Jan Nelson, chief executive of gold producer Pan African Resources, talks to Stockopedia

Since being brought in as chief executive of AIM listed mining group Pan African Resources Plc (LON:PAF) in 2005, Jan Nelson has overseen a transformation in the group’s fortunes from a fledgling explorer to mid-tier gold producer. Central to his achievement was the 2007 acquisition of a majority stake in South Africa’s Barberton Mines, which has helped to drive up group profits by 91% during the past three years. With other assets including the Manica gold project in Mozambique and near-term plans to begin producing platinum group metals, Nelson is keen to expand Pan African’s operations and is continuing to explore additional deals.

Last month the group unveiled a 29% rise full year revenues from gold sales to £68.5m, with earnings rising by 9.1% to £25.0m. The figures followed a year in which Pan African consolidated its hold on the flagship Barberton Mines by acquiring the outstanding 26% stake from its black economic empowerment partner Shanduka Resources, in return for shares. As part of an operational restructuring, Pan African also bought out a management contract for Barberton from previous shareholder Metorex (JSE:MTX) in a move that also paid off Pan African’s acquisition of Phoenix Platinum in South Africa. Phoenix is Nelson’s next major play, and a move that will see the group diversify into producing platinum group metals from tailings in South Africa’s Bushveld Igneous Complex, where the likes of Aquarius Platinum Limited (LON:AQP) , Jubilee Platinum (LON:JLP) and Caledonia Mining Corp (LON:CMCL) are active.

Jan Nelson spoke to Stockopedia about the continuing success of the Barberton Mines operation and his plans to expand Pan African Resources even further.

Jan, since taking the reigns as CEO of Pan African back in 2005, what have been the key moments that have got the company where it is today?

I think the defining moment for the company was certainly when it acquired a 74% stake in Barberton Gold Mines. I don’t think that distracts from what the company did before, because I think we did some good work on the Manica deposit, but I think Barberton redefined the company, that’s what gave us our cash flow and I think put us in the position we are in now.

Can you tell me a bit more about Barberton – what factors have made the project such a success and how confident are you about further development there?

The thing that sets it apart, first of all, is that it is a greenstone gold deposit so it is not typical. It is high grade, it is shallow and we have a very mature workforce and management team on the operation that has been there for a very long time. That all helps in terms of the experience and how they approach the whole project, so I think that certainly sets it apart. One thing I think had been lacking was a co-ordinated mineral resource management focus but since we took direct control of the mine from Metorex we have been rolling out an integrated mineral resource management programme. By taking that approach it has extended the life of the mine from 10 to 15 years and we have quite a number of significant growth projects. I think the Board has also, year on year, increased the capital significantly; for this year the capital has increased by over 47% to date, so we are putting a lot of money back into the mine to grow it and we’re getting good results.

Clearly the rising price of gold has been a major boost for you over the course of the last year; how reliant are you on those high gold prices for sustaining your business model?

Well, first of all our approach is that we cannot control the gold price but what we can control is cost and productivity improvement. Our investment criteria is also structured in such a way that we only look at assets that are high quality and low cost and Barberton certainly fulfils that. If you look at the total cash cost of Barberton in South African Rand terms, including capex, it’s sitting at 130,000 Rand a kilogram where the prevailing gold price is sitting at 300,000 Rand a kilogram, so you can see we’ve got a big margin. Obviously we’re bullish about gold and where it is going to go but I think that because we’ve got a good quality asset and our management team is able to control their costs very well that makes the difference and that allows you to weather the commodity cycles as they come and go.

You have fixed some of the security issues that caused a problem during 2009, but it has been a costly exercise. How much of a challenge has it been to get Barberton more secure?

It got quite serious in December, we had two hostage situations underground and although none of our people were injured we had to stop the mine for two weeks. We removed over 800 people from the mine, so that came at a huge cost to us, I think security costs for the year were close to 40m Rand. We had additional security there, we had helicopters and we ran quite an intensive intelligence network with the police but I think the end result of that was that six of the seven syndicate leaders were arrested last week by the police. So I think the camel’s back’s been broken, we’ve had no serious incident at the mine in the last four months and I think now we can scale down our security measures and make use more of technology. You know, when we have 800 people underground unfortunately you have to take certain measures and spend money to get them removed. I think it’s now a much more manageable process for access control technology in terms of keeping the cost down but having the same effect. It is sorted, it’s something we had to do and we did it and the end result of it was that on a plan of 92,000 ounces for the year the mine came in on 98,000 ounces, despite the fact we stopped the mine for two weeks, so I think that shows it was the right decision. We created an enabling environment where our employees felt safe and they could do their work productively and by doing that they produced virtually 6,000 ounces up on plan.

Do you foresee production levels remaining in that sort of range?

Our plan for this year is just over 100,000 ounces and we are confident we will achieve that and that will be a combination of anywhere between 315,000 and 330,000 tons at between 10 and 11 grams of gold a ton.

You are closing in on plans to begin work on extracting platinum group metals from tailings at Phoenix Platinum during the course of 2011; why was that original deal to buy the options on Phoenix a good one for the group and what impact do you think it will have once production’s underway?

What we will do is extract platinum group metals from chrome tailings. So the chrome producers mine the chrome seams and once they have disposed of the tailings we then take the tailings and we extract the platinum group metals. I think what attracted us to the project is that the total cash cost is less than US$400 an ounce, the capex is less than £8m, which we can pay back in two years, so quick payback, build the plant in a year and the life is in excess of 70 years and this project will contribute about 35% to our bottom line at the end of next year. We’ve only 40 people working on the plant whereas Barberton’s got about 2,000 people working on the mine. So just from that perspective, low risk, high margins, it’s not labour intensive and the fact that we have quick payback and the current market price is sitting at $1,500 an ounce, so you can see the margin, we’ve got over $1,100 an ounce margin, so it is a great business.

Your other project at Manica is currently in feasibility; what expectations have you got that the project will ultimately become a revenue generator for Pan African?

There are two issues that we face there. The only way we will successfully mine the project is attacking it in a phased approach and we’re currently looking at only mining the oxides from an open pit, potentially. We will have to consolidate more ground around it and we are talking to parties. If we can tick those two boxes then I think the chances of making it work are good, if not then we’ll obviously have to look at mining the whole ore body. So we’ve got two studies underway, one will finish by the end of October in terms of oxides and at the same time we are talking to some big parties around us to consolidate more ground and those results we’ll make available to the market towards the end of the year. Then the other study to look at the entire body will be complete by the end of the year. So a phased approach and we’ve got to consolidate more ground.

You looked at 43 possible project deals last year but none of them matched your investment criteria. What types of project are you looking for and what confidence have you got of doing deals in the near future?

Well, our investment criteria is quite strict, we have to go for quality assets and they’ve got to have a low cost base against the life of mine. So we bought Barberton Mines in the last three years and we’ve acquired Phoenix, which is quite significant. So we might not do the amount of transactions that the other companies do but I think once you buy a mining project that you’re stuck with for 20 to 30 years I’d rather take another two years before I buy something good – if you’ve bought it you’re stuck with it. We are confident that we will definitely do a transaction in the next two or three years or maybe it could happen next month but we are not hung up on it, we will not do it for the sake of saying we’ve got a big resource base or we have got a project pipeline of 10 projects, for us it’s about profitability and making money, so if the right project comes our way we will. As you can see we look at quite a lot of things but I think that’s the nature of the business. We have got two or three projects currently on the table that we are seriously looking at but, again, we are very cautious in terms of our approach and I think it has paid off.

The other thing is we also have a strategic alliance with Shanduka Resources and they have got an extensive network in Africa, they recently acquired a 9% stake in Lonmin (LON:LMI), for example. Through that association some projects have been passed on to our syndicate and that is certainly a strategic partnership that we have for that specific reason, so hopefully that will also bear fruit in the future.

When you look around at your peers in the Southern African gold sector which do you view as particularly good performance and as you drive Pan African forwards what are your longer term objectives for the group?

Our peer group is a very difficult group because we are not quite gold anymore, we offer platinum with a precious metals flavour so I don’t really think we have a peer group in South Africa. It is very difficult to compare but certainly I think in terms of our assets, our assets are much shallower, they’re much higher grade and, like I said, we offer a precious metals perspective which I don’t think anybody else offers. I’m not sure on AIM that there’s a company that has got both platinum and gold paying a dividend, so I don’t quite know who our peers are so we will benchmark ourselves against ourselves.

Would it be fair to say that you are bullish about the future of the group and the opportunities you are seeing?

I think so. We’ve got a very capable, experienced management team at Barberton Gold Mines, we’ve got a great strategic partner in Shanduka, we’re privileged to have Cyril Ramaphosa as our chairman, he brings a wealth of experience, and we’ve got a very dynamic Board. I think we’ve got a good gold asset that’s kicking out money, we’ve got a platinum project that’s going to start contributing to revenue. We changed our strategy last year by not looking at exploration anymore, and I think our whole conservative approach to how we deal with projects has paid off, so that’s why I’m bullish. Our profit has increased over the last three years by 91% and if we can just do that over the next three years then I’m sure we will be quite delighted with where we’re going and paying a dividend and the share price will follow. We can’t manage the share price but if we do the basics right the share price will come but it takes time to build a gold mining company, you can’t do it in two years.

Thank you for talking to Stockopedia.

No it’s a pleasure, thanks for taking the time.