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

A shift in strategy has led to increased uncertainty surrounding Barrick Gold Corp. (ABX-N, ABX-T), according to RBC Dominion Securities analyst Stephen Walker.

That has prompted him to take a more “cautious” outlook for the company, leading him to downgrade his rating for its stock to “sector perform” from “outperform.”

“After successfully executing the restructuring, decentralizing, and strengthening the balance sheet over the last three years, Barrick’s strategy is becoming more tactical,” said Mr. Walker. “We expect management and the board to be more focused on capital allocation decisions, including a return of capital and buy or build decisions. The challenge for share price performance during this period is the uncertainty that currently exists around strategic issues.”

In a research note released Monday, Mr. Walker pointed to five issues of concern:

- Ongoing negotiations with the Tanzanian government over for Acacia Mining plc’s operations;

- “No reference to the $5-billion debt target in the Q2/18 report likely signals alternate uses for cash, whether returns of capital or new investments;”

- The potential for asset sales or swaps with China’s Shandong Gold Group following the announcement of their “enhanced strategic cooperation” agreement;

- “The current share price weakness results in less competitive currency, when seeking acquisitions in the competitive Americas market, potentially making Barrick a takeover target;”

- The need for a new president and “articulating strategic priorities.”

In order to reflect “the overhang expected from the uncertainties,” Mr. Walker lowered his target price for Barrick shares to US$14 from US$16. The average target on the Street is currently US$14.71, according to Thomson Reuters Eikon data.


Meanwhile, Mr. Walker upgraded his rating for Agnico Eagle Mines Ltd. (AEM-N, AEM-T), expecting production increases to lead to free cash flow growth.

The analyst is projecting a 32-per-cent increase in gold production between 2018 and 2010 as the Toronto-based company completes its Meliadine and Amaruq development projects in Nunavut. He expects “significant” operating free cash flow growth to materialize beginning in the middle of 2019, estimating a rise from $1.17 per share in 2019 to $2.36 in 2020 and $3.44 in 2021.

“With the final permit in hand, we have a high level of confidence that the Whale Tail Lake cofferdam at Amaruq can be completed in time for open-pit ore to be trucked to the Meadowbank plant by the mid-2019 target,” said Mr. Walker. “Construction of the Meliadine plant is on schedule, with the major mill components installed and the underground development effectively completed. We believe both mines are in good shape to begin production in mid-2019.

“We forecast production to decline year-over-year from 1.71 million ounces in 2017 to 1.59 million ounces in 2018, and then forecast steady growth to 2.09 million ounces in 2020, above company guidance of 2.0 million ounces. We forecast AISC [all-in sustaining costs] to decline from $912 per ounce in 2018 to $849 per ounce in 2020, within guidance ranges. We expect Agnico to continue to meet or exceed its operational guidance and there to be positive surprise potential relative to consensus estimates.”

Moving Agnico shares to “outperform” from “sector perform,” Mr. Walker raised his target to US$55 from US$49. The average is US$53.19.

“Given expected production and FCF growth and potential for a material improvement in the dividend, we believe Agnico’s shares should trade at higher valuation multiples of 1.8 times P/NAV [price to net asset value] and 20 times EV/Adj. CF [enterprise value to adjusted cash flow] (were 1.6 times and 18 times), which supports the increase in our price target,” he said.

Mr. Walker added: “Agnico has a solid record of building high return projects, returning capital to shareholders and has paid a dividend for the past 36 years. With surplus capital forecast to increase beginning in 2019, we believe there is potential for the current 44 cents per share dividend to return to the 2013 level of 88 cents per share. Our analysis shows the capacity to repay $360-million of debt in 2020, invest $500-600-million in annual capex and pay out an 88 cents per share ($205-million per year) dividend over the next 5 years at $1,200 per ounce.”


In the wake of the release of its “impressive” second-quarter financial results, Desjardins Securities analyst Benoit Poirier said Aecon Group Inc. (ARE-T) is “building a strong foundation for the future.”

On Thursday, the Calgary-based construction company reported quarterly revenue of $755-million, exceeding the expectations of both Mr. Poirier ($733-million) and the consensus on the Street ($674-million). Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $41.4-million also topped projections ($40.5-million and $37.7-million, respectively).

"ARE reiterated its positive outlook for 2018 and beyond as it expects revenue growth and higher consolidated EBITDA based on stronger margins," said the analyst. "In addition, the company foresees many growth opportunities in infrastructure (mainly with P3s), nuclear (mainly with the Bruce Nuclear Generating Station) and energy (mainly with pipelines). ARE highlighted that more than $8-billion of opportunities are expected to be awarded over the next 12 months. Assuming a win rate of 33 per cent for ARE (in line with historical levels), this would represent up to $2.6-billion of additional project wins or 40 per cent of ARE’s current backlog."

After increasing his fiscal 2018 and 2019 expectations, Mr. Poirier increased his target to $21 from $20, keeping a "buy" rating for Aecon shares. The average target is $19.95.

“Bottom line, we are maintaining our bullish stance on ARE in light of its attractive valuation (EV/FY1 EBITDA of 4.2 times versus U.S. peers at 7.9 times), solid balance sheet, record backlog and robust market conditions across the board,” he said. “In addition, we see the recent appointment of Jean-Louis Servranckx as CEO as a strong testament to ARE’s commitment to its business, and believe that the company is building a strong foundation for the future.”

Elsewhere, AltaCorp Capital analyst Chris Murray upgraded Chris Murray raised Aecon to “sector perform” from “underperform” and hiked his target to $18 from $13.

Mr. Murray said: “We are becoming more constructive on the outlook for Aecon’s E&C operations, while still noting earnings are volatile, and the high level of fixed-price contracts places higher levels of risk on the Company. With the hire of a new President with strong international experience and the failure of the CCCI transaction, we are somewhat uncertain regarding what Aecon could look like over the next five years. While questions around strategic options abound and were also a focus on the call, we remain positive about the Company’s long-term future given substantial backlogs, solid balance sheet and expected earnings profile. We believe the Company is approaching a reset point in its evolution, however complexities around M&A and the path forward as well as mixed messaging around future earnings have us believe a neutral stance is appropriate at this juncture.”

Raymond James analyst Frederic Bastien increased his target to $23 from $20.50 with a “strong buy” rating (unchanged).

Mr. Bastien said: "We reaffirm our bullish recommendation on Aecon Group after the firm produced solid operating results and grew its backlog to unprecedented levels in 2Q18. What we find particularly encouraging, above all, is the high level of continuity in the recent contract wins and the multitude of sectors from which they are derived. This, in our opinion, clearly shows that Aecon is the contractor best positioned to profit from Canada's exceptional market opportunity. Our price target rises ... to reflect the greater confidence we have in our above-consensus forecasts for 2H18 and 2019."


Though Atrium Mortgage Investment Corp.'s (AI-T) fundamentals “remain strong,” Industrial Alliance Securities analyst Dylan Steuart thinks its current valuation should lead investors to wait for a more enticing entry point.

Despite last week's release of in-line second-quarter financial results, Mr. Steuart downgraded the Toronto-based company's stock to "hold" from "buy."

On the back of "strong" loan expansion and the continued expansion of asset yields, Atrium reported diluted earnings per share of 24 cents per share, matching Mr. Steuart's estimate and a jump of 4.5 per cent from the same period a year ago.

"Overall, another fundamentally solid quarterly result particularly given the modest increase in realized asset yields and asset growth," he said. "However, we do note that the loan growth was aided by unusually low mortgage repayments in the quarter of $22.5-million. On the earnings conference call management confirmed that this was simply a timing issue and expects repayments to normalize in the back half of 2018. As such we are forecasting flat loan balance growth for the remainder of 2018, closing the year at $698-million, up marginally from our prior forecast ($693-million).

"However, Atrium has reached our mortgage balance forecast quicker than expected, leading to an increase in our revenue estimate for 2018 to $58.2M (from $57.2M) which also assumes steady expansion of the asset yield. Management disclosed that 31 per cent of loan rates are tied to the prime rate as of Q2/18 (up from 22.5 per cent in Q1/18) with expectations that a large share of new originations should have similar terms. This will allow overall yields to accommodate further rate increases, supporting interest spreads in the portfolio, assuming continued rising rates."

Mr. Steuart did not alter his target price for Atrium shares of $13.50, which is 25 cents higher than the consensus.

"The recent run in AI’s stock price (up 1.5 per cent since our last [update] on July 18 and 7.5 per cent since Q1/18 results) has led to subsequent valuation metrics approaching the high end of historic norms. As such, we are updating our recommendation to Hold (previously Buy)," he said. "We note that fundamentals of the underlying business remain strong as the most recent quarter clearly shows, but suggest investors wait for a more attractive valuation entry point or for stronger indications that the increased interest rate environment is flowing through to the bottom line."


Minto Apartment REIT (MI.UN-T) possesses an “institutional quality” portfolio and benefits from “robust” demand and a below-average degree of execution risk, according to RBC Dominion Securities analyst Matt Logan.

He initiated coverage of the equity, which began trading on the TSX on July 4, with an "outperform" rating.

"MI owns a portfolio of 22 properties spanning 4,279 suites with a value of [approximately] $1.1-billion," he said. "Notably, MI is the only apartment REIT in our coverage universe to derive 100 per cent of its NOI [net operating income] from major markets. This includes: 63 per cent from Ottawa, 30 per cent from Toronto and the balance from Edmonton and Calgary. We believe the business is well positioned to deliver same-property NOI growth of 4 per cent, compared with Canadian apartment REITs at 3 per cent and the REIT sector at 1–2 per cent. We also see potential for sizable acquisition growth as the top 10 landlords own less than 15 per cent of Canada's dedicated rental suites."

Mr. Logan emphasized Minto is set to benefit from what he sees as a "landlord-favourable" backdrop in Ontario, noting: "In our view, the outlook for apartments in Ontario remains robust, underpinned by: 1) strong demand growth, bolstered by rising immigration; 2) benign expense growth, driven by lower electricity costs and potential for reduced suite turnover; and, 3) the introduction of a more stringent rent control regime in 2017. In addition, we see momentum in the REIT's urban portfolio which has posted peer-leading same-property NOI [net operating income] growth of 8-per-cent annualized over the past 3-years, compared with 6 per cent for non-energy exposed Canadian apartment REITs and 2 per cent for the group as a whole."

Mr. Logan set a target price of $19 for Minto units. The average on the Street is now $18.83.


Emphasizing the presence of a number of potential catalysts, Echelon Wealth Partners analyst Russell Stanley initiated coverage of Organigram Holdings Inc. (OGI-X) with a “speculative buy” rating.

“The Company is fully financed to take annualized production capacity from 36,000 kilograms to 113,000 kilograms by October 2019, and as of June 2018, it had over 15,000 registered patients with an active prescription,” he said. “At the 2017 Lift Canadian Cannabis Awards, only one other producer received more awards as voted by medical cannabis patients (MedReleaf, recently acquired by Aurora Cannabis, ACB-T). With large scale production capacity and supply agreements with multiple provinces, we believe OGI could be an attractive candidate for potential strategic investors/acquirers.”

Mr. Stanley pointed to several potential catalysts moving forward, including: further supply agreements, graduating to the TSX, the company’s organic recertication, improved financial results and potential strategic investments.

“While there may be initial shortages when the legal recreational market opens in October, we continue to expect dried cannabis to become increasingly commoditized through oversupply,” he said. “The companies that prosper will be those that compete well in terms of ultra-low cost production and/or strength in developing and commercializing value-added products. We believe Organigram is one of a handful of companies positioned to compete well on both fronts. OGI’s fully funded planned capacity of 113,000 kilograms uniquely positions it as one of a handful of producers with the scale needed to offer buyers reliable production at scale and competitive pricing. Through a number of production improvements and scale economies (due in part to its 3-tiered grow rooms) OGI has successfully reduced its cost per gram harvested by 47 per cent from $2.75 per gram in FQ118 to $1.47/gram in FQ218. With capacity expected to almost triple by October 2019, we expect continued cost improvement to enable OGI to compete very well on costs.”

Mr. Stanley set a target of $7 for Organigram shares, which is 16 cents higher than the consensus.


In other analyst actions:

Cormark Securities analyst Maggie Macdougall raised PFB Corp. (PFB-T) to “buy” from “market perform” with a target of $10.25 (from $9). The average on the Street is $10.58.

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