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Gold Producer Pan African Makes it to the Big League

In a recent review of the gold diggers published by Royal Bank of Scotland in conjunction with Nedbank, Pan African Resources (LON:PAF, JSE:PAN) was hailed as one of the emerging stars of the sector.

Describing it as a “quality junior”, Nedbank analyst Christian Siebert said: “This company, with a healthy balance sheet and no debt, is constantly reviewing potential growth projects.

“Management is also not shy in identifying opportunities outside of gold and even outside of the precious metals complex.” 

The comprehensive note released on September 20 assessed the outlook for the gold price and its impact on the companies unearthing the precious metal.

PAF found itself in exalted company as its prospects were examined alongside those of heavyweights such as Anglo-Gold Ashanti, Harmony and Gold Fields.

Pan African was rated a 'buy' and its valuation was bumped up 27 per cent to R1.19 a share (10.5p).

The RBS/Nedbank research predicted the gold price will remain at around US$1,200 an ounce next year, easing only slightly to US$1,100 in 2012.

“Fundamentals were priced into gold equities until Lehman collapsed in September 2008,” Siebert notes.

“While bullion had gained 180 per cent since the dawn of the bull cycle in 2002, the Johannesburg Stock Exchange gold index achieved an unimpressive net gain of one per cent. 

"Only since then has the sector kept pace with, and some stocks even outperformed, gold as its safe haven status became firmly entrenched and the global economic recovery remained in doubt.”

This can only be good news for PAF, which has made the transition from promising explorer to a cash-generating producer with output of 100,000 ounces of gold a year.

It is the culmination of two years of drilling at the company’s Barberton Mines in South Africa.  

Pan African completed the acquisition of the operation in mid 2007, transforming the group from a largely exploration focused company to a gold producer. 

Since then it has worked hard to upgrade both the size and increase confidence in the resources by extending the mine life and visibility of production.

Evidence of that effort was provided in June when the group upgraded the total resource by 18 per cent, and more importantly, raised the measured and indicated resource by 30 per cent to 1.8 million ounces (9.43 million tonnes at 5.99 grams per tonne in situ).  

The mining reserve also climbed by nearly 7 per cent to 661,000 ounces (2.31 million tonnes at 6.29 grams per tonne gold).  The boost in the measured and indicated resource pushed out the mine life up by 50 per cent to 15 years based on a depletion rate of 100,000 ounces per annum.  

The transformation of PAF was confirmed by a solid set of annual results just over a month ago.

Revenue from gold sales increased by almost 30 per cent to £68.5 million, while EBITDA grew by 9 per cent to £25 million. 

It generated more than £10 million of cash in the year and has £12.8 million on the balance sheet, putting it in a very healthy position to pay 0.37p final dividend.

Meanwhile Phoenix platinum tailings project looks set begin production in the second half of next year.

The resource has been upgraded 15 per cent to 469,000 ounces, while the cash cost of extracting the precious metal is expected to be less than US$400 announced. 

The only real fly in the ointment for Pan African has been the Manica gold project in Mozambique, where the company continues to assess the viability of the mine. 

It said in its last results it is taking a “phased approach”, and said it would first assess the “oxide mining potential”.

This will be followed by a “mining option focusing on the sulphide bearing portion” of the Fairbride project. 

An update on the first phase of the assessment is due sometime this month.

Separately, the group has been forced to fight a rearguard against illegal gold diggers at Barberton, which forced the shutdown of the mine in December last year.

The clampdown worked, but it came at a cost as security related expenditure rose to £2.7 million.

Nedbank’s Siebert suspects the company might be tempted to diversify, but cautions against this course of action.

“The African-focused gold mining company has become the African focused mining company and we cannot exclude the possibility of investments in coal or base metals,” he said. 

“However, a clearer defined strategy is required and for now we believe the focus should be on optimising Barberton and getting Phoenix Platinum into production."