Wednesday’s analyst upgrades and downgrades

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

In a preview of the first quarter of 2016 in the precious metals sector, Raymond James analysts maintained their gold and silver price decks of $1,275 (U.S.) per ounce and $16.50 per ounce, respectively.

However, they made several ratings changes to both gold and silver companies, based largely on valuation and recent share price performance.

"With positive momentum in precious metals prices, we suggest gravitating to those names with strong execution records underpinned by assets that can generate meaningful free cash flow at current prices," the analysts said. "We expect growth opportunities to receive increasing investor attention, though we suspect cash flow and capital allocation to be of most significance for now. Disconnected stocks that are out of favour today and have a significantly different outlook at gold prices of +$1,250/oz with attractive valuations are also recommended on an attractive risk/reward basis."

The changes to gold companies were:

- Alamos Gold Inc. (AGI-N, AGI-T) to "market perform" from "outperform" with a target price of $7 (U.S.), which is unchanged. The analyst consensus is $9.62, according to Thomson Reuters.

Analysts said: "We are lowering Alamos Gold … primarily due to Alamos' valuation recovering off its lows to trade in-line with its peers (up 95 per cent year to date versus Market Vectors Gold Miners ETF [GDX] 69 per cent). We remain constructive in our outlook for Alamos; we like its key assets Mulatos and YoungDavidson which form over 80 per cent of its asset NAV [net asset value]. However at current price levels, we believe investors need to be willing to ascribe increasing value to its Turkey pipeline, which is uncertain today. 2016 remains largely a transition year for the company at the aforementioned key mines, however into 2017, a fully ramped up Young-Davidson combined with the commencement of production from the La Yaqui deposit at Mulatos, is set to provide marked operational improvements for Alamos. While trading at fair value today, in our view, we recognize that visibility into advancement in Turkey could unlock meaningful upside to today's levels, however in the absence of such we prefer to take pause for now."

- Guyana Goldfields Inc. (GUY-T) to "market perform" from "outperform" with a target of $6.75 (Canadian), up from $6.25. Consensus is $6.39.

Analysts said: "We are lowering Guyana Goldfields … given our belief that the company has re-rated to producer-type multiples following its 49-per-cent outperformance over peers since its commissioning phase (up 69 per cent versus 20 per cent for GDX) and 106-per-cent year-to-date return (versus 69 per cent for the GDX). Guyana has moved through its ramp up period with relative success - a marked distinction versus other peers who have stumbled over recent years in this final stage of development - rewarding the company with the market re-rate that aspiring producers are due to attract. In our view, Guyana is near 10 per cent of those producer multiples, motivating our move to Market Perform. Though we view shares as fairly valued at present, we see any further precious metals price momentum as incrementally positive for the name, and expect increased take out potential for Guyana in an amplified M&A period given the low-cost nature of the asset. In that scenario we can see further appreciation above today's level since single asset producers have recently been acquired in the 1.3-times vicinity, whereas we believe fair value for Guyana is 1.1 times (today trades at 1.04x)."

- Tahoe Resources Inc. (THO-T, TAHO-N) to "outperform" from "strong buy" with a target of $18 (from $17). Consensus is $17.30.

Analysts said: "We are lowering Tahoe … based on share price performance (up 53 per cent versus GDX 32 per cent) since our upgrade to Strong Buy [on Feb. 9]. We remain constructive in our outlook for Tahoe and continue to view the company as offering a unique combination of low cost production, fully funded organic growth, significant FCF [free cash flow] generation, and a strong balance sheet, reflective of our Outperform rating."

- Integra Gold Corp. (ICG-X) to "outperform" from "strong buy" with a target of 80 cents (up from 70 cents). Consensus is 80 cents.

Analysts said: "We are lowering our rating .. based on strong share price performance (up 74 per cent versus GDX 44 per cent) since our initiation of coverage [on Feb. 5]. However, we remain constructive in our outlook for Integra and believe a number of key potential catalysts will continue to drive share price performance, including the release of further exploration results at Triangle, No. 4 Plug (as evidenced yesterday), and the gap between the two zones, as well as an updated PEA (anticipated in June)."

- Endeavour Mining Corp. (EDV-T) to "strong buy" from "outperform" with a $20 target (up from $17.75). Consensus is $15.51.

Analysts said: "We are increasing … based on valuation and near-term potential catalysts which include the closing of True Gold Acquisition (anticipated by the end of April 2016) and a PEA [preliminary economic assessment] for Ity (anticipated by end of 2Q16/ beginning of 3Q16). We also watch for development updates for EDV's Hounde development stage project (construction commenced in early April 2016). Besides project fundamentals, we take comfort from EDV's capacity to fund Hounde, and measures to protect near-term CF [cash flow] via the employment of a revenue protection program."

For silver companies, the changes were:

- First Majestic Silver Corp. (FR-T, AG-N) to "underperform" from "market perform" with a $7 target (up from $6.10). Consensus is $12.61.

Analysts said: "We are lowering First Majestic to underperform from Market Perform based on share price performance (up 176 per cent versus Market Vectors Junior Gold Miners ETF 69 per cent year to date). We note First Majestic's better than anticipated 1Q16 production results, on an AgEq basis. Of particular note, we highlight La Encantada's better than anticipated quarter of production, driven by higher grades (224 grams per tonne or g/t silver) comparable with recently released reserve grades (219 g/t), despite the milling of less tonnes to due mechanical issues. We will watch for news on La Encantada's operating plan (roasting of tailings), Del Toro's operating plan (rate of sulphide production), La Parrilla's operating plan (oxide/sulphide ore mix) and the release of 1Q16 financials (anticipated in mid-May) as an opportunities to revisit our valuation."

- Silver Wheaton Corp. (SLW-N, SLW-T) to "outperform" from "market perform" with an unchanged $24 (U.S.) target. Consensus is $21.10.

Analysts said: "We are upgrading Silver Wheaton … post its recently completed equity financing and our view that investors are likely to continue to hold meaningful weightings in the streaming companies. Our previous position was primarily driven by a weakening silver price towards the end of last year and a fixation by the market on the company's taxation issues. Both of these issues have altered in significance in the first quarter of 2016, with a strengthening commodity backdrop seeing the company's CRA [Canadian Revenue Agency] dispute taking a back seat in the eyes of the market. The $632.5-million financing also accelerates its debt repayment plans, freeing needed capital to pursue potential near-term acquisitions while the cycle remains in the streamers' favour in our view."

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In a research report on contract drillers in the energy sector, Raymond James analyst Andrew Bradford said stocks are "proving highly responsive to crude pricing."

He said: "When crude moves, the market instinctively gravitates to wherever it can find 'torque,' and the drillers have historically provided that torque. But when it comes to torque, it's possible to have too much of a good thing. Higher levels of financial leverage mean greater equity returns as activity rises above certain economic thresholds, but it also means that these economic thresholds are themselves higher. Our cautionary remark for the drillers is that activity and resulting EBITDA need to surpass minimum thresholds that in some cases are above our own forecasts."

In reaction to recent share price performance by drillers, Mr. Bradford downgraded Ensign Energy Services Inc. (ESI-T) and Precision Drilling Corp. (PD-T, PDS-N) to "underperform" from "market perform."

His target price for Ensign moved to $6 from $5.60, compared to an analyst consensus of $7.53.

For Precision, his target is now $4.25 (up from $3.30). Consensus is $6.82.

He also downgraded Trinidad Drilling Ltd. (TDG-T) to "market performer" from "outperform." His target moved to $2.30 from $2. Consensus is $2.73.

Mr. Bradford moved his target price for Savanna Energy Services Corp. (SVY-T) to $3.40 from $3 while maintaining a "strong buy" rating. Consensus is $2.11.

"We continue to position Savanna as the small-cap, quasi-orphaned stock within the contract driller group – consequently, it's mispriced," he said. "Nevertheless, its Canadian equipment is highly marketable in a recovering oilpatch and its leverage ratios are among the lowest in the group. In terms of balance sheet risk vs. ultimate reward under a moderate recovery scenario, we suggest investors focus on Savanna and Trinidad."

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Canaccord Genuity analyst David Galison downgraded his rating for Altagas Ltd. (ALA-T) to "hold" from "buy" based on share price appreciation.

In a research note previewing first-quarter earnings for midstream energy companies, he said that recent increase "limits" the implied return on his target price. Altagas reported its financial results prior to market opening on Wednesday.

His target of $34 did not change. The analyst consensus price target for Altagas is currently $34.83.

On the sector, he said: "When applicable, we have updated our models to incorporate Q1/16 commodity pricing, currencies, Alberta power pricing as well as revised forward pricing. In addition, we are introducing our 2018 EBITDA estimates and have adjusted our price targets (where applicable) to reflect our 2018 outlook."

He made target price changes to the five other companies in the group. They are:

• Pembina Pipeline Corp. (PPL-T, buy) to $39 from $37. Consensus: $39.92.
• Inter Pipeline Ltd. (IPL-T, hold) to $27 from $23. Consensus: $26.50.
• Keyera Corp. (KEY-T, buy) to $44 from $40. Consensus: $44.64.
• Veresen Inc. (VSN-T, hold) to $8.50 from $8. Consensus: $10.94.
• Enbridge Inc. (ENB-T, buy) to $57 from $54. Consensus: $54.67.

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Shares of TransAlta Renewables Inc. (RNW-T) are now "fairly valued," according to CIBC World Markets analyst Paul Lechem.

He downgraded his rating for the Calgary-based renewable power company to "sector performer" from "sector outperformer."

"Recall, we had upgraded RNW to sector outperformer on Dec. 2," said Mr. Lechem. "At that time, the stock was trading at $10.16 per share, well below the highs ($13/share) reached earlier in the year as the stock reacted to two external trends, and one company-specific issue: 1) the collapse of the yield-co model; 2) a sell-off in sympathy with TransAlta, which sold off sharply in 2015 due to a very weak Alberta power market; and 3) the financing related to its latest dropdown.

"The stock has recovered nearly 25 per cent since Dec. 2, is trading in-line with the group, and is within 3% of our price target. The rebound in the stock reflects the reversal of some of the dynamics noted above, and is further supported by: 1) a 7.0-per-cent dividend yield, above industry comparables of 6.5 per cent; 2) a low-risk business model with fully contracted power assets, with an average remaining term of 11.2 years; 3) a forecast 6-7-per-cent dividend increase in 2017 following completion of the South Hedland power station in Australia; and 4) strong Q4 results ($95-million EBITDA versus consensus $81-million) and forecast 2016 guidance (EBITDA of $365-$390 million versus prior consensus of $345-million)."

Mr. Lechem maintained his price target for the stock of $13. The consensus is $13.61.

"While the company's low-risk business model is supportive of its valuation, the lack of clarity to future growth (beyond South Hedland) and a higher-than-average dividend payout ratio (estimated 70 per cent in 2016 versus group average of 55 per cent) are headwinds," he said. "Overall, we believe an in-line valuation with the sector average is a fair reflection of the RNW's opportunities and challenges, and we maintain our $13 price target. Given limited upside to this target from the current stock price (3-per-cent capital appreciation, 10-per-cent total shareholder return including dividends), we downgrade RNW."

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The focus will be on credit, core earnings-per-share growth, integration of acquisitions and partnerships and capital-related items when Canadian lifecos report first-quarter 2016 results, said Desjardins Securities analyst Doug Young in a research note previewing earnings season.

"Canadian lifecos declined 5.5 per cent as a group over the first three months of 2016, underperforming the S&P/TSX, which was up 2.7 per cent," said Mr. Young. "Needless to say, it has been a bumpy ride for the lifecos, and we expect this to continue near-term. That said, looking out over the next 12–24 months, we remain constructive on the lifeco space. Our macro views are based on Desjardins Economics Studies' forecasts, which includes a slow but steady increase in US and Canadian 30-year bond yields and U.S./Canadian equity market returns of 5.2 per cent/4.2 per cent."

Mr. Young raised his target prices for stocks by 2 per cent after rolling forward his valuations and reacting to a "slight rebound in macro conditions since February," when shares were off by more than 15 per cent.

His changes were:

- Sun Life Financial Inc. (SLF-T , buy) to $47 from $46. Consensus is $45.14.
- Industrial Alliance Insurance and Financial Services Inc. (IAG-T, buy) to $45 from $44. Consensus is $42.70.
- Great-West Lifeco Inc. (GWO-T, hold) to $35 from $34. Consensus is $36.40.

He did not change his target for Manulife Financial Corp. (MFC-T, buy) of $22. Consensus is $21.63.

"Sun Life is our preferred stock in the lifeco sector for four reasons," he said. "First, we anticipate core EPS growth of 8 per cent in 2016/17, driven by further improvements at its U.S. group insurance operations, its domestic mutual funds business breaking even (vs being a drag) and contributions from acquisitions made through 2015. Second, we believe it has the most attractive wealth management franchise via MFS, its $418-billion (U.S.) U.S. asset management platform. We acknowledge that MFS net flows have been hurt by certain popular funds being capped (an internal decision), a shift to passive (vs active) strategies, as well as a shift to fixed income (from equity) mandates. But we do not believe the value of the MFS franchise has been tarnished. If we apply a 14.0-times multiple to our 2016 operating earnings estimate for MFS, the rest of Sun Life trades at an attractive 10.6x our 2016 core EPS estimate. Third, Sun Life has the most attractive Canadian life insurance platform of its publicly traded peers, in our view, with a dominant group franchise, growing market share in individual insurance and the build-out of a successful asset management platform. Fourth, it remains comfortably capitalized. Pro forma the U.S. Assurant acquisition, we estimate it ended 4Q15 with $750-million–$1-billion (Canadian) in excess capital (holdco plus opco), which provides downside protection should macro conditions deteriorate or leaves room for ROE expansion as funds are deployed. We view recent acquisitions as financially attractive (accretive to EPS and ROE) and on strategy with the company's commitment to build out investment management capabilities, and they add scale/offerings to its US group business and demonstrate management's ability to prudently deploy excess capital. The company raised its dividend twice in 2015 by 8 per cent in aggregate."

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In other analyst actions:

TD Ameritrade Holding Corp (AMTD-N) was downgraded to "equal-weight" from "overweight" at Barclays by equity analyst Kenneth Hill. The target price is $33 (U.S.) per share.

CI Financial Corp (CIX-T) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Geoffrey Kwan. The 12-month target price is $30 (Canadian) per share.

Dominion Diamond Corp (DDC-N) was rated new "buy" at TD Securities by equity analyst Steven Green. The 12-month target price is $18 (U.S.) per share.

Ensign Energy Services Inc (ESI-T) was downgraded to "underperform" from "market perform" at Raymond James by equity analyst Andrew Bradford. The 12- month target price is $6 (Canadian) per share.

Marriott International Inc (MAR-Q) was downgraded to "market perform" from "outperform" at Raymond James by equity analyst William Crow.

Mitra Energy Inc (MTE-X) was downgraded to "hold" from "speculative buy" at TD Securities by equity analyst Shahin Amini. The 12-month target price is 45 cents (Canadian) per share.

Parkland Fuel Corp (PKI-T) was raised to "buy" from "neutral" at PI Financial by equity analyst Jason Zandberg. The 12-month target price is $23.50 (Canadian) per share.

Parex Resources Inc (PXT-T) was downgraded to "hold" from "buy" at TD Securities by equity analyst Shahin Amini. The 12-month target price is $12 (Canadian) per share.

Schlumberger Ltd (SLB-N) was raised to "overweight" from "equal-weight" at Barclays by equity analyst J David Anderson. The target price is $93 (U.S.) per share.

Sandstorm Gold Ltd (SSL-T) was downgraded to "sector perform" from "outperform" at RBC Capital by equity analyst Dan Rollins. The 12-month target price is $5.50 (Canadian) per share.

Stornoway Diamond Corp (SWY-T) was rated new "hold" at TD Securities by equity analyst Steven Green. The 12-month target price is $1.30 (Canadian) per share.

With files from Bloomberg News