Gold is popular when stock markets are weak. That makes me wonder why Pan African Resources (LSE: PAF) has been on such a low valuation, even before the share price fell more than 20% on Friday morning.
Production cut
The gold miner has just reported a big drop in production estimates for this year.
Previously, the firm had predicted an output of between 195,000oz and 205,000oz of the shiny stuff. The company has now dropped that to 175,000oz. Half of it is due to electricity supply problems, it seems.
So that’s a dip of 20,000oz-30,000oz. At a gold price of $1,995 per ounce, that’s a shortfall of around $40m-$60m (£32m-£49m).
Production costs will presumably be reduced too, which should offset that to an extent. But it’s still bad news.
Late notice
I wonder why, with a financial year ending in June, the company has only just noticed the shortfall and told us about it so late in the year.
Still, the share price has been falling since early May. So it seems those who recently sold their shares got lucky.
The question now is whether the shares are good to buy.
Prior valuation
Prior to this, forecasts had Pan African shares on a price-to-earnings (P/E) ratio of under six. The expected dividend yield stood at 5%, and was set to rise to around 6.5% in the next two years.
That looks like a nice valuation. And it shows a benefit of buying shares in a gold miner.
I wouldn’t buy the metal itself, as it doesn’t create any actual wealth. Maybe the price will rise and I can make a profit when I sell. But maybe it won’t.
Gold stocks, on the other hand, generate cash from miners selling the metal. And that can get me a nice dividend income.
Low production cost
It will most likely vary from year to year. But as long as a miner can produce gold for a cost that’s lower than the market price, it should be able to make a profit and pay me the cash.
Pan African puts its all-in sustaining production costs at $1,325-$1,350 per ounce. That’s higher than last year. But there’s still a markup of between $645 and $670 per ounce to the market price.
It looks to me like the kind of margin that could remain profitable, with some safety in it.
As for dividends, the latest announcement said that “the group is well positioned to continue making cash distributions to shareholders in the future“.
Guidance
Pan African has set its guidance for the 2023-24 year at 178,000oz-190,000oz. So that’s a fair bit lower than earlier estimates for this year. But the firm does at least talk of “a further production increase in the 2025 financial year“.
So would I buy? I do still like the look of the current valuation. And that’s even after this fall in output. But it’s a risky industry, especially with the small miners. So for that reason, I’ll stay away.
