Inside the Market’s roundup of some of today’s key analyst actions
A “material” increase in gold and silver prices is likely to translate to higher free cash flow and “trending balance sheet improvements” for Canadian precious metals companies in the second quarter, according to equity analysts at National Bank Financial.
In a research report released Wednesday previewing the approaching earnings season, the firm emphasized several companies have already upgraded production guidance for the year and it expects to see higher output results from the previous quarter.
“With inflation remaining top of mind, we are looking for commentary on any inflationary pressures that could have a material impact on costs in 2H24 and beyond,” they said.
The analysts also increased their near-term prices for both gold and silver through 2025 as well as their 2026-2028 price estimates to “reflect the elevated trading ranges over the last six months.”
“Consensus estimates remain fluid, thus modest differentials vs. NBF may be explained, while larger gaps are a source for our conviction beats/misses,” they said. “At the time of writing, we have conviction in Agnico Eagle (AEM-T), Dundee Precious (DPM-T), Lundin Gold (LUG-T) and MAG Silver (MAG-T) beating Bloomberg consensus Adj. EPS estimates, while we model Allied Gold (AAUC-T), Centerra (CG-T), Endeavour Mining (EDV-T) and OceanaGold (OGC-T) below consensus. Details behind our conviction calls are presented later in this report. For concentrate producers, provisional pricing adjustments are expected to be a net positive for 2Q24 earnings.”
The analysts made a series of target prices increases to stocks in their coverage universe, adding: “Companies with target price changes of 10 + include: Coeur (+41.7 per cent), ARIS Mining (+21.4 per cent), G Mining Ventures (+16.7 per cent), Kinross (+16.4 per cent), Wesdome Gold (+15.0 per cent ), Pan American Silver (+14.7 per cent), Artemis Gold (+14.3 per cent), Dundee Precious Metals (+14.3 per cent), New Gold (+14.3 per cent), Sandstorm (+11.4 per cent), OceanaGold (+11.1 per cent), K92 Mining (+10.8 per cent), Lundin Gold (+10.8 per cent), and I-80 Gold (-10.3 per cent).
The firm also reiterated its top picks in the sector moving forward. They are:
Seniors
Kinross Gold Corp. (K-T) with an “outperform” rating and $16 target, up from $13.75. The average on the Street is $13.66, according to LSEG data.
Analyst Michael Parkin: “Kinross maintains significant opportunities for growth within its North American portfolio, which will help improve its geopolitical risk profile. This includes the Great Bear project (Ontario), Manh Choh (Alaska), which recently poured its first gold bar, Curlew Basin (Washington State) and the Round Mountain U/G project (Nevada).
“Kinross also exhibits above-average leverage in a supportive environment for the commodity, with our NAV showing about a 2.8:1 sensitivity to the gold price. This above-average sensitivity comes from a combination of a modestly levered balance sheet, being a pure-play precious metals producer and having an above-average cost structure. With an expected low-capital intensity over this year and next, we see Kinross well positioned to generate significant FCF.”
Intermediates/Juniors
Aya Gold & Silver Inc. (AYA-T) with an “outperform” rating and $21.75 target, down from $22. Average: $20.
Analyst Don DeMarco: “Only pure-play silver producer on the TSX, with sight lines for NAV expansion vis-à-vis Zgounder plant ramp-up to 2,700 tpd (from current 700 tpd), with first pour achieved in early July. Drives peer-leading production CAGR, peaking at 9.0 mln oz in 2028 per the Zgounder Feasibility Study (FS; Dec. 2021), over 4 times the FY23A of 2.0 mln oz Ag. Resource accretion compelling with visibility for150 mln oz (NBF est., from the current ~103 mln). Strong operations with a FY23 guidance beat, while mining rates and throughput buoyant, lending de-risking and confidence ahead of expansion completion”
OceanaGold Corp. (OGC-T) with an “outperform” rating and $5 target, up from $4.50. Average: $4.76.
Mr. Parkin: “OceanaGold continues to exhibit strong operational performance and remains set to deliver significant growth in 2H24 and 2025. The growth will mostly come from the Horseshoe U/G ramp up at Haile and elevated waste stripping easing at Haile and Macraes.
“The company recently completed the IPO of 20 per cent of Didipio on the Philippine Stock Exchange, with proceeds being used to pay down outstanding debt. OceanaGold expected to move into a net cash position by the end of Q2, which aligns well with our estimates.”
Royalty Companies
Osisko Gold Royalties Ltd. (OR-T) with an “outperform” rating and $28 target, up from $26. Average: $27.73.
Analyst Shane Nagle: “Osisko Gold Royalties maintains an attractive near-term growth outlook with three- and five-year growth CAGR’s of 6.2 per cent and 5.2 per cent, respectively.
“As we are forecasting strong FCF throughout the royalty sector at current gold prices, a competitive deal environment is likely to contribute to increased competition for quality opportunities and lead to consolidation within the industry. We view several companies in the sector motivated to acquire OR’s high-quality portfolio given its strong near-term growth pipeline, largely derived from politically stable jurisdictions, including: Canadian Malartic, Island Gold, Mantos Blancos and the CSA mine.”
Developers
Artemis Gold Inc. (ARTG-X) with an “outperform” rating and $16 target, up from $14. Average: $14.65.
Mr. DeMarco: “FCF inflection on deck (NBF est. first pour Oct. 2024) with Blackwater development led by an experienced COO, fully financed, on time and on budget, with potential development tailwinds from a mild winter in 2023/24. Attractive economics from LOM production of 339k oz/year over 22 years (DFS Sept. 2021) from a sizable 8.0 mln oz reserve endowment and visibility for elevated F5Y production (500k oz/year) upon accelerating Phase 2. Tier One jurisdiction benefits accentuated as headwinds continue to increase in other jurisdictions and for non-permitted projects universally. Additionally, we flag high insider ownership (38%) and M&A appeal as a single-asset producer.”
G Mining Ventures Corp. (GMIN-T) with an “outperform” rating and $3.50 target (following 4-for-1 consolidation), up from $3. Average: $13.93.
Analyst Rabi Nizami: “Expect the ‘G Mining Premium to be earned and maintained upon completion and ramp-up of TZ in the coming months. We believe that confidence in the team’s ability to deliver projects on time and budget should reflect immediately on the valuation of Oko West for their next build. The G Mining team has proven their mining building abilities and timing is aligned well to transfer the best-inclass team over to build Oko West.
“Oko West adds one of the largest resource discoveries in recent years. G Mining team’s decades of mine-building experience in Guyana Shield (they built Merian, Essakane, Omai) with further benefits from Supply chain overlaps and continuity of the same relationships and LatAm teams who are building TZ.”
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In response to recent share price appreciation as well as its “rich” valuation and a lack of near-term catalysts, Desjardins Securities analyst Benoit Poirier lowered his recommendation for TFI International Inc. (TFII-T) to “hold” from “buy” on Wednesday.
“TFII’s shares have rallied 15.6 per cent since our 2Q preview in June and are up 13.6 per cent since we noted the positive implications of the potential FedEx LTL spin-off (vs 6.3 per cent and 5.5 per cent for the S&P/TSX),” he said. “While we continue to like the name long-term, we view the lack of nearterm catalysts (no immediate trucking recovery, TL [truck load] spin-off more than a year away, large M&A unlikely and reduced buyback pace) as unjustifiable at the current rich valuation levels. We suggest investors wait for a more attractive entry point.”
Mr. Poirier now sees sentiment around the transportation market “coming into the quarter too hot,” pointing to the probability of a September rate cut and the increasing likelihood of a second Trump presidency.
“Truck and rail stocks have rallied thanks to the higher probability of a rate easing cycle, ocean imports being pulled forward to beat Trump’s threatened tariffs and potential tax cuts (among other reduced regulation),” he said. “While some of these factors could eventually materialize (timing remains uncertain), we have not seen any inflection in trucking volumes as yet, and we believe there are some ‘pricing to perfection’ dynamics currently at play.
“Transportation bellwether JBHT reported weak 2Q results after market close — signals that trucking inflection is not imminent. JBHT delivered 2Q operating income of US$206-million (below consensus of US$217-million) and EPS of US$1.32 (below consensus of US$1.48).”
Accordingly, Mr. Poirier now sees the Montreal-based company’s valuation reaching “overheated levels.”
“TFII is trading at 9.5 times our 2025 EBITDA and 17.8x our EPS, higher than the five-year +1 standard deviation levels of 9.0 times and 16.8 times,” he said. “It is also trading in line with its blended peer multiple (based on average of segmented peers) of 9.8 times EV/FY2 EBITDA. Increasing our exit valuation multiples to 10 times EV/EBITDA and 19 times P/E, we calculate a potential return of only 1.8 per cent (including dividends), which is less compelling from a risk-reward standpoint, in our view.”
The analyst did raise his target for TFI shares to $219 from $207 after adjustments to reflect the reduction in market yields. The average on the Street is $200.54.
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Ahead of the mid-August release of its second-quarter financial results, National Bank Financial analyst Patrick Kenny downgraded Superior Plus Corp. (SPB-T) to “sector perform” from “outperform” to reflect “the increased uncertainty surrounding the growth trajectory of the Certarus business following the recent departure of Curtis Philippon, Executive VP, Superior Plus and President, Certarus, along with higher competitive pressures amid a lower U.S. rig count.”
For the quarter, Mr. Kenny is currently projecting adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $42-million, below the Street’s expectation of $58-million and down from $52-million for the same period a year ago. He pointed to “new challenges” at recently acquired Certarus, which is its low carbon energy business, as well as a decline in propane distribution contributions due to warmer weather and “modestly” weaker margins in the U.S. and Wholesale segments.
“At Certarus, we expect contributions of US$27.9-million for Q2/24, representing a 10-per-cent decline year-over-year based on a lower U.S. rig count (down 16 per cent year-over-year) and more competitive summer CNG MSU market,” the analyst said. “Specifically, with Q2/Q3 Certarus contributions being largely skewed towards oil and gas industry costumers, the company was unable to fully utilize its fleet as market rates failed to meet the company’s previous returns of more than 20 per cent.”
“Integrating higher competitive pressures and seasonality into our Certarus estimates for Q2/Q3, with contributions reduced by US$15-million on a run rate basis, we forecast a 2025 AFFO [adjusted funds from operations] yield of 11 per cent and free cash flow after capex and dividends of $25-million available for debt repayment. As such, we forecast 2025 D/EBITDA of 3.9 times (was 3.7 times) as we await further clarity on SPB’s strategy to meet its longer-term target of 3.0 times within three years.”
With an increase to his cost of equity assumption, Mr. Kenny reduced his target for Superior Plus shares to $10 from $12. The average on the Street is $12.50.
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Citing valuation concerns, Desjardins Securities analyst Gary Ho moved Dominion Lending Centres Inc. (DLCG-T) to “hold” from “buy” in anticipation of its second-quarter financial results.
“While we like DLCG’s business model in a rate cut cycle and while it has had success in onboarding brokers, we believe these are somewhat priced into the stock as it is up 38 per cent year-to-date (vs a gain of 10 per cent for the S&P/TSX) and up 93 per cent (vs up 12 per cent) since our upgrade in July 2023,”
“We expect decent 2Q results, and FMV [funded mortgage volume] to grow 10.2 per cent/6.8 per cent in 2024/25 and Velocity adoption exiting 2025 of 75 per cent. Given upcoming mortgage refis and further rate cuts, the outlook remains constructive, but with 5.1-per-cent potential upside to our $4.00 target (was $3.75), we are downgrading to Hold (from Buy).”
The analyst raised his second-quarter funded mortgage volume assumption to $16.4-million from $16.1-billlion, but he trimmed EBITDA projection to $8.9-million from $9-milllion.
“We expect FMV growth of 10.2 per cent in 2024 (more conservative than CREA’s forecast of 15.8 per cent), followed by 6.8 per cent in 2025 (CREA 15.3 percent),” he said. “Our estimates reflect robust growth in 1H24 (12.2 per cent year-over-year), offset by a more muted 2H24 (8.7 per cent year-over-year) as it laps the strong recovery in 3Q23.”
Mr. Ho’s higher target price for Dominion shares remains below the average on the Street of $4.38.
“Our investment thesis is predicated on: (1) funded mortgage volumes should recover in 2024 and 2025; (2) EBITDA margin likely bottomed in 2023, and the DLC model has significant torque when mortgage volumes return; (3) there could be further upside in Newton penetration; (4) attractive valuation and 3.1-per-cent yield; and (5) potential privatization scenario could provide share price upside.”
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Seeing it as a “clear takeout target” given its position as the the largest single-asset iron ore producer, Desjardins Securities analyst Amanda Lewis initiated coverage of Champion Iron Ltd. (CIA-T) with a “buy” recommendation.
“Its Bloom Lake mine produces a high-quality concentrate, and an upgrade is underway to further augment 50 per cent of the current concentrate produced to DR-quality iron ore — a niche product which commands a premium price and is in increasing demand for the energy transition,” she said.
Ms. Lewis thinks Champion’s portfolio of high-purity iron ore assets, located in Labrador Trough at the Quebec–Labrador border, is “already recognized as a scarce and critical resource needed for the energy transition to limit climate change.” She predicts demand for its differentiated product to only increase in the coming years, “which should enable the company to continue charging a premium price and makes it a prime acquisition target.”
“Champion is the largest single-asset iron ore producer and is surrounded by majors, creating opportunities for acquisition synergies,” the analyst said. “Currently, Champion offers investors a secure investment—backed by ample liquidity — in a top jurisdiction, with FCF generation supporting a stable dividend; investors are thus paid while maintaining exposure to a critical resource.”
She set a target of $8.25 per share. The current average on the Street is $8.13.
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In other analyst actions:
* JP Morgan’s Tien-tsin Huang downgraded Telus International Inc. (TIXT-N, TIXT-T) to “underweight” from “neutral” with a US$7 target. The average on the Street is US$9.55.
* TD Cowen’s Thomas Fitzgerald lowered his Air Canada (AC-T) target to $25, below the $26.19 average, from $33 with a “buy” rating.
* Raymond James’ Frederic Bastien reduced his Badger Infrastructure Solutions Ltd. (BDGI-T) to $54 from $57 with an “outperform” rating. The average is $53.38.
“We are ... lowering our Badger Infrastructure estimates closer to where the Street currently resides, but note that our modest revisions pale in comparison to the stock’s 26-per-cent retreat since the start of 2Q24. Therein lies the best buying opportunity we’ve seen on the stock since launching research coverage of BDGI,” he said.
* Ahead of the release of its first-quarter fiscal 2025 results, Desjardins Securities’ Benoit Poirier trimmed his CAE Inc. (CAE-T) target to $28 from $29 with a “hold” rating (unchanged). The average is $30.08.
“The holdup in the arrival of new planes has cut into carriers’ hiring plans, and we now believe this will negatively impact the near-term results of CAE’s Civil segment,” he said. “We are reducing our estimates and believe CAE is unlikely to meet its FY25 Civil segment guidance of low-double-digit growth and a 23-per-cent operating margin. Consensus does not yet reflect the softening Civil environment, which may weigh on the stock if CAE reduces its guidance after one quarter.”
“We believe CAE will be range-bound for some time and see better opportunities to deploy capital elsewhere.”
* Jefferies’ Stephanie Moore reduced her Canadian Pacific Kansas City Ltd. (CP-N, CP-T) target to US$100 from US$105 with a “buy” rating. The average is $125.30 (Canadian).
* Canaccord Genuity’s Aravinda Galappatthige cut his Cineplex Inc. (CGX-T) target to $12 from $12.50, which is the current average, with a “buy” rating.
* In a quarterly results preview for Canadian asset managers, TD Cowen’s Graham Ryding raised his targets for Fiera Capital Corp. (FSZ-T, “hold”) to $8 from $7.50 and Sprott Inc. (SII-T, “buy”) to $68 from $66, while he lowered his CI Financial Corp. (CIX-T, “buy”) target to $20 from $21. The averages are $7.64, $59.67 and $19.25, respectively.
“Our estimates for most names have changed modestly as AUM [assets under management] levels were largely in-line with our previous outlook. Our estimates for CI have come down slightly as we factor in the recent debt transactions. Given trends in industry fund flows (May 2024), and company commentary and updates, we have reduced our asset manager flows outlook slightly for some names. We are generally forecasting flows to remain negative in 2024 and move positive in 2025 (Sprott being the exception). We acknowledge Sprott Inc.’s target return does not align with our rating and will look to update our estimates, target, and rating following quarterly earnings around mid-August,” he said.
* RBC’s Michael Harvey raised his target for PrairieSky Royalty Ltd. (PSK-T) to $31, exceeding the $29.52 average, from $27 with a “sector perform” rating.
“PSK’s solid quarter highlighted the company’s dominant position within multi-lat oil fairways, a theme we see continuing for the foreseeable future and supported by our go-forward view of robust crude pricing. Our SP rating reflects our view that PSK is a premium company with also a premium valuation,” said Mr. Harvey.