Monday's analyst upgrades and downgrades

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

Lower operating costs and capital spending were a "consistent" theme in the first-quarter results in the precious metals sector, said Raymond James analysts in a research note.

"Compared to 1Q15 where we saw AIC [all-in sustaining costs] of $1,044 per ounce, 1Q16 AIC was lowered to $950/oz as weaker local currencies and lower energy costs continued to aid results," the analyst said. "We observe that 1Q16 capital spend was low versus our expectations and we believe should rise through 2016 which supported this quarter's lower AIC."

In the note, analysts made several ratings changes. They were:

Analyst Chris Thompson downgraded  Endeavour Mining Corp. (EDV-T)  to "outperform" from "strong buy" with a target of $20 (unchanged). Consensus is $20.58.

"We are lowering Endeavour Mining to outperform … and maintaining our target price given EDV's recent share price strength and only 19-per-cent return to our target. We continue to view Endeavour Mining as an aggressive growth story, with an improving cost profile and balance sheet. Endeavour has an attractive balance sheet (cash $150-million, debt $200-million at 2Q16) and is adequately funded for Capex requirements at Hounde ($300-million total liquidity). While we forecast that Endeavour will only turn FCF positive in early 2018E we see potential for rapid debt repayment (negative Net Debt in mid-2018E)."

Mr. Thompson also downgraded Newmarket Gold Inc. (NMI-T) to "outperform" from "strong buy" with a target of $4 (up from $3.75). Consensus is $4.55.

"We are lowering Newmarket to outperform … and raising our target price … on model adjustments,"  he said. "We base our revised target price on a 50/50 weighting on a 5.0 times 2017 estimated CFPS [cash flow per share] (an increase from 4.0 times) and a 1.1x NAV [net asset value], a slight discount to our junior producer peer group due to NMI's relatively short reserve supported mine lives. We continue to see Newmarket as a well-funded FCF generator at current metal prices that offers exploration (results pending) and development upside; Fosterville (high grade at depth), Cosmo (Maud Creek), Stawell (resource expansion, Big Hill). We expect near-term FCF [free cash flow] to continue ($10-million in 1Q16), improving an attractive balance sheet ($51-million in cash and no debt). We note continued exploration success at Fosterville (Lower Phoenix mineralization, Eagle, specifically high-grade gold intercepts with visible gold along-strike down and up plunge from current mineral reserves) and a recently announced positive PEA for Maud Creek."
 
Analyst David Sadowski upgraded his Roxgold Inc. (ROG-X) to "strong buy" from "outperform" with a target of $1.70 (unchanged). Consensus is $1.71.

He said: "Roxgold is our top pick in the gold developer group. Our upgrade reflects recent share price weakness and a highly compelling return to target. We had only recently downgraded Roxgold … due to a surge in its share price, but shares have trimmed 20 per cent since that time, versus GDXJ [Market Vectors Junior Gold Miners ETF] a decline of 13 per cent over same time period – unjustifiably, in our view. Earlier this month, Roxgold announced first gold pour ahead of schedule at its flagship, 90-per-cent-owned 55 Zone mine in Burkina Faso. We believe the stock will return to an earlier trend of outperforming the group as the operation achieves commercial production in the coming quarter, and the company increasingly underlines the viability of an expansion of low cost production at 55 and the satellite Bagassi South zone. We model Roxgold as fully-funded to positive cash flow."

Mr. Sadowksi downgraded Kaminak Gold Corp. (KAM-X) to "market perform" from "outperform" with a target of $2.35 (down from $2.50). Consensus is $2.58.

The group also made several target price changes to stocks in their coverage universe. Changes included:

- Agnico Eagle Mines Ltd. (AEM-N; AEM-T, market perform) to $43 (U.S.) from $42. Consensus: $44.75.
- Barrick Gold Corp. (ABX-N; ABX-T, market perform) to $15 (U.S.) from $14.50. Consensus: $16.49.
- Eldorado Gold Corp. (EGO-N; EGO-T, market perform) to $6 (U.S.) from $5.50. Consensus: $5.40.
- Goldcorp Inc. (GG-N; G-T, outperform) to $19.50 (U.S.) from $22. Consensus: $20.08.
- Kinross Gold Corp. (KGC-N; K-T, outperform) to $5.25 (U.S.) from $5.50. Consensus: $5.36.
- Orezone Gold Corp. (ORE-X, outperform) to $1.50 (Canadian) from $1.20. Consensus: $1.36.
- Endeavour Silver Corp. (EDR-T; EXK-N, underperform) to $3.25 (Canadian) from $2.75. Consensus:  $3.54.
- First Majestic Silver Corp. (FR-T; AG-N, underperform) to $8 (Canadian) from $7. Consensus: $19.06.
- Fortuna Silver Mines Inc. (FVI-T; FSM-N, outperform) to $8.25 (Canadian) from $7.20. Consensus: $8.10.
- Pan American Silver Corp. (PAAS-Q; PAA-T, market perform) to $15 (U.S.) from $13. Consensus: $14.22.
- Silvercorp Metals Inc. (SVM-T, market perform) to $2.50 (Canadian) from $2.30. Consensus: $5.74.

The group added said selectivity remains key for equity investors.

"On balance, precious metal stocks are pricing in higher metal prices, signifying, in our view, an evolving market dynamic across portfolios of rebalancing exposure from negative yielding bonds towards harder assets like precious metal commodities and stocks," they said. "The near-term offers some volatility with the conjecture surrounding the Federal Reserve and interest rate movements, however we believe the recovery in commodities is more than just purely interest rate driven over the long term and potentially marks the beginnings of a new cycle after an extended period in the doldrums."

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Poor coal market fundamentals are likely to provide downside risk to the earnings, cash flow and, accordingly, share price for Westshore Terminals Investment Corp. (WTE-T), said BMO Nesbitt Burns analyst Fadi Chamoun.

Adding those factors outweigh the potential for upside following a recent rise in valuation, Mr. Chamoun downgraded the stock to "underperform" from "market perform."

"WTE continues to export near 5 million tons of thermal coal mostly for Signal Peak, which we believe are uneconomical export tonnage at current coal prices," the analyst said. "We note that Signal Peak Energy is a privately owned company that reduced its workforce by 20 per cent at the end of 2015 and one of its stakeholders, FirstEnergy (FE-N; rated 'market perform' by Michael S. Worms), recently wrote down its one-third stake in the Signal Peak coal mine from $362 million to zero. We characterize this throughput as being at high risk. On the other hand, Teck (TCK.B-T; rated 'market perform' by Sasha Bukacheva) throughput of 19 million tons is likely to remain stable or even rise by up to 5 million tons if Teck decides to consolidate shipments through WTE. Arguably, Teck would consolidate the volume with WTE only if it receives a financial incentive to do so (i.e., a lower loading rate). While throughput might remain stable in this case, we believe that the loading rate is likely to decline."

Mr. Chamoun said there is "very limited visibility to upside to the current run rate" of $162-million projected EBITDA in 2016, or between $142-and $147-million (excluding estimated shortfall payments).

"At this EBITDA run rate, the stock trades at 9 times or 9.5-10 times excluding estimated shortfall payments. We see more downside risk than upside potential," he said.

He maintained a $14 target for the stock. Consensus is $17.65.

"Our target price implies a 7 times EV/EBITDA multiple, which is well below the historical average of 12 times but reflective of the significant challenges currently facing the coal market coupled with WTE's high level of customer concentration," he said. "While we acknowledge value in WTE's unique terminal assets, we believe a high level of conviction in an improving coal outlook is required to justify share price upside from current levels."

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In reaction to the rise in share price for Canadian Energy Services & Technology Corp. (CEU-T) following the announcement of an $80-million equity financing deal last week, Beacon Securities analyst Elias Foscolos downgraded his rating to "sell" from "hold."

On May 12, the Calgary-based energy services company reported first-quarter 2016 revenue of $137-million, which fell below both Mr. Foscolos's projection of $155-million and the consensus of $150-million. Earnings per share of a loss of 7 cents also missed the analyst's estimate (3-cent loss) and the consensus (4-cent loss).

The company also reported declines in North American rig count (down 25 per cent), consolidated revenue (down 17 per cent), cash gross margin (down 13 per cent), and earnings before interest, taxes, depreciation and amortization (50 per cent).

"Clearly the focus on reducing G&A will be key to restoring profitability," said Mr. Foscolos.

On May 18, the company announced bought-deal financing of 26.7 million shares at $3 each, which was a 4-per-cent discount to the previous day's closing price.

Mr. Foscolos said he likes the deal as the company is bumping up against its current debt covenant.

"CEU's high yield debt carries no covenants, however, its undrawn banking facility has some key covenants, the most critical one at present being the Interest coverage ratio (less-than 1.5 times)," he said. "At quarter-end, CEU had not drawn on its bank line; however, to make an acquisition and draw on it would have likely put the company in default making access to the facility unavailable."

He added: "Issuing equity at a premium valuation is always a good thing for existing holders. The final reason we view this equity issuance positively is that it was done at a premium valuation to our target and at a very rich premium to the Company's 2016 EV [enterprise value]/EBITDA valuation. We believe that CEU will be able to find an accretive deal since it is trading at an EV/EBITDA2016 multiple in excess of 25x, however, if one believes a rebound is coming in 2017 the metrics will look more challenged."

However, in justifying the rating change, Mr. Foscolos said the company continues to face a challenging first half of the calendar year, citing the impact of reduced rig counts and pricing headwinds.

"Once closed, the financing will facilitate an acquisition but CEU's track record of achieving returns in excess of its cost of capital is not conclusive," he said. "At this point, there are no changes to our revenue and EBITDA forecasts and our only change involves increasing share count resulting in no change to our $2.90 target. Based on the uptick in the stock price since the financing, we are reducing our rating."

The analyst consensus price target is $4.28, according to Thomson Reuters.

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Alta Corp analyst Mark Westby downgraded CERF Inc. (CFL-X) to "sector perform" from "outperform" following lower-than-expected first-quarter results.

CERF, a Calgary-based company engaged in equipment rental, equipment sales and service, and waste management services, missed Mr. Westby's revenue and EBITDA projections. Based on his revised financial models, he said the company is at risk of breaching its debt to EBITDA credit facility covenant by the second half of 2016.

"Aside from debt covenant concerns, the company has done an impressive job at integrating its recent acquisitions and restructuring its business for a challenging operating environment, which is expected to result in lower G&A," he said. "Further, the Fort McMurray fire may provide opportunities for the company to deploy assets for use in rebuilding (this would present an upside to our estimates and presents a potential catalyst for the stock).

"There has also been increased demand in Alberta for field accommodations for use outside of oilfield services. Accordingly, we expect that CFL will be able to sell its remaining drill camps and its older well site trailers this summer (we estimate 60-80 per cent of its fleet of 120 trailers), potentially recovering more than the recently impaired $3.7 book value of its assets for sale, which would improve its debt profile somewhat."

He lowered his full-year 2016 revenue projection by 9 per cent to $36.4-million, while his EBITDA estimate dropped 24 per cent to $5.9-million.  He introduced his 2017 estimates of revenue of $47.9-million (an increase of 32 per cent year over year) and $14.7-million in EBITDA (up 147 per cent).

His target price of the stock dropped to 50 cents from 70 cents. Consensus is 75 cents.

"While we are optimistic that management will be able to resolve any potential debt covenant concerns with its lenders, due to CFL's increased risk profile we lower our target multiple to 0.5 times from 0.7x prior," he said.

"Further covenant relief would cause us to reconsider our valuation given the positive catalysts ahead."

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In other analyst actions:

Arsenal Energy Inc (AEI-T) was raised to "hold" from "sell" at Paradigm Capital by equity analyst Ian Macqueen. The 12-month target price is $1.65 (Canadian) per share.

Delphi Energy Corp (DEE-T) was downgraded to "sector underperform" from "sector perform" at Scotia by equity analyst Cameron Bean. The 12-month target price is 60 cents (Canadian) per share. It was also downgraded to "speculative buy" from "buy" at Beacon Secs by equity analyst Kirk Wilson with a 12-month target price of $1.60 per share.

With files from Bloomberg News