Among the world’s gold producing companies, big and small, Pan African Resources manages its assets a bit differently from the rest. In this article, we explain how it does so, and why its strategy holds unique appeal for investors seeking a sustainable gold mining company in the longer term, and one that has a track record of paying industry-leading dividends.

Pan African currently has six active operating assets in South Africa, another under development and exploration licenses over five areas in the Republic of Sudan. Its South African mines are all located in Mpumalanga and Gauteng: they include the three underground mines and Barberton Tailings Retreatment Plant (BTRP) surface retreatment plant around Barberton; and the Evander underground mine and the Elikhulu retreatment plant near Secunda. The Group’s latest development project, Mogale Tailings Retreatment (MTR) plant, is located just outside Johannesburg.

In its 2023 financial year, Pan African produced 175,209oz of gold. Due to its mix of underground and surface operations, its overall operating costs are below average for the industry. As a result, Pan African is highly leveraged to a rising dollar gold price: when the gold price increases, Pan African’s margins widen significantly. Its operating costs (which are in rands) do not increase in tandem with gold prices.

Although gold prices were range-bound at $1,600-$2,050/oz for several years, since February 2024 they have surged to $2,400 and higher, spurred by fears of unchecked inflation in the US and central bank buying.

While South Africa, as an emerging market, faces many challenges, from high unemployment rates and crime to inadequate or failing infrastructure, Pan African’s management has a demonstrable track record of finding solutions. The more that investors understand about emerging market miners, the better-equipped they are able to discern value in their shares and earn higher returns.

Pan African, as one of South Africa’s highest-margin gold producers, strives to ensure that it can continue to deliver sustained returns to shareholders. Its strategy is to increase output gradually over time by allocating capital to organic growth opportunities that it is capable of executing, which can deliver the required risk-adjusted return over the investment horizon.

Extracting gold efficiently depends on improving productivity and making operations resilient. Sustainable profitability, growth and expansion follow from disciplined cost and cash flow management, strategic capital allocation and prudent capital spending.

This is borne out by the excellent returns earned on capital invested in the BTRP, Evander Mines 8 Shaft Pillar, and Elikhulu operations. Both BTRP and Elikhulu were completed on time and within budget. Payback for BTRP, with a life of mine (LOM) of over 12 years, was 18 months, while Elikhulu was paid back in less than three years, also with a similar LOM. Both of these operations produce at all-in sustaining costs of under US$1,ooo/oz, generating spectacular profit margins at prevailing gold prices.

Deon Louw, financial director, says Pan Africans’ financial strategy is “underpinned by disciplined capital allocation and robust financial management, ensuring sustainable growth and improved shareholder value”.

Pan African’s primary investment criterion is “to earn a minimum return in excess of the Group’s cost of capital, after adjusting for project-specific and sovereign risks,” he says. “Furthermore, to ensure our returns are robust through the cycle, we endeavor to invest only in projects that fall into the lower half of the cost curve and where the execution risk is within our capability.”

The measurement of its success is evident in Pan African’s lower all-in sustaining cost (AISC). In 2023, its AISC was US$1,327/oz, below its peer group average of $1,330/oz, and its guidance for 2024 is an AISC of $1,325-1,350/oz, below the peer group average of $1,377/oz. Its lowest-cost operations, which account for over 80% of production (excluding the Sheba and Consort mines) average an AISC of $1,152/oz. Management is taking steps to reduce costs at Sheba and Consort and various initiatives such as renewable energy generation, water recycling and growing production are expected to cut real AISC in future.

As a result, Pan African’s return on shareholders’ funds in 2023 was 20.6%, comfortably exceeding the peer group average of 8.9%. It aspires to pay a regular, industry-leading dividend aligned with the cash generation potential of the business. The 2023 dividend was ZAR18c/share (US$0.96/share at R18.83/$), which reflected a dividend yield of 5.9% at the end-June 2023 share price. Pan African has paid a steadily increasing dividend every year since 2020. This makes the shares particularly appealing to investors looking for undervalued, high dividend-paying shares.

Pan African maintains liquidity for its operational requirements and debt redemption. The Group ensures that it has medium-term funding in place for organic growth, exploration and acquisition opportunities and uses innovative funding solutions to raise capital. It was one of the first mining companies in South Africa to launch a sustainability-linked bond in December 2022. This $43.2 million bond issue to finance growth projects not only strengthened the group’s ESG status but was also recognised as the Metals and Mining Deal of the Year at the Bonds, Loans and ESG Capital Markets Africa Awards 2023.

Management understands that generating the necessary risk-adjusted returns on capital employed and rewarding shareholders with dividends or share buybacks is important to ensure their support for future equity funding.

Pan African’s overarching ambition is to produce high-margin ounces in a safe, sustainable and efficient manner. The key to long-term sustainability for a group operating in a cyclical industry is disciplined capital allocation. An example is the Royal Sheba and Western Cross projects, which are planned new feed sources for the BTRP.

The BTRP has three more years of remaining production, which will taper off in its last two years. To supplement it, feedstock will be sourced from the Royal Sheba and Western Cross orebodies. Mining the Royal Sheba orebody can extend the BTRP’s life by eight years, by extracting about 235,000oz of gold from currently estimated resources at an average mining grade of 3g/t. To exploit this opportunity, Pan African intends to install a crushing and milling circuit at Royal Sheba, and pump the slurry from the milling plant to the BTRP. It will spend capital in phases, aligning with the availability of the feed. An internal feasibility study with a detailed cost analysis using the various options available is being finalized for board approval.

At the heart of more efficient mining is Pan African’s readiness to take up technological innovation. Mine planning uses state-of-the-art systems and the survey department has cutting-edge computer-aided drawing and 3D modeling systems. At Barberton, there is a centralized operations control room integrated with multiple SCADA systems to ensure prompt response times to breakdowns and emergencies. Mineware reporting is being installed which will deliver real-time data on production, planning and labor issues to aid decision-making. Pan African has also installed state of the art security systems to address illegal mining, crime and other security issues.

Pan African’s competitive advantages among gold miners are its unique combination of underground and surface operations; multiple assets which allow for operational flexibility, low operating costs and a robust project pipeline. These features provide shareholders with reassurance that the shares are underpinned by the necessary diversity and resilience to maintain profitability throughout the economic cycle.

Pan African’s two biggest developing projects currently underway are the Evander Mines 24 – 26 Level underground development and the surface Mintails Tailings Retreatment (MTR) plant.

Production from Evander Mines 24 Level will gradually grow as gold mined from the No. 8 Shaft Pillar is depleted. Level 24 is expected to yield about 35,000oz of gold a year for the next two and a half years. After that, Levels 25 and 26 will ramp up to produce 65,000-70,000oz/year for the following eight years.

MTR involves the reprocessing of about 120 million tons of treatable material on surface at a grade of 0.3g/t, equivalent to about 1.1Moz of gold in situ. Payback is expected within three years of full-scale commissioning. The full upfront capital requirement of ZAR2.5 billion has been secured through a combination of an issue of bond notes, senior debt facilities and a forward gold sale. Full-scale construction of the treatment plant commenced in July 2023, which will enable MTR to produce about 50,000oz of gold a year for more than 20 years at an AISC similar to Elikhulu’s (2023: $1,008/oz). Steady state production is expected to be achieved by December 2024.

Investing in emerging markets is not without risk. Changing policies and regulations, inconsistent applications of the law, crime and corruption, poor infrastructure and community protests are realities. Pan African Resources’ management has decades of operating experience in South Africa and are fully aware of their responsibility to maintain open communication with shareholders about the key risks and how they are being actively managed.

Pan African’s Elikhulu Tailings Retreatment Plant is its flagship tailings treatment operation. “Our investment in the Elikhulu project reflects our commitment to sustainable mining practices and long-term value creation for all stakeholders,” says CEO Cobus Loots.

Elikhulu has maintained steady output at around 50,000oz of gold a year, even through events such as electricity and weather disruptions. It has the lowest AISC of all Southern African mining operations, at $1,008/oz in 2023. As Elikhulu processes historic tailings in the Leslie/Bracken dumps, it is depositing a smaller residue on a new TSF, which reduces the environmental footprint. Elikhulu’s Kinross phase 1 and 2 tailings dam extension is lined to minimize the risk of underground seepage and pollution. The re-mining process uses non-potable water from the adjacent mine and underground. Elikhulu also uses renewable energy sourced from a 9.9MW solar PV plant, which is important to reduce the operation’s GHG footprint as well as operating costs over the long term.

Investments such as Elikhulu and MTR address the challenge of depleting orebodies and focus on long-life, lower-cost mining. When historic tailings are reprocessed by a reputable company, they fulfil several ESG elements: cleaning up environmental degradation and rehabilitating land for alternate economic use, providing jobs for the communities and giving greater transparency to affected communities and shareholders. These objectives appeal to investors with a sustainability focus.

Achieving and maintaining Pan African’s production target of between 195,000 and 205,000oz of gold a year will be derived over the long term from several projects at different stages of development. Among them are the Evander 24- 26 Level project; the construction of a subvertical shaft at Fairview, which can increase production by up to 10,000oz a year; and the massive MTR project, which will produce about 50,000oz of gold a year for over 20 years.

Work on the MTR plant began in July 2023, and commissioning is expected at the end of 2024, with steady state production to be achieved three months later. “When we bring Mintails on line, the additional surface mining ounces will bring overall production costs down across our portfolio,” says Loots.

Whether the gold price stays flat or increases sharply, companies like Pan African with visible, low-risk production prospects are likely to be able to keep delivering returns to their shareholders. There is a possibility of further upside through technological innovation, which can bring costs down further, or new exploration success. At this stage, Pan African’s highest-risk exploration activities are in Sudan, but the Company is also exploring organic growth opportunities around its existing operations at Barberton and Evander, which contain extensive Measured and Indicated Mineral Resources of over 40 Moz of gold.

Pan African has proven that a gold miner in an emerging market, when managed by a team with deep in-country experience, can deliver sustainable growth and returns. The key is prudent financial management, transparency and agility, as well as working closely with communities to deliver real and sustainable benefits. A project pipeline that is realistically achievable will ensure the company’s long-term future.

It is worth considering Pan African’s main differentiators from the rest of the industry: its diversified operations, low production cost, production flexibility and focus on ESG pillars such as health and safety, sustainable stakeholder value creation, a low carbon footprint and responsible water use.

With a portfolio of underground and surface operations and both organic and greenfields exploration opportunities, the Group possesses the flexibility to maintain its low cost, high-margin position through market cycles.

Readers can discover more about Pan African Resources’ on its website, and in its latest annual report and investor presentations, available here.