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Wednesday’s analyst upgrades and downgrades

Eldorado Gold's Säo Bento Mine in Brazil.

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

As its valuation metrics improve with the payability terms for its Olympias mine in Greece, Canaccord Genuity analyst Tony Lesiak upgraded his rating for Eldorado Gold Corp. (ELD-T, EGO-N).

On Tuesday, Vancouver-based Eldorado announced it has received multiple tenders for "significantly better" concentrate sales terms at its Phase II expansion at Olympias. It also announced wet commissioning has commenced on schedule. Pre-commercial production is expected by the second quarter of 2017 with commercial production beginning in the second half of the year.

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"Gold payability terms have increased from 58 per cent (our previous assumption long term) to a maximum of 71 per cent depending on the levels of gold in the concentrate," said Mr. Lesiak. "We currently expect Olympias concentrate grades to exceed the maximum payability thresholds (+25 grams per ton gold in con) for the majority of the life of the asset. TC/RC [treatment charge/refining charge] rates are expected to remain unchanged despite the improved payabilities.

"Overall, based on the revised payability terms and the current zinc price, we see cash operating costs below the bottom of the current guided range of $230 to $370 per ouncenet of by-products from 2018 to 2022. The revised payability terms have improved our NAV [net asset value] by 57 cents per share. Our valuation continues to assume a 36-per-cent expansion in mill throughput to 600ktpa. While the incentive for constructing a gold plant (pressure oxidation?) on site has been reduced given the improved payability, it remains part of the EIA for now. Ultimately, we believe any future amendments that improve environmental performance should be approved by a reasonable government."

Mr. Lesiak moved his rating to "buy" from "hold" and raised his target price for the stock to $5.50 from $5 to account for improved payability. The analyst consensus price target is $4.65, according to Thomson Reuters.

"Our target multiple remains suppressed (average 1.0 times target multiple for the group) mainly given the social/political situation in Greece where 60 per cent of ELD's assets by NAV are located," he said. "We note that ELD is expected to host a tour of its Greek asset in early June, and the Syriza government are currently in bailout discussions again.

"Eldorado has underperformed its peers 7 per cent year to date with the peer group also having underperformed bullion by 5 per cent. Given the improved valuation metrics relative to our revised target (now offering potential upside of 29 per cent), we are revising our rating."

Elsewhere, Credit Suisse analyst Anita Soni increased her target for the U.S. issue of the stock to $5.25 (U.S.) from $4.75 with an "outperform" rating (unchanged).

"We rate EGO Outperform due to an attractive valuation, low costs, long mine life and growth," she said. "EGO trades at 0.68 times P/NAV at spot, lowest in our coverage deck and a 0.44-times discount to peers (versus a 0.15-times average since 2013). Ramp ups and geopolitical risks in Greece and Turkey are the key risks."

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Methanex Corp. (MEOH-Q, MX-T) should be able to generate strong free cash flow in a "stagnant" oil environment, said CIBC World Markets analyst Jacob Bout.

After meeting with the company's chief executive officer, John Floren, Mr. Bout upgraded his rating for the stock to "outperformer" from "neutral."

"What impressed us is John's focus on shareholder return/ROIC [return on invested capital] and relative tightness of methanol markets despite the recent pullback in oil," said Mr. Bout.

The analyst said he expects the Vancouver-based company's strong FCF to translate to increased share buybacks and dividend hikes, noting: "In a higher methanol price environment (CIBC estimated 2017 realized price of $360 per ton versus $242 per ton in 2016), we continue to expect MEOH to generate strong free cash flow (FCF yield of 15.1 per cent in 2017). We are modelling that the 5-per-cent NCIB [normal-course issuer bid] (approximately 4.5 million shares) to be completed in 2017 and that a dividend increase will be announced at the AGM on April 27. Additionally, we believe it is possible (and not unwarranted historically) to see another NCIB before 2017 is complete. We forecast a dividend payout ratio (based on FCF before changes in working capital) to drop to 15-25 per cent in 2017/18 versus 80 per cent in 2016."

Mr. Bout also emphasized a "strong" start to 2017 for methanol contract prices, noting Methanex's contract price for March rose to $499 per ton from a fourth-quarter 2016 average of $326 and a March, 2016, price of $249.

"SE Asian contract prices have followed a similar trend, with March prices increasing to $500 per ton versus Q4/16 average of $315 per ton and March 2016 price of $255 per ton," he said. "The Q2 European contract price increased to €450 per ton from €370 per ton quarter over quarter and €275 per ton year over year. Note, we are forecasting a 2017 realized methanol price of $360 per ton  versus $242 per ton year over year."

To account for higher-than-projected methanol prices, Mr. Bout raised his 2017 non-discounted methanol price assumption to $412 per ton from $370. Accordingly, his EBITDA jumped to  $907-million from $692-million.

His target rose to $56 (U.S.) from $45. The analyst average is $54.75, according to Bloomberg.

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Canaccord Genuity analyst Tony Lesiak raised his target price for shares of Barrick Gold Corp. (ABX-T, ABX-N) in reaction to its joint venture with Goldcorp Inc. (G-T) in Chile.

On Tuesday, the companies announced an agreement to leverage potential synergies in the Maricunga gold belt in a multiple-step transaction. They plan to advance the Cerro Casale and Caspiche gold deposits.

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"The key benefits from the combination include infrastructure sharing (water pipeline, power, roads), improved ore sequencing (grade profile improves), capital sharing (less onerous), technology sharing (Goldcorp CEP process to help at Caspiche) and importantly a revised water strategy with a potential seawater pipeline to be funded by the JV and other regional parties, effectively unlocking the Maricunga," said Mr. Lesiak. "The two projects are approximately 10-kilometres apart. Overall, Barrick had been looking for ways to unlock value at Cerro Casale and now appears to have found a way forward.

"Barrick receives no immediate cash as part of the reduction in its interest in Cerro Casale from 75 per cent to 50 per cent and loss of full control; however, Goldcorp has agreed to fund Barrick's first $175-million U.S. ($260-million net of $85-million for Barrick's share of the cost to acquire Exeter's Caspiche) of expenditures on the project. Goldcorp will also pay Barrick $40M in cash upon a positive construction decision and $20-million cash upon Cerro Casale achieving commercial production. Goldcorp has also granted Barrick a 1.25-per-cent royalty interest on 25-per-cent of all metal produced at Cerro Casale and Quebrada Seca (also acquired from Kinross). The transaction is expected to close in Q2/17."

Mr. Lesiak maintained a "buy" rating for Barrick stock and bumped his target to $31 from $30. Consensus is $21.12.

"Barrick currently trades at a 28-per-cent premium to peers on a P/NAV [price to net asset value] basis and a 17-per-cent discount on 2017 P/CF [price to cash flow]," he said. "ABX currently trades at a 4.7-per-cent FCF [free cash flow] yield, the highest in the group."

"Reflecting the deal value applied to 25 per cent of Cerro Casale purchased by Goldcorp, we have increased the option value for the asset to $900-million (represents 40 per cent of estimated NAV) from $300-million previously. We carry Barrick's stake in Donlin at $400-million (permitting risk and weak project IRR) and Pascua $450-million (unknown development plans) at reduced option values. We have revised our target price."

At the same time, Mr. Lesiak lowered his target price for Goldcorp stock to $23 from $23.50 with a "hold" rating. Consensus is $20.86.

"With the transactions, Goldcorp has gained control of 40Mozs (attributable) of gold at an average purchase price of $15 per ounce in a favourable jurisdiction, well below typical industry finding costs," he said. "Management cites the downward trajectory for industry reserves and production, increasing scarcity of quality development projects and diminutive upfront payments ($260-million cash, 1-per-cent dilution) as key rationale. Management also sees the transactions as neutral to the balance sheet, effectively recycling capital from the sale of Los Filos. Confronted with the question of the large future capital commitment, management responded that the Casale/Caspiche combination provides for longer-term NAV accretion through reduced capital intensity, optionality, collaboration (capital and technology sharing) with an investment decision not expected after some five years of optimization and trade-off studies. We currently estimate a 10-per-cent IRR [internal rate of return] for Goldcorp for the combined Caspiche and Casale at $1,300 per ounce gold and $3 per pound copper based on our initial projections. The acquisition is not expected to alter the investment timelines for Dome Century (one to two years out) and Nueva Union (two to three years out).

"Overall, we can't deny the logic behind Goldcorp's decision. However, given the track record from the last major investment cycle (Eleonore, Cochenour and Cerro Negro), we also understand the market's frigid initial reaction. While we also appreciate the out of the box thinking, optionality and potential NAV accretion, we also note the increased M&A focus of late after the initial promise of hunkering down and fixing and unlocking the existing portfolio. The good news is that 'the pipeline is full right now.'"

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RBC Dominion Securities analyst David Palmer raised his target price for shares of Darden Restaurants Inc. (DRI-N), expecting the U.S. multi-brand restaurant operator to continue to gain market share.

On Tuesday, Darden, which owns seven chains including Olive Garden and LongHorn Steakhouse, announced an agreement to purchase the Cheddar's Scratch Kitchen chain for $780-million (U.S.). Cheddar's, based in Texas, currently has 165 locations across 28 states.

"Our guess is that Cheddar's can bolster Darden's long-term growth by 1-2 percentage points (to about 10 per cent longterm) given its unit economics ($4.4 million average unit volume and 17-per-cent restaurant-level margin), and modest penetration. Cheddar's widespread appeal seems to be partly driven by its varied menu, high quality ingredients and prep methods, and attractive entry price points ($13.50 average check)."

He added: "While the 'brand portfolio' structure in restaurants has a mixed history, Darden believes that a combination of a decentralized management structure and certain scale advantages (e.g. data collection, supply chain, and real estate expertise) makes it a synergistic acquirer of top tier casual dining brands. OG (55 per cent of sales) and LH (23 per cent of sales) share gains have held up through F3Q against a difficult industry backdrop in spite of difficult year-over-year comparisons. The company estimates its SSS [same-store sales] growth rate of 1.4 per cent for OG and 0.2 per cent for LH represented a 560 basis points and 400 basis points gap to the industry (ex/ Darden), respectively. In addition, OG take-out business has increased 17 per cent in F3Q17, and likely drove over 100 per cent of the brand's incremental growth during the quarter."

Mr. Palmer raised his fiscal 2018 earnings per share estimate to $4.41 (U.S.) from $4.37, an increase of 11 per cent year over year. His 2019 projection is $4.77, an increase of 8 per cent.

He said those projections do not include accretion from Cheddar's, which he projected could total 25 cents or more per share.

His "sector perform" rating did not change, but his target price for Darden rose to $86 (U.S.) from $80. Consensus is $78.59.

Elsewhere, BMO Nesbitt Burns analyst Andrew Strelzik said Darden is "feeling full," moving his target by a dollar to $81 with a "market perform" rating.

"We believe Cheddar's is a good strategic fit for DRI at a reasonable price," he said. "Cheddar's is on-trend with concepts that are performing well in this environment and its competitive positioning could be strengthened further over time as it leverages DRI's capabilities. In addition, synergy guidance appears highly achievable, if not conservative. Given Cheddar's issues related to over-development and softer comps in the recent past, DRI's focus on a faster, but still prudent unit growth trajectory (5-6 per cent growth in calendar 2018) and core competency in operations increase the likelihood that the brand can continue its recent solid performance against the difficult industry backdrop.

"That said, we cannot justify a more constructive view of the stock. Our view entirely reflects valuation rather than business fundamentals, which remain strong. Specifically, DRI's stock price already incorporates the full post-synergy accretion on top of our FY18 EBITDA estimate and a nearly 10x EV/EBITDA [enterprise value to earnings before interest, taxes, depreciation and amortization] multiple that is full to extended, in our view. To put DRI's valuation in perspective, it is in line with TXRH [Texas Roadhouse Inc.] despite TXRH comps growing approximately 2 times the rate of DRI's and unit growth approximately 3 times the rate of DRI's."

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The second quarter should provide a positive catalyst for McCormick & Company Inc. (MKC-N), said Credit Suisse analyst Robert Moskow, who emphasized investor concerns about weaker U.S. consumer trends are overdone.

On Tuesday, the Maryland-based spice and seasonings company reported first-quarter adjusted earnings of 76 cents a share, exceeding expectations of 74 cents. However, sales growth of 1 per cent missed the consensus projection by 1.2 per cent.

"The 1-per-cent sales decline in the Americas Consumer business raised a host of concerns among investors about what happens next," said Mr. Moskow. "Some worry that McCormick's price increases will lead to a sharper-than-expected volume decline due to elasticity of demand. Some fear that the company shipped ahead of consumption in 4Q and is now experiencing inventory deloading at the trade. Our view is that most of the weakness in 1Q will prove to be transitory nature opposed to steady market share erosion that plagued the company in 2013 and 2014. Most of the declines in 1Q came from cold-weather product lines (like chili recipe mixes) or products related to Lent (like authentic Mexican spices). And it seems a little premature to start worrying about price elasticity in this category when private label pricing is up almost 20 per cent. The company's April 4 investor day will give the management team an opportunity to lay out more of the details behind its plans for improving its U.S. revenue trends."

He pointed to three reasons to be optimistic about the stock in the second quarter: "1) Easier weather comparisons, the late timing of Easter, and the full benefit of price increases all point to a stronger 2Q. As evidence, the company's U.S. shipments and its retail tracking data already have showed signs of a recovery in March versus February. 2) Management's announcement that it will close a plant in Portugal appears to give it more ammunition to raise its costs savings target above $100-million. And 3) potential for another accretive acquisition to strengthen its position in flavors."

Mr. Moskow maintained an "outperform" rating for the stock and raised his target to $108 (U.S.) from $105. Consensus is $98.25

"Our target price of $108 assumes a 23.4 times P/E [price to earnings] against our forward 12-month EPS estimate," he said. "This reflects a 15-per-cent premium to packaged foods peers, higher than its historical average of 10 per cent. We think McCormick's relative valuation will exceed its historical average as its revenue growth rate continues to outpace packaged food peers. Over the past two years, MKC is the only food company in our coverage that has consistently achieved its stated sales algorithm, averaging 3.5-per-cent organically."

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In other analyst actions:

Agnico Eagle Mines Ltd. (AEM-T) was raised to "overweight" from "neutral" at JPMorgan by analyst John Bridges. His 9-month target price remains $78.00 per share. The analyst average target price is $65.12.

Enghouse Systems Ltd. (ENGH-T) was downgraded to "sector perform" from "outperform" at RBC by analyst Paul Treiber, who lowered his target to $64 from $70. The average is $65.50.

Home Capital Group Inc. (HCG-T) was raised to "neutral" from "underperform" by Macquarie analyst Jason Bilodeau. His target fell to $28 from $30, compared to the average of $29.55.

Shopify Inc. (SHOP-N, SHOP-T) was rated new "equal-weight" at Barclays by analyst Deepak Mathivanan with a $64 (U.S.) target. The average is $66.58.

Snap Inc. (SNAP-N) was rated new "equal-weight" at Barclays by analyst Ross Sandler. His target is $24 (U.S.), while the average is $23.58.

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About the Author
Globe Investor Content Editor

David Leeder is a content editor in the Report on Business. He was previously Deputy Sports Editor and Weekend Digital Editor at The Globe.  He holds an undergraduate degree from McMaster University and a graduate degree from Ryerson University. More

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