South African precious metals group Pan African Resources (LSE: PAF) saw its profits take a dive as higher production costs and a number of operational challenges impacted full-year results for its 2017 financial year.
Operational challenges
The AIM-listed gold miner said that pre-tax profits had slipped to £23m from £33.9m for the 12 months to 30 June, despite a 5.1% rise in group revenue to £169.6m over the same period. Profits were hit by higher production costs which rose from £100.5m to £134m as a result of salary and wage increases, as well as higher electricity costs.
But the group was also hit by significant operational challenges during the year, with production suspended at its Evander mines for 55 days to carry out critical shaft infrastructure refurbishments, and frequent instances of community unrest resulting in lower production at its Barberton mines. Consequently, gold production was down 15.4% on the previous year to 173,285oz, compared to 204,928oz in 2016.
Recovery play
Perhaps unsurprisingly, Pan African’s share price has suffered as a result of the recent issues, shedding 30% of their value in just 12 months. Investors will no doubt have been spooked by the operational difficulties and higher production costs. But management has since taken remedial action and expects a much improved performance in the 2018 financial year, together with a substantial increase in expected gold production.
With the promise of a significant improvement in performance in the coming year, and a price-to-earnings ratio down to just seven, I believe Pan African could be the perfect stock for gold bulls on the lookout for a potential recovery play.
Political and economic turmoil
It’s no secret that mining stocks can be high-risk investments, particularly the smaller Aim-listed resource companies like Pan African. Yes, there are huge profits to be made, but share prices can often suffer from extremely high levels of volatility and investors can suffer huge losses if the timing isn’t quite right.
It’s for this reason that many gold bugs prefer to invest in the larger miners such as Randgold Resources (LSE: RRS). With a market value of around £6.8bn the Africa-focused miner is easily the largest pureplay gold miner on the London Stock Exchange. As with most mining stocks, Randgold’s share price is highly geared to the price of the precious metal it mines. So in effect, the shares are a play on the price of gold.
In times of political and economic uncertainty such as these, investors often turn to the yellow metal as a safe haven. But Randgold’s shares are far from cheap, currently trading on a high earnings multiple of 30. Nevertheless, with Donald Trump in the White House, the threat of political and economic turmoil is never too far away, and gold bulls may well have the last laugh.