By Chris Shaw

Emerging copper producer PanAust ((PNA)) delivered an in-line June quarter production report, output of 16,000 tonnes of copper in the period matching market expectations.

There were some positives in the report, Deutsche Bank noting the result implies full year production in 2010 may come in at the higher end of the reaffirmed guidance range of 60-63,000 tonnes of copper and 43,000 ounces of gold.

The other good element of the production report in RBS Australia's view was it showed PanAust's ability to generate stable operating performance and levels of cash flow from the Phu Kham mine in Laos. As evidence of this, RBS notes, mill throughput was a record at 3.6 million tonnes, which was 19% above design, and recoveries were steady at 70%.

One less positive element for the quarter was an increase in costs, BA Merrill Lynch noting these were a little higher than expected thanks to a combination of lower gold credits, lower copper grades, higher transportation costs and a higher strip ratio.

RBS also commented on costs, noting PanAust expects improvement in haulage costs next quarter, while copper grades are also expected to improve. This means management have not needed to adjust guidance on costs for the full year of US$0.95-$1.05 per pound. RBS remains somewhat conservative, forecasting costs of US$1.07 per pound.

Expansion of the Phu Kham project remains on the cards, Macquarie noting the plant expansion study is likely to be completed in the third quarter and released to the market in the final quarter of this year. RBS sees scope for expanded production to operate at 18-20 million tonnes per annum rather than 16 million at present, which it estimates could see annual production increase to around 70,000 tonnes from 60-65,000 tonnes now.

Looking beyond Phu Kham, the company is evaluating the Ban Houayxai project in Laos, which is an open pit gold-silver project where production of 100-130,000 ounces yer year at low cash costs are expected.

PanAust also has some good exploration ground in Laos and a 59% stake in the Inca de Oro project in Chile, so there is significant scope for the company to continue to develop its operations in coming years.

This pipeline of projects should also see regular news flow for the company, something Deutsche Bank suggests will keep investor interest in the company at high levels. This is enough for Deutsche to rate PanAust as its preferred copper play, so post the production report there is no change to the stockbroker's Buy rating.

RBS Australia is similarly positive, noting its $0.63 valuation includes only 4c for exploration potential in Laos. With the stock trading at a 15% discount to this valuation, there is enough value on offer to Buy the stock in the broker's view.

Most of the market agrees as the FNArena database shows PanAust is rated as Buy seven times and Hold just once. This comes via Macquarie, reflecting its view both Phu Kham and Ban Houayxai are relatively fully priced at current levels.

While Macquarie accepts there is potential upside form positive drilling results at the Phonsavan project in Laos in coming months, the stockbroker argues it is simply too early in the going for this prospect to drive any re-rating of the stock in the shorter-term.

BA Merrill Lynch counters this by pointing out PanAust offers strong leverage to the copper price. As this is the broker's preferred base metal exposure, BA-ML continues to see upside from current levels. BA-ML has a price target on PanAust of $0.65, broadly in line with the average target according to the database of $0.67.

Citi has a similar view, as even after trimming its earnings estimates post the production report, Citi suggests value in PanAust remains compelling and it is the best pick for copper exposure among the Australian plays in the broker's coverage.

Shares in PanAust today are stronger and as at 11.35am the stock was up 1.5% at $0.545. This compares to a trading range over the past 12 months of $0.365 to $0.65 and implies upside of better than 20% to the average price target in FNArena's database.

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