Pan African Resources – 570% ahead on this tip so far – more to come

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I tipped AIM listed gold stock Pan African Resources (LSE:PAF) at 2.6785p back in November 2005. Long term investing pays off. Ignoring dividends, those who bought then are 570% ahead with the shares at 18p. That values Pan African at £260 million but having just had a long chat with CEO Jan Nelson I am convinced that there is more to come. And here’s why.

Results for the year just ended ( to June 30th) were out today and were pretty impressive. But that is not the real story. For what it is worth gross revenues from gold sales increased by 27.65% to £101.1 million – largely a function of a higher hold price. EBITDA soared by 57.89% to £45 million ( operational gearing) and net income increased by 69.77% to £17.2 million – earnings per share came in at 2.02p, an increase of 69.77%. The profit margin was $918 oz. The net cash position increased by 96.04% to £19.8 million.  But that is the past. The company will be transformed by Christmas into a  mid-tier producer.

Firstly it has offloaded its small exploration project at Manica in Mozambique. Secondly the Phoenix PGM tailings project came onstream in April. This year it should produce c15,000 oz of PGMs. Thirdly the company is investing c£23 million in a tailings project at Barberton ( its main South African mine which is consistently producing at c100,000 oz per annum) and this will add another 25,000 oz per annum to production. The total resource Pan African sat on at the year end was 5.92 million ounces with a reserve of 1.16 million ounces.

But the game changer is the proposed purchase of the Evander mine from Harmony for £116.2 million. Harmony wishes to raise cash to develop a major find in PNG and because it wishes to cut its exposure to South Africa. As a result Pan African seems to be picking up an absolute bargain as Evander’s mine at Mpumalanga  has a resource of 28.4 million ounces and a reserve of 7.66 million ounces and is quite capable of producing 100,000 oz a year for more than a decade. In the year to June 30th 2012 it made a pre-tax profit of £52 million , up from £16.7 million, with much of the increase attributable to Harmony  spending £21 million on upgrading and improving facilities.

But is Harmony right to want to cut its exposure to South Africa and is Pan high risk because it is now a 100% SA play? I asked Jan about those pictures we saw of rioting miners on the TV the other day? He asked me about the pictures he saw of London in flames last year and said he was worried that the UK was a politically unstable place to do business. A good answer. Why said South Africans do not have a sense of humour? Jan concedes there are issues. But so far Pan African has not been affected by industrial unrest and Nelson is confident that the current troubles will die down. None the less, I do fear SA based plays will- for political reasons – always trade at a bit of a discount to fair value.

Pan will fund the purchase by taking on c£50 million of debt. It will also do a 1 for 4 rights issue ( which is fully underwritten) at 14p.  What will the group look like post deal?

In the year to June 30th 2013 ( assuming 8 months of Evander) output will be c 180,000 oz of gold and PGMs. Next year we are looking at 240,000 oz. Even on a $1500 gold price this is a group which should next year chuck off c$240 million. After capex needed to upgrade Evander and the completion of the Barberton tailings work this group should still be generating £40 million of free cashflow this year and £80 million next time. Thus it is perfectly capable of clearing down its debt very rapidly and resuming chunky dividend payments from this year.

What is Pan worth? Well adjusting for the rights issue the market cap is £325 million at 18p. Of course if you buy today at 18p you can reduce your average in price by taking up your rights. I would have thought that even allowing for the SA factor, the size of Pan’s resource justifies a free cashflow multiple of at least 5. On $1500 gold  that equates to a £400 million market cap or 22.5p per share. But on $1750 gold you would add another £40 million a year to free cashflow (on a 5 times multiple that is worth 10p per share).

As such I certainly would not be selling at 18p. Since I remain a gold bull I would have thought that fair value is at least 25p. With two big producing mines and 4 projects Pan African has spread its risk. I would have thought it is now of a size where it will be going onto the radar screens of the majors as a takeover target. So far I am 570% ahead on this one, but Pan remains a solid low risk buy for gold fans.

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  1. Don shuter says:

    Pity it wasn’t one of your main gold tips! What’s your opinion on NGL and Ascot which were both highly recommended by you?

  2. Don

    What do you mean one of my “main gold tips” – I followed it week in week out for 7 years. Clearly you have decided that my main tips are ones that went down while Centamin ( sold for a 1000% gain) or Paf are just sideshows.

    I am working through all my old tips one by one. Not dodging failures ( see R4E earlier this week). There will be winners ( actually far more than losers over the past 12 years) which you will no doubt say “were not main tips” & losers ( which you will decide were main tips).

    I am just finishing a piece on Chaarat (off by 40% so no dioubt you will classify it as a main tip) but I’d rather speak to CEOs before writing and produce sensible comment if that is okay with you?


  3. Susan says:


    Maybe if you had headlined your R4E update in a similar manner as PAF people would be more forgiving?
    For example: Reach4Entertainment:Down 95% since my tip is it Bad Dog or Good Dog?
    Just an idea.

  4. Don shuter says:

    What I was alluding to is that NGL was your number one tip of the year for 2012 and that Ascot was your number one tip the year before, hence my specific mention of them. At the beginning of 2012 your target price for NGL ‘ for starters’ was 25p and for Ascot ‘ for starters’ was 60p. Both of these have failed miserably so far and so it isn’t unreasonable to ask for your opinion on them now. Pan African wasn’t mentioned as a tip for 2012 but fair play to you as it has been a decent call.

    I admire your willingness to update on all of your old positions as it can’t be easy. The performance of the gold fund, the small companies fund, the Elite fund, Athol Gold (which was way over exposed to Ascot), WSAG, Worship Street and RIvington are testament to that.

  5. Susan Sweetest whatever I write you would stick the boot in. Be honest…

    Don. I published 234 tips on over 12 years. Some have been disasters. Some have been 10 baggers. 1 ten bagger pays for a stack of dogs. Look at the overall record and judge me. Do not judge by 1, 2 or 5 stocks be they stars of dogs.

    And yes I shall update on ALL the live tips. But I am not going to bash out quick copy just to keep folks happy. I write after speaking to companies and thinking not just to fill space. That’s my style.

    No apologies


  6. Don shuter says:

    When you work out your gains and losses on your tips are these based on actual buying and selling prices which would be the fair and correct way to do it? Using mid prices would be wrong in my opinion and not give a fair reflection of performance.

  7. James K says:

    Tom, why do you not charge for giving out tips now?

  8. Susan says:

    James K

    lol. Made me smile.

  9. James K says:

    Susan, It’s a genuine question as Tom’s tips seem pretty good and well researched. Yes , he has losers as well as winners and IMO gives out too many tips which are hard and a bit complicated to follow if you do not read his articles on a weekly basis. However, if he just keeps it simple and selects 3-5 for shorting and buying every year ..I think it would be worth worth paying for.

  10. Londonian says:

    Tom, in view of the unstable labour situation in South African mines, I sold PAF (at a profit). Tell me why I was wrong.

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