I think Pan African Resources (LSE: PAF) has attractive growth prospects, but its share price has had a turbulent five years. Still, since a low in May 2018, the gold producer’s shares are up 84%. And interim results pushed the price up 3.5% on Tuesday.
Speaking of the six months to 31 December, CEO Cobus Loots said: “Our business strategy of delivering safe, sustainable and high-margin gold production has yielded improved operational, financial and safety results for the six months ended 31 December 2019.”
The firm sold 90,602 ounces of gold in the period, up 13.6%, and is targeting 185,000 ounces for the full year.
Gold
Production costs have risen and will need to be watched. But in the half, its Elikhulu resource recorded an all-in sustaining cost (AISC) of $708 per ounce, with AISC at the Barberton Tailings Retreatment Plant coming in at $643 per ounce. Pan African says full-year production should be at an AISC of below $1,000 per ounce, though if it gets close to that level I might get a bit concerned.
Pan African shares are on P/E multiples of only around five, and dividends are forecast to ramp up to yield 5.4% by 2021. That looks cheap, but the cyclical nature of the gold business, plus the small market-cap (of approx £240m), both add risk for Pan African.
The Pan African share price is likely to be driven by the price of gold, but I can’t help feeling that’s likely to be reasonably buoyant for the next few years. Gold is currently at $1,580 per ounce, and it’s been above $1,200 since September 2018.
I’m seeing a good safety margin there, and I reckon Pan African Resources shares are undervalued.
Cheap?
Glencore (LSE: GLEN), meanwhile, has seen its shares fall 40% since a high in January 2018, after suffering a couple of years of falling earnings. And the price dipped 3.5% Tuesday, after the mining giant reported a 26% fall in adjusted EBITDA for the 2019 year just ended. Cash generated by operating activities dipped 22% to $10.3bn.
Net debt grew 19% to $17.6bn, above the top end of the firm’s $10bn-$16bn target range. There’s now a net debt to adjusted EBITDA ratio of 1.51, which is perhaps within reasonable bounds. But I really wouldn’t like to see it getting much above that.
It’s mostly down to weakening commodity prices. But CEO Ivan Glasenberg also spoke of “prolonged and uncertain trade deal negotiations” as also impacting the firm’s performance.
Coal
Investors will presumably have had mixed reactions to Glencore’s statement on carbon emissions on the same day too. The company plans to reduce emissions by 30% by 2035, and says that “includes natural depletion of our oil and coal resource base over time.” That might be good for the planet, but a reduction in coal and oil income streams will surely hit the bottom line.
This may all sound a bit gloomy, but it was largely expected, and it’s really giving me mixed messages regarding the share price. On the one hand, dividend yields of close to 6% look very attractive, and I quite like the mining business for its long-term income potential.
But against that, Glencore could be in a bit of a down cycle in a very cyclical business. And I fear a couple of tough economic years ahead. Right now, a forward P/E of 13.7 doesn’t provide enough safety margin for me.
