Mod­u­lar busi­ness plan pays div­i­dends

Finweek English Edition - - INSIDE - BY WAR­REN DICK

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.

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