Canaccord downgrades 8 gold, silver stocks as it slashes metals outlook

The Globe and Mail

 

(John Lehmann/The Globe and Mail)

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.

Canaccord Genuity has slashed its outlook for gold and silver prices, resulting in sweeping downgrades and price target cuts for many of the precious metals stocks it covers.

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The Canaccord analysts, led by Rahul Paul, lowered their 12-month forecast for gold to $1,350 (U.S.) an ounce from $1,750, and for silver to $23 an ounce from $32.50. Their new forecasts assume gold and silver prices will stay at those new averages for 2014 through 2017.

But the action did not reflect a shift in their longer-term optimism about gold and silver prices; rather, they think a recovery in the commodity markets will take longer than they first forecast. They believe investors in equities are likely to make decisions based on prevailing gold prices over the coming year, not by how much higher bullion will rise over the long term.

“We remain optimistic that the gold price should move substantially higher longer term, given our view that the current environment will likely not justify development of meaningful new gold projects and could lead to reserve declines in the sector, thereby leading to declining global mine supply going forward,” the Canaccord analysts said in a research note. “We also believe that gold’s status as a precious metal, reserve asset and inflation hedge is unlikely to change, thereby continuing to drive ongoing investment and jewellery demand. Despite the year-to-date selling (ETF and COMEX speculative contracts) that has led to an approximate 23 per cent decline in the gold price this year, we expect increased physical and jewellery demand to keep overall demand relatively stable going forward.”

With its revised view on precious metals prices over the coming year, the Canaccord analysts forecast about a 32 per cent decline in earnings for the producers it covers.

The rating downgrades and revised price target changes are as follows:

Alamos Gold Inc. downgraded to “hold” from “buy” with the price target dropping to $15.50 (U.S.) from $18. The average analyst target is $16.66, according to Bloomberg data.

“Alamos remains better positioned than many of its peers to weather a prolonged period of depressed gold prices, thanks to a strong balance sheet (US$373-million cash/US$496-million in working capital as of March 31, 2013) and low cost, profitable production from Mulatos. Under our revised gold price forecasts, we see no external financing requirements to develop the Turkish projects, although we believe any delays in the permitting process could push out our estimated start-up timelines.”

Galane Gold Ltd. downgraded to “hold” from “speculative buy” with the target cut to 20 cents (Canadian) from 80 cents. The average target is 20 cents.

"Based on our current gold price forecasts, we estimate that the Mupane gold mine may be cash flow negative, possibly leading management to put the mine on care and maintenance. Also of concern would be the scheduled debt repayments to IAMGOLD, i.e., $2.53-million due by Q1/14 (due in two installments of $1.26-million each on August 30, 2013 and February 28, 2014, respectively), but we anticipate that IAMGOLD (the largest holder of Galane equity) may be open to extending the repayment deadlines if liquidity constraints were to persist for long). Given the small market cap, we still believe there may be some optionality to higher gold prices or salvage value associated with the infrastructure and/or equipment, thereby limiting downside potential from these levels."

Golden Queen Mining Corp. downgraded to “hold” from “speculative buy” with the target price cut to $1 (Canadian) from $1.65. The average target is $1.

"The (gold price) revisions had significant negative impacts on our underlying valuations for the company’s Soledad Mountain open pit, heap leach project (California), and hence our target price."

Golden Star Resources Ltd. downgraded to “sell” from “hold” with the target cut to 20 cents (U.S.) from $1. The average target is 61 cents.

"Under our revised gold price forecasts, we expect that the Bogoso/Pretea operation will likely not be viable. We continue to see value in the Wassa operation at our revised gold price forecasts. However, we believe that sustaining profitability over the next few years will likely require significant near term capital investments. We believe prevailing market conditions may force the company to drastically cut capital spending over the next 12-months, which in our view, could impact future profitability."

Goldrock Mines Corp. downgraded to “hold” from “speculative buy” with a revised target of 35 cents (Canadian) from 90 cents. The average target is 87 cents.

"Downward revisions in our precious metal forecast and its impact on the valuation of the fully permitted, Lindero open pit/heap leach gold project has led us to defer the forecast development of the project by three years to FQ2/16E (November 2016) with initial production postponed to 2018E. The net impact of these changes was a drop in our NPV11 per cent valuation (~US$30-million, ↓75 per cent) of the Lindero project. A testimony to the project’s leverage to gold price."

Midway Gold Corp. downgraded to “sell” from “speculative buy” with the target cut to 70 cents (Canadian) from $1.65. The average target is $1.56.

"Our commodity price revisions had significant negative impacts (35– 50 per cent) on our underlying valuations for the company’s key projects."

New Gold Inc. downgraded to “hold” from “buy” with the target cut to $7.75 (U.S.) from $11. The average target is $9.90.

"Despite one of the lowest cost and more attractive growth profiles in the sector, approximately 42 per cent of our NAV estimate is tied to unpermitted development stage assets. In a risk-averse environment, we are concerned that this may limit re-rating. Blackwater represents a key component of New Gold’s production growth profile. We consider economics reasonable for a large project, and believe that it should offer NGD shareholders with substantial optionality to higher gold prices. That said, under our revised gold price forecasts, we anticipate that construction may have to be delayed by at least two years so as to develop the project using internal cash flow. We see the potential for further delays if the gold price/capital market conditions were to further worsen."

Pan American Silver Corp. downgraded to “hold” from “buy” with the target cut to $13 (U.S.) from $19.50. The average target is $13.22.

"While Pan American Silver has one of the strongest balance sheets in the sector (US$245-million in cash/ US$738-million in working capital as of March 31, 2013), we estimate that free cash flow would be limited (representing an FCF yield of 5 per cent in 2014E and beyond) under our revised gold and silver price forecasts. Organic growth within the portfolio is limited (mill/pulp agglomeration circuit at Dolores and possible expansion at La Colorada – both pending completion of economic studies), and we expect that without a material improvement in the silver price and the situation in Argentina, Navidad will likely not be built."

Endeavour Mining Corp. maintained as “speculative buy” but price target cut to $1.80 from $3. The average target is $1.69.

"We have updated our model for our revised commodity price deck and assumed a push back of the development of the Houndé project for a start of production in 2018. Given the uncertainty of when development could begin and what will happen with the project, we have also increased the discount rate to 15 per cent from 10 per cent previously. The net impact is a drop in our estimate of NAVPS (5-15 per cent, US$1,350/oz Au) to C$1.98, down from C$4.34."

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Johnson & Johnson delivered solid second-quarter results, with sales and earnings per share ahead of expectations and strong pharmaceutical sales offsetting weaker device and consumer trends, commented RBC Dominion Securities analyst Glenn Novarro.

But he believes shares already reflect high expectations for the company.

Deutsche Bank analyst Kristen Stewart echoed that view, downgrading the stock to "hold" from "buy," believing the stock's valuation is fair.

Target: Mr. Novarro raised his price target to $88 (U.S.) from $82 and reiterated a "sector perform" rating. Ms. Stewart raised her price target to $93 from $92. The average analyst price target, according to Bloomberg data, is $95.50.

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Yahoo Inc.'s second-quarter results were mixed, as earnings beat Street forecasts but revenues once again came up short. But RBC Dominion Securities analyst Mark S. Mahaney remains a believer in a potential turnaround story at the Internet pioneer.

"History suggests that it is a multi-year process built on products and execution, the same strategy (CEO) Marissa Mayer is employing at Yahoo," he commented. "To date, we haven't seen any positive fundamental impact from the accelerated pace of product innovation, but we believe this could happen sometime in 2014."

He estimates the stock is trading at only 2 times EBITDA for its core Internet business, which "still implies very modest expectations."

Target: Mr. Mahaney raised his price target to $32 (U.S.) from $24. The average target is $29.40.

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Credit Suisse analyst Colin Moore has lowered his second-quarter EBITDA forecasts for Rogers Communications Inc. by 3 per cent to reflect weakening results from its media division and slightly higher wireless subsidies.

He also expects higher costs from its Blue Jays baseball team without an offsetting revenue pick-up, but said cable financial trends should remain "relatively strong."

Target: Mr. Moore cut his price target by $2 to $50 and reiterated a "neutral" rating. The average target is $47.62.

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CIBC World Markets analyst Kevin Chiang is taking a more cautious view on oil services provider Mullen Group Ltd., downgrading the stock to "sector underperformer" amid ongoing headwinds in the Canadian energy patch.

Second-quarter rig counts in the second quarter were down 13 per cent from a year earlier, and conditions are expected to remain challenging for the rest of the year. That might mean Mullen shares could come off their highs, given that the company trades at a premium to peers, despite the high quality of its management and its proven ability to execute well even during market downturns, he said.

"Even with the challenging environment, we expect MTL to achieve an EBITDA margin of about 21 per cent and remain disciplined in its capital allocation," said Mr. Chiang. "That said, from a valuation perspective, it appears things are getting stretched, with MTL trading at 7.7x consensus 2014E EBITDA, a significant premium to its peers."

Target: Mr. Chiang maintained a $22 price target. The average target is $23.68.

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