Of all the JSE-listed gold miners, I get the sense that Pan African Resources Plc (PAN) is just simply underappreciated.
Probably because it is relatively small. Yet, size is not necessarily correlated with quality, and the gold junior stacks up well against even the majors.
Despite Pan African Resources’ modest R7.5bn market cap, the Group’s latest operational update reveals that it has managed to produce 201,608/oz of gold in FY 21. This is a better production profile than DRD Gold’s latest annualized production despite DRD having a market cap of R12,8bn.
Perhaps more important than ounces are profitable ounces (something the mining industry seems to only recently remembered). At the last reported date, Pan African Resources’ was the 2nd lowest cost producer on the local bourse (only beaten by Goldfields). No surprise, but the legacy operations of Sibanye-Stillwater are the most expensive per ounce produced.
|JSE-listed Gold Miners||Annualized Last Production (.oz)||Latest All-in Sustaining Cost (USD/oz)|
|Goldfields||2 164 000 oz||$1 078/oz|
|Pan African Resources||201 608 oz||$1 252/oz|
|AngloGold Ashanti||2 352 000 oz||$1 287/oz|
|DRD Gold||177 732 oz||$1 343/oz|
|Harmony||1 499 032 oz||$1 416/oz|
|Sibanye-Stillwater (gold)||997 568 oz||$1 606/oz|
For some background, perhaps listen to Pan African Resources’ latest update in this MoneywebNOW’s interview. The two key highlights are:
- FY 21 gold production +12.3% y/y higher, &
- Net senior debt has basically halved (-45% y/y).
Beyond this, Pan African Resources has a range of projects that either derisk its operations (e.g. solar power that should be operational in Q3 of this year), expand its production (e.g. Mintails transaction) or support the local communities in which is operates above-and-beyond ESG minimums (e.g. Project Blue). All positives, all likely to incrementally add value and all—probably—not appreciated by the market.
Adding to this attractiveness is Pan African Resources’ strong dividend policy (other than FY 18, they have consistently paid out a generous portion of their profits as a dividend to shareholders and management has reiterated their intention to keep doing this). Pan African Resources’ excellent dividend history sets a high benchmark against which many of the other gold miners fail.
More subtly, this dividend flow from Pan Africa Resources allows investors to hold what is effectively a (dividend) yielding investment in a geared exposure to the Rand-gold price. There is a lot in that sentence, so let me break it down in my conclusion:
Pan African Resources offers a domestic investor the following exposure:
- Rand-gold exposure: Pan African Resources’ revenue is earned by selling gold priced in USD’s and translating this back to ZARs. Thus, you are getting both gold price and currency movements (so-called ‘Rand-gold price’) embedded in this revenue stream.
- Geared exposure to this Rand-gold price: The costs of running Pan African Resources’ mines are largely fixed costs and do not change with the changes in the Rand-gold price. Thus, the Group has strong operating leverage; if the Rand-gold price moves higher, this change drops to the bottom line creating a leveraged effect on its profits. Thus, if the Rand-gold price is running higher, Pan African Resources can outperform this movement.
- (Dividend) Yielding Rand-gold play: If you bought an ounce of gold in South Africa, you would have 1-to-1 exposure to the Rand-gold price. That said, no matter how long you held that ounce of gold, you would still only have an ounce of gold and would have earned no interest on the capital invested. Pan African Resources pays dividends from its profits and, thus, you get the (geared) exposure to Rand-gold, but also earn a yield on your capital here (imagine a bank account offered your capital exposure to Rand-gold with an attractive interest rate attached!).
In closing, I get the sense that Pan African Resources Plc (PAN) is often underappreciated and, honestly, I do not think it should be. It is a good quality junior gold miner with strong management and the latest operational update further illustrates this.
ARTICLE ORIGINALLY APPEARED ON MONEYWEB.