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

Ero Copper Corp.'s (ERO-T) exploration efforts at its Mineração Caraíba S/A complex in Brazil are likely to bear fruit in 2020, according to Scotia Capital analyst Orest Wowkodaw.

In a research note released Monday, Mr. Wowkodaw raised his rating for the Vancouver-based miner to “sector outperform” from “sector perform” after a visit to MCSA last week, touting its “impressive” upside and citing an improved “confidence in the Curaca Valley supporting a higher-grade mine plan over the long term.”

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“With one of the world’s largest ongoing exploration efforts (27 rigs; $25 million per annum budget), we anticipate significant positive news flow over the next 12 months,” the analyst said. “Based on our visit, we are most intrigued by future exploration results from the Pilar Deeps, Siriema, Toboggan (part of Vermelhos), along with targeted regional drilling. At the Pilar Deeps, we anticipate in-fill drilling (five rigs) to prove up a potential 10-12 million tons high-grade resource (2.0-per-cent copper) yielding a 7-8 Mt reserve. Ero has 15 drill rigs operating within the Vermelhos district, which includes Siriema (located 1.5 kilometres from the main deposit). Downhole EM is helping to guide the exploration efforts at Siriema in search of a potential higher-grade feeder zone for the recently discovered lower-grade disseminated orebody. We note that five drill holes have visually confirmed the discovery of higher-grade nickel (along with Cu and PGM’s) at Siriema. At Toboggan, drilling suggests the high-grade Vermelhos main orebody likely continues at depth. Finally, Ero has made a new regional discovery (Botacele), located between the Suribim and Vermelhos districts. While assay results are pending, the first two drill holes (located 100 metres apart) appear to have both intersected high-grade Cu mineralization.”

Though Mr. Wowkodaw now expects a lower phased ramp-up for the mine, he’s projecting a “markedly higher” average grade. That and a lower capital expenditure expectation led to an increase in his free cash flow estimates for 2020 through 2022.

His target for Ero Copper shares jumped to $23 from $15. The average on the Street is currently $21.11, according to Bloomberg data.

“We anticipate Ero shares trading at a significant premium,” the analyst said.


With its stock up almost 50 per cent thus far in 2019 and now closing in on his sum-of-the-parts valuation, Citi analyst William Katz said he’s “moving to the sidelines” on Brookfield Asset Management Inc. (BAM-N, BAM-A-T).

No longer seeming “compelling” upside in the near term, he downgraded its stock to “neutral” from “buy.”

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“While we see BAM increasingly well positioned strategically among the Alts and a clear beneficiary amidst rising allocations/Real Assets play, we think the stock may consolidate as near-term catalysts either soften or do not transmit well,” said Mr. Katz. “Specifically: 1) 2020 is likely to be a softer NNA year as BAM transitions between now about complete $50-billion capital raise cycle and $100-billion cycle (reiterated from recent investor day) likely to kick in around 2021-2022; 2) while realizations may pick-up (BAM legacy plus OAK), BAM’s fixed quarterly payout waters down the benefit and support – both in absolute sense and versus peers; and, 3) we believe buyback is less likely in the more intermediate time frame. As such, we think the ‘Flywheel’ slows a bit and tempers upside.”

Though he lowered his funds from operations per share projection for 2019 to US$4.09 from US$4.40, Mr. Katz raised his 2020 and 2021 estimates to US$4.97 and US$5.68, respectively, from US$4.61 and US$5.38.

He also increased his target for Brookfield Asset shares to US$63.50 from US$62.50. The average is currently US$65.28.

“We believe BAM remains in a strong FRE growth cycle. However, at current valuations, we see risk/reward as more balanced,” he said.

Elsewhere, RBC Dominion Securities analyst Neil Downey increased his target to $63 from $57 with an “outperform” rating (unchanged).

Mr. Downey said: “BAM’s Q3/19 Operating FFO/share was below our expectations due to some short-term anomalies in returns on invested capital while FRE [fe-related earnings] exceeded forecast. Thematically the Asset Management franchise (continues to) exceed expectations. The $5.2-billion Oaktree acquisition may not alter OFFO/share results in the near-term (2020-21), but full-cycle we believe it may prove very strategic.”

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Though its “robust” net asset value growth profile remains, Industrial Alliance Securities analyst Brad Sturges lowered his rating for StorageVault Canada Inc. (SVI-X), citing its “strong” share price outperformance and expanded premium valuation relative to its NAV and its U.S. self storage peers.

“To be very clear, our rating adjustment of SVI is simply a valuation call as the company’s execution and robust NAV per share growth year-over-year is nothing short of stellar,” said the analyst. "In our view, SVI remains one of the top Canadian growth stories in the publicly traded Canadian real estate and REIT sector, which may support its premium valuation in the near term.

"In 2019 year-to-date, SVI has generated a total return of 52 per cent, above the 25-per-cent and 22-per-cent total returns generated for the S&P Capped REIT Index and S&P/TSX Composite Index, respectively. By comparison, in 2018, SVI generated a negative 9-per-cent total return, compared to a 6-per-cent gain for the S&P/TSX Capped REIT Index, and 9-per-cent loss for the S&P/TSX Composite Index."

Mr. Sturges made the move following Friday's releease of StorageVault's third-quarter results, which included a rise in funds from operations to 3 cents per share from 2.5 cents during the same period a year ago. Same property net operating income grew by 7.1 per cent.

“Since Q3/15, SVI has generated 11.6-per-cent average quarterly SP-NOI growth year-over-year (U.S. self storage peer average: 5.6 per cent year-over-year),” said Mr. Sturges. “While SVI’s Q3 organic growth year-over-year remains well above it U.S. self storage REIT/REOC peer average and SVI’s long-term target range, the company’s SP-NOI growth year-over-year has slightly moderated in 2019 year-to-date. For 2020, we expect SVI to generate SP-NOI growth of 6 per cent year-over-year, or essentially at the upper end of SVI’s longer-term guidance range.”

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Moving StorageVault shares to “hold” from “buy,” Mr. Sturges increased his target price to $3.90 from $3.25. The average on the Street is $4.03.

“SVI is uniquely positioned to benefit from generally improving Canadian self storage property demand fundamentals," he said. "The majority of the company’s primary and secondary self storage property markets exhibit positive demand fundamentals that are driven by population growth, an aging Canadian population, and other positive factors that include event driven demand drivers such as death, divorce, and downsizing.

"SVI remains one the top Canadian growth stories in the publicly traded Canadian real estate and REIT sector. We believe SVI has the potential to grow its NAV per share by up to 25 per cent in the next 12 months. In addition, SVI’s AFFO per share may achieve a CAGR [compound annual growth rate] of 23 per cent from 2018 to 2020, which compares quite favourably to 4 per cent for its U.S. self storage REIT/REOC peers.

“In our estimation, SVI can quickly grow into its market valuation in the next 12 months as a result of its significant internal and external acquisition growth prospects that reflect the company’s self storage operating expertise, and the potential access to a possible acquisition pipeline as a result of SVI’s strategic sponsor, Access Storage (Access), and due to the highly fragmented nature of the Canadian self storage industry.”


The outlook for TSX-listed independent power producers remains positive following a "mixed" third-quarter earnings season, according to Desjardins Securities analyst Bill Cabel, who points to a "solid" macro environment.

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"Our names under coverage continue to move inversely to bond yields (specifically the 10-year) and interest rates, and thus have performed very well in the year to date (outperforming the S&P/TSX by 25 per cent on average)," said Mr. Cabel in a research report released Monday.

"We continue to believe that the macro environment is currently producing a significant tailwind for our defensive, higher-yielding, capital-intensive stocks under coverage. In our view, recessionary fears and expectations for a low interest rate environment continue to stimulate our stocks. A significant macro event, if not the most significant, is the current US–China trade war. While the trade war itself does not have a direct impact on our coverage names, it has been affecting interest rate decisions; we therefore believe a prolonged trade war, or negative news on negotiations to reach a deal, should continue to be a tailwind for our coverage names. Further, with a number of our coverage names at or near all-time highs, they are being considered for/included in certain indices (MSCI and FTSE Russell), which is fuelling additional demand for their shares."

The analyst said the earnings season was highlighted by "some wide swings" in generation results, deepnding on region, technology and weather resources.

“Generally, hydrology in Canada and the eastern U.S. and wind resources in eastern Canada and France were weak, while pockets of the U.S. were relatively strong for wind,” said Mr. Cabel. "Overall, our coverage names were 3 per cent below our estimate on average, with BEP having the toughest quarter from a generation perspective (10 per cent below our estimate) and INE having the best quarter (7 per cent above our estimate). INE’s outperformance was primarily due to modelling (timing of projects producing electricity). Offshore wind in the North Sea appears to have been roughly in line with LTAs, but some curtailments continue to persist at Nordsee One. On average, total generation was 3 per cent below our estimates but showed significant improvement (16-per-cent increase) vs 3Q18, primarily driven by asset additions (through both acquisitions and asset commissioning) and better weather resources.

"Adjusted EBITDA results were mixed. Again, consistent with generation, there were some relatively large beats and misses. NPI outperformed our estimate and consensus by the widest margin (6 per cent ahead of our estimate and consensus), primarily due to solid results and a tailwind from its 269MW DeBu offshore wind project producing pre-completion revenue ahead of schedule. At the other end, BLX posted the biggest miss (10 per cent below our estimate and consensus), primarily due to weaker weather resources at its wind and hydro assets.

With the results, Mr. Cabel moved his rating for Pattern Energy Group Inc. (PEGI-Q, PEGI-T) to “tender” from “hold” to reflect its acquisition by Canada Pension Plan Investment Board in a deal valued at US$2.6-million. His target remains US$26.75, which exceeds the average by 3 cents.

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“Along with the quarterly results, PEGI announced that it has entered into a transaction with CPPIB to be acquired for an all-cash offer of US$26.75/share; at the time, while we believed this to be a good offer, we maintained our Hold rating as we wanted to put further thought into the transaction and have some discussions with clients and other industry experts,” he said. “We now believe this is likely the best all-cash offer and we have therefore changed our rating to Tender (from Hold). We acknowledge that PEGI is still trading through the offer price at US$27.42 but believe this is due to the fact that shareholders are expecting to receive an additional 84 US cents per share in dividends before the acquisition closes.”

He also made the following target price changes:

Brookfield Renewable Partners LP (BEP.UN-T, “hold”) to $55 from $53. Average: $55.31.

“We have reduced our discount rate on BEP by 25 basis points to reflect our expectation that the new BEP-C structure would have a potentially meaningful impact on demand for the stock, resulting in our target price increasing,” he said.

Boralex Inc. (BLX-T, “buy”) to $26 from $25.75. Average: $25.13.

“We have added BLX’s recent 32MW of wins from the France RFP into our valuation and have reduced our risking on its more recent France RFP wins (100MW) to 40 per cent (from 60 per cent) due to the high probability these projects will be built out, in our view. This results in a small change to our target,” he said.

TransAlta Renewables Inc. (RNW-T, “hold”) to $14 from $13.50. Average: $14.18.

“We believe it is possible that the 207MW Windrise project could be dropped down into RNW; after rounding, it is the primary driver of our target increasing,” he said.


Though produce cultivation is where Village Farms International Inc. (VFF-Q, VFF-T) “cut its teeth, cannabis “cannabis is where VFF will bare them," said Raymond James analyst Rahul Sarugaser.

“We believe VFF, via Pure Sunfarms, is positioned to shine in the current cannabis market environment, which is increasingly focused on operations, execution, and profitability,” said Mr. Sarugaser. "At the time of writing, Pure Sunfarms had posted four consecutive quarters of EBITDA-positive results—boasting US$10.1-million ($13.3-million) in EBITDA (56-per-cent EBITDA margin) and gross margins last quarter of 69 per cent — yielded exclusively from sales of dried cannabis to other licensed producers (LPs). Late last quarter (3Q19), Pure Sunfarms began selling branded cannabis directly to distributors in Ontario and British Columbia, which—so long as processing, packaging, and shipping costs are tempered—could drive outstanding future contribution margins on account of much higher selling prices and sustained industry-leading production costs.

“The company has made a practice of dominating agricultural verticals in which North American producers have, traditionally, struggled to thrive due to intense international competition in commoditized markets. VFF was the first company we’ve met that not only welcomed the idea of commoditization in the cannabis space, but suggested that it would gladly play a key part in catalyzing said commoditization. We appreciate management’s — seasoned agriculturalists, supply chain experts, and retail specialists—confidence, and the track record that supports this confidence.”

In a research report released Monday, Mr. Sarugaser initiated coverage of the Vancouver-based company with an “outperform” rating, pointing to its agricultural expertise as an asset in the newborn cannabis market.

“With several million square-feet of high-tech greenhouses at its fingertips, decades of local weather data, and 30 years successfully operating in a super-tight margin business — fresh produce — we believe VFF, via Pure Sunfarms, is positioned to shine in the now-maturing cannabis market environment, which is increasingly focused on operations, execution, and profitability," the analyst said.

He set a target of US$11 per share. The average on the Street is US$19.17.


Three of the four equity analysts on the Street currently covering Kew Media Group Inc. (KEW-T) downgraded its stock on Monday in the wake of weaker-than-anticipated quarterly results that sent the Toronto-based company’s stock plummeting by over 40 per cent on Friday.

TD Securities’s Vince Valentini cut it to “speculative buy” from “action list buy” with a $5.50 target, dropping from $13.

GMP’s Deepak Kaushal lowered the stock to “hold” from “buy” with a $5 target, down from $14.

Cormark Securities’ David McFadgen moved it to “market perform” from “buy” with a $4 target, sliding from $11.

The average on the Street is now $5.13.


Wallbridge Mining Company Ltd.'s (WM-T) Fenelon gold project in northern Quebec has the potential to grow from a 40,000-ounce to a multi-million-ounce resource, said Paradigm Capital analyst Don Blythe, who initiated coverage of the Lively, Ont.-based company with a “speculative buy” rating on Monday.

“Wallbridge has made great strides advancing Fenelon since it acquired the project in mid-2016, and the share price has reflected that (up over 600 per cent in that period),” he said. “The story is far from over however, and we expect the resource to continue growing with the company aggressively drilling at a rate of 8,000–10,000 metres per month. The Lower Tabasco Zone has the greatest potential to add high-grade ounces in the near term but the lower-grade mineralization, while still not yet well defined, could eclipse the high-grade in terms of contained ounce potential.”

Currently the lone analyst covering the stock, according to Bloomberg, Mr. Blyth set a target of $1.


In other analyst actions:

* Scotia Capital analyst Himanshu Gupta lowered WPT Industrial REIT (WIR.U-T) to “sector perform” from “sector outperform” upon assuming coverage of the stock. His target slid to US$14.50 from the firm’s previous target of US$14.75. The average is US$14.94.

“WPT’s units have underperformed in 2019 with a price return of 6 per cent vs. the REIT sector at 18 per cent, CAD industrial sector at 34 per cent, and U.S.-listed industrial sector at 45 per cent, as investors have been more focused on land-constrained industrial plays in Canada (Toronto, Montreal, Vancouver) and the U.S. (major coastal markets),” he said.

“Overall, we are bullish on the industrial sector and believe WPT will continue to be a beneficiary. There has been unprecedented investor demand, with over $30-billion of industrial M&A in last six months – coastal traded at over $100 per square foot, non-coastal at $80/sf vs. WPT implied at $70/sf (Exhibit 1). While we have begun to see pockets of new supply in some non-land-constrained markets, new supply is largely in check in most of WPT’s markets (Exhibit 2). Lastly, we highlight WPT’s de-risked near-term cash flow profile.”

* National Bank Financial analyst Don Demarco cut Taseko Mines Ltd. (TKO-T) to “sector perform” from “outperform” with a 90-cent target, falling from $1 and below the average of $1.48.

* Mr. Demarco also lowered Alacer Gold Corp. (ASR-T) to “sector perform" from “outperform” with a $7.50 target, down from $8. The average is $7.01.

* National Bank Financial’s John Sclodnick raised Lundin Gold Inc. (LUG-T) to “outperform” from “sector perform” with a $9.50 target. The average is $9.45.

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