Pan African Resources forecasts production increase

When we covered Pan African Resources’ (PAF) half-year figures in February we noted that the investment case was bound up with “faltering underground operations at the Barberton complex and progress on the industrial relations front”. We may well have added power outages and execution risk into the equation.

An improved rand gold price aided financial performance through to its June year-end, although headline profits contracted by a fifth to $60.7mn (£48.4mn). The gold miner has also been methodically reducing its reliance on South Africa’s unreliable Eskom power grid. Yet it will need to keep its ongoing projects at Mintails and Evander Underground on schedule to meet production and cost targets. Nonetheless, if progress is maintained at the two capital projects, annual production should reach 200,000 ounces (oz) in 2025.

The group aims to generate 40 megawatts (MW) of energy from renewable sources by 2027, representing a target of 15 per cent of its total energy consumption. Cobus Loots, Pan African’s chief executive, revealed that the solar plant at the Evander gold mining operation has reduced all-in sustaining costs (AISC) by around $10 an oz, a figure that is set to increase as more capacity is brought to bear and Eskom continues to crank up its tariff rates. AISC was in line with revised guidance at $1,327 an oz, a sub-US$ inflation increase of 3.3 per cent, and is predicted to rise by 2 per cent to $1,350 an oz (assuming an exchange rate of US$/ZAR:18.50).

It should be remembered that Pan African was up against strong prior-year comparators. The good news is that production for the current financial year is expected to rise from 175,200 oz to 175,800-190,000 oz. On the balance of probabilities, we are confident that Pan African can meet its 2025 objectives, by which time the stock may well be trading above its current lowly rating of five times consensus earnings. Buy.

Last IC view: Buy, 14.8p, 15 Feb 2023