Once again, shares in South African gold miner Pan African Resources look worth buying since the company announced a cheap and transformational acquisition that could double gold production immediately. The deal should pay for itself in less than three years. In a way, it's paying for itself already, though it hasn't even closed, thanks to a arrangement whereby profits from the mine have been accruing toward the purchase since April.
- Recent acquisition doubles gold production
- Deal brings diversification
- Management's operational track record
- Solid output from existing mine
- Acquisition adds debt, operational risk
- Dividend may come under pressure
Pan African is acquiring the Evander gold mining complex in South Africa from one of the country's leading gold miners, Harmony Gold. It will pay ZAR1.5bn (£115m) for Evander, a mine with a life of more than 10 years that's expected to produce 100,000 ounces of gold this year at respectable cash costs of $783 per ounce. Evander also comes with several shut-in shafts and high-grade projects nearby. In all, the underground complex has possibly over 32m ounces of gold resources and 7.6m ounces of gold reserves. Which prompts the question: why is Harmony selling?
South African gold miners are diversifying elsewhere in order to lower their exposure to the country's rising cost base and increasingly difficult operating conditions. Harmony is no exception, and is selling off non-core assets to help fund a massive joint venture in Papua New Guinea.
But, with the gold price hovering around $1,600 (£1,030) an ounce, South African operators that can deliver solid production while keeping a lid on costs still stand to make a decent profit. Pan African's management has shown its ability to do just that, maintaining gold production from its Barberton mine complex at between 90,000 and 100,000 ounces a year for the past three years. Costs, meanwhile, have risen from $469 an ounce to $781. That's slightly higher than the industry average but still good for South Africa, putting them in the middle of the global cost curve.
PAN AFRICAN RESOURCES (PAF) | ||||
|---|---|---|---|---|
| ORD PRICE: | 16p | MARKET VALUE: | £232m | |
| TOUCH: | 15.5-16p | 12-MONTH HIGH/LOW: | 18p | 10p |
| DIVIDEND YIELD: | 1.9% | PE RATIO: | 9 | |
| NET ASSET VALUE: | 6p | NET CASH: | £5.0m | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 39.3 | 11.9 | 0.52 | nil |
| 2009 | 53.0 | 16.3 | 0.40 | 0.26 |
| 2010 | 68.5 | 22.2 | 1.04 | 0.37 |
| 2011 | 79.2 | 26.4 | 1.20 | 0.51 |
| 2012* | 103.2 | 42.5 | 1.80 | 0.30 |
| % change | +30 | +61 | +50 | -41 |
Normal market size: 15,000 Matched Bargain Trading Beta: 1.0 * Edison Investment Research forecasts | ||||
Pan African's bosses think they can do the same at Evander, which, after operating problems and infrastructure upgrades in recent years, now looks to be in solid shape. Several Pan African mining executives have also worked at Evander before, adding to confidence in the high-grade deposit.
True, taking over a new mine - however familiar - brings risks. But it also lessens Pan African's reliance on Barberton's production. Financing the deal through a combination of debt, equity and net profits may also put pressure on Pan African's dividend. Its bosses say they are committed to a payout, but broker Edison thinks it will be cut this year (see table).
