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Buy Ratings Continue To Dominate For PanAust

Australia | Oct 30 2012

 – PanAust lifts copper output in September quarter
 – Full year production guidance maintained
 – Company continues to develop additional growth options 
 – Brokers retain a majority of Buy ratings

By Chris Shaw

An expansion of operations at Phu Kham helped PanAust ((PNA)) lift copper output in the September quarter, the company producing 14,933 tonnes at a cost of US$1.22 per pound. Production compares to 13,908 tonnes produced in the June quarter.

Full year production guidance for PanAust has been maintained at around 64,000 tonnes at costs of US$1.05-$1.15 per pound. Credit Suisse notes with production year to date of just under 45,000 tonnes, the December quarter will require an improvement in both grades and throughput for guidance to be achieved.

BA Merrill Lynch has maintained the expectation of strong December quarter production for PanAust, but takes the view 2013 production is now unlikely to increase by as much as had been previously thought. This reflects a faster than expected decline in grades.

To account for this BA-ML has lowered earnings estimates for PanAust by 12% in 2013 to US$200m, which the broker notes is well below the consensus result of US$226 million. Others have been less severe, most brokers in the FNArena database making only minor changes to earnings forecasts through 2013.

A key focus for PanAust remains growth projects and as well as the expansion at Phu Kham, JP Morgan notes PanAust still has a number of development options. A maiden resource for Nam San and Long Chieng Track is expected in the final quarter of this year, while beyond this year the Phonsavan pre-feasibility study is still scheduled for completion in the second quarter of 2013, with feasibility expected in the second half of next year. 

For JP Morgan, PanAust remains the most attractive copper producer on the ASX given the combination of a strong balance sheet and exposure to good medium-term production growth as well as a number of project development options.

Despite recent share price strength that leaves the stock trading broadly in line with its valuation, JP Morgan continues to see PanAust as attractive relative to the rest of the sector. This underpins the broker's Outperform rating.

Citi matches JP Morgan's positive rating, noting PanAust's growth options should be able to be pursued given a solid funding positions thanks to strong free cash flow generation. PanAust is also Citi's top copper play on the Australian market.

BA-ML is less positive, rating PanAust as Neutral. While growth options look solid, valuation is the issue for the broker given PanAust is trading at a solid premium to the broker's $2.84 valuation at present.

Credit Suisse is even more conservative, rating PanAust as a Sell given the share price is comfortably above the broker's price target for the stock.

This leaves BA-ML and Credit Suisse as the outliers on PanAust, as the FNArena database shows the six other brokers to cover the company rate the stock as Buy. Price targets range from Credit Suisse at $3.10 to UBS at $4.20, with the consensus target of $3.57 up slightly from $3.54 prior to the quarterly report.

Shares in PanAust today are higher and as at 11.10am the stock was up 4.5c at $3.345. This compares to a range over the past year of $2.19 to $3.84, the current share price implying upside of just under 8% relative to the consensus price target in the FNArena database. 

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