SA gold producer Pan African Resources reported a 43.7% drop in headline earnings per share (HEPS) for the six months to end-December as the group’s attempt to hedge against shifts in the gold price backfired.
The miner, valued at about R20bn on the JSE, reported headline earnings at 1.20 US cents per share as gold output for the first half came in 13% lower than the previous comparable period.
The decline in production was attributed to a delay in commissioning a shaft at Pan African Resources’ Evander Mines and, despite SA's relatively stable electricity supply during the period under review, the company flagged multiple Eskom transformer failures at its Barberton mines, which also negatively affected production.
This was partly offset by production from the Mogale Tailings Retreatment operation, which was ramped up ahead of schedule.
Pan African Resources’ flagship tailings retreatment asset will produce about 50,000oz of gold a year for the next two decades, with the ability to expand output to about 60,000oz in the year ahead, said CEO Cobus Loots.
Additional downward pressure on headline earnings came from the group’s synthetic forward transaction, a process that enables companies to hedge against price risk by creating a “synthetic” position using financial instruments such as swaps and options.
With the price of gold rising about 15% over the past six months, Pan African Resources’ efforts to protect against a downturn in prices ended up imposing a significant opportunity cost on the business, wiping out an estimated $17.4m in profit.
The transaction, used partly to fund the construction of its Mogale Tailings Retreatment operation, also negatively affected cash flow, with the group reporting $11.7m in net cash from operating activities compared to $27.2m in the previous comparable period.
Pan African Resources assured investors that the transaction agreement will be settled by the end of February, after which the group will fully benefit from the current spot price. According to PAR, this would be 21% higher than the average price it received previously.
Despite the drop in headline earnings, the acquisition of Tennant Consolidated Mining Group (TCMG) in Australia added $25.2 m to the group’s interim profit, which was reported at $44.6m, up 10% year on year.
The gold produced by TCMG is set to initially add more than 20% to the annual output of Pan African Resources’ current reserves, said the group, adding that the operation held significant exploration potential as well.
The miner expects a significant increase in output in the 2026 financial year, when the TCMG operation is set to reach full-year production of 48,000oz-60,000oz.
With the sub-vertical shaft at Evander underground being fully commissioned last month and production at Mogale Tailings Retreatment now fully ramped up, Pan African Resources said it was well positioned for improved production in the second half. Full-year guidance was maintained at 215,000oz, representing a 16% increase from the previous year.
“We believe Pan African is in an excellent position to capitalise from record gold prices, with high margins, a stable and growing production profile and the group being materially unhedged from March 2025,” Loots said.
“At prevailing gold prices, we anticipate the group to de-gear completely in the next 12-18 months, allowing us to reinvest, to grow and continue to provide sector-leading returns to shareholders.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.