Pan African Resources, a South African gold mining company well-regarded for its savvy dealmaking and leading returns to shareholders, continued to show its dealmaking prowess in 2017 through the development of the R1.7bn Elikhulu Tailings Project in Evander, Mpumalanga. This project is a major milestone for Pan African, increasing gold production by more than 25% and decreasing the average production cost per ounce of gold produced by the group. The fact that it was concluded at a time when the mining industry in South Africa is struggling to compete for investment from global investors, means this project stands out as a vote of confidence in the quality of the resources (both human and geological) available in South Africa.
Pan African has concluded a string of profitable acquisitions over the years, even venturing into coal and platinum group metals . In its 2013 acquisition of the Evander Gold Mine from Harmony Gold, Pan African acquired a producing deep level gold mine as well as a number of large tailings dumps in the vicinity of Evander. Using the strong cash flows generated by the Barberton gold mine, Pan African has reinvested in these assets to develop the Elikhulu project and ensure a long sustainable life for the Evander mine. Since acquiring Evander, Pan African has built two tailings retreatment plants: the first at the Barberton mines, treating the high grade dumps from the country's oldest gold mining area; and the second at Evander as a large-scale pilot plant ahead of commencing the build on Elikhulu. The success of the Evander tailings retreatment plant proved the concept that the tailings dumps at Evander could yield some of the most profitable ounces in the Pan African portfolio.
Gold mine tailings dumps are the large mounds of yellowish sand that we see dotted around the Johannesburg landscape. These are the finely-ground remnants of gold-bearing ore mined from deep underground over centuries of mining. This ore is crushed down to a fine powder so that the gold contained therein can be dissolved in solution and separated from the rock. Historically, the process was efficient but left some gold behind in the sand. With technological advances and the current gold price environment, it has become increasingly compelling to run this sand back through a gold processing plant to extract more of the remaining gold - typically at less than 0.3 grams of gold per tonne of material.
The Elikhulu project sees the Evander tailings dumps retreated through a new state-of-the-art gold processing plant, with the sand in the dumps carved off the dump faces with high-powered hoses and then pumped to the plant in a process called hydraulic mining. With more than a million tonnes of tailings passing through the plant, this is a highly sophisticated, large-scale operation. Through the mining process, Pan African will be consolidating three tailings dumps into one centralised dump and storing those tailings in line with modern best practice - at a higher environmental standard than was in place when the dumps were initially formed. Not only will Pan African be producing some of the lowest-cost ounces in the South African mining industry from Elikhulu, it will be mitigating environmental risk and employing local community members for a net positive impact.
The project was funded through a combination of debt and equity, with RMB underwriting the R1bn project finance facility and assisting in the accelerated bookbuild that Pan African undertook to raise the equity portion of the funding. The underwrite of the funding for the project was provided ahead of the equity being raised, and gave shareholders the confidence that with their additional subscription, the project would be fully funded without requiring cross-subsidisation from the existing operations. This helped boost confidence and attract the necessary capital whilst giving shareholders the comfort that the existing operations could continue to pay dividends and provide a return.
This facility was carefully structured to dovetail with Pan African's existing R1bn corporate revolving credit facility, and required careful planning and clean execution to ensure that Pan African could achieve the best possible pricing while having sufficient flexibility in the ongoing management of the facilities and the continued growth of the business. Typically corporate facilities have fewer undertakings and restrictions on the borrower than conventional project finance, and the R1bn facility in place prior to the Elikhulu facility was priced attractively and allowed Pan African to manage its working capital movements effectively across the group without being too restrictive.
The Elikhulu facility structure used the same collateral, but implemented a new structure which will allow Pan African flexibility in refinancing once the Elikhulu project is producing at steady state. Because the Elikhulu facility also benefited from the collateral provided by the existing operations, it was possible to reduce the number of restrictions on Pan African and keep the overall facilities from hampering Pan African's growth ambitions.
The project stands out not only in that it is a new development during uncertain times in the South African mining industry, but also because of its integrated funding solutions combining the best of corporate and project finance, and the net positive impact the project will have on the environment and the Evander community.
Julian Grieve is a transactor in Resource Finance at Rand Merchant Bank.