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Normally, we advise private investors, especially beginners in the share market, to stay away from commodity shares because of their volatility. Commodity prices are set on international commodity markets over which commodity producers usually have little or no control. This means that it is difficult for a commodity producer to have any clear idea of exactly how much he will be able to sell his product for. At the same time commodity producers have a multitude of problems which are often unpredictable and difficult to assess – like strike action and problems with underground mining operations like flooding, faulting and friability of the rock surface.

However, sometimes there is a commodity producer which is not exposed so much to those risks and whose operation is reasonably predictable. Pan African Resources (PAN) is such a producer.

PAN is a London- and JSE-listed re-treatment gold producer. What makes it particularly interesting is that it has now shifted its operation from underground mining at the recently closed Evander mine to surface operations which are obviously much cheaper and less risky. With its Elikhulu plant it will be able to produce about 700 000 ounces of gold a year at a cost of about R326 000 per kilogram against a current gold price of around R550 000. This means that over its life it will produce revenue of approximately R15bn of which R5,3bn will go back into the economy in the form of mine expenses creating a highly profitable entity with minimal risks.

It will also employ 350 people. In US dollars, the cost per ounce will be about $700 against a current price of just above $1200.This gives the company plenty of room should the gold price fall unexpectedly (which often happens). In our view, it is highly unlikely that the gold price will fall to anywhere near $700 – in fact, we believe that as the world economy moves into the current economic boom, inflationary pressures will inevitably build up and the demand for gold as the best inflation hedge will rise. The gold price is probably passed its cycle low and will probably remain above $1200.

In its financials for the year to 30th June 2018, the company took a R1,78bn impairment on the closure of Evander which put it into its first loss for 11 years - but this result was fully discounted into the share price and known. PAN also had very good results from its drilling exploration of the Royal Sheba mine in Mpumalanga. This could be developed into a fully mechanised open-cast mine with a grade of 3,8 grams per ton creating 500 jobs. The area appears to have considerable potential for gold mining, but there are often bureaucratic difficulties with establishing a new mine in South Africa.

The September quarter 2018 update shows that 37729 ounces of gold were produced in the quarter and the Elikulu mine is commissioned and operating. The Barbeton mine is ramping up to 100 000 ounces per annum and at the decommissioned Evander mine the company is taking out the pillars and remaining high-grade ore. Technically, the share has fallen from a high of 444c in July 2016 to current levels around 153c, but it now looks like very good value with low risk. Consider the chart:

<a href="https://www.pdsnet.co.za/img/uploads/2018/11/Pan-African.jpg"><img class="alignnone" src="https://www.pdsnet.co.za/img/uploads/2018/11/Pan-African.jpg" alt="" width="1108" height="555" /></a>
<h5>Pan African Resources (PAN) January to November 2018 - Chart by ShareFriend Pro</h5>
Here you can see that the switch from underground operations to surface re-treatment and open-cast mining is gradually being appreciated by the market. Investors are buying the share up on weakness and the price is climbing steadily.