Pan African Resources PLC (PAF) Earnings Call Transcript & Summary

Good morning to all of you. A very warm welcome to the 2020 Pan African Year-end Results Presentation. Hopefully, we will meet again soon in person. In the interim, thank you very much for taking time out of your busy schedules to join us virtually today. Pan African's strategy is to position ourselves as a sustainable, safe, high-margin and long-life gold producer. The last financial year has again seen us taking significant steps towards the delivering into this strategy. We are very proud of our recently launched new corporate identity. Please join us for a couple of minutes as we view a clip that should give you even more of a sense of the DNA of Pan African Resources. [Presentation]

Thank you, and welcome again. Rest assured that we will keep the presentation fairly brief even though we again have a number of positive developments to highlight. There will be an opportunity for questions after our presentation. Please refer to our SENS RNS announcement and to the supplementary information available on the Pan African website should you require detail not dealt with in today's presentation. As per usual, our disclaimer and detail on forward-looking statements can be found on Page 2 and 3. On Slide 4, an overview of the presentation. We will spend time on the impact of -- and our response to COVID-19 and follow-up with some of the highlights and features of the year passed, which was a year of delivery for Pan African. I believe it is key that we provide shareholders with a sense of how well positioned we are for the year ahead from an operational perspective. This means spending some time on our key mining assets and also our ESG initiatives. Deon will analyze our financials, including detail on the group re-degearing and the very large increase in the proposed dividend payout. We will conclude with an update on Egoli and our outlook for the business for the year ahead. So let's get right into it. Slide #6. Firstly, our thoughts and prayers go out to all of those who have lost loved ones to COVID-19 and those who have suffered with the illness. I am incredibly proud of the manner in which the people of Pan African responded to the massive challenges presented by the pandemic and by the lockdown situation. We started planning well in advance of any lockdown, putting protocols in place, educating our staff on prevention and identifying and stocking up on critical consumables and spares. More than 24 hours of receiving word of the hard lockdown in South Africa, we had our detailed plans mapped out and had communicated those plans to all stakeholders. We managed to look after our people and also protect our assets. We operated our tailings operations with just 20% of the normal staff complement. And we ensured that our underground mines were ready to hit the ground running, so to speak, once we receive the okay from government. The accelerated rate of ramp up post-lockdown is testament to the quality of management and commitment of our people, and I wish to, again, thank each and every Pan African employee for your dedication and very hard work during this difficult time. In terms of the numbers, it is encouraging to see our number of cases going down. As of yesterday, we only had one employee still hospitalized, with a recovery rate of more than 90% for our group. On Slide #7, not only did we manage to operate successfully during the height of the pandemic. We also managed to assist others and we will continue to do so. We assisted employees and also vulnerable community members, distributing thousands of food and essential hampers to the most needy. Our policies and procedures were audited by external parties, and generally, the results were favorable, and we adjusted policies and practices where required. In terms of COVID-19, we do not know what the future holds, but we are as prepared as we can be. If we then turn the page in terms of financial year 2020, despite corona, the year was a year of delivery for Pan Africa. That is demonstrated in our safety, financial and also our operational achievements. Let's have a closer look at a summary of our performance on Slide 9. In terms of safety, we managed to maintain our industry-leading lost time and reportable injury frequency rate performance. For the first time in the operation's history, Barberton Mines achieved 3 million fatality-free shifts; and Fairview operation, 2 million. Elikhulu went for 11 months without recording one single lost time injury, which is exceptional. Against the backdrop of this achievement, we are saddened to report a fatal injury related to a fall of ground accident at our Fairview mine in July 2020 post-year-end. We again express our condolences to the family, friends and colleagues of Mr. [ Mavimbela ] and also Mr. [ Williamson ], who was injured in the accident. In terms of safety, we will continue our unrelenting push to do better. Also on Slide 9, Deon will spend more time on our financial performance, but a couple of comments from my side. We changed our reporting currency to U.S. dollars in 2019. If we were still reporting in South African rands, it would have been a record profit year 2020. We estimate that COVID cost us more than 10,000 ounces in lost production. Despite the setback, we managed to halve senior debt and significantly reduce our net debt-to-EBITDA ratio during the year. We are also proposing a record rand dividend to shareholders for approval at the upcoming AGM. This recommended dividend demonstrates our confidence in the positioning of the business in the next year. At current gold prices, assuming we meet production guidance, we should be pretty much debt-free at the end of FY '21. Slide 10, if we move on to operational performance. We will discuss detail per operation in the next slides. However, the following is worth noting. We managed to increase production in the year passed by some 4% despite covert. Even more encouraging is that we are increasing our production guidance for the year ahead to approximately 190,000 ounces, an increase of some 6% broadly comprised as follows: 100,000 ounces from the Barberton complex; 60,000 ounces from Elikhulu; and 30,000 ounces from our 8 Shaft pillar operation, which is now steady state. This increase in production guidance again demonstrates how quickly we managed to ramp up post the hard lockdown. We also now source 50% of our gold from surface operations and production. Certainly, our all-in sustaining costs for the year that's passed was badly impacted by hedge losses and also by the impact of COVID-related production losses. But I think on an absolute cost basis, our costs are very well controlled. Barberton's total cost base increases with less than 10% per annum as we mine more gold in the next year, the unit costs for all of our operations should also decrease. On Slide #11, it includes a simplified, but easy to understand schematic of our flagship tailings retreatment operation, Elikhulu, and also its 12 years life of mine plan. During the financial year 2020, Elikhulu treated 13 million tonnes of tailings at a head grade of 0.3 grams per tonne to recover almost 60,000 ounces of gold. We produced these ounces at an all-in sustaining cost of just over $600 per ounce, which I believe is exceptional. Compartment 1 of the Kinross tailings facility is now undergoing floor cleanup to establish the area for the construction of the enlarged Kinross tailings facility during the next year. So we are finishing up on Kinross in the next 2 years, and then we are moving to Leslie/Bracken with a final 4 to 5 years of Elikhulu's life on the Winkelhaak tailings facility. The operation ticks all of the boxes in terms of low cost, safe, long life, with the added benefit that we are reducing our environmental footprint as we go along. The 10 MVA solar plant that we will construct on-site in the next year at a cost of approximately ZAR 150 million, will take care of most of Elikhulu's daytime power requirements and also further add to operations sustainability into the future. In the year past, we spent very limited capital on Elikhulu. In the next 2 years, we are enlarging the tailings footprint and also preparing to move to the Leslie/Bracken tailings facility. The capital required for these initiatives is approximately ZAR 300 million split over -- over the 2 years. Once this move is complete, the capital will again drop to a very limited number for Elikhulu. Also worth noting as a final point on Elikhulu, that the operation generated almost ZAR 1 billion of EBITDA in the last year at a much lower gold price than the prevailing spot. On Slide 12, in terms of our BTRP at Barberton or our other tailings business, we produced just over 20,000 ounces for the financial year, in line with guidance and expectations. The BTRP's costs were higher in the current year as a result of lower recoveries from the areas where we are currently mining, being [ half of ] north, again in line with what we expected and also the cost of buying material. Now BTRP's life is currently 6 years, and we should be able to maintain the cost at these levels in the next years. We are also finalizing studies and plans for alternative feedstocks, including from our Royal Sheba project in order to keep BTRP going for many more years. On Slide 13, which is a schematic of our Fairview and also our Sheba underground operations at Barberton. We always refer to the Barberton underground as a universe of opportunities, and it continues to prove true. Fairview has a life of mine of 20 years only on current reserves. But I suspect the operation will outlive us all. In the last years, the mining and development layout at our high-grade MRC orebody has been optimized to enhance mining flexibility and decrease the waste development required. Currently, we have 3 active high-grade platforms in production cycle, with a fourth platform being accessed in FY '21. Having 4 high-grade platforms to cycle at Fairview mine has not been the case for many years. We should be in a position to commence with the raised boring of the Fairview sub vertical-shaft in the next 12 to 24 months, and the Fairview mine is very well positioned for the year ahead. If we then move on to Slide 14. An achievement that we are particularly proud of is the much publicized discovery at Consort's PC Shaft 42 level. We promised shareholders that we would turn Consort around, and now we have. The group successfully executed into this turnaround strategy for the new Consort operation by developing and establishing the extremely high-grade mining panel on 42 level PC Shaft. This specific target block is only the first of 7 identified target areas that are currently being evaluated. You will note from the production profile from Consort that the production has increased materially in the last months, with unit costs of production decreasing. We still aim to reduce Consort's all-in sustaining costs to approximately $1,200 per ounce by year-end. And I wish to specifically give credit to our mining and MRM teams for this 42 level initiatives. Suffice to say, that has given Consort a new lease on life. On Slide 15, the Evander 8 Shaft Pillar. So steady-state production in the pillar was achieved during May 2020 with 9 crews now actively mining panels within the pillar. This pillar mining is much less complex than the historic mining at Evander 8 Shaft because we have much shorter tramming distances. We have improved ventilation and environmental conditions. There are minimal geological disturbances in the pillar area. We have pre-developed mining blocks, resulting in high confidence in grade and orebody continuity. And the 8 Shaft pillar is also relatively shallow when compared to other South African pillar operations. So to conclude on 8 Shaft, we have -- the capital we've invested in its development should pay itself back in the first year of steady-state production. On Slide #16, in summary, in our assets, we have a unique value proposition of surface re-mining and underground operations. Our assets are long-life, highly cash-generative and have further optimization and growth potential. On Slide #17, the costs of our low-cost operations are pretty compelling. And these comprise the largest part of our portfolio by far. I also think that the initiatives highlighted in the previous slides should give comfort on how we plan on reducing the cost of production and our higher-cost operations. So what does all of this translate to in terms of Slide #18, a targeted all-in sustaining cost of $1,000 per ounce for FY '21 at an assumed dollar-rand exchange rate of ZAR 16.5. This excludes hedging profits or losses. This cost profile is very much in line with the gold -- the global average. On Slide 19, very briefly, the CapEx profile for our group. We are reinvesting quite a bit into our assets. However, you can expect the overall CapEx for the current operations to reduce in the years ahead. If we then move on to Slide 21, ESG or Environmental, Social and Governance. This is really part of our DNA, and it's part of what we do. In the past, we have maybe not articulated this focus and our achievements sufficiently. This has to change, and we have to do even more. Some of the initiatives I have to mention are the following: Our Board has approved a major agriculture project in Barberton, utilizing very fertile, but currently fallow mine land. This initiative has the potential of creating more than 400 permanent jobs. I have mentioned the solar project and plant in Evander, which is only Phase I. We will look to expand this plant to a possible 25 MVA for Egoli, and we are also conducting a feasibility into a similar plant at Barberton. Our closure costs are fully funded, and during the year, we increased our ongoing rehabilitation initiatives including the final closure of Evander 5 and 9 shafts. We were subject to a number of independent audits and reviews, including on our tailings facilities and our carbon emissions. And I have to say I'm particularly proud of the work that we are doing with regards to schools and clinics in the Barberton area. Let me pause here and hand over to Deon to take us through the financial results, and emphasize some key matters.

Thank you, Cobus. Slide 23 summarizes the group's results for the 2020 financial year. Evident is the increase in turnover by 26%, resulting from a combination of a 1% increase in gold sold and a substantial increase in the dollar gold price by 24% and 37% in rand terms, following a 23% year-on-year depreciation in the rand-dollar exchange rate. Although earnings increased year-on-year by 17%, the 2019 comparative financial results included an impairment reversal of ZAR 18 million, which, if eliminated, shows that earnings actually increased by 93%, as is reflected in headline earnings, which under these circumstances, is a more appropriate indicator of the relative performance. These impairment reversals relate to the commencement of Evander's 8 Shaft pillar project, following impairment of the 8 Shaft complex in the 2018 financial year. Adjusted EBITDA, which also excluded payment reversals, increased by 52% to $87 million, enabling the reduction in net senior debt by 52% to $62 million relative to the $130 million owing at the end of the prior financial year. Both in dollar and rand terms, all-in sustaining cost was adversely impacted by the COVID-related production losses and the inclusion of realized hedge losses, which I'll touch on later in a subsequent slide. Slide 24 illustrates in the top half, the group's existing senior debt obligations, which for the 2021 financial year comprises ZAR 75 million on the RCF facility and ZAR 200 million on the Elikhulu facility, a total of ZAR 275 million or approximately $16 million, but relative to the $340 million or $20 million of principal debt that matured in the 2020 financial year. Subsequent to year-end, we further reduced senior debt by ZAR 260 million or approximately $15 million. The bottom half of this slide shows anticipated rated, which the group delevers its existing senior debt at the prevailing rand gold prices and guided production. In anticipation of possible losses and associated negative cash flows resulting from the COVID-related operational disruptions, we deferred the repayment of the last 5,000 ounces of the gold LOM to the first quarter of the 2021 financial year. Fortunately, COVID-related disruptions were well-managed with limited negative cash flow consequences and we ended the financial year with $34 million in cash, relative to the $5 million at the end of the prior financial year. The new Egoli facilities first drawdown is anticipated in November 2020 and entails ZAR 400 million in the first 18 months of the project development, followed by ZAR 800 million in Phase 2, which will be drawn down in the last 18 months of the project's 3-year development period. The Egoli facility's redemption profile of 24 months is cultured to the cash flow generated from the project and should not curtail the group's ability to continue paying dividends from the cash flows generated by the existing suite of operating mines. Slide 25 illustrates the improvement in the group's net debt-to-EBITDA ratio following the repositioning of the business model in the 2018 financial year. At a ratio of below 1:1, the group's financial strength has materially improved. And despite the new Egoli debt, it should continue to be robust given the operational mix and sustainability of the mines going forward. Slide 26 plots of rand gold price in kilograms over the last 5 years during which the gold price increased by 117% from ZAR 456,000 a kilogram in June 2015 to ZAR 991,000 a kilogram in June 2020. This has, however, not been without volatility as we see the rand gold price increasing to ZAR 650,000 a kilogram on more than one occasion, only to revert again to levels well below ZAR 500,000 a kilogram eliminating most of our cash flow margin. And after the post-Brexit peak of 2016, we see it took more than 3 years for the rand gold price to attain the level of ZAR 650,000 again in August 2019. The 2020 financial year was no exception to rand gold price volatility, where in the first half, we saw a modest 7% increase in the rand gold price to ZAR 683,000 a kilogram, the second half saw a stellar 45% increase to ZAR 991,000 a kilogram. The group's debt is rand-denominated and with evident volatility in the rand gold price and onerous debt redemptions of the 2020 financial year, our risk was a reversion in the rand gold price to below ZAR 650,000 a kilogram for a protracted period of time, leading to covenant breaches and possibly an inability to redeem the senior debt obligations during this period. As the gold price progressively increased during the first 9 months of the financial year, we increased our hedge levels to approximately 50% of the guided production to ensure that an adequate cash flow margin is locked in for both debt redemption and an increased dividend, while at the same time being cognizant that some upside would be sacrificed in the event of there've been a substantial spike in the gold price in the short term. We keep our hedges short-dated and base these decisions on risk management principles rather than a specific view of the gold prices prospects. Least of all, the probability of a global pandemic and its likely impact on the rand gold price. With a substantial spike in the rand gold prices in the second half of the financial year, realized hedge losses of $12 million were incurred and unrealized hedge losses of $10 million on the remaining 50,000 ounces hedged for the second half of the 2021 financial year. Unfortunately, the P&L, profit and loss impact of these losses was exacerbated by a COVID-related production loss of approximately 10,000 ounces with a value of approximately ZAR 300 million, which would have materially offset the P&L impact of the hedge losses. The remaining hedges for the 2021 financial year comprises 26% of guided ounces with a floor price of ZAR 708,000 a kilogram and a ceiling price of ZAR 926,000 a kilogram, approximately 12% below the prevailing spot price of ZAR 1,050,000 a kilogram. Post-December 2020, the group is unhedged. And with the 52% reduction in net senior debt in the past financial year and the anticipated rate of deleveraging in the current financial year, future hedge levels will be more in line with policy guidelines. Slide 25 illustrates historical dividend yields and yield of the proposed 2020 financial year dividend. Based on the share price at 30 June ZAR 3.70 or approximately USD 0.21 per share, the dividend proposed by the Board of ZAR 313 million or approximately $19 million is in excess of the group's dividend policy guideline, but takes into account the robust cash generation in the 2020 financial year and the favorable prospects for the 2021 financial year.

Thank you very much, Deon. I think it is now worthwhile spending a bit of time on Egoli as our Board has now approved the development of this project, and we have finalized the project finance on a nondilutive basis with our banking consortium. So if I can ask that we move to Slide 29. We don't build projects for the sake of ounces, we only undertake a project where we are convinced that it will generate the requisite economic returns for our shareholders over its life at fairly conservative gold price assumptions. Now we had a number of offers of funding for Egoli, including office for streaming, royalties and minority equity positions. These offers demonstrated the confidence that third parties has in our project and also in the feasibility work that we undertook. So on Slide #30, are we crazy to start a new mining project in South Africa? I guess the point is that Egoli is not new. It is utilizing existing infrastructure to access a virgin orebody. The fact that there have been 10 vertical shafts sunk on Evander's orebodies, says something about the quality of the Kimberley Reef in the Evander Basin. We don't have to sync or equip a new vertical shaft for Egoli. We have a functioning twin vertical-shaft system to 1,600 meters. We don't have to construct a new processing plant. The Kinross plant is currently operational and has the capacity to treat more than 50,000 tonnes of hard rock per month, and we don't have to develop an underground haulage. The current haulage extends all of the 1.6 kilometers to the start of 3 Decline. You will have to look far and wide to find a brownfields project able to produce almost 80,000 ounces for an initial life of mine of 9 years with definite potential to also extend this life at an all-in sustaining costs well south of $1,000 for a peak funding requirement of $70 million. In terms of the next steps, we are currently busy with detailed scheduling for Egoli. Preliminary refurbishment is about to start. We will start placing orders for long lead items before the end of the calendar year. And for de-watching and equipping will start before the end of the 2021 financial year. We have done the work on planning and checking for fatal flaws. Going forward, we'll again be about project execution. And I think that is where Pan African really excels. We really look forward to updating the market on Egoli on a regular basis. If we then move on to Slide 33 and our track record. I do think that our track record of delivery in terms of projects speaks for itself. There's no reason why Egoli will be different. In terms of looking ahead on Slide #36. So what are the key focus areas in the year ahead? We will continue to produce safely and sustainably into the production guidance of 190,000 ounces. We will certainly continue our ESG initiatives and efforts. We will reduce the group all-in sustaining cost to $7,000 per ounce through focused asset optimization. And then we'll continue to de-gear the balance sheet and increase dividends to shareholders. Let me conclude, and thank all of my colleagues at Pan African Resources for your dedication and hard work in the last year. I would also like to thank all of our other stakeholders for your contributions to our business. We look forward to mining for a future in the year ahead. Thank you very much. Deon and I will now be available to take questions.

Great. Thank you. I think we'll start with questions from the conference call, if we have any.

[Operator Instructions] We have a question from Tim Huff of Peel Hunt.

Just 2, really. I guess the first on -- I know you said you're going -- it's on Egoli. You said you're going into the detailed scheduling as we're looking forward. But you're starting with the prelim refer, it sounds like this quarter, I guess, dewatering gets underway in a couple of quarters. Do you -- I mean, do you have a preliminary sort of feel as to how long the whole dewatering gets before you get to the whole footwall development and further associated decline work?

Thanks, Tim. Yes. We're in the process of finalizing that schedule. And we obviously -- as we mentioned, we have bank approval for the facility. So hopefully, we'll get those legal signed and then the development can start in earnest. Because of the mining we're doing at 8 Shaft, I mean, we're obviously constantly busy with #7, and we've spent a bit of money and we'll continue to spend money as and when needed. So the first goal at this point, is planned 20 months from when we started the major development. And again, that's a schedule that we'll optimize. But as we said, I mean, we'll sort of continue to update the market. And hopefully, we can expedite the refurbishment and development also.

Okay. That's great. And the second question was just at Elikhulu. You guys went over fairly well the CapEx needed over the next couple of years as you transition Elikhulu to the next stage. Just wondering, on an operating cost basis, I know there are disruptions across the board this year -- or last fiscal year, sorry, and there were less disruption at the surface operations, particularly Elikhulu. But I was just wondering in terms of cost progress, do you think you'll be able to get that back down below $600 an ounce in the coming fiscal year or does it look like it's going to be holding around here?

Yes. So Tim, we're obviously sort of massively focused on reducing costs where we can. Most of the costs at Elikhulu are variable. I think it was a very good cost performance. Clearly you know at the extent we can reduce costs, we'll do so. But there's not an awful lot of scope to squeeze down cost much further on Elikhulu.

Okay. That's what I thought. So it was a pretty similar outlook to BTRP, where you're just looking for more steady-state costs than anything else at both of those ops?

Yes. Exactly.

We have no further questions from the conference call.

Okay. Great. So I think we'll then going take online questions. The first question related to hedging. And given that gold price and prevailing spot, are we going to continue to hedge? And I think maybe that's appropriate that Deon answers.

Thank you, Cobus. As I said in my section of the presentation, we hedged at a specific level given the circumstances that were specific to that point in time. With the deleverage on all the group in the manner that we anticipate over the next 12 months, there should be no reason to hedge to the same extent, if at all.