PanAust Holds Promise as Target or Stand-Alone: Real M&A

PanAust Ltd. shareholders may be set for a windfall with or without a takeover of the Australian copper producer.

PanAust in May rejected as too low a A$1.46 billion ($1.3 billion) approach from its biggest investor, China’s Guangdong Rising Assets Management Co. The company then opened its books to Guangdong Rising and another unidentified suitor and asked for formal offers by this month. The stock, which closed above the A$2.30-a-share proposal as recently as August, yesterday traded 23 percent below it, suggesting investors’ expectations have faded for a counterbid at a price PanAust would accept.

Even without a deal, Deutsche Bank AG expects PanAust shares to surge to A$3 in 12 months. The Brisbane-based company is weighing a 20-year development of one of the world’s largest untapped copper and gold deposits in the forested foothills of Papua New Guinea. Meantime, analysts estimate operational mines in Laos will help almost triple PanAust’s profit by 2016.

“Pessimism toward a deal getting done has been growing steadily,” Matthew Trivett, a Brisbane-based analyst at Patersons Securities Ltd., said by phone. “If a takeover doesn’t materialize, any selldown would present a pretty attractive buying opportunity.”

A representative for PanAust declined to comment on the prospects for a deal. Representatives for Guangdong Rising, a state-owned Chinese investment group known as GRAM, didn’t immediately respond to an e-mailed request for comment.

‘Good Value’

PanAust stock today fell 1.4 percent to A$1.75 at the close in Sydney, cutting the company’s market value to A$1.11 billion. The stock has lost 26 percent since Aug. 21, when Managing Director Gary Stafford said a second potential buyer would complete due diligence the following month. He set an October cutoff for bids.

“The fact it has drawn out so long could suggest GRAM are unlikely to follow through,” Reg Spencer, a Sydney-based analyst at Canaccord Genuity Group Inc., said by e-mail.

The company is now cheap, whether it’s being pursued by potential acquirers or not, said Mark Taylor, an analyst at Morningstar Inc. who values the stock at A$2.50. The Laos assets, with enough reserves to last another decade, are the main draw for any new owner and the undeveloped Frieda River project in Papua New Guinea is an added bonus, he said.

“It’s good value,” Sydney-based Taylor said by phone. “The projects are up and running. Cash flow is good.”

Net income at PanAust is projected to reach $107.1 million in 2016 from $36.4 million last year, according to analysts’ estimates compiled by Bloomberg. The flagship mine in Laos is the Phu Kham copper and gold deposit, about 140 kilometers from the capital Vientiane. PanAust expects to access even better quality grades of ore at the site as soon as this year.

All Aboard

The Papua New Guinea project, which the company estimates will cost about $1.7 billion to develop, is designed to sustain earnings beyond the life of the Laos mines. Analysts have become more optimistic about its prospects since visiting the remote site this month.

Frieda River may have average annual production of 125,000 metric tons of copper concentrate and 200,000 ounces of gold concentrate, according to PanAust. PanAust plans to complete a feasibility study by November 2015 and start production in 2019.

The project is viable, Brett McKay, an analyst at Deutsche Bank in Sydney, said in a phone interview after visiting the site. “Jump on board,” he wrote on the front page of his post-tour report on Oct. 14, advising investors to buy PanAust shares.

At Credit Suisse Group AG, analyst Michael Slifirski said in his report after the trip he’s more confident a mine will be built. He expects PanAust stock to reach A$2.46 in the next 12 months.

Frieda Purchase

PanAust bought its 80 percent share of Frieda River in August from Glencore Plc, which had acquired the deposit through its 2013 purchase of Xstrata Ltd. Port Moresby, Papua New Guinea-based Highlands Pacific Ltd. owns the rest of the project.

Compared with Xstrata’s plans for the site, PanAust has scaled back the development, shortening potential access roads and shrinking manpower estimates in a bid to make it viable. The area is similar to terrain in Laos, and PanAust plans to apply some of the same mining techniques.

Any formal offer from Guangdong Rising would now have to value PanAust’s ownership of the project, according to Canaccord’s Spencer.

“The prize is Frieda,” Spencer said. “With the acquisition of Frieda River now complete, any offer from GRAM would have to incorporate significant value for this asset.”

Copper Prices

Recent declines in commodity prices may make buyers less willing to pay up for PanAust now, and Guangdong Rising’s 23 percent stake could deter other bidders, said Tom Sartor, a Brisbane-based analyst at Morgans Financial Ltd.

The Bloomberg Commodity Index, a gauge of 22 commodities including crude oil, gold and copper, this week fell to a five-year low, partly on concern global growth is faltering. Copper, used in houses, power stations and cables and an indicator of economic health, has fallen 11 percent this year, though it’s forecast to climb next year.

“In this environment, we haven’t seen anyone willing to try and pay a premium or get into a bidding war,” said Sartor.

A rival bidder for PanAust may yet emerge, though they might have to offer as much as A$3 a share to convince Guangdong Rising to part with its stake, according to Trivett at Patersons.

Either way, PanAust needs to settle its future in the coming weeks, Trivett said. Stafford said in August the deal process was time-consuming and acknowledged the producer would soon need to move on and focus on its operations.

“It would be in the company’s best interests to try and bring this thing to a head as quickly as possible,” Trivett said. “The fundamentals of the company are quite strong.”

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