Inside the Market’s roundup of some of today’s key analyst actions. This post will be updated with more analyst commentary during the trading day.
Credit Suisse analyst Anita Soni believes Barrick Gold Corp. is moving in the right direction with its dividend cut and plans to cut costs through the sale or suspension of high-cost mines.
But a lot hinges on gold staying above $1,300 (U.S.) an ounce.
According to Ms. Soni, that’s the “key pinch point” for Barrick’s liquidity and critical to the future viability of its huge Pascua-Lama project, which straddles the Chile-Argentina border. An analysis conducted by Credit Suisse suggests Barrick can finance Pascua’s capital expenditures from cash flows at $1,300 an ounce, with minimal draws on its credit facility.
By comparison, Barrick would need to draw $2.3-billion on its $4-billion credit facility in 2016 at a gold price of $1,200 an ounce.
Barrick must spend a further $4.6-billion on the $10-billion project before production can resume, according to Credit Suisse estimates.
Barrick Aug. 1 took a $5.1-billion impairment charge on the project as it reported second-quarter results, but CEO Jamie Sokalsky isn’t backing away from it. The company has submitted a compliance plan for approval by Chilean regulatory authorities to complete a water-management system by the end of 2014. It’s key for getting Pascua-Lama in production later this decade.
Although Ms. Soni is feeling more upbeat on Barrick’s future, she’s not recommending investors buy shares quite yet.
“Longer term, we like management’s focus on free cash flow and returns but a few key risks remain, keeping us at neutral,” she said in a research note. “First, high debt leverage relative to peers, with asset sales needed to expedite de-leveraging. Second, the current gold price environment, with $1,300/oz a key pinch point for liquidity. Third and far more minor is Pascua Lama capex uncertainty.”
“We need to see one or two more positives for us to move from the sidelines,” she added. “Cost reductions are an excellent start, as are much needed asset rationalizations. While these moves bring the company back towards less risky funding levels, further improvement is needed through either a move higher in the gold price or asset sales. Thus further asset divestitures would be positive while the Pascua Lama capex update with Q3 results and reserve/resource update with year-end 2013 remain key risks.”
Target: Ms. Soni raised her price target to $22 (U.S.) from $20. The average analyst price target is $20.18 (U.S.), according to Bloomberg data.
CIBC World Markets analyst Kevin Chiang upgraded Chorus Aviation Inc. to “sector performer” from “sector underperformer,” as the regional jet carrier nears the end of its drawn out arbitration process with Air Canada over so-called benchmarking.
While both companies have agreed to benchmark the growth of controllable costs at Jazz Aviation, Chorus’ operating unit, to similar operators in the U.S., the two companies disagree over the methodology to do so. A decision is expected by year-end after final arguments are being held next month. Chorus has said it expects to prevail.
“It does appear that we are getting close to the end of this drawn out saga,” said Mr. Chiang. The upgrade, he said, reflects “improved visibility around the benchmarking arbitration, which suggests the current dividend is sustainable under what looks to be the worse-case scenario of the controllable mark-up falling to 7.11 per cent.”
Target: Mr. Chiang maintained a $3 price target. The average target is $2.65.
Raymond James analyst Frederic Bastien downgraded Bird Construction Inc. after another disappointing quarter, which the company blamed on problems with a fixed-price construction project.
Although he remains optimistic about Bird’s long-term prospects – noting that the company has secured $100-million worth of oil sands construction contracts – “the risk of near-term disappointment is too high to be recommending the stock,” said Mr. Bastien.
“Alas, what Bird’s results unmistakably reminds us is that construction stocks, even the best-in-class, aren’t for the faint of heart,” said Mr. Bastien.
Target: Mr. Bastien lowered his price target to $12 from $14 and slashed his rating to “market perform” from “outperform.” The average price target is $12.79, according to Bloomberg data
InterRent Real Estate Investment Trust delivered another solid quarter of growth, with a bump of 5 per cent on same-property net operating income. But it still came in slightly below what Raymond James analyst Ken Avalos was expecting.
InterRent also has a sizable amount of debt about to come due, noted Mr. Avalos, totaling $93-million this year and $54-million next year.
Target: Mr. Avalos cut his price target to $6.50 down from $7 and downgraded his rating to “outperform” from “strong buy.” The average target is $6.62
Although Pure Industrial Real Estate Trust has continued its “torrid pace” of acquisitions and tightened up expense control, offsetting the impact of higher interest rates and administrative costs, it wasn’t enough for Raymond James analyst Ken Avalos.
Growth will be “incrementally more challenging for the REIT over the next few quarters,” said he said.
“In the current macro environment, we believe that the REIT sector will endure more volatility going forward as investors try to figure out the potential impact of changing debt and equity costs, coupled with potential capital outflows into either U.S. REITs or higher risk assets,” said Mr. Avalos.
Target: Mr. Avalos downgraded his rating to “market perform” from “strong buy.” He no longer has a price target. The average Street target is $5.30.
For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @ eyeonequities