Pan African Resources Moves Ahead in Evander Gold Mines Acquisition

The completion of its ZAR703m, 25.5 per 100 rights issue at 14p per share effectively completes the financing requirements for Pan African’s acquisition of Evander Gold Mines from Harmony later this year. As such, it removes financing risk from the transaction, rending a successful outcome more likely and increasing confidence in Edison’s updated valuation for PAF of 29.83p/share (at a long-term price of US$1,676/oz Au).

Principal remaining condition precedents
The two principal condition precedents remaining to be fulfilled prior to the closure of the transaction are Evander’s entering into an acceptable electricity supply agreement with Eskom (which may be waived by PAF) and Section 11 Ministerial Consent, “which is required to be obtained no later than 30 June 2013.”

EGM effect on Pan African
September quarterly results from EGM demonstrated a recovery in tonnes milled to ostensibly the target milling rate and an encouraging 14.6% decline in unit working costs to ZAR1,741/t, which is within 2.7% of PAF’s target unit cost of ZAR1,696/t. Since 1 April, earnings from EGM have been available to reduce the total consideration of ZAR1.5bn payable by Pan African to Harmony. After the closing date, EGM will be fully consolidated. Edison’s current forecasts assume that the acquisition will be concluded imminently and that EGM will be consolidated into PAF’s accounts from January 2013.

If closure of the transaction is delayed until 30 June, Edison forecasts that PAF will instead announce revenue of £121.0m for FY13, normalised profit before tax of £59.3m, EPS of 2.40p and a dividend payment of c 0.34p per share. These compare to unaudited, pro-forma headline EPS of 2.37p in FY12 after both the EGM transaction and rights issue (on the assumption that both were executed on 1 July 2011).

Valuation: Up 44% on updated gold price and ZAR
Aside from the details of the rights issue, Edison’s forecasts for Pan African have been adjusted to reflect both the recent weakness of the rand in the foreign exchange markets and also Edison’s updated long-term gold price of US$1,676/oz. As a result, Edison’s updated absolute valuation of Pan African, based on a maximum potential dividend flow discounted at 10% per annum, has increased by 43.6%, from 20.77p per share (see note dated 11 September 2012) to 29.83p per share currently. Assuming the successful acquisition of Evander, PAF’s enterprise value will equate to US$17.11 per resource ounce excluding surface resources, or US$14.60/oz including estimated surface resources.

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