Tuesday's analyst upgrades and downgrades

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

Raymond James expects the fourth quarter to be strong across the precious metals sector with the majority of producers either meeting or exceeding annual production guidance.

"Further, we expect 4Q17 to be the strongest operational quarter of the year for a number of coverage companies," said analysts Brian MacArthur, Farooq Hamed, Chris Thompson and Tara Hassan in a research note released Tuesday.

"On the commodities, gold has averaged $1,281 per ounce quarter-to-date, so far continuing a trend of sequentially higher quarterly average gold prices. While we remain constructive on the gold price through year-end with fundamental jewelry demand from the holiday season, we acknowledge that a potential rate hike in December from the US Fed could add pressure on the gold price. The silver price has averaged $16.99 per ounce quarter-to-date, ahead of the 3Q average of $16.83 per ounce."

After revising full-year 2017 financial estimates to incorporate third-quarter results, the analysts made numerous target price changes to stocks in their coverage universe.

As well, both Coeur Mining Inc. (CDE-N) and Pan American Silver Corp. (PAAS-Q, PAAS-T) were upgraded to "outperform" from "market perform" following recent price pullbacks.

Mr. Thompson raised his target price for shares of Coeur to $10.50 (U.S.) from $10.25. The analyst consensus price target is currently $11.08, according to Thomson Reuters data.

His target for Pan American fell to $19.50 (U.S.), in line with the consensus, from $20.50.

Citing a lack of near-term catalysts, Fortuna Silver Mines Inc. (FVI-T, FSM-N) and MAG Silver Corp. (MAG-T) were downgraded to "outperform" from "strong buy."

Mr. Thompson's target for Fortuna remains $9 (Canadian). Consensus is $8.

His target for MAG fell to $22 from $25. Consensus is $24.62.

Other price target changes made by the firm were:

- Barrick Gold Corp. (ABX-N/ABX-T, "market perform") to $18 (U.S.) from $20. Consensus: $18.61.

- Detour Gold Corp. (DGC-T, "outperform") to $22 (Canadian) from $23. Consensus: $21.80.

- Endeavour Mining Corp. (EDV-T, "outperform") to $34.50 from $34. Consensus: $32.81.

- Franco-Nevada Corp. (FNV-N/FNV-T, "outperform") to $90 (U.S.) from $88. Consensus: $79.27.

- Newmont Mining Corp. (NEM-N, "outperform") to $46 (U.S.) from $46. Consensus: $42.09.

- Osisko Gold Royalties Ltd. (OR-T/OR-N, "outperform") to $20 (Canadian) from $19.50. Consensus: $19.64.

- Bear Creek Mining Corp. (BCM-X, "outperform") to $3.50 from $4. Consensus: $3.67.

- Endeavour Silver Corp. (EDR-T/EXK-N, "outperform") to $4.25 from $5. Consensus: $4.03.

- First Majestic Silver (FR-T/AG-N, "market perform") to $8.50 from $9.25. Consensus:$12.43.

- Silvercorp Metals Inc. (SVM-T, "outperform" to $4.75 from $5.20. Consensus: $5.20.

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Though 2018 looks better at its San Francisco mine, near-term challenges remain for Alio Gold Inc. (ALO-T), according to Raymond James analyst Tara Hassan.

"Although many of the concerns which resulted in a challenging 3Q17 at San Francisco have been addressed, we look for 4Q17 to be another weak quarter and have made revisions to our 2018 production estimates to better reflect our expectation for a ramp-up on grades, recovery, throughput and costs tied to the completion of some capital projects which are underway, but delayed from our previous expectations," said Ms. Hassan.

She added: "Two weeks ago, the highest profile company in the Guerrero district, Torex Gold (TXG-T) announced the closure of its El Limon mine due to threats of violence. Although these threats are related to some union issues, making the issues driving the mine closure specific to Torex, we think the negative headlines from the region are likely to weigh on Alio, particularly if the closure period is extended."

After reducing her financial expectations for its 100-per-cent-owned and operating San Francisco facility, located in Sonora, Mexico, Ms. Hassan's net asset value and operating cash flow estimates for the next 12 months also dropped. In reaction to those changes, she downgraded her rating for the stock to "underperform" from "outperform."

"We are revising our rating … to reflect the headwinds we have outlined above and to reflect the relative valuation of Alio to junior producing peers, with Alio now trading in-line on a 2017 and 2018 estimated price-to-cash flow basis," the analyst said. "With near-term headwinds and our expectation that the company could underperform peers, we note that there is risk that the warrants expiring in May 2018 (1.8 mln at $7.00) may not be exercisable, a situation that could create a funding gap for the Ana Paula project. Although we see potential positive catalysts on the horizon at Ana Paula related to the completion of the Feasibility Study and the underground drilling program, it's possible that the timing of these catalysts coupled with gold price performance may not align with the expiry date of these warrants."

Ms. Hassan lowered his target price for Alio shares to $7.25 from $9.50. Consensus is $8.19.

"While we continue to regard Ana Paula as a high caliber development project that will drive attractive cash flow, in the near-term we see limited potential catalysts for Alio and we believe this, coupled with the operating transition at San Francisco, will lead to underperformance," she said.

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Citing "significant" multiple expansion for its peers, Echelon Wealth Partners analyst Russell Stanley hiked his target price for shares of CanniMed Therapeutics Inc. (CMED-T).

On Monday, Aurora Cannabis Inc. (ACB-T) said it is moving ahead with plans to launch a hostile takeover bid to acquire Saskatoon-based CanniMed. Aurora proposed the deal a week ago with a deadline of last Friday to respond. It now plans to present its all-share offer to CanniMed investors later this week.

"ACB intends to offer approximately 4.5 shares of ACB per share of CMED, with a price cap of $24.00 per share of CMED," said Mr. Stanley. "ACB noted that it has obtained irrevocable lock-up agreements from CMED shareholders representing 38 per cent of the outstanding stock. The agreements require that these shareholders also vote against any proposed action by the CMED board, so obtaining CMED shareholder approval for the HIP acquisition may not be a slam dunk. As of writing, the share exchange ratio implies a value for CMED of $25.71 per share, so the price cap of $24.00 per share would apply if executed today. We also note that CMED is still trading well short of the price cap level, suggesting uncertainty as to whether an ACB takeover will succeed, or what the value of that ACB stock would be once it is issued (or both)."

Last Friday after market close, CanniMed announced a $238-million deal to acquire Toronto-based Newstrike Resources Ltd. Mr. Stanley said Newstrike "would add complementary brands and capacity to service the recreational market."

"We view the transaction as a strategic fit, and it is consistent with management's previously stated plan to enter the recreational market via an acquisition of a distinct, premium producer," he said. "Based on HIP's current share price, this represents approximately $15.85 per gram of HIP's funded capacity, a 26-per-cent discount to the peer group average of $21.52 per gram, so the purchase price looks very attractive. However, we are not yet including HIP's potential contribution in our estimates or model for CMED, given the level of uncertainty around shareholder approval."

Keeping a "speculative buy" rating, Mr. Stanley hiked his target price for CanniMed shares to $22, which is the consensus, from $14.  

"When we initiated coverage of CanniMed on Aug. 15, we valued CMED based using a 10 times enterprise value-to-EBITDA multiple, based on our estimates for fiscal 2019," he said. "This multiple represented a 37-per-cent premium to the then-peer group average of 7.3 times."

"Since we initiated coverage, the peer group average multiple has climbed from 7.3 times EV/calendar 2019 to 12.3 times EV/C2019 (based on consensus expectations). We continue to believe that CMED warrants a premium to its peers, given its long production history in a market that is still relatively new, as well as its high value revenue base, with 57 per cent of last quarter's revenue coming from the sale of cannabis extracts."

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Calling its plan to sell its U.S. mainland operations "a major milestone in turning around the company's fortunes," CIBC World Markets analyst John Zamparo upgraded Liquor Stores N.A. Ltd. (LIQ-T) to "outperformer" from "neutral."

On Monday, the Edmonton-based company announced it is selling its 15 Liquor Barnstores in Kentucky to Blue Rose Spirits LLC for $33-million and entering into negotiations for the sale of its 51-per-cent interest in Birchfield Ventures LLC, which owns two stores in New Jersey, for $4-million.

"We suspect that looking at store level, these assets were likely sold for a mid-single digit EBITDA multiple, but that's not what's relevant for Liquor Stores," said Mr. Zamparo. "This move allows the company to accelerate its cost-cutting plan and reduce its U.S. footprint by way of closing the US. head office. This will mean significant cost savings. Management stated in today's press release that the opex saved from these initiatives is expected to nearly offset the cash flow that is contributed from the Kentucky, New Jersey and Connecticut stores. Through this lens, the company generates roughly $40-million in net proceeds, while only reducing its EBITDA by what we estimate to be a few million dollars. It's an excellent trade, which we see unambiguously putting LIQ in a stronger position today than it was yesterday.

Emphasizing the deals provide "significant" deleveraging, the analyst added: "Historically, one of the causes of hesitation in owning LIQ shares has been relatively high debt levels combined with a large backlog of capital projects, particularly renovations. Even though capex requirements remain significant (the store renovations and ERP implementation alone should cost $30-million next year), the proceeds from this asset sale, when added to our forecast for $40-million in inventory savings in 2018, should put the company on much safer ground."

He raised his target for Liquor Store shares by a loonie to $11. The average target is $11.75.

"We believe [Monday's] muted reaction in the share price underappreciates the value and importance of this deal," said Mr. Zamparo. "In just a few months, the company has already meaningfully cut costs, reduced inventory and lowered net debt. LIQ still faces headwinds in its home market, but management is on the right track, and has begun to achieve its goals faster than we had expected."

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Nebraska's approval of an alternative route for the $8-billion (U.S.) Keystone XL pipeline is a "major milestone" for TransCanada Corp. (TRP-T), said CIBC World Markets analyst Robert Catellier.

"The Keystone XL project has reached its most significant milestone yet with the approval by the Nebraska PSC," he said. "Although the order is for the Mainline Alternative Route as opposed to the Preferred Route, we deem this variance as a normal part of the regulatory process and in an acceptable range of outcomes. The PSC found that the Preferred Route failed to take advantage of opportunity to co-locate with the existing utility corridor represented by Keystone I, and therefore approved the Mainline Alternative Route. What is surprising to us is the approval does not contain any particular additional conditions. While recommending the Natural Resource Conservations Service (NRCS) be used regarding reclamations disputes, it stopped short of ordering consultation and compliance with NRCS advice. That said, we expect interested landowners and environmental groups to continue to pursue their interests including through appeal."

Mr. Catellier emphasized opposition to the project will continue and commercial terms requite finalization, however he believes there's enough progress to include the project in his valuation of the company.

Accordingly, he raised his target price for TransCanada shares to $75 from $70. The consensus is $72.17.

The analyst maintained an "outperformer" rating.

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Rogers Sugar Inc.'s (RSI-T) $40-million acquisition of Decacer gives it "another good bite out of the maple syrup market," said Desjardins Securities analyst Frederic Tremblay.

On Monday, Vancouver-based Rogers announced the deal for the major bottler and distributor of branded and private label maple syrup and maple sugar based in Dégelis, Que. It will draw on its existing $275-million revolving credit facility to finance the acquisition.

"The acquisition of Decacer comes three and a half months after Rogers Sugar made its entry into the maple syrup products market with the acquisition of LBMT in August 2017," said Mr. Tremblay. "This supports our view that maple products offer not only stronger organic revenue growth prospects than the mature duopoly-like Canadian refined sugar market, but also a larger number of M&A opportunities.

"As shown by the acquisition of Decacer, Rogers Sugar's entry into the fragmented maple syrup market in August 2017 via the acquisition of LBMT opened the door to potential incremental M&A as there is a large number of relatively small firms behind the top three global maple syrup players. In the province of Quebec only, there are more than 75 maple syrup bottlers and processors (21 of whom have revenue above $1-million). Based on our research, in addition to Decacer, we identify Érablières des Alléghanys and Les Industries Bernard as Québec-based players with approximately $25–50-million in revenue. By adding Decacer, we believe LBMT's market share of the $750-million global wholesale maple syrup products market increases to 25–30 per cent from 21 per cent."

Believing the multiple paid "looks fair," Mr. Tremblay raised his 2018 EBITDA projection by 4 per cent, while his earnings per share estimate rose by 2 per cent (to 54 cents from 53 cents).

"While the primary near-term focus will likely be the integration of LBMT and Decacer, we expect management to keep its eyes open for tuck-in opportunities that would further strengthen its leadership position in maple syrup. In the absence of M&A, we would expect debt reduction to progress at a measured pace," he said.

Maintaining a "buy" rating for Rogers Sugar shares, he increased his target price to $7.25 from $7, believing "that a slight premium would be warranted based on the improved growth profile associated with RSI's maple syrup platform". Consensus is $7.20.

Elsewhere, Scotiabank analyst George Doumet raised his target to $7.50 from $7 with a "sector outperform" rating.

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Loop Capital analyst Betsy Van Hees downgraded Cavium Inc. (CAVM-Q) after it "throws in [the] towel as a stand-alone company."

On Monday, rival chip maker Marvell Technology Group Ltd. (MRVL-Q) announced the $6-billion (U.S.) acquisition San Jose-based Cavium.

"While we view the pending transaction as a long-term win/ win for MRVL as it provides the company with 1) increased scale, 2) broader product and endmarket diversification away from the secular declining HDD market, and 3) accretion to pro forma EPS, margins, and revenue growth, we were surprised that CAVM was ready to throw in the towel as a stand-alone company," said Ms. Van Heese. "We expect CAVM to see meaningful year-over-year earnings and revenue growth in 2018 and 2019 driven by 1) the ramp of OCTEON III, 2) robust revenue growth from new products of Fusion-M, LiquidIO, ThunderX, XPliant, and LiquidSecurity, and 3) steady revenue contributions from QLogic products.

"The timing for CAVM's decision to be acquired given the multiple tailwinds at its back does give us pause for concern that maybe the trajectory for the ramp from new products might not happen as we had expected. While we believe it is far too early to make a call on the ramp of core CAVM new products, we will be watching this closely."

She moved the stock to "hold" from "buy" with a target of $84 (U.S.), up from $81. Consensus is $84.

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In other analyst actions:

Expressing confidence Bombardier Inc.'s (BBD.B-T) turnaround is taking hold, JPMorgan raised its rating for the company to "overweight" from "neutral."

Deere & Co. (DE-N) was raised to "outperform" from "neutral" by Robert W. Baird based on higher-than-anticipated heavy equipment demand. Its target rose to $155 (U.S.) from $140. Consensus is $133.68.

Expecting it to achieve material expansion in margins in 2018, AK Steel Holding Corp. (AKS-N) was upgraded to "outperform" from "neutral" by Credit Suisse analyst Curt Woodworth, who raised his target to $7 (U.S.) from $1. The average target is $5.50.

"AK has a clear leadership position in value add markets in the US where through-the-cycle margins are strong," said Mr.Woodworth. "AK has been negatively impacted by large LIFO charges in 2017 as well as metal lag issues in alloys. AKS has surcharge mechanisms in place for chrome and electrodes, and hedges zinc / ore. Key risk is contract pricing."