The Bank of Nova Scotia's commodity price index fell to a six-month low in February as plunging natural gas and propane prices outweighed hefty gains by metals like copper, zinc and silver, which climbed to records or multiyear highs.
And further advances by many metals are thought to be in the cards.
Spot uranium prices climbed from $37.50 (U.S.) a pound in late January to $38.50 in late February and now stands at about $40.50. "A major change in the global supply/demand balance will not occur until Saskatchewan's Cigar Lake mine starts up in the first half of 2007," said Patricia Mohr, vice-president of Scotia Economics.
Copper prices on the London Metal Exchange increased to $2.26 a pound in February from $2.15 in January. The latter is well above the previous $1.59 peak of late 1988. "While we have recently revised up our price forecast for copper to $2.05 for 2006 and $1.50 for 2007, these forecasts may prove too conservative," Ms. Mohr said.
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Zinc prices also surged, moving to $1.01 a pound in February from 95 cents in January, and hit a record high of $1.18 earlier this week. "A global shortage of zinc concentrates is constraining smelter output and will likely ensure a tightening market through much of 2007," Ms. Mohr said. Zinc prices are now above aluminum prices — an unusual situation — and that, together with the fact that zinc prices are likely headed higher still, will prompt manufacturers to increase efforts to economize on their use of zinc, she said.
Meanwhile, silver is on track to post its best year since 1979-80 when the Hunt Brothers of Texas hoarded the metal, forcing the price to soar. The London fix on silver has hit a 22-year high of $10.90 an ounce, buoyed by expectations that a silver exchange-traded fund will soon be approved for the American Stock Exchange.
But the overall commodity price index, which measures price trends in 32 of Canada's major exports, declined a hefty 5.4 per cent in February from January, pulled down primarily by tumbling natural gas and propane prices. U.S. inventories of natural gas are currently 40 per cent higher than a year earlier, thanks to U.S. winter temperatures that were 11 per cent warmer than usual. Natural gas prices which spiked to an "extraordinary" $15.38 per million British thermal units in December, dropped as low as $6.55 in early March "but appear to have found a bottom and rebounded to the $7 mark in mid-March," she said. West Texas intermediate crude slipped from $65.54 a barrel in January to $61.93 in February, but has since strengthened again and now stands at $66.07, buoyed by supply disruptions from Nigeria. ANGELA BARNES
ATI downgraded before earnings
Analysts who cover ATI Technologies Inc. can agree that the stock has dropped in the past year. There is little consensus, however, on whether that weakness presents a buying opportunity.
Lehman Brothers analyst Arnab Chandra downgraded ATI to "equal weight" from "over weight" Tuesday, and slashed its price target to $14 (U.S.) from $20. The bearish turn of events comes as the Markham, Ont.-based computer graphics chip maker prepares to release its second-quarter earnings report on Thursday.
"We believe ATI is experiencing mix-related issues and could show lower gross margins," Mr. Chandra said, citing a higher percentage of revenues from lower-margin chipsets, along with a higher cost structure in its high-end desktop products.
"We would recommend investors take the sidelines, as there is no near-term catalyst."
Shares of ATI fell 24 cents (Canadian) or 1.35 per cent to $17.56 in Toronto. The stock, down 12 per cent in the last year, recovered some lost ground early this year but has dropped 6.5 per cent in the last month.
In the U.S., ATI shares dipped 20 cents (U.S.) or 1.31 per cent to $15.02.
Blackmont Capital analyst Bruce Krugel noted on Monday that ATI's shares have fallen 17.3 per cent since the start of February. He said the recent selloff is overdone, and that new products will provide traction. He has a "buy" recommendation on ATI stock and a $21 stock target price.
Likewise, Merrill Lynch's Sidney Ho sees the ATI stock weakness makes it a good time to buy. "Our thesis is based on our belief that ATI's market share in the desktop graphics processing unit market has bottomed, and that the company should recover market share more meaningfully."
ATI shares suffered last year after it missed financial targets and was forced to write down inventory, losing ground in the high-end market to its chief rival, Nvidia Corp., of Santa Clara, Calif.
Analysts expect ATI will report earnings of 11 cents a share early on Thursday, down from 25 cents a year ago, according to Thomson First Call. Sales are forecast to rise 7 per cent to $648-million.
Lehman's Mr. Chandra said ATI's gross margins could decline if chipset sales rise, because they provide a lower margin than other products. He estimated that chipsets will contribute 25 per cent of ATI's overall revenue in the second quarter, but with a gross margin of only 10 per cent to 12 per cent.
"Other concerns include potential mobile market share loss to Nvidia, given ATI's majority market share and seasonally slow period for consumer (handset and DTV)," he wrote in a note.
Analysts are divided over ATI's merits as an investment. Twenty-two analysts who follow the company have a "buy" recommendation on the stock, compared with 10 who rate it a "hold" and three a "sell," according to Bloomberg data. ROMA LUCIW
Analyst reduces forecast for Great Canadian Gaming
Great Canadian Gaming Corp. moved to ease its balance sheet woes Tuesday, but TD Newcrest analyst Damir Gunja isn't so thrilled with the result.
The Richmond, B.C., casino company has renegotiated covenants with its bondholders and bankers and will raise $80-million in fresh equity.
The good news: Chief executive officer and chairman Ross McLeod is putting up $50-million of it. The bad news: The terms are rather sweet. Not only will Mr. McLeod and other participants get 6.2 million shares at $12.89, a discount to the current market price, they'll also get a warrant for more shares that won't expire for two years.
The deal and the dilution sent Mr. Gunja back to his spreadsheets, and he took a hatchet to his estimates. Great Canadian will earn 37 cents a diluted share this year, he figures, a substantial drop from his previous estimate of 55 cents. Great Canadian slipped 25 cents to $13.25 in Toronto Tuesday.
"GCD continues to trade at a healthy premium to its U.S. counterparts," which is "somewhat justified" because B.C. is a less competitive gambling market, Mr. Gunja wrote. But with worries about "management depth and credibility," the premium seems a bit too high, so he cut his rating to "reduce" from "hold" with a price target of $11. DEREK DeCLOET
Boston Pizza downgraded after strong unit price gains
Lighten up on the pizza and go for that coffee refill instead. It's not diet advice but an investment recommendation from Canaccord Adams analyst Chris Rankin.
The brokerage is downgrading Boston Pizza Royalties Income Fund to "hold" from "buy" after several months of strong unit-price gains for the restaurant chain. At the same time, the firm is upgrading units of Second Cup Royalty Income Fund to "buy" from "speculative buy."
Boston Pizza units have surged 12 per cent since the start of the year and Mr. Rankin said this makes the fund less attractive from a valuation perspective.
The family restaurant chain is the sector leader in same store sales growth at 8 per cent last year and an estimated 7 per cent in 2006. It's also the top restaurant royalty fund in terms of valuation, trading at almost 14 times projected distributable cash flow per unit. Mr. Rankin is targeting a unit price of $17.75. "We think the units likely stall out in the $18.00 range unless [comparable] store sales accelerate here (which we think is unlikely)," he said in a note to clients.
Second Cup Royalty Income Fund is a different story. Canaccord believes the coffee chain's turnaround plan begun in 2004 is well under way and starting to work, adding cash distributions "should increase substantially."
At current prices, Second Cup trades at about 9.7 times projected distributable cash flow per unit, Canaccord said.
Mr. Rankin said the fund is currently generating more cash than it pays out to unit holders and suggested "there is room for Second Cup to increase distributions by up to 11 per cent." ANDY HOFFMAN
