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Edited Transcript of PAF.L earnings conference call or presentation 18-Sep-19 9:00am GMT

Full Year 2019 Pan African Resources PLC Earnings Call

Johannesburg Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Pan African Resources PLC earnings conference call or presentation Wednesday, September 18, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gideon P. Louw

Pan African Resources PLC - Financial Director & Executive Director

* Jacobus Albertus Johannes Loots

Pan African Resources PLC - CEO & Executive Director

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Conference Call Participants

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* Arnold Van Graan

Nedbank Capital, Research Division - Analyst

* Justin Chan

Numis Securities Limited, Research Division - Analyst

* Timothy Alan Huff

Peel Hunt LLP, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, apologies for this delay. We are in the process of reconnecting the main venue. Please remain online. Thank you.

(technical difficulty)

Ladies and gentlemen, please note, the main venue has rejoined, and they will be resuming shortly. Thank you.

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [2]

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(technical difficulty)

cannot multiply. 1 Krugerrand will unfortunately remain 1 Krugerrand. A producer like Pan African can bring resources, which in this market are not attributed any significant value in the ground to account as quality, profitable and incremental production ounces. Also, the leverage is greater in buying a quality producer in a gold bull market. A 20% increase in the gold price can result in much larger profits for the producer.

Let's move on and spend a couple of minutes on Slide 6 and 7 on gold mining in South Africa. A statesman said many years ago that South Africa as a country would never be as good or as bad as it could be. Until today, that saying holds true even though, for most of us, it's a pretty negative place at the moment.

Let's look at some of the positives. We have 130 years of gold mining history. Barberton has been going since 1886. We have well-established infrastructure and technical support. It takes us 1 hour on a bus to get to Evander and 4 hours to get to our Barberton operation. When we have a major breakdown, we can have it fixed within a day or so. That's not the case in the rest of Africa.

In terms of the government and investment, despite certain [frustrations] to the contrary, there are many good skills and committed people in government. We have seen a definite decrease in unnecessary Section 54 stoppages by the DMR. And where we have operational challenges, I want to commend those government officials that assist. Recently, after many frustrating years, there seems to be a real realization from government that unnecessary bureaucracy and impediments will cost jobs and growth, which our country can ill afford.

Deon will spend a bit of time on the rand leverage effects on our profits. But suffice to say that in the right circumstances, it makes for a very attractive return. We have a sophisticated financial sector in South Africa. All of Pan African's banking facilities are currently with South African banks. These institutions assist us with funding value-accretive growth. I have to say our banks can sharpen pencils a bit in terms of cost of our funding, specifically in this gold price environment, but otherwise are supportive partners. We have a world-class constitution without, in my view, any need to change it and also well-functioning legal system.

On Slide 7, some of the most material operational challenges in South Africa at the present. Our people are desperate, unemployed with limited prospects, and the situation with people have nothing to lose is very dangerous. We were and we will continue to up our game in terms of community engagement. We make a massive positive impact in the areas in which we operate. It is important that we have our communities understand how interlinked their future fortunes are with our own.

Barberton is an old mine, one of the oldest in the world, as I said. We are frugal with capital. Our capital spend has to generate the requisite returns. We have great engineering teams, and we will continue to invest in this asset. In a higher gold price environment, it makes sense to invest a little more to enhance future returns, and we'll get to that a bit later in this presentation.

Regulatory uncertainty. You need to better resolve the issue around Mining Charter III. Unlike some other miners, we do, however, not have to rely solely on wanting power. We are currently 26% empowered at group level. Electricity, we all know the issues related to Eskom. We will be finalizing a study into a 10 MVA solar plant at Elikhulu soon. Fortunately, our tailings, as you will see, is far less exposed to Eskom.

Increased illegal mining, this is something that's always spent the mine. Security has now become a core and specialized function for Pan African. If we hadn't spent more on security in the last year, our operations would have been overrun, similar to what happened in 2009. At the moment, we are arresting 250 illegal miners a month. We see these individuals not only from South Africa but from neighboring countries as well. It's a worrying trend, and it's something that's certainly we're paying a lot of attention to.

So this list of challenges appear quite daunting. For the most part, we have equipped and secured ourselves to manage successfully in this environment. Also, South Africa is not unique in its challenges. In other parts of Africa, you have to worry about terrorism or very limited infrastructure, about ever-changing rules of the game and in a number of other South American countries, militant unions and road blockages.

We then move on to Slide #9, 2009 -- 2019 at a glance. I believe it's very positive. We've improved on pretty much every metric. Safety, we'll discuss in a bit more detail, but certainly encouraging performance. Production, increased gold production from all of our operations. Costs and profits, really significant reduction in all-in costs. Also the point has to be made, this is in a much lower gold price environment to what we're seeing at the moment. So gold price [advantage] the year past was ZAR 577 per kilo versus the current north of ZAR 700. So clearly, these numbers would have been a lot -- looked a lot better.

ESG, we'll discuss ESG. We're making good progress as far as ESG is concerned. Growth, successfully commissioned Elikhulu. We've had the first gold from Evander 8 Shaft pillar that came in, in July, a bit ahead of schedule. Royal Sheba, we're progressing, and we'll discuss the Egoli project also.

And in dividend, I think quite a special occasion for us to reinstate dividends. It demonstrates that as a group, we really are on a better footing. So why not pay the bulk -- pay down the bulk of our debt first? The dividend proposed is fairly modest even though 1% yield in hard currency is much better than negative interest rates in Europe at present. The dividend focus, management on capital discipline and the dividend is very important to some of our shareholders. I'm quite relieved that come Christmastime this year, we do not have to explain the lack of dividends to some of our elderly shareholders.

On Slide #10, we can always do better as far as safety is concerned, however, an excellent safety performance from our team for the year that's passed. We've more than halved our lost time injury frequency and reportable injury frequency rate, and we compare very favorably with the industry. For the first time, we've achieved 2 million fatality-free shifts at our Barberton operation. Our group health and safety manager, Mr. Mandla Ndlozi, is here today, and we call him our [pillar] on safety. He does not take prisoners. It's also his birthday today, so happy birthday, Mandla. I implore each and every one of our employees to take charge of your own health and safety and to continue this incredibly positive achievement of our group.

Let us move on to ESG. ESG has become big business for fund managers and consultants alike. We have to caution against this. ESG is about the sustainability of the business in the future, about doing the right thing, not about ticking box just for profit. Mining gold profitably is critically important, but it's not the only issue of importance for Pan African. As illustrated in this quote on the slide, which I won't go into, for more than a century ago, during the Yukon Gold Rush, we endeavor and generally we succeed in making a real positive difference in the lives of our stakeholders. We build schools and clinics, we provide bursaries and we build infrastructure. We skill up entrepreneurs and we support local business.

Our Tailings Operations clean up legacy liability. Our closure liabilities are fully funded. In the last year, we spent ZAR 16 million on demolishing and rehabilitating old shops and infrastructure at Evander. These activities in themselves create opportunities in employment as per a directive from the Minister of Mineral Resources. We've also strengthened our Board, and I welcome the new board members to Pan African.

Allow me then a couple of minutes on our financial FY 2019 production and cost summary. So overall, I think it was a really good year. We increased gold production. We brought down all-in sustaining costs, both in dollars and in rand, quite dramatically. And our tailings business reduces the exposure to above inflationary input costs such as labor and electricity. So for the first time, we produced almost 40% of our production from tailings. So we'll deal with the tailings in detail. But then also importantly, we're increasing our forecast for FY '20 quite dramatically.

On Slide #13, this is how we now compare to the rest of the South African industry. So when we compare ourselves from a cost perspective, we do not look only at South Africa, we also clearly have to look at the international benchmarks. So it's quite controversial to say we're the lowest-cost producer in South Africa, but it's pretty safe to say we pretty much [drive] down there. We have long-life assets. And globally, we compare quite favorably. We would expect this cost to decrease further in the next year as we have a full year of production from Elikhulu.

So on Slide #14, our business can now be positioned in 2 pretty distinct blocks. The first, where we get pretty much 40% of our gold, only employs some 500 people. It's incredible, really lower cost. Also, less exposure, as we've said, to labor and electricity increases. You can see on ETRP -- or rather, BTRP and Elikhulu, about only 10% of our -- 10%, 11% of our costs relate to labor and only sort of 15% relate to electricity. So that's quite a lot lower than what you see in other operations. Then on the right-hand side, we have our underground ounces. They're very highly leveraged to gold price, increases certainly group profitability significantly in a highly -- high gold price environment such as what we're seeing at the moment.

If we then move on to next slide, a beautiful picture of our Elikhulu plant and the [iron dam]. On Slide #16, let's spend a couple of minutes on our tailings business. Really, it's something to talk about. So overall, we produced almost 80,000 ounces, all-in sustaining cost of below $600 an ounce. And we've increased recoveries, and that really is as a result of the Elikhulu operation now being in full production. And again, we increased our guidance, as I've said, so we should get 85,000 ounces plus out of our tailings business in the next year.

Briefly then, the 2 components when we talk about surface re-mining or tailings re-mining. BTRP is a fantastic asset. Deon has said I should stop saying that it pays itself back in 18 months, but it does and it's still a good achievement. The regrind mill, which we commissioned last year, working exactly to expectation, and really a great performance from BTRP. Also, you can see our all-in costs have come down quite dramatically in the year that's passed.

Elikhulu, I think if there ever is a project that demonstrates that a -- the right management team can bring an accretable project to account in South Africa in record time, it's Elikhulu. We had a lot of naysayers, a lot of people that didn't believe we could do it. And it's not often that you find a project delivering in excess of the bankable feasibility study. We're doing it pretty much on most metrics at the moment. We were early on commissioning. Our recovery is a little bit better than what we expected. And the average all-in sustaining cost also is lower than what the feasibility indicated.

If we move on to Barberton underground, a fairly solid performance, certainly an increase from last year. There are some challenges also. Barberton is an incredibly higher grade market on average. You can see that Fairview delivered at just over $1,000 an ounce all-in sustaining. Sheba contributed, but there's a bit of work to be done on Consort, low ounces and not profitable in the year that's passed. That's something we need to address. Also, in terms of all-in sustaining cost, the cost per unit or per ounce went up by more than inflation.

So why is that? Normally, I mean electricity is something we can't really do much about. As I've said, we've had to spend more on security, and that's something we have to focus on. We have to (inaudible) to have a sustainable solution, but not at the cost that we spent in the last year. And then also, we processed some surface material that increased costs as far as processing is concerned. The ounces contributed to profits, but that put up our costs slightly.

So we have an opportunity to optimize Barberton by what we believe to simplify the 2-phase or 2-stage approach. First stage would be -- rather phase 1a, sustain and grow underground high-grade production. A couple of points, we spoke about the sub-vertical shaft previously. The feasibility study indicates that the sub-vertical will increase production from Fairview by some 7,000 to 10,000 ounces. We now have bottom and top (inaudible) we can start development in terms of the shaft in the next year. So this project should be completed in the next 24 months. We're doing a lot more drilling. And I think something that's quite telling is we're doing a lot of development. If I give you the waste development meters for the last years, it becomes quite clear. We did 2,000-odd meters in 2017, 2,200 2018 and 3,100 in 2019. And we're budgeting for the year ahead more than 4,000 meters of waste development to give us more flexibility.

Dibanisa, the project we're excited about, combining the infrastructure of Sheba and Fairview. It's a busy slide and -- so it's a slide that's best discussed in person. But suffice to say, we believe that the Barberton underground presents a universe of opportunity. So that's phase 1a.

Phase 1b, sweat and optimize surface infrastructure, we've already started. We've upgraded the plant capacities of both the Sheba and Consort plants in the last year. These plants now contributed an additional 3,000 ounces from surface. And really, it's being these resources to count in the years to come. We have almost 100,000 ounces now in reserve that we didn't have there before. So it's a nice and sizable resource and reserve to [assert].

And in phase 2, new mining projects. So incredible, after 7 years of mining, we still have new mining projects. We have elected not to proceed with the open pit at Royal Sheba for a number of reasons. Environmentally, it would have been challenging in terms of pit slopes, that we believe that the capital was too much. So we do have 2 distinct (inaudible) one orebody that we're planning on accessing in the next years. I think (inaudible). Phase 2 mining, which you see at the bottom, that's 500,000 ounces in resource, 400,000 ounces in reserve.

Development of phase 2 via the ZK shaft on 23 Level, there's about [500], 600 meters development to go. So we'll bring that orebody into production in the next years, next 2 -- next 3 to 4 years. And also, I mean I'm quite excited about phase 1, accessing the old workings and some virgin -- at some of the virgin orebodies via an adit. So what we said is we will update the market in the year -- in the months to come as far as our exact plans are concerned for Royal Sheba phase 1.

If we then move on to Slide #23, Evander 8 Shaft. So we might get the question, 8 Shaft lost money again, why haven't you closed it properly? So operation is pretty much [dead] for Pan African now. We only have about 60 employees still on the books of Evander. The rest of the employees mining the underground are contractors. We needed the water from 8 Shaft in the year past and so systemically moved ETRP into Elikhulu. It is no longer the case. 8 Shaft and what you see the negative EBITDA contributed in terms of overheads. So there would have been care and maintenance costs to incur if we hadn't continued to mine 8 Shaft, so it contributed from that perspective.

And then also now, it's opened up a pillar for us. So we're forecasting 20,000 ounces out of the pillar in the first year. We have 2 crews already mining the pillar. All of our crews should be in the pillar come February. Initial capital, as we have to spend -- we spent about ZAR 30 million in the year past, and we'll spend ZAR 55 million in the 2020 financial year. So in terms of ZAR 700,000 in gold price, certainly, we'll make a bit of money in the pillar in the year ahead. But then for FY '21 and FY '22, producing 30,000 ounces are pretty limited. There's no -- pretty much no capital, should generate significant returns for our shareholders.

I would then ask Deon to come up and give some color to the numbers. Thank you.

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Gideon P. Louw, Pan African Resources PLC - Financial Director & Executive Director [3]

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Thank you, Cobus, and good morning to everyone. By the way, this is the new smelt outside the Elikhulu. Quite impressive photograph.

Before we start with the detailed financial review, a couple of noteworthy points. Firstly, you will have seen that the reporting currency has changed from the British pound to the U.S. dollar. This is not, as one of our fund managers asked -- not fund managers, one of our shareholders asked, is this now because we're going to be paid in U.S. dollars? I said, no, it's simply to make the results comparable to that of the rest of the gold sector.

Secondly, in certain instances, we refer to the financial results of the continuing business that comprises Barberton's underground and ETRP operations, Elikhulu now incorporating the ETRP throughput, the remnant mining and Evander's 8 Shaft and in the new pillar project that Cobus referred to. And in other instances, we refer to the combined businesses, both continuing and discontinuing, with the discontinued operations comprises Evander's deep-level underground 8 Shaft infrastructure that we impaired last year. And finally, the full annual integrated report was also loaded onto the company's website this morning for review by our stakeholders.

Slide 25 summarizes the group's results for the financial year through 30 June 2019. Notable is the increased turnover from continued operations to $217 million from $146 million in the prior year as gold production increased by 54% to 172,000 ounces and the rand price on gold increased by 7% to ZAR 578,000 per kilogram. That's the average for the last year. Although the gold price on gold declined by 3% during the 2019 year, the rand/dollar exchange rate also depreciated by 10%, resulting in a net 7% increase in the average rand price on gold for the 2019 financial year, which assisted in offsetting inflation-linked costs.

Elikhulu's lower cost of production for the 10 months, first [convening] on 30th August last year, and the generally improved performance from Barberton contributed to the group's all-in sustaining cost declining by 28% to $987 an ounce or ZAR 451,000 per kilogram, representing a 20% decline in all-in sustaining cost relative to the 2018 financial year.

Commensurately, EBITDA increased by 75% to $57 million, and attributable earnings increased to $38 million, relative to the loss of $123 million in the prior financial year after recognizing a loss from discontinued operations of $138 million due to the cessation of deep-level underground mining at Evander's 8 Shaft.

The materially improved turnover and reduced costs contributed to basic earnings per share increasing by 129% and headline earnings per share increasing by 20%. Headline earnings per share excludes the impact of the impairment of the 2018 financial year and its partial reversal in the 2019 financial year following the decision to mine the 8 Shaft pillar and in so doing used some of the infrastructure impaired in the prior financial year.

Although there were no new shares issued in the 2019 financial year, the number of shares taken into account for earnings per share purposes increased relative to the prior year as the full effect of the 130 million shares issued on 30 May 2018, were taken into account for calculating earnings per share and headline earnings per share in the current year. Pan African still holds 306 million treasury shares that reduces the total issued shares, number of shares of 2.2 billion to 1.9 billion, which were taken into account for purposes of calculating the 2019 earnings per share and headline earnings per share.

At year-end, our senior debt peaked at ZAR 219 million and should now aggressively amortize, as I'll illustrate in a subsequent slide. The decline of 58% in capital expenditure is largely attributable to expansionary capital declining following Elikhulu's commissioning. The other growth initiatives that Cobus referred to in the presentation have their own capital requirements, but these are largely with the exception of Egoli funded from internally generated cash flows.

Slide 26 demonstrates, for illustrative purposes, the operational leverage in year-end [paused] operations. Evident is the escalating rate at which operational profits increased at gold prices in excess of our breakeven costs of approximately ZAR 451,000 a kilogram. A wide example, a 21% increase in the gold price from ZAR 578,000 a kilogram, which is the average price for the 2019 financial year, to a level of ZAR 700,000 a kilogram, the prevailing -- more or less, the prevailing rand gold price increases operating profits by 96%.

The following slide shows, for illustrative purposes again, the cash flow impact of this gearing on the group's debt repayment profile. Contractually, our debt is repaid at the rate depicted in the golden-colored line graph over the next 5 years. This repayment profile was modeled at a spot gold price of approximately ZAR 550,000 a kilogram, approximately towards the end of the last calendar year.

The blue-colored line graph shows the rate at which the same debt is repaid at a gold price of ZAR 700,000 per kilogram, a sub-2-year repayment profile. If the prevailing gold price and all other assumptions hold, the benefit of having rand-denominated debt is evident under the prevailing economic circumstances with the dollar price of gold increases and the rand depreciates relative to the U.S. dollar.

The bar graph on the lower section of the slide shows the frequency and magnitude of the senior debt principal installments over the next 5 years, with the first installment of ZAR 50 million on the Elikhulu term facility payable at the end of this month and the first installment of ZAR 250 million on the RCF facility payable on 15 June 2020. With the proceeds of the gold loan that we entered into in July this year, we reduced the RCF's balance by ZAR 394 million, and obviously, subject to it not being drawn again, effectively have already prepaid the June 2020 RCF installment.

Slide 28 shows the gold price hedges entered into for the 2019 -- '20 financial year. With the higher debt levels in the prevailing elevated gold price, it makes sense to enter into zeros -- of zero cost collars to lock in minimum floor prices in rand gold terms. For the first half of the financial year, a floor price of ZAR 604,000 per kilogram or 29,550 ounces was entered into earlier in this year when the gold price was approximately ZAR 610,000, ZAR 620,000 a kilogram. And for second half of financial year, a floor price of ZAR 655,000 a kilogram on 50,460 ounces was entered into. To fund these floors, we sold gold and forfeited the gold price upside of these ounces at ZAR 666,000 a kilogram for the first half of this financial year to December and ZAR 836,000 a kilogram in the second half of the financial year.

In all instances, the same number of ounces of the tax base as in -- as on the floors, these are typical [made in] zero cost collars. Once these hedges run out in 2020, we have one remaining collar in place at a floor of ZAR 690,000 a kilogram and a cap of ZAR 926,000 a kilogram on 40,000 ounces for the 6 months to December 2020. We have no hedges in place beyond that date. Hopefully, the balance sheet would have been materially de-geared by then, and the need to manage risk in this manner has commensurately reduced.

Slide 29 shows the group's historical dividend yields. As already mentioned, the Board recommended that dividends be reinstituted this year after suspending dividends in the 2018 financial year given Elikhulu's construction and the cessation of deep-level mining at Evander's 8 Shaft. Although the dividend is materially lower than in the past, as Cobus mentioned, that signals our confidence in the repositioning of the operations and the ability to generate discretionary cash flows in the future.

In recommending the reinstituting of the dividends, the Board weighed up the group's existing debt levels against the prevailing gold price, the price protection already entered into in the form of the hedges that I referred to in the previous slide and the forecast cash flows for the foreseeable future. Should the Board approve the development of the Egoli project in the near future, our intent is to fund, to the extent possible, this project in a manner that ring-fences its funding impact on the rest of the group so as not to curtail future dividends and the redemption of the existing senior debt.

Thank you.

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [4]

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Thank you very much, Deon. Let's conclude then. A couple of slides. Investing in the future of our assets. So I think Pan African has a good track record of delivering organic projects over time. I used to speak a lot about our massive resource base, more than 30 million ounces, but -- and then last year, the market simply gave no value for ounces in the ground. It's about profitably bringing these ounces to account and creating returns as a result.

So I think this is the point on Slide 31, as we have a number of attractive projects, some a bit further away than others, but as I've said, we have a good track record of delivering organically. And to the extent one can grow your portfolio organically, clearly it makes sense. You don't have to pay for assets.

In terms of Slide 32, reinvesting in our assets. So we don't skimp, as far as capital is concerned, on our operations. So we believe that if you spend the right level of capital, these operations will return the capital over time.

So in the last year, we spent about ZAR 140 million of sustaining capital at Barberton. Even the higher gold price, we decided to spend a little bit more capital in the year ahead. So it's for 3 specific initiatives. We're replacing some of the very old LHDs. We are upgrading switchgear and fire suppression systems. And as I said before, we're significantly increasing the level of development we're doing underground. So all of those initiatives will bear fruit in the near term.

We move on to near-term organic growth. And I can just see some people sort of shaking their heads when we speak about Egoli as a growth project. So clearly, there's a lot of skepticism around underground gold mining in South Africa and we going to do have a lot -- have to do a lot of work in convincing all of our shareholders and other stakeholders that Egoli is the right thing for us to do. We're not there yet. We're going through a process. And as is on slide -- Slide 34 is stating that we hope to have an optimized study, by the end of September and we'll share that study with the market. Very briefly, Egoli -- the Egoli project is within 3 kilometers traveling distance from our 7 Shaft. We spent a lot of money in refurbishing 7 Shaft over the last years.

Historical development on 7 Shaft. The 7 Shaft has made ready access to the orebody possible. But following dewatering, standard footwall development and furthering deepening of the decline and on-reef development, social engineering is required before mining can commence. I'll speak about the resource on the next slide. As I said, a study is expected by the end of September. And then we are considering funding options. As Deon has said, we believe if we do proceed with Egoli, it will have to be on a ring-fenced basis. We've actually received the funding proposal from a financing institution. A nonbinding one at this point, but very encouraging.

So very briefly, Egoli versus Evander 8 Shaft foreclosure. What are the differences? First, Egoli is a lot shallower. Access, certainly their access on to 24 level at the 8 Shaft is very difficult, very convoluted.

Accessing Egoli directly from 7 Shaft, front shaft system with only 1 decline. Tramming/traveling distance, [chalk and cheese], 3 kilometers versus 13. Transfer points, only 6 versus 20. That's certainly is going to set the mine fall factor. Head grade, pretty similar. Waste and reef, we have no ability to split waste and reef at 8 Shaft. That certainly limits your ability to develop, also dilutes your 8 grade. So we can start from scratch, clean slate at Egoli.

Employees. Ability to pick and choose a workforce, make the workforce tailor-made for the project. So as I said, it's a significant resource and it's certainly on our radar in terms of progressing it going forward.

If we then finalize and conclude this presentation, our health check on deliverables. So what are we -- what have we focused on and what will we focus on in the year ahead? Continued emphasis on improving our safety performance and ESG compliance, on sustainability.

Production. We've delivered into our guidance for the year past. We're on track to deliver into FY '20 guidance. We are making sure that Elikhulu delivers and we obviously completed the ETRP incorporation into Elikhulu. That's running really smoothly. And as I said, we need to implement initiatives to further reduce all-in sustaining costs, specifically at the Barberton underground.

From a financial -- a finance perspective, balance sheet de-gearing, the gold price stays where it is. You certainly should see that de-gearing coming through and we've reinitiated the dividends.

Growth. So in terms of our -- the way we look at the capital allocation. Firstly, we reinvest in our assets. Secondly, we have to give shareholders a return and we give a balance sheet [de-gearing] and thirdly, we also have to continue to look at growth opportunities and I mean, we can grow via Elikhulu.

We're busy with the Evander 8 Shaft project. We'll update the market as far as Royal Sheba phase 1 is concerned in the months ahead. And then I hope to also update the market as far as Egoli is concerned before the end of this financial year.

So finally, I would like to conclude by thanking each and every Pan African employee for their hard work and dedication in the year past. The fruits of your labor reflect in our safety performance, our production numbers, and our profits included in these results.

There is a lot to be said for positive momentum. We all know what is required of us in the year ahead. Thank you very much.

We'll now take some questions from the floor and then move on to the conference call participants.

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Questions and Answers

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Arnold Van Graan, Nedbank Capital, Research Division - Analyst [1]

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I'm Arnold Van Graan from Nedbank. I've got 3 questions. So I'll start with the easy one and progress from there.

So the first one is, what is your all-in sustaining cost guidance at 8 Shaft in 2021 and 2022? Because it's quite high still next year. I understand you gave the CapEx. But I want to get a sense once all that capital is spent. So that's the first question.

The second question is, what is your views on hedging going forward? So I understand now you've put hedging in place to mitigate the risk associated with your debt. So what's your views on that given where the gold price is now and the longer term? And then I've got a third one once you've answered those.

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [2]

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Okay. So I'll answer the first -- the second question first. Shareholders, generally, are allergic to us hedging too much. So the reasons why we would look into hedges would be to protect the capital spend, ensure that we can repay our debt potentially -- possibly for a dividend. So we're quite conservative as far as level of gearing is concerned.

Also, we don't go and hedge a long-dated answers, who knows what the market will do?

So we're quite satisfied that at the current level of hedging, we protected the downside and we should be able to very much de-gear in the year ahead. So shareholders want exposure to the upside and hence -- we mean we're quite cautious of sterilizing that upside. Also, because of the fact that we've repositioned ourselves, as far as being a low-cost producer is concerned, I mean we can always withstand pretty much most cycles. So again, no massive need to gear there.

In terms of the first question on the forecasts on 8 Shaft. Our all-in sustaining costs, as you point out, we will expect that cost to come down quite dramatically in terms of FY '21 and '22. So we haven't issued guidance, but you can quite simply assume that our costs are pretty much fixed. We don't spend any capital and go and calculate production 2021 of circa [ZAR 0.20]. We're guiding 30,000 ounces, so you can -- I mean it sounds quite attractive and hence, we're quite cautious on overpromising. But I was down in terms of -- on [13] level a couple of weeks ago. So it's incredible. You walk out of the station, literally 50 meters later, you hit the pillar. It's the nicest conglomerate I have certainly seen at Evander. We've taken a lot of care in terms of rock mechanics. The key is not to overmine, to make sure you do it in a phased and planned approach and very cautious. So I think the upside, as far as the pillar is concerned, is quite attractive.

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Arnold Van Graan, Nedbank Capital, Research Division - Analyst [3]

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Yes. And then my final question comes to growth and growth through M&A. And I understand the need to grow. I mean, obviously, you -- the company is a certain size. You've got a certain overhead. So growth definitely has a benefit. But how do you add value through M&A, especially now at the high gold price? And how do you add value by doing M&A into Africa? In other words, what do you bring? What do you bring to an asset?

So you're clearly good executors when it comes to projects, [golden] projects. We've seen that in Elikhulu. And you've got Greenstone-[evolved] expertise. But how are you, in Africa, coming to an impressive buy it and do better? Or is it really just buying an asset at the right time in the pricing cycle?

So how do you approach that? How do you go through that process and make sure that if you do M&A, there is value?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [4]

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Yes, it's actually not that difficult a question to answer. I don't think we've done any silly M&A. So we are very cautious in terms of capital allocation, in terms of return, which is one of the reasons we haven't actually gone and done M&A.

There are some opportunities, and opportunities really is, I believe -- the world has changed in the last years. So 5 years or 10 years ago, people were quite excited about single-asset companies in Africa. It's no longer the case. The world -- investors want liquidity. They want to be able to move in and out of stocks. So that might be an opportunity. But again, it starts with the assets and the ability to sort of have a look and a hard look at a conservative gold price. And say we're going to generate the requisite returns for shareholders.

So I mean, we're constantly looking at M&A. We don't mind looking. But as I said before, every time we look at an asset, we actually learn a little bit about our own portfolio and what we're doing right and what we can do better. We are under no sort of imminent pressure to do M&A. Yes, we're sort of being sort of in-and-out of opportunities. But again, haven't done any silly M&A and certainly, we don't plan to do so in the future.

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Unidentified Analyst, [5]

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Cobus, it's [Myron] from (inaudible). Well done on Elikhulu. I mean it looks like it's hitting its stride, going to steady-state. In the last quarter -- I mean, I can back it up but just to hear it from you, what sort of yields did you recover? And what's the all-in sustaining costs, just on the Elikhulu project in the last quarter? I mean, is that something that's sustainable? It's going to come down some more, it looks like, but just hear your thoughts on it.

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [6]

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Yes, so we've done a lot of work in terms of drilling the dams. So we understand where we're mining and there is some grade variability. So we've got it 65,000 ounces for the year. And you can sort of -- you can take sort of cost for the last year and put 8, 9 -- let's call it 8% on top of it, in terms of all-in sustaining costs.

So when you're treating 1.2-odd million tonnes a month, you do get some law of averages, fortunately, that come through. But it's -- I mean, the guidance should not be a significant increase, other than an inflationary for cost in the year ahead. So yes, it's -- I think it's added factor as well (inaudible) being in the last year.

Also, on top of it, we're not spending a lot of capital. The budget is only ZAR 20 million of sustaining capital for Elikhulu in the next year.

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Unidentified Analyst, [7]

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And the (inaudible)

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [8]

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Well, I mean -- we sort of -- you saw we achieved circa 49%. We have a bit of play in the plant. So when you -- we can play with throughput in order to get our ounces. So if recoveries fall a little bit, we can put through -- Jonathan, we have -- we can -- on occasion, we can squeeze the plant. It'll push the plant a little bit. So we've brought in a little bit of flexibility there to get to our ounces.

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Unidentified Analyst, [9]

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Cobus, it's [Leroy] from HSBC. My first question is, do you have a sense of what your carbon tax liabilities will be over the next couple of years? How much that is going to cost you?

And then my second question is, when you think about your portfolio over the long term, Elikhulu seems like mechanized operation. It looks like you're considering Egoli, which is more conventional. Do you have a preference? Or do you have a certain direction that you want to take your portfolio? Or are you open to both?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [10]

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Okay, so I think the (inaudible) , [Leroy], is very limited. We posted about ZAR 2-odd million, ZAR 2.5 million in the first years. Clearly, it escalates in some years from now. It's something we're coming to grips with and seeing how we can mitigate the impact. In terms of our portfolio, to be honest, it's a lot easier mining surface ounces than what it is mining underground ounces. That's a fact. But I think we are successful greenstone miners. We'd like to think we're some of the best greenstone miners in the world.

Some of the analysts might have said, "Well, you guys made a mess of 8 Shaft." That's a difficult one and we've spent quite a lot of time on analyzing exactly what happened. Some operations, quite simply, just come to the end of their lives. And when you have a downturn in the gold price, it sort of makes it more difficult.

So I think it's not clever to only limit ourselves like some other companies who say, "We're only going to get surface because we might stumble or certainly not stumble, but come upon an attractive opportunity that's not surface."

So the bottom line is, can we mine it safely, sustainably at a cost that is attractive and generates a return to our shareholders? That's really how we look at projects. We have the ability to mine surface. Open pit, fine, we're doing it on a limited basis. It's a lot easier, as I've said, than going underground. We wouldn't shy away from underground purely because it's underground. I don't think it's the right approach.

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Unidentified Analyst, [11]

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Cobus, it's [Rene Hoffbrauner] from [Nord] Capital. Well done on the results. Very nice to see that tremendous increase in earnings and other stuff. When are you going to close Consort down? I see it's trading at $1,900 an ounce AISC.

And just my second question, 53% internal rate of return on Elikhulu -- on the Egoli project. That's ZAR 700,000 a kilo is a great return. But you mentioned pensioners before. If you didn't go ahead with that project, what could you push the dividend yield up to?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [12]

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So it's a sensitive issue. I mean we're not [through] talking about closing Consort at this point. We certainly highlighted the issue to help staff and employees at Barberton. Even though we're running at a loss, and any loss is not acceptable, there are other benefits, and if you recall some years ago, Consort was actually the highest-grading mine at Barberton.

So what you see -- you'll see in the slide dealing with the strategy as far as underground is concerned. The current situation is not sustainable and we have to fix it. If we can't fix it, we are not going to continue to run loss-making operations.

In terms of dividend yield, we have to find a balance between growth and paying our dividends. So it's great to have -- unfortunately, you file a dividend, if you have a 5% dividend yield, stock will re-rate and you might find yourself having a lower yield. Again, it's about finding that balance.

I think if you look at the track record of Pan African, we always returned a lot of money to our shareholders and the plan certainly is to continue to do that going forward. We commented on sort of the risks of underground operations. We have a guy that gets sort of called at 3 or 4 in the morning from the underground. So it's not something that we will embark upon in anything other than a very circumspect and considered approach.

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Unidentified Analyst, [13]

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Sorry. I might have missed it, what was the total CapEx for Egoli?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [14]

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I mean this is the thing, the Egoli, including the plant, is estimated at -- in order of -- peak funding is estimated in order of ZAR 750 million. So if this were -- if Egoli was anywhere else in the world, with these grades, with 1 million ounces, it would be [center camp invested] with market utilization of I don't know. I don't want to guess. The key is, if the company has the ability, the credible ability to deliver, the company could be listed and would have, I think, an attractive market cap.

So we must look at sort of owning the fact that it's in South Africa, and that normally, deep-level mines are difficult and high cost. It doesn't necessarily have to be the case. So where else in the world can you find 100,000 ounces at a reasonable all-in cost of $40 million. It's not many places.

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Unidentified Analyst, [15]

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Just a follow-on on Egoli. Have you looked at bringing in a partner to share some of the risks...?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [16]

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We have. We are talking to partners. Again, it's about finding the right partner, someone you can work with. And if we find the right proposal, there's no reason for us not to execute and implement. I think our shareholders would prefer that also.

Anything else? Any calls from the conference call?

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Operator [17]

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Yes. We have a question from Justin Chan of Numis.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [18]

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Congratulations on a much better year. My first question is just with regards to balance sheet management. I mean do you have a view of how much, I guess, cash you'd like to save for rainy day? And on the dividend policy, have you -- I guess could you give any more guidance on how you came to the number and what the dividend policy might be going forward?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [19]

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I think our dividend policy remains unchanged. And operationally, the money we're paying out, we did generate via a number of initiatives in the next -- in the last year.

If you look at the policy, we do retain flexibility and times where we believe we can move the dividend up or down. In terms of balance sheet flexibility, prefer to have no debt, to be honest. Really, the less debt the better. We're a mining company in our view. It'll be a great position when we have cash, and I think we'll sort of fight with shareholders in terms of how much we divvy out and how much we keep on the balance sheet. So hopefully, that's a discussion we can have in a year and a bit, Justin.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [20]

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Okay. And on Royal Sheba, I realize that the parameters have changed, perhaps. But can you give us a sense of how much CapEx you're looking at, just even from a balance sheet allocation perspective? And then how does that rate versus Egoli in terms of priorities?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [21]

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So one of the key issues we had, Justin, before with Royal Sheba as an open pit, was the separate plant was the capital. The capital was north of ZAR 500 million. It wasn't attractive on that basis. If we develop what we call [uppers] which is circa, at this point, resource of 160,000 ounces, the capital, Justin, will not be, in my view, more than ZAR 60 million, ZAR 70-odd million. So the return on that, I think, is quite attractive. And certainly, we can fund it internally. So as I've said, we can update the market in the months ahead as far as Royal Sheba is concerned.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [22]

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Okay. Perfect. And then just my last one is on where your all-in sustaining costs or cash cost guidance is for next year. So other than improvement at Evander and inflation, are there any other moving parts that we should be aware of?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [23]

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No. I think we've sort of highlighted issues in terms of capital. There is no massive cost increases, other than what you normally find in South Africa, that weakening that we're anticipating. So with a full year production at Elikhulu, an exchange rate that's a bit weaker than what we had the year past, I think you can expect a reasonable performance.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [24]

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Okay. Perfect. And just my last one is on the grade profile, especially at Barberton. I guess what are your expectations for -- is there any unique variation through the year? Yes, I mean, do you expect to be roughly at a similar point? (inaudible)

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [25]

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Yes, we target 10 grams a tonne. There was -- you'll see in the results, the underground delivered 8 grams -- 9-point -- 8 grams a tonne, close to 10. That was diluted by some of the surface materials, so you'll see that we report a little bit lower, 8 grams a tonne. But as I said, that's a result of surface. So we're targeting 10 grams a tonne, and there is no reason for us, we believe, not to achieve that target.

We have flexibility and certainly more flexibility. We have the platform that we [honor throughout] (inaudible) mining. So for the full year, you should see that come through.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [26]

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Okay. And do you -- in your forecast, do you have much in the way of surface for this coming year?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [27]

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Yes. You'll see that we reported [results] for the first time on surface. And as part of the underground, you should see [70,000 to 75,000] ounces from [surface].

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Operator [28]

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The next question comes from Tim Huff of Peel Hunt.

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Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [29]

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Yes, and great set of numbers. Just 3 questions from me. You've run through a lot of the different growth options and given some timeframes on the sub-vertical shaft as well as the ZK shaft , your timelines there. But can you give us a little bit of an idea of where you're thinking Dibanisa fits into that as well?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [30]

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So Tim, I think, next year, we'll have to refine Dibanisa and then communicate to the market what the plans are. I think we highlighted in the presentation that a key area of focus of us in the next year will be the Barberton underground, as it has been in the years past. These shifts don't turn as quickly as what you want them to. So hopefully, we can update you as far as Dibanisa is concerned in, I think, 6 months.

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Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [31]

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Okay. That's great. And then on the div, you've been pretty clear about your dividend policy. OCF minus sustainable CapEx and debt commitments. But I was just wondering, does that mean you're prioritizing the dividend or dividend growth over some of your growth projects? Because you do have quite a few growth projects that look like they could require capital in the coming year or 2.

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [32]

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Okay, sure. So I think it's a balance and that's what we try and strike between returning money to shareholders and growth. And shareholders are difficult creatures and rightly so. They want growth, they want dividend, they don't want to pay for any of it. And that's the balance that we operate and try and strike. We don't get it right always, but that's what we look at.

So growth, not growth at any or all costs, it has to be value-accretive growth. And mostly -- we find that the value-accretive growth in a portfolio such as ours, to some extent, funds itself. If we have to look too much into our own cash flows then potentially want to say, we'll relook at the returns of the specific project.

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Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [33]

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That's fair enough. I had a feeling you guys are going to balance it all out. And then the last question, was just a follow-up on the other Consort question. You guys have identified that you know exactly what the issues are there. Have you given yourselves a timeline in which you want to fix that before having to maybe make a strategic decision?

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [34]

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Well, we have to be careful because we haven't especially communicated anything. And we have a timeframe and I would not want to stand in front of shareholders again with Consort performing like it did in the year past, if that makes sense.

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Timothy Alan Huff, Peel Hunt LLP, Research Division - Analyst [35]

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Fair enough. That's exactly what we were looking for. Excellent.

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Operator [36]

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And gents, there are no further questions on the line. Thank you.

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Jacobus Albertus Johannes Loots, Pan African Resources PLC - CEO & Executive Director [37]

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Great. Thank you very much to everybody for attending, and we'll be outside if there's anything else. Thank you. Cheers.