Australia | Jul 26 2011
– PanAust 2Q production broadly as expected
– Exploration and development offer upside potential
– Production and capex costs rising
– Recent share price gains generate two rating downgrades
By Chris Shaw
Copper producer PanAust ((PNA)) largely met expectations with respect to production in the June quarter, output of 15,184 tonnes a flat result relative to the March quarter. Costs were higher at US$1.04 per pound, this due to ongoing wet weather and adverse foreign exchange movements.
For coming quarters Credit Suisse notes September may turn out another flat production experience, though this will depend on when PanAust can access higher grade ore. Stronger grades should be evident by the December quarter, so generating a strong finish to 2011 production. Full year production guidance stands at 62,000-65,000 tonnes of copper.
While production costs rose during the quarter so too did capex costs at the Ban Houayxai silver-gold project. The final cost for the project is now expected to be between $175-$200 million, well above the original estimate of $150 million.
The Ban Houayxai project, along with an expansion at the Phu Kham mine, will help PanAust achieve its long-term production goal. Deutsche Bank notes this is for output of 100,000 tonnes of copper, 200,000 ounces of gold and one million ounces of silver annually by 2014.
Further drilling over the balance of 2011 should lift reserves and the long-term production profile for PanAust. For RBS Australia this will highlight ongoing development potential, as for example at Phu Kham discoveries continue both to the north of existing operations and along strike.
Further good drilling results at the LCT prospect in particular offer a potential valuation boost, as RBS notes LCT could potentially develop into a standalone mine. Good drilling results could also come from the Phonsavan project in coming months, while ongoing positive news flow is likely at the Inca de Oro project, predicts RBS.
Recent share price gains leads the stockbroker to suggest the market has been playing catch-up with respect to PanAust's development upside. But even given the gains of the past few weeks, RBS remains of the view the market is undervaluing the potential for further mine life extensions.
As a result, RBS Australia retains a Buy rating, lifting its price target post the production report to $4.91 from $4.80. The consensus price target for PanAust according to the FNArena database stands at $4.53, with targets ranging from $4.00 to $5.00.
Overall, PanAust is rated as Buy three times, Hold twice and Underperform once, the shares receiving two downgrades post the quarterly production report. One was Deutsche Bank downgrading to Hold from Buy, the move largely a valuation one given recent share price gains.
Supporting the Deutsche downgrade is the potential for ongoing downside risks, these from lower production and grades but also from project delays and higher capex at developing projects. Credit Suisse downgraded its rating on PanAust to Underperform from Neutral, which again was a valuation call given the recent share price gains.
But like RBS Australia, both BA Merrill Lynch and UBS continue to see enough value in PanAust to justify Buy ratings. As UBS points out, PanAust offers a solid production growth profile in both Laos and Chile, enough for the stock to remain the broker's preferred copper exposure.
Shares in PanAust today are slightly weaker and as at 11.00am the stock was down 4c at $4.19. Over the past year PanAust has traded in a range of $0.52 to $4.31, the current share price implying upside of around 8% to the consensus price target in the FNArena database.
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