brokers buy report

The Potential Of Pan Australian In The Gold Sector
FN Arena News - April 07 2006

As the gold price continues to surge, finding value in the gold sector of the Australian share market is becoming increasingly difficult. Historical trends during boom periods in resources show the larger stocks move first, with attention then turning to mid-size players and then the smaller cap stocks.

As a result the search continues for undervalued gold stocks, with Tolhurst Noall adding Pan Australian Resources (PNA) to the mix by initiating coverage with a Buy, High Risk rating.

Part of the attraction of the stock in the broker's view is it is neither a one commodity nor a one project company, as it has exposure to both gold and copper. It currently produces gold from its Phu Bia heap leach operation in Laos, which is currently estimated to have a five-year mine life and produce 50,000-60,000oz of gold annually at costs of about US$380 per ounce.

The broker regards this as a rather unexciting project, but it serves the purpose of generating cashflows until the Phu Kham copper-gold project commences production, which is forecast to be in the middle of 2008.

On the company's current forecasts the mine at full production will produce 52,000t of copper annually, along with 400,000 ounces of silver and 47,000 ounces of gold, in what is shaping as a long life operation.

There remains upside in the broker's view as it notes some high-grade resources currently not included in the reserve estimate should be accessible through further optimisation of the mining pit, while the project will also be very sensitive to the copper price.

The broker expects the equity portion of the capital costs, which are estimated at about US$232m currently, will be met through a share placement in the current quarter at a price of around $0.25 per share.

The company also holds the Puthep copper heap leach project, where the broker notes no work has been done for several years due to environmental concerns. Despite this it suggests there may eventually be some value in the project as the company has recently been granted approval to access the site.

While noting there are risks given full production at the company's major asset remains some time away, the broker has assessed a valuation of $0.59/share, which compares favourably to the last closing price of $0.305. The stock has traded between $0.16 and $0.31 over the past 12 months.