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Why GRAM will need to cough up more for PanAust Limited

Copper producer PanAust Limited (ASX: PNA) is putting its best foot forward to stay ahead of a takeover battle, with management unveiling record production and a sharp improvement in costs.

PanAust is fending off a hostile takeover by its largest shareholder Guangdong Rising Assets Management (GRAM), who is offering $1.71 a share for the 77.5% of the miner it doesn’t already own.

Management considers that to be a lowball bid and is hoping the March quarterly activities report will dissuade shareholders from selling their stock to GRAM through its unconditional offer that closes on May 15.

The strategy appears to be working with shares in PanAust inching up 0.5 cents, or 0.3%, to $1.74. That’s comfortably ahead of the offer price and the gain comes on a day when the mining sector is wallowing in red ink.

This includes the 2.9% crash in Independence Group NL (ASX: IGO) to $5.64 despite the miner also delivering a solid quarterly report, and BHP Billiton Limited’s (ASX; BHP) 1.7% fall from grace to $30.09 as it too handed in its March quarter update.

PanAust produced 21,146 tonnes of copper in concentrate for the three months to March as cash cost of $US1.05 a pound fell 24% over the previous quarter. The more holistic cost measure, called the all-in-sustaining cost (AISC), also fell 22% to $US1.50 a pound for the period.

The miner produced 24,530 ounces of gold at a cash cost and AISC of $US674 and $US862 an ounce, respectively.

The improved cost performance was largely due to lower labour and sustaining capital costs that were a result of its efficiency review initiatives.

Copper is the main game for PanAust and I am taking the cost improvement in copper production with a small grain of salt as I wonder if operations are geared towards near-term performance at the expense of the longer term.

Don’t get me wrong, I think GRAM’s offer is too low. GRAM is sending out feelers to retail investors to gauge their interest, according to a report by the Australian Financial Review, and I suspect most feel the same way.

GRAM had initially proposed a non-binding $2.30 a share offer nearly a year ago that was rejected by the miner as being too low. I would think that GRAM will need to come back closer to that price point to gain wider support.

It is also worth noting that management recently upgraded its production outlook for the next few years and is forecasting copper and gold production to range between 74,000 and 76,000 tonnes and 195,000 and 205,000 ounces for 2015, respectively.

I can’t speak for other shareholders, but I would rather hold on to my shares for the long run and suffer the volatility than sell them at $1.71.

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Motley Fool contributor Brendon Lau owns shares in PanAust and BHP. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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