Golden opportunity at high-yield Pan African

The miner firmly established itself as one of South Africa's mid-tier gold producers back in 2013 when it completed the acquisition of the Evander gold mine from Harmony Gold to sit alongside its existing Barberton operations. But since then it has not been smooth going. As well as the gold price ructions, Pan African has been hit by a low-ore-grade mining cycle at its Evander complex. This meant that Pan African's total production in the six months to 31 December 2014 was restricted to 88,307 ounces, which represented a 4 per cent decline on the preceding six-month period. As a consequence, interim cash profits came in at £12.9m, against £28.3m for the December 2013 half-year.

But it looks as though Pan African's fortunes are finally about to change. It is moving out of the low end of the cycle and expects to be exploiting higher-grade ore material for the next couple of years. That should push down unit costs while improving production and, ultimately, earnings.

Even without the expected rise in ore grades, production prospects are looking up. Pan African's tailings operation at Evander is now ready to kick in and is eventually expected to contribute another 10,000 ounces per year to total output. A previous commissioning of the Barberton Tailings Retreatment Plant added around 20,000 low-cost ounces to annual gold output. The new tailings contribution, along with the impact of refurbishment work at two shafts in the group's Barberton complex, are expected to help drive Pan African towards annual production of 250,000 ounces.

Admittedly, market sentiment towards gold mining stocks remains lukewarm at best. And a possible US rate rise later this year won't help matters. But there have been some encouraging signs. From the end of the first quarter, speculators in gold futures have been adding to bets on a rising price even as the metal struggled to hold on to the $1,200 an ounce level. Indeed, the US Commodity Futures Trading Commission has reported increased long positions in the yellow metal for the last four weeks in a row. These recent flows could point to doubts over the sustainability of US dollar strength staying at current levels; a positive point given its inverse correlation to the gold price. There have been confused messages from the US Federal Reserve on the possibility of a June rate rise, with most commentators now taking the view that there won't be a hike until September at the earliest, or perhaps not until 2016.

But even if gold prices were to remain static or exhibit further weakness, Pan African's low cost base means that it is better placed than many peers to cope with reduced gold price assumptions. And Pan African is able to fund all on-mine capital expenditure from internal cash flows generated by its operations.

Importantly, Pan African's shares look so cheap that it should not take much in the way of good news to get them moving in the right direction. The shares are forecast to produce a bumper yield of 7.5 per cent in 2016 and they are rated at a significant discount to peers based on the forecast earnings multiple.