Inside the Market’s roundup of some of today’s key analyst actions
Pointing to increased risk from its operations in Zambia and balance sheet concerns, Citi analyst Alexander Hacking lowered his rating for First Quantum Minerals Ltd. (FM-T) to “neutral” from “buy” and maintaining a “high risk” designation.
“We still believe in the fundamental FM story with a strong management team, a Tier 1 asset under construction and inflection point in FCF/leverage,” he said. “Yet, we are concerned that Zambia risk is not adequately priced. In addition, the company has more downside risk than peers if copper prices disappoint in 2019-2020.”
Mr. Hacking said the environment for miners in the African country has deteriorated since March of 2018 when its government demanded $8-billion in taxes. It then imposed “significantly” higher costs on the sector though a combination of power tariffs, mining taxes and a plan to increase sales taxes.
“More recently, we are seeing a potential rise in government intervention,” said Mr. Hacking. “First, the government threatened to take over two mine shafts being closed at Glencore’s Mopani mine. Second, the government has threatened to strip Vedanta-KCM (Konkola Copper Mines) of its operating license and bring in a new investor. The fundamental problem is that Zambia needs to raise revenues and mining is one of the only viable sources. The challenge is that most Zambian copper mines are only marginally profitable in the new price-cost environment and are adjusting production / work force accordingly. The recent intervention suggest that government did not anticipate this move by the miners and is reacting negatively to it.
“The good news for First Quantum is that their mines – Kansanshi and Sentinel – are the two most copper profitable mines in Zambia and can keep operating under the new cost burdens. Given this, we would not expect any government intervention. Yet, it may also encourage the government to find additional ways to tax these assets going forward.”
The rating change came as the firm’s commodities team updated its price forecasts for base metals in reaction to the “recent unexpected deterioration” in trade negotiations between the United States and China.
“The team is downgrading base metals near term, upgrading bulks for 2H, and staying bullish precious metals,” said Mr. Hacking. “The trade war will impact base metals more than bulks and precious metals could benefit. Citi’s base case is that tariffs are resolved during 2H with a gradual unwind beginning in 4Q19 and there is sufficient China easing to get to 6.4-per-cent GDP growth.
“Citi’s 2020 full year forecasts are bullish on copper, nickel and aluminum relative to current spot prices. Citi is most bearish on zinc, coking coal and iron ore.”
With those changes, Mr. Hacking’s 2019 adjusted EBITDA projection for First Quantum fell by 9 per cent to US$1.7-billion.
His target price for its shares also fell, sitting at $13 (Canadian) from $18. The average on the Street is currently $17.94, according to Bloomberg data.
At the same time, Mr. Hacking maintained a “neutral” rating and $30 target for Teck Resources Ltd. (TECK-B-T). The average target is $39.84.
"We rate TECK at Neutral as we currently seeing more upside in pure-play copper names (SCCO & FCX)," he said. "We see outperformance potential for Teck if the company can deliver on reducing costs in coal and reducing capex (ex-QB2) in 2020+."
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Calling it “a quality name with a premium valuation,” Desjardins Securities analyst Benoit Poirier downgraded CAE Inc. (CAE-T) to “hold” from “buy” in the wake of the release of “solid” fourth-quarter financial results.
"Overall, while we continue to like CAE in the long term, we believe the stock is fairly valued considering recent share price performance (up 46 per cent year-to-date vs 15 per cent for the S&P/TSX)," he said. "Therefore, we would wait for a better entry point before buying the stock."
On Friday before the bell, CAE, a Montreal-based manufacturer of simulation technologies, modelling technologies and training services, reported earnings per share of 48 cents, exceeding the projections of Mr. Poirier (46 cents) and the Street (43 cents), due to higher-than-anticipated EBIT margin (17.4 per cent versus the consensus of 16.1 per cent). Revenue of $1.022-billion also topped expectations ($1.001-billion and ($941-million).
Also providing a "decent" fiscal 2020 outlook, Mr. Poirier raised his target to $37 from $31. The average is $36.07.
“CAE is trading at a premium versus its leading U.S. peers since the beginning of the B737 MAX incidents,” the analyst said. “The incidents with the B737 MAX program have put greater emphasis on training requirements. Interestingly, CAE was trading at a 1.2-times discount vs its peers (on an EV/FY2 EBITDA basis) prior to the B737 MAX crisis and is now trading at a premium of 1.2 times. We believe CAE should trade at a premium vs peers due to its leading market position, higher profitability (EBITDA margin of 21.2 per cent versus 16.0 per cent for average peers, although D&A expenses represent a high percentage of total revenue (8 per cent) due to the capital intensity of CAE’s training business) and stable business model. On that front, recall that CAE’s consolidated operating income decreased by 60 per cent following the 2001 recession compared with a decline of only 14 per cent following the 2008 financial crisis. For comparison, services accounted for 15 per cent of total revenue in FY01 versus 60 per cent in FY18. At this point, we consider the stock fairly valued.”
Elsewhere, BMO Nesbitt Burns analyst Fadi Chamoun lowered CAE to “market perform” from “outperform” with a $36 target, rising from $33.
“The strong share price performance, which we believe is in part due to M&A speculation, puts the stock in the Market Neutral zone based on fundamentals solely,” he said.
“We would reconsider rating on pullback in valuation and continue to be fans of CAE’s long-term fundamentals.”
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Though Gran Tierra Energy Inc. (GTE-T) has “significant upside potential,” RBC Dominion Securities analyst Al Stanton lowered his rating for its stock, expressing a more “cautious” view of its future and noting its shares haven’t kept up with the recovery in oil prices in 2019.
“Having trended with Brent through 2018, Gran Tierra decoupled in January and now lags behind Brent's 38-per-cent year-to-date increase,” he said.
“As a result of third-parties' aspirational 2P production profiles and often-quoted pre-tax asset valuations - 'Gran Tierra shares currently trade at a significant discount; 0.4 times of 2P NAV per share' - expectations are set too high, and pitched against these metrics, the business appears to be under delivering.”
Mr. Stanton called Gran Tierra a “financially robust growth stock,” however he lowered his rating for the Calgary-based company to “outperform” from “top pick.”
“We change the narrative, by: 1) refocusing attention on posttax valuations, which knock 20 per cent off the headline valuations, and 2) assuming probable reserves are produced over a longer time frame,” he said.
“Our more cautious view on 2020+ production has reduced our Tangible NAV to $4.19 per share; but this still represents a target 46 per cent above the current share price, and faced with achievable, yet material, objectives, Gran Tierra can be seen to be delivering.”
Mr. Stanton lowered his target for the stock to $4.20 from $5.50, which falls short of the consensus of $5.12.
“We expect Gran Tierra to generate FCF from H2/19, but given our lower valuation, the portfolio's latent potential and the weak 'signal' being generated by the buyback, we would suspend share repurchases, and accelerate debt reduction while increasing development activity where possible,” he said.
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RBC Dominion Securities analyst Stephen Walker lowered his financial expectations and target price for shares of Iamgold Corp. (IAG-N, IMG-T) based on operational challenges at its Westwood Project in southwestern Quebec.
“We have revised our estimates at Westwood following operational challenges as a result of seismic and ground control issues underground,” he said. “IAMGOLD has scaled back mining from higher grade zones until a risk mitigation plan is completed, with preliminary results from a revised lifeof-mine plan expected in Q4. We anticipate the new mine plan could include lower targeted underground mining rates and greater sustaining capital requirements versus prior guided run-rates.
“As such, we have lowered our estimates at Westwood and estimate average production of 135 Koz with mine-site sustaining costs of $930/oz over a 12 year mine life versus our prior estimate of 145 Koz at $875/oz over 15 years. In our view, the operational uncertainty around Westwood is an overhang for shares given questions around steady-state production levels, long-run cost structure, and underlying value of the operation.”
Mr. Walker compared Iamgold’s current valuation discount to “similar challenges” in 2015, noting: “With the sell-off in shares following Q1/19 financial results, IAMGOLD trades at a significant discount to Intermediate peers on long-term NAV and near-term EV/EBITDA. This lower rating is comparable to similar challenges related to ground control issues at Westwood encountered in mid-2015, reflecting heightened risk around longer-term value. In our view, this discount could persist until greater clarity is provided around sustainable run rate of operations at the mine.”
Keeping a “sector perform” rating, his target fell to US$3.25 from US$5. The average on the Street is US$3.93.
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Credit Suisse analyst Manav Gupta feels both Cenovus Energy Inc. (CVE-T) and Canadian Natural Resources Ltd. (CNQ-T) sit in a favourable position in the second quarter compared to their peers.
“Canadian Integrated space has seen a pullback in the last 4 weeks, with higher beta names CVE (down 14.2 per cent) and CNQ (down 12.2 per cent) underperforming more diversified peers Suncor Energy (down 2.2 per cent), Imperial Oil (down 4.3 per cent) and Husky Energy (down 5.3 per cent),” he said in a research note released Tuesday. “Given the tight oil macro and narrower diffs, we still have a preference for Beta over defence and see the recent pullback as an opportunity to add to two high quality names.”
“Despite ENB line 3 setback, we have not seen a blowout in diffs and both light-light and heavy-light diffs are trending below the 5-year average. With both upstream (vs. 4Q18) and downstream (vs. 1Q19) fundamentals showing material improvement, we see 2Q19 cash flow per shares on an average up 14 per cent vs. 1Q19 and up 48 per cent vs. 4Q18. In 2Q19, SU’s and CVE’s, downstream earnings will not see the benefits of FIFO similar to what we saw in 1Q19, but improved gasoline margins should be able to offset that deficit. Our 2Q19 adjustments are based on individual company guidance, turnarounds and reversal of onetime items.”
Mr. Gupta maintained an “outperform” rating for Canadian Natural Resources with a $50 target, which exceeds the consensus of $47.50.
“CNQ reported $1.15-billion in Oil Sands EBIT in 1Q19 and we see a stronger 2Q19 in the cards,” he said. “With Horizon all in cost at $15 per barrel, CNQ is best positioned to benefit from lower diffs. Syncrude –WTI discount blew out to $30/bbl in November 2018, but QTD Syncrude has traded at $0.48/bbl premium to WTI, a major tailwind for CNQ (70-per-cent light crude). Our analysis indicates that in 2Q19 CNQ will generate $1.2-billion in discretionary cash (CFO–capex-dividend) to further lower debt and support buybacks. We see the pace of buybacks accelerating in 2Q19.”
He also kept an “outperform” rating for Cenovus with a target of $17, topping the consensus of $15.75.
“In 1Q19 CVE reported Oil Sands EBIT of $467-million vs. loss of $496-million in 4Q18 (the highest positive quarter-over-quarter rate of change),” he said. “Given volumes are guided up 3.5 per cent quarter-over-quarter and crude prices are up 5 per cent quarter-to-date, CVE’s Oil Sands business should deliver another strong quarter. We see CVE reducing debt by $650-million per quarter. As a result we see a high probability at its investor day event scheduled for October 2, 2019, CVE announces it is commencing buybacks (positive catalyst).”
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In other analyst actions:
Wells Fargo Securities analyst Edward Kelly upgraded Dollarama Inc. (DOL-T) to “outperform” from “market perform” and raised his target to $48 from $34. The average target on the Street is $40.67.
Canaccord Genuity analyst Raveel Afzaal upgraded Just Energy Group Inc. (JE-T) to “speculative buy” from “hold” with a $6 target, up a loonie but 18 cents lower than the consensus.
David Leeder