Assignment 1

Student Number 1710D3613374

INTRODUCTION

The report has been prepared based on data connected with Pan African Resources PLC using real
data from the Company which is listed on the London Stock Exchange. The report will attempt to loo
at the company from an Investor’s point of view covering information regarding its corporate
governance, capital investment, sources of finance and will use the company’s financial information
to measure business performance. The report will conclude by commenting on the company’s share
performance from an Investor’s perspective.

CORPORATE GOVERNANCE - STATUS AND CHALLENGES

Pan African Resources PLC is a mid-tier Africa focused gold producer who was incorporated and
registered on 25th February 2000 in England and Wales under the companies act of 1985 with
registration number 3937466. They have a production capacity of more than 170,000 ounces of gold
per annum and have a portfolio of high-quality low-cost operations and projects in South Africa. Their
approach is to identify and implement into organic and acquisitive growth opportunities which are
aimed at creating sustainable investor value by focusing on safe operating environment, value
accretive capital allocations, acceptable execution risk and low-cost production.

Organisation’s Shareholding

According to the organisation’s structure as at 30th December 2019, the company’s shareholding was
as follows:

Pan African Resources Capital Structure as at 30 December 2019

Shares in issue 2,234,687,537

Percentage of AIM Securities not in public hands 41.73

Major Shareholder Information

Shareholder Shares %ISC

Allan Gray Investment Management 621,458,329 27.81

PAR Gold 306,358,058 13.71

Coronation Fund Managers 134,449,606 6.02

Investec Asset Management 124,205,658 5.56

Public Investment Corporation 111,403,410 4.99

Ruffer 110,710,483 4.95

River and Mercantile Asset Management 78,250,000 3.50

Directors Share Holdings
30-Jun-19 30-Jun-18

Keith Spencer 3,000,000 3,000,000

Cobus Loots 668,675 668,675

Thabo Mosololi 50,000 50,000

Deon Louw 257,450 257,450

Total 3,976,125 3,976,125

No dealings in securities by the directors of the company took place between the financial year ended 30
June 2019 and the date of the results announcement on 18 September 2019.

Treasury Shares
As at As at
31-Dec-19 30-Jun-19

Shares held as “Treasury Shares” 306,358,058 306,358,058

The company’s Black Economic Empowerment (BEE) was restructured 15th January 2018 which saw
Concrete Rose Proprietary Ltd gaining 22.1% of the shares and Mining Operations employees owning
5%.

Board of Directors and Management

The board of Pan African Resources consist of seven Directors. The organisation tried to maintain a
clear balance of power and authority at Board level with its chairman being an independent non-
executive director. There are a further four directors who are non-executive and the remaining two
are executive directors. The board is composition ensures that no individual has unfettered powers of
decision making.

The Board chairman is Mr. Keith Spencer. The 2 executive directors are Mr Cobus Loots, who is the
Chief Executive Officer and Mr Deon Louw. The non-executive directors are Mr. Hester Hickey, Mr.
Thabo Mosololi, Mr. Charles Needham and Ms. Yvonne Themba. The board chairman and the CEO are
responsible for the strategic direction and sign for financial statements of the organisation.

The company also has an executive committee which comprises of the 2 executive directors and the
Chief Operations officer (Mr. Andre van de Bergh). These are further supported by an established
operations committee comprising of 10 individuals selected from the organisation’s management
team.
The board is supposed to be ethical and commit to duty, answerability, impartiality and transparency.
It is required to assimilate responsible corporate citizenship in its business strategies, audit and all
assessments and should insert sound corporate governance practices in their daily operations and
procedures through all subsidiaries. The corporate governance strategies are reviewed. The group has
assumed the King IVTM as a recognised corporate governance code. This was to make sure that all
stakeholder interests are being considered and to comply with laws and regulations. This was also
done in adapting to changes in the regulatory environment

Governance Framework

The board is the ultimate responsibility for the group’s governance structure and context and is
supported in operations by four sub-committees. The organisation outline includes a delegation of
authority process which sees the everyday management of the company given to the chief executive
officer and the Executive Committee (Exco), while still maintaining the board’s accountability. The
EXCO is reinforced by the operations committee (Opsco), which integrates the general managers at
all mining operations and other important corporate office personnel.

The standards of disclosure relating to corporate governance at the company are regulated by the
Companies Act 2006, the South African Companies Act1, the AIM Rules of the London Stock Exchange
(LSE), the Johannesburg Stock Exchange (JSE) Listings Requirements and King IV™. The board has also
carefully adopted the values of corporate governance contained in the UK Corporate Governance
Code and the guidance published by the Financial Reporting Council (FRC) regarding risk
administration and internal controls.

Challenges

There have been constant operational disruptions which impacted production. Community unrests
resulted in loss of 20 production days in 2019 at the Barberton Mines. Illegal mining has also negatively
affected production, safety and security of the employees which impacted revenue and security costs.

The re-mining feed at Elikhulu became unstable affecting production at the mine. There was also a
cessation of large-scale underground operations at Evander Mines which led to cutbacks on staff in
2018. This increased unemployment in the surrounding communities giving rise to illegal mining and
theft.

COMPANY CAPITAL INVESTMENTS - EXISTING OR PROJECTED

The corporation has got 4 projects in which they are operating

1. Barberton Mines

The mine is in a greenstone belt. It is low cost, high grade operation comprising 3 underground mines
called Sheba, Fairview and New Consort. Production costs for the mine in 2019 were US$92 million.
The capital expenditure was US$16.2 Million encompassing capital expenditure sustenance at US$9.9
Million and Capital expansion of US$6.3 Million

The company has projected that in 2020, they will optimise the Barberton mines’ infrastructure
exploitation by advancing the Royal Sheba Project, the Fairview sub-vertical shaft project and Project
Dibanisa

2. Barberton Tailings and Retreatment Plant

The treatment plant is located at the Barberton mines costing R325.7 Million and constructed in 2012.

3. Evander mines 8” Shaft Pillar

This mine is projected to contribute 20,000 oz to 30,000 oz per annum for 3 years with the first of its
gold produced in August 2019. Total capital expenditure at the mine was US$40.4 Million. This related
largely to the expansion of Elikhulu.

Projections for the year 2020 includes expedition of the Egoli project and assessing capital possibilities

4. Elikhulu Tailings Retreatment Plant

Elikhulu treatment plant exploits gold stakeouts deposited in the Kinross, Leslie/Bracken and
Winkelhaak tailings storage facilities.

The company has three other capital investments that they pride themselves in managing;

1. Intellectual investment

The company devotes some efforts in employees through development of management expertise and
trainings.

2. Human Capital

People are important to the sustainability of the mining business and they are key enablers in
executing the company strategy. The company therefore focuses on ensuring that they have the
necessary skills, culture and personnel in place

3. Social and Relationship Capital

Production is contingent on excellent relationships between various stakeholders. The associations

have been built based on trust, respect and integrity which has become essential to evolution, value
creation and sustainability

4. Ordinary Capital
Natural resources such as Water, Air, Land and Fuel for energy are used to operate the manufactured
capital.

SOURCES OF FINANCE

Pan African Resources PLC declared four sources of capital during the period ending 30th June 2019

1. Share Capital

The company share capital at 30th June 2019 stood at US$38.151 Million. This is derived from the
number of ordinary shares that were issued and paid for and treasury shares. It is noted that there
were no supplementary ordinary shares issued during 2018. During the same period, Pan African
disposed of 130 Million shares at US$0.09 per share which reduced the treasury shares held.

2. Share Premium

The organisation had a share premium of US$235mn during the period ending 30th June 2019.

3. Share Option Reserve

The share option reserve was at US$112mn. This consisted of historical IFRS 2 equity-settled share
option and BBBEE transactions. In January 2018, the group concluded BBBEE restructuring exercise
with Concrete Rose.

4. Retained Earnings

The company declared retained earnings of US$113 Million in the period ending 30th June 2019.

BUSINESS PERFORMANCE

In order to measure the corporation’s business performance, this paper will investigate three types of
ratios. We will compare ratios for 2019 and 2018 to try and measure the going concern of the business.

1. Liquidity Ratio

As the designation advocates, short-term solvency ratios as a group are proposed to provide
information about a firm’s liquidness, and as such, these ratios are sometimes called liquidity
measures. Their primary concern is to show the firm’s capacity to pay its bills over the short run
without unnecessary stress. Consequently, these ratios focus on current assets and current liabilities
(Ross et all, 2015). For this purpose, we will review the corporation’s Current Ratio

Current Ratio

Current Ratio = Current Assets

Current Liabilities

2019 (US$ Thousand) 2018 (US$ Thousand)

29,964.4 = 0.46 times 26,513.8 = 0.60 times
63,854.5 44,394.6

The firm has a higher degree of liabilities that current assets. In the short term, PLC cannot afford to
service its debt. Most of the liability is reflected in advances received from financial institutions. The
Financial institutions liability increased US$133.8 million (2018: US$119.3) due to non-current portion
of the RCF which decreased to US$52.8 million (2018: US$56.7 million). The firm had US$9 million
classified as a current liability. The non-current portion of the Elikhulu term loan facility increased to
US$57 million (2018: US$56 million). The advance was utilised to complete the construction of Elikhulu
project. The current portion of the Elikhulu term loan facility increased to US$14 million (2018: nil).

2. Profitability Ratios

Profitability ratios are planned to measure how efficiently the firm uses its assets and manages its
operations. The focus is on the net income.

Net Profit Margin

Net Profit Margin = Net Income

Revenue

2019 (US$ Thousand) 2018 (US$ Thousand)

38,042.20 = 17.5% times 15,589.40 = 10.7% times
217,679.00 145,974.80

Return on equity (ROE)

ROE = Net Income

Total Equity

2019 (US$ Thousand) 2018 (US$ Thousand)

38,042.20 = 20.7% 15,589.40 = 10.6%
183,581.90 146,987.60

Company revenue from continuing operations improved the year by 49.1%. This was mainly due to an
increase of 54% in gold sold from continuing operations (171,706oz, 2018: 111,879oz) and Elikhulu
contributions in the current financial year. The cost of production for on-going operations increased
by 43% to US$153.0 million from US$107 million in 2018. The increase is mainly attributed to the
commissioning of Elikhulu which contributed an additional US$25 million in production costs,
Remnant underground mining and vamping activities, which contributed an additional US$30 million.
Other costs which contributed to the increase are increases in Salaries and wages, Mining and
processing costs, Electricity costs, Engineering and technical costs and Security costs.

There are other important ratios that need to be acknowledged as an investor. These are based on
information that is not necessarily contained in financial statements but look at the market value
through price per share of the stock. These are calculated directly on companies that have been listed
on a public exchange platform.

Earnings Per Share (EPS)

The London Stock Exchange declared the EPS for Pan African for 2019 as 1.97p. This is a significant
increase from 0.63p declared in 2018. This cab be attributed to increased profits in 2019 and the
change in equity shareholding of the company which rose from a deficit of £93.27 Million in 2018 to
£38.04 Million in the reporting year. The negative equity is attributed to the massive investment that
the company embarked on such as the Elikhulu Project. The company further undertook renovations
to their existing mines like the Evander Mines, Evander South Project. This forced the company to
declare a loss of £93 Million as compared to a profit of £38 Million declared in 2019. The company had
an almost similar trend in 2015 where the EPS declared was 0.64p. However, 2016 and 2017, there
was a significant increase in the basic EPS of the company.

Dividend Per Share (DPS)

Dividend per share is the total of stated dividends allotted by a company for every current ordinary
share. This figure is considered by dividing the total dividends paid out by a business, which
includes interim dividends, over a period of time, by the number of existing ordinary shares issued. A
business's DPS is often derived using the dividend paid in the most recent quarter, which is also used
to calculate the dividend yield. The DPS for Pan African in 2019 was 0.13p, a decrease of 71% from
0.45p declared in 2018. The dividends were affected by the company liabilities that Pan African had
to service in the year which reduced profit attributable to equity holders.

Dividend Coverage Ratio (DCR)

The Dividend Coverage Ratio, also referred to as dividend cover, is a financial metric that measures
the number of times that a company can pay dividends to its shareholders. The dividend coverage
ratio is the ratio of the company’s net income divided by the dividend paid to shareholders. Pan
African declared a DCR of 15.56 Million in 2019 as compared to £1.41 in 2018. The increase can be
attributed to increased investments in the company and rehabilitation work to existing assets which
improved the company’s worth to investors.

Share Capital and share premiums

Pan African Resources declared a share capital of £38.15 million in 2019, an increase of 71% from
£22.35 Million declared in 2018. This means that the company increased its capital to finance further
growth as can be witnessed in their increasing production and improvement of infrastructure. This
can however also generate adverse results by diluting the shares held by investors. The company’s
share premium account has seen a record increase of 63% in 2019 at £235 Million from £145 Million
declared in 2018.

COMPANY’S SHARE PERFORMANCE

The comments in this section are being derived from the perspective of an investor.

Pan African Resources PLC has got a lot of potential and its growth prospects are promising. Over the
years, the company’s financial position has been satisfactory. It has continued to maintain profits
during the period even when the company has seen massive investments being put into its operations.
The projected growth seems to promise potential returns. It can be classified as a growing concern
and investing into it can be profitable in the long run.

The company’s share performance for last 3 years has been fluctuating. As at June 2017, the
company’s shares were trading at GBX13.75/Share. However, a year later in 2018, the share
plummeted to GBX6.96. 2019 saw the shares climb up again to trade at GBX10.00 as 30 th June. While
this can bring mixed reaction to investors, it is worth noting that company’s EPS through the years Ahs
also fluctuated in response to the share performance. However, by 2019, the company’s EPS has
improved to 1.97p which is the highest of the 5 years reviewed. The dividend per share has however
registered a decline over the period, with the g=highest being registered in 2017 at 0.88p. In 2019, the
DPS was recorded at 0.13p which is the lowest in the 5 years reviewed. The many improvements and
innovations that the company has embarked on in 2018 should indicate improved returns for investors
in the medium to long term. One can only imagine that with these improvements, the company will
continue to register increasing return for its investment which in turn means increased earnings to its
investors.

The gold market has consistently shown improvement since 1978 with investors in the industry able
to hedge against value loss. This has usually been done by a futures market in which gold is one of the
commodities. Contracts are entered by participants, agreeing to buy or sell gold at a defined price at
a stated future date. Gold futures are used both as a way for gold producers and market makers to
hedge their products against fluctuations in the market, and as a way for speculators to make money
off those same movements in the market. The contracts are standardized by a futures exchange as to
quantity, quality, time and place of delivery. Only the price is variable. For this reason, the Gold market
remains competitive and productive to the investor for the foreseeable future.
REFERENCES

http://www.londonstockexchange.com/exchange/prices/stocks/summary/fundamentals.html?four
WayKey=GB0004300496G

http://www.panafricanresources.com/

http://www.miningweekly.com/article/pan-africans-elikhulutailings-project-to-deliver-exceptionally-
low-cost-organicgrowth-2017-06-09

http://www.panafricanresources.com/

Ross S.A, Westerfield R.W and Jordan B.A, 2015, Essentials of Corporate Finance, 9th Edition, McGraw
Hill

Sangster A and Wood F, 2018, Frank Wood’s Business Accounting Volume 1, 14th Edition, Pearson UK