Pan African tipped for more gains

[] — PAN African Holdings has posted share price gains of around 34% in 2011, following a 27% rise in 2010, and would pay almost half its earnings back to shareholders in a dividend. Some might ask whether it was time to sell on a high.

CEO Jan Nelson and his management team in the last 18 months or so prevailed to instil confidence, backed up by operational success, in Pan African following the group’s ill-fated foray into the Central African Republic and an onslaught by illegal miners for control over its Barberton Mines.

Still, when it posted annual gains in headline earnings per share of 12.5% on Monday, with a 37% increase in dividend and promises of similar payouts in future, as well as extending the life of Barberton from 10 to 17 years, not everyone was impressed.

“Return on equity amounted to a very modest 23%, considering South African risk this remains very inadequate,’ said Libertas Capital Corporate Finance analyst Roger Bade in a note to clients. “.they trade at a historic multiple of 12 times and offer a 3.5% yield. This is no longer cheap.’

Bade said the market is presumably expecting a “fancy valuation’ on Pan African’s Manica gold project in Mozambique, which would be spun out, as well as some new revenue from the Phoenix tailings plant, to come on stream in December.

A commentator on Miningmx even questioned the wisdom of a “gold junior’ paying a dividend, arguing investors would prefer investments in growth projects. Also, he said, one shouldn’t count your chickens on an upstart PGM tailings plant as metallurgical issues might turn out to be more complex than originally thought.

On the former objection, Imara SP Reid gold analyst Percy Takunda said it was a common view held by too many South African investors who over time had allowed themselves to be persuaded that payouts were value destructive. As for Phoenix, it forms a smaller part of the business and won’t be the main driver of income growth for the foreseeable future, he said.

“Pan African is unhedged and the gold price is running,’ Takunda said on Thursday, pointing to the fact that Pan African received an average of $1,366/oz for gold in its 2011 financial year. When the new financial year started on July 1, gold was already trading at around $1,500 and was tipped to break $2,000/oz by year-end, according to the latest GFMS gold update.

Andy Davidson of Numis Securities was equally positive, saying the share has got space to run by at least another 25%, based on “fairly conservative assumptions’.

“Return on equity amounted to a very modest 23%, considering South African risk this remains very inadequate.’

“They are well placed and tick a lot of boxes,’ Davidson said, his only criticism being that Pan African would have to address getting growth projects in line for the medium term. He said he iwas comfortable that management was aware of the issue and would pursue opportunities in good time.

XCAP Securities shared the sentiment.

“We believe that with the extension of mine life to 17 years, the increase in the dividend and relative low industry costs that Pan African will appeal to investors wishing to sit long of an un-hedged gold play,” they said.

RBC Capital Market’s Leon Esterhuizen argued the stock could still jump more than 30%, to 19p in London from Monday’s 14.5p.

“We believe that the stock continues to trade at an undemanding valuation, despite a recent run-up,’ Esterhuizen said. “The growth potential and the value-unlock associated with the Manica spin-off is not fully reflected in the market valuation.’