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

Following the release of a “flat” fourth-quarter earnings report, Canaccord Genuity analyst Matt Bottomley raised his recommendation for Aurora Cannabis Inc. (ACB-T) in reaction to recent share price depreciation.

With its shares down almost 50 per cent since its previous quarterly release in mid-May, he moved the Edmonton-based company to “hold” from “sell,” believing the “company’s leading Canadian and international medical platforms are close to supporting its share price on a stand-alone basis at current levels.”

After the bell on Tuesday, Aurora reported total revenue of $50.2-million, down 0.4 per cent quarter-over-quarter but exceeding Mr. Bottomley’s $47.1-million estimate.

“The company continues to hold the #1 medical cannabis market share in Canada, with revenues of $24.9-million (up 0.4 per cent quarter-over-quarter), in a segment that was generally flat during FY2022,” he said. “Outside of Canada, ACB saw its higher-margin international contribution decrease by a sizable 20 per cent to $11.6-million on the back of lower sales in the EU (on supply constraints) and a depreciating € vs. the C$. In terms of its Cdn recreational contribution, Aurora reported total net adult-use sales of $12.6-million, representing a sequential increase of 22 per cent, which was supported by the closing of Thrive Cannabis during the quarter. However, as noted during the FQ4 earnings call, management anticipates pressure on its consumer cannabis revenue in FQ1/23 as a result of external disruptions in the OCS’ distribution system and labour strikes in BC, that combined, could represent a topline headwind of $3-million next quarter.”

Mr. Bottomley said Aurora’s cost-saving initiatives are “progressing well” with the company saying it is on track to reach adjusted EBITDA profitability by the first half of 2023.

“Further, on the back of continued efforts to streamline its operations (including the shuttering of Aurora Sky), management hopes to achieve$150-million-$170-million of opex savings by H1/23,” he added.

While a “sizable valuation decline” led to his upgrade, Mr. Bottomley lowered his target for Aurora shares to $2 from $2.50 after lowering his near-term estimates based on “continued Canadian adult-use headwinds.” The average target on the Street is $3.08.

Elsewhere, Piper Sandler’s Michael Lavery lowered his target to US$3 from US$4 with a “neutral” rating.


Calling it “an under-valued renewable stock with [an] improving growth outlook,” National Bank Financial analyst Rupert Merer sees Innergex Renewable Energy Inc.’s (INE-T) sees “improved visibility” on its five-year strategic plan to 2025, which he calls “increasingly achievable.”

“Progress on FCF [free cash flow] and FCF per share growth is what we believe matters the most, and INE has delivered on this key objective,” he said. “INE has already delivered on 53 per cent (36 per cent last year) of its adj. FCF growth target of $278-million (from a baseline of $107-million in 2020). Within its identified development pipeline, it now has visibility on an additional 24 per cent (was 7 per cent in 2021) of the cash flows it needs to achieve its objective, leaving only 23 per cent (was 57 per cent) or $39-million (was $80-million) of the objective yet to be identified with growth opportunities.”

Following its second annual Investor Day event on Tuesday, Mr. Merer applauded the Longueuil, Que.-based company’s progress, saying it has “considerably improved its visibility on where this growth will come from.”

“We believe more visibility on growth should provide investors with more confidence in INE’s ability to lower its payout ratio to a more sustainable level of 70 per cent by 2025 (net of development expenses), compared to 135 per cent in 2020,” he said.

“Although INE could look at M&A to support its incremental growth plans of 1.2 GW to 2025, its advanced and mid-stage developments projects (approximately 4 GW) could prove much more attractive. Indeed, with the passage of the Inflation Reduction Act in the U.S. and renewed production tax credits, the U.S. market could boom. In addition, INE has a healthy pipeline in Quebec, where that province could look for >6GW of new generation over next few years (including in partnership with INE’s largest shareholder, Hydro-Quebec).”

Also expecting higher power prices to drive upside, Mr. Merer raised his target for Innergex shares to $25 from $24 based on a recalibration of his “growth pipeline valuation,” keeping an “outperform” recommendation. The average target on the Street is $22.38.

“While it was expected that most of INE’s growth from its five-year strategic plan would be front-end loaded, INE surpassed our expectations with M&A and organic growth opportunities,” he concluded.

Elsewhere, iA Capital Markets’ Naji Baydoun thinks the company’s “conservative” FCF guidance “leaves significant potential for patient investors,” reiterating his “strong buy” rating and $25 target.

“The higher targets relative to last year’s Investor Day are supported by (1) already completed/closed initiatives, (2) ongoing/current growth projects, and (3) fundamental tailwinds that should support accelerate capacity build-out in INE’s core markets,” he said. “INE expects to invest $3.5-billion of capital to achieve its 2025 growth ambitions, and expects to pull several funding levers to efficiently source capital for its discreet equity needs ($0.9-billion). The Company’s overall plan is achievable, and we see upside potential to FCF and FCF/share targets from higher-than-assumed returns on new investments. Given that INE has already made significant progress towards its targets, we would not be surprised if the Company exceeds its objectives and investor expectations. In our view, INE’s shares have the potential to deliver a compelling risk-adjusted 13-19-per-cent TSR through 2025 from a combination of double-digit per share growth and a potential positive valuation multiple re-rating.”


National Bank Financial analyst Mike Parkin reaffirmed Kinross Gold Corp. (K-T) as his “top pick” among senior producers after Tuesday’s announcement of an enhanced share buyback program and a presentation from chief executive officer Paul Rollinson at the Denver Gold Forum.

The miner plans to repurchase US$300-million over the remainder of 2022 and has allocated 75 per cent of its free cash flow after dividends and interest payments to further buybacks in 2023 and 2024.

“This enhanced share buyback program demonstrates Kinross’ ability to leverage its financial health and stable FCF outlook to provide best in class shareholder returns,” the analyst said. “We view this as a prudent use of capital given Kinross’ discounted valuation relative to peers.”

“The 2023 and 2024 buybacks will preserve balance sheet strength as they will only take place if the company’s net leverage ratio is below the LTM [last 12-month] average of 1.7:1. Kinross also maintains the ability to pause buybacks in case of a ratings downgrade, major operational disruptions and/or a significant drop in gold price. This flexibility allows Kinross to maintain its financial health in the case of unforeseen events, which de-risks the significant buyback program.”

The analyst said Mr. Rollinson expects production to “drastically improve” through the second half of the year.

“Mr. Rollinson highlighted that Kinross has achieved guidance 9 out of the last 10 years reinforcing our conviction in Kinross’ ability to achieve 2022 guidance,” Mr. Parkin said.

“The company also noted they continue to see elevated costs impacting operations, especially at the Nevada sites, thus we feel 2023 budgets may assume no cost easing from current levels. Management believes the current portfolio is in great shape and no further M&A is required as after divesting from Russia and Ghana earlier this year, the company’s current asset base will be able to maintain stable production of 2.0M+ GEO, with 70 per cent of production coming from the Americas.”

Touting its operational “consistency,” he raised his target for Kinross shares to $9 from $8.25, maintaining an “outperform” rating. The average is $8.24.


Resuming coverage following the close of its $150-million bought deal offering, Desjardins Securities analyst John Sclodnick said Marathon Gold Corp. (MOZ-T) remains one of his “top developer picks,” seeing its Valentine Gold project “nearly at the fully funded finish line.”

“A common question from clients on the equity financing was on the timing of the raise, which we discussed with management,” he said. “Management stated that it did not want to go into construction with an equity financing overhang, as this scenario would have put it in a more challenging position when negotiating with the equity markets. However, a potentially bigger factor in the deliberations was that many of the bids and firm quotes received for the construction had associated expiries. Management had always been clear that it would move forward with the build and there were certain key milestones that it needed to achieve to maintain the current timeline. As much as shareholders did not like the impact on the stock, to delay the project by a year with a continued equity overhang would likely have been a worse outcome. We understand management’s predicament, and while the equity financing discount taken was greater than we were expecting, we ultimately believe that the greatest value creation will come from successfully building the project on time and on budget. Completing the equity financing in a timely manner was necessary to maintain the schedule and budget.”

Maintaining a “buy” rating for Marathon shares, Mr. Sclodnick cut his target to $2.60 from $3 to account for additional share dilution. The average is $2.94.

“With the environmental assessment now complete and a positive formal construction decision made, Marathon is able to begin project construction and is planning to kick off site early works at the start of 4Q22,” he said. “Full construction will ramp up in January 2023 and first gold is planned for early 2025. We expect to receive ongoing construction updates as the project progresses.

“In addition to construction updates, another major catalyst for the stock will be the updated feasibility study expected in 4Q22. This study will confirm the updated capital cost and provide updated sustaining and expansion capital and operating costs. The major update in the study will be the inclusion of the Berry deposit, which will increase the project’s mineral reserves (currently at 2.05moz at 1.36g/t), extend the minelife and increase the production profile.

Other analysts making adjustments include:

* National Bank Financial’s Don DeMarco to $2.25 from $2.50 with an “outperform” rating.

“The financing marks a significant project de-risking milestone and addresses the overhang after messaging for higher development capex,” he said.

* TD Securities’ Arun Lamba to $2 from $2.50 with a “speculative buy” rating.


Seeing a “significant” slowdown in steel demand south of the border and rising inventory levels, Stifel analyst Ian Gillies trimmed his target prices for a trio of stocks on Wednesday.

“The key takeaways are that (1) U.S. steel producers have been providing 3Q22 guidance over the last week which we would characterize as below consensus, and we are waiting for guidance from STLC and ASTL; (2) North American steel demand is weakening, and we could be on the verge of another step down in pricing; and (3) natural gas prices could have a deleterious impact on margins through the winter,” he said.

Mr. Gillies’s changes are:

* Russel Metals Inc. (RUS-T, “buy”) to $37 from $40. Average: $39.07.

“This is the only BUY rated stock,” he said. “We continue to have a positive bias on this name as its current valuation of 1.1 times 2023 estimated P/Book is an attractive entry point, and typically is a leading indicator for positive returns over the following 12-months. This is augmented by an active NCIB and a dividend yield of 5.4 per cent.”

* Algoma Steel Group Inc. (ASTL-T, “hold”) to $14 from $14.50. The average on the Street is $17.30.

* Stelco Holdings Inc. (STLC-T, “hold”) to $37 from $41. Average: $51.36.

“ASTL and STLC: We are waiting for our estimates to trough or get closer thereto before coming more positive. We would surmise any pre-announcements by either for 3Q22 are already priced into the stock,” he said.


RBC Dominion Securities’ Michael Harvey reiterated his “constructive” outlook on shares of Arc Resources Ltd. (ARX-T) after a study of its Montney drilling inventory with the firm’s data science team.

“We think an inventory figure of about 6,000 wells is reasonable (but could ultimately prove conservative), which positions ARC with a multi-decade portfolio of projects and on a short list of heavyweights for strategic LNG supply,” he said.

Mr. Harvey called LNG “the key” to the company’s long-term growth.

“ARC’s existing 2P reserve book contains sufficient resource to sustain an entire 2-train LNG project (1.8 bcf/d) for 10+ years, and when adding future drilling could increase to 40-50 years,” he said. “Accordingly, the company should be viewed as a key supplier, or alternatively as a strategic asset for operators looking for vertical integration. The owners of LNG Canada now collectively hold enough product to support Phase 1 of the development (~1.8 bcf/d), but any expansion (Phase 2, +1.8 bcf/d) would need to be augmented.”

Also touting its “strong” organic free cash flow, Mr. Harvey raised his target for Arc shares by $1 to $27 with an “outperform” rating. The average is $24.85.

“While investors remain nearterm focused, we expect ARC’s resource base to ultimately underpin long term value creation – either organically or from a strategic viewpoint,” he said.


In other analyst actions:

* Following Tuesday’s corporate update and third-quarter earnings guidance, iA Capital Markets’ Chelsea Stellick lowered her target for Dialogue Health Technologies Inc. (CARE-T) to $6, below the $6.72 average, from $7.50 with a “buy” rating. Others making changes include: Canaccord Genuity’s Doug Taylor to $6 from $8 with a “speculative buy” rating, Laurentian Bank Securities’ Nick Agostino to $6 from $8 with a “buy” rating and TD Securities’ David Kwan to $3.50 from $4.50 with a “hold” rating.

“The large customer lost in the Optima migration to Dialogue’s virtual EAP was more than offset by ARR growth in the virtual business during Q3/22 which will support CARE’s path to profitability, although we moderate our top-line growth estimates to reflect the weaker-than-expected revenue in the Q2/22 preview,” Ms. Stellick said. “Dialogue maintains the highest quality B2B pure play telehealth business in Canada, with integration, continuity of care, and short turnaround times benefiting employers through reduced employee leaves of absence.”

* TD Securities’ Brian Morrison cut his Magna International Inc. (MGA-N, MG-T) target to US$81 from US$85 with a “buy” rating. The average is US$78.63.

* In a research note on North American large-cap energy exploration and production companies, Citi’s Scott Gruber raised his Ovintiv Inc. (OVV-N, OVV-T) to US$65 from US$57 with a “buy” rating. The average is US$70.63.

“In late June, we became more selective on the E&Ps, noting that the risk/reward skew for the equities appeared negative given the downside risk to oil (per our Commodities team’s view),” he said. “While oil has slid, the E&Ps have bounced modestly, leading to material 2023 multiple expansion and yield compression. Thus, we maintain a selective stance, preferring names with differentiated narratives including APA (rising international gas exposure, multi-year growth of Suriname if exploration successful), EOG (exploration program converting to capital efficient reserve adds and gas growth, rising international gas exposure over time) and OVV (hedge roll, Rex transport contract roll, falling Aeco exposure, cash return enhancement).”

* M Partners’ Ben Pirie initiated coverage of Pacific Ridge Exploration Ltd. (PEX-X) with a “buy” rating and 60-cent target.

“PEX’s portfolio of nine assets combine to form a junior explorer that can quickly and systematically develop its flagship project while advancing its other assets in a cost-efficient manner,” he said. “The Company has exceptional access to capital while also having the option to sell off or spin out its non-core Yukon assets. 2022 could be a transformational year for the Company as it advances its B.C. projects with Kliyul showing early signs of a sizable copper-gold porphyry deposit.”

* Morgan Stanley’s Keith Weiss cut his Shopify Inc. (SHOP-N, SHOP-T) target to US$40 from US$44 with an “equal-weight” rating. The average is US$42.06.

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