Pan African Resources:Long Term Valuation Remains Intact

Pan African Resources (PAF.AIM) has announced that it has successfully commissioned its Barberton Tailings Retreatment Project (BTRP) ‘on schedule and within budget’ and conducted its inaugural gold pour. The project will now ramp up to its full 100ktpm capacity by September and, at US$800/oz costs and with 90% of capex already invoiced, contribute rapidly to positive cash-flows.

BTRP
The BTRP’s reserves have been well drilled and, coupled with a flexible mining method, therefore allow the mined grade to be managed in line with the gold price. Phase I of the operation (mining the 3Mt Bramber and 3Mt Harper dumps) has a life of six years, after which the option exists to mine the 6Mt Consort dumps for a capital investment of ZAR55m (US$5.5m) to install a ball mill. The potential also exists to process the Sheba dumps, in which case material could be transported underground for processing, thereby avoiding the intervening hills/mountains.

Evander (EGM) and Phoenix
The BTRP ramp-up occurs at a time in which EGM is entering a 12 month low grade cycle at 8 shaft (forecast yield 7.0g/t in FY14) before recovering once the high grade areas of the Kinross pay-shoot are more fully developed. In the intervening time, management are studying two potential projects: 1) a ball mill to replace an underground autogenous mill in order to process fine, high grade (0.8-1.2g/t) surface material close to the Winkelhaak plant, to produce 500-650oz/mth and adding two years to the life of surface operations and 2) the opening up of the old 7 shaft gold section to access the 2010 pay channel currently locked up in the flooded number 3 decline. Studies relating to the Evander Tailings Retreatment Project remain on-going. In the meantime, the water streams relating to Phoenix have been separated so that the plant is no longer affected by current arisings of oxide material. Simultaneously, Phoenix is expediting an additional tailings storage facility to be completed in Sept that will allow it to bypass the oxidised tailings and increase recoveries. Targeted production in FY14 is 700oz/mth precious metals.

Valuation: Long term remains intact
While Edison’s long-term gold price forecast remains US$1,676/oz, it has revised its short term forecasts to US$1,365/oz and US$1,633/oz in FY14 and FY15, respectively, which has inevitably affected short-term forecasts. Nevertheless, the NPV10% of the (maximum potential) dividend stream to investors to 2039 is still 29.5p. In the meantime, its two-year diluted (reported) P/E ratio declines to 5.2x in FY14 cf AngloGold Ashanti’s 7.5x and Gold Fields’ 11.3x (source: Bloomberg).

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