strong sell, page-8

Here is the Huntley's research below for anyone interested to see there opinion.

Huntley's Recommendation: PanAust Limited

Recommendation: Reduce

PNA is a copper-gold miner with operations in South East Asia. Its Phu Kham copper-gold mine in Laos started in 2008 and produces around 65,000t of copper a year. Cash costs of about US$1/lb are around average for the industry, a 14 year life is respectable. Development projects include the Ban Houayxai gold project 25km west of Phu Kham and the Inca de Oro copper-gold project in Chile. Phu Kham cash flows should largely fund development and exploration aspirations. Debt was repaid in FY09 from equity issuance. Sovereign risk is average and should reduce with geographic diversification. Management's good track record and exploration blue sky from exploration projects appeal.

Event11-Jan-2011
PNA upgraded its FY10 production and earnings guidance to 67,000 tonnes of copper in concentrate and US$260m respectively. The upgrade coincided with new high copper prices of US$4.30/lb.

Business Impact: Our valuation increases by 3% to $0.62 but our long term assumptions remain unchanged. The earnings uplift has been driven by strong commodity prices more than operational improvements.

Forecast Impact: --

Recommendation Impact: Despite the increase in our fair value our Reduce recommendation is maintained. We like the company but not the current share price.

Event Analysis
PNA increased FY10 earnings and production guidance yet again last month. Copper production at its Phu Kham mine in Laos will now be 67,000 tonnes for the year, 3% higher than the 65,000 tonnes announced in October. Guidance for earnings before interest tax depreciation and amortisation (EBITDA) increased to US$260m from US$220m - US$240m. Of most interest was the decline in cash costs to just US$0.56/lb during October and November and into the lowest quartile of the cost curve. Full year cash cost guidance is now US$0.90/lb down from US$1.01/lb and safely into the bottom half of the cost curve. The share price jumped 11% on the announcement adding A$270m to the market capitalisation or A$61 per additional pound of copper! We advise investors to keep their heads. Commodity prices are up in US$ terms but the stronger A$ penalises Australian investors. The US$ copper price rose 31% in 2010 but in A$ terms, just 15%. PNA reports in US$ but focus should remain on A$ earnings and production growth. The Phu Kham mine performs well but our long term production forecasts remain unchanged. The fall in cash costs is largely due to strong metal credits. The improvement will be reversed should the gold price weaken. PNAs share price is benefitting much less from underlying business improvements than strong copper and gold prices. PNA is heavily dependent upon its Phu Kham mine. Other assets are small or early stage. Its second operating mine will be the Ban Houayxai gold mine, also in Laos, and will start in FY11. It will produce 100,000oz gold and 700,000oz silver a year until 2020. Our NPV is just A$160m, a small contributor to the $2.5bn market capitalisation. Our long term forecasts include: US$2.50/lb copper; US$800oz gold; and an A$/US$ FX rate of 0.80. Our NPV for Phu Kham is A$1.5bn but this would increase to US$2.2bn if we used spot copper (US$4.30/lb), gold (US$1,400/oz) and FX rates (US$/A$ 1.00). Our FY11 NPAT forecast is A$241m. At a $0.83 share price this implies an undemanding price earnings ratio of 10.3x but ignores limited mine life of around 14 years. We exclude potential reserve upgrades at Phu Kham as well as the Inca de Oro, Phonsovan and Puthep projects from our valuation. These assets are insufficiently progressed to include at this stage. Our fair value increases to $0.62 a share but our Reduce recommendation is maintained. The 4Q10 quarterly and FY10 results will be released on 20 January and the 24 February respectively. Both are well flagged. We expect the copper price and project development announcements to be the main drivers of the share price.

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Back Issues
Date Heading
11/01/2011 FY10 guidance upgraded again
03/09/2010 1H10 Result Copper bottomed
06/08/2010 Quarterly production update (Initiation)