More than meets the eye to Pan African Resources acquisition of Mintails

Main photo: Evander Gold Mine 7 shaft headgear by Andrew Ashton licensed under Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic (CC BY-NC-ND 2.0).

South African-based gold mining company Pan African Resources announced on Friday that it’s potentially acquiring a tailings project for about $3.1m. A regulatory filing said the purchase of historic tailings from Mogale Gold and Mintails would complement its strategy of pursuing safe, low cost gold mining opportunities. The tailings are said to represent an estimated gold content of 2.36Moz of gold, a considerable haul of gold. However, I believe this purchase offers represents risk, perhaps not fully revealed in the announcement, only hinting at “due diligence” and “feasibility work”.

My holding in PAF

My position in Pan African Resources dates from 2012 and involves some of my first ever stock trades. I established a slightly ill-conceived position in two gold mining companies operating on the African continent. One of those, Avocet Mining, which had operations in Burkina Faso and Guinea, went bust, going into administration in August 2019, leaving nothing for shareholders. The other of my forays into mining companies is Pan African Resources, and this position has been considerably more successful than doomed Avocet.

I’ve had to have faith in the South African mining company and subscribed to a rights issue in 2013, and added considerably to my position in 2017 and 2018, averaging down my cost. This has been rewarded because as well as receiving a dividend, I have taken advantage of the strengthening share price in 2019 to reduce my position, netting some profit. My current position is effectively at zero cost given that I’ve covered my initial outlay, so all my risk is profit I’ve not yet realised. According to my calculations (based on Friday’s closing price) I’ve netted 33%, although looking at the seesaw chart for Pan African Resources over the years, I could have made a lot more money. But I’ve also been cautious about overexposing myself to a mid-tier gold miner in a country that is sometimes quite volatile. Anyway, this acquisition prompted me to rethink this shareholding and how long I keep it. I do consider gold a useful part of hedging my portfolio for potential market turmoil, especially in these volatile coronavirus-laden times. And Pan African Resources remains my only individual gold mining stock, my main exposure to gold is through various ETFs.

Pan African Resources share price, chart via London Stock Exchange

Environmental cleanup

So what is the concern about the acquisition of these two companies and various tailings projects? Well, Mintails, has considerable environmental liabilities, with their operations in the West Rand causing an “environmental catastrophe”, as reported by the Independent Online. Mintails, once listed on the Australian Stock Exchange, went bust, leaving behind an environmental liability of R485million (about $30.8m) and little in the way of financial provision, as cited by IOL.

Digging a little deeper uncovers a report by Mark Olalde for The Star newspaper published on The Pulitzer Center’s website, describing how the failed closure of Mintails resulted in the pollution of water used by local residents. People were exposed to harmful pollutants, as Mintails’ financial problems hampered efforts for the rehabiliation of the project. Oxpeckers, an journalism outfit focused on environmental issues, reported in 2018 that the company collapsed, in part, due to a lack of financing from investors. Oxpeckers cited documents saying rehabiliation would cost up to R336.5m (approximately $21.6m), with Mintails claiming that some of the environmental liabilities pre-dated the company’s involvement.

Existing liabilities and new investment

Miningmx reports that the purchase by Pan African Resources would involve investment in a tailings treatment facility similar in scale to the Elikhulu project. This project exploits historically generated gold tailings and cost R1.79bn (about $114.8m), starting production in 2018. It also seems salient to note that the mining company’s regulatory announcement notes, “rehabilitation liabilities and shareholder loans” included in the acquisition price, but neither of those potential costs are outlined.

I’m saying that there’s more than meets the eye to this acquisition. Although, at the same time, I’ve confidence in Pan African Resources CEO Cobus Loots and the company’s management. It appears a solid company, paying down its debt by over 50% in the last year, and growing profit and revenue. Of course, increasing gold prices have buoyed the dual-listed miner, but it is also trying to establish itself as a low-cost gold miner, successfully delivering on a pipeline of projects.

I don’t for one minute think that Loots and the management of Pan African Resources aren’t aware of the challenges that Mintails poses as a new acquisition. I’m sure that they’ll be weighing the financial cost of the environmental rehabiliation required, shareholder loans to be paid back and investment needed to get new tailings projects off the ground. Pan African has given itself six months to conduct “due diligence to its sole and absolute satisfaction”. But for me, the question is – do I want to continue holding the stock? This development seems to be a natural point to reconsider whether I hold individual gold mining companies in my portfolio, especially as Pan African’s stock hits all time highs, and I’ve largely simplified my gold exposure through ETFs.

Pan Resources also recently said they’d started work on the Egoli project, a standalone underground development, costing up to $66m and financed by a dedicated debt facility from a South African bank. So more financing to get Mintails up and running, increases the debt pile once again. More details on this latest Mintails acquisition could be revealed during the company’s AGM, slated for 26 November 2020. It strikes me that this project could have quite serious obligations in sorting out the environmental impact of past mining operations, as well as other yet to be disclosed liabilities and potential funding needs. While on the plus side, the acquisition represents quite an addition to the company’s gold reserves, especially if gold prices remain high.


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