PANAUST (PNA) BUY

By Jason Fittler

PanAust Limited (PNA) is a copper and gold producer with interests in Laos and Thailand. The company is headquartered in Brisbane and owns a 90% stake in Phu Bia Mining Ltd, a Lao-registered company.

A  A$385m combined equity offer and cornerstone investment by Chinese investor GRAM, will,  if approved dramatically reduce balance sheet risk and allow PNA to refocus on building value in its growth pipeline. The deal requires approvals from PNA shareholders, FIRB and Chinese regulators.

Recent similar decisions, with PNA’s assets overseas, suggest to us that regulatory risks are moderate to low.

The US$80m in subordinated debt will be repaid, while US$185m in Project Debt will be partially or fully re-paid.

We expect this deal to give PNA leverage in replacing its Project Debt with a corporate facility allowing a prudent gearing level in time. This would free up funding flexibility enabling cash flow to be directed toward expanding Phu Kham, evaluating Ban Houayxai and pursuing regional exploration.

Our revised valuation of 40cps assumes the deal completes with proceeds offsetting debt and applies a reduced the weighted average cost of capital of 11%, as a result of the de-risking the balance sheet.

Our target price of 44cps is set at a premium to reflect spot copper prices trading above our forecasts. This is a good stock to own but keep in mind that size of the company and speculative nature of its business before buying.