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Dividend suspension fears send HudBay shares plunging

Production at HudBay mine.

Brian Pieters

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

Shares in HudBay Minerals Inc. sunk more than 7 per cent today, one day after the company reported a sharp drop in quarterly revenue and profit and hinted it may have to suspend its dividend.

Even before the results, which included news that capital costs at its Lalor project will rise by $90-million to $794-million, HudBay shares were under pressure from a downturn in industrial metal prices. For the week, shares are off nearly 15 per cent.

Minutes released this week from the Federal Reserve's latest monetary policy meeting, which unexpectedly showed some appetite among Fed officials for withdrawing bond-buying measures even before the labour market gets fully back on its feet, has diminished the appetite for the economically sensitive metals like the copper HudBay produces.

But HudBay has its own problems, including the additional costs at Lalor in Manitoba and a nine-month extension of its construction schedule. The company also said rainfall disrupted work at its Peruvian project.

The possible cut to its payout may be a particular concern for investors. HudBay said it's "uncertain" whether its 10-cent semi-annual dividend can be maintained until the company's new mines achieve production. HudBay is aiming to more than quadruple its copper production by 2015.

Dundee Securities analyst David Charles noted that in order to declare a dividend, debt covenants require HudBay to retain a ratio of consolidated debt-to-EBITDA of 2.5 times or less. But the company is facing a short-term revenue shortfall because of the production gap between the closure of its Chisel North and Trout Lake mines and the ramp up of production at Lalor.

"Management clearly stated that their goal is not to cut the dividend, but if a decrease cannot be avoided, it would be temporary until revenues grow back up in 2014. The outcome depends on negotiations with the note holders," he said.

He thinks the dividend worries, however, are overdone: "We do not believe that investors own HBM for the dividend and believe that with the (nearly) 8 per cent decline in the share price today, a dividend decrease is already partly discounted," he said.

Upside: Mr. Charles maintained a "buy, high risk" rating with a target of $15. Desjardins Securities analyst John Hughes maintained a "buy" rating but trimmed his target to $13.35 from $13.65.

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Herbalife International Inc.'s fourth-quarter results "offered more consistency, no surprises and at least a brief refocus on business fundamentals" after the well-publicized clash of views on the company from activist investors Bill Ackman and Carl Icahn, said Canaccord Genuity analyst Scott Van Winkle.

Mr. Ackman is short the stock and calls it a pyramid scheme, something Herbalife – a direct seller of dietary supplements - vehemently denies. Mr. Icahn has taken a 13 per cent stake in the company, believing it has significant growth potential.

Herbalife reported profit in its latest quarter of $117.9-million (U.S.), or $1.05 a share, up from $105.4-million, or 86 cents a share, a year earlier. Sales jumped 20 per cent to $1.06-billion.

Mr. Van Winkle affirmed his belief that Mr. Ackman has made a big mistake.

"Our position that Herbalife's multi-level marketing sales model is legitimate and well managed and that the risk of some catastrophic regulatory action is remote is completely unchanged," he said.

"We believe HLF is a sustainable growth company given its favourable positioning from product (weight loss), sales method (direct selling is ideal for weight loss products), geographical exposure (emerging market exposure) and business model (high ROIC and free cash flow) standpoints.

Upside: Mr. Van Winkle reiterated a "buy" rating and cautioned it's a pick only for long-term investors. But he cut his price target to $63 (U.S.) from $76, noting that multi-level marketing firms, as a group, have settled into a modest valuation range after two months of volatility.

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The consensus forecast for Mullen Group Ltd. 's earnings is too high and the stock – after gaining 5 per cent since mid-January – is priced at the upper end of the company's historical trading range based on valuations, said Raymond James analyst Andrew Bradford.

"Based on this pattern, we believe the stock is likely to retrace its recent gains," Mr. Bradford said as he downgraded the oilfield and trucking services firm to "underperform" from "market perform."

Downside: Mr. Bradford has a $22.50 price target.

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Several growth and margin headwinds that dragged Softchoice Corp. 's results down in 2013 have started to abate, Raymond James analyst Steven Li said after the software firm delivered "a clean beat" in its fourth-quarter earnings and revenues this week.

Softchoice raised its dividend by 2 cents to 9 cents, but that implies a payout ratio of only 17 per cent, and the company's balance sheet "remains pristine," with net cash of $68-million and no debt.

Upside:
Mr. Li raised his price target to $16.50 from $13.50 and reiterated an "outperform" rating.

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Canam Group Inc.'s improved risk controls, a better bidding discipline among industry participants, and a brighter macro picture for the U.S. commercial construction sector all point to further volume and margin gains ahead for the steel fabricator, according to analyst Frederic Bastien of Raymond James.

Upside: Mr. Bastien reaffirmed an "outperform" rating and raised his price target by $2 to $9.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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