In its nine-month operational update, Pan African Resources (PAF) disclosed production that is consistent with its FY19 guidance of 170,000oz. This caused us to reduce our FY19 forecasts fractionally in anticipation of lower production than we previously expected from Barberton offset by higher (but lower-margin) production from Evander underground and the BTRP. More importantly, however, Pan African’s directors approved the development of the Evander 8 Shaft pillar project, with production from as early as August, causing us to increase our forecasts for FY20 and beyond and our ultimate valuation of the company.
The Evander 8 Shaft pillar project will contribute, on average, 30,000oz of production per annum to the group over the next three financial years, including c 20,000oz in its first year of production, with the result that management has increased its group-wide production guidance for FY20 from 170,000oz to 185,000oz currently (an increase of 8.8%). According to the project’s updated feasibility study, capital expenditure will amount to ZAR70m, of which ZAR40m will pre-date production, while all-in sustaining costs have been estimated at US$900/oz (at an exchange rate of ZAR14.30/US$). The pre-tax NPV of the project on this basis is US$25.8m (1.3 US cents per share) at a 10% discount rate and a gold price of US$1,305/oz.
Including the Evander 8 Shaft pillar project, our headline absolute valuation of PAF has increased from 12.90p/share to 14.05p/share – a rise of 8.9%. This increases to 19.00p/share (cf 17.69p previously) once growth projects and other assets have been taken into account, plus the value of c 19.2m underground Witwatersrand ounces, which could lie anywhere in the range of 0.17–4.15p per share, depending on market conditions. In the meantime, if PAF’s historical average price to normalised EPS ratio of 9.4x in the period FY10–18 is applied to our respective forecasts, its share price could be expected to be 9.3p in FY19, rising to 17.6p in FY20 (cf 16.1p previously). Pan African also remains cheaper than its South African- and London-listed gold mining peers on at least two-thirds of valuation measures regardless of whether Edison or consensus forecasts are used. Finally, based on our assumptions, its dividend yield will be within the top third (if not the top 10) of the 45 precious metals companies expected to pay a dividend over the course of the next 12 months, if not in FY19 then certainly in FY20.