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

Investors are likely to see “considerable” volatility in base metals in the near term given the escalating tension in the Middle East, according to Paradigm Capital analysts David Davidson and Jeff Woolley.

However, they expect the “overall theme” of the first year to be higher copper prices, noting the market is beginning to look at supply/demand fundamentals.

“Copper LME inventories continue to decline and now sit at 142,000 tonnes,” the analysts said. “Low, yes, but they have been lower historically and are subject to some wild reversals. Considering this is typically seasonally the strong period for demand, it would be surprising to see significant inflows for the next few months. Notably, China is sending a delegation to Washington on Jan. 15 for the signing of the Phase 1 trade pact — the first easing of trade tensions during the past year which could positively impact price dynamics.”

“Notably, commitment of trader speculators swung to a net long position in late December 2019, after seven months of consecutive net short positions — a sign of positive market sentiment. Last week saw a decline in net shorts by another 1,677 contracts, putting the net position long by 5,144 contracts.”

In a research note released Wednesday, the firm released their top equity picks for 2020 in the copper sector.

For producers, they selected First Quantum Metals Ltd. (FM-T). Mr. Davidson has a “buy” rating and $21 target price for the company’s shares. The average target on the Street is $16.09, according to Bloomberg data.

“First Quantum is one of the few companies with production growth as Cobre Panama should add an additional 100,000 tons copper, allowing the company to reach 2020 production guidance of 840–870,000 tons,” he said. “FM is also in discussions to sell an interest in its Zambian asset which could be as much as $1.8-billion which would go a long way in reducing the debt on its balance sheet (current net debt of C$9.3-billion/US$7.15-billion). With no major capital expenditures on the horizon, FM will be generating significant free cash flow which will be used to further deleverage the balance sheet. A decision was made to proceed with the eighth mill at Cobre Panama, increasing production throughput to 100 million tons per annum for a modest capital investment of $340-million. This makes FM an obvious takeover target considering its size and free cash flow. Jiangxi’s recent maneuvering to gain 18-per-cent interest has forced FM to institute a shareholders’ rights plan, which will allow current shareholders to purchase shares of FM at a discount if Jiangxi passes the 20-per-cent interest threshold.”

Among developers and junior producers, their picks are Imperial Metals Corp. (III-T) and Capstone Mining Corp. (CS-T).

Mr. Davidson has a “buy” rating and $4.10 target for Imperial shares. The average on the Street is $2.90.

“While not a true development story as it has a 30% interest in Red Chris, the potential restart of Mount Polley and ultimate expansion of Red Chris to a combined open pit/block cave fits the bill. Red Chris in its current form should deliver solid operating and financial results during the first half of 2020, owing to higher grade and mill efficiencies to be executed by operator Newcrest Mining. An aggressive drill program is underway to better define the underground development opportunity — we expect initial drill results in Q1.”

Mr. Woolley has a “buy” rating and $1.25 target for Capstone. The average is $1.05.

“From an organic growth and financing risk perspective, Capstone has moved back to the top pick in our juniors owing to better costs and balance sheet than its peers,” he said. “Pinto Valley is performing well, tracking top end of guidance for FY19 and with an optimization study expected in early 2020.”

For explorers, the firm selected Regulus Resources Inc. (REG-X).

Mr. Davidson has a “speculative buy” rating and $3.45 target. The average is now $3.20.

“Regulus is exploring one of the largest undeveloped copper/gold porphyry systems in Peru. Drilling to date has defined 520 million tons of indicated and inferred resources grading 0.70-per-cent copper equivalent (CuEq) at the AntaKori deposit,” he said. “Subsequent drilling has added significantly to that with an updated resource expected in Q2/20. Despite a patchwork land package, it is becoming quite apparent that the centre of gravity for low strip, low arsenic, open-pit material is on the Regulus ground. This should be the defining year for AntaKori as permits are now in hand to test some of the highest-ranked targets on the project.”


Bank of America analyst Gregory Francfort downgraded Restaurant Brands International Inc. (QSR-N, QSR-T) on Wednesday, believing the efforts to stabilize its Tim Hortons brand are likely to continue to weigh on the stock.

The analyst sees the Dec. 27 departure of Tims president Alex Macedo as a sign that it may take longer than anticipated, and he expects its performance to weigh on 2020 EBITDA revisions over the next several quarters.

“We expect 4Q19 results for RBI to be fine from a total sales and profit perspective,” he said. "However, we believe challenged performance at the Tim Horton’s brand will take time to fix and we expect performance to weigh on 2020 EBITDA revisions over the next few quarters which will be a challenge for the stock.

“For 4Q19, we model an OK quarter at Burger King, very strong Popeye’s results, and challenged performance at Tim Hortons. On a consolidated basis we model $599-million of EBITDA, or $618-million comparable to RBI’s presentation, vs $613-million consensus.”

Mr. Francfort pointed to several factors weighing on Tims results, including increased domestic competition.

“We think Tim Hortons has lost share over the past several years in Canada to its two biggest competitors, Starbucks and McDonald’s,” he said. "With Starbucks, strong Canadian store growth of 3-4 per cent has accelerated over the past two quarters to 5.9 per cent, which may be contributing to a deceleration in recent sales growth at the market share leader Tims.

"McDonald’s has only seen relatively pedestrian 0-1-per-cent store growth over the past several years but same store sales have been robust and likely foreshadow a future unit growth acceleration. McDonald’s hosted its biannual McTrip in 4Q18 in Canada and disclosed same store sales had been running at 5-8 per cent over 2015-2018. "

Moving the stock to “underperform” from “neutral,” he also cut his target to US$62 from US$72. The average on the Street is US$77.84.


Despite reporting “strong” first-quarter results that exceeded his expectations, Canaccord Genuity analyst Robert Young said he staying on the sidelines in his investing thesis toward EXFO Inc. (EXFO-Q, EXF-T) based on sustained booking weakness.

On Tuesday before the bell, the Quebec City-based maker of testing equipment for telecom companies reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of US$7.5-million, topping Mr. Young’s projection of US$5.3-million and leading him to suggest its on pace to achieve its US$33-million guidance for fiscal 2020. Revenue of US$73.6-million also blew past his projection (US$73.1-million).

“With that said, EXFO reported soft bookings figures alongside a lackluster guide for FQ2, which suggests the strength will be backend weighted,” the analyst said. “Consistent with previous commentary, management expects an inflection in its North American and EMEA [Europe, the Middle East and Africa] service assurance businesses in H2/F20 driven by 5G and small cell. FQ2 appears to be a trough in performance, but we continue to see forecast risk.”

Mr. Young emphasized company’s sales guidance for the second quarter of US$66-million to US$71-million falls well short of both his expectation (US$77.8-million) and the Street’s consensus estimate (US$75.2-million).

“We believe a mixed outlook from peers on telecom spending creates heightened risk around the backend-loaded nature of the adj EBITDA trajectory,” he said.

With that concern about “sagging” bookings, Mr. Young lowered his revenue and adjusted EBITDA estimates for 2020 to US$293.6-million and US$31.5-million, respectively, from US$314.6-million and US$32.1-million.

However, he did call the first quarter a “positive start” to the year, noting: “This is the fifth consecutive quarter EXFO has delivered sales results above the midpoint of its range, giving us confidence in the company’s increasingly dependable forward guidance.”

Keeping a “hold” rating for EXFO shares, he increased his target to US$4.75 from US$4 per share. The average on the Street is US$4.83.


Citi’s Alexander Hacking lowered his fourth-quarter 2019 financial expectations for Teck Resources Ltd. (TECK.B-T) to reflect lower-than-expected met coal prices.

The analyst now projects EBITDA and earnings per share for the quarter of $853-million and 36 cents, respectively.

“Both are below consensus – but we expect downgrades as met coal is marked-to-market,” he said in a research note released late Tuesday. “Key questions in the quarter will QB2 capex guidance – although we do not expect an update until later in 1Q; and the cadence of 2020 coal production / costs, which will be 2H weighted.”

With the changes, his 2019 EPS projection fell to $2.54 from $2.69, while he also reduced his 2020 and 2021 estimates to $2.04 and $1.54, respectively, from $2.18 and $1.59.

He maintained a “buy” rating and target price of $27 for Teck shares. The average is currently $31.98.

“Overall we remain positive on TECK given the view that met coal prices will rebound in 1H20 and the stock is oversold on concerns about QB2 capex,” he said.


Heading into 2020, RBC Dominion Securities analyst Andrew Wong said he continues to see Illinois-based fertilizer manufacturer CF Industries Holdings Inc. (CF-N) as a “solid” investment, citing its “steady” operations and “stable” free cash flow generations.

However, he expects the upside in the nitrogen market to remain “relatively limited” this year, and, accordingly, views CF Industries as "fairly valued."

“We expect nitrogen prices to recover in early-2020 as the Northern Hemisphere spring season ramps up along with a significant increase in U.S corn acreage,” he said. “We also note recent strength in global energy prices provides better cost curve support and the Iran situation provides potential upside, although prices will likely continue to experience significant seasonal volatility. In North America, margins should remain strong due to low-cost domestic natural gas, but US Midwest price premiums likely lower. Overall, nitrogen prices are expected to remain relatively flat year/year as market conditions similar to 2019, but cost curve could be more supportive.”

With those market conditions, Mr. Wong expects CF Industries’ earnings to be relatively flat as lower relative prices are offset by lower costs. He projects EBITDA of US$1.6-billion, which falls narrowly below the US$1.8-billion consensus on the Street.

“We expect similar sales volumes in 2020 as CF continues to operate near full capacity,” he said. “Costs may be slightly lower due to lower natural gas input costs, offsetting lower realized prices due to lower price premiums in the U.S. Midwest as logistical challenges from 2019 normalize in 2020.”

“We continue to expect strong FCF generation at $1-billion annually. We think CF has done well with de-levering the balance sheet, repurchasing shares and paying a steady dividend. We would not be surprised if capital is allocated to growth (likely inorganic) at the right valuations, but management has recently indicated such opportunities are not readily available and would prefer to continue repurchasing shares at current prices.”

With an unchanged “sector perform” rating, he increased his target for CF shares to US$46 from US$44. The average on the Street is now US$52.30.

Separately, he maintained an “outperform” rating and US$60 target for Nutrien Ltd. (NTR-N, NTR-T). The average target among analysts covering the stock is US$60.39.

“We believe Nutrien remains an attractive investment with a favourable upside/downside return profile, strong operations and solid management," he said. "We expect Nutrien to benefit from a recovery in ag and fertilizer markets, which should support further capital return to shareholders, investments in growth, and improved investor sentiment.”

He also kept an “outperform” rating for The Mosaic Co. (MOS-N) with a US$26 target, which falls 19 US cents below the consensus.

“Although 2019 was disappointing, we believe Mosaic continues to provide strong upside potential from an eventual recovery in phosphate markets that we think are close to bottoming," the analyst said. "Additionally, potash remains relatively stable and the Fertilizantes business should see significant improvements.”


Seeing Hecla Mining Co. (HL-N) moving past a “critical point financially” following “strong” fourth-quarter production results, CIBC World Markets analyst Cosmos Chiu raised his rating for the Idaho-based company to “neutral” from “underperformer.”

“Hecla Mining reported 2019 full-year production ahead of guidance on silver and mostly in line with guidance on gold, due to the continued outperformance at Greens Creek, partially offset by decreases at Casa Berardi,” he said. "For the year, Hecla reported 12.6 million ounces of silver production and 272,873 ounces of gold production, compared to guidance of 11.7 million ounces of silver and 274koz of gold, and our estimate of 12.3 million ounces of silver and 277koz of gold.

“More importantly, Hecla was able to continue to strengthen its balance sheet, increasing its cash balance to $62-million at the end of Q4/2019 (from $33-million at the end of Q3/2019), while repaying the $50-million drawn on the line of credit. Hecla repaid its line of credit with a combination of free cash flow and the issuance of $49-million in shares through its At-The-Market (ATM) facility in Q4. Additionally, it was also announced today that the Lucky Friday Union workers have ratified the collective bargaining agreement (after a 2.5 year strike) and many of the workers are expected to return to work.”

Mr. Chiu moved his target for Hecla shares to US$3.75 from US$1.75, which exceeds the current consensus of US$2.87.


In other analyst actions:

* M Partners analyst Andrew Hood initiated coverage of Kitchener, Ont.-based Quarterhill Inc. (QTRH-T) with a “buy” rating.

“Quarterhill trades at a substantial discount to its peers in both patent licensing/assertion and IoT/SaaS,” he said. “While we believe a discount is warranted currently based on unpredictability of results and uncertainty surrounding the management team, we believe both these issues will be alleviated over the coming months and years. Further, the discount to its peer groups is steep considering the above-average revenue growth and EBITDA margins at Quarterhill. A few quarters of consistent growth, on top of an intelligent acquisition and new management could bring QTRH closer to peers.”

He set a $3 target, which exceeds the current consensus of $2.65.

* TD Securities analyst Daryl Young cut Boyd Group Services Inc. (BYD-UN-T) to “hold” from “buy” with a target price of $225, rising from $215. The average on the Street is $212.75.

* TD’s Aaron Bilkoski raised Tourmaline Oil Corp. (TOU-T) to “action list buy” from “buy” with a $24 target (unchanged). The average is $20.14.

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