WHAT Eskom taketh away, the rand giveth back. That’s one way of looking at prospects for Pan African Resources, a midtier gold producer that seems to have completely missed the rand gold price bonanza being lapped up by other South African-focused gold miners.
Pan African’s share price has fallen 19% in 12 months whereas shares in Harmony Gold are 67% higher. DRDGold, the company with which Pan African is most often compared, is 115% higher. Over five years, the difference is even starker: Pan African has returned a respectable 120%, including dividends, but DRDgold’s total return is a whopping 430%. All three companies are exposed to the South African furies: government failures, social foment and rampant crime. Yet their relative performance proves the simplest of equations applies to mining shares: maintain production and contain costs.
Pan African operates Barberton Mines in Mpumalanga, which has been mined for 130 years. Its other operation, Evander Gold Mines, also has a place in history: it was once a flagship mine for Gencor’s Gengold, the former mining house. But as ageing assets, they are subject to dips in form despite management’s best-laid plans, and so it proved in the third quarter of Pan African’s financial year. Efforts to implement a round-the-clock shift system, “continuous operations”, aimed at lifting volume, failed to gain traction.
Added to this, load curtailments implemented by Eskom resulted in a production loss of 10,000 ounces. That’s a big deal in Pan African’s life. It’s now predicting 175,000 oz in production, against its earlier 200,000 oz forecast. The market voiced its disappointment by slashing the share price about 20% in a day.
Pan African CEO Cobus Loots said Eskom’s load curtailment programme doesn’t only lead to less power. “It blows out pumps, trips equipment, burns out transformers. I think in four years we’ll have excess power because of renewables [Pan African is installing 19MW of solar power at Evander and Fairview, a section of Barberton] but for now it is what it is.”
Concerns over South Africa’s relations with the West, and that increased load-shedding will further shrink the economy this winter, have weakened the rand, but there’s some relief for gold miners. The realised gold price during Pan African’s operational update was just over R1m/kg produced. That’s risen to more than R1.2m/kg — worth an additional R750m in after-tax profit, according to Loots.
That’s why analysts are upbeat about Pan African. In fact, the stock may be a rare opportunity for investors who were slow to lock in rand hedge options. In addition, Loots believes the continuous operations project, which requires a change in mindset for employees, is gathering momentum. Pan African’s restated production for the year is conservative.
“We remain constructive and see an opportunity to add on weakness,” said Richard Hatch, an analyst for UK bank Berenberg. Quoting Pan African’s UK valuation — the company has a dual listing — he has a 27 pence a share target price. Raj Ray, an analyst for BMO Capital Markets, argued for 25p a share.
“A lot of bad news seems to be already priced in,” said Arnold van Graan, an analyst for Nedbank Securities. “Steps have been taken to address the issues and it seems as though some of these initiatives are starting to yield results.”
The company will be “highly cash generative” despite the recent operational setbacks, he said. That is good news for dividends, which Pan African has promised to maintain. But, Van Graan warned: “The market would want to see clear signs that the operational performance has stabilised and is improving before it warms to Pan African’s story.”
Growth is especially important for mining shares of Pan African’s stripe; in its case, there’s a lack of operational flexibility. For that reason, its R2.5bn Mintails project, currently in commissioning, is a critical building block. In addition to providing a production lift, it lowers aggregate operating costs because it involves reworking an old, very large, group of gold dumps.
Loots says Mintails is “a big focus” and while he’s confident of not overrunning on capex, investors need to know the dumps are located in an area marked by social disorder. It was at Mintails’ North Sands dump that eight women were gang-raped in July 2022 while making a music video — a national scandal that threw the spotlight on police minister Bheki Cele at his casual worst.
Pan African has experience in tackling operational difficulty and social unrest, but it almost certainly needs support from the government. What risk premium will investors demand for that?
For his part, Loots has a unique approach. When the company lodges an application for an environmental licence, he said, it is so completely overengineered that it’s easier to grant it than ask for a rewrite.
Loots takes hope from a recent visit to the Mintails site by Gauteng premier Panyaza Lesufi. “‘How can we help you?'” Loots quoted Lesufi as saying. “When was the last time you heard that from the government?”
This article first appeared in the Financial Mail.