[miningmx.com] — IN LATE November last year the share prices of two JSE-listed gold juniors – Simmer & Jack Mines (Simmers) and Pan African Resources (Pan African) – matched each other for a brief period at around 100c. That didn’t last long, as Simmers continued its downward slide from a 12-month high of 150c to current levels around 86c/share; while Pan African carried on up from a 12-month low of 64c to current levels around 119c/share.
Simmers continued to slide despite the announcement in December it would merge with Bernard Swanepoel’s Village Main Reef in a deal that put a nominal price on Simmers of around 105c, based on the value of Village equity.
Simply stated: Simmers has become a dog while Pan African’s future looks so bright that CEO Jan Nelson will have to start wearing sunglasses at investor presentations.
Don’t just take my word for it. Here’s how RBC Capital Markets gold analyst Leon Esterhuizen described the company in a December research review of SA’s gold sector. He commented Pan African “is developing into an exciting growth story, especially now it’s also pursuing a larger platinum group metals (PGM) business. Until the PGM strategy is either delivered or sold, the market will likely continue to look at Pan African as too small to really matter.
“That essentially means the company will more than likely end up being taken over by a bigger player; but that’s a positive and yet another reason to buy the stock.’
It wasn’t always so. Go back five years and Pan African was the dog while Simmers was the junior gold miner with the great future. In 2007 Simmers was trading at levels as high as 700c while Pan African sat at around 200c/share.
Simmers was poised to reap the benefits from turning various marginal SA gold operations around, either directly or through associate First Uranium, which it had hived off and listed on the Toronto Stock Exchange.
Pan African was in the process of beating a retreat from the Central African Republic, where it had claimed to have found a whole new gold province. But the exploration results eventually didn’t back that up.
That year Pan African agreed to buy 74% of Barberton Mines from Metorex, which – although it gave the company control of a producing mine – wasn’t viewed that favourably given the traditionally erratic nature of gold mining in the Barberton region.
So what happened? It boils down to two key factors: operational delivery and choice of a black empowerment partner. Pan African’s management made a success of running Barberton and overcame some huge challenges in the process, such as having to defend the operation from an onslaught by illegal miners. Management came very close to losing control of the mine to the illegals but fought back hard by – in Nelson’s words – making security a “core’ business function. Nelson reported no incidents of illegal mining in its latest results for the year to end-December.
Simmers has so far failed to turn its marginal Buffelsfontein mine around, despite pumping hundreds of millions of rand into it since it acquired the operation after DRDGold put it into liquidation. The company’s future is now pinned on the nearby – profitable – Tau Lekoa mine it bought from AngloGold Ashanti.
Pan African reported a 58% jump in attributable profits to £7,6m for 2010 due to higher grade at Barberton, combined with lower operating costs. It’s also now consistently paying dividends, making it a rarity in the junior gold league.
In stark contrast, Simmers remains cash-strapped and is currently scrambling to find another R155m to settle debts falling due. That despite entering into a forward gold sale with Deutsche Bank in November that raised around R140m for the same purpose.
Problems Simmers previously had with empowerment partner Vulisango had a lot to do with the state the company currently finds itself in. This bitter feud, which dates back to when Roger Kebble restructured Simmers and brought in Vulisango as its empowerment partner, delayed various projects when Vulisango enlisted the help of the department of mineral resources, which in turn slowed the anticipated receipt of revenues Simmers management was counting on to help fund its capital and operating bills.
Vulisango eventually won and removed all the directors from the Simmers board it wanted rid of – in particular, former CEO Gordon Miller and former chairman Nigel Brunette. But at what cost?
Simmers is now being taken over by Village at what looks like a bargain price for Swanepoel – assuming he can turn it around – in a deal Esterhuizen has described as a “final capitulation’ by Simmers. Esterhuizen put a sell on the share in December when it sat at 101c.
Pan African’s black empowerment partner is Cyril Ramaphosa’s Shanduka Resources. Not only have both sides worked well together but Shanduka is one of those rare empowerment companies with money as well as good political and business contacts. It seems there’s plenty more to come from the Shanduka connection, judging by Nelson’s comments at the recent presentation of Pan African’s 2010 results. He said Pan African was in a position to pursue new growth opportunities now the Phoenix Platinum tailings recovery plant was under construction and the Barberton mine was running smoothly.
Nelson added growth would be both organic as well as involving M&A activity, using the strategic partnership with Shanduka.
– The article first appeared in Finweek. Ryan holds shares in Pan African Resources.
