Pan African cuts payout after year of production headaches

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Cobus Loots, CEO, Pan African Resources

PAN African Resources (Pan African) cut the final dividend 62% to R185m following a difficult operational year characterised by hindrances and vexations which resulted in lower gold production.

“The 2017 financial year was operationally challenging,” said Cobus Loots in his CEO’s commentary published today. He added, however, that the current year would be better with production returning to 190,000 ounces.

Production from the R1.74bn Elikhulu project would also start to flow from the third quarter of the 2018 calendar year reaching nameplate capacity of 56,000 oz in the final quarter. Elikhulu will operate at this run-rate for an initial eight years.

For 2017, however, it was problems heaped upon problems. Shaft 7 at Evander Gold Mines (EGM) was shut for 55 days while refurbishment was completed while at Barberton Mines, Pan African’s flagship operation, there were community disruptions, safety-related stoppages and flexibility issues at the Fairview section. An engineering review at EGM had detected “… further infrastructural issues, which are being addressed,” the firm said.

The result was 15.4% lower production which at 173,285 oz resulted in a significant increase in all-in sustaining costs to R514,435 per kilogram from R405,847/kg previously. The gold price in rand terms was flat year-on-year as the rand strengthened against the dollar. The group’s figures were also affected by a R100m impairment on its investment in Phoenix Platinum, a surface mining operation which is being sold to Sylvania Platinum for R89m once the deal has Competition Commission approval.

The outcome was a 43% decline in taxed profit of R310m and 34.4% lower share earnings which came out at 19.8 cents.

On the positive side, net debt was reduced to R67.6m (339.6m). In order to fund the Elikhulu project, Pan African took out a R1bn term debt facility with Rand Merchant Bank and raised R696m through a share issue during the year. In addition to the sale of Phoenix Platinum, Pan African also disposed of its shares in Uitkomst, a colliery, which was sold to Coal of Africa, recognising a profit on sale of R91.3m in the process.

Pan African anticipated improved revenues in the 2018 financial year. “Looking ahead, the outlook for the ZAR (rand) is predominantly negative due to ongoing political, economic and social uncertainties facing South Africa,” Loots said.

Shares in the company were down less than a percent in early morning trade on the Johannesburg Stock Exchange. The stock has tracked disappointingly in the last 12 months, however, down about 29%.

Pan African is assessing a number of brownfields expansion projects during the 2018 financial year including the 2010 Pay Channel at EGM which had been previously flagged. The concept is to complete a project discontinued by Harmony Gold when it was the owner of the mine. The feasibility study for the project is expected to be completed during the first quarter of the 2018 financial year.

Another previously flagged opportunity is the Barberton Mines’ sub-vertical shaft project at Fairview which will cost R105m over two years. It would contribute between 7,000 and 10,000 additional oz annually on completion.

“The group continues to evaluate acquisitive opportunities, particularly within other African jurisdictions, in accordance with the group’s rigorous capital allocation criteria,” said Loots in notes to the financial figures.

1 COMMENT

  1. Dear Fellow Readers,

    As is custom, this is what I gleaned from the numbers:

    SALIENT POINTS

    1. A big production guidance miss resulting in lousy set of results. Production DOWN Costs UP. Gold production profile is erratic due to Evander Mines. Evander Mines production for the last 5 yrs range : 70 – 91 Koz/yr.
    2. Harmony Gold are the true winners from the Evander Mines deal with PAN. PAN is -R2000M ( Yes, R2billion!) out of pocket. Kimberly Reefs Mining is NOT for the fainthearted and shoestring budgets!
    3. Barberton Mines continue to be the flagship ops for PAN, delivering Operating Profit = R676M ( FY16:R730M) on a production base of 72Koz ( FY16 : 85Koz). Thats Good Money!
    4. Elikhulu Tailings Project looks excessive at R1,74Billlion for a gold production of ~50Koz/yr project

    DETAILED ANALYSIS

    1. EVANDER GOLD MINES : Harmony bought these mines for ~R545M back in 1998 when its roll-up model was in full-throttle. These mines were marginal from the get-go. The reefs are faulted and lack consistent payability ( due to erratic channeling of payshoots)thus requiring extensive development capex. Even with that ORD capex, their production was inconsistent by ± 60Koz y/y , thus resulting in production range FY07-FY12 of 253koz – 121koz(max – min). Extensive studies were launched to try and stabilise these ops , only for the outcome to reveal in FY10 that only Shaft 8 is viable but requiring significant capex , with some potential areas ( Poplar , Shaft 7 portion of the 2010 payshoot , Rolspruit). In 2011, after attempting high-grading strategy, Harmony gave-up and began shopping these mines around after putting lipstick on them (read : making them cash flow positive). In 2013, PAN fell for them with a stupendous R1700M cheque with stated ambitions of producing 85-95 koz/yr. Well, here is the story since then in monetary terms, EBITDAX( or better known as Net Mine Cash Flows):
    FY13 : R89,6M
    FY14 : – R82M
    FY15 : – R206M
    FY16 : R209M
    FY17 : -R279,6M

    thus cum.OCF = -R268,6M
    Plus Purchase Price = -R1968,6M
    PAN has well and truly bloodied by these mines and has never gotten close to the said target of 85-95 koz/yr because it will just cost too much ORD capex. I see that they have implemented so called “Production Sustainability” measures. I hate to say this, but Evander Mines will deliver another nasty surprise on PAN…. despite its galant efforts. As a parting shot, the AISC = R916000/kg for FY17 with the gold price = R543000/kg …so it’s a longway to go to profitability for these mines!

    2. BARBERTON MINES : Only if PAN would stick to its knitting , which is affording these ops their full attention. I stand to be corrected, but my history tells me that this mining district has produced > 8Moz. It has high ( >8g/t) headgrades and thicknesses to continue to make it profitable. At AISC = R440k/kg , it just needs to be ramped up at most , the least PAN management can do is achieve its potential of >100koz/yr.

    CONCLUSIONS
    The preoccupation of management with Tailings Retreatment is a concern for me whilst ignoring the headache that is Evander Mines. Elikhulu Tailings cape intensity is out-of-kilter and its OPEX estimates are unrealistic as compared to the best-in-class Mine Waste Solutions. The operational performance of PAN was atrocious for FY17. Furthermore, their FY18 target of 190Koz @ AISC= 250koz/yr OR is this the onset of mediocrity and hum-hum performance. The Gold hedge is also underwater by some R82Million!

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