Inside the Market’s roundup of some of today’s key analyst actions
Touting the long-term benefits of the acquisition of Goldcorp and its joint venture with Barrick Gold Corp. (ABX-T) in Nevada, RBC Dominion Securities analyst Stephen Walker raised his rating for Newmont Goldcorp Corp. (NEM-N, NGT-T) on Monday.
"Our upgrade of NEM to sector perform from underperform reflects our view that with weaker than expected guidance for the Goldcorp assets now likely priced in, we expect the market to begin to discount the successful integration of the core Goldcorp assets and synergies from the Nevada JV," he said. "We expect these assets and NEM's existing operating mines to contribute significant near-term free cash flow."
Mr. Walker said he expects the company’s operating results to improve as it implements its Full Potential optimization program at its Peñasquito and Cerro Negro assets, as “necessary infrastructure investments at Musselwhite and potentially Éléonore are completed, and synergies from the Nevada JV (38.5 per cent NEM) begin to be demonstrated.”
"Prior to noncore asset sales we forecast 6.4 million ounces (Moz) of gold production at AISC [all-in sustaining costs] of $970 per ounce in 2019 with the mid-year completion of the two M&A transactions, and an average of 7.3 Moz at ~$860/oz over 2020–22. We forecast average annual operating FCF of $3.2-billion for 2020-21 at $1,500/oz gold, providing a 10% FCF yield and supporting Newmont’s expected project pipeline and dividend payout."
Mr. Walker also suggested the sale of non-core assets could be explored to improve its operating base, saying: "We believe Red Lake, Cripple Creek, Porcupine and Phoenix (Au-Cu) are non-core and their sale would reduce annual gold production by 1.0 Moz at AISC of $1,050/oz for potential proceeds of ~$2.5-3.0B. Near-term sales at current higher gold prices could optimize the value received, and we would expect cash flow per share lost to be offset by the improving financial contribution from the lower-cost assets retained in the portfolio."
Prior to moving the stock to "sector perform" from "underperform," Mr. Walker had been the lone analyst covering the stock to have a sell-equivalent rating, according to Bloomberg.
Seeing valuation upside, he maintained a US$45 target price, which falls 31 US cents below the consensus on the Street.
“Newmont Goldcorp has an industry-leading production/reserve base and the trading liquidity/diversification required to attract large institutional investors as a member of the S&P 500 Index, which in our view supports a premium valuation relative to other gold producers,” the analyst said. “History suggests that it takes the market 2 to 3 quarters before paying up for a major M&A transaction as the company works through the merger integration risks.”
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Believing it is on track to exceed 1 million merchant customers by the end of 2019, Baird analyst Colin Sebastian raised his target price for shares of Shopify Inc. (SHOP-N, SHOP-T) on Monday.
If it reaches that level, the Ottawa-based company would surpass eBay Inc. (EBAY-Q) as the largest e-commerce platform in North America, trailing only Amazon.com Inc. (AMZN-Q).
Mr. Sebastian sees the Shopify’s gains driven by “ongoing favorable secular e-commerce trends, large online services market opportunity, mission-critical software offering, and incremental monetization opportunities.”
Gaining customers at a brisker-than-anticipated pace, he increased his target to US$410 from US$370, maintaining an “outperform” rating. The average target on the Street is US$355.99.
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Seeing its shares as attractive valued given its current trading level reflects “caution” surrounding the company, BMO Nesbitt Burns analyst Ben Pham upgraded AltaGas Ltd. (ALA-T) to “outperform” from “market perform.”
“ALA shares have performed well this year, but the shares have languished since the beginning of 2018,” he said. "A 56-per-cent dividend cut, high leverage, and limited EPS visibility drove the shares lower.
“While we acknowledge further evidence of improvement needs to be seen for valuation expansion, we believe the current trading level more than accounts for this caution (14-15 times P/E vs. utilities at 18 times and pipelines at 16 times).”
Expressing a positive view on asset sales and expecting leverage to drop, he increased his target by a loonie to $22. The average is currently $21.71.
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Possessing a “positive asymmetric risk/reward profile,” Orla Mining Ltd. (OLA-T) presents an “attractive” opportunity for investors, according to Desjardins Securities analyst Raj Ray.
He said the Vancouver-based miner possess quality assets in its portfolio, particularly its 100-per-cent-owned Camino Rojo Oxide Gold Project in Zacatecas state, Mexico, and possess both a “proven” management team and “number of key catalysts expected over the next 12 months,” which he sees providing continued support for Orla’s share price.
“The [Camino Rojo project in Zacatecas, Mexico] as laid out in the feasibility study has an NPV [net present value] of US$142-million, which increases to US$240-million using current spot gold price assumption,” he said. “The company’s market capitalization of US$250-million suggests limited upside is priced in beyond the current project, thereby ignoring the company’s stable of high-quality assets, each of which could return significant value to shareholders. Particularly relevant is the near-term value appreciation potential for the Camino Rojo project if the company can reach a deal with Fresnillo plc.”
“Management is working on an arrangement with Fresnillo, whose neighbouring claim would otherwise limit the final Camino Rojo pit size. Our current valuation for Orla assumes an agreement will be in place by late 2019, thereby unlocking at least another 0.7 moz in reserves. Consequently, we model a 25,000 tons per day operation (vs 18,000 tpd in the 2019 feasibility study), which indicates an after-tax NPV5% of US$372-million. Other material opportunities include the substantial 9.6 moz Aueq (average value for development assets is US$44 per ounce Aueq) indicated sulphide resource at Camino Rojo, the company’s Cerro Quema heap leach project and the promising new Caballito sulphide discovery at Cerro Quema.”
He maintained a “buy” rating and $2.35 target, which exceeds the consensus by 11 cents.
“The company’s current valuation largely ignores the optionality related to Orla’s significant asset base,” said Mr. Ray.
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Open Text Corp. (OTEX-Q, OTEX-T) has built a “durable platform to enable sustained growth,” according to RBC Dominion Securities analyst Paul Treiber, who called the Waterloo, Ont.-based tech company “The Rodney Dangerfield of software” after attending its Investor Day event on Friday.
“OpenText has delivered 17.6 per cent CAGR [compound annual growth rate] in free cash flow (FCF) per share over the last 10 years, but is trading at the lowest multiple among the Canadian software consolidators," he said. “The discount reflects the quarterly volatility of OpenText’s shares, inconsistent organic growth, and perceived challenges from competitors. We believe OpenText’s business has transformed over the last several years into a durable platform, which is likely to enable more consistent organic growth and greater predictability in achieving high returns on acquisitions. Greater consistency and predictability may lead to improved sentiment and potentially an upwards re-rating in OpenText’s valuation over time, in our view.”
Mr. Treiber said the event exhibited the “underlying stability” of OpenText’s business, noting: “OpenText is raising customer support prices this year (from high teens to 23 per cent of license), which shows management’s confidence in the stickiness of its customers. Renewal rates are in the low 90-per-cent range, customer satisfaction is 95 per cent, and OpenText’s net promoter score rose 10 points in the last year. Additionally, annual recurring revenue accounts for 75 per cent of total revenue.”
He maintained an “outperform” rating and US$47 target. The average on the Street is US$46.85.
“We believe OpenText is likely to continue to create shareholder value through its acquisition strategy," the analyst said. "Our Outperform thesis on OpenText is based on: 1) Expected value creation through acquisitions; 2) organic growth expectations are now achievable; and 3) valuation is below Canadian software consolidators. We believe additional M&A represents an upside catalyst for the stock.”
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Despite reporting a “strong” year-over-year increase in copper and gold reserves, Haywood Securities analyst Pierre Vaillancourt lowered his target for shares of Lundin Mining Corp. (LUN-T), pointing to a “weaker" copper price environment.
Following “a deterioration in the copper price by more than 10 per cent over the last six months, and the resultant lower valuation multiples,” he dropped his target by a loonie to $8.50 with a “buy” rating (unchanged). The average is $8.73.
“Despite a weak 2Q19, we are encouraged by the progress at initiatives for Candelaria, Eagle East and Neves Corvo. The addition of Chapada in 3Q19 will provide valuable diversification from the base metals portfolio through more gold exposure,” said Mr. Vaillancourt. “While we remain underweight the sector while U.S.-China trade talks drag on and the global economic outlook stagnates, we maintain that LUN is best positioned among peers to weather the storm.”
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In other analyst actions:
Eight Capital initiated coverage of K92 Mining Inc. (KNT-X) with a “buy” rating and $4.50 target. The average target on the Street is $3.92.
David Leeder