On 8 February, Pan African (PAF) updated its earnings guidance for H115 to reflect the material changes in forex rates since early December (eg ZAR/£ -7.8%, ZAR/US$ -13.2% and £/US$ -4.8%) and actual vs expected production in H116, which was 5.5%, or 5,583oz, above our expectations. Whereas Edison had expected the outperformance to occur in Pan African’s underground operations however, in general it occurred in its tailings retreatment operations (the BTRP and ETRP). The following analysis therefore compares actual operational results with our expectations of 10 December 2015 and 11 February 2016.
Evander Gold Mines (EGM) back in profit
Evander’s most significant achievement during the period was to return to profitability for the first time since H114 (ie July-December 2013). Throughput was closely aligned with our expectations, suggesting that the earlier underground challenges and infrastructure constraints (especially those relating to conveyor belt availability) had been successfully overcome and, as a result, there was no low-grade ore processed from surface sources. Albeit the (underground) head grade was lower than our (augmented) February 2016 forecast, it was still higher than our December 2015 forecast and, importantly, consistent with Evander exiting its low-grade mining cycle (see below). Unit working costs were ZAR2,450/t milled, which was 2.9% above our February 2016 forecast, but only 3.1% above our H215 underground unit working cost estimate of ZAR2,376/t (cf our target of ZAR2,159/t). As a result, gross total cash costs increased back to the levels of H214 and H115; however, this was more than offset by the increase in revenue as a result of the planned concentration of mining activities on the newly established, higher-grade areas of 25 level.
Exhibit 2: EGM operational results, H114-H216e, actual and forecasts
|
H114 |
H214 |
H115 |
H215 |
H116e (Dec ’15) |
H116e (Feb ’16) |
H116a |
H216e |
FY16e (updated) |
Tonnes milled underground (t) |
200,272 |
194,855 |
197,879 |
184,107 |
200,500 |
200,500 |
200,942 |
200,500 |
401,442 |
Head grade underground (g/t) |
6.20 |
4.17 |
4.30 |
4.92 |
5.68 |
6.35 |
5.80 |
6.75 |
6.27 |
Underground gold contained (oz) |
39,921 |
26,138 |
27,357 |
29,137 |
36,615 |
40,959 |
37,471 |
43,512 |
80,983 |
Tonnes milled surface (t) |
111,225 |
149,676 |
198,578 |
67,645 |
|
|
0 |
|
0 |
Head grade surface (g/t) |
1.30 |
1.47 |
1.40 |
0.22 |
|
|
0.00 |
|
0.00 |
Surface gold contained (oz) |
4,649 |
7,095 |
8,938 |
477 |
0 |
0 |
0 |
0 |
0 |
Tonnes milled (t) |
311,497 |
344,531 |
396,457 |
251,752 |
200,500 |
200,500 |
200,942 |
200,500 |
401,442 |
Head grade (g/t) |
4.45 |
3.00 |
2.85 |
3.66 |
5.68 |
6.35 |
5.80 |
6.75 |
6.27 |
Contained gold (oz) |
44,570 |
33,233 |
36,295 |
29,614 |
36,615 |
40,959 |
37,471 |
43,512 |
80,983 |
Recovery (%) |
97 |
102 |
93 |
100 |
98 |
98 |
97 |
98 |
97 |
Production underground (oz) |
38,710 |
27,246 |
26,024 |
27,722 |
35,773 |
40,017 |
36,370 |
42,512 |
78,882 |
Production surface (oz) |
3,955 |
6,645 |
7,831 |
1,982 |
|
|
0 |
|
0 |
Total production (oz) |
42,665 |
33,891 |
33,855 |
29,704 |
35,773 |
40,017 |
36,370 |
42,512 |
78,882 |
Recovered grade (g/t) |
4.26 |
3.06 |
2.66 |
3.67 |
5.55 |
6.21 |
5.63 |
6.59 |
6.11 |
|
|
|
|
|
|
|
|
|
|
Gold sold (oz) |
43,164 |
33,392 |
33,733 |
29,825 |
35,773 |
40,017 |
36,370 |
42,512 |
78,882 |
Average spot price (US$/oz) |
1,302 |
1,290 |
1,233 |
1,206 |
1,121 |
1,121 |
1,105 |
1,225 |
1,169 |
Average spot price (ZAR/kg) |
421,273 |
443,171 |
435,376 |
461,891 |
484,259 |
490,846 |
483,309 |
559,531 |
563,958 |
|
|
|
|
|
|
|
|
|
|
Total cash cost (US$/oz) |
985 |
1,358 |
1,317 |
1,277 |
901 |
876 |
995 |
717 |
800 |
Total cash cost (ZAR/kg) |
318,616 |
466,650 |
464,955 |
489,118 |
389,068 |
383,460 |
435,190 |
327,394 |
377,100 |
Total cash cost (US$/t) |
134.93 |
134.43 |
112.03 |
149.51 |
160.69 |
174.79 |
180.15 |
151.98 |
157.22 |
Total cash cost (ZAR/t) |
1,373.00 |
1,427.75 |
1,230.00 |
1,794.96 |
2,159.08 |
2,380.43 |
2,450.00 |
2,159.08 |
2,304.70 |
|
|
|
|
|
|
|
|
|
|
Implied revenue (US$000s) |
56,200 |
42,940 |
41,593 |
35,694 |
40,101 |
44,859 |
40,189 |
52,077 |
92,223 |
Implied revenue (ZAR000s) |
565,576 |
460,221 |
456,799 |
427,794 |
538,809 |
610,935 |
546,731 |
739,838 |
1,383,655 |
Implied revenue (£000s) |
35,471 |
25,504 |
25,566 |
23,502 |
26,080 |
29,266 |
26,219 |
34,333 |
63,260 |
|
|
|
|
|
|
|
|
|
|
Implied cash costs (US$000s) |
42,029 |
46,317 |
44,415 |
37,639 |
32,219 |
35,045 |
36,199 |
30,471 |
63,114 |
Implied cash costs (ZAR000s) |
422,810 |
491,905 |
487,800 |
451,884 |
432,896 |
477,276 |
492,308 |
432,896 |
925,203 |
Implied cash costs (£000s) |
26,527 |
27,662 |
27,297 |
24,917 |
20,977 |
22,913 |
23,635 |
20,089 |
42,792 |
|
|
|
|
|
|
|
|
|
|
Forex (ZAR/£) |
15.9388 |
17.8279 |
17.8700 |
18.1318 |
20.6370 |
20.8300 |
20.8300 |
21.5487 |
21.7135 |
Forex (ZAR/US$) |
10.0600 |
10.6853 |
10.9827 |
11.9173 |
13.4362 |
13.6190 |
13.6000 |
14.2067 |
14.8421 |
Forex (US$/£) |
1.5844 |
1.6685 |
1.6269 |
1.5186 |
1.5377 |
1.5328 |
1.5328 |
1.5168 |
1.4688 |
Source: Edison Investment Research, Pan African Resources.
Level 25 at 8 shaft has now been firmly established, with the majority of crews working in the high-grade area of the mine. As a result (and significantly), the actual head grade mined at Evander exceeded management’s expectations (September 2015 guidance) in two of the final three months of the year, as shown in Exhibit 3.
Exhibit 3: Evander underground head grade, actual vs expected (July-December 2015)
|
|
Source: Pan African Resources, Edison Investment Research
|
In addition to the head grade, a number of other operational parameters at EGM improved during the period, including the mine call factor (from 59% in H115 to 65% in H116 versus a target of 73%), face advance (from 7.9m in H115 to 8.4m in H116 versus a target of 12m) and stoping width (reduced from 131cm in H115 to 127cm in H116 versus a target of 125cm). By contrast, while throughput matched our expectations, utilisation at 8 shaft remained relatively low at c 78.6% over the six-month period and with only one month in which it achieved its 35-40ktpm capacity. In the short to medium term, management will focus on improving this performance. In the meantime however, the situation in which the majority of crews are focused on the high-grade areas of the mine is expected to pertain for at least the next two years and head grades are therefore expected to remain in the range 6.0-7.0g/t for the next three to five years. In the immediate future, operations at Evander will involve advancing from 25 to 26 level in approximately nine months’ time. This will increase the number of conveyor belts from 11 (over 5km) currently to 12, and proportionately increase the amount of associated maintenance required. However, it will also improve access to more high-grade panels and allow management to manage and blend the ore mined towards achieving its target of 110,000oz of annual gold mined at EGM by selectively reducing mining at the lower-grade extremities of the Kinross pay channel.
In the longer term, management believes that a grade of 7.2g/t is possible. Note that, had an underground head grade of 7.2g/t prevailed in H116 (and applying the group’s H116 marginal tax rate to the incremental profits), we estimate that it would have added c 0.26p to both Pan African’s EPS and headline EPS in H116 (ie 0.52p, or ZAR0.11 per share, on an annualised basis). Had an underground head grade of 7.2g/t prevailed in H116 and a gold price of US$1,234/oz, then we estimate that 0.42p/share would have been added to EPS and HEPS in H116. Had an underground head grade of 7.2g/t prevailed in H116 and a gold price of US$1,466/oz (Edison’s average real, long-term gold price, see pages 15-16), then we estimate that 0.70p/share would have been added to EPS and HEPS in H116.
Barberton Gold Mining Operations (BGMO)
As with Evander, throughput at Barberton was closely aligned with our prior expectations and, while the head grade was not as high as our (augmented) February 2016 estimate, it was still noticeably higher than our December 2015 one and displayed a material increase compared to the (implied) grade in H215. Metallurgical recoveries increased to 92.0%, such that both throughput and recoveries have now returned to levels that are consistent with those pre-dating the contamination of the Biox plant with oil at Fairview in May 2014 (ie H214). Unit working costs were 9.6% and 18.0% below our two prior forecasts, respectively, aided by a ZAR23.5m gold inventory credit adjustment relating to 58kg (1,865oz) of unsold gold inventory concentrates held in the Fairview Biox plant (NB equates to US$811/oz of concentrate). Excluding this credit, unit working costs would have been ZAR3,066.54/t – ie on a par with H115 and therefore once again demonstrating diligent cost control, year-on-year.
Exhibit 4: Barberton operational results, H114-H216e
|
H114 |
H214 |
H115 |
H215 |
H116e (Dec ’15) |
H116e (Feb ’16) |
H116a |
H216e |
FY16e (updated) |
Tonnes milled (t) |
149,589 |
142,532 |
126,713 |
134,036 |
140,768 |
140,768 |
139,430 |
147,500 |
286,930 |
Head grade (g/t) |
10.45 |
10.56 |
11.40 |
10.00 |
10.26 |
11.32 |
10.60 |
10.26 |
10.38 |
Contained gold (oz) |
50,272 |
48,374 |
46,443 |
43,080 |
46,433 |
51,234 |
47,117 |
48,654 |
95,771 |
Recovery (%) |
91 |
96 |
89 |
90 |
92.5 |
92.5 |
92.0 |
92.5 |
92.4 |
Production underground (oz) |
41,849 |
46,130 |
42,666 |
38,649 |
42,946 |
47,386 |
43,487 |
45,000 |
88,487 |
Production calcine dumps/surface ops (oz) |
390 |
369 |
76 |
102 |
|
|
130 |
|
130 |
Total production (oz) |
42,239 |
46,499 |
42,742 |
38,751 |
42,946 |
47,386 |
43,617 |
45,000 |
88,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gold sold (oz) |
45,405 |
43,333 |
41,232 |
40,261 |
42,946 |
47,386 |
43,617 |
45,000 |
88,617 |
Average spot price (US$/oz) |
1,317 |
1,290 |
1,229 |
1,206 |
1,121 |
1,121 |
1,113 |
1,225 |
1,169 |
|
|
|
|
|
|
|
|
|
|
Average spot price (ZAR/kg) |
426,101 |
443,171 |
433,966 |
461,891 |
484,259 |
490,846 |
486,567 |
559,531 |
560,904 |
|
|
|
|
|
|
|
|
|
|
Total cash cost (US$/oz) |
787 |
770 |
885 |
825 |
782 |
771 |
681 |
740 |
653 |
Total cash cost (ZAR/kg) |
254,506 |
263,029 |
312,502 |
318,061 |
337,869 |
337,614 |
297,877 |
337,869 |
14,301 |
Total cash cost (US$/t) |
222.22 |
251.14 |
287.82 |
238.62 |
238.62 |
259.55 |
213.09 |
225.67 |
201.57 |
Total cash cost (ZAR/t) |
2,403.00 |
2,668.95 |
3,161.00 |
2,860.08 |
3,206.09 |
3,534.86 |
2,898.00 |
3,206.09 |
2,984.86 |
|
|
|
|
|
|
|
|
|
|
Implied revenue (US$000s) |
59,798 |
56,360 |
50,674 |
48,095 |
48,143 |
53,120 |
48,546 |
55,125 |
103,626 |
Implied revenue (ZAR000s) |
601,758 |
600,142 |
556,300 |
574,798 |
646,858 |
723,437 |
660,091 |
783,147 |
1,546,008 |
Implied revenue (£000s) |
37,743 |
33,700 |
31,148 |
31,559 |
31,309 |
34,655 |
31,671 |
36,343 |
70,881 |
|
|
|
|
|
|
|
|
|
|
Implied cash costs (US$000s) |
33,242 |
35,796 |
36,471 |
31,983 |
33,589 |
36,537 |
29,711 |
33,287 |
57,837 |
Implied cash costs (ZAR000s) |
334,362 |
380,411 |
400,600 |
383,353 |
451,315 |
497,595 |
404,068 |
472,898 |
856,446 |
Implied cash costs (£000s) |
20,978 |
21,484 |
22,417 |
21,043 |
21,869 |
23,888 |
19,398 |
21,946 |
39,418 |
|
|
|
|
|
|
|
|
|
|
Forex (ZAR/£) |
15.9388 |
17.8279 |
17.8700 |
18.1318 |
20.637 |
20.8300 |
20.8300 |
21.5487 |
21.7135 |
Forex (ZAR/US$) |
10.0600 |
10.6853 |
10.9827 |
11.9173 |
13.4362 |
13.6190 |
13.6000 |
14.2067 |
14.8421 |
Forex (US$/£) |
1.5844 |
1.6687 |
1.6269 |
1.5186 |
1.5377 |
1.5328 |
1.5328 |
1.5168 |
1.4688 |
Source: Edison Investment Research, Pan African Resources
Principal sources of cost inflation and deflation in rand terms over the year were as follows:
■
salary and wages: +15.7% (vs +4.7% in FY15) as a result of the 9% wage agreement settlement with the unions (see page 12) coupled with increased production and a new bonus scheme, which gave rise to an increase in production incentives and overtime payments. Note that this forms a welcome contrast with FY15, which exhibited a decrease in the number of employees on the mine and also lower incentivisation payments;
■
mining costs: +1.0 % (vs +5.3% for FY15), including a 2.7% increase in vamping contractor’s costs. Excluding vamping contractor’s costs, mining costs were unchanged, year-on-year;
■
processing costs: -10.6% (vs -1.6% for FY15) reflecting lower metallurgical plant repairs and maintenance costs;
■
engineering and technical services: +24.4% (vs +12.2% for FY15) owing to the need for secondary support at Fairview’s high-grade 11-block in order to access additional high-grade pillars; and
■
electricity: +9.2% (vs +11.5% for FY15), which is below the 8% NERSA approved, regular tariff increase plus the additional one-off 4.69% tariff increase imposed from 1 April 2015, owing to improved electricity management, including the re-scheduling of processing into lower tariff periods.
Capital expenditure was ZAR55.9m in H116 and was thus consistent with FY15’s figure of ZAR112.6m, almost all of which is now classified as either ‘maintenance’ or ‘development’ after the conclusion of the BTRP’s construction.
Finally, after exploration drilling in FY15 confirmed the down-dip extension of the high-grade 11-block of the MRC orebody by a further 170m, thereby increasing the life of BGMO’s operations by 5.3%, from 19 to 20 years (company estimate), a further two holes are planned again later this year.
Barberton Tailings Retreatment Project (BTRP)
In contrast to BGMO and Evander, PAF’s retreatment operations typically outperformed our expectations. In the case of the BTRP, the head grade was maintained at an elevated level, resulting in materially higher metallurgical recoveries, while costs returned to levels of H214 and H115, resulting in unit costs of production falling to an unprecedented US$367/oz and gross profits increasing in rand, dollar and sterling terms.
Exhibit 5: BTRP operational results, H114-H216e
|
H114 |
H214 |
H115 |
H215 |
H116e (Dec ’15) |
H116e (Feb ’16) |
H116a |
H216e |
FY16e |
Tonnes processed tailings (t) |
343,137 |
472,599 |
484,315 |
487,312 |
543,656 |
543,656 |
464,179 |
532,090 |
996,269 |
Head grade tailings (g/t) |
1.70 |
1.58 |
1.50 |
1.30 |
1.15 |
1.15 |
1.30 |
1.15 |
1.22 |
Tailings gold contained (oz) |
18,755 |
23,208 |
23,357 |
20,377 |
20,135 |
20,135 |
19,401 |
19,707 |
39,108 |
Recovery (%) |
60 |
49 |
51 |
65 |
45 |
45 |
64 |
45 |
55.5 |
Production tailings (oz) |
11,603 |
11,282 |
11,710 |
13,219 |
9,061 |
9,061 |
12,830 |
8,868 |
21,698 |
Production other (oz) |
0 |
0 |
0 |
0 |
0 |
|
|
|
|
Total production (oz) |
11,603 |
11,282 |
11,710 |
12,573 |
9,061 |
9,061 |
12,830 |
8,868 |
21,698 |
Recovered grade (g/t) |
1.05 |
0.74 |
0.75 |
0.80 |
0.52 |
0.52 |
0.86 |
0.52 |
0.68 |
|
|
|
|
|
|
|
|
|
|
Gold sold (oz) |
11,603 |
11,282 |
11,710 |
12,573 |
9,061 |
9,061 |
12,830 |
8,868 |
21,698 |
Average spot price (US$/oz) |
1,317 |
1,290 |
1,229 |
1,206 |
1,121 |
1,121 |
1,113 |
1,224 |
1,158 |
|
|
|
|
|
|
|
|
|
|
Average spot price (ZAR/kg) |
426,101 |
443,171 |
433,799 |
461,891 |
484,259 |
490,846 |
486,566 |
632,956 |
546,396 |
|
|
|
|
|
|
|
|
|
|
Total cash cost (US$/oz) |
454 |
528 |
459 |
497 |
692 |
683 |
367 |
547 |
441 |
Total cash cost (ZAR/kg) |
146,928 |
181,511 |
162,203 |
190,268 |
299,051 |
299,051 |
160,665 |
282,631 |
210,428 |
Total cash cost (US$/t) |
15.36 |
12.72 |
11.11 |
12.88 |
11.54 |
11.38 |
10.15 |
9.11 |
9.59 |
Total cash cost (ZAR/t) |
154.53 |
131.28 |
121.98 |
152.69 |
155.02 |
155.02 |
138.00 |
146.51 |
142.5461 |
|
|
|
|
|
|
|
|
|
|
Implied revenue (US$000s) |
15,281 |
14,584 |
14,392 |
15,112 |
10,157 |
10,157 |
14,280 |
10,855 |
25,134 |
Implied revenue (ZAR000s) |
153,776 |
155,425 |
157,998 |
179,905 |
136,476 |
138,332 |
194,166 |
174,587 |
368,754 |
Implied revenue (£000s) |
9,645 |
8,723 |
8,846 |
9,885 |
6,606 |
6,627 |
9,316 |
7,727 |
17,043 |
|
|
|
|
|
|
|
|
|
|
Implied cash costs (US$000s) |
5,271 |
6,011 |
5,379 |
6,277 |
6,273 |
6,188 |
4,710 |
4,847 |
9,557 |
Implied cash costs (ZAR000s) |
53,025 |
63,693 |
59,077 |
74,406 |
84,280 |
84,280 |
64,057 |
77,958 |
142,014 |
Implied cash costs (£000s) |
3,327 |
3,590 |
3,306 |
4,111 |
4,084 |
4,046 |
3,075 |
3,450 |
6,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forex (ZAR/£) |
15.9388 |
17.8279 |
17.87 |
18.1318 |
20.6370 |
20.8300 |
20.8300 |
22.5969 |
21.7135 |
Forex (ZAR/US$) |
10.0600 |
10.6853 |
10.9827 |
11.9173 |
13.4362 |
13.6190 |
13.6000 |
16.0841 |
14.8421 |
Forex (US$/£) |
1.5844 |
1.6685 |
1.6269 |
1.5186 |
1.5377 |
1.5328 |
1.5328 |
1.4048 |
1.4688 |
|
|
|
|
|
|
|
|
|
|
Capex (US$000s) |
3,569 |
364 |
100 |
188 |
0 |
0 |
566 |
0 |
566 |
Capex (ZAR000s) |
35,900 |
4,800 |
1,100 |
2,200 |
0 |
0 |
7,700 |
0 |
7,700 |
Capex (£000s) |
2,252 |
159 |
62 |
122 |
0 |
0 |
370 |
0 |
370 |
Source: Edison Investment Research, Pan African Resources
Nameplate capacity at the BTRP is 100ktpm and management is expected to work towards achieving this level in H117. For the moment, Edison is continuing to anticipate a moderation in grade and metallurgical recoveries. However, management has also recently been investigating the potential to reduce retention times, while maintaining metallurgical recoveries at relatively high levels. To the extent that it is successful, our forecasts may therefore prove to be relatively conservative.
In the longer term, approximately two-thirds of the tailings being treated at the BTRP originated from the Fairview concentrator at a grade of c 1.6g/t. The remaining third are from the same origin, but are supplemented with material from the Biox plant at a grade of 3-10g/t. As a result, a substantial portion of the resources being treated by BTRP exists at a grade in excess of 1.6g/t and there is therefore ample opportunity for management to pursue higher-grade strategies in order to increase financial returns.
The ETRP operated at 74.2% capacity utilisation in H116. However, metallurgical recoveries were materially higher than expected, at 63% (vs 48% expected) on average, which could be attributed to the processing of higher-grade surface material, which achieved a recovery rate of 78.3% vs 52.7% for tailings.
Exhibit 6: ETRP operational results, H115-H216e
|
H215 |
H116e (Dec ’15) |
H116e (Feb ’16) |
H116a |
H216e |
FY16e |
Tonnes processed from surface feedstocks (t) |
139,723 |
|
|
161,090 |
140,000 |
301,090 |
Head grade surface feedstocks (g/t) |
1.10 |
|
|
1.30 |
1.25 |
1.28 |
Surface feedstocks gold contained (oz) |
4,941 |
|
|
6,733 |
5,626 |
12,359 |
Tonnes processed tailings (t) |
507,444 |
1,080,000 |
1,080,000 |
729,085 |
764,543 |
1,493,628 |
Head grade tailings (g/t) |
0.30 |
0.32 |
0.32 |
0.30 |
0.32 |
0.31 |
Tailings gold contained (oz) |
4,894 |
11,111 |
11,111 |
7,032 |
7,866 |
14,898 |
Total tonnes processed (t) |
647,167 |
1,080,000 |
1,080,000 |
890,175 |
904,543 |
1,794,718 |
Head grade (g/t) |
0.47 |
0.32 |
0.32 |
0.48 |
0.46 |
0.47 |
Contained gold (oz) |
9,836 |
11,111 |
11,111 |
13,765 |
13,492 |
27,257 |
Recovery (%) |
54 |
48 |
48 |
63 |
48 |
56.7 |
Production tailings (oz) |
4,029 |
5,333 |
5,333 |
3,708 |
6,476 |
10,184 |
Production surface (oz) |
2,494 |
|
|
5,272 |
|
5,272 |
Total production (oz) |
6,523 |
5,333 |
5,333 |
8,980 |
6,476 |
15,456 |
Recovered grade (g/t) |
0.31 |
0.15 |
0.15 |
0.31 |
0.22 |
0.27 |
|
|
|
|
|
|
|
Gold sold (oz) |
6,523 |
5,333 |
5,333 |
8,980 |
6,476 |
15,456 |
Average spot price (US$/oz) |
1,206 |
1,121 |
1,121 |
1,108 |
1,224 |
1,157 |
|
|
|
|
|
|
|
Average spot price (ZAR/kg) |
466,647 |
484,259 |
490,846 |
484,298 |
632,956 |
547,267 |
|
|
|
|
|
|
|
Total cash cost (US$/oz) |
688 |
567 |
560 |
528 |
625 |
565 |
Total cash cost (ZAR/kg) |
266,453 |
245,000 |
245,000 |
230,857 |
323,318 |
269,640 |
Total cash cost (US$/t) |
6.93 |
2.80 |
2.76 |
5.33 |
4.48 |
4.90 |
Total cash cost (ZAR/t) |
83.53 |
37.63 |
37.63 |
72.00 |
72.00 |
72.227 |
|
|
|
|
|
|
|
Implied revenue (US$000s) |
7,260 |
5,979 |
5,979 |
9,950 |
7,927 |
17,877 |
Implied revenue (ZAR000s) |
87,403 |
80,333 |
81,425 |
135,268 |
127,499 |
262,767 |
Implied revenue (£000s) |
4,609 |
3,888 |
3,901 |
6,491 |
5,643 |
12,134 |
|
|
|
|
|
|
|
Implied cash costs (US$000s) |
4,488 |
3,025 |
2,984 |
4,741 |
4,049 |
8,790 |
Implied cash costs (ZAR000s) |
54,060 |
40,643 |
40,643 |
64,500 |
65,127 |
129,627 |
Implied cash costs (£000s) |
3,004 |
1,969 |
1,951 |
3,096 |
2,882 |
5,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forex (ZAR/£) |
18.1318 |
20.6370 |
20.8300 |
20.8300 |
22.5969 |
21.7135 |
Forex (ZAR/US$) |
12.0400 |
13.4362 |
13.6190 |
13.6000 |
16.0841 |
14.8421 |
Forex (US$/£) |
1.5186 |
1.5377 |
1.5328 |
1.5328 |
1.4048 |
1.4688 |
|
|
|
|
|
|
|
Capex (US$000s) |
7,899 |
0 |
0 |
0 |
0 |
0 |
Capex (ZAR000s) |
95,100 |
0 |
0 |
0 |
0 |
0 |
Capex (£000s) |
5,284 |
0 |
0 |
0 |
0 |
0 |
Source: Edison Investment Research, Pan African Resources
The grade of the dam being re-mined at the ETRP is 0.3g/t. However, the operation is commercially viable given its ability to fill unutilised capacity in the Kinross plant and the fact that it therefore attracts only incremental operating costs (broadly 14 additional employees). Re-mining is being conducted without breaching the dam wall and the tailings are being redeposited at Winkelhaak, thereby simplifying the environmental requirements (ie the Environmental Impact Assessment) with respect to re-filling the Kinross dam at a later date.
Nameplate capacity at the ETRP is 200ktpm and management’s target is to achieve 150-160ktpm (75-80% capacity utilisation on a sustainable, long-term basis). At ambient head grades (0.32g/t) and metallurgical recoveries (45%), this should result in the production of 10,000oz per annum at a total cash cost of US$807/oz (Edison calculation), based on the ETRP’s current cost base of ZAR130m per annum. In the meantime however, management will continue to source toll-treatment material with higher grades than the ETRP’s reserve and resource grades. Note that, in this respect, it is at a commercial advantage in that it is the only retreatment operator in the area and is therefore (effectively) the buyer of choice (or even the buyer of last resort) for tailings assets destined for retreatment in the region. As a result, currently it has approximately 12 months of such surface material on hand to process – a similar quantity to March 2015.
Effectively, the ETRP represents a substantial (10,000oz per year) pilot plant, designed to prove recovery and cost parameters, before a decision is taken on the much larger Elikhulu project, which would process 12Mtpa (cf the ETRP’s 2.16Mtpa) to produce c 50koz per annum, but would require c ZAR1.5bn (US$93.2m, or US$1,863 per annual ounce of production) in third-party capital investment and would need to support an independent cost base (cf the ETRP, which supports only an incremental cost base).
Phoenix’s performance was transformed in H215 by IFM’s resumption of mining at its underground Lesedi Mine, which provided sulphide material for treatment in the CTRP (vs oxide material from Skychrome previously). This, in combination with an improved reagent suite and the processing of higher sulphide content tailings contained in number 4 dam, resulted in a materially improved plant recovery and financial performance. With the descent of IFM into Business Rescue proceedings (akin to Chapter 11 in the United States) in H116 however, Phoenix’s performance similarly regressed, exacerbated by a shortage of water on account of a drought in the North West province, which resulted in the loss of three weeks of production, and lower platinum group element (PGE) prices.
Exhibit 7: Phoenix Platinum operating and financial performance, H114-H215
|
H114 |
H214 |
H115 |
H215 |
H116 |
Plant feed - total (t) |
118,259 |
132,923 |
135,963 |
126,156 |
117,461 |
Head grade (g/t) |
3.80 |
3.61 |
3.16 |
3.47 |
3.25 |
Contained PGE (oz) |
14,448 |
15,432 |
13,813 |
14,081 |
12,274 |
Plant recovery (%) |
24.0 |
27.3 |
34.0 |
53.8 |
39.0 |
Recovered PGE (oz) |
3,468 |
4,217 |
4,697 |
7,577 |
4,493 |
|
|
|
|
|
|
Production and sales of PGE 6E (oz) |
2,987 |
4,217 |
4,711 |
5,534 |
4,493 |
Basket price received (ZAR/oz) |
9,380 |
10,016 |
9,815 |
9,423 |
8,716 |
Basket price received (US$/oz) |
932 |
937 |
894 |
791 |
641 |
Implied revenue (ZAR000s) |
28,018 |
43,934 |
46,238 |
52,144 |
39,161 |
Implied revenue (£000s) |
1,758 |
2,464 |
2,587 |
2,876 |
1,880 |
Total cash costs (ZAR/oz) |
8,484 |
9,868 |
6,817 |
6,453 |
7,653 |
Total cash costs (US$/oz) |
843 |
924 |
621 |
542 |
563 |
Total cash costs (ZAR/t) |
214 |
313 |
236 |
283 |
293 |
Implied total cash costs (ZAR000s) |
25,307 |
41,615 |
32,087 |
35,713 |
34,416 |
Implied total cash costs (£000s) |
1,588 |
2,334 |
1,796 |
1,970 |
1,652 |
Capex (ZAR000s) |
200 |
200 |
100 |
500 |
800 |
Source: Edison Investment Research, Pan African Resources
Year-on-year contributors towards upward cost pressures in FY15 were:
■
Salary and wages: +5.3% (vs +10.7% in FY15), attributable to a 7.5% pay increase awarded to employees but lower production incentive payments under the new incentive scheme linked to productivity and profitability.
■
Electricity +31.6% (vs +2.8% in FY15 and Eskom’s tariff increase of 12.7%), as a result of adjusting the milling coarseness of Elandskraal’s tailings.
In addition to current arisings from Lesedi (typically c 20% of its feedstock), Phoenix also sources electricity, water and certain other services from IFM. Management maintains that “is not in a position to fully assess the impact of the Business Rescue proceedings” on Phoenix. On a group level, Phoenix’s contribution to Pan African’s profits is small (Edison estimates £0.5m at a gross level in H216). However, in the event that the business rescue proceedings are finalised and the Lesedi mine is put on care and maintenance indefinitely and the current PGE market conditions persist, Phoenix’s effective life would reduce from 28 years to nine to 12 years, in which case “there is a risk of an impairment of Phoenix Platinum’s carry value at financial year end” – albeit, this is clearly a non-cash cost. It will also place on Phoenix a requirement for a new, permanent tailings storage facility (at an estimated cost of c ZAR30-40m). In the meantime however, Phoenix remains a ‘strategic’ investment for Pan African, providing it with an entry into the PGE market. Moreover, on 15 September 2015, the administrator opined that there is a reasonable prospect of rescuing IFM (South Africa) via a sale of its assets/business and/or equity, albeit the process would probably take two to three months, to which end stakeholders are currently considering a bid for the company from Samancor.
In addition to its existing operations, Pan African has four near- to medium-term expansion opportunities: Elikhulu, Uitkomst, Evander South and the Evander 2010 pay channel at 7 shaft.
The total resource at Elikhulu is 165Mt at a grade of 0.28g/t, containing 1.5Moz, which management envisages is capable of supporting an operation processing 12Mtpa to produce 50,000oz per annum for the first eight years of its life, followed by 38,000oz per annum for the remaining six at a capital cost of c ZAR1.5bn (US$93.2m, or US$1,863 per annual ounce of production), operating costs of less than US$500/oz and with a payback period of less than four years.
PAF is in the process of completing a definitive feasibility study (DFS) to assess the development options for Elikhulu and is scheduled to conduct a review of the project in June/July 2016.
In June 2015, Pan African entered into agreements to acquire the Uitkomst colliery, near the town of Utrecht in KwaZulu-Natal, from Oakleaf Investments Holding 109 Proprietary and Shanduka Resources for a cash consideration of ZAR200m (US$12.4m, or £8.9m, at current exchange rates vs £9.3m at the time of our December note). The colliery is already operational, at the following rates:
Exhibit 8: Uitkomst operating parameters
Parameter |
ZAR |
US$ |
£ |
Run-of-mine coal mined per annum |
600,000t |
600,000t |
600,000t |
Saleable coal produced per annum |
408,000t |
408,000t |
408,000t |
Yield |
68% |
68% |
68% |
Coal price AP14 price per tonne |
806 |
50.05 |
36.05 |
Post-tax profit and cash-flow per annum |
35m |
2.2m |
1.6m |
Sustaining capex per annum |
10m |
0.6m |
0.4m |
Consideration |
200m |
12.4m |
8.9m |
Forecast pay-back period |
<4yrs |
<4yrs |
<4yrs |
|
|
|
|
Resources |
25.7Mt |
25.7Mt |
25.7Mt |
Life of mine |
28yrs |
28yrs |
28yrs |
Plant employees |
110 |
110 |
110 |
Contractors |
300 |
300 |
300 |
Source: Pan African, Edison Investment Research
The mine produces high-grade thermal, export-quality coal with metallurgical applications to both the export and domestic markets, including a potential long-term contract with the South African electricity supplier, Eskom.
The acquisition remains subject to Section 11 DMR approval. However, management anticipates it to be immediately earnings- and cash-flow accretive. Moreover, while the headline consideration is ZAR200m, this will include cash of c ZAR25-35m, working capital of a similar figure and a ZAR85m debt facility. As a result, the net cash outflow relating to the transaction from Pan African is forecast by management to be in the order of ZAR80m only (£3.6m at current forex rates).
As with Sibanye’s recent initiatives regarding coal, Uitkomst also effectively provides Pan African with a natural hedge against energy prices in South Africa. Until the transaction closes, however, it remains excluded from our forecasts.
Evander South has an estimated mineral resource of 20.1Mt at a grade of 7.7g/t, containing 4.9Moz from a depth of only 300m below surface. Significant technical work has already been completed on the Evander South project and this is now being advanced into a preliminary economic assessment (PEA).
Evander is supplied by only one feeder cable from Eskom (vs four at BGMO). This increases the operational risk of being affected by power outages. However, Evander has also been designated as a ‘key industrial customer’, with the result that it is the last operation to be affected in its region and has never experienced an uncontrolled power cut. Unlike Barberton, however, it lacks the capacity to support itself on self-generated power, with the exception of the winders, emergency pumps and fans.
As has been well documented, South Africa is currently suffering from a shortage of effective generating capacity as older power stations on the historic Eastern Transvaal coalfields approach obsolescence.
In response, Eskom has commissioned two new power stations in South Africa’s Limpopo and Mpumalanga provinces. Known as Medupi and Kusile, respectively, each plant will have a generating gross capacity of c 4,800MW, with Medupi representing the largest investment in Eskom’s 84-year history and the first base-load project to be built in the country in 20 years. The combined output of the plants represents c 23% of the country’s current power generating capacity.
However, the completion of Medupi has faced numerous setbacks, from procurement, technical issues, labour problems, and claims of mismanagement. Whereas Eskom initially estimated that Kusile/Medupi would power up in 2011 and that the total duration of the project would be no longer than four years at the time of its commissioning, commencement of the project was subsequently delayed by two years to 2013 while, to date, only one unit of 794MW capacity has been built (out of six). As a result, Medupi, which witnessed its first unit go online in 2015, will now not see its final unit go live until May 2020:
Exhibit 9: Medupi and Kusile commissioning dates
Medupi |
Kusile |
Unit |
Date of commercial operation |
Unit |
Date of commercial operation |
6 |
August 2015 |
1 |
July 2018 |
5 |
March 2018 |
2 |
July 2019 |
4 |
July 2018 |
3 |
August 2020 |
3 |
June 2019 |
4 |
March 2021 |
2 |
December 2019 |
5 |
November 2021 |
1 |
May 2020 |
6 |
September 2022 |
Source: Eskom, Edison Investment Research
While the news of Medupi’s synchronisation into the grid is positive within the context of South Africa’s electricity tribulations, it represents only one-sixth of design capacity and only 1.9% of Eskom’s current capacity of c 42,000MW. Moreover, capital expenditure on the two new power stations has exceeded the budget, such that Eskom has needed to turn to the South African Treasury for additional funding. As a result, in addition to the three 8% per year increases agreed between Eskom and the regulator, NERSA, in 2013, there was one further increase of 4.69% from 1 April 2015. Nevertheless, at c ZAR0.92-0.97/kWh (c US$0.059/kWh), electricity remains cheap in South Africa relative to the rest of the world – not least as a result of the depreciation of the rand, which has resulted in the equivalent US dollar price falling from US$0.060/kWh in the past three months. In addition, all operations at Pan African are engaged in a process of load shedding and power clipping aimed at minimising electricity consumption wherever possible. Note that the cost of self-generating power at Pan African’s mines is typically 3-4x the cost of grid power.
At least until the two power stations are commissioned and synchronised into the grid, South Africa appears likely to continue to experience intermittent load shedding and power outages. However, this is almost invariably directed towards residential, rather than industrial consumers. By contrast, industrial consumers are typically required to reduce their consumption by 10% or, at worst, 25%. As a consequence of this situation, it is supposed that the South African government will look more favourably on independent power producer-generating solutions for South Africa’s future electricity needs. It will also focus on the previously largely unexploited resources of the Waterberg coalfield in the Limpopo province for its energy source (NB readers are directed to Sibanye’s recent private sector initiative in this region).
In the interim however, Eskom CEO Brian Molefe has expressed confidence in the current strength of South Africa’s power system, saying that the country should not see any load shedding until at least May 2016.