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

Good morning to all of you, and a warm welcome to the 2021 Pan African interim results presentation. Thank you very much for taking time out of your schedules to join us. Today marks the second results presentation delivered virtually. Hopefully, we are able to meet in-person again soon. The last 6 months have again seen good progress with Pan African strategy of positioning ourselves as a safe and sustainable, high-margin and long-life gold producer. Joining me in presenting today will be Gideon Louw, our Financial Director; Barry Naicker, our Head of ESG; and Itumeleng Phoshoko, our Group Project Engineer. Rest assured that we will keep the presentation fairly brief and that there will be an opportunity for questions afterwards. Please refer to our SENS and 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 our response to COVID-19 and follow with some of the highlights and features of the half year past. We would go detail our plans to further reduce the group's all-in sustaining costs and also discuss how we continue to reinvest in our mining assets via capital spend. As the mining industry, we need to communicate better on how we make a positive difference to all of the stakeholders in the areas where we operate. And Barry will give us more color on our environmental, social and governance initiatives. Deon will analyze our H1 numbers and financials, including detail on a very robust financial performance in the first half and on the group's continued de-gearing. Itumeleng will focus on recent progress with Egoli, South Africa's newest underground gold mining project. And we will then conclude with some thoughts on the Mintails opportunity, and by demonstrating that Pan African is firmly on track in meeting our FY '21 deliverables. So, moving along. Slide 6. Firstly, our thoughts and prayers go out to all of those who have lost loved ones to COVID-19, including 2 of our colleagues. I would like to thank all the people of the Pan African group and your families for your hard work and dedication in what has been an incredibly difficult time in dealing with the pandemic. As you know, our mining sector has operated close to full capacity since the start of a pandemic. And South Africa has now been hard hit by 2 waves of the virus. Our people do not have the luxury of working remotely but Pan African's operational performance is testament to their commitment to continued delivery. I have to say that in my view, the South African mining sector has done pretty well in managing the impact of the virus. Less than 5% of Pan African's employees have been affected to date. In terms of mitigating measures and response plans, we continue to maintain and update all of our procedures and protocols, with ongoing education and provision of PPE to our staff. In terms of the numbers, it is encouraging to see our current cases declining. As of last week, we only had 3 active cases in the group, with an overall recovery of more than 97%. Finally, on the matter of COVID. I believe our mining sector can play an important role in the vaccination drive when this happens, utilizing our medical facilities and resources to get the job done faster and more efficiently. The next section of the presentation deals with some of the key features from the half year past. On Slide #8, the gold price in U.S. dollars and South African rand. Now, one is always in 2 minds as to whether to include the gold price graph in the results presentation. We don't try and forecast the gold price. We use fairly conservative estimates when we do our budget planning to ensure our operating margins are robust and that we do not overstress our balance sheet. We then focus on those aspects of our business over which we can exercise more control, which is costs, productivity and efficiencies and production planning and flexibility. Suffice to say that the recent gold price strength has benefited Pan African. Not only have we almost doubled our profitability, we have managed to de-gear our balance sheet faster than previously anticipated, pay a record rand dividend to shareholders, whilst also investing in our mining assets and into our ESG initiatives, which is part of our philosophy of mining for a future. On Slide #9. The gold price wasn't the only highlight of the current reporting period. We delivered a robust production performance with gold produced up almost 6%. The Barberton team deserves special mention. Production from Fairview, Sheba and Consort was up more than 15%. Barberton is now well on track to deliver into its 100,000 ounces production guidance for the full year. Dion will speak more about the financial performance, but we achieved a record profit for the half, which one does not get to report on too often. From a cost performance perspective, our lower cost operations, which now comprise some 80% of our production portfolio delivered very close to $1,000 per ounce all-in sustaining cost target. And we know that the Evander 8 Shaft will do a lot better in H2 of this year. In terms of our safety performance, we again have to express our condolences to the family and friends of our colleague that lost his life in a fatal accident at Barberton in July of last year, a month after the operation achieved 3 million fatality-free shifts. Elikhulu has now gone for 18 months without a single reportable or lost time injury, and we have again demonstrated an improvement in all reportable accident rates across the group. I'm convinced that we can achieve our goal of 0 harm in the next years, as Elikhulu has demonstrated is possible. If we then proceed to an overview of our operations and operating environment, on Slide 11. So, in terms of a track record of operating successfully in South Africa, Pan African's Barberton has a pedigree second to none. This mining complex has been mining continuously for more than 130 years. What investors should realize is that a few jurisdictions are without challenges. It is, therefore, key that you have quality assets and the management team experienced and equipped to deal with problems and challenges as they arise or even more ideally, preempt and avoid some of these challenges altogether. We continuously seek ways of making our business less susceptible to adverse external impacts in South Africa. In terms of electricity, we are constructing our first 10-megawatt solar plant at Elikhulu and I see our solar power generation very quickly increasing to at least 30 megawatts in the years ahead, with also possibly storage added at a later stage. On mining tenure, Evander's mining right is valid until 2038, and we expect Barberton's mining right renewal is imminent. I'm very proud of the way in which we have professionalized our security function in the last years. We have accepted that it is a core function that we have to do really well. Stakeholder engagement and ESG, these are also in our core to our business, and Barry will discuss some very exciting developments in this regard in the ESG section. On Slide 12, Pan African's business represents a unique combination of surface re-mining and underground mining. The surface mining reduces costs and production variability, whilst the underground provides exceptionally long life of mines, solid returns as a result of a large sunk capital base and also attractive optionality as recently evidenced by the fantastic find at our new Consort operation. On Slide 13, it's a bit of a simplified way of summarizing our business. You have Elikhulu and BTRP, our surface operations. These plants are highly automated and have generated fantastic returns for the group. Elikhulu will repay its capital investment in 3 years and BTRP repaid its capital in 18 months. Barberton Mines, as I've said, is one of the oldest mining operations in the world, still with a 20-year life, and the Evander 8 Shaft will now require very limited capital and generate attractive cash flows in the years ahead. If we move on to the next section, let's spend a couple of minutes on the operational performance of each of our core assets. Elikhulu, on Slide 15. Now, in the reporting period, we were constrained on tonnage throughput as a result of remedial works to one of our deposition compartments. We, therefore, could not compensate for a drop in recoveries, which were as a result of the areas where we were mining by increasing throughput. In the next period, we will be remining more of Kinross Dam 3 with higher recoveries, which, combined with higher throughput is expected to improve Elikhulu's gold production. Elikhulu is one of the lowest-cost producers of gold in Southern Africa. And the 10-megawatt solar plant we are constructing on-site will make this asset even more attractive and sustainable. On Slide 16, the current reporting period saw a decent performance from BTRP, with the asset generating more than $8 million in EBITDA. We processed significantly more material at BTRP, and the costs were higher as a result of increased transport costs for the new feedstock and lower recoveries. BTRP can continue for many more years, but in order to maximize margins from this plant, we will look to convert it to cheap material from Royal Sheba in the years ahead. We will do our first Royal Sheba bulk sample in the next 12 months. Similar to Elikhulu, BTRP also reduces the tailings footprint for Barberton Mines, turning rehabilitation liabilities into profits. Now Slide 17 to 19 provides more detail on the Barberton underground operations. And again, credit to our geology and mining teams for the excellent performance in H1. In terms of mineral resource management, in additional -- in addition to technological advances and implementing industry-based practice, our recent focus has been on structural mapping and interpretation at the Barberton underground. This has resulted in additional mineralization being discovered and accessed both at Fairview 64 Level Hope Reef and then also at the 66 Level Main Reef Complex, also called the 11-block. I have to say that Slide 18 has us quite excited. In the last 10 years, Fairview Mine has not had this level of mineable reserves. Look at how we have increased the size of our mineable areas on our current platforms with grades that continue to be world-class. Current grades in the MRC are between 15- to 35-grams per tonne on average. The current platforms should give us at least 3 years of life with the 258 platform also accessed before the end of the financial year. Now Slide 19, Consort Mine is currently shooting the lights out, so to speak. The 42 Level find made international headlines. We have reduced all-in sustaining costs from $2,000 to $1,200, as promised, with production in the reporting period exceeding targets by more than 30%. The old lady Consort really has a new lease on life. If we then conclude on our operations, Slide 20. Evander 8 Shaft pillar, I have to say, was a disappointment in the current reporting period. We encountered issues with the pseudo-packs utilized for support and then a fracturing of the shaft lining, which has taken almost 3 months to repair, also set us back. These issues have been addressed, and we have confidence in our Evander team. The 8 Shaft pillar will generate very attractive cash flows for the group in the next 3 years. We now have the momentum, and we have to make our investment and hard work count. On Slide 21, all-in sustaining costs. 80% of our portfolio now pretty much delivers on the all-in sustaining cost target of $1,000 per ounce. Importantly, we now include all of Barberton's underground in the lower cost operations. The math on the Evander underground is quite simple, we produce the ounces in the half year ahead and the unit costs will come into line. A final word on costs on Slide 22. I think it demonstrates that our cost performance on core operations is very much in line with the global sector. On Slide 23, group capital expenditure. We continue to invest in our assets. In the last 6 months, we invested a bit more than previously anticipated, including into a circuit to extract PGMs, specifically Osmium and Iridium out of the Evander ore and also for further drilling at Evander 9A block. In a lower gold price environment, we can cut CapEx to maintain margins. But for the time being, we are able to balance a fairly large capital reinvestment into our assets with debt reduction and increased dividends. The next section of the presentation relates to ESG. Now for Pan African, ESG and sustainability is not a drag or an imposition on our business. It is actually an enhancement. In many instances, forcing us to look at ways of improving operations and utilizing existing but dormant assets, such as agricultural land, to benefit all of our stakeholders. Barry Naicker will now take you through some of Pan African's existing and current ESG initiatives.

Thanks, Cobus. I will be presenting Slide 25, environment, social and governance. I would like to firstly provide a context of the current ESG space the organization is currently operating under and proceed into the detail of our implementation trend on our ESG projects. In recent years, environment, social and governance, ESG initiatives and sustainability development goals have gained momentum within most companies. However, recently, the risk and opportunities on ESG matters have been elevated due to the impacts of the global pandemic. COVID-19 has highlighted our social vulnerabilities in our health and safe well-being at our homes, workplaces and communities, and thus, our drive to be more impactful as an organization. The group has made significant progress on projects targeting social and environmental impacts, including climate change and biodiversity, mine closure and environmental rehabilitation and as well as water management solutions. Workplace health and safety initiatives emphasize the latest COVID-19 prevention and mitigation measures while progress with social and economic development projects continues in our host communities. Our environmental projects, climate change and renewable energy. Evander Mines has appointed Juwi Renewable Energies Proprietary Limited to construct a 10-megawatt solar plant. Construction will commence during the first quarter of 2021, with the commissioning anticipated in the third calendar quarter of 2021. The solar plant will provide an estimated 30% of Elikhulu's power requirement, resulting in a reduction of scope 2 greenhouse gas emissions of more than 26,000 tonnes and reducing the group's carbon footprint by an estimated 3% to 5% annually. The total cost of the solar plant is an estimated USD 9.5 million with a payback on investment of less than 5 years. A feasibility study for a similar 10-megawatt plant at Barberton Mines is currently being undertaken. Water management. Water is a strategic natural resource for South Africa and is vital to Pan African's business, the group's commitment to responsible and sustainable water use is embedded in our water management policy and water use licenses. In December 2020, a feasibility study on the water treatment plant was concluded. The study investigated recycling water pumped from Evander Mines underground workings. The proposed plant design is to treat approximately 3 megaliters of water a day using reverse osmosis technology, producing portable water for daily consumption and replacing municipally sourced water. The plant's anticipated savings in water cost and in recycling will result in a positive environmental impact. Biodiversity and conservation. The group conservation initiatives focuses on funding biodiversity projects that ensure the sustainability of protected areas and communities we operate in. The group is currently progressing with several initiatives, including a collaboration agreement with Barberton Nature Reserve, which levers the Makhonjwa mountains, recently proclaimed as a world heritage site by UNESCO for its rich biodiversity and unique geological features. In addition, we have adopted 3 orphan baby rhinos at rhino sanctuary near Barberton called Care For Wild. We will keep you updated on their care and rehabilitation. Our social programs, corporate social investment and local economic development. During the current reporting period, the group invested USD 1 million in its host communities and employee development programs. Barberton and Evander mines invested in education and health care infrastructure projects, arts and culture programs and other youth-development initiatives. Highlights include the following: 90% progress in the construction of the Cathyville Clinic within the Barberton Mines community and a planned handover of the clinic to the Department of Health in March 2021. Finalization of the construction tender process of Barberton's Mines, Cathyville, Kaap Valley primary school. The Sakhisizwe and Embalenhle, township's public lighting projects, concluded at Evander Mines, which are much needed public safety initiatives. Job creation. Barberton Blueberries, our social agri project flagship. The group has partnered with Primocane Capital, an independent company with a well-established track record in blueberry farming to develop a 15-hectare phase 1 blueberry farm on land and infrastructure made available by Barberton Mines. The project was initiated late in 2020 and is on track to be commissioned during 2021. The total cost of the project is estimated at $2.7 million, and indicative of the beyond compliance approach adopted by the group in its endeavor to sustaining its communities. During the construction phase, an estimated 60 temporary jobs will be created. Post-commissioning, an estimated 20 impairment and 375 seasonal jobs will be created for members of local communities. A sizable first harvest is planned for 2022. Pan African is proud to be part of this exciting agribusiness venture, which will contribute in alleviating the high unemployment in Barberton communities. Our approach to governance. The group reviews its corporate governance practices regularly and have adopted King IV as the recognized corporate governance code to ensure that we act in the best interest of our shareholders, comply with the applicable laws and regulations and adapt to the changes of our regulatory environment. Independent orders completed and ongoing are, carbon techs emissions and disclosures, tailing storage facilities audits, mineral tender compliance, SLP implementation and water use license amendment and applications. The group will continue to assess its ESG risks and opportunities, thus maintaining its sustainability into the future. I will now hand over to our Financial Director, Gideon Louw, who will be presenting the financial results.

From the summary of the group's results on Slide 27, noteworthy is the operational leverage of a 38% increase in turnover, giving rise to a 73% increase in adjusted EBITDA and 86% increase in attributable earnings, a historical profit record for the group. Equally compelling is the increase in cash from $7.4 million at the end of the corresponding period to $28 million at the end of this reporting period, which contributed to a decline in net debt by 47%, notwithstanding the payment of a dividend of approximately $21 million in December last year. Slide 28 illustrates the group's existing senior debt profiles and forecast debt profiles before the set off of any existing or future cash holdings. The red line graph depicts the contractual amortization profile of the existing RCF and Elikhulu facilities, which results in the existing senior debt being extinguished by March 2024. In comparison, the blue line growth, however, depicts the forecast rate of amortization of these facilities, given the assumptions disclosed at the bottom of the slide. And on this basis, the group will have extinguished a senior debt by December of this year. The green line graph depicts the anticipated draw down rate of the new Egoli facility and its contractual amortization profile over a 24-month period post the 15-month development period. We intentionally structured the repayment profile in this manner to ensure that Egoli's debt redemption obligations do not curtail the group's ability to continue paying dividends and unlocking the potential of existing asset portfolio through ongoing exploration and development. We expect the Egoli facility to become available in March and the first tranche of approximately $400 million or 20 -- of approximately ZAR 400 million or approximately $27 million being drawn down over the next 18-month phase 1 development period. The remainder of Egoli facility of ZAR 800 million or approximately $54 million is projected to be drawn down over the 12 months phase 2 of the project's development. Finally, the yellow line represents a solar plant facility of ZAR 140 million, which is drawn down as a single tranche and amortizes evenly over a 6-year period plus a 9-month construction period. Slide 29 depicts the combined principal debt profile of the 4 senior facilities referred to in the previous slide. As mentioned, we expect the group to materially de-gear its senior debt by the end of this calendar year and fully on a net basis within the final quarter of this calendar year. As Egoli's facilities drawdown, the senior debt commences to increase again to a projected peak of approximately $80 million, excluding any cash holdings, by June 2023, materially below the historical peak in excess of $120 million. At this stage, the revenue from the group's forecast production of 250,000 ounces should comfortably support this level of debt. From June 2025, the remaining -- the only remaining debt is a solar plant facility, which then amortizes over a 27-month period. Finally, Slide 50 illustrates the improvement in the group's net debt to net adjusted EBITDA ratio since 2018 and a reversion to the 2016 level of a robust 0.5 for this ratio. We use a net adjusted EBITDA definition, as this is consistent with the senior debt facilities covenant definitions. The only difference to prove this definition and the conventional EBITDA definition is the exclusion of impairment charges, which tend to be -- which tend not to be of a cash flow nature and hedging gains and losses. The loss of the gold price hedges entered into -- in the 2020 financial year was settled in the reported period for a net gain of $3.4 million and the group's gold revenues and hedge going into the second half of the 2021 financial year. Thank you. Itumeleng will now give an overview of the Egoli project.

Thanks, Deon. I'll be presenting Slide #32. The Egoli project is South Africa's newest underground gold mining project, it is a low-cost brownfield project, which seeks to create 1,200 direct jobs. We inherited the Egoli project after acquiring Evander Mines from Harmony. It was previously known as the 2010 patient. Pan African resources commenced with concept study into the Egoli project in 2017 and completed the feasibility study in 2019. The feasibility study demonstrated a robust and economically viable business proposition, which we are now very excited to develop. Egoli has an initial life of mine of 9 years, producing 550,000 ounces of gold at an all-in sustaining cost of less than USD 1,000 per ounce, which fits well with Pan African's current all-in sustaining cost target of USD 1,000 per ounce. The underground project is expected to contribute 72,000 ounces of gold over its life span per annum and produce its first gold 20 months after construction begins. Egoli can increase Pan African's total annual gold production to 250,000 ounces per year once in steady state from the current market guidance of 190,000 ounces per annum. Our project execution team is comprised of individuals who have a wealth of strategic execution and operational experience, not only at Evander Mine, but also at various other operations with similar mining metrics. The geology around the Evander complex is well under from the adjacent operations and from recent geological studies in drilling. The Evander Mine effectively comprises of 2 existing vertical shops, 1 hoisting and 1 material, a 1.75 kilometer internal distance to the start of the decline and a single decline to the ore body, located 2 kilometers below surface. All will be processed at Kinross plant, located adjacent to the #7 shaft surface complex. Licensing is still in place with the mining right valid until 2038. If we proceed to Slide #33. [ CRA Global ] has been mandated to complete the detailed project scheduling and planning as part of the [ LUX ] program for Egoli, which commenced in October 2020. Engineering, procurement and construction management contract is to be completed in the next 3 months. We have now broken the work structures into the following key areas: the Kinross process plant, mining service infrastructure, main power supply, 7 shop and 15 level horizontal infrastructure, 3 decline, main block and east block, which includes the mining and associated infrastructure, and largely mining equipment. Work has commenced on number 7 shaft for the [ LUX ] and comprises of optimization of the ventilation and refrigeration design, dewatering designs and the water balance. Dimensional and nondestructive testing inspection quotations for all winders are in progress. Commencement of large-scale project construction is anticipated in March or April 2021. As Deon mentioned, the funding structure for the Egoli project is being finalized and is non-dilutive with a dedicated senior debt package from Pan African's banking consortium. Debt redemptions are commercially ring-fenced to the Egoli cash flows and does not affect cash flows from any of our existing operations. Thank you. I will now hand over back to Cobus.

Slide 34, Mintails. It's not often that one can possibly acquire more than 2 million ounces of surface resources for $3 million. We've extended our Mintail study period to January 2022, and the way we are approaching this opportunity is effectively as a rehabilitation project that generates attractive returns. As part of our work, we are considering green fenced financing options, which will not have recourse to the Pan African balance sheet. Technically, we believe we can make this project work. But there are a number of other pieces that have to fall into place. We will continue to update the market in the year ahead. Lastly, let us conclude on Slide 36. Pan African is firmly on track to meet our full year deliverables. Key focus areas in the next 6 months will include continuing to manage the impact of COVID-19, certainly continuing our proactive journey to 0 harm, we would like to deliver and potentially exceed our production guidance of 190,000 ounces for the year. We will reduce all-in sustaining costs at Evander number 8 Shaft and at Barberton mines, the Sheba operation, we will progress Egoli and the evaluation of the Mintails opportunity and we will endeavor to increase dividends and further reduce net debt. Thank you very much for your time this morning. We look forward to continue mining for a future in the year ahead. The team will now be available to answer questions.

Thank you so much. So, should we start with questions from the conference call?

[Operator Instructions] At this stage, there are no questions from the line, sir.

Okay. Thank you. Shall we move to the webcast?

We have one question from Mr. [ A. Ross ] to the CEO. Are you going to declare an interim dividend?

Deon, can you take that one?

Sure, Cobus. I think it's something the Board would assess on a ongoing basis. We paid a record dividend in December last year for the 2020 financial year. Deleveraging is obviously something which also needs to be taken into account. But I think in the context of that deleveraging going forward, the prospect probably becomes more tangible, but it's something the Board will consider on an ongoing basis.

We've got another question from Arnold Van Graan of Nedbank CIB. Arnold says good results, well done. And he's got 2 or 3 questions. Number one, why did you not declare an interim dividend, given strong results and a solid outlook. Two, please elaborate on the issues that caused the delays at Evander 8 Shaft. He got cut off a bit. So, he didn't hear the full explanation on that one. And three, kindly explain on the reasons for the Elikhulu throughput issues low recoveries. You mentioned some remedial work, has all the issues been addressed? And can we expect stable throughput and recoveries going forward?

Thanks. Thanks, Arnold. So, I think we've addressed the first question on dividends. Certainly, we de-geared the balance sheet quite materially in the last year, but we'd like to do so further. And so, as we've always said, it's -- in terms of cash flow generation, it's a balance between reinvesting in our assets, dividends and in de-gearing the balance sheet. So certainly, I think given the prospects, with -- as Deon has said, de-gearing to forecast to actually happen in the current year. It will give us a lot more flexibility for dividends or interim dividends in the future. In terms of 8 Shaft, as we've said, yes, I mean, on a portfolio basis, that was that 1 asset which was -- in terms of performance, it was disappointing. So key issues was support on the pseudo-packs. It took us some time to actually get that method of support to work as we sort of hoped it would work, and it is now very efficient. So, we've replaced the Elikhulu tailings we were pumping into these packs with dry tailings and fly ash. So, it's working very well. Obviously, when one is mining, the pillar of safety is your paramount concern. So, we're taking it a bit slower and making sure we get it right. And then also, we had a facture in a ventilation shaft, and that caused quite a lot -- big delay. That's been taken care of. And we're already seeing the production increase from 8 Shaft. So, we're certainly forecasting a much better performance from 8 Shaft in the 6 months ahead. Despite all of the issues, if you look at the Evander complex, we still generated cash flow, a positive cash flow in the 6 months. And again, that demonstrates that we can do a whole lot better in the 6 months ahead. And in terms of Elikhulu, mining is mining and you're going to have some challenges. So, the drop in recoveries on Elikhulu wasn't unexpected, it's -- the grades and recoveries are variable as we mine through these dumps. And as you go deeper, the material does become more preg-robbing and less oxidized. And we allow ourselves some level of flexibility in terms of throughput. But with the remedial work, as we've said, so we were not able to push that button. So remedial work really comprised principally of the installation of elevated drains on the bottom compartment. That's now done. So, we can increase throughput. So yes, we're expecting a better half for Elikhulu. But let's put it in context, Elikhulu is sort of probably still the lowest cost producer of gold in Southern Africa and will continue to be so.

Thank you, Cobus. We've got a few more questions. There are 2 from Mark Du Toit of Oystercatcher. I think we've addressed the interim dividend declaration consideration. And the second question is the $777 AISC for the Egoli project. Is that still attainable? Or is it closer to the $1,000 AISC group target?

Thank you, Mark. So, studies that were done in 2019 calculated the all-in sustaining cost of $777, which is obviously quite opportune or fortunate. But in terms of our forecast and our planning, we're forecasting, rather budgeting or planning for a bit of a higher cost. I mean, as these things go. So, the project is very robust. And hence it can sustain, obviously, quite a large increase in cost, not that, that would be our aim. But I think we're trying to be a little bit conservative in terms of our forecast. But yes, the study number was $777, 100%.

Thanks, Cobus. And the next question is from [ Keith McLoughlin ], who is now private. [ Keith ] asked, does the funding package at Egoli require any degree of gold hedge in place?