Evaluation of Pan African Resources plc ltd.

This project report evaluates Pan African Resources plc ltd. with respect to organisational accomplishments and achievements, including corporate governance status, capital investment projects, sources of finance, and business performance.

Finance & Strategic
Management
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Contents
INTRODUCTION...........................................................................................................................1
CORPORATE GOVERNANCE STATUS & CHALLENGES......................................................1
CAPITAL INVESTMENT PROJECTS..........................................................................................3
COMPANY’S SOURCES OF FINANCE......................................................................................4
COMPANY’S BUSINESS PERFORMANCE...............................................................................5
COMPANY’S STOCK PERFORMANCE...................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15
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INTRODUCTION
In this project report, an evaluation and examination of Pan African Resources plc ltd. has
been done with respect to organisational accomplishments and achievements. Pan African
Resources is a medium level gold producer and African focused. The company has its
headquarters in UK. The company was registered and incorporated under the companies act of
1985 in England & Wales. The company is regarded as one of the lowest cash-cost producers in
gold. Also, there are several subsidiaries of the company which are involved in similar business
related to mining. This project reports aims at evaluation of corporate governance status and
challenges faced by the company and the existing and projected capital investment projects of
the company. The project aims at understanding and determining the company’s sources of
finance including short-term and long-term finance requirements. The company’s financial
performance is being evaluated by using various ratios calculated on the basis of financial
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information of the company (Bailey, 2017). This project also aims at evaluation of the share
performance of the company from an investor’s point of view.
CORPORATE GOVERNANCE STATUS & CHALLENGES
Corporate governance structure:
Board of directors of the company are responsible for an organisation’s corporate
governance and ensuring smooth operations in an ethical and moral manner. The governing body
for corporate governance is responsible for considering the environmental impact of the
company’s operation and ensuring that the operations of the company have no bad effect on the
business surroundings and environment. It is the duty of the board of directors and the governing
body to make sure that the company remains ethical, integral and disciplined in its business
conducts (Cornish, 2013). Pan African Resources has constituted an independent board of 6
members which consists independent directors, chief executive officers and other top
management members of the company. Executive and non-executive directors have an equal
number in the board. All the board of directors of the company have vast experience and
knowledge in the industry which makes the decision-making process of the company very rich
and coherent. Independent directors constitute about 67% of the board which ensure no conflict
due to personal decisions while taking any operational decision. Right to vote is equally granted
to every board member which removes any possibility of personal conflict. Along with the board
of directors, there are 4 committees namely ethics committee, remuneration committee, audit
committee and social committee which help the board in taking vital operational decisions and
controlling the business activities. Each committee is vital in providing guidance to the board
members in terms of corporate governance and has ensured proper discharge of its duties and
conduct over the years. To ensure the independence of its directors, the company evaluates every
director in terms of his relationships and character which might hinder the independence. Term
period of a director is limited to 9 years and the company follows both U.K. legislature and S.A.
legislature. The firm has experienced satisfaction in terms of the independence of its directors in
the recent past ensuring better corporate governance.
Corporate governance challenges:
The company has always shown commitment to provide the best standards of governance in
operations of the business. The business is being conducted by the board of directors with the
highest possible standards by adopting crucial corporate governance practices. The company has
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a vision to conduct every business operation with utmost sincerity and integrity which ensures a
trust of the stakeholder’s. The management of the company believes that corporate governance
standards are extremely important for better trust between the company and the outsiders. The
remuneration committee set-up by the company helps in deciding the bonus, grants and
commission to the employees and also evaluates directorial remuneration in respect of their
services and consideration is made of the interest payable to the shareholders (Edozie, 2017).
The company has recently faced some problems in the production process and some delays
happening in underground production as a result of employee action and strikes. This was a
direct result of pressure from community groups. Also, mining operations were hindered by the
community unrest in the villages due to poor and inefficient governing services in Barberton
mine. Proper training is advisory for the governing body of corporate governance to ensure
adoption of better practices and policies which help in ethical operation and conduct of the
organisation. Corporate governance with respect to economic development in African areas
where the company produces gold is essential to ensure better discharge of social responsibilities
associated with the organisation. A social committee is established for scanning this horizon of
corporate governance and guiding the board of directors. Pan African Resources plc ltd. is
striving continues to overcome all the challenges in its corporate governance and ensure better
organisational performance as well.
CAPITAL INVESTMENT PROJECTS
The Elikhulu Project:
It is one of the biggest capital investment project of Pan African Resources plc ltd. which
is being executed by the company right now. The project was forecasted by the company to be
completed and executed by the ending quarter of the fiscal year in 2018 and at the same time
extraction of gold resources was also projected to be started within the similar period. One-
hundred and seventy five million rand (R175,000,000) was the amount which was invested
initially in the project by the company and the projected investment was of one-hundred seventy
four million rand (R174,000,000) in the year 2017 (Mukherjee and Mahakud, 2012). The initial
investment of the project was regarded as capital expenditure which covered the costs for civil
engineering works, long-term items, purchases of cranes, carbon tanks and many other items
used for extraction and mining purposes. The initial production expected after the commission of
the project was expected to be 56,000oz of gold per year during the first 8 years of project life
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and 45,000oz of gold per year during the next 6 years of the project life. Out of the 1.74 Billion
proposed investment, 1 Billion is expected to be funded out of a 5 year committed debt
programme and the remaining amount to be funded through raising equity funds. The
development of Elikhulu project has raised the gold producing capacity of the company to almost
181koz. The management has projected to increase the investment in the project due to the
relative success of the project.
2010 Pay channel project at Evander mines:
The pay channel project of 2010 is also considered as one of the biggest capital
investment made by the company with an objective of improving the extraction and mining
actives of gold at Evander underground mines at a significantly lower cost. As a result of this
project and capital investment, an exploration programme was started on the orebody after
considering all the technical and economical viability of each and every dimension of the project.
This would result in no-requirement of a new vertical shaft.
Barberton mines sub-vertical shaft project:
To welcome the increase in the production capacity of the site with the help of new
projects, the company has made investments in the staffs, working tools and materials to the
construction site. The estimated cost of the project is valued to be at one-hundred and five
million rand (R105,000,000) and the expected increased in the productivity of gold is about
7000oz of gold per annum and is expected to increase to a level of 10,000oz as the time passes.
This is also one of the most important capital expenditure project with respect to the
organisation’s future operations.
COMPANY’S SOURCES OF FINANCE
The high requirements for capital investment project has forced the management of Pan
African Resources plc ltd to adopt a very flexible capital structure and a number of sources has
been used by the company to meet its long-term as well as short-term capital requirements which
are as follows:
Debt financing:
To finance the most important Elikhulu project, the company obtained a debt of around
one-billion rands (R100,000,000,000) from one of the subsidiary banks and extension of First
Rand Bank called Rand Merchant Bank. This bank has been showing a high interest in this
project by giving an oversubscription equivalent to 50% of the project cost. Debt financing has
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been used as a source by the company to finance the most of its projects such as 2010 pay
channel of Evander mines (Nini, Smith and Sufi, 2012). Committed debt financing programme is
a major financing source for the company.
Retained Earnings:
Pan African Resources has also used retained earnings as a source of meeting its financial
requirements. This was done by a method of plugging back of the profits earned by the company
into the business itself. During the expanding of business, the company used an amount
equivalent to 94 million euros from the retained earnings of the company. Retained earning as a
source of finance not only provided easy capital to an organisation but also at a very low cost of
capital. Although, too much retained earnings may result in discouragement of shareholders due
to a decrease in the amount of premium on the shares.
Share issue:
Pan African Resources has increased the number of shares issued and the shareholding in
the venture by issue of a lot of shares. Companies such as Investec emerging companies, River &
Mercantile company, Alianz UK growth etcetera are the major shareholders and investors of the
company. Although, the increased share capital has led to an increase in the cost of capital of the
company.
Bank loan and overdraft:
The company’s brand image and reputation has made it possible for the management of
the company to raise more and more funds from various financial institutions and banks. The
company has raised almost 114 million euros from financial institutions. This resulted in a lower
cost of capital for the company as compared to the cost of equity capital of the company.
Uitkomst Colliery disposal:
Pan African Resources holds a subsidiary company which has helped the company in
meeting the finance requirements equivalent to one-hundred and twenty five million
(R125,000,000) by the issue of equity shares with a term of deferred interest payment of twenty
five-million rand (R25,000,000). Although, too much reliance on equity capital is considered
risky and results into dilution of control beyond the admissible levels.
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Therefore, it can be concluded that the company has maintained a good capital structure and has
a moderate risk in its financial debt structure (Nwogugu, 2015). The company has raised finance
from various sources to maintain flexibility and the high-profit levels has enabled the company
to bear a little more risk in its capital structure and acquire further funds from any source
according to the discretion of the management and finance managers.
COMPANY’S BUSINESS PERFORMANCE
1. Liquidity ratio: It's a ratio that tells one's ability to repay off its loans as and when it is due.
In other terms, it can assume that this amount tells how easily a corporation will be able to turn
its capital assets into cash so that it can pay back its debt on time (Pilbeam, 2018). Liquidity and
short-term solvency are typically used simultaneously.
 Current ratio- Current assets/current liabilities
Current ratio helps in determination of the ability of the company to meet its short-term
liabilities in future. It is advisable that a company should maintain a current ratio of 2:1.
Year 2018 2019
Current assets 26 30
Current liabilities 44 64
Current ratio 0.59 0.47
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Analysis- On the bases of above graph this can be find out that company is unable to meet ideal
form of current ratio that is 2:1. Such as in year 2018, it was of 0.59 times and 0.47 times in year
2019. It indicates that above company should focus on enhancing their current assets so that their
liquidity position can be enhance.
 Quick ratio= Quick assets/current liabilities
Quick ratio helps in determination of the ability of the company to meet its working capital
requirement and funds required for smooth flow of operational activities.
Year 2018 2019
Quick assets 22 24
Current liabilities 44 64
Quick ratio 0.5 0.375
Analysis- On the bases of above graph this can be find out that company is unable to meet
ideal form of quick ratio that is 1.5:1. Such as in year 2018, it was of 0.5 times and 0.37
times in year 2019. It indicates that above company should focus on enhancing their current
assets so that their liquidity position can be enhance. This can be come possible by reducing
value of current liabilities.
2. Profitability ratio: Profitability ratios shows or represents the profit earning capacity of an
organisation (Ryan, 2012). It is one of the most important or crucial ratio which is used by many
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stakeholders such as investors, employees, banks and financial institutions etcetera to determine
the profit earning trend and capacity of the company that they are interested in.
 Gross profit ratio= Gross profit/net sales*100
Gross profit defines the profit earned by the company as a percentage of its sales before
deduction of any operational expense or office expenses.
Year 2018 2019
Gross profit 31 48
Net sales 139 218
Gross profit ratio 22.30 22.02
Analysis- On the basis of above graph, this can be find out that gross profit margin is almost
similar in all years. Such as in year 2018, it was of 22.30% and 22.2 % in year 2019. The above
company should focus on increasing their sales revenues so that ratio can be enhanced.
 Net profit ratio: Net profit/net sales*100
Net profit ratio is presented as profit earned as percentage of sales after all the expenses
of the company such as interest and depreciation have been provided for.
Year 2018 2019
Net profit -122 38
Net sales 139 218
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Net profit ratio -87.77 17.43
Analysis- The net profit of company was negative in year 2018 that was of -87.77%. While in
year 2019, it raised 17.43%. This shows that company’s efficiency has been increased in year
2019 although a much more strategic approach is advisable for future financial and operational
performance of the company.
 Operating profit ratio= Operating profit/net sales*100
Operating profit ratio represents the profit earned by the organization as a result of its operational
activities and no abnormal profit is included herein as a percentage of its sales.
Year 2018 2019
Operating profit 12 46
Net sales 139 218
Operating profit
ratio 8.63 21.10
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Analysis- On the basis of above mentioned graph this can be find Company’s operating profit
ratio was of 8.63% that raised and became of 21.10% in year 2019. This is showing that
company’s efficiency to generate operating income has been raised in year 2019.
3. Efficiency ratio: Efficiency ratio for any organisations shows the capacity of the organisation
to use or effectively deploy its capital resources into value creation for the organisation and the
stakeholders (Taylor and Smits, 2018). The eficiency ratio is an important tool which helps the
management to determine the efficiency in operations of the organisation and identify any
problem therein.
 Accounts receivable ratio- Sales/accounts receivable
This ratio shows the amount which is receivable by the company as a percentage of its sales to
determine the sources of funds and the credit sales done by the company.
Year 2018 2019
Accounts receivable 9 9
Net sales 139 218
Accounts receivable turnover
ratio 15.44 24.22
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Analysis- On the basis of above graph this can be found out that company’s ratio has been raised
in year 2019. Such as in year 2018, it was of 15.44 times which raised and became of 24.22
times. It is showing that company’s efficiency was better in year 2019 as they are able to make
payment to their receivables on time.
 Total assets turnover ratio= Sales/total assets
This ratio represents sales in terms of the total assets for example an assets turnover ratio of 0.5
shows that the sales of company were equivalent to 50% of the amount invested in assets of the
company. The higher the ratio, the better it is
Year 2018 2019
Total assets 347 393
Net sales 139 218
Total assets turnover ratio 0.40 0.55
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Analysis- On the basis of above graph, this can be find out that company’s ratio was 0.40 times
in year 2018 and in year 2019 this was of 0.55 times. This is indicating that company‘s
efficiency is better in year 2019 as compared to year 2018.
COMPANY’S STOCK PERFORMANCE
In order to measure company’s share performance in the stock exchange from investors point of
view there are different types of ratios in such manner:
Earnings per share= Net income/outstanding shares
Earning per share is a tool of ratio analysis which is used mainly by some of the internal
members of any organisation and the investors or shareholders of the company to determine the
profit and hence dividend generation capacity of the company per share. It helps the investors in
taking crucial decision such as investing into the equity shares or the preference shares, risk
associated with the investment etcetera.
Year 2018 2019
Net income -122 38
Outstanding shares 218 273
EPS -0.56 0.14
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Analysis- On the basis of above chart, this can be find out that company’s earnings of each
shares lower in year 2018 which was of -0.56. This ratio raised in year 2019 and became of 0.14.
This is indicating that company’s shareholders can make investment as their ratio is showing
positive result.
From the viewpoint of the investor, the share price of the company has been on a constant
decline due to low profitability. The company’s growth has been negatively effected due to the
low returns and profit. The company has not been able to create much value on the money
invested by the shareholders which is a matter of serious concern and might end up lowering the
value of the company’s stock in a further manner (Ryan, 2013). The negative share price
movement has shown that if the investors invest more money in the company, they might end up
with a decreased value of their investment in future years as per the company’s recent profit
trend. The management of the company needs to make sure to improve the business profitability
and efficiency of the operations to take care of the interest of the conman’s shareholders.
CONCLUSION
It can be concluded on the basis of above report that corporate governance is a very
important and crucial aspect for any organisation and the company Pan African Resources has
made significant effort to increase its standards of corporate governance. The company has
adopted more independence in the structure of the governing board. The company has made
huge capital investments in its expansion projects to increase the gold productivity and
extraction. It can also be concluded that the major sources of finance for the company are debt
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financing and equity share offerings (Tricker and Tricker, 2015). The financial performance of
the company during the last few years has witnessed a downhill mainly due to the decreased
profitability and low business growth. At last, it can be concluded that from a shareholder’s
perspective the company has not been able to generate any value to the investments which have
been made in the company in the last few years and need an immediate action by the
management.
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REFERENCES
Books and Journals
Bailey, S.J., 2017. Strategic public finance. Macmillan International Higher Education.
Cornish, L., 2013. Evander Gold Mines-earmarked for greatness: precious metals. Inside
Mining. 6(7). pp.28-31.
Edozie, R.K., 2017. Afro-modern Entrepreneurs and (Pan) African Business Leaders: Tony
Elumelu and Reuel Khoza as Exemplars. In “Pan” Africa Rising (pp. 105-134). Palgrave
Macmillan, New York.
Mukherjee, S. and Mahakud, J., 2012. Historical market-to-book ratio and corporate capital
structure: Evidence from India. Global Business Review. 13(2). pp.339-350.
Nini, G., Smith, D.C. and Sufi, A., 2012. Creditor control rights, corporate governance, and firm
value. The Review of Financial Studies. 25(6). pp.1713-1761.
Nwogugu, M.C., 2015. Corporate Governance, Managerial Psychology and Business Processes:
The Case of Pan-African Banks. Managerial Psychology and Business Processes: The
Case of Pan-African Banks.
Pilbeam, K., 2018. Finance & financial markets. Macmillan International Higher Education.
Ryan, B., 2012. Pan African revises its Evander deal with Wits Gold. Gold Mining
Journal. 1(108). p.7.
Ryan, B., 2013. Pan African chases Chinese cash. Australia's Paydirt. 1(203). p.57.
Taylor, J.L. and Smits, R., 2018. Bank holding company regulation in Kenya, Nigeria and South
Africa: a comparative inventory and a call for Pan-African regulation. Journal of Banking
Regulation. 19(3). pp.175-210.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices.
Oxford University Press.
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