Yamana Gold
Inside the Market's roundup of some of today's key analyst actions
BMO Nesbitt Burns' mining team believes most commodities are "moving up the recovery curve."
In a research report on the global metals and mining sector, the firm said it expects some prices "to fade slightly from spot." However, they said "the bearish sentiment that plagued late 2015 and early 2016 is behind us."
"This has been a long, hard climb – driven by oversupplied markets and slowing demand growth," the report said. "The recovery is therefore dependent on the supply side as we continue to believe that global demand growth is structurally slowing. We do maintain a modicum of caution in our price forecasts, however. We expect potential headwinds from: 1) A stronger U.S. dollar, and 2) Our view that the run-up in some industrial commodities has been too far, too fast in a slow-growth recovery."
They added: "Our outlook for the precious metal equities can best be described in Dickens-like fashion as a 'Tale of Two Themes.' On one hand, the downgrade of our gold and silver outlook for 2017 is a clear message to investors that we believe a key element of an investment thesis of the precious metal sector is likely to be absent through most of 2017. Given strong sector fundamentals, valuations for the gold and silver companies under coverage remain reasonable, in our view, even accounting for our more conservative outlook for gold and silver prices in 2017. That said, an investment case for gold and silver can be supported by continued global macroeconomic uncertainty and related volatility combined with sector fundamentals and relative valuation.
"We expect the macro outlook to continue to cloud a precious metal strategy, but recognize that the risk is to the upside given our view that markets are already pricing in the impact of three Fed rate hikes in 2017. In our view, global political uncertainty combined with the fragility of economic recovery within Europe and continued quantitative easing continue to be supportive of precious metals when the markets refocus on these systemic risks. The precious metals equities have come a long way since the dark days of 2013 when gold and silver equities were caught with bloated costs and at peak debt levels fueled by ill-timed growth strategies. Even after mark-to-market adjusting our gold and silver prices, and adjusting our gold and silver prices for 2017, our forecast presents a relatively constructive outlook for the sector that in aggregate should continue to generate free cash flow (3.0-per-cent free cash flow yield in 2017) and positions to withstand lower prices, as suggested by free cash flow breakeven prices for the next three years of $960 (U.S.) per ounce gold and $9.29 per ounce silver, on average, including growth capex."
The analyst said they have "reverted toward a more defensive investment strategy along with a focus on equities that host key catalysts, providing investors exposure to alpha," given the prevailing belief that president-elect Donald Trump's policies will have a positive impact on the U.S. economy.
Accordingly, they lowered their target prices for precious metals producers by 23 per cent, on average, for the precious metals producers under coverage.
They also made several rating changes to stocks in the sector. They are:
Asanko Gold Inc. (AKG-T) was downgraded to "market perform" from "outperform" by Andrew Breichmanas. His target fell to $5 from $7. The analyst average is $6.67, according to Bloomberg.
"The company has successfully delivered the Asanko Gold Mine into production and has elected to initiate the Phase 2A expansion from 3.6Mtpa [million metric tonnes per annum] to 5.0Mtpa," said Mr. Breichmanas. "However, the stock now appears to be valued more in line with peers trading at 1.1x NPV [net present value] 5 per cent and 11.8x 2017E cash flow versus peer averages of 1.2x and 10.0x respectively. At sustained lower gold prices, focus would likely shift towards the company's ability to fund its expansion plans."
Mr. Breichmanas raised SEMAFO Inc. (SMF-T) to "outperform" from "market perform." His target fell to $5 from $7. The average is $6.61.
"At spot prices, the stock currently trades at 1.2x NPV5 per cent versus its trailing two-year average of 1.8 times and a peer average of 1.8x," he said. "With permits for the Natougou project expected imminently, the company appears poised to roughly double its production and improve costs as Mana transitions into processing lower grades.
Yamana Gold Inc. (AUY-N, YRI-T) was downgraded to "market perform" from "outperform" at BMO by analyst Andrew Kaip. His target dropped to $3.25 (U.S.) from $5.92. The average is $4.66.
"In the current gold price environment, we expect that 2017 may be a challenging year for shares of AUY," said Mr. Kaip. "At spot prices, the company appears unlikely to meet management net debt reduction targets, and we see a potential funding shortfall in late 2017/early 2018, absent additional asset sales, or deferral of capital spending at Cerro Moro."
Goldcorp Inc. (GG-N, G-T) was downgraded to "market perform" from "outperform" by Andrew Kaip. His target fell to $15 (U.S.) from $23. The average is $18.52.
"We continue to be constructive on GG's longer-term outlook," he said. "However, in our view, shares of GG are unlikely to outperform the peer group until several key catalysts are delivered, which we do not expect until late 2017."
Mr. Kaip downgraded Kinross Gold Corp. (KGC-N, K-T) to "market perform" from "outperform" with a target of $3.75 (U.S.), down from $6.50. The average is $4.87.
"Following strong performance in 2016, KGC shares appear fully valued relative to peers and historical averages," he said. "Further, we expect that investors will focus on the impact of capital spending at Tasiast on FCF generation, and the potential for production to be at the bottom end of guidance, which may limit upside for shares of KGC in 2017."
Mr. Kaip lowered Sabina Gold & Silver Corp. (SBB-T) to "market perform" from "outperform" with a target of $1 (Canadian.), down from $2. The average is $1.16.
"Following the recommendation by the Nunavut Impact Review Board that Back River not proceed to licensing and permitting, we do not expect shares of SBB to outperform until further clarity on permitting timelines at Back River is provided," said the analyst.
Citing "reasonably strong sector fundamentals," the analysts called the current valuations for gold and silver companies, in general, reasonable based on their "more conservative" price outlook for 2017. However, they said momentum favours other sectors.
"Despite our constructive view for the precious metal equities supported by the 'safe-haven' qualities of gold and by their relative valuation, we recognize that momentum currently favours the material subsectors geared to an improving U.S. economic outlook," they said. "We see the best risk/reward for the large cap global diversified stocks, the U.S. steel producers, and select copper equities; particularly when you consider that precious metals equities under coverage trade at a premium to the base and bulks companies under coverage, on average."
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TMAC Resources Inc. (TMR-T) is set to become Canada's next gold producer following the completion of the Hope Bay project in Nunavut early next year, according to RBC Dominion Securities analyst Sam Crittenden.
TMAC acquired the mine from Newmont Mining in March, 2013.
"The anticipated start up at Hope Bay provides near term production located in Canada, which is known for being a stable, mining-friendly jurisdiction," said Mr. Crittenden, who initiated coverage of the stock with an "outperform" rating.
"We believe TMAC offers investors material near term, low-cost production, and the company could potentially re-rate higher as the mine is derisked and ramped up towards full production."
Mr. Crittenden added that the company has the potential for "significant" free cash flow (FCF) despite lower gold prices, noting: "TMAC stands out as one of the higher grade gold projects, with a reserve grade of 7.7 g/t Au … We believe this translates into low costs and significant FCF generation, averaging $120-million annually over the 20 year mine life on our RBC price deck using $1,300 (U.S.) per ounce long-term, or $80-million at a flat $1,100 per ounce gold price. This FCF provides flexibility to repay construction debt and expand production."
"There is already a significant mineral resource at Hope Bay … and recent drilling highlights the potential to expand the known deposits which could have a meaningful impact on project economics. In particular, recent drilling at depth at the Doris deposit has the potential to extend the mine life in that area while promising drilling in the northern portion of the Madrid deposit could expedite and lower costs of Phase 2 of the mine plan."
Mr. Crittenden set a price target of $20 for the stock. The analyst consensus price target is $20.33, according to Thomson Reuters.
"We believe TMR presents an attractive risk/reward opportunity, with a compelling valuation at 0.7 times NAV [net asset value]. Our base case NAV of $18.24 uses a 7-per-cent discount rate and a long term gold price of $1,300 per ounce with CAD/USD of 0.80. Our $20.00 target is based on 1.1x NAV and 11.0x our adjusted CFPS [cash flow per share] estimate, in line with Tier III peers. We calculate an upside case of $25 if exploration success translates into expanded production, while our $10 downside case assumes higher costs and lower grades."
He added: "We believe there is further upside despite the outperformance in shares year to date, as we expect a potential re-rating as Hope Bay moves towards commercial production. It is trading at 0.7x our NAV estimate currently vs. more established producing peers trading at a premium to NAV. Recent exploration success highlights the potential to expand the resource and grow production beyond the current base case of 165,000 ounces per year."
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Tree Island Steel Ltd. (TSL-T) is "nailing it," said Canaccord Genuity analyst Roman Trusz.
He initiated coverage of Richmond, B.C.-based manufacturer and supplier of wire products with a "buy" rating.
"With [approximately] 43 per cent of sales coming from the construction sector, the thriving U.S. housing market and significant non-residential spending on tap across North America provide a long, stable runway of growth," said Mr. Trusz. "More specifically, the National Association of Home Builders expects U.S. housing starts to grow 10 per cent in 2017 and 9 per cent the following year, with leading indicators continuing to support the forecast. On the non-residential front, Canada and the U.S. should see mid-single-digit growth through 2019. Providing potential upside to the forecast is $465-billion of infrastructure investments planned from Canadian federal and provincial governments, while we could see upwards of an additional $1.51-trillion spent on infrastructure in the U.S. over the coming years."
Mr. Trusz called the company's management "solid operators and strong capital allocators." He added its done an "impressive" job in growing revenue since taking over in 2011 with 11-per-cent compound annual growth rate (CAGR) and an improving earnings before interest, taxes, depreciation and amortization (EBITDA) margin, rising from 0.0 per cent in 2010 to 9.1 per cent in the third quarter of 2016.
"By executing on the business strategy and operational excellence initiatives, gross profit per ton over the same period has increased to $239 from $121," he said. "Capital allocation is equally impressive, with management driving ROIC [return on invested capital] steadily from negative 4.0 per cent in 2011 to 16.6 per cent in Q3/16."
He added: "In our view, the hidden real estate value not reflected on the books points to a higher valuation. We believe the two properties located in the Greater Vancouver Area and the Greater Los Angeles Area are worth $2.50 per Tree Island Steel share after tax. Under a lease back scenario, we see value of $5.75 per share, with the current 12x P/E multiple applied to 2017E earnings pro forma a 5.5 per cent cap rate on the properties."
Mr. Trusz predicts "modest" EBITDA growth period going forward, driven by "a better product mix, production efficiencies related to the recent consolidation of residential production, and overall operating leverage from higher volumes."
He is forecasting EBITDA of $23-million for 2016, an increase of 24 per cent year over year, $23-million in 2017 (3 per cent) and $25-million in 2018 (8 per cent).
"On the EPS front, we expect a downward trend through 2017 before growing in 2018, as deferred tax assets roll off in 2016," said Mr. Trusz.
He set a price target of $6 for the stock. The analyst consensus is $5.58.
"With the stock trading 24 per cent lower following the release of Q3/16 results, we believe investors are being offered an excellent entry point," the analyst said. "Given many of the indicators we track continue to trend in a positive direction, we are viewing the softness experienced in certain end-markets, particularly Industrial, as the result of U.S. pre-election jitters. With that said, we see a compelling buying opportunity at current levels considering the outlook remains bright, the company is run by a more than capable management team, and the potential for multiple expansion exists."
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Raymond James analyst Kurt Molnar wonders whether there are "still more presents to come" from Paramount Resources Ltd. (POU-T).
On Friday, the Calgary-based company announced it has monetized another 5 million shares of its Seven Generations Energy Ltd. Holdings in a private bought deal for gross proceeds of $150-million. Those shares were acquired in a $1.9-billion deal, announced in July, to sell a large portion of its oil and natural gas producing assets to its rival.
Mr. Molnar noted Paramount has raised almost $880-million in cash from monetizing those shares thus far.
"The first $250-million of this capital was notionally dedicated to their Karr capital program," he said. "Then the next $280-million was dedicated to the early redemption of their outstanding notes. This effectively left Paramount with pro forma $350-million of cash with no currently identified use of proceeds. This would have been enough on its own to have us speculate that Paramount has an acquisition they would like to effect with that cash."
He added: "Our speculation in this regard has only been heightened by the incremental news that Paramount intends to dividend out the remaining 3.8 million shares of Seven Generations they still hold while they have also signed a royalty deal for their Cavalier bitumen subsidiary that brings in another $100-million of cash. So Paramount has pro forma $450- ($350- plus $100-) million of cash (that we expect they might spend soon). At the same time even after they spend that money they expect to be in a really strong position given they think they should dividend the remaining VII shares rather than hold them for potential incremental cash. All this also suggests a high degree of confidence in how things are unfolding in the Karr drilling program."
Maintaining an "outperform" rating for the stock, Mr. Molnar raised his target to $23.00 from $20.50 "to reflect the royalty deal on the Cavalier assets and to reflect the VII dividend to be given to shareholders." Consensus is $18.53.
"We expect another surprise to follow in coming days or weeks on how Paramount may use their growing stack of cash," he said.
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RBC Dominion Securities analyst Sam Crittenden initiated coverage of Integra Gold Corp. (ICG-X) with an "outperform" rating.
Calling the company an "emerging gold producer in the right jurisdiction," Mr. Crittenden expects strong returns for its Lamaque mine in Val-d'Or, Que.
"The Lamaque Project is characterized by high grades … As well, the strategic purchase of the fully permitted Sigma mill in 2014 has provided Lamaque with a potential return that stands out amongst other advanced stage development projects. We believe ICG has a unique combination of high grades and return on investment, and we estimate annual production eventually ramping up to 120Koz at low cash costs of $450 per ounce with initial capital of $70-million ($92-million Canadian)."
He added its "aggressive" drilling program on its Lamaque South property provides a near-term catalyst.
"An updated PEA in Q1/17 is expected to incorporate drill results from early 2016 and provide a preliminary look into the economics of the project, while a more comprehensive resource update in late-Q1/17 is expected to include full results from the 2016 exploration program," he said. "Ongoing drilling below the historic Lamaque mine could demonstrate significant longer term potential on the property if the deposit does indeed continue at depth."
With the company's shares outperforming thus far in 2016, Mr. Crittenden said Integra remains a potential takeover candidate going forward, adding: "We believe that ICG remains an attractive takeover candidate for companies currently in or looking to enter the Abitibi region (or Canada). The company currently trades at a premium versus peers on an EV/oz [enterprise value per ounce] basis, which we believe is due to the high grade/high return nature of the project, along with the market pricing in a portion of the potential increase in ounces from the upcoming resource update. However, we believe that the company is not yet fully valued on a P/NAV [price to net asset value] basis, and still trades at a substantial discount when applying precedent transaction multiples for pre-production projects. We believe that the high potential return on the project, along with the prospective location along the eastern end of the Abitibi belt, make ICG an attractive takeover candidate."
He set a target price of $1 for the stock. Consensus is $1.18.
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In Citi's 2017 preview for apparel and footwear companies, analyst Kate McShane upgraded Carter's Inc. (CRI-N) to "buy" from "neutral" and downgraded Finish Line Inc. (FINL-Q) to "neutral" from "buy."
Ms. McShane raised her target price for Carter's stock to $112 (U.S.) from $97. The analyst average is $106.63.
"After trading near its trough in October, CRI has staged a modest recovery but the stock still remains [approximately] 16 per cent below this year's highs," she said. "We upgrade to a Buy rating based on the following: 1) Although Spring '17 wholesale bookings are expected to be down mid-single digits and store comps are still a concern (down 4.1 per cent for Carter's in Q3) we believe 2017's sales growth (up 6 per cent) will be driven in large part by new store openings and online sales, 2) Further, while we expect 2016's op margin to be comparable to last year (impacted by investment spend), we believe CRI's op margin will expand next year as the sourcing environment remains favourable for apparel and management works toward their 14-per-cent operating margin goal, 3) Finally, based on our DCF analysis, we see notable upside (21 per cent) with our $112 target price."
For Finish Line, her target fell to $24 (U.S.) from $26. The average is $23.45.
"This time last year, dis-intermediation concerns were weighing more heavily on investor sentiment after Nike highlighted DTC growth ambitions at its Oct. 15 analyst day," she said. "A few quarters. of volatile results for FINL and a robust basketball cycle had also caused investors to question FINL's competitive ability. Since then, the level of competition among vendors has intensified (which we believe is a positive for retailers) with strong trends at adidas and UA helping to fuel category growth. FINL has continued to work on building stronger vendor relations and introduced initiatives to help comps and profitability (e.g. remodels & store closures). Macy's growth has also been encouraging (up 25 per cent in 1H16). We believe the stock's current multiple reflects these positives and that upside to EPS growth beyond 2017 (FY18) could be more difficult to achieve. We downgrade FINL to Neutral. FL trades at a premium to FINL but we believe this is warranted given our view that FL has the strongest product allocations and more growth avenues."
On the sector, as a whole, Ms. McShane said: "Heading into 2017, the US consumer continues to appear healthy. The unemployment rate stands below 5 per cent, disposable income per capita continues to rise at approximately 3 per cent year over year and consumer confidence is at the highest level seen since the 2008-2009 recession. President-elect Trump's policy changes may alter the domestic growth trajectory, with potential tax changes having garnered the most attention since the election. However, our conversations with Citi's Federal Government Affairs Group suggest changes aren't likely to impact 2017 results. Citi's Economists suggest the economic impact of Trump's fiscal policy is highly uncertain, with risks to the outlook skewed to the downside over the longer term. Given this backdrop, we expect overall growth in apparel and footwear to remain solid in 2017. That being said we think two factors will have an outsized impact on sales results during the year: 1) changing consumer preferences in apparel and footwear, and 2) the ongoing shift to e-commerce."
In Citi's 2017 broadlines and hardlines playbook, Ms. McShane upgraded Costco Wholesale Corp. (COST-Q) to "buy" from "neutral" and raised her target to $184 from $167. The average is $171.48.
"When we initiated coverage of COST in late 2015 we highlighted a variety of factors that we liked about the company, but chose the sideline (and have remained there throughout 2016) due to top-line concerns and the stock's lofty valuation," she said. "The long-term positives of the COST story – its membership format, its merchandising strategy, the draw of its ancillary businesses, its e-commerce initiatives, the steady nature of margins, and cash returns to shareholders – remain in place. Meanwhile, we see a clear path to accelerating SSS growth in FY17 via the abatement of headwinds from gasoline price deflation, food deflation and tobacco SKU reductions as well as the benefit from the new cobranded credit card and potential US tax changes that are likely to be particularly favorable for COST's affluent customer. Given the stock's now-reasonable valuation, we are upgrading COST to Buy."
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In other analyst actions:
Bombardier Inc. (BBD.B-T) was raised to "outperform" from "sector perform" at Alta Corp Capital by analyst Chris Murray. His target increased to $2.75 (Canadian) from $2.25. The average is $2.40.
Toromont Industries Ltd. (TIH-T) was downgraded to "sector perform" from "outperform" at National Bank by analyst Maxim Sytchev. His target rose to $46 from $42. The average is $41.44
Transat AT Inc. (TRZ-T) was downgraded to "sector perform" from "sector outperform" at Scotia by analyst Turan Quettawala with a target of $7, down from $8. The average is $7.31.
David Leeder