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

Following a “rollercoaster” last year, precious metals equity analysts at Canaccord Genuity are bullish on gold heading into 2023.

“We were largely cautious on gold in 2022, with inflation accelerating and fueling an increasingly hawkish Fed,” they said. “The Fed was the most hawkish major central bank in 2022, hiking the fed funds rate 425 bps and helping the U.S. dollar soar to a 20-per-cent year-over-year rate and to 20-year highs, with gold dropping to an interyear low of $1,623 per ounce as gold tends to move inversely with the U.S. dollar. However, these headwinds look to have largely run their course with inflation and the economy slowing and with the Fed funds terminal rate plateauing at 5 per cent. Against this backdrop, the U.S. dollar appears to have peaked in late September, dropping 10 per cent since then and sparking a 17-per-cent rebound in the gold price and an 40-per-cent move in the S&P/TSX Gold index.

“We think gold and gold equities have more room to run ahead of a potential Fed pause and with a non-trivial chance of a recession emerging.”

With that backdrop, the firm expects a rebound in all-in sustaining cost margins this year, driven by higher gold prices and “abating inflationary pressures.”

“We forecast average producer co-product AISC in our coverage universe jumping 16 per cent in 2022 to $1,290 per ounce and eclipsing the 2012 peak of $1,225/oz,” the analysts said. “With gold essentially flat y/y in 2022, we see average AISC margins compressing to $510/oz, down 25 per cent from the $682/oz realized in 2021. For 2023, we forecast an average AISC of $1,265/oz, down modestly (down 2 per cent year-over-year). Anecdotally, most producers indicate that input cost inflation appears to have peaked around Q3 of last year, with most prices plateauing or, in some cases, falling. We note that WTI oil averaged $95 per barrel in 2022, up 39 per cent year-over-year and is now trading around $82/bbl, down 14 per cent. Based on our 2023 gold price assumption of $1,862/oz (spot currently trading at $1,920/oz), we forecast AISC margins improving 17 per centto $597/oz in 2023.”

After raising the firm’s gold price deck by an average of 5-7 per cent, including its long-term gold price assumption to US$2,048 per ounce from US$1,922, the analysts made a series of recommendation and target price changes.

They downgraded both Newmont Corp. (NEM-N, NGT-T) and Alamos Gold Inc. (AGI-T) to “hold” from “buy” based on valuation.

Analyst Carey MacRury’s target for Newmont increased to US$56 from US$50. The average on the Street is US$54.89.

“Newmont had a tough year in 2022 with its shares down 24 per cent in US$ terms, underperforming the S&P/TSX gold index drop of 7 per cent,” said Mr. MacRury. “Newmont’s operations were impacted by lingering effects of COVID19 early in the year and compounded by weather, supply chain, and operating issues that saw the company cut its guidance to 6.0Moz from 6.2Moz originally. Cost inflation also hit hard with cash cost guidance revised upwards to $900 per ounce from $820/oz originally (and we forecast 2022 cash costs ultimately coming in at ~$931/oz). The company also telegraphed potential cuts to its dividend with a reset to its dividend framework. Our HOLD rating is based on limited return to target. However, we still see Newmont ultimately as a steady operator with a deep project pipeline, strong balance sheet and with a focus on solid capital returns.”

Analyst Dalton Baretto’s Alamos target rose to $15 from $13, remaining below the $15.63 average.

“AGI outperformed its peers in 2022, with the shares retuning 31 per cent vs. the precious metal producer peer group average of negative 10 per cent,” said Mr. Baretto. “We attribute the outperformance to the company’s relatively low risk profile in a ‘risk-off investment climate. Over the year, AGI delivered sound operating results for the most part, and was one of the few companies we cover that did not face significant cost pressure, which we attribute to limited diesel exposure, a weaker CAD, and the ramp-up of the lower cost La Yaqui Grande mine in H2. The company also began construction on its next phase of growth, Island Gold Phase 3.”

“We believe that AGI’s share price movements will be hostage to the gold price in 2023, given a lack of meaningful catalysts, limited free cash flow yield, relatively modest shareholder return program and limited near-term growth. That said, we believe AGI remains a quality option for pure-play gold exposure, given reasonable production scale at compelling margins in safe jurisdictions.”

Conversely, Canaccord raised Coeur Mining Inc. (CDE-N) to “hold” from “sell” with a US$4 target, up from US$3, and Orezone Gold Corp. (ORE-T) to “buy” from “speculative buy” with a $3 target, down from $3.25. The averages are US$4.28 and $2.37, respectively.

“ORE is our top pick among the junior precious metal producers,” said analyst Michael Fairbairn. “Over the past year ORE has done an admirable job advancing Bomboré into commercial production on time and on budget. We believe ORE’s management is well positioned to continue successfully executing as production ramps up and Orezone shifts its focus to its next stage of growth. In the near term, management has guided plant throughput to range between 5.6-5.8Mt in 2023, well above nameplate capacity of 5.2Mt. We view this as a strong start for the company which only declared commercial production a few months ago. Longer term, we envision ORE pursuing a larger “Phase II” expansion than laid out in the 2019 FS, maintaining its 5.2Mtpa oxide throughput while also constructing an additional 4Mtpa sulphide plant that comes online in H2/25. Following this expansion, we forecast annual production of ~260koz per year at $900 per ounce AISC (100-per-cent basis), driving annual FCF of more than $170-million. In our view, Orezone’s shares are attractive at current prices, trading at a significant discount to peers”

For senior producers, the analysts’ target changes were:

  • Barrick Gold Corp. (ABX-T, “buy”) to $30 from $28. Average: $28.79.
  • Agnico Eagle Mines Ltd. (AEM-T, “buy”) to $88 from $84. Average: $84.12.
  • Kinross Gold Corp. (K-T, “buy”) to $8 from $7.25. Average: $7.70.
  • Pan American Silver Corp. (PAAS-Q/PAAS-T, “buy”) to US$28 from US$26. Average: US$22.79.
  • Endeavour Mining Corp. (EDV-T, “buy”) to $43 from $40. Average: $39.84.
  • Yamana Gold Inc. (YRI-T, “buy”) to $10.75 from $8.75. Average: $6.12.
  • B2Gold Corp. (BTO-T, “buy”) to $8 from $7.25. Average: $6.93.
  • SSR Mining Inc. (SSRM-T, “buy”) to $29.50 from $25. Average: $22.25.

“CG precious metal top picks: Senior producers: EDV, K; Intermediate/Juniors: SSRM, FVI, ORE; Explorer/Developers: PRB;• Royalty/streaming companies: WPM, OR,” the firm said.

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Despite turbulence last year, Canaccord Genuity’ analyst Katie Lachapelle remains optimistic about the state of the uranium market.

“2022 was a frustrating year for uranium equities, with price performance largely in direct contrast to the strong fundamental supply-demand backdrop,” she said in a report released Thursday. “While uranium equities declined 21 per cent on average, spot pricing ended the year up 14 per cent after a period of significant volatility following Russia’s invasion of Ukraine. In contrast, spot SWU and conversion prices had a standout year, up 123 per cent and 150 per cent, respectively, as utilities looked to reduce their reliance on Russia for these downstream services.”

“While we remain cautious in the near term as recessionary fears continue to impact global market sentiment, from a fundamental perspective, the argument to maintain exposure to uranium remains extremely strong. Demand for nuclear continues to increase as the transition to clean energy gains momentum and energy security becomes of increasing importance. At the same time, uranium supply sits near a decade low, and geopolitical tensions continue to rewire global supply chains.”

Ms. Lachapelle sees the potential for both spot and term to continue their upward trajectory “as demand makes its way back upstream (to U3O8).”

“In the near term, amid macro uncertainty, we recommend adding exposure to physical uranium (SPUT/YCA) as we believe there is limited downside to current spot pricing (with clear support around $48 per pound), yet material upside potential,” she said. “However, as 2023 progresses and market sentiment improves, we would add exposure to miners/developers, where one has substantially more leverage.

“Our global top picks are Denison Mines (DML-TSX), Uranium Energy Corp (UEC-US), Paladin Energy (PDN-ASX) and Boss Energy (BOE-ASX).”

Calling its US$4.5-billion acquisition of Westinghouse Electric Co. with Brookfield Asset Management Inc. (BAM-A-T) “arguably the most significant transaction announced in the nuclear industry in nearly a decade,” the analyst raised her Cameco Corp. (CCO-T) target to $46, exceeding the $44.49 average, from $44 with a “buy” rating.

“Overall, we expect 2023 to be a transformative year for Cameco with the McArthur River restart driving material FCF growth (up 165 per cent vs. 2022) and an expected close of the Westinghouse transaction in H2 2023,” she said. “We currently forecast total 2023 revenue of $1.9-billion and EBITDA of $853-million, based on an average realized price of US$47/lb U3O8 and C$35/kgU. We expect McArthur River to produce 11mlb in 2023 (CCO share – 7.5mlb), below 2024 guidance of 15mlbs (2023 not provided), as ramp-up continues after achieving first production in November. At Cigar Lake, we conservatively assume total production of 15mlbs on a 100-per-cent basis, below prior year guidance of 18mlbs, to account for CCO’s plans to reduce capacity at the project to 13.5mlb starting in 2024.”

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Paradigm Capital analyst Adam Gill thinks the collapse in demand for natural gas is “likely insurmountable for [a] bullish case” for exploration and production companies.

“Given the significant softness in heating demand in the most important month, natural gas prices have fairly fallen,” he said. “That said, we have seen winter weakness followed by stronger springs/summer the past five years in the gas market, but that said we believe a recovery in price this year will be harder to come by given limited growth in new demand and expected production increases. Thus, we are downgrading our outlook on gas equities.

“Residential/commercial demand is the biggest factor over the winter, peaking in January. That said, January demand month-to-date has averaged 38.7 Bcf/d, the lowest since January 2006, and while the outlook is starting to improve for the last week of the month, demand so far is 10 Bcf/d off average levels. While there is still some winter to go, it is unlikely that the demand differential can be made up in in the coming months outside of an extremely cold February, like in 2021. If we have a one-in-five-year heating demand like we saw in 2014 and 2019, the market would be in a better position but not one that would be a clear bullish case, in our view. We are likely entering a period of higher inventories.”

Mr. Gill said the recovery in 2021 and 2022 was driven by increased LNG demand and gas-burn electrical generation capacity, however he thinks those factors are not existent this year. Accordingly, he does not see “the same recovery set-up in gas prices as in prior years.”

“With a warm January and a challenged supply/demand balance, gas prices have cooled off substantially over the past 1.5 months, with the 2023 NYMEX strip down 37 per cent since the start of December while the AECO strip is down 30 per cent,” the analyst said. “That said, the equities have held in much better, driving a re-rate on valuation. From the start of December to today, the Canadian gas-weighted E&P average valuation multiple has increased 0.8 points, the liquids-rich group has seen a 0.6-point increase in valuation multiple while the oil names have been steady in valuation. The same impact has been seen on FCF yields. Thus, we would angle exposure in the energy space to the oil-focused E&Ps at this juncture until we see a turnaround in the gas macro.”

Mr. Gill downgraded his ratings for his “drier” gas producers, moving Birchcliff Energy Ltd. (BIR-T) and Pine Cliff Energy Ltd. (PNE-T) to “buy” from “hold” with targets of $9.50 and $1.60, respectively, down from $12.25 and $2. The averages on the Street are $13.41 and $2.01.

He also made these other target reductions:

  • Advantage Energy Ltd. (AAV-T, “buy”) to $11.85 from $14.25. Average: $14.11.
  • ARC Resources Ltd. (ARX-T, “buy”) to $23 from $24.50. Average: $24.70.
  • Kelt Exploration Ltd. (KEL-T, “buy”) to $6.25 from $8.50. Average: $8.98.
  • Spartan Delta Corp. (SDE-T, “buy”) to $19 from $19.50. Average: $21

“We continue to have BUY ratings on ARX, KEL and SDE given the better liquids exposure, and continue to see AAV as the more attractive option on the gas side given the potential in Entropy is current a free option in the stock, in our view. That said, with gas prices pulling back, we current see ARX as our top investment idea in the gas space given valuation and FCF yield,” he concluded.

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Desjardins Securities analyst Chris Li expects Metro Inc.’s (MRU-T) first-quarter results to “reflect solid execution against a highly inflationary backdrop” as it continues to “benefit from the shift to discount and solid pharmacy sales.”

Ahead of the Jan. 24 release, Mr. Li is projecting earnings per share of 98 cents, a penny above the consensus estimate on the Street. That result is driven by “strong” same-store sales growth from its Food Retail segment of 8.5 per cent year-over-year driven by price inflation and a 5-per-cent gain from its Pharmacy business “with solid script growth partly offset by moderating pharmacy services (ie COVID-19 vaccinations and rapid tests).

“We expect a slight decline in Food margin to be offset by a slight increase in Pharmacy,” said the analyst. “For Food, higher product and labour costs, increase in shrink and promo penetration and channel shift should be partly offset by strong privatelabel sales and benefits from the new frozen DC in Toronto resulting in productivity/efficiency gains, reduction in direct-to-store deliveries from certain vendors and better in-stock position at store level. Pharmacy margins should benefit from strong sales in higher-margin cosmetics and OTC drugs.

“We expect inflationary pressures from labour, transportation, energy and supply costs to weigh on SG&A, with the rate increasing by 10 basis points year-over-year despite strong sales.”

After narrow increases to his revenue projections for fiscal 2023 and 2024, Mr. Li bumped his full-year EPS expectations to $4.19 and $4.47, respectively, from $4.18 and $4.45.

He maintained a “hold” rating and $77 target for Metro shares. The average is $77.90.

“We believe MRU is well-positioned to achieve solid 8-per-cent EPS growth (same-week) this year despite moderating inflation, but its premium valuation (17.5 times forward P/E vs 16 times average) and sector rotation keep us on the sidelines,” he said.

Elsewhere, RBC’s Irene Nattel raised her target to $80 from $76 with a “sector perform” rating.

“Forecasting Q1/F23 EPS $0.98 (up 11.5 per cent year-over-year), a tick ahead of consensus $0.97 (range: $0.95-$0.99) when MRU reports on January 24,” she said. “Forecast assumes improved food tonnage trends sequentially combined with accelerating inflation, increased promo and private label uptake. Pharmacy trends should reflect a gradual improvement in Rx count growth as medical consultations and procedures normalize, in addition to strong OTC sales related to the prevalence of a “virus trifecta” during the quarter.”

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Raymond James analyst Brad Sturges thinks Slate Grocery REIT (SGR.U-T, SGR.UN-T) offers “unique investment exposure” to the U.S. grocery-anchored retail property sector, which he calls a “defensive asset class providing attractive risk-adjusted returns.”

“GR is the only TSX-listed REIT to focus on owning and acquiring unenclosed essential retail neighbourhood shopping centers that are typically anchored by market dominant grocery retailers in targeted growing U.S. non-gateway metropolitan statistical areas (MSA),” he said. “SGR’s U.S. portfolio comprises 119 assets totaling 15.5 million square feet of GLA in 23 states. Notably, SGR’s essential retail portfolio is concentrated in the U.S. Sunbelt (approximately 51 per cent of net operating income), and North-East (20 per cent of NOI), with Florida ( 18 per cent of NOI), North Carolina (12 per cent of NOI) and New York (12 per cent of NOI) representing SGR’s largest operating regions.”

Seeing Slate Asset Management LP, its external asset manager which owns a 6-per-cent stake, providing “expertise, possible access to capital, and an extensive network of U.S. grocery-anchored retail property sector relationships,” Mr. Sturges initiated coverage with a “market perform” recommendation, expecting a “highly fragmented” sector to provide ample opportunities for future acquisitions.

“We believe SGR’s above-average distribution income profile is supported by the defensive nature of its U.S. essential retail shopping center portfolio,” said Mr. Sturges. “Further, the REIT’s future organic growth prospects could be supported by capturing the gap between in-place rents psf and estimated market rents psf through executed leasing activities in 2023, and beyond. Future accretive growth of its portfolio through additional acquisitions may act as a positive catalyst for SGR’s unit price.”

Blaming its discounted valuation on its external management structure and low trading liquidity, Mr. Sturges set a Street-high target of US$13 per unit. The average is US$11.90.

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Eight Capital analyst Anoop Prihar sees “significant upside potential” in Premium Nickel Resources Ltd. (PNRL-X) following its 2022 acquisitions of a trio of previously producing mines in Botswana.

That led him to initiate coverage of the Toronto-based company with a “buy” recommendation.

“Our PNRL investment thesis is twofold,” he said. “First, the commercial potential of the Selebi and Selkirk Mines is enhanced by the favourable global supply/demand fundamentals for nickel, which is a key component in most EV batteries.

“Second, we anticipate that PNRL will create value by redeveloping these two brownfield properties. Management is targeting the release of a NI 43-101-compliant PEA for the Selkirk project by the end of 2023, with the Selebi PEA to follow in 2024. We believe that there are three potential sources of upside.”

Emphasizing Botswana is a “stable mining friendly jurisdiction,” Mr. Prihar set a target of $3.10 per share, which represents a 64-per-cent total potential return. The average is $4.50.

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In other analyst actions:

* After Bank of Montreal (BMO-T) gained regulatory approvals for its Bank of the West acquisition, Canaccord Genuity analyst Scott Chan trimmed his target to $147.50 from $151 to account for its $3.4-billion equity raise, keeping a “buy” rating. The average is $142.29.

* In response to the release of its 2023 guidance and 10-fold increase to quarterly dividend increase (20 cents per share), ATB Capital Markets’ Patrick O’Rourke trimmed his Birchcliff Energy Ltd. (BIR-T) target to $13 from $13.50 with an “outperform” rating, while Stifel’s Michael Dunn lowered his target to $9 from $9.75 with a “buy” rating. The average is $13.38.

* Lowering his fourth-quarter 2022 and full-year 2023 estimates, BMO’s Fadi Chamoun reduced his Street-low Cargojet Inc. (CJT-T) target to $140 from $150 with a “market perform” rating. The average is $191.

“Our flight activities data suggests CJT total flight hours in Q4/22 decelerated to an increase of 8 per cent year-over-year compared to 19-per-cent higher year-over-year in Q3/22, with January so far reporting high-single-digit decline,” he said. “Domestic network experienced a steeper than previously expected deceleration. With limited visibility into demand improvement and continued elevated earnings risk, we remain on the sideline despite the lower valuation.”

* Haywood Securities’ Neal Gilmer lowered his target for Curaleaf Holdings Inc. (CURA-CN) to $9.25 from $10.25, keeping a “buy” rating. The average is $11.52.

* Calling the drill results from its Coka Rakita exploration project in Serbia “positive,” M Partners analyst Eric Carstaits hiked his Dundee Precious Metals Inc. (DPM-T) target to $15.50 from $12.50 with a “buy” rating. The average is $11.44.

* After its 2023 production guidance fell in line with his expectations, National Bank’s Shane Nagle raised his target for Ero Copper Corp. (ERO-T) to $21 from $20 with a “sector perform” rating, while TD Securities’ Craig Hutchison increased his target to $22 from $19.50 with a “hold” rating. The average is $21.92.

“We reiterate our Sector Perform rating as our estimates take into account Ero’s growth profile, incremental exploration potential, near-term expansion opportunities and low operating costs offset by elevated capital/development risks and a premium valuation, “ said Mr. Nagle. “Our target has increased by adopting a higher multiple to reflect reduced risks after implementing copper price hedges for 2023.”

* BMO’s Ben Pham trimmed his Innergex Renewable Energy Inc. (INE-T) by $1 to $18 from with an “outperform” rating. The average is $20.31

* Haywoods’s Pierre Vaillancourt raised his Lundin Mining Corp. (LUN-T) target to $10.50, above the $9.23 average, from $8 with a “hold” rating.

* JP Morgan’s John Royall cut his MEG Energy Corp. (MEG-T) target to $22 from $23. The average is $23.57.

* Scotia Capital’s Michael Doumet lowered his Russel Metals Inc. (RUS-T) target to $37.50 from $38, maintaining a “sector perform” rating. The average is $36.93.

“Steel prices moderated through most of 4Q22, but have recently shown signs of life as mills push through price increases,” said Mr. Doumet. “To us, steel price upside remains limited in the near-term given low utilization rates, short lead times, and soft demand. In the NTM [next 12 months], we expect more downside to plate prices (vs. HRC), which should weigh on RUS’s revenue and gross profits per ton. As is common during this part of the cycle, we expect several quarters of margin compression (we are below consensus), but strong FCF generation. As much as it is important not to overpay for earnings through upcycles (i.e. 2021/22), our negative revisions (due to lower steel prices) have little implications to our view of RUS’s intrinsic value. In this report, we refresh our mid-cycle EBITDA estimate (based on new disclosures): our conclusion is that, before acquisitions, mid-cycle EBITDA amounts to $300 million (M&A can add more than$50 million). RUS should no longer be considered a pure-cyclical: its improved earnings power (and excess capital) will enable it to recycle capital into the business and compound earnings through-the-cycle.”

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