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Labrador Iron Ore Royalty Income Fund

Inside the Market's roundup of some of today's key analyst actions. This file will be updated often during the trading day so check back for new details.

Investors are showing increasing signs of concern about the sustainability of the current dividend of Labrador Iron Ore Royalty Corp. (LIF-T), according to Canaccord Genuity analyst Kyle Franklin.

The company's shares have fallen almost 25 per cent thus far in 2016, coinciding with a decline in iron ore prices. In reaction to that drop in share price, Mr. Franklin upgraded his rating for the stock to "buy" from "hold."

"LIF now offers an attractive yield, close to 14 per cent; however, we continue to be cautious amid the current iron ore price decline and our forecast for a dividend cut in 2016," he said. "We are estimating a 60-cent dividend in 2016 (down from the 2015 dividend of $1.00)."

On Monday, Rio Tinto reported fourth-quarter production and sales volumes for Iron Ore Company of Canada, of which Labrador owns a 15.1-per-cent equity interest stake. Those results met Mr. Franklin's expectations, however the sales mix of concentrates and pellets resulted in a reduction in his earnings per share estimate for the quarter to 15 cents from 22 cents.

"Iron ore prices have shown no real signs of strength in the past six months, as major producers continue putting additional tonnes on the market, weakening producer currencies have been lowering production costs and China demand concerns continue to weigh," he said. "In addition to macro factors, we believe recent newsflow related to production curtailments and labour relations issues at Iron Ore Company of Canada (IOC) have also weighed on LIF shares. Assuming a Canadian dollar/U.S. dollar exchange rate of 0.70 (close to current spot) and a pellet premium of $26 (U.S.)/tonne (close to current spot contracts), we believe that IOC would probably remain cashflow positive for the 2016 fiscal year at an average iron ore price (62 per cent iron, landed in China) of about $46/tonne, slightly above current spot price of $43/t. Given recent capital investments and expected productivity improvements, we believe the risk of a complete shutdown at IOC is low, but that production curtailments and product mix decisions along with volatile iron ore pricing could likely strain 2016 cashflow available to LIF and its shareholders."

Mr. Franklin reduced his target price for the stock to $10 from $11. The analyst consensus target price is $14.21, according to Thomson Reuters.


BMO Nesbitt Burns analyst Andrew Breichmanas upgraded his rating for Guyana Goldfields Inc. (GUY-T) following the publication of a feasibility study for its Aurora gold project.

Mr. Breichmanas moved his rating to "outperform" from "speculative outperform."

"The study demonstrates the Aurora mine's low all-in costs and attractive economics even at lower gold prices, which should enable the company to service its debt obligations while beginning to accumulate cash," he said.

Mr. Breichmanas added: "The updated plan includes lower capital for an expansion of plant throughput, higher underground development and mining costs, and reallocates some corporate overheads to the mine level," he said. "We have adjusted unit costs to reflect mine life averages and near-term guidance for 2016 total cash costs of $487-537 (U.S.)/ounce and all-in sustaining costs of $587-637/oz. The study provides a good indication of expectations, but the mine plan is likely to be further optimized given the potential to define additional reserves once drill programs are initiated. We continue to incorporate mineable resources of 4.4 million ounces (Moz) from anticipated additions on surface and extensions to the underground at depth."

He maintained a price target of $5 for the stock. The analyst consensus is $4.84.


Desjardins Securities analyst Justin Bouchard said he's "all but certain" Suncor Energy Inc.'s (SU-T, SU-N) amended $4.2-billion deal to purchase Canadian Oil Sands Ltd. (COS-T) will go through.

He changed his rating for COS to "tender" from "sell."

On Monday, the companies agreed to a revised deal after Suncor raised its offer to 0.28 of its shares for each Canadian Oil Sands stock from an original proposal of 0.25 shares.

"Relative to the 0.25 share offer, there is almost no change to cash flow, debt and other metrics with the revised offer," said Mr. Bouchard. "The bottom line is that, pro forma, the deal does not look all that compelling at $45 (U.S.) per barrel WTI (because COS does not generate any free cash). However, at $65/bbl WTI, the deal 'improves' SU. And, if we were to factor in some of the expected cost reductions and reliability improvements, things would look even better. This deal still prices in a significantly higher oil price than where we are sitting today, but it certainly buys SU significant upside beyond $65–70/bbl WTI (and remember, Syncrude has a remaining estimated life of 43 years — that's plenty of time for oil prices to recover!)."

"The corporate integration of COS into SU should be fairly straightforward and there should be some immediate savings in [general and administrative expenses] (approximately $25-million Canadian per year). And, as COS's debt begins to mature in 2019, investors should expect to see some reduction in interest expense as SU rolls over this debt at lower interest rates. Additionally, SU may look to win the next management agreement at Syncrude (which would also come with a financial benefit) when the current 10-year agreement with [Imperial Oil Ltd.] expires in late 2016."

Mr. Bouchard maintained his price target of $10 for COS stock. The analyst average, according to Bloomberg, is $9.04.

He also did not change his "hold" rating for Suncor with a $39 target. The average is $39.44.

"Reliability is an area where the Syncrude project has struggled for the past decade, and this had led to persistently higher unit costs and lower production," the analyst said. "Over that same time frame, SU has managed to make dramatic improvements to its own legacy mining operations and we believe SU should be able to bring some of its 'know-how' to the table and deliver similar operational improvements to Syncrude. SU also brings a unique competitive advantage to the table — it can use its big upgrader plants nearby to increase the structural reliability of the Syncrude project through optimization (parallel processes increase system reliability). The cross connection of Syncrude with SU operations should allow production to be higher at Syncrude."

Elsewhere, Peters & Co. analyst Jeff Martin upgraded his rating for COS to "sector outperform" from "sector perform" while lowering his target to $9.75 from $11.


The recent drop in unit price for Boardwalk Real Estate Investment Trust (BEI.UN-T) is "likely overdone" in reaction to investor concerns about "softening" fundamentals in Western Canada, according to Canaccord Genuity analyst Mark Rothschild.

Boardwalk's unit price has declined 43 per cent from its all-time high of $71.40 in November 2014.

"While we do not believe that vacancy has bottomed, we do believe that the market is pricing in a greater level of pain than Boardwalk is likely to suffer," said Mr. Rothschild. "However, it is difficult to see a material near-term catalyst for the REIT's units."

The analyst pointed to data for October from Canada Mortgage and Housing Corporation that said the rental apartment vacancy rate in Calgary increased 3.9 per cent and 2.5 per cent in Edmonton. He said it is "reasonable" to expect that rate to rise further in 2016 given increasing unemployment in Western Canada.

"Of the nine cities that we surveyed, average asking rental rates increased slightly in one city, were essentially unchanged in five cities, and declined in three cities," he said. "In Calgary and Edmonton, asking rental rates declined by 1.4 per cent and 0.8 per cent, respectively. While the decline is modest, January represents the fifth consecutive month of lower asking rental rates in Calgary and the ninth in Edmonton."

He lowered his cash flow estimates in reaction to this expected "additional softening" of fundamentals in the REIT's core markets. His funds from operations (FFO) per diluted unit projections for 2015 and 2016 fell to $3.44 and $3.40 from $3.51 and $3.53.

Maintaining his "hold" rating, he also lowered his target price to $45 from $50. The analyst consensus is $60.23.


BMO Nesbitt Burns analyst Heather Kirk adjusted her financial estimates and target price for RioCan Real Estate Investment Trust (REI.UN-T) to account for the $1.9-billion (U.S.) sale of its U.S. portfolio to Blackstone Group LP and its $132-million settlement with Target Corp.

"Although the sale price of $1.9-billion was higher than expected at a 6.7-per-cent cap rate, we view the [approximately] 55-per-cent lift in portfolio value since the acquisition as having delivered a solid return to unitholders," she said. "The higher-than-forecast cap rate (the International Financial Reporting Standards cap rate was 6.1 per cent) was in part due to the secured debt on the portfolio, which was a stumbling block for more levered buyers. The cap rate paid by the buyer was likely lower than the quoted cap rate by [approximately] 25 basis points due to transaction costs. Pro-forma the sale, which is slated to close on April 30, REI's debt to total asset ratio is expected to trend down to 39 per cent from the current 44 per cent."

Ms. Kirk's net asset value (NAV) projection declined by 3 per cent to $25.40 per unit, "reflecting a slightly higher than forecast cap rate on disposition and taxes and transactions costs." Her 2016 funds from operations (FFO) and adjusted FFO estimates declined to $1.63 and $1.49, respectively.

"The REIT's AFFO payout ratio is expected to trend up in the short term, but to remain below 100 per cent and trend down as development projects are delivered and vacant space is leased," the analyst said. "We also note that on Jan. 13, the Ontario Superior Court rejected Target Canada's proposed recovery plan. This is expected to have no impact on the $132-million settlement with RioCan."

She kept her "outperform" rating for the stock but lowered her target to $28 from $29.75 based on a lower NAV. The average is $27.50.

"REI currently trades at an 8-per-cent discount to NAV versus a historical premium of 7 per cent," Ms. Kirk said. "We like RioCan due to its size/liquidity, dominant platform, strong management team with a track record of value creation and low leverage. In addition, RioCan is a potential candidate for February addition to the TSX 60, which could increase short-term fund flows into the name."


In other analyst actions:

Arch Capital Group Ltd. (ACGL-Q) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Amit Kumar. The 12-month target price is $70 (U.S.) per share.

Allstate Corp. (ALL-N) was raised to "outperform" from "neutral" at Macquarie by equity analyst Amit Kumar. The 12-month target price is $68 (U.S.) per share.

Allegion PLC (ALLE-N) was raised to "outperform" from "market perform" at Bernstein by equity analyst Steven Winoker. The 12-month target price is $70 (U.S.) per share.

Apple Hospitality REIT Inc. (APLE-N) was downgraded to "sell" from "neutral" at Ladenburg Thalmann by equity analyst Daniel Donlan. The 12-month target price is $12 (U.S.) per share.

Cogeco Cable Inc. (CCA-T) was raised to "buy" from "hold" at TD Securities by equity analyst Vince Valentini. The 12-month target price is $76 (Canadian) per share.

Campbell Soup Co. (CPB-N) was raised to "neutral" from "underweight" at JPMorgan by equity analyst Ken Goldman. The 12-month target price is $55 (U.S.) per share.

Equity Residential (EQR-N) was downgraded to "market perform" from "market outperform" at JMP Securities by equity analyst Aaron Hecht. The target price is $90 (U.S.) per share.

Eaton Vance Corp. (EV-N) was raised to "neutral" from "negative" at Susquehanna by equity analyst Douglas Sipkin. The 12-month target price is $28 (U.S.) per share.

Michael Kors Holdings Ltd. (KORS-N) was raised to "neutral" from "underweight" at Piper Jaffray by equity analyst Erinn Murphy. The 12-month target price is $38 (U.S.) per share.

McCormick & Co. Inc. (MKC-N) was downgraded to "underweight" from "neutral" at JPMorgan by equity analyst Ken Goldman. The 12-month target price is $76 (U.S.) per share.

Parkland Fuel Corp. (PKI-T) was rated new "sector perform" at RBC Capital by equity analyst Sabahat Khan. The 12-month target price is $23 (Canadian) per share.

ResMed Inc. (RMD-N) was downgraded to "underweight" from "equal-weight" at Barclays by equity analyst Matthew Taylor. The target price is $52 (U.S.) per share.

UDR Inc. (UDR-N) was downgraded to "market perform" from "market outperform" at JMP Securities by equity analyst Aaron Hecht. The target price is $40 (U.S.) per share.

Yamana Gold Inc. (YRI-T) was downgraded to "neutral" from "outperform" at Macquarie by equity analyst Michael Siperco. The 12-month target price is $2.50 (Canadian) per share.

With files from Bloomberg News

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