Pan African Resources — Update 13 December 2016

Elikhulu has a resource of 192.7Mt at a grade of 0.29g/t, containing 1.8Moz gold. A brief comparison of the main parameters of the DFS with their equivalents in the earlier PFS is as follows:

An environmental impact assessment (EIA) is already underway and Department of Mineral Resources’ approval for the project is anticipated in late CY17. Power and water infrastructure to site is already well developed. Elikhulu will require 20MVA of installed power, while water will be supplied from existing operations and the Leeuwpan dam, to which end a water use licensing & permitting process (WULA) has also commenced, with Department of Water Affairs’ approval also expected in late CY17.

The project will proceed in three phases. A new CIL plant will be located just to the north of the existing Kinross tailings storage facility (TSF), while the TSF will be located just to the south of, and adjacent to, it (NB the existing Kinross TSF footprint will be re-used). Thereafter, phase 1 of the hydraulic mining at the Kinross TSF is scheduled to commence in the fourth quarter of CY18, with commercial production being achieved in December. Phase 2, at the Leslie TSF, is then scheduled for the end of Q3 CY21 and Phase 3 at Winkelhaak in Q3 CY26. Note that the mine plan, as set out above, excludes an inferred resource of 244,398oz of gold delineated in the soil material below the existing tailings dumps, which could add an additional 2.6 years to operations at Elikhulu at the metallurgical recoveries shown.

Subject to the finalisation of the project financing package, Pan African’s board has approved the construction of the project. In the meantime, Rand Merchant Bank (a division of First Rand) has provided Pan African with the necessary approvals for a ZAR1bn underwritten five-year debt facility in addition to the group’s current ZAR800m revolving credit facility, which can, in any event, be extended to ZAR1.1bn, subject to approval from its lenders. The balance of funding is anticipated to be derived from internal cash flows, such that Pan African’s dividend policy is expected to be unaffected.

In addition to its DFS announcement, Pan African also provided a trading update relating to activities in H117. A summary of anticipated output from PAF’s operations relative to previous guidance and Edison’s prior expectations is provided in Exhibit 2, below:

Note that, for these purposes, all reductions in output anticipated by Edison have been applied to the traditional underground operations at Pan African’s mines at Barberton and Evander, rather than its more contemporary tailings’ retreatment projects, on the grounds that the former are more prone to production disruptions. In this respect, Pan African reported that Evander had lost 13 production days to date during the six-month period (7.1% of the total) owing to Department of Mineral Resources initiated Section 54 safety stoppages cf two in the prior year period and that Barberton had lost eight days (4.3%) of the total in addition to six days (3.2% of the total) as a result of community protests. Barberton also experienced a ‘go slow’ by workers in relation to a number of union demands, while Evander was adversely affected by curtailed hoisting capacity at number seven shaft (typically used for vamping and not Evander’s main production shaft, which is number eight shaft) on account of the dislodgement of a steel shaft guide, which also damaged the shaft infrastructure. Note that, against this background, Evander’s performance, in particular, and its forecast output of 42,000oz during the six months under review might be regarded as something of a success under the circumstances and is consistent with its milling 174.5kt during the period at a grade of 6.5g/t.

Edison’s full-year forecast of 192,071oz now compares with Pan African’s updated guidance of 195,000oz. Note however that the BTRP has consistently outperformed its target output since achieving commercial production by as much 2,830oz during a six-month period and that the ETRP has similarly consistently outperformed by as much as 3,980oz – which is likely to account for the balance.

Edison has revised its normalised EPS forecasts for Pan African on account of three factors since our last note in September, namely 1) the revised Barberton production outlook, 2) foreign exchange rates (the rand has been slightly weak against the US dollar since September and sterling even weaker) and 3) revised gold price forecasts (see Edison’s mining overview, entitled Gold and other metals, published in October 2016). A summary of the effect of these changes is as follows:

Note that Edison’s 2.37p/share normalised EPS forecast for FY17 is predicated on an H217 gold price forecast of US$1,275/oz. It would fall to 2.03p/share in the event that the gold price remains at its current level of US$1,171/oz. These compare with consensus forecasts of 3.19p in FY17 within a range of 2.31-4.20p and 3.01p in FY18 within a range of 1.98-3.80p. Note that the number of shares used in our EPS and EV/EBITDA calculations is 1,506.8m. The accounting treatment of the mid-year Shanduka Gold transaction is such that the 436.4m shares of Pan African owned by Shanduka are eliminated on consolidation.

Updating our long-term forecasts to reflect these changes (and in particular Edison’s revised gold price forecasts), but also including Elikhulu for the first time, our absolute value of PAF moderates slightly, to 23.25p (vs 25.21p ex-div in September), based on the present value of our estimated maximum potential stream of dividends payable to shareholders over the life of mining operations (applying a 10% discount rate).

The above profile assumes that the grade profile at Evander will average 6.43g/t from FY17-30 and that the gold price will average US$1,283/oz (real), in which case we forecast an average EPS over the period of 3.32p/share.

In addition, Pan African remains notably cheap (based on our updated estimates) when compared with its immediate peers in Exhibit 5, below.

On these measures, it can be seen that Pan African is cheaper than its peers in at least 60% of the instances considered (whether using Edison forecasts or consensus forecasts). In the meantime, Pan African has the third highest (consensus) forecast dividend yield of the 40 gold counters paying dividends to shareholders (including royalty and streaming companies), out of 672 publicly listed gold mining companies, globally.

Pan African had net debt on its balance sheet of £22.8m as at 30 June 2016 and a reported £14.1m as at the date of its trading statement on 2 August 2016. Edison’s forecasts for Pan African’s immediate capital expenditure commitments related to Elikhulu by financial year are as follows:

Whereas Edison had previously been expecting Pan African to be net debt free ‘by the end of FY17’, the imposition of capital requirements related to Elikhulu will now delay this until FY21.

Maintaining a dividend policy of 40% of free cash flows less sustaining capital, debt repayments and exceptionals, Pan African’s funding requirement, as estimated by Edison, will be as follows in the period from FY16 to FY21:

Note that PAF’s maximum funding requirement of £51.0m in FY19, as estimated by Edison, equates to ZAR899.0m at prevailing forex rates, gearing (debt/equity) of 24.0% and leverage (debt/[debt+equity]) of 19.3%.