SMALL CHAPTER IDEA: Pan African strikes gold with mine acquisition

Investing in the gold mining sector comes with dizzying ups and downs.

While backing an exploratory minnow can generate dazzling returns if all goes according to plan, the potential rewards come with a high risk factor.

Canceled and delayed mining permits, regional conflicts, fluctuating market dynamics, and the simple fact that returns can be a big disappointment all play a role.

But that only makes the reward even sweeter when the risk-reward scale tips in the right direction.

Carry panafricanwhose chief executive, Cobus Loots, is approaching his 10th anniversary as CEO of the London- and Johannesburg-listed gold producer.

Pan African has achieved many notable victories in recent months, including the full stake acquisition of Tennant Consolidated (TCMG), which is developing a gold project in Australia’s Northern Territory.

In discussing the acquisition with Proactive, Loots called it “an opportunity to further expand production, further diversify our business, reduce volatility and basically achieve growth at what we believe is a reasonable price.”

Pan African also recently announced the successful commissioning of the Mogale Tailings Retreatment (MTR) operation in South Africa.

This project will further expand Pan African’s production capabilities. But there is more than that.

The 100-year history of large-scale gold mining in South Africa is written into the contours of the landscape in the form of these ancient tailings dams.

Tailings are essentially a byproduct of gold mining. They are strips of materials left after gold is extracted from the earth. These tailings are dumped and often abandoned at sites called tailings dams.

They are not useless. In fact, they are literal gold mines, albeit of very low grade.

Pan African is one of three major companies examining these tailings to extract residual gold reserves.

About 0.3 grams of gold per ton are extracted from these tailings, and although the recovery rate is only half that amount, the cost benefits make the effort worth it.

“Because this process is so simple and efficient and the scale is so large, it gives us these economies of scale,” Loots said.

There is also a big ESG angle, in that they are “reducing legacy liabilities (and) consolidating residual tailings into new, modern facilities,” he added.

On average, it costs about $1,000 to produce an ounce of gold from the MTR tailings facility. Not bad when the price of gold more than doubles.

Which brings us to an important point.

Gold prices have soared in 2024, reaching an all-time high of $2,800 an ounce in late October.

While prices have since entered a correction phase, gold still remains in a strong position at $2,568 per ounce (as of November 15).

Hopefully gold can sustain these bullish prices into the year ahead, because Pan African has some lofty production targets up its sleeve.

In fiscal 2024 that ended June 30, Pan African produced just under 190,000 ounces from all its operations. The production target for the current year is 215,000 ounces, a 16 percent increase compared to the previous year.

For next year? With MTR running at full speed and Tennant Creek producing, ‘we can get very close to 300,000 ounces of production.’

Botín stated.

To top it all off, Pan African is leveraging renewable energy to help maintain desirable margins.

In fiscal year 2024, Pan African sourced 6 percent of its energy needs from renewable energy (mainly solar). The goal is to achieve a 30 percent renewable energy mix by 2030, although Loots sees the potential for it to reach 50 percent.

Coupled with Pan African’s numerous achievements so far this year, its share price has soared 90 percent, but analysts believe there is more to come.

“In this context of near-term production growth, particularly with the MTR project offering low-cost growth as well as improved margins… we expect Pan African to enter a period of increased profitability,” analysts at Berenberg in a recent note.

Loots stated that Pan African has finished acquisitions for the time being and that the company will focus on delivering on existing projects over the next year.

Despite the large number of new developments, some analysts believe that Pan African remains undervalued by the market.

In a recent broker note, Peel Hunt agreed with the 300,000 ounces per year run rate given by Pan African.

However, with the stock trading at a forward price-to-EBITDA ratio of 4.1 times at the time of writing, “we don’t think growth from developing or accretive assets is priced in,” analysts at Peel Hunt.

The stock is a buy at 44p, they said.

As things stand, Pan African is looking for a mid-cap valuation with a current market capitalization of £744 million.