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Eye on Equities

Don't rule out competing bid for Consolidated Thompson: analysts Add to ...

Is a higher bid looming for Consolidated Thompson Iron Mines Ltd. or should shareholders take Cliffs Natural Resources Inc.'s $17.25-a-share offer and run?

It's the question of the day and several analysts suggest not to rule out another party coming to the table.

As readers of the Eye on Equities posting know, Consolidated Thompson has been a favourite of the analyst community in recent months (see Are Consolidated Thompson shares a steal? and Bulked-up Consolidated Thompson seen outperforming). Expanding steel production from the rapidly growing economies of China and India paints a promising future for the Montreal-based iron ore producer, which is increasing output through its Peppler Lake and Bloom Lake operations in Labrador at a time of limited global supply growth.

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While the offer valued at about $4.9-billion represents a 30 per cent premium to its closing price on Tuesday and the 20-day volume weighted average price, a handful of analysts believe it doesn't fully value the company.

Jennings Capital Inc. analyst Peter Campbell maintained his target price of $18.50 and said while the offer is reasonable, it does not offer shareholders any premium to its fair value and "there is at least a remote possibility for a premium offer to arise." Cliffs has indicated $75-million (U.S.) in synergies; he wonders what cost savings may arise if producers like ArcelorMittal and Rio Tinto tie up with the company.

Even more in the "don't tender" camp is TD Newcrest analyst Craig Miller. He hiked his target price by $6 to $20 and still rates the stock as a "buy."

Mr. Miller said that the offer appears favourable, judging by the earnings multiples he expects for 2012. But further out to 2014, when the company's Bloom Lake project could produce 16 million tonnes of iron ore annually, Cliffs is only paying 3.5 times his enterprise value/earnings before interest, taxes, depreciation and amortization multiple. He said this undervalues the company's future earnings potential.

Canaccord Genuity analyst Gary Lampard hiked his price target to $19 from $14.50. "We do not believe the sale process has to this point been competitive," he said. He sees Teck Resources Ltd. , Xstrata, ArcelorMittal and Tata Steel as potential counter-bidders.

Less confident that another bidder will arise is Desjardins Securities Inc. analyst John Redstone, who recommends shareholders tender to the offer. He hiked his target to $17.25, as did UBS analyst Chris Lichtenheldt.

It's worth pointing out that the offer has the unanimous support of Consolidated Thompson's board and its largest shareholder, Wuhan Iron and Steel. The deal requires two-thirds support among Consolidated Thompson shareholders and comes with a $156.5-million break fee.

CIBC World Markets Inc. has hiked its long-term West Texas Intermediate crude price forecast by $10 to $95 (U.S.) per barrel. CIBC believes MEG Energy Corp. will especially benefit from the higher prices, thanks to long-life reserves that it controls and a well-financed position.

Upside: CIBC analyst Andrew Potter raised his price target by $8 to $52 and upgraded the stock to "sector outperformer" from "sector performer."

Investors will favour Enerplus Corp. this RRSP season thanks to its high yield of 6.9 per cent, which compares to the group average of 5.4 per cent, said CIBC analyst Jeremy Kaliel. He believes fund flows into the oil and gas intermediate sector will remain strong into 2011, supported by robust fundamentals for crude.

Upside: Mr. Kaliel boosted his 12- to 18-month price target by $8 to $35.50 and upgraded his rating to "sector performer" from "sector underperformer."

Corus Entertainment Inc. reported a solid first quarter, with earnings per share 2 cents better than consensus. But the recent rise in the stock price has left the shares reasonably valued, and there's potential for the company to make some dilutive acquisitions in the short term, said TD Newcrest analyst Scott Cuthbertson.

Downside: Mr. Cuthbertson downgraded the stock to a "hold" from a "buy" and maintained a 12-month target price of $25.

Related: Corus expects premium reaction to Oprah network

Richfield Ventures Corp. reported a "spectacular" drill hole result at its Blackwater project, grading 1.23 grams per tonne gold over an interval of 222 metres, noted Loewen Ondaatje McCutcheon Ltd. analyst Michael Fowler. Four other holes on the margins of the gold mineralizing system returned low grades over more moderate widths, which was expected, he added.

Upside: Mr. Fowler maintained a "speculative buy" on the stock and $6.23 price target.

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