Modular business plan pays dividends
Pan African Resources has come a long way since it emerged as a gold exploration company exploring some, shall we say, rather marginal assets in Africa a few years ago. Under the guidance of its previous CEO Jan Nelson, the company got its hands on a really fantastic operating gold mine in Barberton and from there has expanded on an almost modular basis by developing tailings retreatment plants, as well as acquiring the Evander gold mine from Harmony.
What has made the company so successful and really set it apart from other producers is its laser-like focus on costs and its discipline in ensuring that it only mines profitable ounces. Besides a healthy dividend, investors have been rewarded with a three-fold increase in the share price over the last three and a half years – so where to from here?
Ron Holding, who succeeded Nelson, now has the job of bedding down the acquisition of Evander and getting the tailings retreatment plants at Phoenix (platinum) and Barberton (gold) to run optimally. This may not be such an easy task. For one, the Phoenix platinum retreatment plant has given the company its fair share of hassles. In its interim results to end December 2013, the plant produced 2 987 ounces (oz) of platinum group elements. This represented a decline of 4.8% over the period ending December 2012. The plant was originally designed to deliver 12 000 oz a year (6 000 oz per interim period). Management believes that they have identified the problem and the plant will begin producing to a revised schedule, which will be lower than originally estimated.
The company has also effectively doubled its gold production due to the acquisition of the Evander gold mine. Evander produced 43 164 oz of gold to end December which, when combined with the 45 405 oz from Barberton, makes the company on track to deliver about 180 000 oz a year from underground operations. The beauty of Evander is that the company has a 30m oz plus resources that it can exploit, which has greatly extended the company’s life. But it is the Barberton underground mine that can officially be called the gift that keeps on giving. It’s been in existence for over 100 years and the company is still pulling out gold at a head grade of 11.5g/ tonnes (almost double that of Evander).
The Barberton tailings retreatment plant came on stream during the period and contributed 11 603 oz of gold. This equated to EBITDA of R85.1m. The combination of a falling gold price and the consolidation of acquisitions saw revenue rise by 101% to R1.3bn and the cost of production by 148% to R862.5m. HEPS rose by 31% to 15.11c/ share. Assuming the gold price remains in around the $1 350/oz range going forward, the inclusion of the ounces produced at the Barberton tailings plant do not appear to be recognised in the share price of Pan African at the moment.