Pan African prepares platinum push  

Jan Nelson, CEO of London-headquartered South African precious metals producer Pan African Resources, is preparing the AIM and Johannesburg-quoted company for some momentous developments.

Already distinct from most mining companies of its size in paying dividends and boasting as chairman a former campaigning trade unionist, Cyril Ramaphosa, ex-leader of the South African mineworkers, Pan African is adding platinum group metals (PGMs) to its existing gold mining business.

The company recently increased reserves at its key Barbeton gold mine 51 per cent to one million oz at a respectable grade of 8.12 grammes of gold per tonne of ore, with estimated resources up 7 per cent to 2.55 million oz at 8.35 grammes a tonne. It plans to have a plant commissioned for its Phoenix PGM arm in three months and hopes to be producing at the rate of 12,000 oz a year by January.

With a maiden proven and probable reserve figure of 174,000 oz, observers suggest Phoenix could help the company double annual pre-tax profits to nearly £46 million within three years, along with progress in other parts of the company’s operations.

Barbeton could have a gold mining life of 15 years, argues Nelson, who suggests that three potential new projects there could double that. He sees production being accelerated and overall costs reduced by tapping tailings left over from previous mining at Barbeton, whose gold content can now be economically extracted by modern techniques, and talks of recovering 50 per cent of the tailings gold lodged in 11 million tonnes of material.

Pan African hoisted profits in the six months to last December 58 per cent to £7.6 million on marginally increased half-year gold sales of 46,655 oz and turnover up 32 per cent to £38.3 million, helped by a rising gold price. According to Nelson, the company can fund projected capital costs of £23 million for a plant and tailings at Barbeton out of cash flow, supplemented by new bank facilities of some £14 million.

With a feasibility study due by the end of September, he contends that the tailings project could produce 25,000 oz of gold a year at a cost of $400 an ounce against a current gold price of more than $1,550 an ounce and talks of a 60 per cent internal rate of return.

But, of course, it is the prime underground gold mining from Barberton, with annual production of around 100,000 oz at a decidedly steeper cost of around $700 an ounce, that holds the key to Pan African’s prospects – until Phoenix shows its mettle. Both Barberton and Phoenix came to the company as part of an asset streamlining by South African copper producer Metorex, which used to own more than 50 per cent of Pan African and is now the target of bid attentions from Brazilian mining giant Vale and others.

South African Black Economic Empowerment group Shanduka Gold owned 26 per cent of Barbeton, which became translated into 26 per cent of Pan African as part of the Metorex divestment. That made Shanduka Pan African’s largest shareholder and accounts for Ramaphosa’s position as chairman.

Outside South Africa itself, the company has a gold project at Manica in Mozambique, where it recently upgraded the resource estimate 16 per cent to 2.99 million oz. Whether Manica, which analysts have valued at £25 million, will be sold or developed remains to be seen and will depend on what deals and opportunities present themselves.

Steeply rising costs, of electricity, cyanide and labour, are a feature of South African commercial life, which is why the low-cost tailings should help the economics of Barbeton and maintaining wide margins is important. Nelson stresses that Pan African uses a heavily discounted gold price of $750 an ounce in project planning.

Analysts see pre-tax profit increasing by 37 per cent to £30.4 million for the year to last month, with £45.7 million on the cards for 2011-12, with the dividend rising from 0.29p to 0.45p a share. With gold and platinum still in demand, and despite potential currency and economic uncertainties in South Africa, Pan African shares – at 10.75p, on a price-to-earnings ratio of 6.8 and yielding 2.7 per cent – could make more progress.