July 2023

Pan African Resources PLC was incorporated in 2000 and is based in Johannesburg, South Africa. 

The company makes its money from mining, extraction, production, and the sale of gold in South Africa.

What is Pan African Resources?

We selected PAF as our November 2022 Stock pick. The company is a leading gold miner operating in South Africa, with a diversified portfolio of assets that includes several producing mines and exploration projects. 

Since we bought in, the share price has decreased, mainly due to guidance that their gold production is set to be at the lower end of expectation for this financial year. However, as long term investors, we see many reasons to be optimistic and a potential opportunity to reinvest in the business at an improved price point:
  • Strong Track Record and Experienced Management
Pan African Resources has a proven track record of delivering consistent operational and financial performance. The company has been in operation for over two decades and has demonstrated its ability to navigate the challenges of the mining industry successfully. The management team has extensive experience in the sector, with a deep understanding of the local operating environment and a strong focus on operational efficiency.

  • Diversified Asset Portfolio
One of Pan African Resources' key strengths is its diversified asset portfolio, which includes both underground and surface mining operations. The company owns and operates the Barberton Mines and the Evander Mines, which have a combined annual production capacity of over 200,000 ounces of gold when operating at full steam. Additionally, Pan African Resources has exploration projects in various stages of development, providing potential upside for future growth.

  • Cost-effective Operations and Cash Flow Generation
Pan African Resources has a strong focus on cost control and operational efficiency. The company has implemented various initiatives to optimise its operations, resulting in lower production costs and improved margins. This disciplined approach to cost management, coupled with its stable production levels, enables Pan African Resources to generate robust cash flows even in a challenging gold price environment.

  • Strategic Expansion and Growth Opportunities
Pan African Resources has a clear growth strategy focused on organic expansion and value-accretive acquisitions. The company has successfully completed several expansion projects in recent years, including the Elikhulu Tailings Retreatment Plant, which has significantly increased production and reduced costs. Pan African Resources also continues to actively explore and develop new projects, with a strong pipeline of potential discoveries.

  • Exposure to Gold as a Safe-Haven Asset
Gold has historically been considered a safe-haven asset during times of economic uncertainty. As an established gold mining company, Pan African Resources provides investors with direct exposure to the gold price. In periods of market volatility or inflationary pressures, gold prices tend to rise, potentially leading to increased profitability for the company and attractive returns for shareholders. Right now, the price of gold is relatively high, which could offset the lower production this year. 

What has happened since we last bought in?

At the end of May, PAF provided revised production guidance for the year ending June 30, 2023:
  • The company expects production for the year to be approximately 175,000 ounces of gold, lower than previously anticipated. This was due to challenges with electricity supply and slower ramp-up at certain mines. However, tailings operations are performing as expected. 
  • The company also reported a fatal accident at one of its mines, but expects an improvement in overall safety rates for the full year. 
  • They are Pan African Resources is implementing renewable energy plans to mitigate the impact of electricity supply challenges occurring in the future. 
  • Construction of the Mintails project is set to commence soon, with steady-state production expected by December 2024. 
  • Despite lower production, the company anticipates a robust financial performance due to higher gold prices and disciplined cost control. 
  • In the longer term, PAF aims to position itself as a sustainable, high-margin, and long-life gold producer. The company plans to continue making cash distributions to shareholders in the form of dividends, and has manageable debt levels
Overall, despite the challenges faced in the current financial year, Pan African Resources remains well-positioned as a gold producer with a robust financial performance. The company has shown improvements in safety rates, and its operations at Barberton Mines are experiencing positive momentum. The commencement of the Mintails project construction indicates future production growth.

From our perspective, their commitment to renewable energy projects and reducing dependency on Eskom is a positive sign, as it enhances the company's sustainability and reduces operational risks. The company's focus on value creation for its stakeholders, disciplined cost control, and manageable debt levels further strengthen the investment case.

What about the share price? 

Since we bought in, the share price has declined by around 26%. We believe this could be a good opportunity to buy more shares of this quality company at an improved price point. 

Conclusion

Despite the challenges faced in the current financial year, Pan African Resources remains well-positioned as a gold producer with a robust financial performance. 

PAF is a high-quality, dividend paying company and we will be adding to our investment tomorrow morning.