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2. exercise

1
Investment Views
Monday, October 20, 2014
Click to view full story

Click to view synopsis

Pertinent Revision Summary
3

Edge at a Glance
15

Companies Reporting
21

Sumit Malhotra
22
 
Ben Isaacson
32
 
Tanya Jakusconek
57
 
Tanya Jakusconek
62
 
Trevor Turnbull &
Ovais Habib &
Craig Johnston
75
 
Orest Wowkodaw &
Mark Turner
88
 
Jeff Fan
96
 
Matthew Akman 134
 
Ben Isaacson 138
 
Q3/14 Production Miss Due to Wet
Weather
Ovais Habib 140
 
Q3/14 Production Miss Due to Wet
Weather
Ovais Habib 140
 
Rodrigo Echagaray 143
 
Industry Comments
Canadian Banks
Energy Exposure Means More to
Investment Banking than it Does to the
Loan Book
Global Fertilizers
The Contrarian Bet
Gold & Precious Minerals
Oil Price Sensitivity On Gold Seniors
Gold & Precious Minerals
Revising our Precious Metal Price Deck
Gold & Precious Minerals
Metals & Mining
Telecommunications and Cable
Flattening Our Price Assumptions
Adjusting Our Estimates for Lower Gold
and Silver Price Forecasts
Canadian Q3/14 and Q4/14 Previews
Company Comments
Canada
Inter Pipeline Ltd.
IPL-T
Paladin Energy Ltd.
PDN-T, PDN-AX
Timmins Gold Corp.
TMM-T, TGD-A
Corridor and Continuity
Survival Mode Continues
Latin America
Timmins Gold Corp.
TMM-T, TGD-A
Wal-Mart de México y Centroamerica, Inventory Markdowns at SAM's Impact
Q3 Results; Walmex CEO to Retire in
SAB de CV
2015
WALMEX V-MX
Equity Event: Telecom & Cable 2015
146

For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by
non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
2
Investment Views
Monday, October 20, 2014
Equity Event: Transportation & Aerospace 2014
147

Equity Event: Canadian Energy Infrastructure Conference
148

Equity Event: Mining Conference 2014
149

3
Pertinent Revision Summary
Monday, October 20, 2014
Pertinent Revision Summary
(For Rating Changes: 24-Hour SC Pro Personal Trading Restriction Applies)
1-Yr
Rating
Risk
Key Data
Target
Year 1
Year 2
Year 3
Valuation
African Barrick Gold plc (SP) (ABG-L 198.00p)
Revising our Precious Metal Price Deck
New -Old --
---
250.00p
295.00p
Adj. EPS14E: US$0.21 Adj. EPS15E: US$0.23 Adj. EPS16E: US$0.20
Adj. EPS14E: US$0.25 Adj. EPS15E: US$0.35 Adj. EPS16E: US$0.45
0.90x NAV
1.00x NAV
Valuation: 0.90x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Agnico Eagle Mines Limited (SO) (AEM-N US$28.72)
Revising our Precious Metal Price Deck
New SO
Old SP
---
---
Adj. EPS14E: $1.16
Adj. EPS14E: $1.31
Adj. EPS15E: $1.34
Adj. EPS15E: $1.83
Adj. EPS16E: $1.33
Adj. EPS16E: $2.27
---
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; foreign exchange risk.
Agrium Inc. (SO) (AGU-N US$82.79)
The Contrarian Bet
New --
--
$105.00
--
Adj. EPS15E: $7.25
--
Old --
--
$110.00
--
Adj. EPS15E: $7.72
--
Adj. EPS15E: $0.16
Adj. EPS15E: $0.22
Adj. EPS16E: $0.25
Adj. EPS16E: $0.42
7.5x 2015E EBITDA, 14.5x 2015E EPS, DCF @
10%, 60% RCN
7.5x 2015E EBITDA, 14x 2015E EPS, DCF @
10%, 60% RCN
Valuation: 7.5x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 10%, 60% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Alamos Gold Inc. (SP) (AGI-N US$8.27)
Flattening Our Price Assumptions
New -Old --
---
$7.25
$7.50
Adj. EPS14E: $0.08
Adj. EPS14E: $0.09
0.87x NAV
0.82x NAV
Valuation: 0.87x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Allied Nevada Gold Corp. (SU) (ANV-A US$2.43)
Flattening Our Price Assumptions
New -Old --
---
$1.00
$3.00
---
Adj. EPS15E: $-0.14
Adj. EPS15E: $0.18
Adj. EPS16E: $0.27
Adj. EPS16E: $0.98
---
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates
are not registered/qualified as research analysts with FINRA in the U.S.
4
Pertinent Revision Summary
Monday, October 20, 2014
AngloGold Ashanti Limited (SP) (AU-N US$10.02)
Revising our Precious Metal Price Deck
New -Old --
---
$13.00
$18.00
Adj. EPS14E: $0.86
Adj. EPS14E: $1.01
Adj. EPS15E: $0.83
Adj. EPS15E: $1.55
Adj. EPS16E: $0.75
Adj. EPS16E: $2.12
0.90x NAV
1.10x NAV
Valuation: 0.90x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Argonaut Gold Inc. (SO) (AR-T C$3.58)
Flattening Our Price Assumptions
New -Old --
---
---
-- Adj. EPS15E: US$0.10 Adj. EPS16E: US$0.14
-- Adj. EPS15E: US$0.16 Adj. EPS16E: US$0.28
---
Valuation: 1.09x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
AuRico Gold Inc. (SO) (AUQ-N US$3.56)
Flattening Our Price Assumptions
New -Old --
---
$5.50
$6.00
---
Adj. EPS15E: $-0.06
Adj. EPS15E: $0.03
Adj. EPS16E: $-0.03
Adj. EPS16E: $0.14
1.25x NAV
1.20x NAV
Valuation: 1.25x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
B2Gold Corp. (FS) (BTO-T C$2.31)
Flattening Our Price Assumptions
New -Old --
---
$3.50
$3.75
---
EPS15E: US$0.08
EPS15E: US$0.12
EPS16E: US$0.10 -EPS16E: US$0.18 --
Valuation: 1.31x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Barrick Gold Corporation (SP) (ABX-N US$13.41)
Revising our Precious Metal Price Deck
New -Old --
---
$17.00
$20.00
Adj. EPS14E: $0.63
Adj. EPS14E: $0.81
Adj. EPS15E: $0.92
Adj. EPS15E: $1.35
Adj. EPS16E: $1.05
Adj. EPS16E: $1.91
1.00x NAV
1.05x NAV
Valuation: 1.00x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
BCE Inc. (SP) (BCE-T C$47.33)
Canadian Q3/14 and Q4/14 Previews
New --
--
--
Adj. EPS14E: $3.10
Adj. EPS15E: $3.20
Old --
--
--
Adj. EPS14E: $3.12
Adj. EPS15E: $3.21
Valuation: 1-yr fwd: 7.2x NTM EBITDA; 6.5% NTM FCF yield (fully-taxed); 12.3x NTM EV/Cash EBIT
Key Risks to Price Target: Faster acceleration in access line loss and higher wireline capex to compete on broadband.
-- 1-yr fwd: 7.2x NTM EBITDA; 6.5% NTM FCF
yield (fully-taxed); 12.3x NTM EV/Cash EBIT
-- 1-yr fwd: 7.1x NTM EBITDA; 6.6% NTM FCF
yield (fully-taxed); 12.3x NTM EV/Cash EBIT
5
Pertinent Revision Summary
Monday, October 20, 2014
Bear Creek Mining Corporation (SP) (BCM-V C$1.60)
Flattening Our Price Assumptions
New -Old --
---
$2.00
$3.00
---
---
-- --- --
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Centerra Gold Inc. (SP) (CG-T C$5.45)
Flattening Our Price Assumptions
New -Old --
---
$7.00
$6.50
Adj. EPS14E: US$0.05 Adj. EPS15E: US$0.03 Adj. EPS16E: US$0.26
Adj. EPS14E: US$0.06 Adj. EPS15E: US$0.21 Adj. EPS16E: US$0.71
0.75x NAV
0.50x NAV
Valuation: 0.75x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
CF Industries Holdings, Inc. (SO) (CF-N US$244.96)
The Contrarian Bet
New -Old --
---
---
Adj. EPS14E: $19.61
Adj. EPS14E: $18.62
Adj. EPS15E: $20.51
Adj. EPS15E: $20.35
-- --- --
Valuation: 7x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 9% , 70% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Coeur Mining, Inc. (SU) (CDE-N US$4.78)
Flattening Our Price Assumptions
New -Old --
---
$4.60
$7.00
---
Adj. EPS14E: $-1.06
Adj. EPS14E: $-1.05
Adj. EPS15E: $-0.55
Adj. EPS15E: $0.15
1.11x Q2/15E NAV
1.10x Q2/15E NAV
Valuation: 1.11x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Cogeco Cable Inc. (SP) (CCA-T C$57.53)
Canadian Q3/14 and Q4/14 Previews
New --
--
--
Adj. EPS14E: $4.90
Adj. EPS15E: $5.37
Old --
--
--
Adj. EPS14E: $4.89
Adj. EPS15E: $5.36
-- 1-yr fwd: 6.3x NTM EBITDA; 9.4% NTM FCF
yield (fully-taxed); 11.7x NTM EV/Cash EBIT
-- 1-yr fwd: 6.4x NTM EBITDA; 9.2% NTM FCF
yield (fully-taxed); 11.3x NTM EV/Cash EBIT
Valuation: 1-yr fwd: 6.3x NTM EBITDA; 9.4% NTM FCF yield (fully-taxed); 11.7x NTM EV/Cash EBIT
Key Risks to Price Target: Cdn. IPTV and fiber expansion and content costs; acquisitions
Compañía de Minas Buenaventura SAA (SP) (BVN-N US$11.11)
Revising our Precious Metal Price Deck
New -Old --
---
$12.50
$13.00
Adj. EPS14E: $0.61
Adj. EPS14E: $0.55
Adj. EPS15E: $0.91
Adj. EPS15E: $0.96
Valuation: 0.85x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk; permitting risk.
Adj. EPS16E: $1.92
Adj. EPS16E: $2.14
---
6
Pertinent Revision Summary
Monday, October 20, 2014
Copper Mountain Mining Corporation (FS) (CUM-T C$1.94)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
$3.15
$3.30
Adj. EPS14E: $0.06
Adj. EPS14E: $0.07
Adj. EPS15E: $0.21
Adj. EPS15E: $0.23
Adj. EPS16E: $0.33
Adj. EPS16E: $0.37
---
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, construction, operating, and technical risks, environmental and legal risks
Detour Gold Corporation (FS) (DGC-T C$9.18)
Flattening Our Price Assumptions
New -Old --
---
$17.00
$18.00
Adj. EPS14E: US$-0.41 Adj. EPS15E: US$0.57 Adj. EPS16E: US$1.32
Adj. EPS14E: US$-0.40 Adj. EPS15E: US$0.91 Adj. EPS16E: US$2.06
---
Valuation: 1.15x NAV
Key Risks to Price Target: Multiple contraction, commodity prices as well as technical and operational risks.
Eldorado Gold Corporation (SO) (EGO-N US$7.00)
Revising our Precious Metal Price Deck
New -Old --
---
---
Adj. EPS14E: $0.20
Adj. EPS14E: $0.24
Adj. EPS15E: $0.25
Adj. EPS15E: $0.31
Adj. EPS16E: $0.32
Adj. EPS16E: $0.47
1.35x NAV
1.20x NAV
Adj. EPS16E: $0.11
Adj. EPS16E: $0.68
---
Valuation: 1.35x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
First Majestic Silver Corp. (SO) (AG-N US$7.17)
Flattening Our Price Assumptions
New -Old --
---
$10.00
$13.00
Adj. EPS14E: $0.06
Adj. EPS14E: $0.07
Adj. EPS15E: $0.06
Adj. EPS15E: $0.34
Valuation: 60% of 13.0x 2015 CFPS & 40% of 1.40x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
First Quantum Minerals Ltd. (SO) (FM-T C$18.37)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
---
Adj. EPS14E: US$0.96 Adj. EPS15E: US$1.62 Adj. EPS16E: US$2.77
Adj. EPS14E: US$0.97 Adj. EPS15E: US$1.64 Adj. EPS16E: US$2.81
---
Valuation: 50% of 8.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Political, commodity, operating, development, currency and balance sheet
Fortuna Silver Mines Inc. (SP) (FSM-N US$4.62)
Flattening Our Price Assumptions
New -Old --
---
$4.95
$5.25
---
Adj. EPS15E: $0.36
Adj. EPS15E: $0.49
Adj. EPS16E: $0.39
Adj. EPS16E: $0.61
Valuation: 1.30x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
---
7
Pertinent Revision Summary
Monday, October 20, 2014
Franco-Nevada Corporation (SP) (FNV-N US$53.43)
Revising our Precious Metal Price Deck
New -Old --
---
$66.00
$62.50
Adj. EPS14E: $0.99
Adj. EPS14E: $1.05
Adj. EPS15E: $1.26
Adj. EPS15E: $1.46
Adj. EPS16E: $1.20
Adj. EPS16E: $1.54
2.00x NAV
1.90x NAV
Adj. EPS15E: $3.05
Adj. EPS15E: $3.13
Adj. EPS16E: $6.31
Adj. EPS16E: $6.64
---
Adj. EPS15E: $0.23
Adj. EPS15E: $0.41
Adj. EPS16E: $0.26
Adj. EPS16E: $0.64
---
Adj. EPS16E: $1.31
Adj. EPS16E: $2.09
---
Adj. EPS16E: $-0.02
Adj. EPS16E: $0.01
---
Valuation: 2.00x NAV
Key Risks to Price Target: Commodity prices; non-operator.
Freeport-McMoRan Inc. (SO) (FCX-N US$30.34)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
$46.00
$48.00
Adj. EPS14E: $2.46
Adj. EPS14E: $2.48
Valuation: 50/50 mix of 6.0x 2015E/2016E EV/EBITDA and 1.0x 8% NAV
Key Risks to Price Target: Commodity prices; operational; balance sheet; political
Gold Fields Limited (SP) (GFI-N US$3.69)
Revising our Precious Metal Price Deck
New -Old --
---
$4.50
$5.00
Adj. EPS14E: $0.13
Adj. EPS14E: $0.17
Valuation: 0.90x NAV
Key Risks to Price Target: Commodity prices; operational and development risk; political risk; currency risk.
Goldcorp Inc. (SO) (GG-N US$22.92)
Revising our Precious Metal Price Deck
New -Old --
---
$31.50
$32.50
Adj. EPS14E: $0.72
Adj. EPS14E: $0.78
Adj. EPS15E: $1.06
Adj. EPS15E: $1.46
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk
Golden Star Resources Ltd. (SU) (GSS-A US$0.37)
Flattening Our Price Assumptions
New -Old --
---
$0.10
$0.15
---
Adj. EPS15E: $-0.06
Adj. EPS15E: $0.02
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Guyana Goldfields Inc. (SO) (GUY-T C$2.85)
Flattening Our Price Assumptions
New -Old --
---
---
---
Adj. EPS15E: $0.01
Adj. EPS15E: $0.02
Adj. EPS16E: $0.25
Adj. EPS16E: $0.35
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
---
8
Pertinent Revision Summary
Monday, October 20, 2014
Hecla Mining Company (SP) (HL-N US$2.39)
Flattening Our Price Assumptions
New -Old --
---
---
---
Adj. EPS15E: $-0.02
Adj. EPS15E: $0.07
Adj. EPS16E: $-0.04
Adj. EPS16E: $0.12
1.21x NAV
1.11x NAV
Valuation: 1.21x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
HudBay Minerals Inc. (SO) (HBM-T C$8.29)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
$12.25
$12.50
---
Adj. EPS15E: $1.13
Adj. EPS15E: $1.12
Adj. EPS16E: $1.75
Adj. EPS16E: $1.72
---
Adj. EPS15E: $0.05
Adj. EPS15E: $0.21
Adj. EPS16E: $0.08
Adj. EPS16E: $0.38
---
Adj. EPS16E: $1.44
Adj. EPS16E: $1.60
---
Valuation: 50/50 mix of 6.0x 2015/2016E EV/EBITDA and 1.0x 8% NAV
Key Risks to Price Target: Commodity, operating, development, financing, political
IAMGOLD Corporation (SP) (IAG-N US$2.36)
Revising our Precious Metal Price Deck
New -Old --
---
$3.00
$4.00
Adj. EPS14E: $0.13
Adj. EPS14E: $0.16
Valuation: 0.75x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Imperial Metals Corporation (SP) (III-T C$8.64)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
$9.50
$10.00
---
Adj. EPS15E: $0.57
Adj. EPS15E: $0.62
Valuation: 50% of 8.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity, operating, development, financing, permitting
Inter Pipeline Ltd. (SP) (IPL-T C$34.90)
Corridor and Continuity
New --
--
$38.00
--
--
Old --
--
$36.00
--
--
-- 5.3% 2015E Free Cash Yield and 17.5x 2015E
EV/EBITDA
-- 5.6% 2015E Free Cash Yield and 16.9x 2015E
EV/EBITDA
Valuation: 5.3% 2015E Free Cash Yield and 17.5x 2015E EV/EBITDA
Key Risks to Price Target: Commodity prices; Frac spreads; Throughput volumes; FX; Quasi-utility ROE
Intrepid Potash, Inc. (SP) (IPI-N US$13.66)
The Contrarian Bet
New -Old --
---
---
Adj. EPS14E: $0.13
Adj. EPS14E: $0.10
Valuation: 11x 2015E EBITDA, DCF @ 10% , 40% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Adj. EPS15E: $0.29
Adj. EPS15E: $0.47
-- 11x 2015E EBITDA, DCF @ 10%, 40% RCN
-- 9.5x 2015E EBITDA, 22x 2015E EPS, DCF @
10%, 40% RCN
9
Pertinent Revision Summary
Monday, October 20, 2014
K+S AG (SP) (SDF-DE €19.97)
The Contrarian Bet
New SP
--
€22.00
EPS14E: €1.68
EPS15E: €1.81
Old SU
--
€21.00
EPS14E: €1.50
EPS15E: €1.72
-- 7x 2015E EBITDA, 13x 2015E EPS, DCF @
10%, 25% RCN
-- 6.5x 2015E EBITDA, 12x 2015E EPS, DCF @
10%, 25% RCN
Valuation: 7x 2015E EBITDA, 13x 2015E EPS, DCF @ 10% , 25% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Kinross Gold Corporation (SP) (KGC-N US$2.93)
Revising our Precious Metal Price Deck
New -Old --
---
$3.75
$5.00
Adj. EPS14E: $0.13
Adj. EPS14E: $0.16
Adj. EPS15E: $0.18
Adj. EPS15E: $0.33
Adj. EPS16E: $0.17
Adj. EPS16E: $0.46
---
-- Adj. EPS16E: US$0.12
-- Adj. EPS16E: US$0.13
---
Valuation: 1.00x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Nevada Copper Corp. (SO) (NCU-T C$1.36)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
---
---
Valuation: 0.60x Mine Site NAV + 1.0x Net Cash
Key Risks to Price Target: Commodity price, permitting, construction, operating, and technical risks, environmental and legal risks
Nevsun Resources Ltd. (SO) (NSU-T C$3.89)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
---
CFPS14E: US$0.70
CFPS14E: US$0.71
---
CFPS16E: US$0.38 -CFPS16E: US$0.39 --
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, operating, and technical risks, environmental and legal risks
New Gold Inc. (SP) (NGD-A US$4.44)
Flattening Our Price Assumptions
New -Old --
---
$6.00
$6.50
---
Adj. EPS15E: $0.11
Adj. EPS15E: $0.19
Adj. EPS16E: $0.26
Adj. EPS16E: $0.39
1.24x NAV
1.21x NAV
Valuation: 1.24x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Newmont Mining Corporation (SP) (NEM-N US$22.40)
Revising our Precious Metal Price Deck
New -Old --
---
---
Adj. EPS14E: $0.75
Adj. EPS14E: $0.91
Adj. EPS15E: $1.28
Adj. EPS15E: $1.69
Valuation: 1.25x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Adj. EPS16E: $1.34
Adj. EPS16E: $2.99
1.25x NAV
1.15x NAV
10
Pertinent Revision Summary
Monday, October 20, 2014
Osisko Gold Royalties Ltd. (SP) (OR-T C$15.14)
Flattening Our Price Assumptions
New -Old --
---
$16.50
$17.00
---
Adj. EPS15E: $0.42
Adj. EPS15E: $0.47
Adj. EPS16E: $0.52
Adj. EPS16E: $0.63
---
Valuation: 1.59x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Pan American Silver Corp. (SP) (PAAS-Q US$10.55)
Flattening Our Price Assumptions
New -Old --
---
$11.60
$14.75
Adj. EPS14E: $-0.03
Adj. EPS14E: $-0.01
Adj. EPS15E: $-0.03
Adj. EPS15E: $0.34
Adj. EPS16E: $0.23
Adj. EPS16E: $0.79
1.05x Q2/15E NAV
1.04x Q2/15E NAV
Valuation: 1.05x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Potash Corporation of Saskatchewan, Inc. (SP) (POT-N US$31.92)
The Contrarian Bet
New --
--
$34.00
Adj. EPS14E: $1.83
Adj. EPS15E: $1.97
Old --
--
$33.00
Adj. EPS14E: $1.80
Adj. EPS15E: $2.00
-- 9.5x 2015E EBITDA, 17.5x 2015E EPS, DCF @
9.5%, 50% RCN
-- 9x 2015E EBITDA, 16.5x 2015E EPS, DCF @
9.5%, 50% RCN
Valuation: 9.5x 2015E EBITDA, 17.5x 2015E EPS, DCF @ 9.5% , 50% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Premier Gold Mines Limited (SO) (PG-T C$2.65)
Flattening Our Price Assumptions
New -Old --
---
$4.25
$4.75
EPS14E: $-0.05
EPS14E: $-0.01
EPS15E: $-0.04
EPS15E: $-0.10
-- 0.90x NAVPS
-- 0.9x NAVPS
Valuation: 0.90x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Primero Mining Corp. (SO) (P-T C$5.01)
Flattening Our Price Assumptions
New -Old --
---
$7.50
$9.00
-- Adj. EPS15E: US$0.07 Adj. EPS16E: US$0.10
-- Adj. EPS15E: US$0.22 Adj. EPS16E: US$0.49
---
Valuation: 60% of 10.0x 2015 CFPS & 40% of 1.14x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Quebecor Inc. (FS) (QBR.B-T C$27.85)
Canadian Q3/14 and Q4/14 Previews
New -Old --
---
---
EPS14E: $1.65
EPS14E: $1.70
EPS15E: $1.80
EPS15E: $1.91
Valuation: 1-yr fwd: 6.9x NTM EBITDA; 6.4% NTM FCF yield (fully-taxed); 12.4x NTM EV/Cash EBIT
Key Risks to Price Target: Wireless execution; IPTV competition; Newspaper/TV cyclicality
-- --- --
11
Pertinent Revision Summary
Monday, October 20, 2014
Randgold Resources Limited (SP) (GOLD-Q US$66.93)
Revising our Precious Metal Price Deck
New -Old --
---
$86.50
$92.00
Adj. EPS14E: $2.73
Adj. EPS14E: $2.49
Adj. EPS15E: $2.91
Adj. EPS15E: $3.76
Adj. EPS16E: $2.73
Adj. EPS16E: $4.36
---
Adj. EPS14E: US$0.21 Adj. EPS15E: US$0.12 Adj. EPS16E: US$0.13
Adj. EPS14E: US$0.22 Adj. EPS15E: US$0.14 Adj. EPS16E: US$0.20
---
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Rio Alto Mining Ltd. (SO) (RIO-T C$2.91)
Flattening Our Price Assumptions
New -Old --
---
$3.00
$3.25
Valuation: 1.00x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Rogers Communications Inc. (SP) (RCI.B-T C$42.28)
Canadian Q3/14 and Q4/14 Previews
New --
--
--
Adj. EPS14E: $3.02
Adj. EPS15E: $3.03
Old --
--
--
Adj. EPS14E: $3.08
Adj. EPS15E: $3.12
-- 1-yr fwd: 7.0x NTM EBITDA; 6.5% NTM FCF
yield (fully-taxed); 13x NTM EV/Cash EBIT
-- 1-yr fwd: 6.9x NTM EBITDA; 6.6% NTM FCF
yield (fully-taxed); 12.8x NTM EV/Cash EBIT
Valuation: 1-yr fwd: 7.0x NTM EBITDA; 6.5% NTM FCF yield (fully-taxed); 13x NTM EV/Cash EBIT
Key Risks to Price Target: Wireless competition (from both incumbents and new entrants)
Royal Gold Inc. (SP) (RGLD-Q US$66.39)
Revising our Precious Metal Price Deck
New -Old --
---
$85.00
$88.00
Adj. EPS15E: $1.32
Adj. EPS15E: $1.50
Adj. EPS16E: $1.33
Adj. EPS16E: $1.72
Adj. EPS17E: $1.38
Adj. EPS17E: $1.65
1.80x NAV
1.80x NAV (excluding cash)
Valuation: 1.80x NAV
Key Risks to Price Target: Commodity prices; non-operator.
SEMAFO Inc. (SO) (SMF-T C$4.14)
Flattening Our Price Assumptions
New -Old --
---
$4.50
$4.75
-- Adj. EPS15E: US$0.26 Adj. EPS16E: US$0.22
-- Adj. EPS15E: US$0.32 Adj. EPS16E: US$0.34
---
Valuation: 1.20x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Shaw Communications Inc. (SO) (SJR.B-T C$27.29)
Canadian Q3/14 and Q4/14 Previews
New --
--
$30.00
--
Adj. EPS15E: $1.74
Old --
--
$29.00
--
Adj. EPS15E: $1.77
Valuation: 1-yr fwd: 8.4x NTM EV/EBITDA; 4.5% NTM FCF yield (fully-taxed); 15.1x NTM EV/Cash EBIT
Key Risks to Price Target: Irrational competitive behaviour by Shaw or TELUS.
-- 1-yr fwd: 8.4x NTM EV/EBITDA; 4.5% NTM FCF
yield (fully-taxed); 15.1x NTM EV/Cash EBIT
-- 1-yr fwd: 8.1x NTM EV/EBITDA; 4.4% NTM FCF
yield (fully-taxed); 14.5x NTM EV/Cash EBIT
12
Pertinent Revision Summary
Monday, October 20, 2014
Silver Standard Resources Inc. (SP) (SSRI-Q US$5.56)
Flattening Our Price Assumptions
New -Old --
---
$6.25
$8.65
Adj. EPS14E: $0.03
Adj. EPS14E: $0.04
Adj. EPS15E: $0.29
Adj. EPS15E: $0.41
Adj. EPS16E: $-0.21
Adj. EPS16E: $0.50
0.94x Q2/15E NAV
0.92x Q2/15E NAV
Valuation: 0.94x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Silver Wheaton Corp. (SO) (SLW-N US$19.50)
Flattening Our Price Assumptions
New -Old --
---
$27.50
$30.00
---
Adj. EPS15E: $0.88
Adj. EPS15E: $1.26
Adj. EPS16E: $1.02
Adj. EPS16E: $1.64
1.58x NAV
1.51x NAV
Valuation: 1.58x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Sociedad Quimica y Minera de Chile (SP) (SQM-N US$22.87)
The Contrarian Bet
New --
--
$28.00
Adj. EPS14E: $1.14
Adj. EPS15E: $1.45
Old --
--
$33.00
Adj. EPS14E: $1.22
Adj. EPS15E: $1.72
-- 11x 2015E EBITDA, 20x 2015E EPS, DCF @
10.5%
-- 11x 2015E EBITDA, 19.5x 2015E EPS, DCF @
10.5%
Valuation: 11x 2015E EBITDA, 20x 2015E EPS, DCF @ 10.5%
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Teck Resources Limited (SO) (TCK.B-T C$17.65)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
$25.00
$25.50
Adj. EPS14E: $0.83
Adj. EPS14E: $0.85
Adj. EPS15E: $1.17
Adj. EPS15E: $1.21
Adj. EPS16E: $1.63
Adj. EPS16E: $1.69
---
Valuation: 50% of 8.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity prices, currency, operating, development, balance sheet and environmental
TELUS Corporation (SP) (T-T C$38.04)
Canadian Q3/14 and Q4/14 Previews
New --
--
--
EPS14E: $2.32
--
Old --
--
--
EPS14E: $2.30
--
-- 1-yr fwd: 7.2x NTM EBITDA; 5.7% NTM FCF
Yield (Fully-Tax); 14.3x NTM EV/Cash EBIT
-- 1-yr fwd: 7.3x NTM EBITDA; 5.6% NTM FCF
Yield (Fully-Tax); 14.2x NTM EV/Cash EBIT
Valuation: 1-yr fwd: 7.2x NTM EBITDA; 5.7% NTM FCF Yield (Fully-Tax); 14.3x NTM EV/Cash EBIT
Key Risks to Price Target: Wireless competition; Wireline business deterioration
Teranga Gold Corporation (SP) (TGZ-T C$0.67)
Flattening Our Price Assumptions
New -Old --
---
$0.70
$0.80
Adj. EPS14E: US$0.06 Adj. EPS15E: US$0.16 Adj. EPS16E: US$0.20
Adj. EPS14E: US$0.07 Adj. EPS15E: US$0.21 Adj. EPS16E: US$0.30
Valuation: 1.00x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
---
13
Pertinent Revision Summary
Monday, October 20, 2014
The Mosaic Company (SO) (MOS-N US$40.76)
The Contrarian Bet
New SO
--
--
--
EPS15E: $3.28
Old SP
--
--
--
EPS15E: $3.33
-- 8.5x 2015E EBITDA, 16x 2015E EPS, DCF @
9.5%, 45% RCN
-- 8.5x 2015E EBITDA, 15.5x 2015E EPS, DCF @
9.5%, 45% RCN
Valuation: 8.5x 2015E EBITDA, 16x 2015E EPS, DCF @ 9.5% , 45% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Thompson Creek Metals Company Inc. (SP) (TCM-T C$2.17)
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
New -Old --
---
$2.10
$2.30
-- Adj. EPS15E: US$-0.14 Adj. EPS16E: US$0.00
-- Adj. EPS15E: US$-0.12 Adj. EPS16E: US$0.03
---
Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity, operating, development, balance sheet
Timmins Gold Corp. (SP) (TMM-T C$1.41)
Q3/14 Production Miss Due to Wet Weather
New -Old --
---
$2.00
$2.25
EPS14E: US$0.10
EPS14E: US$0.11
EPS15E: US$0.11
EPS15E: US$0.16
EPS16E: US$0.07 -EPS16E: US$0.17 --
Valuation: 1.10x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Torex Gold Resources Inc. (SO) (TXG-T C$1.57)
Flattening Our Price Assumptions
New -Old --
---
$2.75
$3.00
---
---
Adj. EPS16E: $0.02
Adj. EPS16E: $0.04
---
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
True Gold Mining Inc. (SO) (TGM-V C$0.31)
Flattening Our Price Assumptions
New -Old --
---
$0.50
$0.55
---
---
EPS16E: $0.04 -EPS16E: $0.09 --
Valuation: 0.90x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Verde Potash plc (SP) (NPK-T C$0.46)
The Contrarian Bet
New -Old --
---
$1.10
$2.10
---
Valuation: 0.3x NAV
Key Risks to Price Target: Financing, development progress, potash supply/demand
---
-- 0.3x NAV
-- 0.6x NAV
14
Pertinent Revision Summary
Monday, October 20, 2014
Wal-Mart de México y Centroamerica, SAB de CV (SP) (WALMEX V-MX MXN 32.53)
Inventory Markdowns at SAM's Impact Q3 Results; Walmex CEO to Retire in 2015
New -Old --
---
---
EBITDA14E: 43,059
EBITDA14E: 44,329
EBITDA15E: 47,253
EBITDA15E: 48,993
-- --- --
Valuation: 2014E-2020E DCF w/ 9.1% WACC; 13x (NTM) EV/EBITDA
Key Risks to Price Target: Operating performance, consumer behavior, tax reforms
Yamana Gold Inc. (SO) (AUY-N US$5.54)
Revising our Precious Metal Price Deck
New -Old --
---
$9.00
$11.00
Adj. EPS14E: $0.15
Adj. EPS14E: $0.20
Adj. EPS15E: $0.26
Adj. EPS15E: $0.43
Adj. EPS16E: $0.29
Adj. EPS16E: $0.61
1.35x NAV
1.40x NAV
Valuation: 1.35x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Yara International ASA (SP) (YAR-OL 302.90kr)
The Contrarian Bet
New -Old --
---
---
Adj. EPS14E: 28.85kr
Adj. EPS14E: 27.21kr
Adj. EPS15E: 27.44kr
Adj. EPS15E: 28.10kr
-- --- --
Valuation: 5.5x 2015E EBITDA, 11.5x 2015E EPS, DCF @ 10.5% , 45% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
15
Edge at a Glance
Monday, October 20, 2014
Edge at a Glance
Canadian Banks
Sumit Malhotra, CFA - (416) 863-2874
(Scotia Capital Inc. - Canada)
Energy Exposure Means More to Investment Banking than it Does to the Loan Book
Event
■ With crude oil prices (as measured by WTI) having plunged 23% from their YTD high on
July 23rd, we consider the potential impact of an energy downturn to the Canadian banking
sector with respect to (1) the loan portfolio; (2) capital markets activity; and (3) sentiment to
the stocks.
Implications
■ Loans to the energy sector comprised just 6% of total business loans and 2% of the entire
portfolio of the Big Six banks as of Q3/14. The health of the energy portfolio has been
pristine, as the current 22bp NPL ratio is considerably below the aggregate 83bp rate on the
business book as a whole. Though an extended period of weakness in energy prices would
clearly impact credit quality trends, in our view the size of the portfolio is not large enough
to materially weigh on either credit or growth trends.
■ In what has thus far been a record year for investment banking fees for the sector, as per our
review the energy complex has accounted for ~30% of YTD underwriting revenue for the
banks. Though the capital market units of the banks are much more diversified than those of
the independents, as evidenced by the delay in the Teine IPO, softness in the crude quote
can very quickly impact the ability / willingness of issuers to come to market.
Recommendation
■ We believe sentiment towards CWB is most affected by weakness in energy prices.
Additionally, when considering the combination of (1) industry-high revenue reliance on
NII with yields having fallen; and (2) the likelihood of higher comp costs in 2015; we need
to see CWB trading at a discount to peers (current premium is 4.4%) in order to get more
interested in the stock.
Global Fertilizers
The Contrarian Bet
Full Story
ScotiaView Analyst Link
Table of Contents
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Event
■ There's no doubt in our minds overall fertilizer demand will take a hit next year, as both
planted acreage and farmer profitability decline. As the energy complex falls, we could see
mild cost curve pressure on nitrogen producers. We argue that the potash supply/demand
imbalance will grow by 50% next year, which will pressure prices, disciplined producers, or
perhaps both. We're already seeing red flags appear in the phosphate market, as Indian
farmers balk at higher prices, while producers curtail production.
Implications
■ While the above outlook is clearly negative, we think fertilizer stocks are generally
oversold. In our view, the fertilizer sector has been caught up with other commodity stocks
that are much more closely tied to economic cycles. Ag cycles are different, and can snap
back to life quickly.
■ This presents an opportunity for investors that can stomach some chop. We have upgraded
K+S and MOS, both based on valuation only. Our target moves slightly higher on POT and
slightly lower on AGU and SQM. We certainly do not dare call a bottom to this market, but
the risk/reward is framing up exceptionally well for those looking beyond one or two
quarters.
Recommendation
■ We don't know how much market carnage is left, and neither do you. But we do see a
valuation window that has emerged for investors, especially as a weaker 2015 is largely
known and priced in. The contrarian in us suggests buying the sector selectively, rather than
continuing to sell in a panic.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed
by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Full Story
ScotiaView Analyst Link
Table of Contents
16
Edge at a Glance
Monday, October 20, 2014
Gold & Precious Minerals
Oil Price Sensitivity On Gold Seniors
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
Event
■ We have run sensitivities for a 10% oil price decline in our coverage universe.
Implications
■ Falling oil prices are positive for miners in the long term. Short-term fluctuations may not
have an immediate impact due to inventories at mine sites in addition to subsidies in various
countries. The main use for oil in the mining industry is focused on fuel for mining
equipment (trucks, etc.) and diesel/oil for power generation in mining operations where
there is no access to grid power (or too expensive).
■ Our analysis shows that for a 10% decline in oil prices over a one-year period in oil prices,
our companies would see a benefit in 2015 of ~3% for EPS, ~1.3% for cash flow, ~1.5% for
EBITDA, and ~2.5% on NAV (LOM). Our companies are using an average oil price of
$103/bbl in their costing budgets.
Recommendation
■ ABG, AU, GFI, IMG and NEM show the greatest sensitivity on an NAV basis to falling oil
prices. The least sensitive companies are ELD, G, K and YRI. On 2015 cash flow, the most
sensitive names are ABG, AEM, IMG and NEM; the least sensitive are K and YRI.
Gold & Precious Minerals
Revising our Precious Metal Price Deck
Full Story
ScotiaView Analyst Link
Table of Contents
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
Event
■ We have adjusted our precious metal price deck.
Implications
■ Gold/Silver Price Assumptions - Our revised 2014 gold price estimate is $1,270/oz
reflecting the year-to-date average and assuming spot prices for Q4/14. For 2015 and 2016,
our price is $1,300/oz as is our long-term price for 2017 and beyond (unchanged at
$1,300/oz). For silver, our price has been adjusted in accordance with the gold price and is
now $19.00/oz.
■ Gold Outlook - The gold price short term faces headwinds with the strengthening of the
U.S. dollar and a more positive sentiment towards the U.S. economic outlook. We believe
that longer-term inflationary expectations with quantitative easing have increased money
supply which will eventually increase the velocity of money and multiplier supporting a
higher gold price. This is despite expectation of nominal rate hikes as long as real rates
remain under 2%. Timing of this is difficult to forecast and hence we have remained more
conservative in our forecasts.
■ Investment Thesis - With our gold price forecast at an average of $1,300/oz level for the
foreseeable future, our focus is on companies that can run their business in this price
environment (i.e., delivering on operations). Balance sheet strength will be of importance.
Companies which have optionality, declining AIC and positive FCF will be rewarded.
Recommendation
■ We have only one rating change; AEM moves to SO from SP. Our other Sector Outperform
rated companies are G, ELD and YRI in the North American names. GOLD remains our top
pick in the internationals.
Full Story
ScotiaView Analyst Link
Table of Contents
17
Edge at a Glance
Monday, October 20, 2014
Gold & Precious Minerals
Flattening Our Price Assumptions
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
Ovais Habib (416) 863-7141
(Scotia Capital Inc. - Canada)
Craig Johnston, CPA, CA (416) 860-1659
(Scotia Capital Inc. - Canada)
Event
■ We are publishing revised valuations, financial forecasts, and target prices based on our new
Scotiabank GBM equity research flat gold price assumption of $1,300/oz and recently
revised base metal price estimates.
Implications
■ $1,300/oz long-term gold price forecast unchanged; however, we have taken a more
conservative near-term view on bullion. We believe positive sentiment toward the U.S.
economy and corresponding strengthening of the U.S. dollar will maintain downward
pressure on near-term gold prices. We have adjusted our 2015 and 2016 forecast to
$1,300/oz in line with our long-term view. Our silver price forecast has been revised lower
to $19/oz both near and long term, representing a 68:1 gold:silver ratio.
■ We have updated our near-term copper, lead, nickel, and zinc forecasts in line with
Scotiabank GBM Base Metals Research Team price estimates.
■ Investment Thesis. Our recommendations are focused on highlighting the companies we
feel are best positioned to achieve production and free cash flow while maintaining well managed balance sheets.
Recommendation
■ There are no ratings changes associated with our price forecast adjustments. B2Gold and
Detour Gold remain our Focus Stocks with expected near-term operational improvements
and significant growth driving expected margins higher and our positive outlook for these
names.
■ Our development-stage recommendations are not materially impacted by the lower nearterm bullion forecast. We continue to rate GUY, PG, TXG, and TGM as Sector Outperform.
Full Story
ScotiaView Analyst Link
Table of Contents
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
Mark Turner, MBA, P.Eng. - (416) 863-7484
Adjusting Our Estimates for Lower Gold and Silver Price Forecasts
(Scotia Capital Inc. - Canada)
Metals & Mining
Event
■ We have updated our estimates for the base metals producers and developers to reflect the
impact of the revised precious metals commodity price forecasts published by Scotiabank's
Gold Team (see Exhibit 1). Please see the note entitled "Revising our Precious Metal Price
Deck" published on October 20 for details.
Implications
■ The commodity changes include a material reduction in gold price assumptions to $1,300/oz
in both 2015 and 2016, down 7% and 13% from our previous forecast of $1,400/oz and
$1,500/oz, respectively. There was no change to gold price assumptions in future periods.
■ In addition, the revised pricing deck includes a materially lower silver price forecast of
$19/oz in all periods beginning in 2015, which is 16%, 24%, and 5% below our previous
forecast of $23/oz in 2015, $25/oz in 2016, and $20/oz thereafter.
■ In general, the revised precious metals price deck reduced our estimates for companies with
exposure to gold and silver. However, for some companies such as First Quantum, this
impact was largely offset by a material increase in our platinum and palladium price
forecasts.
Recommendation
■ We have made no ratings changes. However, based on our lower estimates, we have
modestly reduced our target prices for Copper Mountain, Freeport McMoran, HudBay
Minerals, Imperial Metals, Teck Resources, and Thompson Creek Metals.
Full Story
ScotiaView Analyst Link
Table of Contents
18
Edge at a Glance
Monday, October 20, 2014
Telecommunications and Cable
Canadian Q3/14 and Q4/14 Previews
Jeff Fan, CPA, CA, CFA - (416) 863-7780
(Scotia Capital Inc. - Canada)
Event
■ We preview quarterly earnings for RCI and SJR (Oct. 23), CCA (Oct. 31), MBT (Nov. 5), T
and BCE (Nov. 6), and QBR (Nov. 11).
Implications
■ We expect T will again lead the wireless industry in postpaid adds and estimate good
wireless financial results to continue for T and BCE until the impact of mandated wireless
roaming regulation and 4th operator recapitalization in F15. We believe the wireless
industry will once again exhibit limited wireless penetration gain in Q3.
■ With recent OTT video streaming announcements by US content providers, we believe the
focus will shift to fixed broadband, which is critical for OTT. In Canada, we believe QBR
and SJR are currently putting the most efforts behind differentiating their broadband
advantages (SJR with Wi-Fi and Internet-only offers and QBR with speed and in-home WiFi). We expect QBR to report a strong quarter on subscriber additions.
■ With the pullback in share prices we updated our dividend yield spread and relative PE
valuation analyses. Both analyses support our preference for the US. Furthermore, with
lower interest rates, we provide a preliminary assessment of the impact on pension solvency
deficit and funding. We believe MBT is the most impacted and T is the least impacted.
Recommendation
■ We increased our SJR target price to $30. Other target prices are unchanged. QBR remains
our Top Pick with a FS rating and SJR is rated SO. MBT, CCA, BCE, RCI and T are rated
SP. Within the large cap telecom/cable sectors, we favor CMCSA and VZ in the US.
Inter Pipeline Ltd. (IPL-T C$34.90)
Corridor and Continuity
Full Story
ScotiaView Analyst Link
Table of Contents
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
Event
■ We hosted IPL management for investor meetings.
Implications
■ The investor meetings reinforced the continuation of a management and governance
approach focused on low-risk long-life cash flow and reliable dividend growth. In addition,
the recent cancellation of PPL's Cornerstone Pipeline causes us to re-visit our thesis on IPL
with a more positive bias.
■ With all of the change in the company - from governance/structure to senior management it is clear IPL is seeking to branch out into new related businesses. There is potential for a
renewed focus on gas/NGL infrastructure, in our view. But new CEO Chris Bayle made it
clear new ventures would not compromise risk.
■ Meanwhile the outlook for its existing assets has improved. In particular, we were
concerned that competition from PPL on diluent pipelines would impact post-2015 growth
on IPL's diluent pipeline, Polaris. Competition is far from absent. However, new business
will likely just be split with ENB only.
Recommendation
■ IPL has garnered a premium valuation for its low-risk assets and growth track record. We
see a continuation of that premium now. Whether the stock will outperform likely depends
on any success in opening Corridor Pipeline to third parties. We are maintaining our Sector
Perform rating but with a more positive bias, as supported by our $2 TP increase to $38.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
$38.00
$36.00
CFPS14E
-$1.81
CFPS15E
-$2.20
CFPS16E
-$2.27
New Valuation:
5.3% 2015E Free Cash Yield and 17.5x
2015E EV/EBITDA
Old Valuation:
5.6% 2015E Free Cash Yield and 16.9x
2015E EV/EBITDA
Key Risks to Target:
Commodity prices; Frac spreads;
Throughput volumes; FX; Quasi-utility
ROE
Full Story
ScotiaView Analyst Link
Table of Contents
19
Edge at a Glance
Monday, October 20, 2014
Paladin Energy Ltd. (PDN-T C$0.33)
Survival Mode Continues
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ PDN released its Q1/15 activities report.
Implications
■ While spot rose by 6% in the quarter, PDN's realized price of $31/lb is almost 20% below
the previous quarter, and well below our forecast. The swing is due to some defined-priced
contracts in Q4/14 that were not realized in Q1/15. We expect higher realized prices next
quarter.
■ Guidance for F2015 has not deviated from 5.4 Mlb to 5.8 Mlb. The threshold price for
restarting KM production was lowered to a range from $70/ to $75/lb versus $75/lb last
communicated. We maintain a view that ~$60/lb will be sufficient to see the mine back in
business.
■ PDN remains in survival mode with high cash costs and debt overhang. They can't ramp up
production as LHM is operating at a full capacity, and they don't have the capital to do the
next expansion. It's also probably difficult to negotiate down their debt further.
Recommendation
■ We maintain our view PDN will move independently to change in spot and term uranium, at
least until there is a verifiable improvement to the liquidity of these markets. While PDN's
higher cost profile offers investors much better recovery torque than other producers, we're
not convinced the market is ready to recover just yet. Therefore, we remain on the sidelines
at a Sector Perform rating.
Rating:
Risk:
Target:
1-Yr
Timmins Gold Corp. (TMM-T C$1.41)
Q3/14 Production Miss Due to Wet Weather
Event
■ Timmins reported Q3/14 gold production of 26.7 koz, 8% below our estimate of 29.1 koz
and a 19% decrease from Q2/14.
Implications
■ The production miss vs. our estimate was due to record rainfall in September that restricted
access to the open pit and resulted in Timmins processing lower grade ore from stockpiles
(0.50 g/t Au vs. our est. of 0.60 g/t Au). Calendar quarter gold recoveries of 74% beat our
estimate of 67% despite the company's statement that the rain caused leach solution
dilution. The crushing circuit maintained its expanded design rate of 24,000 tpd for a 2nd
consecutive quarter despite the wet weather.
■ Implied Q3/14 revenue of $34.2M (sales of 26.7 koz Au at a realized price of $1,284/oz)
was 8% lower than our estimate of $37.4M as sales and production were lower than
expected.
■ Timmins expects to achieve the high end of its 2014 guidance range (115-125 koz Au) at a
cash cost of ~$800/oz and we model 2014 production of 122 koz Au at $792/oz. The
company also anticipates releasing drill results from its regional exploration program
shortly.
Recommendation
■ We rate Timmins Sector Perform with a C$2.25 one-year target price.
SP
Speculative
C$0.55
Adj. EPS15E:
Adj. EPS16E:
US$-0.06
US$-0.03
Valuation:
0.5x NAV
Key Risks to Target:
Uranium S/D; uranium prices; F/X rates;
geopolitical risk
Full Story
ScotiaView Analyst Link
Table of Contents
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
--
$2.25
EPS14E
US$0.10
US$0.11
EPS15E
-US$0.16
EPS16E
-US$0.17
New Valuation:
-Old Valuation:
1.10x NAVPS
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Full Story
ScotiaView Analyst Link
Table of Contents
20
Edge at a Glance
Monday, October 20, 2014
Wal-Mart de México y Centroamerica, SAB de CV (WALMEX V-MX MXN 32.53)
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
Inventory Markdowns at SAM's Impact Q3 Results; Walmex CEO to Retire in 2015
Event
■ Walmex reported weaker than expected quarterly numbers: EBITDA declined 4.2% vs. our
+3% growth estimate (~11% below consensus).
Implications
■ A combination of inventory markdowns and increasing promotional activity at SAM's led to
a gross margin contraction, as expected. This and MXN318 million in expenses related to
hurricane Odile led to an EBITDA decline of 4.2% (-1% excluding this one-time expense).
■ On the positive side: 1) Central America EBITDA grew 24%, 2) Online sales increased
66%, 3) expansion for the year was reiterated (+4.4%), and 4) SSS at Bodega Aurrera
Express grew an impressive 12.6%.
■ Walmex announced CEO Scot Rank is retiring next year. Walmart's CEO for Latin-America
Enrique Ostale should therefore have a closer oversight of the Mexican operations until a
new CEO is elected.
Recommendation
■ Walmex outlined what we view as an unconvincing 4-year plan to turnaround SAM's. The
company refrains from discussing the most important issue according to our channel checks:
market share losses not only to COSTCO (in the individual members) but also to regional
wholesalers such as Garis, DECASA, etc. (in the business members). Remain neutral but
prefer Walmex to Chedraui, Comerci and Soriana.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Low
--
37.00
EBITDA14E
43,059
44,329
EBITDA15E
47,253
48,993
New Valuation:
-Old Valuation:
2014E-2020E DCF w/ 9.1% WACC; 13x
(NTM) EV/EBITDA
Key Risks to Target:
Operating performance, consumer
behavior, tax reforms
Full Story
ScotiaView Analyst Link
Table of Contents
21
Companies Reporting
Monday, October 20, 2014
Companies Reporting
Reporting
Date
Conference Call Details
(time, number, pass code)
Brookfield Canada Office Properties (BOX.UN-T)1
Tuesday, Oct-21, 2014 at 9:00 AM EST. Dial In: 888-438-5491 (code#5810088) and
20-OCT-14
webcast Replay: 888-203-1112 (Code: 5810088)
Est.
for
Qtr
Earnings
Last
Year’s
Qtr
Most
Recent
Qtr
Year
End
Qtr
Dec
3
$0.40
$0.43
$0.40
Dec
3
$0.24
$0.22
$0.25
Dec
3
$10.59
$10.23
$9.50
1
$0.87
$0.69
$1.05
Celestica Inc. (CLS-T)
21-OCT-14
4:30 p.m. EDT, (647) 427-7450 or (888) 231-8191
Colabor Group Inc. (GCL-T)2
22-OCT-14
Open Text Corporation (OTEX-O)
Earnings release after market close. 5:00pm EST conference call at 604-638-5340 or 80022-OCT-14
Jun
319-4610
 A replay of the call will be available beginning October 22, 2014 at 7:00 p.m. ET through 11:59 p.m. on November 5, 2014 and can be accessed by dialing 1-800-
319-6413 (toll-free) or +1-604-638-9010 (international) and using passcode 1469 followed by the number sign.
Yara International ASA (YAR-OL)3
22-OCT-14
Dec
3
$8.15
$5.62
$7.74
Aug
4
$0.40
$0.31
$0.49
Corus Entertainment Inc. (CJR.B-T)3
23-OCT-14
Conference Call at 2:30 p.m. ET. Dial-in numbers: 1-800-750-5845
 The conference call is also available through a live webcast on the Corus Entertainment website at www.corusent.com under the Investor Information section.
Potash Corporation of Saskatchewan, Inc. (POT-N)3
23-OCT-14
Dec
3
$0.45
$0.44
$0.56
Dec
3
$0.89
$0.97
$0.84
Dec
3
$123.76
$151.44
$78.00
Dec
3
$115.55
$104.82
$110.93
Rogers Communications Inc. (RCI.B-T)3
23-OCT-14
8:00 a.m.; 416-644-3414
Capital Power Corporation (CPX-T)2
24-OCT-14
October 27, 11:00 AM ET, (855) 353-9183, passcode: 21543#
Totvs SA (TOTS3-SA)2
24-OCT-14
No Details
Source: Scotiabank GBM estimates.
Table of Contents
1
Funds From Operations
2
EBITDA
3
Adj Earnings
22
Industry Comment
Monday, October 20, 2014, Pre-Market
Canadian Banks
Sumit Malhotra, CFA - (416) 863-2874
(Scotia Capital Inc. - Canada)
[email protected]
Energy Exposure Means More to
Investment Banking than it Does
to the Loan Book
Sunny Singh, MBA, CFA - (416) 863-7286
(Scotia Capital Inc. - Canada)
[email protected]
Matthew Rajnauth, MBA - (416) 863-7076
(Scotia Capital Inc. - Canada)
[email protected]
Event
■ With crude oil prices (as measured by WTI) having plunged 23% from their
YTD high on July 23rd, we consider the potential impact of an energy
downturn to the Canadian banking sector with respect to (1) the loan
portfolio; (2) capital markets activity; and (3) sentiment to the stocks.
ScotiaView Analyst Link
Implications
■ Loans to the energy sector comprised just 6% of total business loans and 2%
of the entire portfolio of the Big Six banks as of Q3/14. The health of the
energy portfolio has been pristine, as the current 22bp NPL ratio is
considerably below the aggregate 83bp rate on the business book as a
whole. Though an extended period of weakness in energy prices would
clearly impact credit quality trends, in our view the size of the portfolio is
not large enough to materially weigh on either credit or growth trends.
■ In what has thus far been a record year for investment banking fees for the
sector, as per our review the energy complex has accounted for ~30% of
YTD underwriting revenue for the banks. Though the capital market units of
the banks are much more diversified than those of the independents, as
evidenced by the delay in the Teine IPO, softness in the crude quote can
very quickly impact the ability / willingness of issuers to come to market.
Recommendation
■ We believe sentiment towards CWB is most affected by weakness in energy
prices. Additionally, when considering the combination of (1) industry-high
revenue reliance on NII with yields having fallen; and (2) the likelihood of
higher comp costs in 2015; we need to see CWB trading at a discount to
peers (current premium is 4.4%) in order to get more interested in the stock.
Universe of Coverage
Price
BMO-T
BNS-T
CM-T
CWB-T
LB-T
NA-T
RY-T
TD-T
C$79.79
C$67.31
C$97.53
C$37.08
C$48.53
C$50.62
C$78.82
C$53.47
Rating
Risk
1-Yr
ROR
SP
SO
SO
SP
SP
SP
SO
SO
Low
Low
Low
Low
Low
Low
Low
Low
$87.00
$78.00
$113.00
$43.00
$52.00
$54.00
$86.00
$60.00
13.0%
19.9%
20.0%
18.2%
11.5%
10.6%
13.0%
15.9%
The Bank of Nova Scotia is the parent company and a related issuer of Scotia Capital Inc. and ultimate parent company
and related issuer of Scotia Capital (USA) Inc. This issuer owns 5% or more of the total issued share capital of The Bank
of Nova Scotia.For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by
non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S.
23
Thinking Through the Energy Exposure of the Canadian Banking Sector
■ On July 23rd the price of crude oil (as measured by West Texas Intermediate, or WTI) closed
at its 2014 high of $107.62, sufficient for a YTD increase of 9%. Given the significant
weighting (25 – 30%) of the energy complex within the benchmark TSX Index, the solid
performance of the crude quote in the first seven months of the year was enjoyed by energyrelated stocks as well, as up to the aforementioned date the YTD advance of both the TSX
Energy Index (+19%) and the aggregate TSX (+13%) far outpaced the appreciation of the
S&P 500 Index (+8%).
■ Of course, oil has been very much at the forefront of the downside volatility in market
conditions in the past month, with factors such as US dollar strength, oversupply, and
increasing concern over the health of the global economy sharing blame for the fact that WTI
has plunged 23% (to close Friday at $82.75) over the past three months. Not surprisingly,
the rapid reversal in the crude quote has weighed significantly on the TSX, as over this
period the Energy Index has fallen 16% and the TSX has given back 8%, trailing the 5%
decline in the S&P 500.
Exhibit 1 – The price of crude oil (WTI) has plunged 23% since July 23rd…
Exhibit 2 - …and as a result Energy is one of the poorest performing subindices on the TSX Index in 2014
$110.00
Consumer Staples
$105.00
21%
Information Technology
12%
Industrials
$100.00
10%
Consumer Discretionary
$95.00
8%
Banks
7%
Financials
$90.00
$85.00
5%
Real Estate
5%
Utilities
5%
TSX Index
$80.00
3%
Health Care
2%
Telecom Services
$75.00
0%
10/7/2014
9/23/2014
9/9/2014
8/26/2014
8/12/2014
7/29/2014
7/15/2014
7/1/2014
6/17/2014
6/3/2014
5/20/2014
5/6/2014
4/22/2014
4/8/2014
3/25/2014
3/11/2014
2/25/2014
2/11/2014
1/28/2014
1/14/2014
12/31/2013
Materials
Energy
Life & Health Insurance
(10%)
(0%)
(4%)
(4%)
(5%)
0%
Source: Bloomberg; Scotiabank GBM
Source: Bloomberg; Scotiabank GBM
■ Fortunately or unfortunately, depending on your viewpoint, covering the banking sector over
the past number of years has provided us with a lot of experience in terms of thinking
through potential areas of trouble for the group. From the 2008 credit crisis and the 2011
European sovereign debt concerns, to issues closer to home such as the housing market and
commodities volatility, we have become accustomed to getting our hands dirty
(metaphorically anyway) in ascertaining the potential impact to the banks from a particular
area of interest. Accordingly, though “concern” may be a bit premature, given the downturn
in energy prices we did want to at least size the direct exposure of the Canadian banks to the
sector, and give some thought to possible indirect effects as well.
Energy-Related Loans Account for a Small Proportion of the Loan Book
■ Given the discussion regarding the viability of certain oil sands projects as oil prices decline,
we think the natural place to start is to measure just how exposed the loan books of the banks
are to deterioration in the financial health of energy producers. Our first look is at the hard
numbers of the Canadian banking sector loan portfolio, which on a ‘Big Six’ basis ended
Q3/14 (July quarter) with $2.02tn in total loans, and at a high level was allocated 45% to
residential mortgages, 24% to personal loans & credit cards, and 31% to business loans &
acceptances.
5%
10%
15%
20%
25%
24
Exhibit 3 – Canadian Banks – a look at the loan mix of the sector (Big Six banks only) on an all-bank basis
($M)
3Q13
4Q13
1Q14
2Q14
3Q14
QoQ
YoY
Residential mortgages
875,350
888,826
896,569
899,330
Personal and Credit cards
468,653
474,587
478,243
480,842
913,658
1.6%
4.4%
486,773
1.2%
Corporate and commercial
551,025
564,522
601,515
3.9%
617,553
621,645
0.7%
12.8%
1,895,028
1,927,935
1,976,327
1,997,725
2,022,076
1.2%
6.7%
Total Big Six Canadian Bank loans
Total
Loan mix
Residential mortgages
46.2%
46.1%
45.4%
45.0%
45.2%
Personal and Credit cards
24.7%
24.6%
24.2%
24.1%
24.1%
Corporate and commercial
29.1%
29.3%
30.4%
30.9%
30.7%
100.0%
100.0%
100.0%
100.0%
100.0%
Total
Source: Company reports; Scotiabank GBM
■ From a disclosure perspective the banks provide high-level information on which sectors
their business lending operations are allocated to. We used this data to break down the
exposure of the loan portfolio to the commodities sector, which for the purposes of this
exercise we categorized as energy, mining, and agriculture. The numbers show us that the
Big Six had $83.7bn in business loans allocated to resource-oriented sectors at the end of
July, which accounts for 13.5% of the business portfolio and 4.1% of the entire loan book.
For energy specifically, the percentages are 6.1% and 1.9%, respectively, with NA and BNS
skewing higher than peers in terms of their relative lending reliance on commodities.
Exhibit 4 – Loans allocated to energy sector account for 2% of total loan book and 6% of business portfolio
($M)
Total loans & acceptances
Total business loans
Biz loans as a % of total
Agriculture
Energy / Oil & Gas
Metals & Mining
Total Commodities
As a % of total loans
Agriculture
Energy / Oil & Gas
Metals & Mining
Total Commodities
As a % of total biz loans
Agriculture
Energy / Oil & Gas
Metals & Mining
Total Commodities
BMO
BNS
CM
NA
RY
TD
Big Six
297,209
125,463
42%
432,358
139,025
32%
264,192
62,506
24%
103,982
36,007
35%
442,790
117,623
27%
481,545
141,021
29%
2,022,076
621,645
31%
9,006
5,359
1,016
15,381
6,800
12,000
5,800
24,600
4,299
4,678
1,264
10,241
3,770
3,360
7,130
5,594
9,325
1,420
16,339
4,660
3,167
2,137
9,964
34,129
37,889
11,637
83,655
3.0%
1.8%
0.3%
5.2%
1.6%
2.8%
1.3%
5.7%
1.6%
1.8%
0.5%
3.9%
3.6%
3.2%
0.0%
6.9%
1.3%
2.1%
0.3%
3.7%
1.0%
0.7%
0.4%
2.1%
1.7%
1.9%
0.6%
4.1%
7.2%
4.3%
0.8%
12.3%
4.9%
8.6%
4.2%
17.7%
6.9%
7.5%
2.0%
16.4%
10.5%
9.3%
0.0%
19.8%
4.8%
7.9%
1.2%
13.9%
3.3%
2.2%
1.5%
7.1%
5.5%
6.1%
1.9%
13.5%
Notes:
(1) NA - loan disclosure combines "Mining, Oil, and Gas"
(2) TD - Energy disclosure combines "Pipelines, Oil, and Gas"
Source: Company reports; Scotiabank GBM
25
■ With the aggregate size of the energy loan book not particularly worrisome in the context of
overall bank lending commitments, the next parts of the equation that we considered were
(1) how have the energy-oriented portfolios fared from a credit quality perspective; and (2)
how important have loans to the sector been in terms of driving overall growth in the
corporate & commercial book? We look at these issues in greater detail below with the
assistance of Exhibits 5 -7.
Exhibit 5 – Gross impaired ratio on energy loans (22bp) is much lower than either total business book or entire loan portfolio for the banking sector
($M)
Gross impaired loans ratio - total
Business loans - GIL ratio
Loans outstanding:
Agriculture
Energy / Oil & Gas
Metals & Mining
Total Commodities
BMO
BNS
CM
NA
RY
TD
Big Six
0.665%
0.789%
0.894%
0.930%
0.565%
1.213%
0.395%
0.786%
0.451%
0.860%
0.547%
0.605%
0.612%
0.835%
9,006
5,359
1,016
15,381
6,800
12,000
5,800
24,600
4,299
4,678
1,264
10,241
3,770
3,360
5,594
9,325
1,420
16,339
4,660
3,167
2,137
9,964
34,129
37,889
11,637
83,655
118
1
12
131
79
44
44
167
7
0
2
9
19
27
34
5
10
49
8
6
16
30
265
83
84
432
1.310%
0.019%
1.181%
0.852%
1.162%
0.367%
0.759%
0.679%
0.163%
0.000%
0.158%
0.088%
0.504%
0.804%
0.608%
0.054%
0.704%
0.300%
0.172%
0.189%
0.749%
0.301%
0.776%
0.219%
0.722%
0.516%
Gross impaired loans:
Agriculture
Energy / Oil & Gas
Metals & Mining
Total Commodities
GIL ratio:
Agriculture
Energy / Oil & Gas
Metals & Mining
Total Commodities
7,130
46
0.645%
Notes:
(1) NA - loan disclosure combines "Mining, Oil, and Gas"
(2) TD - Energy disclosure combines "Pipelines, Oil, and Gas"
Source: Company reports; Scotiabank GBM
Exhibit 6 – From the low-point in 2010 loans to the commodities sector have
increased by 48%...
Exhibit 7 - …with energy exposure climbing at a 43% clip over that period
35,000
90,000
Mining
Oil and gas
Agriculture
30,000
80,000
70,000
25,000
$millions
$millions
60,000
50,000
40,000
20,000
15,000
30,000
10,000
20,000
10,000
5,000
2005
2005
2006
2007
2008
2009
2010
2011
2012
2013
2006
2007
2008
Q3/14
Source: Company reports; Scotiabank GBM
Source: Company reports; Scotiabank GBM
2009
2010
2011
2012
2013
Q3/14
26
■ The total gross impaired loan ratio for the Big Six banks was 61.2bp at Q3/14, substantially
better than the cycle-high 142.0bp level observed back in Q2/10. As seen in Exhibit 5, the
GIL ratio of the business portfolio remains decently higher than the total book at 83.5bp, but
digging further into the disclosure we find that the impairment level on business loans in the
resources space (agriculture, energy, and mining) is lower at 51.6bp. For energy specifically,
the impairment rate on the loan book is just 21.9bp, which means the GIL ratio in this
portfolio is actually lower than what the banks are experiencing in their residential mortgage
loans (42.7bp).
Exhibit 8 – Canadian banks – gross impaired loans ratio by product (Q3/14)
Residential mortgages
Personal loans & credit cards
Business loans & acceptances
Total NPL
BMO
0.510%
0.661%
0.789%
0.665%
BNS
0.671%
1.406%
0.930%
0.894%
CM
0.334%
0.463%
1.213%
0.565%
NA
0.155%
0.232%
0.786%
0.395%
RY
0.315%
0.283%
0.860%
0.451%
TD
0.371%
0.725%
0.605%
0.547%
Source: Company reports; Scotiabank GBM
■ The growth rate in the energy component of the loan portfolio has been solid in the past few
years, but not to a degree that it has been outsized relative to what the aggregate business
loan book of the banking sector has been producing. As mentioned in Exhibit 7 the energy
portfolio ended Q3/14 up 43% from the year-end 2010 level. By comparison, total corporate
& commercial commitments for the Big Six banks have grown at a 40% clip over that
period. Looking at the resource numbers in more detail in Exhibit 9 below, we see that while
energy and agriculture (in part due to a disclosure change by BMO) have grown consistently
for the sector, the more challenging conditions encountered by the mining arena have
resulted in banks reducing the level of loan exposure here sharply since the 2008 highs.
Industry
0.427%
0.676%
0.835%
0.612%
27
Exhibit 9 – Resource lending at the Big 5 – loans to the Mining sector have declined sharply since 2008, but Energy and Agriculture are higher
($M)
% change
% change
since '08
since '10
2008
2009
2010
2011
2012
2013
Q3/14
Agriculture
BMO
BNS
CM
RY
TD
Total
3,778
4,700
3,204
5,305
2,856
19,843
3,524
4,300
3,016
5,090
2,774
18,704
3,856
4,500
3,343
4,815
2,864
19,378
4,496
5,200
3,679
4,880
2,980
21,235
7,323
5,700
3,755
5,202
3,513
25,493
8,389
6,100
3,974
5,441
4,203
28,107
9,006
6,800
4,299
5,594
4,660
30,359
138%
45%
34%
5%
63%
53%
134%
51%
29%
16%
63%
57%
Oil & Gas
BMO
BNS
CM
RY
TD
Total
6,224
7,800
3,663
8,146
3,580
29,413
4,286
9,800
3,103
7,055
2,009
26,253
3,680
9,300
2,563
5,945
2,701
24,189
3,469
9,600
3,297
6,545
2,731
25,642
3,468
9,800
3,653
8,802
3,067
28,790
3,909
10,400
4,028
8,906
2,715
29,958
5,359
12,000
4,678
9,325
3,167
34,529
(14%)
54%
28%
14%
(12%)
17%
46%
29%
83%
57%
17%
43%
Mining
BMO
BNS
CM
RY
TD
Total
3,256
6,100
2,951
3,947
4,613
20,867
1,049
5,700
849
1,774
3,423
12,795
266
5,300
284
635
1,528
8,013
640
6,300
472
1,122
1,600
10,134
662
3,200
664
965
1,841
7,332
962
4,700
1,143
1,074
1,927
9,806
1,016
5,800
1,264
1,420
2,137
11,637
(69%)
(5%)
(57%)
(64%)
(54%)
(44%)
282%
9%
345%
124%
40%
45%
Total - Resources
BMO
BNS
CM
RY
TD
Total
13,258
18,600
9,818
17,398
11,049
70,123
8,859
19,800
6,968
13,919
8,206
57,752
7,802
19,100
6,190
11,395
7,093
51,580
8,605
21,100
7,448
12,547
7,311
57,011
11,453
18,700
8,072
14,969
8,421
61,615
13,260
21,200
9,145
15,421
8,845
67,871
15,381
24,600
10,241
16,339
9,964
76,525
16%
32%
4%
(6%)
(10%)
9%
97%
29%
65%
43%
40%
48%
Note - the sharp increase in Agriculture loans at BMO in 2012 over 2011 appears to have been driven by a reclassification between sectors
Source: Company reports; Scotiabank GBM
■ To “bottom line it” as far as the energy exposure of the Canadian banking sector loan
portfolio is concerned, our synopsis would be that (1) energy accounts for ~2% of total loans
and ~6% of the business portfolio; (2) credit quality has been excellent, with a GIL ratio of
just 22bp; and (3) while growth in the energy book has been strong in recent years, it is not
at a level that we see as outsized relative to the solid pace of increase the sector has
demonstrated for business loans as a whole. Accordingly, though we will monitor the GIL
trends in the portfolio diligently, we do not think the downturn in energy prices has yet been
sufficient to materially impair the ability of borrowers to make good on their obligations.
28
More Immediate Impact of Softer Energy Tape is seen in Capital Markets
■ If the loan book represents “direct exposure” to energy producers, then the impact on the
capital market operations of the bank can be termed the “indirect exposure”. That said,
given the strength of the capital market segments of the banks this year (net income in the
Wholesale units of the Big Six are up 16% YoY thus far in 2014), and our view that energy
represents the largest investment banking vertical of virtually every Canadian-based broker
deal (from bank, to independent, to global), we think the impact from a period of weakness
in crude prices will be more noticeable in the near term on capital markets activity than it
will in the loan book.
■ To put this in context, we reviewed the underwriting activity for each of the Big Six banks in
the first three quarters of 2014 on a deal-by-deal basis (we kept it at Canadian transactions
only for five members of the group, and included the non-domestic deal flow for RY given
its importance to the total number for the bank). While we will admit that the sample size is
small, by our math in what has thus far been a record year for underwriting & advisory fees
for the group the energy sector (inclusive of the energy infrastructure space) has comprised
~30% of the total for the Big Six.
Exhibit 10 – Underwriting & advisory fees have come in at a record level for the
Canadian banking sector in the first nine months of 2014…
Exhibit 11 - …and as per our review the energy sector accounted for ~30% of
total underwriting revenue for the banks
Q1/14
Q2/14
Q3/14
YTD '14
BMO
19.2%
19.9%
28.3%
23.2%
BNS
35.0%
39.6%
23.9%
31.8%
CM
33.1%
30.7%
33.0%
32.4%
NA
27.3%
31.7%
28.5%
29.2%
RY
30.4%
26.7%
31.5%
30.0%
TD
29.5%
26.2%
32.5%
29.9%
1,500
$millions
1,300
1,100
900
700
Source: FP Infomart; Deallogic; Scotiabank GBM estimates.
500
3Q14
1Q14
3Q13
1Q13
3Q12
1Q12
3Q11
1Q11
3Q10
1Q10
3Q09
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
Source: Company reports; Scotiabank GBM
■ As we have demonstrated many times in our coverage of the independent broker/dealer
space, a downturn in commodity prices can and does have a very quick impact on the ability
of resource-centric companies to issue equity to the market, largely due to the willingness of
investors to support them. We are certainly cognizant of the fact that the investment banking
franchises of the Canadian banks are much more diversified than those if their independent
competitors, and that there have been enough sizable transactions already undertaken in
Q4/14 (CPG, LUN, MFC, PSK, VSN) to ensure that the coming quarter will not be an issue.
■ That said, with press reports last week suggesting that the planned IPO by Teine Energy had
been put on hold, clearly the downturn in oil prices is already being felt on the revenue line
of the brokerage space. Bottom line, while we do not want to be too alarmist in this regard,
it should be clear that the capital markets operations of the banks have played a key role in
driving revenue and earnings growth for the Canadian banking sector in 2014, and any
sustained period of weakness in the energy sector would be detrimental to activity levels
going forward.
29
Importance of energy prices to Western Canada suggests that extended
downturn in prices would be most impactful to CWB
■ In the nearly three months since the WTI price closed at is 2014 peak, the worst performing
Canadian bank stock amongst the eight names we cover has been CWB (down 10%). While
there are clearly other factors at play here besides the pullback in the crude quote, in our
view this underperformance stands to reason, as we believe CWB would be the bank most
impacted by an extended period of softness in the energy space.
■ Though a very small proportion of the CWB loan book is allocated to oil & gas producers
(2%), to their credit management has always been candid that many other components of the
portfolio – equipment financing, general commercial, real estate, and to some extent
consumer – are sensitive to the outlook for project activity in Western Canada. From our
seat this comes back to the trend in energy prices, which particularly in Alberta (41% of the
total book at CWB) have a sizable impact on aggregate economic growth.
■ The extent to which investor sentiment towards Alberta-based companies is influenced by
the performance of oil prices has been well reflected in the relative performance of CWB
shares over the years. In our experience in covering the company, we have noted that the
trend in CWB shares versus the TSX Bank Index as a whole has demonstrated a closer
correlation versus the WTI quote. In other words, the mindset of the market suggests that
the ability of CWB to outperform is clearly influenced by the economic outlook of its home
market, where energy plays an important role.
30
Exhibit 12 – Relative performance of CWB shares vs. TSX Bank Index has demonstrated a close correlation vs. crude oil prices over time
670
R-squared = 80%
270
570
250
230
470
210
190
370
170
270
150
130
170
110
90
70
Sep-14
Mar-14
■ Besides the outlook for energy prices, there are two other issues that speak to our cautious
outlook on CWB shares in the near term; in this context we would point to (1) the industryhigh revenue reliance of CWB on net interest income (81% of total revenue in 2014 vs. 50%
for the sector) at a time at which the long-end of the yield curve has – again – moved
materially lower; and (2) the commentary from CWB management alongside the Q3/14
results that a review of the compensation practices of the company will likely result in higher
expenses in 2015.
■ Despite the softer performance of CWB shares in 2014 (down 4% YTD, the only bank stock
down in a year in which the Bank Index is up 8%), we have noted that the shares continue to
be accorded a premium valuation (the 12.1x multiple on our 2015E is 4.4% higher than the
market-cap weighted sector average of 11.6x). When considering the challenges the bank
faces from the combination of weaker energy prices, lower bond yields, and higher expenses,
we need to see CWB trading at a discount to the peer group prior to espousing a more bullish
viewpoint on the stock.
Sep-13
Source: Bloomberg; Scotiabank GBM
Mar-13
Crude Oil
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-04
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
CWB versus S&P/TSX Bank Index
Crude oil price performance (indexed at 100.0)
Share price performance: CWB vs. S&P/TSX Bank Index
(indexed at 100.0)
290
31
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Bank of Montreal (BMO-T)
Valuation: 12.3x 2015E operating EPS
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
Bank of Nova Scotia (BNS-T)
Valuation: 12.9x 2015E operating EPS
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
Canadian Imperial Bank of Commerce (CM-T)
Valuation: 11.5x 2015E operating EPS
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
Canadian Western Bank (CWB-T)
Valuation: 14x 2015E operating EPS
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
Laurentian Bank of Canada (LB-T)
Valuation: 9.5x 2015E operating EPS
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
National Bank of Canada (NA-T)
Valuation: 11.4x 2015E operating EPS
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
Royal Bank of Canada (RY-T)
Valuation: 13x 2015E operating EPS
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
TD Bank Financial Group (TD-T)
Valuation: 12.9x 2015E operating EPS
Key Risks to Price Target: Economic, systemic, interest rate, regulatory and counterparty failures
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
32
Monday, October 20, 2014, Pre-Market
Global Fertilizers
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
[email protected]
The Contrarian Bet
Carl Chen - (416) 863-7184
(Scotia Capital Inc. - Canada)
[email protected]
Christine Munroe, CPA, CA - (416) 863-5907
(Scotia Capital Inc. - Canada)
[email protected]
Event
■ There's no doubt in our minds overall fertilizer demand will take a hit
next year, as both planted acreage and farmer profitability decline. As the
energy complex falls, we could see mild cost curve pressure on nitrogen
producers. We argue that the potash supply/demand imbalance will grow by
50% next year, which will pressure prices, disciplined producers, or perhaps
both. We're already seeing red flags appear in the phosphate market, as
Indian farmers balk at higher prices, while producers curtail production.
ScotiaView Analyst Link
Implications
■ While the above outlook is clearly negative, we think fertilizer stocks
are generally oversold. In our view, the fertilizer sector has been caught up
with other commodity stocks that are much more closely tied to economic
cycles. Ag cycles are different, and can snap back to life quickly.
■ This presents an opportunity for investors that can stomach some chop.
We have upgraded K+S and MOS, both based on valuation only. Our target
moves slightly higher on POT and slightly lower on AGU and SQM. We
certainly do not dare call a bottom to this market, but the risk/reward is
framing up exceptionally well for those looking beyond one or two quarters.
Recommendation
■ We don't know how much market carnage is left, and neither do you. But
we do see a valuation window that has emerged for investors, especially as a
weaker 2015 is largely known and priced in. The contrarian in us suggests
buying the sector selectively, rather than continuing to sell in a panic.
Universe of Coverage
Price
AGU-N
CF-N
IPI-N
MOS-N
NPK-T
POT-N
SDF-DE
SQM-N
YAR-OL
US$82.79
US$244.96
US$13.66
US$40.76
C$0.46
US$31.92
€19.97
US$22.87
302.90kr
Rating
Risk
SO
SO
SP
SO
SP
SP
SP
SP
SP
Medium
High
High
High
Speculative
High
High
Medium
High
1-Yr
ROR
$105.00
$300.00
$13.50
$52.00
$1.10
$34.00
€22.00
$28.00
300.00kr
30.5%
24.9%
-1.2%
30.0%
139.1%
10.9%
12.0%
24.9%
1.4%
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
33
IPI
K+S
MOS
SQM
POT
AGU
CF
YAR
Soy
Corn
Wheat
Palm Oil
UAN
Urea
Potash
DAP
Ammonia
The Contrarian Bet
■ Weaker grain prices will lead to compressed farmer
budgets, lower crop input spending, and therefore, reduced Exhibit 1 – Standardized Bloomberg Stock Recommendation Changes (y/y)
fertilizer profits next year. For example, a return to trend-line
5%
corn yield coupled with current futures prices should result in a
10% to 15% decline to cash margins per acre. It’s a similar
2%
3%
1%
story for other crops. This is why sell-side sentiment has fallen
1%
by an adjusted 6% over the past year, (Exhibits 1 and 2).
-1% 56% 25%
■ Given the decline in crops, fertilizer stocks have held up
-3%
fairly well. Specifically, a basket of cash crops has fallen by
22%, while the large cap fertilizer equity universe has only
-5%
-4%
retreated by 4% (Exhibit 3). Looking back, the obvious
-6%
-7%
explanation is that fertilizer prices have not followed crops, and
-7%
6% decline in sentiment (ex
-7%
-9%
are up 14% this year, led by DAP. Alternatively, perhaps the
K+S and URKA due to BPC
-9%
break-up one year ago)
market believes low grain prices are either not sustainable or
-11%
will not meaningfully impact profitability in the fertilizer sector
-11% -11% -11%
-13%
next year. While we expect stock prices to recover over the next
URKA K+S PHOR CF POT ICL AGU IPL
IPI SQM MOS YAR
year, sentiment may still be too optimistic on 2015 earnings.
■ Fertilizer prices have more downside than upside. We see Source: Bloomberg; Scotiabank GBM.
the potash supply/demand imbalance worsening in 2015, which
should pressure disciplined producers, prices, or both – but not
until after spring. Ammonia outages should improve shortly, Exhibit 2 – Standardized Bloomberg Stock Recommendations
which will lead to slightly lower prices, with flexible plants
BUY 5.0
switching back toward more urea/UAN production. On the
Street Sentiment (Oct 14)
margin, DAP prices will likely follow ammonia and sulphur,
4.5
Street Sentiment (Oct 13)
although North American export margins could improve
4.0
slightly on a switch back to Latin American business. Overall,
we’ve lowered our price deck, with most of the downside not
3.5
coming for another five to six months.
3.0
HOLD
■ While the outlook is negative, fertilizer stocks seem
2.5
oversold. In our minds, the sector has been caught up with
other commodities that are more closely tied to economic
2.0
cycles. Ag cycles are different, and can snap back quickly.
1.5
■ The contrarian bet. We see a valuation opportunity emerging
SELL
1.0
for patient investors. We have removed our long-standing
IPI SQM URKA K+S POT YAR MOS ICL IPL AGU CF PHOR
Sector Underperform rating on K+S, and recommend
increasing the stock to market weight. We have also upgraded
MOS to Sector Outperform based on valuation, and knowing Source: Bloomberg; Scotiabank GBM.
full well P+K activity will be tougher next year. Our target
price on AGU moves 5% lower to $105 on a weaker retail
outlook, but we still believe in the long-term thesis, so our SO Exhibit 3 – Crops vs. Fertilizers vs. Fertilizer Equities YTD
rating stands. The lithium/iodine outlooks for SQM appear to
30% 27%
be more stable on the margin, and so we are more likely buyers
22%
18%
20%
than sellers, although hold insufficient conviction to make a
14% 14%
formal rating change. We made no changes to CF, which
Equities
10%
Crops
remains one of our top picks, and continues to hold in fairly
-4%
3%
-22%
0%
well relative to its peers, despite the termination of merger
0%
negotiations. YAR may have more downside than upside,
-3%
Fertilizers
given a more challenging feedstock outlook that will likely -10%
-8% -9%
+14%
-12% -12%
compress 2015 margins. Despite the outlook, the valuation
-16%
-18%
remains fair, and so a SP rating stands. We made no changes to -20%
-20% -21%
IPI, but tweaked POT a touch higher to $34. POT’s yield is -30%
-29%
superb, FCF is set to expand, which will lead to divy growth
and more buybacks. We are slowly warming up to POT’s offer, -40%
irrespective of our bearish potash market view, and therefore
suggest slightly increasing exposure to the stock. While we
don’t know how much carnage is left, we see a L/T valuation
opportunity emerging, especially as a weaker 2015 is largely Source: Bloomberg; CRU; Scotiabank GBM.
priced in. Therefore, the contrarian in us suggests buying the
sector selectively, rather than panic selling.
34
Key Recommendation Changes
Exhibit 4 – Key Recommendation Changes
New
Rating
Old
Target Price
New
Old
AGU
SO
SO
$105
$110
$84
28.6%
CF
SO
SO
$300
$300
$254
20.3%
IPI
SP
SP
$13.5
$13.5
$14.0
-3.6%
SDF
SP
SU
€ 22
€ 21
€ 20
14.1%
SQM
SP
SP
$28
$33
$23
26.4%
MOS
SO
SP
$52
$52
$41
28.0%
POT
SP
SP
$34
$33
$32
9.8%
YAR
SP
SP
NOK 300
NOK 300
NOK 297
3.4%
Company
Company
New
Q3/14 EPS
Old
Consensus
New
Q4/14 EPS
Old
Current
Price
Consensus
Implied
Total ROR
2015E EPS
Old
New
Consensus
AGU
$0.50
$0.50
$0.51
$0.66
$0.66
$0.76
$7.25
$7.72
$7.90
CF
$3.47
$3.39
$3.53
$5.54
$4.62
$5.40
$20.51
$20.35
$20.72
IPI
$0.05
$0.03
$0.05
$0.02
$0.01
$0.06
$0.29
$0.47
$0.36
SDF
€ 0.17
€ 0.16
€ 0.18
€ 0.46
€ 0.30
€ 0.33
€ 1.81
€ 1.72
€ 1.65
SQM
$0.28
$0.31
$0.30
$0.28
$0.33
$0.31
$1.45
$1.72
$1.47
MOS
$0.57
$0.57
$0.61
$0.66
$0.66
$0.68
$3.28
$3.33
$3.39
POT
$0.45
$0.44
$0.41
$0.42
$0.41
$0.44
$1.97
$2.00
$2.12
YAR
NOK 8.15
NOK 6.94
NOK 7.92
NOK 5.93
NOK 5.50
NOK 5.97
NOK 27.44
NOK 28.10
NOK 26.92
Company
2013A
P/E
2014E
2015E
2013A
EV/EBITDA
2014E
2015E
Target Valuation
EV/EBITDA
P/E
DCF
AGU
11.4x
15.0x
11.6x
7.5x
8.5x
6.7x
14.5x
7.5x
$110
CF
10.9x
13.0x
12.4x
5.4x
6.8x
6.3x
14.5x
7.0x
$333
IPI
43.0x
n.m.
47.8x
14.1x
13.3x
11.1x
-
11.0x
$14
SDF
8.6x
11.7x
10.9x
6.0x
6.2x
6.3x
13.0x
7.0x
€ 21
SQM
12.7x
19.9x
15.6x
8.4x
9.9x
8.7x
20.0x
11.0x
$26
MOS
n.m.
16.9x
12.6x
n.m.
7.7x
6.7x
16.0x
8.5x
$53
POT
15.3x
17.7x
16.4x
9.5x
10.3x
9.7x
17.5x
9.5x
$32
YAR
12.3x
10.3x
10.8x
6.6x
5.5x
5.7x
11.5x
5.5x
NOK 322
Average
16.3x
14.9x
17.3x
8.2x
8.5x
7.6x
15.3x
8.4x
Source: Bloomberg; Scotiabank GBM estimates.
n.a.
35
Soybeans-to-Corn Ratio
Reduced Acreage + Reduced Budgets = Reduced Fert Demand
■ We expect to see 90M acres of U.S. corn acreage planted
next year, down from 91.6M, 95.4M, and 97.2M acres planted Exhibit 5 – We Expect to See 90M Acres of U.S. Corn Planted Next Year
over the past three years. As soybeans compete with corn for
3.0x
Farmers prefer to
acreage then the farmer is naturally cognizant of the soybeanplant soybeans
to-corn ratio. As can be seen in Exhibit 5, there is a clear
2.8x
relationship between the soybean-to-corn ratio at the timing
90M ?
planting decisions are made, and the actual corn acreage
planted. In fact, we estimate that farmers are more incentivized
2.5x
to direct marginal acres toward soybeans over corn next year
than at any time over the past decade.
91.6M
2.3x
■ Watch for corn margins per acre to drop significantly next
year. A decline in the December 2015 futures price of corn to
95.4M
2.0x
$3.60/bu, coupled with an expectation of a trend-line yield of
97.2M
~165 bu/acre, means the U.S. farmer may earn about $250 per
acre – a level we haven’t seen in years (Exhibit 6). While the
Farmers prefer
1.8x
Timing of planting decision
to plant corn
December 2015 is still $3.60/bu, reflecting only a 15% forecast
Corn acreage planted
decline in cash margins per acre, the December 2014 futures
1.5x
price, which has almost fell below $3.20 bu/acres highlights
2006
2007
2008
2009
2010
2011
2012
2013
2014
the risk farmers need to plan for.
■ Corn acreage is essential for fertilizer demand. Corn Source: USDA; Bloomberg; Scotiabank GBM.
requires 140 lb/acre of applied nitrogen, while soybeans do not
really require applied nitrogen, as it fixates nitrogen from the
air. With respect to P+K, an acre of corn requires four times Exhibit 6 – Corn Farmer Profitability Should Decline Next Year
the amount of applied phosphate compared to an acre of
soybeans (47 lbs vs. 11 lbs), while corn uses nearly 2.5x more
2012
2013
2014
2015E
potash than soybeans (48 lbs vs. 20 lbs). Therefore, while 2
Yield
(bu/acre)
123.4
158.8
171.7
165.0
million acres of corn lost to soybeans is not detrimental to
Avg. Farm Price
($/bu)
$6.89
$4.45
$3.70
$3.60
fertilizer demand, it will have a negative impact.
Gross Revenue
($/acre)
$850
$707
$635
$594
■ Why fertilizer demand may not be as bad as some think.
Operating Costs
The record yields we’re seeing in both corn (171.7 bu/acre)
Fertilizer
($/acre)
$157
$153
$140
$138
and soybeans (46.6 bu/acre) mean crops are pulling more
Seed
($/acre)
$92
$98
$98
$98
nutrients out of the ground than normal do, which will actually
Fuel
($/acre)
$31
$33
$32
$32
lead to a greater-than-expected fertilizer replenishment need.
Other
($/acre)
$70
$72
$73
$75
Therefore, while traditional logic suggests P+K application
Total
($/acre)
$350
$356
$343
$343
rates will be down substantially next year, as farmer budgets
fall, we think it’s not unreasonable to see P+K application
Return > Op Costs
($/acre)
$500
$351
$292
$251
rates down ‘only slightly’ next year in the U.S.
■ Overall, we forecast no change to U.S. nitrogen demand Source: NPK FAS; USDA; Scotiabank GBM estimates.
next year. The mix of planted acreage coupled with
agronomist concerns over above-average nitrogen uptake in
2014 leads us to estimate no change to nitrogen demand. Exhibit 7 – U.S. NPK Demand Forecast
However, this is by no means a ‘get out of jail’ card for U.S.
nitrogen suppliers like CF, AGU, POT, and YAR. Just because
Year
N
P
K
Total
we believe overall nitrogen demand will be unchanged, it does
(Millions of Nutrient Short Tons)
not mean the type of nitrogen demanded, and therefore the
margin profile of nitrogen producers, will also be unchanged.
2009
11.46
3.14
3.08
17.68
In fact, we expect to see farmers favour ammonia over urea
2010
12.23
4.16
4.46
20.85
and UAN, as ammonia is considered the least expensive form
2011
12.81
4.30
4.57
21.68
of nitrogen. While nitrogen prices and margins are volatile on a
2012
13.50
4.35
4.63
22.48
day to day basis, it’s reasonable to suggest that upgrading
nitrogen to urea and nitrates is generally a more profitable
2013
13.38
4.33
4.61
22.32
enterprise than just selling ammonia. This could cause nitrogen
2014
13.32
4.44
4.94
22.70
producer earnings to inch lower next year, but not free fall like
some think. Recall, the U.S. is a net importer of all nitrogen.
2015
13.30
4.25
4.80
22.35
■ Watch for lower P+K demand next year. We think overall
U.S. P+K demand will only be down 3% to 4% in the U.S., as Change
0%
-4%
-3%
-2%
higher nutrient replenishment demand surprises the bears.
Source: NPK FAS; AAPFCO; Scotiabank GBM estimates.
Demand will likely be much lower elsewhere.
36
NA Logistics Issues Likely Won’t Clear Up Anytime Soon
■ Rail delivered potash to the U.S. Midwest may not make it
to the farmer in time for the fall season. Why? CN and CP Exhibit 8 – CP Rail Shipments: Grains vs. Minerals
are each required to move a weekly minimum of 536,250 mt of
80%
grain (about 5,000 rail cars), or face Canadian government
60%
2014 Grain Shipments
imposed fines of up to C$100,000 per week (reduced from
(% Change over 2013)
C$100,000 per day!). The order, which falls under the Fair Rail
40%
for Grain Farmers Act, is due to expire on November 29, but
could be extended as it was in August. Pressure from the grain
20%
market is also a story on the U.S. rail system, but there is the
additional demand from petroleum movement too.
0%
■ This is partially why granular potash in the Corn Belt
-20%
continues to rise (now to $410/st), despite weaker demand
next year, due to: (1) reduced farmer budgets; and (2) lower
-40%
than expected current cash flow, as farmers hold onto more
2014 'Mineral' Shipments
grain for higher prices. The other problem is that, since 2009,
-60%
(% Change over 2013)
the distributor has been able to get potash whenever he wants
5-Jan
5-Feb
5-Mar
5-Apr
5-May
5-Jun
5-Jul
5-Aug
5-Sep
(i.e., just-in-time) by simply picking up the phone. This year is
different, and has led to product inventory investment, like we Source: CP; Scotiabank GBM.
saw prior to the fertilizer market crash in 2008 (although that
was distributors speculating more on commodity price Exhibit 9 – Reduced CN Rail Speeds Partially Due to Too Much Volume
appreciation than anything else). However, the title of our Q2
POT note said it all - you can only restock the cupboard once.
Accordingly, we see this as a one-time restocking trade –
unlikely to be repeated beyond next spring.
■ Rail constraints are a multi-year problem that has only
been amplified this year by record grain production. It is
clear that more rail capacity investment is required to clear up
the logistics issues that are impacting the fertilizer markets.
While investment in new rail capacity is indeed being made,
logistics challenges could actually increase until the market is
balanced sometime in 2016 or 2017.
■ Record grain production is now impacting barge markets.
Barge freight rates are sharply higher on limited availability,
rising by $30+ per ton to most key up-river destinations (to
almost triple the normal rate). This is due to grain exporters
simply outbidding fertilizer traders. Barge companies are
moving empty barges north to avoid cleaning expenses and Source: AAR; Scotiabank GBM Rails Monthly – September 2014.
delays rather than carrying fertilizer north in order to move
grain south. Gulf suppliers (including importers) now have to
eat up the higher shipping cost to compete with deliveries that Exhibit 10 – Grains & Crude Are Taking Away From Fertilizer Movement
are covered by barge contract arrangements. UAN barges are
YOY Change
almost entirely covered by full-year contract pricing rather
CP
Total
Carloads
Week
35
Q3TD
than spot values, and therefore will not be affected by the surge
Automotive
-5.9%
-0.9%
in barge freight rates, although could be affected by volatile
Coal
-11.8%
-20.8%
urea prices. In our view, it’s only a matter of time before inland
Chemical
&
Plastics
-1.3%
4.4%
urea and DAP prices rise slightly to support replacement tons
Crude
94.4%
54.5%
that are paying higher barge costs.
Fertilizer & Sulphur
-8.3%
-15.2%
■ One of the benefits of the VT acquisition by AGU was VT’s
Forest Procducts
-0.5%
-8.0%
strong on-farm storage bin business. We see this rapidly
Grain
(Canadian)
12.1%
46.1%
growing business as a hidden gem for AGU that should
Grain (U.S.)
26.8%
-8.9%
become more prominent as logistics disruptions continue into
Metals & Consumer Products
9.0%
15.8%
next year. AGU sees this opportunity as being transferable to
Potash
-32.7%
-1.8%
the Brazilian market, which we see as having one of the worst
logistics systems among all major fertilizer markets.
Domestic Intermodal
25.4%
18.8%
International Intermodal
Total
Source: CP Scotiabank GBM.
-11.9%
3.1%
-13.3%
2.2%
37
U.S. Ammonia Producer Inv (M st)
Value per Nitrogen Unit ($/st)
Ammonia Strength is Effectively Over Until Spring
■ What goes up… Falling crop prices and a return to trend-line
yields next year means lower-value nitrogen like ammonia is in Exhibit 11 – N Value per Nitrogen Fertilizer
high demand (Exhibit 1). This is why downstream inventory at
$14
Ammonia (US MW)
the end of the fertilizer year was wiped out (Exhibit 2), and
$13
Urea (US MW)
why we expect fall demand to actually be higher than last year,
UAN (US MW)
$12
despite crop prices being lower (Exhibit 3). The above factors,
coupled with limited supply availability from Algeria, Egypt,
$11
Libya, Trinidad, and Ukraine, have led to a brief but powerful
$10
run in the ammonia market (Exhibit 4). In the Black Sea, the
$9
spot price has increased to $625/mt from only $450 in mid$8
August. In the Tampa contract market, benchmark indicators
suggest a November contract as high as $700/mt, although as
$7
we explain below, it’s more likely the contract will settle closer
$6
to $640, or flat with the October price.
$5
■ …must come down. There is no question that resistance to a
$4
soaring ammonia market is mounting by the day. Signals we’re
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
watching: (1) MOS citing high ammonia costs as a reason it
will reduce U.S. DAP/MAP production N/T; (2) U.S. inland Source: CRU; Scotiabank GBM.
buyers threatening to switch to urea and/or UAN; (3) the
closure of caprolactam and acrylonitrile plants in SE Asia due
to ammonia feedstock costs being too high; and (4) continued Exhibit 12 – U.S. Ammonia Producer Inventories Will Need to Be Refilled
refusal by Indian buyers to pay higher prices. On the supply
1.2
side, we’re seeing the restoration of natural gas availability in
Trinidad lift 70% utilization rates toward 80%, or even 90%.
1.0
Also, Statoil’s gas supply agreement to Ukraine, at prices that
are “much lower than the Russian gas”, will see idled plants re0.8
fired in the region. Therefore, we see high ammonia as only a
N/T phenomenon, and have reflected this in our price forecast.
0.6
■ Keep an eye on gas price development. Costs are equally as
important to margin development as price. And while ammonia
0.4
prices should correct in the N/T, gas cost are falling. In fact, in
the past several days, Henry Hub has declined toward
0.2
$3.80/mmBtu from over $4.10. For every $0.50 improvement
in the cost of natural gas, we estimate ammonia margins
0.0
increase by $15 to $20/mt, with similar margin expansion in
F04 F05 F06 F07 F08 F09 F10 F11 F12 F13 F14
urea and UAN. All else equal, North American nitrogen
producers like AGU and CF – both rated Sector Outperform, Source: NPK FAS; Scotiabank GBM.
will benefit in a lower energy complex.
Exhibit 13 – U.S. Fall Ammonia Demand Should Increase This Year
Exhibit 14 – Ammonia Price Development
$900
CFR Tampa
$800
2.0
Black Sea
Middle East
$700
1.5
Ammonia ($/mt)
U.S. Fall Ammonia Demand (M st)
2.5
1.0
0.5
$600
$500
$400
0.0
F2008
F2009
F2010
F2011
F2012
F2013
Source: Company reports; NPK FAS; Scotiabank GBM estimates.
F2014
F2015
$300
Oct-12
Feb-13
Jun-13
Source: CRU; Bloomberg; Scotiabank GBM.
Oct-13
Feb-14
Jun-14
Oct-14
38
Urea Forward Contract
(FOB NOLA; $/st)
Urea Should Remain ‘Relatively’ Stable Until the Spring Rush
■ The market is still trying to figure out whether the U.S. is
long urea for Q4. The main source of confusion is how much Exhibit 15 – U.S. Granular Urea Forward Curve
urea application work will be undertaken during the quarter on
$375
the back of lower crop prices, particularly winter wheat. This
Oct
time of year usually sees a dip in granular prices as the bulk of
Nov
$350
Northern Hemisphere demand is complete. Therefore, Middle
Dec
Eastern producers will start to lower prices to motivate U.S.
spot buying. Beyond this modest volatility, we expect granular
$325
urea to remain relatively unchanged in the low-$300/st (FOB
NOLA) area into early 2015 (Exhibit 15).
$300
■ China and India will drive the prilled market for the rest of
the year. While Egypt and Algeria are slowing improving
availability, there is a bigger supply issue weighing on the
$275
market: China. With the off-season export tax window set to
close on October 31, we hear of Chinese (mostly prilled) urea
$250
producers racing to get product into bonded warehouses. Early
10-Jul 24-Jul
7-Aug 21-Aug 4-Sep 18-Sep
estimates are that 3M mt of product could be available at offseason cash costs through January (Exhibit 16). While clearly a Source: CRU; NPK FAS; Scotiabank GBM estimates.
negative, India needs every tonne it can get right now, and will
therefore likely keep the prilled urea market balanced over the
short-term.
Exhibit 16 – Chinese Urea Exports
■ If all else fails, watch for Chinese discipline! During the
12
summer, the China Nitrogen Fertilizer Industry Association
1H
(CNFIA) sent a letter to urea producers to highlight the
2H
10
prospect that continued dumping of urea would lead to almost
all domestic urea producers losing money. In its letter, CNFIA
8
asked producers to: (1) not supply India at $266/mt (CFR); (2)
enhance cooperation; (3) keep urea inventories at ports
6
reasonable; and (4) coordinate urea plant maintenance
appropriately. Urea producers naturally responded positively to
4
the letter, which is partially responsible for higher urea prices.
As China is the marginal producer, discipline at $273/mt (FOB
2
China), which is what many have called for, would have
improved margins in three of the past six years (Exhibit 17).
0
Today, the prilled price is over $290/mt, while still in the low2005 2006 2007 2008 2009 2010 2011 2012 2013
export tax season.
Chinese Urea Exports (M mt)
2-Oct
2014 2015
Source: CRU; Bloomberg; Scotiabank GBM.
Exhibit 17 – Chinese Prilled Urea Discipline @ $273/mt is a Net Positive
Exhibit 18 – Urea Price Development
$600
$400
372
$360
FOB Middle East
340
$340
$500
Annual Floor Urea Price
$320
$300
278
$280
$260
254
FOB U.S. Gulf ($/st)
FOB Black Sea
Urea ($/mt)
Prilled Urea (FOB China)
$380
FOB Mid Corn Belt ($/st)
$400
252
246
$300
$240
$220
$200
2009
2010
2011
Source: CRU; Bloomberg; Scotiabank GBM.
2012
2013
2014
$200
Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14
Source: CRU; Bloomberg; Scotiabank GBM.
39
(M Tons P2O5)
(M mt)
DAP ($/mt)
DAP Prices Could Retreat on India’s Exit
■ Highlights: (1) DAP/MAP prices are too high (Exhibit 19),
but margins are not keeping up; (2) one last surge of Indian Exhibit 19 – DAP Price Development
demand is possible, but the Chinese export tax window just
$700
U.S. Gulf Export
closed; (3) the Indian MRP must rise soon; and (4) U.S.
CFR India
DAP/MAP market share continues to decline, which MOS just
FOB NOLA ($/st)
FOB Mid Cornbelt ($/st)
supported by production cuts on rising costs.
$600
■ DAP/MAP prices are too high, but margins are not keeping
up. It’s true, the DAP price has risen nicely over the past
several months, finally breaking through $500/mt (CFR India).
$500
However, what’s more important from an equity point of view
is whether higher prices = greater profits. The answer, is not
really. In fact, this is exactly why MOS announced two weeks
$400
ago that it will curtail phosphate rock and finished P fertilizer
production, like DAP and MAP.
$300
■ One last surge of Indian demand for the season. India came
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
into the market recently to buy close to 1M mt of DAP for
delivery through early November, ahead of the Rabi season. Source: CRU; Scotiabank GBM.
This means DAP imports by India should end up being slightly
better than 4M mt (Exhibit 20), but far short of the 5.5M to
7.5M mt import range in five of the past six years. The
improved demand comes on the back of a recovered monsoon, Exhibit 20 – India DAP Imports
as well as justified concerns that the closure of China’s off8
season export tax window could lead to reduced DAP
7
availability.
■ The Indian DAP MRP must rise. Global DAP suppliers face
6
a lose-lose situation over the near-term. On the one hand, DAP
5
prices have already broken through $500/mt (CFR India),
which would normally sound great for producers. However,
4
Indian importers are losing money at this level, and therefore
3
have no incentive to continue importing unless the Maximum
Retail Price (MRP) is raised by a good INR 2,000 to INR
2
24,000/mt. A request for a higher DAP price has been made to
1
the government, with no response. The problem with raising
the DAP price is that demand destruction will likely occur, and
0
F07/08 F08/09 F09/10 F10/11 F11/12 F12/13 F13/14 F14/15
possibly be further amplified by a weak crop in India and
falling prices. As we go to press, some producers have raised
their DAP price above the maximum allowable, to the INR Source: CRU; Scotiabank GBM estimates.
23,500/mt area. We will see what happens, but it should be
approved the government, which would pressure demand
lower next year.
Exhibit 21 – U.S. DAP Exports Are Clearly Falling
■ U.S. DAP/MAP market share continues to decline. For the
10.0
2014 fertilizer year (already complete), we estimate U.S.
Export
Domestic
9.0
exports of DAP/MAP hit the lowest level in nearly 30 years.
This comes at a time when global exports have grown in six of
8.0
the past seven years. There are several reasons for this. First,
7.0
over the past decade, China has dramatically changed its
6.0
position in the industry from being a net importer to that a
major exporter of DAP/MAP. Second, the start-up of Ma’aden
5.0
I in Saudi Arabia pushed the U.S. further up the cost curve,
4.0
especially on a delivered to India basis. Third, Morocco
continues to make progress on moving further down the P 2O5
3.0
chain, in order to capture a full margin. The net result is that
2.0
the U.S. now has a sub-20% market share of the global
1.0
DAP/MAP market, down from a 35%+ market share only four
to five years ago (Exhibit 21).
0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: DOC; NPKFAS; Scotiabank GBM.
40
How Excess Potash Supply Could Grow by 50% to 200% Next Year!
■ We see seven primary factors driving change to the potash supply/demand imbalance next
year: (1) distributor restocking should be over; (2) but, U.S. restocking could overshoot; (3)
Indian importers have been stock-piling; (4) K application rates could fall next year on lower
farmer economics; (5) AGU will have meaningfully more output next year; (6) Belaruskali’s
excess inventory has been sold; and (7) some forward buying in 2014.
1. Distributor restocking should be over. We think the collapse of the potash market
last year pushed 2M mt of 2013 demand into 2014. 2013 demand came in at ~53M mt,
and most are looking for 2014 to land on ~57M mt. Accordingly, if we take 2M mt out
of 2014 and put it back into 2013, then some could argue there was no demand growth
at all this year. At our September conference, POT stated demand appears to be
tracking close to 59M mt. Regardless of what the right 2014 demand number is, we
think global distributor restocking alone will reduce 2015 demand by ~1.5M mt.
2. But, U.S. restocking could overshoot. One of the sobering lessons U.S. Midwest
distributors learned this year is that potash isn’t always available whenever it’s needed,
which is a phenomenon we haven’t experienced since prior to the 2008/09 collapse of
the fertilizer market. Logistical issues are the reason why. As a result, potash prices in
the U.S. Midwest remain strong. Therefore, we expect to see distributors re-fill their
warehouses beyond normal levels to ensure product is always available for farmers.
This could add 0.5M mt to 2015 demand.
3. The Indians have been stock-piling. India signed the bulk of its potash contracts in
April – a time when monsoon expectations were normal. While the monsoon partially
recovered, it was tracking at a five-year low and close to 60% of normal when key
potash purchasing decisions were made. Therefore, distributors haven’t been
distributing at the same rate at which importers have been importing. Accordingly, if
potash deliveries to India continue as scheduled and the nutrient is not applied
meaningfully to the Rabi crop, distributor potash inventory will keep rising, weakening
import demand propsects for 2015, likely by about 0.5M mt.
4. Potash application rates could fall next year. As we saw this year, crop protection
chemical application was lighter than expected, as a meaningful decline in crop values
occurred AFTER the crop was planted and AFTER fertilizer was applied, although
AGU argues this was also due to below-normal pest infestation this year. Next year
will be different. Low grains prices will impact crop input decision making BEFORE
fertilizer application. In our view, the risk to reduced potash application is greater
than the risk to nitrogen. To be somewhat conservative, we only assume 1M mt of
reduced core global potash demand next year, although it could be much more.
5. AGU will offer more product next year. The combination of a damaged hoist as well
as Vanscoy tie-ins means we expect AGU to sell about 1M mt of produced-potash in
2014, down about 0.5M mt from the three year average level. We also expect an
additional 0.5M mt of Vanscoy expansion sales next year, as it ramps the mine up to
3M mt over the next few years. Therefore, AGU alone should add 1M mt of supply
next year that it did not have available to it in 2014.
6. Excess inventory has been sold. When URKA withdrew from BPC, Belaruskali was
caught with no way to market its potash. Accordingly, Belaruskali was forced to
temporarily shut some production, which ended after Belaruskali was eventually able
to start making essential potash sales, following several months of sending marketing
delegations around the world. In our opinion, within the first six months 2014,
Belaruskali had exported much more potash than it was really capable of, meaning a
one-time inventory destocking by Belaruskali had occurred. We estimate up to 1.5M mt
of excess potash inventory will not be available for Belaruskali to sell next year,
partially offsetting some of the negative factors mentioned above. There is probably
another 1M mt of global excess inventory that will also not be available next year.
7. Uralkali may have caused forward buying in 2014. URKA is now seeking a 10%
hike to the Chinese contract in 2015, which would result in a $335/mt price tag. What
is also circulating is the possible renewal of a Russian potash marketing arrangement
between URKA and BELA, which many believe will be settled by mid-2015. Based on
both of these points, we believe some distributors, especially in Europe, have been
forward buying. While the magnitude of forward buying is likely not dramatic (0.5M
mt), it is yet another reason why 2015 potash may disappoint.
41
■ Putting it all together. When taking each of the above factors into account, we estimate the
supply/demand imbalance could grow by 50% next year toward 4.5M mt, from our estimate
of 3M mt in 2014. Of course, we have assumed no incremental supply from any other
producer in the world other than AGU’s Vanscoy ramp (a generous assumption). Potash
producers will argue that net potash availability could decline next year, and we agree with
them. Where the difference in opinions emerge, is that we think demand falls by a greater
amount next year, widening the supply/demand imbalance.
■ What about POT’s commentary? At our September 23 conference, POT’s CFO revealed
they are working on a thesis that could in fact see the Canadian producer increase production
toward 11M mt from about 9M mt this year. If our analysis is even remotely close, and some
will argue it’s not, then POT is unlikely to increase its production toward 11M mt without
impacting pricing negatively next year.
■ The Bear Case. If potash demand surprises to the downside (some co-ops are talking about
30% to 50% cuts), and POT increases its production, which would likely cause a production
response from URKA and others, we could see the 2015 supply/demand imbalance grow by
a stunning 200% to nearly 9M mt from our 2014 forecast of about 3M mt – see below.
Exhibit 22 – How Excess Potash Supply Could Grow by 50% to 200% Next Year
Producer
GBM Est.
2014E
(M mt)
Canpotex
POT
MOS
AGU
9.1
8.7
1.0
18.8
Former BPC
BELA
URKA
9.0
11.5
20.5
POT's Equities
ICL
SQM
APC
QSLP (China)
5.3
1.7
2.2
4.0
13.2
Independent
IPI
K+S
VALE
China/All other
2014E Supply
1.
2.
3.
4.
5.
6a.
6b.
7.
Distributor restocking should be over
U.S. restocking could overshoot on logistics fears
The Indians have been stock-piling
Potash application rates could fall next year (Brazil/U.S.)
AGU will offer more product next year
Belaruskali destocking complete
Global supplier destocking complete
Forward buying in 2014
BASE CASE
8.
9.
10.
1.0
3.2
0.3
3.0
7.5
60.0
North America
China
India
SE Asia
Europe & FSU
Brazil
ROW
10.0
12.2
3.2
8.2
10.5
9.2
3.7
Excess Supply?
2014E Demand
57.0
3.0
1.0
-1.5
-1.0
+50%
-0.5
58.5
POT increasing production to 11M mt
Other supply increases (APC, URKA etc.)
2015 Global potash application worse than thought
1.9
1.0
2015E Supply
(M mt)
-1.5
0.5
-0.5
-1.0
2015E Supply
BEAR CASE
GBM Est.
2014E
2015E Demand
54.0
4.5
+200%
-1.0
61.4
2015E Demand
52.5
Source: Scotiabank GBM estimates.
■ The standard-grade catch-up. Belaruskali is finished selling its excess inventory from the
end of last year, and has gone one-step further and has just finished undergoing maintenance.
This occurs at a time when negotiations with China kick into high gear. There is a clear
relationship between the SE Asian spot standard-grade potash price and the Chinese contract
price coming in about $35/mt less, as an average since 2010. We suspect the Chinese know
this game, and will likely seek a greater than the $15 discount (2014 level) to any potash run
SE Asia sees over the coming weeks. Watch for a flat contract at $305/mt with China.
8.9
42
Our Fertilizer Price Forecast
Exhibit 23 – Our Fertilizer Price Forecast
Potash (Standard)
Sep 15
2007
2008
2009
2010
2011
2012
Q1-13
Q2-13
Q3-13
Q4-13
China
(CFR, $/mt)
305
240
512
611
350
435
470
400
400
400
354
389
309
305
305
305
306
305
305
305
305
305
India
(CFR, $/mt)
322
247
536
556
370
420
485
480
427
427
379
2013 Q1-14 Q2-14 Q3-14 Q4-14 2014E Q1-15 Q2-15 Q3-15 Q4-15 2015E
428
372
330
322
322
337
322
322
322
322
322
SE Asia
(CFR, $/mt)
320
294
857
683
413
504
512
437
445
418
337
409
321
320
314
320
319
315
310
310
315
313
Brazil
(CFR, $/mt)
363
270
791
688
405
529
514
442
440
404
335
405
325
346
353
375
350
360
350
350
345
351
Western Europe
(CIF, €/mt)
290
170
340
330
265
356
369
356
361
348
287
338
262
274
290
295
280
290
285
275
270
280
U.S. Midw est
(FOB, $/st)
417
261
736
595
427
522
523
471
459
413
388
433
367
385
409
400
390
390
380
370
365
376
Tampa
(CFR, $/mt)
570
334
587
285
407
561
608
647
582
491
470
547
461
565
550
625
550
565
525
500
475
516
Black Sea
(FOB, $/mt)
510
264
525
243
357
512
546
582
510
426
408
481
428
499
475
550
488
490
450
425
400
441
NOLA
(FOB, $/st)
570
309
584
247
395
524
581
651
600
472
428
538
382
540
545
565
508
510
470
450
425
464
U.S. Corn Belt
(FOB, $/st)
655
470
784
376
503
701
740
783
771
587
564
676
560
675
640
675
638
620
580
560
535
574
Black Sea
(FOB, $/mt)
320
308
499
251
289
430
409
402
356
313
308
345
340
315
315
320
322
330
310
300
310
313
NOLA (Granular)
(FOB, $/st)
350
346
505
272
312
426
485
418
353
311
315
349
411
375
365
330
370
340
320
310
320
323
China (Export)
(FOB, $/mt)
291
-
-
256
294
434
405
397
347
291
306
336
328
278
274
290
293
300
280
270
280
283
India
(CFR, $/mt)
277
348
539
291
329
467
429
402
371
304
323
350
338
314
279
310
310
320
300
290
300
303
(FOB, $/st)
245
262
373
164
221
321
310
327
312
242
237
279
288
276
245
245
263
255
240
230
240
241
Tampa (Export)
(FOB, $/mt)
500
433
980
324
485
625
543
492
495
441
364
448
472
467
502
455
474
445
430
430
420
431
NOLA
(FOB, $/st)
443
394
849
324
508
591
490
468
442
399
356
416
458
462
445
415
445
405
390
390
380
391
India
(CFR, $/mt)
497
491
919
361
469
599
577
519
508
446
393
466
422
455
475
480
458
470
455
455
445
456
(FOB, $/mt)
115
59
363
122
124
185
192
183
154
117
99
138
116
130
127
115
122
115
110
115
110
113
(FOB, $/lt)
136
75
355
15
125
211
183
149
142
74
77
110
152
148
156
130
146
130
135
135
135
134
AECO
($/mmBtu)
3.61
6.00
7.76
3.48
3.88
3.58
2.35
3.13
3.46
2.37
3.36
3.08
4.91
4.28
3.68
3.75
4.16
4.00
3.75
3.75
3.90
3.85
Henry Hub
($/mmBtu)
3.80
6.94
8.84
3.92
4.37
3.96
2.73
3.42
4.00
3.53
3.81
3.69
4.89
4.55
3.91
4.00
4.34
4.25
4.00
4.00
4.15
4.10
Potash (Granular)
Ammonia
Urea (Prilled)
UAN (32%)
NOLA
DAP
Phosphate Rock
Morocco
Liquid Sulphur
Tampa
Natural Gas
Source: Scotiabank GBM estimates.
Exhibit 24 – Key Changes to Our Fertilizer Price Forecast
Potash (Standard)
Q1-14
Q2-14
Q3-14
Q4-14
2014E Q1-15
Q2-15
Q3-15
Q4-15
2015E
China
(CFR, $/mt)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
India
(CFR, $/mt)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
SE Asia
(CFR, $/mt)
$0
$0
$0
$5
$1
$5
$0
$0
$0
$1
Potash (Granular)
Brazil
(CFR, $/mt)
$0
$0
$0
$20
$5
$10
$0
$0
$0
$3
Western Europe
(CIF, €/mt)
€0
€0
€0
€0
€0
€0
€0
€0
€0
€0
U.S. Midwest
(FOB, $/st)
$0
$0
$0
$0
$0
$15
$5
$5
$0
$6
Tampa
(CFR, $/mt)
$0
$0
$0
$35
$9
$15
$0
$0
$0
$4
Black Sea
(FOB, $/mt)
$0
$0
$0
$35
$9
$15
$0
$0
$0
$4
NOLA
(FOB, $/st)
$0
$0
$0
$35
$9
$15
$0
$0
$0
$4
U.S. Corn Belt
(FOB, $/st)
$0
$0
$0
$35
$9
$15
$0
$0
$0
$4
Black Sea
(FOB, $/mt)
$0
$0
$0
-$15
-$4
$0
$0
$0
$0
$0
NOLA (Granular)
(FOB, $/st)
$0
$0
$0
-$10
-$3
$0
$0
$0
$0
$0
China (Export)
(FOB, $/mt)
$0
$0
$0
-$35
-$9
-$20
-$20
-$20
-$20
-$20
India
(CFR, $/mt)
$0
$0
$0
-$15
-$4
-$35
-$35
-$35
-$35
-$35
(FOB, $/st)
$0
$0
$0
-$10
-$3
$0
$0
$0
$0
$0
Tampa (Export)
(FOB, $/mt)
$0
$0
$0
-$5
-$1
-$10
-$20
-$10
-$15
-$14
NOLA
(FOB, $/st)
$0
$0
$0
$0
$0
-$10
-$20
-$10
-$15
-$14
India
(CFR, $/mt)
$0
$0
$0
-$5
-$1
-$10
-$20
-$10
-$15
-$14
(FOB, $/mt)
$0
$0
$0
-$10
-$3
-$10
-$15
-$10
-$15
-$13
(FOB, $/lt)
$0
$0
$0
-$10
-$3
-$10
-$5
-$5
-$5
-$6
AECO
($/mmBtu)
0.00
0.00
0.00
-0.50
-0.13
0.00
0.00
0.00
-0.10
-0.02
Henry Hub
($/mmBtu)
0.00
0.00
0.00
-0.50
-0.13
0.00
0.00
0.00
-0.10
-0.02
Ammonia
Urea (Prilled)
UAN (32%)
NOLA
DAP
Phosphate Rock
Morocco
Liquid Sulphur
Tampa
Natural Gas
Source: Scotiabank GBM estimates.
43
Cash Cost (€/mt)
Potash Sales (M mt)
The Contrarian Bet
■ Upgrading K+S to Sector Perform; raising target to €22.
The massive 25%+ sell-off from ~€27 to ~€19 means the Exhibit 25 – K+S’ Cash Costs Are Improving – Albeit Slowly
valuation of K+S is much more palatable at 6.3x 2015E
250
3.0
EBITDA. Accordingly, a Sector Underperform rating is no
longer warranted, in our view. It’s true that a step down in
234
200
global potash demand next year is a harsh reality potash
215
2.5
207
205
producers will face. But, it will likely be managed by the
193
192
Canadians, and to a lesser extent, the Russians, as it usually is.
150
2.03
Therefore, K+S may see slight price risk, but likely no volume
1.94
2.0
risk. The €400M wastewater disposal issue also put pressure
1.77
1.72
100
1.63
on the stock, although the payment is years away. Investors
1.51
should increase K+S exposure to market weight. Those
1.5
50
waiting for a Legacy capex increase may be disappointed, as
we think management has costs under control.
■ Maintain AGU at Sector Outperform, lowering target to
0
1.0
Q1/13
Q2/13
Q3/13
Q4/13
Q1/14
Q2/14
$105. In our view, the long-term FCF build for AGU is much
better than most other stocks in our coverage universe (Exhibit
26). However, given our expectation for weakness in the Source: K+S; Scotiabank GBM.
fertilizer market, due to lower acreage, compressed farmer
budgets, and expectations of a normal yield, we think it’s
prudent for investors to lower near-term expectations. The Exhibit 26 – AGU’s Shareholder Prize Remains Intact
impact to AGU could come from multiple sources, such as
$2,000
$12
retail margins, volumes, reduced rebates, and potentially
weaker wholesale prices. We’re not sure how much of a re$10
$1,500
rating 2015 earnings will see, but we’ve taken our 2015
numbers down to $7.25. Against this backdrop, we no longer
$8
$7.34
$7.25
forecast AGU to achieve the $1.3B of 2015 retail EBITDA it
$1,000
has been talking about for several years. Other than a possible
$5.61
$678
$6
dividend hike toward $4 from $3, which we think AGU needs
$500
to do imminently, we’re not sure where the incremental upside
$238
$4
will come from over the next six months. The FCF story is still
there and has not changed, which is why we like AGU over
$0
$2
the long-term (i.e., FCF quantity growth, FCF quality growth,
and FCF return to shareholders), but it is likely pushed out
-$294
-$500
$0
and/or compressed slightly now. Our target price is reduced to
2013
2014E
2015E
2016E
2017E
$105 from $110. We would not be surprised to see AGU trade
down temporarily and view anything south of $85 as a rare Source: Scotiabank GBM estimates.
buying opportunity even for a cyclical such as AGU.
■ Maintain POT at Sector Perform; raising target to $34. For
those that think we’re perma-bears on POT, we’re not. It’s Exhibit 27 – POT’s Cost Profile Is Set to Improve Dramatically by 2016/17
true, we are certainly bearish on the potash market, but that
doesn’t mean we MUST be bearish on POT itself. In fact, POT
is starting to look more interesting these days, especially given
the recent pullback, as well as the weak outlook for the
fertilizer market, which we think will lead to investors paying
up for some of the unique aspects POT offers, including: (1)
dividend growth – likely toward $1.60 before the end of
January – our estimate only; (2) FCF growth – mostly on the
back of the conclusion of growth capex, (3) the ability to
increase production by at least 50% (and actually much more)
for little to no expense; (4) free call options on BPC 2.0 + BHP
2.0. Additionally, we think POT has proven its ability to
manage the potash market this year, and it has been
exceptional. As the above factors become a more prominent
theme for POT entering into 2015, we think a modest valuation Source: PotashCorp.
multiple bump is warranted. Canadians seeking shelter from
gold doesn’t hurt either! Our target increases to $34. We
suggest investors buy POT here.
Free Cash Flow (LHS)
Adjusted EPS ($/sh)
Free Cash Flow ($M)
Adjusted EPS (RHS)
44
■ Upgrading MOS to Sector Outperform; maintain target at
$52. At times, POT is protected by Canadians with nowhere Exhibit 28 – One Reason We Prefer MOS over POT
else to put their money, especially when the gold trade is to the
downside. MOS does not have this luxury, which means
meaningful pullbacks offer unique opportunities for near-term
outperformance, provided the underlying business remains
solid. Does MOS have its challenges? Yes. We don’t ‘love’
India exposure, and MOS has more than its peers. We also
recognize that U.S. DAP/MAP capacity is becoming less
competitive globally, especially as Saudi Arabia, China, and
Morocco ramp low cost capacity. But, MOS has numerous
strategies to overcome its challenges, which include: (1) the
Ma’aden II JV with Sabic; (2) the continued ramp of higher
margin MicroEssentials; (3) the closure of high cost potash
mines like Hersey and Carlsbad; (4) the completion of potash
expansion projects, including K3, which we see as an
insurance policy against a flood at K1/K2; (5) the investment
into a distribution business in Brazil, which is where MOS has Source: Bloomberg; Scotiabank GBM.
a shipping advantage relative to India. With the recent
pullback, we now see a greater than 25% total ROR as being
available for shareholders over the next year, with no change Exhibit 29 – Another Reason We Prefer MOS over POT
to our $52 target price. Investors should buy MOS.
100%
■ Maintain CF at Sector Outperform, maintain target at
POT
90%
MOS
$300. Now that the Yara distraction is over, investors should
80%
revisit CF’s FCF story, which we see as reaching $50+/sh in
2017, assuming no changes to Q2 nitrogen pricing and/or gas
70%
costs, as well as to leverage. Heading into 2015, we think it
60%
will become more apparent that there is no volume risk to
50%
North American nitrogen producers, as the U.S. is forecast to
remain a net importer of ammonia, urea, and hopefully UAN
40%
over the next five years. While falling Chinese coal prices is a
30%
slight risk to our 2015 CF thesis, as these producers set the
20%
marginal cost of urea production, we’re not too concerned, as
China is better ‘managing’ its coal and nitrogen industries. CF
10%
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
remains one of the best ways to play the fertilizer space right
now, with the stock set to improve on: (1) strong FCF and
dividend growth prospects; and (2) a L/T valuation multiple Source: Bloomberg; Scotiabank GBM.
rerating as investors realize CF’s FCF is more stable given
recent deals with off-takers like MOS.
Exhibit 30 – Nitrate Margin Development in Europe
■ Maintain YAR at Sector Perform; maintain target at NOK
300. With CF out of the way, YAR’s stock price going forward
$1,200
Yara EU gas cost *20
will be based on three factors: (1) European gas price
Urea CFR Europe
development; (2) sufficient evidence to support a sustainable
Ammonia (46%N)
$1,000
nitrate premium in excess of the historical average; and (3)
CAN (46% N)
Chinese coal price development for marginal cost urea
producers. Based on the Zeebrugge forward strip, gas prices in
$800
Europe are set to rise, which will negatively impact Yara’s
margins in Q4. However, this should already be largely priced
$600
in. While we don’t know how the nitrate premium will play
out, we can take comfort that the European Union recently
extended anti-dumping duties on Russian nitrates entering the
$400
union, which means Yara is somewhat protected. We are
comfortable with Chinese coal, and therefore marginal urea
production costs, which have stopped falling (for now). This
$200
comes at a time when the low export tax window will close
and tighten up the supply/demand balance of the seaborne urea
$0
market. On the margin, what keeps us on the sidelines is a lack
of a permanent senior management team, which will likely
cause investors to rethink how efficiently shareholder value Source: CRU; Bloomberg; Scotiabank GBM estimates.
creation develops from here.
15x
Multiple Spread
13x
POT
MOS
11x
EV/ NTM EBITDA
9x
7x
5x
3x
1x
-1x
-3x
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Price ($/mt)
Price / RCN Per Share (%)
-5x
Oct-11
Feb-14
Jun-14
Oct-14
45
Cash Costs ($/st)
■ Maintain IPI at Sector Perform; maintain target at $13.50.
We’re feeling more comfortable about the FCF prospects for Exhibit 31 – IPI’s Cash Costs Should Improve with the HB Mine
IPI, especially now that HB is halfway through its ramp up
300
period, which means the bulk of capex is behind the company,
and cash costs should start to improve. Specifically, we’re
250
looking for a 9% improvement to overall cash costs toward
$175/st (assuming a $90/st cash cost at HB). What also keeps
200
us optimistic in the near term is: (1) logistics issues in Canada
150
and the northern U.S. that will benefit IPI’s Southern Plains
markets; and (2) the closure of MOS’ Carlsbad mine that will
100
reduce availability in the region; and (3) a portfolio that sells
25% to 30% of potash into non-agriculture markets, which
50
should limit demand and netback volatility. We recently
upgraded IPI to Sector Perform, and believe a Market Weight
0
position is appropriate for now, especially given the lack of
consensus as to how the potash market will play out next year.
■ Maintain SQM at Sector Perform; lowering target to $28.
With RB Energy bankrupt, SQM is helped from the closure of Source: Intrepid Potash; Scotiabank GBM estimates.
the Quebec Lithium mine, as well as the likely shutdown of
RBI’s Aguas Blancas iodine operation. Despite the temporary
help from RBI, both commodities remain challenged, which is Exhibit 32 – Iodine Market Share
partially what keeps us on the sidelines at Sector Perform.
While we have seen greater cooperation by iodine producers in
Chile, we’re unsure how sustainable the behaviour is, and more
importantly, if the free-fall in iodine (~1/3 of SQM’s EBITDA)
is behind us. Other factors that keep us on the sidelines
include: (1) Chilean tax reform; (2) the dispute with CORFO;
and (3) issues related to SQM’s largest shareholder and
Chairman of the company, which could keep the stock on the
pressure. Over the long-term, the current stock price will likely
prove to be a good entry point, but we can’t justify the risk
when there are better opportunities elsewhere in the space.
Source: SQM.
46
Importers Margin ($/mt)
MOP (000 mt)
Monsoon Wrap Up
■ One-third of India’s subdivisions received ‘deficient’ rain
this season (Exhibit 33). Deficient is defined as -20% to -59%, Exhibit 33 – The 2014 Indian Monsoon Was 12% Below Normal.
whereas normal rainfall can ‘still’ be as low as -20% from
normal. The departure from normal stands at -12%. Despite a
significant improvement from -50% in June and -24% in July,
fertilizer purchase decisions have already been made.
■ India’s Rabi crops may experience a water shortage.
According to Indian Meteorological Department, Rabi crops,
including wheat and barley, could face water shortages this
fertilizer year. With the monsoon season now over, the nations
key resoivoirs are barely two-thirds full. This comares to one
year ago when dams were over 80% full.
■ We have seen 1M+ mt of potash stock-piling over the past
year. According to India’s Department of Fertilizers, potash
imports on a rolling 12 month period are 3.4M mt, while
consumption over the same period is 2.2M mt (Exhibit 34).
The stockpiling is a result of the weak monsoon, and could
lead to lower-than-expected 2015 potash shipments to India. In
fairness, as the monsoon season improved in Aug 1, some of
the stock-piled potash may have been used for NPK.
■ DAP demand direction is likely lower. Initially, the weak
start to the monsoon led some retailers to drop the price of
DAP below the MRP of INR 22,500/mt to stimulate demand.
Now, there are rumours swirling that the government may drop
the customs duties on raw materials required to produce DAP,
which would lead to a revised MRP of about INR 20,000/mt –
also used to simulate demand. On the other side of the equation
is the importer’s current margin (or lack thereof). Given the
phosphoric acid contract the Indians recently signed with OCP,
the DAP price should stay in the $500/mt (CFR) area until
sulphur/ammonia ease. However, the problem with $500/mt is
that it leaves no room for an importer margin (Exhibit 35). Source: India Meteorological Department.
Therefore, some are increasing the MRP to INR 23,500/mt and
beyond to allow for an importer margin. In our view, a higher
MRP will reduce farmer demand, while a lower MRP will
Exhibit 34 – Indian Potash Imports Are Growing Faster Than Consumption
reduce importer demand.
4,000
Cumulative Consumption
■ If URKA achieves a 10% hike on the Chinese potash
3,500
Cumulative Imports
contract, Indian importer margins will turn negative. We
3,000
About 1,100k mt of potash distributor
estimate the importer is currently earning about $26/mt, based
2,500
inventory has been built over the past
year. This could reduce 2015 import s.
on an import price of $322/mt, 180 days credit, a MRP of INR
2,000
1,500
16,000/mt, and an F/X rate of INR 61 to the U.S. dollar.
1,000
Therefore, a $30 hike on China’s current $305/mt contract – if
500
pushed through to the Indians – would push importers into the
0
red, similar to current DAP economics!
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
■ New gas price in India could lead to increased urea import
demand. The Indian government has raised the industrial Source: CRU; Scotiabank GBM.
natural gas price to between $6.00 and $6.50/mmBtu, which
will severely hamper the profitability of many domestic Exhibit 35 – Indian DAP Importer Margins Are Negative!
producers that have been enjoying $4.20/mmBtu feedstock for
120
some time. We estimate India currently produces ~22M mt of
100
urea and imports about ~8M mt. The higher gas price will
80
likely cause the urea MRP to increase, unless the Indian
60
government puts more subsidy dollars into nitrogen to keep
40
prices stable. Etiher way, the risk for urea demand is to the
20
downside, if anything.
0
Oct-13
Jan-14
-20
Source: CRU; Bloomberg; Scotiabank GBM.
Apr-14
Jul-14
47
Exhibit 36 – Tear Sheet - AGU
Agrium
AGU.T; AGU.N
1-Year Target:
1-Year Return:
Rating:
NTM Dividend
Risk:
FY End:
$105
30.5%
SO
$3.00
Medium
Dec. 31
Last Price:
Market Cap:
EV:
Avg. Volume:
FD Shares O/S:
Float:
$82.79
$11.9B
$15.5B
0.8M
144.0M
99.8%
Valuation: 7.5x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 10%, 60% RCN
Insider Ownership:
Institutional Ownership:
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
2012
6.0x
8.4x
15.0x
1.7x
2013
7.4x
11.3x
50.0x
1.8x
2014E
8.4x
14.8x
-40.6x
1.7x
2015E
6.6x
11.4x
17.6x
1.5x
Target Valuation
Price to Earnings (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
1.8%
21%
9%
26%
16%
-1%
2.7%
16%
7%
24%
13%
-18%
3.6%
11%
5%
21%
11%
-13%
3.6%
13%
5%
22%
14%
27%
Income Statement
Net Sales
COGS
Gross Profit
EBITDA
Wholesale
Retail
AAT
Other
Net Income
Adj EPS (FD)
2012
16,485
12,121
4,364
2,573
1,795
951
32
-205
1,429
$9.88
2013
15,976
12,157
3,819
2,099
1,281
1,039
12
-233
1,060
$7.34
2014E
15,983
12,569
3,413
1,835
842
1,088
0
-94
787
$5.61
2015E
16,518
12,954
3,564
2,338
1,099
1,200
0
39
1,044
$7.25
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
2012
726
3,698
15,977
2013
801
4,960
15,977
2014E
500
6,648
15,708
2015E
500
7,497
16,475
Short-Term Debt
Long-Term Debt
Total Liabilities
1,846
2,115
9,057
822
3,066
9,181
1,361
3,004
8,579
1,787
2,544
8,733
Shareholders' Equity
6,920
6,796
7,129
7,742
2012
1,997
-3,330
593
-740
2013
1,750
-681
-867
150
2014E
1,715
-2,064
-112
-460
2015E
1,664
-1,198
-892
-425
Cash Flow Statement
Operating (post-WC)
Investing
Financing
Cash Δ
Replacement Cost New
Calculated: $184/sh
Target:
Current:
60%
45%
Operational
Nitrogen Volume (M mt)
Phosphate Volume (M mt)
Phosphate Realized Price ($/mt)
Potash Volume (M mt)
Potash Realized Price ($/mt)
Adj EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus*
2012
$1.34a
$5.04a
$1.34a
$2.16a
$9.88a
Multiple
14.5x
7.5x
60%
10.0%
Value
$105.16
$97.06
$110.15
$109.50
Weight
25%
25%
25%
25%
2013
3.6
1.0
$638
1.5
$369
2014E
4.1
1.0
$578
1.0
$303
2015E
4.9
0.9
$593
2.1
$281
2013
$1.03a
$4.94a
$0.50a
$0.87a
$7.34a
2014E
$0.07a
$4.37a
$0.50
$0.66
$5.61
$5.73
2015E
$0.39
$4.62
$0.96
$1.28
$7.25
$7.90
Δ
2014E Sensitivity
Potash ($/mt)
Phosphate Margin ($/mt)
Nitrogen Margin ($/mt)
Resale Margin (%)
Crop Protection Margin (%)
Crop Nutrient Margin (%)
Seed Margin (%)
Merchandise (%)
C$ (US$)
$10
$10
$10
1%
1%
1%
1%
1%
$0.01
EPS
+6¢
+5¢
+18¢
+8¢
+21¢
+27¢
+13¢
+3¢
-3¢
Credit Metrics
Net Debt/EBITDA
Interest Coverage
Debt/Total Capital
Standard & Poor's:
2012
1.3x
24.0x
0.36x
BBB
2013
1.5x
18.0x
0.36x
2014E
2.1x
13.8x
0.38x
Moody's:
2015E
1.6x
11.7x
0.36x
Baa2
Free Cash Flow
EBITDA
Less: Cash Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
2012
2,573
500
3
1,274
796
2013
2,099
338
-293
1,816
238
2014E
1,835
302
-175
2,003
-294
2015E
2,338
385
77
1,198
678
All figures in $M, unless otherwise noted.
* Bloomberg.
Source: Bloomberg; Scotiabank GBM estimates.
0.3%
65.1%
48
Exhibit 37 – Tear Sheet - CF
CF Industries
CF.N
1-Year Target:
1-Year Return:
Rating:
NTM Dividend
Risk:
FY End:
$300
24.9%
SO
$6.00
High
Dec. 31
Last Price:
Market Cap:
EV:
Avg. Volume:
FD Shares O/S:
Float:
$244.96
$12.6B
$14.7B
0.8M
51.2M
99.5%
Valuation: 7x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 9%, 70% RCN
Insider Ownership:
Institutional Ownership:
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
2012
4.2x
8.9x
11.9x
2.0x
2013
5.2x
10.5x
8.2x
2.3x
2014E
6.6x
12.5x
n.m.
2.6x
2015E
6.1x
11.9x
24.6x
2.5x
Target Valuation
Price to Earnings (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
0.7%
31%
17%
47%
50%
16%
0.9%
29%
18%
52%
56%
-19%
2.0%
30%
13%
42%
47%
-21%
2.4%
19%
8%
46%
55%
8%
2012
6,225
2,991
3,234
189
3,054
3,500
1,840
$27.48
2013
5,475
2,955
2,520
75
2,445
2,822
1,465
$23.41
2014E
4,696
2,724
1,972
10
1,962
2,227
1,450
$19.61
2015E
4,388
2,358
2,030
0
2,030
2,409
953
$20.51
Income Statement
Net Sales
COGS
Gross Profit
Phosphate
Nitrogen
EBITDA
Net Income to CS
EPS (FD)
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
2012
2,275
3,901
10,167
2013
1,711
4,102
10,678
2014E
659
5,893
11,083
2015E
0
6,856
11,367
Short-Term Debt
Long-Term Debt
Total Liabilities
5
1,600
3,885
0
3,098
5,240
0
4,592
6,226
86
4,592
6,393
Shareholders' Equity
6,282
5,438
4,857
4,974
Cash Flow Statement
Operating (post-WC)
Investing
Financing
Cash Δ
2012
2,376
-514
-797
1,068
2013
1,467
-1,065
-935
-564
2014E
1,014
-1,315
-750
-1,051
2015E
1,699
-1,500
-944
-746
Replacement Cost New
Calculated: $413/sh
All figures in $M, unless otherwise noted.
* Bloomberg.
Source: Bloomberg; Scotiabank GBM estimates.
Target:
Current:
70%
59%
0.50%
94.9%
Operational
Nitrogen Sales (M Product st)
Realized Urea ($/st)
Realized Ammonia ($/st)
DAP & MAP Volume (M st)
Realized DAP Price ($/st)
EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus*
2012
$6.06a
$8.71a
$5.85a
$7.27a
$27.48a
Multiple
14.5x
7.0x
70%
9.0%
Value
$297.33
$282.26
$288.91
$332.60
Weight
25%
25%
25%
25%
2013
12.9
$369
$592
1.9
$427
2014E
13.1
$373
$530
0.5
$343
2015E
13.1
$350
$525
0.0
$0
2013
$6.03a
$8.53a
$3.89a
$5.04a
$23.41a
2014E
$4.51a
$6.10a
$3.47
$5.54
$19.61
$19.96
2015E
$4.59
$7.26
$3.59
$5.06
$20.51
$20.72
Δ
2014E Sensitivity
DAP/MAP ($/st)
Urea ($/st)
Ammonia ($/st)
UAN ($/st)
Natural Gas ($/mmBtu)
DAP/MAP Volume (000 st)
Ammonia Volume (000 st)
Urea Volume (000 st)
UAN Volume (000 st)
$10
$25
$10
$25
-$0.25
100
100
100
100
EPS
+23¢
+78¢
+28¢
+180¢
+94¢
+7¢
+40¢
+18¢
+15¢
Credit Metrics
Net Debt/EBITDA
Interest Coverage
Debt/Total Capital
Moody's:
2012
-0.2x
22.8x
0.20x
Ba2
2013
0.5x
15.8x
0.36x
2014E
1.8x
8.3x
0.49x
2015E
1.9x
7.4x
0.48x
Free Cash Flow
EBITDA
Less: Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
2012
3,500
964
488
994
1,055
2013
2,822
844
-376
820
1,534
2014E
2,227
396
297
2,200
-666
2015E
2,409
413
-14
1,500
510
49
Exhibit 38 – Tear Sheet - IPI
Intrepid Potash
IPI.N
1-Year Target:
1-Year Return:
Rating:
NTM Dividend
Risk:
FY End:
$13.50
-1.2%
SP
$0.00
High
Dec. 31
Last Price:
Market Cap:
EV:
Avg. Volume:
FD Shares O/S:
Float:
$13.66
$1.0B
$1.2B
0.9M
75.6M
73.6%
Valuation: 11x 2015E EBITDA, DCF @ 10%, 40% RCN
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
2012
6.4x
11.7x
n.m.
1.1x
2013
13.8x
42.0x
n.m.
1.1x
2014E
13.0x
n.m.
17.9x
1.1x
2015E
10.8x
46.6x
19.9x
1.1x
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
0.0%
10%
9%
40%
42%
-12%
0.0%
2%
2%
25%
27%
-53%
0.0%
1%
1%
14%
25%
6%
0.0%
2%
2%
20%
29%
21%
Income Statement
Net Sales
COGS
Gross Profit
Potash
Langbeinite (Trio)
EBITDA
Net Income
Adj EPS (FD)
2012
422
237
170
168
3
179
87
$1.17
2013
307
217
78
74
8
83
22
$0.33
2014E
359
294
52
39
12
88
11
$0.13
2015E
370
279
72
56
16
107
22
$0.29
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
Short-Term Debt
Long-Term Debt
Total Liabilities
Shareholders' Equity
Cash Flow Statement
Operating (post-WC)
Investing
Financing
Cash Δ
2012
34
543
995
2013
0
690
1,175
2014E
44
825
1,159
2015E
114
801
1,184
0
0
89
0
150
241
0
150
212
0
150
215
906
934
947
969
2012
188
-170
-57
-40
2013
65
-246
148
-33
2014E
113
-24
-1
43
2015E
110
-40
0
70
Replacement Cost New
Calculated: $35/sh
Source: Bloomberg; Scotiabank GBM estimates.
Target:
Current:
40%
39%
Insider Ownership:
Institutional Ownership:
26.4%
73.6%
Target Valuation
Price to Earnings (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
Multiple
11.0x
40%
10.0%
Value
$13.93
$13.85
$13.69
Weight
33%
33%
33%
Operational
Potash Volume (000 st)
Realized Price ($/st)
2012
839
$454
2013
692
$382
2014E
897
$330
2015E
945
$315
Trio Volume (000 st)
Realized Price ($/st)
124
$329
123
$352
179
$350
216
$335
Adj EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus*
2012
$0.27a
$0.25a
$0.38a
$0.26a
$1.17a
2013
$0.20a
$0.17a
$0.07a
-$0.11a
$0.33a
2014E
-$0.01a
$0.07a
$0.05
$0.02
$0.13
$0.18
2015E
$0.08
$0.08
$0.07
$0.07
$0.29
$0.36
Δ
2014E Sensitivity
Potash ($/st)
Potash Sales (000 st)
Potash Margin (%)
Trio ($/st)
Trio Sales (000 st)
Trio Margin (%)
$10
50
2%
$10
50
5%
EPS
+8.4¢
+3.4¢
+5.5¢
+1.6¢
+3.3¢
+2.7¢
Credit Metrics
Net Debt/EBITDA
Interest Coverage
Debt/Total Capital
Standard & Poor's/Moody's:
2012
n.a.
n.a.
n.a.
n.a.
2013
1.2x
n.a.
0.2x
2014E
1.2x
3.2x
0.2x
2015E
1.2x
7.2x
0.2x
Free Cash Flow
EBITDA
Less: Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
2012
179
27
-7
246
-88
2013
83
8
62
250
-237
2014E
88
3
-17
45
58
2015E
107
7
7
40
52
All figures in $M, unless otherwise noted.
* Bloomberg.
50
Exhibit 39 – Tear Sheet - MOS
The Mosaic Company
MOS.N
1-Year Target:
1-Year Return:
Rating:
NTM Dividend
Risk:
FY End:
$52
30.0%
SO
$1.00
High
Dec 31
Last Price:
Market Cap:
EV:
Avg. Volume:
FD Shares O/S:
Float:
$40.76
$15.7B
$16.0B
2.6M
386.0M
93.4%
Valuation: 8.5x 2015E EBITDA, 16x 2015E EPS, DCF @ 9.5%, 45% RCN
Insider Ownership:
Institutional Ownership:
6.6%
77.2%
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
2012
5.7x
10.0x
9.3x
1.2x
2013*
n.m.
n.m.
n.m.
1.4x
2014E
7.6x
16.6x
10.4x
1.4x
2015E
6.6x
12.4x
28.8x
1.3x
Target Valuation
P/E (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
Multiple
16.0x
8.5x
45%
9.5%
Value
$52
$52
$52
$53
Weight
25%
25%
25%
25%
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
0.7%
14%
10%
28%
28%
-10%
2.5%
n.m.
n.m.
22%
23%
n.m.
2.5%
8%
5%
22%
25%
n.m.
2.5%
10%
6%
24%
27%
15%
Operational
P Crop Nutrients (M mt)
Realized DAP ($/mt)
Realized Blends ($/mt)
Potash Volume (M mt)**
Realized MOP ($/mt)
2013*
5.9
$443
$519
7.7
$349
2014E
6.9
$443
$471
8.5
$276
2015E
8.7
$421
$463
8.5
$285
Income Statement
Sales
COGS
Gross Profit
Potash
Phosphate
Corporate/Other
EBITDA
Net Income
Adj EPS (FD)
2012
9,974
7,214
2,760
1,611
1,162
-13
2,811
1,886
$4.08
2013*
9,021
7,006
2,016
1,104
913
-2
2,118
1,063
$2.84
2014E
8,538
6,667
1,870
802
1,068
0
2,116
951
$2.45
2015E
8,989
6,858
2,131
860
1,271
0
2,444
1,232
$3.28
2013*
n.a.
n.a.
$0.51a
$0.36a
$2.84a
2014E
$0.52a
$0.70a
$0.57
$0.66
$2.45
$2.54
2015E
$0.77
$0.92
$0.76
$0.82
$3.28
$3.38
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
2012
3,697
8,487
18,086
2013*
5,293
8,577
19,554
2014E
2,241
10,004
18,224
2015E
2,162
10,879
19,312
70
1,010
4,643
23
3,009
8,233
13
3,013
6,982
13
3,013
7,212
Shareholders' Equity
13,443
11,321
11,242
12,099
Cash Flow Statement
Operating (post-WC)
Investing
Financing
Cash Δ
2012
1,965
-1,590
-398
-36
2013*
2,020
-1,595
1,515
1,888
2014E
2,465
-2,656
-2,831
-3,032
2015E
1,895
-1,600
-374
-79
Short-Term Debt
Long-Term Debt
Total Liabilities
Replacement Cost New
Calculated: $116/sh
All figures in $M, unless otherwise noted.
* 2013 represents a change in fiscal year end.
** Includes K-Mag.
Source: Bloomberg; Scotiabank GBM estimates.
Target:
Current:
45%
35%
Adj EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus***
2012
$1.03a
$1.05a
$0.88a
$1.14a
$4.08a
Δ
2014E Sensitivity
Potash ($/mt)
DAP/MAP ($/mt)
Tampa Ammonia ($/mt)
Sulphur ($/lt)
Natural Gas ($/mmBtu)
P Sales (M mt)
K Sales (M mt)
C$ (US$)
Brazilian Real (US$)
$20
$20
-$20
-$20
-50¢
0.5
0.5
5¢
2¢
EPS
+41¢
+31¢
+4¢
+13¢
+2¢
+15¢
+13¢
-14¢
+2¢
Credit Metrics
Net Debt/EBITDA
Interest Coverage
Debt/Total Capital
Standard & Poor's:
2012
-0.9x
n.m.
0.1x
BBB-
2013*
-1.1x
n.m.
0.2x
2014E
0.4x
11x
0.2x
Moody's:
2015E
0.4x
11x
0.2x
Baa2
Free Cash Flow
EBITDA
Less: Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
2012
2,811
341
-817
1,588
1,699
2013
3,478
611
-405
2,172
1,100
2014E
2,116
178
-724
1,150
1,512
2015E
2,444
231
67
1,600
545
51
Exhibit 40 – Tear Sheet - POT
Potash Corporation of Saskatchewan
POT.T; POT.N
1-Year Target:
$34
Last Price:
$31.92
1-Year Return:
10.9%
Market Cap:
$27.0B
Rating:
SP
EV:
$31.1B
NTM Dividend
$1.40
Avg. Volume:
4.3M
Risk:
High
FD Shares O/S:
847.0M
FY End:
Dec. 31
Float:
99.4%
Valuation: 9.5x 2015E EBITDA, 17.5x 2015E EPS, DCF @ 9.5%, 50% RCN
Insider Ownership:
Institutional Ownership:
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
Target Valuation
Price to Earnings (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
2012
8.6x
11.2x
33.4x
2.7x
2013
9.4x
15.1x
17.7x
2.8x
2014E
10.3x
17.5x
17.9x
3.2x
2015E
9.6x
16.2x
11.9x
3.0x
2.0%
21%
12%
43%
48%
-25%
3.7%
19%
10%
39%
49%
-8%
4.4%
18%
9%
37%
48%
-8%
4.4%
18%
10%
40%
52%
7%
Income Statement
Sales
COGS
Gross Profit
Potash
Phosphate
Nitrogen
EBITDA
Net Income
Adj EPS (FD)
2012
7,927
3,997
3,437
1,963
469
978
3,604
2,106
$2.85
2013
7,306
3,918
2,815
1,578
310
908
3,307
1,810
$2.11
2014E
6,936
3,833
2,536
1,333
208
997
3,030
1,544
$1.83
2015E
6,666
3,491
2,670
1,510
405
755
3,227
1,649
$1.97
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
2012
562
11,505
18,206
2013
628
12,233
17,958
2014E
0
12,561
17,092
2015E
206
12,321
16,967
Short-Term Debt
Long-Term Debt
Total Liabilities
615
3,466
8,294
967
2,970
8,330
462
3,711
8,554
430
3,211
7,945
Shareholders' Equity
9,912
9,628
8,538
9,022
Cash Flow Statement
Operating (post-WC)
Investing
Financing
Cash Δ
2012
3,252
-2,204
-889
159
2013
3,237
-1,624
-1,522
91
2014E
2,447
-1,110
-1,997
-660
2015E
2,461
-558
-1,665
238
Credit Metrics
Net Debt/EBITDA
Interest Coverage
Debt/Total Capital
Standard & Poor's:
2012
1.0x
23.0x
0.29x
A-
2013
1.0x
16.3x
0.29x
2014E
1.4x
11.7x
0.33x
Moody's:
2015E
1.1x
12.9x
0.29x
A3
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
Free Cash Flow
EBITDA
Less: Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
Adj EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus*
Multiple
17.5x
9.5x
50%
9.5%
Value
$34.40
$31.43
$37.36
$32.16
Weight
25%
25%
25%
25%
2012
3,604
529
133
2,133
809
2013
3,307
440
-285
1,624
1,529
2014E
3,030
398
22
1,100
1,510
2015E
3,227
420
-14
558
2,263
2012
$0.58a
$1.02a
$0.74a
$0.52a
$2.85a
2013
$0.63a
$0.73a
$0.44a
$0.31a
$2.11a
2014E
$0.40a
$0.56a
$0.45
$0.42
$1.83
$1.81
2015E
$0.53
$0.54
$0.49
$0.41
$1.97
$2.12
Δ
2014E Sensitivity
Potash ($/mt)
DAP/MAP ($/mt)
Urea ($/mt)
Ammonia ($/mt)
Sulphur ($/lt)
Natural Gas ($/mmBtu)
N Sales (M mt)
P Sales (M mt)
K Sales (M mt)
C$ (US$)
Operational
Potash Sales (M mt)
Realized Price ($/mt)
Solid Phosphate Sales (M mt)
Realized Price ($/mt)
Ammonia Sales (M mt)
Realized Price ($/mt)
Urea Sales (M mt)
Realized Price ($/mt)
$10
$20
$20
$20
-$20
-50¢
0.1
0.1
0.1
1¢
2013
8.1
$332
1.2
$615
2.0
$525
1.1
$414
Replacement Cost New
Calculated: $75/sh
All figures in $M, unless otherwise noted.
* Bloomberg.
Source: Bloomberg; Scotiabank GBM estimates.
0.9%
81.3%
EPS
+7¢
+6¢
+5¢
+4¢
+3¢
+7¢
+2¢
+2¢
+1¢
-1¢
2014E
9.0
$262
1.2
$495
2.1
$504
1.2
$426
2015E
9.1
$253
1.2
$488
2.1
$461
1.3
$358
Target:
Current:
50%
43%
52
Exhibit 41 – Tear Sheet - SDF
K+S Aktiengesellschaft
SDF
1-Year Target:
1-Year Return:
Rating:
NTM Dividend
Risk:
FY End:
€ 22.00
12.0%
SP
€ 0.36
High
Dec. 31
Last Price:
Market Cap:
EV:
Avg. Volume:
FD Shares O/S:
Float:
€ 19.97
€ 3.8B
€ 5.5B
1.7M
191.4M
90.1%
Valuation: 7x 2015E EBITDA, 13x 2015E EPS, DCF @ 10%, 25% RCN
Insider Ownership:
Institutional Ownership:
9.9%
22.9%
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
2012
5.3x
6.7x
5.1x
1.1x
2013
6.1x
8.7x
n.m.
1.1x
2014E
6.3x
11.9x
-17.1x
1.0x
2015E
6.4x
11.1x
-7.9x
0.9x
Target Valuation
Price to Earnings (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
Metric
13.0x
7.0x
25%
10.0%
Value
€ 23.48
€ 22.72
€ 21.77
€ 20.67
Weight
25%
25%
25%
25%
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
7.0%
16%
9%
45%
26%
-13%
1.3%
12%
6%
43%
23%
-13%
1.3%
9%
4%
41%
23%
-4%
1.8%
8%
4%
40%
22%
-1%
Operational
Potash Volume (M mt)
Potash Europe (€/mt)
Potash Overseas (€/mt)
Salt (M mt)
Salt De-icing/Other (€/mt)
2013
6.9
305
281
22.8
55/103
2014E
6.9
289
252
23.2
51/102
2015E
7.0
269
255
23.0
58/101
Income Statement
Sales
COGS
Gross Profit
EBITDA
Potash
Salt
Other
Net Income
EPS (FD)
2012
3,935
-2,159
1,777
1,038
870
180
28
668
€ 3.00
2013
3,950
-2,246
1,705
903
668
236
32
419
€ 2.28
2014E
3,748
-2,219
1,529
863
642
235
33
344
€ 1.68
2015E
3,832
-2,300
1,532
856
533
336
33
346
€ 1.81
EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus*
2013
€ 0.99a
€ 0.56a
€ 0.37a
€ 0.36a
€ 2.28a
2014E
€ 0.74a
€ 0.31a
€ 0.17
€ 0.46
€ 1.68
€ 1.66
2015E
€ 0.80
€ 0.33
€ 0.24
€ 0.44
€ 1.81
€ 1.65
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
2012
352
2,535
6,639
2013
1,011
2,933
7,498
2014E
713
3,970
8,714
2015E
184
4,847
9,175
Short-Term Debt
Long-Term Debt
Total Liabilities
1
1,265
3,162
746
1,509
4,102
735
2,009
4,956
735
2,009
4,992
Shareholders' Equity
3,477
3,397
3,758
4,183
Cash Flow Statement
Operating (post-WC)
Investing
Financing
Cash Δ
2012
557
-891
243
-122
2013
756
-809
668
660
2014E
868
-1,605
439
-298
2015E
653
-1,135
-48
-529
Replacement Cost New
Calculated: €87/sh
Source: Bloomberg; Scotiabank GBM estimates.
Target:
Current:
25%
23%
2012
€ 1.01a
€ 0.79a
€ 0.52a
€ 0.68a
€ 3.00a
Δ
2014E Sensitivity
Potash (€/mt)
De-icing Salt (€/mt)
Potash COGS (€/mt)
Comp EBITDA Margin
K Sales (M mt)
De-icing Salt Sales (M mt)
US$ (€ )
€ 10
€5
-€ 10
5%
0.1
1.0
10¢
EPS
+27c
+11c
+27c
+3c
+3c
+6c
-26c
Credit Metrics
Net Debt/EBITDA
Interest Coverage
Debt/Total Capital
Standard & Poor's:
2012
0.9x
7.9x
0.3x
BBB
2013
1.4x
7.9x
0.4x
2014E
2.4x
7.9x
0.4x
Moody's:
2015E
3.0x
7.9x
0.4x
Ba1
Free Cash Flow
EBITDA
Less: Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
2012
1,038
198
-286
378
749
2013
903
133
88
709
-28
2014E
863
122
-135
1,100
-223
2015E
856
125
77
1,135
-481
All figures in €M, unless otherwise noted.
* Bloomberg.
53
Exhibit 42 – Tear Sheet - SQM
Sociedad Quimica y Minera de Chile
SQM.N (ADR)
1-Year Target:
1-Year Return:
Rating:
NTM Dividend
Risk:
FY End:
$28
24.9%
SP
$0.57
Medium
Dec. 31
Last Price:
Market Cap:
EV:
Avg. Volume:
FD ADRs O/S:
Float:
$22.87
$6.0B
$7.1B
0.4M
263.2M
0.0%
Valuation: 11x 2015E EBITDA, 20x 2015E EPS, DCF @ 10.5%
Insider Ownership:
Institutional Ownership:
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
2012
6.3x
9.3x
9.0x
2.8x
2013
8.5x
12.9x
15.3x
2.5x
2014E
10.0x
20.1x
8.3x
2.3x
2015E
8.7x
15.8x
13.0x
2.0x
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
0.0%
30%
15%
42%
46%
17%
0.0%
19%
10%
33%
38%
-25%
0.0%
12%
6%
28%
34%
-15%
0.0%
13%
7%
31%
37%
15%
Segmented GM
SPN
Iodine & Derivatives
Lithium & Derivatives
MOP (& SOP 2010+)
Industrial Chemicals
Income Statement
Sales
COGS
Gross Profit
Potash
Iodine & Derivatives
Lithium & Derivatives
Industrial Chemicals
EBITDA
Net Income
Adj EPS (FD)
2012
2,429
1,205
1,029
216
0
53
0
1,118
649
$2.47
2013
2,203
1,265
722
152
0
50
0
833
467
$1.77
2014E
2,086
1,293
580
168
0
39
0
707
299
$1.14
2015E
2,202
1,304
685
203
0
38
0
810
381
$1.45
Adj EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus*
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
2012
324
1,988
4,416
2013
477
2,054
4,768
2014E
859
1,953
4,980
2015E
1,238
1,890
5,332
Short-Term Debt
Long-Term Debt
Total Liabilities
153
1,446
2,229
401
1,417
2,335
216
1,362
2,381
216
1,139
2,361
Shareholders' Equity
2,187
2,432
2,599
2,971
Cash Flow Statement
Operating (post-WC)
Investing
Financing
Cash Δ
2012
650
-563
-198
-121
2013
736
-578
-2
146
2014E
886
-65
-447
389
2015E
698
-150
-169
379
All figures in $M, unless otherwise noted.
* Bloomberg.
Source: Bloomberg; Scotiabank GBM estimates.
~64.0%
39.8%
Target Valuation
Price to Earnings (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
Multiple
20.0x
11.0x
10.5%
Value
$28.98
$29.81
$26.18
Weight
33%
33%
33%
2012
32%
62%
51%
41%
34%
2013
22%
56%
48%
27%
28%
2014E
23%
45%
42%
20%
35%
2015E
28%
49%
42%
23%
29%
2012
$0.57a
$0.73a
$0.63a
$0.54a
$2.47a
2013
$0.58a
$0.41a
$0.53a
$0.26a
$1.77a
2014E
$0.31a
$0.27a
$0.28
$0.28
$1.14
$1.57
2015E
$0.34
$0.40
$0.36
$0.35
$1.45
$1.87
Δ
2014E Sensitivity
Potash ($/mt)
Potash Margin (%)
SPN Margin (%)
Iodine Margin (%)
Lithium Margin (%)
Industrial Chemicals Margin (%)
SPN Sales (M mt)
K Sales (M mt)
Chilean Peso (US$)
$15
3%
3%
3%
3%
3%
100
100
$30
EPS
+6¢
+5¢
+7¢
+13¢
+5¢
+2¢
+3¢
+1¢
+3¢
Credit Metrics
Net Debt/EBITDA
Debt/Total Capital
Standard & Poor's:
2012
1.1x
0.42x
BBB
2013
1.6x
0.43x
2014E
1.0x
0.38x
Moody's:
2015E
0.1x
0.31x
Baa1
Free Cash Flow
EBITDA
Less: Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
2012
1,118
0
9
444
666
2013
833
0
52
386
395
2014E
707
134
-270
120
723
2015E
810
161
36
150
463
54
Exhibit 43 – Tear Sheet - YAR
Yara International ASA
YAR.OL
1-Year Target:
1-Year Return:
Rating:
NTM Dividend
Risk:
FY End:
NOK 300
1.4%
SP
NOK 7.15
High
Dec. 31
Last Price:
Market Cap:
EV:
Avg. Volume:
FD Shares O/S:
Float:
NOK 302.90
NOK 83.8B
NOK 87.0B
1.0M
276.5M
63.4%
Valuation: 5.5x 2015E EBITDA, 11.5x 2015E EPS, DCF @ 10.5%, 45% RCN
Insider Ownership:
Institutional Ownership:
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
2012
5.1x
8.4x
19.5x
1.7x
2013
6.7x
12.5x
19.5x
1.5x
2014E
5.6x
10.5x
n.m.
1.4x
2015E
5.8x
11.0x
11.9x
1.3x
Target Valuation
Price to Earnings (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
Multiple
11.5x
5.5x
45%
10.5%
Value
NOK 316
NOK 288
NOK 275
NOK 322
Weight
25%
25%
25%
25%
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
2.3%
21%
13%
26%
20%
-6%
4.3%
10%
7%
23%
15%
-25%
2.4%
13%
9%
24%
17%
20%
3.3%
12%
8%
20%
14%
-3%
Operational
Total Upstream (M mt)
Ammonia ($/mt)
Urea ($/mt)
Total Industrial (M mt)
Total Downstream (M mt)
2013
16.4
$475
$340
4.5
23.5
2014E
17.7
$464
$315
4.7
24.4
2015E
19.7
$410
$300
4.8
28.6
2013
7.95a
7.98a
5.62a
2.64a
24.23a
2014E
7.03a
7.74a
8.15
5.93
28.85
28.28
2015E
7.66
7.17
6.55
6.06
27.44
27.15
Income Statement
Sales
COGS
Gross Profit
EBITDA
Upstream
Industrial
Downstream
Eliminations
Net Income
Adj EPS (FD)
2012
84,508
62,507
22,001
17,125
11,849
1,112
3,910
254
10,601
2013
85,053
65,093
19,960
12,900
8,715
1,105
4,388
-1,309
5,747
2014E
91,266
69,160
22,106
15,528
11,536
1,251
5,800
-3,058
7,952
2015E
105,997
85,112
20,886
15,070
11,536
1,251
5,800
-3,517
7,589
NOK 35.99
NOK 24.23
NOK 28.85
NOK 27.44
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
2012
9,941
27,893
81,259
2013
6,819
32,867
88,980
2014E
2,061
37,714
89,442
2015E
5,176
37,259
95,415
Short-Term Debt
Long-Term Debt
Total Liabilities
1,914
9,694
31,351
4,823
6,231
32,562
419
6,371
28,399
420
6,370
30,055
Shareholders' Equity
49,908
56,418
61,043
65,360
Cash Flow Statement
Operating (post-WC)
Investing
Financing
Cash Δ
2012
13,232
-3,955
-5,050
4,073
2013
12,175
-9,258
-5,988
-3,119
2014E
9,003
-7,351
-6,465
-4,763
2015E
10,071
-4,200
-2,757
3,115
Replacement Cost New
Calculated: NOK611/sh
Source: Bloomberg; Scotiabank GBM estimates.
Target:
Current:
45%
50%
Adj EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus*
36.2%
26.4%
2012
8.36a
10.84a
9.05a
7.72a
35.99a
Δ
2014E Sensitivity
Phosphate Rock Cost ($/mt)
Urea ($/mt)
Ammonia ($/mt)
Nitrates ($/mt)
Zeebrugge Gas ($/mmBtu)
Crude Oil ($/bbl)
Henry Hub Gas ($/mmBtu)
NOK (US$)
Credit Metrics
Net Debt/EBITDA
Debt/Total Capital
Standard & Poor's:
Free Cash Flow
EBITDA
Less: Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
$50
$10
$10
$10
-$0.50
-10.0
-1.0
0.1¢
EPS
+ NOK 0.57
+ NOK 0.64
+ NOK 0.12
+ NOK 0.63
+ NOK 1.14
+ NOK 0.00
+ NOK 0.28
+ NOK 0.57
2012
0.1x
0.19x
BBB
2013
0.3x
0.16x
2014E
0.3x
0.10x
Moody's:
2015E
0.1x
0.09x
Baa2
2012
17,125
2,600
1,629
3,568
9,328
2013
12,900
1,985
2,201
4,425
4,288
2014E
15,528
2,348
2,141
7,328
3,711
2015E
15,070
2,187
1,657
4,200
7,025
All figures in NOK M, unless otherwise noted.
* Bloomberg.
55
Pertinent Data
Rating Risk
1-Yr
Target
Key Data
Year 2
Year 1
Year 3
Valuation
Agrium Inc. (AGU-N)
New
$105.00
Adj. EPS15E: $7.25
7.5x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 10%, 60%
RCN
Old
$110.00
Adj. EPS15E: $7.72
7.5x 2015E EBITDA, 14x 2015E EPS, DCF @ 10%, 60%
RCN
Valuation: 7.5x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 10%, 60% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
CF Industries Holdings, Inc. (CF-N)
New
Adj. EPS14E: $19.61 Adj. EPS15E: $20.51
Old
Adj. EPS14E: $18.62 Adj. EPS15E: $20.35
Valuation: 7x 2015E EBITDA, 14.5x 2015E EPS, DCF @ 9%, 70% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Intrepid Potash, Inc. (IPI-N)
New
Adj. EPS14E: $0.13
Adj. EPS15E: $0.29
11x 2015E EBITDA, DCF @ 10%, 40% RCN
Old
Adj. EPS14E: $0.10
Adj. EPS15E: $0.47
9.5x 2015E EBITDA, 22x 2015E EPS, DCF @ 10%, 40%
RCN
Valuation: 11x 2015E EBITDA, DCF @ 10%, 40% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
The Mosaic Company (MOS-N)
New SO
EPS15E: $3.28
8.5x 2015E EBITDA, 16x 2015E EPS, DCF @ 9.5%, 45%
RCN
Old SP
EPS15E: $3.33
8.5x 2015E EBITDA, 15.5x 2015E EPS, DCF @ 9.5%, 45%
RCN
Valuation: 8.5x 2015E EBITDA, 16x 2015E EPS, DCF @ 9.5%, 45% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Verde Potash plc (NPK-T)
New
$1.10
0.3x NAV
Old
$2.10
0.6x NAV
Valuation: 0.3x NAV
Key Risks to Price Target: Financing, development progress, potash supply/demand
Potash Corporation of Saskatchewan, Inc. (POT-N)
New
$34.00
Adj. EPS14E: $1.83
Adj. EPS15E: $1.97
9.5x 2015E EBITDA, 17.5x 2015E EPS, DCF @ 9.5%, 50%
RCN
Old
$33.00
Adj. EPS14E: $1.80
Adj. EPS15E: $2.00
9x 2015E EBITDA, 16.5x 2015E EPS, DCF @ 9.5%, 50%
RCN
Valuation: 9.5x 2015E EBITDA, 17.5x 2015E EPS, DCF @ 9.5%, 50% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
56
Pertinent Data
Key Data
Year 2
1-Yr
Target
Year 1
New SP
€22.00
EPS14E: €1.68
EPS15E: €1.81
7x 2015E EBITDA, 13x 2015E EPS, DCF @ 10%, 25% RCN
Old SU
€21.00
EPS14E: €1.50
EPS15E: €1.72
6.5x 2015E EBITDA, 12x 2015E EPS, DCF @ 10%, 25%
RCN
Rating Risk
Year 3
Valuation
K+S AG (SDF-DE)
Valuation: 7x 2015E EBITDA, 13x 2015E EPS, DCF @ 10%, 25% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Sociedad Quimica y Minera de Chile (SQM-N)
New
$28.00
Adj. EPS14E: $1.14
Adj. EPS15E: $1.45
11x 2015E EBITDA, 20x 2015E EPS, DCF @ 10.5%
Old
$33.00
Adj. EPS14E: $1.22
Adj. EPS15E: $1.72
11x 2015E EBITDA, 19.5x 2015E EPS, DCF @ 10.5%
Valuation: 11x 2015E EBITDA, 20x 2015E EPS, DCF @ 10.5%
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Yara International ASA (YAR-OL)
New
Adj. EPS14E: 28.85kr Adj. EPS15E: 27.44kr
Old
Adj. EPS14E: 27.21kr Adj. EPS15E: 28.10kr
Valuation: 5.5x 2015E EBITDA, 11.5x 2015E EPS, DCF @ 10.5%, 45% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
57
Industry Comment
Friday, October 17, 2014, Pre-Market
Gold & Precious Minerals
Oil Price Sensitivity On Gold
Seniors
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
[email protected]
Joanne van Ballegooie - (416) 863-7431
(Scotia Capital Inc. - Canada)
[email protected]
James Bender, CPA, CA - (416) 945-4648
(Scotia Capital Inc. - Canada)
[email protected]
Event
■ We have run sensitivities for a 10% oil price decline in our coverage
universe.
ScotiaView Analyst Link
Implications
■ Falling oil prices are positive for miners in the long term. Short-term
fluctuations may not have an immediate impact due to inventories at mine
sites in addition to subsidies in various countries. The main use for oil in the
mining industry is focused on fuel for mining equipment (trucks, etc.) and
diesel/oil for power generation in mining operations where there is no
access to grid power (or too expensive).
■ Our analysis shows that for a 10% decline in oil prices over a one-year
period in oil prices, our companies would see a benefit in 2015 of ~3% for
EPS, ~1.3% for cash flow, ~1.5% for EBITDA, and ~2.5% on NAV
(LOM). Our companies are using an average oil price of $103/bbl in their
costing budgets.
Recommendation
■ ABG, AU, GFI, IMG and NEM show the greatest sensitivity on an NAV
basis to falling oil prices. The least sensitive companies are ELD, G, K and
YRI. On 2015 cash flow, the most sensitive names are ABG, AEM, IMG
and NEM; the least sensitive are K and YRI.
For Reg AC and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
58
Oil Price Sensitivity on Gold Equities
■ We have reviewed the oil price sensitivity for our coverage universe. For gold producers the
sensitivity comes from cost savings, as some operations use oil for power in their operations
and in other consumables (fuel in trucks etc.). In some cases, the countries where certain
mines are located may have subsidies in place versus spot oil prices, therefore, the impact
may not be felt in these locations. Some assets are in remote locations and these may have 12
to 18 months of inventory on site. The companies have factored these details into their
sensitivities in addition to any hedges they may have in place.
■ Exhibit 1 has 2015 EPS, CFPS, EBITDA and NAV sensitivity for a ~10% decline in oil
prices based on our estimates, all else equal. Our analysis is based on the cash cost impact
provided by each gold producer at the beginning of the year based on each company’s base
oil price assumption for planning purposes, see Exhibit 2 for more details on these. We have
assumed that the sensitivity for 2015 is similar to the 2014 sensitivity as 2015 budgets are
currently being prepared and are expected to be released in early 2015. Please note that for
royalty companies, namely FNV, the impact comes on the fall in revenue from their oil and
gas royalties.
Exhibit 1 - Oil Price Sensitivities - 10% Decline From Base Assumption of ~$100/bbl.
Period
Financial Estimate
Gold Producers
ABG
ABX
AEM
AU
BVN
ELD
G
GFI
GOLD
IMG
K
NEM
YRI
Average - gold producers
2015
EPS
2015
CFPS
2015
EBITDA
LT
NAV
6.2%
1.5%
3.0%
3.0%
2.1%
1.1%
1.9%
3.6%
2.2%
8.5%
1.2%
4.0%
1.4%
3.0%
3.3%
0.7%
1.9%
1.1%
1.5%
0.7%
0.8%
1.1%
1.3%
2.4%
0.4%
1.9%
0.4%
1.3%
3.2%
0.7%
1.8%
1.3%
1.6%
0.8%
1.1%
1.4%
1.6%
3.0%
0.5%
1.8%
0.6%
1.5%
4.6%
1.5%
2.6%
4.0%
2.0%
0.9%
1.0%
3.8%
1.7%
3.7%
0.8%
5.2%
0.8%
2.5%
Royalties
FNV
RGLD
Average - royalties
-2.4%
0.0%
-1.2%
-1.4%
0.0%
-0.7%
-1.5%
0.0%
-0.7%
-1.2%
0.0%
-0.6%
Source: Scotiabank GBM estimates.
■ The impact on gold producers is not as strong as we might expect for several reasons. First,
as seen in Exhibit 3, fuel accounts for about 10% of the cost structure for extracting gold (or
$70/oz in operating costs) plus an additional amount for diesel used in power generation
(which is included within the power category). Second, miners will buy oil months in
advance for some operations, especially if they are in remote areas. Consequently, there is a
timing issue at play where short-term oil prices may not have an impact as the companies
may have already purchased oil for the next 12-18 months for assets in remote areas (i.e
assets like K’s mines in Russia or AEM’s Meadowbank that have fuel farms). Most
companies will have some sort of inventory at mine sites. Additionally, some companies
may hedge their oil exposure in the market and also some countries in South America have
subsidies. As a result, the industry would need to experience lower oil prices over a period of
time in order for the impact to be felt on margins due to the reasons mentioned above.
59
Exhibit 2 – Cash Cost Sensitivity for a $10/bbl Move in Oil
Cash Cost Sensitivity Per $10/bbl Move in Oil
Company
Seniors
ABX
G
K
NEM
Intermediates
AEM
ELD
IMG
YRI
Internationals
ABG
AU
BVN
GOLD
GFI
Average
2014E
Oil price assumption
Change in
Cash Costs
(US$/bbl)
Cash costs (US$/oz) % Move
$585
$656
$742
$734
$100
$100
$100
$100
$5
$8
$3
$13
1%
1%
0%
2%
$655
$541
$845
$618
$95
$100
$95
$100
$12
$5
$14
$4
2%
1%
2%
1%
$741
$801
$801
$792
$688
$700
$125
$100
$100
$110
$110
$103
$15
$7
$7
$12
$7
$9
2%
1%
1%
2%
1%
1%
Source: As provided by company officials/reports, Scotiabank GBM estimates.
Exhibit 3 – Cost Structure Breakdown
Cash Cost Components
ELD
K
G1
IMG1
NEM
ABX
AEM
YRI
Other:
ABG
AU
BVN
GFI1
GOLD2
Average
Labour
23%
37%
37%
22%
50%
40%
43%
26%
Fuel
9%
15%
9%
13%
10%
10%
9%
8%
40%
44%
58%
45%
45%
39%
15%
10%
7%
0%
10%
10%
Breakdown of Cost Structure
Power
Consumables
14%
42%
8%
34%
10%
20%
18%
20%
10%
10%
5%
20%
5%
37%
12%
33%
5%
10%
3%
13%
20%
10%
20%
21%
23%
27%
15%
25%
Other
12%
6%
24%
27%
20%
25%
6%
21%
Total
100%
100%
100%
100%
100%
100%
100%
100%
20%
15%
12%
15%
10%
16%
100%
100%
100%
100%
100%
100%
1) Fuel included in consumables.
2) Labour includes mine contracting and consultant costs.
Figures may not add due to rounding
Source: as provided by company officials/reports, Scotiabank GBM estimates.
■ Conclusion – The current fall in oil price may not be felt right away in margins due to
various factors (inventories at sites, subsidies etc.). Fuel alone is $70/oz to the cost structure
and a 10% move in oil price impacts costs by about ~$10/oz. This is fuel alone, and some of
the power cost is diesel/oil generated, so the impact will likely be higher (power is about
10% cost structure as well or $70/oz). From a sensitivity perspective, the most sensitive
companies under our coverage on NAV impact are ABG, AU, GFI, IMG and NEM. The
least sensitive are ELD, G, K and YRI. On a cash flow basis, the most sensitive names are
ABG, AEM, IMG and NEM; the least sensitive are K and YRI.
60
Universe of Coverage
Price
ABG-L
ABX-N
AEM-N
AU-N
AUY-N
BVN-N
DDC-N
EGO-N
FNV-N
GFI-N
GG-N
GOLD-Q
IAG-N
KGC-N
NEM-N
RGLD-Q
200.70p
US$13.78
US$30.46
US$10.45
US$5.76
US$11.21
US$14.21
US$7.29
US$54.69
US$3.87
US$23.88
US$69.21
US$2.47
US$2.94
US$22.72
US$68.87
Rating
Risk
1-Yr
ROR
SP
SP
SP
SP
SO
SP
SO
SO
SP
SP
SO
SP
SP
SP
SP
SP
High
High
High
High
High
High
High
High
High
High
High
High
High
High
High
High
295.00p
$20.00
$40.00
$18.00
$11.00
$13.00
$20.00
$10.00
$62.50
$5.00
$32.50
$92.00
$4.00
$5.00
$28.00
$88.00
48.5%
46.6%
32.4%
72.2%
93.6%
16.0%
40.7%
37.6%
15.7%
30.5%
38.6%
33.7%
61.9%
70.1%
24.3%
29.0%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
African Barrick Gold plc (ABG-L)
Valuation: 1.00x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Barrick Gold Corporation (ABX-N)
Valuation: 1.05x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Agnico Eagle Mines Limited (AEM-N)
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; foreign exchange risk.
AngloGold Ashanti Limited (AU-N)
Valuation: 1.10x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Yamana Gold Inc. (AUY-N)
Valuation: 1.40x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Compañía de Minas Buenaventura SAA (BVN-N)
Valuation: 0.85x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk; permitting risk.
Dominion Diamond Corporation (DDC-N)
Valuation: 1.00x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; foreign exchange risk; global economy outlook.
61
Eldorado Gold Corporation (EGO-N)
Valuation: 1.20x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Franco-Nevada Corporation (FNV-N)
Valuation: 1.90x NAV
Key Risks to Price Target: Commodity prices; non-operator.
Gold Fields Limited (GFI-N)
Valuation: 0.90x NAV
Key Risks to Price Target: Commodity prices; operational and development risk; political risk; currency risk.
Goldcorp Inc. (GG-N)
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk
Randgold Resources Limited (GOLD-Q)
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
IAMGOLD Corporation (IAG-N)
Valuation: 0.75x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Kinross Gold Corporation (KGC-N)
Valuation: 1.00x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Newmont Mining Corporation (NEM-N)
Valuation: 1.15x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Royal Gold Inc. (RGLD-Q)
Valuation: 1.80x NAV (excluding cash)
Key Risks to Price Target: Commodity prices; non-operator.
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
62
Industry Comment
Monday, October 20, 2014, Pre-Market
Gold & Precious Minerals
Revising our Precious Metal Price
Deck
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
[email protected]
Joanne van Ballegooie - (416) 863-7431
(Scotia Capital Inc. - Canada)
[email protected]
James Bender, CPA, CA - (416) 945-4648
(Scotia Capital Inc. - Canada)
[email protected]
Event
■ We have adjusted our precious metal price deck.
ScotiaView Analyst Link
Implications
■ Gold/Silver Price Assumptions - Our revised 2014 gold price estimate is
$1,270/oz reflecting the year-to-date average and assuming spot prices for
Q4/14. For 2015 and 2016, our price is $1,300/oz as is our long-term price
for 2017 and beyond (unchanged at $1,300/oz). For silver, our price has
been adjusted in accordance with the gold price and is now $19.00/oz.
■ Gold Outlook - The gold price short term faces headwinds with the
strengthening of the U.S. dollar and a more positive sentiment towards the
U.S. economic outlook. We believe that longer-term inflationary
expectations with quantitative easing have increased money supply which
will eventually increase the velocity of money and multiplier supporting a
higher gold price. This is despite expectation of nominal rate hikes as long
as real rates remain under 2%. Timing of this is difficult to forecast and
hence we have remained more conservative in our forecasts.
■ Investment Thesis - With our gold price forecast at an average of
$1,300/oz level for the foreseeable future, our focus is on companies that
can run their business in this price environment (i.e., delivering on
operations). Balance sheet strength will be of importance. Companies which
have optionality, declining AIC and positive FCF will be rewarded.
Recommendation
■ We have only one rating change; AEM moves to SO from SP. Our other
Sector Outperform rated companies are G, ELD and YRI in the North
American names. GOLD remains our top pick in the internationals.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
63
Updating Our Commodity Price Deck
■ Background to Our Pricing Adjustment for 2015 and 2016 – We are adjusting our gold
price forecast for 2014 to $1,270/oz given year-to-date actual pricing ($1,285/oz). Short
term, the gold price faces headwinds with the strengthening of the U.S. dollar (Exhibit 1
shows the strong correlation at -96%) and a more positive sentiment towards the U.S.
economic outlook. This has resulted in gold's role as a "safe haven" to change somewhat and
outflows have been evident both in the gold ETFs (see Exhibit 2) albeit small relative to last
year and Comex positions (see Exhibit 3). We have seen ~265 tonnes hit the market since
mid-August from Comex and ETFs. We believe this sentiment will continue into 2015.
■ Economic Drivers for Longer Term Pricing 2015+ – With quantitative easing having
occurred globally and money supply at very high levels, particularly in the U.S. (see Exhibit
4), this money supply will ultimately flow through the system and this will be evident
through the increase in the velocity of money and the money multiplier. This will result in
inflationary expectations. Currently, there are none as both of these are at very low
levels (see Exhibit 5). It is difficult to forecast timing of inflation in the current market. Real
rates are another important factor for the gold price. Real interest rates continue to be
negative (currently at negative 1.68%) which support gold as an investment versus other
asset classes with negative returns (see Exhibit 6). Once the U.S. economy improves and rate
hikes are a focus, our analysis shows that gold price can perform well in a real interest rate
environment up to 2% (even in a rising short-term nominal rate environment; see Exhibit 7).
Surpassing the 2% mark should result in gold as an asset class to underperform versus other
asset classes. For the gold price to underperform other asset classes, this would have to
imply interest rate hikes of about 370 basis points. Timing of inflationary expectations is
difficult to forecast and hence we have remained more conservative in our forecast for
commodity pricing.
■ Supply/Demand for the Commodity – With the decline in the gold price, mine output is
forecast to remain flat in the short term (very few projects are coming on stream) and
declining longer term. This is due to lower grades being mined coupled with the continued
deferral of projects. Scrap (recycled gold) has been declining to a more normalized rate with
the lower pricing. On the demand side, central banks continue to be net buyers of gold. We
believe this view of diversifying outside of the US dollar continues to be part of their
mandate. Jewellery demand has rebounded somewhat from the 2009 recession dip, although
still not to pre-recession levels. This demand is seasonal given various holiday periods
around the world. China and India are the two key gold buyers; however, both down in
Q2/14 over Q1/14. In China, jewellery demand declined 45% to 154.7 tonnes (demand in
Hong Kong was down 52%) as consumers stuck with their occasion-driven buying approach.
While, again, the decrease was very high for the region, the WGC analysis show that 2014
demand has reverted toward more of a trend level. A weaker renminbi also pushed domestic
prices up and contributed to the weaker environment. In India, jewellery demand was down
18% YOY. The big story in India in Q2/14 was the general election in mid-May. Highervalue purchases had been restricted in the run-up to the election, which contained demand.
Following the election, demand fell off sharply as the market waited to see whether the
newly elected government would relax the import restrictions on gold, however, no further
changes of the restrictions was announced, and combined with the onset of the seasonally
quieter gold buying period, demand was subdued for the remainder of Q2/14. Unofficial
flows of gold into India continued – these flows will likely build momentum over the coming
months as we move into a seasonally stronger period (Diwali and the wedding season). The
Indian stock market had also been outperforming the world’s largest stock exchanges (has
declined with the global markets since September), and some believe that this may have
impacting gold buying as it becomes another vehicle to invest in other than the physical
market. We await Q3/14 supply/demand data from the World Gold Council. As mentioned
previously, the strength of the U.S. dollar, coupled with Comex selling in recent months (a
total of ~194t in since mid-August, 2014) and continued selling through the ETFs (a total of
~107t to date in 2014) have placed pressure on the gold price in recent months. There still
remains a net long position of ~265 tonnes on the Comex and if U.S. dollar continues to
strengthen this may come to market.
■ Gold Price Assumptions – Our 2014 gold price assumption is adjusted to $1,270/oz from
$1,300/oz. We have also decreased our 2015 and 2016 estimates; to $1,300/oz (from
$1,400/oz and $1,500/oz, respectively). Our long-term gold price is unchanged at $1,300/oz
which reflects normalized all-in costs in the industry. Our gold price reflects a zero contango
64
in the gold market; although we believe long-term that inflationary expectations will kick in,
and gold price will react well to this trigger, it is very difficult to forecast timing and hence
have kept our pricing outlook flat for our current modelling and valuations.
■ Silver Price Assumptions – The silver price change assumes a 68.5:1 ratio for silver to
gold. Our estimate for 2014 is now $19.25/oz from $20.50/oz. For 2015, our silver price is
$19.00/oz (from $22.50/oz), $19.00/oz in 2016 (from $25.00/oz). Our long-term price has
been adjusted slightly to $19.00/oz from $20.00/oz.
■ Platinum/Palladium Price Assumptions – We have adjusted our platinum and palladium
commodity prices to be generally in line with consensus. Our platinum estimate for 2014
changes to $1,453/oz (from $1,494/oz), our 2015 estimate is $1,500/oz (unchanged) our
2016 estimate is $1,600/oz (from $1,400/oz), our 2017 and beyond estimate is $1,600/oz
(from $1,400/oz). Our palladium estimate for 2014 changes to $818/oz (from $753/oz), our
2015 estimate is $853/oz (from $725/oz) our 2016 estimate is $900/oz (from $700/oz), our
2017 beyond estimate is $950/oz (from $650/oz).The only company in our coverage universe
with platinum/palladium exposure is FNV.
■ Base Metal Prices – We have incorporated the base metal price deck as launched by the SC
base metal team on October 6. For more detail, please view their report titled “Updated
Commodity Price Outlook: Steel Inputs Complex Taken to the Woodshed”. We have also
updated our oil and gas price deck as outlined by our oil & gas research team on September
29, 2014 in their report titled “Quarterly Commodity Price Update”.
Exhibit 1 – Gold Correlation to US Dollar – Almost Perfect Negative Correlation
Since July 1, 2014
Exhibit 2 – Gold ETFs - Monthly Inflows and Outflows
250
1,350
200
Correlation: -0.96
150
$1,900
Price Range (US$/oz)
Min
Max
Tonnes
<$600
531
$
600 $
700
225
$
700 $
800
124
$
800 $
900
427
$
900 $ 1,000
361
> $1,000
0
$1,800
$1,700
$1,600
$1,500
100
Tonnes
Gold Price (US $/oz)
$1,300
50
$1,200
0
$1,100
$1,000
-50
$900
1,250
-100
$800
$700
-150
$600
Gold Price Vs USD
-200
Dec-05
Trendline
$500
Dec-06
Dec-07
Dec-08
Dec-10
Dec-10
Dec-11
Dec-12
1,200
79
80
81
82
83
84
85
86
ETF - tonnes bough t/so ld - monthly
US Dollar
Source: Bloomberg; Scotiabank GBM.
Source: ETF websites; Scotiabank GBM estimates.
Monthly A vera ge Gold Price
Dec-13
Gold Price (US$/oz)
$1,400
1,300
65
Exhibit 3 – Weekly Speculative Position on the Comex
Exhibit 4 – Money Supply (M2)
300,000
$1,800
270,000
Current Long Position = 85,415 contracts or 8.5 Moz
12,000
$1,800
$1,700
10,000
240,000
$1,600
210,000
$1,600
$1,500
$1,400
$1,400
180,000
8,000
120,000
$1,100
$1,000
90,000
$900
60,000
$1,200
Gold Price/M2 Money Supply r2 = 84%
$1,000
6,000
$800
$800
30,000
M2 Money Supply
$1,200
Gold Price ($/oz)
$1,300
150,000
US$/oz
4,000
$600
$700
$600
0
$400
$500
(30,000)
2,000
$400
(60,000)
$200
$300
$200
Gold Price
Source: Bloomberg; Scotiabank GBM.
Feb-14
Feb-12
Feb-10
Feb-08
Feb-06
Feb-04
Feb-02
Feb-00
Feb-98
Feb-96
Feb-94
Feb-92
Feb-90
Feb-88
Feb-86
Feb-84
Feb-82
Feb-80
Feb-78
$0
Lon don PM Fix G old Price
Feb-76
Non-Commercial Positio n - Fu tur es Only
Feb-72
(90,000)
Feb-74
Non-Commercial - Net Position
$2,000
$1,900
M2 Money Supply
Source: Bloomberg; Scotiabank GBM.
Exhibit 5 - Velocity of Money and the Money Multiplier
Exhibit 6 - Real Interest Rates versus Gold Price
11
1.100
$1,900
10.00%
$1,800
10
8.00%
$1,700
1.000
$1,600
6.00%
$1,500
Multiplier Using MzM (LHS)
0.900
$1,400
4.00%
$1,300
8
0.800
7
0.700
6
0.600
Gold Price (US$/oz)
$1,200
2.00%
$1,100
$1,000
0.00%
$900
$800
-2.00%
$700
$600
-4.00%
$500
Velocity (RHS)
5
$400
0.500
Multiplier:
Money Zero Maturity Money Stocks (MzM) /
Reserves of Depository Institutions Adjusting for Changes in Reserve Requirements,
Monetary Base
4
-6.00%
$300
Shaded areas show
periods of negative real
interest rates
$200
0.400
$100
$0
1968
Velocity
GDP / Money Zero Maturity Money Stocks (MzM)
3
-10.00%
1971
1974
1977
1980
1983
1986
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: Bloomberg; Scotiabank GBM.
Source: The Federal Reserve Bank of St. Louis; the BEA; Scotiabank Economics; Global
Insight.
1989
Gold Price
0.300
72
-8.00%
Real Interest Rates: -1.68%
Gold Price: $1,238.00
1992
1995
1998
Real Interest Rates
2001
2004
2007
2010
2013
Real Interest Rates (%)
9
66
Exhibit 7 - Real Interest Rates and Gold Price Performance
3.5%
Rising Short Term Rates
Falling Short Term Rates
3.0%
2.5%
Monthly Average Return
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
<-2
<-1
<0
<1
<2
<10
<-2
<-1
<0
<1
<2
<10
Real Interest Rate Ranges (%)
Data from 1968 onwards
Source: Bloomberg; Scotiabank GBM estimates.
■ The consensus average estimate for 2014 is $1,296/oz; $1,290/oz for 2015; $1,303/oz for
2016, $1,313/oz for 2017 and $1,306/oz in 2018 (see Exhibit 9). Our forecasts are in line
with consensus.
Exhibit 8 - Commodity Price Forecasts
Commodities
Gold (US$/oz)
Silver (US$/oz)
Palladium (US$/oz)
Platinum (US$/oz)
Source: Scotiabank GBM estimates.
Current
2014E
2015E
2016E
2017E
Long-Term
$1,238
$17.34
$755
$1,259
$1,270
$19.25
$818
$1,453
$1,300
$19.00
$853
$1,500
$1,300
$19.00
$900
$1,600
$1,300
$19.00
$950
$1,600
$1,300
$19.00
$950
$1,600
67
Exhibit 9 - Consensus Gold Price Estimates (US$/oz)
Scotiabank GBM
BB&T Capital
Bernstein Research
BMO Capital Markets
BNP Paribas
Canaccord Genuity
CIBC World Markets
CIMB Research
Clarus Securities
Cormark Securities
Daiwa Securities
Deutsche Bank
DZ Bank
Desjardins
GMP
Haywood Securities
Investec Securities
Jeffries
Jennings
Laurentian Bank Securities
M Partners
National Bank Financial
Nomura
Numis Securities
PI Financial
RBC Capital Markets
Raymond James
Salman Partners
Sanford C. Bernstein & Co.
Societe Generale
Standard Chartered
Stifel Nicolaus
TD Securities
Consensus Average
Consensus High
Consensus Low
2014E
$1,270
$1,291
$1,300
$1,270
$1,275
$1,270
$1,350
$1,291
$1,320
$1,291
$1,250
$1,291
$1,247
$1,315
$1,276
$1,300
$1,270
$1,264
$1,297
$1,346
$1,250
$1,298
$1,346
$1,266
$1,400
$1,331
$1,321
$1,294
$1,300
$1,290
$1,275
$1,299
$1,300
$ 1,296
$ 1,400
$ 1,247
2015E
$ 1,300
$ 1,300
$ 1,349
$ 1,190
$ 1,200
$ 1,217
$ 1,300
$ 1,325
$ 1,350
$ 1,300
$ 1,250
$ 1,163
$ 1,106
$ 1,350
$ 1,336
$ 1,300
$ 1,300
$ 1,200
$ 1,325
$ 1,550
$ 1,250
$ 1,325
$ 1,460
$ 1,200
$ 1,400
$ 1,300
$ 1,350
$ 1,300
$ 1,349
$ 1,175
$ 1,160
$ 1,300
$ 1,300
$ 1,290
$ 1,550
$ 1,106
2016E
$ 1,300
$ 1,300
$ 1,404
$ 1,238
$ 1,230
$ 1,242
$ 1,200
$ 1,306
$ 1,350
$ 1,300
$ 1,250
$ 1,150
n.a
$ 1,350
$ 1,350
$ 1,300
$ 1,300
$ 1,200
$ 1,375
$ 1,650
$ 1,250
$ 1,350
$ 1,510
$ 1,200
$ 1,400
$ 1,325
$ 1,350
$ 1,300
$ 1,404
$ 1,000
$ 1,220
$ 1,300
$ 1,300
$ 1,303
$ 1,650
$ 1,000
2017E
$ 1,300
n.a
$ 1,461
$ 1,250
n.a
$ 1,253
n.a
n.a
$ 1,350
$ 1,300
n.a
$ 1,125
n.a
$ 1,350
$ 1,350
$ 1,300
$ 1,300
$ 1,200
n.a
$ 1,500
n.a
$ 1,400
$ 1,510
$ 1,200
$ 1,400
$ 1,375
$ 1,350
$ 1,275
$ 1,461
$
900
n.a
n.a
$ 1,300
$ 1,313
$ 1,510
$
900
2018E
$ 1,300
n.a
$ 1,520
$ 1,250
n.a
$ 1,284
n.a
n.a
$ 1,350
$ 1,300
n.a
$ 1,200
n.a
$ 1,350
$ 1,350
$ 1,300
$ 1,300
$ 1,200
n.a
n.a
n.a
$ 1,400
n.a
n.a
$ 1,400
$ 1,400
$ 1,350
$ 1,250
$ 1,520
$
800
n.a
n.a
$ 1,300
$ 1,306
$ 1,520
$
800
Source: FactSet; Scotiabank GBM estimates.
Revising our Financial Estimates and Net Asset Values
■ Exhibit 10 outlines our revised net asset values (NAVs) for the gold companies and our
revised targets. In addition to changes to our precious metal pricing, we have also:
1. Incorporated base metal assumptions as per SC Research forecasts.
2. Incorporated oil & gas assumptions as per SC Research forecasts (as it pertains to
FNV).
3. We have updated our FX estimates in line with SC FX forecasts.
4. Have adjusted values for assets that are based on a $/oz in the ground to reflect current
pricing.
5. Investment portfolios in juniors have been marked-to-market.
6. We have removed some of the development assets (more details in each company
section below) and valued them on a $/oz in the ground.
7. As in our previous modelling, where the cash balance has turned negative, we have
adjusted companies to draw down on current credit facilities with payback when the
facilities expire. Our cash balances reflect our conversations with management as to
what levels of cash are required to be maintained on the balance sheet to run the
business.
■ We have also made the following company specific changes:
■ ABX – We adjusted the Pascua-Lama valuation based on $/oz in the ground and have this
value similar to the DCF if the project were to start in 2020. Since we do not have PascuaLama coming into production by 2017, we have assumed an ABX repayment to Silver
Wheaton of about $275M, in 2017.
■ NEM – We have updated our Batu Hijau mine module in line with last reported guidance.
NEM’s divided paid is also impacted by the level of the gold price.
68
■ AEM – We have assumed 52ktpd for 2015/2016 at Canadian Malartic and assumed $100M
to get to 60ktpd by 2017 (over 55ktpd requires an amendment to permits). We have also
adjusted for the Cayden Resources acquisition (issued shares) which is expected to close
before year-end. Furthermore, we have given some value in the exploration portfolio to the
Amaruq project (formerly IVR).
■ ELD – We value Perama Hill on a $/oz in the ground given the determination of the permit
is difficult now with a minority government in place. ELD’s dividend is impacted by the
level of the gold price and production.
■ IMG – We have adjusted for the updated diamond royalty exposure.
■ YRI – C1 Santa Luz and Ernesto Pau-a-Pique (EPP) have been valued on a $/oz in the
ground basis but we have kept holding costs in place for 2015. We have also been more
conservative on Pilar’s ramp-up. Canadian Malartic has been modelled in line with AEM
(see above).
■ ABG – The dividend is tied to the profitability of the company. We have assumed the lower
end of guidance for payout at 15% of cash flow net of sustaining capital.
■ AU – We have modified our mine module for Obuasi with the lower gold price given the
mine is losing money. A new mine plan with lower production is expected to be released
next year.
■ BVN – We have assumed a lower value for Chucapaca based on a $/oz in the ground. The
dividend is based on company profitability from direct operations, and thus was adjusted
with the lower profitability expected with the lower gold price. We have lowered our
effective tax rate going forward to reflect the higher share of income from associates going
forward.
■ GFI – We have adjusted the royalty value of Chucapaca in line with BVN valuation. The
dividend is based on company profitability and thus is adjusted with the lower gold price.
■ GOLD – We have valued Massawa based on a $/oz in the ground given management’s
current view of the project. Additionally, we have lowered our depreciation expense
estimate for 2014 taking into account year-to-date actual financial results and expected
2H/14 operations.
■ FNV – We have adjusted the value of Perama Hill in line with the ELD’s valuation and have
increased our value of non-operating assets based on $150/oz of attributable production vs.
$100/oz, previously.
■ RGLD – We had modelled Pascua-Lama in line with ABX valuation.
Adjustment to Multiples for Targets
■ Changes to Multiples – Stock specific multiple adjustments include:
■ ABG – We have adjusted the multiple to 0.9x from 1.00x reflecting the company’s
ramp-up of production at Bulyanhulu (84% NAV) to over 300 koz, a level which the
mine has struggled to achieve in the past.
■ ABX – We have moved the multiple to 1.0x from 1.05x to reflect the high debt level in
the lower gold price environment. Also see above for the ABG exposure.
■ AU – We have adjusted our multiple to 0.9x from 1.1x to reflect the debt level in the
lower gold price environment and also the erosion of multiple after the pulled corporate
restructuring/equity raise (management credibility).
■ NEM – We have adjusted our multiple upward to 1.25x from 1.15x given Batu Hijau is
ramping up after the export permit is granted and also greater financial flexibility with
the sale of La Herradura (proceeds will be used for debt repayment improving the debt
load).
■ ELD – We have adjusted our multiple to 1.35x from 1.20x to reflect that ELD is
moving closer to positive FCF in 2016 and the market will start to pay for this within
the next twelve months.
■ YRI – We have reduced our multiple to 1.35x from 1.40x to reflect the ramp up issues
the company has faced with its development pipeline. These assets are now ~10% of
our overall valuation.
■ FNV – We have increased our multiple to 2.0x from 1.9x with the recently announced
royalty acquisition on Candelaria; versus just having cash on the balance sheet.
69
■ Returns in the group – Based on our new estimates, the average return for the group (to
target price) is ~26% (excluding dividends). Our multiple changes are outlined above.
Revised EPS/CFPS/FCFPS Estimates
■ With the changes to our commodity price assumptions and other changes highlighted in this
note, this has resulted in revisions to our 2014-2016 estimates. Our revised EPS, CFPS and
FCF estimates are outlined in Exhibit 11.
Exhibit 10 - Estimates Table
New Estimates
New
Old
Rating Rating
Seniors
ABX
G
K
NEM
Average
Mid Tier
AEM
ELD
IMG
YRI
Average
Internationals
ABG
AU
BVN
GFI
GOLD
Average
Royalties
FNV*
RGLD*
Average
Overall Average
Price as at
10/16/2014
NAV
($/sh)
P/NAV Multiple
(X)
(X)
Previous Estimates
Target
($/sh)
Return
%
NAV
($/sh)
Multiple
(X)
Target
($/sh)
SP
SO
SP
SP
SP
SO
SP
SP
$13.78
$23.88
$2.94
$22.72
$17.10
$20.90
$3.75
$22.20
0.81
1.14
0.78
1.02
0.94
1.00
1.50
1.00
1.25
1.18
$17.00
$31.50
$3.75
$28.00
23%
32%
28%
23%
27%
$19.20
$21.65
$4.85
$24.30
1.05
1.50
1.00
1.15
1.18
$20.00
$32.50
$5.00
$28.00
SO
SO
SP
SO
SP
SO
SP
SO
$30.46
$7.29
$2.47
$5.76
$26.75
$7.50
$4.15
$6.60
1.14
0.97
0.60
0.87
0.89
1.50
1.35
0.75
1.35
1.21
$40.00
$10.00
$3.00
$9.00
31%
37%
21%
56%
37%
$26.60
$8.40
$5.35
$7.65
1.50
1.20
0.75
1.40
1.21
$40.00
$10.00
$4.00
$11.00
SP
SP
SP
SP
SP
SP
SP
SP
SP
SP
$3.23
$10.45
$11.21
$3.87
$69.21
$4.40
$14.20
$14.45
$4.95
$57.70
0.73
0.74
0.78
0.78
1.20
0.85
0.90
0.90
0.85
0.90
1.50
1.07
$4.00
$13.00
$12.50
$4.50
$86.50
24%
24%
12%
16%
25%
20%
$5.15
$16.35
$15.30
$5.75
$61.40
1.00
1.10
0.85
0.90
1.50
1.07
$5.00
$18.00
$13.00
$5.00
$92.00
SP
SP
SP
SP
$54.69
$68.87
$32.95
$47.20
1.73
1.52
1.62
0.99
2.00
1.80
1.90
1.24
$66.00
$85.00
21%
23%
22%
26%
$32.75
$49.00
1.90
1.80
1.85
1.24
$62.50
$88.00
* Note: P/NAV multiples for RGLD and FNV exclude cash balances
SO = Sector Outperform
SP = Sector Perform
Source: FactSet; Scotiabank GBM estimates.
SU = Sector Underperform
FS = Focus Stock
70
Exhibit 11 - Updated Earnings, Cash Flow and Free Cash Flow Estimates
New Estimates
Previous Estimates
EPS
CFPS
FCFPS
EPS
CFPS
FCFPS
2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E
Seniors
ABX
G
K
NEM
Mid Tier
AEM
ELD
IMG
YRI
Internationals
ABG
AU
BVN
GFI
GOLD
Royalties
FNV
RGLD*
$0.63
$0.72
$0.13
$0.75
$0.92
$1.06
$0.18
$1.28
$1.05
$1.31
$0.17
$1.34
$2.13
$1.86
$0.85
$3.05
$2.62
$2.63
$0.89
$5.67
$2.86 ($0.39)
$3.01 ($0.31)
$0.89 $0.20
$4.97 ($0.20)
$0.81
$0.78
$0.16
$0.91
$1.35
$1.46
$0.33
$1.69
$1.91
$2.09
$0.46
$2.99
$2.31
$1.96
$0.90
$2.62
$3.11
$3.04
$1.04
$4.69
$3.84 ($0.20) $0.27 ($0.46)
$3.80 ($0.20) $1.03 $1.98
$1.19 $0.25 $0.53 $0.50
$6.08 ($0.64) $0.69 $2.05
$1.16
$0.20
$0.13
$0.15
$1.34
$0.25
$0.05
$0.26
$1.33
$0.32
$0.08
$0.29
$3.47
$0.48
$0.79
$0.87
$3.96
$0.53
$0.71
$1.15
$3.94 $0.68 $1.21 $1.52 $1.31
$0.73 ($0.19) ($0.33) $0.17 $0.24
$0.79 ($0.34) $0.05 $0.11 $0.16
$1.15 ($0.07) $0.36 $0.30 $0.20
$1.83
$0.31
$0.21
$0.43
$2.27
$0.47
$0.38
$0.61
$3.69
$0.53
$0.83
$0.92
$4.82
$0.60
$0.88
$1.36
$5.56 $0.90 $2.07
$0.91 ($0.14) ($0.37)
$1.11 ($0.30) $0.22
$1.52 ($0.02) $0.55
$0.21
$0.86
$0.61
$0.13
$2.73
$0.23
$0.83
$0.91
$0.23
$2.91
$0.20
$0.75
$1.92
$0.26
$2.73
$0.74
$3.38
$0.81
$1.01
$5.70
$0.81
$3.99
$1.09
$1.17
$6.28
$0.84 $0.05 $0.07 $0.16 $0.25
$3.93 ($0.50) ($0.60) $0.97 $1.01
$2.24 $0.09 ($0.07) $0.90 $0.55
$1.24 $0.00 $0.15 $0.28 $0.17
$6.20 $1.20 $3.26 $3.37 $2.49
$0.35
$1.55
$0.96
$0.41
$3.76
$0.45
$2.12
$2.14
$0.64
$4.36
$0.79
$3.50
$0.76
$1.06
$5.86
$0.98
$4.90
$1.13
$1.36
$7.32
$1.17 $0.10 $0.24 $0.46
$5.60 ($0.40) $0.03 $2.37
$2.59 $0.38 ($0.04) $1.20
$1.63 $0.03 $0.87 $0.55
$8.13 $1.36 $4.25 $2.88
$0.15 $1.05 $1.46 $1.54 $2.32
$2.36 $0.84 $1.50 $1.72 $2.50
$2.88
$3.45
$3.03 ($5.62) $0.29
$3.78 $0.43 $1.75
$0.99 $1.26 $1.20 $2.25 $2.67 $2.66 ($5.68)
$0.84 $1.32 $1.33 $2.50 $3.27 $3.37 $0.43
$0.27
$0.62
$0.38
$1.91
$0.07
$1.57
$0.23
$1.20
$0.20
$1.33
*RGLD – June year end; F2014A in 2014E column.
Source: Scotiabank GBM estimates.
Investment Thesis
■ With the decline in the gold price and our assumption for the gold price averaging
~$1,300/oz level flat, our focus is on companies that are able to withstand this gold price
environment. First and foremost, delivering on operating targets is critical. Furthermore, the
companies with balance sheet strength and with higher grade assets (better costs) will also be
rewarded. The market is also willing to pay for optionality (production growth) as this is the
only way in the current gold market (with a zero contango) that provides investors more gold
per share. Increasing growth generally (only a few of our coverage companies have growth)
has declining fully loaded AIC, and hence helps improve margins. FCF generating ability
will also be rewarded. However, it is important to note that currently, FCF breakeven for the
group is $1,320/oz for 2014 and $1,160/oz in 2015 and $1,100/oz in 2016. The decline in
price for FCF generation is mainly due to development capital being reduced as few
companies have built their projects.
Recommendations
■ We have made one rating change; AEM moves to SO from SP.
■ Our Sector Outperform rated companies have over a 30% return. This includes G in
the senior space. Our other mid-tier Sector Outperforms remain YRI and ELD. AEM
has been added to the list with the recent upgrade.
■ G – We see positive FCF starting with Cochenour, Élèonore and Cerro Negro coming into
production in 2014/15. These three mines will add to the overall grade profile of the
company as they are high grade (over 8 g/t), as such, the overall head grade will
significantly increase going forward. Given the new mines coming into production, fully
loaded AIC (including exploration, G&A, corporate taxes, and total capex) will be declining
to $997/oz in 2016 from $1,703/oz this year. This will help overall margins. The company
has the best balance sheet in the senior space. From a valuation standpoint, it trades at a
higher P/NAV than its peers; but it is the only North American senior that has optionality,
declining fully loaded AIC, positive FCF and a strong balance sheet.
■ ELD – We have assumed that ELD completes the Kisladag expansion, builds Skouries and
receives the permit for Eastern Dragon (as it only requires four months and $35M to
complete the tailings area). With the capital spend over in the next 18 months, we see
positive FCF in 2016. The debt is very manageable and the company has one of the few
CEO’s that has operating experience in a low gold price environment. Valuation wise, it is
the cheapest North American mid-tier with the best risk reward from a value perspective
versus its FCF potential and overall optionality (growth) and a drastic decline in fully loaded
AIC.
$3.27
$0.16
$0.43
$0.65
$0.53
$2.77
71
■ AEM – The share price has declined to a level where we feel comfortable moving the rating
back to a Sector Outperform (SO). AEM is a quality company with solid management and
assets in low political risk jurisdictions (Canada, Finland and Mexico). We expect the
company to generate FCF this year. It also has additional optionality from Kittila, LaRonde,
Canadian Malartic and some of the satellite zones (Goldex and in Mexico) in terms of
production growth. Furthermore, we see a potential for increased minelife at Meadowbank
with the newly discovered Amaruq project. We see fully loaded AIC declining and
remaining low.
■ YRI – We see this stock as having a valuation discrepancy (the shares are discounting 2%
below spot gold price). Given its optionality, FCF and declining fully loaded AIC, we expect
YRI to trade at a premium to bullion. We believe that as the company delivers quarterly
operating results, the valuation gap should narrow over the next 6-12 months.
■ In the international space – Our preference would be GOLD (although we have it rated a
Sector Perform). Our Sector Perform rating is tied to the expected return for GOLD being in
line with the group average. Any weakness in share price would be viewed as a buying
opportunity. Our preference to GOLD vs the South African producers and BVN is tied to its
significant FCF generation and growth (both production and NAV) as the company will be
mining high grade material (~4 g/t versus the industry average of ~1.5 g/t).
■ In the royalty space – Our preference is FNV (although we have it rated as a Sector
Perform) over RGLD. This is due to the fact that a greater portion of FNV’s valuation is on
operating gold assets versus RGLD which has still exposure to assets ramping up (Mt.
Milligan) and Pascua-Lama (development has been suspended).
72
Universe of Coverage
Price
ABG-L
ABX-N
AEM-N
AU-N
AUY-N
BVN-N
DDC-N
EGO-N
FNV-N
GFI-N
GG-N
GOLD-Q
IAG-N
KGC-N
NEM-N
RGLD-Q
198.00p
US$13.41
US$28.72
US$10.02
US$5.54
US$11.11
US$14.20
US$7.00
US$53.43
US$3.69
US$22.92
US$66.93
US$2.36
US$2.93
US$22.40
US$66.39
Rating
Risk
1-Yr
ROR
SP
SP
SO
SP
SO
SP
SO
SO
SP
SP
SO
SP
SP
SP
SP
SP
High
High
High
High
High
High
High
High
High
High
High
High
High
High
High
High
250.00p
$17.00
$40.00
$13.00
$9.00
$12.50
$20.00
$10.00
$66.00
$4.50
$31.50
$86.50
$3.00
$3.75
$28.00
$85.00
27.6%
28.3%
40.4%
29.7%
65.2%
12.5%
40.8%
43.3%
25.0%
23.3%
40.1%
30.0%
27.1%
28.0%
26.1%
29.3%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
African Barrick Gold plc (ABG-L)
New
250.00p
Adj. EPS14E: US$0.21 Adj. EPS15E: US$0.23 Adj. EPS16E: US$0.20 0.90x NAV
Old
295.00p
Adj. EPS14E: US$0.25 Adj. EPS15E: US$0.35 Adj. EPS16E: US$0.45 1.00x NAV
Valuation: 0.90x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Barrick Gold Corporation (ABX-N)
New
$17.00
Adj. EPS14E: $0.63
Adj. EPS15E: $0.92
Adj. EPS16E: $1.05 1.00x NAV
Old
$20.00
Adj. EPS14E: $0.81
Adj. EPS15E: $1.35
Adj. EPS16E: $1.91 1.05x NAV
Valuation: 1.00x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Agnico Eagle Mines Limited (AEM-N)
New SO
Adj. EPS14E: $1.16
Adj. EPS15E: $1.34
Adj. EPS16E: $1.33
Old SP
Adj. EPS14E: $1.31
Adj. EPS15E: $1.83
Adj. EPS16E: $2.27
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; foreign exchange risk.
AngloGold Ashanti Limited (AU-N)
New
$13.00
Adj. EPS14E: $0.86
Adj. EPS15E: $0.83
Adj. EPS16E: $0.75 0.90x NAV
Old
$18.00
Adj. EPS14E: $1.01
Adj. EPS15E: $1.55
Adj. EPS16E: $2.12 1.10x NAV
Valuation: 0.90x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Yamana Gold Inc. (AUY-N)
New
$9.00
Adj. EPS14E: $0.15
Adj. EPS15E: $0.26
Adj. EPS16E: $0.29 1.35x NAV
Old
$11.00
Adj. EPS14E: $0.20
Adj. EPS15E: $0.43
Adj. EPS16E: $0.61 1.40x NAV
Valuation: 1.35x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
73
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Compañía de Minas Buenaventura SAA (BVN-N)
New
$12.50
Adj. EPS14E: $0.61
Adj. EPS15E: $0.91
Adj. EPS16E: $1.92
Old
$13.00
Adj. EPS14E: $0.55
Adj. EPS15E: $0.96
Adj. EPS16E: $2.14
Valuation: 0.85x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk; permitting risk.
Dominion Diamond Corporation (DDC-N)
Valuation: 1.00x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; foreign exchange risk; global economy outlook.
Eldorado Gold Corporation (EGO-N)
New
Adj. EPS14E: $0.20
Adj. EPS15E: $0.25
Adj. EPS16E: $0.32 1.35x NAV
Old
Adj. EPS14E: $0.24
Adj. EPS15E: $0.31
Adj. EPS16E: $0.47 1.20x NAV
Valuation: 1.35x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Franco-Nevada Corporation (FNV-N)
New
$66.00
Adj. EPS14E: $0.99
Adj. EPS15E: $1.26
Adj. EPS16E: $1.20 2.00x NAV
Old
$62.50
Adj. EPS14E: $1.05
Adj. EPS15E: $1.46
Adj. EPS16E: $1.54 1.90x NAV
Valuation: 2.00x NAV
Key Risks to Price Target: Commodity prices; non-operator.
Gold Fields Limited (GFI-N)
New
$4.50
Adj. EPS14E: $0.13
Adj. EPS15E: $0.23
Adj. EPS16E: $0.26
Old
$5.00
Adj. EPS14E: $0.17
Adj. EPS15E: $0.41
Adj. EPS16E: $0.64
Valuation: 0.90x NAV
Key Risks to Price Target: Commodity prices; operational and development risk; political risk; currency risk.
Goldcorp Inc. (GG-N)
New
$31.50
Adj. EPS14E: $0.72
Adj. EPS15E: $1.06
Adj. EPS16E: $1.31
Old
$32.50
Adj. EPS14E: $0.78
Adj. EPS15E: $1.46
Adj. EPS16E: $2.09
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk
Randgold Resources Limited (GOLD-Q)
New
$86.50
Adj. EPS14E: $2.73
Adj. EPS15E: $2.91
Adj. EPS16E: $2.73
Old
$92.00
Adj. EPS14E: $2.49
Adj. EPS15E: $3.76
Adj. EPS16E: $4.36
Valuation: 1.50x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
IAMGOLD Corporation (IAG-N)
New
$3.00
Adj. EPS14E: $0.13
Adj. EPS15E: $0.05
Adj. EPS16E: $0.08
Old
$4.00
Adj. EPS14E: $0.16
Adj. EPS15E: $0.21
Adj. EPS16E: $0.38
Valuation: 0.75x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
74
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Kinross Gold Corporation (KGC-N)
New
$3.75
Adj. EPS14E: $0.13
Adj. EPS15E: $0.18
Adj. EPS16E: $0.17
Old
$5.00
Adj. EPS14E: $0.16
Adj. EPS15E: $0.33
Adj. EPS16E: $0.46
Valuation: 1.00x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Newmont Mining Corporation (NEM-N)
New
Adj. EPS14E: $0.75
Adj. EPS15E: $1.28
Adj. EPS16E: $1.34 1.25x NAV
Old
Adj. EPS14E: $0.91
Adj. EPS15E: $1.69
Adj. EPS16E: $2.99 1.15x NAV
Valuation: 1.25x NAV
Key Risks to Price Target: Commodity prices; technical and operational risk; geopolitical risk.
Royal Gold Inc. (RGLD-Q)
New
$85.00
Adj. EPS15E: $1.32
Adj. EPS16E: $1.33
Adj. EPS17E: $1.38 1.80x NAV
Old
$88.00
Adj. EPS15E: $1.50
Adj. EPS16E: $1.72
Adj. EPS17E: $1.65 1.80x NAV (excluding cash)
Valuation: 1.80x NAV
Key Risks to Price Target: Commodity prices; non-operator.
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
75
Industry Comment
Monday, October 20, 2014, Pre-Market
Gold & Precious Minerals
Flattening Our Price Assumptions
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
Craig Johnston, CPA, CA - (416) 860-1659
(Scotia Capital Inc. - Canada)
Event
ScotiaView Analyst Link
■ We are publishing revised valuations, financial forecasts, and target prices
based on our new Scotiabank GBM equity research flat gold price
assumption of $1,300/oz and recently revised base metal price estimates.
Implications
■ $1,300/oz long-term gold price forecast unchanged; however, we have
taken a more conservative near-term view on bullion. We believe positive
sentiment toward the U.S. economy and corresponding strengthening of the
U.S. dollar will maintain downward pressure on near-term gold prices. We
have adjusted our 2015 and 2016 forecast to $1,300/oz in line with our longterm view. Our silver price forecast has been revised lower to $19/oz both
near and long term, representing a 68:1 gold:silver ratio.
■ We have updated our near-term copper, lead, nickel, and zinc forecasts
in line with Scotiabank GBM Base Metals Research Team price estimates.
■ Investment Thesis. Our recommendations are focused on highlighting the
companies we feel are best positioned to achieve production and free cash
flow while maintaining well-managed balance sheets.
Recommendation
■ There are no ratings changes associated with our price forecast
adjustments. B2Gold and Detour Gold remain our Focus Stocks with
expected near-term operational improvements and significant growth
driving expected margins higher and our positive outlook for these names.
■ Our development-stage recommendations are not materially impacted
by the lower near-term bullion forecast. We continue to rate GUY, PG,
TXG, and TGM as Sector Outperform.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
76
Gold & Silver – Downward Revisions to Reflect Current Market Conditions
■ Short-term gold price reduced on favorable U.S. outlook. We believe the positive
sentiment towards the U.S. economy and the corresponding strengthening of the U.S. dollar
will maintain downward pressure on near-term gold prices. We have revised our outlook for
2015 onwards to a flat $1,300/oz gold price.
o Refer to Scotiabank GBM Gold and Precious Minerals Analyst Tanya
Jakusconek’s note “Revising Our Precious Metals Price Deck” from October
20, 2014, for further details.
■ Short- and long-term silver price reduced in line with gold. For 2015 onwards we have
gone to a flat $19/oz silver price, in line with a 68:1 gold:silver ratio. This is a significant
increase in the average 60:1 ratio seen since September 2008; however, 68:1 reflects our
belief that the more recent trading relationship between gold and silver (exceeding 70:1 in
some cases) may continue. We do see significant upside to our silver price forecast if
silver prices’ correlation to gold and copper prices revert back to historical levels.
Multiple regressions of historic silver prices against both copper and gold prices indicate that
our silver forecast has upside to the low-to-mid $20s (based on our gold and copper price
forecasts).
Exhibit 1 - Changes to Precious Metals Price Deck
Precious Metals
2014E
2015E
2016E
2017E
2018E
2019E
2020E
LT
Gold (US$/oz)
New
Prior
% change
$1,270
$1,272
0%
$1,300
$1,400
-7%
$1,300
$1,500
-13%
$1,300
$1,300
0%
$1,300
$1,300
0%
$1,300
$1,300
0%
$1,300
$1,300
0%
$1,300
$1,300
0%
Silver (US$/oz)
New
Prior
% change
$19.25
$19.33
0%
$19.00
$22.50
-16%
$19.00
$25.00
-24%
$19.00
$20.00
-5%
$19.00
$20.00
-5%
$19.00
$20.00
-5%
$19.00
$20.00
-5%
$19.00
$20.00
-5%
Source: Scotiabank GBM estimates.
Base Metals – Minor Near-Term Revisions
■ Updated to match Scotiabank GBM’s Base Metals Team. We updated our base metals
forecasts in line with Scotia Analysts Orest Wowkodaw and Mark Turner’s note “Updated
Commodity Price Outlook: Steel Inputs Complex Taken to the Woodshed.”
Exhibit 2 - Changes to Base Metals Price Deck
Base Metals
2014E
2015E
2016E
2017E
2018E
2019E
2020E
LT
Copper (US$/lb)
New
Prior
% change
$3.14
$3.17
-1%
$3.15
$3.25
-3%
$3.40
$3.50
-3%
$3.60
$3.75
-4%
$3.85
$4.00
-4%
$4.00
$4.00
0%
$4.00
$4.00
0%
$3.00
$3.00
0%
Lead (US$/lb)
New
Prior
% change
$0.96
$0.97
-1%
$1.01
$1.05
-4%
$1.10
$1.10
0%
$1.15
$1.15
0%
$1.15
$1.15
0%
$1.15
$1.15
0%
$1.15
$1.15
0%
$0.95
$0.95
0%
Nickel (US$/lb)
New
Prior
% change
$7.75
$8.06
-4%
$8.50
$9.50
-11%
$10.00
$10.50
-5%
$11.00
$11.00
0%
$11.00
$11.00
0%
$11.00
$11.00
0%
$11.00
$11.00
0%
$9.50
$9.50
0%
Zinc (US$/lb)
New
Prior
% change
$0.98
$0.99
-1%
$1.10
$1.15
-4%
$1.20
$1.20
0%
$1.25
$1.25
0%
$1.25
$1.25
0%
$1.25
$1.25
0%
$1.25
$1.25
0%
$1.00
$1.00
0%
Source: Scotiabank GBM estimates.
77
Impact to Our Companies
■ Silvers hit the hardest with NAVs down 20% on average, cash flows hit harder. The
larger change to our silver prices compared to gold prices resulted in further reductions to
our silver producer NAVs and targets.
■ Gold producers have fared better, generally suffering only a single-digit NAV
reduction. In the end, the impact was subdued and we have made no rating changes. We do
highlight Allied Nevada and Golden Star for the most significant declines under the new
price deck.
■ Limited impact to developers as long-term prices largely unchanged. Our long-term gold
price of $1,300/oz is unchanged resulting in a limited impact to gold developers. While the
comparable silver price forecast is now 5% lower, the impact is also muted given that we do
not expect production to begin until at least 2018 for MAG Silver and Bear Creek Mining.
Exhibit 3 - Changes to NAVs, Target Multiples, and Target Prices
1
New
NAV
Previous
% Change
$8.64
$0.80
$5.39
$4.27
$2.61
C$9.67
C$13.88
$0.05
$5.15
C$10.45
$5.41
$3.09
$3.74
$0.70
$1.86
$8.93
$2.81
$5.61
$5.00
$2.78
C$10.28
C$14.65
$0.14
$5.34
C$10.60
$6.08
$3.20
$3.92
$0.83
$2.01
-3%
-72%
-4%
-15%
-6%
-6%
-5%
-67%
-4%
-1%
-11%
-3%
-5%
-16%
-8%
0.87x
1.00x
1.09x
1.25x
1.31x
0.71x
1.20x
1.00x
1.24x
1.59x
*
1.00x
1.20x
1.00x
1.10x
0.82x
1.00x
1.09x
1.20x
1.31x
0.60x
1.20x
1.00x
1.21x
1.59x
*
1.00x
1.20x
1.00x
1.10x
5%
0%
0%
4%
0%
18%
0%
0%
3%
0%
0%
0%
0%
0%
$7.25
$1.00
$6.00
$5.50
$3.50
C$7.00
C$17.00
$0.10
$6.00
C$16.50
$7.50
$3.00
$4.50
$0.70
$2.00
$7.50
$3.00
$6.00
$6.00
$3.75
C$6.50
C$18.00
$0.15
$6.50
C$17.00
$9.00
$3.25
$4.75
$0.80
$2.25
Silver Producers
Coeur Mining Inc.
First Majestic Silver Corp.
Fortuna Silver Mines Inc.
Hecla Mining Company
Pan American Silver Corp.
Silver Standard Resources Inc.
Silver Wheaton Corp.
$4.85
$4.21
$3.74
$2.22
$11.17
$6.66
$17.47
$6.91
$5.42
$4.14
$2.66
$14.14
$9.71
$19.46
-30%
-22%
-10%
-16%
-21%
-31%
-10%
1.11x
**
1.30x
1.21x
1.05x
0.94x
1.58x
1.10x
**
1.28x
1.11x
1.04x
0.92x
1.51x
1%
1%
9%
1%
2%
5%
$4.60
$10.00
$4.95
$3.00
$11.60
$6.25
$27.50
Developers
Bear Creek Mining Corp.
Belo Sun Mining Corp.
Gabriel Resources Ltd.
Guyana Goldfields Inc.
Lydian International Ltd.
MAG Silver Corp.
Premier Gold Mines Ltd.
Pretium Resources Inc.
Torex Gold Resources Inc.
True Gold Mining Inc.
C$2.86
$0.84
C$1.87
C$4.79
C$1.22
$10.67
$4.59
$12.34
C$2.69
$0.57
C$3.21
$0.84
C$1.90
C$4.94
C$1.22
$11.06
$5.14
$12.40
C$2.74
$0.61
-11%
0%
-1%
-3%
0%
-4%
-11%
0%
-2%
-7%
0.65x
0.70x
0.45x
1.00x
1.00x
1.00x
0.90x
0.80x
1.00x
0.90x
0.94x
0.70x
0.45x
1.00x
1.00x
1.00x
0.90x
0.80x
1.00x
0.90x
-31%
0%
0%
0%
0%
0%
0%
0%
0%
0%
C$2.00
$0.60
C$1.00
C$5.00
C$1.25
$11.00
$4.25
$10.00
C$2.75
$0.50
Gold Producers
Alamos Gold Inc.
Allied Nevada Gold Corp.
Argonaut Gold Inc.
AuRico Gold Inc.
B2Gold Corp.
Centerra Gold Inc.
Detour Gold Corp.
Golden Star Resources Ltd.
New Gold Inc.
Osisko Gold Royalties Ltd.
Primero Mining Corp.
Rio Alto Mining Ltd.
SEMAFO Inc.
Teranga Gold Corp.
Timmins Gold Corp.
1
Blended Target Multiple
New
Previous
% Change
New
Target Price
Previous
% Change
Rating2
Analyst3
-3%
-67%
0%
-8%
-7%
8%
-6%
-33%
-8%
-3%
-17%
-8%
-5%
-13%
-11%
SP
SU
SO
SO
FS
SP
FS
SU
SP
SP
SO
SO
SO
SP
SP
TT
TT
OH
TT
OH
TT
TT
TT
TT
TT
OH
OH
OH
OH
OH
$7.00
$13.00
$5.25
$3.00
$14.75
$8.65
$30.00
-34%
-23%
-6%
0%
-21%
-28%
-8%
SU
SO
SP
SP
SP
SP
SO
CJ
OH
CJ
TT
CJ
CJ
TT
C$3.00
$0.60
C$1.00
C$5.00
C$1.25
$11.00
$4.75
$10.00
C$3.00
$0.55
-33%
0%
0%
0%
0%
0%
-11%
0%
-8%
-9%
SP
SP
SP
SO
SO
SO
SO
SP
SO
SO
TT
OH
TT
TT
TT
TT
OH
OH
TT
OH
Blended Target Multiple refers to blended multiple of entire company; includes producing assets, development/exploration assets, net cash, and corporate adjustments.
FS = Focus Stock, SO = Sector Outperform, SP = Sector Perform, SU = Sector Underperform
3
TT = Trevor Turnbull, OH = Ovais Habib, CJ = Craig Johnston
* Primero's valuation is unchanged and is based on 60% of 10.0x 2015 CFPS & 40% of 1.14x NAVPS
** First Majestic's valuation is unchanged and is based on 60% of 13.0x 2015 CFPS & 40% of 1.40x NAVPS
2
Source: Scotiabank GBM estimates.
78
■ Expected EPS, CFPS, and FCFPS reduced in near term for our precious metals
producers and near-term developers. See Exhibit 4 to 6 for the detailed changes.
Exhibit 4 - Changes to EPS, CFPS, and FCFPS for Gold Producers
Gold Producers
Alamos Gold Inc.
Allied Nevada Gold Corp.
Argonaut Gold Inc.
AuRico Gold Inc.
B2Gold Corp.
Centerra Gold Inc.
Detour Gold Corp.
Golden Star Resources Ltd.
New Gold Inc.
Osisko Gold Royalties Ltd.
Primero Mining Corp.
Rio Alto Mining Ltd.
SEMAFO Inc.
Teranga Gold Corp.
Timmins Gold Corp.
1
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
2014E
EPS
2015E
2016E
2014E
CFPS
2015E
2016E
2014E
FCFPS1
2015E
2016E
$0.08
$0.09
-1%
($0.31)
($0.31)
-1%
$0.03
$0.03
-4%
($0.19)
($0.19)
0%
$0.04
$0.04
-3%
$0.05
$0.06
-7%
($0.41)
($0.40)
-1%
($0.07)
($0.07)
-2%
$0.10
$0.10
-5%
C$0.14
C$0.14
-1%
($0.05)
($0.05)
-4%
$0.21
$0.22
0%
$0.09
$0.09
-2%
$0.06
$0.07
-2%
$0.10
$0.10
-1%
$0.16
$0.22
-31%
($0.14)
$0.18
-176%
$0.10
$0.16
-41%
($0.06)
$0.03
-271%
$0.08
$0.12
-34%
$0.03
$0.21
-85%
$0.57
$0.91
-37%
($0.06)
$0.02
-385%
$0.11
$0.19
-38%
C$0.42
C$0.47
-11%
$0.07
$0.22
-69%
$0.12
$0.14
-19%
$0.26
$0.32
-19%
$0.16
$0.21
-25%
$0.15
$0.20
-28%
$0.25
$0.42
-39%
$0.27
$0.98
-72%
$0.14
$0.28
-50%
($0.03)
$0.14
-122%
$0.10
$0.18
-44%
$0.26
$0.71
-64%
$1.32
$2.06
-36%
($0.02)
$0.01
-297%
$0.26
$0.39
-33%
C$0.52
C$0.63
-17%
$0.10
$0.49
-80%
$0.13
$0.20
-32%
$0.22
$0.34
-35%
$0.20
$0.30
-33%
$0.11
$0.21
-48%
$0.44
$0.44
0%
$0.34
$0.35
-1%
$0.33
$0.33
0%
$0.25
$0.25
0%
$0.21
$0.21
-1%
$1.34
$1.35
0%
$0.81
$0.81
0%
$0.00
$0.00
-27%
$0.52
$0.53
-1%
C$0.14
C$0.14
-1%
$0.53
$0.53
0%
$0.30
$0.30
0%
$0.41
$0.41
0%
$0.12
$0.13
-1%
$0.28
$0.28
0%
$0.46
$0.53
-13%
$0.23
$0.55
-58%
$0.38
$0.45
-15%
$0.33
$0.40
-19%
$0.26
$0.30
-14%
$1.03
$1.22
-15%
$1.90
$2.24
-15%
$0.05
$0.13
-61%
$0.61
$0.68
-10%
C$0.52
C$0.57
-9%
$0.75
$0.92
-18%
$0.23
$0.26
-10%
$0.60
$0.67
-10%
$0.18
$0.23
-22%
$0.22
$0.29
-23%
$0.64
$0.80
-21%
$0.72
$1.43
-50%
$0.45
$0.59
-24%
$0.41
$0.60
-32%
$0.30
$0.38
-23%
$1.38
$1.86
-26%
$2.05
$2.78
-26%
$0.04
$0.07
-42%
$0.77
$0.90
-14%
C$0.54
C$0.64
-16%
$1.07
$1.59
-33%
$0.30
$0.37
-17%
$0.49
$0.62
-22%
$0.26
$0.36
-27%
$0.20
$0.31
-36%
($0.13)
($0.12)
-1%
($0.58)
($0.57)
-1%
($0.22)
($0.22)
0%
($0.67)
($0.67)
0%
($0.22)
($0.22)
0%
$0.32
$0.33
-1%
($0.68)
($0.68)
0%
($0.15)
($0.15)
-1%
($0.17)
($0.16)
-4%
C$2.28
C$2.28
0%
($0.36)
($0.36)
0%
$0.00
$0.00
-15%
$0.14
$0.14
-1%
($0.19)
($0.19)
-1%
$0.06
$0.06
-2%
($0.38)
($0.31)
-22%
($0.08)
($2.63)
97%
($0.00)
$0.04
-105%
($0.04)
$0.04
-183%
($0.10)
($0.14)
-31%
($0.67)
($0.49)
-36%
$0.47
$0.76
-38%
($0.11)
($0.03)
-225%
($0.32)
($0.24)
-31%
C$0.52
C$0.57
-9%
$0.09
($0.07)
224%
($0.22)
($0.19)
-13%
$0.46
$0.53
-13%
($0.00)
$0.05
-110%
$0.06
$0.12
-51%
($0.64)
($0.48)
-34%
($5.63)
($4.93)
-14%
($0.06)
$0.02
-402%
$0.03
$0.23
-86%
($0.14)
($0.06)
149%
($1.06)
($0.61)
-74%
$0.57
$1.20
-52%
($0.06)
($0.02)
-127%
($0.45)
($0.32)
-41%
(C$1.55)
(C$1.44)
-7%
$0.20
$0.06
254%
$0.19
$0.25
-23%
$0.39
$0.52
-26%
$0.04
$0.14
-72%
$0.09
$0.19
-53%
FCFPS refers to equity holders before dividends.
Source: Scotiabank GBM estimates.
79
Exhibit 5 - Changes to EPS, CFPS, and FCFPS for Silver Producers
Silver Producers
Coeur Mining Inc.
First Majestic Silver Corp.
Fortuna Silver Mines Inc.
Hecla Mining Company
Pan American Silver Corp.
Silver Standard Resources Inc.
Silver Wheaton Corp.
1
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
2014E
EPS
2015E
2016E
2014E
CFPS
2015E
2016E
2014E
FCFPS1
2015E
2016E
($1.06)
($1.05)
-1%
$0.06
$0.07
-11%
$0.17
$0.17
-1%
($0.06)
($0.06)
-5%
($0.03)
($0.01)
-99%
$0.03
$0.04
-34%
$0.80
$0.80
0%
($0.55)
$0.15
-457%
$0.06
$0.34
-84%
$0.36
$0.49
-26%
($0.02)
$0.07
n.m.
($0.03)
$0.34
-108%
$0.29
$0.41
-31%
$0.88
$1.26
-30%
($0.08)
$0.81
-110%
$0.11
$0.68
-84%
$0.39
$0.61
-37%
($0.04)
$0.12
n.m.
$0.23
$0.79
-71%
($0.21)
$0.50
-142%
$1.02
$1.64
-38%
$0.50
$0.51
-1%
$0.64
$0.65
-1%
$0.49
$0.49
-1%
$0.25
$0.25
0%
$0.82
$0.84
-2%
$0.45
$0.46
-3%
$1.28
$1.28
0%
$0.61
$1.28
-53%
$0.95
$1.26
-25%
$0.59
$0.72
-19%
$0.33
$0.41
-20%
$0.96
$1.44
-34%
$0.93
$1.50
-38%
$1.46
$1.83
-21%
$0.87
$1.73
-50%
$1.22
$1.84
-34%
$0.64
$0.88
-26%
$0.32
$0.49
-34%
$1.18
$2.00
-41%
$0.76
$1.71
-56%
$1.68
$2.30
-27%
($1.18)
$0.27
-538%
($0.44)
($0.43)
-2%
$0.02
$0.02
-12%
($0.14)
($0.14)
-1%
($0.45)
($0.43)
-4%
($3.53)
($3.56)
1%
$0.50
$0.50
0%
($0.46)
$0.17
-373%
($0.13)
$0.16
-181%
$0.19
$0.40
-54%
($0.22)
($0.13)
-62%
$0.02
$0.03
-50%
$0.26
$1.07
-76%
$1.44
$1.82
-21%
($0.18)
$0.60
-129%
$0.33
$0.91
-64%
$0.39
$0.69
-44%
($0.19)
($0.02)
n.m.
$0.53
$0.72
-27%
$0.11
($0.14)
175%
$1.07
$1.69
-37%
FCFPS refers to equity holders before dividends.
Source: Scotiabank GBM estimates.
Exhibit 6 - Near-Term Developers - Changes to EPS, CFPS
Developers
Guyana Goldfields Inc.
Torex Gold Resources Inc.
True Gold Mining Inc.
1
New
Previous
% Change
New
Previous
% Change
New
Previous
% Change
2014E
EPS
2015E
2016E
2014E
CFPS
2015E
2016E
($0.08)
($0.08)
0%
($0.03)
($0.03)
0%
($0.05)
($0.05)
0%
$0.01
$0.02
-37%
($0.03)
($0.03)
0%
($0.03)
($0.03)
0%
$0.25
$0.35
-28%
$0.02
$0.04
-53%
$0.05
$0.09
-46%
($0.05)
($0.05)
0%
($0.02)
($0.02)
0%
($0.04)
($0.04)
0%
$0.07
$0.08
-11%
($0.02)
($0.02)
0%
($0.02)
($0.02)
0%
$0.45
$0.55
-18%
$0.06
$0.08
-25%
$0.15
$0.19
-22%
FCFPS refers to equity holders before dividends.
Source: Scotiabank GBM estimates.
80
P/NAV
■ Diversified gold royalties continue Exhibit 7 - Month-End P/NAV Analysis for Royalty Companies (Last 24 months)
to command a premium to single2.50x
asset
royalties
and
silver
streaming companies. Refer to
2.00x
Exhibit 7 for an overview of the
month-end P/NAV ranges, and how
our target multiples compare.
1.50x
■ 2016E break-even gold price
analysis reveals impact of capital
1.00x
expenditure programs and what
the market is paying for. B2Gold,
0.50x
Centerra, New Gold, and Alamos
are expected to spend heavily in
0.00x
2016 on Fekola, Oksut, Rainy
FNV
SLW
RGLD
OR*
River, and Agi Dagi, respectively.
Target Price Multiple
2-Year Low Multiple
2-Year High Multiple
Current Multiple
Rio Alto and SEMAFO have
impressively low break-even prices, * OR includes June 16 - October 16, 2014 period.
though we feel the market is paying "Target Price Multiple" is a blended multiple that includes corp. adjustments (i.e., not only asset multiple).
appropriately for them. Refer to "Current Multiple" refers to October 17, 2014.
Exhibit 8.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 8 - Implied Gold Price vs. 2016E Breakeven Gold Price
AGI
$2,300
NGD
2016 Break-Even Gold Price ($/oz)
$2,100
$1,900
CG
$1,700
BTO
$1,500
GSS
AR
ANV
AUQ
$1,300
TGZ
DGC
$1,100
TMM
P
$900
SMF
$700
$500
$1,000
RIO
$1,100
$1,200
$1,300
Implied Gold Price ($/oz)
Source: Company reports; Scotiabank GBM estimates.
$1,400
$1,500
81
Other Notable Changes to our Models
■ Reduced contribution of Pascua Lama to Silver Wheaton’s valuation by assuming
production is pushed to 2020. We now value the project at $9/oz for the 132 Moz
attributable to Silver Wheaton which is the equivalent of a discounted cash flow valuation at
3% with operations commencing in 2020.
■ Moving Primero’s Cerro del Gallo gold project to an EV/oz valuation. We now value
Cerro del Gallo at C$40M (down from C$90M) using an EV to global resource multiple of
C$25/oz. The company has yet to achieve its stated goal of a 15% IRR for the project using a
$1,100/oz gold price and with our new gold and silver price forecast, we estimated Primero
would need to draw down the entirety of its $75 million line of credit to fund the project’s
development. Due to the liquidity constraints this introduced to our model, we decided to go
with an EV/oz valuation until such time as Primero makes a positive construction decision.
■ Our comparables at spot prices ($1,240/oz gold and $17.40/oz silver) are presented in
Exhibit 9.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 9 - Precious Metals - Comparable Universe - Using Spot Prices
82
83
Universe of Coverage
Price
AG-N
AGI-N
ANV-A
AR-T
AUQ-N
BCM-V
BSX-T
BTO-T
CDE-N
CG-T
DGC-T
FSM-N
GBU-T
GSS-A
GUY-T
HL-N
LUC-T
LYD-T
MPV-T
MVG-A
NGD-A
OR-T
P-T
PAAS-Q
PG-T
PVG-T
RIO-T
SLW-N
SMF-T
SSRI-Q
SWY-T
TGM-V
TGZ-T
TMM-T
TXG-T
US$7.17
US$8.27
US$2.43
C$3.58
US$3.56
C$1.60
C$0.18
C$2.31
US$4.78
C$5.45
C$9.18
US$4.62
C$0.85
US$0.37
C$2.85
US$2.39
C$2.23
C$0.73
C$5.20
US$7.78
US$4.44
C$15.14
C$5.01
US$10.55
C$2.65
C$6.34
C$2.91
US$19.50
C$4.14
US$5.56
C$0.53
C$0.31
C$0.67
C$1.41
C$1.57
Rating
Risk
SO
SP
SU
SO
SO
SP
SP
FS
SU
SP
FS
SP
SP
SU
SO
SP
SP
SO
N/A
SO
SP
SP
SO
SP
SO
SP
SO
SO
SO
SP
SO
SO
SP
SP
SO
High
High
High
High
High
Speculative
Speculative
High
High
High
High
High
Speculative
Speculative
Speculative
Speculative
High
Speculative
N/A
Speculative
High
High
High
Speculative
Speculative
Speculative
High
High
Speculative
Speculative
Speculative
Speculative
Speculative
High
Speculative
1-Yr
ROR
$10.00
$7.25
$1.00
$6.00
$5.50
$2.00
$0.60
$3.50
$4.60
$7.00
$17.00
$4.95
$1.00
$0.10
$5.00
$3.00
$2.50
$1.25
N/A
$11.00
$6.00
$16.50
$7.50
$11.60
$4.25
$10.00
$3.00
$27.50
$4.50
$6.25
$1.00
$0.50
$0.70
$2.00
$2.75
39.5%
-9.9%
-58.8%
67.6%
54.5%
25.0%
242.9%
51.5%
-3.8%
31.4%
85.2%
7.1%
17.6%
-73.0%
75.4%
25.9%
13.9%
71.2%
N/A
41.4%
35.1%
9.0%
49.7%
14.7%
60.4%
57.7%
3.1%
43.1%
8.7%
12.4%
88.7%
61.3%
4.5%
41.8%
75.2%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
First Majestic Silver Corp. (AG-N)
New
$10.00
Adj. EPS14E: $0.06
Adj. EPS15E: $0.06
Adj. EPS16E: $0.11
Old
$13.00
Adj. EPS14E: $0.07
Adj. EPS15E: $0.34
Adj. EPS16E: $0.68
Valuation: 60% of 13.0x 2015 CFPS & 40% of 1.40x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Alamos Gold Inc. (AGI-N)
New
$7.25
Adj. EPS14E: $0.08
Adj. EPS15E: $0.16
Adj. EPS16E: $0.25 0.87x NAV
Old
$7.50
Adj. EPS14E: $0.09
Adj. EPS15E: $0.22
Adj. EPS16E: $0.42 0.82x NAV
Valuation: 0.87x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
84
Allied Nevada Gold Corp. (ANV-A)
New
$1.00
Adj. EPS15E: $-0.14
Adj. EPS16E: $0.27
Old
$3.00
Adj. EPS15E: $0.18
Adj. EPS16E: $0.98
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks
Argonaut Gold Inc. (AR-T)
New
Adj. EPS15E: US$0.10 Adj. EPS16E: US$0.14
Old
Adj. EPS15E: US$0.16 Adj. EPS16E: US$0.28
Valuation: 1.09x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
AuRico Gold Inc. (AUQ-N)
New
$5.50
Adj. EPS15E: $-0.06
Adj. EPS16E: $-0.03 1.25x NAV
Old
$6.00
Adj. EPS15E: $0.03
Adj. EPS16E: $0.14 1.20x NAV
Valuation: 1.25x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Bear Creek Mining Corporation (BCM-V)
New
$2.00
Old
$3.00
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Belo Sun Mining Corp. (BSX-T)
Valuation: 0.70x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
B2Gold Corp. (BTO-T)
New
$3.50
EPS15E: US$0.08
EPS16E: US$0.10
Old
$3.75
EPS15E: US$0.12
EPS16E: US$0.18
Valuation: 1.31x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Coeur Mining, Inc. (CDE-N)
New
$4.60
Adj. EPS14E: $-1.06
Adj. EPS15E: $-0.55 1.11x Q2/15E NAV
Old
$7.00
Adj. EPS14E: $-1.05
Adj. EPS15E: $0.15 1.10x Q2/15E NAV
Valuation: 1.11x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Centerra Gold Inc. (CG-T)
New
$7.00
Adj. EPS14E: US$0.05 Adj. EPS15E: US$0.03 Adj. EPS16E: US$0.26 0.75x NAV
Old
$6.50
Adj. EPS14E: US$0.06 Adj. EPS15E: US$0.21 Adj. EPS16E: US$0.71 0.50x NAV
Valuation: 0.75x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
85
Detour Gold Corporation (DGC-T)
New
$17.00
Adj. EPS14E: US$- Adj. EPS15E: US$0.57 Adj. EPS16E: US$1.32
0.41
Old
$18.00
Adj. EPS14E: US$- Adj. EPS15E: US$0.91 Adj. EPS16E: US$2.06
0.40
Valuation: 1.15x NAV
Key Risks to Price Target: Multiple contraction, commodity prices as well as technical and operational risks.
Fortuna Silver Mines Inc. (FSM-N)
New
$4.95
Adj. EPS15E: $0.36
Adj. EPS16E: $0.39
Old
$5.25
Adj. EPS15E: $0.49
Adj. EPS16E: $0.61
Valuation: 1.30x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Gabriel Resources Ltd. (GBU-T)
Valuation: 0.50x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Golden Star Resources Ltd. (GSS-A)
New
$0.10
Adj. EPS15E: $-0.06
Adj. EPS16E: $-0.02
Old
$0.15
Adj. EPS15E: $0.02
Adj. EPS16E: $0.01
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Guyana Goldfields Inc. (GUY-T)
New
Adj. EPS15E: $0.01
Adj. EPS16E: $0.25
Old
Adj. EPS15E: $0.02
Adj. EPS16E: $0.35
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Hecla Mining Company (HL-N)
New
Adj. EPS15E: $-0.02
Adj. EPS16E: $-0.04 1.21x NAV
Old
Adj. EPS15E: $0.07
Adj. EPS16E: $0.12 1.11x NAV
Valuation: 1.21x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Lucara Diamond Corp. (LUC-T)
Valuation: 1.25x NAV
Key Risks to Price Target: Diamond prices; development risk; technical and operational risk; multiple contraction; and geopolitical risk
Lydian International Limited (LYD-T)
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
MAG Silver Corp. (MVG-A)
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
86
New Gold Inc. (NGD-A)
New
$6.00
Adj. EPS15E: $0.11
Adj. EPS16E: $0.26 1.24x NAV
Old
$6.50
Adj. EPS15E: $0.19
Adj. EPS16E: $0.39 1.21x NAV
Valuation: 1.24x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Osisko Gold Royalties Ltd. (OR-T)
New
$16.50
Adj. EPS15E: $0.42
Adj. EPS16E: $0.52
Old
$17.00
Adj. EPS15E: $0.47
Adj. EPS16E: $0.63
Valuation: 1.59x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Primero Mining Corp. (P-T)
New
$7.50
Adj. EPS15E: US$0.07 Adj. EPS16E: US$0.10
Old
$9.00
Adj. EPS15E: US$0.22 Adj. EPS16E: US$0.49
Valuation: 60% of 10.0x 2015 CFPS & 40% of 1.14x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Pan American Silver Corp. (PAAS-Q)
New
$11.60
Adj. EPS14E: $-0.03
Adj. EPS15E: $-0.03
Adj. EPS16E: $0.23 1.05x Q2/15E NAV
Old
$14.75
Adj. EPS14E: $-0.01
Adj. EPS15E: $0.34
Adj. EPS16E: $0.79 1.04x Q2/15E NAV
Valuation: 1.05x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Premier Gold Mines Limited (PG-T)
New
$4.25
EPS14E: $-0.05
EPS15E: $-0.04
0.90x NAVPS
Old
$4.75
EPS14E: $-0.01
EPS15E: $-0.10
0.9x NAVPS
Valuation: 0.90x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Pretium Resources Inc. (PVG-T)
Valuation: 0.80x NAVPS
Key Risks to Price Target: Multiple Contraction, Commodity Prices, Technical and Operational Risks, Geopolitical Risks
Rio Alto Mining Ltd. (RIO-T)
New
$3.00
Adj. EPS14E: US$0.21 Adj. EPS15E: US$0.12 Adj. EPS16E: US$0.13
Old
$3.25
Adj. EPS14E: US$0.22 Adj. EPS15E: US$0.14 Adj. EPS16E: US$0.20
Valuation: 1.00x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Silver Wheaton Corp. (SLW-N)
New
$27.50
Adj. EPS15E: $0.88
Adj. EPS16E: $1.02 1.58x NAV
Old
$30.00
Adj. EPS15E: $1.26
Adj. EPS16E: $1.64 1.51x NAV
Valuation: 1.58x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
87
SEMAFO Inc. (SMF-T)
New
$4.50
Adj. EPS15E: US$0.26 Adj. EPS16E: US$0.22
Old
$4.75
Adj. EPS15E: US$0.32 Adj. EPS16E: US$0.34
Valuation: 1.20x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Silver Standard Resources Inc. (SSRI-Q)
New
$6.25
Adj. EPS14E: $0.03
Adj. EPS15E: $0.29
Adj. EPS16E: $-0.21 0.94x Q2/15E NAV
Old
$8.65
Adj. EPS14E: $0.04
Adj. EPS15E: $0.41
Adj. EPS16E: $0.50 0.92x Q2/15E NAV
Valuation: 0.94x Q2/15E NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Stornoway Diamond Corporation (SWY-T)
Valuation: 0.92x NAV
Key Risks to Price Target: Diamond Prices, Development Risk, Technical Risk, Operating Risk
True Gold Mining Inc. (TGM-V)
New
$0.50
EPS16E: $0.04
Old
$0.55
EPS16E: $0.09
Valuation: 0.90x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Teranga Gold Corporation (TGZ-T)
New
$0.70
Adj. EPS14E: US$0.06 Adj. EPS15E: US$0.16 Adj. EPS16E: US$0.20
Old
$0.80
Adj. EPS14E: US$0.07 Adj. EPS15E: US$0.21 Adj. EPS16E: US$0.30
Valuation: 1.00x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Timmins Gold Corp. (TMM-T)
New
$2.00
EPS14E: US$0.09
EPS15E: US$0.11
EPS16E: US$0.07
Old
$2.25
EPS14E: US$0.11
EPS15E: US$0.16
EPS16E: US$0.17
Valuation: 1.10x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Torex Gold Resources Inc. (TXG-T)
New
$2.75
Adj. EPS16E: $0.02
Old
$3.00
Adj. EPS16E: $0.04
Valuation: 1.00x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
88
Industry Comment
Monday, October 20, 2014, Pre-Market
Metals & Mining
Adjusting Our Estimates for Lower
Gold and Silver Price Forecasts
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
[email protected]
Mark Turner, MBA, P.Eng. - (416) 863-7484
(Scotia Capital Inc. - Canada)
[email protected]
Event
ScotiaView Analyst Link
■ We have updated our estimates for the base metals producers and
developers to reflect the impact of the revised precious metals commodity
price forecasts published by Scotiabank's Gold Team (see Exhibit 1). Please
see the note entitled “Revising our Precious Metal Price Deck” published on
October 20 for details.
Implications
■ The commodity changes include a material reduction in gold price
assumptions to $1,300/oz in both 2015 and 2016, down 7% and 13% from
our previous forecast of $1,400/oz and $1,500/oz, respectively. There was
no change to gold price assumptions in future periods.
■ In addition, the revised pricing deck includes a materially lower silver price
forecast of $19/oz in all periods beginning in 2015, which is 16%, 24%, and
5% below our previous forecast of $23/oz in 2015, $25/oz in 2016, and
$20/oz thereafter.
■ In general, the revised precious metals price deck reduced our estimates for
companies with exposure to gold and silver. However, for some companies
such as First Quantum, this impact was largely offset by a material increase
in our platinum and palladium price forecasts.
Recommendation
■ We have made no ratings changes. However, based on our lower estimates,
we have modestly reduced our target prices for Copper Mountain, Freeport
McMoran, HudBay Minerals, Imperial Metals, Teck Resources, and
Thompson Creek Metals.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
89
Exhibit 1 - Updated Commodity Price Forecasts
Gold (US$/oz)
2010A
2011A
2012A
2013A
Q1/14A
Q2/14A
Q3/14A
Q4/14E
2014E
Q1/15E
Q2/15E
Q3/15E
Q4/15E
2015E
2016E
2017E
2018E
2019E
2020E
LT
$1,226
$1,572
$1,669
$1,414
$1,293
$1,289
$1,282
$1,220
$1,271
$1,300
$1,300
$1,300
$1,300
$1,300
$1,300
$1,300
$1,300
$1,300
$1,300
$1,300
$1,282
$1,300
$1,291
$1,400
$1,400
$1,400
$1,400
$1,400
$1,500
$1,300
$1,300
$1,300
$1,300
$1,300
0%
-6%
-2%
-7%
-7%
-7%
-7%
-7%
-13%
0%
0%
0%
0%
0%
$19.75
$17.20
$19.26
$19.00
$19.00
$19.00
$19.00
$19.00
$19.00
$19.00
$19.00
$19.00
$19.00
$19.00
$19.75
$21.00
$20.21
$22.50
$22.50
$22.50
$22.50
$22.50
$25.00
$20.00
$20.00
$20.00
$20.00
$20.00
0%
-18%
-5%
-16%
-16%
-16%
-16%
-16%
-24%
-5%
-5%
-5%
-5%
-5%
$1,436
$1,250
$1,390
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,500
$1,436
$1,550
$1,465
$1,500
$1,500
$1,500
$1,500
$1,500
$1,400
$1,400
$1,400
$1,400
$1,400
$1,400
0%
-19%
-5%
0%
0%
0%
0%
0%
7%
7%
7%
7%
7%
7%
$864
$750
$794
$900
$900
$900
$900
$900
$950
$950
$950
$950
$950
$950
$864
$725
$787
$725
$725
$725
$725
$725
$700
$650
$650
$650
$650
$650
0%
3%
1%
24%
24%
24%
24%
24%
36%
46%
46%
46%
46%
46%
prior
change
Silver(US$/oz)
$20.21
$35.31
$31.16
$23.91
$20.44
$19.66
prior
change
Platinum (US$/oz)
$1,613
$1,720
$1,553
$1,488
$1,428
$1,448
prior
change
Palladium (US$/oz)
$528
$733
$644
$727
$745
$815
prior
change
Source: Bloomberg; Scotiabank GBM estimates.
Exhibit 2 - NAV and Target Price Revisions
New
Target Price
Base Metals Producers
Capstone Mining
Copper Mountain
First Quantum Minerals
Freeport-McMoRan
HudBay Minerals
Imperial Metals
Nevsun Resources
Sherritt International
Taseko Mines
Teck Resources
Thompson Creek Metals
Base Metals Developers
Nevada Copper
Royal Nickel
Iron Ore Producers
Labrador Iron Ore Royalty
Iron Ore Developers
Alderon Iron Ore
Champion Iron
New Millennium Iron Ore
1
Previous
Target Price
Change
New
Rating1
Previous
Rating1
Previous
NAVPS
Change
C$3.50
C$3.15
C$26.00
US$46.00
C$12.25
C$9.50
C$5.30
C$5.00
C$2.50
C$25.00
C$2.10
C$3.50
C$3.30
C$26.00
US$48.00
C$12.50
C$10.00
C$5.30
C$5.00
C$2.50
C$25.50
C$2.30
0%
-5%
0%
-4%
-2%
-5%
0%
0%
0%
-2%
-9%
SO
FS
SO
SO
SO
SP
SO
SO
SP
SO
SP
SO
FS
SO
SO
SO
SP
SO
SO
SP
SO
SP
US$5.22
C$4.12
C$26.34
US$33.84
C$9.91
C$11.98
US$4.41
C$6.33
C$3.45
C$23.87
C$2.13
US$5.24
C$4.19
C$26.34
US$34.30
C$9.91
C$12.20
US$4.44
C$6.33
C$3.45
C$24.09
C$2.19
0%
-2%
0%
-1%
0%
-2%
-1%
0%
0%
-1%
-3%
C$4.80
C$1.10
C$4.80
C$1.10
0%
0%
SO
SO
SO
SO
US$6.17
C$2.15
US$6.22
C$2.14
-1%
0%
C$26.00
C$26.00
0%
SO
SO
C$24.90
C$24.90
0%
C$2.50
C$0.10
C$0.55
C$2.50
C$0.10
C$0.55
0%
0%
0%
SO
SU
SP
SO
SU
SP
C$3.27
C$0.33
C$1.06
C$3.27
C$0.33
C$1.06
0%
0%
0%
FS = Focus Stock; SO = Sector Outperform; SP = Sector Perform; SU = Sector Underperform; UR = Under Review; R = Restricted
Source: Scotiabank GBM estimates.
New
NAVPS
90
Exhibit 3 - Revisions to Estimates
Adjusted EBITDA Estimates
Adjusted EBITDA ($M)
Base Metals Producers
Capstone Mining
Copper Mountain
First Quantum Minerals
Freeport-McMoRan
Hudbay Minerals
Imperial Metals
Nevsun Resources
Sherritt Intl. (inc. Nickel Assets)
Taseko Mines
Teck Resources
Thompson Creek Metals
Iron Ore Producers
Labrador Iron Ore Royalty
New
2015E
Previous
%
Change
2015E
Consensus
New
2016E
Previous
%
Change
2016E
Consensus
US$200
C$81
US$2,374
US$10,270
C$547
C$163
US$158
C$419
C$92
C$2,743
US$154
US$201
C$85
US$2,396
US$10,430
C$552
C$170
US$161
C$419
C$92
C$2,773
US$165
0%
-5%
-1%
-2%
-1%
-4%
-2%
0%
0%
-1%
-7%
US$222
C$86
US$2,615
US$10,074
C$511
C$171
US$271
C$393
C$102
C$2,935
US$230
US$336
C$101
US$3,589
US$17,396
C$915
C$305
US$97
C$590
C$154
C$3,187
US$198
US$337
C$107
US$3,636
US$18,066
C$927
C$329
US$100
C$590
C$154
C$3,235
US$222
0%
-6%
-1%
-4%
-1%
-7%
-3%
0%
0%
-1%
-11%
US$285
C$112
US$3,471
US$15,247
C$731
C$227
US$156
C$493
C$141
C$3,074
US$243
C$171
C$171
0%
C$199
C$145
C$145
0%
C$210
%
Change
2015E
Consensus
New
%
Change
2016E
Consensus
CFPS Estimates (Attributable)
CFPS
New
2015E
Previous
2016E
Previous
Base Metals Producers
Capstone Mining
Copper Mountain
First Quantum Minerals
Freeport-McMoRan
Hudbay Minerals
Imperial Metals
Nevsun Resources
Sherritt International
Taseko Mines
Teck Resources
Thompson Creek Metals
US$0.37
C$0.61
US$2.32
US$6.71
C$1.16
C$0.31
US$0.59
C$0.52
C$0.33
C$3.18
US$0.27
US$0.38
C$0.64
US$2.35
US$6.80
C$1.16
C$0.35
US$0.59
C$0.52
C$0.33
C$3.24
US$0.29
-3%
-5%
-1%
-1%
0%
-11%
0%
0%
0%
-2%
-7%
US$0.52
C$0.54
US$3.13
US$7.08
C$1.44
C$1.31
US$0.88
C$0.92
C$0.39
C$4.00
US$0.62
US$0.68
C$0.77
US$3.91
US$11.51
C$3.34
C$1.77
US$0.38
C$0.57
C$0.47
C$3.79
US$0.37
US$0.68
C$0.82
US$3.96
US$11.84
C$3.36
C$1.93
US$0.39
C$0.57
C$0.47
C$3.85
US$0.40
0%
-6%
-1%
-3%
-1%
-8%
-3%
0%
0%
-2%
-8%
US$0.60
C$0.73
US$4.12
US$10.01
C$2.20
C$1.63
US$0.51
C$1.21
C$0.53
C$4.14
US$0.62
Iron Ore Producers
Labrador Iron Ore Royalty
C$1.16
C$1.16
0%
C$2.11
C$1.08
C$1.08
0%
C$1.77
%
Change
2015E
Consensus
New
%
Change
2016E
Consensus
Adjusted EPS Estimates (Attributable)
Adjusted EPS
New
2015E
Previous
2016E
Previous
Base Metals Producers
Capstone Mining
Copper Mountain
First Quantum Minerals
Freeport-McMoRan
Hudbay Minerals
Imperial Metals
Nevsun Resources
Sherritt International
Taseko Mines
Teck Resources
Thompson Creek Metals
US$0.14
C$0.21
US$1.62
US$3.05
C$1.13
C$0.57
US$0.31
(C$0.25)
C$0.07
C$1.17
(US$0.14)
US$0.14
C$0.23
US$1.64
US$3.13
C$1.12
C$0.62
US$0.32
(C$0.25)
C$0.07
C$1.21
(US$0.12)
0%
-9%
-1%
-3%
1%
-8%
-3%
NM
0%
-3%
-17%
US$0.21
C$0.27
US$1.80
US$2.73
C$0.83
C$0.89
US$0.47
C$0.28
C$0.12
C$1.31
US$0.10
US$0.39
C$0.33
US$2.77
US$6.31
C$1.75
C$1.44
US$0.16
C$0.27
C$0.30
C$1.63
(US$0.00)
US$0.39
C$0.37
US$2.81
US$6.64
C$1.72
C$1.60
US$0.18
C$0.27
C$0.30
C$1.69
US$0.03
0%
-11%
-1%
-5%
2%
-10%
-11%
0%
0%
-4%
NM
US$0.28
C$0.28
US$2.56
US$5.14
C$1.18
C$1.36
US$0.25
C$0.64
C$0.24
C$1.71
US$0.13
Iron Ore Producers
Labrador Iron Ore Royalty
C$1.64
C$1.64
0%
C$2.14
C$1.35
C$1.35
0%
C$1.63
Source: Scotiabank GBM estimates.
91
Exhibit 4 - Target Price Methodology
* all figures in C$, except FCX
Company
Ticker
Base Metals Producers - Large Cap
First Quantum
FM-T
Freeport-McMoran
FCX-N
Teck Resources
TCK'B-T
Average
Share Price
17-Oct
12 Month
Target
Implied Rate
of Return
$18.37
US$30.34
$17.65
$26.00
US$46.00
$25.00
Base Metals Producers- Mid Cap
Capstone Mining
CS-T
Copper Mountain Mining
CUM-T
HudBay Minerals
HBM-T
Imperial Metals
III-T
Nevsun Resources
NSU-T
Sherritt International
S-T
Taseko Mines
TKO-T
Thompson Creek Metals
TCM-T
Average
$2.06
$1.94
$8.29
$8.64
$3.89
$2.77
$1.69
$2.17
Base Metal Developers
Nevada Copper
Royal Nickel
Average
$1.36
$0.36
NCU-T
RNX-T
Source: Factset; Scotiabank GBM estimates.
Rating
Analyst
Target Price Methodology
41.5%
51.6%
41.6%
44.9%
SO
SO
SO
OW
OW
OW
50% of 8.0x 2015 EV/EBITDA ($26.21) + 50% of 1.0x 8% NAV ($26.34)
50% of 6.0x 2015/2016 EV/EBITDA (US$59.28) + 50% of 1.0x 8% NAV (US$33.84)
50% of 8.0x 2015 EV/EBITDA ($27.01) + 50% of 1.0x 8% NAV ($23.87)
$3.50
$3.15
$12.25
$9.50
$5.30
$5.00
$2.50
$2.10
69.9%
62.4%
47.8%
10.0%
36.2%
80.5%
47.9%
-3.2%
43.9%
SO
FS
SO
SP
SO
SO
SP
SP
MT
MT
OW
OW
MT
OW
MT
OW
50% of 6.0x 2015 EV/EBITDA ($3.87) + 50% of 0.67x 8% NAV ($3.46)
50% of 6.5x 2015 EV/EBITDA ($3.46) + 50% of 0.86x 8% NAV ($3.74)
50% of 6.0x 2015/2016 EV/EBITDA ($14.74) + 50% of 1.0x 8% NAV ($9.91)
50% of 8.0x 2015 EV/EBITDA ($7.21) + 50% of 1.0x 8% NAV ($11.98)
50% of 4.5x 2015 EV/EBITDA ($5.68) + 50% of 0.87x 8% NAV ($3.85)
50% of 6.0x 2015 EV/EBITDA ($3.99) + 50% of 1.0x 8% NAV ($6.33)
50% of 5.5x 2015 EV/EBITDA ($2.39) + 50% of 0.88x 8% NAV ($3.36)
50% of 7.0x 2015 EV/EBITDA ($2.10) + 50% of 1.0x 8% NAV ($2.13)
$4.80
$1.10
252.9%
205.6%
252.9%
SO
SO
MT
MT
0.71x of 8% NAV ($4.88)
0.51x 8% NAV ($1.09)
Source: FactSet; Scotiabank GBM estimates.
Exhibit 5- Scotiabank Coverage Comp Table
92
93
Universe of Coverage
Price
ADV-T
CIA-T
CS-T
CUM-T
FCX-N
FM-T
GMEXICO B-MX
HBM-T
III-T
LIF-T
LIM-T
LUN-T
ML-T
%MNB-T
NCU-T
NML-T
NSU-T
RNX-T
S-T
SCCO-N
TCK.B-T
TCM-T
TKO-T
VALE-N
C$0.59
C$0.16
C$2.06
C$1.94
US$30.34
C$18.37
MXN 44.12
C$8.29
C$8.64
C$19.85
C$0.05
C$5.08
C$0.03
C$0.02
C$1.36
C$0.22
C$3.89
C$0.36
C$2.77
US$28.82
C$17.65
C$2.17
C$1.69
US$10.94
Rating
Risk
SO
SU
SO
FS
SO
SO
SP
SO
SP
SO
UR
Restricted
UR
UR
SO
SP
SO
SO
SO
SO
SO
SP
SP
SP
Speculative
Speculative
High
High
High
High
High
High
Speculative
Medium
N/A
N/A
N/A
N/A
Speculative
Speculative
High
Speculative
High
High
High
High
High
High
1-Yr
ROR
$2.50
$0.10
$3.50
$3.15
$46.00
$26.00
51.00
$12.25
$9.50
$26.00
N/A
N/A
N/A
N/A
$4.80
$0.55
$5.30
$1.10
$5.00
$40.00
$25.00
$2.10
$2.50
$12.50
323.7%
-37.5%
69.9%
62.4%
55.7%
42.6%
18.4%
48.0%
10.0%
40.1%
N/A
N/A
N/A
N/A
252.9%
155.8%
40.3%
205.6%
83.2%
40.8%
46.7%
-3.2%
47.9%
19.8%
Pertinent Data
Rating Risk
1-Yr
Target
Key Data
Year 2
Year 1
Year 3
Valuation
Alderon Iron Ore Corp. (ADV-T)
Valuation: 0.60x Mine Site NAV8% + 1.00x Net Cash
Key Risks to Price Target: Commodity price, operating and technical risks, environmental and legal risks
Champion Iron Ltd. (CIA-T)
Valuation: 0.20x Mine Site NAV8% + 1.00x Net Cash
Key Risks to Price Target: Commodity price, operating and technical risks, environmental and legal risks
Capstone Mining Corp. (CS-T)
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, operating, and technical risks, environmental and legal risks
Copper Mountain Mining Corporation (CUM-T)
New
$3.15
Adj. EPS14E: $0.06
Adj. EPS15E: $0.21
Adj. EPS16E: $0.33
Old
$3.30
Adj. EPS14E: $0.07
Adj. EPS15E: $0.23
Adj. EPS16E: $0.37
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, construction, operating, and technical risks, environmental and legal risks
Freeport-McMoRan Inc. (FCX-N)
New
$46.00
Adj. EPS14E: $2.46
Adj. EPS15E: $3.05
Adj. EPS16E: $6.31
Old
$48.00
Adj. EPS14E: $2.48
Adj. EPS15E: $3.13
Adj. EPS16E: $6.64
Valuation: 50/50 mix of 6.0x 2015E/2016E EV/EBITDA and 1.0x 8% NAV
Key Risks to Price Target: Commodity prices; operational; balance sheet; political
94
Pertinent Data
Rating Risk
1-Yr
Target
Key Data
Year 2
Year 1
Year 3
Valuation
First Quantum Minerals Ltd. (FM-T)
New
Adj. EPS14E: US$0.96 Adj. EPS15E: US$1.62 Adj. EPS16E: US$2.77
Old
Adj. EPS14E: US$0.97 Adj. EPS15E: US$1.64 Adj. EPS16E: US$2.81
Valuation: 50% of 8.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Political, commodity, operating, development, currency and balance sheet
Grupo México, SAB de CV (GMEXICO B-MX)
Valuation: Scenario-Weighted SOTP
Key Risks to Price Target: Commodity price, operating, and technical risks, political, environmental, and legal risks
HudBay Minerals Inc. (HBM-T)
New
$12.25
Adj. EPS15E: $1.13
Adj. EPS16E: $1.75
Old
$12.50
Adj. EPS15E: $1.12
Adj. EPS16E: $1.72
Valuation: 50/50 mix of 6.0x 2015/2016E EV/EBITDA and 1.0x 8% NAV
Key Risks to Price Target: Commodity, operating, development, financing, political
Imperial Metals Corporation (III-T)
New
$9.50
Adj. EPS15E: $0.57
Adj. EPS16E: $1.44
Old
$10.00
Adj. EPS15E: $0.62
Adj. EPS16E: $1.60
Valuation: 50% of 8.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity, operating, development, financing, permitting
Labrador Iron Ore Royalty Corp. (LIF-T)
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, operating and technical risks, environmental and legal risks
Labrador Iron Mines Holdings Limited (LIM-T)
Valuation:
Key Risks to Price Target:
Mercator Minerals Ltd. (ML-T)
Valuation:
Key Risks to Price Target:
Mirabela Nickel Limited (%MNB-T)
Valuation:
Key Risks to Price Target:
Nevada Copper Corp. (NCU-T)
New
Adj. EPS16E: US$0.12
Old
Adj. EPS16E: US$0.13
Valuation: 0.60x Mine Site NAV + 1.0x Net Cash
Key Risks to Price Target: Commodity price, permitting, construction, operating, and technical risks, environmental and legal risks
New Millennium Iron Corporation (NML-T)
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, operating and technical risks, environmental and legal risks
95
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Nevsun Resources Ltd. (NSU-T)
New
CFPS14E: US$0.70
CFPS16E: US$0.38
Old
CFPS14E: US$0.71
CFPS16E: US$0.39
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, operating, and technical risks, environmental and legal risks
Royal Nickel Corporation (RNX-T)
Valuation: 0.30x Minesite NAV + 1.0x Net Cash Items
Key Risks to Price Target: Commodity price, construction, operating, and technical risks, environmental and legal risks
Sherritt International Corporation (S-T)
Valuation: 50% of 6.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity Prices, Operational, Balance Sheet, Political
Southern Copper Corporation (SCCO-N)
Valuation: Scenario-Weighted NAV
Key Risks to Price Target: Commodity price, operating, and technical risks, political, environmental, and legal risks
Teck Resources Limited (TCK.B-T)
New
$25.00
Adj. EPS14E: $0.83
Adj. EPS15E: $1.17
Adj. EPS16E: $1.63
Old
$25.50
Adj. EPS14E: $0.85
Adj. EPS15E: $1.21
Adj. EPS16E: $1.69
Valuation: 50% of 8.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity prices, currency, operating, development, balance sheet and environmental
Thompson Creek Metals Company Inc. (TCM-T)
New
$2.10
Adj. EPS15E: US$- Adj. EPS16E: US$0.00
0.14
Old
$2.30
Adj. EPS15E: US$- Adj. EPS16E: US$0.03
0.12
Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity, operating, development, balance sheet
Taseko Mines Limited (TKO-T)
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, operating, and technical risks, environmental and legal risks
Vale SA (VALE-N)
Valuation: Dividend Discount Model
Key Risks to Price Target: Commodity price; operating and technical risks; political, environmental, and legal risks
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
Industry Comment
Monday, October 20, 2014, Pre-Market
Telecommunications and
Cable
Jeff Fan, CPA, CA, CFA - (416) 863-7780
(Scotia Capital Inc. - Canada)
[email protected]
Jay Oduwole - (416) 945-4249
(Scotia Capital Inc. - Canada)
[email protected]
Canadian Q3/14 and Q4/14
Previews
Shay Nulman, MBA - (416) 862-3721
(Scotia Capital Inc. - Canada)
[email protected]
Event
ScotiaView Analyst Link
■ We preview quarterly earnings for RCI and SJR (Oct. 23), CCA (Oct. 31),
MBT (Nov. 5), T and BCE (Nov. 6), and QBR (Nov. 11).
Implications
■ We expect T will again lead the wireless industry in postpaid adds and
estimate good wireless financial results to continue for T and BCE until the
impact of mandated wireless roaming regulation and 4th operator
recapitalization in F15. We believe the wireless industry will once again
exhibit limited wireless penetration gain in Q3.
■ With recent OTT video streaming announcements by US content providers,
we believe the focus will shift to fixed broadband, which is critical for OTT.
In Canada, we believe QBR and SJR are currently putting the most efforts
behind differentiating their broadband advantages (SJR with Wi-Fi and
Internet-only offers and QBR with speed and in-home Wi-Fi). We expect
QBR to report a strong quarter on subscriber additions.
■ With the pullback in share prices we updated our dividend yield spread and
relative PE valuation analyses. Both analyses support our preference for the
US. Furthermore, with lower interest rates, we provide a preliminary
assessment of the impact on pension solvency deficit and funding. We
believe MBT is the most impacted and T is the least impacted.
Recommendation
■ We increased our SJR target price to $30. Other target prices are unchanged.
QBR remains our Top Pick with a FS rating and SJR is rated SO. MBT,
CCA, BCE, RCI and T are rated SP. Within the large cap telecom/cable
sectors, we favor CMCSA and VZ in the US.
Universe of Coverage
Price
BA-T
BCE-T
CCA-T
CMCSA-Q
GLN-T
MBT-T
QBR.B-T
RCI.B-T
SJR.B-T
T-T
T-N
TWC-N
VZ-N
C$30.31
C$47.33
C$57.53
US$50.68
C$10.00
C$28.24
C$27.85
C$42.28
C$27.29
C$38.04
US$34.08
US$135.35
US$48.07
Rating
Risk
N/A
SP
SP
SO
SO
SP
FS
SP
SO
SP
SU
SO
SO
N/A
Medium
Medium
Medium
High
Medium
Medium
Medium
Medium
Medium
Medium
Medium
Medium
1-Yr
ROR
N/A
$50.00
$64.00
$65.00
$14.00
$31.00
$35.50
$43.00
$30.00
$37.00
$36.00
$187.00
$55.00
N/A
11.0%
13.4%
30.0%
45.3%
15.8%
27.8%
6.0%
14.0%
1.6%
11.1%
40.4%
18.8%
For Reg AC Certification and important disclosures see Appendix A of this report.
Analysts employed by non-U.S. affiliates are not registered/qualified as research
analysts with FINRA in the U.S.
Exhibit 1 - US Earnings Preview Summary
Target Price
Rating
Earnings Call
Dial Details
Rogers (Q3/14)
$43.00
Sector Perform
Oct 23 at 8:00am ET
Dial: 416-644-3414
Code: N/A
Shaw (Q4/14)
$30.00
Sector Outperform
Oct 23 at 3:30pm ET
Dial: 1-877-881-1303
Code: N/A
Cogeco (Q4/14)
$64.00
Sector Perform
Nov 3 at 11:00am ET
Dial: 1-800-524-8950
Code: 6637961
MTS (Q3/14)
$31.00
Sector Perform
Nov 5 at 5:00pm ET
Dial: 1-888-231-8191
Code: N/A
BCE (Q3/14)
$50.00
Sector Perform
Nov 6 at 8:00am ET
TELUS (Q3/14)
$37.00
Sector Perform
Nov 6 (Tentative)
Quebecor (Q3/14)
$35.50
Focus Stock
Nov 11 (Tentative)
Pending
Pending
Pending
Source: Company reports; Scotiabank GBM estimates.
Exhibit 2 - Valuation Comparables
NTM Valuation
Country (Currency)
Can (C$)
US (US$)
US (US$)
US (US$)
Can (C$)
Can (C$)
Can (C$)
Can (C$)
Can (C$)
Can (C$)
US (US$)
Can (C$)
Company
Quebecor Inc.
Time Warner Cable Inc.
Comcast Corporation
Verizon Communications
Shaw Communications
Manitoba Tel
Cogeco Cable
BCE Inc.
Rogers Communications
TELUS Corporation
AT&T Inc.
Glentel Inc.
Ticker
QBR.B-CA
TWC-US
CMCSA-US
VZ-US
SJR.B-CA
MBT-CA
CCA-CA
BCE-CA
RCI.B-CA
T-CA
T-US
GLN-CA
Rating
Focus Stock
Sector Outperform
Sector Outperform
Sector Outperform
Sector Outperform
Sector Perform
Sector Perform
Sector Perform
Sector Perform
Sector Perform
Sector Underperform
Sector Outperform
Prices as at Oct. 16, 2014
1
Assumes full cash taxes are paid, except for MBT which has a tax holiday beyond 2019.
Sources: Factset; Scotiabank GBM estimates.
Source: Company reports; Scotiabank GBM estimates.
Current Price
$27.50
$131.88
$49.59
$47.67
$27.05
$28.10
$56.79
$47.18
$41.70
$37.97
$33.64
$10.00
Div. / Share
$0.10
$3.00
$0.90
$2.20
$1.10
$1.70
$1.20
$2.47
$1.83
$1.52
$1.84
$0.52
One-Year
Target Price
$35.50
$187.00
$65.00
$55.00
$30.00
$31.00
$64.00
$50.00
$43.00
$37.00
$36.00
$14.00
ROR
29%
44%
33%
20%
15%
16%
15%
11%
8%
1%
12%
45%
Market
Cap ($M)
3,955
38,192
130,323
197,687
11,697
2,175
2,747
36,692
21,559
23,341
172,977
224
Dividend
Yield
0.4%
2.3%
1.8%
4.6%
4.1%
6.0%
2.1%
5.2%
4.4%
4.0%
5.5%
5.2%
U.S. Average
Can. Average
Cable Average
Integrated Telco Average
EV/cash EBIT
12.9x
12.6x
10.6x
10.4x
13.6x
13.0x
11.5x
12.1x
13.2x
15.2x
11.5x
4.7x
EV/EBITDA
6.8x
7.0x
7.3x
6.6x
7.6x
5.6x
6.1x
6.9x
7.1x
7.6x
5.8x
4.0x
P/E
13.3x
16.4x
15.7x
13.5x
15.4x
17.1x
10.4x
15.3x
13.8x
15.8x
13.4x
8.9x
11.0x
13.2x
11.2x
11.4x
6.5x
7.1x
7.2x
6.4x
14.2x
14.9x
15.7x
13.7x
FCF Yield
Full tax 1
Actual tax
6.6%
6.7%
5.4%
7.5%
6.5%
6.9%
8.1%
8.1%
4.7%
4.7%
5.2%
5.2%
10.6%
9.8%
6.6%
7.5%
6.3%
6.6%
4.9%
4.9%
6.3%
6.6%
15.2%
15.2%
6.9%
6.0%
6.2%
7.0%
7.3%
6.4%
6.9%
7.2%
Wireless: The Calm before the Storm
We expect TELUS will again lead the industry in postpaid additions driven by industry
leading churn, followed by BCE and RCI. We expect to see good wireless financial results
driven by price discipline amongst the three incumbents, lower subscriber additions and
smartphone upgrades (hence lower equipment subsidies). We believe the introduction of the
iPhone 6/6+ had limited impact due to the late introduction in the quarter and short supply. We
expect QBR will be the only publicly-traded wireless provider to show YOY increase in net
additions with the addition of the iPhone to its lineup and we also expect QBR to report strong
wireless ARPU growth driven by data and smartphone adds. For the industry overall, we
believe Q3 will once again exhibit limited wireless penetration gain in Canada caused by the
unintended consequences of the Wireless Code of Conduct, which resulted in higher monthly
rate plans and higher handset prices. We think the lack of market growth, the regulatory risk
associated with mandated wireless roaming regulations and 4th operator recapitalization will
create downside risk to both estimates and valuation in 2015.
Exhibit 3 - Big-3 Net Adds
Q1F13
Total Postpaid Net Adds (K)
BCE
TELUS
Rogers
Total
Q2F13
Q3F13
Q4F13
Q1F14
Q2F14
Q3F14E
Q4F14E
59
60
32
151
96
100
98
294
103
106
64
273
120
113
34
267
34
48
2
84
66
78
38
182
75
85
40
200
90
105
40
235
Change in Postpaid Net Adds (% YOY)
BCE
TELUS
Rogers
Total
-4.9%
-4.8%
-31.9%
-12.2%
-5.5%
-9.9%
12.6%
-1.9%
-31.1%
-8.6%
-15.8%
-20.0%
-17.0%
-8.1%
-41.4%
-18.0%
-42.9%
-20.0%
-93.8%
-44.6%
-31.3%
-22.0%
-61.2%
-38.1%
-27.0%
-19.8%
-37.5%
-26.7%
-24.7%
-7.1%
17.6%
-11.8%
Postpaid Net Add Share (% of Total)
BCE
TELUS
Rogers
Total
39.3%
39.6%
21.1%
100.0%
32.7%
34.0%
33.3%
100.0%
37.7%
38.9%
23.5%
100.0%
44.8%
42.4%
12.8%
100.0%
40.5%
57.2%
2.4%
100.0%
36.3%
42.8%
20.9%
100.0%
37.5%
42.5%
20.0%
100.0%
38.3%
44.7%
17.0%
100.0%
Source: Company reports; Scotiabank GBM estimates.
Fixed Broadband Becomes More Critical in an OTT Video World
■ With recent over-the-top (OTT) video streaming announcements by US content
providers Starz, HBO and CBS, it looks like the horse is now out of the barn and the
moves raise some questions on the impact to Canadian media and pay-tv providers.
■ On the media side, it is important to remember that Canada is largely verticallyintegrated (content and content distribution) and US content providers sell into a few
large broadcasters that are also pay-TV distributors (Rogers, BCE and Shaw, which is
related to Corus). It is not clear that it is worthwhile for US providers to go direct to
Canadian consumers and incur additional sales and marketing costs, as opposed to selling the
OTT rights to the Canadian broadcasters. Joint ventures like Rogers’ and Shaw’s Showmi
and the recent agreement extension on content between BCE/Corus and HBO would suggest
Canada broadcasters will have their own OTT solutions. We expect BCE will soon introduce
its own OTT service in the coming months. And for HBO, the contract with BCE (former
Astral) and Corus extends until 2018.
■ Regarding the Pay-TV providers, we believe the potential impact on video EBITDA
and cash flow will be more than offset by the gains from broadband, which will become
even more critical for OTT video-only homes. As more streaming content becomes
available, we believe there will be a greater need for higher broadband capacity and usage.
As a result, we expect the EBITDA/cash flow profile of OTT video-only homes could
exceed an average broadband and video home (at industry ARPUs). We believe Internetonly ARPUs are well above Canadian industry ARPU of ~$45. In Canada, we believe QBR
and SJR are currently putting the most effort behind differentiating their broadband services.
Specifically, SJR is differentiating with Wi-Fi outside the home and promoting Internet-only
offers and QBR is differentiating with speed.
Impact of Lower Rates: Valuation Still Favors US
With the recent share price movements, we revisited the PE valuation and the dividend
yield of the sector relative to the overall market PE and 10-year treasuries, respectively.
On the relative PE comparison, we believe US telecom is more attractive than Canada, which
supports our outlook as well. Currently, the Canadian telecom sector is trading at a 1%
premium to the S&P/TSX. Over the past 20 years, the average has been a 4% premium.
Conversely, the US telecom sector is trading at a 12% discount to the S&P 500 and over the
past 20 years, the average has been a 6% premium. On the dividend yield spread, the recent
downward move in the share prices (results in higher dividend yields) and lower rates have
caused the spread to spike to levels not seen since late 2012 for both the US and Canada. On a
relative basis to each other, the US sector is also slightly more attractive.
Exhibit 4 - Relative P/E - Canadian Telecom vs. S&P/TSX
Exhibit 5 - Relative P/E - US Telecom vs. S&P 500
Source: Company reports; FactSet, FAME, Bloomberg, Scotiabank GBM estimates.
Source: Company reports; FactSet, FAME, Bloomberg, Scotiabank GBM estimates.
Exhibit 6 - Telecom Index Dividend Yield Spread (over Government 10 Year Bond Yield)
31-Dec-2011:
U.S. 3.70
Canada 2.49
4.5
4.0
U.S., 16-Oct-14, 2.90
3.5
3.0
2.5
Spread (%)
2.0
1.5
Canada, 16-Oct-14,
2.83
31-Dec-2010:
Canada 1.89
U.S. 1.81
1.0
0.5
(0.5)
(1.0)
(1.5)
(2.0)
Canada
U.S.
Source: Company reports; FactSet, FAME, Bloomberg, Scotiabank GBM estimates.
Impact of Lower Rates: Higher Pension Deficits and Funding
With lower interest rates, we provide a preliminary assessment of the impact
of lower rates on pension solvency deficits and funding. In the exhibit below, we
outline a continuity of the pension solvency deficit and plan assets starting at the
beginning of 2014 to the present based on a few key assumptions as outlined in the
table. In summary, we believe MBT is the most impacted and T is the least
impacted. For MBT the pension funding pressure may add to the urgency of
revisiting an Allstream divestiture again to avoid having to raise capital in the debt
or equity markets.
30-Jun-14
31-Dec-13
30-Jun-13
31-Dec-12
30-Jun-12
31-Dec-11
30-Jun-11
31-Dec-10
30-Jun-10
31-Dec-09
30-Jun-09
31-Dec-08
30-Jun-08
31-Dec-07
30-Jun-07
(2.5)
Exhibit 7 - Impact of Lower Rates on Pension Deficit and Funding
Impact of Lower Rates on Pension Deficit and Funding (C$M)
A Pension solvency deficit (1)
Market cap, Dec. 31 2013
Deficit as % of market cap, Dec. 31 2013 (2)
Funded status %
Canada 10-year treasury (Jan. 1, 2014)
Canada 10-year treasury (Current)
Canada 10-year treasury change, YTD (bps)
Pension benefit obligation sensitivity (3)
B YTD obligation increase
BA-CA
350
6,126
6%
91%
BCE-CA
1,000
35,717
3%
94%
MBT-CA
205
1,945
11%
92%
T-CA
23,426
0%
100%
2.77
1.94
(0.83)
2.77
1.94
(0.83)
2.77
1.94
(0.83)
2.77
1.94
(0.83)
508
2,764
317
1,072
422
2,294
263
890
Pension plan asset composition (Dec. 31 2013)
Canadian
Foreign
Equity
Government
Corporate
ABS
Commercial mortgages
Debt
Cash and cash equivalents
Real estate (Alternative Investments)
Total plan asset (Jan 2014)
301
1,325
1,626
960
960
2,171
2,171
4,342
4,374
4,374
671
671
1,342
405
405
1,920
54
5
3,605
8,748
1,441
14,477
809
72
115
2,338
2,394
2,491
4,885
1,309
790
31
319
2,449
182
458
7,974
Pension plan asset composition (October 15 2014 estimate)
Canadian
Foreign
Equity
Government
Corporate
ABS
Commercial mortgages
Debt
Cash and cash equivalents
Real estate
Total estimate plan assets (Oct 2014) (4)
318
1,385
1,703
1,030
1,030
2,061
54
5
3,823
2,295
2,269
4,564
4,693
4,693
9,387
1,441
15,392
709
701
1,411
434
434
868
72
115
2,466
2,530
2,604
5,135
1,405
848
31
319
2,602
182
458
8,377
218
6.0%
915
6.3%
128
5.5%
403
5.1%
554
6,873
8%
87%
2,379
36,258
7%
87%
340
2,119
16%
88%
487
23,895
2%
95%
204
68
14
NA
NA
NA
1,379
460
92
2,990
4%
74%
135
45
9
112
8%
94%
487
162
32
1,158
3%
73%
27
NA
NA
NA
184
3,012
6%
78%
18
115
16%
101%
65
1,280
5%
76%
C YTD estimated plan asset change
% change
D Current pension solvency deficit (A + B - C) (5)
Market cap (Current)
Deficit as % of market cap, Oct 15, 2014 (2)
Funded status
E Increase in pension solvency deficit (D - A)
F Smoothing mechanism over 3 years (E / 3 years)
Incremental annual pension funding (F / 5 years)
2015E FCF (BCE includes BA)
% of 2015E FCF
2015E proforma dividend payout ratio
Increase in annual pension funding (5 year)
2016E FCF (BCE includes BA)
% of 2016E FCF
2016E proforma dividend payout ratio
Notes:
1
2
3
4
5
Per company disclosures on conference calls or financial reports.
BCE market cap and hence the BCE deficit includes its proportionate (~45%) share of BA solvency deficit.
Per 100 bps decline in discount rate as disclosed in company 2013 annual reports.
Return assumptions: Equity - TSX and MSCI World YTD return; Debt - FTSE TMX Index Monitor
Assumes no voluntary deficit contribution before year end.
Source: Company reports; Scotiabank GBM estimates; Bloomberg; DEX.
RCI Q3/14 Preview: Signs of Stabilization but Growth
Remains Challenged
Exhibit 8 - RCI Q3/14 Estimates
Q3/F14E
YoY
Subs Grw.
Cable
(30,000)
-5.2%
Internet
12,000
2.4%
Cable Telephony
3,000
1.7%
(15,000)
-0.9%
Subscribers
■ We maintain our $43 target and Sector Perform rating. We continue
to believe the regulatory and competitive risks are not being
appropriately factored into RCI’s share price. On NTM estimates,
Rogers trades at 7.1x EV/EBITDA, 13.1x EV/cash EBIT and 6.4% FCF
yield (full-taxed), higher than the US and integrated telecom group
average and in line with the Canadian average.
■ On the whole, we anticipate another lackluster quarter. While
financial and operating trends appear to have stabilized, we continue to
expect anaemic consolidated revenue and EBITDA growth of 0.1% and
approx. -0.5% YOY, below FactSet consensus expectations. Though we
believe new CEO Guy Laurence has correctly identified required areas
of improvement at RCI, we remain patient for turnaround initiatives to
take hold and drive enhanced subscriber and financial performance. We
outline our segmented expectations below.
Cable RGUs
Net sub adds consensus est.
Postpaid
40,000
1.4%
Prepaid
5,000
-8.8%
45,000
-0.1%
Financials
Q3/F14E
YoY Grw.
Service
1,728,410
0.1%
121,691
1.4%
Wireless Subscribers
Equipment
Wireless
Low Volume and Price Discipline Drives Wireless
Profitability
■ We expect flat service revenue growth and modest 1% YOY
EBITDA growth in Q3. The flat revenue growth, unchanged
sequentially, is a reflection of stabilizing ARPU following an extended
period of weakness. While cheaper US roaming plan impact has largely
been lapped, we continue to expect ARPU deterioration related to
simplified pricing plans. As a result, we estimate postpaid ARPU
decline of -1% YOY. We forecast healthy EBITDA margins of 51.2%,
despite the launch of the iPhone 6, due to pricing and promotional
discipline. IPhone sales began in the last week of Q3 and inventory
supply was limited, therefore we do not expect high subsidy costs
typically associated with iPhone launches to negatively impact
profitability in the quarter.
■ We continue to expect weak volume even with iPhone availability. In
view of the late quarter launch of the iPhone 6, we do not expect the
iconic smartphone to fuel increased volume. Therefore, we anticipate the
general market malaise that has impacted the industry since the onset of
the Wireless Code of Contact in July 2013 to continue to depress
subscriber trends. We expect postpaid gross additions of ~330K and
postpaid net adds of 40K, both down -7% and -38% YOY, respectively.
Looking ahead to Q4, we expect a full quarter of iPhone availability and
greater inventory supply to drive increased sales.
IPTV Competition Pressures Cable Results
■ We forecast flat cable revenue growth and -1% EBITDA decline.
Revenue is supported by revenue per RGU growth of ~2% driven by
price increases instituted earlier this year, offset by subscriber loss. We
believe the competitive environment remains elevated against IPTV
operators. Accordingly, in-market promotions should weigh on EBITDA
in Q3 and we expect YOY margin contraction of 60 bps to ~48%. On
the subscriber front, we expect -30K TV losses due to competition from
IPTV. Moreover, phone additions are also expected to be moderate with
+3K additions in the quarter due to wireless substitution. The lone bright
spot remains broadband at +12K net adds.
Net Adds
1,850,101
0.2%
Cable Operations
872,198
-0.1%
Media
446,295
1.4%
94,831
-6.5%
RBS
Corporate
Revenue
1
(28,098)
n.a.
3,235,327
0.1%
Consensus estimates
Wireless (FactSet)
1,834,000
Cable Operations (FactSet)
946,000
Media (FactSet)
452,000
RBS (FactSet)
97,000
Consolidated (FactSet)
(29,000)
Consolidated (FactSet)
3,258,000
Wireless
884,627
1.1%
Cable Operations
419,573
-1.3%
Media
46,485
-15.5%
RBS
30,773
-4.7%
Corporate
(43,211)
n.a.
1,338,247
-0.4%
EBITDA 2
Consolidated (FactSet)
EPS (Basic adjusted)
3
Consolidated (FactSet)
1,355,000
$0.89
-8.2%
$0.90
Wireless
286,766
49.4%
Cable Operations
255,000
-14.7%
49,027
-14.0%
590,793
7.8%
Other
Capex
Consolidated (FactSet)
FCF (before w /c and div.)
593,000
395,455
Financials in $000s except per share data
Figures exclude Video segment results.
1
2
Grow th rates adjusted for Pivot/Granite acquisitions
EBITDA excludes non-cash stock comp and integration expenses.
Grow th rates adjusted for Pivot/Granite acquisitions
3
Grow th rate excludes Q3/13 $0.07/share adjustment related to stock comp,
and restructuring expenses. We exclude an estimated $0.08 in Q3/14 related to
restructuring activities.
Consensus estimates per FactSet as at Sept. 25, 2014.
Source: Company reports; Scotiabank GBM estimates.
10%
Media Limited by Advertising Decline
■ We expect Media to face persistent decline related to a
secular shift from traditional media to online and digital.
Revenue should grow by a modest 1% to $446M; however,
EBITDA should decline by -15.5% due to higher
programming and production costs. Furthermore, we expect
approx. $4.5M of capex related to the construction of a new
Sportsnet Hockey Night in Canada set ahead of the NHL
season kick-off.
RBS Growth Fueled by Next Generation Services,
Offset by Legacy Deterioration
■ We expect organic RBS revenue and EBITDA decline of 6.5% and -5%, respectively. The revenue pressure,
excluding the contribution of Pivot/Granite, is due to a
reduction of off-net legacy revenue, partially absorbed by
continuing growth in on-net and next generation services and
increased revenue from new data centres.
Exhibit 9 - RCI Q3/14 Wireless Estimates
Q3/F14E
YoY Grw.
40,000
5,000
45,000
1.4%
-8.8%
-0.1%
ARPU
Postpaid
Prepaid
Blended
$68.08
$16.84
$60.89
-1.0%
0.0%
0.1%
Data
Voice
Blended
$32.80
$28.09
$60.89
13%
-11.6%
0.1%
Churn
Postpaid
Prepaid
Blended
1.20%
3.86%
1.57%
-3 bp
53 bp
2 bp
Net Subscriber Adds
Postpaid
Prepaid
Total
Net sub adds consensus est.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 10 - RCI Summary Model
Year ending December 31
2012
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14E
Q4/F14E
7,846
268
1,591
(170)
$59.76
-0.7%
$24.20
40.5%
1.29%
3.99%
8,074
228
1,429
(162)
$59.57
-0.4%
$28.01
47.0%
1.24%
3.86%
8,194
120
1,303
(126)
$59.26
-0.5%
$31.30
52.8%
1.21%
3.80%
8,334
140
1,213
(90)
$59.49
0.4%
$34.24
57.6%
1.20%
3.76%
8,464
130
1,138
(75)
$59.97
0.8%
$36.78
61.3%
1.20%
3.74%
7,878
32
1,498
(93)
$59.64
3.5%
$27.00
45.3%
1.22%
4.48%
7,976
98
1,442
(56)
$59.24
0.2%
$27.10
45.7%
1.17%
4.13%
8,040
64
1,458
16
$60.83
-1.8%
$29.04
47.7%
1.23%
3.33%
8,074
34
1,429
(29)
$58.56
-3.2%
$28.95
49.4%
1.34%
3.41%
8,076
2
1,356
(73)
$57.60
-3.4%
$29.51
51.2%
1.20%
3.55%
8,114
38
1,325
(31)
$59.14
-0.2%
$30.23
51.1%
1.13%
3.92%
8,154
40
1,330
5
$60.89
0.1%
$32.80
53.9%
1.20%
3.86%
8,194
40
1,303
(27)
$59.57
1.7%
$32.74
55.0%
1.30%
3.86%
2,074
(33)
51.8%
1,784
(7)
86.0%
1,983
2
95.6%
1,164
1
56.1%
5,221
-0.9%
$55.51
-0.1%
2,044
(30)
50.9%
1,777
(7)
86.9%
1,995
12
97.6%
1,167
3
57.1%
5,206
-0.9%
$55.77
1.9%
2,014
(30)
49.9%
1,762
(15)
87.5%
2,005
10
99.6%
1,170
3
58.1%
5,189
-1.0%
$56.05
1.3%
Operational Data
Wireless Subs (postpaid)
Net Adds
Wireless Subs (prepaid)
Net Adds
Blended Wireless ARPU ($ / month / subscriber)
% YOY change
Blended Data ARPU
Data ARPU as % of total ARPU
Wireless churn (postpaid)
Wireless churn (prepaid)
Postpaid churn is expected to remain steady in 2014, reflecting
wireless market maturity and focus on retention.
Basic Cable Subs
Net Adds
Penetration
Digital Cable Subs
Net Adds
Penetration of Basic
High-speed Internet Subs
Net Adds
Penetration of Basic
Digital Phone Subs
Net Adds
Penetration of Basic
Total RGU (basic, Internet and phone)
RGU year-over-year change
Cable revenue per RGU
YOY Growth
2,214
(83)
58.1%
1,768
(7)
79.9%
1,864
73
84.2%
1,074
23
48.5%
5,152
0.2%
$54.44
-0.1%
2,127
(127)
53.5%
1,765
(41)
83.0%
1,961
63
92.2%
1,153
42
54.2%
5,241
-0.4%
$55.31
1.6%
Source: Company reports; Scotiabank GBM estimates.
2,014
(113)
49.9%
1,762
(4)
87.5%
2,005
44
99.6%
1,170
17
58.1%
5,189
-1.0%
$55.49
0.3%
1,853
(161)
45.0%
1,759
(3)
94.9%
2,060
55
111.2%
1,194
10
64.4%
5,107
-1.6%
$57.56
3.7%
1,799
(54)
43.0%
1,756
(2)
97.6%
2,126
66
118.2%
1,169
(25)
65.0%
5,094
-0.3%
$59.25
2.9%
Our ARPU estimate in 2014 reflects continued impact
from voice ARPU pressure and less expensive roaming
plans, slightly offset by less aggressive price discounting.
2,189
(25)
57.2%
1,773
5
81.0%
1,890
26
86.3%
1,091
17
49.8%
5,170
0.7%
$55.61
3.9%
2,194
(35)
56.1%
1,799
(12)
82.0%
1,930
6
88.0%
1,145
17
52.2%
5,269
0.5%
$55.56
1.5%
2,155
(39)
54.5%
1,789
(10)
83.0%
1,948
18
90.4%
1,148
3
53.3%
5,251
-0.2%
$54.75
0.7%
2,127
(28)
53.5%
1,765
(23)
83.0%
1,961
13
92.2%
1,153
5
54.2%
5,241
-0.4%
$55.34
0.4%
2,107
(20)
52.8%
1,791
26
85.0%
1,981
20
94.0%
1,163
10
55.2%
5,251
-0.6%
$54.64
-1.7%
We expect the ARPU
deterioration to stabilize as
management pulls back
from in-market promotions
and focuses on
ARPU/higher usage. We
expect volume to improve
slightly in 2H14, reflecting
the launch of iconic
devices.
Exhibit 10 - RCI Summary Model (cont'd)
Year ending December 31
2012
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14E
Q4/F14E
6,719
561
7,280
3,709
1,620
(123)
12,486
1.1%
1.8%
1.5%
0.6%
6,748
522
7,270
3,849
1,704
(117)
12,706
0.9%
0.4%
2.1%
3.8%
6,735
539
7,274
3,858
1,820
(117)
12,834
-0.1%
-0.2%
-0.6%
2.1%
6,798
546
7,344
3,948
2,066
(121)
13,238
1.7%
0.9%
2.2%
3.6%
6,890
542
7,432
4,039
2,152
(123)
13,499
2.0%
1.4%
2.0%
4.1%
1,683
77
1,760
954
341
(28)
3,027
2.9%
4.4%
4.4%
-3.7%
1,670
143
1,813
960
470
(31)
3,212
2.6%
1.1%
1.9%
5.0%
1,726
120
1,846
966
440
(28)
3,224
0.4%
-1.0%
2.1%
9.9%
1,669
182
1,851
969
453
(30)
3,243
-1.8%
-2.5%
0.2%
3.0%
1,636
91
1,727
954
367
(28)
3,020
-1.8%
-2.8%
-2.1%
6.0%
1,674
126
1,800
967
475
(30)
3,212
-0.6%
0.2%
-0.4%
0.3%
1,728
122
1,850
967
446
(28)
3,235
0.1%
0.1%
-0.1%
1.4%
1,696
201
1,897
970
531
(31)
3,367
1.7%
1.6%
0.3%
1.8%
Media EBITDA Growth
3,063
1,694
190
(113)
4,834
38.1%
2.0%
45.6%
0.9%
47.8%
3.6%
11.7%
5.6%
3,157
1,816
156
(149)
4,980
38.5%
2.1%
46.8%
3.1%
49.2%
5.0%
9.2%
-16.3%
3,207
1,808
124
(162)
4,977
38.5%
-0.7%
47.6%
1.6%
48.6%
-1.8%
6.8%
-16.6%
3,242
1,876
133
(167)
5,085
38.1%
2.1%
47.7%
1.1%
49.3%
3.6%
6.5%
3.4%
3,299
1,952
139
(171)
5,220
38.3%
2.7%
47.9%
1.8%
50.0%
3.5%
6.5%
4.1%
765
444
(12)
(31)
1,166
36.6%
6.6%
45.5%
3.8%
48.9%
11.4%
-3.5%
n.m.
821
456
64
(35)
1,306
40.6%
1.7%
49.2%
3.1%
49.5%
5.0%
13.6%
-8.0%
875
454
55
(43)
1,341
41.4%
2.8%
50.7%
3.8%
48.7%
3.2%
12.5%
6.2%
696
462
49
(40)
1,167
35.4%
-2.2%
41.7%
1.3%
49.7%
0.7%
10.8%
-39.7%
790
437
(24)
(42)
1,161
38.3%
-2.2%
48.3%
3.3%
47.6%
-4.9%
-6.5%
40.8%
843
451
54
(35)
1,313
40.5%
-0.1%
50.4%
2.7%
48.5%
-2.5%
11.4%
-17.6%
885
450
46
(43)
1,338
41.1%
-0.4%
51.2%
1.1%
48.1%
-1.3%
10.4%
-15.5%
689
469
48
(42)
1,164
34.0%
-0.2%
40.6%
-1.0%
50.3%
1.5%
9.0%
-2.6%
Depr. & Amort.
1,819
1,898
2,163
2,182
2,201
Revenue
Service
Equipment
Wireless
Cable
Media
Corporate
Total Revenue
Growth (1) - Consolidated
Wireless Service
Cable Operations
Media
Our Cable revenue and
EBITDA estimates indicate
pressure related to
competition.
In Media, we lowered our
EBITDA expectations,
primarily reflecting a weak
advertising market, as well
as higher
programming/production
costs.
EBITDA
Wireless
Cable
Media
Corporate
Total EBITDA (excl. stock comp.)
EBITDA Margin
EBITDA Growth (1)
Wireless EBITDA Service Margin
Wireless EBITDA Growth
Cable Ops EBITDA Margin
Cable Ops EBITDA Growth
Media EBITDA Margin
450
463
477
508
519
532
556
2,938
2,998
2,772
2,859
2,974
658
842
857
641
637
770
775
590
1,732
1,669
1,443
1,511
1,597
353
532
464
320
307
405
416
315
Average shares (millions)
519
515
515
510
495
515
515
515
515
515
515
515
515
$3.45
7%
$3.42
-1%
$3.02
-12%
$3.03
0%
$3.30
9%
$0.79
14%
$0.97
5%
$0.97
1%
$0.69
-22%
$0.66
-16%
$0.84
-13%
$0.89
-8%
$0.64
-7%
$1.58
11%
$1.74
10%
$1.83
5%
$1.92
5%
$2.01
5%
$0.44
$0.44
$0.44
$0.44
$0.46
$0.46
$0.46
$0.46
464
15.3%
702
23.2%
11,333
2.43
361
428
543
525
16.3%
781
24.3%
11,713
2.24
534
505
602
548
17.0%
793
24.6%
10,871
2.03
361
506
620
703
21.7%
464
14.3%
10,967
2.35
174
109
279
488
16.2%
673
22.3%
11,930
2.57
222
357
491
576
17.9%
737
22.9%
14,144
2.69
467
435
547
591
18.3%
747
23.1%
13,996
2.61
395
430
557
648
19.2%
516
15.3%
13,762
2.95
199
199
326
Basic adj. EPS (C$)
EPS Growth
Dividends per share (C$)
YOY Growth
In 2015, we expect modest
service revenue growth
and flat margins supported
by RCI's new-found focus
on revenue and disciplined
price promotions.
556
Net Income to Common
EBIT
In wireless, we expect
margin improvement in
2014, reflecting lower net
equipment cost driven by
lower activations and
upgrade volume.
We expect a 5% dividend rate increase in 2015,
in-line with the increase in F14.
Other:
Capex (2)
Capex Intensity
Cash EBIT (EBITDA - Capex)
Cash EBIT Margin %
Net Debt
Net Debt / EBITDA (x)
FCF (Scotiabank GBM def'n, after tax)
FCF (RCI definition, after-tax)
FCF (RCI definition, pre-tax)
2,142
17.2%
2,692
21.6%
11,087
2.29
1,479
1,649
2,029
2,240
17.6%
2,740
21.6%
10,967
2.20
1,430
1,548
2,044
2,303
17.9%
2,674
20.8%
13,762
2.77
1,284
1,422
1,922
2,340
17.7%
2,745
20.7%
13,548
2.66
1,432
1,432
1,923
2,423
17.9%
2,797
20.7%
14,065
2.69
1,459
1,459
1,978
Our after-tax FCF estimate is near the lowend of management's $1.425B to $1.5B
guide. Cash tax is expect to remain on par
with 2013 levels at approx. $500M.
Our F14 leverage estimate reflects 700 MHz spectrum. In F15, we now assume that SJR will not be successful in
the sale of its AWS spectrum licenses to RCI and will have to refund $200M of prepayment back to RCI (SJR keeps
$50M for the option). Target leverage is 2.0x-2.5x range. Our F14 estimate assumes no share buyback.
Subscriber figures in 000. Financial figures in C$ millions except per share data. Estimates are under IFRS 2011 onward.
Video segmented treated as discontinued operations beginning in F12.
(1) 2011 adjusted for Atria acquisition. 2013 and 2014 adjusted for the Score, Mountain Cable, BLACKIRON, Pivot and Granite acquisitions.
(2) As required under IFRS, includes capitalized interest in F11 onward for assets under construction but not yet in use.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 11 - RCI NAV
(C$ thousands, except per share data)
Current
$41.70
13.2 x
7.1 x
13.8 x
6.3%
Share Price
EV/Cash EBIT Multiple (net of tax shield)
EV/EBITDA Multiple (net of tax shield)
P/E Multiple (NTM)
Free Cash Flow Yield (NTM fully taxed)
1-Year ROR
Current
EBITDA
2013
2014E
2015E
2016E
3,157,000
3,206,769
3,242,089
3,298,984
3.1%
1.6%
1.1%
1.8%
1,816,000
1,807,692
1,876,415
1,952,397
5.0%
-1.8%
3.6%
3.5%
1-Year Target
$43.00
13.0 x
7.0 x
13.3 x
6.5%
7.7%
1-Year Target
Shares
EV/EBITDA Mult.
or Share Price
Value *
Value
per Share
EV/EBITDA Mult.
Owned
or Share Price
Value *
Value
per Share
7.5 x
24,417,491
1,642,333
22,775,158
$47.23
$3.18
$44.05
6.4 x
20,957,169
-51,000
21,008,169
$40.88
-$0.10
$40.98
6.3 x
11,640,133
2,812,667
8,827,467
$22.51
$5.44
$17.07
6.3 x
12,105,785
1,896,869
10,208,916
$23.61
$3.70
$19.91
7.7 x
1,017,096
$1.97
8.1 x
1,062,217
$2.07
$51.32
$56.79
306,349
606,967
678,000
477,395
1,113,921
$0.59
$1.17
$1.31
$0.92
$2.15
$51.32
$64.00
306,349
684,027
678,000
500,513
1,167,863
$0.60
$1.33
$1.32
$0.98
$2.28
-1,081,017
11,140,000
(12,221,017)
-$2.09
$21.55
-$23.64
6.5 x
-1,104,307
13,454,491
(14,558,798)
-$2.15
$26.25
-$28.40
21,512,625
$41.61
$0.09
18,842,092
$36.75
$0.09
Rogers Wireless
Rogers Wireless
Less: Wireless Debt
Total Rogers Wireless
Rogers Cable Inc.
Rogers Cable
Less: Cable Debt
Total Rogers Cable
Rogers Media Inc.
Total Rogers Media
Investments
156,000
124,199
133,448
138,865
-16.3%
-16.6%
3.4%
4.1%
Cogeco Inc. (CGO)
Cogeco Cable (CCA)
37.5% stake in MLSE and other investments
Less: Holding Company Discount
Total Investments
Corporate
Corporate Expense and Elim.
(149,000)
Less: Corporate Debt Net of Cash
Total Corporate
6.0 M
10.7 M
30.0%
(161,969)
(167,420)
NAV Excluding Tax Shields
Plus: Present Value of Tax Shields (Discounted 25%)
NET ASSET VALUE
Shares Outstanding ('000)
(170,526)
6.5 x
46,275
21,558,900
$41.70
30.0%
46,275
18,888,367
517,000
512,647
Average of DCF and NAV
* Enterprise Value calculated using 12 month forward EBITDA or Revenue
Source: Company reports; Scotiabank GBM estimates.
$36.84
$42.55
October 16, 2014
SJR Q4/F14 and F15 Preview: Focus on
Residential Broadband and Business Segments
Exhibit 12 - Shaw Q4/14 Estimates
Q4/F14E
■ We increased our one-year target to $30 and maintain our
Sector Outperform rating. Our higher target is due to
estimate roll-forward. Our one-year target implies 8.4x
EV/EBITDA, 15.1x EV/cash EBIT and 4.5% FCF yield
(fully-taxed), a premium to peers. In our view, the premium is
warranted given Shaw’s healthy EBITDA and FCF growth in
2015/2016, mid-to-high single-digit dividend growth
expectation, and no wireless exposure.
■ Overall, despite a minor pick up in competitive intensity,
Shaw should demonstrate another solid quarter with
healthy EBITDA growth. We expect revenue to increase by
1.5% YOY and EBITDA by 4%, largely explained by a focus
on high-ARPU, high-value households and margin expansion.
We outline our Q4/14 and F15 expectations below.
Healthy Cable Results Driven by Broadband
Differentiation (Wi-Fi and Internet-only)
■ Modest upturn in competitive activity in Q4/F14, but
overall environment remains disciplined. In fiscal Q4,
TELUS offered a TV and Internet plan for $15 each monthly
for the first year of a 3 year-term. While we do not believe the
rival offer is significant enough to incite a pricing response
from Shaw, we do believe it has slowed Shaw’s subscriber
momentum slightly. As a result, we anticipate -27K TV losses
in Q4/F14, slightly better YOY but less substantial than the
YOY net add improvement we have witnessed over the
previous two quarters. With respect to Internet and Phone, we
forecast +17.5K and flat subscriber additions, respectively.
Finally, we believe Shaw’s Internet only customer base is
growingly rapidly with very attractive ARPUs (~$70). We
believe growth of Internet-only customers reflects Shaw’s
prudent focus on cord-cutters and cord shavers.
■ We expect Cable revenue growth of ~3% YOY, driven by
disciplined pricing, Wi-Fi differentiation and a persistent
focus on higher-ARPU households. We forecast healthy
revenue per RGU growth of ~3% YOY, as we believe Shaw
has remained disciplined despite the modest uptick in
competitive activity. We estimate solid EBITDA growth of
~5%, largely explained by top-line growth and margin
expansion (~100 bps YOY).
Media Impacted by Secular Decline in Advertising
■ Media revenue and EBITDA should decline -2% and -7%
YOY, respectively. The performance pressure is largely
explained by a continual decline in advertising sales, as ad
dollars are shifted away from traditional media towards
online and digital platforms. We expect modest subscriber
revenue growth for Specialty programming to offset some of
the advertising deterioration.
Net Adds
YoY
Subs Grw.
Basic Cable
(26,920)
-4.4%
High-Speed Internet
17,500
2.4%
DTH
(5,000)
-2.4%
Subscribers
VoIP
RGUs (Cable, Internet and VoIP)
0
1.0%
(9,420)
-0.6%
RGU consensus estimate
Financials
0
Q4/F14E
YoY Grw.
Cable
840,988
2.8%
Satellite
220,604
0.7%
Media
226,245
-2.1%
Intersegment
Revenue
Cable revenue consensus estimate
(22,627)
n.m.
1,265,211
1.5%
842,000
Satellite revenue consensus estimate
218,000
Media revenue consensus estimate
225,000
Consolidated revenue consensus estimate
Cable
1,274,000
416,694
5.2%
Satellite
67,314
2.0%
Media
31,675
-6.8%
EBITDA
515,683
4.0%
Consolidated EBITDA consensus estimate
519,000
EPS (Basic adjusted) 1
$0.35
EPS consensus estimate
18%
$0.37
Cable (includes Wi-Fi)
273,414
-8%
Satellite
24,951
-20%
Media
15,000
0%
Other
10,000
n.m.
2
323,365
5%
Capex
Capex consensus estimate
FCF (before w /c and div.)
335,000
3
32,799
-58%
Financials in $000s except per share data
Cable grow th excludes Enmax contribution
1
Excludes est. $0.06/share related to one-time
non-operating items.
2
Includes equipment subsidies. "Other" totalled -$33M in Q4/F13
and adjusts for capex-related w orking capital increase (decrease)
included in segment capex, increase (decrease) in customer
equipment receivables excluded from segment capex, and
profit (loss) related to satellite equipment sales.
Cable capex includes ACF.
3
CFO before changes in w orking capital less capex, preferred share dividends,
and distributions to Media non-controlling interests. Includes program rights expense
and excludes settlement of, and realized losses on, financial instruments.
Consensus estimates per Factset as at Oct 1, 2014.
Source: Company reports; Scotiabank GBM estimates.
Stable Satellite Performance
■ We expect Satellite revenue to increase 1% YOY, largely
fueled by ARPU growth. We attribute the ARPU growth to
rate increases and the availability of additional HD
programming that drive customers to subscribe to higherpriced service tiers. We expect EBITDA growth of 2% due to
revenue growth and cost stabilization as we lap the launch of
the Anik G1 satellite last year, which drove higher
transponder and programming expenses. With regard to
customer trends, subscriber losses should remain mostly
unchanged sequentially at -5K, driven by IPTV competition.
Outlook: Focus on Broadband and Business
Drivers FCF Growth
■ We expect disciplined pricing and high-value customer
focus to continue in 2015. We anticipate F15 consolidated
EBITDA will increase by ~3% YOY. We expect Cable
revenue and EBITDA growth (excl. Viawest contribution) of
~3% and ~4%, respectively, driven by revenue/RGU growth
of ~3% and margin expansion (50 bps). In Media, secular
advertising pressure is expected to continue to weigh on F15
revenue and EBITDA, down -1% and -3% YOY. We forecast
Viawest will contribute approx. $240M of revenue and
$100M of EBITDA to consolidated results in 2015. Finally,
Shaw will begin reporting Business segment performance in
Q1/F15, which provides greater transparency into a segment
that is demonstrating rapid growth.
■ We forecast FCF (Scotiabank definition) will accelerate
from $345M last year to $591M in F15 due to lower ACF
investment. F15 ACF spending is expected to fall to $140M
from its peak of $250M in 2014. Furthermore, we expect the
FCF impact from newly acquired Viawest to be largely cash
flow neutral in 2015. As per management’s definition which
excludes ACF, FCF is expected to be $738M.
■ We expect Shaw to announce a dividend hike in early
calendar 2015 given solid FCF growth. We believe the
healthy FCF growth, assuming a consistent ~65% (of FCF)
payout ratio, will support a 5%-10% dividend increase in
early calendar 2015.
Exhibit 13 - Shaw F14 and F15 Estimates
Cable (includes Enmax and Viawest)
Satellite
Media
Intersegment
Revenue
Consensus
1
Cable (includes Enmax and Viawest)
Satellite
Media
EBITDA
Consensus
EPS
Consensus
F15E
3,715
877
1,082
(102)
5,572
5,491
YOY Growth
3.2%
-0.2%
-0.8%
n.m.
1.7%
-0.1%
1,637
272
344
2,253
2,255
1,807
273
333
2,413
2,370
4.3%
0.3%
-3.1%
2.7%
0.7%
$1.71
$1.78
Cable (includes Wi-Fi and ACF)
Satellite
Media
Other 2
Capex
FCF (Scotiabank GBM definition)
FCF (Management definition) 3
F14E
3,369
879
1,091
(96)
5,243
5,258
3
$1.74
$1.84
978
96
22
53
1,148
921
70
22
48
1,062
-5.7%
-27%
0.0%
n.m.
-7.5%
345
686
591
738
71.3%
7.6%
Figures in C$ millions except per share data.
Revenue, EBITDA, EPS, and capex consensus estimates per
Reuters as at Oct 1, 2014.
1
Cable grow th is adjusted for the Viaw est acquisition.
2
Decrease in capex-related w orking capital, increase in customer
equipment financing receivables, less proceeds on disposal
of PP&E and satellite equipment profit to reconcile segment capex w ith
capex per cash flow statements.
3
CFO before changes in w orking capital less capex, preferred share
dividends, and distributions to Media non-controlling interests.
Scotiabank GBM definition includes program rights expense
and excludes settlement of, and realized losses on financial instruments,
as w ell as Wi-Fi and Accelerated Capital Fund spending.
Source: Company reports; Scotiabank GBM estimates.
2.1%
3.4%
Exhibit 14 - Shaw Summary Model
Changes from Previous
Year ending August 31
2013
2014E
2015E
2016E
2017E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14
Q4/F14E
Operational Data 1
Basic Subs
2,040
Net Adds
1,951
1,887
1,827
1,773
2,167
2,137
2,070
2,040
2,011
1,990
1,978
1,951
(110)
(89)
(64)
(60)
(54)
(24)
(30)
(27)
(30)
(30)
(21)
(12)
(27)
Penetration
50.9%
47.7%
45.3%
43.2%
41.3%
54.1%
53.1%
51.9%
50.9%
49.9%
49.2%
48.6%
47.7%
Internet Subs
1,891
1,936
1,996
2,061
2,131
1,902
1,910
1,880
1,891
1,893
1,906
1,918
1,936
Net Adds
Penetration of Basic
28
45
60
65
70
6
8
4
11
3
13
12
18
92.7%
99.2%
105.8%
112.8%
120.2%
87.8%
89.4%
90.8%
92.7%
94.2%
95.8%
97.0%
99.2%
904
882
862
842
822
906
907
904
904
894
893
887
882
DTH Subs
Net Adds
Digital Phone Subs
(6)
1,360
Net Adds
(21)
1,374
(20)
1,374
(20)
1,374
(20)
1,374
(4)
1,363
1
1,376
(3)
1,355
(1)
1,360
(9)
1,361
(1)
1,369
(6)
1,374
53
14
-
-
-
17
13
18
5
1
8
5
Penetration of Addressable Homes
35.7%
35.4%
34.7%
34.2%
33.7%
35.8%
36.0%
35.8%
35.7%
35.6%
35.6%
35.5%
Penetration of Basic
66.7%
70.4%
72.8%
75.2%
77.5%
62.9%
64.4%
65.5%
66.7%
67.7%
68.8%
69.5%
5,291
5,261
5,257
5,262
5,278
5,432
5,423
5,305
5,291
5,265
5,265
5,270
Revenue-Generating Units (incl. Basic, Internet and Phone)
YOY Growth (%)
-0.5%
-0.6%
-0.1%
(28)
(30)
(4)
RGU net adds
Revenue per RGU ($/month)
$50.31
YOY Growth (%)
1.9%
$52.67
4.7%
$54.43
3.3%
0.1%
0.3%
5
16
$56.38
$58.47
3.6%
3.7%
Rev/RGU trend of ~5% growth in 2014 reflects a stable
competitive environment as well as price increases mainly in
broadband.
Source: Company reports; Scotiabank GBM estimates.
1.6%
0.2%
0.0%
-0.5%
-1.0%
(1)
(9)
(5)
(14)
(26)
$49.65
0.5%
$50.00
0.4%
$50.90
4.1%
$50.71
2.8%
$52.82
6.4%
-0.8%
-0.7%
0
5
$52.63
$52.84
5.3%
3.8%
Beginning in Q3/F13
subscriber count
adjusts for sale of
Mountain Cable (41K
Basic, 34K Internet and
38K phone).
Our Cable subscriber
estimates (TV +
Internet) reflect Shaw
Go Wi-Fi momentum,
- which in-turn enhances
churn and improves
35.4%
subscriber metrics. Our
70.4% Phone estimates reflect
5,261
the effect of wireless
substitution.
-0.6%
(5)
1,374
(9) Our Satellite subscriber
$52.40
3.3%
results indicate
continued competitive
losses.
Exhibit 14 - Shaw Summary Model (cont'd)
Year ending August 31
2013
2014E
2015E
2016E
2017E
3,330
3,435
3,558
3,698
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14
Q4/F14E
Revenue
Cable
3,251
Enmax
15
814
822
806
836
831
835
828
13
42
46
49
-
-
3
12
8
8
10
Viawest
-
-
237
279
321
-
-
-
-
-
-
-
-
DTH (StarChoice)
779
798
796
793
790
194
189
197
199
198
200
199
201
Satellite Services
81
81
81
81
81
20
20
21
20
20
20
21
20
Media
1,106
Intersegment
(90)
39
809
1,091
(96)
1,082
(102)
1,076
(104)
1,071
(108)
319
249
(23)
(21)
307
(24)
231
(22)
325
(25)
239
(24)
301
(24)
226
(23)
Total Revenue
5,142
5,243
5,572
5,729
5,901
1,319
1,251
1,326
1,246
1,362
1,274
1,342
1,265
Growth (organic)
3.1%
2.4%
1.7%
2.8%
3.0%
3.1%
1.6%
4.0%
3.4%
4.0%
2.6%
1.6%
1.5%
Cable Growth (excluding Enmax and Viawest)
2.6%
3.9%
3.1%
3.6%
3.9%
2.1%
1.2%
4.3%
2.5%
5.5%
4.2%
3.0%
2.7%
1,569
1,617
1,686
1,755
1,828
396
EBITDA
Cable
Enmax
6
Viawest
-
DTH (Shaw Direct)
242
Satellite Services
396
391
401
394
412
410
23
25
-
-
1
5
4
4
5
7
117
136
-
-
-
-
-
-
-
-
234
237
240
64
59
62
57
56
59
60
58
39
39
39
39
39
10
10
10
9
10
10
10
9
344
333
331
330
131
69
116
34
137
61
114
32
Total EBITDA 2
2,206
2,253
2,413
2,503
2,598
601
524
585
496
608
528
601
516
Overall Margin
42.9%
43.0%
43.3%
43.7%
43.7%
45.6%
41.9%
44.1%
39.8%
44.6%
41.4%
44.8%
40.8%
4.0%
2.6%
2.7%
3.7%
3.8%
6.2%
6.3%
3.5%
-0.4%
1.9%
1.6%
3.1%
4.0%
Cable Margin (excluding Enmax and Viawest)
48.3%
48.6%
49.1%
49.3%
49.4%
48.9%
47.4%
48.1%
48.5%
48.0%
47.4%
49.3%
49.5%
Cable Growth (excluding Enmax and Viawest)
5.3%
4.5%
4.3%
4.1%
4.1%
5.0%
9.7%
5.8%
0.7%
3.4%
4.3%
5.5%
4.9%
854
784
891
898
944
208
211
212
223
194
202
183
205
1,352
1,469
1,523
1,605
1,654
393
313
373
273
414
326
418
311
635
689
717
741
756
179
151
168
137
182
150
209
148
EBITDA Growth (organic)
Depr. & Amort.
EBIT
Interest, taxes, pref. div., etc.
Net Income to Common
717
780
806
864
898
214
162
205
136
232
176
209
163
Average shares (millions)
448
457
463
461
454
444
446
449
453
454
456
458
461
$1.60
$1.71
$1.74
$1.87
$1.98
$0.48
$0.36
$0.46
$0.30
$0.51
$0.39
$0.46
$0.35
-1%
7%
2%
8%
6%
8%
-4%
-2%
-8%
6%
6%
0%
18%
$0.99
$1.06
$1.16
$1.26
$1.36
$0.24
$0.24
$0.26
$0.26
$0.26
$0.26
$0.28
$0.28
5%
7%
9%
9%
8%
5%
5%
5%
5%
5%
5%
8%
8%
273
Basic adj. EPS (C$)**
EPS Growth
Dividends per share (C$)
YOY Growth
We expect capex intensity will normalize to ~mid-20% longer
term. In 2015, we now assume that SJR will not be
successful in the sale of its AWS spectrum licenses to RCI
and will have to refund $200M of prepayment back to RCI
(SJR keeps $50M for the option). We expect SJR leverage
will be approx. 2x.
Other:
Capex - Cable (includes Enmax, ACF, and equipment subsidy)
867
927
140
176
255
296
265
234
213
123
96
70
65
64
25
21
46
31
36
18
17
25
31
22
22
32
32
4
6
6
15
2
2
3
15
(18)
45
123
135
146
43
(1)
(27)
(33)
14
(10)
31
10
1,003
1,148
1,062
1,108
1,168
212
202
280
309
317
244
264
323
110
250
140
-
-
10
40
60
63
45
53
89
Capex - other 7
Total Capex
Cable CI (includes Enmax, ACF, and equipment subsidy)
Cable CI (before ACF but includes Enmax and equipment subsidy)
Cash EBIT - consolidated
4
Cash EBIT Margin - consolidated
Net Debt
3
26.5%
24.4%
876
24.3%
-
24.7%
23.2%
21.8%
20.3%
24.3%
24.7%
1,053
1,307
1,359
1,429
22.4%
20.1%
23.5%
23.7%
24.2%
28.8%
24.5%
22.0%
13.8%
20.5%
21.1%
24.0%
14.5%
4,546
4,344
5,593
5,574
5,550
5,244
4,847
4,676
4,546
4,562
4,396
4,342
4,344
2.1 x
1.9 x
2.3 x
2.2 x
2.1 x
2.2 x
2.3 x
2.0 x
2.3 x
1.9 x
2.1 x
1.8 x
2.1 x
604
686
738
619
640
244
161
138
61
157
158
240
131
258
178
148
79
83
114
115
33
5
FCF (Scotiabank GBM definition)
29.2%
847
1,151
Net Debt / EBITDA (x)
FCF (Management definition)
985
We estimate SJR's ~65% payout ratio as a % of FCF will support a
5%-10% per annum dividend increase from 2015-2017.
Capex - Satellite (includes equipment subsidy)
Capex - media
ACF capex included in Cable capex
6
663
345
591
618
647
Dividend Payout Ratio (Cash dividend as % of Scotiabank GBM FCF)
48%
99%
65%
67%
68%
Dividend Payout Ratio (excluding the impact of ACF)
41%
57%
52%
67%
68%
Figures under IFRS for F12 and later. Earlier figures under Canadian GAAP.
Subscriber figures in 000. Financial figures in C$ millions except per share data.
1
Subscriber net adds reflect organic changes.
2
Excludes $14M benefit from CRTC decision on timing of broadcast license fees in Q2F13.
3
Net debt includes preferred shares accorded 50% equity treatment.
5
233
386
22
100
350
Media (1 month in Q1/F11)
4
20
-
380
307
292
172
279
269
322
On a reported basis, we expect the payout ratio will increase in 2014 reflecting the
ACF. Adjusted for these investments, which last until 2015, we believe the payout
ratio is sustainable. Our F18 estimates (and beyond) assume there will be no DRIP.
Defined as EBITDA less capex and CRTC benefit package payments.
Defined as EBITDA less capex, interest, cash taxes, CRTC benefit obligation funding, and Media minority interest. Beginning in F12, management also deducts preferred share dividends, increases in customer equipment
financing receivables (a component of "cash" capex), and cash pension funding. Shaw definition excludes pre-Wi-Fi opex and capex. Shaw capex definition includes working capital changes, satellite equipment profit.
and proceeds on disposal of PP&E.
6
The 2012 figure includes $25M of cash tax recovery. The 2013 figure excludes $300M pension contribution and includes ~$85M cash tax recovery ($65M related to pension contribution).
Defined as CFO before w/c changes less "cash" capex (per cash flow statements), preferred share dividends, restructuring and distributions to Media non-controlling interests.
We include program rights expense for F11 onward, as well as restructuring in F14 and exclude settlement of, and realized losses on, financial instruments. We include pre-WiFi wireless spending.
7
Capex-related working capital decrease, satellite equipment profit, and proceeds on PP&E disposal included in segment capex plus increase in customer equipment financing receivables excluded from segment capex.
Source: Company reports; Scotiabank GBM estimates.
183
16-Oct-14
Our long term Cable
estimates reflect
pricing power in
broadband, a stable
competitive
environment with
TELUS, and better
customer traction of
Shaw Go Wi-Fi. Our
2015 cable estimates
also reflect an
anticipated $50M in
savings related to
restructuring activities.
Our 2015 satellite
estimates reflect
easier cost
comparisons related to
the Anik launch, as
well as ARPU growth
from price increases.
Cable: With a stable
competitive
environment, we
estimate Cable
EBITDA growth (ex.
Enmax) of ~4% and
margin will reach
~49.5% over the next
three years.
We lowered our longterm Media estimates
to reflect revenue
pressure related to the
advertising shift from
conventional to digital
platforms.
Exhibit 15 - Shaw NAV
(C$ thousands, except per share data)
Current
$27.05
7.6 x
15.4 x
13.6 x
4.7%
Share Price
EV/EBITDA Multiple (NTM)
P/E Multiple (NTM)
Cash EBIT Multiple (NTM)
FCF Yield (NTM)
1-Year ROR
Current
EV/EBITDA Mult.
2013
2014E
2015E
2016E
2017E
or Share Price
1,505,275
1,587,246
1,647,419
1,718,588
1,792,606
7.7 x
Value+
1-Year Target
$30.00
8.4 x
15.9 x
15.1 x
4.5%
14.8%
1-Year Target
Value
per Share
EV/EBITDA Mult.
or Share Price
Value+
$26.81
$26.81
7.5 x
12,960,126
$2.21
$0.43
$0.42
$1.98
$6.01
$11.05
10.0 x
9.0 x
5.0 x
5.0 x
9.0 x
Value
per Share
Cable
Cable and Internet
Total Cable
Viawest
Enmax
Business-to-Business
Shaw Direct
Canwest/Media (Proportionate)
12,359,011
12,359,011
64,000
80,800
99,687
117,132
136,306
20,455
19,674
21,641
23,372
25,008
39,000
39,000
39,000
39,000
39,000
161,000
178,363
181,237
189,161
193,389
325,000
318,675
308,038
306,457
304,896
10.0 x
9.0 x
5.0 x
5.0 x
9.0 x
1,019,537
196,792
195,000
911,233
2,770,497
5,092,611
Tax Shield (discounted 25%)
Total Gross Asset Value
Less:
Total Net Debt (Cash) 2
-28,472
17,377,050
4,907,000
FD Shares Outstanding ('000)
NET ASSET VALUE
$27.95
$27.95
12,960,126
$2.58
$0.46
$0.42
$2.05
$5.94
$11.45
1,196,235
212,262
195,000
948,498
2,756,285
5,307,790
-$0.06
$37.69
18,267,916
$0.00
$39.39
$10.64
6,245,052
$13.47
0
461,000
12,470,050
$27.05
463,733
$25.93
12,022,864
Average (DCF, NAV)
+ Enterprise Value calculated using 12 month forward values
1
2
Includes equipment subsidies.
Includes working capital deficit and preferred shares accorded 50% equity treatment.
Source: Company reports; Scotiabank GBM estimates.
30.00
October 16, 2014
CCA Q4/F14 Preview – ARPU and Strong USD Support
Financial Performance
Exhibit 16 - CCA Q4/14 Estimates
Q4/F14E
Canada Subscribers
■ We maintain our $64 target price and SP rating. We believe CCA is
fairly priced given its slower F15 growth outlook and risk profile. We
believe the market's concern over CCA's capital allocation policy will limit
multiple expansions, and without acquisition-driven growth, we do not see
significant upside to the share price.
■ We estimate Canadian Cable EBITDA growth of +4% YOY driven by
ARPU growth. We anticipate that the focus on ARPU (through rate
increases and upgrades to higher tier services) will more than offset slower
net adds. We expect the ARPU increases to grow revenue/PSU by +4.8%
YOY, more than offsetting our estimated +3.6% opex/PSU YOY increase
to support margin expansion. We believe the cost increase primarily stems
from higher content costs (including a new sports agreement signed with
Rogers Sportsnet). On the subscriber front, we anticipate that greater telco
IPTV competition, product maturity and CCA’s commitment to pricing
discipline will cause PSUs to decline by -14.4K this quarter. We expect
that the decline will be led primarily by Basic Cable (-12.5K) and partially
offset by Internet (+0.6K). We continue to be concerned over medium-tolong-term prospects. These include the larger-than-expected Bell Fibe
overbuild, the TiVo platform not being available until Q1/15 and rising
content costs.
■ We expect continued double-digit revenue and EBITDA growth in
Enterprise Services (14% and 11% respectively), but it comes with
higher CapEx until 2016. Enterprise margins appear to be stabilizing as
Peer 1’s capacity utilizaiton improves (without the $3M receivables
impairment in Q3/14, margins would have been flat YOY). While the
strong growth is encouraging, it comes at the cost of increased CapEx.
Based on company guidance at the end of Q3/14, Cash EBIT (EBITDA
minus CapEx) breakeven has been postponed from 2015 to 2016. This
reflects the accelerated development of the company’s Barrie and Montreal
data centers. We are concerned that over the medium term, CCA would
need to increase CapEx further in order to sustain growth.
■ We forecast ABB revenue and EBITDA growth of 10% and 7%
respectively (in C$), of which only 5% and 2% respectively is not
related to favorable currency changes. We continue to believe that the
majority (~5%) of ABB revenue and EBITDA growth comes from the
stronger U.S. dollar. We attribute the remaining revenue growth to price
increases with revenue/PSU at US$61.87 (up +3.1% YoY) and slightly
greater subscriber growth (+1.7K PSU adds vs. -1.3K PSU adds in Q4/13)
as triple-play momentum grows. We forecast EBITDA of $43M (up +6.9%
YoY) with margins down -120bps YoY to 42.3%, as rising content and
other costs (+5% cost/PSU YOY) continue to outstrip revenue growth.
Looking ahead, the improving housing market in the U.S. (particularly in
the Miami system) and improvement in product offerings should drive
subscriber additions over the next few years. In response to AT&T UVerse expanding to Miami, ABB recently began offering 1Gbps service in
the city. While the TiVo rollout is complete, we expect CapEx to remain
elevated (at 17.0% of revenue) as ABB boosts speed profiles in its
DOCSIS footprint. ABB is also looking to boost ARPU through sports and
broadcast surcharges starting in Q1/15.
Net Adds
YoY1
Subs Grw.
(12,498)
-4.7%
Basic Cable
High-Speed Internet
559
2.4%
VoIP
(2,433)
-3.0%
RGUs 2
(14,372)
-1.9%
Q4/F14E
YoY1
U.S. Subscribers
Net Adds
Subs Grw.
Basic Cable
(1,248)
-2.7%
High-Speed Internet
2,836
8%
VoIP
92
2%
RGUs 2
1,680
2.0%
Financials
Q4/F14E
YoY Grw. 1
Cable Services
317,702
2.9%
ABB
100,417
9.9%
80,425
14.0%
Enterprise Services
Intersegment
-636
n.a.
Total Revenue
497,908
5.9%
Consensus estimate
496,000
Cable Services
165,351
4.0%
ABB
42,519
6.9%
Enterprise Services
29,858
11.0%
Intersegment
Total EBITDA
Consensus estimate
EPS (Basic adjusted) 3
-3,278
n.a.
234,450
5.4%
229,000
$1.25
38.9%
Consensus estimate
$1.24
n.a.
Cable Services
88,414
45%
ABB
26,434
56%
Enterprise Services
59,545
98%
174,394
61%
416
n.a.
n.a.
Capex 4
FCF (before w /c and div.) 6
Financials in C$000s except per share data.
Consensus estimates per FactSet, October 10, 2014
1
2
3
4
5
Organic grow th rate; acquisition effects removed.
Basic cable subscriber count includes digital subs.
Grow th rate based on EPS from continuing operations.
Capital expenditures include deferred charges.
Per management definition, w hich reflects current tax expense
and interest expense.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 17 - CCA Summary Model
.
Year ending August 31
Operational Data (Canada)
Basic Subs
Net Adds
Penetration
Internet Subs
Net Adds
Penetration of Basic
Digital Phone Subs
Net Adds
Penetration of Basic
PSU* Adds
PSU Growth
Revenue/PSU Growth
2012
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14
Q4/F14E
863
(15)
52.4%
635
33
73.5%
471
53
54.6%
72
4.1%
0.6%
835
(28)
49.9%
661
21
79.2%
484
13
58.0%
5
0.3%
1.2%
795
(39)
47.0%
677
16
85.2%
469
(15)
59.0%
(38)
-1.9%
3.8%
759
(36)
44.4%
691
14
91.1%
456
(13)
60.1%
(35)
-1.8%
3.0%
730
(30)
42.2%
702
11
96.3%
442
(14)
60.6%
(33)
-1.7%
2.9%
861
(2)
52.1%
645
12
75.0%
478
6
55.5%
16
2.4%
0.7%
853
(8)
51.4%
649
6
76.1%
483
5
56.6%
2
1.9%
1.4%
845
(7)
50.7%
650
3
76.9%
486
3
57.4%
(1)
1.5%
1.2%
835
(11)
49.9%
661
0
79.2%
484
(2)
58.0%
(12)
0.3%
1.4%
828
(7)
49.3%
668
7
80.7%
480
(4)
57.9%
(5)
-0.8%
1.7%
816
(12)
48.5%
673
5
82.5%
473
(6)
58.0%
(13)
-1.6%
3.5%
808
(8)
47.9%
677
4
83.8%
472
(1)
58.4%
(6)
-1.8%
5.2%
795
(12)
47.0%
677
1
85.2%
469
(2)
59.0%
(14)
-1.9%
4.8%
232
(19)
44.9%
177
20
34.3%
78
5
15.1%
6
1.3%
0.0%
226
(6)
43.5%
192
15
36.7%
80
2
15.4%
10
2.0%
4.2%
222
(4)
42.5%
204
12
39.1%
81
1
15.5%
9
1.8%
3.5%
220
(2)
41.8%
214
10
40.8%
81
1
15.5%
9
1.8%
1.5%
237
(13)
46.0%
170
12
32.9%
78
5
15.2%
4
1.5%
1.7%
235
(2)
45.5%
175
5
33.9%
79
1
15.3%
4
1.6%
1.7%
234
(1)
45.3%
176
1
34.1%
79
(0)
15.2%
(0)
1.6%
3.2%
232
(2)
44.9%
177
1
34.3%
78
(1)
15.1%
(1)
1.3%
3.9%
230
(2)
44.5%
181
4
34.9%
79
0
15.2%
2
0.9%
5.0%
229
(1)
44.2%
185
4
35.7%
79
0
15.3%
3
0.7%
5.8%
227
(2)
43.8%
189
4
36.4%
80
1
15.4%
3
1.4%
3.1%
226
(1)
43.5%
192
3
36.7%
80
0
15.4%
2
2.0%
3.1%
(28)
(26)
(23)
Operational Data (U.S.)
Basic Subs
Net Adds
Penetration
Internet Subs
Net Adds
Penetration of Internet homes passed
Digital Phone Subs
Net Adds
Penetration of phone homes passed
PSU* Adds
PSU Growth
Revenue/PSU Growth (USD)
PSU* Adds - Canada + U.S. (Q2-Q4 only in F13)
Source: Company reports; Scotiabank GBM estimates.
7
Our FY14 PSU adds
estimate reflects
slower growth in
Canadian and US
operations, offset by
ARPU growth. We
believe ARPU
growth is primarily
dirven by Internet.
Exhibit 17 - CCA Summary Model (cont’d)
Year ending August 31
Revenue
Cable services
Enterprise services
Intersegment
Canada
United States
Total Revenue
Cable services
Enterprise services
Canada Growth (1)
U.S. Growth (CAD)
Consolidated Growth (1)
EBITDA
Cable services
Enterprise services
Intersegment
Management fees
Canada
United States
Total EBITDA
Cable services
Enterprise services
Canada Margin
Cable services
Enterprise services
Canada Growth (1)
U.S. Margin
U.S. Growth (CAD)
Consolidated Margin
Consolidated Growth (1)
Depr. & Amort.
EBIT
2012
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14
Q4/F14E
1,189
90
(1)
1,278
1,278
5.8%
7.9%
7.0%
1,226
200
(2)
1,425
268
1,692
3.2%
13.4%
3.8%
4.1%
3.9%
1,257
308
(2)
1,563
392
1,955
2.5%
14.8%
4.2%
12.1%
5.5%
1,269
340
(2)
1,607
425
2,032
0.9%
10.5%
2.8%
8.3%
3.9%
1,283
374
(2)
1,655
441
2,095
1.1%
10.0%
3.0%
3.7%
3.1%
305
24
(0)
328
328
3.8%
8.1%
4.0%
306
38
(0)
344
86
430
3.6%
6.3%
3.7%
1.5%
3.7%
306
68
(0)
374
90
464
3.0%
15.3%
3.9%
6.2%
3.9%
309
71
(0)
379
91
470
2.3%
23.4%
3.8%
9.2%
3.8%
310
73
(0)
382
93
475
1.5%
13.3%
2.4%
12.1%
2.4%
313
75
(1)
388
98
486
2.3%
16.3%
3.8%
14.2%
5.9%
317
79
(1)
395
101
496
3.5%
15.3%
5.6%
12.2%
6.9%
318
80
(1)
397
100
498
2.9%
14.0%
4.9%
9.9%
5.9%
611
74
(16)
(10)
660
120
781
49.8%
37.2%
46.3%
6.5%
18.6%
7.1%
44.9%
0.1%
46.1%
7.1%
641
107
(14)
(10)
725
172
897
51.0%
34.8%
46.4%
4.9%
12.5%
6.2%
43.9%
11.2%
45.9%
6.5%
652
119
(14)
(10)
746
183
929
51.4%
34.9%
46.5%
1.7%
10.7%
3.0%
43.0%
6.1%
45.7%
3.6%
666
130
(15)
(10)
771
188
959
51.9%
34.9%
46.6%
2.1%
10.0%
3.3%
42.7%
3.0%
45.7%
3.3%
149
10
(5)
(7)
147
147
48.8%
41.8%
44.9%
11.1%
14.6%
11.6%
150
14
(5)
(3)
157
39
196
49.1%
37.7%
45.5%
8.4%
13.5%
6.0%
45.7%
3.2%
45.6%
6.0%
153
23
(3)
174
41
215
50.0%
34.4%
46.5%
3.3%
15.9%
5.7%
45.6%
3.1%
46.3%
5.7%
159
27
(3)
183
40
222
51.5%
38.1%
48.2%
3.8%
27.9%
5.8%
43.5%
1.1%
47.3%
5.8%
154
28
(4)
(10)
169
43
212
49.9%
38.0%
44.2%
3.8%
41.5%
5.3%
46.0%
23.1%
44.5%
5.3%
158
25
(3)
(0)
179
42
222
50.4%
33.4%
46.2%
5.0%
10.6%
8.6%
43.1%
7.8%
45.6%
8.4%
164
24
(3)
185
45
229
51.6%
30.8%
46.7%
6.9%
3.2%
6.1%
44.2%
8.7%
46.2%
6.6%
165
30
(3)
192
43
234
52.0%
37.1%
48.3%
4.0%
11.0%
5.1%
42.3%
6.9%
47.1%
5.4%
383
470
464
464
116
113
118
123
111
574
38
(14)
(9)
589
589
48.3%
42.5%
46.1%
6.9%
12.6%
7.2%
0.0%
46.1%
275
4.0%
44.9%
11.6%
65
93
111
114
314
398
427
465
495
82
103
104
108
96
108
112
Interest, taxes, pref. div., etc.
145
213
189
204
195
40
52
56
65
46
48
44
51
Net Income (before Extr. Items to Common) (2)
170
185
238
261
300
42
51
48
44
50
60
68
60
Average shares (millions)
Basic adj. EPS (C$) (2)
EPS growth
Other:
Cable services
Enterprise services
Canada
U.S.
Total Capex
Cable services
Enterprise services
Canada
U.S.
Total Capex Intensity
Cable services
Enterprise services
Management fees and intersegment
Canada
U.S.
Total Cash EBIT (EBITDA - Capex)
Cable services
Enterprise services
Canada
U.S.
Total Cash EBIT Margin
Net Debt
Net Debt / EBITDA (x)
FCF
49
49
49
49
49
49
49
49
49
49
49
49
48
$3.48
-10%
$3.80
2%
$4.90
29%
$5.37
10%
$6.17
15%
$0.87
$1.05
$0.99
$0.90
$1.02
$1.24
$1.39
$1.25
52
22
74
11
85
36
27
63
18
81
42
19
61
23
84
88
60
148
26
174
We expect CI% will remain elevated due to
increased 2014 and 2015 CapEx in the
Enterprise segment.
313
63
375
375
236
128
364
44
408
218
127
346
79
425
232
129
361
72
433
257
130
387
75
462
17.4%
41.3%
22.1%
20.2%
21.7%
18.3%
37.8%
22.5%
17.0%
21.3%
20.0%
34.9%
23.4%
17.0%
22.0%
22.4%
62.0%
25.3%
29.4%
19.2%
64.0%
25.5%
16.5%
24.1%
261
(25)
(23)
214
214
375
(54)
(25)
296
76
372
423
(20)
(23)
379
93
472
420
(10)
(24)
386
111
496
409
(25)
384
113
498
22.0%
-27.4%
16.7%
0.0%
16.7%
30.6%
-26.8%
20.8%
28.4%
22.0%
33.6%
-6.5%
24.3%
23.7%
24.2%
33.1%
-2.9%
24.0%
26.0%
24.4%
845
1.4 x
66
2,866
3.7 x
151
2,816
3.1 x
242
2,601
2.8 x
272
26.3%
69.9%
29.4%
68
15
83
83
55
36
91
14
104
51
48
99
14
113
61
30
91
17
108
25.3%
18.0%
93.8%
26.4%
15.8%
24.3%
16.7%
70.4%
26.5%
15.3%
24.3%
19.8%
42.5%
24.1%
18.5%
23.0%
16.8%
29.6%
19.3%
12.3%
17.9%
11.4%
36.2%
16.2%
18.3%
16.6%
13.4%
23.6%
15.5%
23.1%
17.0%
27.8%
74.0%
37.2%
26.3%
35.0%
80
(5)
(11)
64
64
95
(21)
(8)
66
26
91
102
(25)
(3)
75
27
102
98
(3)
(3)
91
23
114
102
6
(13)
95
31
126
122
(2)
(4)
116
24
141
121
6
(3)
124
21
145
77
(30)
(3)
44
16
60
31.9%
0.0%
23.2%
25.7%
23.7%
26.4%
-20.2%
19.6%
33.3%
-36.0%
20.0%
30.4%
22.0%
31.7%
-4.4%
24.1%
25.0%
24.3%
33.1%
8.4%
24.9%
19.6%
31.0%
-56.2%
19.1%
29.9%
21.3%
26.6%
39.0%
-2.8%
30.0%
24.8%
29.0%
38.2%
7.1%
31.3%
21.1%
29.2%
24.2%
-36.9%
11.1%
16.0%
12.1%
2,403
2.5 x
261
2,298
3.1 x
17
2,955
3.8 x
36
2,950
3.4 x
43
2,866
3.2 x
55
2,929
3.5 x
67
2,923
3.3 x
87
2,799
3.1 x
88
2,816
3.0 x
0
Figures for F12 onward presented under IFRS and are pro forma sale of Portugal operation and acquisition of Atlantic Broadband on Aug. 31, 2011.
Subscriber figures in 000. Financial figures in C$ millions except per share data.
* PSU = Primary Service Unit, comprises basic, Internet, and phone subs
2012 growth rates are pro forma Quiettouch and MTO Telecom acquisitions (estimated annual revenue, EBITDA, and capex of $35M, $16M, and $10M).
Quarterly segment results (except Q4/F12) are Scotiabank GBM estimates only.
(1) Adjusted for acquisitions and divestitures and $5M CRTC recovery Q4/F11.
(2) 2012E and growth rate based on continuing operations.Growth rates adjusted for debt redemption charge and CRTC recovery in F11 and deferred tax charge in F12 related to
province of Ontario corporate tax rate changes.
Source: Company reports; Scotiabank GBM estimates.
17-Oct-14
We kept our
Canadian margins
largely flat to reflect
price increases and
lower net adds
offset by higher
content costs.
Exhibit 18 – CCA NAV
(C$ thousands, except per share data)
Current
$56.79
6.1 x
10.4 x
9.8%
10.6%
11.5 x
Cogeco Cable Inc. (CCA) Share Price
EV/EBITDA Multiple (NTM)
P/E Multiple (NTM)
FCF Yield (NTM)
FCF Yield, fully taxed (NTM)
EV/Cash EBIT Multiple (NTM)
1-Year ROR
EV/EBITDA
EBITDA
2015E
2016E
2017E
1-Year Target
$64.00
6.3 x
10.2 x
8.5%
9.4%
11.7 x
14.9%
Value
EV/EBITDA
Multiple
Value +
per Share
Multiple
Value +
per Share
Value
6.00 x
6.19 x
6.00 x
6.23 x
5.75 x
3,922,985
870,812
-145,361
4,648,436
1,053,949
$81.10
$18.00
-$3.01
$96.10
$21.79
6.00 x
9.50 x
6.00 x
6.87 x
5.75 x
4,011,719
1,253,072
-149,527
5,115,263
1,083,657
$81.92
$25.59
-$3.05
$104.46
$22.13
2,955,433
$61.10
2,733,445
$55.82
2,746,953
$56.79
3,465,475
$70.77
Cogeco Cable
Residential
CDS
Management fees and intersegment
Cable & Internet - Canada
Cable & Internet - U.S.
652,060
665,815
118,537
130,391
(24,139) (24,820)
746,458
740,951
182,586
188,093
687,594
142,126
(25,602)
768,524
190,956
Less: Net Debt 1
NET ASSET VALUE
3%
9%
2%
Avg of NAV and DCF
Shares Outstanding ('000)
+
1
Enterprise Value calculated using 12 month forward EBITDA
Includes US$1.36B for Atlantic Broadband acquisition and $635M for Peer 1 acquisition.
Source: Company reports; FactSet, Scotiabank GBM estimates.
48,370
$64.50
48,971
October 16, 2014
MBT Q3/14 Preview: Expect Allstream
Stabilization but Wireless under Pressure at MTS
■ We maintain our $31 target and Sector Perform rating.
On NTM estimates, MBT trades at 5.6x EV/EBITDA, 13x
EV/cash EBIT and 5.3% FCF yield (fully-taxed). While MBT
is cheap relative to peers on EV/EBITDA, it remains
expensive on EV/cash EBIT and FCF yield. Given MBT’s
low growth profile, the renewal of pension concerns and the
absence of Allstream M&A potential, we believe there is
limited upside to the share price.
■ Lower rates renew pension funding and dividend
concerns. We were not too concerned about the Supreme
Court of Canada pension lawsuit settlement and its impact on
pension funding and dividend payout. However, with interest
rates trending lower in recent weeks, we believe there is
upward pressure on the pension solvency deficit and annual
deficit funding requirement. We currently estimate approx.
$40M-$45M of required cash pension solvency funding in
2015 and 2016 (dividend payout of ~85%). With rates down
around 75bps YTD, and assuming no further changes between
now and year-end, we estimate the increase in annual pension
funding will be approximately $9M in 2015 and $18M in
2016. We estimate this could bring the dividend payout ratio
back to 90%-100% in 2015 and 2016 unless MTS raises the
capital to reduce the deficit before year-end. In 2013 under
similar circumstances after the Allstream sale was rejected,
the company issued common equity.
■ Overall, we expect consolidated revenue of $401M (-3%
YOY) and EBITDA to grow 2% YOY to $146M (-6%
excl. restructuring). While Allstream operations appear to be
on more stable footing following last year’s sale disruption,
wireless and legacy pressure at MTS are impacting overall
results. We outline are segmented expectations below.
MTS: Legacy and Wireless Pressure
■ At MTS, we forecast YOY revenue decline of -2% and flat
EBITDA growth (-3% excl. restructuring), largely related
to lower wireless and legacy revenue. We attribute the
weakness in wireless to ARPU and wholesale roaming
revenue decline. Blended ARPU is expected to decrease 4.5% YOY due to simplified pricing plans that bundle
voicemail and caller ID services that were previously charged
for separately. Meanwhile, wholesale revenue in Q3 should
fall by -50% YOY, as carriers move their subscribers off of
MTS’ legacy CDMA network onto their own LTE networks.
Furthermore, we expect the secular erosion of local and LD
services to persist and to decline -6% and -2%, respectively.
With respect to profitability, we anticipate EBITDA margins
of ~46%, lower YOY, due to wireless and legacy decline,
partially offset by growth in broadband.
■ On the subscriber front, we forecast +2.5K wireless
subscriber additions and healthy blended churn of 1.7%.
Within wireline, we expect residential NAS decline of -5%
YOY, TV net adds of +1.7K, and Internet customer additions
of +3.5K.
Exhibit 19 - MBT Q3/14 Estimates
Financials
Q3/F14E
YoY Grw.
Wireless
92.2
-3.1%
Broadband & Converged IP
59.9
3.2%
Unified Communications
15.0
5.0%
Local Access Services
60.2
-6.0%
LD & Legacy Data
25.4
-2.0%
252.7
-2.0%
MTS
Converged IP
65.2
8.1%
Unified Comm. & Security
17.0
-2.0%
Local Access Services
32.8
-13%
LD & Legacy Data
41.5
-15%
156.4
-4.7%
Allstream
Intersegment eliminations
Revenue
-8.2
n.a.
400.9
-3.1%
Consensus MTS estimate
255.0
Consensus Allstream estimate
158.0
Consensus Consolidated estimate
404.0
MTS
117.2
-3.0%
Allstream
28.4
-17.3%
145.6
-6.2%
MTS
117.2
0.0%
Allstream
28.4
11%
145.6
2.0%
EBITDA (before restructuring)
EBITDA (incl. restructuring)
Consensus estimate
145.0
EPS (Basic adjusted)
$0.39
Consensus estimate
Capex
FCF
-37%
$0.42
1
88.2
29%
27.5
-39%
C$ millions, except per share data.
Consensus estimates per FactSet as at Oct 6, 2014.
1
Before changes in non-cash w orking capital and dividends.
Operating Metrics
Q3/F14E
YoY Grw.
Net Sub Adds
2.5
1.5%
ARPU (calc.)
$61.13
-4.5%
Blended churn
1.70%
00 bp
3.5
6.0%
Residential
(5.7)
-5.2%
MTS Segment Business
(0.8)
-2.5%
Total Net Sub Adds
(6.5)
-4.0%
Video Net Sub Adds
1.7
6.7%
Wireless
High-Speed Net Sub Adds
NAS Lines
Net subscriber additions in 000s.
YOY grow th refers to subscriber base, not net adds, w here applicable.
Source: Company reports; Scotiabank GBM estimates.
Allstream: Expect Stabilization with IP and On-Net Focus
■ Within Allstream, we expect YOY revenue decline of approx. -5%, largely due to
legacy lower margin and off-net service revenue deterioration, partially absorbed by
higher margin on-net Converged IP revenue growth. We anticipate Converged IP
revenue growth of 8% YOY due to Shared Services contribution and flow-through of strong
sales activity earlier this year. We expect cost efficiencies and favourable YOY comparisons
to drive EBITDA growth of 11% (-17% excl. restructuring).
Exhibit 20 - MBT Summary Model
Year ending December 31
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14E
Q4/F14E
275
-5.3%
212
-2.2%
208
15
8%
501
4
$62.95
3.0%
1.67%
105
8
$67.95
-0.6%
260
-5.2%
207
-2.5%
220
12
6%
508
7
$60.47
-3.9%
1.68%
111
6
$65.43
-3.7%
249
-4.4%
203
-2.0%
231
11
5%
517
9
$58.94
-2.5%
1.58%
117
7
$63.47
-3.0%
240
-3.6%
199
-2.0%
242
10
5%
529
12
$57.90
-1.8%
1.48%
118
1
$62.20
-2.0%
285
-6.5%
216
-2.2%
197
3
3%
493
(4)
$61.58
1.3%
1.74%
98
1
$67.85
0.3%
289
-5.6%
216
-1.9%
201
4
6%
495
2
$64.07
3.5%
1.70%
100
2
$68.82
-0.2%
284
-5.1%
215
-1.8%
205
4
7%
497
1
$63.98
3.3%
1.70%
102
2
$66.18
-3.2%
275
-5.3%
212
-2.2%
208
4
8%
501
5
$62.52
3.5%
1.67%
105
3
$69.23
0.5%
271
-5.0%
211
-2.5%
211
3
7%
499
(2)
$60.25
-2.2%
1.68%
106
1
$66.60
-1.8%
275
-5.0%
210
-2.5%
214
3
6%
502
3
$60.23
-6.0%
1.63%
107
1
$65.22
-5.2%
269
-5.2%
209
-2.5%
217
3
6%
504
3
$61.13
-4.5%
1.70%
109
2
$63.53
-4.0%
260
-5.2%
207
-2.5%
220
3
6%
508
4
$60.48
-3.3%
1.70%
111
2
$66.46
-4.0%
Operational Data
Lines in service (residential)
% YOY change
Lines in service (MTS business)
% YOY change
High-speed Internet Subs
Net Adds
% YOY change
Wireless Subs
Net Adds
Blended Wireless ARPU
% YOY change
Wireless churn
TV Subs
Net Adds
TV ARPU
% YOY change
F14 EBITDA is at the low-end of management's $580M-$620M guide.
Revenue
MTS
Allstream
Intersegment
Total Revenue
Growth
EBITDA (1)
EBITDA Margin
EBITDA Growth (incl. restr. & other)
EBITDA Growth (excl. restr. & other)
MTS EBITDA
MTS EBITDA Margin
MTS EBITDA Growth
Allstream EBITDA
Allstream EBITDA Margin
Allstream EBITDA Growth
Depr. & Amort.
EBIT
Net Income to Common (Continuing Ops)
Average shares (millions)
Basic adj. EPS (C$)
995
674
(35)
1,634
1.0%
1,000
642
(35)
1,606
-1.2%
987
636
(35)
1,588
-1.3%
981
630
(34)
1,577
-0.6%
244
172
(9)
407
-0.1%
247
172
(9)
410
0.2%
253
164
(8)
408
2.5%
251
166
(9)
409
1.4%
249
162
(9)
402
-0.3%
250
162
(9)
403
-1.0%
253
156
(8)
401
-2.0%
248
162
(9)
401
-1.3%
551
33.7%
-5.8%
-0.2%
579
36.1%
5.1%
-1.1%
576
36.3%
-0.6%
-0.6%
573
36.3%
-0.6%
-0.6%
149
36.5%
0.5%
0.6%
132
32.2%
-10.4%
-1.3%
143
34.9%
-2.0%
6.6%
128
31.3%
-11.4%
-6.8%
148
36.8%
-0.7%
-0.9%
143
35.3%
8.0%
-2.1%
146
36.3%
2.0%
-6.2%
144
35.9%
12.4%
5.4%
479
48.1%
0.4%
107
15.9%
-3.7%
469
46.9%
-2.2%
111
17.2%
3.2%
461
46.7%
-1.6%
115
18.1%
4.0%
461
47.0%
-0.1%
112
17.8%
-2.6%
121
49.5%
0.0%
28
16.5%
0.7%
122
49.2%
0.7%
24
14.2%
-10.7%
121
47.8%
1.2%
34
20.9%
31.9%
116
46.1%
-0.4%
20
12.3%
-32.2%
120
48.3%
-0.4%
28
17.2%
-1.4%
117
46.9%
-3.5%
25
15.3%
1.6%
117
46.4%
-3.0%
28
18.1%
-17.3%
114
45.9%
-1.7%
30
18.4%
45.6%
309
322
321
316
85
77
64
83
74
83
83
83
160
179
177
178
43
35
58
24
58
40
41
39
(85)
129
129
130
31
(56)
25
(85)
42
29
30
29
68
$1.69
78
$1.67
79
$1.64
80
67
$1.63
68
68
70
77
77
78
Our MTS estimates reflect
pressure in Wireless
related to loss of
wholesale roaming
revenues and voice ARPU
decline.
Our Allstream estimates in
F14-F16 reflect faster flowthrough of cost savings
related to restructuring
activities, off-net to on-net
migration, and
improvement in the sales
funnel following the
Accelero sale disruption.
78
$0.46
$0.34
$0.62
$0.28
$0.54
$0.37
$0.39
$0.37
67
16.4%
14
68
16.8%
1,075
1.5
(22)
73
17.8%
23
36
8.8%
1,077
1.7
(54)
69
16.8%
15
60
14.6%
1,029
1.8
45
88
21.5%
21
19
4.6%
1,129
2.2
26
44
10.9%
15
89
22.2%
1,127
1.9
73
78
19.4%
15
49
12.2%
1,142
2.0
34
88
22.0%
14
43
10.8%
1,139
2.0
28
88
21.9%
21
35
8.7%
1,174
2.0
(11)
Management's capex intensity guidance range is 18%-20%.
Due to SRED credit, we expect it will be below the mid-point.
Other:
Capex
Capex Intensity
Wireless cost of acquisition
Cash EBIT (EBITDA less capex and wireless COA)
Cash EBIT Margin
Net Debt
Net Debt / EBITDA (x)
FCF (Scotiabank GBM definition) (2)
Payout ratio (3)
296
18.1%
72
183
11.2%
1,129
2.0
(4)
n.m.
298
18.5%
65
217
13.5%
1,174
2.0
124
77%
Subscriber figures in 000. Financial figures in C$ millions except per share data.
Figures for 2011 onward under IFRS. Figures for F13 onward reflect adoption of IAS19.
(1) Reflects impact from IAS 19
(2) F13 includes $55M pension pre-funding.
(3) Reflects DRIP participation of ~30% ($33M of savings).
Source: Company reports; Scotiabank GBM estimates.
293
18.5%
65
218
13.8%
1,191
2.1
112
86%
291
18.5%
65
217
13.7%
1,182
2.1
115
86%
We lowered our 2014 FCF estimate to reflect a $30M payment related to the
Supreme Court of Canada settlement. In 2015-2016, we estimate approx.
$40M-$45M of required cash pension solvency funding. DRIP began in 2012
and saves $30M-$35M of cash outlay per year.
16-Oct-2014
Exhibit 21 – MBT NAV
(C$ thousands, except per share data)
Current
$28.10
Share Price
Consolidated EV/EBITDA Mult. 2
5.6 x
6.4 x
Consolidated P/E Mult.
FCF Yield (NTM)
17.1 x
5.2%
19.0 x
4.6%
EV/Cash EBIT Mult. 2
1-Year ROR
13.0 x
15.0 x
16.4%
Current
EBITDA
1-Year Target
$31.00
EV/EBITDA
+
1-Year Target
Value
EV/EBITDA
per Share
Multiple
Value +
per Share
Value
6.50 x
4.00 x
2,574,075
450,589
3,024,665
$32.82
$5.75
$38.57
2013
2014E
2015E
2016E
Multiple
Value
406,300
72,600
478,900
403,733
110,689
514,422
396,435
115,074
511,508
395,903
112,027
507,931
6.00 x
4.00 x
2,388,938
456,724
2,845,662
$30.86
$5.90
$36.77
285,000
$3.68
177,381
$2.26
$0.00
0
$0.00
3,130,662
$40.45
3,202,045
$40.83
955,722
$12.35
1,000,140
$12.75
Telecom
MTS (Manitoba) 1
Allstream (National)
Total Telecom
Tax Shield and Legal Liab
Tax Shield Value
Pension Cost 3
Total Gross Asset Value
Less:
Total Net Debt (Cash)
FD Shares Outstanding ('000)
NET ASSET VALUE
77,400
2,174,940
$28.10
78,429
2,201,905
$28.08
DCF Value
$32.94
Average of DCF and NAV
$30.51
1
Net of wireless deferred costs and restructuring.
2
Excludes tax shield value.
3
Pension service costs are included in EBITDA and hence deficit is not included in the NAV calculation.
However, on a take-out of the MTS unit, we believe pension solvency deficit of approx. $300M, reflecting all 2013 voluntary contributions, will have to be included.
+
Enterprise Values calculated using 12 month forward values
Source: Company reports; Scotiabank GBM estimates.
October 16, 2014
BCE Q3/14 Preview: Expect Healthy Wireless
Growth and Improving Wireline Trends, Offset by
Media Pressure
Exhibit 22 - BCE Q3/14 Estimates
Financials
Q3/F14E
■ We maintain our $50 target and Sector Perform rating.
On NTM estimates, BCE trades at 6.9x EV/EBITDA, 12x
EV/cash EBIT, and 6.6% FCF yield (fully-taxed), less
expensive compared to the Canadian peer group average. We
prefer BCE over the other Big Three Canadian incumbents
due to the lower downside risk to the current share price
related to the recapitalization of the 4th wireless operator. We
also believe BCE’s 5% dividend growth expectation in 2015
is more insulated relative to RCI and T due to the FCF
accretion from its recent BA acquisition. However, given the
uncertain wireless regulatory environment, we remain
cautious on BCE and the Canadian incumbents.
■ Overall, the financial results could come in below
consensus due to weaker than expected Media results. We
forecast 0.5% consolidated BCE revenue growth and
EBITDA growth, below Street expectations of ~1% and ~2%,
respectively.
YoY Grw.
Service
1,444
5.3%
Product
97
-8.4%
16
5.0%
Wireless
Local & Access
Long Distance
Data
Equipment & other
Intersegment
Intersegment
1,557
571
169
1,476
168
91
4.3%
-6.8%
-8.4%
3.5%
0.0%
0.0%
Wireline
2,475
-0.3%
Media
642
-3.3%
Intersegment
(120)
Bell Canada
Bell Aliant
Intersegment
Revenue
4,552
0.6%
690
-0.7%
(121)
5,122
0.5%
Consensus revenue estimates
Wireless Results Remain Healthy
■ Wireless service revenue should increase 5% YOY, largely
explained by healthy ~4% blended ARPU growth. We
forecast EBITDA growth and service margin of ~8% YOY
and ~46%, respectively. The healthy margin reflects a
continuation of slow subscriber volume experienced since the
onset of the Wireless Code of Conduct last summer.
Accordingly, we estimate postpaid gross adds of +320K and
postpaid net additions of +75K, lower by approx. -4% and
-27% YOY, respectively. Moreover, we do not believe the
debut of the iPhone 6 had a material impact on Q3 given the
late quarter launch and limited inventory supply. We expect
the negative margin impact typically associated with iPhone
launches to be mainly a Q4 event.
Wireless Service
1,453
Wireline
2,463
Media
659
Bell Canada
4,593
BCE
5,168
Wireless
665
7.7%
Wireline
920
-0.3%
169
-15.1%
Media
Bell Canada
Bell Aliant
EBITDA 1
1,755
0.9%
319
-1.6%
2,074
0.5%
Consensus EBITDA estimates
Wireless
675
Wireline
920
Media
Fibe Momentum Drives Improving Wireline Trend
■ We forecast flat revenue and EBITDA in Q3 supported by
increasing Fibe scale, steady growth in 3-product households,
and the flow-through of recent price increases ($5 for Internet
and $1 for Phone in June in Ontario; $3 for Internet, $1.50 for
Phone, and $2 for TV in September in Quebec). However, we
expect most of the residential strength to be absorbed by a
Business segment that remains burdened by a soft job market.
Looking ahead, we estimate strength in residential services
will drive positive EBITDA growth in Q4 and 2015.
179
Bell Canada
1,774
BCE
2,101
EPS (Basic Adjusted) 2
$0.73
Consensus estimate
Capex
FCF
3
-2.1%
$0.77
966
5.7%
721
n.a.
C$ millions, except per share data.
Grow th rates adjusted for IFRS.
Consensus estimates per company poll of analysts.
1
Grow th ratesexclude an expected $2M
PPA amortization expense in Q3F14 and $2M in Q3F13.
2
3
Grow th rates adjusted for tax benefits.
CFO before changes in w orking capital and PPA amortization expense, less
capex, pref share dividends, and distributions to non-controlling interests.
Source: Company reports; Scotiabank GBM estimates.
Media Pressured by Cost Inflation and Weak Ad
Sales
■ We expect an anemic advertising market and content cost
inflation to pressure revenue and profitability. Media
revenues should decline -3% YOY as the TV ad-sales market
is facing secular and competitive threat from online media
alternatives. Furthermore, significantly higher content costs
(e.g. renewal of the CFL contract, regional hockey rights,
additional TSN feeds, expanding TV Everywhere library,
etc.) compared to Q3/13 are expected to drive EBITDA
decline of -15% YOY. Over the longer-term, we lowered our
Media estimates to reflect the ongoing secular advertising
pressure from digital media.
Exhibit 23 - BCE Q3/14 Wireless Estimates
Subscribers
Q3/F14E Net
Adds
YoY Grw.
Residential
(60)
-8.8%
Business
(27)
-4.1%
(87)
-6.5%
Total NAS Lines
1
Consensus estimates
Residential
(54)
Business
(29)
Wireless
50
2.2%
High-Speed 2
20
3.1%
Consensus estimate
Video 2
Consensus estimate
1
26
24
4.9%
36
Net adds and grow th rates exclude subs transferred from a third-party
w holesaler to Bell's platform.
2
Grow th rates adjusted for subscriber base restatements.
Wireless
Q3/F14E
YoY Grw.
Net Sub Adds 1
Prepaid
(25)
-11.2%
Postpaid
75
4.4%
50
2.2%
Total
Consensus estimates
Prepaid
(12)
Postpaid
78
Total
65
ARPU
Data
$26.87
16.0%
Voice
$33.61
-4.3%
Blended
$60.49
3.8%
Consensus estimate
$60.63
Churn
Prepaid
3.50%
20 bp
Postpaid
1.20%
0 bp
1.50%
0 bp
Blended
Consensus estimates
Prepaid
3.39%
Postpaid
1.15%
Blended
1.46%
COA
$420
Consensus estimate
4.2%
$407
Net adds in 000s.
Consensus estimates per company poll of analysts.
1
Grow th rate refers to subscriber base, not net adds. Postpaid subscriber
grow th rate adjusted for restatements.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 24 - BCE Summary Model
Residential voice service lines improve in F14 due to positive
pull-through effects associated with increased Fibe loading.
Year ending December 31
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14E
Q4/F14E
2,652
-9.7%
2,590
-4.2%
2,185
58
3%
6,678
378
1,101
(160)
$57.25
2.6%
1.21%
3.75%
639
2,278
122
2,402
-8.8%
2,458
-4.2%
2,239
54
2%
6,943
265
951
(149)
$59.39
3.7%
1.21%
3.69%
710
2,375
97
2,174
-9.5%
2,305
-6.3%
2,307
68
3%
7,137
194
856
(95)
$61.17
3.0%
1.21%
3.69%
719
2,484
109
1,978
-9.0%
2,162
-6.2%
2,413
106
5%
7,280
143
813
(43)
$62.21
1.7%
1.21%
3.69%
723
2,527
43
2,857
-10.7%
2,680
-4.1%
2,131
4
1%
6,485
59
1,188
(68)
$55.92
3.9%
1.25%
3.79%
122
2,170
14
2,775
-10.7%
2,651
-4.0%
2,133
2
1%
6,581
96
1,135
(53)
$56.85
2.7%
1.30%
3.70%
134
2,196
26
2,716
-10.2%
2,622
-4.2%
2,169
36
2%
6,684
103
1,121
(13)
$58.30
1.7%
1.20%
3.30%
157
2,242
47
2,652
-9.7%
2,590
-4.2%
2,185
16
3%
6,678
120
1,101
(26)
$57.92
2.1%
1.30%
3.40%
226
2,278
36
2,587
-8.7%
2,554
-3.7%
2,200
16
4%
6,712
34
1,051
(50)
$57.90
3.5%
1.24%
3.67%
117
2,307
29
2,519
-8.6%
2,516
-4.1%
2,204
4
4%
6,778
66
1,026
(25)
$59.49
4.6%
1.16%
3.48%
164
2,328
21
2,459
-8.8%
2,489
-4.1%
2,224
20
3%
6,853
75
1,001
(25)
$60.49
3.8%
1.20%
3.50%
202
2,352
24
2,402
-8.8%
2,458
-4.2%
2,239
15
2%
6,943
90
951
(50)
$59.66
3.0%
1.30%
3.60%
227
2,375
23
Operational Data
Lines in service (residential)
% YOY change
Lines in service (business)
% YOY change
High-speed Internet Subs
Net Adds
% YOY change
Wireless Subs (postpaid)
Net Adds
Wireless Subs (prepaid)
Net Adds
Blended Wireless ARPU
% YOY change
Wireless churn (postpaid)
Wireless churn (prepaid)
Wireless CAPEX
TV Subs (Satellite + IPTV)
Net Adds (Satellite + IPTV)
Blended ARPU growth driven by increased postpaid
subscriber mix and higher-ARPU 2 year plans.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 24 - BCE Summary Model (cont'd)
Year ending December 31
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14E
Q4/F14E
10,097
5,849
2,557
(394)
18,109
2,759
(468)
20,400
-1.2%
5.4%
4.2%
0.8%
0.5%
10,023
6,117
2,902
(477)
18,565
2,733
(466)
20,832
-0.7%
5.3%
-1.2%
0.5%
0.3%
10,032
6,393
2,910
(477)
18,858
2,678
(466)
21,070
0.1%
5.0%
0.3%
1.6%
1.1%
10,061
6,569
2,918
(477)
19,071
2,630
(466)
21,236
0.3%
2.9%
0.3%
1.1%
0.8%
2,508
1,409
513
(82)
4,348
684
(113)
4,919
-2.7%
7.2%
0.2%
0.4%
0.2%
2,506
1,442
559
(83)
4,424
692
(115)
5,001
-1.1%
6.1%
5.3%
1.6%
1.3%
2,482
1,493
664
(115)
4,524
695
(121)
5,098
-0.7%
5.0%
7.6%
1.2%
0.7%
2,601
1,505
821
(114)
4,813
689
(119)
5,383
-0.4%
3.7%
0.7%
0.2%
-0.1%
2,462
1,472
722
(118)
4,538
676
(115)
5,099
-1.8%
4.7%
3.3%
0.0%
-0.2%
2,485
1,522
761
(119)
4,649
683
(111)
5,221
-0.5%
5.7%
-0.5%
0.6%
0.4%
2,475
1,557
642
(120)
4,554
690
(121)
5,123
-0.3%
5.3%
-3.3%
0.7%
0.5%
2,601
1,566
777
(120)
4,824
685
(119)
5,390
0.0%
5.4%
-2.9%
0.7%
0.5%
3,861
2,806
732
7,399
1,311
8,710
38.4%
1.5%
46.0%
4.1%
25.1%
-1.8%
38.8%
2.1%
41.0%
2.1%
958
585
98
1,641
321
1,962
38.2%
-4.5%
44.9%
11.6%
22.6%
11.5%
38.2%
1.9%
40.3%
1.4%
979
609
156
1,744
322
2,066
39.1%
-2.5%
45.9%
8.9%
30.8%
4.5%
39.8%
2.1%
41.6%
1.4%
923
617
199
1,739
324
2,063
37.2%
-4.3%
45.0%
11.6%
30.3%
6.2%
38.5%
1.8%
40.5%
1.2%
934
529
230
1,693
305
1,998
35.9%
-0.6%
38.9%
10.4%
30.3%
-3.7%
35.6%
2.4%
37.5%
1.5%
930
628
150
1,708
314
2,022
37.8%
-4.1%
46.0%
7.4%
23.4%
-5.2%
38.1%
-0.1%
40.0%
-0.5%
953
667
210
1,830
314
2,144
38.4%
-1.9%
47.5%
9.5%
30.0%
-6.8%
39.8%
1.6%
41.4%
1.0%
920
665
169
1,753
319
2,072
37.2%
-0.3%
46.0%
7.7%
26.6%
-15.1%
38.5%
0.8%
40.5%
0.4%
952
556
193
1,701
298
1,999
36.6%
1.9%
38.8%
5.1%
25.1%
-14.4%
35.3%
0.7%
37.1%
0.3%
7,319
8,610
38.4%
2.2%
40.5%
2.1%
1,610
1,929
37.4%
-0.1%
39.6%
0.8%
1,716
2,038
39.2%
2.6%
41.1%
1.2%
1,444
1,766
32.0%
-15.0%
34.7%
-12.8%
1,652
1,950
34.7%
3.8%
36.6%
2.8%
1,682
1,984
37.5%
0.2%
39.3%
-0.7%
1,782
2,090
38.7%
0.5%
40.4%
-0.3%
1,750
2,068
38.5%
21.2%
40.4%
17.1%
1,698
1,995
35.2%
3.1%
37.1%
2.5%
Revenue
Wireline
Wireless
Media (from April 1, 2011)
Intersegment
Bell Canada
Bell Aliant
Intersegment
BCE
Wireline growth
Wireless service growth
Media growth (1)
Bell Canada growth (1)
BCE growth (1)
EBITDA before restructuring (2)
Wireline
Wireless
Media (from April 1, 2011)
Bell Canada
Bell Aliant
BCE
Wireline EBITDA margin
Wireline EBITDA growth
Wireless EBITDA service margin
Wireless EBITDA growth
Media EBITDA margin
Media EBITDA growth
Bell Canada EBITDA margin
Bell Canada EBITDA growth
BCE EBITDA margin
BCE EBITDA growth
We expect an improving wireline EBITDA growth trend
reflecting higher Fibe TV contribution, higher Internet
additions, and fewer residential NAS losses. Enterprise
is expected to remain under pressure.
3,794
2,340
683
6,817
1,272
8,089
37.6%
-3.0%
43.6%
10.6%
28.9%
3.8%
37.9%
2.0%
39.9%
1.4%
3,755
2,516
722
6,992
1,245
8,237
37.5%
-1.1%
44.6%
7.5%
26.3%
-11.3%
37.9%
0.8%
39.7%
0.3%
3,802
2,696
745
7,244
1,289
8,533
37.9%
1.6%
45.5%
7.2%
25.6%
-2.3%
38.4%
3.0%
40.5%
3.1%
We expect organic EBITDA growth of ~1% in
2014, adjusted for Astral contribution and other
EBITDA including restructuring (2)
Bell Canada
BCE
Bell Canada EBITDA margin
Bell Canada EBITDA growth
BCE EBITDA margin
BCE EBITDA growth
Depr. & Amort.
EBIT
Adj. Net Income to Common
Average shares (millions)
Basic adj. EPS (C$)
EPS Growth
Dividend per share (C$)
Growth
Other:
Capex
Cash EBIT (EBITDA less Capex)
Cash EBIT Margin %
Net Debt (proportionate) (3)
BCE Consolidated Net Debt / EBITDA (x) (4)
Bell Net Debt / EBITDA (x) (BCE definition) (5)
FCF (Scotiabank GBM definition) (6)
FCF (BCE definition) (7)
FCF/share ($)
Payout ratio (% of FCF)
6,422
7,683
35.8%
-2.2%
37.9%
-2.1%
6,912
8,137
37.5%
5.7%
39.3%
4.3%
7,164
8,433
38.0%
3.0%
40.0%
3.6%
3,380
3,495
3,549
3,550
838
842
845
855
866
879
875
875
3,216
3,761
3,849
4,065
913
867
617
819
945
943
919
954
2,317
2,434
2,688
2,852
599
594
584
540
626
640
565
604
776
785
839
839
776
776
776
776
777
778
778
809
$2.99
$0.01
$3.10
4%
$3.20
3%
$3.40
6%
$0.77
$0.12
$0.77
($0.21)
$0.75
$0.08
$0.70
$0.16
$0.81
4%
$0.82
7%
$0.73
-4%
$0.75
7%
$2.33
5%
$2.47
6%
$2.59
5%
$2.65
2%
$0.58
7%
$0.58
7%
$0.58
3%
$0.58
3%
$0.62
6%
$0.62
6%
$0.62
6%
$0.62
6%
3,544
5,166
24.3%
17,264
2.18
1.86
2,985
3,004
$3.58
74%
722
1,240
25.2%
16,156
2.29
1.84
794
247
830
1,236
24.7%
15,771
2.13
1.79
758
903
880
1,183
23.2%
18,836
2.50
2.16
647
747
1,139
859
16.0%
18,751
2.58
2.12
204
674
729
1,293
25.4%
18,641
2.53
2.06
643
262
937
1,207
23.1%
18,883
2.42
2.07
676
815
966
1,106
21.6%
18,520
2.46
2.04
719
758
1,043
956
17.7%
18,762
2.56
2.09
726
849
F14E EPS estimate is within BCE's $3.10-$3.20
range and growth rates reflects ~$0.04/share
tax adjustment.
3,571
4,518
22.1%
18,751
2.55
2.12
2,403
2,571
$3.31
70%
3,676
4,562
21.9%
18,762
2.48
2.14
2,765
2,684
$3.42
72%
3,514
5,019
23.8%
17,848
2.31
1.95
2,973
2,958
$3.53
73%
Our FCF estimate is within BCE's $2.65B-$2.75B guidance range and reflects rising cash taxes to
approx. $600M, offset by EBITDA growth. We expect cash taxes to increase futher in 2015 to
$650M to $700M.
Subscriber figures in 000. Financial figures in C$ millions except per share data. F11 onward figures presented under IFRS.
(1) Adjusted for Olympics contribution, retroactive CRTC programming fee decision, and CRTC loops decision, which affected 2012 results. Growth rates are pro-forma Astral acquisition.
(2) Growth rates adjusted for acquisitions, Media PPA amortization expense F11-F14, and Olympics, CRTC decisions, NHL lock out, and one-time pension benefit that affected 2012 results.
(3) Figures include BCE's 45% share of BA net debt and treat preferred shares as 50% debt. Figures Q2/F11 onward include Bell's proportionate share of CTVgm debt.
(4) Annualized quarterly EBITDA used.
(5) Reflects Bell's proportionate interest in CTV and includes BA distributions to BCE. Uses LTM EBITDA.
(6) CFO before work ing capital changes less capex, preferred share dividends, and distributions to non-controlling interests. Excludes non-cash PPA amortization expense.
(7) BCE definition includes changes in work ing capital and other investing activities and excludes undistributed BA cash flow and CTV acquisition benefits pack age payments and other costs.
Source: Company reports; Scotiabank GBM estimates.
Our 2014 capital
intensity estimate is
is at the high-end of
management's 16%17% range.
Exhibit 25 - BCE NAV
(C$ Millions, except per share data)
Share Price
P/E Multiple on BCE
Consolidated EV/EBITDA (NTM)
FCF Yield (NTM, fully taxed)
FCF Yield (NTM, actual tax)
Consolidated Cash EBIT multiple (NTM)
ROR
Bell Media 3
Value
per Share
1-Year Target
$50.00
15.3x
7.2x
6.5%
7.1%
12.3x
11.4%
1-Year Target
EV/EBITDA Mult.
NTM
or Share Price
Value+
EBITDA
2014E 2015E
2016E
Shares
Owned
4,619
2,391
4,860
2,568
4,945
2,749
5,020
2,859
100%
100%
5.0x
8.5x
24,729
23,052
$31.80
$29.64
6.5x
7.2x
32,530
20,497
683
722
745
732
82%
10.0x
10.0x
2013
Bell Canada
Bell Canada - Wireline/Other 1
Bell Canada - Wireless 2
Current
EV/EBITDA Mult.
NTM
or Share Price
Value+
Current
$47.18
15.3x
6.9x
6.6%
7.5%
12.1x
Value
per Share
$39.28
$24.75
6,098
$7.84
6,048
$7.30
MLSE
28%
400
$0.51
400
$0.48
Q9
30%
185
$0.24
185
$0.22
15,743
$20.24
17,752
$21.44
38,721
$49.79
41,907
$50.60
38,721
$49.79
41,907
$50.60
545
1,698
2,243
214
-
$0.70
$2.18
$2.88
$0.28
$0.00
815
2,003
2,818
261
-
$0.98
$2.42
$3.40
$0.32
$0.00
Less: Bell Net Debt 4
Total Bell Canada
Other/Corp
Total Gross Asset Value
Less:
Bell working capital deficit (incl. BA)
Bell Preferred Shares (50%)
Total Net Debt (Cash)
Plus: NPV of Tax shield
Less: 30% Discount on Inukshuk
Shares Outstanding (M)
Net Asset Value
Target Price Calculation (Average of NAV and DCF)
Reflects 100% of Bell Aliant's Wireline EBITDA
Includes Bell Aliant's estimated Wireless EBITDA (assume 40% EBITDA margin)
3 EBITDA estimates are consolidated. Ownership % reflects Bell's proportionate share.
4 Reflects Bell's proportionate share of CTVgm debt.
+ Enterprise Values calculated using 12 month forward values.
777.7
36,692
$47.18
828.1
39,350
$49.61
1
2
Source: Company reports; Scotiabank GBM estimates.
$47.52
October 16, 2014
TELUS Q3/14 Preview – Expect Continued Strong
Execution
Exhibit 26 - TELUS Q3/14 Estimates
Financials
Network
Equipment
■ We maintain our $37 target and SP rating. We believe that the
Wireless
government will continue to be relentless in its effort to
Wireline
strengthen a fourth national operator, hence our valuation reflects Revenue
regulatory risk and the risk associated with a fourth national
Wireless
wireless competitor being recapitalized. Despite the recent
Wireline
pullback, we believe TELUS is fairly valued. Our one-year target
price reflects a 15% wireless valuation discount in our NAV, but Consensus Revenue est. (Factset)
we have not adjusted our estimates to account for the effects of a
Wireless
viable fourth national wireless carrier. If a viable fourth national
Wireline
operator is recapitalized, our potential one-year target would fall EBITDA (before restr.)
to $34 with estimate adjustments. And while we expect that
Wireless
TELUS’ dividends will be safe, we believe dividend growth of
Wireline
10% may be a challenge over the next two years and that share
EBITDA (incl. restr.)
repurchases will be reduced. Our valuation reflects a forward
EV/EBITDA ratio of 7.2x, a EV/Cash EBIT ratio of 13.9x, a P/E Consensus EBITDA (incl. restr.) est. (FactSet)
ratio of 14.3x and an FCF yield of 5.7%.
EPS (Basic Adjusted)
Consensus est. (Factset)
■ We expect TELUS will maintain previous quarters’ strong
momentum in wireless metrics (ARPU, churn and net adds), Capex
but remain concerned about revenue growth. After TELUS’
Consensus est. (Factset)
commendable execution in Q2/14 stemming from its focus on
subscriber lifetime value and customer service, we expect FCF
wireless metrics to remain strong. We believe TELUS will add
+85K postpaid subs (due to lower competitive pressure from RCI Financials in C$ millions except per share data.
and the Sept 19th iPhone 6 introduction), +2.9% blended ARPU Consensus estimates per Factset on October 15, 2014.
growth (due to price increases and higher data usage), and churn Growth rates omit Public Mobile acquisition impact.
of 0.87%, relatively flat YOY (due to the lapping effect of Source: Company reports; Scotiabank GBM estimates.
shifting to two-year contracts). However, due to slower
smartphone penetration gain and industry saturation, our wireless
service revenue growth estimate is at the low end of TELUS' 5%-7% FY14 growth target
(excluding Public Mobile). As such, we expect wireless service revenue to grow only +5.0%
YOY (excluding PM), at the bottom end of aforementioned guidance range (but faster than
the +3.7% YOY in Q1/14 and +4.5% YOY in Q2/14). We believe that net adds and revenue
growth will accelerate in Q4/14 due to a full quarter availability of the iPhone 6. We
anticipate wireless EBITDA will grow +6.4% YOY (before restructuring), outpacing
revenue growth due to lower customer acquisition costs. We believe that margins will grow
+30bps to 47.7%, primarily as a result of higher ARPU and comparatively small promotions
associated with the iPhone 6.
■ In wireline, we expect the strong momentum from Q2/14 to continue, driven by IPTV
performance and competitive equilibrium in Western Canada. We expect revenue
growth of +3.7% YOY to $1.36B, driven primarily by price increases. While TELUS has
engaged in some promotional activity this quarter (a TV and Internet plan for $15/month
each for the first year of a three-year contract), we do not anticipate a pricing response from
Shaw or a change in the largely benign competitive environment. We anticipate that
EBITDA will increase +4.2% YOY to $381M and margins to increase by +20bps to 28.1%,
as scale-driven operational efficiencies more than offset higher TV content costs. However,
given slower market growth and increasing content costs, we anticipate that scale -driven
YOY margin improvements for the rest of 2014 will be modest. We expect the pace of TV
net adds to slow YOY to +26K and Internet nets adds to be largely flat YOY at +20K, due to
slower overall market growth and improved execution by Shaw.
Q3/F14E
1,535
125
YoY Grw.
5.0%
1.5%
1,661
4.6%
1,359
3.7%
3,020
4.2%
1,648
1,383
3,003
714
6.4%
381
4.2%
1,095
5.6%
705
6.1%
362
2.0%
1,067
5.6%
1,088
$0.59
4.1%
$0.61
522
-5.9%
543
231
-43%
■ 2014 share buybacks are complete and a $500M NCIB has
been approved for 2015. TELUS announced that it completed its
$500M NCIB for 2014, repurchasing 13M shares (or 2.1% of its
outstanding shares). TELUS also received approval for its 2015
NCIB program to purchase up to 16M common shares worth up
to $500M, consistent with our expectations. Since the renewal,
TELUS purchased 79K shares worth approximately $3.0M.
Exhibit 27 – TELUS Q3/14 Subscriber Estimates
Wireless
Q3/F14E
YoY Grw.
Prepaid
(5)
-7.8%
Postpaid
85
3.4%
80
1.9%
Net sub adds
Total
1
Net postpaid sub adds consensus est. (Factset)
Data (calculated)
Voice (calculated)
Service ARPU (calculated)
87
$32.00
$31.80
17%
-8.2%
$63.80
2.9%
Consensus estimate (Factset)
$63.64
Prepaid (calculated)
4.15%
-14 bp
2
0.87%
-1 bp
Blended churn (reported)
1.28%
-7 bp
Q3/F14E
Net Adds
YoY Grw.
(27)
-5.7%
Postpaid (calculated)
Subscribers
Residential
Business
1
0.0%
NAS Lines
(26)
-2.9%
Consensus NAS Line loss est. (Factset)
(29)
High-Speed
20
5.6%
TV
26
15%
Wireless
80
1.9%
Total RGUs
100
1.8%
Consensus estimates per Factset on October 15, 2014.
Net adds in 000s.
1
Net adds adjusted to omit Public Mobile acquisition.
2
YOY growth rate based on calculated 3Q13 postpaid churn of 0.88%
as compared with reported rate of 0.99%.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 28 - TELUS Summary Model
Year ending December 31
2011
2012
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14E
Q4/F14E
1,915
-6.4%
1,678
-0.9%
4,889
-6.1%
0.098
-2.2%
1,242
75
6.4%
509
195
1,339
27.1%
6,130
425
1,210
(56)
$58.60
2.5%
1.22%
3.82%
$386
508
9.3%
1,767
-7.7%
1,639
-2.3%
4,494
-8.1%
0.095
-3.1%
1,326
84
6.8%
678
169
1,270
25.2%
6,543
413
1,127
(83)
$59.89
2.2%
1.00%
4.00%
$408
711
12.2%
1,643
-7.0%
1,611
-1.7%
4,090
-9.0%
0.098
3.4%
1,395
69
5.2%
815
137
1,398
26.5%
6,751
379
1,056
(71)
$60.75
1.4%
0.93%
4.34%
$400
712
11.6%
1,552
-5.5%
1,617
0.3%
3,719
-9.1%
0.098
0.0%
1,471
76
5.4%
921
106
1,433
26.2%
7,067
316
969
(87)
$62.22
2.4%
0.88%
4.35%
$419
764
11.7%
1,459
-6.0%
1,617
0.0%
3,380
-9.1%
0.093
-5.0%
1,536
65
4.4%
1,002
81
1,398
24.9%
7,266
199
919
(50)
$63.15
1.5%
0.88%
4.35%
$440
811
12.2%
1,364
-6.5%
1,600
-1.0%
3,071
-9.1%
0.088
-5.0%
1,602
66
4.3%
1,056
54
1,431
25.0%
7,415
149
889
(30)
$63.92
1.2%
0.85%
4.02%
$445
816
12.0%
1,733
-7.2%
1,630
-2.3%
1,059
-9.0%
0.095
0.9%
1,342
16
6.8%
712
34
333
25.9%
6,603
60
1,100
(27)
$59.45
1.8%
1.01%
4.22%
$369
134
9.1%
1,701
-7.2%
1,623
-1.9%
1,048
-9.0%
0.102
7.9%
1,355
13
6.1%
743
31
340
25.8%
6,627
100
1,079
(21)
$60.27
0.7%
0.93%
4.22%
$374
171
11.3%
1,668
-7.4%
1,616
-1.8%
1,006
-9.0%
0.095
2.4%
1,374
19
5.4%
776
34
361
27.5%
6,732
106
1,078
(1)
$62.00
1.7%
0.88%
4.30%
$399
194
12.4%
1,643
-7.0%
1,611
-1.7%
978
-9.0%
0.098
2.4%
1,395
21
5.2%
815
38
364
26.7%
6,751
113
1,056
(22)
$61.22
1.5%
0.88%
4.65%
$453
213
13.4%
1,619
-6.6%
1,611
-1.2%
963
-9.1%
0.096
0.2%
1,416
21
5.5%
842
27
331
24.7%
6,799
48
1,019
(37)
$60.67
2.0%
0.92%
4.53%
$375
165
10.6%
1,600
-5.9%
1,615
-0.5%
953
-9.1%
0.102
-0.3%
1,431
15
5.6%
865
23
408
30.3%
6,877
78
999
(20)
$61.85
2.6%
0.82%
4.23%
$397
228
14.2%
1,573
-5.7%
1,616
0.0%
914
-9.1%
0.095
0.0%
1,451
20
5.6%
891
26
340
25.0%
6,962
85
994
(5)
$63.80
2.9%
0.87%
4.15%
$419
183
11.0%
1,552
-5.5%
1,617
0.3%
889
-9.1%
0.098
0.0%
1,471
20
5.4%
921
29
354
25.0%
7,067
105
969
(25)
$63.42
3.6%
0.91%
4.50%
$476
189
11.0%
1,347
1,604
2,951
2.4%
4.5%
3.5%
1,359
1,661
3,020
3.7%
5.0%
4.2%
1,417
1,715
3,132
4.0%
6.6%
6.3%
381
714
1,095
28.1%
4.2%
48.0%
6.4%
36.3%
5.6%
1,067
26.6%
2.0%
47.6%
6.1%
35.3%
4.5%
398
632
1,030
28.1%
4.7%
42.5%
5.3%
32.9%
5.0%
1,002
26.7%
5.4%
42.1%
4.6%
32.0%
5.7%
Operational Data
Lines in service (residential)
% YOY change
Lines in service (business)
% YOY change
Long distance minutes
% YOY change
Long distance ARPM ($ / minute / line)
% YOY change
High-speed Internet Subs
Net Adds
% YOY change
TELUS TV Subs (includes satellite resale)
Net Adds
Wireline CAPEX
Capex Intensity
Wireless Subs (postpaid)
Net Adds
Wireless Subs (prepaid)
Net Adds
Blended Wireless ARPU ($ / sub / month)
% YOY change
Wireless churn (postpaid, calc.)
Wireless churn (prepaid, calc.)
Wireless COA ($ / gross subscriber addition)
Wireless CAPEX
Capex Intensity
We expect ARPU growth driven by higher
priced 2-year plans, price increases and
migration to shared data plans. Service
revenue growth guidance: 5%-7%,
excluding Public Mobile.
Financial
We believe wireline CapEx will remain elevated as long Optik
TV adoption grows and FTTH deployment increases
Revenue
Wireline
Wireless
Total Revenue
Wireline growth
Wireless service growth
Growth (1)
4,935
5,462
10,397
2.0%
8.5%
5.4%
5,049
5,845
10,894
2.7%
7.3%
5.0%
5,274
6,130
11,404
4.9%
5.0%
4.6%
5,464
6,535
11,998
3.6%
5.0%
4.4%
5,616
6,646
12,263
2.8%
3.9%
2.2%
5,725
6,799
12,524
1.9%
2.9%
2.1%
We expect wireline EBITDA growth and margins will
improve slightly due to higher data revenue growth and a
more benign competitive envornment
1,284
1,472
2,756
3.6%
6.4%
5.1%
1,316
1,510
2,826
7.2%
4.8%
6.4%
1,311
1,563
2,874
4.5%
5.2%
4.3%
1,363
1,585
2,948
3.4%
3.6%
3.1%
1,340
1,555
2,895
4.4%
3.7%
4.2%
Wireless margins should remain healthy due to lower volume, lower
churn and higher ARPUs. Wireless EBITDA growth guidance: 3%8%, excluding Public Mobile.
EBITDA
Wireline
Wireless
Total EBITDA (before restructuring)
Wireline EBITDA Margin (1)
Wireline EBITDA Growth (1)
Wireless EBITDA Service Margin (2)
Wireless EBITDA Growth (3)
EBITDA Margin (1)
EBITDA Growth (1)
Total EBITDA (with restructuring)
Wireline EBITDA Margin (1)
Wireline EBITDA Growth (1)
Wireless EBITDA Service Margin (2)
Wireless EBITDA Growth (3)
EBITDA Margin (1)
EBITDA Growth (1)
Depr. & Amort.
EBIT
Adj. Net Income to Common
Average shares (millions)
Basic adj. EPS (C$)
EPS Growth
Dividend per share (C$)
Dividend Growth
Payout ratio (% of EPS) (4)
1,625
2,188
3,813
32.7%
-5.7%
43.7%
8.1%
36.6%
1.8%
3,778
32.0%
-3.3%
43.7%
8.2%
36.2%
3.1%
1,533
2,480
4,013
30.4%
-4.6%
46.2%
13.3%
36.8%
5.7%
3,965
29.7%
-4.9%
46.0%
12.9%
36.4%
5.4%
1,482
2,634
4,116
28.1%
4.1%
46.9%
6.7%
36.1%
5.9%
4,018
26.8%
1.8%
46.4%
6.4%
35.2%
4.6%
1,544
2,750
4,294
28.3%
4.2%
47.2%
5.5%
35.8%
5.0%
4,219
27.3%
5.6%
46.9%
5.6%
35.2%
5.7%
1,617
2,916
4,533
28.8%
4.7%
47.4%
4.5%
37.0%
5.6%
4,458
27.5%
3.3%
47.1%
4.6%
36.4%
4.5%
1,705
3,044
4,749
29.8%
5.4%
48.1%
4.4%
37.9%
4.8%
4,674
28.5%
5.7%
48.1%
5.2%
37.3%
4.9%
Capex Intensity
Cash EBIT (EBITDA - Capex)
Cash EBIT Margin (1)
Net Debt
Net Debt / EBITDA (x)
FCF
361
676
1,037
27.4%
9.4%
48.5%
6.0%
36.7%
7.2%
998
25.2%
2.0%
47.8%
4.7%
35.3%
4.0%
366
684
1,050
27.9%
3.4%
47.4%
7.0%
36.5%
5.7%
1,035
27.1%
0.9%
47.1%
6.3%
36.0%
4.5%
380
604
984
27.9%
3.5%
43.0%
7.5%
33.4%
6.0%
951
26.3%
2.0%
42.4%
7.6%
32.3%
4.6%
392
693
1,085
29.3%
4.5%
49.4%
4.9%
37.5%
4.8%
1,077
28.9%
5.2%
49.3%
5.1%
37.2%
5.1%
373
711
1,084
27.7%
3.3%
49.0%
5.5%
36.7%
4.7%
1,073
27.1%
9.9%
48.9%
6.6%
36.4%
7.7%
1,810
1,865
1,803
1,819
1,953
2,021
451
446
445
461
463
444
455
457
1,591
1,775
1,768
1,928
1,959
2,083
487
420
481
380
512
514
485
417
1,219
1,318
1,294
1,425
1,459
1,552
362
286
356
290
377
381
359
309
648
652
640
616
604
590
653
652
633
623
622
617
613
610
$1.88
16%
$2.02
8%
$2.02
10%
$2.32
15%
$2.42
4%
$2.63
9%
$0.55
13%
$0.44
-4%
$0.56
14%
$0.47
16%
$0.61
9%
$0.62
41%
$0.59
4%
$0.51
9%
$1.10
13%
59%
$1.22
11%
60%
$1.36
12%
67%
$1.56
15%
67%
$1.72
10%
71%
$1.89
10%
72%
$0.32
$0.32
$0.36
$0.36
$0.38
$0.38
$0.40
$0.40
1,847
17.8%
1,931
18.4%
6,918
1.83
958
1,981
18.2%
1,984
18.2%
6,542
1.65
1,186
2,110
18.5%
1,908
16.7%
7,552
1.83
949
2,197
18.3%
2,022
16.8%
9,395
2.19
949
2,209
18.0%
2,248
18.3%
10,085
2.22
1,163
2,247
17.9%
2,427
19.4%
10,443
2.20
1,285
522
17.3%
545
18.0%
9,474
2.27
231
543
17.3%
459
14.7%
9,395
2.23
145
We believe TELUS will remain committed to its policity of increasing
annual dividends by 10%. Our estimates do not reflect the effect of entry
by a recapitalized fourth national wireless carrier.
We expect capex intensity to remain at ~18-18.5% in 2014 and
2015 due to increased wireless and wireline investment.
Other:
Capex
375
670
1,045
29.2%
1.8%
48.9%
7.4%
37.9%
5.4%
1,034
28.7%
2.4%
48.6%
7.1%
37.5%
5.6%
467
16.9%
567
20.6%
6,555
1.64
32
511
18.1%
487
17.2%
6,811
1.70
256
555
19.3%
480
16.7%
7,269
1.81
404
577
19.6%
374
12.7%
7,552
1.88
257
496
17.1%
581
20.1%
8,153
2.01
350
636
21.6%
437
14.8%
9,227
2.23
223
We expect TELUS to keep investing as long as
cash flows are increasing.
(1) Growth rates adjusted for small acquisitions and divestitures in F13 and adoption of IAS19 in 2013.
Subscriber figures in 000. Financial figures in C$ millions except per share data. Figures under Cdn GAAP prior to F11 and IFRS otherwise.
(2) 2014 EBITDA margins exhibit compression due to the negative EBITDA impact of the Public Mobile acquisition. 2015 margins expected to rebound once Public Mobile is absorbed.
(3) Growth rates do not include Public Mobile results.
(4) Payout ratio policy at 55%-65% through 2012 and 65%-75% in 2013 onward to reflect IAS 19 impact.
Source: Company reports; Scotiabank GBM estimates.
16-Oct-2014
Exhibit 29 - TELUS NAV
(C$ millions, except per share data)
Share Price
Consolidated EV/Cash EBIT Multiple
Consolidated EV/EBITDA Multiple
Consolidated P/E Multiple
FCF Yield (NTM, fully taxed)
FCF Yield (NTM, actual tax)
1-Year ROR
Current
$37.97
15.2 x
7.6 x
15.8 x
4.9%
4.9%
Current
EBITDA
Wireline 1
Wireless
Total Telecom
EV/EBITDA
1-Year Target
$37.00
13.9 x
7.2 x
14.3 x
5.7%
5.7%
1.9%
1-Year Target
Value
EV/EBITDA
Value
2013
2014E
2015E
2016E
Multiple
Value +
per Share
Multiple
Value +
per Share
1,384
2,634
4,018
1,469
2,750
4,219
1,542
2,916
4,458
1,630
3,044
4,674
5.92 x
8.50 x
9,032
24,493
33,525
$14.69
$39.84
$54.54
6.50 x
7.23 x
10,476
21,801
32,278
$17.23
$35.85
$53.08
-8.2
-$0.01
0.0
$0.00
33,516
$54.52
32,278
$53.08
10,175
0.0
$16.55
$0.00
10,809
0.0
$17.77
$0.00
Other
Tax Shields (discounted 25%)
Total Gross Asset Value
Less:
Total Net Debt (Cash) 2
Implied Holding Company Discount
0.0%
FD Shares Outstanding (M)
NET ASSET VALUE
0.0%
615
23,341
$37.97
608
21,469
$35.30
DCF
$39.37
Average of DCF and NAV
$37.33
1
Excludes pension interest expense and pension return on assets.
2
Includes working capital deficit.
+
Enterprise Values calculated using 12 month forward values
Source: Company reports; Scotiabank GBM estimates.
October 16, 2014
Quebecor Q3/14 Preview: Expect a Healthy
Quarter
Exhibit 30 - Q3/14 QBR Estimates
Q3/F14E
YoY
■ We maintain our $35.50 rating and Focus Stock rating.
On NTM estimates, QBR remains attractively valued at 6.8x
EV/EBITDA, 12.9x EV/cash EBIT and 6.7% FCF yield
(fully-taxed). We believe investors should be assured of
QBR’s financial discipline in its pursuit of the national
wireless opportunity. With healthy core cable performance
and an existing Quebec wireless segment that is experiencing
accelerated ARPU growth, we believe QBR provides strong
growth at an attractive valuation.
■ Overall, we expect a healthy quarter driven by steady
cable financial results and wireless performance. We
forecast consolidated revenue of $1.05B and EBITDA of
$376M, slightly above consensus on revenue but below on
EBITDA.
Subs Grw.
Basic Cable1
(1,000)
-2.0%
Digital Cable
14,000
1.7%
Internet
16,000
1.7%
0
-0.4%
Cable RGUs
15,000
0%
Wireless Subscribers
30,000
22%
Subscribers
Cable Telephony
Financials
Cable: Broadband Bundle Differentiation to Drive
Strong Subscriber Additions
■ Recently, QBR has promoted an $80/month triple play
bundle that has proven successful with subscribers. The
promotion includes basic TV, phone, 30 Mbps broadband,
Videotron’s OTT offering (Illico Web), and an in-home Wi-Fi
modem. The in-home Wi-Fi strategy is similar to CMCSA’s
objective of ensuring a best in class in-home Wi-Fi
experience. As the company previously indicated publicly,
July was a strong month with 3x the PSU adds compared to a
year ago. Since August and September are typically strong
seasonally, we estimate PSU addition will be approx. +15K.
On ARPU, the $80/month bundled promotion will likely
drive Q3 ARPU growth to similar levels as Q2 (1.6% YOY);
however, the impact should be offset by price increases
instituted in late Q1/14, recent price increases on broadband
of $1-$2/month, and pending price increases on the $80 triple
play bundle.
Wireless: ARPU Growth Expected to Accelerate
with Smartphone Take-Up
■ With the iPhone in its handset line-up during the back to
school period, we expect to see some incremental
subscriber net additions compared to the prior year (+30K
in Q3/14 vs. +27K in Q3/13). The volume growth does not
include the iPhone 6/6+ impact, which launched late in Q3
with limited supply. In addition to subscriber growth, we
believe a key revenue and margin driver will be higher
ARPUs driven by the increased penetration of smartphone
subscribers. We estimate QBR smartphone ARPU is approx.
$50, compared to current ARPU of approx. $42 (iPhone
ARPUs are closer to $70). Moreover, QBR’s recent LTE
launch in the summer, as well as its network sharing
agreement with Rogers, should help narrow any remaining
perceived network quality gap between QBR and the
incumbents. We believe this will help sustain long-term
subscriber growth towards well over 1M subscribers by 2018
and ARPU level towards $50.
Net Adds
Q3/F14E
YoY Grw.
Cable Operations (incl. Wireless)
704,628
3.1%
Wireless
72,346
25%
Cable Operations (excl. Wireless)
632,282
1.1%
News Media
174,785
-9.6%
Broadcasting (TVA)
105,256
-1.0%
Leisure & Entertainment
74,900
0%
Interactive
2
22,600
0%
(28,510)
n.m.
1,053,660
0.1%
Corporate
Revenue
Cable Operations (incl. Wireless) estimate
704,000
News Media estimate
164,000
Broadcasting (TVA) estimate
98,000
Leisure & Entertainment estimate
76,000
Interactive estimate
35,000
Consensus estimate
1,051,000
Cable Operations (includes Wireless)
News Media
339,758
3.2%
9,135
5%
Broadcasting (TVA)
14,559
-5%
Leisure & Entertainment
12,359
56%
2,600
0.0%
Interactive
2
Corporate
EBITDA
Consensus estimate
EPS (Diluted adjusted)
(2,376)
n.m.
376,035
3.9%
386,000
3
Capex
Consensus estimate
FCF (before w /c and div.)
$0.41
-5%
222,906
31%
169,000
16,964
-76%
$42.58
2.5%
$508
4%
Wireless metrics
ARPU ($)
CPGA/COA per sub ($)
Financials in C$000s except per share data.
Consensus estimates per FactSet as at Oct. 16, 2014.
1
2
3
Digital included in basic cable count.
Grow th rates adjusted for the sale of Nurun, w hich closed Sept. 2, 2014.
Grow th rate excludes $1.87/share negative impact in Q2F13 for loss on valuation and
translation of financial instruments and unusual items.
Source: Company reports; Scotiabank GBM estimates.
News Media: Consolidation of News Media and TVA
■ The two reporting segments will be consolidated for reporting purposes to reflect the
management structure. However, TVA remains public and results can still be analyzed
separately. In Q3, we expect News Media to remain challenged, with revenue decline of
-10%. However, with cost reduction, we estimate EBITDA will increase by about 5% YOY,
which could be conservative.
National Wireless Update
■ With the CRTC wireless wholesale hearing behind us, we believe QBR is in a wait and
see position. If the CRTC roaming decision is favorable (e.g., a mandated data roaming rate
below $0.01/MB), we believe QBR will solidify its plans with potential investors that are
waiting on the sidelines to recapitalize and consolidate into a stronger 4th operator in ON,
BC and AB. We still believe QBR is a key part of the puzzle since it can contribute
spectrum, capital and, more importantly, operational experience into the mix.
■ We believe QBR has and will continue to exhibit financial discipline. With a low
roaming rate and access to towers and spectrum, we believe QBR can be part of the 4th
operator consortium and ring-fence the national wireless investment from its core Quebec
business. In our view, this will preserve QBR’s capacity to buy out CDP’s 25% interest in
Quebecor Media over the next few years.
Exhibit 31 - QBR Summary Model
We expect Videotron to focus on ARPU (pricing and usage) to drive
Core Cable revenue growth, driven by product upgrades and pricing
power. We expect Core Cable RGU pressure will be more than offset
by ARPU.
Year ending December 31
Operational Data
Basic Subs
Net Adds
Penetration
ARPU ($/sub/month)
Digital Subs
Net Adds
Penetration of Basic
Internet Subs
Net Adds
Penetration of Basic
ARPU ($/sub/month)
Digital Phone Subs
Net Adds
Penetration of Addressable Homes
Penetration of Basic
Revenue-generating units (TV, Internet and phone)
RGU net adds
RGU growth %
Revenue/RGU growth %
Wireless Subs
Net Adds
Penetration of Basic
Penetration of Covered POPs
ARPU ($/sub/month)
ARPU growth %
2012
2013
2014E
2015E
2016E
Q1/F13
Q2/F13
Q3/F13
Q4/F13
Q1/F14
Q2/F14
Q3/F14E
1,855
(7)
68.7%
$48.56
1,485
84
80.0%
1,388
55
74.8%
$47.54
1,265
60
46.8%
68.2%
4,508
108
2.5%
3.1%
403
112
21.7%
5.2%
$41.28
-6.8%
1,825
(30)
66.5%
$49.42
1,531
47
83.9%
1,418
31
77.7%
$48.67
1,286
21
46.9%
70.5%
4,530
22
0.5%
1.4%
503
101
27.6%
6.2%
$40.75
-1.3%
1,790
(35)
64.3%
$50.19
1,557
25
87.0%
1,442
24
80.6%
$50.55
1,276
(10)
45.8%
71.3%
4,508
(21)
-0.5%
1.9%
611
108
34.2%
7.5%
$41.40
1.6%
1,738
(53)
61.5%
$50.44
1,577
20
90.7%
1,472
30
84.7%
$53.83
1,250
(26)
44.2%
72.0%
4,460
(49)
-1.1%
2.3%
709
97
40.8%
8.6%
$42.23
2.0%
1,686
(52)
58.7%
$50.44
1,589
13
94.3%
1,507
35
89.4%
$57.87
1,215
(35)
42.3%
72.1%
4,408
(52)
-1.2%
2.8%
806
97
47.8%
9.6%
$43.07
2.0%
1,849
(6)
68.2%
$48.95
1,500
16
81.1%
1,397
10
75.6%
$47.49
1,274
9
47.0%
68.9%
4,521
13
2.6%
0.1%
421
18
22.8%
5.4%
$40.48
-2.6%
1,832
(17)
67.3%
$49.15
1,502
2
82.0%
1,395
(2)
76.2%
$48.70
1,275
1
46.8%
69.6%
4,503
(18)
2.3%
1.5%
451
30
24.6%
5.7%
$40.60
-1.7%
1,830
(2)
67.0%
$49.25
1,518
16
82.9%
1,408
13
76.9%
$49.01
1,281
7
46.9%
70.0%
4,520
17
1.1%
1.7%
478
27
26.1%
6.0%
$41.55
0.5%
1,825
(5)
66.5%
$50.39
1,531
14
83.9%
1,418
10
77.7%
$49.51
1,286
5
46.9%
70.5%
4,530
10
0.5%
2.4%
503
25
27.6%
6.2%
$40.49
-1.4%
1,811
(14)
65.9%
$50.02
1,533
1
84.6%
1,419
1
78.4%
$49.81
1,280
(6)
46.6%
70.7%
4,511
(19)
-0.2%
2.7%
522
18
28.8%
6.4%
$40.13
-0.8%
1,794
(17)
65.0%
$49.74
1,530
(3)
85.3%
1,416
(4)
78.9%
$50.44
1,276
(4)
46.2%
71.1%
4,486
(25)
-0.4%
1.4%
551
30
30.7%
6.8%
$41.51
2.2%
1,793
(1)
64.6%
$49.87
1,544
14
86.1%
1,432
16
79.8%
$50.72
1,276
46.0%
71.2%
4,501
15
-0.4%
1.6%
581
30
32.4%
7.1%
$42.58
2.5%
Q4/F14E
1,790
(3)
64.3%
Cable/Wireless
$51.27
subscribers: We
1,557
increased our
13
subscriber
estimates
87.0%
in Q3/Q4 to reflect
1,442
volume strength from
11 QBR's recent $80/mth
80.6% triple play promotions.
$51.36
1,276
45.8%
71.3%
4,508
8
-0.5%
1.9%
611
30
34.2%
7.5%
$41.50
2.5%
Wireless ARPU: We increased our wireless APRU
estimates in 2H14 to reflect the positive impact of the
iPhone, as well as the launch of 4GLTE.
Revenue
Cable and Telecom
News Media
Broadcasting
Other
Total Revenue
Growth (1)
Cable Growth
2,598
876
458
318
4,249
0.8%
6.9%
2,712
784
459
322
4,277
0.8%
4.4%
2,808
715
451
278
4,253
0.5%
3.6%
2,914
679
449
187
4,228
1.7%
3.7%
3,012
654
454
188
4,309
1.9%
3.4%
661
185
114
67
1,027
-1.1%
2.3%
675
201
115
72
1,063
0.6%
3.5%
683
193
106
81
1,064
2.7%
5.1%
693
205
124
102
1,123
0.5%
3.7%
692
169
109
67
1,037
1.0%
4.7%
695
187
114
74
1,069
0.6%
3.1%
705
175
105
69
1,054
0.1%
3.1%
717
185
123
68
1,093
0.3%
3.4%
EBITDA
Cable and Telecom
News Media (excl. restr.)
Broadcasting
Other
Total EBITDA
Overall Margin (2)
EBITDA Growth (1,2)
Cable Margin (2)
Cable Growth (2)
1,204
105
33
39
1,381
32.4%
5.6%
46.4%
11.5%
1,285
98
45
24
1,452
34.0%
4.0%
47.4%
5.3%
1,343
107
37
25
1,511
35.5%
4.7%
47.8%
4.9%
1,415
101
34
13
1,563
37.0%
4.1%
48.6%
5.4%
1,484
96
37
12
1,629
37.8%
4.2%
49.3%
4.9%
313
15
(4)
1
325
31.9%
4.2%
47.3%
2.5%
320
29
17
5
372
35.0%
5.5%
47.5%
5.2%
329
9
15
10
363
34.2%
5.8%
48.2%
8.2%
322
45
17
8
391
34.8%
4.8%
46.5%
5.2%
335
15
(11)
7
347
33.4%
5.6%
48.4%
7.0%
331
35
17
3
386
36.1%
5.4%
47.6%
5.0%
340
9
15
13
376
35.7%
3.9%
48.2%
3.2%
337
47
16
2
403
36.9%
4.2%
47.0%
4.6%
164
169
170
170
168
168
Cable/wireless: core cable growth of 3-4%, plus improving
wireless EBITDA should help drive Videotron EBITDA growth of
~5%% p.a. in 2014 and 2015.
Depr. & Amort.
EBIT
Interest, taxes, pref. div., etc.
600
666
675
684
689
163
170
795
786
836
880
940
162
208
194
221
177
216
208
235
606
579
599
623
640
125
155
144
155
128
150
154
168
Net Income to Common (2)
189
207
236
257
300
38
53
50
67
49
66
54
67
Average shares (FD, millions)
132
136
144
142
141
151
124
124
145
144
144
143
143
$1.43
$1.52
$1.65
$1.80
$2.12
$0.25
$0.43
$0.40
$0.46
$0.34
$0.46
$0.38
$0.47
144
15
12
170
16.6%
155
15.1%
4,645
3.6 x
123
15
15
152
14.3%
220
20.7%
4,841
3.3 x
137
16
17
170
16.0%
193
18.2%
4,751
3.3 x
112
37
11
160
14.2%
216
19.2%
4,584
2.9 x
141
25
16
182
17.6%
164
15.8%
4,681
3.4 x
113
39
12
164
15.4%
222
20.7%
4,839
3.1 x
119
90
14
223
21.2%
143
13.6%
4,728
3.1 x
120
48
15
184
16.8%
209
19.1%
4,639
2.9 x
Adj. EPS (C$) (4)
Videotron capex estimates include $160M of wireless LTE
investment in 2014.
Other:
Capex - cable (5)
Capex - wireless
Capex (ex-cable and wireless)
Capex - total
Capex intensity - total
Cash EBIT (3)
Cash EBIT margin
Net Debt
Net Debt / EBITDA (x)
QBR Equity FCF
QBR Equity FCF/share (4)
QBR Equity FCF (fully taxed)
QBR Equity FCF/share (fully taxed) (4)
644
104
58
805
19.0%
555
13.1%
4,566
3.3 x
154
$1.16
100
$0.76
516
83
53
652
15.2%
787
18.4%
4,584
3.2 x
167
$1.23
(250)
-$1.84
493
202
57
753
17.7%
738
17.3%
4,639
3.1 x
191
$1.55
177
$1.44
Subscriber figures in 000. Financial figures in C$ millions except per share data.
Q1-Q3/2012 segmented revenue and EBITDA are estimates to reconcile with annual restated figures
(1) Adjusted for acquisitions
(2) Excludes one-time items (i.e.: Part II fee recovery) and stock comp expense/recoveries.
(3) Includes News Media severance expense and excludes stock comp expense.
(4) Figures for 2014 and beyond are based on basic shares outstanding excluding the convertible impact.
(5) Excludes $46M in 700 MHz spectrum payment
Source: Company reports; Scotiabank GBM estimates.
516
99
51
667
15.8%
884
20.9%
4,415
2.8 x
233
$1.91
233
$1.91
550
111
50
711
16.5%
918
21.3%
4,109
2.5 x
286
$2.37
286
$2.37
FCF lower in 2014 due to 4GLTE. 2015 FCF
includes $50M spending in Quebec City arena.
17-Oct-2014
Cable/Wireless: The
revenue mix shift to
broadband and
positive operating
leverage of wireless
are driving margin
expansion.
News Media: Our
News Media estimates
reflect management's
effective removal of
overhead.
Other: Estimates
reflect the sale of
Nurun.
Exhibit 32 - QBR NAV
Current
$27.50
6.8 x
13.3 x
6.7%
12.9 x
6.6%
C$ thousands, except per share data
Share Price
Prop. EV/EBITDA Multiple
P/E Multiple
FCF Yield (NTM)
Prop. EV/cash EBIT Multiple
FCF Yield (NTM) fully taxed
1-Year ROR
1-Year Target
$35.50
6.9 x
14.7 x
6.4%
12.4 x
6.4%
29.5%
Current
Shares
EBITDA
Cable (Videotron, including wireless)
2012
2013
2014E
2015E
2016E
1,213,400
1,284,800
1,342,636
1,414,580
1,484,024
Owned
EV/EBITDA
+
1-yr Target
Value
EV/EBITDA
per share
Multiple
Value +
per share
6.50 x
9,553,995
$66.98
Multiple
Value
6.56 x
9,177,466
$63.82
Value
Newspapers 1
81,100
81,700
86,159
88,535
86,617
4.0 x
352,198
$2.45
4.0 x
348,035
$2.44
Other (Leisure & Entertainment + Portals)
32,800
24,000
15,365
13,076
11,753
5.0 x
67,719
$0.47
5.0 x
60,117
$0.42
35,807
45,300
36,962
34,188
36,777
5.1 x
$1.24
($0.09)
$1.33
4.5 x
$8.05
178,800
(12,556)
191,356
$8.05
155,227
(29,722)
184,950
$1.09
($0.21)
$1.30
1,359,707
1,442,800
1,490,512
1,552,810
1,623,082
6.3 x
9,776,183
$67.98
6.3 x
10,117,375
$70.93
4,291,100
$29.84
3,889,326
$27.27
5,485,083
$38.14
6,228,049
$43.67
92,999
$0.65
5,392,084
TVA gross asset value
Less: Net debt (cash) + w/c deficit (surplus)
TVA net asset value
QMI Cons. Gross Asset Value 1
23.8 M
Less: QMI Cons. Net Debt + W/C Deficit
QMI Equity
Less: TVA Minority Interest
11.6 M
$8.05
QBR and CDP share of QMI Equity
Less: CDP Minority Interest 2
QBR share of QMI Equity
Less: QBR Corporate Debt
QBR Corporate
3,400
(7,000)
10
(2,432)
(3,910)
5.5 x
92,999
$0.65
$37.50
6,135,050
$43.01
1,326,453
$9.22
1,509,222
$10.58
4,065,631
$28.27
4,625,828
$32.43
100,500
$0.70
100,500
$0.70
(10,631)
($0.07)
(19,844)
($0.14)
FD Shares Outstanding ('000)
QBR Net Asset Value
$8.05
5.5 x
143,800
3,954,500
$27.50
142,631
4,505,483
Average NAV and DCF
$31.59
35.28
October 16, 2014
+
Enterprise Value calculated using 12 month forward values
1
Includes News Media severance expense.
2
24.6% of QMI held by CDP
Source: Company reports; Scotiabank GBM estimates.
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
BCE Inc. (BCE-T)
New
Adj. EPS14E: $3.10
Adj. EPS15E: $3.20
1-yr fwd: 7.2x NTM EBITDA; 6.5% NTM FCF yield (fullytaxed); 12.3x NTM EV/Cash EBIT
Old
Adj. EPS14E: $3.12
Adj. EPS15E: $3.21
1-yr fwd: 7.1x NTM EBITDA; 6.6% NTM FCF yield (fullytaxed); 12.3x NTM EV/Cash EBIT
Valuation: 1-yr fwd: 7.2x NTM EBITDA; 6.5% NTM FCF yield (fully-taxed); 12.3x NTM EV/Cash EBIT
Key Risks to Price Target: Faster acceleration in access line loss and higher wireline capex to compete on broadband.
Cogeco Cable Inc. (CCA-T)
New
Adj. EPS14E: $4.90
Adj. EPS15E: $5.37
1-yr fwd: 6.3x NTM EBITDA; 9.4% NTM FCF yield (fullytaxed); 11.7x NTM EV/Cash EBIT
Old
Adj. EPS14E: $4.89
Adj. EPS15E: $5.36
1-yr fwd: 6.4x NTM EBITDA; 9.2% NTM FCF yield (fullytaxed); 11.3x NTM EV/Cash EBIT
Valuation: 1-yr fwd: 6.3x NTM EBITDA; 9.4% NTM FCF yield (fully-taxed); 11.7x NTM EV/Cash EBIT
Key Risks to Price Target: Cdn. IPTV and fiber expansion and content costs; acquisitions
Comcast Corporation (CMCSA-Q)
Valuation: 1-yr fwd: 8.2x NTM EV/EBITDA; 5.7% NTM FCF yield (fully-taxed); 11.7x NTM EV/Cash EBIT
Key Risks to Price Target: U.S. economic slowdown; OTT cord-cutting; content costs; telco/satellite competition
Glentel Inc. (GLN-T)
Valuation: 9x Forward Cash P/E
Key Risks to Price Target: Slowing wireless market growth, increasing retail competition
Manitoba Telecom Services Inc. (MBT-T)
Valuation: 1-year fwd: 6.4x NTM EBITDA, 4.6% NTM FCF yield (fully-taxed); 15x NTM EV/Cash EBIT
Key Risks to Price Target: Pension funding, Further Allstream deterioration
Quebecor Inc. (QBR.B-T)
New
EPS14E: $1.65
EPS15E: $1.80
Old
EPS14E: $1.70
EPS15E: $1.91
Valuation: 1-yr fwd: 6.9x NTM EBITDA; 6.4% NTM FCF yield (fully-taxed); 12.4x NTM EV/Cash EBIT
Key Risks to Price Target: Wireless execution; IPTV competition; Newspaper/TV cyclicality
Rogers Communications Inc. (RCI.B-T)
New
Adj. EPS14E: $3.02
Adj. EPS15E: $3.03
1-yr fwd: 7.0x NTM EBITDA; 6.5% NTM FCF yield (fullytaxed); 13x NTM EV/Cash EBIT
Old
Adj. EPS14E: $3.08
Adj. EPS15E: $3.12
1-yr fwd: 6.9x NTM EBITDA; 6.6% NTM FCF yield (fullytaxed); 12.8x NTM EV/Cash EBIT
Valuation: 1-yr fwd: 7.0x NTM EBITDA; 6.5% NTM FCF yield (fully-taxed); 13x NTM EV/Cash EBIT
Key Risks to Price Target: Wireless competition (from both incumbents and new entrants)
Shaw Communications Inc. (SJR.B-T)
New
$30.00
Adj. EPS15E: $1.74
1-yr fwd: 8.4x NTM EV/EBITDA; 4.5% NTM FCF yield (fullytaxed); 15.1x NTM EV/Cash EBIT
Old
$29.00
Adj. EPS15E: $1.77
1-yr fwd: 8.1x NTM EV/EBITDA; 4.4% NTM FCF yield (fullytaxed); 14.5x NTM EV/Cash EBIT
Valuation: 1-yr fwd: 8.4x NTM EV/EBITDA; 4.5% NTM FCF yield (fully-taxed); 15.1x NTM EV/Cash EBIT
Key Risks to Price Target: Irrational competitive behaviour by Shaw or TELUS.
TELUS Corporation (T-T)
New
EPS14E: $2.32
1-yr fwd: 7.2x NTM EBITDA; 5.7% NTM FCF Yield (FullyTax); 14.3x NTM EV/Cash EBIT
Old
EPS14E: $2.30
1-yr fwd: 7.3x NTM EBITDA; 5.6% NTM FCF Yield (FullyTax); 14.2x NTM EV/Cash EBIT
Valuation: 1-yr fwd: 7.2x NTM EBITDA; 5.7% NTM FCF Yield (Fully-Tax); 14.3x NTM EV/Cash EBIT
Key Risks to Price Target: Wireless competition; Wireline business deterioration
AT&T Inc. (T-N)
Valuation: 14.4x NTM EPS 1-year forward; 11.7x NTM EV/Cash EBIT; 6.0x NTM EV/EBITDA; 6.2% FCF Yield (Fully-taxed)
Key Risks to Price Target: Cable/wireless competitive intensity; pension funding; U.S. economy
Time Warner Cable Inc. (TWC-N)
Valuation: 2.875x exchange ratio of 1-year forward CMCSA target price ($65)
Key Risks to Price Target: U.S. economy; cord-cutting; programming costs
Verizon Communications Inc. (VZ-N)
Valuation: 1-yr fwd: 7.0x NTM EV/EBITDA; 7.2% NTM FCF yield (fully-taxed); 11.0x NTM EV/Cash EBIT
Key Risks to Price Target: U.S. economy; pension funding; VZW cash to support dividend
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
134
Company Comment
Monday, October 20, 2014, Pre-Market
(IPL-T C$34.90)
Inter Pipeline Ltd.
Corridor and Continuity
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
[email protected]
Dario Neimarlija, CA, CFA - (416) 863-2852
(Scotia Capital Inc. - Canada)
Lukasz Michalowski, MBA - (416) 863-5915
(Scotia Capital Inc. - Canada)
Rating: Sector Perform
Target 1-Yr:
C$38.00 ROR 1-Yr:
Risk Ranking: Medium
Valuation: 5.3% 2015E Free Cash Yield and 17.5x 2015E EV/EBITDA
12.9%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.41
$1.29
3.7%
Key Risks to Target: Commodity prices; Frac spreads; Throughput volumes; FX; Quasi-utility ROE
Event
Pertinent Revisions
■ We hosted IPL management for investor meetings.
New
Old
Target:
1-Yr
$38.00
$36.00
New Valuation:
5.3% 2015E Free Cash Yield and 17.5x
2015E EV/EBITDA
Old Valuation:
5.6% 2015E Free Cash Yield and 16.9x
2015E EV/EBITDA
Implications
■ The investor meetings reinforced the continuation of a management and
governance approach focused on low-risk long-life cash flow and
reliable dividend growth. In addition, the recent cancellation of PPL's
Cornerstone Pipeline causes us to re-visit our thesis on IPL with a more
positive bias.
■ With all of the change in the company - from governance/structure to
senior management - it is clear IPL is seeking to branch out into new
related businesses. There is potential for a renewed focus on gas/NGL
infrastructure, in our view. But new CEO Chris Bayle made it clear new
ventures would not compromise risk.
■ Meanwhile the outlook for its existing assets has improved. In
particular, we were concerned that competition from PPL on diluent
pipelines would impact post-2015 growth on IPL's diluent pipeline,
Polaris. Competition is far from absent. However, new business will
likely just be split with ENB only.
Recommendation
■ IPL has garnered a premium valuation for its low-risk assets and growth
track record. We see a continuation of that premium now. Whether the
stock will outperform likely depends on any success in opening Corridor
Pipeline to third parties. We are maintaining our Sector Perform rating
but with a more positive bias, as supported by our $2 TP increase to $38.
Qtly CFPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.40 A
$0.41 A
$0.52
(FY-Dec.)
Free Cash Flow/Share
Price/Earnings
EV/EBITDA
Payout Ratio
EBITDA (M)
Debt/EBITDA
Tot. Debt/(Tot.Dbt+Eq.)
Enterprise Value (M)
Q2
$0.38 A
$0.39 A
$0.53
2012A
$1.38
23.3x
16.3x
76%
$584
5.3x
0.64
$9,514
Q3
$0.43 A
$0.49
$0.58
2013A
$1.46
24.6x
19.1x
80%
$620
6.4x
0.62
$11,820
Q4
$0.44 A
$0.51
$0.56
2014E
$1.60
31.1x
21.4x
82%
$740
6.2x
0.60
$15,863
Year
$1.65
$1.81
$2.20
$2.27
P/CF
15.6x
19.3x
15.9x
15.3x
2015E
$2.00
24.9x
16.5x
75%
$1,006
4.9x
0.60
$16,554
2016E
$2.07
23.1x
15.5x
76%
$1,071
4.6x
0.59
$16,636
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$11,329
$4,276
$15,604
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
325
318
135
Corridor and Continuity
■ The recent sharp correction in energy reminds us that in the end, all of the
midstream/pipeline companies have exposure to oilsands growth. And that growth can never
be entirely certain with so much volatility in world oil prices. At the same time, however, the
appetite for steady growing dividends sustains as bond yields remain stuck at their lows. IPL
is among a handful of the midstream companies that have sufficient duration of contracts,
strength of counter-parties, and longevity of assets to hold dividends and likely even raise
them in challenging environments.
■ Long-term contracts at oilsands pipelines Cold Lake/Polaris (FCCL, Imperial Oil, CNRL)
and Corridor (Shell, Chevron, and Marathon) will make up ~50% of total company EBITDA
next year. These cash flows are as “bullet-proof” as it gets in the energy infrastructure
business. Credit risk is minimal with the super-majors and there is no volume sensitivity to
cash flow on the base business. Even in a draconian oil environment, we believe this cash
flow would be protected, as would much of the rest of the asset-backed earnings.
■ With that backstop, the question at IPL is how best to grow off of that platform. In what we
view as a significant positive development for IPL, cancellation of PPL’s Cornerstone diluent
line makes growth in the existing assets a lot easier to find. Polaris will have 660k b/d of
spare diluent capacity in 2016 and can attract volumes at low cost. In our view, ENB is now
the only other true competitor for those volumes (Norlite). And over the next five years,
barring a draconian oil environment, there is enough volume to make both Polaris and
Norlite winners.
■ Identifying which specific projects will contract with Polaris and which with Norlite is a
challenging task but we have attempted a first cut at it. Distance from the pipeline, in-service
timing of the oilsands project and existing producer contract relationships will likely drive
who wins which business. In a preliminary analysis, we calculate that Polaris should win
~240k b/d of volume. Using recent contract announcements as a benchmark, we estimate this
volume could generate ~$170M in annual EBITDA for IPL over the 2016-2020 period at a
capital cost of about ~$1.1B.
Exhibit 1 –Potential Polaris Upside Opportunities
Project
Owner
Expected
Diluent
Shipments
(bpd)
Hangingstone
Expansion *
AOC
12,000
Phase 2
2017
Application
9,000
Phase 3
2018
Application
Hangingstone
Expansion *
JACOS
Sunrise - Phase II *
Husky
Kearl *
Kirby North
Imperial Oil
CNRL
Phase, If
Applicable
Expected InService Date
Project's
Regulatory
Status
3,000
2016
Construction
21,000
Phase 2A
2018
Application
21,000
Phase 2B
2020
Application
24,000
Phase 3
2020
Approved
13,500
Debottleneck
TBD
Approved
12,000
KN1
2017
Approved
18,000
KN2
2022
Application
2018
Application
Grouse
CNRL
15,000
Surmont Phase II & III
Conoco
Phillips
35,400
Phase II
2015
Construction
40,500
Phase III
2020+
Announced
TBD
Approved
Caribou
Husky
3,000
Taiga
OSUM
6,900
Phase 1
2018
Approved
6,600
240,900
Phase 2
2020
Approved
TOTAL
Existing Customer Relationship & Other
Estimated Estimated
Estimated Distance Capex
EBITDA
for New Laterals (km) ($M)
($M)
Strong existing customer relationship - IPL already serving
AOC on the existing 12" pipeline. IPL also holds an exclusive 110 - 130
right to provide future diluent to this project.
$182
$21
20
$26
$3
120 - 130
$364
$38
Strong existing customer relationship - IPL already serves
Kearl on the existing 12" pipeline. IPL will likely need to
extend Polaris north of Narrows Lake.
10
$325
$27
Strong existing customer relationship - IPL already serves
CNRL on both, Cold Lake and Polaris systems. Very close to
new Polaris Pipeline. Already serving Kirby project's diluent
and bitumen needs.
30
$51
$16
Strong existing customer relationship - IPL already serves
CNRL on both, Cold Lake and Polaris systems. Very close to
new Polaris Pipeline. Already serving Kirby project's diluent
and bitumen needs.
10 - 20
$17
$8
IPL is already serving bitumen and diluent needs of the FCCL
partnership. Phase II volumes required soon. No significant 10
infrastructure to compete with IPL on this phase.
$39
$41
No existing customer relationship exist. However, due to lack
of potential competing pipelines, IPL may be the only shipper 10
with the access to this project for diluent delivery.
$19
$3
$51
$12
$1,075
$170
Strong existing customer relationship - already serving
JACOS on the existing 12" pipeline. May need to extend
Polaris north of Narrows Lake.
Strong existing customer relationship - IPL already serves
Phase I on the existing 12" pipeline. ENB expected to have
full infrastructure to this area through Norlite. However, IPL
already serves Sunrise Phase 1.
Existing customer relationship exists through Orion project.
30
Due to lack of potential competing pipelines, IPL may be the
only shipper with the access to this project for diluent delivery.
Source: Company reports; Scotiabank GBM estimates; Government of Alberta.
* Capital expenditures on these projects have been prorated based on volume contribution by each project.
Assume 30% of bitumen production is diluent volume requirement. Pipeline extensions and lateral sizes based on volume requirements. Capital costs on pipelines based on assumed $110k cost
per diameter inch-km.
136
■ Even if the rest of the IPL businesses do not grow at all (or shrink) over the next five years,
the Polaris organic growth should result in ~4% annual free cash flow per share growth.
Assuming the other businesses are flat is probably not a bad starting point on a net basis.
While Conventional Pipeline is clearly growing (recent $100M Viking expansion for ~$30M
in annual EBITDA), our long-held view that the NGL extraction business is in secular
decline remains unchanged. There might be some bounce-back in offshore storage –
management indicated that “green shoots” are starting to appear – but we assume it stagnates
for conservatism and due to uncertainty in the European oil markets that business serves.
■ With a solid mid-single digit growth rate and a relatively low-risk business mix, IPL will
likely sustain its premium trading multiple. But unless the growth rate accelerates beyond
that level, we doubt the stock will outperform peers that are either faster-growing and/or
cheaper on free cash yield (ENB, KEY, PPL). A change in the contract structure at Corridor
Pipeline is probably the greatest opportunity for accelerated growth and outperformance, in
our opinion.
■ When Corridor was constructed for Shell, it had much grander oilsands development plans
and the pipeline was built with 1.4M b/d of capacity and an exclusive-use right. Today, the
current throughput remains at only 325k b/d and contract volumes are stuck at 465k b/d. If
Shell were to allow third-party shippers onto the line, we believe it could result in a windfall
for IPL. Not only would revenues rise, but potentially the natural cash-flow decline (about
$25M annually) arising from the cost-of-service tolling arrangement could be eliminated.
With so much room on the pipeline, Shell’s decision to allow third-party volumes or not
probably depends more on service and product quality (co-mingling) than it does on the
availability of capacity.
■ If a new deal with Corridor shippers materializes, IPL probably won’t have to do any
acquisitions or diversify its business to achieve premium growth in this decade. But should
any significant business diversification occur, it would likely focus in gas/NGL
infrastructure. Two primary options for achieving this diversification are: partnering with a
major producer as its infrastructure (particularly gas processing) provider of choice; or,
acquiring a competitor in Western Canadian NGL infrastructure such as Keyera or Plains All
American. Our preliminary view is that acquiring is advantageous because duplicating
particularly certain existing fractionation/storage/pipeline assets in Alberta is virtually
impossible (not to mention IPL is less expert in the area than its peers).
■ Whichever path is chooses, it appears IPL shareholders can expect the same approach to risk
management and value creation as followed by the previous management. New CEO Chris
Bayle appeared appropriately open to extension into new activities but emphasised continuity
in maintaining a focus on asset-backed cash flow and steady dividend growth. As such,
though we are maintaining our Sector Perform rating (premium valuation), it is with a more
positive bias and also supported by a $2 target price increase to $38 which implies a solid
total return still from current levels.
137
Exhibit 2 - Inter Pipeline Ltd. Financial Statement Summary
Earnings and per share data ($M)
2013
2014E
2015E
2016E
EBITDA by Segment
Oil Sands
NGL Liquids
Conventional
Bulk Liquid Storage
Corporate & Other
Total EBITDA
$264
$171
$175
$74
($64)
$620
$362
$167
$200
$80
($69)
$740
$626
$138
$220
$82
($60)
$1,006
$691
$128
$232
$81
($61)
$1,071
Depreciation and amortization
Financing charges
Other
Sub-total other expenses
Income before income taxes
Provision for income taxes
Net (loss) income
Adjustments
Adjusted net income / (loss)
$127
$92
$13
$231
$388
$87
($47)
$358
$311
$151
$86
($3)
$235
$505
$127
$378
($2)
$376
$177
$153
$0
$330
$676
$169
$507
$0
$507
$179
$154
$0
$334
$738
$184
$553
$0
$553
Adjusted net income / (loss), net of NCI
$300
$358
$466
$504
Net income / (loss) per Share, net of NCI
Adjusted diluted
Weighted Avg. Shares Outstanding
Adjusted EBITDA, net of NCI
$1.05
285.9
$603
$1.12
319.6
$714
$1.40
332.6
$964
$1.51
333.9
$1022
Summary Cash flow Statement ($M)
Net Income
Depreciation & Amortization
Other
Operating Activities
2013
($47)
$127
$389
$469
2014E
$378
$151
$65
$595
2015E
$507
$177
$88
$772
2016E
$553
$179
$76
$808
($1,757)
$203
($1,554)
($1,301)
$3
($1,298)
($675)
$0
($675)
($316)
$0
($316)
$716
$0
($111)
$0
($496)
$0
($18)
$65
$47
$13
$47
$61
($14)
$61
$46
($3)
$46
$43
81%
82%
75%
76%
Balance Sheet ($M)
Cash
Other Current Assets
PP&E
Intangibles & Goodwill
Other Assets
Total Assets
2013
$47
$293
$6,700
$618
$0
$7,658
2014E
$61
$200
$7,945
$611
$0
$8,817
2015E
$46
$200
$8,491
$611
$0
$9,348
2016E
$43
$200
$8,650
$611
$0
$9,505
Current Liabilities
Long Term Debt
Other Liabilities
Total Liabilities
Total Equity
Total Liabilities and Equity
$2,249
$2,346
$679
$5,273
$2,384
$7,658
$2,242
$2,838
$738
$5,818
$2,999
$8,817
$2,235
$3,188
$656
$6,079
$3,268
$9,348
$2,235
$3,188
$732
$6,155
$3,349
$9,505
PP&E
Other investing activities
Investing activities
Financing activities
Effect of foreign currency translation
Change in year-end cash
Cash, beginning of year
Cash, end of year
Payout ratio after sustaining capital (%)
Source: Company reports; Scotiabank GBM estimates.
$1,064
$3
138
Company Comment
Friday, October 17, 2014, Pre-Market
(PDN-T C$0.33)
(PDN-AX A$0.33)
Paladin Energy Ltd.
Survival Mode Continues
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: Speculative
Valuation: 0.5x NAV
Carl Chen - (416) 863-7184
(Scotia Capital Inc. - Canada)
Christine Munroe, CPA, CA - (416) 863-5907
(Scotia Capital Inc. - Canada)
Target 1-Yr:
C$0.55
ROR 1-Yr:
69.2%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.00
C$0.00
0.0%
Key Risks to Target: Uranium S/D; uranium prices; F/X rates; geopolitical risk
Event
■ PDN released its Q1/15 activities report.
Implications
■ While spot rose by 6% in the quarter, PDN's realized price of $31/lb is
almost 20% below the previous quarter, and well below our forecast.
The swing is due to some defined-priced contracts in Q4/14 that were
not realized in Q1/15. We expect higher realized prices next quarter.
■ Guidance for F2015 has not deviated from 5.4 Mlb to 5.8 Mlb. The
threshold price for restarting KM production was lowered to a range
from $70/ to $75/lb versus $75/lb last communicated. We maintain a
view that ~$60/lb will be sufficient to see the mine back in business.
■ PDN remains in survival mode with high cash costs and debt overhang.
They can't ramp up production as LHM is operating at a full capacity,
and they don't have the capital to do the next expansion. It's also
probably difficult to negotiate down their debt further.
Recommendation
■ We maintain our view PDN will move independently to change in spot
and term uranium, at least until there is a verifiable improvement to the
liquidity of these markets. While PDN's higher cost profile offers
investors much better recovery torque than other producers, we're not
convinced the market is ready to recover just yet. Therefore, we remain
on the sidelines at a Sector Perform rating.
Qtly Adj. EPS (FD)
2013A
2014A
2015E
2016E
Q1
$-0.05 A
$-0.04 A
$-0.02
$-0.01
(FY-Jun.)
Uranium Production (M lb)
Spot Uranium Price ($/lb)
Term Uranium Price ($/lb)
Realized Uranium Price ($/lb)
Cash Cost ($/lb)
Reserves & Resources (M lb)
Cash+Equivalents (M)
Q2
$-0.18 A
$0.02 A
$-0.01
$-0.01
Q3
$-0.06 A
$-0.02 A
$-0.01
$-0.01
Q4
$-0.21 A
$-0.03 A
$-0.01
$0.00
Year
$-0.50
$-0.07
$-0.06
$-0.03
P/E
n.m.
n.m.
n.m.
n.m.
2012A
6.9
$52
$64
$55
$34
638.7
$112.1
2013A
8.3
$36
$56
$50
$30
616.8
$78.1
2014A
7.9
$34
$47
$38
$26
584.5
$88.8
2015E
5.3
$34
$47
$36
$27
2016E
5.5
$42
$54
$42
$24
$41.2
$0.0
BVPS15E: $0.31
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
C$374
$637
C$1,091
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
1,152
1,082
139
Exhibit 1 – PDN – Q1/15 Operational Highlights
Actual
Q1/15
Quarterly results
GBM Est.
Q1/15E
Actual
Q4/14
%∆
Uranium
Spot Uranium Price
Realized Uranium Price
$/lb
$/lb
Total Sales Volume
Total Production Volume
000 lb
000 lb
Langer Heinrich Mine
Cash Operating Costs
Average Gross Margin
Gross Margin As %
$/lb
$/lb
%
Production Volume
000 lb
Kayelekera Mine
Cash Operating Costs
Average Gross Margin
Gross Margin As %
$/lb
$/lb
%
-
$31.00
$4.00
11%
-
Production Volume
000 lb
-
-
-
Overall
Revenues
Adj. EBITDA
Adjusted EPS
Gross Profit
Gross Margin as %
$M
$M
$/lb
$M
%
Actual
Q1/14
%∆
%∆
$31.17
$31.16
$31.00
$35.00
1%
-11%
$29.31
$38.20
6%
-18%
$36.00
$41.38
-13%
-25%
1,250
1,027
1,150
878
9%
17%
1,812
1,601
-31%
-36%
1,673
2,044
-25%
-50%
1,027
$39.0
-
$29.00
$6.00
17%
1,170
$40.7
-$5.5
-$0.02
-$6.5
-16%
-
-12%
-4%
-
$31.20
$7.00
18%
1,339
$44.70
($6.50)
-17%
262
$69.5
-$1.7
-$0.03
-$37.4
-54%
-
-23%
-
-
-44%
-
$28.00
$13.38
32%
1,429
$39.30
$2.08
5%
615
-
-28%
-
-
$69.4 -44%
-$3.8
-$0.04
-$14.9
-21%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
140
Intraday Flash
Friday, October 17, 2014 @ 10:36:25 AM (ET)
(TMM-T C$1.41)
(TGD-A US$1.25)
Timmins Gold Corp.
Q3/14 Production Miss Due to Wet Weather
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
[email protected]
Ciara Sawicki - (416) 862-3738
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: High
Target 1-Yr:
C$2.25
ROR 1-Yr:
59.6%
Valuation: 1.10x NAVPS
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
■ Timmins reported Q3/14 gold production of 26.7 koz, 8% below our
estimate of 29.1 koz and a 19% decrease from Q2/14.
Implications
■ The production miss vs. our estimate was due to record rainfall in
September that restricted access to the open pit and resulted in Timmins
processing lower grade ore from stockpiles (0.50 g/t Au vs. our est. of
0.60 g/t Au). Calendar quarter gold recoveries of 74% beat our estimate
of 67% despite the company's statement that the rain caused leach
solution dilution. The crushing circuit maintained its expanded design
rate of 24,000 tpd for a 2nd consecutive quarter despite the wet weather.
■ Implied Q3/14 revenue of $34.2M (sales of 26.7 koz Au at a realized
price of $1,284/oz) was 8% lower than our estimate of $37.4M as sales
and production were lower than expected.
■ Timmins expects to achieve the high end of its 2014 guidance range
(115-125 koz Au) at a cash cost of ~$800/oz and we model 2014
production of 122 koz Au at $792/oz. The company also anticipates
releasing drill results from its regional exploration program shortly.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Pertinent Revisions
EPS14E
New
US$0.10
Old
US$0.11
Recommendation
■ We rate Timmins Sector Perform with a C$2.25 one-year target price.
Qtly EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.03 A
$0.10 A
$0.05 A
$0.04
(FY-Dec.)
Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (oz) (000)
Tot. Cash Cost ($/oz)
Rlzd. Gold Price (/oz)
Q2
$0.04 A
$0.02 A
$0.02 A
$0.04
Q3
$0.09 A
$0.03 A
$0.01
$0.04
Q4
$0.09 A
$0.03 A
$0.01
$0.04
Year
$0.26
$0.21
$0.10
$0.16
P/E
11.6x
5.1x
13.2x
7.7x
2012A
$0.26
11.6x
$0.40
7.5x
$69
94.4
$743
$1,661
2013A
$0.21
5.1x
$0.44
2.4x
$57
119.7
$717
$1,358
2014E
$0.10
13.2x
$0.28
4.5x
$45
121.7
$792
$1,272
2015E
$0.16
7.7x
$0.29
4.4x
$55
120.6
$782
$1,400
2016E
$0.17
7.4x
$0.31
4.1x
$59
123.1
$865
$1,500
BVPS14E: $1.69
ROE14E: 5.69%
NAVPS:
P/NAV:
C$2.01
0.70x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
C$246
$-48
C$193
175
168
141
Q3/14 Operating Results vs. Comparable Quarters
■ Exhibit 1 provides a detailed quarter-over-quarter comparison for the Q3/14 results. Exhibit 2
shows quarterly trends in grade, calendar-quarter gold recovery, and ore processed at San
Francisco.
Exhibit 1 - Timmins Gold’s Q3/14 Operating Statistics vs. Comparable Quarters and Prior SC Estimates
Operating and Financial Statistics
Q3/14A Q2/14A
% Q3/13A
Operating Statistics - San Francisco
Ore processed (000's tonnes)
Average grade (g/t Au)
Low grade stockpiled (000's tonnes)
Average grade stockpiled (g/t Au)
Waste mined (000's tonnes)
Total mined (000's tonnes)
Strip ratio (waste:ore)
Gold placed on pads (oz)
Gold produced (oz)
Gold recovery (%)
Average ore processed (tpd)
Financial Statistics
Gold sold (oz)
Average realized gold price ($/oz)
Implied metal revenues ($M)
%
SC Estimates
Q3/14E
%
2,214
0.504
68
0.245
6,208
8,226
3.08
35,889
26,671
74%
24,062
2,184
0.650
399
0.245
5,810
8,217
2.36
45,649
32,932
72%
24,003
1%
-22%
-83%
0%
7%
0%
31%
-21%
-19%
3%
0%
1,816
0.771
446
0.255
5,442
7,703
2.58
45,009
29,139
65%
19,736
22%
-35%
-85%
-4%
14%
7%
19%
-20%
-8%
15%
22%
2,254
0.60
5,297
7,551
2.35
43,486
29,135
67%
24,500
-2%
-16%
17%
9%
31%
-17%
-8%
11%
-2%
26,671
$1,284
$34.2
33,000
$1,284
$42.4
-19%
0%
-19%
28,637
$1,329
$38.1
-7%
-3%
-10%
29,135
$1,282
$37.4
-8%
0%
-8%
Source: Company reports; Scotiabank GBM estimates.
Exhibit 2 – San Francisco: Trends in Grade, Gold Recovery, and Ore Processed
1.10
Ore Processed (Tonnes)
0.94
0.90
0.86
0.82
2,000
0.90 0.89
0.80 0.78
0.72
0.77
0.82 0.83 0.81
0.87
0.77
0.90
0.76
72% 74%
0.70
1,500
65%
54% 55% 55% 54%
69%
59% 62% 62% 60% 58%
65%
68%
60%
0.50
0.50
47% 49%
1,000
0.65
0.30
500
0.10
0
-0.10
Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep10
10
10
11
11
11
11
12
12
12
12
13
13
13
13
14
14
14
Ore Processed
Source: Company reports; Scotiabank GBM estimates.
Gold Grade
Gold Recovery
Grade (g/t Au) & Recovery (%)
2,500
142
Valuation & Recommendation – Maintaining Our SP Rating
■ We maintain our Sector Perform rating and C$2.25 one-year target price. Our NAV 3%
estimate decreases by 1.5% to C$2.01/sh after model revisions for the Q3/14 operating
results.
o Timmins currently trades at a P/NAV of 0.70x and 2014E P/CF of 4.5x vs.
peers at 0.83x and 8.4x, respectively.
■ Moderate three-year cash build of $27.2 million at spot gold prices (excluding the equity
financing) from 2014 to 2016 could be used to install the third crushing circuit and
bring La Chicharra into production if warranted by a sustained higher gold price. We
currently model Timmins going forward with the expansion to 30,000 tpd beginning in late
2015 along with the corresponding pre-stripping at La Chicharra in 2016. Without the
crusher expansion and development of La Chicharra, we estimate the mine life will decrease
to 8 years yielding a project NPV of C$245 million vs. C$280 million including the
expansion at our $1,300/oz long-term gold price.
■ No margin for error in new mine plan. Although the new mine plan announced in
November 2013 increased the mine life, it came at the cost of higher capex, especially over
the next three years, which materially reduced our free cash flow outlook for the company.
We also see heightened operational risk as our production estimates over the next two years
are dependent on both sustained higher crusher throughput and increased gold recoveries.
Exhibit 3 – Free Cash Flow Forecast at $1,235/oz Spot Gold (2014E to 2018E)
Timmins Gold
unit
2014E
2015E
2016E
2017E
2018E
(US$/oz)
$1,275
$1,235
$1,235
$1,235
$1,235
Production/Cost Profile
unit
2014E
2015E
2016E
2017E
2018E
Gold Production (oz)
(oz)
121,724
120,624
123,116
136,308
136,308
Cash Costs (US$/oz)
(US$/oz)
$792
$782
$864
$864
$864
unit
2014E
2015E
2016E
2017E
2018E
Net Operating Cash Flow
US$M
$46
$32
$26
$31
$32
Capital Expenditures
US$M
($25)
($20)
($17)
($19)
($22)
Net Cash Provided by Financing Activities
US$M
($11)
($6)
$0
$0
$0
Free Cash Flow
US$M
$10
$6
$10
$12
$10
US$/sh
$0.06
$0.04
$0.06
$0.07
$0.06
24.1x
38.9x
25.1x
20.1x
23.7x
Gold Price
Cash Flow Profile
Free Cash Flow per Share
P/FCF
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
143
Company Comment
Monday, October 20, 2014, Pre-Market
Wal-Mart de México y Centroamerica, SAB
de CV
(WALMEX V-MX MXN
32.53)
Inventory Markdowns at SAM's Impact Q3
Results; Walmex CEO to Retire in 2015
Rodrigo Echagaray, MBA, CFA - (416) 945-4405
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: Low
Karla B. Peña - +52 (55) 9179 5211
(Scotiabank Inverlat)
[email protected]
Target 1-Yr: MXN 37.00
ROR 1-Yr:
16.7%
Valuation: 2014E-2020E DCF w/ 9.1% WACC; 13x (NTM) EV/EBITDA
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
0.97
0.96
2.9%
Key Risks to Target: Operating performance, consumer behavior, tax reforms
Event
■ Walmex reported weaker than expected quarterly numbers: EBITDA
declined 4.2% vs. our +3% growth estimate (~11% below consensus).
Implications
■ A combination of inventory markdowns and increasing promotional
activity at SAM's led to a gross margin contraction, as expected. This
and MXN318 million in expenses related to hurricane Odile led to an
EBITDA decline of 4.2% (-1% excluding this one-time expense).
■ On the positive side: 1) Central America EBITDA grew 24%, 2) Online
sales increased 66%, 3) expansion for the year was reiterated (+4.4%),
and 4) SSS at Bodega Aurrera Express grew an impressive 12.6%.
■ Walmex announced CEO Scot Rank is retiring next year. Walmart's
CEO for Latin-America Enrique Ostale should therefore have a closer
oversight of the Mexican operations until a new CEO is elected.
Pertinent Revisions
EBITDA14E
EBITDA15E
New
43,059
47,253
Old
44,329
48,993
Recommendation
■ Walmex outlined what we view as an unconvincing 4-year plan to
turnaround SAM's. The company refrains from discussing the most
important issue according to our channel checks: market share losses not
only to COSTCO (in the individual members) but also to regional
wholesalers such as Garis, DECASA, etc. (in the business members).
Remain neutral but prefer Walmex to Chedraui, Comerci and Soriana.
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
8,350 A
8,856 A
9,120 A
10,100
8,755 A
9,425 A
9,653 A
10,220
9,057 A
9,551 A
9,146 A
10,753
13,698 A
13,199 A
15,140
16,180
39,860
40,747
43,059
47,253
EV /
EBITDA
18.4x
14.6x
12.9x
11.5x
2011A
1.24
30.8x
18.0x
378,850
37,188
9.8%
2012A
1.29
32.8x
18.4x
412,060
39,860
9.7%
2013A
1.25
27.3x
14.6x
425,171
40,747
9.6%
2014E
1.31
24.9x
12.9x
446,516
43,059
9.6%
2015E
1.43
22.7x
11.5x
486,006
47,253
9.7%
(FY-Dec.)
Earnings/Share
Price/Earnings
EV/EBITDA
Revenues (M)
EBITDA (M)
EBITDA Margin
BVPS14E: 7.82
ROE14E: 20.30%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
572,706
-6,847
565,859
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in MXN unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
17,605
5,440
144
Exhibit 1 – Walmex Q3/14 results
Source: Company reports; Scotiabank GBM estimates.
Exhibit 2 – SSS
Source: Company reports, ANTAD.
Exhibit 3 – Walmex Operating Summary
Source: Company reports.
145
Exhibit 4 – Mexico & Central America SSS
Exhibit 5 – Mexico & Central America Gross Margin
Source: Company reports; Scotiabank GBM estimates.
Source: Company reports; Scotiabank GBM estimates.
Exhibit 6 – EBITDA Margin per Country
Exhibit 7 – EBITDA in Q3/14 excluding one-offs
Source: Company reports.
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
Equity Event
Wednesday, October 15, 2014
Equity Event: Telecom & Cable 2015
Insert graphic here
147
Equity Event
XXX, XXX XX, XXXX
Equity Event: Transportation & Aerospace 2014
Insert graphic here
148
Equity Event
XXX, XXX XX, XXXX
xx
Equity Event: Canadian Energy Infrastructure
Conference
Insert graphic here
149
Equity Event
XXX, XXX XX, XXXX
Xs 2
Equity Event: Mining Conference 2014
Insert graphic here
150
Disclosures and Disclaimers
Monday, October 20, 2014
Appendix A: Important Disclosures
Company
African Barrick Gold plc
Agnico Eagle Mines Limited
Agrium Inc.
Alamos Gold Inc.
Allied Nevada Gold Corp.
AngloGold Ashanti Limited
Argonaut Gold Inc.
AuRico Gold Inc.
B2Gold Corp.
Bank of Montreal
Bank of Nova Scotia
Barrick Gold Corporation
BCE Inc.
Bear Creek Mining Corporation
Bell Aliant Inc.
Brookfield Canada Office Properties
Canadian Imperial Bank of Commerce
Canadian Natural Resources Limited
Canadian Western Bank
Capital Power Corporation
Capstone Mining Corp.
Celestica Inc.
Cenovus Energy Inc.
Centerra Gold Inc.
Chevron Corporation
Coeur Mining, Inc.
Cogeco Cable Inc.
Colabor Group Inc.
Compañía de Minas Buenaventura SAA
ConocoPhillips
Controladora Comercial Mexicana, SAB de CV
Copper Mountain Mining Corporation
Corus Entertainment Inc.
Detour Gold Corporation
Dominion Diamond Corporation
Eldorado Gold Corporation
Enbridge Inc.
First Majestic Silver Corp.
First Quantum Minerals Ltd.
Fortuna Silver Mines Inc.
Franco-Nevada Corporation
Gabriel Resources Ltd.
Gold Fields Limited
Goldcorp Inc.
Golden Star Resources Ltd.
Grupo Comercial Chedraui, SAB de CV
Grupo México, SAB de CV
Guyana Goldfields Inc.
Ticker
ABG
AEM
AGU
AGI
ANV
AU
AR
AUQ
BTO
BMO
BNS
ABX
BCE
BCM
BA
BOX.UN
CM
CNQ
CWB
CPX
CS
CLS
CVE
CG
CVX
CDE
CCA
GCL
BVN
COP
COMERCI
UBC
CUM
CJR.B
DGC
DDC
EGO
ENB
AG
FM
FSM
FNV
GBU
GFI
GG
GSS
CHDRAUI B
GMEXICO B
GUY
Disclosures (see legend below)*
P, T
P, T, VS170, VS185, VS60, VS149
T
P, T
T, U, V66, VS77
P, T
P, T, VS53, VS155
G, I, N1, P, T, U, VS190
VS54, VS126, VS133
G, I, S, U, UKO
G, H.P.271, I, N1, S1, U
G, I, P, T, U, VS5, VS178
B26, B8, G, I, S, T, U
P, T
G, I, T, U
T
G, I, S, U, UKO
G, I, N1, U
G, I, U
I, T
I, P, T, VS132
V30
I, S
P, T
I, V19
J, VS109
I, T
T
P, T
V17, V19, V21
M13, S
G, I, T, U, VS38, VS39, VS131, VS166
T
G, I, U, VS157
P, T, VS107
P, T, VS6
G, I, S, T, U
VS56, VS110
T, VS124
P, T, VS22
G, U
P, T
P, T
D26, G, I, N1, P, T, U, VS8, VS82
J, P, T
M13, T
M14, M9, P, T, VS140
I, P, T, VS187
151
Disclosures and Disclaimers
Monday, October 20, 2014
Hecla Mining Company
HudBay Minerals Inc.
HL
HBM
Husky Energy Inc.
IAMGOLD Corporation
Imperial Metals Corporation
Imperial Oil Limited
Inter Pipeline Ltd.
Intrepid Potash, Inc.
K+S AG
Keyera Corp.
Kinross Gold Corporation
Labrador Iron Mines Holdings Limited
Labrador Iron Ore Royalty Corp.
Laurentian Bank of Canada
Lundin Mining Corporation
Lydian International Limited
MAG Silver Corp.
Manitoba Telecom Services Inc.
Marathon Oil Corporation
Mercator Minerals Ltd.
Mirabela Nickel Limited
Mountain Province Diamonds Inc.
National Bank of Canada
Nevada Copper Corp.
Nevsun Resources Ltd.
New Gold Inc.
New Millennium Iron Corporation
Newmont Mining Corporation
Organización Soriana, SAB de CV
Pan American Silver Corp.
Pembina Pipeline Corporation
Potash Corporation of Saskatchewan, Inc.
Premier Gold Mines Limited
Pretium Resources Inc.
Primero Mining Corp.
Quebecor Inc.
Randgold Resources Limited
Rogers Communications Inc.
Royal Bank of Canada
Royal Nickel Corporation
SEMAFO Inc.
Shaw Communications Inc.
Sherritt International Corporation
Silver Standard Resources Inc.
Silver Wheaton Corp.
Sociedad Quimica y Minera de Chile
Southern Copper Corporation
Stornoway Diamond Corporation
Taseko Mines Limited
TD Bank Financial Group
Teck Resources Limited
HSE
IAG
III
IMO
IPL
IPI
SDF
KEY
KGC
LIM
LIF
LB
LUN
LYD
MVG
MBT
MRO
ML
%MNB
MPV
NA
NCU
NSU
NGD
NML
NEM
SORIANA B
PAAS
PPL
POT
PG
PVG
P
QBR.B
GOLD
RCI.B
RY
RNX
SMF
SJR.B
S
SSRI
SLW
SQM
SCCO
SWY
TKO
TD
TCK.B
P, T, VS162
G, I, N1, T, U, V25, VS66, VS101, VS174,
VS69
G, I, N1, S, U
P, T, VS7, VS61
T, VS65
I, U, V48
G, I, T, U
P, T
T
G, I, T, U
G, I, N1, P, T, U
I, P, T
I, T, V42, VS37
G, I, S, U
T, VS67
G, I, U, VS189
G, I, U, VS130
B9, G, I, S, T, U
I, U, V19, V69
P, T
T
G, U, VS154
G, I, S, U
T
J, VS36
P, T
P, T, VS34, VS35
P, T
M13, T
P, T, VS134, VS138, VS136
G, I, S, U
G, I, N1, T, U
P, T, VS51, VS52
G, I, P, T, U, VS14, VS169
G, I, P, T, U, V59, VS57, VS160, VS177
I, T
P, T
G, I, N1, S, T, U
G, I, S, U, UKO
G, I, P, T, U
VS127
G, I, S, T, U
G, U, VS141
P, T
V25
P, T
M14, M9, P, T
G, I, J, U, VS163
P, T, VS40, VS41, VS188
G, I, S, U, UKO
T, VS68
152
Disclosures and Disclaimers
Monday, October 20, 2014
TELUS Corporation
Teranga Gold Corporation
The Mosaic Company
Thompson Creek Metals Company Inc.
Time Warner Cable Inc.
Timmins Gold Corp.
Torex Gold Resources Inc.
Totvs SA
True Gold Mining Inc.
Vale SA
Verde Potash plc
Verizon Communications Inc.
Wal-Mart de México y Centroamerica, SAB de CV
Yamana Gold Inc.
Yara International ASA
T
TGZ
MOS
TCM
TWC
TMM
TXG
TOTS3
TGM
VALE
NPK
VZ
WALMEX V
AUY
YAR
G, I, J, T, U
G, I, U
G, I, N1, T, U
VS100
I
G, I, U, VS55
G, I, P, T, U, VS75, VS76
M12, M4
G, I, T, U, VS125
I, M14, M9, VS142, VS143, VS165
T
H.P.230
M13, T
G, I, N1, P, T, U, VS186
T
Each Research Analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection
with securities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is,
or will be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report.
This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst.
All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date,
unless otherwise explicitly stated.
All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director, Head of
Institutional Equity Sales, Trading and Research, who is not and does not report to the Head of the Investment Banking Depart ment.
Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public
information across internal information barriers, such as between Investment Banking and Research.
The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall
profitability of Scotiabank, Global Banking and Markets and the revenues generated from its various departments, including investment banking.
Furthermore, the research analyst’s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments,
including investment banking. Research Analysts may not receive compensation from the companies they cover.
Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to FINRA Rule 2711
restrictions on communications with subject company, public appearances and trading securities held by the analysts.
For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit
http://www.gbm.scotiabank.com/disclosures
Scotiabank, Global Banking and Markets Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1.
*
Legend
B26
Thomas C. O'Neill is a director of BCE Inc. and is Chairman of the Board of The Bank of Nova Scotia.
B8
Ronald Brenneman is a director of BCE Inc and is a director of The Bank of Nova Scotia.
B9
N. Ashleigh Everett is a director of Manitoba Telecom Services Inc. and is a director of The Bank of Nova Scotia.
D26
Tanya Jakusconek is a Director of Equity Research for Scotiabank, Global Banking and Markets and is a member of the board of
directors for Tahoe Resources Inc. Goldcorp Inc. is a significant shareholder of Tahoe Resources Inc.
G
Scotia Capital (USA) Inc. or its affiliates has managed or co-managed a public offering in the past 12 months.
H.P.230
Jay Oduwole, a member of Jay Oduwole's household and/or an account related to Jay Oduwole own securities of this issuer.
153
Disclosures and Disclaimers
Monday, October 20, 2014
H.P.271
Sumit Malhotra, a member of Sumit Malhotra's household and/or an account related to Sumit Malhotra own securities of this
issuer.
I
Scotia Capital (USA) Inc. or its affiliates has received compensation for investment banking services in the past 12 months.
J
Scotia Capital (USA) Inc. or its affiliates expects to receive or intends to seek compensation for investment banking service s in
the next 3 months.
M13
Karla Pena, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A., which
forms a part of Grupo Financiero Scotiabank Inverlat.
M14
Christian Castillo Landi, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat
S.A., which forms a part of Grupo Financiero Scotiabank Inverlat.
M4
Andres Coello, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
M9
Alfonso Salazar, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
N1
Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months.
P
This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit
material operations of this issuer.
S
Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and
outstanding equity securities of this issuer.
S1
The Bank of Nova Scotia is the parent company and a related issuer of Scotia Capital Inc. and ultimate parent company and
related issuer of Scotia Capital (USA) Inc.
T
The Fundamental Research Analyst/Associate has visited material operations of this issuer.
U
Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or
debt securities of, or have provided advice for a fee with respect to, this issuer.
UKO
This issuer owns 5% or more of the total issued share capital of The Bank of Nova Scotia.
V17
Scotia Waterous has been retained by ConocoPhillips as financial advisor in a process to divest certain oil sands assets. Scotia
Waterous is a wholly-owned subsidiary of The Bank of Nova Scotia.
V19
Howard Weil is a Division of Scotia Capital (USA) Inc., a U.S. registered broker-dealer and a member of the New York Stock
Exchange and FINRA. Scotia Capital (USA) Inc. is a wholly owned subsidiary of Scotia Capital Inc., a Canadian registered
investment dealer, and indirectly owned by The Bank of Nova Scotia. Howard Weil Research Analysts and Scotiabank Research
Analysts are independent from one another and their respective coverage of issuers are different. In addition, because they are
independent from one another, Howard Weil Research Analysts and Scotiabank Research Analysts may have different opinions
on the short-term and long-term outlooks of local and global markets and economies.
V21
Scotia Waterous Inc. has been retained by ConocoPhillips as financial advisor in a process to divest certain oil sands assets.
Phillips 66 is a subsidiary of ConocoPhillips. Scotia Waterous Inc. is a wholly owned subsidiary of The Bank of Nova Scotia.
V25
Scotiabank acted as a financial advisor for HudBay Minerals Inc. in a precious metals stream transaction with Silver Wheaton
Corp.
V42
Scotia Capital Inc. has been retained by Labrador Iron Ore Royalty Corporation as financial advisor relating to Rio Tinto’s
possible sale of its interest in Iron Ore Company of Canada.
V48
Scotia Waterous has been retained as exclusive financial advisor by Imperial Oil Resources Limited in the divestiture of various
assets.
V59
Scotiabank has been retained by the Board of Directors of Primero Mining Corp. as financial advisor and to provide a fairness
opinion in its acquisition of Brigus Gold Corp.
V66
Scotia Capital Inc. has been retained as financial advisor by Allied Nevada Gold Corp. with respect to the Hycroft Mill Expan sion.
154
Disclosures and Disclaimers
Monday, October 20, 2014
V69
Scotia Waterous is acting as a financial advisor to Marathon Oil Corporation on the sale of its Norwegian assets. Scotia
Waterous is a wholly-owned subsidiary of The Bank of Nova Scotia.
VS100
Our Research Analyst visited Mt. Milligan, an operating mine, on October 9, 2013 and August 19, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS101
Our Research Analyst visited Constancia, a mine under development, on October 2, 2013. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS107
Our Research Analyst visited the Ekati mine, an operating diamond mine, on October 29, 2013. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS109
Our Research Analyst visited Palmarejo, an operating mine, on November 19, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS110
Our Research Analyst visited Encantada, La Parrilla, and Del Toro, silver producing mines, on November 18-21, 2013. Partial
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS124
Our Research Analyst visited the Kansanshi and Sentinel mines, a copper mine and mine under development, respectively, on
February 6-7, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research
Analyst to visit this site.
VS125
Our Research Analyst visited the Karma project, a mine under development, on January 26, 2014. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS126
Our Research Analyst visited the Otjikoto gold project, a mine under development, on January 29, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS127
Our Research Analyst visited Mana, an operating mine, on February 3-4, 2014. Partial payment was received from the issuer for
the travel-related expenses incurred by the Research Analyst to visit this site.
VS130
Our Research Analyst visited the Juanicipio project, an underground mine development, on February 5, 2014. Partial payment
was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS131
Our Research Analyst visited Copper Mountain Mine, principal mining operations, on March 28, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS132
Our Research Analyst visited Pinto Valley Mine and Cozamin Mine, primary mining assets, on March 31-April 3, 2014. Partial
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS133
Our Research Analyst visited Masbate, an operating mine, on March 22, 2014. Partial payment was received from the issuer for
the travel-related expenses incurred by the Research Analyst to visit this site.
VS134
Our Research Analyst visited La Colorada, an operating mine, on April 2, 2014. Partial payment was received from the issuer f or
the travel-related expenses incurred by the Research Analyst to visit this site.
VS136
Our Research Analyst visited Dolores, an operating mine, on March 31, 2014. Partial payment was received from the issuer for
the travel-related expenses incurred by the Research Analyst to visit this site.
VS138
Our Research Analyst visited Alamo Dorado, an operating mine, on March 31, 2014. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS14
Our Research Analyst visited the Brucejack project, an exploration gold project, on June 20, 2013. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS140
Our Research Analyst visited Ray Mine, an operating mine, on April 2, 2014. No payment was received from the issuer for the
travel-related expenses incurred by the Research Analyst to visit this site.
VS141
Our Research Analyst visited Ambatovy, a nickel mine, on March 28-29, 2014. Partial payment was received from the issuer for
the travel-related expenses incurred by the Research Analyst to visit this site.
VS142
Our Research Analyst visited Salobo Mine and Carajas Mine, both operating mines, on September 11-12, 2013. Partial payment
was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
155
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Monday, October 20, 2014
VS143
Our Research Analyst visited Salobo Mine and Carajas Mine, both operating mines, on September 11-12, 2013. Partial payment
was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS149
Our Research Associate visited LaRonde and Goldex, underground mines and processing facilities, on May 21, 2014. Full
payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS154
Our Research Analyst visited the Gahcho Kué project, a mine under development, on March 8, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS155
Our Research Analyst visited El Castillo, La Colorada, and San Agustin, operating gold mines, on May 21 and 23, 2014. Partial
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS157
Our Research Associate visited Detour Lake, an operating mine and mill, on June 4, 2014. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS160
Our Research Analyst visited the Blackfox Complex, an operating mine, on June 19, 2014. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS162
Our Research Analyst visited the Casa Berardi mine, an operating gold mine, on June 26, 2014. Full payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS163
Our Research Analyst visited the Renard Project, a mine under development, on March 8, 2014. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS165
Our Research Analyst visited the Itabiritos mine, an operating mine, on August 6 and 7, 2014. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS166
Our Research Analyst visited the Copper Mountain Mine, sole mining asset, on August 20, 2014, September 12 and October 8,
2014. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS169
Our Research Associate visited the Brucejack project, a mine under development, on August 20, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS170
Our Research Analyst visited Meliadine, a mine under development, on August 26. 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS174
Our Research Analyst visited the Constancia project, a copper mine, on September 8, 2014. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS177
Our Research Analyst visited San Dimas, an operating mine, on September 18, 2014. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS178
Our Research Analyst visited Goldstrike, Cortez, and Goldrush, producing mines and exploration property, on September 17-18,
2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this
site.
VS185
Our Research Analyst visited Canadian Malartic, a producing mine, on September 30, 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS186
Our Research Analyst visited Canadian Malartic, a producing mine, on September 30, 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS187
Our Research Associate visited the Aurora Project, a gold mine under construction, on October 2, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS188
Our Research Analyst visited the Gibraltar mine, primary mineral asset, on October 9, 2014. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS189
Our Research Analyst visited the Amulsar gold project, a mine under development, on October 7-8, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
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VS190
Our Research Analyst visited the Young-Davidson Gold Mine, an operating underground gold mine and mill, on October 15,
2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this
site.
VS22
Our Research Analyst visited San Jose mine, an operating mine, on September 10, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS34
Our Research Analyst visited the Schefferville projects, development & exploration projects, on July 23, 2012. Full payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS35
Our Research Analyst visited the Schefferville DSO and Taconite projects, main mineral assets, on August 20, 2013. Full
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS36
Our Research Analyst visited the Bisha mine, principal mining operations, on May 25-27, 2012. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS37
Our Research Analyst visited the Carol Lake operations, a mine processing plant and rail operations, on September 14, 2012.
Full payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS38
Our Research Analyst visited the Copper Mountain project, a 75% -owned operating mine, on November 30, 2012. No payment
was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS39
Our Research Analyst visited the Copper Mountain Mine, principal mining operations, on June 10, 2013. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS40
Our Research Analyst visited the Gibraltar mine, a 75% -owned operating mine, on November 29, 2012. No payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS41
Our Research Analyst visited the Gibraltar mine, principal mining operations, on June 11, 2013. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS5
Our Research Analyst visited Pueblo Viejo, an operating mine, on February 28, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS51
Our Research Analyst visited the Cove project, an advanced exploration project, on August 23, 2012. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS52
Our Research Analyst visited the Hardrock project and the Rahill-Bonanza JV, exploration/development sites, on July 25, 2013.
Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS53
Our Research Analyst visited La Colorada and El Castillo, both operating mines, on October 21-25, 2012, and October 22-23,
2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this
site.
VS54
Our Research Analyst visited La Libertad and Limon, both operating mines, on May 22-24, 2013. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS55
Our Research Analyst visited the San Francisco project, an operating mine, on October 22, 2012, and May 20, 2014. Partial
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS56
Our Research Analyst visited San Martin, La Parrilla and Del Toro, silver producing mines, on June 10-11, 2013. Partial payment
was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS57
Our Research Analyst visited San Dimas and Cerro del Gallo, producing and development mines, respectively, on September
26-27, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to
visit this site.
VS6
Our Research Analyst visited Efemcukuru, Kisladag, Perama Hill, Olympias, Skouries, Piavitsa, and Stratoni, operating mines
and projects under development, on October 1-5, 2012. Partial payment was received from the issuer for the travel-related
expenses incurred by the Research Analyst to visit this site.
VS60
Our Research Associate visited La India, a gold mine, on September 20-21, 2013. Full payment was received from the issuer for
the travel-related expenses incurred by the Research Associate to visit this site.
157
Disclosures and Disclaimers
Monday, October 20, 2014
VS61
Our Research Associate visited the Westwood project, a development project soon to enter commercial production, on
September 11, 2013. Full payment was received from the issuer for the travel-related expenses incurred by the Research
Associate to visit this site.
VS65
Our Research Analyst visited the Mt. Polley and Huckleberry mines, and the Red Chris project, on August 19-21, 2013. Partial
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS66
Our Research Analyst visited mining assets at Flin Flon, Manitoba, on April 15-17, 2013. No payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS67
Our Research Analyst visited the Eagle project, a development mine, on September 26, 2013. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS68
Our Research Analyst visited Highland Valley, an operating mine, on September 4, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS69
Our Research Associate visited 777, Lalor, Reed, the Flin Flon complex, and Snow Lake, mines and processing plants, on July
8-10, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Associate to
visit this site.
VS7
Our Research Analyst visited Cote Gold, a development project, on October 22, 2012. Full payment was received from the issuer
for the travel-related expenses incurred by the Research Analyst to visit this site.
VS75
Our Research Analyst visited the Morelos project, a gold and copper exploration site, on September 13, 2012. Partial payment
was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS76
Our Research Analyst visited the Morelos mine project, a gold mine under development and exploration, on September 26, 2013,
and September 18, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research
Analyst to visit this site.
VS77
Our Research Analyst visited the Hycroft mine, an operating gold and silver mine, on November 13, 2012. No payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS8
Our Research Analyst visited Pueblo Viejo, an operating mine, on February 28, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS82
Our Research Associate visited the Red Lake mine, an operating mine, on September 5, 2012. Full payment was received from
the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
158
Disclosures and Disclaimers
Monday, October 20, 2014
Definition of Scotiabank, Global Banking and Markets Equity Research Ratings & Risk Rankings
We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating
that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst.
Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Stat istical and judgmental factors
considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, consistency and predictability of
earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly
make the final determination of all risk rankings.
The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research a nalyst’s
12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that
differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings
Risk Rankings
Focus Stock (FS)
Low
The stock represents an analyst’s best idea(s); stocks in this category are Low financial and operational risk, high predictability of financial results,
expected to significantly outperform the average 12-month total return of the low stock volatility.
analyst’s coverage universe or an index identified by the analyst that includes,
Medium
but is not limited to, stocks covered by the analyst.
Moderate financial and operational risk, moderate predictability of financial
Sector Outperform (SO)
results, moderate stock volatility.
The stock is expected to outperform the average 12-month total return of the
High
analyst’s coverage universe or an index identified by the analyst that includes,
High financial and/or operational risk, low predictability of financial results,
but is not limited to, stocks covered by the analyst.
high stock volatility.
Sector Perform (SP)
Speculative
The stock is expected to perform approximately in line with the average 12month total return of the analyst’s coverage universe or an index identified by Exceptionally high financial and/or operational risk, exceptionally low predictability
of financial results, exceptionally high stock volatility. For risk-tolerant investors
the analyst that includes, but is not limited to, stocks covered by the analyst.
only.
Sector Underperform (SU)
The stock is expected to underperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Other Ratings
Tender – Investors are guided to tender to the terms of the takeover offer.
Under Review – The rating has been temporarily placed under review, until
sufficient information has been received and assessed by the analyst.
Scotiabank, Global Banking and Markets Equity Research Ratings Distribution*
Distribution by Ratings and Equity and Equity-Related Financings*
Percentage of companies covered by Scotiabank, Global Banking
and Markets Equity Research within each rating category.
Percentage of companies within each rating category for which
Scotiabank, Global Banking and Markets has undertaken an
underwriting liability or has provided advice for a fee within the last
12 months.
Source: Scotiabank GBM.
For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than “buy,” “hold/neutra l” and
“sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based
on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.
159
Disclosures and Disclaimers
Monday, October 20, 2014
General Disclosures
This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Markets. Scotiabank, together
with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets bu sinesses of The Bank of
Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc.
All other trademarks are acknowledged as belonging to their respective owners and the display of such trademarks is for infor mational use only.
Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “Globally-branded research”
under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most st ringent standards set by
regulators in the various jurisdictions in which the research reports are produced. In addition, the analysts who produce the research reports, regardless of
location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various jurisdictions where the research
reports are produced.
Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1% of t he issued and outstanding equity
securities thereof. In addition, an affiliate of Scotia Capital Inc. is a lender to TMX Group Limited under its credit facilities. As such, Scotia Capital Inc. may be
considered to have an economic interest in TMX Group Limited.
This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy
any securities and/or commodity futures contracts.
The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is distributed.
The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotiabank, Global Banking and
Markets makes no representation or warranty, express or implied, as to their accuracy or completeness.
Scotiabank, Global Banking and Markets has policies designed to make best efforts to ensure that the information contained in this report is current as of the
date of this report, unless otherwise specified.
Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any
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Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrar y from the opinions expressed
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Additional Disclosures
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