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Gold bars are stacked in the Pro Aurum gold house in Munich, Germany, in 2014.


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

Failing to see "simple" solutions to structural concerns about its near-term state, Raymond James analyst Kurt Molnar downgraded Chinook Energy Inc. (CKE-T) in reaction to its fourth-quarter 2017 results and operational update.

"Chinook reported 4Q16 financial and operating results that were consolidated with assets since removed from the business," said Mr. Molnar. "So comparatives up-and-down the income statement for estimates are of little value for the investor for 4Q16. Going forward the prospects for the equity account will be largely biased to the Birley Montney project. Exit 2016 positive working capital of $15.1-million was largely in line with our estimate of $15.7-million."

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With the results, released on March 23, Chinook, based in Calgary, also announced well test and early production data for three new Birley Montney wells, which ranged from 1,094-1,364 barrels of oil equivalent per day (boed) and gas leverage ranging from 88 per cent to 96 cents.

"We were not expecting this lean of a gas and/or with this lean of gas we would have expected higher test rates frankly," said Mr. Molnar. "These wells are very early in the actual production (IP4-8) with production rates of 690-774 boed."

"On the basis of these wells the Company revised their guidance for 2017, increasing production while capex remains the same and implied cash flow falls moderately. Here lies the rub. The implication of this guidance is that Chinook's cash netbacks in 2017 are expected to be about $6.50 per boe. We would expect this to be the lowest netback of Chinook's regional peers due to the high cash costs that the Chinook business model still has. Chinook's regional neighbors posted PDP capital costs of $6-8 per boe this past year and we don't see Chinook's project being more capital efficient than peers like Storm or Blackswan. Most critically, even if Chinook had PDP capital costs of $6 per boe, a cash netback of $6.50 per boe would not be enough to even cover Chinook's cost of capital."

Mr. Molnar's rating for Chinook stock fell to "underperform" from "market perform." His target price fell to 35 cents from 50 cents. The consensus price target is 61 cents.

"So while Chinook plans to consume their positive working capital over the course of the year, their return on capital is likely to be unattractive in our view," he said. "This causes a problem obviously for the equity investor and even raises doubts as to the saleability of the company/assets unless the buyer could sharply reduce cash costs of the Chinook business model. The Company notes it has an $8-million bank line but drawings are limited to a max of $2-million without the prior approval of the banks. The exit positive working capital forecast of $2-million as at the end of calendar 2017 leaves little breathing room in the business model unless the larger credit limit is available."


NewCastle Gold Ltd. (NCA-T) is "building momentum on the path to production," according to Canaccord Genuity analyst Kevin MacKenzie.

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As it moves toward production at its 100-per-cent-owned Castle Mountain project in California, he initiated coverage of the junior exploration and development company with a "speculative buy" rating.

"With a new management team now in place, and ongoing development studies to culminate in a PFS [pre-feasibility study] by year-end, NewCastle is increasingly gaining development momentum," said Mr. MacKenzie. "This momentum was initiated early last year when the company merged with Catalyst Copper, which saw mining entrepreneurs, Richard Warke and Frank Giustra join the board. With Gerald Panneton assuming the role of President and CEO shortly thereafter, our conviction on the trajectory of the Castle Mountain project was further solidified, this given his experience in establishing, advancing and commissioning the Detour Lake project."

Castle Mountain, located in San Bernardino county, is a heap leach gold mine, which produced over 1 million ounces of gold from 1992 to 2004. Active operations ended in 2001 due to lower gold prices and local pit wall stability issues. The project has an established open-pit mining permit, which Mr. MacKenzie highlighted as a benefit for NewCastle.

"Our base case model for the Castle Mountain project is centred on the project's permitted 8.16 million tons per annum (Mtpa) production capacity and is rooted in its 2015 resource estimate," he said. "Overall, we model a 27-year open pit heap leach operation at an average rate of 142Koz/yr. Assuming a commissioning date of early 2021, and a long-term gold price of $1,314 (U.S.) per ounce, we calculate a project NPV7% of $385-million and an IRR [internal rate of return] of 21 per cent. Given the size of the resource base at Castle Mountain, and overall exploration upside, we expect that the project will ultimately be permitted at an expanded capacity. We reflect this in our expanded Upside Case, which outlines a ramp-up to 16.3 million tons per year in Year 7, producing an average of 238,000 ounces per year over 19 years (NPV7% of $662-million an IRR of 25 per cent)."

"NewCastle is currently advancing multiple project efficiency studies which aim to further improve the economics of the Castle Mountain project. This includes the ongoing +60,000m drill program, which is designed to lower the project's overall strip ratio, while increasing the resource base and grade. A second area of investigation has been on the potential to run a coarser heap crush, and the associated CAPEX/OPEX trade-offs of a two-stage versus three-stage circuit. Lastly, ongoing testing of the JSLA pit backfill material (previously treated as waste) has highlighted the potential of a ROM project (up to 20 million tonnes grading 0.3-0.4 grams per ton) that could commence as early as Q1/18. The ROM project is expected to recover the majority of the costs associated with relocating the backfill material, while advancing the Castle Mountain project into small scale production in the near-term."

Citing the tenure of its management team, Mr. MacKenzie said NewCastle is currently "well positioned" to construct and commission the project. He sees the company as "a serious takeover candidate," citing its sizable resource base, exploration upside and safe mining jurisdiction.

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"Given the associated premium with which these potential acquirers trade at relative to NewCastle, we may see a bid for the company sooner than expected, this as a considerable control premium could be applied while still making a deal accretive," he said.

The analyst set a target price of $1.50 per share. Consensus is $1.52.

"At present, NewCastle trades at a significant discount to that of the open pit heap leach peer group ($20 U.S. per ounce versus $47 per ounce average)," he said. "We view this to be an opportunistic market disconnect that is expected to narrow in the near to medium term as NewCastle continues to advance/de-risk the Castle Mountain project."


Desjardins Securities analyst Michael Parkin lowered his target price for Agnico Eagle Mines Ltd. (AEM-T, AEM-N) to account for its new issuances of shares, which he did not think was expected by the market.

On Monday after market close, Agnico announced it has agreed to issue and sell 5,003,412 common shares to a U.S. institutional investor at a price of $43.97 (U.S.) each. The total consideration of $220-million is slated to be used for general corporate purposes.

"The issue price represents a 1.5-per-cent discount to the closing price of $44.64 (U.S.) per share on the NYSE and a 2.7-per-cent discount to the 50-day moving average of $45.20 per share," he said.

"We were not expecting an equity or capital raise, and have not had a chance to follow up with management at this point. The share issuance represents dilution of 2.2 per cent based on the end-of-year share count of 225.0 million."

With a "buy" rating, his target price fell by a loonie to $71 (Canadian). Consensus is $48.56.


Héroux-Devtek Inc.'s (HRX-T) rejected bid for a new contract with the U.S. military "adds another element of uncertainty" said Raymond James analyst Ben Cherniavsky.

On Monday morning, Longueuil, Que.-based aerospace company announced it had lost a bid with the U.S. air force for a comprehensive Performance Based Logistics contract to provide total supply chain management for all landing gear parts requirements for the C-130, KC-135 and E-3 aircraft.

"We followed up with management and understand that the guidance range of $480–$520-million by 2021 is still achievable," said Mr. Cherniavsky. "But we feel there is now a greater degree of uncertainty, especially considering the bid fell through with a customer of 40 years.

"Importantly, this does not impact the current contract with the USAF for the provision of landing gear repair and overhaul services, as well as the manufacturing and delivery of certain aftermarket components. Heroux anticipates that its volume based on the terms of the current agreement will gradually phase out over the course of fiscal 2019."

With a "market perform" rating, Mr. Cherniavsky lowered his target price for the stock to $13 from $14.50. Consensus is $14.

"We forecast peak revenue of $480-million and EPS of $1.05 for Héroux in fiscal 2021 (down from $490-million and $1.10 previously)," he said. "Applying Héroux's 10-year average price-to-earnings multiple of 15 times to that peak number (down from 16 times prior due to greater uncertainty) and discounting it back three year (at 7 per cent) gives us a new 6-12 month target price of $13.00. We believe it is appropriate to look at fiscal 2021 EPS in light of the extended duration of the growth drivers."

Meanwhile, Desjardins Securities analyst Benoit Poirier lowered his target by a loonie to $15 with a "hold" rating (unchanged).

"Despite the material weakness in the share price recently, we expect the stock to trade sideways in the coming months as investors await additional visibility on the revenue and margin outlook," said Mr. Poirier. "In our view, HRX will need to provide positive newsflow through new contract announcements or solid quarterly results to regain investor confidence. Therefore, although we still see potential for a C$20+ share price beyond 2020, we recommend investors stay on the sidelines in the short term."


Red Hat Inc. (RHT-N) had a "nice bounce back" with its fourth-quarter financial results, according to BMO Nesbitt Burns analyst Keith Bachman.

The North Carolina-based tech company reported quarterly billings of $986-million (U.S.), ahead of Mr. Bachman's projection of $879-million and the consensus of $879-million.

Calling the results "very strong across the board," Mr. Bachman said app development and emerging tech revenue drove "quality" upside.

"We believe an important driver of app development and emerging tech and total subscription growth in Q4 was strong renewal rates," he said. "The top 25 renewal rates were more than 120 per cent in Q4, consistent with the Q3 and much better than 105 per cent in first half of fiscal 2017. Similarly, 90 per cent of deals included app development and emerging tech, substantially higher than the 73 per cent reported in fiscal 2016 and the average of 72 per cent in the first three quarters of fiscal 2017. If Red Hat is able to keep renewals at 120-per-cent levels for larger deals (not just the top 25), then we think fiscal 2018 revenue guidance is reasonable, if not conservative. Similarly, the average contract term increased to 25 months from 21 months in fiscal 2016 and an average of 22 months in the first three quarters of fiscal 2017. Long-term DR increased by 16 per cent year over year, and short-term DR rose by 23 per cent quarter over quarter. Therefore, we don't think billings duration increased in the February quarter. While management suggested that contract term would decline from 25 months in the February quarter, we don't think billings duration will decrease, as several large contracts did not fully bill, although cloud growth will serve as a headwind. Hence, we forecast FY2018 billings growth of 12 per cent, but we think we this could be a bit conservative.

With the results, Mr. Bachman raised his 2018 revenue projection to $2.76-billion from $2.68-billion, while his earnings per share estimated moved to $2.64 from $2.58. He introduced his fiscal 2019 estimates of $3.10-billion in revenue and $3.07 in EPS.

He maintained a "market perform" rating and increased his target to $90 (U.S.) from $75. Consensus is $87.16.

"Our late calendar 2016 cautious stance on Red Hat was based on the view that revenue and billings estimates would stay range-bound," said Mr. Bachman. "However, emerging technologies, led by strength in OpenShift and OpenStack, are proving to be much stronger than we previously estimated. Moreover, we conclude that we likely have more upside than downside tension. However, to return to our previously bullish stance on the shares, we would need more conviction on the durability of app development and emerging tech growth. Nonetheless, we acknowledge a very strong February quarter."

Elsewhere, RBC Dominion Securities analyst Matthew Hedberg raised his target to $98 from $95 with an "outperform" rating (unchanged).

"Leveraging an open-source platform, a vibrant development community, and hardened support infrastructure, Red Hat is building a cost-effective, enterprise-class software platform including operating system, applications, and middleware across the server, workstation, and desktop domains," said Mr. Hedberg. "In our view, the company's value proposition and go-to-market model are well aligned with enterprise customers through direct and subscription sales channels. However, Red Hat must continue to fend off encroachment from existing and emerging software and system vendors seeking to expand their range and depth of open-source solutions and services."

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