Pan African worth a punt

Pan African had a breakout financial year, with its results from the 12 months to 30 June a major improvement on the 2018 financial year. Production grew 54 per cent and cash and all-in sustaining costs fell 23 per cent and 27 per cent year on year, respectively. Gold production is forecast to climb in the 2020 financial year as well, to 185,000 oz. 

Cash profits climbed from $32.4m in the 2018 financial year to $56.8m in 2019, and now the gold price has settled $200 an oz higher than the average price from last year, at $1,266 an oz, which will see earnings climb significantly again – Peel Hunt expects cash profits to double in 2020. 

Pan African has been an unpopular gold play in recent years, with a run on the rand causing costs to climb amid falling production. The company has since mostly shuttered the expensive Evander Mines underground operation – there is a new area being exploited now, a decision resulting in a happy reversal of a $17.9m impairment – and commissioned a lower-cost tailings retreatment plant there. 

Pan African is running at a 71 per cent net debt to equity position after paying for the tailings plant at Evander. But broker Peel Hunt expects net debt to come down from its $130m level in 30 June this year to $71m in two years’ time. 

Pan African’s main operation is its Barberton mine, which also boasts a contribution from tailings retreatment. While Evander was the main cost drain in recent years, Barberton has had its own troubles. As per the June quarter production announcement, Pan African’s Barberton operation “recently experienced a number of lost production days due to its roadways being blocked and the destruction of mine property by protesters”. The miner blamed local politicians and criminals and described the protests as “extortion”. Police arrested 302 people at Barberton in May alone. 

Pan African is a highly speculative buy based on its operations getting back to 180,000 oz a year coupled with gold price strength. A discount to more established gold producers is justified by the Barberton issues, but we think four times forward earnings is too cheap. Fellow South African miner Gold Fields (SA:GFI) is no stranger to unrest but its shares trade at 14 times forward earnings, and smaller gold miner Shanta Gold (AIM:SHG) in politically risky Tanzania at 10 times.