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Eye on Equities

Groupe Aeroplan downgraded as 'massive miles expiry' looms Add to ...

Groupe Aeroplan Inc. last week reported generally better-than-expected fourth-quarter results, but one analyst is warning shareholders should prepare for a more turbulent ride in the months ahead.

Versant Partners analyst Neil Linsdell today downgraded the stock to a "sell" from "neutral." A key reason: Aeroplan is expecting redemption costs to rise this year by an extra $45-million to $65-million, and Mr. Linsdell suspects this number will swell over the following two years.

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While a lot of members may not yet be familiar with the rule, mileage earned before 2007 is now subject to a seven-year expiry that will cancel pre-2007 miles on Dec. 31, 2013. The rule also means that since January, 2007, miles automatically have a seven-year expiry from the month that those miles are collected.

As more customers become aware of the rule, rememption rates may rise, pushing up costs and possibly eroding free cash flow.

"One of our major concerns about investing in Aeroplan shares is the off-balance sheet liabilities, principally the over $1.3-billion in future redemption costs," said Mr. Linsdell.

"The company is putting a positive spin on this extra cost, saying that the increased redemption activity will be due to enhancements to their website that are allowing members easier access to more flights, and that increased redemption activity will engage members, enticing them to subsequently increase gross billings activity.

"Our belief is that the increased activity will be generated by members that are becoming more aware of the massive miles expiry deadline looming at the end of 2013 and prompted by Aeroplan starting to make notices of the expiring miles to members on their website," said Mr Linsdell.

Aeroplan Canada previously has stated it plans to issue consumer alerts on its website in 2011 to notify members that certain reward miles are in danger of expiring within three years.

Downside: Mr. Linsdell cut his 12-month price target by $1 to $12. "We must keep in mind, however, that the company has been, and likely will continue to be, aggressive in supporting the stock through a buyback program," he noted.

Onex Corp. is now likely to trade at a modest premium to its net asset value due to a number of factors, including sufficient management fees to cover costs of running the private equity management business, said BMO Nesbitt Burns Inc. analyst Peter Sklar. "We believe that we are still in the early stages of a private equity cycle and that acquisition and monetization of investments and fundraising activity will accelerate over the next few years," he said.

Upside: Mr. Sklar raised his target price by $6 to $40.

Related: Onex reports 2010 loss

Valuations for Iamgold Corp. are favourable, as it is the least expensive million-ounce-per-year producer on a net asset value basis, said CIBC World Markets Inc. analyst Barry Cooper. While the company will see little growth in 2012, subsequent years should see strong production growth and operating costs should come down through mine expansions, he said.

Upside: Mr. Cooper raised his price target by $5 (U.S.) to $31.

Minefinders Corp. Ltd. is forecasting better production this year at its Dolores gold and silver operation in Mexico and lower operating costs. Canaccord Genuity analyst Wendell Zerb is encouraged by the outlook, noting that the company is now using a new leach pad to extract minerals, which could help boost metal recoveries in the near term.

Upside: Mr. Zerb raised his price target to $14.45 from $12.65.

Champion Minerals Inc. shares "are attractive at current levels given the potential for positive near-term catalysts, exploration upside, and long-term take-out potential," said RBC Dominion Securities Inc. analyst Robin Kozar. Champion holds a collection of attractive iron ore mineral properties, and a preliminary economic assessment suggests its flagship Fire Lake North project could produce 7 million tonnes of iron ore concentrates annually for 14 years.

Upside: Mr. Kozar initiated coverage with an "outperform-speculative risk" rating and $3.50 price target.

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