Pan African Resources

Pan African Resources Déjà vu all over again full dividend reinstated FY13 results Metals & mining Headline earnings of 35.2m (+20.1% compared to FY12) were closely in line with Edison s estimate from 11 September of 36.9m (a full analysis is provided overleaf). Of more significance, a dividend pay-out to shareholders was reinstated at a cover ratio relative to headline EPS (2.6x) that was comparable to the ratio before the Evander deal (and associated capex) was proposed in FY12. PAF is now targeting production at a rate of 250,000oz pa from its current asset base and infrastructure within 18 months. 27 September 2013 Price 15.75p Market cap 288m ZAR15.6049/ Net debt 30 June 2013 7.2 Shares in issue 1,825.8m Free float 74% Code PAF Year end Revenue PBT* EPS* 06/12 100.9 42.3 2.03 0.00 7.8 N/A 06/13 133.3 47.5 2.18 0.83 7.2 5.3 06/14e 186.2 70.9 2.48 0.95 6.4 6.0 06/15e 224.1 106.5 4.05 1.55 3.9 9.8 Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. DPS P/E (x) Yield (%) Primary exchange Secondary exchange Share price performance AIM, JSE N/A Challenges managed Group total cash costs were 5.0% higher than FY12 at US$815/oz, despite notable operational challenges, such as a 16.1% increase in labour costs at Barberton (in rand terms), a 15.0% increase in electricity costs and the failure of the 8 shaft rock winder bull gear and a refrigeration plant and booster fan at Evander. 88% of resources yet to be turned to account Compared to a current figure of 35.1Moz, the lifetime operations of Barberton, BTRP and Evander will deplete Pan African s resource base by a mere 4.2Moz (ie 12%), leaving c 30.9Moz yet to be exploited. In the short term, there are at least four initiatives being evaluated to bring these ounces to account, including Evander 7 shaft sweepings and vamping (now commenced), the Evander Tailings Retreatment Plant and the reopening of the No. 3 decline at Evander 7 shaft (currently flooded) to access the 2010 pay-channel. Major, longer-term projects include Rolspruit, Royal Sheba, Evander South and Poplar. NB Neither residual resources nor any of these projects form any part of the valuations below. Valuation: 30p valuation from just 12% of resources Assuming that the gold price reverts to Edison s long-term forecast of US$1,676/oz, based on its long-term correlation with the total US monetary base, our longer-term earnings forecasts remain substantially unchanged in excess of 4p/share. On this basis the net present value of the (maximum potential) dividend stream to investors is 29.87p in absolute terms (discounting at 10% pa). At the current share price of 15.75p, this offers investors an internal rate of return of 21.3% to 2039. Otherwise, PAF s two-year diluted forecast P/E ratio declines to 4.0x in FY15 cf AngloGold Ashanti (16.3x) and Gold Fields (16.3x) to December 2015 (source: Bloomberg) while its EV/EBITDA ratio declines to 4.1x, cf Anglogold Ashanti (4.8x) and Gold Fields (4.7x). At a flat gold price of US$1,300/oz, PAF s diluted forecast P/E ratio rises to only 5.9x; its forecast yield nevertheless remains over 5%. % 1m 3m 12m Abs 10.9 22.0 (12.3) Rel (local) 9.7 13.8 (24.4) 52-week high/low 21.0p 12.3p Business description Pan African Resources (PAF) has four major assets: Barberton Mines (target output 95koz Au pa), the Barberton Tailings Retreatment Project (20koz), Evander Gold Mines (95koz + mediumterm tailings) and Phoenix Platinum (12koz). All are located in South Africa. Next events BTRP full production October 2013 Analyst Charles Gibson +44 (0)20 3077 5724 mining@edisongroup.com Edison profile page Pan African Resources is a research client of Edison Investment Research Limited

Investment summary A summary of Pan African s FY13 results relative to both the prior year and Edison s expectations is given in the table below. During the year, gold sold increased 38.2%, to 130,493oz, reflecting principally four months worth of contributions from Evander, but also higher grades at Barberton (notably at Consort, which offset the disruption as a result of the refurbishment of the 2 and 3 shafts at Fairview, resulting in its moving from six to five shifts per week). A peculiarity of the results was that, whereas Evander contributed to Pan African for only four months, the additional shares relating to the rights issue to part-fund its purchase were accounted for over six months, thereby increasing their dilutive effect. Had the new shares only been in existence for four months instead, Edison estimates that the weighted average number of shares in issue during the period would have been c 1,573m, in which case headline EPS (HEPS) would have been 2.24p cf 2.17p (NB ignoring any effect on interest income). Exhibit 1: Pan African FY13 financial results vs FY12 and prior Edison expectations FY12 FY13e FY13a Change (%) Variance (%) Revenue Precious metal sales 101,068.596 137,691.651 133,534.950 32.1 (3.0) Realisation costs (163.217) (242.729) (226.738) 38.9 (6.6) Do. (%) 0.161 0.176 0.170 5.1 On-mine revenue 100,905.379 137,448.922 133,308.212 32.1 (3.0) Cost of production (46,122.811) (68,843.068) (71,181.165) 54.3 3.4 Depreciation (3,259.010) (5,271.522) (5,998.267) 84.1 13.8 Mining profit 51,523.558 63,334.333 56,128.780 8.9 (11.4) Other income/(expenses) (5,916.227) (4,918.636) (5,652.226) (4.5) 14.9 Impairment costs/gains (48.238) 5,100.000 7,232.201 (15,092.7) 41.8 Royalty costs (3,848.450) (3,779.462) (3,198.622) (16.9) (15.4) Net income before finance items 41,710.643 59,736.234 54,510.133 30.7 (8.7) Finances income 652.267 1,454.659 Finance costs (136.765) (1,257.696) Net finance income 515.502 283.699 196.963 (61.8) (30.6) Profit before taxation 42,226.145 60,019.934 54,707.096 29.6 (8.9) Taxation (12,984.511) (17,993.870) (12,133.063) (6.6) (32.6) Marginal tax rate (%) 30.750 29.980 22.178 (27.9) Profit after taxation 29,241.634 42,026.064 42,574.033 45.6 1.3 Headline earnings 29,307.794 36,926.064 35,189.520 20.1 (4.7) Average weighted number of shares in issue (m) 1,445,202.485 1,635,548.312 1,619,756.902 12.1 (1.0) Derivatives etc (m) 8,085.456 46,945.000 6,176.989 (23.6) Fully diluted shares in issue (m) 1,453,287.941 1,682,493.312 1,625,933.891 11.9 (3.4) EPS (pence) 2.02 2.57 2.63 29.9 2.3 HEPS (pence) 2.03 2.26 2.17 7.1 (4.0) Diluted EPS (pence) 2.01 2.50 2.62 30.1 4.8 Diluted HEPS (pence) 2.02 2.19 2.16 7.3 (1.4) DPS (pence) 0.00 0.34 0.83 N/A 144.1 Dividend cover N/A 6.69 2.62 N/A (60.8) Source: Pan African Resources, Edison Investment Research A notable feature of the results was the lower marginal tax rate incurred as a result of the BTRP being granted major project status and therefore being fully tax deductible. The average gold price over the period was US$1,553/oz, or ZAR440,824/kg. Group cash costs amounted to ZAR231,439/kg (US$815/oz), split between Barberton ZAR221,424/kg (US$780/oz) and Evander ZAR259,646/kg (US$915/oz), although costs at EGM during the four months in which it was consolidated were reported to be c ZAR277,000/kg (US$918/oz), after failures of the rock winder bull gear at Evander 8 shaft and a refrigeration and booster fan, which reduced stope Pan African Resources 27 September 2013 2

access. Costs at Barberton were also inflated by the need to install one extra specialised ground support platform at 11-block at Fairview. All-in sustaining costs (as defined by the World Gold Council) were ZAR281,551/kg (US$992/oz) and all-in costs ZAR343,949/kg (US$1,212/oz), albeit the latter were inflated by capital expenditure related to the BTRP and shaft deepening at Evander, which will not be repeated in FY14. Future initiatives Short term After having been commissioned in late June, production at the BTRP is reported to have averaged 45kg (1,447oz) per month in each of the first two months of FY14 and is anticipated to reach capacity of c 50kg (1,608oz) by the end of October. Elsewhere, Evander is anticipated to enter a lower grade mining cycle, yielding 7.0g/t for the remainder of FY14 (cf 7.8g/t in the last four months of FY13). Simultaneously, capital expenditure will reduce after the completion of the BTRP and in the aftermath of Harmony s refurbishment of Evander prior to its sale to Pan African. In the medium term, the refurbishment of 2 and 3 shafts at Fairview will last for another c 18 months (ie until March 2015, in FY15), after which operations there will revert to six shifts per week (compared to five currently). Thereafter, Pan African is targeting 250,000oz of annual production from its current portfolio of assets and infrastructure. In order to achieve this (within a timeframe of approximately 18 months), PAF is pursuing a number of initiatives: Processing old gold sweepings and vampings at the reclamation section at Evander 7 shaft (now commenced). Upgrading a ball mill at Evander (to be completed by December) in order to process additional surface material at a rate of c 20ktpm and extend the life of surface sources to 24 months. The Evander Tailings Retreatment Plant (ETRP). Pan African is studying converting the 2.7Mtpa of spare capacity at Evander to tailings retreatment. The ETRP has recently been prioritised by management and a pre-feasibility study (PFS) is currently being conducted. Similar in concept to both Phoenix and the BTRP, the ETRP is envisaged to produce 20,000oz per annum within 18 months of a development decision, albeit at significantly reduced capex (eg ZAR140m, US$14.3m). If otherwise similar to the BTRP, Edison estimates that the ETRP could eventually add c US$78m (4.3c, or 2.7p per share) in value to Pan African. Re-opening the No. 3 decline section of Evander 7 shaft, thereby accessing the 2010 pay channel, which is potentially a significant new mining area containing 12 months of reserves (c 12-18koz). This option is currently in the process of being evaluated by management. In the longer term, major, transformative projects based on Pan African s portfolio of resources include: Rolspruit. Effectively the extension of Evander 8 shaft, mineralisation at Rolspruit descends to a depth of 3,500m, but potentially yields an in-stope grade of 14.5g/t Au. Royal Sheba. Evander South and Poplar, at which SRK is currently undertaking GAP analyses with a view to upgrading existing pre-feasibility studies to bankable status. The potential to develop the infrastructure to separate reef and waste (currently blended) at Evander 8 shaft. Pan African Resources 27 September 2013 3

Resources During FY13 resources at Pan African s assets increased to 35.1Moz. Apart from the acquisition of Evander, resources at Barberton increased by a net 0.6Moz, including the acquisition of Harper tailings. Sheba tailings are expected to be converted to resources in FY14. Reserves currently total 9.2Moz, putting PAF, at a share price of 15.75p, on an EV multiple of US$13.24 per total gold resource ounce and US$50.55 per total gold reserve ounce (NB excluding 0.7Moz Phoenix 4PGE resource). Corporate activity The acquisition of Evander having now been completed and operations successfully integrated into the group management structure, Pan African has stated that it is targeting long-life, high grade projects with attractive margins and low cash cost profiles which are either at or near production stage. At present, management does not consider itself restricted by geographical area or region with respect to its strategic aims. Valuation: 30p excluding new projects and initiatives Edison calculates an absolute value for Pan African, based on its current assets and projects (but no incremental growth or long-term projects) of 29.04p plus 0.83p for the FY13 dividend declared but not yet paid (ie 29.87p in total). This is based on the maximum potential dividends that could be paid out to shareholders over the remaining life of operations until FY39 at a discount rate of 10%, as shown in Exhibit 2. We assume forex rates of ZAR9.8127/US$, ZAR15.6049/ and US$1.5903/, and a gold price escalating to US$1,676/oz by calendar Q115. Exhibit 2: PAF estimated life of operations diluted EPS and (maximum potential) DPS Pence per share 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2039 2038 2037 2036 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 Dil EPS Potential dividends (pence) Source: Edison Investment Research Stated alternatively, at a share price of 15.75p, Pan African offers investors an internal rate of return over the next 26 years of 21.3%. A consistently flat gold price of US$1,300/oz, by contrast, would alter our short-term expectations as follows. Exhibit 3: Edison financial forecasts for Pan African at US$1,300/oz gold price Year end Revenue PBT* EPS* DPS P/E (x) 06/12 100.9 42.3 2.03 0.00 7.8 N/A 06/13 133.3 47.5 2.18 0.83 7.2 5.3 06/14e 175.3 60.6 2.24 0.86 7.0 5.5 06/15e 185.1 69.2 2.73 1.04 5.8 6.6 Source: Edison Investment Research, PAF accounts. Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. Yield (%) Pan African Resources 27 September 2013 4

Note that the gold price at the time of writing is US$1,325/oz after the Federal Reserve declined to taper QE3 (as per its announcement on Wednesday 18 September). Financials Exhibit 4: Financial summary Including short-term liabilities, Pan African had net debt of 7.2m as at June 2013, equating to gearing of 4.2% and leverage (debt/[debt+equity]) of 4.0%. It generated 48.3m from operations in FY13 and is forecast by Edison to generate 51.9m in FY14 before much reduced capex of 15.0m, such that it returns to a net cash position by June 2014. '000s 2008 2009 2010 2011 2012 2013 2014e 2015e Year end 30 June IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 39,148 52,860 68,344 79,051 100,905 133,308 186,151 224,088 Cost of sales (25,164) (28,505) (40,554) (45,345) (46,123) (71,181) (102,206) (103,332) Gross profit 13,985 24,355 27,790 33,705 54,783 62,127 83,945 120,755 EBITDA 13,711 22,890 25,023 28,540 45,018 53,276 79,263 114,832 Operating profit (before GW and except.) 11,745 20,529 21,897 25,655 41,759 47,278 71,588 106,357 Intangible amortisation 0 0 0 0 0 0 0 0 Exceptionals 0 (5,025) (335) 0 (48) 7,232 486 486 Other 0 0 0 0 0 0 0 0 Operating profit 11,745 15,504 21,562 25,655 41,711 54,510 72,073 106,843 Net interest 200 807 594 762 516 197 (651) 186 Profit before tax (norm) 11,945 21,336 22,491 26,417 42,274 47,475 70,937 106,542 Profit before tax (FRS 3) 11,945 16,311 22,156 26,417 42,226 54,707 71,423 107,028 Tax (4,367) (8,219) (7,656) (9,248) (12,985) (12,133) (25,774) (32,644) Profit after tax (norm) 7,579 13,117 14,835 17,169 29,290 35,342 45,163 73,898 Profit after tax (FRS 3) 7,579 8,091 14,500 17,169 29,242 42,574 45,649 74,384 Average number of shares outstanding 1,043.8 1,104.4 1,366.3 1,432.7 1,445.2 1,619.8 1,824.3 1,825.8 (m) EPS - normalised 0.5 0.9 1.1 1.2 2.0 2.2 2.5 4.0 EPS - FRS 3 0.5 0.4 1.0 1.2 2.0 2.6 2.5 4.1 Dividend per share 0.0 0.3 0.4 0.51 0.00 0.83 0.95 1.55 Gross margin (%) 35.7 46.1 40.7 42.6 54.3 46.6 45.1 53.9 EBITDA margin (%) 35.0 43.3 36.6 36.1 44.6 40.0 42.6 51.2 Operating margin (before GW and except.) (%) 30.0 38.8 32.0 32.5 41.4 35.5 38.5 47.5 BALANCE SHEET Fixed assets 55,647 67,198 74,324 97,281 86,075 249,316 257,109 259,857 Intangible assets 35,577 35,397 36,829 38,229 23,664 38,628 40,005 41,382 Tangible assets 20,070 31,801 37,495 59,052 62,412 209,490 215,905 217,276 Investments 0 0 0 0 0 1,199 1,199 1,199 Current assets 8,770 4,949 17,677 15,835 41,614 26,962 52,240 90,815 Stocks 378 358 1,126 1,457 1,869 6,596 6,212 7,478 Debtors 2,973 2,201 3,795 4,254 6,828 15,384 21,445 25,814 Cash 5,419 2,389 12,756 10,124 19,782 4,769 24,371 57,310 Current liabilities (6,611) (6,101) (7,084) (8,960) (11,062) (24,066) (27,466) (20,681) Creditors (6,521) (6,080) (7,084) (8,960) (11,062) (23,202) (26,601) (19,817) Short-term borrowings (89) (21) 0 0 0 (864) (864) (864) Long-term liabilities (7,438) (9,686) (11,431) (13,410) (14,001) (80,004) (81,295) (83,251) Long-term borrowings (17) 0 0 (181) (869) (11,133) (11,133) (11,133) Other long-term liabilities (7,421) (9,686) (11,431) (13,228) (13,132) (68,871) (70,163) (72,118) Net assets 50,369 56,360 73,487 90,746 102,626 172,208 200,589 246,740 CASH FLOW Operating cash flow 12,762 25,420 25,387 24,285 41,090 58,480 76,985 102,413 Net Interest 200 807 594 762 516 197 (651) 186 Tax (1,723) (10,886) (7,656) (8,445) (11,030) (10,412) (24,482) (30,689) Capex (5,680) (5,705) (6,764) (21,712) (17,814) (27,197) (14,982) (10,737) Acquisitions/disposals 226 (4,205) 0 0 (1,549) (96,006) 0 0 Financing 785 0 48 1,545 259 47,112 0 0 Dividends 0 (6,774) 0 0 0 0 (17,268) (28,232) Net cash flow 6,571 (1,343) 11,609 (3,565) 11,471 (27,826) 19,602 32,940 Opening net debt/(cash) (136) (5,313) (2,369) (12,756) (9,943) (18,913) 7,228 (12,373) Exchange rate movements (1,394) (2,642) (281) 925 (1,813) 594 0 0 Other 0 1,041 (940) (173) (688) 1,090 0 0 Closing net debt/(cash) (5,313) (2,369) (12,756) (9,943) (18,913) 7,228 (12,373) (45,313) Source: Company sources, Edison Pan African Resources 27 September 2013 5

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