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Pan African: Not all gold


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The main beneficiary of gold miner Pan African Resources’ decision to pay a 30% higher dividend for the year to June will be the company itself.

Pan African passed the interim dividend to conserve cash for investment opportunities. As a final dividend, it is proposing to pay 15.4c/share, up from 11.5c/share in 2015, which will cost a record R300m.

After Shanduka Group and Pembani merged in 2015, Pan African bought out the stakes in Shanduka Gold (now PAR Gold) held by Standard Bank and Jadeite for R547m to protect its black empowerment status.

As a result, it holds 49.9% of PAR Gold, which in turn owns 22.46% of Pan African shares. Because of the structure of the transaction, which was funded with a vendor loan, the attributable dividend to Pan African is R65.7m.

The group’s second-biggest shareholder after PAR Gold is Allan Gray Investment Management, with 19.62%.

Like many other mining companies which used to have progressive dividend policies and found them inappropriate in a cyclical industry, Pan African has changed to paying a percentage of earnings instead. It says it will normally pay out 40% of net cash generated from operating activities, taking into account factors like sustaining capital, contractual debt repayments and the cash effect of one-off items. In the year to June its net cash from operating activities was R489.4m after spending R302m on sustaining capital.

CEO Cobus Loots says the proportion of the final dividend payment, at 61%, is above the target, showing the flexibility of the policy and scope for discretion in current economic conditions.

Much as shareholders like dividends, this generosity could be seen as untimely since the group is considering a substantial investment of R1.7bn, which is a quarter of the current market capitalisation, into a tailings project at the Evander mine called Elikhulu.

Pan African has received underwritten proposals for the full funding from a number of institutions but Loots says this liability will not affect future dividend payments.

He says Pan African’s shareholders expect to receive dividends and they are an important part of the group’s investment case. The Elikhulu project will pay for itself within three or four years at current gold prices.

Shoaib Vayej, portfolio manager at Afena Capital, says management indicated on a conference call that Pan African would have zero debt by November this year, suggesting that the group’s free cash flow is sufficient at current gold prices to fund the project internally.

Any debt arrangements could be seen as a contingency for lower gold prices.

Vayej says the Elikhulu project, though significant in relation to Pan African’s market capitalisation, is relatively low-risk as it will process tailings and it effectively scales up an existing operation. In response to a question about project funding, management also mentioned hedging as an option to reduce price risk.

Elikhulu will be Pan African’s fourth tailings operation. It also treats tailings — mine dumps from which low-grade gold can be extracted profitably, using modern methods — at Barberton Mines, Phoenix Platinum and Evander.

Elikhulu has a 1.7moz resource in tailings built up over Evander’s 70-year history.

The operation would treat 1Mt of material a month for 14 years to produce 45,000-50,000oz of gold a year in its first eight years and about 38,000oz/year in the final six years. The average all-in sustaining cost would be about $650/oz, which means a profit margin of over 50% on current gold prices of $1,350/oz.

The biggest capital items would be a new tailings storage facility, which would be large enough to accommodate all of Evander’s tailings and will be located next to the existing storage facility, and a carbon-in-leach (CIL) plant with a capacity of 1Mt/month.

Loots says Pan African has established that the existing Leeuwpan Dam has sufficient water for this project.

The project is currently in definitive feasibility study stage. The study should be completed by November and submitted to the board for approval. It would take 18-24 months to construct and commission, with first gold produced by November 2018.

Simultaneously, management is studying a second project, the Evander 2010 pay channel, which would involve mining an ore body accessible from Evander’s existing No 7 shaft.

It would save the huge cost of sinking another shaft from the surface. The results of the current drilling programme on this ore body will also be available by November.

Pan African’s shares reached a record peak of 435c in early July and have reverted to 345c.

FD Deon Louw says though the shares have significantly outperformed the FTSE/JSE gold index over the past year, management believes they are trading below fair value, especially taking into account the growth projects.

Vayej says on a current dividend yield of 4.5% compared with a historical average of about 3.3%, Afena considers the shares offer good value.