Interview with Cobus Loots, CEO of Pan African Resources (LSE: PAF).
These guys get things done. Mining is never easy, mining in South Africa is far from easy, but the management team at gold producer, Pan African Resources, keep finding a way to get things done and are consistently hitting targets. Pan African is well on its way to becoming a mid-tier gold producer targeting 185,000oz per annum this year. Loots ran us through the highs and lows of the last 6 months, including the recently released operational update.
Pan African Resources has a share price of GB£0.125 and a market cap of GB£278M. It is listed on the LSE.
The key highlights from the update?
- Pan African is on track to deliver the full-year production guidance of 185,000oz.
- Group gold sales increased by 14.7% to 92,941oz (2018: 81,014oz).
- The Evander 8 Shaft Pillar project development is progressing according to plan, with steady-state production planned from March 2020.
We like the tailings slant on the business. Green is very fashionable right now. Barberton Tailings Retreatment Plant produces a steady stream of gold, c. 25,000oz per annum, and the Shaft Pillar at Evander, an area of developmental focus in the near future for Pan African, could provide 20,000oz, rising to 30,000oz+ “in the years ahead.” Pan African is now mining more economically due to a strategy change: mining at the shaft rather than at deeper levels. The result is an intended sub-US$1,000 AISC for the Pillar project. Solid numbers, and in line with the rest of Pan African’s other operations. Elikhulu Tailings Retreatment Plant has had a mining feasibility study conducted that is now being independently vetted by a third party, with the view to expand it to a full feasibility study. Loots says it looks like c. 90,000oz per annum, with a 9-year life-of-mine, rising to 20 years with further resource modeling. By utilising existing infrastructure, Pan African can keep costs down and get things going quicker. This is still a little way off but could be a good addition to the portfolio.
In terms of dividends, Pan African recently released its first dividends for years. Loot states the company was recently one of the highest yielding gold dividend shares in the world. Loots states that he wants to get back there. Let’s see how things turn out.
For now, it’s full speed ahead developing the projects, overcoming issues pertaining to jurisdiction, community and environment difficulties, and getting the share price where investors will no doubt want to see it.
- 1:34 – Operational Update: Overview of Performance Results
- 2:45 – Producing as Expected? A Run Through the Projects
- 8:27 – AISC and Debt: What is the Current Position and What’s to Come?
- 9:39 – Dividends: Keeping Them Going
- 12:40 – Troubles in Jurisdiction and Community Issues: How Will They Ensure a Smooth Run of Operations?
- 16:14 – What Should We Look Forward to from Pan African Resources?
Watch the interview here.
Matthew Gordon: Happy New Year. I haven’t spoken to you since before Christmas, so how are you?
Cobus Loots: Thanks, Matthew. We’re good. We’ve been busy as
you might have seen from the operational update.
Matthew Gordon: We
have, that’s why we called you. It seems like you have had a good last 6-months.
You are on target to hit 185,000oz; that puts you very much in the mid-cap territory
for sure. Are you pleased with your performance?
Cobus Loots: Yes. We believe that, certainly the performance for the first 6-months
provides a solid base for us to have a very good financial year. So Elikhulu
performed very well, so we produced almost 30,000oz. We are well-positioned now
actually for the next 6-months to increase that to go to almost 65,000oz for
the full year so that is a great performance. Barberton was down slightly,
mostly as a result of underground. But we have more flexibility now so we
expect a much better 6-months, going forward from Barberton. And then also, and
what I think is very positive, the work that we have done in the Evander 8 Shaft
pillar. This project has gone from being a liability to actually now being
poised to generate attractive cash flows going forward for the next 3-years.
Matthew Gordon: Okay. If you don’t mind,
can we just break down that 185,000oz that you are going to be producing.
You’ve got your existing Barberton and Elikhulu, both on the tailings and the
mining front, and they are going as planned? The numbers are as targeted, first
Cobus Loots: Well yes.Let’s start with Elikhulu
first of all which we started last year: it’s a world class project. It is USD$130M
that we put into the ground. It retreats old historic mining tailings, and it
has a life of 12-years at present. And it is producing at an All In Sustaining
Cost of USD$650 per oz or below. I think what’s more is that we are cleaning up
legacy liabilities so it ticks the box in terms of ESG, looking after the
environment, etc. So it’s a great project. It’s incredibly safe. We don’t have
as many employees as what we would have had underground. So, we are very happy
with the performance at Elikhulu, and as I said, we expect Elikhulu to do even
better over the next 6-months.
And then the Barberton
complex, which is also a world class tailings business, the BTRP, we do have about
20,000oz from the BTRP at Barberton and then 80,000oz at underground. So that
gives us another 100,000oz per year, from Barberton. And then as I said, the
Pillar, which is a project that we commissioned at the moment at Evander, that will
give us 20,000oz which then actually becomes 30,000oz and more in the years
Matthew Gordon: Okay. And you actually
refer to that as a former liability. Why was that?
Cobus Loots: We
curtailed operations at 8 Shaft, so we were mining 24 level, which was very
deep. With a lot of infrastructure, a lot of logistics, a huge number of
employees. So we curtailed that business about 2 years ago. We actually shut it
down. And then the sort of question arose: what do we do with the remaining
resource? We could have quite simply terminated operations at 8 Shaft, and that
would have been the end. Instead, we said, let’s have a look at this Pillar
project, let’s see what sort of Gold we can get out and over what sort of
timeframe and at what margin, importantly. And that’s how the 8 Shaft pillar
project has happened.
Matthew Gordon: Right. So basically, it
was costing you a lot of money to get Gold out of the ground. It was becoming
less and less profitable, having sunk a lot of money into the ground there as
well. So you are now mining more economically as a result. That’s the point of
what you have done?
Cobus Loots: Well, we are ceasing operations at the bottom
levels which are very expensive and we are actually starting mining right at
the shaft. So we have guided, we have anticipated that the all in sustaining
costs of this Pillar project to be below USD$1000, which is very attractive.
And that’s in-line with the rest of our operations.
Matthew Gordon: And
Cobus, can I just ask you about Egoli, because you have obviously talked about
the MFS, the mine Feasibility Study has been finalised now. Where are you at
with that? What should we be excited about?
Cobus Loots: Yes. It has been a very interesting project
from our perspective, as you said, the Mining Feasibility Study has been done.
We are actually getting the study independently vetted by a third party and
then they are expanding it to a full Feasibility Study, the results of which
will be available pretty much at the same time as our interim financial
Cobus Loots: And yes, circa 90,000oz per year, initially
life of mine 9-years but if we model for the resources, it’s anywhere from 15
to 20-years. At a fairly limited capital
number for a project of this nature because of the fact that you are utilising
existing infrastructure mostly: there is a processing plant, it’s operational
on surface, we have the vertical shaft that’s all done. There are turns,
certainly, currently, even a conservative Gold price to be attractive. So I
think, you know, watch this space in terms of Egoli and our next steps when we
release our interim results.
Matthew Gordon: Okay, when does that
actually…how does that ramp up? How quickly does that ramp up?
Cobus Loots: You know, we haven’t yet pushed the button on
development. The key is to finalise funding. And we what we have said to
shareholders, we will not do the funding in any way that is dilutive. So we are
looking at potentially bring in a stream or an equity investor of sorts. Certainly,
the project has dig capacity in our view also. Once we are happy with the
Feasibility Study and the fact that we can manage the risks, and it is a
project that we need to be doing, from a pipeline perspective, we will finalise
the funding and we will certainly add a time frame in terms of development.
Matthew Gordon: Okay. So the timing is
not imminent? Because when I asked you earlier about, have you plans for adding
debt for this year, you said, no. So, this is not a 2020 debt solution. You are
saying that will come after that?
Cobus Loots: That’s right. The ramp-up period is three
years, and most of the capital is spent in the later years. And if we
potentially look to get in an equity investor, or some other form of finance,
then that sort of takes off the burden, certainly from ourselves. But in terms
of existing operations, certainly, we will be set in terms of debt, that holds
true so we are not going to look to gear up the existing operations to fund a
project like this. I think that it will stand on its own two feet.
Matthew Gordon: Okay. So you have been
looking at the AISC and looking at ways of reducing it. I mean, I guess it is
pretty standard: getting somewhere between USD$950 USD$1,000 is where you want
to be, especially in today’s Gold price. So you are obviously throwing off a
lot more cash, but you’ve also had to finance a lot of the development work
with debt so what is the position on that at the moment?
Cobus Loots: Well, for 6-months to December, we have managed
to de-gear the balance sheet and we have guided that in the year ahead, we
should see a dramatic decrease in our gearing levels. You know, that’s a
product of the Pillar coming into production, so we will be steadily instating
the Pillar in March. It’s a product of Elikhulu performing at a steady state
and the operations at Barberton performing. Certainly, what’s helping us also
is the Gold price which is performing well in US dollars and even more so in
South African Rand which is the currency that we look at.
Matthew Gordon: Yes. Okay. So, if I may
just touch upon this here; a lot of mid cap and a lot of large companies, they
tend to borrow money, then plough it back into the ground and kind of forget
about shareholders. You issued your first dividend for a couple of years
recently, what are your plans for keeping that going? Are you going to give
back to long-holding shareholders in your company? Or is it the plan just to
reinvest into the ground?
Cobus Loots: Well, if you look at our priorities in terms of
how we apply capital, we need to continue to invest in our assets. But in the past,
we have managed to do so, and then also pay an attractive dividend. Certainly,
up to quite recently, we were one of the highest yielding Gold dividend shares
in the world. And that’s where we’d like to get back to. And I think the
operating environment in terms of the robustness of our assets and the
performance, and then also the Gold price, should assist us in resuming even
more attractive dividends in the future. Clearly, we have stalled some of the
debt that we took on to fund Elikhulu, that’s still on the balance sheet, but
as I said, we anticipate that number, in terms of the gearing levels, to come
down quite dramatically in the year ahead.
Matthew Gordon: Any
more plans for any more debt?
Cobus Loots: Well no, there’s no need for us to incur any
more debt. Also, if you look at the sort of projects that we undertake now, one
obviously looks at all the return metrics including internal rate of return, MPV
etc, but payback is also very important for us, so how long does it take for us
to get our money back and that’s where projects like Elikhulu where regionally,
we were costing a payback of 4 years on a USD$130M odd, and at this Gold price,
I actually expect the pay back to be sooner. So those are the sort of projects
we like to do.
Matthew Gordon: Again,
it’s just trying to understand the thinking of the management team here,
because you’ve got options of paying it back in 4-years or paying it back
quicker, paying dividends, you know, you have got the choice of what you do with
that money. Some companies like to be completely debt-free as quickly as
possible; others like to maintain some kind of leverage and utilise that spare
cash elsewhere to develop and grow the business, where’s your head at?
Cobus Loots: Well look, obviously, a mining company should
not be over-geared and they should have a conservative level of debt. That’s
really where I think we will end up in the next 6 months or so. It also doesn’t
make sense for us to have no debt. In our view, it’s not efficient from a
capital allocation perspective. We think that we can pay a significant, pretty
much all of our debt in the next 12 to 18 months in resumed dividends so that
one is not at the expense of the other.
Matthew Gordon: Okay. So dividends; they
are still in the pipeline, your shareholders will still be receiving dividends
as you continue to develop the business and grow the business – perfect. Can we
talk about something else though? You did highlight them and I’ll give you
credit for this; you don’t shirk or hide from this, you have talked about a
couple of things: there have been some community issues which have affected
productivity, and also, more recently, some power issues. I know mining is
mining, and it is tough, but what has gone on there and will it reoccur?
Cobus Loots: Yes, sure. I think we have demonstrated the
ability to operate successfully in South Africa. We have had community unrest
and that has affected, as you pointed out, the Barberton operations in the last
6 months. We had very serious power issues with ESCOM, our South African power
and utilities, in December. On top of it, we also had probably the weakest
December in terms of rainfall that I can recall for the last 20-years, so that
will also have affected operations. So, you know, the bottom line is that one
has to plan some level of disruption to your operations and you have to robust
assets that can withstand these sorts of issues, and a management team that is
proactive and can anticipate when they can and then deal accordingly.
So yes, South Africa
gets quite a lot of bad press I think in terms of the operating environment,
and a lot of it is justified, but as you said, most mining jurisdictions have
They do, and like I say, I give you credit for not shirking away from it or
ignoring it, but like I say, ESKOM for instance – what was the issue? Is it
going to reoccur? Because I look at the, again, the information that you have
provided, the prices have been going up and up, which affects your margins, but
how do you engage with them? How do you have conversations that give you some
sort of certainty about what the future looks like?
Cobus Loots: Well sure. ESKOM has been more of an issue at Evander,
our underground business, and fortunately there, we have spare capacity so we
can afford to turn off a mill for a couple of hours if there is what is termed,
low-shedding: so where the grid is overloaded. So we do have that capacity but
what I think also, the ESKOM situation is not going to become any easier
overnight. We will continue to have power shortages in South Africa for at
least the next 2-years. Barberton mines is less energy intensive so it is less
affected. Elikhulu doesn’t use a lot of electricity so that is less affected. And
fortunately, as I said, at Evander underground, we have some spare capacity so
we can afford to reduce our underground consumption for a limited period. And
recently, the Minister of Mines in South Africa has come out and said that they
are in the process of deregulating the private power generation. At Evander, we
are completing a Feasibility Study (FS) into our solar plant that will be able
to look after pretty much all of Elikhulu during the daytime. And we expect
that we will be able to, over time, expand that project also. So miners are
being creative about finding solutions and I think that over the medium to
longer-term, we will get those solutions implemented in a way that actually
makes sense for shareholders.
Interesting. You should talk to your neighbours over the road at Bushveld by
the sounds of it.
Cobus Loots: Exactly.
Matthew Gordon: Okay. Well thanks for
that update. It just sounds like business as usual for you. I appreciate you
being quite direct about some of the issues that you miners face, but you are
consistently hitting the numbers, or exceeding the numbers, despite those
problems. So you always find a way. Do stay in touch and let us know how you
get on. What are the next big things that we should be looking out for?
Cobus Loots: Well, we have our interim results now being
released next week, on the 18th February and that will contain more
detail on performance and what we expect for the remainder of the year. And
yes, as I said, we are quite positive. We have laid a solid foundation, a good
base to do well. So the Rand Gold price, is pretty much the highest it has ever
been so that’s a good environment for us to operate in also.
Matthew Gordon: You
see that continuing do you?
Cobus Loots: We sort of try focussing on those issues we can
control, but it’s always nice to have tailwinds like the Gold price.
Light a candle, for sure.
Thanks again, speak real soon.
Cobus Loots: Thanks, Matthew. Speak soon.
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