Pan African leaves other gold miners in the dust

Cobus Loets, CEO of Pan African Resources. (Picture supplied)
Cobus Loets, CEO of Pan African Resources. (Picture supplied)

Pan African Resources CEO, Cobus Loots, delivered the perfect riposte to those critics who doubted an accountant could run a gold mining company.

Scepticism about Loots, who was appointed CEO in April 2015, was compounded when he sanctioned the purchase of a coal mine in KwaZulu-Natal.

Even though the asset, Uitkmost, is expected to deliver payback in four years, there were concerns Loots would take Pan African in a different direction.

Pan African’s reputation is for conservatively sticking to its knitting, which is to say: pay dividends from profits earned at the Barberton gold mines in Mpumalanga.

While the rest of the South African gold mining sector slid into debt, Pan African was solid and reliable.

The purchase of Harmony Gold’s Evander Gold Mines several years ago was seen as a somewhat risky step, but still within the remit of what Pan African was supposed to deliver.

As it happened, Evander encountered a low-grade patch in the ore body shortly before Loots became CEO.

This hurt profits which, coupled with the Uitkomst episode, created the impression Loots had lost the plot fairly early in his time at the company.

Things are looking up

Interim results ended December, published last month, put a somewhat different colour on things.

Profit more than doubled largely owing to improved grade at Evander while the Barberton mines continued to perform.

In short, Loots delivered a mining response to his sceptics. But his board held the dividend as it had to pay for a share buyback after taking the stake Standard Bank owned in Shanduka Gold, the empowerment company with which Pan African is intertwined.

The second half of the firm’s financial year is looking solid, however. Loots told finweek that at R600 000 per ounce of gold mined, company profits could increase a further 30% year-on-year which raises the question as to whether a final dividend will come into play.

Vying for cash flow, however, is a couple of organic projects that Loots has dusted off: the Elikhulu surface gold mining project in Mpumalanga, which could increase output a quarter to 250?000 ounces a year, and Evander South – a project that was once part of the Gengold portfolio in the 1990s.

Analysts welcome the fact that the debate at Pan African has shifted away from mining performance to capital allocation but they warn against the dangers of taking marginal gold projects off the shelf, especially as optimism developing them may be informed by the spike in the rand gold price.

Loots claims not to be tempted into following the gold price. “We will relook at Evander South, but it’s risky,” he said.

“It’s an underground project and we have to be comfortable with the economics before going forward,” he added.

“We can’t spend R1bn and hope that the gold price stays where it is. We are very cognisant of that. That’s not the way we run our business,” he said.

The Elikhulu project, easier to justify on paper, must also see a pull down in initial capital expectations from R1.8bn to at least R1.5bn, but preferably R1.1bn, said Loots.

“We are conscious of capital and we wouldn’t ask shareholders to fund the project [Elikhulu], so we have to find a funding partner as well as innovative funding solutions,” he said.

The group previously funded its Evander Tailings Retreatment Project with a gold loan, which paid for construction of the plant.

Then there are the group’s continental ambitions.

Loots confirmed that his company is watchful of expansion into the sub-Saharan gold market.

“We are looking for a mid-tier gold mine or a development project that wouldn’t compromise the company,” he said.

This article originally appeared in the 10 March 2016 edition of finweek. Buy and download the magazine here

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