Barrick sinks to multi-decade lows as analyst downgrades stock

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Inside the Market's roundup of some of today's key analyst actions. This post will be updated with more analyst commentary during the trading day.

The misery at Barrick Gold Corp. is only getting worse, with the stock today sinking to its lowest level in more than two decades amid plunging bullion prices and as Credit Suisse backed away from an earlier gutsy recommendation to buy its beaten-down shares.

Analyst Anita Soni downgraded Barrick to "neutral" from "outperform," and dramatically cut her price target, as Credit Suisse lowered its price forecasts for gold. It now sees bullion averaging $1,452 (U.S.) an ounce in 2013 and $1,390 in 2014, down from earlier forecasts of $1,580 from $1,500, respectively.

But Ms. Soni also made clear it's not just the gold price that is hurting the outlook on Barrick, but rather a "confluence" of factors that also includes uncertainty over the Pascua-Lama project, high debt levels relative to peers, and potential write-downs. These "in isolation would likely have been weathered, but in combination reduces the risk/reward profile for the company."

"We are reducing our rating until the company provides clarity on the path for Pascua and for handling asset sales and its financial leverage," Ms. Soni said. She expects Barrick will provide some clarity on Pascua-Lama, located on the Chilean-Argentian border, before third-quarter results are released in late October. First production at the project has been delayed due to work required to comply with orders from Chile's environmental regulator.

Due to the lower gold price assumptions, Credit Suisse's net asset value estimate for Barrick was reduced to $18.40 from $34.50. It lowered its earnings per share forecast for 2013 to $2.61 from $3.24. For next year, it sees earnings of $2.28, down from $2.92.

The rapid decline in gold and copper prices in the second quarter of this year has significantly increased the probability of asset write-downs at Pascua-Lama, as well as at the Jabal Sayid, Lumwana, and Buzwagi projects, she said.

But Ms. Soni thinks Barrick will see brighter days at some point down the road. "Longer term, we like management's focus on fiscal cash flow and returns and Barrick's high-quality asset base that, with rationalization, will provide a low cost and highly renewable base," she said.

Barrick shares are down 7 per cent in late afternoon trading on the Toronto Stock Exchange.

Target: Ms. Soni cut her price target to $20 (U.S.) from $36. The median price target is $27, according to Thomson First Call.

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Morgan Stanley upgraded Microsoft Corp. to an "overweight" rating, believing there's further upside in the stock even after its more than 25 per cent surge so far this year.

"While Microsoft sentiment has improved from the trough, we see further room to go with increased focus on strong trends in their Cloud and non-PC businesses, the potential for restructuring to sharpen focus on key assets and better PC data," Morgan Stanley analyst Keith Weiss said in a research note.

Target: Mr. Weiss raised his price target to $40 (U.S.) from $36. The median target is $35.

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RBC Dominion Securities analyst Haran Posner downgraded Cineplex Inc. to "sector perform" from "outperform," citing valuation concerns and a modest cut to the bank's box office estimates.

"While we continue to view Cineplex as a core holding for investors in the Canadian media sector, we will look for a better entry point into the name," Mr. Posner said.

Cineplex shares are up 12 per cent year-to-date, an impressive performance when compared to the S&P/TSX composite index's decline of about 3 per cent. Over that same period, Cineplex's forward 12-month multiple based on enterprise value to earnings before interest, taxes, depreciation and amortization has risen to 11.1 times from 10.2 times – even as the company's earnings outlook has been largely unchanged.

"Despite a modest expansion in valuation multiples of U.S. exhibition peers, the valuation premium of CGX has reached new historical highs. Although we would still consider a reasonable valuation premium to be justified, at current levels we believe the stock is approaching fair value," he said.

Target: Mr. Posner cut his price target by $1 to $36. The median price target is $35.30.

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BMO Nesbitt Burns upgraded KeyCorp to "outperform" from "market perform," believing the U.S. financial services firm will benefit well from a sustainable economic recovery.

"KeyCorp has finally gone back on the offensive after playing defence for several years," commented BMO analyst Peter J. Winter. "Its balance sheet is better positioned for rising interest rates than its asset sensitivity analysis indicates."

He thinks the company's efforts to improve efficiencies will start benefiting its bottom line in the second half of this year. "Unlike most of its peers, KeyCorp faces no revenue headwinds from the expected slowdown in mortgage banking," Mr. Winter said. And, "its best-in-class capital ratios will allow it to return substantial amounts of capital to shareholders."

BMO raised its 2013 earnings per share estimate for the firm to 88 cents from 86 cents, and moved up its 2014 estimate to 99 cents from 95 cents.

Target: Mr. Winter raised his price target to $13 (U.S.) from $10. The median price target is $11.

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Storm Resources Ltd. has unusually large natural gas reserves for a company with its small market capitalization, commented Clarus Securities analyst Daniel Choi.

Between its assets in the Montney and Horn River Basin regions, the company could have 2.9 trillion cubic feet of contingent reserves, he said.

"We view Storm as one of the most attractive names given the recent focus on gas-leveraged names with liquefied natural gas upside," Mr Choi commented. "Through the three previous iterations of the Storm entities, the management team has demonstrated its ability to build significant assets and monetize them. Despite challenging gas prices, the management team is executing on its strategy and de-risking its Montney asset in a steady manner."

Target: Mr. Choi initiated coverage with a "buy" rating and a 12-month price target of $3.25 per share. The median price target is $28.13.

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