Pan African Resources (LSE:PAF) share price came under the limelight recently after announcing a reduction in its production guidance for gold in the current financial year. While the low electric supply disrupting operations is a genuine enough reason, that doesn’t mean investors weren’t frustrated. Almost immediately, Pan African Resources stock started dropping and ended the week at 13.50p. That’s roughly an 18.5% decline – a downward trend that continues today.

Seeing such volatility in a resources business is hardly surprising. But it doesn’t necessarily mean the stock is forever stuck on a downward path. Let’s explore this enterprise’s mix of bull and bear cases and whether analysts believe it has long-term potential for explosive growth.

Key points

• Barberton Mines’ mining rights were renewed by the DMRE in June 2021 for 30 years.
• The recent downgraded production guidance for the current fiscal year led to negative investor sentiment.

What does Pan African Resources do?

Pan African Resources Plc is predominantly a gold producer. Its principal business is the operation of the Barberton Mines gold mining project. Barberton Mines’ mining rights for Fairview, Sheba, and Consort Mines were renewed by the DMRE in June 2021 for 30 years¹. And they are now valid until June 2051.

The mining company has a demonstrable record of replenishing its mineral resources and mineral reserves through effective brownfield exploration. And they are always looking at organic growth projects, the recent one being the Royal Sheba project, to further enhance the sustainability and longevity of the overall company’s operations.

The bull case for the Pan African Resources share price

In the past few years, Pan African Resources’ shares enjoyed a continuous bullish period from July 2018 to August 2020. In these two years, the stock of the aim-listed company grew by 274%!

While the bullish trend ended after the stock hit a peak of 26.3p, the growth drivers of the company are expected to take the company’s stock to new heights. The first and most important driver is the huge increase in the gold price. With a per-ounce gold rate above $2,000², I foresee the profits of the company continuously rising even more so, given the current economic climate that’s pushing gold prices even higher.

Secondly, the finalisation of the funding arrangement for its new Mintails tailings project has solidified the grounds for expected future profitability.

The bear case for the Pan African Resources share price

Since the stock of the gold-producing company hit its peak, it has been declining slowly and steadily. From a price of 26.3p in August 2020, the stock last closed at 12.78p. Despite multiple ups and down during this bearish journey, the stock has been declining to date.

One of the biggest challenges the AIM-listed company is facing is its high fixed costs. While the production of gold varies, the fixed cost will remain constant. So, should the price of gold eventually tumble, the group’s profit margins could be significantly squeezed, making it far harder to generate a profit. Don’t forget, as a resources company, Pan African has no pricing power.

Share price prediction

Despite the shocking news of a reduction in production guidance, analysts are still optimistic about the Pan African Resources share price. The 12-month average price forecast represents an 85.9% increase with a target price of 25.9p. The highest price estimate is 26.71p, and the low estimate price is 24.29p.

There are currently only three institutional analysts following this business. And these forecasts obviously need to be taken with a pinch of salt since the firm is highly sensitive to external factors beyond its control. However, three independent opinions of long-term growth potential is an encouraging sign.

Considering the ongoing developments and the rising gold prices working in favour of the company, I see why the analysts have a positive forecast for the gold-producing company.

Should I buy Pan African Resources shares today?

While the consistent decline in the Pan African Resources share price is concerning, I’m cautiously optimistic. Unlike most mining groups, the company is more established, granting increased flexibility than its younger rivals.

Having said that, the volatility in the share price doesn’t entice me to invest today. Once production is back on track, and assuming there aren’t any other major disruptions, I may change my position. But for now, this stock is staying on my watchlist despite the positive forecasts from analysts.

Article sources

1. Pan African Resources. “Operational Performance Review“
2. Biznews. “Pan African Resources, and the key events impacting a bumpy ride: Buy, hold, or sell?“

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.

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