Friday’s analyst upgrades and downgrades

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

Raymond James analyst Farooq Hamed thinks cost performance will continue to be an important focus for mining companies in the fourth quarter.

In a research report reviewing the recently completed earnings season, he emphasized that several companies in his coverage universe warned that full-year cash costs and all-in sustaining costs may land in the upper end of guidance ranges as “inflation continues to push consumable, labour, and logistics costs higher.”

“Notable guidance improvements came from B2Gold Corp. and Ivanhoe Mines Ltd., while New Gold Inc. reduced full-year guidance ahead of its quarterly results,” he said. “For BTG, continued outperformance from the Fekola mill allowing for greater-than-expected throughput allowed the company to increase 2021 production guidance by approximately 4 per cent. For IVN, the smooth startup and faster-than-expected ramp to nameplate capacity at the mill drove a production guidance increase of 7 per cent in 2021. At NGD, continued poor grade reconciliation from the East lobe of the ODM zone at Rainy River impacted 3Q production causing a reduction in full-year guidance.”

Previewing the fourth quarter, Mr. Hamed expects operating improvement from several base and precious metal companies and predicted Yamana Gold Inc. (YRI-T, “market perform” and US$6 target), Ivanhoe Mines Ltd. (IVN-T, “outperform” and $12.50) and Hudbay Minerals Inc. (HBM-T, “outperform” and $12) could also see their “strongest” quarters of the year.

“With full-year guidance refinements made across the coverage group in 3Q, we expect our coverage companies to generally meet operating guidance except for IVN, where we anticipate the company is positioned to beat the upper end of its production range,” he said.

Mr. Hamed made these target changes:

• Ero Copper Corp. (ERO-T, “outperform”) to $28 from $30. The average on the Street is $29.73.
• Lundin Mining Corp. (LUN-T, “market perform”) to $13 from $13.50. Average: $12.05.
• Agnico Eagle Mines Ltd. (AEM-T, “outperform”) to US$73 from US$74. Average: US$76.78.
• Kinross Gold Corp. (K-T, “outperform”) to US$9 from US$8.50. Average: US$9.58.
• OceanaGold Corp. (OGC-T, “outperform”) to $3.50 from $3.25. Average: $3.44.

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Upon assuming coverage of six precious metals companies on Friday, Desjardins Securities analyst Jonathan Egilo named K92 Mining Inc. (KNT-T) his “top pick.”

“We believe the stock is not adequately pricing in the upside that the Kainantu mine offers,” he said. “As the drilling focus turns to Judd, we believe expanding this deposit, alongside continuing to drill Kora deeper and along strike, could provide substantial NAVPS accretion. Drilling from K92 Mining has routinely provided exceptional results and we believe continued strong results, particularly at Judd, could have the market pricing in larger life-of-mine scenarios.”

Expecting resource expansion drilling to pick up in 2022, Mr. Egilo set a buy” rating and $11.75 target for K92 shares. The average on the Street is $11.36, according to Refinitiv data.

The analyst also initiated coverage of Lundin Gold Inc. (LUG-T) with a “buy” rating, calling it “a premier, quality company within the intermediate space.”

“Lundin Gold’s Fruta del Norte (FDN) is one of the lowest-cost gold mines in the world and commands the lowest 2022 AISC [all-in sustaining cost] estimate within our collective intermediate peers (excluding those with significant by-product credits),” he said. “Additionally, despite the relatively short operating history, since commissioning FDN in 2020, management has gained a reputation for exceeding expectations. 2H20 guidance was surpassed, and thus far through nine months of 2021, the company is tracking toward the very upper end of guidance. In our view, there is a strong possibility that Lundin Gold will exceed the upper end of its 380–420koz 2021 production guidance.”

Mr. Eglio set a target of $13.75 for Lundin shares, which is below the $15.03 average.

He also assumed coverage of the following companies:

• Americas Gold and Silver Corp. (USA-T) with a “hold” rating and $1.40 target. Average: $1.98.
• Ascot Resources Ltd. (AOT-T) with a “buy” rating and $1.75 target. Average: $1.81.
• Liberty Gold Corp. (LGD-T) with a “buy” rating and $1.70 target. Average: $2.43.
• Osisko Development Corp. (ODV-X) with a “buy” rating and $8.25 target. Average: $10.20.

“With the exception of K92 Mining, our coverage universe contains a largely Americas focus,” the analyst said. “We also note that two of the three producers are single-asset companies, placing them in the M&A conversation. In particular, Lundin Gold management has noted that it recently began evaluating external opportunities now that the 4,200tpd expansion at Fruta del Norte has been largely completed. We also view Americas Gold and Silver as a topical company for M&A, as it could potentially be acquired due to the discounted valuation for its silver-focused portfolio.

“The three developers are North America–focused, with Liberty Gold in Idaho, and Ascot and Osisko Development in British Columbia. All three companies offer investors exposure to different stages of the developer lifecycle, ranging from Liberty Gold which recently declared a maiden resource at Black Pine, to Ascot which has obtained construction financing and is roughly 12 months away from planned first gold. The third company, Osisko Development, is between the other two in terms of its stage of advancement, and is looking to obtain permits in 2022 while concurrently executing a massive drill program at Cariboo.”

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After the release of “blockbuster” third-quarter financial results, Echelon Capital Partners analyst Amr Ezzat said Redishred Capital Corp. (KUT-X) continues to present “exceptional risk-reward characteristics at current levels.”

“With many of the Company’s franchisees up for renewal in the next three years, we expect management to go cherry picking and deploy more capital into accretive tuck-ins,” he said. “The acquisitions highlight KUT’s low-risk sizeable M&A pipeline. Namely, we estimate the Company can more than double its revenues through the roll-up of its franchisees. We have recently anointed it as one of Echelon’s Top Picks.”

After the bell on Wednesday, the Mississauga-based company reported sales of $9.8-million, up 46.8 per cent year-over-year and above the projections of both Mr. Ezzat ($8.4-million) and the Street ($8.9-million). Earnings before interest, taxes, depreciation and amortization jumped 53.1 per cent to $2.9-million, also topping estimates ($2.4-million and $2.6-million, respectively).

Saying the results exhibit “exceptional earnings momentum,” the analyst added: “This is a high-quality beat driven by strong organic growth with sales from corporate locations 22 per cent higher year-over-year on an organic and constant currency basis. We expect continued strong performance.”

Maintaining a “buy” recommendation, he raised his target for Redishred shares to $1.50 from $1.25. The average on the Street is $1.35.

Others making changes include PI Financial’s Devin Schilling to $1.30 from $1.20 and Acumen Capital’s Nick Corcoran to $1.25 from $1.15. Both kept “buy” ratings.

“We view the record Q3/21 results as positive. Catalysts include acquisitions and improving operational performance,” said Mr. Corcoran.

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Canaccord Genuity analyst Mark Rothschild sees Canadian Net Real Estate Investment Trust (NET.UN-X) as “attractive for investors looking for a sustainable and growing distribution, which is supported by a stable cash flowing portfolio and the opportunity for continued accretive growth.”

Late Wednesday, the Pointe-Claire, Que.-based trust, formerly known as Fronsac REIT, reported third-quarter funds from operations of 14.5 cents per unit, up 14 per cent year-over-year and exceeding the analyst’s 13.7-cent projection. He attributed the beat to contributions from $78-million of accretive acquisitions completed since the beginning of the fourth quarter of 2020.

“Canadian Net REIT has consistently increased its distribution and we expect this to continue over the next few years,” said Mr. Rothschild. “The REIT announced a 13.3-per-cent increase in the monthly distribution from an annualized rate of $0.30 to $0.34. Since 2012, the distribution has been raised a total of 172 per cent, a CAGR [compound annual growth rate[ of 10.5 per cent.”

Expecting stronger cash flow growth, he raised his FFO per diluted unit projection for 2021 by a penny to 58 cents and his 2022 estimate to 67 cents from 60 cents, representing growth of 20 per cent and 16 per cent, respectively. He also introduced a 2023 estimate of 70 cents.

“In the near term, Canadian Net’s portfolio should continue to generate stable operating income given the REIT’s triple-net lease agreements, long-term leases with necessity-based tenants,” Mr. Rothschild said.

Maintaining a “buy” rating, he increased his target for the REITs’ units to $9, matching the current consensus, from $8.50.

Elsewhere, Laurentian Bank Securities analyst Yashwant Sankpal raised his target by $1 to $9, maintaining a “buy” recommendation.

“NET offers exposure to well-located, single-tenant, retail properties mainly located in secondary markets,” he said. “Because of the long-term, management-free nature of its leases, NET’s cash flow is quite steady. Most importantly, NET has been growing its FFO/unit at a CAGR [compound annual growth rate] of 20 per cent since 2011 thanks to its approach of disciplined acquisitions and strict cost control. NET has a long runway to continue doing such accretive investments as this real estate sub-sector is huge and fragmented. As a result, we think NET is a must investment for long-term growth REIT investors.”

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In other analyst actions:

* Canaccord Genuity analyst Scott Chan raised his Axis Auto Finance Inc. (AXIS-X) target by 10 cents to 80 cents, maintaining a “buy” rating.

* In the wake of lower-than-anticipated third-quarter results and a “more conservative” outlook, Echelon Capital analyst Michael Mueller cut his target for Green Impact Partners Inc. (GIP-X) to $11.50 from $16 with a “speculative buy” recommendation, while RBC Dominion Securities analyst Nelson Ng lowered his target to $10 from $12, keeping a “sector perform” rating. The average is $13.45.. The average is $12.10.

“While the quarterly results were weaker than expected, and the Company has diverted some capital from its water and industrial business in favour of the renewables projects in its pipeline which has reduced our 2022 outlook, we are encouraged by the progress being made at GreenGas Colorado as well as seeing a focus on these larger-scale biofuels projects,” Mr. Mueller said. “We remain focused on the Company’s execution on the renewables projects and look to GIP reaching FID on these projects in 2022.”

* After a “soft” third quarter and emphasizing liquidity concerns, Canaccord’s Derek Dley lowered his Green Organic Dutchman Holdings Ltd. (TGOD-CN) target to 15 cents from 20 cents with a “hold” rating. The average is 27 cents.

“We await more organic revenue growth and market share gains before becoming more constructive on the name,” he said.

* Scotia Capital analyst George Doumet raised his Rogers Sugar Inc. (RSI-T) target to $6 from $5.50 with a “sector perform” rating, while BMO’s Stephen MacLeod bumped up his target to $6 from $5.75 with a “market perform” rating. The average is $5.80.

“Q4/21 results were below both our and management’s expectations, due to the Sugar segment,” said Mr. MacLeod. “Sugar EBITDA declined year-over-year and was below our estimate. Maple results improved y/y and were above forecast (lower volumes). Volumes have “re-balanced” to pre-COVID levels, and initial 2022E expectations are improved profitability in both Sugar and Maple Products. Our estimates are unchanged and we maintain our Market Perform rating, but believe the stock may be attractive for income-oriented investors (6.4-per-cent dividend yield).”