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

While industrial commodity producers are currently facing both demand and macro headwinds, Canaccord Genuity analyst Dalton Baretto views the obstacles as “transitory,” expecting the sector to continue to push higher on supply constraints.

“In our last quarterly outlook for the industrial commodities, Summertime Sadness, Fall Madness, we flagged the potential for a strong fall rebound in industrial activity, commodity prices, and mining equity performance based on the following rationale: increasing near-term (global restocking) and medium/long-term (infrastructure spending) economic activity and physical commodity demand; a step change in economic growth and inflation readings relative to recent history; an ongoing decline in the US$ on the back of increasing spending plans by the Biden administration coupled with the commitment by the Fed to maintain a low interest rate environment in the medium term,” he said.

“While the above remains our base case, economic growth appears to be facing nearterm headwinds. Severe shortages of renewable power and LNG in Europe and essentially all energy commodities in China ahead of a looming winter have resulted in curtailed economic activity in favour of residential energy needs. Further compounding the negative short-term economic picture are concerns around the Chinese property sector, with flailing debt-laden Evergrande as the poster child. Signals from the US Federal Reserve that tapering is imminent has further served to strengthen the US$.”

In a research report released Tuesday, Mr. Baretto expressed confidence in the resolution of several of those headwinds, including:.

* The expectation the current power “crisis” to be resolved through government intervention, supply increases or reduced demand;

* The Chinese government will manage the Evergrande saga “in a way that does not impact either the general populace or economic growth materially; a deceleration of the property sector was always in our base case.”

* The U.S. Fed will act to reassure investors rate increases will “be measured and that it remains tolerant of higher inflation in the short to medium term.”

“We expect these issues will be resolved over the course of the fall/winter,” he added. “In the meantime, global supply chain inventories remain at critical levels, and as the Delta wave appears to have crested, we expect robust end-user demand going forward. In addition, availability of essentially all commodities remains tight, and with ongoing supply concerns, we expect pricing to remain well supported in the near term. We expect a normal seasonal slowdown in Q1/22 around Chinese New Year, followed by what should be a very robust spring construction and manufacturing season in the northern hemisphere.”

Expressing a preference for equities that have “reasonably high leverage commodity prices as well as near-term catalyst,” Mr. Baretto upgraded Ivanhoe Mines Ltd. (IVN-T) to a “buy” recommendation from a “speculative buy” recommendation, citing “the company’s transition to producer status.”

He raised his target for Ivanhoe shares to $11.50 from $10.50. The average target is $11.35.

Mr. Baretto also raised his targets for these equities:

  • Flo Mining Corp. (FIL-T, “speculative buy”) to $15 from $14.50. Average: $13.44.
  • Teck Resources Ltd. (TECK.B-T, “hold”) to $36 from $31. Average: $38.87.
  • Trevali Mining Corp. (TV-T, “hold”) to 25 cents from 20 cents. Average: 29 cents.
  • Titan Mining Corp. (TI-T, “hold”) to 70 cents from 35 cents. Average: 35 cents.
  • Josemaria Resources Inc. (JOSE-T, “speculative buy”) to $2.50 from $2. Average: $1.75.
  • Lundin Mining Corp. (LUN-T, “hold”) to $12.50 from $12. Average: $12.98.
  • Hudbay Minerals Inc. (HBM-T, “buy”) to $13 from $12. Average: $12.89.
  • First Quantum Minerals Ltd. (FM-T, “buy”) to $36 from $35. Average: $32.85.
  • Capstone Mining Corp. (CS-T, “buy”) to $7 from $6.50. Average: $6.98.

He cut his targets for:

  • Champion Iron Ltd. (CIA-T, “buy”) to $6 from $8. Average: $7.70.
  • Ero Copper Corp. (ERO-T, “buy”) to $30 from $32. Average: $30.50.

“Our preferred picks are: Producers: FM, IVN (large cap), HBM, CS (mid/small cap); Developers: FIL, JOSE, MARI,” he said.

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After Citi raised oil price forecasts in response to a recent surge and citing “continued improvement in forward downstream margin indicators,” equity analyst Prashant Rao raised his earnings expectations for Canadian integrated producers on Tuesday

“Over the past two months, oil price is up 33 per cent and shares across our Canadian coverage are up just slightly more (37 per cet), with CVE leading the group (up 50 per cent) and SU lagging (up 28 per cent),” he said. “From here, remaining upside implied by our DCF-based targets form a tighter range (8 per cent to 19 per cent), but shares could overshoot on continued upward estimate revisions.”

“While consensus 3Q21 FFO per share estimates seem fair, we see 15-per-cent upside to consensus 4Q21, implying that near-term trading momentum in the equities could continue, potentially beyond justified long-term valuations for some of the group.”

Mr. Rao reaffirmed Cenovus Energy Inc. (CVE-T) as his “top pick” in the group, raising his target for its shares to $17 from $14 with a “buy” recommendation. The current average on the Street is $17.13

“Buy-rated CVE’s organic CF generation is on pace to handily beat its $10-billion year-end 2021 net debt target, after which we see $5-billion in organic 2022 FCF generation, or more than $3-billion in potential return to non-COP shareholders,” he said. “Asset sales could further enhance this; the company has already ID’ed Retail as a candidate, with investors penciling in $0.5-billion as a conservative estimate of what it could fetch. All of this warrants continued multiple expansion.”

He also increased his target for Imperial Oil Ltd. (IMO-T) shares to $47 from $38, exceeding the $44.65 average, with a “neutral” recommendation.

“We think Upstream CF generation and Downstream momentum against very limited capex and debt service needs puts Neutral-rated IMO in position potentially to return 40-per-cent-plus of its current market cap over the next few years,” he said. “The central question among investors remains by what mechanism(s) IMO will be able to return cash in excess of its NCIB. While we do not expect an announcement with 3Q21 results, we think the company likely will provide greater clarity by year-end. FFO estimates are chasing shares upward,” he said.

Mr. Rao maintained a “neutral” rating and $31 target for Suncor Energy Inc. (SU-T). The average is $35.96.

“We think the company’s strong balance sheet and integrated model will give it breathing room to complete major growth projects and withstand the ongoing trough in the Canadian oil cycle, while being best positioned among its peers to drive capital returns to shareholders through dividends and share buybacks,” the analyst said. “That said, given our outlook for global transition to clean energy, SU’s current risks/rewards appear to be balanced on our negative terminal growth assumption for the company..”

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Touting its “massive” potential market and believing its “strong data with low bar for approval makes for exceptionally high probability of success,” iA Capital Markets analyst Chelsea Stellick initiated coverage of Alpha Cognition Inc. (ACOG-X) with a “speculative buy” recommendation on Tuesday.

The Vancouver-based biopharmaceutical company is focused on therapies for those with debilitating neurodegenerative disorders. In September, the U.S. Food and Drug Administration announced it has accepted its Investigational New Drug (IND) application for its lead candidate, Alpha-1062.

Ms. Stellick said Alpha-1062, a proprietary new chemical entity, belongs to a class of Alzheimer’s Dementia (AD) drugs that have averaged more than 20 million prescriptions over the last decade.

“Alpha-1062 is a patented prodrug of galantamine, administered orally, with reduced side effects to improve tolerability,” said Ms. Stellick. “Alpha-1062 could offer a potential best-in-class treatment option for the 45 per cent of patients who discontinue AChEIs within a year of starting treatment, mainly due to gastrointestinal (GI) side effects.”

“The pivotal study for Alpha-1062 only requires bioequivalence (rather than efficacy), making the trial faster and smaller than typical Phase 3 trials. This means Alpha-1062 is close to approval (New Drug Application (NDA )submission is planned for 2022) with less risk of failure since bioequivalence has already been shown in previous studies, which also showed reduced diarrhea, nausea, and vomiting in patient.”

Ms. Stellick said there are more than 6.3 million AD patients in the U.S. alone, and expects rapid growth with ageing demographics and increasing diagnosis related to new disease-modifying therapies.

“Based on existing sales, [acetylcholinesterase inhibitors] are a more than $5-billion market at branded prices,” she said. “Capturing even a small percent of this market would bring an order of magnitude increase in ACOG’s valuation, and very likely be accompanied by a buyout or a Nasdaq uplisting. ALS and mTBI, while smaller, are nonetheless each multi-billion-dollar market opportunities.”

She set a target of $5 for shares of Alpha Cognition, exceeding the current average of $3.50.

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Expecting it to benefit from accelerating demand for cloud and digital solutions, CIBC World Markets analyst Stephanie Price initiated coverage of Softchoice Corp. (SFTC-T) with an “outperformer” rating, forecasting the Toronto-based company to deliver a 15-per-cent gross profit increase annually through 2022.

“Softchoice has transitioned from a product-only reseller to a trusted solutions provider, deriving 70 per cent of gross profits from software, cloud and services,” she said. “It acts as a technology agnostic partner, connecting its 8,700 customers with several hundred technology partners as it designs, procures, implements, and manages complex multi-vendor IT environments. The company’s largest partners are Microsoft (approximately 20 per cent of net sales) and Cisco (10 per cent). Softchoice is also seeing strong growth from its Google and AWS relationships, with billed revenue doubling year-over-year in 2020 as companies focused on cloud solutions and remote work.”

“After spending $50-million on its Project Monarch business re-engineering initiative, we expect Softchoice to begin to see the benefits of the project in H2/21 and beyond. We expect $19-million in gross profit savings and $6 million in adjusted EBITDA savings in 2022E from the project. In addition to these quantifiable benefits, we see upside from improved utilization, lower attrition, and improved analytics, driving cross-sell/up-sell.

Ms. Price set a $40 target, exceeding the $38 average.

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RBC Dominion Securities analyst Arun Viswanathan expects lithium demand to continue to rise as auto production recovers following the global chip shortage, driving the demand for electric vehicles “stronger.”

With that view, he believes Albemarle Corp. (ALB-N) will “continue to benefit given its unique low cost position and global scale.”

Also anticipating secular trends in 5G connectivity along with a return to travel will help its Bromine and Catalysts segments continue to recover, he raised his rating for the Charlotte-based company to “outperform” from “sector perform” on Tuesday.

“We are upgrading ALB to OP from SP and raising estimates and our price target to $280 based on three points: a) better-than-expected lithium volume growth underpinned by strong global demand and increased OEM commitments; b) continued upward lithium price growth (lithium hydroxide prices in China reaching new highs at $28k/tonne, which should result in positive contracting activity; c) continued recovery in Bromine and Catalysts,” said Mr. Viswanathan.

After raising his fiscal 2021 and 2022 earnings expectations, he hiked his target for Albemarle shares to US$280 from US$246. The average on the Street is US$231.32.

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Goldman Sachs analyst Neil Mehta raised his target prices for a series of large-cap Canadian energy companies on Tuesday.

His changes include:

  • Canadian Natural Resources Ltd. (CNQ-N/CNQ-T, “buy”) to US$51 from US$44. The average target is $58.95 (Canadian).
  • Cenovus Energy Inc. (CVE-N/CVE-T, “buy”) to US$14.50 from US$12.50. Average: $17.97 (Canadian)
  • Imperial Oil Ltd. (IMO-T, “neutral”) to $47 from $42. Average: $44.65.
  • MEG Energy Corp. (MEG-T, “buy”) to $13 from $11. Average: $13.13.
  • Suncor Energy Inc. (SU-N/SU-T, “buy”) to US$28 from US$27. Average: $35.96 (Canadian).

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In other analyst actions:

* In an earnings preview, CIBC World Markets analyst Jacob Bout raised his target for WSP Global Inc. (WSP-T) to $180 from $166 with an “outperformer” rating. The average is $168.50.

Mr. Bout also hiked his targets for Stantec Inc. (STN-T, “outperformer”) target to $73 from $67, Bird Construction Inc. (BDT-T, “outperformer”) to $12 from $11 and Westshore Terminals Investment Corp. (WTE-T, “neutral”) to $28 from $23.50. The averages are $66.71, $12.03 and $25.80, respectively.

“The outlook for the E&C and heavy equipment industries remains robust, though there are concerns regarding ballooning material costs and labour shortages, which could temper the nascent recovery in construction,” he said.

* After expanding its royalty interest in the Omolon hub operation in Russia through a US$23.5-million deal with Omolon Gold Mining, a subsidiary of Polymetal International PLC, Raymond James analyst Brian MacArthur increased his target for shares of Maverix Metals Inc. (MMX-T) to $8.50 from $8.25 with an “outperform” rating, while Scotia Capital’s Trevor Turnbull raised his target to US$7 from US$6 with a “sector perform” rating. The average is $8.68.

“Given its smaller market capitalization and lower trading liquidity, Maverix may not be a suitable investment for all investors. However, for smaller-cap investors, we believe Maverix offers a gold-focused royalty/streaming company with growth, as well as a flexible balance sheet,” said Mr. MacArthur.

* Barclays analyst Christine Cho raised her Enbridge Inc. (ENB-T) target to $53 from $50 with an “equal weight” rating. The average on the Street is $55.02.

* Ms. Cho also increased his target for TC Energy Corp. (TRP-T) target to $64 from $62with an “equal weight” rating. The average is $69.

* CIBC’s Bryce Adams trimmed his Sierra Metals Inc. (SMT-T) target by $1 to $4.24 with an “outperformer” rating. The average is $4.28.

* Jefferies analyst Owen Bennett cut his Tilray Inc. (TLRY-Q, TLRY-T) target to US$22 from US$27, keeping a “buy” rating. The average is US$13.95.

* National Bank Financial analyst Adam Shine lowered his Stingray Group Inc. (RAY.A-T) target to $8.50 from $10, falling below the $9.08 average, with an “outperform” rating.

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