Picture: ISTOCK
Picture: ISTOCK

Pan African Resources had no difficulty raising R705m in a share placement with institutions last week despite political uncertainty in SA and recent problems at its Evander gold mine. Institutional investors are remaining loyal to its attractions as a defensive gold share. Out of the Bloomberg consensus of eight analyst ratings, five rate the shares a "buy".

Shoaib Vayej, portfolio manager at Afena Capital, says Pan African remains one of the firm’s preferred gold stocks, though there have been some concerns about recent performance.

The shares offer an above-average dividend yield and have previously always been defensive. They underperform their peers when gold is rising and outperform when gold is falling.

But the greater contribution from Evander since Pan African acquired it in 2013 has exposed the group to the same risks as other SA deep-level gold miners.

The share placement was to raise funds for the Elikhulu tailings treatment project at Evander, which will deliver about 56,000oz/year of gold in its first eight years, starting in late 2018, and 45,000oz in the final five years. A R1bn loan has already been secured.

Pan African is growing its lower-risk surface operations, which will offset some of the volatility in grades at the underground Evander mine. It already has gold tailings projects at Barberton and Evander and a platinum tailings project at Phoenix near Brits.

Pan African has always been differentiated from SA’s costly deep-level gold mines in the Witwatersrand because its core operation, the Barberton gold mine, is a greenstone deposit and is mined and processed differently.

In 2012 it bought the 10 Evander shafts, which are more typical Witwatersrand reefs, from Harmony Gold for R1.5bn. All but one of the shafts were on care and maintenance. Harmony had invested about R390m in refurbishment in the two years before it sold Evander.

In the past few months Barberton and Evander have experienced an increase in safety stoppages. There has been community unrest around Barberton and the dislodgement of a steel shaft guide at Evander No 7 shaft, which is used for hoisting rock. This, coupled with a fatality in February, has necessitated a suspension of Evander’s operations for refurbishment at a cost of R40m and 14,000oz of lost production.

Picture: ISTOCK
Picture: ISTOCK

Pan African’s total gold production in the current financial year to June is expected to fall to 181,000oz from previous guidance of 195,000oz.

In the first half the group’s after-tax profits rose 9.8% compared with the same period a year before, aided by a higher gold price, a buyback of shares through the Shanduka Gold transaction and the inclusion of Uitkomst Colliery’s contribution for the first time. In the core gold operations, production fell 10%.

The effect on full-year headline earnings from lower gold production and an increase in issued shares will be partly offset by the proceeds of the sale of Uitkomst to Coal of Africa. There could also be a boost from the gold price, which is responding to concerns about US President Donald Trump’s policies.

Vayej says the company has attractive, low-risk surface tailings projects — both the existing projects at Barberton and Evander, and the potential Elikhulu tailings project — but there may be a need for more hands-on management.

Edison Investment Research analyst Charles Gibson says that for the first time at interim stage Pan African earned more profit from tailings projects than from underground operations.

Gibson valued the shares at 21.38p, equivalent to R3.43, when the exchange rate was R16.06/£1, assuming an average grade of 6.43g/t for the next 10 years and a real gold price averaging US$1,283/oz. The shares were at 260c after the share placement.

Though Pan African’s numerous small shareholders may be miffed about being excluded from the Elikhulu share placement, CEO Cobus Loots says a restricted share placement was quicker and cheaper to do than a full rights issue. The value shareholders will gain from the fully funded Elikhulu project will more
than offset the discount offered in the placement and the dilutive effect of issuing more shares, Loots says.

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