While Pan African Resources’ (PAF) pre-tax profit for the year to end-June 2018 was within 5% of our prior forecast (on an underlying basis, excluding impairments), bottom-line results were significantly ahead of our expectations as a result of a material tax credit applied to Evander. While FY18 was a challenging year, in which the board elected not to recommend a final dividend (as expected), an idea of its future financial potential may be gleaned from the fact that underlying earnings from continuing operations nevertheless amounted to £19.6m, or 1.08p per share (1.60p excluding ‘other’ items).
Management reiterated its production guidance of 170,000oz in FY19, reflecting the fact that commissioning at Elikhulu is progressing “very well”, with 56kg (1,800oz) of gold produced from 1–19 of September and with a forecast of 90–100kg (2,894– 3,215oz) for the month as a whole. By November, the plant is expected to be operating close to capacity of 1Mt and 145kg (4,600oz) gold per month.
At the same time, however, the price of gold has fallen by 8.2%, or more than US$100/oz, from over US$1,300/oz in the first five months of CY18 to under US$1,200/oz at the time of writing – only partially offset by a 5.3% decline in the value of the South African rand relative to its FY18 average. As a result, we have reduced our gold price forecast for H119, from US$1,320/oz to US$1,225/oz, which has reduced our earnings and cash flow expectations for FY19.
Updating our long-term forecasts to reflect the mid-year decline in the gold price, our headline absolute valuation of PAF has eased by just 3.9% to 12.50p. Including new projects and other assets, however, this increases to 17.01p plus the value of c 20.1m underground Witwatersrand ounces, which could lie anywhere in the range of 0.17–4.15p per share, depending on market conditions. At the same time, if PAF’s average price to normalised current year EPS ratio of 9.4x in the period FY10–18 is applied to our forecasts, then its share price could be expected to be 10.2p in FY19 and 17.2p in FY20. In the meantime, it remains cheaper than its South African- and London-listed gold mining peers on at least 91% of valuation measures on the basis of our forecasts, or 94% on the basis of consensus forecasts (see Exhibit 9). Finally, based on our assumptions, PAF’s dividend yield is also the eighth-highest of the 65 precious metals’ companies expected to pay a dividend over the course of the next 12 months (see Exhibit 10).