Australia | Nov 03 2014
-Play on long-term copper prices
-Higher grades likely to be realised
-Upside catalyst in Frieda River
By Eva Brocklehust
Copper-gold miner PanAust ((PNA)) is expecting a lift in grades, recoveries and operational performance in order to meet its 2014 production guidance. Guidance was reiterated despite the third quarter being weaker than expected, which leads brokers to expect a flourish at the final post.
The company expects to reach the upper end of 65-70,000 tonnes of copper and 160-165,000 ounces of gold. Improving head grades and recoveries are expected at both Phu Kham and Ban Houayxai to deliver the required fillip in the fourth quarter. On the earnings front, cash flow was affected in the quarter by the final payment for Frieda River and an US$8m working capital adjustment associated with inventory build.
UBS suspects, with copper and gold prices moderating, it could be a stretch to reach the earnings target previously set at US$200-225m, which the broker notes was not mentioned in the update. UBS believes growth opportunities are important for investors looking for copper exposure and securing these now is the best way to play the favourable outlook for long-term copper prices. The broker also considers PanAust has one of the best undeveloped copper projects – Frieda River – and when the PNG government commits to acquiring and funding its 30% option interest, this could immediately unlock the full valuation.
JP Morgan retains a Neutral stance on the stock, with uncertainty existing over the nature of the proposal from Guangdong Rising Assets Management (GRAM). In May, GRAM made an indicative, non-binding proposal at $2.30 a share which was rejected by PanAust. Since then several parties have conducted due diligence. GRAM has not presented a revised takeover proposal and the company stated the matter has not materially progressed, while no counter-bid has transpired from those accessing the data room.
The uncertainty does not worry brokers unduly. Citi upgraded to Buy from Neutral on the back of the strong production profile. FNArena's database contains six Buy ratings with JP Morgan alone in the middle of the road at Neutral. The consensus target is $2.58, suggesting 50.0% upside to the last share price. Targets range from $2.20 (Citi) to $2.90 (Deutsche Bank).
Despite no definitive agreement with GRAM, Deutsche Bank concedes it is possible that suitors are still milling around. PanAust has, reportedly, had little contact with GRAM for the last three months, which suggests to the broker than a revised bid is unlikely. Nevertheless, a slim chance exists that one may eventuate. The stock is one of the few quality copper names in the Australian sector and this underpins Deutsche Bank's Buy rating. As the company is attending to business as usual, Citi also believes it unlikely a GRAM offer will eventuate. The core of the broker's valuation rests on the Phu Kham production profile and the high grade KTL satellite deposit.
The lack of progress with GRAM is well reflected in the share price, in Morgan Stanley's view. While the price reflects the low confidence in a deal being formalised, the broker believes the company has rightly focused on its operations and growth projects. Moreover, PanAust has announced it will re-start the process of looking for a successor to the managing director, which had been put on hold pending the GRAM proposal. Morgan Stanley takes this comment to mean an increased likelihood the GRAM proposal will not move forward. Meanwhile, higher grades are needed to meet the top end of guidance and the broker remains confident this will happen.
GRAM owns 23% of PanAust and, after six months of due diligence and a comprehensive knowledge of the company from the privilege of sitting on the board, Credit Suisse assumes the offer is dead. In the broker's opinion due diligence is either very thorough, or very slow and the absence of the GRAM board member from recent meetings and no resolution to the offer, does not look good in the broker's view.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
