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PAN African: What I learned from Charl Botha

April 16, 2024
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Paul Roux
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Paul Roux

Covering all things PAN African

 

PAN 101

Pan-African is a South African gold company. The company is listed on the JSE and London Stock Exchange, and at the time of writing, is roughly R8.8 billion in market cap. Via its mining operations, the company produces about 200,000 ounces of gold per year. 

PAN does two sorts of mining:

1. Regular underground mining

2. Tailings operations, where mine dumps are put through a modern processor. 

 

Value drivers for mining companies

Charl identifies five main value drivers for PAN. It's similar for all mining companies. Whilst the five drivers are the same, the specifics of each driver when applied to various companies are different.

  1. Revenue factor1: The gold price. 
  2. Revenue factor2: The rand/dollar exchange rate. 
  3. Revenue factor3: The quantity of gold produced per year. 
  4. The costs of operation: How cheaply can mining take place. 
  5. Life of mines: How long will the mines last.

 

PAN Africans value drivers

  1. The gold price

Charl suspects that Gold will return to its historic average of around $1500. But, the direction of the gold price is very difficult to estimate. I am not an expert, and when Im not an expert, I try to take a step back. The exact price of gold is a small thing. You want to get the big things right first, and then the small things will fall into place. Because Im not an expert, I dont say the gold price is going to be X, Id rather say IF the gold price is X/Y/Z, how would it affect the valuation going forward? So, I change the question to something that is easier to answer.

 

     2. Exchange rate

Important note PAN is a South African company and therefore sells at the RAND price of gold. The Rand price is the dollar price of gold multiplied by the exchange rate. The Rand is quite volatile against the dollar, and on average, the Rand depreciates by roughly 6% against the dollar every year. PAN generates revenue via the Rand price of gold, and the company also pays its cost in Rand. Currently, the Rand price of gold is at an all-time high, which benefits the revenue growth. 

 

     3. Quantity of Gold Produced

Last year PAN produced roughly 200 000 ounces of gold per year. That equates to around 7 tons of gold. Within the next two years, PAN has a tailings project called Mintails which will improve the output to roughly 250 000 ounces.  

In the last 6 months, PAN has had some geological difficulties in one of its mines, which caused production misses. The market reacted negatively to these results, resulting in an 18% drop in share price.

 

     4. Cost to mine

A mine is fixed-cost intensive. This means that even a small change in volume produced will have a significant impact on cost per unit. PANs all in sustainable cost (which is the gold industrys metric to determine the total cost per ounce produced) is roughly R1260 per ounce. This cost point is almost exactly on the world average. In Charls opinion, this is a great advantage. 

Why is this bullish? If the gold price decrease, there is still quite a bit of room for PAN to operate before the company starts losing money (going below breakeven). Mines like Sibanye are very high on the cost curve, meaning that they have little wiggle room. The flip side is that the higher on the cost curve a company is, the more exponentially it benefits if prices are high. Its essentially a double-edged sword. Only a small move to the upside will cause an explosion of profits because the margins are so small to begin with. In finance, this concept is called operational leverage. Example:

Average sales price: R2000, both companies produce 500 units. 

  • Company A cost: R1800. Revenue = (R2000 R1800) x 500 = R100 000
  • Company B cost: R1400 = (R2000 R1400) x 500 = R300 000

Now the average sales price decreases from R2000 to R1900.

  • Company A cost: R1800. Revenue = (R1900 R1800) x 500 = R50 000 (decrease of 50%)
  • Company B cost: R1400 = (R1900 R1400) x 500 = R250 000 (decrease of 16.67%)

Company As profit margin has decreased significantly relative to company B. Vice versa would happen should the gold price increase (like it did in 2022), causing companies like Thungela to have record profit margins.

 

     5. Life of mines

In short PAN has no issue with the life of mines. The mines still have the capacity for decades to operate. Companies like Thungela have short life of mines, which might be a concern over the medium term. Additionally, every mining company has to cover rehabilitation cost after the mine is depleted an obligated cost to restore the environment to pre-mining conditions, which can be many millions of Rands.

 

Valuation

According to Charls analysis, PAN is worth around R4.80. The stock is currently trading at R3.46.


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