Later this year, Pan African Resources (LON:PAF), the South African mining group that has spent the last six years building a gold business, will turn its hand to platinum group metals. It is a move that CEO Jan Nelson says will not only boost profits but also prove to investors the company’s ambition to build a wider portfolio of projects. As the majority owner of the 2.5 million ounce Barberton Mines gold operation, Pan African last year produced close to 100,000 ounces of gold. Since speaking to Stockopedia in September last year, Nelson and his team have begun working on plans to add another 20,000 ounces by reprocessing a tailings dam on the current site. Meanwhile, the Phoenix platinum project – a chrome tailings reprocessing operation based at International Ferro Metals’ Lesedi mine, 50 km east of Rustenburg – promises a high margin, low cost addition. Likewise, the prospect of drilling a recently upgraded potential 3 million ounce resource at its Manica gold project in Mozambique and further exploration work in and around Barberton, is enough to lead Nelson to suggest that the company could soon be owed a substantial re-rating in the price of its AIM listed shares.
Jan, clearly you have been very busy in recent months. What has Pan African been working on since the start of the year?
Jan Nelson: There has been quite a lot of work done, especially by Ron Holding, our operations manager, and his team. There is the increase in the resource and reserves at Barberton, which we are happy about; the team has spent a lot of time getting that right and there is more work going on. Phoenix, which Ron also looks after, is ahead of schedule and that is going well and then we have got this new tailings project at Barberton, which is also pretty far advanced. Then there is the news out on Manica. So yes, it is all going very well.
In February you reported a lot of improvement at Barberton, with production up, profits up and the costs were falling. How satisfied are you with the way that asset is performing?
Jan Nelson: We are very happy with that asset; we have got a very good team there. Despite some real issues on the mine in terms of criminal mining, which have now been resolved, they continue to deliver grades close to 10 grams a ton. In the new strategic plans they are looking to increase the volume and with the new tailings project we are looking to increase our ounces of production to about 120,000 ounces. The increase in ounces will come at a cash cost of close to about $400 an ounce. So I think one has got to be happy with the way that the asset is performing. There is good growth in terms of the resource work that we have done and then this year we will also target doing drilling on our prospecting permit.
Over the past three years you have been working on an integrated Mineral Resource Management programme at Barberton, which has opened up the opportunity to extract value from the Bramber tailings dam. Can you tell me about that?
Ron Holding: We are continually looking for new ore bodies, especially targeting the areas where we know there is a chance of finding a high grade. So that is where we have targeted the underground expansion through the MRM programme. On the Bramber tailings dam itself, it started operating in 1986 and towards the beginning of last year reached its final construction height. So the call was made then to construct an extension to the tailings dam and to put all of our tailings in there. So we actually shut down the old Bramber tailings operation in December last year, which meant that the Bramber tailings dam then became available to drill up and see if there was any potential for recovering any additional gold from it. There is in the region of just over 3 million tons of resources there, with an average grade of 1.47 grams per ton. The geological tests are still on-going but it is extremely positive, and we have got a team of guys doing all the finalising and the feasibility study.
How about the on-going exploration work at Barberton? This is very significant as well, isn’t it?
Jan Nelson: Yes, we are in the process of signing off all our budgets and our strategic plan and in that we will allow for capital for drilling, not only on the prospecting permit but actually on the southern part of the Fairview Mining Authorisation as well, where we have got some geophysical anomalies.
You recently announced a resource upgrade for the Manica gold project in Mozambique and you have secured a mining licence there. What’s the significance of that?
Jan Nelson: We are in the process of finishing the pre-feasibility study on open pit and underground now, which is different from the previous studies we did which focused on one aspect. The significance is that we are moving closer to production. The plan would be that during this year we finish the pre-feasibility, I envisage that there will be some trial mining taking place next year and, on the back of that, the finalisation of a proper feasibility study and then the final run down to production.
You are forecasting production to start at Phoenix later this year. What is the schedule there and how excited are you about that?
Ron Holding: It is going extremely well. Our target date of 28 October for getting the plant into cold commissioning is going to be met; in fact we are going to beat it. We are also going to be about 7% to 10% below the budget that we expected to spend. That is looking extremely well, there are no major issues at all there. All the mechanical equipment that that was required for the plant has been ordered, most of it is waiting for delivery from the suppliers.
Jan Nelson: I think Phoenix is exciting because it is expected to start generating cash by January of next year. So in the current financial year we will have six months of contribution from Phoenix. We estimate that it will contribute about ZAR 50 million (£4.6 million) at fairly conservative market prices. Our profit after tax at Barberton will probably be about ZAR 180 million (£16.8 million), plus another ZAR 50 million, so we will be sitting at about ZAR 230 million, which is quite a substantial increase, about a 35% increase.
You have made no secret of pursuing organic growth and building value from your existing projects rather than acquiring new ones. Why have you followed that strategy?
Jan Nelson: We have got a whole new business section that has been looking at projects around Africa but, as we said in the last annual report, this year we certainly are going to take that team and focus more on our organic growth projects. If there are new business opportunities we will still look at them but I think with commodity prices being quite high, projects are extremely expensive at this time. We just see that we can extract much more value by focusing on those projects that we have, like the dump treatment project and Phoenix, which earn a lot more margin very quickly. So it is very difficult at the moment with new projects. The commodity prices are high and projects are worth three times more than they should be. So its is not a good time to buy something, but I think it is a good time to maximise returns from your current operations.
What can we look forward to from you over the course of the rest of the year?
Jan Nelson: You have seen the updates on Barberton and Manica. I think you will see an upgrade in the reserve over the next three months, which will specifically be from Phoenix, moving the resources into reserve with the mining plan coming into place. So resource upgrades, reserve upgrades, you will see in the next three months a cold commissioning of the Phoenix plant plus the pre-feasibility study on Manica coming up. You will see our results coming out within the next three months as well and we will pay another dividend. You will see the final feasibility study on the dump treatment project at Barberton coming out before the end of the year. So there is quite a bit of news that will be coming out.
Finally, do you think you are getting the attention you deserve from the Alternative Investment Market and UK investors?
Jan Nelson: Yes I think so; I think the investors are beginning to see these projects coming online. I think a previous criticism has been that there was not really an organic pipeline of projects. I think they can see with the dump project and Phoenix plus other projects at Barberton and exploration permits, they are now seeing the project pipeline growing and coming into play. I think with the results coming out, with Phoenix about to start producing and the dump project getting the nod from the directors, we should see an appreciation in our share price. I don’t think we have seen it yet, it has been touching 11p, but I think with those things coming online, the dividend coming, I would not be surprised if the share price re-rates and we double the share price, as we did last year with the payment of the new dividend again. I’m seeing from discussions amongst the retail shareholders and the institutional shareholders that there certainly is some excitement now.
Jan and Ron, thank you for your time.
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