Inside the Market’s roundup of some of today’s key analyst actions
Citing valuation concerns, BMO Nesbitt Burns analyst Jackie Przybylowski downgraded First Quantum Minerals Ltd. (FM-T) to “market perform” from “outperform” on Monday.
“First Quantum share price has appreciated significantly year-to-date and, even with an increase to our target multiple, we see the shares as fully valued today,” she said in a research note released before the bell. “This review was conducted as part of our normal practice of reviewing our ratings and targets after quarterly earnings are wrapped up.”
Despite the recommendation changes, Ms. Przybylowski said she maintains her “optimism” that Cobre Panama, which continues to be the centre of a dispute with the Panamanian government, will restart.
“We continue to assume Cobre Panama restarts in mid-2025 (unchanged) and that First Quantum will continue to own and operate the mine,” she said .”We don’t currently assume any increases to taxes, royalties, or other costs related to the restart. The uncertainty around timing and cost of the restart is reflected in our NAV target multiple, which we set at 0.7 times (versus 1.0 times for other mature operations such as Kansanshi and Sentinel).”
She now has a target for First Quantum shares of $19, rising from $17 and above the $18.52 average on the Street, according to LSEG data.
“Despite the increase to our target price, First Quantum share price is still above our revised one-year target,” she said. “Year-to-date the company’s share price has appreciated 79 per cent, above the Senior North American peer group mean 48 per cent. Upside to our target could come on de-risking of the Cobre Panama startup, which would move our NAV target multiple closer to 1.0 times (from 0.7 times), or on higher base metals commodity price assumptions.”
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Ms. Przybylowski made the change to First Quantum in conjunction with the release of a report wrapping up earnings season titled The Quiet Quarter Was Generally Stronger Than Expected Bottom Line in which she said 2024 is “off to a great start” in the mining sector.
“News flow in the Q1/24 earnings season was quiet as expected as many companies continue to work towards completion of various projects.” she said. “These projects (as well as weather, mine sequencing, and other factors) are expected to more heavily weight production to the second half of the year; however, in general production in the quarter was better than expected for most companies in our coverage.”
She added: “Companies in our coverage generally outperformed their respective peer groups on the day after each company’s earnings were reported, and this share price performance was well-earned: production and costs were generally better than expected. Along with generally positive results, cadence of project completions meant that companies avoided negative news flow on project updates and other catalysts - these project completions and production ramp-ups are generally more expected towards the end of the year
“2024 could be a very good year. We are expecting production volumes will be more heavily weighted to H2, which in some cases could lead to upward revisions to, or beats of guidance and project completions could contribute to significant positive catalysts later this year, if commodity prices are maintained at current strong levels (well beyond our current base case price estimates).”
After adjusting her forecasts to reflect the quarterly results, Ms. Przybylowski made a series of target changes to stocks in her coverage universe.
“As commodity prices have run and investor enthusiasms continue to grow, equity prices in our coverage universe have sometimes reached our exceeded our previously published target prices,” she said. “This is most true for copper miners for three reasons: (1) Copper commodity prices have seen a sharp rally in recent weeks as discussed below; (2) copper spot prices are now well above our base case commodity price estimates, last updated March 27, 2024; (3) investors bullish base metals have fewer investment options with which to express a positive (or negative) view and so equities, especially the largest and most liquid, can be over bought by investors seeking exposure to a market theme.”
“We have raised our target prices for a number of companies in our coverage universe – most notably to Lundin Mining up by 18 per cent, Kinross up 15 per cent, Hudbay Minerals up 13 per cent, and IAMGOLD up 11 per cent. We have also reduced our target prices on several companies in our coverage universe – most notably Metals Acquisition down 8 per cent. Cuts to our targets are related to other changes to our estimates or refreshed links to other models, and not to our target multiples.”
Her changes include:
- Agnico Eagle Mines Ltd. (AEM-N/AEM-T, “outperform”) to US$79 from US$78. The average on the Street is US$77.19.
- Ero Copper Corp. (ERO-T, “market perform”) to $35 from $32. Average: $33.39.
- Franco-Nevada Corp. (FNV-T, “outperform”) to $201 from $205. Average: $199.49.
- Hudbay Minerals Inc. (HBM-T, “outperform”) to $17 from $15. Average: $14.79.
- Iamgold Corp. (IAG-N/IMG-T, “outperform”) to US$5 from US$4.50. Average: US$4.45.
- Kinross Gold Corp. (KGC-N/K-T, “outperform”) to US$11.50 from US$10. Average: US$8.33.
- Lundin Mining Corp. (LUN-T, “outperform”) to $19.50 from $16.50. Average: $16.97.
- Metals Acquisition Ltd. (MTAL-N, “market perform” from “outperform”) to US$12 from US$13. Average: US$15.30.
- Newmont Corp. (NEM-N/NGT-T, “outperform”) to US$53 from US$54. Average: US$48.37.
- Nexa Resources SA (NEXA-N, “outperform”) to US$7.50 from US$7. Average: US$7.05.
- Pan American Silver Corp. (PAAS-N/PAAS-T) to US$24 from US$22. Average: US$23.03.
- Royal Gold Inc. (RGLD-Q, “outperform”) to US$161 from US$160. Average: US$151.17.
- Wheaton Precious Metals Corp. (WPM-N/WPM-T, “outperform” to US$61 from US$59. Average: US$61.17.
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National Bank Financial analyst Mike Parkin was one of three analysts on the Street to raise their recommendations for shares of New Gold Inc. (NGD-T, NGD-N) to “outperform” from “sector perform” in response to the May 13 announcement of a strategic partnership with Ontario Teachers’ Pension Plan at the New Afton Mine in British Columbia that will see it increase its effective free cash flow interest to 80.1 per cent (from 54 per cent) in exchange for an upfront cash payment of US$255-million.
“Based on our previous New Afton valuation, we estimate New Gold paid approximately 0.58 times NAV [net asset value] (including resource credits) or 0.85 times NAV on just reserves for the increased exposure,” he said after coming off research restriction. “In our opinion, this is a very good price paid given the expected strong cash flow growth over the coming years, and further exploration upside from near-mine zones which show a strong potential for LOM [life-of-mine] expansion at minimal capital investment. We continue to watch for the full potential of the project as it ramps up over the NTM [next 12 months] to see the ultimate cost structure, but believe our current longer-term estimates remain conservative compared to when the Lift 1 block caves operated at full throughput during the last decade.
“With the closing of the agreement (expected by the end of May), our updated estimates show improved production at declining AISC [all-in sustaining costs] on a GEO basis. The improved production and lower costs support strong FCF growth over the medium-long term with our” current estimates showing NGD transitioning to a state of positive FCF in mid-2024.”
With New Gold paying for the deal through cash on hand, borrowings from its revolving credit facility and net proceeds from a concurrent bought deal equity financing of common shares for approximately US$173-million, Mr. Parkin sees a “overall net positive impact” on his estimates after incorporating the details of the increased exposure to New Afton.
“Our 2H24+ gold and copper production estimates move meaningfully higher with the 100-per-cent ownership of New Afton, while costs over the same period decline,” he said. “We have also tweaked our resource credits at New Afton modestly higher to better align with our DCF/GEO value and long-term gold and copper prices. We believe the increased resource credits are fair given the LOM upside potential over the next few years as further exploration continues on near-mine exploration targets, as well as the good start to the C Zone ramp up.
“We believe the market was waiting for a decision with respect to the OTPP FCF option, and given the good price paid, we believe this transaction helps to derisk the story. As a result of our model updates, we see our NAVPS increase 17 per cent while our target price rises.”
His target for New Gold shares is now $3.50, up from $3.25 previously. The average on the Street is $2.70.
“We believe the increased EV/EBITDA target multiple is fair given the increased exposure to a low-risk jurisdiction and higher expected cash flow going forward, as well as the good start to the C Zone ramp up to date and the OTPP option overhang eliminated,” Mr. Parkin said. “We are upgrading New Gold to Outperform given the good price paid and strong start to the CZone ramp-up which will boost near-to-medium term FCF generation for the company. We are adding a Speculative risk qualifier given the ongoing ramp-up risk associated with the C Zone at New Afton.”
Elsewhere, others making rating changes are:
* Scotia’s Eric Winmill to “sector outperform” from “sector perform” with a US$2.25 target, up from US$2.
“We view the OTPP deal as positive for NGD shares—not only is the deal structure financially accretive by our estimates, but it increases exposure to a known asset (New Afton) with a long operating history in a stable jurisdiction (BC),” he said. “We see this removing a potential overhang on NGD shares and allows the focus to shift to value creation through exploration and optimization. Model edits result in positive NAVPS accretion of 12 per cent, prompting a PT increase to $2.25 (from $2.00), with our rating upgraded to SO (from SP). We model spot FCF of over $400-million in 2025 (FCF yield: 25 per cent).”
* TD Securities’ Steven Green to “hold” from “sell” with a US$2 target, up from US$1.50.
“We view the deal positively as it is mildly accretive to NAV and improves the company’s asset mix quality, providing more exposure to an asset with exploration upside and good near-term outlook,” said Mr. Green.
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Desjardins Securities analyst Benoit Poirier thinks CAE Inc.’s (CAE-T) risk/reward proposition is “less attractive in this structural [aerospace and defence] bull market.”
That led him to lower his recommendation for its shares to “hold” from “buy” ahead of the May 29 release of its fourth-quarter 2024 financial results.
“With CAE up 8 per cent since we published on 3Q, we believe the share price already reflects the upcoming potential catalysts (dividend or NCIB introduction and some problematic contract costs pulled forward),” he said. “As shown by the muted/negative reactions to the defense leadership and board changes, we believe CAE will be range-bound for some time and see better opportunities to deploy capital in our A&D coverage universe (our targets for HRX and BBD both imply 29-per-cent potential returns vs only 8 per cent for CAE).”
In a research report released Tuesday, Mr. Poirier said the supplier sector is “clearly on fire as supply chain issues are beginning to ease, MRO demand is heightened following the recent 2–3 years of decreased deliveries and civil/defense demand continues to ramp up.”
“We also see more upside following a number of aerospace transactions at elevated multiples (12–13 times) in recent months,” he added. “Moreover, the recent IPO of Loar Holdings (niche US A&D component supplier; US$4-billion market cap) opened at US$45/share (above expectations of US$24–26/share). Loar is up 13 per cent since then and is now trading at a whopping 4 times LTM [last 12-month] EBITDA, demonstrating the continued demand for reputable aerospace assets. When combining these tailwinds with (1) the success of BBD’s recent investor day (stock up 25 per cent since), at which management cleared up the capital-allocation thesis for the next decade; and (2) the potential return vs our target prices, we have a preference for BBD and HRX over CAE. Moreover, despite the recent run-up in both stories, they continue to trade at significant discounts to peers, further emphasizing their more attractive risk/return dynamics vs CAE.”
That preference is based largely on his view that CAE’s upcoming catalysts already priced in.
“With the sale of the healthcare business completed, investors expect CAE to announce a return of capital with 4Q results,” Mr. Poirier said. “Our model already assumes the introduction of a quarterly dividend of 5 cents per share (NCIB also an option but would be limited given CAE’s goal of remaining investment grade). CAE is also looking to accelerate the retirement of the problematic contracts (fair to expect some impairment charges in 4Q for the L3H MT business, carrying over $1-billion of intangible assets). Despite this, with the ‘transformative’ contracts making up only 20 per cent of the backlog and the increased likelihood of new award delays (CGY mentioned Canadian military budget constraints and U.S. Congress only passed the FY24 defense bill in March after months of delays), we still expect margin pressures into FY26.
“We see a low probability of the FY25 guidance surprising to the upside. We do not expect another year of mid- to high-teens growth in civil adjusted operating income (low- to mid-teens more likely) given some North American airlines are beginning to cut capacity and slow hiring due for several reasons (demand, GTF and Boeing issues). Another $50-million year-over-year capex increase is possible given the network investments needed (occurred in 4Q FY23; consensus expecting flat). For the defense segment, we do not expect any guidance given the restricted visibility.”
The analyst maintained a $30 target for CAE shares. The average on the Street is $32.83.
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Citi analyst Spiro Dounis boosted his valuation for Pembina Pipeline Corp. (PPL-T) to reflect higher cash flows following its first-quarter beat and additions to its project backlog that are expected to drive higher EBITDA in 2026 and beyond.
“PPL appears to be flush with accretive projects, adding gas storage (in high demand) and LPG exports (highly strategic) to an already large backlog of projects – many of which are low-cost/high-return brownfield investments,” he said. “We model 6-per-cent EBITDA/share CAGR through 2026, consistent with management’s 4-6-per-cent guided range. Even with Cedar LNG capital spending, we expect PPL to generate cumulative FCFAD of $0.9-billion through 2026 when Cedar capital spending peaks. At current prices, we estimate a 7-per-cent FCF yield, consistent with the peer group.”
Reiterating his “neutral” recommendation, the analyst bumped his target to $53 from $50. The average on the Street is $54.50.
“PPL boasts a growth backlog of high-quality and low-carbon projects; however, the company already trades at a premium to peers and likely reflects most of these positive attributes,” said Mr. Dounis. “PPL offers investors a unique dual track: a low-risk growing base business and one of the most holistic approaches to low-carbon growth among our coverage. PPL’s base business take-or-pay earnings profile bests its peers. Its growth backlog of low-carbon projects also stands out.
“That said, PPL already trades at a premium, reflecting its lower risk profile. Its energy transition projects have the potential to offer new revenue streams, but are in early stages and present execution risk. PPL trades at a high-single-digit FCF yield, which is in-line with peers and offers comparable growth forecast.”
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While the first quarter was a “slow start” to the year for Exro Technologies Inc. (EXRO-T), National Bank Financial analyst Rupert Merer thinks it “should not be material” to its full fiscal 2024, expecting a rise in sales as it continues to integrate its recent acquisition of SEA Electric Inc.
“Despite delays to its initial ramp-up, we believe EXRO is well positioned for growth,” he said.
On May 15, the Calgary-based clean technology company reported quarterly sales of $1.3-million, missing Mr. Merer’s $2.7-million estimate due to “slightly slower-than-expected” gains from the merger. That led to cost of goods sold of $0.9-million, also below the analyst’s forecast ($2.5-million). Earnings per share of a loss of 8 cents fell in line with expectations.
“As EXRO completes the merger with SEA and ramps production of its various product offerings, results could be lumpy,” he warned.
However, the analyst expects to see growth from contracts with large original equipment manufacturers (OEMs).
“In Q1, EXRO delivered sample units of the coil driver to HB4, Vicinity Motors and Giaffone electric,” he said. “With SEA, the company has deals with Mack (five years, up to 5,000 units) and Hino (three years, up to 3,500 units), where EXRO is targeting 1,000 deliveries 12 months from the deals’ closing date. With execution on SEA’s backlog and Coil driver contracts, EXRO could reach breakeven EBITDA and FCF in ‘25E. With Linamar, EXRO has furthered co-development of the e-Axle and is expecting to showcase at the ACT Expo on May 20th. UL certification for its Cell Driver should also come during Q2E, which should help support 2024.”
“Upon the close of the merger, gross proceeds of $27.5-milllion of subscription receipts were reclassified as cash, leaving EXRO with a cash runway for the initial production ramp. However, it may need to raise capital before reaching profitability by Q2′25. It is also in late stage conversations to secure nondilutive working capital. We estimate a cash balance of $17.4-million at the end of Q2E. EXRO is also implementing cost-cutting measures, which have realized a $5-million reduction to date and targets a $10-million reduction by the end of 24.”
Maintaining his “outperform” recommendation, Mr. Merer reduced his target to $1.40 from $1.60 to reflect a lower sales projection. The average on the Street is $1.52.
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Stifel analyst Cole McGill sees a “rationalized” lithium market for the second half of 2024 “with a largely balanced supply/demand outlook driving a ‘Goldilocks Zone’ of pricing.”
“In a market that needs to more than double size in six years, we think price has to trend more towards incentive ($20-25k/t) than marginal ($12k/t), providing asymmetric upside to equity exposure,” he said. “A short term approach to capital allocation can exacerbate the volatility of an immature market. Industry conversations leave us thinking OEM/vertical interest in counter cycle sourcing has the ability to put a floor in equities, and would provide a lift on valuations due to easing liquidity in less dilutive manner. For those that see flat 2024 pricing, we point to LAAC, a counter cyclical, scalable brine ramp up story, while for those that see upward pricing momentum in 2H24 we point to LTH, as the speed to market thesis can be driven by increased balance sheet support.”
In a report released Tuesday, Mr. McGill made a series of target adjustments to stocks in the sector. They are:
- Critical Elements Lithium Corp. (CRE-X, “buy”) to $2.65 from $3.25. The average is $3.11.
- Frontier Lithium Inc. (FL-X, “buy”) to $3 from $4.80. Average: $3.32.
- Lithium Argentina Corp. (LAAC-N/LAAC-T, “buy”) to US$12 from US$18.50. Average: US$13.36.
- Lithium Ionic Corp. (LTH-X, “speculative buy”)to $4 from $5.50. Average: $4.70.
- Patriot Battery Metals Inc. (PMET-T, “speculative buy”) to $15 from $16. Average: $16.60.
- Standard Lithium Ltd. (SLI-X, “buy”) to $5 from $9. Average: $5.45.
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In other analyst actions:
* CIBC’s Scott Fletcher raised his Altus Group Ltd. (AIF-T) target to $53 from $51, maintaining a “neutral” rating. Other changes include: TD’s Daniel Chan to $55 from $59 with a “buy” rating and Scotia’s Kevin Krishnaratne to $53 from $49 with a “sector perform” recommendation. The average is $55.11.
“We continue to rate shares of AIF SP as we await clearer signs of a recovery in the CRE market,” said Mr. Krishnaratne. “Although Friday’s announcement that Altus is terminating its acquisition of REVS [Situs Group’s CRE valuation & advisory services business] is seen as disappointing by management given how the asset would have strengthened its VMS business, we were more neutral on the deal until we received better clarity on the proposed benefits. Meanwhile, leverage was expected to jump to 3.5 times vs. the current 2.0 times upon deal closing, which we viewed as incrementally negative. Although we weren’t including REVS in our forecast, we valued the stock on the PF entity. We now move our valuation to Altus core, with our target increasing
* RBC’s Sabahat Khan cut his ATS Corp. (ATS-T) target to $60, below the $62.43 average, from $65 with an “outperform” rating.
“ATS reported Q4/F24 results ahead of Street expectations. Despite some headwinds in the Transportation/EV business, ATS’ other end-markets continue to trend well. Looking ahead to F2025, we think the company will deliver EBIT growth (reflecting margin expansion), which we view favourably considering the uncertainty in Transportation,” said Mr. Khan
* RBC’s Pammi Bir increased his Extendicare Inc. (EXE-T) target to $8.50 from $8. The average is $8.33 with a “sector perform” rating.
“Post Q1 results that were ahead of our call (albeit with help), our outlook on EXE has improved. Importantly, a step up in operating and capital funding by the ON government should help alleviate the significant cost pressures in LTC, while also improving returns on the redevelopment of Class C beds. Indeed, momentum in the Axium JV seems set to build. All said, we nudged up our estimates,” said Mr. Bir.
* CIBC’s Anita Soni bumped her Iamgold Corp. (IAG-N, IMG-T) target to US$5 from US$4 with a “neutral” rating. The average is US$4.45.
* TD Securities’ Vince Valentini increased his Telus Corp. (T-T) target to $27 from $25 with a “buy” rating. The average is $25.35.
“We have introduced 2026 estimates to show that TELUS can sustain 7-per-cent dividend growth with both declining debt leverage and a lower dividend payout ratio,” he said. “6.9-per-cent dividend yield is way too high and opex/capex benefits of FTTH deserve more credit from investors.”
* Berenberg’s Richard Hatch hiked his Wheaton Precious Metals Corp. (WPM-N, WPM-T) target to US$64 from US$54, exceeding the US$61.17 average, with a “buy” rating.
David Leeder