SHARES in gold miner Pan African Resources have doubled this year, which is normally a signal to investors to steer clear of the company. At just over 33p a share, the company is quickly advancing on target prices of 33p-35p forecast by investment banks, which were positive on the company’s prospects following its full-year results in September.
“We expect Pan African to enter a period of enhanced profitability,” said Richard Hatch, an analyst for Berenberg Bank in the UK. The major driver for Pan African is its R2.4bn Mintails project, which it’s commissioning this week. The project is expected to increase annual gold production to as much as 220,000 ounces — roughly 40,000 oz more than in the 2024 financial year.
At a “well-supported” gold price of $2,500/oz, the higher output, forecast to be mined at an all-in sustaining cost of about $1,000/oz, will result in a free cash flow yield of 20% this year, said Hatch. Net debt is expected to peak at R3bn, mostly owing to the cost of building Mintails, but the firm is expected to be net cash by 2026.
Hatch calculates a three-year dividend yield of about 9% for Pan African, against 3.5% now. Peel Hunt, another UK bank, said: “The 2025 financial year looks set to be another year when Pan African improves the quality of its business.”
These are happy days for CEO Cobus Loots, who has long battled to eke out a profit from Pan African’s Barberton Mines, a century-old gold mining district full of operational hazards. While not every step has been in the right direction — plans to drill for gold in Sudan have been all but shelved — the purchase of the Mintails deposit near Krugersdorp has been a masterstroke. Loots took his lead from Elikhulu, a tailings project he commissioned earlier at Evander in Mpumalanga, hoping to replicate it. It’s unlikely he bet on a $1,500/oz margin for Mintails.
The big question is whether Pan African doubles its money. Loots says Mintails production can be increased with the construction of another R2bn standalone plant at the nearby Soweto Cluster — resources secured as part of the original Mintails parcel but planned for later development.
“We have to do what’s right over the long to medium term,” says Loots. The advantage of Mintails is that it doesn’t need a $2,500/oz gold price to perform. “We do have a bit of optionality in the portfolio. It [the Soweto Cluster] is another 50,000 oz per year in production,” he says.
“The question you have to ask is whether you’re here for a good time or for a long time.”
Shareholders, who can switch out their money in a heartbeat, will likely opt for a good time even as gold industry CEOs highlight value concerns in gold sector merger & acquisition activity. “These are markers of exuberance in the market,” said Barrick Gold CEO Mark Bristow on the sidelines of last week’s Denver Gold Forum regarding a spate of deal-making in the sector.
What’s in Pan African’s favour, however, is that it secured the investment option over Mintails in late 2020, when the gold price was trading at about $1,700/oz. While hardly countercyclical, the investment represents authentic organic growth and leaves Loots with a decision to make.
A version of this article first appeared in the Financial Mail.
