Monday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions

Gold is likely to maintain its lustre in 2016, according to Raymond James analyst Phil Russo.

"We continue to believe that the set up for gold in 2016 is robust as broader market uncertainty across the globe and the subdued motivation for further near-term increases in U.S. interest rates, should collectively fuel gold's hard-asset appeal in the coming months," said Mr. Russo. "We view strong year-to-date inflows in gold ETFs as a key indicator of the strength of support for the metal at current levels."

Accordingly, Mr. Russo raised his gold price deck by almost 11 per cent to $1,275 per ounce from $1,150, noting the price of gold has risen almost 20 per cent thus far in 2016.

"The last time we updated our price deck was July 2015, as gold has gone through a consolidation period over the last couple of years," he said.

Mr. Russo also raised his silver price deck by 6 per cent to $16.50 per ounce from $15.50.

In reaction to these increases, he raised his target prices and altered his ratings for several companies, including:

Agnico Eagle Mines Ltd. (AEM-N, AEM-T) to "market perform" from "outperform" with a target of $42 (U.S.) from $32.50. Consensus is $35.68.

Mr. Russo said: "Our call to lower Agnico Eagle to market perform is purely valuation driven with Agnico enjoying a leading premium to net asset value (NAV) above our historical levels. Adjusting for our price deck change, Agnico still reigns superior versus the group. While lowering Agnico's rating for being rewarded for strong execution form is unsettling for us, valuation inevitably comes into play and we expect Agnico to reach lower highs for now on the tailwinds of general appreciation in the sector. At this point, we feel we have baked in reasonable value for its sphere of projects and mines, handing meaningful value for Meliadine, Amaruq and El Barqueno and other opportunities in its pipeline; updates on these assets, amongst others, could represent potential positive catalysts."

Yamana Gold Inc. (AUY-N, YRI-T) to "outperform" from "market perform" with a target of $4.50 (U.S.) from $3.25. Consensus is $3.54.

Mr. Russo said: "Our Market Perform rating on Jan. 15 was predicated at gold prices $182/oz lower than today where at those levels we foresee pressure building on Yamana's financial position. At today's spot prices, Yamana is a different company, offering significant upside in FCF and NAV leverage for investors as limitations in its financial flexibility abate. As a laggard, the risk/reward is attractive in our view, particularly given the name essentially met expectations in 2015 with good operating performance expected to continue through 2016."

Royal Gold Inc. (RGLD-Q) to "market perform" from "outperform" with a target of $62 (U.S.) from $55. Consensus is $50.11.

Mr. Russo said: "Royal Gold has outperformed its immediate peers since the sector saw a broader recovery in mid-January, rising 94 per cent vs peers at 59 per cent. That level of recovery is justifiable given the significance of the underperformance prior as the stock saw increased focus around its Mt Milligan cash flows and as the market digested the disappointment of the Rubicon suspension. At current levels, we see exposure in the name to Mt Milligan (versus earlier when arguably those cash flows had been priced out) and despite the likelihood the mine will continue to operate through Thompson Creek's restructuring process, the heightened level of uncertainty combined with the company's improved valuation has us taking pause at current levels."

Semafo Inc. (SMF-T) to "market perform" from "outperform" with a target of $5.50 (Canadian) from $5. Consensus is $5.49.

Mr. Russo said: "We continue to view SEMAFO as an attractive free cash flow (FCF) generator, with a good growth profile and strong balance sheet, we would wait for a pullback in valuation to become more constructive on the name."

Newmarket Gold Inc. (NMI-T) to "strong buy" from "outperform" with a target of $3.30 from $2.20. Consensus is $2.60.

He said: "We continue to believe NMI is in the midst of a market re-rating as the company continues to unlock value at its Fosterville mine (high grade Phoenix/Eagle zone) leading to expanded margins (assisted by a strong Aussie dollar gold price). The stock is attractively valued, trading at a 0.8x price/net asset value which is below junior/intermediate peers at 1.0x, a gap which we believe will narrow, a reflection of our revised SB1 rating."

Fortuna Silver Mines Inc. (FVI-T) to "outperform" from "strong buy" with a target of $6.30 from $5. Consensus is $5.26.

Mr. Russo said: "Whilst we have adjusted our target price higher .. driven by our revised silver and gold price assumptions, a reduced return to our target (15 per cent) supports a re-rating ... We note that our revised silver price assumption is currently 6 per cent above spot, and Fortuna's 2016 production weighting is 50 per cent silver, 23 per cent gold and 27 per cent base metals by value (using base case metal prices). Fortuna currently trades at a 1.2x P/NAV which is in-line relative to peers, a reflection of our revised rating."

Endeavour Silver Corp. (EDR-T, EXX-N) to "underperform" from "market perform" with a target of $2 from $1.50. Consensus is $2.40.

Mr. Russo said: "We have adjusted our target price higher … driven by our revised silver and gold price assumptions. However. a lofty valuation (2.1-times NAV) and a negative 45-per-cent return to our target warrants a downgrade.... We also have some operational concerns surrounding Endeavour's asset base, with El Cubo transitioning to care and maintenance later this year, and the company guiding to a very weak year of production at Bolanitos, supporting our belief the stock is overvalued at current levels."

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BMO Nesbitt Burns analysts expect precious metals equities to outperform over the next 12 months and offered a word of advice to investors – "take profits."

In a research note entitled "Spring Into Growth, But Summer Better Than Others," the analysts said they expect seasonality to "moderate" precious metals prices from current levels through the second quarter of 2016. They revised their near-term prices, noting "economic uncertainty has raised the floor for precious metals.

"Over the past couple of years, we have advocated a defensive strategy for investors focused on the senior miners that provide a combination of asset quality, balance sheet strength, superior management and liquidity," said analysts Andrew Breichmanas, Jessica Fung, Andrew Kaip and Brian Quast. "Our increased 2016 and 2017 estimates, combined with the recent outperformance of the more defensive names, lead us to suggest investors begin to expand their focus and consider looking at some equities that have lagged and appear to offer better value. These less-defensive names tend to be smaller producers that often have superior growth profiles to the larger producers, which lead these companies to deliver better leverage to higher metals prices."

The group raised their 2016 gold price assumptions by 12 per cent to $1,175 per ounce and silver by 5 per cent to $14.69. Accordingly, their earnings per share forecasts have risen on average by 94 per cent and cash flow per share forecasts by 24 cents. Their target prices also rose 24 per cent.

They also changed their ratings for several companies. They upgraded the following:

Mandalay Resources Corp. (MND-T) to "outperform" from "market perform" with a target price of $1.25 (from $1.05) per share. Consensus is $1.04.

BMO: "Raising our near-term gold and silver price assumptions has had a significant impact on our Mandalay valuation. With relatively short mine lives, Mandalay is more sensitive to near-term changes in commodity price assumptions, and our net present value (NPV) for the company increases almost 10 per cent, while our 2016 estimate cash flow per share (CFPS) increases over 30 per cent.

Newmarket Gold Inc. (NMI-T) to "outperform" from "market perform" with a target price of $2.75 (from $2.25) per share. Consensus is $2.60.

BMO: "Newmarket has relatively high leverage to our gold price estimates, particularly in the nearer term, so our 5-per-cent NPV increases by 36 per cent and our 2016 estimated CFPS estimate increases by 37 per cent following the increase in our 2016 and 2017 gold price estimates."

Centerra Gold Inc. (CG-T) to "speculative outperform" from "market perform" with a target of $10 (from $8.25) per share. Consensus is $6.88.

BMO: "The stock currently trades at 1.0 times NPV5 per cent and 5.5 times cash flow per share versus peer averages of 1.2 times and 10.6 times, in line with the historical discount afforded the company due to greater jurisdictional risks within its portfolio of assets. However, the company has begun to advance a suite of development projects that should see most of the company's value weighted toward more attractive jurisdictions within three years and ultimately enable production to exceed 1.0  [million] oz. With cash and short-term investments of $542.2-million at year end, the company appears well-funded to execute its organic growth plans."

Sabina Gold & Silver Corp. (SBB-T) to "speculative outperform" from "market perform" with a target of $1.40 (from 75 cents) per share. Consensus is $1.19.

BMO: "Positive. In our view, results of the latest feasibility study (released in September, 2015,) reflected a constructive step toward demonstrating a viable development scenario for the Back River project in the context of a challenging capital markets environment. Since the release of the study, the gold price has increased 13 per cent and SBB's market value has increased 170 per cent. Growth in the company's market capitalization should lessen the dilutive impact of future financing requirements, which would reflect an important de-risking event to support project advancement."

Alacer Gold Corp. (ASR-T) to "market perform" from "underperform" with a target price of $3.10 (from $2.70) per share. Consensus is $3.04.

BMO: "Relative to other precious metals producers, Alacer has underperformed the group over recent months. Compared to the GDXJ, Alacer has underperformed by [about] 31 per cent year to date. While risks still remain regarding commissioning the start-up of the sulphide project, we believe the valuation of ASR is now sufficiently compelling to upgrade Alacer."

Pan American Silver Corp. (PAAS-Q, PAA-T) was raised to "market perform" from "underperform" with a target price of $10.50 (U.S.) from $5.75 per share. Consensus is $8.91.

BMO: "We believe PAAS's progress at Dolores and La Colorada should be recognized for the meaningful impact it will have on PAAS's margins going forward. The company provided a three-year outlook in January, emphasizing that these are projects for the much longer term. We have also incorporated the relatively high capex costs at Dolores over the next three years, which in our view provided transparency around the scope of this project. We view less of a risk to dividends given our higher price deck; with debt still manageable over the long term."

The group downgraded the following companies:

New Gold Inc. (NGD-T) to "market perform" from "outperform" with a target price of $5.75 (Canadian) from $5.25 per share. Consensus is $5.07.

BMO: "While the price target for New Gold still increases as a result of increasing our 2016 and 2017 commodity price estimates, this increase is muted since there are collars placed on the Q2-Q4 2016 gold price (270 koz collared between $1,200/oz and $1,400/oz)."

Richmont Mines Inc. (RIC-T) to "market perform" from "outperform" with a target price of $8.50 (from $7.50) per share. Consensus is $7.37.

BMO: "Richmont has had a strong performance year to date, outperforming the GDXJ by [about] 23 per cent. While our price target increases for Richmont as a result of raising our gold price estimates, other smaller producers have more leverage to changing commodity price estimates."

First Majestic Silver Corp. (FR-T) to "underperform" from "market perform" with a  target price of $5.50 (from $5) per share. Consensus is $11.94.

BMO said: "We believe FR's share price performance year to date was driven by two things: the expectation that silver would outperform gold on the way up, and the incorporation of better margins at Santa Elena, which we already included in our model following 2015 earnings results. however, we also acknowledge that if we are wrong in our silver view, and silver prices stage a late rally, FR could offer commodity and operational leverage for investors."

True Gold Mining Inc. (TGM-X)  to "market perform" from "speculative outperform" with a target price of 50 cents (from 35 cents) per share. Consensus is 50 cents.

BMO: "We are downgrading our recommendation on shares of True Gold ... on its acquisition by Endeavour Mining. The company has brought the Karma project tantalizingly close to production, with construction 98-per-cent complete, ore stacked on the leach pads, and irrigation under way to achieve a first gold pour around the end of March. Management should be commended on advancing the project through social and political unrest to the brink of completion. However, the consideration appears to represent an appropriate blend of the historical averages for producing mines (96 per cent) and development-stage projects (73 per cent) given the advanced stage of Karma construction."

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It is hard to see "the light at the end of the tunnel" for Canadian Energy Services & Technology Corp. (CEU-T), said BMO Nesbitt Burns analyst Michael Mazar.

After lower-than-expected fourth-quarter results, Mr. Mazar downgraded his rating for the Calgary-based company to "market perform" from "outperform."

On Thursday, the company reported quarterly earnings before interest, taxes, depreciation and amortization of $8-million, below both Mr. Mazar's projection of $22-million and the consensus of $20. Mr. Mazar pointed to a "lower top line combined with weaker margins and higher-than-modelled [expenses]." Revenue of $165-million also failed to meet the estimate of Mr. Mazar (and the consensus) of $178-million.

"Severe pricing pressure has continued into 2016, with poor North American activity levels expected to weigh on performance," the analyst said. "The Q4 results were particularly disappointing given the resilience the business model has shown over the last few quarters. It appears that severe activity declines and pricing pressure have now caught up to CEU, and given industry inventory overhangs on the fluids side it could be several quarters before pricing normalizes."

In reaction to the results and the "weak" activity environment, Mr. Mazar lowered his 2016 earnings per share forecast to a loss of 19 cents from a profit of 3 cents. His 2017 projection fell to 2 cents from 5 cents.

He also lowered his target price for the stock to $3.75 from $5.25. Consensus is $5.18.

"While CEU's production and specialty chemicals offerings continue to experience growth, it is at a lower rate in a challenging pricing environment," he said. "The production orientation of CEU's chemicals businesses helps to offset some of the activity-driven declines in drilling fluids and frac chemicals but the overall business does not appear to be as insulated from lower activity levels as previously demonstrated.

"Our revised estimates also imply a significantly stretched balance sheet, with net debt/EBITDA of nearly 25 times and a payout ratio over 100 per cent (we're not sure of the rationale for continuing to pay the dividend). Given the extremely challenging market conditions, declining cash flow, increasing leverage, and lack of near-term catalysts, we think there are better risk-reward profiles available elsewhere and are lowering our rating … and reducing our target price."

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Citing limited near-term catalysts and the potential for multiple compression, Citi analyst P.J. Juvekar downgraded Monsanto Co. (MON-N) to "neutral" from "buy."

"MON has been one of our favourite long-term growth stories over the past several years. But in the current Ag downturn MON's high-tech biotech seeds have come under more pricing pressure than we expected," he said. "Competition from Pioneer and others has been intense (particularly in older seed) and some farmers on the fringes of the U.S. cornbelt may be trading down to lower-tech seeds. Given the lack of near-term catalysts, we move to the sidelines."

Mr. Juvekar said without high grain prices there are risks to the company's ability to raise seed prices and "reaccelerate" seeds profit growth. Thus, he said there are risks to Monsanto's long-term growth outlook.

He added: "With mega cap companies such as DowDuPont being created, along with the proposed acquisition of Syngenta by ChemChina, MON's options to acquire Ag chemicals now seem limited. MON has consistently argued over the past year, starting when it first bid for Syngenta, that they need to integrate seed and chemical offerings. If MON tried to do a joint venture (JV) with Bayer or BASF, MON will have to pay up to buy into the JV, creating deal risk to shareholders. We think MON's multiple is likely to come under pressure in such a scenario because Ag chemicals tend to trade at a lower multiple than the biotech seed business."

He dropped his target price for the stock to $95 (U.S.) from $105. Consensus is $101.11.

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BMO Nesbitt Burns analyst Ben Pham downgraded Veresen Inc. (VSN-T) in reaction to a Federal Energy Regulatory Commission (FERC) decision denying its Jordan Cove/Pacific Connector Gas Pipeline plan.

Moving his rating to "underperform" from "market perform," Mr. Pham said: "We thought project challenges would be on the contracting front, but it appears the regulatory environment is also against VSN too."

He sees three "key implications for the company from the decision: 1) The FERC noted that the pipeline project did not demonstrate sufficient commercial support to outweigh the adverse effects on landowners. As the pipeline was denied, the JC terminal in turn was also denied. We had expected contracting challenges in the context of the LNG supply glut and depressed gas prices, but not FERC denial. VSN plans to file a request for a rehearing of the decision and says that it will continue to advance discussions with potential customers. This no doubt pushes the JC timelines further out into the future. 2) Though our analysis suggests that near-term cash flow could support the $1.00 dividend, with timelines continuing to slip on JC, we find it harder to support a payout calculation on distributable cash flow before LNG development costs; we estimate a payout closer to 150 per cent after JC expense for 2016 and not the guided 93-106 per cent. If our estimates are right, one has to acknowledge that there is a material risk of a dividend cut. 3) There are no changes to our estimates and JC was never reflected in our valuation, but we are now applying a wider valuation discount to peers than before. The shares appear to trade at a 15 per cent discount to peers, but when adjusted for JC expense, it trades at a 20-per-cent premium. Whether you include development expenses or not, one has to acknowledge the payout is high by any measure."

He lowered his price target to $6 from $8. Consensus is $11.70.

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In other analyst actions:

Alamos Gold Inc (AGI-T) was downgraded to "neutral" from "buy" at Dundee by equity analyst Josh Wolfson. The 12-month target price is $6 (Canadian) per share.

Baytex Energy Corp (BTE-T) was downgraded to "market perform" from "outperform" at FirstEnergy Capital by equity analyst Michael Dunn. The 12-month target price is $5 (Canadian) per share.

Cabot Corp (CBT-N) was downgraded to "neutral" from "overweight" at JPMorgan by equity analyst Jeffrey Zekauskas. The 12-month target price is $47 (U.S.) per share.

Home Capital Group Inc (HCG-T) was downgraded to "market perform" from "buy" at Cormark Securities by equity analyst Jeff Fenwick. The 12-month target price is $38 (Canadian) per share.

IBI Group Inc (IBG-T) was downgraded to "hold" from "speculative buy" at Canaccord Genuity by equity analyst Yuri Lynk. The target price is $4.25 (Canadian) per share.

Snipp Interactive Inc (SPN-X) was rated new "buy" at Paradigm Capital by equity analyst Kevin Krishnaratne. The 12-month target price is 65 cents (Canadian) per share.

Tesla Motors Inc (TSLA-Q) was raised to "outperform" from "neutral" at Robert Baird by equity analyst Ben Kallo. The 12-month target price is $300.00 per share.

Waste Connections Inc (WCN-N) was downgraded to "hold" from "buy" at BB&T Capital by equity analyst Charles Redding.

With files from Bloomberg News