PanAust Ups The Ante

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-Strong numbers but too late?
-New GRAM bid opportunistic
-But higher bid more possible
 

By Eva Brocklehurst

A revived bid for copper-gold miner PanAust ((PNA)) from its major shareholder has sparked renewed interest in the stock from brokers, if only to observe the new offer is highly opportunistic.

PanAust has pre-released its quarterly production numbers, revealing a much stronger March quarter than had been expected. While this may support the potential for a higher bid, the company is in a much weaker position than it was around this time last year when Guangdong Rising Asset Management (GRAM) made an indicative offer of $2.30 a share. That offer lapsed as PanAust decided to open its data room to flush out a counter bid. None was forthcoming.

The company’s flagship mine, Phu Kham in Laos, impressed Macquarie in the March quarter, with copper production 10% higher than expected. Gold and silver production were 40% and 19% higher respectively compared with the broker’s forecasts. The company’s second mine, Ban Houayxai, was more mixed with gold production lower and silver production higher than forecast. All up, Macquarie believes an upgrade to 2015 gold production guidance is now likely and upgrades 2015 earnings forecasts by 25%, incorporating mark-to-market prices as well. The broker’s target of $1.71 remains unchanged and in line with GRAM’s current cash bid for the stock.

GRAM has just released its bidder’s statement and the offer officially opens on April 13. PanAust has 15 days from that date to lodge a target’s statement. The offer is due to close on May 15, but Macquarie expects this will be extended if GRAM has not secured control of PanAust by that time. PanAust has advised its shareholders to take no action on the bid at this time.

The production numbers could add some pressure to GRAM to bump up its bid price, in JP Morgan’s opinion, given the price does not factor in value for Frieda River and the pre-release was a break from PanAust tradition. The bid appears opportunistic to the broker but the likelihood of an improved offer is now higher, which could provide a short-term trading opportunity. That said, for long-only investors, JP Morgan continues to recommend selling into the proposal, believing there is better value in mid-cap listed copper peer, Sandfire Resources ((SFR)). The broker retains a target of $1.71.

Morgan Stanley always expected the March quarter would be strong and factors in a slight pullback in production in the middle quarters of 2015. This broker also considers there is potential for a small increment to the current bid price but this would still imply a premium to spot copper of around 8.0%. Morgan Stanley has a target price of $1.85 with an Equal-weight rating. Citi, on the other hand, expects PanAust will surpass its 2015 production guidance and maintains a Buy rating, increasing its target to $2.30. The current offer from GRAM is considered to be, simply, too low.

These preliminary numbers may be strong but UBS suspects this is too late to avert a takeover. After failing to engage with GRAM over the proposal last year, and the share price tumbling in the wake of falling commodity prices, the company faces lower earnings forecasts and major impairment of its development assets. Hence, the board is in a difficult position, in the broker’s view.

The day the latest bid was announced, GRAM’s holding increased to 24.1% from 22.5%, the broker observes. With the offer unconditional and no defeating condition, it will be hard for the PanAust board to prevent a deal being completed. In the absence of a white knight, UBS believes the best outcome would be to negotiate a higher bid price.

PanAust’s board may be backed into a corner but UBS believes the bid is highly opportunistic and priced too low, agreeing that it attributes no value to the company’s key growth asset, Frieda River. Moreover, UBS believes GRAM is simply leveraging off the equity market’s reticence in attributing any value to this asset, despite it being one of the best undeveloped copper-gold assets in the world. UBS retains a $2.40 target.

FNArena’s database contains five Buy ratings and three Hold. The consensus target is $1.99, suggesting 13.9% upside to the last share price. Targets range from $1.58 to $2.40.
 

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