Pan African gives green light to R1.74bn Elikhulu project

Cobus Loots, CEO, Pan African Resources

PAN African Resources has approved spending of R1.74bn on its Elikhulu Tailings project in Mpumalanga province – a venture that would yield 56,000 ounces of gold a year in its first eight years, boosting group output a quarter.

About R1bn of the project capital would be financed through a five-year debt facility, arranged through Rand Merchant Bank (RMB), while proposals to fund the balance were being assessed, the company said today.

Importantly, the project would not endanger Pan African’s dividend policy which is to pay 40% of annual free cash flow. The firm announced in November it would pay a final dividend of R300m, a 42% increase on last year’s payout – its largest yet – following a strong showing in its 2016 financial year in which gold output increased 16.5% to just over 200,000 ounces.

Shares in Pan African were nearly 4% by midday on the Johannesburg Stock Exchange. The company is trading at R3.22/share. Shares in the company were off 15% over the past 30 days in line with a softer gold price.

Approval of the project establishes Pan African as a surface miner in which old dumps are re-processsed at relatively low cost for extant gold reserves. It already mines tailings at its Barberton and Evander gold mining premises. The Elikhulu project is near Evander.

As a result, Pan African is hoping that previous experience will be repeated with the project falling in line with budgets and time schedules. “Operating low cost tailings plants has become an important business for Pan African in recent years,” said Cobus Loots, CEO of Pan African in a statement.

“This project is expected to materially enhance our group’s production profile and support Pan African’s continued focus on low-cost, high-margin gold ounces,” he said.

He also raised the prospect of extending the group’s influence in low-cost tailings treatment saying Elikhulu could “… possibly unlock other opportunities in the sector”.

Including Elikhulu, roughly 40% of Pan African gold’s production will be sourced from mining surface sources of gold, said Loots in a text response to a Miningmx query. About 20% of gold production is currently from surface mining.

First gold from the project is forecast for the final quarter of the 2018 calendar year and full commissioning is scheduled for December of that year.

After the first eight years, Elikhulu will deliver a further 45,000 oz a year of gold for the remaining five years it is in operation. There is a possibility of extending the life of mine to beyond 13 years, however.

Assuming a gold price of $1,100/oz, and a price received of R17,110/oz, Pan African hopes to achieve payback on the project of less than four years. The price received currently is R16,155/oz.

The all-in sustaining cost of the operation is estimated to be $532/oz over the life of the project. Including repayment of debt over a five-year redemption period, cash outflow per ounce is estimated to be $805/oz.

Repayment of the R1bn facility with RMB will be from cash flow during the first five years of the project. The facility is in addition to the group’s existing R800m revolving credit facility which can be extended to R1.1bn.

The project has not yet completed the environmental impact assessment and water usage licence processes, but approvals by the Department of Mineral Resources was expected by late 2017, it said.