ounces over the short-to-medium term.”

This keen-eyed focus on costs is no accident. It was margin pressures that did for Evander in the end as erratic grades undermined the Pan African modelling, and the company is determined not to get itself into such a position again.

Instead, the plan now is to focus on existing assets and allow the sizeable and growing cashflow to whittle away at the debt that was incurred to get Elikhulu up and running.

“In three years’ time I would anticipate that our debt will have been substantially repaid,” says Loots.

“At that point we’ll have stable production, and hopefully we’ll be looking at growth.”

What’s more, he adds, by that time Pan African ought to be in a secure enough position to go back to paying dividends, which it did with clockwork regularity before drastic action at Evander was called for.

Barberton has a 20 year mine life on current plans although, given that its current operational history stretches back 130 years, it’s probably imprudent to set any absolute and final limit to its life.

Either way, Pan African investors can look ahead for much further than the decade that is usual when it comes to modelling mid-tier mining investments.

The company has an established record as an experienced producer, and to boot, has shown recently that it can navigate some pretty choppy waters. With the return of dividends now looming on the horizon, supported by newly stabilising production, it looks as though conditions for Pan African will be set fair for plenty of years to come.



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