Elikhulu Project

Pan African Resources PLC

(Incorporated and registered in England and Wales under

Companies Act 1985 with registered number 3937466 on 25 February 2000)

AIM Code: PAF

JSE Code: PAN

ISIN: GB0004300496

(“Pan African” or “Group”)

RESULTS OF DEFINITIVE FEASIBILITY STUDY FOR THE ELIKHULU TAILINGS PROJECT AND GROUP PRODUCTION UPDATE

Pan African is pleased to announce positive results for the independent Definitive Feasibility Study (“DFS”) for its Elikhulu Tailings Project (“Elikhulu” or “the Project”).  The Pan African board of directors (“Board”) has approved the construction of the Project, subject to finalisation of the Project financing package.

The Project DFS results indicate excellent recovered grades and gold production, attractive financial returns and a low execution risk, with the DFS results surpassing expectations of previous technical and financial assessments of the Project.  The DFS was undertaken by DRA Projects SA Proprietary Limited who has reviewed and approved the information contained in this announcement in writing.

DFS highlights and key assumptions

• The planned commencement date of the Project is January 2017, with first gold forecast for the final quarter of the 2018 calendar year and full commissioning in December 2018.  

• Annual recoverable gold production of approximately 56,000 ounces for its initial eight years of operations and 45,000 ounces of gold for the remaining five years thereafter.

• Current arisings and inferred gold resource could extend Project life beyond the DFS estimated life of 13 years.

• Optimal plant capacity for the Project allows 12-million tonnes per annum throughput.

• The Project is expected to add approximately 25% to the Group’s current production profile and reduce the Group’s all-in sustaining cost (“AISC”) profile.

• Initial capital cost is forecast at approximately R1.74 billion (US$119.9 million).

• The Project internal rate of return (“IRR”) (real, post-tax) of 23.1% (30.6% nominal) with a payback period of less than four years, based on assumed gold price of US$1180/oz (R17,110/oz).

• Return on equity (real, post-tax) of 34.3% (42.5% nominal)  

• Project net present value (“NPV”) of R1.1bn (US$75.9 million).

• AISC of US$523/oz over the life of the Project.

• Cash outflow per ounce over the life of the operation is sub $650/oz, inclusive of debt servicing, and amounts to approximately $805/oz, inclusive of debt servicing, over the five year debt redemption term.

• Average gold recovery rate over the life of the Project of 47.77%.

• Environmental Impact Assessment (“EIA”) and Water Usage Licence (“WULA”) processes are underway, with both approvals expected by late 2017.

  DFS economic assumptions:

• Gold price assumption: US$1,180/oz.
• Rand/US Dollar exchange rate:  ZAR/US$:14.50.
• NPV discount rate: 9% real.
• Debt to equity ratio: 115%, debt to total capital ratio of 53%.
• Long term South African inflation rate of 6.1%.

Return on investment

Pan African endeavours to invest only in projects positioned in the lower half of the cost curve, and only when the project execution and construction risk is within Pan African’s capability.  The experience gained in the construction and operation of the Barberton Tailings Retreatment Plant (“BTRP”) and the Evander Tailings Retreatment Plant (“ETRP”) positions Pan African to successfully execute the construction and operation of the Elikhulu project. The Board is satisfied that the Project meets the Group’s investment criteria and that the Group’s track record of successfully operating three tailings plants, all of which were constructed on time and on budget, will be invaluable in the construction and operation of the Elikhulu Project. 

Project funding

Pan African funds its capital programmes and acquisitions with conservative debt levels that are appropriate for the specific project, and the Group’s overall level indebtedness. The Project’s execution and operational risk is deemed to be low, and the robust nature of the Project’s cash flow generation allows for a relatively high level of debt funding.

Rand Merchant Bank, a division of First Rand Bank Limited, has provided Pan African with all necessary approvals for a R1bn underwritten five-year debt facility on competitive terms (“RMB Facility”). This facility will be dedicated to the funding of the Project’s development and will be repaid from the Project’s cash flows, generated during the initial five years of production. This facility is in addition to the Group’s current Revolving Credit Facility (“RCF”) of R800 million (US$55.2 million), which can be extended to R1.1 billion (US$75.9 million), conditional on approval from the RCF lenders.

The Group is evaluating a number of funding proposals to fund the balance of the initial Project capital and, given its strong financial position and access to debt facilities, does not foresee difficulty in securing the balance of the funding on competitive terms.

The RMB Facility’s repayment profile is matched to the Project’s cash flow generation and is not expected to impact Pan African’s existing dividend policy, which provides for a pay-out ratio of 40% of annual free cash flow. 

Cobus Loots, Pan African’s CEO, said:

“We are pleased to announce the positive findings of the independent Definitive Feasibility Study.  Operating low cost tailings plants has become an important business for Pan African in recent years, and we now intend to proceed with construction of the Elikhulu tailings retreatment project. This project is expected to materially enhance our Group’s production profile and support Pan African’s continued focus on low-cost, high-margin gold ounces. The substantial capital investment required demonstrates our commitment to the South African mineral sector and our shared responsibility of creating employment and alleviating poverty in the Evander community.

Our primary consideration in any capital allocation decision is our ability to successfully execute the designated project and to generate the required returns over the investment horizon. The attractive returns already being earned on the capital invested in the BTRP and ETRP bear testimony to our previous success and will serve as invaluable experience in completing the Project.

Elikhulu is expected to firmly establish Pan African as a leader in long-life, low-cost tailings retreatment, and possibly unlock other opportunities in the sector.  We expect the Project to reduce the Group and Evander cost profiles and generate robust cash flows and attractive returns for our shareholders.”

Scope of the project

The Project entails establishing facilities and infrastructure at Evander Gold Mining (Proprietary) Limited (“Evander”), owned and operated by Pan African, to retreat gold plant tailings at a rate of 1-million tonnes per month. This is in addition to the existing production from the ETRP which will continue to operate independently of the Project for the next 13 years. Three existing tailings storage facilities will be reclaimed, in the following order: Kinross, Leslie and Winkelhaak. Post processing, these will be consolidated into a single enlarged Kinross tailings facility, contributing to reducing Evander’s environmental footprint and associated environmental impact.

The Project is expected to yield approximately 56,000oz of gold per annum for the initial eight years of production (while treating the Kinross and Leslie tailings storage facilities), and then approximately 45,000oz a year for the Project’s remaining five years from processing the Winkelhaak tailings storage facility. These production figures exclude an inferred resource of 244,398oz of gold delineated in the soil material beneath the existing tailing dumps. 

The average gold recovery over the life of the project is forecast at 47.77%. Using modelled recoveries, the gold dissolution value estimated for Kinross is 51.38%, Leslie 48.29% and Winkelhaak 53.77%.

Project capital:

	Construction capital				Construction capital				Life of operation
	Phase 1				Phase 2		Phase 3		All Phases
	2017		2018		2021		2026		Total
	R million	US$ million	R million	US$ million	R million	US$ million	R Million	US$ million	R million	US$ million
Pre-construction	24.5	1.7	-	-	-	-	-	-	24.5	1.7
Process plant	273.3	18.8	409.9	28.3	-	-	-	-	683.2	47.1
Tailings storage facility	283.1	19.5	424.7	29.3	138.4	9.5	-	-	846.2	58.3
Overland piping	30.3	2.1	45.5	3.1	29.8	2.1	48.0	3.3	153.6	10.6
Hydraulic mining	22.6	1.6	34.0	2.3	125.9	8.7	58.4	4.0	240.9	16.6
Contingency	94.7	6.5	96.5	6.7	19.0	1.3	6.6	0.5	216.8	15.0
Total	728.5	50.2	1,010.6	69.7	313.1	21.6	113.0	7.8	2,165.2	149.3

Phase 1 capital relates to the initial capital required to construct the plant and associated infrastructure. This capital of R1.74 billion (US$119.9 million) includes a contingency of R191.2 million (US$13.2 million) to account for potential cost overruns and additional plant design requirements.

Phase 2 and 3 capital of R313.1 million (US$21.6 million) and R113.0 million (US$7.8 million), respectively, which is required to re-establish the hydro-mining infrastructure to the Leslie and Winkelhaak tailing dumps, will be funded from Project-generated cash flows.

Mineral reserve estimate

Tailings facility	Probable reserve tonnes (M)	Probable reserve grade (g/t)	Probable Au content (Moz)
Kinross	47.0	0.31	0.47
Leslie	70.1	0.32	0.71
Winkelhaak	70.0	0.24	0.55
Total	187.1	0.29	1.73

The mineral reserve estimate is a probable 187.1Mt and comprises the Kinross (47.0Mt), Leslie (70.1Mt) and Winkelhaak (70Mt) tailings storage facilities at Evander. The combined 187.1Mt will provide feed material to the existing ETRP at 200,000 tonnes per month, and to the Project process plant at a rate of 1-million tonnes per month (of which 40,000 tonnes per month will be from run-of-mine tailings).

The combined mineral reserve contains an estimated 1.73Moz of gold of which an estimated 688,700oz of gold will be recovered over the life of the Project. This estimate excludes the inferred resource 244,398oz of gold leached into the soil beneath the existing tailing dumps, which could potentially increase the Project life. 

The mineral reserve estimate assumes a non-selective mining method whereby the whole of mineral deposit is mined in a predetermined sequence. The mining method allows for a 100% extraction of the target mineral deposit. Hydraulic mining has been selected as the preferred mining method as it is proven technology, cost effective and operationally well understood.

Competent person

Mr Barry Naicker, the group mineral resource manager, has signed-off the mineral reserve information contained in this announcement, following his review and approval. He is a member of the South African Council for Scientific Professions (400234/10). Mr Naicker has 15 years of experience in economic geology and mineral resource management. He is based at 1st Floor, The Firs, corner Cradock and Biermann Avenues, Rosebank 2196, Gauteng.

Timeline to production

Phase 1 of the hydraulic mining at the Kinross tailings storage facility is scheduled to commence in the fourth calendar quarter of 2018 and for the Project to reach full commercial production December of that year. Phase 2 at the Leslie tailings storage facility is scheduled for the end of the third quarter of 2021 and Phase 3 at Winkelhaak in the third calendar quarter of 2026.

Cost profile

The Project is expected to be a low cost producer with a cash cost of US$440/oz and an AISC of US$523/oz over the life of the Project. Cash costs for Phase 1 are however lower at US$398/oz, due to the lower re-mining costs of the Kinross tailings dump. The Phase 2 and 3 cash costs are expected to be US$448/oz and US$504/oz, respectively.

Environmental impact

The EIA process for the Project is underway and Department of Mineral Resources’ (“DMR”) approval is expected to be granted by late 2017. The WULA process has also commenced with Department of Water Affairs’ approval expected in late 2017. Water will be sourced from the existing Evander underground workings and the Leeuwpan evaporation dam, which is owned and operated by Evander. The Leeuwpan dam is situated approximately 10km south west of the Kinross tailings storage facility and, based on the Project’s overall water balance, there is sufficient water to support the Project through its life.

Financial evaluation

The project benefits from a short commissioning period and is highly cash generative from inception, which enables the Project to be funded with a relatively high level of gearing.  The Project’s all-in cash outflow per ounce, inclusive of debt instalments, is US$636 per ounce over the life of operation, and US$805 per ounce during the 5 year debt redemption period, which illustrates the economic robust nature of the Project. With a real IRR of 23.1% (nominal 30.6%), and a payback period of less than four years, the project generates distributable cash flow from inception and should enhance Pan African’s ability to continue declaring sector leading dividends to shareholders.

The Project’s estimated real post tax cash flows and pre-debt instalments, over the initial four years of production are illustrated hereunder:

	Dec-19		Dec-20		Dec-21		Dec-22
	R million	US$ million	R million	US$ million	R million	US$ million	R million	US$ million
Revenue	1,062.0	73.2	1,032.0	71.2	982.0	67.7	978.0	67.4
Operating costs	(333.0)	(23.0)	(336.0)	(23.2)	(339.0)	(23.4)	(337.0)	(23.2)
Capital costs	(64.0)	(4.4)	(169.0)	(11.7)	(273.0)	(18.8)	(64.0)	(4.4)
Taxation and royalties	(1.0)	(0.1)	(1.0)	(0.1)	(47.0)	(3.2)	(176.0)	(12.1)
Post tax cash flows	664.0	45.7	526.0	36.2	323.0	22.3	401.0	27.7

Further information on the Project

A presentation with further Project detail is available on the Pan African website (www.panafricanresources.com). The complete DFS is also available for review at Pan African’s corporate office.

PRODUCTION UPDATE

Interim Period ending 31 December	Mining and tailings operations
	Barberton Mines and BTRP (Gold ounces)	Evander Mines and ETRP (Gold ounces)	Uitkomst Colliery (Coal tonnes)*	Phoenix Platinum (PGE ounces)
Actual 2015	56,447	45,350	-	4,493
Forecast 2016	49,000	42,000	330,000	4,900
Percentage	(13.2%)	(7.4%)	100.0%	9.1%

*Uitkomst Colliery was acquired on 31 March 2016, and the coal tonnes forecast includes approximately 200,000 tonnes from the underground mining operation and 130,000 acquired coal tonnes for processing and blending.

Gold mining operations production update

The Group previously guided gold production of approximately 200,000oz for the 2017 financial year.  In light of challenges experienced with its operating environment and underground operations in recent months, the Group now considers it appropriate to revise this guidance down to approximately 195,000oz of gold production for the 2017 financial year, with gold production in the 2^nd half of the financial year exceeding 1^st half performance.

In addition to the operational challenges detailed below, community unrest in the Barberton area and DMR safety stoppages (“Section 54 regulatory notices”) severely affected gold production in the current reporting period.  Pan African is actively engaging with all stakeholders in this regard, in order to ensure that operations are allowed to operate at steady-state and in a sustainable manner.

Cobus Loots, Pan African’s CEO, said:

“Operational performance from our underground operations during the 1^st half of the 2017 financial year has been disappointing. Pan African’s mines are not exempt from the political and social unrest that is prevailing in South African society at present.  The current state of affairs is clearly unacceptable and our management team will not relent until the previous operational form has been restored.  All stakeholders have to work together in this regard, the Group will use all means at our disposal to ensure we protect and increase value for our stakeholders“.

The decreased production guidance is principally due to the following factors:

Evander Mines

Operational:

• Evander Mines’ 7 Shaft, which is used to hoist ore from underground mining operations to surface for processing, is undergoing critical maintenance following the dislodgement of a steel shaft guide which damaged the shaft infrastructure. Even though primary repairs have been completed, 7 Shaft’s hoisting speed is curtailed until the full maintenance programme is completed. The shaft is expected to resume normal hoisting speed in early January 2017.
• Evander Mines experienced a material increase in DMR initiated safety stoppages during the past five months. The operation was issued with four Section 54 regulatory notices, which resulted in 13 lost production days (Comparable period: three Section 54 regulatory notices resulting in 2 lost production days).  The majority of the lost production days related to the 7 Shaft incident.

Barberton Mines

Industrial relations and community protests:

• Three separate community protests relating to unrest as a result of poor government service delivery in the area and competing recruitment interests from lobby groups was experienced, which resulted in 6 days of lost production.

• Union related demands resulted in workers embarking on a go slow which adversely affected productivity.

Operational:

• Fairview mine experienced flexibility issues, specifically at its very high grade 11-block.  Work is underway to develop a new production platform. Further flexibility improvements will be achieved via a new decline under development.  In addition, a new refrigeration plant will improve working conditions in this area.
• Six Section 54 regulatory notices, which resulted in 8 lost production days. (Comparable period: one Section 54 regulatory notice resulting in 3 lost production days). Barberton Mines and Pan African continue to engage with all stakeholders, including the DMR, in order to reduce the impacts of these notices in future.

Uitkomst Colliery

Production and performance for the period has remained in line with expectations. Uitkomst Colliery has also bought-in additional coal from neighbouring mining operations to optimise its washing plant’s operations. If the current favourable coal price environment continues, the payback period for this acquisition is expected to be less than the four years previously forecast.

Phoenix Platinum

Phoenix Platinum processing capacity has increased from 25,000 tons per month to 30,000 tonnes per month, following the installation of a scrubber in July 2016. The operation has experienced water constraints due the persistent drought conditions during October and November 2016. Despite these challenges, production is expected to increase by 9.1% to 4,900oz for the 31 December 2016 reporting period.

Forward looking statements

Any forward looking statements made throughout this announcement regarding the future financial performance of the Group have not been reviewed or audited by the Group’s external auditors. The Board accepts full responsibility for the accuracy of the information contained in this announcement.

Pan African is not obliged to publicly update any forward-looking statements included in this announcement, or revise any changes in events, conditions or circumstances on which any such statements are based, occurring after the publication date of this announcement, other than as required by regulation.

Johannesburg

5 December 2016

Contact information
Corporate Office The Firs Office Building 1st Floor, Office 101 Cnr. Cradock and Biermann Avenues Rosebank, Johannesburg South Africa Office:   + 27 (0) 11 243 2900 Facsimile: + 27 (0) 11 880 1240	Registered Office Suite 31 Second Floor 107 Cheapside London EC2V 6DN United Kingdom Office:   + 44 (0) 207 796 8644 Facsimile: + 44 (0) 207 796 8645
Cobus Loots      Pan African Resources PLC    Chief Executive Officer  Office: + 27 (0) 11 243 2900	Deon Louw Pan African Resources PLC Financial Director Office: + 27 (0) 11 243 2900
Phil Dexter St James's Corporate Services Limited Company Secretary Office: + 44 (0) 207 796 8644	John Prior / Paul Gillam Numis Securities Limited Nominated Adviser and Joint Broker Office: [phone]
Sholto Simpson One Capital JSE Sponsor Office: + 27 (0) 11 550 5009	Matthew Armitt / Ross Allister Peel Hunt LLP Joint Broker Office: [phone]
Julian Gwillim Aprio Strategic Communications Public & Investor Relations SA Office: [phone]	Lorna Cobbett Bell Pottinger PR Public & Investor Relations UK Office: + 44 (0) 203 772 2564
Jeffrey Couch/Neil Haycock/Thomas Rider BMO Capital Markets Limited Joint Broker Office: [phone]

www.panafricanresources.com