PanAust Leveraged To Both Gold And Copper FNArena News - October 14 2009
By Chris Shaw
Market expectations are for the global economy to continue to recover and if this is the case there will be increased demand for industrial metals in general and copper in particular, especially out of China. In the view of Morgan Stanley this makes PanAust Limited (PNA) an attractive play, especially as the company also offers associated exposure to gold production.
Another attraction of the stock, in the broker's view, is the fact it has strong enough cash flow to cover the future capital expenditure requirements for its expansion projects, especially since PanAust restructured its balance sheet in the first half of this year. Further, the company has been one of the early movers into South East Asia, which is a region the broker believes is under-explored and so offers opportunities for new discoveries in base metals especially.
PanAust currently operates in Laos and is exploring both there and in Thailand and its capture of the potential Putep copper project is an example of the first mover advantage the broker sees as giving it a head start in acquiring other prospective projects in the region. The group's major shareholder, GRAM (Guangdong Rising Asset Management Co Ltd) also offers potential for an inside track on new projects in China in the broker's view.
The fact the company has a net cash balance of around $100 million at present post a recent equity raising means it is in a strong enough financial position to consider new opportunities, whether from its own discoveries or via possible merger and acquisition options. Further funding would only be required in the broker's view if copper prices fell back to below US$1.50 per pound in 2010 and Morgan Stanley suggests such an outcome is unlikely.
Also working to the company's advantage is the fact it is a low cost producer as the gold and silver by-product credits bring down its operating costs, putting PanAust in the first quartile of the cash curve for copper producers. Cash costs are estimated to be around US80c per pound when full production is reached at Phu Kham and as the broker notes, this gives PanAust greater protection in terms of not losing money should copper prices weaken in the future.
These low costs are in addition to higher output, as the broker expects the company will lift production to 65,000 tonnes of copper in 2010 with an eventual target of 75,000 tonnes per year along with 65,000 ounces of gold and around 600,000 ounces of silver annually.
Also positive is the project has long life reserves, currently estimated at better than 10 years with good potential for exploration success to see mine life extended to 15 years or more, especially as management is building a reputation for sucess in exploration and project development.
Factoring all this in, Morgan Stanley's base case valuation scenario for the stock is $0.65, while its bull and bear case scenarios imply values of $0.82 and $0.39 respectively. This is based on earnings per share (EPS) forecasts of US5c in 2010 and US7c in 2011, which the broker notes puts it above consensus of US5c with respect to its latter year estimate.
Given the share price is only slightly above the $0.50 level at present, the risk is weighted to the upside in the broker's view and so it has initiated coverage with an Overweight rating, supported by an attractive industry view. Many in the market agree with the Morgan Stanley view as the FNArena database shows a total of four Buy ratings and three Holds, with an average price target of $0.557. GSJB Were is the most aggressive with its target of $0.70, while both Macquarie and Citi have targets of $0.45.
Shares in PanAust today are stonger and as at 12.20pm the stock was up 1.5c at $0.54, which compares to a trading range over the past year of $0.082 to $0.545.
PNA Price at posting:
$2.58 Sentiment: LT Buy Disclosure: Not Held
