Pan African may offer defensive qualities to investors as gold fervour begins to cool

THE Johannesburg Stock Exchange’s gold sector is expected to come under more selling pressure but one share tipped as a defensive option during price correction is Pan African Resources, also listed in London.

“The company has 30% of its ounces coming from dump retreatment operations with all-in sustaining costs (AISC) below $1,000/oz. That’s very defensive,” said Simon Hudson-Peacock, an analyst for S2 Research, in an interview with the Financial Mail.

Pan African is on track to double production in the next seven to eight years with 20 years of declared reserves to do it, excluding recently acquired options over other tailings projects. “The others don’t and can’t,” added Hudson-Peacock.

Arnold van Graan, an analyst at Nedbank Securities is negative on gold stocks currently and not just because of inflation. “The gold sector faces several challenges that could weigh on the operational performance and margins. These include regressions in safety statistics, ongoing pandemic related disruptions, skills shortage and logistical challenges,” he said.

Inflation is also knocking margins. A report by Goldman Sachs earlier this month said inflation may run to 30% this year for companies on its coverage, and could be as much as 35% for companies operating refineries.

Cobus Loots, CEO of Pan African, said inflation was the headline concern this year, even if most of Pan African’s assets are competitive on the cost curve. “Electricity is a big one, so its steel and fuel which is up about 30%,” he said.

He acknowledged that a recently announced cost cutting programme at Barberton Gold Mines could see Pan African running to stand still. Yet that may be enough to outpace competitors in a sector losing its lustre suddenly.

“We believe the Evander mine and Egoli project – both conventional underground operations – raise the company’s operational risk profile,” said Van Graan of Pan African’s organic growth options.

“However, this is balanced with its surface portfolio and in time this could be expanded with the optionality at Mintails and the Blyvoor assets,” said Van Graan. Pan African is kicking the tyres at some of South Africa’s forgotten gold tailings deposits west of Johannesburg, although they’re not ‘forgotten’ for nothing.

One that Loots is running the rule over –  Mintails near Carletonville – has a troubled social, environmental, and ownership history and is currently in liquidation. Yet despite its controversial past it contains an estimated 533,000 ounces of gold that Pan African thinks could be mined over 12 years. A feasibility study is due for presentation to shareholders in weeks. Loots won’t say what Pan African found, but he sounded positive about it.

There’s also gold tailings at another of Carletonville’s former mines, Blyvoor which was once an important asset in Randgold & Exploration stable. Loots signed an option agreement over the property in December right from under the nose of the UK’s Katoro Mining which was struggling to raise sufficient cash to buy and list it. It’s scoped to produce 25,000 to 30,000 oz/year over 15 years. Post a recent fatal flaw analysis, a decision on proceeding with Blyvoor is due in December.

These tailings deposits potentially add around 100,000 oz and would take the company towards 400,000 oz/year. Hamburg-headquartered bank Berenberg said in a note published in February that the Mintails assets alone had a net asset value of about $131m. Incorporating Mintails, Pan African shares could be worth 30 pence/share. In London, the stock is currently trading at 20.05p/share.