Pan African goes all in on Australia’s ‘heart of gold’

Pan African Resources – a one-time gold-mining minnow that started with just a deep-level mine in Barberton – is extending its empire in Australia. This, arguably, at peak gold prices.

Yet shareholders have embraced its decision to buy Emmerson in an all-scrip deal that values the Australian mining firm at A$311m. Emmerson is its 25% partner in the Tennant Creek joint venture, a historic mining prospect between Alice Springs and Darwin, that has echoes of Pan’s own storied South African roots. Currency spoke to CEO Cobus Loots about the deal. 

There are plenty of fears that gold-mining companies are going to make rash, bad decisions by splashing about their capital at what could be the top of the cycle. How would you reassure them that this is a sound purchase?

I think, first, one just needs to look at our track record in terms of capital allocation. I mean, the last two transactions we did were MTR [Mogale Tailings Retreatment], which we bought for $2.5m, and then Tennant Consolidated Mining Group for about $60m. They were transformational deals for the group, and as part of Tennant we inherited this joint-venture relationship. It’s a very complicated one and difficult for shareholders to understand, so it makes sense to clear it up.

It’s certainly not the cheapest deal that we’ve done, but then the premium is pretty much what’s acceptable in the markets in a takeover of this nature, and effectively we’re investing in our own assets here. And remember we’re using our paper to pay, and I don’t need to tell you what’s happened to our share price. [Pan African stock, at R35.29 is up 31% year to date and 298% higher over one year.]

Look, we know the asset well and when we [first] invested in this deal one of the reasons we were able to pick it up so cheaply was because it was assumed there were no bigger deposits. But together with Emmerson we found White Devil, which is a half-million-ounce deposit at 4g per tonne on surface. Also it’s not the biggest deal for us – it’s under 5% of our market cap.

What was the complication? Was it that Emmerson could, “subject to provisions, retain a contributing 40% equity interest in any major mine discovery in the joint-venture area”.  

Well, that’s the principal reason for us taking them out. So just take a step back, the three principal reasons for taking them out are: 1) Royalty payments due to them; 2) Penalty payments due to them which were factored into our purchase price initially; and 3) White Devil is a very attractive open-pittable deposit and they indicated to the market that they were going to exercise their rights to take 40% of it. Now, effectively, that is neutralised, so we own all of White Devil and we can fast-track its development and develop it as we see fit without any interference from a third party.

I understand Tennant Creek was known as the “heart of gold” thanks to a mining boom in the 1930s. Is it mainly tailings or is there an underground mine too?

What we bought was effectively a processing plant that was in construction; we saw that construction through and together with Emmerson we effectively control 1,700km² of exploration ground, which includes copper.

What happened at Tennant Creek was a gold rush and it was the highest-grade gold in Australia in its day, and the deposits were always in quite a small body.

We’ve built a processing plant that was three times bigger than anything that had ever operated in the field, to 1-million tonnes per year [of ore]. In the last set of results we indicated the plans for us to move from circa 50,000 to about 100,000 ounces per annum over the next three years, and that excludes the copper-gold angle.

So did you find more gold there than you anticipated?

Much more gold than we thought. Obviously this higher gold price is fantastic – long may it last – but you want to invest in assets that have longer life and are lower down on the cost curve to make sure you can withstand any drop in the cycle. These assets should be producing at $2,000 or below, which is not unattractive.

What do you make of the price where it is? There’s talk of the gold price heading to $6,000 – is that insane or actually reasonable?  

Obviously I’m biased, and we always say you can’t predict the gold price, but we’ve been at this game for a long time and it does feel like this shift has been structural versus cyclical. We see it all around: the world order is changing, and investors and central banks are seeking assets that are outside of the monetary regime and gold has stood the test of time. 

Does this deal make Pan African a more complicated prospect? You’ll have more Australian assets as well as an ASX listing – there’s more management involved, as opposed to the sweet little one-mine company it was.

Well, I’ve come to the conclusion that in mining you are exploiting a wasting asset – so you’re either moving backwards or you’re progressing. We don’t want to move backwards, and if we stuck with Barberton mines as the first asset we’d be lucky if we had a R2bn market cap – so that demonstrates the strategy of diversifying to lower-risk, higher-margin tailings in South Africa and an acquisition such as this.

We have good skills all the way from mining 2.4km underground, to geology to metallurgy, with BIOX (biological oxidation) having been invented at Barberton, and we might as well put all that talent and skills and expertise to good use. And, if anything, having more assets I think reduces risk, because in mining things don’t always go to plan, so the more diversification you have in your portfolio, the better you’re able to absorb short-term shocks.

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