Inside the Market’s roundup of some of today’s key analyst actions
H.C. Wainwright analyst Heiko Ihle thinks Australia’s Paladin Energy Ltd. agreement to buy Canadian mining development company Fission Uranium Corp. (FCU-T) in a friendly transaction worth $1.14-billion furthers his long-held thesis that North American uranium assets should trade for a premium.
“In addition, this transaction may also become a catalyst for a general rise in M&A activity for other uranium assets as companies seek to source uranium from more geopolitically safe jurisdiction,” he said in a research note.
On Monday, shares of Kelowna, B.C.-based Fission, which is developing the Patterson Lake South (PLS) project in the Athabasca Basin region of Saskatchewan, soared 15.5 per cent following the premarket announcement of the deal, which Mr. Ihle thinks benefits both sides.
“Although proposed to be consummated at a price that is well below our target price, the deal has the potential for unlocking shareholder value in the intermediate and longer term,” he said. “For one, the proposed transaction provides an immediate premium, and simultaneously allows Paladin to become a more prominent figure in the global clean energy sector. Looking ahead, the transaction offers Paladin a more straightforward path toward becoming a leader in clean energy, with multiple assets scheduled to be in production by 2029. In addition, the combined entity is meaningfully larger and should, therefore, have an easier time in acquiring financing for PLS. We reiterate that the proposed transaction is to be paid solely in Paladin shares, which allows Fission shareholders continued exposure to upside from PLS. In conclusion, while the deal was made at a price below our fair value for the asset, it ultimately provides growth possibilities and diversification.”
While acknowledging the sale is likely to happen below our previous net asset value projection for Fission, Mr. Ihle maintained a “buy” recommendation and $1.90 target for its shares. The average target on the Street is $2.12, according to LSEG data.
“Our overall model and valuation method for PLS therefore remain unchanged,” he said. “We also maintain our long-term uranium price estimate of $90.00 per pound (lb) (C$122.93/lb). We then add cash and the 32.8Mlbs of Fission’s additional uranium resources(at an increasingly conservative-looking average value of $8.50/lb that accounts for present spot pricing and its North American origin) to calculate our NAV. We calculate a value of $1.93 per share, which we round to our final price target of $1.90.
“We acknowledge the chance of a white knight starting an auction for PLS. In our view, there are several competing bidders that should benefit from exposure to a large-scale uranium deposit in a geopolitically safe jurisdiction. As for the rest of the market, we view this deal as a potential catalyst for increased M&A activity for uranium assets going forward.”
Elsewhere, believing the proposed deal “seems light,” Eight Capital’s Puneet Singh kept his “buy” recommendation and $2.30 target.
“In our view, NXE, FCU, and DML own the most attractive/most advanced development stage assets globally,” said Mr. Singh. “These are also the assets most strategic to the U.S. (the largest source of uranium demand today) post-2028 when the Russian uranium ban comes into full effect after the current waiver period. Considering this, we believe the significance of PLS (which would equate to 5 per cent of global supply once in production) globally is not being fully reflected in this bid. If NXE/DML were to be bought out today, we believe both would garner premium-to-NAV offers. Rather than another bidder coming over the top we believe shareholders pushing for a higher bid is the more likely outcome. A bid closer to 0.8-0.9 times Consensus NAV for FCU seems more reasonable.”
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National Bank Financial analyst Mohamed Sidibé trimmed his net asset value projection for Patriot Battery Metals Inc. (PMET-T) following last week’s release of its fourth-quarter 2024 financial results, expecting an increases in expenses in its current fiscal year and a higher equity raise expectation ($60-million from $50-milllion).
“With PMET being an exploration company with no revenues being generated, the focus of the financial results is on the company’s cash position and its ability to undertake its exploration and development programs,” he said. “We continue to be on the lookout for results from the ongoing drill programs at CV5 and CV13 [at its Corvette Property in Quebec], as well as the upcoming resource update and PEA expected in Q3/CY24.
“The company ended the fiscal year with cash and cash equivalents of $73-million vs. our estimate of $78-million on higher-than-expected G&A. This cash balance does not reflect the $75-million flow through financing completed in May 2024 which is reflected in our model.”
Mr. Sidibé noted the Vancouver-based lithium exploration company is “focused on the completion of its exploration camp and the all-season road, the collection of environmental baseline data, the publication of updated mineral resource statement for CV15 and CV13, as well as the PEA on CV5.”
“A definitive feasibility study is expected to start in Q3/CY24 for publication before September 30, 2025,” he added. “An infill drilling program at CV5, which will support the DFS, is expected to be completed Q1/CY25.”
While his NAV per share estimate slid to $13.64 from $13.72, the analyst reaffirmed his “outperform” recommendation and $12 target for its shares, which implies a gain of almost 135 per cent from its Monday close. The average on the Street is $15.25.
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RBC Dominion Securities analyst Robert Kwan sees Keyera Corp. (KEY-T) “well-positioned to benefit from growing Western Canada Sedimentary Basin (WCSB) oil and gas production via increased throughput at its facilities (i.e., higher revenue without capital investment), and long-term contracted projects with attractive returns.”
In a research report wrapping up recent meetings with chief financial officer Eileen Marikar, Mr. Kwan touted Calgary-based company’s “superior financial setup in the upper tier of all North American midstreamer” and sees it “well-positioned to ride the wave of WCSB oil and gas growth on a capex light basis.”
“We project free cash flow after all capex and dividends will average about $200 million in 2024 and 2025,” he said. “Further, debt/EBITDA was 2.5 times at the end of Q1/24 (calculation includes hybrids at 50-per-cebt equity credit in line with the rating agency approach), and we forecast a dividend payout ratio of 60 per cent in 2024 and 2025. We believe these metrics place Keyera’s financial setup in the upper echelon of midstream companies on both sides of the border.”
“Keyera continues to message an EBITDA CAGR [compound annual growth rate] (2022-2025; holding Marketing flat) that is trending towards the upper-end of its 6-7-per-cent guidance range. We anticipate that the majority of Keyera’s growth over the next 18 months will come from its existing integrated asset footprint, such as the ramp up in volumes on KAPS, filling up spare capacity at Wapiti, and increasing throughput for its condensate system commensurate with future growth in oil sands production following the completion of the Canadian government’s Trans Mountain pipeline expansion in May 2024.”
The analyst also sees Keyera “opening the door to share buybacks.”
“While deploying capital to contracted growth projects and delivering a growing stream of dividends remain top priorities for the company, we believe management is increasingly open to share buybacks,” he said. “Previously, we think there was minimal interest in allocating capital to buybacks. In our view, we believe Keyera could potentially establish a framework that allocates a portion of excess Marketing cash flow to share buybacks.”
Mr. Kwan maintained an “outperform” recommendation and Street-high $41 target for the company’s shares. The current average is $37.33.
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After attending Tamarack Valley Energy Ltd.’s (TVE-T) Investor Day event on Monday, Desjardins Securities analyst Chris MacCulloch said he was “impressed by the economics and technical breakdown of the asset portfolio, the transformation of which is now complete following several years of M&A.”
“The company also outlined a measured five-year plan that will deliver 3–5-per-cent annualized organic production growth, bolstered by waterflood, which should support further debt repayment and a significant acceleration in share buybacks, with a view toward delivering a 15-per-cent CAGR [compound annual growth rate] in FCF per share,” he added.
In a research note titled Eyes on the FCF prize, Mr. MacCulloch called the returns on Tamarack’s Clearwater and Charlie Lake plays “phenomenal,” adding “management highlighted it is now achieving multiple levels of payout (2–4 times) over a five-year period through multi-bench development, the deployment of new technologies and the continued success of its waterflood program.”
“The five-year plan is primarily focused on delivering growth in debt-adjusted FCF on a per-share basis and retaining flexibility to adjust capital allocation, depending on commodity prices and the underlying equity valuation,” he said. “While questions naturally gravitated toward a potential acceleration of the planned 3–5-per-cent organic growth trajectory, management vocalized its desire to remain nimble. Under the revised return-of-capital framework, the company expects to pay 75 cents per share of base dividends over the next five years, reduce net debt by 90 cents per share and provide $1.60/share of share buybacks at US$75/bbl WTI, the sum of which nearly equates to the current stock price in value creation for shareholders. In terms of buybacks, TVE expects to exhaust 20–60 per cent of its currently outstanding share count over the next five years, depending on commodity prices. The reduction in share count is expected to drive significant growth in per-share metrics, including a 15-per-cent CAGR in FCF per share over the next five years, which will effectively double from current levels.”
Mr. MacCulloch reiterated his “buy” recommendation and $5 target for the Calgary-based company’s shares. The current average is $5.16.
Elsewhere, BMO’s Jeremy McCrea reaffirmed a “market perform” recommendation and $4 target
“Tamarack has been one of the most acquisitive E&Ps over the last few years. The repositioning into the Charlie Lake and Clearwater has materially improved the company’s inventory duration, as well as its go-forward profitability. Unfortunately, the higher debt balance has weighed on the stock, however, as the investor day showed, these top quartile plays continue to perform exceptionally well, which in time should lead to a higher share price, especially if growth returns.,” said Mr. McCrea.
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TD Cowen analyst Steven Green reaffirmed Alamos Gold Inc. (AGI-T) as one of the firm’s “best” small and mid-cap ideas, calling it a “high-quality gold producer with peer-leading growth.”
“Alamos is a mid-tier gold producer that has gained a good reputation in recent years by delivering strong, predictable results, growing reserves through the drill bit, and adding growth through opportunistic acquisitions,” he said. “The company has relatively low geopolitical risk with its key assets in Canada, and has peer-leading near-term growth prospects.”
In a research note released before the bell, Mr. Green also called Toronto-based growth potential “impressive” and estimates it will gradually grow production to over 900,000 ounces of gold annually by 2029, an increase of 76 per cent from 2023.
“In the near term, we expect growth to come from the opportunistic acquisition of the Magino Gold mine which neighbors the company’s flagship project, Island Gold, in Ontario,” he added. “Alamos intends to use the Magino mill as a central processing facility for both mines, which is expected to generate significant capital and operating cost savings. “The remainder of the mid-term production growth is expected to come from the ongoing Island P3+ expansion plan, and the PDA deposit at the Mulatos mine in Mexico. Longer term, Alamos also has the Lynn Lake project in Manitoba, which we forecast to start production in 2028, adding roughly 200koz/yr production in the initial years.”
Mr. Green has a “buy” rating and $27 target for Alamos shares. The average is $25.73.
“Alamos’ mid-term growth profile is unique compared to its peer group, which we expect to be largely flat,” he said. “While their peers may moderately improve their production profiles, it is clear to us that Alamos has peer-leading growth prospects. We believe the growth plan is well-defined, relatively low-risk and that the company is capable of executing. Alamos is also differentiated by its track record of growing reserves through the drill bit at a time when reserve growth is elusive for the broader industry.”
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In response to the late Monday announcement of a temporary suspension of its Eagle Gold Mine in Yukon due to a heap leach pad incident, a pair of analysts on the Street downgraded Victoria Gold Corp. (VGCX-T).
CIBC World Markets’ Allison Carson cut the stock to “underperformer” from “neutral” and dropped her target to $4 from $10.
“Without knowing the full extent of the impact to the operation, we expect any prolonged shutdown of the mine to significantly impact the company’s liquidity, potentially rendering it unable to maintain debt covenants and potentially impacting the company’s ability to fund clean-up costs,” she said.
“Given the uncertainty around the length of the suspension at Eagle, the status of operation, and implications from a regulatory perspective, we have changed our valuation to an in situ basis method and added in $100-million in clean-up costs, decreasing our NAV to $4.05 from $13.68.”
Elsewhere, BMO Nesbitt Burns’ Andrew Mikitchook lowered his recommendation to “market perform” from “outperform” without a specified target after withdrawing his $15 target.
“The company disclosed that although there were no injuries, some damage to mine infrastructure occurred and operations have been suspended as they investigate the incident and determine next steps,” said Mr. Mikitchook. “As a result of the incident, we are changing our recommendation to Market Perform Speculative, reflecting the uncertainty of the mine recovering from the heap leach failure incident. Due to the limited information publicly available, we are unable to set a price target at this point.”
“Any rehabilitation work will likely require arranging financing sources, securing waivers from existing debt providers and coordination with the Yukon permitting authorities — all layers of uncertainty for Victoria shareholders. In our opinion, a production restart in 2024 would be challenging based on the limited current information. We will look to further updates from the company and will review our outlook and valuation at that time.”
David Leeder