PanAust. Larger impairment and dividend cut A$1.35 AUSTRALIA. Event. Impact. Earnings and target price revision. Price catalyst

Transcription

1 AUSTRALIA PNA AU Price (at 7:6, 19 Feb 215 GMT) Outperform A$1.35 Valuation A$ - DCF (WACC 11.%, beta 1.7, ERP 5.%, RFR 3.8%) month target A$ month TSR % Volatility Index High GICS sector Materials Market cap A$m 86 3-day avg turnover A$m 4.3 Number shares on issue m Investment fundamentals Year end 31 Dec 214A 215E 216E 217E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % nmf nmf nmf ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x PNA AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February 215 (all figures in USD unless noted, TP in AUD) 19 February 215 Macquarie Securities (Australia) Limited Larger impairment and dividend cut Event PNA s CY14 earnings result was weak, with a larger impairment than expected compounded by a decision to suspend the full-year dividend. Impact Underlying Ebitda was previously released: PNA released its underlying Ebitda forecast with the December quarterly result; hence, revenue and Ebitda of US$697m and US$194m were in line with our expectations. The reported net loss of US$178m was nearly double our forecast due to a much larger impairment charge. Cash flow was broadly in line but dividend cut was unexpected: PNA s operating and free cash flow results were broadly in line with our forecasts as was group net debt of US$19m at the end of December. We had expected a final dividend of $.3 to be declared bringing the full-year payment to $.6. However, due to weak metal prices PNA has decided to suspend the dividend. Impairments larger than expected: A decision to focus its efforts on Frieda River has resulted in PNA writing down the carrying value of all other exploration and development assets. The major impairment charges were US$93m for Inca de Oro, US$31m for Carmen and US$28m for KTL and US$27m on exploration. In addition, Ban Houayxai was written down by US$63m to reflect lower metal price assumptions. Reserve and resource update: PNA has released its updated reserve and resource statement for 215. The new update incorporates reduction in assumed metal prices, which has seen a reduction in reserves and resources for the Ban Houayxai project. Phu Kham saw only modest reductions after accounting for depletion while KTL was removed from reserves. Earnings and target price revision We make only modest changes to our earnings forecasts after factoring in the CY14 earnings result with our CY15 estimate falling 3% and our CY16 and CY17 estimates rising 2-3%. However, we have shortened the mine life of Ban Houayxai by ~4 years to reflect the reduction in reserves and also removed any resource conversion in our base case for Phu Kham, reducing its life by 2 years. The net impact is a 15% cut in our price target from $2. to $1.7. Price catalyst 12-month price target: A$1.7 based on a DCF methodology. Catalyst: Completion of the Frieda River study presents the most significant catalyst for PNA in 215. Action and recommendation Maintain Outperform: The suspension of the dividend was disappointing but probably prudent given the decline in copper prices. However with Frieda River likely to go ahead, we have suspended the dividend until 219. PNA looks cheap despite the reduction in our valuation, and on our estimates the company can comfortably fund Frieda River off its own balance sheet assuming the PNG Government farms into the project. Please refer to page 6 for important disclosures and analyst certification, or on our website

2 CY14 result analysis, reserve and resource update and earnings changes PNA released its underlying Ebitda forecast with the December quarterly result; hence, revenue and Ebitda of US$697m and US$194m were in line with our expectations. Fig 1 Underlying earnings in line but impairment larger than expected CY14 result Macq Actual Variance Revenue (US$m) (1%) Ebitda (US$m) % Ebit (US$m) % NPAT (US$m) (88.2) (178.1) 12% Operating cash flow (US$m) (15%) Free cash flow (US$m) (23%) Net cash / (debt) (US$m) (112) (19) (3%) DPS (Ac) % Source: Company data, Macquarie Research, February 215 PNA s 215 reserves and resources update included a number of significant changes. The reduction in copper and gold reserves at Phu Kham largely reflected mine depletion; however, the company has removed the reserve estimate for the KTL deposit with this project unlikely to be developed at current prices. Fig 2 KTL reserve has been removed Reserves Mt Cu (%) Cu (kt) Au (g/t) Au (koz) Phu Kham old 157.5% ,138 KTL old 8 1.7% Phu Kham new 13.52% KTL new Phu Kham change (17%) 5% (13%) 2% (16%) KTL - change (1%) (1%) (1%) (1%) (1%) Source: Company data, Macquarie Research, February 215 Both reserves and resources at Ban Houayxai have been significantly downgraded in the new update over and above mine depletion. The downgrade reflects incorporating lower metal prices (gold falls from US$1,3/oz to US$1,2/oz), which has resulted in the size of the open pit being reduced and low grade stockpiles have been removed from the reserve estimate. Fig 3 Significant downgrade to Ban Houayxai s reserves and resources Ban Houayxai Mt Au (g/t) Au (koz) Ag (g/t) Ag (koz) Reserves - Old ,259 Reserves - New ,69 Change (28%) 7% (22%) 15% (17%) Resources - Old , ,69 Resources - New , ,73 Change (34%) (6%) (38%) 15% (24%) Source: Company data, Macquarie Research, February 215 We make only modest changes to our earnings forecasts after factoring in the CY14 earnings result with our CY15 estimate falling 3% and our CY16 and CY17 estimates rising 2-3%. However, we have shortened the mine life of Ban Houayxai by ~3 years to reflect the reduction in reserves and also remove any resource conversion in our base case for Phu Kham. The net impact is a 15% cut to our price target from $2. to $1.7 Fig 4 Shorter mine lives at Ban Houayxai and Phu Kham drive valuation cut Y/E December CY15e CY16e CY17e CY18e Price Target Net profit (A$m) - old Net profit (A$m) - new Change (3%) 2% 3% 6% (15%) Source: Company data, Macquarie Research, February February 215 2

3 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-2 Sep-2 Mar-21 Sep-21 Mar-22 Sep-22 Mar-23 Sep-23 Mar-24 Sep-24 Mar-25 Sep-25 Macquarie Wealth Management Fig 5 Phu Kham production forecasts Fig 6 Ban Houayxai production forecasts (kt/koz) Copper production (kt) Gold production (koz) 1. C1 cash costs (US$/lb) AISC (US$/lb) 3.5 (koz) Gold production (koz) Silver production (koz) 1, C1 cash costs (US$/oz) AISC (US$/oz) 1, , , Source: PNA, Macquarie Research, February 215 Source: PNA, Macquarie Research, February 215 Fig 7 Frieda River production forecasts Fig 8 Inca de Oro production scenario (kt/koz) Copper production (kt) Gold production (koz) 3. C1 cash costs (US$/lb) AISC (US$/lb) 3.5 (kt/koz) Copper production (kt) Gold production (koz) 6. C1 cash costs (US$/lb) AISC (US$/lb) Source: PNA, Macquarie Research, February 215 Source: PNA, Macquarie Research, February 215 Fig 9 PNA net cash build Fig 1 PNA NPV breakdown 2,5 Net cash / (debt) (A$m) Market cap (A$m) 2, Other -15% 1,5 1, 5 (5) Inca de Oro % Frieda River 18% Ban Houayxai 7% Phu Kham 6% Source: PNA, Macquarie Research, February 215 Source: PNA, Macquarie Research, February February 215 3

4 Fig 11 PNA summary financials ASX: PNA Price: (A$ps) 1.35 Year end: Dec Rating: Outperform Up/dn TSR Mkt cap: (A$m) 861 Diluted shares (m) Target: % 26% Mkt cap: (US$m) 672 ASSUMPTIONS CY12 CY13 CY14 CY15e CY16e CY17e ATTRIBUTABLE MINE OUTPUT CY12 CY13 CY14 CY15e CY16e CY17e Exchange Rate A$/US$ Copper Production (kt) Copper (US$/lb) Phu Kham kt Gold (US$/oz) 1,668 1,411 1,27 1,255 1,363 1,44 Inca de Oro kt Frieda River kt RATIO ANALYSIS CY12 CY13 CY14 CY15e CY16e CY17e Total copper production kt Diluted share capital m Gold Production (kt) EPS (diluted and pre sig. items) A Phu Kham koz P/E x 5.5x 9.1x 9.7x 21.2x 8.1x 5.4x Ban Houayxai koz CFPS A Inca de Oro koz P/CF x 5.5x 6.5x 6.2x 5.3x 3.4x 2.7x Frieda River koz DPS A Total gold production koz Dividend yield % 5.2% 4.4% 2.2%.%.%.% AISC Franking Level % % % % % % % Phu Kham (US$/lb) Book value per share x Ban Houayxai (US$/oz) , ,33 P/Book value x.x.x.x.x.x.x Inca de Oro (US$/lb) R.O.E. (pre sig items) % 13% 12% 3% -19% 4% 11% Frieda River (US$/lb) R.O.A. (pre sig items) % 17% 1% 7% 6% 13% 16% OPERATIONAL OUTLOOK (PNA share) Interest Cover x 14.1x 6.6x 3.9x 6.2x 21.6x 141.2x Phu Kham Inca de Oro Frieda River C1 Cash costs (US$/lb) AISC (US$/lb) EBITDA per share US$ps EV/EBITDA x 2.8x 3.7x 4.6x 4.6x 2.5x 2.2x 16. (kt) 14. EARNINGS CY12 CY13 CY14 CY15e CY16e CY17e 2.5 Sales Revenue US$m Other Revenue US$m Total Revenue US$m Operating Costs US$m (373) (452) (466) (485) (47) (496) 8. Operational EBITDA US$m Exploration Expense/Write-offs US$m 4. Corporate & Other Costs US$m (15) (2) (22) (2) (17) (17) 2..5 EBITDA US$m D&A US$m (83) (118) (129) (142) (148) (163). EBIT US$m Net Interest US$m (17) (22) (21) (11) (7) (2) RESERVES AND RESOURCES Significant Items US$m (5) (52) (267) Copper (PNA share) Profit Before Tax US$m (27) Reserves Mt Cu (%) kt Tax Expense US$m (54) (26) (15) (14) (38) (58) Phu Kham % 61 Minorities US$m (16) (7) 43 (1) (9) (14) Copper reserves % 61 Reported NPAT US$m (178) Resources Mt Cu (%) kt Significant Items US$m (5) (52) (267) Phu Kham % 979 Adjusted NPAT US$m LCT 27.8% 22 Inca de Oro 36.36% 1,91 CASHFLOW CY12 CY13 CY14 CY15e CY16e CY17e Frieda River 1,185.49% 5,785 Net Profit US$m Copper resources 517.4% 2,92 Interest/Tax/D&A US$m Working Capital/other US$m (1) (3) (11) (8) Gold (PNA share) Net Operating Cashflow US$m Reserves Mt Au (g/t) koz Capex US$m (22) (125) (123) (155) (68) (42) Phu Kham Investments US$m Ban Houayxai Sale of PPE and Other US$m (8) (5) Gold Reserves ,544 Free cash flow US$m (82) (6) (13) Resources Mt Au (g/t) koz Dividends Paid US$m (17) (37) (29) Phu Kham ,46 Debt US$m (41) (36) (9) Ban Houayxai ,53 Equity Issuance US$m 11 3 LCT FX impact US$m 1 (1) (1) Inca de Oro Net Financing Cashflow US$m (71) (36) (9) Frieda River 1, ,552 Net change in cash US$m (3) 5 (56) (28) 93 (13) Gold Reserves 1, ,478 BALANCE SHEET CY12 CY13 CY14 CY15e CY16e CY17e EQUITY DCF VALUATION Cash US$m Projects A$m A$ps PP&E & Mine Development US$m 1,69 1, ,166 Phu Kham Other US$m Ban Houayxai Total Assets US$m 1,386 1,436 1,188 1,19 1,24 1,437 Inca de Oro Debt US$m Frieda River Total Liabilities US$m Resources Total Net Assets / Equity US$m 1,175 1, ,163 Unpaid capital & investments 8.1 Net Debt / (Cash) US$m (82) 22 Corporate (124) (9) Gearing (net debt/(nd + equity)) % 3% 7% 1% 1% (9%) 2% Net cash (debt) (117) (8) Gearing (net debt/equity) % 3% 8% 11% 11% (8%) 2% Net Equity Value (@ 11% WACC) 1, Price Target (1x NPV) 1.7 Source: PNA, Macquarie Research, February February 215 4

5 Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a reasonably negative view on. The strongest style exposure is Valuations, indicating this stock is under-priced in the market relative to its peers. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 24/254 Global Alpha Model Sector Rank % of BUY recommendations 79% (15/19) Number of Price Target downgrades 23 Number of Price Target upgrades 1 Attractive Quant Rank within Country Rank within Sector Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. The rankings are displayed relative to the sector and country. Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score % -8% -6% -4% -2% % 2% 4% 6% 8% 1% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple % -5% % 5% 1% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. PEG Ratio Inverted Price to Earnings NTM Relative Turnover Piotroski Score Dividend Yield LTM Altman Z-Score Earnings Stability Net Buybacks to Mkt Cap Negatives Positives -22% -24% -27% -18% 27% 25% 23% 33% -4% -2% % 2% 4% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and country Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/254) Percentile relative to country(/24) For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 19 February 215 5

6 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie First South - South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 214 AU/NZ Asia RSA USA CA EUR Outperform 51.8% 58.6% 45.7% 44.42% 6.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients) Neutral 31.8% 27.37% 3.99% 5% 35.37% 33.51% (for US coverage by MCUSA, 3.8% of stocks followed are investment banking clients) Underperform 16.39% 14.57% 23.94% 5.48% 4.8% 19.68% (for US coverage by MCUSA,.44% of stocks followed are investment banking clients) PNA AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, February month target price methodology PNA AU: A$1.7 based on a DCF methodology Company-specific disclosures: PNA AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Panaust Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 29-Jan-215 PNA AU Outperform A$2. 15-Jan-215 PNA AU Outperform A$2.3 2-Sep-214 PNA AU Outperform A$2.8 3-Jun-214 PNA AU Outperform A$ May-214 PNA AU Outperform A$ Apr-213 PNA AU Outperform A$ Feb-213 PNA AU Outperform A$ Jan-213 PNA AU Outperform A$ Oct-212 PNA AU Outperform A$ Sep-212 PNA AU Outperform A$ Apr-212 PNA AU Outperform A$ Feb-212 PNA AU Neutral A$3.9 Target price risk disclosures: PNA AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 19 February 215 6

7 General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 19 February 215 7