Pan African shares surge

[] — PAN African Resources (Pan African) shares hit a new 12-month high of 115c on the JSE on Friday, in response to news that the company had concluded the agreement to build its chrome tailings retreatment plant (CTRP).

The plant will be built at International Ferro Metals (IFM) Lesedi mine near Rustenburg. It will leverage off IFM’s existing infrastructure as well as regulatory and legislative approvals which will bring forward the start of production.

Pan African CEO Jan Nelson said construction would begin immediately, with full production expected by the end of 2011.

Pan African shares have risen nearly 30% over the past month from levels of just below 90 cents per share for a variety of reasons, according to Nelson.

He said: “The jump in the gold price has contributed to this as has confirmation that the CTRP is going ahead, but I think we have also been rerated by the market following our latest set of annual results and declaration of the dividend.’

Nelson added the CTRP would be a substantial contributor to Pan African’s future profits, despite its relatively small scale.

The CTRP – to be developed by Pan African’s wholly-owned subsidiary Phoenix Platinum – will recover platinum group metals (pgm) in a ratio of 60.9% platinum, 21.0% palladium, 16.9% rhodium and 0.2% gold from surface chrome tailings dams.

The Phoenix project has a Samrec (South African code for reporting of exploration results, mineral resources and mineral reserves)-compliant resource of 469,000 ounces of four element pgm (4,6 million tonnes at 3.15g/t pgm in situ).

Total capital cost to build and commission the plant is estimated at R104m, which will be funded from Pan African’s existing cash resources. About R80m is payable to IFM, which will also be funded from Pan African’s cash resources.

Nelson said: “At a conservative pgm basket price of $1,250/oz, the project is anticipated to have a profit margin of over $850/oz with a cash cost of less than $400/oz.

“That works out to an annual after-tax profit of about R45m. Should the pgm basket price rise to around $2,500/oz – as some analysts are predicting – then Phoenix would make an after-tax profit of around R120m.

“That is a lot of money for Pan African, given that our Barberton gold mine is currently making an after-tax profit of between R150m and R160m. There is also the potential to grow the Phoenix business.’

According to a research report from London financial institution Fairfax, “the asset will add incremental precious metal production to the group which is underpinned by its current Barberton 100,000oz/year gold mine in South Africa.

“The cash costs for the CTRP operation are expected to be very low – below $400/oz -so although ounces produced at around 12,000oz/year will be relatively low, they will be highly profitable ounces.’

The asset could also provide a stepping stone to treat other tailings in the region, which could lead to an expanded operation.’

The writer owns shares in Pan African Resources.