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2. investing
3. futures trading

1
Investment Views
Wednesday, October 15, 2014
Click to view full story
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Click to view synopsis
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Pertinent Revision Summary
3
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Edge at a Glance
8
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Industry Comments
Matthew Akman
18
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Benoit Laprade
27
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Ben Isaacson
35
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William S. Lee &
Cameron Bean
38
 
Benoit Laprade
48
Jeff Fan
53
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Trevor Turnbull
55
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Mario Saric
57
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Upgrading to Sector Outperform
Benoit Laprade
58
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Injunction Issued on Kyrgyz Republic's
Shares; Ontario Ruling Could Impact
Kumtor Restructure
Trevor Turnbull
61
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Upgrading to Sector Outperform
Benoit Laprade
63
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Mark Turner
64
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Ben Isaacson
74
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Vladislav C. Vlad
76
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Paul Steep
77
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Ovais Habib
85
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Energy Infrastructure
Taking the Energy Out Of Infrastructure
Forest Products & Diversified
Industries
Revising FX & Commodity Price
Forecast
Global Fertilizers
How Do Replacement Costs Tell Us To
Pair Trade the Carnage?
Oil & Gas - E&P
Running WTI Scenarios: When the
Going Gets Tough
Paper & Forest Products
Wood Products Weekly Monitor
Telecommunications and Cable
Converging Networks
Company Comments
Canada
AuRico Gold Inc.
AUQ-N, AUQ-T
Q3 Production Directly In Line, Costs
Improving
Brookfield Canada Office Properties Drop Down of Brookfield Place Calgary
East
BOX.UN-T, BOXC-N
Canfor Corporation
CFP-T
Centerra Gold Inc.
CG-T
Domtar Corporation
UFS-N, UFS-T
Labrador Iron Ore Royalty Corp.
LIF-T
Methanex Corporation
MEOH-Q, MX-T
Newalta Corporation
NAL-T
Open Text Corporation
OTEX-O, OTC-T
SEMAFO Inc.
SMF-T
Q3/14 Sales Catching Up to Production
Beyond The Oil Proxy Trade: Why
We're Not Ready To Buy MX Just Yet
CEO Succession Plan Announced
Expecting a Solid Start to F2015
SEMAFO Tests M&A Waters with
Hostile Non-Binding Proposal for Orbis
Gold
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
Wednesday, October 15, 2014
U.S.
Thompson Creek Metals Company
Inc.
TCM-T, TC-N
Q3/14 Operating Results: Mt. Milligan
Throughput Struggles Continue
Orest Wowkodaw
98
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Ezequiel Fernández
López
81
 
Andres Coello
93
 
Trevor Turnbull
66
 
Latin America
SABESP
SBSP3-SA, SBS-N
Telefonica Brasil SA
VIV-N, VIVT4-SA
Thirsty for Value? Do Not Look Here
Yet; Trimming Price Target To R$21.0
Incorporating GVT into Our DCF Model
Global
Lydian International Limited
LYD-T
Amulsar Tour Highlights and Photos
Equity Event: Telecom & Cable 2015
104

Equity Event: Transportation & Aerospace 2014
105

Equity Event: Canadian Energy Infrastructure Conference
106

Equity Event: Mining Conference 2014
107

3
Pertinent Revision Summary
Wednesday, October 15, 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
Ainsworth Lumber Co. Ltd. (SO) (ANS-T C$2.37)
Revising FX & Commodity Price Forecast
New -Old --
---
---
EPS14E: $0.00
EPS14E: $-0.01
EPS15E: $0.25
EPS15E: $0.24
---
---
---
---
EBITDA15E: $154
EBITDA15E: $153
EBITDA16E: $176
EBITDA16E: $174
---
EPS15E: $2.96
EPS15E: $2.94
EPS16E: $3.36
EPS16E: $3.26
Valuation: 4.0x NTM EV/EBITDA 1-Year Fwd (25%) + 3.0x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
AuRico Gold Inc. (SO) (AUQ-N US$3.42)
Q3 Production Directly In Line, Costs Improving
New -Old --
---
---
Adj. EPS14E: $-0.19
Adj. EPS14E: $-0.20
Adj. EPS15E: $0.03
Adj. EPS15E: $0.04
Valuation: 1.20x NAV
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Canexus Corporation (SP) (CUS-T C$4.00)
Revising FX & Commodity Price Forecast
New -Old --
---
---
EBITDA14E: $107
EBITDA14E: $106
Valuation: 1.0x NAV
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Canfor Corporation (SO) (CFP-T C$23.13)
Upgrading to Sector Outperform
New SO
Old SP
---
$29.25
$30.00
EPS14E: $1.72
EPS14E: $1.75
4.25x EV/Peak EBITDA
4.0x EV/Peak EBITDA
Valuation: 4.25x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Canfor Pulp Products Inc. (SO) (CFX-T C$11.07)
Revising FX & Commodity Price Forecast
New -Old --
---
---
EPS14E: $1.33
EPS14E: $1.28
---
EPS16E: $1.63
EPS16E: $1.58
---
Valuation: 4.75x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
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
Wednesday, October 15, 2014
Cascades Inc. (SP) (CAS-T C$5.90)
Revising FX & Commodity Price Forecast
New -Old --
---
---
EPS14E: $0.39
EPS14E: $-0.54
EPS15E: $0.66
EPS15E: $0.65
EPS16E: $0.61
EPS16E: $0.67
---
DCPU15E: $2.03
DCPU15E: $2.04
---
---
EPS16E: $3.57
EPS16E: $3.93
---
EBITDA14E: US$983 EBITDA15E: US$1,051 EBITDA16E: US$1,341
EBITDA14E: US$985 EBITDA15E: US$1,083 EBITDA16E: US$1,355
---
Valuation: 5.5x NTM EV/EBITDA (1-year forward) + Boralex Stake + Greenpac stake
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Chemtrade Logistics Income Fund (SP) (CHE.UN-T C$19.24)
Revising FX & Commodity Price Forecast
New -Old --
---
---
---
Valuation: 9.5% FCF yield
Key Risks to Price Target: Lower-than-expected GDP, lower-than-expected prices and volumes
Domtar Corporation (SO) (UFS-N US$33.32)
Upgrading to Sector Outperform
New SO
Old SP
---
$50.00
$52.00
EPS14E: $2.95
EPS14E: $2.93
EPS15E: $3.65
EPS15E: $3.94
Valuation: 5.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Empresas CMPC SA (SP) (CMPC-SN CLP 1370.00)
Revising FX & Commodity Price Forecast
New -Old --
---
---
Valuation: 8.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected pulp prices and demand, FX
Empresas Copec SA (SO) (COPEC-SN CLP 7036.50)
Revising FX & Commodity Price Forecast
New -Old --
---
8,560
8,720
EBITDA14E: US$2,081
EBITDA14E: US$2,084
-- EBITDA16E: US$2,500
-- EBITDA16E: US$2,514
---
Valuation: 1.0x NAV
Key Risks to Price Target: Demand and prices for pulp and panels, fluctuations in the price of oil and to a lesser extent, FX rates.
Fibria Celulose SA (SP) (FBR-N US$10.26)
Revising FX & Commodity Price Forecast
New -Old --
---
$12.00
$13.00
EBITDA14E: BRL 2,441 EBITDA15E: BRL 2,727 EBITDA16E: BRL 3,175
EBITDA14E: BRL 2,414 EBITDA15E: BRL 2,879 EBITDA16E: BRL 3,436
Valuation: 7.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected pulp prices and demand, FX
---
5
Pertinent Revision Summary
Wednesday, October 15, 2014
Fortress Paper Ltd. (SU) (FTP-T C$2.32)
Revising FX & Commodity Price Forecast
New -Old --
---
---
EPS14E: $-4.55
EPS14E: $-4.59
EPS15E: $-2.27
EPS15E: $-2.29
EPS16E: $-1.31
EPS16E: $-1.45
---
EPS15E: $1.69
EPS15E: $1.85
EPS16E: $1.87
EPS16E: $1.94
---
Valuation: Pro-forma recapitalization scenario
Key Risks to Price Target: Lower-than-expected prices, volumes
Interfor Corporation (SO) (IFP-T C$15.58)
Revising FX & Commodity Price Forecast
New -Old --
---
---
EPS14E: $1.20
EPS14E: $1.23
Valuation: 3.5x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Labrador Iron Ore Royalty Corp. (SO) (LIF-T C$20.48)
Q3/14 Sales Catching Up to Production
New -Old --
---
---
Adj. EPS14E: $1.65
Adj. EPS14E: $1.72
---
---
---
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, operating and technical risks, environmental and legal risks
Louisiana-Pacific Corporation (SO) (LPX-N US$12.91)
Revising FX & Commodity Price Forecast
New --
--
$17.25
EPS14E: $-0.01
EPS15E: $0.34
EPS16E: $1.01
Old --
--
$17.75
EPS14E: $0.05
EPS15E: $0.40
EPS16E: $1.09
5.5x NTM EV/EBITDA 1-Year Fwd (25%) +
4.25x EV/Peak EBITDA (75%)
5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.0x
EV/Peak EBITDA (75%)
Valuation: 5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.0x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Methanex Corporation (SP) (MEOH-Q US$54.72)
Beyond The Oil Proxy Trade: Why We're Not Ready To Buy MX Just Yet
New -Old --
---
---
---
Adj. EPS15E: $5.92
Adj. EPS15E: $6.01
---
---
EPS15E: US$1.15
EPS15E: US$1.14
EPS16E: US$2.28
EPS16E: US$2.27
---
Valuation: 7.5x 2015E EBITDA, 12x 2015E EPS, DCF @ 10.5%, 100% Adj. RCN
Key Risks to Price Target: Natural gas supply security, methanol S/D, energy prices
Norbord Inc. (SO) (NBD-T C$21.56)
Revising FX & Commodity Price Forecast
New -Old --
---
$31.25
$32.00
EPS14E: US$0.33
EPS14E: US$0.44
Valuation: 5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.0x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
6
Pertinent Revision Summary
Wednesday, October 15, 2014
Open Text Corporation (SO) (OTEX-O US$53.17)
Expecting a Solid Start to F2015
New -Old --
---
$67.00
$65.00
EPS15E: $3.91
EPS15E: $3.93
EPS16E: $4.66
EPS16E: $4.65
EPS17E: $5.14
EPS17E: --
---
EPS15E: $0.80
EPS15E: $0.73
EPS16E: $1.02
EPS16E: $0.83
4.8x NTM EV/EBITDA 1-Year Forward
5.0x NTM EV/EBITDA 1-Year Forward
---
---
Valuation: 11.0x NTM EV/EBITDA 1-yr fwd
Key Risks to Price Target: Increased competition from large vendors
Resolute Forest Products Inc. (SU) (RFP-N US$15.94)
Revising FX & Commodity Price Forecast
New -Old --
---
$17.00
$16.50
EPS14E: $0.41
EPS14E: $0.28
Valuation: 5.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
SABESP (SP) (SBSP3-SA R$20.33)
Thirsty for Value? Do Not Look Here Yet; Trimming Price Target To R$21.0
New -Old --
---
R$21.00
R$25.00
---
DCF, 7yr explicit period and 2.0% LT growth
DCF, 7-yr explicit period & 2.0% LT growth
Valuation: DCF, 7yr explicit period and 2.0% LT growth
Key Risks to Price Target: Regulatory risk, hydrology
SEMAFO Inc. (SO) (SMF-T C$4.16)
SEMAFO Tests M&A Waters with Hostile Non-Binding Proposal for Orbis Gold
New -Old --
---
---
Adj. EPS14E: US$0.09
Adj. EPS14E: US$0.04
-- Adj. EPS16E: US$0.34
-- Adj. EPS16E: US$0.35
---
Valuation: 1.20x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Superior Plus Corp. (SP) (SPB-T C$12.40)
Revising FX & Commodity Price Forecast
New -Old --
---
---
---
---
CFPS16E: $2.21
CFPS16E: $2.20
---
Valuation: 1.0x NAV
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Telefonica Brasil SA (SO) (VIV-N US$20.34)
Incorporating GVT into Our DCF Model
New --
--
$26.00
-- Revenues15E: $15,611 Revenues16E: $16,709
Old --
--
$25.00
-- Revenues15E: $17,723 Revenues16E: $18,077
Valuation: DCF - 5 years results, 8.6% WACC in US$, terminal growth rate of 4.0%
Key Risks to Price Target: Lower-than-guided synergies from GVT merger; expensive acquisitions
DCF - 5 years results, 8.6% WACC in US$,
terminal growth rate of 4.0%
DCF - 5 years results, 9.01% WACC, terminal
growth rate of 3.0%
7
Pertinent Revision Summary
Wednesday, October 15, 2014
Tembec Inc. (SP) (TMB-T C$3.08)
Revising FX & Commodity Price Forecast
New -Old --
---
$3.50
$3.60
EPS14E: $0.28
EPS14E: $0.25
EPS15E: $0.37
EPS15E: $0.40
EPS16E: $0.60
EPS16E: $0.64
---
Adj. EPS14E: US$0.17 Adj. EPS15E: US$-0.12
Adj. EPS14E: US$0.19 Adj. EPS15E: US$-0.13
---
---
Valuation: 4.75x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Thompson Creek Metals Company Inc. (SP) (TCM-T C$2.29)
Q3/14 Operating Results: Mt. Milligan Throughput Struggles Continue
New -Old --
---
---
Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity, operating, development, balance sheet
West Fraser Timber Co. Ltd. (SO) (WFT-T C$52.20)
Revising FX & Commodity Price Forecast
New -Old --
---
$63.75
$62.00
EPS14E: $3.12
EPS14E: $3.14
EPS15E: $5.26
EPS15E: $5.18
EPS16E: $5.69
EPS16E: $5.57
4.25x EV/Peak EBITDA
4.2x EV/Peak EBITDA
Valuation: 4.2x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Western Forest Products Inc. (SO) (WEF-T C$2.07)
Revising FX & Commodity Price Forecast
New -Old --
---
---
EBITDA14E: $124
EBITDA14E: $130
EBITDA15E: $165
EBITDA15E: $176
EBITDA16E: $190
EBITDA16E: $195
---
Valuation: 3.5x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected Canadian dollar
Weyerhaeuser Company (SP) (WY-N US$32.49)
Revising FX & Commodity Price Forecast
New -Old --
---
---
EPS14E: $1.40
EPS14E: $1.52
EPS15E: $1.42
EPS15E: $1.61
EPS16E: $1.74
EPS16E: $1.94
---
Valuation: 12.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
8
Edge at a Glance
Wednesday, October 15, 2014
Edge at a Glance
Energy Infrastructure
Taking the Energy Out Of Infrastructure
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
Event
■ Energy infrastructure shares have been hit particularly hard lately, likely as a result of the
oil price downturn.
Implications
■ While regulated utilities and most power companies have held firm lately, the pipeline and
midstream stocks have corrected by ~15%-20%.
■ The growth rates in pipeline and midstream are impacted by liquids prices and drilling
activity. However, volume and direct commodity exposure is limited and a lot of the 201517 growth is already locked in.
■ Unless bond yields rise a lot or oil prices drop by another 20%-30%, we believe the stocks
look attractive as income investments. The relative yield of the sector is signalling 'buy'
even if growth rates are materially reduced.
Recommendation
■ It is logical that Canada's midstream and pipeline stocks would weaken in the context of a
significant oil price correction. However, it appears overdone unless there are further major
changes in the macro-environment (bond yields, oil prices). Many of the shares are starting
to look attractive again especially ENB and PPL but also KEY, VSN, IPL, and TRP at these
levels, in our opinion.
Forest Products & Diversified Industries
Revising FX & Commodity Price Forecast
Full Story
ScotiaView Analyst Link
Table of Contents
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
Event
■ We are revising our commodity price and FX forecasts, as well as making the
corresponding changes to our EPS estimates and share price targets.
Implications
■ Newsprint: We have slightly trimmed our price forecast as continued demand declines are
likely to provide an offset to recent capacity shuts.
■ Pulp: We continue to see softwood prices decreasing from their cyclical highs driven by the
wide spread between hardwood and softwood prices. On BHK, we see prices approaching
their bottom as high cost mills are starting to close and LatAm BEK producers have started
to push for price increases.
■ Uncoated Freesheet: Our price increase assumption going forward implies potential capacity
closures and/or a decrease in paper imports.
■ Coated Paper: We expect recent capacity closures to support our forecast of increasing
prices going forward.
■ Containerboard: Sluggish growth outside N.A, a strong US$, softer wastepaper prices, and
increasing supply are likely to support our forecast of decreasing prices.
■ OSB: We continue to believe OSB prices should increase from its lows, as U.S. housing
starts continue their slow but steady recovery.
■ Lumber: Our forecast remains unchanged as we continue to believe prices should rise
driven by a growing US demand and a steady Asian market.
Recommendation
■ Please note we are making two rating changes: (1) CFP to SO from SP and (2) UFS to SO
from SP. All other ratings remain the same.
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
9
Edge at a Glance
Wednesday, October 15, 2014
Global Fertilizers
How Do Replacement Costs Tell Us To Pair Trade the Carnage?
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Event
■ We examine how global fertilizer stocks are currently trading relative to replacement costs.
Implications
■ Over the past four years, we estimate fertilizer stocks have traded at 52% of replacement
cost, in a 36% (K+S) to 65% (CF) range. Currently, the global fertilizer group is trading at
42% of replacement cost, or about 20% below normal levels. We think this presents a
trading opportunity.
■ The best fertilizer carnage pair trades? It's not often we would recommend a trade of LONG
K+S and SHORT YAR, but this is exactly the best trade our replacement cost analysis
suggests. For North Americans, the best trade is to LONG IPI and SHORT CF, although
clearly the CF story is also moving on MOE news/noise. There is no clear pair for
Canadians, as both POT and AGU are trading at a similar discount to their normal
replacement cost trading ranges. Pair trades aside, we believe it would make sense for longterm investors to buy both POT and AGU here.
Recommendation
■ While we don't know how much carnage is left, we see a long-term valuation opportunity
emerging for investors, especially as a weaker 2015 is largely priced in. Therefore, the
contrarian in us suggests buying the sector selectively, rather than panic selling. Our detailed
fall fertilizer update note will follow shortly.
Oil & Gas - E&P
Running WTI Scenarios: When the Going Gets Tough
Full Story
ScotiaView Analyst Link
Table of Contents
William S. Lee, P.Eng. - (403) 213-7331
(Scotia Capital Inc. - Canada)
Cameron Bean - (403) 218-6786
(Scotia Capital Inc. - Canada)
Event
■ In the midst of a widespread sell-off in the market, we are presenting several oil price
scenarios and the impact on our coverage universe.
Implications
■ The past month has seen a huge level of volatility in the market, with the S&P/TSX E&P
Index down 20.7% since the beginning of September, versus WTI and Edmonton Light
down 10.6% and 8.8%, respectively.
■ Exhibits 1 and 2 provide some analysis of hedging positions across our universe, and
Exhibits 3-7 present five different WTI oil price scenarios and the impact on the major
metrics for our names.
■ Valuations. The group is discounting US$75-$80/bbl WTI in our opinion. At US$75/bbl
WTI, the group trades at 7.7x 2015E EV/DACF, P/2P NAV of 1.7x (P/1P NAV at 3.2x),
and 15E D/CF of 3.2x.
■ At US$80/bbl WTI, the group trades at 7.1x 2015E EV/DACF, P/2P NAV of 1.5x (P/1P
NAV at 2.5x), and 15E D/CF of 2.8x.
Recommendation
■ While we can never time the bottom, we would start positioning portfolios for higher-quality
names that have sold off with the market, but are still very well-run companies with good
assets and strong management teams.
■ For oil, we recommend RRX and SPE; for gas we like BXE. Among the divvy payers, we
recommend WCP and TOG; and for deep value we recommend LEG. From a play
perspective, the liquids-rich Montney players (NVA, POU) have held in there but we are
still bullish on these names given the play's top economics.
Full Story
ScotiaView Analyst Link
Table of Contents
10
Edge at a Glance
Wednesday, October 15, 2014
Paper & Forest Products
Wood Products Weekly Monitor
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
Event
■ Lumber and structural panel prices showed mixed movements last week.
Implications
■ Lumber composite increased $3. The Random Lengths Framing Lumber Composite Price
finished last week at $384, compared to $381 the previous week and $383 last year.
Western SPF #2&Btr rose $4 from last week to $352.
■ Structural panel composite increased $2. The Random Lengths Structural Panel Composite
Price ended last week at $409, from $407 the previous week and compared to $387 last
year. N.C. 7/16" OSB prices remained flat from the previous week at $222.
■ Year-to-date, the lumber composite price has decreased 2%, while the structural panel
composite price is up 11%.
■ Note: Lumber prices are US$/Mfbm; panel prices are US$/Msf.
Recommendation
■ For building products exposure, we rate the shares of Ainsworth, Interfor, Louisiana-Pacific,
Norbord, Western Forest Products and West Fraser Timber Sector Outperform.
Full Story
ScotiaView Analyst Link
Table of Contents
Telecommunications and Cable
Converging Networks
Jeff Fan, CPA, CA, CFA - (416) 863-7780
(Scotia Capital Inc. - Canada)
Event
■ Scotiabank GBM has just published its Converging Networks report for the week of
October 13, 2014: "Q3/14 U.S. Earnings Preview Summary". The full report is available on
Scotia View.
Implications
■ In our lead story, we summarize our views on the U.S. telecom and cable companies in
advance of Q3/14 earnings.
■ We also provide industry news, price performance charts, valuation comparables, and
NAVs for companies under coverage.
Recommendation
■ Our recommendations and ratings are unchanged.
Full Story
ScotiaView Analyst Link
Table of Contents
11
Edge at a Glance
Wednesday, October 15, 2014
AuRico Gold Inc. (AUQ-N US$3.42)
Q3 Production Directly In Line, Costs Improving
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ AuRico reported Q3/14 production of 57,037 oz, directly in line with our forecast. Cash
costs of $706/oz were 5% better than expected.
Implications
■ At Young-Davidson, production of 40,538 oz was driven by improved underground
productivity of 3,750 tpd, roughly 94% of the 4,000 tpd year-end target. Recovery of 90% is
expected to be a new sustainable level going forward. Underground mining costs decreased
9% to $41/tonne compared to 1H/14, and are on track to meet the year-end target of
$40/tonne.
■ Underground development remained on plan with 36 m/day during the quarter. The open pit
stockpile contained about 2.6 Mt of ore at 0.8 g/t at the end of the quarter. We are visiting
Young-Davidson tomorrow for a site tour.
■ At El Chanate, production of 16,499 oz reflected a transition to higher grade mining as
expected.
■ Our NAV3% is relatively unchanged at $5.00 per share. AuRico expects to report financial
results after market close on November 6.
Recommendation
■ We rate AuRico Sector Outperform.
New
Old
Rating:
Risk:
---
SO
High
Target:
1-Yr
--
$6.00
Adj. EPS14E
$-0.19
$-0.20
Adj. EPS15E
$0.03
$0.04
Adj. EPS16E
-$0.14
New Valuation:
-Old Valuation:
1.20x NAV
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Full Story
ScotiaView Analyst Link
Table of Contents
Brookfield Canada Office Properties (BOX.UN-T C$26.69)
Drop Down of Brookfield Place Calgary East
Mario Saric, CPA, CA, CFA - (416) 863-7824
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ BOX is buying the 1.4Msf Brookfield Place Calgary East ("BPC E") from BPY for $966M
on an "as is completed" basis. BPC E is 71% pre-leased (to Cenovus), with construction
completion slated for 2H/17.
Implications
■ Pricing appears reasonable although cap rate expansion being assumed. We think the
acquisition was generally anticipated, with the structure mimicking Bay Adelaide Centre
East in 2013 (see our note). The price equates to $690/sf or a stabilized cash cap rate of
5.8% (CBRE Q2/14 Downtown Calgary Class AA Office cap rates = 5.0%-5.5%; Q3 cap
rates expected out this week). BPY is guaranteeing $56M of NOI upon substantial building
completion and fixed rate debt at 50% LTV at ~4.3% for 10-yrs. As a result, BOX is
earning an 8% IRR (return on equity) and a 7.5% FFO yield upon stabilization, providing
some (not complete) protection against higher cap rates. Net-net, we think the transaction is
$0.01-$0.02 accretive to BOX on stabilization.
■ Near-term liquidity exhausted. BOX will contribute $235M of equity this week plus $92M
later on (Q2/14 cash on hand = $98.5M + full $200M undrawn corporate revolver), and
assume a $575M construction loan, with a final $64M payment to BPY upon stabilization.
While BOX does not require equity financing in our view, we estimate pro-forma leverage
is +450bp to ~47%. Given BPY owns ~83% of BOX, we think the deal also represents an
upstream liquidity transfer.
Recommendation
■ Maintain SP rating on BOX and SO rating on BPY.
Rating:
Risk:
Target:
1-Yr
FFOPU14E:
FFOPU15E:
SP
Med
C$29.25
$1.63
$1.79
Valuation:
19.5x AFFO (F'15 estimate)
Key Risks to Target:
Protracted economic recovery, lack of
credit availability, new supply growth,
financial/energy sector consolidation
Full Story
ScotiaView Analyst Link
Table of Contents
12
Edge at a Glance
Wednesday, October 15, 2014
Canfor Corporation (CFP-T C$23.13)
Upgrading to Sector Outperform
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ We are upgrading Canfor to Sector Outperform from Sector Perform.
Implications
■ Canfor shares now provide and attractive rate of return of ~26.5% to our revised one-year
target of $29.25.
■ Although we expect it to be a bumpy ride due to a fragile supply chain and seasonal trends,
we remain constructive on the US housing recovery and continue to believe this cycle is
different and more favorable for lumber producers than the last one (2004-2006) due to a
more diversified demand base and tighter supply (see Exhibit 1).
■ We note that despite being at half the level of US housing starts when compared to the 2005
peak (2M vs. 1M) and with a significantly higher percentage of multi-family starts (~17% in
2005 vs. ~30% now) the Random Lengths Framing Lumber Composite is at approximately
the same level as it was back then (see Exhibits 2 & 3 on the next page).
■ We view CFP's recent acquisitions in the US South positively as Canfor diversifies away
from the mountain-pine-beetle infested BC Interior.
Recommendation
■ We are upgrading CFP to SO from SP and trimming our one-year target slightly to $29.25
(from $30.00). We believe this a good entry point for investors as the stock is currently the
cheapest lumber name under coverage (see Exhibit 4).
New
Rating:
Risk:
Target:
1-Yr
Old
SO
--
SP
High
$29.25
$30.00
EPS14E
$1.72
$1.75
EPS15E
$2.96
$2.94
EPS16E
$3.36
$3.26
New Valuation:
4.25x EV/Peak EBITDA
Old Valuation:
4.0x EV/Peak EBITDA
Key Risks to Target:
Weaker-than-expected U.S. housing
recovery, lower-than-expected prices,
stronger-than-expected C$
Full Story
ScotiaView Analyst Link
Table of Contents
Centerra Gold Inc. (CG-T C$5.96)
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
Injunction Issued on Kyrgyz Republic's Shares; Ontario Ruling Could Impact Kumtor Restructure
Event
Pertinent Data
■ According to a press release from Stans Energy Corp, the Ontario Superior Court issued an
injunction prohibiting the Kyrgyz government from selling or transferring 47 million of its
77 million Centerra shares.
Implications
■ The ruling is in support of a $118 million award obtained by Stans Energy in Arbitration
Court in Moscow against the Kyrgyz Republic. To date, the government has not paid and
according to Stans Energy the Kyrgyz have failed to block the damage award in subsequent
motions.
■ We note that the ruling seems to prevent the Kyrgyz from disposing of a majority of their
shares, but it does not transfer ownership. Stans Energy appears likely to seek court
approval to use the shares as compensation.
■ We see two potentially negative implications for Centerra. First a portion of the Kyrgyz
shares could be awarded to Stans Energy, thereby reducing the value the government can
exchange for a stake in the proposed Kumtor joint venture. Secondly, if the issue with Stans
Energy is left unresolved, we feel an Ontario court would be unlikely to approve the
proposed Kumtor joint venture with the injunction in place.
■ Centerra and the Kyrgyz government continue to follow up on their proposed restructuring
transaction to create a 50:50 Kumtor joint venture in exchange for the government's 32.7%
stake in Centerra.
Recommendation
■ We maintain our Sector Perform rating pending further developments.
Rating:
Risk:
Target:
1-Yr
SP
High
C$6.50
Adj. EPS14E:
US$0.06
Adj. EPS15E:
US$0.21
Adj. EPS16E:
US$0.71
Valuation:
0.50x NAV
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Full Story
ScotiaView Analyst Link
Table of Contents
13
Edge at a Glance
Wednesday, October 15, 2014
Domtar Corporation (UFS-N US$33.32)
Upgrading to Sector Outperform
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ We are upgrading Domtar's shares to Sector Outperform from Sector Perform.
Implications
■ Domtar shares now provide and attractive rate of return of ~55% to our revised one -year
target of $50.00.
■ Although continued secular declines in paper demand and increased imports into North
America (currently their highest level in over 10 years making up 12.5% of the region's
demand) have halted expectations of uncoated free-sheet price increases, we believe this is
priced in the stock, which has declined ~21% since the company reported its Q2/14. Should
imports continue to rise, we believe the company is capable of mitigating any weakness in
pricing through capacity closures.
■ We believe the company's personal care segment could provide the company's shares with
much needed catalysts, which include: (1) incremental acquisitions; and (2) the impact on
the financials of the planned capacity expansion plans (expected late in 2014 and into
2015).
Recommendation
■ We are upgrading Domtar's shares to Sector Outperform from Sector Perform, given the
significant return to our target price. We note that Domtar's shares are supported by a 4.5%
dividend yield, which we see as sustainable.
New
Rating:
Risk:
Target:
1-Yr
Old
SO
--
SP
High
$50.00
$52.00
EPS14E
$2.95
$2.93
EPS15E
$3.65
$3.94
EPS16E
$3.57
$3.93
New Valuation:
-Old Valuation:
5.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Target:
Lower-than-expected prices, strongerthan-expected C$
Full Story
ScotiaView Analyst Link
Table of Contents
Labrador Iron Ore Royalty Corp. (LIF-T C$20.48)
Q3/14 Sales Catching Up to Production
Mark Turner, MBA, P.Eng. - (416) 863-7484
(Scotia Capital Inc. - Canada)
Event
■ Rio Tinto (RIO) has released its Q3/14 Operations Review, including Iron Ore Company of
Canada (IOC) production and sales data.
Implications
■ IOC sold 4.3 Mt of iron ore product in the quarter, an 11.7% increase over Q2/14, and a
13.6% increase over the same quarter last year; despite being 12.2% less than our estimate
of 4.9 Mt. Total production of 3.9 Mt was 2.8% lower than last quarter and 2.3% lower than
the same quarter of 2013. Shipments exceeded production in the quarter as previously
frozen material became for sale.
■ We have updated our model for Q3/14 sales, making no other changes to our assumptions.
Our 2014 full-year sales estimate is now for 15.1 Mt as the CEP2 continues to be ramped up
in 2H/14, and which we forecast to increase to 20.2 Mt in 2015, the first full year after
ramp-up.
■ On our 2015 assumptions - US$88/t 62% Fe fines CFR China, 25% pellet premium,
CAD/USD of 0.90, and 20.2Mt of production (12.2Mt pellets and 8.0Mt concentrate) - we
calculate LIF being able to distribute a total dividend of ~C$1.50 per share or yield of
approximately 7.3% from the current share price.
■ Assuming current spot pricing of US$83.50/t and spot CAD/USD of 0.885, we calculate
LIF being able to distribute a dividend of ~C$1.30 per share or yield of approximately 6.3%
from the current share price.
Recommendation
■ We maintain our SO rating and $26 per share target price.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
--
$26.00
Adj. EPS14E
$1.65
$1.72
Adj. EPS15E
-$1.64
Adj. EPS16E
-$1.35
New Valuation:
-Old Valuation:
50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Target:
Commodity price, operating and
technical risks, environmental and legal
risks
Full Story
ScotiaView Analyst Link
Table of Contents
14
Edge at a Glance
Wednesday, October 15, 2014
Lydian International Limited (LYD-T C$0.68)
Amulsar Tour Highlights and Photos
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ We attended a tour of Lydian's 100%-owned Amulsar gold project in Armenia with
management.
Implications
■ The Armenian infrastructure looked good and does not appear to be an issue for the project.
We have a better appreciation for the layout and we do not see significant technical or
permitting risks.
■ Lydian recently released its new feasibility study that maximizes early cash flow through
processing ore at a higher cut-off in the initial five years. This not only increases value and
reduces the payback period, but also makes the project more attractive to lenders. Lydian
forecasts life-of-mine all-in-sustaining costs to be $701/oz (we calculate $779/oz).
■ We believe there are opportunities to enhance the mine plan with steeper haulage roads, and
potentially optimize the crushing circuit to increase capacity. We also feel the geology
indicates there may be higher-grade structural zones that are not factored in, but could add
value once mining begins.
■ Our $1.22 per share valuation assumes $350 million in debt, a C$165 million equity
financing at C$1.00 per share and eventual mine plan additions of 958,000 oz. Our one -year
target price is $1.25 per share.
Recommendation
■ In our opinion, Amulsar project is a straightforward and viable project that is likely to
receive its construction approval by early next year. We feel it will either be built by Lydian
or acquired.
Rating:
Risk:
Target:
1-Yr
Methanex Corporation (MEOH-Q US$54.72)
SO
Speculative
C$1.25
Adj. EPS14E:
Adj. EPS15E:
Adj. EPS16E:
US$-0.06
US$-0.03
US$-0.03
Valuation:
1.00x NAV
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Full Story
ScotiaView Analyst Link
Table of Contents
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Beyond The Oil Proxy Trade: Why We're Not Ready To Buy MX Just Yet
Event
■ MX has retreated 22% in the past month. The go-to justification for the sell-off is the retreat
of oil, with Brent now in the $86/bbl area. If the oil complex is indeed sustainable at current
levels, then energy-based methanol demand will be stymied, and methanol prices must fall.
Implications
■ What is MX pricing in? We estimate MX is currently pricing in a L/T realized methanol
price of $377/mt. In energy-equivalent terms, this is similar to an average long-term oil
price of $94/bbl, which is well-above where Brent is trading. If we assume Brent stabilizes
in the mid-$90s, the stock is still only fairly valued at $55, and therefore, a buying
opportunity has not yet presented itself, despite the sell-off.
■ In our note, we briefly highlight several reasons to justify the weakness beyond the easy oil
proxy trade, ranging from delayed MTO start-up demand in China, to record-high methanol
inventories, to falling olefin prices, to weakening demand in Europe.
■ We also show how the recent pullback has put MX closer to its historical average of where
it trades relative to its replacement cost, but not yet in 'buy territory', adding further support
of fair value here.
Recommendation
■ We maintain a SP rating on MX. Our $72 price target remains unchanged, but has downside
risk if a lower energy complex becomes sustainable.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
--
$72.00
Adj. EPS14E
-$4.17
Adj. EPS15E
$5.92
$6.01
New Valuation:
-Old Valuation:
7.5x 2015E EBITDA, 12x 2015E EPS,
DCF @ 10.5%, 100% Adj. RCN
Key Risks to Target:
Natural gas supply security, methanol
S/D, energy prices
Full Story
ScotiaView Analyst Link
Table of Contents
15
Edge at a Glance
Wednesday, October 15, 2014
Newalta Corporation (NAL-T C$19.40)
CEO Succession Plan Announced
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ NAL announced John Barkhouse will succeed Al Cadotte as President and CEO effective
November 10, 2014. Mr. Barkhouse has also been appointed to the Board of Directors; Mr.
Cadotte will remain on the Board of Directors until the AGM in 2015.
Implications
■ New leadership should be well received. While Mr. Cadotte's retirement has been known for
some time, the announcement should provide clarity on succession planning while
reinforcing NAL's focus on the energy related side of their business. Mr. Barkhouse brings a
wealth of oilfield service experience most recently having held the position of President at
Bredero Shaw (Shawcor's largest subsidiary), a world class OFS provider with a track
record of operational excellence. That said, Shawcor's core pipe-coating business is very
different than NAL's waste management services; as such, it could take some time to see the
impact of Mr. Barkhouse's leadership.
■ Industrial sale remains key catalyst. Timing of any transaction remains uncertain with no
one logical buyer for the entire division in our view (see our April note). That said, the
incoming CEO may provide some added push to complete the process. NAL currently
trades at a 2.3x discount to Secure (SES-TSX; SO); we do not see NAL trading in line with
SES post-sale, but the valuation gap could narrow.
Recommendation
■ One-year $23 price target and Sector Perform rating unchanged.
Rating:
Risk:
Target:
1-Yr
Open Text Corporation (OTEX-O US$53.17)
Expecting a Solid Start to F2015
Event
■ OTEX will report Q1/15 results on October 22, 2014 at 4:00 p.m., conference call at 5:00
p.m., dial-in: 1-800-319-4610. We forecast revenues of $463M and adj. EPS of $0.87 (cons.
$459M and $0.86).
Implications
■ Our view is that Open Text's Q1 results will reflect positive organic licence revenue growth
(easy prior-year comp) and the inclusion of GXS results (mainly in Cloud segment), with
solid operating margins sustained by cost control efforts.
■ We believe that Open Text remains well positioned for F2015 supported by a completely
updated core EIM product suite (Project Red Oxygen followed by Project Blue Carbon).
With momentum from a new product cycle, the firm is focused on sales execution and a goto-market strategy in F2015. In addition, we anticipate that the firm will deploy up to $3B
for additional M&A over the next five years following its proven acquisition strategy.
Recommendation
■ Our long-term thesis on Open Text remains (1) strong ROIC forecast at > 20%; (2) OTEX's
position as a consolidator in the EIM markets; and (3) potential acquisition target.
SP
High
C$23.00
EBITDA14E:
EBITDA15E:
EBITDA16E:
$184
$216
$237
Valuation:
8.6x our 2015 EV/EBITDA estimate.
Key Risks to Target:
Customer acceptance of onsite,
commodities, labour, regulatory,
weather, and FX.
Full Story
ScotiaView Analyst Link
Table of Contents
Paul Steep, MBA - (416) 945-4310
(Scotia Capital Inc. - Canada)
Pertinent Data
Rating:
Risk:
Target:
1-Yr
New
--
-- Speculative
$67.00
EPS15E
$3.91
EPS16E
$4.66
EPS17E
$5.14
New Valuation:
-Old Valuation:
11.0x NTM EV/EBITDA 1-yr fwd
Key Risks to Target:
Increased competition from large
vendors
Full Story
ScotiaView Analyst Link
Table of Contents
Old
SO
$65.00
$3.93
$4.65
N/A
16
Edge at a Glance
Wednesday, October 15, 2014
SABESP (SBSP3-SA R$20.33)
Ezequiel Fernández López, CFA - +56 9 9991 9152
(Scotia Corredora de Bolsa Chile SA)
Thirsty for Value? Do Not Look Here Yet; Trimming Price Target To R$21.0
Event
■ We are trimming our Sabesp price target by 16% to R$21 per share (or US$8.6 per ADR),
on heightened water provisioning risks.
Implications
■ Negative news flow regarding water supply intensified during recent weeks. First,
precipitation during September failed to materialize into adequate water inflows. Second,
the October-March rainy season started uninspiringly. Third, weather forecasts for the next
six months continue to disappoint. Finally, Sabesp got ousted of the Cantareira crisis
management team after its level reached 5%.
■ We believe that this not only confirms our idea of a difficult 2015, but also that the risk of
seeing sub-par results in 2016 has increased. Of note, given the extreme dry state of some
reservoirs, it might require both steady and strong rains for soils to just recuperate normal
moisture.
■ The solutions for the Sao Paulo Metro Area water production system (~77m3/s) still appear
to be far into the future. The Atibainha interconnection works (+5 to 7m3/s) could be ready
by 2016, but it still needs to be approved by the ANA. The new Sao Lourenço plant
(+7m3/s), already under construction, could be active by 2H/17.
Recommendation
■ Sabesp's current 1.0x PBV and 0.72x EV/Adj.RAB have historically been associated with
strong forward 12m returns. However, drought risks temper the value stance. Still Sector
Perform, prefer Copasa or Aguas/A.
SEMAFO Inc. (SMF-T C$4.16)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
■ SEMAFO announced a hostile non-binding proposal for Orbis Gold Ltd. (OBS-AU, not
covered) and reported Q3/14 operating results.
Implications
■ Orbis' main asset is the Natougou gold development project in Burkina Faso (90% effective
interest). The project currently hosts I&I resources of 2.0 Moz Au (100% basis) at an
average grade of 3.4 g/t Au.
■ SEMAFO's proposed all-cash transaction values Orbis at ~US$140M or ~$60/oz of global
attributable mineral resources which is broadly in line with gold developer acquisitions over
the past few years. We view the proposed Orbis transaction positively as it is 12.7% NAV
accretive based on our scenario analysis using conservative modelling assumptions for
Natougou.
■ The company also announced Q3/14 production of 64.7 koz Au, 18% ahead of our estimate
mainly due to higher ore tonnes processed (no material impact from the rainy season in
Burkina) with total cash costs of ~$560/oz coming in 19% lower than expected.
Recommendation
■ We rate SEMAFO Sector Outperform with a C$4.75 one-year target price. The company has
good operating momentum at Mana and continues to trade attractively vs. peers, particularly
now that the GDXJ overhang is lifted.
SP
Med
R$21.00
R$25.00
EPS14E
-R$1.99
EPS15E
-R$1.98
New Valuation:
DCF, 7yr explicit period and 2.0% LT
growth
Old Valuation:
DCF, 7-yr explicit period & 2.0% LT
growth
Key Risks to Target:
Regulatory risk, hydrology
Full Story
ScotiaView Analyst Link
Table of Contents
SEMAFO Tests M&A Waters with Hostile Non-Binding Proposal for Orbis Gold
Event
Old
---
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
-SO
-- Speculative
--
$4.75
Adj. EPS14E
US$0.09
US$0.04
Adj. EPS15E
-US$0.32
Adj. EPS16E
US$0.34
US$0.35
New Valuation:
-Old Valuation:
1.20x NAVPS
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Full Story
ScotiaView Analyst Link
Table of Contents
17
Edge at a Glance
Wednesday, October 15, 2014
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Telefonica Brasil SA (VIV-N US$20.34)
Incorporating GVT into Our DCF Model
Event
Pertinent Data
■ Using as reference the general guidelines provided by TEF, we are incorporating GVT into
our VIV model. We are also updating FX projections, rolling over our model, and updating
WACC.
Implications
■ TEF is guiding that the €4.7B of synergies is the result of using a 10-year DCF model that
uses a WACC of ~12.0% (in R$). The company is not disclosing the terminal growth rate
(g) but we are using a proxy of long-term inflation (4.0%.) Our DCF model considers five
years of results (2015-2019), so we are adding separately the synergies for the years we are
not modelling, as well as their terminal value.
■ GVT will remain a separate business unit during an initial period, which may limit opex
synergies at the beginning (2H/15E). Also, although we estimate that shares outstanding
will increase by ~46.5% as of Q1/15E, GVT may not be consolidated until Q3, likely
distorting ratios for 2015.
■ After the GVT merger, VIV is likely to emerge as one of the best telecom assets in
developing markets. We see wireless consolidation as an optionality and VIV as the safest
name to play the theme.
Recommendation
■ The incorporation of the GVT synergies has driven us to increase our target to
US$26.00/ADR from US$25.00 despite a more negative view on the FX (R$2.60 by Q4/15
from R$2.16 before.) The dividend yield next year may be impacted by the timing of the
GVT merger; for 2016, we see a yield of 6.9%. At 5.65x 2016 EV/EBITDA, valuation is
attractive. Buy.
Thompson Creek Metals Company Inc. (TCM-T C$2.29)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Med
$26.00
$25.00
Revenues14E
-$15,192
Revenues15E
$15,611
$17,723
Revenues16E
$16,709
$18,077
New Valuation:
DCF - 5 years results, 8.6% WACC in
US$, terminal growth rate of 4.0%
Old Valuation:
DCF - 5 years results, 9.01% WACC,
terminal growth rate of 3.0%
Key Risks to Target:
Lower-than-guided synergies from GVT
merger; expensive acquisitions
Full Story
ScotiaView Analyst Link
Table of Contents
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
Q3/14 Operating Results: Mt. Milligan Throughput Struggles Continue
Event
■ Thompson Creek released its Q3/14 operating results.
Implications
■ In its 4th full quarter of operation, Mt Milligan produced 16.3 Mlbs of Cu and 60,400 ozs of
Au, which was 13.0% below and 16.4% above our forecast of 18.7 Mlbs and 51,900 ozs,
respectively. Throughput of 40,445 tpd (67% of design) improved only slightly from the
Q2/14 level of 38,543 tpd (64% of design), and was well below our forecast of 43,478 tpd
(72% of design). While no other operating data was released, TCM noted an improvement
in Au grades and recoveries.
■ Molybdenum production of 6.6 Mlbs was 2.4% below our forecast of 6.8 Mlbs due to
Thompson Creek.
■ The company did not comment on its previously released guidance, but noted that
throughput at Mt. Milligan is still expected to reach a sustainable 80% of design capacity by
year-end. In our view, this ramp-up target is likely to be a stretch given the YTD throughput
challenges.
Recommendation
■ In our view, a high debt level, ongoing ramp-up risk at Mount Milligan, along with a poor
outlook for molybdenum, are likely to overhang the shares in the near term. TCM is rated
Sector Perform. Our 12-month target of C$2.30 per share is based on a 50/50 mix of 7.0x
our 2015E EV/EBITDA (C$2.48) and 1.0x our 8% NAVPS estimate (C$2.19).
Pertinent Data
New
Old
Rating:
Risk:
---
SP
High
Target:
1-Yr
--
$2.30
Adj. EPS14E
US$0.17
US$0.19
Adj. EPS15E
US$-0.12 US$-0.13
Adj. EPS16E
-US$0.03
New Valuation:
-Old Valuation:
50% of 7.0x 2015E EV/EBITDA + 50% of
8% NAV
Key Risks to Target:
Commodity, operating, development,
balance sheet
Full Story
ScotiaView Analyst Link
Table of Contents
18
Industry Comment
Wednesday, October 15, 2014, Pre-Market
Energy Infrastructure
Taking the Energy Out Of
Infrastructure
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
[email protected]
Dario Neimarlija, CA, CFA - (416) 863-2852
(Scotia Capital Inc. - Canada)
[email protected]
Lukasz Michalowski, MBA - (416) 863-5915
(Scotia Capital Inc. - Canada)
[email protected]
Event
■ Energy infrastructure shares have been hit particularly hard lately, likely as
a result of the oil price downturn.
ScotiaView Analyst Link
Implications
■ While regulated utilities and most power companies have held firm lately,
the pipeline and midstream stocks have corrected by ~15%-20%.
■ The growth rates in pipeline and midstream are impacted by liquids prices
and drilling activity. However, volume and direct commodity exposure is
limited and a lot of the 2015-17 growth is already locked in.
■ Unless bond yields rise a lot or oil prices drop by another 20%-30%, we
believe the stocks look attractive as income investments. The relative yield
of the sector is signalling 'buy' even if growth rates are materially reduced.
Recommendation
■ It is logical that Canada's midstream and pipeline stocks would weaken in
the context of a significant oil price correction. However, it appears
overdone unless there are further major changes in the macro-environment
(bond yields, oil prices). Many of the shares are starting to look attractive
again especially ENB and PPL but also KEY, VSN, IPL, and TRP at these
levels, in our opinion.
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.
19
Taking the Energy Out Of Infrastructure
■ It feels like once a year the midstream and pipeline stocks get clocked, only to rise up again
to yet higher-highs. Usually the annual correction occurs due to fears of rising bond yields –
as it did last year around June. But regulated utilities and many power companies have held
in like a rock lately despite the 15%-20% correction in midstream/pipeline. This time, the
correction is almost certainly due to fears of falling oil prices.
■ Though there is almost definitely some exposure in the group to falling oil prices,
quantifying that exposure for each company is impossible. The impact depends in part on
volume flows (production) of a wide commodity range from bitumen to condensate and
everything in between. In the most draconian of situations where oil prices completely crash,
it might also depend on whether the pipeline and midstream companies have credit-worthy
counterparties to their shipping contracts. In short, there is no sensitivity analysis that can be
conducted for given changes in the oil price. We can derive and have published volume
sensitivities on certain assets for various companies but in fact we do not know, how with
any precision, those volumes will move with commodity price changes.
■ Only in a draconian commodity price environment we would predict with high certainty that
the impacts would be material. Gaining confidence that the sell-off is overdone is, therefore,
a matter of first making an assumption that we are not in that draconian scenario. If we are,
the sell-off is probably not yet done. As we highlight below, relative yields were higher
during the credit crisis when oil dipped below US$40/Bbl. But other than that scenario,
while there are several factors that can take some of the froth off of growth rates, there
should be no concern that dividends are vulnerable to reductions or that they won’t grow.
■ Though the stocks have “only” corrected back to where they were earlier this year, bond
yields have fallen since that time. As a result, the relative yield is attractive. Over the past
decade, this is only the third time that the relative yield of the group has popped up above
1.75x (relative yield defined as the forward free cash yield of the group divided by the BBB
10-Year Corporate Bond yield). The other two times were short-lived and one of those times
was during the credit crisis. Importantly, during most of this time-period, the anticipated
growth rates were not as high as they are now. In fact, expectations for any dividend growth
at all in midstream were minimal during 2004-2010 and yet the relative yield during that
period was generally a lot lower than it is now.
Exhibit 1 – Free Cash Relative Yield Trends
16%
2.5x
14%
2.0x
1.5x
Yield
10%
8%
1.0x
6%
0.5x
4%
Avg. Energy Infrastructure Free Cash Yield, LHS
BBB 10Y Corp. Bond Index Yield, LHS
Relative Yield (Avg. Free Cash Yield / BBB 10Y Yield), RHS
Source: Company reports; Bloomberg; Scotiabank GBM estimates.
Jun-14
Sep-14
Mar-14
Dec-13
Jun-13
Sep-13
Mar-13
Dec-12
Jun-12
Sep-12
Mar-12
Dec-11
Jun-11
Sep-11
Mar-11
Dec-10
Jun-10
Note: Avg. Energy Infrastructure free cash yield includes END, IPL, KEY, PPL, TRP, VSN
Sep-10
Mar-10
Dec-09
Jun-09
Sep-09
Mar-09
Dec-08
Jun-08
Sep-08
Mar-08
Dec-07
Jun-07
Sep-07
Mar-07
Dec-06
Jun-06
Sep-06
Mar-06
Dec-05
Jun-05
Sep-05
Mar-05
Dec-04
Jun-04
Sep-04
0.0x
Mar-04
2%
Relative Yield
12%
20
■ There are many types of indirect commodity exposures in energy infrastructure in addition to
the volume exposure. In particular, there is marketing profit and frac-spread profit that could
compress. Having said that, frac spreads have held steady at levels that are still high in
historical terms since the correction from super-normal levels in the winter (current Mont
Belvieu ex-ethane spread at about US$0.80/gallon). And in any case, the marketing and frac
profit has been marginalized and makes up less than 20% of our forecast EBITDA and
falling. The biggest risk to the sector in our opinion is a reduction in project backlog and/or a
reduction in expectations for the build of a backlog that has not yet even been secured. On
these risks, we can provide generic comments on a company-by-company basis.
■ Enbridge – ENB has insignificant direct commodity price exposure. It does have risk to
volume reductions below our ~2.2M b/d 2015 forecast exit rate. However, given the current
shortfall in exit pipeline capacity and amount of oil projected to move on rail, we believe it
would take an enormous change in Alberta production activity to materially and negatively
impact ENB Mainline volumes. Meanwhile, the secured growth projects are largely tolled
based on a cost of service (an increase in toll through surcharges as opposed to an
expectation or requirement that volumes somehow surge). Major projects such as the $8B
Line 3 replacement are secured – they are contracted and will proceed in our opinion unless
a draconian situation evolves that we are now nowhere near. In summary, we still see
double-digit cash flow per share and dividend growth with a high degree of probability.
■ TransCanada – TRP has insignificant direct exposure to oil prices. It also has minimal
direct exposure to changes in oil volume flow especially out of Canada. However, much of
the company’s growth program is premised on constructing new large-scale oil pipelines. As
in the case of ENB, these are commercially secured. On the other hand, given permitting
challenges they are probably more vulnerable to delay/cancellation than many other projects
in the event of a major oil price correction and/or a prolonged downturn in the oil industry.
Having said that, the company’s other major growth platform – namely LNG pipelines – has
little to do with the oil price and more to do with the economics of natural gas exports.
Therefore, in the event of a further downturn in oil markets, while TRP’s growth rate may be
slower than most of its peers and delayed, the downside is limited and we see a high
probability of at least modest continued dividend growth.
■ Pembina – PPL has limited direct oil price exposure (oil marketing could be impacted but it
is a spread business and comprises less than 10% of our forecast EBITDA). The company
does have exposure to volume flows on its core Conventional Pipeline system. But many of
the plays feeding those volumes are among the most attractive in North America and rank in
the Scotiabank Playbook as economic below US$60/Bbl oil (e.g., Montney/Cardium oil).
Meanwhile the company has secured expansion contracts for ~370k b/d by 2017 which
almost rivals the run-rate volume flow on the current system of about 575k b/d. Only an
extremely pessimistic scenario would result in a volume reduction on the system. Even in the
credit crisis with oil at US$40/Bbl and before hydraulic fracturing technology took off the
company flowed almost 400k b/d. With $6B of secured growth and a robust business model
we see a high probability of continued cash flow per share and dividend growth at PPL.
■ Keyera – KEY has limited direct oil price exposure. There are two main indirect exposures
in the company. One is the marketing business which makes up about 20% of our 2016
EBITDA forecast. Having said that, it is a spread business and not based on absolute prices.
In addition, we believe much of the profit is generated from the butane-iso-octane spread
which may or may not fluctuate with oil prices. The other exposure is the potential indirect
impact of oil prices changes on NGL drilling. Our research has highlighted the upside to
filling processing plants with liquids-rich gas. This project volume increase is not contracted
in the same manner as, for example, PPL’s pipeline volumes. KEY is not as highly
contracted as some of its peers but the positioning of its plants in some of the most economic
and promising basins (Montney, Duvernay, Deep Basin) should continue driving cash flow
growth even in a significantly lower oil price environment.
■ Inter Pipeline – IPL has insignificant direct oil price exposure. It has a very small marketing
business comprising less than 5% of our cash flow forecast. In addition, the contracted
nature of its cash flows on Cold Lake and Polaris largely protect our forecasts through 2016.
Volume exposure is minimal on that core asset because it is contracted and the odds of the
FCCL Partnership, Imperial Oil and Canadian Natural Resources shutting off Cold Lake
production are very low. The Conventional Pipeline business is volume-exposed and has few
multi-year commitments but makes up only about 20% of our EBITDA forecast. Future
growth at IPL depends on securing further contracts on Cold Lake and Polaris which we
21
■
■
■
■
acknowledge may not happen in an extremely negative oil industry context. In this sense, the
company has among the most protected downsides to a major reduction in oil prices but
would also have relatively contained growth prospects in that scenario, in our opinion.
Veresen – VSN has frac spread exposure but no direct oil price exposure. The flagship
Jordan Cove LNG export project is not dependent on high oil prices either. Alliance Pipeline
is probably the one indirect exposure in the business mix. Theoretically if NGL prices move
with oil, drilling for NGL could drop off in the event of a further major correction in the oil
price. Since Alliance is a liquids-rich pipeline, its future cash flows are somewhat dependent
on that volume flow. Having said that, deals on Aux Sable already effectively secure over
half of the Alliance capacity and, as we noted in our commentary on PPL and KEY, many of
Western Canada’s most attractive NGL plays are still economic at US$60/Bbl oil and would
feed the Alliance Pipeline.
AltaGas – ALA has no direct oil price exposure we know of. Now that ALA owns PetroGas,
however, it may have similar oil marketing exposure as the other midstream companies.
Most of ALA’s EBITDA will be derived from regulated utility and contracted hydro (we
estimate about 60%). Therefore, there is significant downside protection to current cash flow
levels even in the context of a major further oil price correction. Moreover, its LNG
expansion plans are likely not directly linked to oil market dynamics. However, with broader
global uncertainty in energy markets, the lack of commercial contracts on its prospective
growth projects creates additional risk to future growth rates, in our opinion.
Gibson Energy – GEI has no direct oil price exposure but probably has the most indirect oil
price exposure of any company we cover. The oil terminals business of GEI is highly
contracted and stable but only contributes about 30% of our EBITDA forecast. The
marketing, services and trucking business all have significant indirect oil price sensitivity
which we are unable to quantify with any precision. As GEI maintains a conservative payout
and secured growth around its terminals has improved, we would not envisage any threat to
the dividend. However, in an increasingly draconian oil price environment, we would
anticipate a significant reduction in prospective dividend growth.
In general, we see strong protection among all of the midstream and pipeline companies of
existing dividends and a high probability of continued dividend growth for most of them
even if the oil price drops further. We would start to get concerned about dividend growth in
the sector only if oil prices drop below ~US$70/Bbl. In a sub-US$60/Bbl oil price
environment we believe dividend growth for many of the companies would be limited but
we would not generally see risk to current dividend levels even in that draconian scenario. In
our view, the risk-reward is attractive particularly in a persistently-low bond yield
environment. Based on our generic risk ratings as outlined below, most of the companies
appear attractive now but ENB and PPL stand out as particularly oversold at this time.
Exhibit 2 - Generic Risk Rankings to Lower Oil Price
Company
ALA
ENB
GEI
IPL
KEY
PPL
TRP
VSN
Low Direct Existing Assets
Oil/NGL Price
Highly
Exposure
Contracted
√√
√√√
√√
√√√
√√
√√
√√√
√√
Source: Scotiabank GBM estimates.
√√√
√√
√
√√
√
√√
√√
√
Biggest Stables Of
Assets Positioned
Secured And HighAround Most Probability Projects PostEconomic Plays
2015
√√
√√
√√
√√
√√√
√√√
√√
√√
√
√√√
√
√
√√
√√√
√√
√√
ENB
ENF
GEI
IPL
KEY
PPL
SE
TRP
VSN
AQN
ALA
ACO.X
BEP.UN
CU
CPX
CSE
EMA
FTS
INE
NPI
PEGI
TA
RNW
Pipelines & Midstream
Enbridge Inc.
Enbridge Income Fund Holdings Inc.
Gibson Energy Inc.
Inter Pipeline Ltd
Keyera Corp.
Pembina Pipeline Corporation
Spectra Energy Corp. (US$)
TransCanada Corporation
Veresen Inc.
Pipelines & Midstream average
Power & Utilities
Algonquin Power & Utilities Corp.
AltaGas Ltd.
ATCO Ltd.
Brookfield Renewable Energy Partners LP (US$)
Canadian Utilities Ltd.
Capital Power Corporation
Capstone Infrastructure Corp.
Emera Inc.
Fortis Inc.
Innergex Renewable Energy Inc.
Northland Power Inc.
Pattern Energy Group Inc. (US$)
TransAlta Corp.
TransAlta Renewables Inc.
Power & Utilities average
SO
SP
SP
SO
SO
SO
SP
SP
SO
SP
SO
SP
SO
SO
SO
Restricted
SP
SP
SO
SO
SP
SP
SP
Rating
$8.53
$42.00
$45.76
$33.80
$38.75
$26.59
$3.90
$35.03
$34.57
$9.96
$15.97
$26.68
$11.01
$11.51
$48.63
$28.77
$30.65
$32.08
$83.25
$42.11
$35.52
$50.53
$16.60
Price
10/14/14
$0.27
$1.53
$3.40
$0.29
$2.21
$1.69
$0.46
$1.86
$1.70
$0.08
$1.11
$0.33
$0.31
$0.48
$1.78
$1.15
$1.05
$1.91
$1.37
$1.64
$2.24
$0.27
2013
$0.41
$1.64
$3.38
$0.19
$2.33
$1.24
$0.31
$2.14
$1.72
$0.08
$0.25
$0.57
$0.24
$0.41
$1.99
$1.09
$1.12
$3.37
$1.39
$1.51
$2.35
$0.26
$0.46
$1.82
$3.75
$0.08
$2.53
$1.72
$0.03
$1.88
$2.00
$0.10
$0.15
$1.18
$0.25
$0.38
$2.23
$1.19
$1.40
$3.65
$1.53
$1.68
$2.55
$0.54
Earnings per share
2014E
2015E
$0.49
$2.00
$4.00
$0.19
$2.65
$1.82
$0.07
$1.92
$2.10
$0.11
$0.21
$1.42
$0.26
$0.42
$2.46
$1.29
$1.51
$4.01
$1.80
$1.78
$2.63
$0.53
2016E
27.0
26.7
13.7
n.m.
16.1
12.6
7.7
16.5
18.0
n.m.
14.0
n.m.
43.6
23.1
19.9
26.1
23.8
24.6
33.6
27.2
21.7
21.7
n.m.
25.5
2013
20.6
25.6
13.6
n.m.
16.6
21.4
12.7
16.4
20.1
n.m.
n.m.
47.1
46.1
28.0
24.4
24.4
28.1
28.6
24.7
30.3
23.6
21.5
n.m.
25.9
Source: Company reports; FactSet; Scotiabank GBM estimates.
18.7
23.1
12.2
n.m.
15.3
15.4
n.m.
18.6
17.3
n.m.
n.m.
22.5
44.7
30.1
21.8
21.8
25.8
22.9
22.8
27.6
21.2
19.8
30.9
24.1
P/E ratios
2014E
2015E
Comparative Valuation of Energy Infrastructure Companies
Notes:
Coverage: Matthew Akman
Figures for Canadian companies in C$; figures for US companies in US$. All metrics for BEP.UN are in US$ except for Current Price and Target Price.
Ticker
Company
October 14, 2014
Market Close
Exhibit 3 - Comparative Valuation of Energy Infrastructure Companies
17.4
21.0
11.4
n.m.
14.6
14.6
n.m.
18.3
16.4
n.m.
n.m.
18.8
41.8
27.6
20.2
19.8
23.7
21.2
20.7
23.4
20.0
19.2
31.4
22.4
2016E
Book
$4.30
$20.28
$26.05
$19.87
$17.16
$24.21
$4.71
$17.93
$20.98
$4.31
$5.00
$11.63
$7.60
$8.73
$11.21
$11.33
$9.36
$16.17
$16.63
$13.10
$24.25
$7.53
value
2014E
2.0
2.1
1.8
1.5
2.3
1.1
0.8
2.0
1.6
2.3
3.2
2.3
1.4
1.3
1.8
4.3
2.7
3.4
5.1
2.5
2.7
2.1
2.2
3.1
book
2014E
Price/
$0.38
$1.77
$0.86
$1.55
$1.07
$1.36
$0.30
$1.45
$1.28
$0.60
$1.08
$1.31
$0.72
$0.77
$1.40
$1.38
$1.20
$1.29
$2.58
$1.74
$1.34
$1.92
$1.00
Dividend
Rate
4.5%
4.2%
1.9%
5.1%
2.8%
5.1%
7.7%
4.1%
3.7%
6.0%
6.8%
4.9%
6.5%
6.7%
5.0%
2.9%
4.8%
3.9%
4.0%
3.1%
4.1%
3.8%
3.8%
6.0%
4.0%
Yield
$10.50
$52.00
$52.00
$38.00
$47.00
$32.00
$4.50
$36.00
$39.00
$11.50
$19.00
$34.00
$14.00
$13.00
$70.00
$36.00
$36.00
$100.00
$55.00
$43.00
$59.00
$19.00
Target
Price
27.6%
28.0%
15.5%
17.6%
24.1%
25.5%
23.1%
6.9%
16.5%
21.5%
25.7%
32.3%
33.7%
19.6%
46.8%
21.4%
16.2%
23.2%
34.7%
24.8%
20.6%
20.5%
Total
Return
22
SO
SP
SP
SO
SO
SO
SP
SP
SO
SP
SO
SP
SO
SO
Restricted
SP
SP
SO
SO
SP
SP
SP
SO
Rating
$8.53
$42.00
$45.76
$33.80
$38.75
$26.59
$3.90
$35.03
$34.57
$9.96
$15.97
$26.68
$11.01
$11.51
$28.77
$30.65
$32.08
$83.25
$42.11
$35.52
$50.53
$16.60
$48.63
Price
10/14/14
207.5
132.8
115.2
275.6
262.8
101.3
96.5
141.6
215.3
100.1
147.1
62.1
273.4
114.7
56.5
123.5
323.0
83.7
319.8
670.7
707.9
276.7
846.6
Shares
Out (m)
$1.8
$5.6
$5.3
$8.3
$10.2
$2.7
$0.4
$5.0
$7.4
$1.0
$2.3
$1.7
$3.0
$1.3
$1.6
$3.8
$10.4
$7.0
$13.5
$23.8
$35.8
$4.6
$41.2
MC
($b)
$0.68
$2.97
$3.33
$2.42
$2.88
$2.56
$0.53
$2.38
$2.07
$0.59
$1.06
$1.31
$1.14
$0.76
$2.14
$1.60
$4.87
$2.64
$1.95
$3.76
$1.02
$0.45
$2.57
$2.65
$2.03
$2.74
$3.24
$0.49
$2.32
$2.10
$0.54
$1.05
$1.19
$0.57
$1.24
$2.99
$2.04
$1.46
$3.74
$2.28
$1.86
$3.68
$1.15
$0.79
$3.15
$3.73
$2.43
$3.16
$3.06
$0.28
$2.34
$2.50
$0.68
$0.96
$1.86
$1.04
$0.86
$2.27
$2.00
$5.55
$2.71
$1.87
$4.03
$1.19
$3.61
$0.86
$3.41
$4.02
$2.54
$3.41
$3.24
$0.30
$2.43
$2.64
$0.74
$0.97
$2.25
$1.04
$0.90
$2.41
$2.07
$6.13
$3.16
$1.94
$4.21
$1.18
$4.16
Free cash flow per share
2014E
2015E
2016E
$1.57
2013
Source: Company reports; FactSet; Scotiabank GBM estimates.
6.1%
6.3%
5.7%
7.3%
7.7%
15.2%
13.8%
7.6%
6.9%
5.1%
6.8%
3.9%
4.2%
11.3%
7.7%
7.4%
5.7%
5.9%
6.1%
5.2%
7.6%
8.0%
6.2%
3.4%
2013
Comparative Valuation of Energy Infrastructure Companies
Notes:
Coverage: Matthew Akman
Figures for Canadian companies in C$; figures for US companies in US$. All metrics for BEP.UN are in US$ except for Current Price and Target Price.
Free cash flow is defined as cashflow from operations before working capital, after maintenance capex.
AQN
ALA
ACO.X
BEP
CU
CPX
CSE
EMA
FTS
INE
NPI
PEGI
TA
RNW
ENF
GEI
IPL
KEY
PPL
SE
TRP
VSN
Power & Utilities
Algonquin Power & Utilities Corp.
AltaGas Ltd.
ATCO Ltd.
Brookfield Renewable Energy Partners LP (US$)
Canadian Utilities Ltd.
Capital Power Corporation
Capstone Infrastructure Corp.
Emera Inc.
Fortis Inc.
Innergex Renewable Energy Inc.
Northland Power Inc.
Pattern Energy Group Inc. (US$)
TransAlta Corp.
TransAlta Renewables Inc.
Power & Utilities average
ENB
Enbridge Income Fund Holdings Inc.
Gibson Energy Inc.
Inter Pipeline Ltd
Keyera Corp.
Pembina Pipeline Corporation
Spectra Energy Corp. (US$)
TransCanada Corporation
Veresen Inc.
Pipelines & Midstream average
Ticker
Enbridge Inc.
Pipelines & Midstream
Company
October 14, 2014
Market Close
Exhibit 3 (Continued) - Comparative Valuation of Energy Infrastructure Companies
8.0%
7.1%
7.3%
8.0%
7.4%
9.6%
13.7%
6.8%
6.0%
5.9%
6.6%
4.9%
10.3%
6.6%
7.7%
7.0%
5.0%
5.8%
6.3%
5.5%
7.4%
6.2%
6.2%
6.1%
9.2%
7.5%
8.2%
8.1%
8.2%
11.5%
7.1%
6.7%
7.2%
6.8%
6.0%
7.0%
9.5%
7.5%
7.9%
7.4%
6.2%
6.7%
6.4%
5.3%
8.0%
7.2%
6.8%
7.4%
10.0%
8.1%
8.8%
8.4%
8.8%
12.2%
7.8%
6.9%
7.6%
7.4%
6.1%
8.5%
9.4%
7.8%
8.4%
7.9%
6.4%
7.4%
7.5%
5.5%
8.3%
7.1%
7.3%
8.5%
Free cash flow yield
2014E
2015E
2016E
5.6x
5.0x
3.7x
5.7x
4.0x
3.4x
5.3x
4.3x
6.2x
9.9x
6.3x
5.8x
3.9x
3.7x
5.2x
2.5x
6.0x
2.3x
3.2x
4.8x
5.2x
5.3x
4.5x
6.4x
Debt to
EBITDA
2014E
67%
59%
70%
61%
64%
50%
73%
66%
68%
82%
78%
66%
70%
39%
65%
44%
59%
48%
43%
63%
63%
51%
56%
80%
Pref to
Cap
2014E
Debt &
14.8
17.3
8.1
13.6
10.4
9.0
8.6
11.7
11.3
16.9
15.5
19.0
9.0
10.7
12.6
9.4
19.0
15.6
17.3
13.3
12.9
14.1
14.9
17.3
2013
13.5
15.4
8.2
13.7
10.6
11.6
7.6
10.3
13.2
16.4
13.4
14.2
8.1
11.3
12.0
10.6
20.2
14.7
17.0
13.2
12.5
19.1
15.5
16.8
13.5
14.1
8.2
12.6
10.2
9.3
8.9
11.4
9.7
16.5
17.0
11.1
8.1
11.4
11.6
9.9
15.6
13.0
16.6
12.8
12.0
14.3
13.6
14.7
EV/EBITDA
2014E
2015E
13.5
13.1
7.8
12.3
9.7
9.5
8.7
11.3
8.9
14.9
20.1
9.3
8.2
10.9
11.3
9.3
14.7
11.8
14.6
12.7
12.2
14.4
13.0
14.0
2016E
23
24
Universe of Coverage
Price
ACO.X-T
ALA-T
AQN-T
BEP.UN-T
CPX-T
CSE-T
CU-T
EMA-T
ENB-T
ENF-T
FTS-T
GEI-T
INE-T
IPL-T
KEY-T
NPI-T
PEGI-Q
PPL-T
RNW-T
SE-N
TA-T
TRP-T
VSN-T
C$45.76
C$42.00
C$8.53
C$33.80
C$26.59
C$3.90
C$38.75
C$35.03
C$48.63
C$28.77
C$34.57
C$30.65
C$9.96
C$32.08
C$83.25
C$15.97
US$26.68
C$42.11
C$11.51
US$35.52
C$11.01
C$50.53
C$16.60
Rating
Risk
SP
SP
SO
SO
SO
SP
SO
SP
SO
Restricted
SO
SP
SP
SP
SO
SO
SP
SO
SO
SP
SO
SP
SP
Low
Medium
Medium
Low
Medium
High
Low
Low
Low
N/A
Low
Medium
Low
Medium
Medium
Low
Medium
Medium
Medium
Medium
Medium
Low
Medium
1-Yr
ROR
$52.00
$52.00
$10.50
$38.00
$32.00
$4.50
$47.00
$36.00
$70.00
N/A
$39.00
$36.00
$11.50
$36.00
$100.00
$19.00
$34.00
$55.00
$13.00
$43.00
$14.00
$59.00
$19.00
15.6%
28.2%
27.7%
17.7%
25.5%
23.1%
24.1%
7.0%
47.1%
N/A
16.7%
21.4%
21.5%
16.4%
23.2%
25.7%
32.7%
34.8%
19.6%
24.9%
33.7%
20.6%
20.5%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
ATCO Ltd. (ACO.X-T)
Valuation: 20% discount to NAV
Key Risks to Price Target: Interest rates; Regulated ROE; Infrastructure construction
AltaGas Ltd. (ALA-T)
Valuation: 6.1% 2015E Free Cash Yield and 16.1x 2015E EV/EBITDA
Key Risks to Price Target: Power prices; Interest rates; Project costs; Gas volumes & NGL margins
Algonquin Power & Utilities Corp. (AQN-T)
Valuation: 7.5% 2015E Free Cash Yield and 14.8x 2015E EV/EBITDA
Key Risks to Price Target: Interest rates; FX; Hydrology and Wind Resource; Regulated ROE; Power prices
Brookfield Renewable Energy Partners LP (BEP.UN-T)
Valuation: 7.0% 2015E Free Cash Yield and 13.5x 2015E EV/EBITDA
Key Risks to Price Target: Hydrology; Wind Resource; FX; Interest Rates
Capital Power Corporation (CPX-T)
Valuation: 9.6% 2015E Free Cash Yield and 10.3x 2015E EV/EBITDA
Key Risks to Price Target: Power Prices; Growth Projects Entering Service; Environmental Regulations
Capstone Infrastructure Corporation (CSE-T)
Valuation: 6.2% 2015E Free Cash Yield and 9.2x 2015E EV/EBITDA
Key Risks to Price Target: Recontracting; Interest rates; FX; Hydrology; Wind resource
Valuation
25
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Canadian Utilities Limited (CU-T)
Valuation: 6.7% 2015E Free Cash Yield and 11.4x 2015E EV/EBITDA
Key Risks to Price Target: Interest rates; Regulated ROE; Spark spreads; FX
Emera Incorporated (EMA-T)
Valuation: 6.5% 2015E Free Cash Yield and 11.6x 2015E EV/EBITDA
Key Risks to Price Target: Interest rates; Regulated ROE; Rate cases; Growth projects; Environmental Legislation
Enbridge Inc. (ENB-T)
Valuation: 5.2% 2015E Free Cash Yield and 17.8x 2015E EV/EBITDA
Key Risks to Price Target: Interest rates; Growth projects; Commodity volumes
Fortis Inc. (FTS-T)
Valuation: 6.4% 2015E Free Cash Yield and 10.3x 2015E EV/EBITDA
Key Risks to Price Target: Interest rates; Rate base growth; Regulated ROE; Acquisitions; Regulatory
Gibson Energy Inc. (GEI-T)
Valuation: 6.3% 2015E Free Cash Yield and 11.2x 2015E EV/EBITDA
Key Risks to Price Target: Commodity price differentials; Drilling and oil field activity; Financing
Innergex Renewable Energy Inc. (INE-T)
Valuation: 5.9% 2015E Free Cash Yield and 17.3x 2015E EV/EBITDA
Key Risks to Price Target: Government Support for Renewables; Credit Spreads; Hydrology; Growth Projects
Inter Pipeline Ltd. (IPL-T)
Valuation: 5.6% 2015E Free Cash Yield and 16.9x 2015E EV/EBITDA
Key Risks to Price Target: Commodity prices; Frac spreads; Throughput volumes; FX; Quasi-utility ROE
Keyera Corp. (KEY-T)
Valuation: 5.6% 2015E Free Cash Yield and 15.3x 2015E EV/EBITDA
Key Risks to Price Target: Gas plant throughput; Marketing gross margins; Hedging mismatches
Northland Power Inc. (NPI-T)
Valuation: 5.1% 2015E Free Cash Yield and 18.2x 2015E EV/EBITDA
Key Risks to Price Target: Projects Entering Service; Interest Rates; Project Financing; FX
Pattern Energy Group Inc. (PEGI-Q)
Valuation: 5.5% 2015E Free Cash Yield and 12.6x 2015E Adjusted EV/Adjusted EBITDA
Key Risks to Price Target: Execution of Drop-Downs; Financing; Interest Rates & Credit Spreads; Wind Resource
Pembina Pipeline Corporation (PPL-T)
Valuation: 4.9% 2015E Free Cash Yield and 20.3x 2015E EV/EBITDA
Key Risks to Price Target: Regulatory approvals; Interest rates; Refinancing; Oil prices & throughput
TransAlta Renewables Inc. (RNW-T)
Valuation: 6.6% 2015E Free Cash Yield and 12.4x 2015E EV/EBITDA
Key Risks to Price Target: Execution of Drop-Downs; Financing; Interest Rates & Credit Spreads; Wind/Hydro Resource
26
Spectra Energy Corp (SE-N)
Valuation: 4.3% 2015E Free Cash Yield and 14.3x 2015E EV/EBITDA
Key Risks to Price Target: FX; Regulatory approvals and ROE's; Commodity prices; Growth projects
TransAlta Corporation (TA-T)
Valuation: 7.4% 2015E Free Cash Yield and 8.9x 2015E EV/EBITDA
Key Risks to Price Target: Power Prices; Interest Rates; Environmental Regulations; Re-contracting
TransCanada Corporation (TRP-T)
Valuation: 6.8% 2015E Free Cash Yield and 13.1x 2015E EV/EBITDA
Key Risks to Price Target: Regulatory approvals; Interest rates; Power prices; Growth projects
Veresen Inc. (VSN-T)
Valuation: 6.2% 2015E Free Cash Yield and 15.7x 2015E EV/EBITDA
Key Risks to Price Target: FX; NGL margins; Interest rates; Recontracting; Growth projects
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
27
Industry Comment
Wednesday, October 15, 2014, Pre-Market
Forest Products &
Diversified Industries
Revising FX & Commodity Price
Forecast
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
[email protected]
Luis Pardo Figueroa - (514) 287-3613
(Scotia Capital Inc. - Canada)
[email protected]
Event
■ We are revising our commodity price and FX forecasts, as well as making
the corresponding changes to our EPS estimates and share price targets.
ScotiaView Analyst Link
Implications
■ Newsprint: We have slightly trimmed our price forecast as continued
demand declines are likely to provide an offset to recent capacity shuts.
■ Pulp: We continue to see softwood prices decreasing from their cyclical
highs driven by the wide spread between hardwood and softwood prices. On
BHK, we see prices approaching their bottom as high cost mills are starting
to close and LatAm BEK producers have started to push for price increases.
■ Uncoated Freesheet: Our price increase assumption going forward implies
potential capacity closures and/or a decrease in paper imports.
■ Coated Paper: We expect recent capacity closures to support our forecast
of increasing prices going forward.
■ Containerboard: Sluggish growth outside N.A, a strong US$, softer
wastepaper prices, and increasing supply are likely to support our forecast
of decreasing prices.
■ OSB: We continue to believe OSB prices should increase from its lows, as
U.S. housing starts continue their slow but steady recovery.
■ Lumber: Our forecast remains unchanged as we continue to believe prices
should rise driven by a growing US demand and a steady Asian market.
Recommendation
■ Please note we are making two rating changes: (1) CFP to SO from SP and
(2) UFS to SO from SP. All other ratings remain the same.
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.
28
Revising Our Commodity Price Deck & FX Assumptions Mainly for Q3/14
Actuals…
Exhibit 1 – Commodity Price Forecast (US$/unit)
Q3/14E
New
Old
Pulp and Paper
NBSK Pulp (mt)
BEK Pulp (N.A.; mt)
Newsprint (mt)
Uncoated Freesheet (st)
Lightweight Coated (st)
Linerboard (st)
Wood Products
Lumber (W.SPF 2x4; Mfbm)
OSB (N.C. 7/16"; Msf)
Foreign Exchange
US$/C$
CLP/US$
R$/US$
Q4/14E
New
Old
2014E
New
Old
2015E
New
Old
2016E
New
Old
1,030
822
unch.
unch.
unch.
unch.
1,018
812
605
1,020
790
790
1,000
unch.
610
unch.
unch.
790
970
805
615
1,020
800
780
1,019
838
606
unch.
unch.
790
1,009
835
608
1,018
801
788
unch.
unch.
unch.
unch.
845
unch.
954
846
625
1,050
850
770
unch.
unch.
unch.
unch.
unch.
unch.
1,000
900
625
1,050
915
770
357
217
350
215
unch.
unch.
350
225
352
220
351
219
unch.
unch.
388
258
unch.
unch.
400
301
$0.900
591
$2.350
$0.913
575
$2.300
$0.919 $0.921
578
577
$2.275 $2.245
$0.910 $0.914
569
565
$2.304 $2.284
$0.886 $0.893
594
576
$2.379 $2.424
Source: RISI; Random Lengths; Scotiabank GBM estimates.
■ Newsprint – Although continued supply discipline and recent capacity shuts, which
removed ~250 thousand tonnes per year of the market, should provide support for price
increases, we believe these may be less than previously anticipated as continued demand
declines provide an offset (North American demand was down 10% YOY in August ‘14).
Thus we have slightly trimmed our short term newsprint price assumption.
■ Pulp –Despite entering the seasonally stronger Q4, usually benefitting from strong
seasonally stronger demand and maintenance outages in the northern hemisphere, we
continue to see softwood prices decreasing from their cyclical highs before year-end and the
softwood/hardwood gap narrowing somewhat. Our assumption is based on the fact the
spread between hardwood and softwood is at its highest level in ~20 years ($215/tonne) and
we expect both producers (where available) and end-users (to the extent possible) to increase
substitution between grades as much as possible. In addition, the gap could lead to
permanent shifts from mechanical to woodfree paper grades if the gap remains for an
extended period of time. Additionally, with ~725 thousand tons per year of coated paper
capacity removed from the North American market, we expect demand for softwood pulp in
the region to decline. On the hardwood side, we see prices approaching their bottom as high
cost mills are starting to close (Old Town Fuel & Fiber's 200,000 tonnes/yr market NBHK
pulp mill in Maine and ENCE’s 410,000 tonnes/yr market BEK Huelva mill in Spain) and
Latin American BEK producers have started to push for price increases. Although these
attempts do not necessarily guarantee higher prices, we see them as an leading indicator of
what’s to come.
■ Uncoated Freesheet (UFS) – Much like newsprint, we see supply discipline playing a key
role in the UFS market. Our price increase assumption going forward implies potential
capacity closures and/or a decrease in paper imports into North America. Currently, UFS
imports into North America are at their highest level in over 10 years, making up 12.5% of
the region’s demand.
■ Coated Paper (LWC) – As mentioned above, ~725 thousand tonnes of annual capacity has
been taken out the market as FutureMark, Resolute Forest Products and Verso each closed a
mill. We expect this to support our forecast of increasing prices going forward. Additionally,
should the potential merger between Verso and NewPage be successful, we could see further
closures that could lead to incremental price increases.
■ Containerboard – Sluggish growth outside North America, the strong US$ (making US
exports unattractive), weaker OCC prices and increasing supply are likely to support our
forecast of decreasing prices going forward.
$0.880 $0.890
584
578
$2.410 $2.500
29
■ OSB – We continue to believe OSB prices should increase from its lows, as U.S. housing
starts continue their slow but steady recovery. Additionally, industry publications report that
prices in the US South (large region for US producers such as NBD and LPX) are coming off
their bottom as buyers are coming off the sidelines due to thinning field inventories.
■ Lumber – Our forecast for lumber prices remains unchanged as we continue to believe they
should go higher driven by steady demand from Asia and growing demand in the US.
■ FX – Please note our FX assumptions are in line with Bloomberg consensus estimates. We
expect the US$ to strengthen vs. the C$, R$ and CLP.
…As Well As Our Estimates & Ratings
■ As a result of the aforementioned commodity and foreign exchange adjustments, we are
making certain revisions to our estimates (see Exhibit 11) and target prices (see Exhibit 12).
Please note we are making two rating changes: (1) CFP to SO from SP and (2) UFS to SO
from SP. Please refer our notes on each company published today for further details.
Exhibit 2 – Estimates Revision
Ainsworth
Brookfield Infrastructure (US$)3
Canexus1
Canfor
Canfor Pulp
Cascades
Chemtrade Income Fund1
Domtar (US$)
Empresas CMPC (US$)
Empresas COPEC (US$)
Fibria (R$)
Fortress Paper
Interfor
Louisiana-Pacific (US$)
Norbord (US$)
Parkland Fuels
Resolute FP (US$)
Superior Plus4
Tembec2
West Fraser Timber
Western Forest
Weyerhaeuser (US$)
Q3/14E
New
Old
unch.
$0.00
unch.
$0.86
unch.
$0.04
$0.52
$0.54
$0.36
$0.39
$0.14
$0.16
unch.
$0.46
$0.85
$0.87
unch.
$0.03
$0.17
$0.18
($0.30)
($0.21)
($0.80)
($0.81)
unch.
$0.22
($0.02)
$0.03
$0.00
$0.06
unch.
$0.13
$0.26
$0.21
unch.
$0.30
n.a.
$0.79
$0.80
$0.02
$0.03
$0.31
$0.37
1
DCPU
2
September year-end
3
Funds From Operations
4
AOCF
Source: Company reports; Scotiabank GBM estimates.
Q4/14E
New
Old
unch.
$0.02
unch.
$0.91
unch.
$0.07
$0.45
$0.47
$0.33
$0.25
$0.17
$0.16
unch.
$0.41
$0.88
$0.85
unch.
$0.03
$0.14
$0.13
($0.11)
($0.11)
($0.73)
$0.77
$0.23
$0.26
unch.
($0.03)
$0.00
$0.05
unch.
$0.20
$0.17
$0.10
unch.
$0.64
$0.07
$0.04
$0.75
$0.75
unch.
$0.05
$0.00
$0.36
2014E
New
Old
unch.
($0.01)
unch.
$3.51
unch.
$0.23
$1.72
$1.75
$1.33
$1.28
$0.39
($0.54)
unch.
$1.30
$2.95
$2.93
$0.11
$0.12
unch.
$0.78
$0.76
$0.85
($4.55)
($4.59)
$1.20
$1.23
($0.01)
$0.05
$0.33
$0.44
unch.
$0.69
$0.41
$0.28
unch.
$1.82
$0.28
$0.25
$3.12
$3.14
$0.21
$0.22
$1.42
$1.52
2015E
New
Old
$0.25
$0.24
unch.
$3.77
unch.
$0.43
$2.96
$2.94
unch.
$1.38
$0.66
$0.65
$2.03
$2.04
$3.65
$3.94
$0.13
$0.14
$0.90
$0.89
$0.66
$0.16
($2.27)
($2.29)
$1.69
$1.85
$0.34
$0.40
$1.15
$1.14
unch.
$1.05
$0.80
$0.73
unch.
$2.08
$0.37
$0.40
$5.26
$5.18
$0.30
$0.34
$1.40
$1.61
2016E
New
Old
unch.
$0.52
unch.
$3.94
$0.58
$0.57
$3.36
$3.26
$1.63
$1.58
$0.61
$0.67
unch.
$2.09
$3.57
$3.93
unch.
$0.22
$1.00
$0.99
$0.57
$1.19
($1.31)
($1.45)
$1.87
$1.94
$1.01
$1.09
$2.28
$2.27
unch.
$1.09
$1.02
$0.83
$2.21
$2.20
$0.60
$0.64
$5.69
$5.57
$0.28
$0.25
$1.74
$1.94
30
Exhibit 3 - Valuation & Ratings
Ainsworth
Brookfield Infrastructure (US$)
Canexus
Canfor
Canfor Pulp
One-Year
Target
New
Old
unch.
$3.30
Rating
New
Old
unch.
SO
Valuation Methodology
New
unch.
Old
4.0x NTM EV/EBITDA 1-Year
Fwd (25%) + 3.0x EV/Peak
EBITDA (75%)
1.0x NAV
1.0x NAV
4.0x EV/Peak EBITDA
4.75x NTM EV/EBITDA 1-Year
Forward
5.5x NTM EV/EBITDA (1-year
forward) + Boralex Stake +
Greenpac stake
9.5% FCF yield
5.0x NTM EV/EBITDA 1-Year
Forward
8.5x NTM EV/EBITDA 1-Year
Forward
8.5x NTM EV/EBITDA 1-Year
Forward
7.5x NTM EV/EBITDA 1-Year
Forward
Pro-forma recapitalization
scenario
3.5x EV/Peak EBITDA
5.5x NTM EV/EBITDA 1-Year
Fwd (25%) + 4.0x EV/Peak
EBITDA (75%)
unch.
unch.
$29.25
unch.
$42.75
$5.00
$30.00
$14.75
unch.
unch.
SO
unch.
SP
SP
SP
SO
unch.
unch.
4.25x EV/Peak EBITDA
unch.
unch.
$8.00
unch.
SP
Chemtrade Income Fund
Domtar (US$)
unch.
$50.00
$22.00
$52.00
unch.
SO
SO
SP
5.35x NTM EV/EBITDA (1-year
forward) + Boralex Stake +
Greenpac stake
unch.
unch.
Empresas CMPC (CLP)
unch.
1,600
unch.
SP
unch.
Empresas COPEC (CLP)
8,560
8,720
unch.
SP
unch.
Fibria (US$)
$12.00
$13.00
unch.
SP
unch.
unch.
$2.00
unch.
SU
unch.
Interfor
Louisiana-Pacific (US$)
unch.
$17.25
$19.75
$17.75
unch.
unch.
SO
SO
unch.
5.5x NTM EV/EBITDA 1-Year
Fwd (25%) + 4.25x EV/Peak
EBITDA (75%)
Norbord
$31.25
$32.00
unch.
SO
unch.
5.5x NTM EV/EBITDA 1-Year
Fwd (25%) + 4.0x EV/Peak
EBITDA (75%)
unch.
$22.00
unch.
SP
unch.
9.5x EV/EBITDA NTM 1-year
forward
Resolute FP (US$)
$17.00
$16.50
unch.
SU
unch.
Superior Plus
Tembec
unch.
$3.50
$14.50
$3.60
unch.
unch.
SO
SP
unch.
unch.
West Fraser Timber
Western Forest
Weyerhaeuser (US$)
$63.75
unch.
unch.
$62.00
$2.60
$36.75
unch.
unch.
unch.
SO
SO
SP
unch.
unch.
unch.
5.0x NTM EV/EBITDA 1-Year
Forward
1.0x NAV
4.75x NTM EV/EBITDA 1-Year
Forward
4.25x EV/Peak EBITDA
3.5x EV/Peak EBITDA
12.0x NTM EV/EBITDA 1-Year
Forward
Cascades
Fortress Paper
Parkland Fuels
Source: Company reports; Scotiabank GBM estimates.
31
Universe of Coverage
Price
ANS-T
BIP-N
CAS-T
CFP-T
CFX-T
CHE.UN-T
CMPC-SN
COPEC-SN
CUS-T
FBR-N
FTP-T
IFP-T
LPX-N
NBD-T
PKI-T
RFP-N
SPB-T
TMB-T
UFS-N
WEF-T
WFT-T
WY-N
C$2.32
US$37.76
C$5.83
C$23.13
C$10.83
C$19.24
CLP 1369.60
CLP 7036.50
C$4.00
US$10.24
C$2.39
C$15.65
US$13.09
C$21.65
C$20.23
US$15.91
C$12.40
C$3.07
US$33.32
C$2.06
C$51.86
US$32.50
Rating
Risk
SO
SP
SP
SO
SO
SP
SP
SO
SP
SP
SU
SO
SO
SO
SP
SU
SP
SP
SO
SO
SO
SP
High
Medium
High
High
High
High
High
High
High
High
High
High
High
High
Medium
High
High
High
High
High
High
High
1-Yr
ROR
$3.30
$42.75
$8.00
$29.25
$14.75
$22.00
1,600
8,560
$5.00
$12.00
$2.00
$19.75
$17.25
$31.25
$22.00
$17.00
$14.50
$3.50
$50.00
$2.60
$63.75
$36.75
42.2%
18.3%
40.0%
26.5%
38.5%
20.6%
17.6%
23.4%
35.0%
17.2%
-16.3%
26.2%
31.8%
55.4%
14.0%
6.9%
21.8%
14.0%
54.6%
30.1%
23.5%
16.6%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Ainsworth Lumber Co. Ltd. (ANS-T)
New
EPS14E: $0.00
EPS15E: $0.25
Old
EPS14E: $-0.01
EPS15E: $0.24
Valuation: 4.0x NTM EV/EBITDA 1-Year Fwd (25%) + 3.0x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Brookfield Infrastructure Partners LP (BIP-N)
Valuation: 1.0x NAV
Key Risks to Price Target: Lower-than-expected GDP, regulatory regime changes, weaker-than-expected U.S. housing recovery
Cascades Inc. (CAS-T)
New
EPS14E: $0.39
EPS15E: $0.66
EPS16E: $0.61
Old
EPS14E: $-0.54
EPS15E: $0.65
EPS16E: $0.67
Valuation: 5.5x NTM EV/EBITDA (1-year forward) + Boralex Stake + Greenpac stake
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Canfor Corporation (CFP-T)
New SO
$29.25
EPS14E: $1.72
EPS15E: $2.96
EPS16E: $3.36 4.25x EV/Peak EBITDA
Old SP
$30.00
EPS14E: $1.75
EPS15E: $2.94
EPS16E: $3.26 4.0x EV/Peak EBITDA
Valuation: 4.25x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
32
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Canfor Pulp Products Inc. (CFX-T)
New
EPS14E: $1.33
EPS16E: $1.63
Old
EPS14E: $1.28
EPS16E: $1.58
Valuation: 4.75x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Chemtrade Logistics Income Fund (CHE.UN-T)
New
DCPU15E: $2.03
Old
DCPU15E: $2.04
Valuation: 9.5% FCF yield
Key Risks to Price Target: Lower-than-expected GDP, lower-than-expected prices and volumes
Empresas CMPC SA (CMPC-SN)
New
EBITDA14E: US$983
EBITDA15E:
US$1,051
EBITDA16E:
US$1,341
Old
EBITDA14E: US$985
EBITDA15E:
US$1,083
EBITDA16E:
US$1,355
Valuation: 8.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected pulp prices and demand, FX
Empresas Copec SA (COPEC-SN)
New
8,560
EBITDA14E:
US$2,081
EBITDA16E:
US$2,500
Old
8,720
EBITDA14E:
US$2,084
EBITDA16E:
US$2,514
Valuation: 1.0x NAV
Key Risks to Price Target: Demand and prices for pulp and panels, fluctuations in the price of oil and to a lesser extent, FX rates.
Canexus Corporation (CUS-T)
New
EBITDA14E: $107
EBITDA15E: $154
EBITDA16E: $176
Old
EBITDA14E: $106
EBITDA15E: $153
EBITDA16E: $174
Valuation: 1.0x NAV
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Fibria Celulose SA (FBR-N)
New
$12.00
EBITDA14E: BRL
2,441
EBITDA15E: BRL
2,727
EBITDA16E: BRL
3,175
Old
$13.00
EBITDA14E: BRL
2,414
EBITDA15E: BRL
2,879
EBITDA16E: BRL
3,436
Valuation: 7.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected pulp prices and demand, FX
33
Fortress Paper Ltd. (FTP-T)
New
EPS14E: $-4.55
EPS15E: $-2.27
EPS16E: $-1.31
Old
EPS14E: $-4.59
EPS15E: $-2.29
EPS16E: $-1.45
Valuation: Pro-forma recapitalization scenario
Key Risks to Price Target: Lower-than-expected prices, volumes
Interfor Corporation (IFP-T)
New
EPS14E: $1.20
EPS15E: $1.69
EPS16E: $1.87
Old
EPS14E: $1.23
EPS15E: $1.85
EPS16E: $1.94
Valuation: 3.5x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Louisiana-Pacific Corporation (LPX-N)
New
$17.25
EPS14E: $-0.01
EPS15E: $0.34
EPS16E: $1.01 5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.25x EV/Peak
EBITDA (75%)
Old
$17.75
EPS14E: $0.05
EPS15E: $0.40
EPS16E: $1.09 5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.0x EV/Peak
EBITDA (75%)
Valuation: 5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.25x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Norbord Inc. (NBD-T)
New
$31.25
EPS14E: US$0.33
EPS15E: US$1.15
EPS16E: US$2.28
Old
$32.00
EPS14E: US$0.44
EPS15E: US$1.14
EPS16E: US$2.27
Valuation: 5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.0x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Parkland Fuel Corporation (PKI-T)
Valuation: 9.5x EV/EBITDA NTM 1-year forward
Key Risks to Price Target: Acquisition risk, fuel margins, supply agreements & general economic conditions
Resolute Forest Products Inc. (RFP-N)
New
$17.00
EPS14E: $0.41
EPS15E: $0.80
EPS16E: $1.02 4.8x NTM EV/EBITDA 1-Year Forward
Old
$16.50
EPS14E: $0.28
EPS15E: $0.73
EPS16E: $0.83 5.0x NTM EV/EBITDA 1-Year Forward
Valuation: 4.8x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Superior Plus Corp. (SPB-T)
New
CFPS16E: $2.21
Old
CFPS16E: $2.20
Valuation: 1.0x NAV
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Tembec Inc. (TMB-T)
New
$3.50
EPS14E: $0.28
EPS15E: $0.37
EPS16E: $0.60
Old
$3.60
EPS14E: $0.25
EPS15E: $0.40
EPS16E: $0.64
Valuation: 4.75x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
34
Domtar Corporation (UFS-N)
New SO
$50.00
EPS14E: $2.95
EPS15E: $3.65
EPS16E: $3.57
Old SP
$52.00
EPS14E: $2.93
EPS15E: $3.94
EPS16E: $3.93
Valuation: 5.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Western Forest Products Inc. (WEF-T)
New
EBITDA14E: $124
EBITDA15E: $165
EBITDA16E: $190
Old
EBITDA14E: $130
EBITDA15E: $176
EBITDA16E: $195
Valuation: 3.5x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected Canadian dollar
West Fraser Timber Co. Ltd. (WFT-T)
New
$63.75
EPS14E: $3.12
EPS15E: $5.26
EPS16E: $5.69 4.25x EV/Peak EBITDA
Old
$62.00
EPS14E: $3.14
EPS15E: $5.18
EPS16E: $5.57 4.2x EV/Peak EBITDA
Valuation: 4.25x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Weyerhaeuser Company (WY-N)
New
EPS14E: $1.40
EPS15E: $1.42
EPS16E: $1.74
Old
EPS14E: $1.52
EPS15E: $1.61
EPS16E: $1.94
Valuation: 12.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
35
Industry Comment
Tuesday, October 14, 2014, Pre-Market
Global Fertilizers
How Do Replacement Costs Tell
Us To Pair Trade the Carnage?
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
[email protected]
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
■ We examine how global fertilizer stocks are currently trading relative to
replacement costs.
ScotiaView Analyst Link
Implications
■ Over the past four years, we estimate fertilizer stocks have traded at 52% of
replacement cost, in a 36% (K+S) to 65% (CF) range. Currently, the global
fertilizer group is trading at 42% of replacement cost, or about 20% below
normal levels. We think this presents a trading opportunity.
■ The best fertilizer carnage pair trades? It's not often we would
recommend a trade of LONG K+S and SHORT YAR, but this is exactly the
best trade our replacement cost analysis suggests. For North Americans, the
best trade is to LONG IPI and SHORT CF, although clearly the CF story is
also moving on MOE news/noise. There is no clear pair for Canadians, as
both POT and AGU are trading at a similar discount to their normal
replacement cost trading ranges. Pair trades aside, we believe it would make
sense for long-term investors to buy both POT and AGU here.
Recommendation
■ While we don't know how much carnage is left, we see a long-term
valuation opportunity emerging for investors, especially as a weaker 2015 is
largely priced in. Therefore, the contrarian in us suggests buying the sector
selectively, rather than panic selling. Our detailed fall fertilizer update note
will follow shortly.
Universe of Coverage
Price
AGU-N
CF-N
IPI-N
MOS-N
NPK-T
POT-N
SDF-DE
SQM-N
YAR-OL
US$83.44
US$252.82
US$13.41
US$41.06
C$0.51
US$31.51
€19.54
US$22.68
302.50kr
Rating
Risk
SO
SO
SP
SP
SP
SP
SU
SP
SP
Medium
High
High
High
Speculative
High
High
Medium
High
1-Yr
ROR
$110.00
$300.00
$13.50
$52.00
$2.10
$33.00
€21.00
$33.00
300.00kr
35.4%
21.0%
0.7%
29.1%
311.8%
9.2%
9.2%
48.2%
1.5%
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.
36
carnage?
Exhibit 1 – Historical Replacement Cost Trading Ranges
100%
90%
Price / RCN Per Share (%)
How do replacement costs tell us to pair trade the
■ Over the past four years, we estimate global fertilizer
stocks have traded at 52% of replacement cost, in a 36%
(K+S) to 65% (CF) range. Currently, the global fertilizer
group is trading at 42% of replacement cost, or about 20%
below normal levels. All else equal, we can draw two
conclusions from this: (1) there is a clear trading opportunity
for those that believe the current market carnage is temporary;
and (2) industry consolidation generally makes more sense
than building new assets. While this analysis lacks
perspective, it partially explains why BHP took a run at POT,
AGU went hostile on CF, CF acquired TRA, and perhaps
even why YAR and CF are now talking.
■ Why stocks trade at a discount to replacement cost. It
should come as no surprise that asset quality impacts how
stocks trade. Looking at the bars in Exhibit 2, what first
jumps out to us is that perceived higher cost producers (K+S
and YAR)_trade at a deeper discount to replacement cost than
perceived lower cost producers (CF and POT). If stocks
consistently traded at a significant premium to replacement
cost, it would make more sense to build your own fertilizer
plant, rather than buy a publicly traded one, after adjusting
for time value of money and execution risk.
■ Long K+S and short YAR. This is not a trade we would
normally recommend, especially as K+S has been our only
fertilizer Sector Underperform for some time. However, our
analysis suggests K+S is trading 37% lower than where it
normally trades relative to its replacement cost, while YAR is
trading at a 10% premium (the only one in the group). YAR’s
premium is explained by a better-than-expected feedstock
cost environment, record nitrate premium (in our view, both
unsustainable), and more recently, a belief by some that it
will create value through a transaction with CF. We think
K+S is trading at a steeper discount than its peers as the
market becomes convinced that next year will be tough for
potash producers. Our view on K+S is supported by the order
of potash stock trading discounts being the same order as
how the stocks rank on the potash cost curve.
■ Other replacement cost trades are less compelling. For
North Americans’ mandates, the best trade is to Long IPI and
Short CF, although clearly the CF story is also moving on
MOE news/noise, so it’s a little tougher to have conviction
with this trade. There is no clear pair for Canadians, as both
POT and AGU are trading at a similar discount to their
normal replacement cost trading ranges. Pair trades aside, we
believe it would make sense for long-term investors to buy
both POT and AGU here, although we have no sense as to
whether the market bloodbath is complete.
■ Conclusion. While every company has a unique story
constantly unfolding, how these stocks trade relative to
replacement cost is fairly stable, especially if we have a good
sense as to where we are in the fertilizer investment cycle. We
have seen these market corrections before, and will see them
again. While we don’t know how much carnage is left, we see
a long-term valuation opportunity emerging for investors,
especially as a weaker 2015 is largely priced in. Therefore,
the contrarian in us suggests buying the sector selectively,
rather than panic selling. Our detailed fall fertilizer update
note will follow shortly.
POT
MOS
SDF
AGU
CF
YAR
IPI
80%
70%
60%
50%
40%
30%
20%
10%
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
Source: Company reports; Bloomberg; Scotiabank GBM estimates.
Exhibit 2 - Current Replacement Cost Trading
80%
70%
L/T Stock Price As a Percentage of Replacement Cost
Current Stock Price As a Percentage of Replacement Cost
60%
50%
40%
30%
20%
10%
0%
SDF
YAR
MOS
IPI
AGU
POT
CF
Source: Company reports; Bloomberg; Scotiabank GBM estimates.
Exhibit 3 – Replacement Cost Suggests LONG High Cost Potash, SHORT N
20%
10%
10%
LONG?
0%
-1%
-10%
SHORT?
-20%
-30%
-40%
-29%
-29%
IPI
MOS
-24%
-23%
POT
AGU
-37%
-50%
SDF
Source: Scotiabank GBM estimates.
CF
YAR
37
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Agrium Inc. (AGU-N)
Valuation: 7.5x 2015E EBITDA, 14x 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)
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)
Valuation: 9.5x 2015E EBITDA, 22x 2015E EPS, DCF @ 10%, 40% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
The Mosaic Company (MOS-N)
Valuation: 8.5x 2015E EBITDA, 15.5x 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)
Valuation: 0.6x NAV
Key Risks to Price Target: Financing, development progress, potash supply/demand
Potash Corporation of Saskatchewan, Inc. (POT-N)
Valuation: 9x 2015E EBITDA, 16.5x 2015E EPS, DCF @ 9.5%, 50% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
K+S AG (SDF-DE)
Valuation: 6.5x 2015E EBITDA, 12x 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)
Valuation: 11x 2015E EBITDA, 19.5x 2015E EPS, DCF @ 10.5%
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Yara International ASA (YAR-OL)
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
38
Intraday Flash
Tuesday, October 14, 2014 @ 11:23:37 AM (ET)
Oil & Gas - E&P
Running WTI Scenarios: When the
Going Gets Tough
William S. Lee, P.Eng. - (403) 213-7331
(Scotia Capital Inc. - Canada)
[email protected]
Cameron Bean - (403) 218-6786
(Scotia Capital Inc. - Canada)
[email protected]
Event
ScotiaView Analyst Link
■ In the midst of a widespread sell-off in the market, we are presenting several
oil price scenarios and the impact on our coverage universe.
Implications
■ The past month has seen a huge level of volatility in the market, with the
S&P/TSX E&P Index down 20.7% since the beginning of September,
versus WTI and Edmonton Light down 10.6% and 8.8%, respectively.
■ Exhibits 1 and 2 provide some analysis of hedging positions across our
universe, and Exhibits 3-7 present five different WTI oil price scenarios and
the impact on the major metrics for our names.
■ Valuations. The group is discounting US$75-$80/bbl WTI in our opinion.
At US$75/bbl WTI, the group trades at 7.7x 2015E EV/DACF, P/2P NAV
of 1.7x (P/1P NAV at 3.2x), and 15E D/CF of 3.2x.
■ At US$80/bbl WTI, the group trades at 7.1x 2015E EV/DACF, P/2P NAV
of 1.5x (P/1P NAV at 2.5x), and 15E D/CF of 2.8x.
Recommendation
■ While we can never time the bottom, we would start positioning portfolios
for higher-quality names that have sold off with the market, but are still very
well-run companies with good assets and strong management teams.
■ For oil, we recommend RRX and SPE; for gas we like BXE. Among the
divvy payers, we recommend WCP and TOG; and for deep value we
recommend LEG. From a play perspective, the liquids-rich Montney
players (NVA, POU) have held in there but we are still bullish on these
names given the play's top economics.
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.
39
Hedging Analysis
■ Exhibit 1 shows the percentage of forecast production (GBM estimates) for 2015E that is
hedged for oil, gas and total production. Exhibit 2 provides some detail on the types of
hedges for applicable producers and an indication of the price at which each company is
hedged. Note that we have excluded detail on any heavy diff hedges in the second exhibit.
Exhibit 1 - 2015E Hedged Production
Company
Advantage Oil & Gas
Arcan Resources
Bellatrix Exploration
Birchcliff Energy
BlackPearl Resources
Cequence Energy
Crew Energy
Delphi Energy
Kelt Exploration
Legacy Oil + Gas
LGX Oil + Gas
Lightstream Resources
Long Run Exploration
NuVista Energy
Painted Pony Petroleum
Paramount Resources
Pinecrest Energy
Raging River Exploration
RMP Energy
Spartan Energy
Spyglass Resources
Surge Energy
TORC Oil & Gas
Trilogy Energy
Twin Butte Energy
Whitecap Resources
Average
Ticker
AAV
ARN
BXE
BIR
PXX
CQE
CR
DEE
KEL
LEG
OIL
LTS
LRE
NVA
PPY
POU
PRY
RRX
RMP
SPE
SGL
SGY
TOG
TET
TBE
WCP
Analyst
WL
CB
CB
CB
WL
CB
CB
CB
CB
WL
WL
WL
WL
WL
CB
WL
CB
WL
CB
CB
WL
CB
WL
WL
WL
WL
2015E Hedging
Oil
Gas
Total
0%
48%
47%
66%
0%
64%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
16%
14%
37%
14%
23%
0%
27%
18%
0%
0%
0%
0%
0%
0%
0%
0%
0%
22%
0%
17%
17%
31%
24%
24%
6%
13%
0%
5%
5%
0%
0%
0%
0%
0%
0%
1%
0%
1%
0%
0%
0%
0%
0%
0%
27%
7%
17%
31%
37%
32%
26%
0%
22%
0%
0%
0%
47%
0%
43%
40%
27%
37%
13%
8%
14%
Source: Company reports; Scotiabank GBM estimates.
Exhibit 2 - 2015E Hedges - Details
Company
Advantage Oil & Gas
Arcan Resources
Cequence Energy
Crew Energy
Ticker
AAV
ARN
CQE
CR
Delphi Energy
Lightstream Resources
Long Run Exploration
DEE
LTS
LRE
NuVista Energy
Painted Pony Petroleum
Raging River Exploration
Spyglass Resources
Surge Energy
TORC Oil & Gas
Twin Butte Energy
NVA
PPY
RRX
SGL
SGY
TOG
TBE
Whitecap Resources
WCP
2015E Oil Hedging
2015E Gas Hedging
Swap: 75.8 mmcf/d hedged at $3.90/mcf
Swap: 2.4 mbbl/d hedged at $91.32/bbl
Swap: 1.8 mbbl/d hedged at $102.73/bbl
Short Call: 0.8 mbbl/d @ Avg $101.45/bbl
Swap: 11.8 mmcf/d hedged at $3.93/mcf
Swap: 14.2 mmcf/d hedged at $4.01/mcf
Swap: 13.7 mmcf/d hedged at $3.61/mcf
Collar: 6.3 mbbl/d @ Floor US$80.97/bbl & Ceiling US$103.95/bbl
Swap: 0.7 mbbl/d hedged at US$87.50/bbl
Collar: 2.5 mbbl/d @ Floor US$95.00/bbl & Ceiling US$97.50/bbl
Long Call: 0.5 mbbl/d @ US85.00/bbl
Long Put: 0.2 mbbl/d @ $104.84/bbl
Swap: 1.9 mbbl/d hedged at $98.72/bbl
Swap: 0.2 mbbl/d hedged at $106.46/bbl
Swap: 1.4 mbbl/d hedged at $99.23/bbl
Swap: 3.4 mbbl/d hedged at $98.51/bbl
Collar: 2.6 mbbl/d @ Floor $90.64/bbl & Ceiling $111.28/bbl
Swap: 6.5 mbbl/d hedged at $102.29/bbl
WCS Swap: 3.3 mbbl/d hedged at $78.14/bbl
Swap: 12.0 mbbl/d hedged at $98.00/bbl
Source: Company reports; Scotiabank GBM.
Collar: 41.9 mmcf/d @ Floor $3.81/mcf & Ceiling $4.41/mcf
AECO Diff: 6.3 mmcf/d hedged at -US$0.44/mcf
Swap: 5.9 mmcf/d hedged at $4.19/mcf
Swap: 3.1 mmcf/d hedged at $4.26/mcf
Swap: 7.6 mmcf/d hedged at $4.14/mcf
Swap: 15.4 mmcf/d hedged at $3.96/mcf
40
Scenario 1: WTI @ US$90.00/bbl and AECO @ $3.50/mcf
■ Note: Flat WTI & AECO prices used. No adjustments to capex programs / facility sizes.
Exhibit 3 – Scenario: WTI @ US$90.00/bbl & AECO @$3.50/mcf
Scenario: WTI US$90.00 /bbl & AECO $3.50 /mcf
Company
Advantage Oil & Gas
Arcan Resources
Bellatrix Exploration
Birchcliff Energy
BlackPearl Resources
Cequence Energy
Crew Energy
Delphi Energy
Kelt Exploration
Legacy Oil + Gas
LGX Oil + Gas
Lightstream Resources
Long Run Exploration
NuVista Energy
Painted Pony Petroleum
Paramount Resources
Pinecrest Energy
Raging River Exploration
RMP Energy
Spartan Energy
Spyglass Resources
Surge Energy
TORC Oil & Gas
Trilogy Energy
Twin Butte Energy
Whitecap Resources
Average
Ticker
AAV
ARN
BXE
BIR
PXX
CQE
CR
DEE
KEL
LEG
OIL
LTS
LRE
NVA
PPY
POU
PRY
RRX
RMP
SPE
SGL
SGY
TOG
TET
TBE
WCP
Analyst
WL
CB
CB
CB
WL
CB
CB
CB
CB
WL
WL
WL
WL
WL
CB
WL
CB
WL
CB
CB
WL
CB
WL
WL
WL
WL
P / NAVPS
PDP
1P
7.5x
2.1x
nmf
0.8x
1.5x
1.2x
3.4x
1.9x
2.1x
1.5x
1.1x
0.9x
2.8x
2.0x
5.3x
2.7x
3.0x
2.5x
1.5x
1.1x
1.0x
0.8x
4.3x
1.6x
2.6x
1.3x
4.1x
2.4x
3.3x
3.0x
12.4x
5.8x
0.3x
0.2x
4.1x
2.4x
5.4x
4.0x
1.9x
1.6x
0.8x
0.6x
2.4x
1.9x
1.8x
1.5x
4.3x
4.0x
5.0x
2.2x
3.9x
2.3x
3.4x
2.0x
2P
1.5x
0.1x
0.8x
1.2x
0.9x
0.6x
1.4x
1.6x
1.9x
0.6x
0.6x
0.6x
0.8x
1.7x
2.2x
3.8x
0.1x
1.7x
1.9x
1.3x
0.4x
1.1x
1.2x
3.3x
0.8x
1.6x
1.3x
EV / DACF
2014E
2015E
6.2x
6.0x
6.2x
6.5x
4.5x
4.4x
6.2x
6.6x
5.6x
4.7x
4.7x
5.4x
6.6x
7.3x
7.6x
6.6x
12.0x
10.5x
4.1x
3.6x
6.7x
6.5x
3.2x
4.3x
3.8x
3.2x
13.8x
7.3x
10.9x
11.2x
20.1x
9.4x
4.3x
4.4x
7.2x
6.4x
5.0x
4.0x
8.8x
5.4x
5.0x
5.1x
6.5x
5.9x
5.9x
5.8x
8.9x
9.9x
4.0x
3.4x
8.0x
6.7x
7.1x
6.2x
Simple Payout
2014E
2015E
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
16%
21%
21%
19%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
45%
32%
43%
43%
17%
18%
15%
16%
30%
25%
35%
34%
9%
8%
12.0x
Capex / CF
2014E
2015E
147%
136%
109%
91%
162%
150%
129%
138%
339%
114%
231%
227%
172%
226%
142%
135%
235%
208%
107%
95%
203%
144%
88%
113%
81%
84%
282%
119%
222%
309%
359%
136%
35%
50%
113%
119%
99%
82%
95%
85%
109%
97%
57%
58%
69%
68%
110%
127%
73%
66%
64%
58%
147%
124%
Total Payout
2014E
2015E
147%
136%
109%
91%
162%
150%
129%
138%
339%
114%
231%
227%
172%
226%
142%
135%
235%
208%
107%
95%
203%
144%
104%
134%
102%
103%
282%
119%
222%
309%
359%
136%
35%
50%
113%
119%
99%
82%
95%
85%
154%
128%
100%
101%
86%
86%
125%
143%
102%
91%
99%
93%
156%
132%
D / CF
2014E
2015E
1.5x
1.7x
8.8x
9.7x
1.3x
1.6x
2.1x
2.5x
1.5x
1.3x
0.8x
2.1x
1.5x
2.7x
2.5x
2.4x
1.0x
1.7x
2.2x
1.8x
3.2x
3.4x
2.5x
3.6x
2.2x
1.6x
1.8x
1.1x
0.1x
2.2x
5.6x
2.4x
4.9x
5.0x
0.6x
0.7x
0.6x
0.3x
0.9x
0.3x
3.8x
3.7x
1.9x
1.7x
0.9x
0.8x
1.9x
2.5x
1.8x
1.5x
1.6x
1.1x
2.2x
2.3x
Q4 / 15E Bank Line
Size
Available
($MM) % Drawn
($MM)
$400
75%
$101
$180
82%
$33
$625
92%
$52
$750
79%
$161
$150
76%
$36
$155
57%
$67
$280
110%
-$28
$190
90%
$18
$100
226%
-$126
$700
76%
$170
$30
101%
$0
$1,250
58%
$523
$695
85%
$107
$240
88%
$30
$150
151%
-$76
$805
60%
$320
$115
87%
$15
$300
44%
$169
$175
37%
$109
$250
22%
$195
$375
77%
$85
$725
64%
$258
$375
29%
$265
$725
65%
$254
$365
68%
$116
$1,000
68%
$321
79%
12.0x
Average: 2.3x
10.0x
8.0x
8.0x
2015E D / CF
10.0x
6.0x
4.0x
6.0x
4.0x
2.0x
0.0x
0.0x
ARN
PRY
SGL
LTS
OIL
CR
TET
BIR
POU
DEE
PPY
CQE
LEG
KEL
AAV
SGY
BXE
LRE
TBE
PXX
WCP
NVA
TOG
RRX
SPE
RMP
2.0x
PPY
KEL
TET
POU
CR
NVA
WCP
BIR
DEE
ARN
OIL
RRX
AAV
SGY
TOG
SPE
CQE
SGL
PXX
PRY
BXE
LTS
RMP
LEG
TBE
LRE
250%
Average: 132%
2015E Total Payout
300%
250%
200%
150%
100%
50%
Average: 79%
200%
150%
100%
50%
0%
PPY
CQE
CR
KEL
BXE
OIL
TET
BIR
AAV
POU
DEE
LTS
SGL
NVA
RRX
PXX
LRE
SGY
LEG
WCP
TBE
ARN
TOG
SPE
RMP
PRY
0%
Q4/15E Bank Line % Drawn
350%
Simple Payout
Capex / CF
Source: FactSet; Company reports; Scotiabank GBM estimates.
KEL
PPY
CR
OIL
BXE
DEE
NVA
PRY
LRE
ARN
BIR
SGL
PXX
LEG
AAV
TBE
WCP
TET
SGY
POU
LTS
CQE
RRX
RMP
TOG
SPE
2015E EV / DACF
Average: 6.2x
Bank Line
Theoretical "Overdraw"
41
Scenario 2: WTI @ US$85.00/bbl and AECO @ $3.50/mcf
■ Note: Flat WTI & AECO prices used. No adjustments to capex programs / facility sizes.
Exhibit 4 - Scenario: WTI @ US$85.00/bbl & AECO @$3.50/mcf
Scenario: WTI US$85.00 /bbl & AECO $3.50 /mcf
Company
Advantage Oil & Gas
Arcan Resources
Bellatrix Exploration
Birchcliff Energy
BlackPearl Resources
Cequence Energy
Crew Energy
Delphi Energy
Kelt Exploration
Legacy Oil + Gas
LGX Oil + Gas
Lightstream Resources
Long Run Exploration
NuVista Energy
Painted Pony Petroleum
Paramount Resources
Pinecrest Energy
Raging River Exploration
RMP Energy
Spartan Energy
Spyglass Resources
Surge Energy
TORC Oil & Gas
Trilogy Energy
Twin Butte Energy
Whitecap Resources
Average
Ticker
AAV
ARN
BXE
BIR
PXX
CQE
CR
DEE
KEL
LEG
OIL
LTS
LRE
NVA
PPY
POU
PRY
RRX
RMP
SPE
SGL
SGY
TOG
TET
TBE
WCP
Analyst
WL
CB
CB
CB
WL
CB
CB
CB
CB
WL
WL
WL
WL
WL
CB
WL
CB
WL
CB
CB
WL
CB
WL
WL
WL
WL
P / NAVPS
PDP
1P
7.7x
2.1x
nmf
nmf
1.6x
1.2x
3.5x
2.0x
2.3x
1.7x
1.2x
0.9x
2.9x
2.2x
5.6x
2.9x
3.1x
2.7x
1.7x
1.3x
1.1x
0.9x
13.1x
2.3x
3.3x
1.6x
4.3x
2.5x
3.3x
3.1x
13.6x
6.3x
0.4x
0.2x
4.6x
2.6x
5.7x
4.3x
2.0x
1.7x
0.9x
0.7x
2.6x
2.1x
1.9x
1.6x
4.6x
4.3x
5.6x
2.4x
4.3x
2.5x
4.0x
2.3x
2P
1.5x
0.2x
0.9x
1.2x
1.0x
0.6x
1.4x
1.7x
2.0x
0.7x
0.6x
0.8x
0.9x
1.8x
2.4x
4.1x
0.1x
1.9x
2.1x
1.4x
0.5x
1.2x
1.3x
3.5x
0.9x
1.8x
1.4x
EV / DACF
2014E
2015E
6.2x
6.0x
6.2x
6.6x
4.5x
4.7x
6.2x
6.9x
5.7x
5.4x
4.7x
5.6x
6.5x
7.6x
7.7x
7.1x
12.1x
11.2x
4.2x
3.9x
6.9x
7.5x
3.3x
4.7x
3.8x
3.4x
13.9x
7.6x
11.0x
11.6x
20.4x
10.0x
4.4x
5.1x
7.4x
6.9x
5.0x
4.2x
8.9x
6.0x
5.1x
5.7x
6.6x
6.4x
6.0x
6.4x
9.0x
10.7x
4.0x
3.5x
8.1x
6.9x
7.2x
6.6x
Simple Payout
2014E
2015E
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
16%
23%
21%
21%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
46%
35%
44%
46%
18%
19%
15%
17%
30%
26%
35%
36%
9%
9%
14.0x
Capex / CF
2014E
2015E
147%
137%
109%
93%
163%
158%
130%
143%
343%
129%
232%
235%
172%
236%
143%
145%
237%
221%
109%
104%
210%
167%
90%
124%
82%
89%
284%
125%
223%
318%
367%
145%
36%
58%
115%
128%
100%
86%
96%
92%
111%
108%
58%
62%
70%
75%
111%
137%
73%
68%
64%
60%
149%
132%
Total Payout
2014E
2015E
147%
137%
109%
93%
163%
158%
130%
143%
343%
129%
232%
235%
172%
236%
143%
145%
237%
221%
109%
104%
210%
167%
106%
147%
103%
109%
284%
125%
223%
318%
367%
145%
36%
58%
115%
128%
100%
86%
96%
92%
157%
143%
101%
108%
88%
94%
126%
154%
103%
94%
99%
96%
158%
141%
D / CF
2014E
2015E
1.5x
1.7x
8.8x
10.0x
1.3x
1.8x
2.1x
2.6x
1.5x
1.7x
0.8x
2.2x
1.5x
2.9x
2.5x
2.6x
1.0x
1.9x
2.3x
2.0x
3.3x
4.2x
2.5x
4.0x
2.2x
1.8x
1.8x
1.2x
0.1x
2.3x
5.7x
2.7x
5.1x
6.0x
0.6x
0.8x
0.6x
0.4x
1.0x
0.5x
3.9x
4.3x
2.0x
1.9x
1.0x
1.0x
2.0x
2.8x
1.8x
1.5x
1.6x
1.2x
2.2x
2.5x
Q4 / 15E Bank Line
Size
Available
($MM) % Drawn
($MM)
$400
75%
$99
$180
82%
$32
$625
95%
$33
$750
80%
$147
$150
85%
$23
$155
59%
$64
$280
113%
-$36
$190
94%
$12
$100
235%
-$135
$700
82%
$126
$30
106%
-$2
$1,250
62%
$471
$695
88%
$80
$240
92%
$19
$150
153%
-$80
$805
65%
$279
$115
90%
$12
$300
50%
$149
$175
43%
$100
$250
28%
$181
$375
80%
$77
$725
67%
$236
$375
35%
$244
$725
69%
$226
$365
70%
$110
$1,000
70%
$299
83%
12.0x
Average: 6.6x
Average: 2.5x
10.0x
2015E D / CF
10.0x
8.0x
6.0x
4.0x
8.0x
6.0x
4.0x
2.0x
0.0x
0.0x
ARN
PRY
SGL
OIL
LTS
CR
TET
POU
DEE
BIR
PPY
CQE
LEG
KEL
SGY
LRE
BXE
AAV
PXX
TBE
WCP
NVA
TOG
RRX
SPE
RMP
2.0x
PPY
KEL
TET
POU
NVA
CR
OIL
DEE
WCP
RRX
BIR
ARN
TOG
SGY
AAV
SPE
SGL
CQE
PXX
PRY
LTS
BXE
RMP
LEG
TBE
LRE
250%
Average: 141%
2015E Total Payout
300%
250%
200%
150%
100%
50%
Average: 83%
200%
150%
100%
50%
0%
PPY
CR
CQE
KEL
OIL
BXE
TET
LTS
DEE
POU
BIR
SGL
AAV
PXX
RRX
NVA
LRE
SGY
LEG
WCP
TOG
TBE
ARN
SPE
RMP
PRY
0%
Q4/15E Bank Line % Drawn
350%
Simple Payout
Capex / CF
Source: FactSet; Company reports; Scotiabank GBM estimates.
KEL
PPY
CR
OIL
BXE
DEE
NVA
PRY
LRE
PXX
ARN
LEG
BIR
SGL
AAV
WCP
TBE
TET
SGY
POU
LTS
CQE
RRX
RMP
TOG
SPE
2015E EV / DACF
12.0x
Bank Line
Theoretical "Overdraw"
42
Scenario 3: WTI @ US$80.00/bbl and AECO @ $3.50/mcf
■ Note: Flat WTI & AECO prices used. No adjustments to capex programs / facility sizes.
Exhibit 5 - Scenario: WTI @ US$80.00/bbl & AECO @$3.50/mcf
Scenario: WTI US$80.00 /bbl & AECO $3.50 /mcf
Company
Advantage Oil & Gas
Arcan Resources
Bellatrix Exploration
Birchcliff Energy
BlackPearl Resources
Cequence Energy
Crew Energy
Delphi Energy
Kelt Exploration
Legacy Oil + Gas
LGX Oil + Gas
Lightstream Resources
Long Run Exploration
NuVista Energy
Painted Pony Petroleum
Paramount Resources
Pinecrest Energy
Raging River Exploration
RMP Energy
Spartan Energy
Spyglass Resources
Surge Energy
TORC Oil & Gas
Trilogy Energy
Twin Butte Energy
Whitecap Resources
Average
Ticker
AAV
ARN
BXE
BIR
PXX
CQE
CR
DEE
KEL
LEG
OIL
LTS
LRE
NVA
PPY
POU
PRY
RRX
RMP
SPE
SGL
SGY
TOG
TET
TBE
WCP
Analyst
WL
CB
CB
CB
WL
CB
CB
CB
CB
WL
WL
WL
WL
WL
CB
WL
CB
WL
CB
CB
WL
CB
WL
WL
WL
WL
P / NAVPS
PDP
1P
7.8x
2.1x
nmf
nmf
1.7x
1.3x
3.7x
2.2x
2.5x
1.8x
1.2x
1.0x
3.0x
2.3x
5.9x
3.2x
3.2x
2.8x
2.0x
1.4x
1.3x
1.0x
nmf
4.2x
4.5x
1.9x
4.4x
2.7x
3.4x
3.2x
15.1x
6.9x
0.5x
0.3x
5.1x
2.9x
6.1x
4.8x
2.1x
1.9x
1.2x
0.9x
2.9x
2.4x
2.0x
1.7x
5.0x
4.6x
6.6x
2.7x
4.7x
2.8x
4.0x
2.5x
2P
1.5x
0.4x
0.9x
1.3x
1.1x
0.7x
1.5x
1.8x
2.1x
0.7x
0.7x
0.9x
1.0x
2.0x
2.6x
4.4x
0.1x
2.2x
2.3x
1.5x
0.6x
1.4x
1.4x
3.7x
1.0x
1.9x
1.5x
EV / DACF
2014E
2015E
6.2x
6.0x
6.2x
6.8x
4.5x
5.0x
6.3x
7.2x
5.8x
6.3x
4.7x
5.8x
6.6x
7.9x
7.7x
7.7x
12.3x
11.9x
4.3x
4.4x
7.2x
8.8x
3.3x
5.2x
3.9x
3.6x
14.0x
8.0x
11.1x
11.9x
20.8x
10.7x
4.5x
6.0x
7.5x
7.5x
5.1x
4.4x
9.0x
6.6x
5.2x
6.4x
6.6x
6.9x
6.1x
7.1x
9.1x
11.5x
4.0x
3.6x
8.1x
7.2x
7.3x
7.1x
Simple Payout
2014E
2015E
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
16%
25%
22%
22%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
47%
40%
44%
49%
18%
21%
15%
19%
30%
27%
35%
37%
9%
9%
14.0x
Capex / CF
2014E
2015E
147%
138%
110%
95%
163%
167%
131%
149%
347%
149%
234%
243%
172%
247%
145%
157%
240%
236%
111%
114%
217%
200%
91%
138%
83%
94%
286%
131%
224%
327%
375%
155%
37%
69%
116%
139%
101%
90%
97%
100%
113%
122%
58%
66%
71%
81%
112%
149%
73%
69%
65%
63%
151%
142%
Total Payout
2014E
2015E
147%
138%
110%
95%
163%
167%
131%
149%
347%
149%
234%
243%
172%
247%
145%
157%
240%
236%
111%
114%
217%
200%
108%
163%
104%
116%
286%
131%
224%
327%
375%
155%
37%
69%
116%
139%
101%
90%
97%
100%
160%
162%
102%
116%
89%
102%
127%
168%
103%
96%
100%
99%
160%
151%
D / CF
2014E
2015E
1.5x
1.7x
8.9x
10.3x
1.3x
1.9x
2.1x
2.8x
1.5x
2.1x
0.8x
2.3x
1.5x
3.0x
2.5x
2.9x
1.0x
2.1x
2.3x
2.3x
3.5x
5.2x
2.6x
4.6x
2.2x
2.0x
1.9x
1.3x
0.1x
2.4x
5.9x
2.9x
5.2x
7.4x
0.6x
1.0x
0.6x
0.5x
1.0x
0.6x
4.0x
5.0x
2.0x
2.1x
1.0x
1.2x
2.0x
3.2x
1.8x
1.6x
1.6x
1.3x
2.3x
2.8x
Q4 / 15E Bank Line
Size
Available
($MM) % Drawn
($MM)
$400
75%
$98
$180
83%
$31
$625
98%
$13
$750
82%
$134
$150
94%
$9
$155
61%
$60
$280
116%
-$44
$190
97%
$6
$100
245%
-$145
$700
88%
$82
$30
112%
-$4
$1,250
66%
$420
$695
92%
$55
$240
96%
$9
$150
156%
-$83
$805
70%
$239
$115
92%
$9
$300
57%
$128
$175
49%
$89
$250
33%
$167
$375
82%
$68
$725
71%
$213
$375
39%
$227
$725
73%
$199
$365
72%
$103
$1,000
72%
$276
87%
12.0x
Average: 7.1x
Average: 2.8x
10.0x
2015E D / CF
10.0x
8.0x
6.0x
4.0x
8.0x
6.0x
4.0x
2.0x
0.0x
0.0x
ARN
PRY
OIL
SGL
LTS
TET
CR
POU
DEE
BIR
PPY
LEG
CQE
KEL
SGY
PXX
LRE
BXE
AAV
TBE
NVA
WCP
TOG
RRX
SPE
RMP
2.0x
KEL
PPY
TET
POU
OIL
NVA
CR
DEE
RRX
BIR
WCP
TOG
SGY
ARN
SPE
SGL
PXX
AAV
PRY
CQE
LTS
BXE
RMP
LEG
LRE
TBE
300%
Average: 151%
2015E Total Payout
300%
250%
200%
150%
100%
50%
Average: 87%
250%
200%
150%
100%
50%
0%
PPY
CR
CQE
KEL
OIL
TET
BXE
LTS
SGL
DEE
POU
PXX
BIR
RRX
AAV
NVA
LRE
SGY
LEG
TOG
SPE
WCP
TBE
ARN
RMP
PRY
0%
Q4/15E Bank Line % Drawn
350%
Simple Payout
Capex / CF
Source: FactSet; Company reports; Scotiabank GBM estimates.
KEL
PPY
CR
OIL
BXE
DEE
NVA
PXX
PRY
LRE
LEG
ARN
BIR
SGL
AAV
TET
WCP
TBE
SGY
POU
LTS
CQE
RRX
RMP
TOG
SPE
2015E EV / DACF
12.0x
Bank Line
Theoretical "Overdraw"
43
Scenario 4: WTI @ US$75.00/bbl and AECO @ $3.50/mcf
■ Note: Flat WTI & AECO prices used. No adjustments to capex programs / facility sizes.
Exhibit 6 - Scenario: WTI @ US$75.00/bbl & AECO @$3.50/mcf
Scenario: WTI US$75.00 /bbl & AECO $3.50 /mcf
Company
Advantage Oil & Gas
Arcan Resources
Bellatrix Exploration
Birchcliff Energy
BlackPearl Resources
Cequence Energy
Crew Energy
Delphi Energy
Kelt Exploration
Legacy Oil + Gas
LGX Oil + Gas
Lightstream Resources
Long Run Exploration
NuVista Energy
Painted Pony Petroleum
Paramount Resources
Pinecrest Energy
Raging River Exploration
RMP Energy
Spartan Energy
Spyglass Resources
Surge Energy
TORC Oil & Gas
Trilogy Energy
Twin Butte Energy
Whitecap Resources
Average
Ticker
AAV
ARN
BXE
BIR
PXX
CQE
CR
DEE
KEL
LEG
OIL
LTS
LRE
NVA
PPY
POU
PRY
RRX
RMP
SPE
SGL
SGY
TOG
TET
TBE
WCP
Analyst
WL
CB
CB
CB
WL
CB
CB
CB
CB
WL
WL
WL
WL
WL
CB
WL
CB
WL
CB
CB
WL
CB
WL
WL
WL
WL
P / NAVPS
PDP
1P
8.1x
2.2x
nmf
nmf
1.7x
1.4x
3.9x
2.3x
2.8x
2.0x
1.2x
1.0x
3.1x
2.4x
6.3x
3.6x
3.3x
2.9x
2.4x
1.7x
1.4x
1.1x
nmf
14.5x
7.1x
2.5x
4.7x
2.9x
3.4x
3.3x
16.8x
7.6x
0.6x
0.4x
5.8x
3.3x
6.5x
5.3x
2.2x
2.0x
1.7x
1.3x
3.3x
2.8x
2.2x
1.8x
5.4x
5.0x
8.5x
3.2x
5.2x
3.1x
4.5x
3.2x
2P
1.6x
nmf
1.0x
1.4x
1.2x
0.7x
1.6x
1.9x
2.2x
0.8x
0.8x
1.2x
1.2x
2.1x
2.8x
4.8x
0.2x
2.4x
2.6x
1.6x
0.8x
1.6x
1.5x
4.0x
1.1x
2.2x
1.7x
EV / DACF
2014E
2015E
6.2x
6.1x
6.3x
6.9x
4.5x
5.3x
6.3x
7.5x
5.8x
7.5x
4.8x
6.1x
6.6x
8.3x
7.8x
8.3x
12.4x
12.8x
4.4x
4.9x
7.5x
10.8x
3.4x
5.6x
3.9x
3.9x
14.1x
8.5x
11.1x
12.3x
21.2x
11.4x
4.6x
7.1x
7.6x
8.3x
5.1x
4.8x
9.1x
7.3x
5.3x
7.3x
6.7x
7.5x
6.2x
7.6x
9.2x
12.5x
4.0x
3.7x
8.1x
7.5x
7.4x
7.7x
Simple Payout
2014E
2015E
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
16%
28%
22%
23%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
48%
46%
45%
54%
18%
23%
15%
20%
30%
27%
35%
38%
9%
10%
14.0x
Capex / CF
2014E
2015E
147%
138%
111%
97%
164%
177%
132%
155%
352%
177%
236%
252%
173%
259%
146%
170%
242%
254%
113%
127%
226%
249%
92%
150%
83%
100%
288%
138%
225%
338%
384%
166%
38%
85%
118%
151%
101%
96%
98%
110%
115%
140%
59%
72%
72%
87%
114%
163%
74%
71%
65%
65%
153%
153%
Total Payout
2014E
2015E
147%
138%
111%
97%
164%
177%
132%
155%
352%
177%
236%
252%
173%
259%
146%
170%
242%
254%
113%
127%
226%
249%
108%
178%
105%
124%
288%
138%
225%
338%
384%
166%
38%
85%
118%
151%
101%
96%
98%
110%
163%
186%
103%
125%
90%
110%
129%
183%
103%
99%
100%
103%
161%
163%
D / CF
2014E
2015E
1.5x
1.8x
9.0x
10.5x
1.3x
2.1x
2.2x
2.9x
1.6x
2.7x
0.9x
2.4x
1.5x
3.2x
2.6x
3.3x
1.0x
2.3x
2.4x
2.7x
3.6x
6.8x
2.6x
5.1x
2.2x
2.2x
1.9x
1.4x
0.1x
2.5x
6.0x
3.2x
5.3x
9.5x
0.7x
1.2x
0.7x
0.6x
1.0x
0.8x
4.1x
5.9x
2.0x
2.4x
1.0x
1.3x
2.0x
3.6x
1.9x
1.7x
1.6x
1.4x
2.3x
3.2x
Q4 / 15E Bank Line
Size
Available
($MM) % Drawn
($MM)
$400
76%
$97
$180
83%
$30
$625
101%
-$8
$750
84%
$120
$150
103%
-$4
$155
63%
$57
$280
119%
-$52
$190
100%
$0
$100
255%
-$155
$700
95%
$38
$30
118%
-$5
$1,250
69%
$386
$695
96%
$30
$240
101%
-$2
$150
158%
-$87
$805
75%
$198
$115
95%
$5
$300
64%
$107
$175
57%
$75
$250
39%
$153
$375
84%
$59
$725
74%
$190
$375
43%
$214
$725
76%
$171
$365
74%
$96
$1,000
75%
$252
91%
12.0x
Average: 7.7x
Average: 3.2x
10.0x
2015E D / CF
10.0x
8.0x
6.0x
4.0x
8.0x
6.0x
4.0x
2.0x
0.0x
0.0x
ARN
PRY
OIL
SGL
LTS
TET
DEE
POU
CR
BIR
LEG
PXX
PPY
CQE
SGY
KEL
LRE
BXE
AAV
TBE
NVA
WCP
TOG
RRX
SPE
RMP
2.0x
KEL
TET
PPY
POU
OIL
NVA
CR
DEE
RRX
TOG
BIR
WCP
PXX
SGY
SPE
SGL
PRY
ARN
AAV
CQE
LTS
BXE
LEG
RMP
LRE
TBE
300%
Average: 163%
2015E Total Payout
350%
300%
250%
200%
150%
100%
50%
Average: 91%
250%
200%
150%
100%
50%
0%
PPY
CR
KEL
CQE
OIL
SGL
TET
LTS
BXE
PXX
DEE
POU
BIR
RRX
AAV
NVA
LEG
SGY
LRE
SPE
TOG
WCP
TBE
ARN
RMP
PRY
0%
Q4/15E Bank Line % Drawn
400%
Simple Payout
Capex / CF
Source: FactSet; Company reports; Scotiabank GBM estimates.
KEL
PPY
CR
OIL
PXX
BXE
NVA
DEE
LRE
PRY
LEG
SGL
BIR
ARN
TET
AAV
POU
WCP
SGY
TBE
LTS
RRX
CQE
RMP
TOG
SPE
2015E EV / DACF
12.0x
Bank Line
Theoretical "Overdraw"
44
Scenario 5: WTI @ US$70.00/bbl and AECO @ $3.50/mcf
■ Note: Flat WTI & AECO prices used. No adjustments to capex programs / facility sizes.
Exhibit 7 - Scenario: WTI @ US$70.00/bbl & AECO @$3.50/mcf
Scenario: WTI US$70.00 /bbl & AECO $3.50 /mcf
Company
Advantage Oil & Gas
Arcan Resources
Bellatrix Exploration
Birchcliff Energy
BlackPearl Resources
Cequence Energy
Crew Energy
Delphi Energy
Kelt Exploration
Legacy Oil + Gas
LGX Oil + Gas
Lightstream Resources
Long Run Exploration
NuVista Energy
Painted Pony Petroleum
Paramount Resources
Pinecrest Energy
Raging River Exploration
RMP Energy
Spartan Energy
Spyglass Resources
Surge Energy
TORC Oil & Gas
Trilogy Energy
Twin Butte Energy
Whitecap Resources
Average
Ticker
AAV
ARN
BXE
BIR
PXX
CQE
CR
DEE
KEL
LEG
OIL
LTS
LRE
NVA
PPY
POU
PRY
RRX
RMP
SPE
SGL
SGY
TOG
TET
TBE
WCP
Analyst
WL
CB
CB
CB
WL
CB
CB
CB
CB
WL
WL
WL
WL
WL
CB
WL
CB
WL
CB
CB
WL
CB
WL
WL
WL
WL
P / NAVPS
PDP
1P
8.3x
2.2x
nmf
nmf
1.8x
1.5x
4.1x
2.4x
3.0x
2.3x
1.2x
1.1x
3.2x
2.6x
6.7x
4.0x
3.4x
3.1x
3.0x
2.0x
1.6x
1.3x
nmf
nmf
17.5x
3.5x
4.9x
3.1x
3.4x
3.5x
19.2x
8.4x
1.0x
0.6x
6.7x
3.8x
7.0x
6.0x
2.4x
2.2x
3.0x
2.0x
3.8x
3.4x
2.4x
2.0x
5.9x
5.5x
13.2x
4.1x
6.0x
3.5x
5.5x
3.1x
2P
1.6x
nmf
1.1x
1.5x
1.4x
0.8x
1.7x
2.1x
2.3x
0.9x
1.0x
1.7x
1.6x
2.3x
3.1x
5.3x
0.2x
2.8x
2.9x
1.8x
1.1x
1.9x
1.7x
4.3x
1.3x
2.4x
2.0x
EV / DACF
2014E
2015E
6.2x
6.1x
6.3x
7.0x
4.6x
5.7x
6.4x
7.9x
5.9x
9.1x
4.8x
6.3x
6.6x
8.8x
7.9x
9.0x
12.5x
13.9x
4.5x
5.6x
7.8x
13.6x
3.4x
6.1x
4.0x
4.2x
14.2x
8.9x
11.2x
12.7x
21.6x
12.2x
4.7x
8.7x
7.7x
9.1x
5.2x
5.2x
9.2x
8.2x
5.4x
8.3x
6.8x
8.2x
6.2x
8.2x
9.3x
13.7x
4.1x
3.8x
8.2x
7.8x
7.5x
8.4x
Simple Payout
2014E
2015E
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
17%
30%
22%
25%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
49%
54%
45%
59%
18%
24%
15%
22%
30%
28%
36%
40%
9%
11%
16.0x
D / CF
2014E
2015E
1.5x
1.8x
9.0x
10.8x
1.3x
2.3x
2.2x
3.1x
1.6x
3.5x
0.9x
2.6x
1.5x
3.5x
2.6x
3.7x
1.1x
2.6x
2.5x
3.3x
3.8x
9.5x
2.6x
5.7x
2.3x
2.4x
1.9x
1.6x
0.1x
2.6x
6.2x
3.6x
5.5x
12.8x
0.7x
1.4x
0.7x
0.7x
1.0x
1.0x
4.2x
7.2x
2.1x
2.7x
1.0x
1.5x
2.1x
4.1x
1.9x
1.8x
1.6x
1.5x
2.4x
3.7x
Q4 / 15E Bank Line
Size
Available
($MM) % Drawn
($MM)
$400
76%
$96
$180
84%
$29
$625
104%
-$28
$750
86%
$106
$150
112%
-$18
$155
65%
$54
$280
122%
-$61
$190
103%
-$7
$100
266%
-$166
$700
101%
-$8
$30
124%
-$7
$1,250
72%
$351
$695
100%
$3
$240
105%
-$13
$150
161%
-$91
$805
80%
$158
$115
98%
$2
$300
71%
$87
$175
65%
$61
$250
44%
$139
$375
86%
$51
$725
77%
$167
$375
46%
$202
$725
80%
$143
$365
76%
$89
$1,000
77%
$228
95%
14.0x
Average: 3.7x
12.0x
12.0x
2015E D / CF
10.0x
10.0x
8.0x
6.0x
8.0x
6.0x
4.0x
4.0x
0.0x
0.0x
PRY
ARN
OIL
SGL
LTS
TET
DEE
POU
PXX
CR
LEG
BIR
SGY
KEL
PPY
CQE
LRE
BXE
AAV
TBE
NVA
WCP
TOG
RRX
SPE
RMP
2.0x
KEL
TET
OIL
PPY
POU
PXX
RRX
DEE
NVA
CR
PRY
SGL
TOG
SPE
SGY
BIR
WCP
ARN
CQE
AAV
LTS
BXE
LEG
RMP
LRE
TBE
2.0x
300%
Average: 180%
350%
300%
250%
200%
150%
100%
50%
Average: 95%
250%
200%
150%
100%
50%
Simple Payout
Capex / CF
Source: FactSet; Company reports; Scotiabank GBM estimates.
KEL
PPY
OIL
CR
PXX
NVA
BXE
DEE
LEG
LRE
PRY
SGL
BIR
ARN
POU
TET
WCP
SGY
AAV
TBE
LTS
RRX
CQE
RMP
TOG
SPE
0%
PPY
OIL
KEL
CR
CQE
SGL
PXX
TET
LTS
BXE
DEE
POU
RRX
BIR
NVA
LEG
AAV
SGY
LRE
SPE
TOG
PRY
WCP
RMP
TBE
ARN
0%
Q4/15E Bank Line % Drawn
400%
2015E Total Payout
Total Payout
2014E
2015E
147%
139%
112%
100%
165%
188%
133%
162%
356%
217%
237%
262%
173%
273%
147%
186%
244%
275%
115%
144%
235%
333%
109%
196%
106%
133%
290%
146%
227%
349%
393%
179%
39%
112%
119%
166%
102%
103%
99%
122%
166%
218%
105%
137%
91%
118%
130%
202%
104%
102%
101%
108%
163%
180%
Average: 8.4x
14.0x
2015E EV / DACF
Capex / CF
2014E
2015E
147%
139%
112%
100%
165%
188%
133%
162%
356%
217%
237%
262%
173%
273%
147%
186%
244%
275%
115%
144%
235%
333%
92%
165%
84%
108%
290%
146%
227%
349%
393%
179%
39%
112%
119%
166%
102%
103%
99%
122%
118%
164%
60%
78%
72%
94%
115%
179%
74%
74%
65%
68%
154%
169%
Bank Line
Theoretical "Overdraw"
45
Universe of Coverage
Price
AAV-T
ARN-V
BIR-T
BXE-T
CQE-T
CR-T
DEE-T
KEL-T
LEG-T
LRE-T
LTS-T
NVA-T
OIL-V
POU-T
PPY-T
PRY-V
PXX-T
RMP-T
RRX-T
SGL-T
SGY-T
SPE-T
TBE-T
TET-T
TOG-T
WCP-T
C$4.83
C$0.14
C$9.10
C$5.80
C$1.45
C$7.59
C$2.55
C$10.18
C$4.85
C$3.62
C$4.03
C$9.76
C$0.41
C$49.58
C$10.48
C$0.05
C$1.80
C$5.77
C$7.40
C$1.17
C$5.99
C$3.07
C$1.38
C$21.69
C$10.06
C$13.59
Rating
Risk
SO
SU
SO
SO
SP
SP
SP
SO
SO
SO
SP
SO
SO
SO
SO
SU
SP
SO
SO
SU
SO
SO
SP
SO
SP
SO
High
Speculative
High
High
High
High
High
High
High
High
High
High
Speculative
High
High
Speculative
High
High
High
High
High
High
High
High
High
High
1-Yr
ROR
$8.00
$0.15
$15.00
$11.00
$2.50
$11.00
$4.15
$16.50
$13.00
$7.00
$7.00
$17.00
$0.85
$80.00
$15.50
$0.05
$3.00
$9.50
$13.25
$1.00
$8.75
$5.25
$2.30
$33.50
$17.00
$22.50
65.6%
3.4%
64.8%
89.7%
72.4%
44.9%
62.7%
62.1%
168.0%
105.0%
85.6%
74.2%
109.9%
61.4%
47.9%
-9.1%
66.7%
64.6%
79.1%
0.9%
56.1%
71.0%
80.4%
56.4%
74.4%
71.7%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Advantage Oil & Gas Ltd. (AAV-T)
Valuation: 1.2x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Arcan Resources Ltd. (ARN-V)
Valuation: 0.4x our 1P NAV.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Birchcliff Energy Ltd. (BIR-T)
Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Bellatrix Exploration Ltd. (BXE-T)
Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Cequence Energy Ltd. (CQE-T)
Valuation: 1.0x our 2P NAV.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Year 3
Valuation
46
Crew Energy Inc. (CR-T)
Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Delphi Energy Corp. (DEE-T)
Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Kelt Exploration Ltd. (KEL-T)
Valuation: 1.1x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Legacy Oil + Gas Inc. (LEG-T)
Valuation: 1.2x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Long Run Exploration Ltd. (LRE-T)
Valuation: 1.1x our 2P NAV blow down.
Key Risks to Price Target: Oil and natural gas prices; drilling program success.
Lightstream Resources Ltd. (LTS-T)
Valuation: 1.0x our 2P NAV blow down.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
NuVista Energy Ltd. (NVA-T)
Valuation: 1.3x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
LGX Oil + Gas Inc. (OIL-V)
Valuation: 1.1x our 2P NAV blow down.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Paramount Resources Ltd. (POU-T)
Valuation: 0.9x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Painted Pony Petroleum Ltd. (PPY-T)
Valuation: 1.0x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Pinecrest Energy Inc. (PRY-V)
Valuation: 0.2x our 1P NAV.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
BlackPearl Resources Inc. (PXX-T)
Valuation: 0.5x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
RMP Energy Inc. (RMP-T)
Valuation: 1.3x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
47
Raging River Exploration Inc. (RRX-T)
Valuation: 1.4x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Spyglass Resources Corp. (SGL-T)
Valuation: 0.3x our 2P NAV blow down.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Surge Energy Inc. (SGY-T)
Valuation: 1.1x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Spartan Energy Corp. (SPE-T)
Valuation: 1.1x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; drilling program success.
Twin Butte Energy Ltd. (TBE-T)
Valuation: 0.8x our 2P NAV plus risked upside.
Key Risks to Price Target: Exploration and drilling execution risk; commodity price risk
Trilogy Energy Corp. (TET-T)
Valuation: 0.8x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
TORC Oil & Gas Ltd. (TOG-T)
Valuation: 1.4x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Whitecap Resources Inc. (WCP-T)
Valuation: 1.6x our 2P NAV plus risked upside.
Key Risks to Price Target: Oil and natural gas prices; Drilling program success.
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
48
Intraday Flash
Tuesday, October 14, 2014 @ 10:50:00 AM (ET)
Paper & Forest Products
Wood Products Weekly Monitor
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
[email protected]
Luis Pardo Figueroa - (514) 287-3613
(Scotia Capital Inc. - Canada)
[email protected]
Event
ScotiaView Analyst Link
■ Lumber and structural panel prices showed mixed movements last week.
Implications
■ Lumber composite increased $3. The Random Lengths Framing Lumber
Composite Price finished last week at $384, compared to $381 the previous
week and $383 last year. Western SPF #2&Btr rose $4 from last week to
$352.
■ Structural panel composite increased $2. The Random Lengths Structural
Panel Composite Price ended last week at $409, from $407 the previous
week and compared to $387 last year. N.C. 7/16" OSB prices remained flat
from the previous week at $222.
■ Year-to-date, the lumber composite price has decreased 2%, while the
structural panel composite price is up 11%.
■ Note: Lumber prices are US$/Mfbm; panel prices are US$/Msf.
Recommendation
■ For building products exposure, we rate the shares of Ainsworth, Interfor,
Louisiana-Pacific, Norbord, Western Forest Products and West Fraser
Timber Sector Outperform.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
49
Key Wood Product Prices
Exhibit 1 - Framing Lumber Composite (Trailing 52 Weeks)
Exhibit 2 - KD Western SPF #2&Btr 2x4 (Trailing 52 Weeks)
400
450
350
US$/Mfbm
350
300
250
300
250
200
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Sep-14
Aug-14
Jul-14
Oct-13
100
Jun-14
May-14
Apr-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
200
Mar-14
150
Nov-13
US$/Mfbm
400
Source: Random Lengths; Scotiabank GBM.
Source: Random Lengths; Scotiabank GBM.
Exhibit 3 - KD Southern Pine West #2 2x4 (Trailing 52 Weeks)
Exhibit 4 - GR Douglas Fir (Portland) Std&Btr 2x4 (Trailing 52 Weeks)
550
450
500
400
350
400
US$/Mfbm
US$/Mfbm
450
350
300
250
300
250
200
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Aug-13
Sep-14
Aug-14
Jul-14
Jun-14
Apr-14
May-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
100
Sep-13
150
100
Aug-13
150
Sep-13
200
Source: Random Lengths; Scotiabank GBM.
Source: Random Lengths; Scotiabank GBM.
Exhibit 5 -Structured Panel Composite (Trailing 52 Weeks)
Exhibit 6 - Oriented Strand Board Composite (Trailing 52 Weeks)
450
310
290
270
US$/Msf
US$/Msf
400
350
300
250
230
210
190
250
Source: Random Lengths; Scotiabank GBM.
Source: Random Lengths; Scotiabank GBM.
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-14
Aug-14
150
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Dec-13
Nov-13
Oct-13
Jan-14
170
200
50
Exhibit 7 - Western Fir Plywood Composite (Trailing 52 Weeks)
Exhibit 8 - OSB North Central 7/16" (Trailing 52 Weeks)
730
280
680
260
240
220
US$/Msf
US$/Msf
630
580
530
200
180
160
480
Jul-14
Aug-14
Sep-14
Aug-14
Sep-14
300
Jul-14
Exhibit 10 - MDF West (Trailing 52 Weeks)
Jun-14
Exhibit 9 - Western Particleboard (Trailing 52 Weeks)
Jun-14
Source: Random Lengths; Scotiabank GBM.
May-14
Source: Random Lengths; Scotiabank GBM.
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Oct-13
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
100
Oct-13
120
380
Nov-13
140
430
600
290
550
500
270
US$/Msf
US$/Msf
280
260
250
450
400
240
Apr-14
Mar-14
Feb-14
Dec-13
Nov-13
Oct-13
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Dec-13
Nov-13
Oct-13
Jan-14
300
220
Jan-14
350
230
Source: Random Lengths; Scotiabank GBM.
Source: Random Lengths; Scotiabank GBM.
Exhibit 11 - Lumber and OSB Capacity Leverage per $1,000 Invested
Exhibit 12 - SC Commodity and Currency Forecast
Lumber (Mmfbm)
$20 change
TMB
40.0
IFP
22.8
CFP
20.6
WFT
15.8
WEF
16.1
PCH
6.8
WY
3.4
OSB (Bsf)
$20 change
NBD
51.7
ANS
48.2
LPX
36.1
WY
2.3
WFT
1.0
Source: Company Reports; Scotiabank GBM.
Lumber Western SPF Std.&Btr (Base, US$/Mfbm)
OSB 7/16" North Central (US$/Msf)
US$/CDN$
Source: Random Lengths; Scotiabank GBM.
2012
299
270
1.00
2013 2014E
356
351
316
219
0.97
0.91
2015E
388
258
0.89
51
Universe of Coverage
Price
ANS-T
CAS-T
CFP-T
CFX-T
CMPC-SN
COPEC-SN
FBR-N
FTP-T
IFP-T
LPX-N
NBD-T
RFP-N
TMB-T
UFS-N
WEF-T
WFT-T
WY-N
C$2.37
C$5.90
C$23.24
C$11.07
CLP 1370.00
CLP 7036.50
US$10.26
C$2.32
C$15.58
US$12.91
C$21.56
US$15.94
C$3.08
US$33.44
C$2.07
C$52.20
US$32.49
Rating
Risk
1-Yr
ROR
SO
SP
SP
SO
SP
SO
SP
SU
SO
SO
SO
SU
SP
SP
SO
SO
SP
High
High
High
High
High
High
High
High
High
High
High
High
High
High
High
High
High
$3.30
$8.00
$30.00
$14.75
1,600
8,720
$13.00
$2.00
$19.75
$17.75
$32.00
$16.50
$3.60
$52.00
$2.60
$62.00
$36.75
39.2%
38.3%
29.1%
35.5%
17.5%
25.7%
26.7%
-13.8%
26.8%
37.5%
59.6%
3.5%
16.9%
60.0%
29.5%
19.3%
16.7%
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Ainsworth Lumber Co. Ltd. (ANS-T)
Valuation: 4.0x NTM EV/EBITDA 1-Year Fwd (25%) + 3.0x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Cascades Inc. (CAS-T)
Valuation: 5.5x NTM EV/EBITDA (1-year forward) + Boralex Stake + Greenpac stake
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Canfor Corporation (CFP-T)
Valuation: 4.0x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Canfor Pulp Products Inc. (CFX-T)
Valuation: 4.75x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Empresas CMPC SA (CMPC-SN)
Valuation: 8.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected pulp prices and demand, FX
Empresas Copec SA (COPEC-SN)
Valuation: 1.0x NAV
Key Risks to Price Target: Demand and prices for pulp and panels, fluctuations in the price of oil and to a lesser extent, FX rates.
Fibria Celulose SA (FBR-N)
Valuation: 7.5x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected pulp prices and demand, FX
52
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
Fortress Paper Ltd. (FTP-T)
Valuation: Pro-forma recapitalization scenario
Key Risks to Price Target: Lower-than-expected prices, volumes
Interfor Corporation (IFP-T)
Valuation: 3.5x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Louisiana-Pacific Corporation (LPX-N)
Valuation: 5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.0x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Norbord Inc. (NBD-T)
Valuation: 5.5x NTM EV/EBITDA 1-Year Fwd (25%) + 4.0x EV/Peak EBITDA (75%)
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Resolute Forest Products Inc. (RFP-N)
Valuation: 5.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Tembec Inc. (TMB-T)
Valuation: 4.75x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Domtar Corporation (UFS-N)
Valuation: 5.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Lower-than-expected prices, stronger-than-expected C$
Western Forest Products Inc. (WEF-T)
Valuation: 3.5x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected Canadian dollar
West Fraser Timber Co. Ltd. (WFT-T)
Valuation: 4.2x EV/Peak EBITDA
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Weyerhaeuser Company (WY-N)
Valuation: 12.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
53
Industry Comment
Wednesday, October 15, 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]
Converging Networks
Shay Nulman, MBA - (416) 862-3721
(Scotia Capital Inc. - Canada)
[email protected]
Event
■ Scotiabank GBM has just published its Converging Networks report for the
week of October 13, 2014: "Q3/14 U.S. Earnings Preview Summary". The
full report is available on Scotia View.
ScotiaView Analyst Link
Implications
■ In our lead story, we summarize our views on the U.S. telecom and cable
companies in advance of Q3/14 earnings.
■ We also provide industry news, price performance charts, valuation
comparables, and NAVs for companies under coverage.
Recommendation
■ Our recommendations and ratings are unchanged.
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$30.51
C$47.74
C$56.54
US$51.47
C$10.05
C$27.97
C$27.34
C$41.67
C$26.92
C$38.03
US$33.84
US$137.54
US$48.22
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
$29.00
$37.00
$36.00
$187.00
$55.00
N/A
10.0%
15.0%
28.0%
44.6%
16.9%
30.2%
7.6%
11.8%
1.6%
11.9%
38.1%
18.5%
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.
54
Pertinent Data
Rating Risk
1-Yr
Target
Year 1
Key Data
Year 2
Year 3
Valuation
BCE Inc. (BCE-T)
Valuation: 1-yr fwd: 7.1x NTM EBITDA; 6.6% 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)
Valuation: 1-yr fwd: 6.4x NTM EBITDA; 9.2% NTM FCF yield (fully-taxed); 11.3x 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)
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)
Valuation: 1-yr fwd: 6.9x NTM EBITDA; 6.6% NTM FCF yield (fully-taxed); 12.8x NTM EV/Cash EBIT
Key Risks to Price Target: Wireless competition (from both incumbents and new entrants)
Shaw Communications Inc. (SJR.B-T)
Valuation: 1-yr fwd: 8.1x NTM EV/EBITDA; 4.4% NTM FCF yield (fully-taxed); 14.5x NTM EV/Cash EBIT
Key Risks to Price Target: Irrational competitive behaviour by Shaw or TELUS.
TELUS Corporation (T-T)
Valuation: 1-yr fwd: 7.3x NTM EBITDA; 5.6% NTM FCF Yield (Fully-Tax); 14.2x 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.
55
Company Comment
Tuesday, October 14, 2014, Pre-Market
(AUQ-N US$3.42)
(AUQ-T C$3.77)
AuRico Gold Inc.
Q3 Production Directly In Line, Costs Improving
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: High
Valuation: 1.20x NAV
Target 1-Yr:
Vitali Mossounov, CPA, CA - (416) 862-3910
(Scotia Capital Inc. - Canada)
Alex Watt, MBA - (416) 860-1429
(Scotia Capital Inc. - Canada)
US$6.00
ROR 1-Yr:
75.4%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.02
0.4%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
Pertinent Revisions
■ AuRico reported Q3/14 production of 57,037 oz, directly in line with
our forecast. Cash costs of $706/oz were 5% better than expected.
Implications
■ At Young-Davidson, production of 40,538 oz was driven by improved
underground productivity of 3,750 tpd, roughly 94% of the 4,000 tpd
year-end target. Recovery of 90% is expected to be a new sustainable
level going forward. Underground mining costs decreased 9% to
$41/tonne compared to 1H/14, and are on track to meet the year-end
target of $40/tonne.
■ Underground development remained on plan with 36 m/day during the
quarter. The open pit stockpile contained about 2.6 Mt of ore at 0.8 g/t
at the end of the quarter. We are visiting Young-Davidson tomorrow for
a site tour.
■ At El Chanate, production of 16,499 oz reflected a transition to higher
grade mining as expected.
■ Our NAV3% is relatively unchanged at $5.00 per share. AuRico
expects to report financial results after market close on November 6.
Adj. EPS14E
Adj. EPS15E
New
$-0.19
$0.03
Old
$-0.20
$0.04
Recommendation
■ We rate AuRico Sector Outperform.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.04 A
$-0.03 A
$0.01
$0.03
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Gold Equiv. Prod. (oz) (000)
Tot. Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Q2
$0.02 A
$-0.06 A
$0.01
$0.03
Q3
$0.00 A
$-0.05
$0.01
$0.04
Q4
$-0.02 A
$-0.05
$0.01
$0.04
Year
$0.04
$-0.19
$0.03
$0.14
P/E
96.7x
n.m.
n.m.
24.7x
2013A
$0.04
96.7x
$0.28
12.9x
$50
163,195
$676
$1,181
2014E
$-0.19
n.m.
$0.25
13.6x
$87
231,465
$692
$1,135
2015E
$0.03
n.m.
$0.40
8.5x
$143
254,873
$754
$1,165
2016E
$0.14
24.7x
$0.60
5.7x
$217
296,442
$693
$1,048
2017E
$0.01
n.m.
$0.52
6.6x
$188
296,442
$693
$1,048
BVPS14E: $6.82
NAVPS:
P/NAV:
$5.00
0.68x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$849
$174
$1,023
248
248
56
Exhibit 1 - Q3/14 Actuals versus Scotiabank GBM Estimates and Q2/14 Actuals
Young-Davidson
Gold Production
Underground Mining Costs
Underground Mining Rate
Grade
Total Cash Costs
El Chanate
Gold Production
Total Cash Costs
Company Total
Gold Production
Total Cash Costs
oz
US$/t
tpd
g/t
$/oz
oz
$/oz
koz
$/oz
Q3/14
Actual
Q3/14
SC Estimate
%
Δ
Q2/14
Actual
%Δ
Q-o-Q
40,538
$41.00
3,752
3.10
$723
40,777
$43.50
3,850
3.10
$767
(1%)
(6%)
(3%)
0%
(6%)
40,166
$45.00
3,595
3.29
$871
1%
(9%)
4%
(6%)
(17%)
16,499
$663
16,505
$695
(0%)
(5%)
16,032
$618
3%
7%
57,037
$706
57,282
$746
(0%)
(5%)
56,198
$801
1%
(12%)
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
57
Company Comment
Wednesday, October 15, 2014, Pre-Market
Brookfield Canada Office Properties
(BOX.UN-T C$26.69)
(BOXC-N US$23.74)
Drop Down of Brookfield Place Calgary East
Mario Saric, CPA, CA, CFA - (416) 863-7824
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: Medium
Trevor Thompson-Harry - (416) 863-7986
(Scotia Capital Inc. - Canada)
[email protected]
Target 1-Yr:
C$29.25
ROR 1-Yr:
14.2%
Valuation: 19.5x AFFO (F'15 estimate)
Key Risks to Target: Protracted economic recovery, lack of credit availability, new supply growth, financial/energy sector consolidation
CDPU (NTM)
CDPU (Curr.)
$1.24
$1.24
Yield (Curr.)
4.6%
Event
■ BOX is buying the 1.4Msf Brookfield Place Calgary East ("BPC E")
from BPY for $966M on an "as is completed" basis. BPC E is 71% preleased (to Cenovus), with construction completion slated for 2H/17.
Implications
■ Pricing appears reasonable although cap rate expansion being
assumed. We think the acquisition was generally anticipated, with the
structure mimicking Bay Adelaide Centre East in 2013 (see our note).
The price equates to $690/sf or a stabilized cash cap rate of 5.8%
(CBRE Q2/14 Downtown Calgary Class AA Office cap rates = 5.0%5.5%; Q3 cap rates expected out this week). BPY is guaranteeing $56M
of NOI upon substantial building completion and fixed rate debt at 50%
LTV at ~4.3% for 10-yrs. As a result, BOX is earning an 8% IRR
(return on equity) and a 7.5% FFO yield upon stabilization, providing
some (not complete) protection against higher cap rates. Net-net, we
think the transaction is $0.01-$0.02 accretive to BOX on stabilization.
■ Near-term liquidity exhausted. BOX will contribute $235M of equity
this week plus $92M later on (Q2/14 cash on hand = $98.5M + full
$200M undrawn corporate revolver), and assume a $575M construction
loan, with a final $64M payment to BPY upon stabilization. While
BOX does not require equity financing in our view, we estimate proforma leverage is +450bp to ~47%. Given BPY owns ~83% of BOX,
we think the deal also represents an upstream liquidity transfer.
Recommendation
■ Maintain SP rating on BOX and SO rating on BPY.
Qtly FFOPU (FD)
2012A
2013A
2014E
2015E
Q1
$0.36 A
$0.40 A
$0.42 A
$0.43
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Price/AFFO
EV/EBITDA
EBITDA (M)
EBITDA Margin
EBITDA/Int. Exp
Q2
$0.36 A
$0.41 A
$0.40 A
$0.42
Q3
$0.38 A
$0.43 A
$0.40
$0.46
Q4
$0.38 A
$0.43 A
$0.41
$0.47
Year
$1.48
$1.67
$1.63
$1.79
P/FFO
19.8x
16.0x
16.4x
14.9x
2011A
$1.36
$1.04
23.3x
19.3x
$218
49.0%
2.4x
2012A
$1.48
$1.16
25.2x
18.9x
$248
48.2%
2.3x
2013A
$1.67
$1.38
19.3x
18.7x
$248
47.4%
2.5x
2014E
$1.63
$1.34
19.9x
19.2x
$246
49.2%
2.7x
2015E
$1.79
$1.50
17.8x
18.7x
$253
49.8%
2.7x
BVPU14E: $33.61
ROE14E: 5.01%
NAVPU:
P/NAV:
$30.25
0.88x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Units O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$2,490
$2,233
$4,650
93
16
58
Company Comment
Wednesday, October 15, 2014, Pre-Market
(CFP-T C$23.13)
Canfor Corporation
Upgrading to Sector Outperform
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
Luis Pardo Figueroa - (514) 287-3613
(Scotia Capital Inc. - Canada)
[email protected]
C$29.25
ROR 1-Yr:
26.5%
Valuation: 4.25x EV/Peak EBITDA
Key Risks to Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Event
■ We are upgrading Canfor to Sector Outperform from Sector Perform.
Pertinent Revisions
Implications
■ Canfor shares now provide and attractive rate of return of ~26.5% to
our revised one-year target of $29.25.
■ Although we expect it to be a bumpy ride due to a fragile supply chain
and seasonal trends, we remain constructive on the US housing
recovery and continue to believe this cycle is different and more
favorable for lumber producers than the last one (2004-2006) due to a
more diversified demand base and tighter supply (see Exhibit 1).
■ We note that despite being at half the level of US housing starts when
compared to the 2005 peak (2M vs. 1M) and with a significantly higher
percentage of multi-family starts (~17% in 2005 vs. ~30% now) the
Random Lengths Framing Lumber Composite is at approximately the
same level as it was back then (see Exhibits 2 & 3 on the next page).
■ We view CFP's recent acquisitions in the US South positively as Canfor
diversifies away from the mountain-pine-beetle infested BC Interior.
Rating:
SO
Target:
1-Yr
$29.25
EPS14E
$1.72
EPS15E
$2.96
EPS16E
$3.36
New Valuation:
4.25x EV/Peak EBITDA
Old Valuation:
4.0x EV/Peak EBITDA
New
Old
SP
$30.00
$1.75
$2.94
$3.26
Recommendation
■ We are upgrading CFP to SO from SP and trimming our one-year target
slightly to $29.25 (from $30.00). We believe this a good entry point for
investors as the stock is currently the cheapest lumber name under
coverage (see Exhibit 4).
Qtly EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.52 A
$0.34 A
$0.60
$0.71
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.61 A
$0.39 A
$0.83
$0.92
Q3
$0.18 A
$0.52
$0.86
$1.01
Q4
$0.35 A
$0.45
$0.68
$0.72
Year
$1.69
$1.72
$2.96
$3.36
P/E
15.8x
13.5x
7.8x
6.9x
2012A
$0.18
$1.38
94.7x
5.1x
$2,714
$287
1.3x
11.6x
2013A
$1.69
$3.57
15.8x
0.5x
$3,195
$544
1.7x
19.5x
2014E
$1.72
$3.41
13.5x
0.5x
$3,479
$570
2.1x
39.3x
2015E
$2.96
$4.27
7.8x
0.3x
$3,942
$786
2.8x
43.7x
2016E
$3.36
$4.68
6.9x
0.3x
$4,189
$868
3.7x
48.2x
BVPS14E: $10.72
ROE14E: 16.76%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$3,131
$47
$3,178
135
135
59
Exhibit 1 - Housing Starts vs. Lumber Capacity
2,500
84
82
US Housing Starts
80
78
1,500
76
1,000
74
72
NA Lumber Capacity (BBF)
2,000
500
70
0
68
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E
Actual US Housing Starts (Single-Family)
Canadian Housing Starts
NA Lumber Shipments to China - US Housing Starts Equivalent
NA Lumber Capacity (BBF)
Notes:
1. 2014 & 2015 data assumes exports to China and Canadian Housing Starts remain constant.
2. US Housing Forecast for 2014 & 2015 is the consensus of Scotiabank Economics; Fannie Mae; Freddie Mac; NAHB; NAR; RISI.
Source: Scotiabank GBM, Scotiabank Economics; Fannie Mae; Freddie Mac; NAHB; NAR; RISI
Exhibit 3 - US Housing Starts vs. Lumber Prices
2,500
US Housing Starts ('000)
85%
80%
75%
70%
65%
2,000
$405
$329 $320
$304 $311
$450
$387
$383 $385
$326
$323
$283
$283 $272
$251
1,500
$222
$400
$350
$300
$250
$200
1,000
$150
$100
500
$50
0
Source: Bloomberg; FEA; Scotiabank GBM; U.S. Census Bureau
2013
2014E
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
60%
$0
US Housing Starts
Random Lengths Framing Lumber Composite
(US$/mmbf)
Exhibit 2 - Share of Single-Family Housing Starts
Random Lengths Framing Lumber Composite*
*Average Price for the Year
Notes: (1) Current lumber price is an average for 2014 as of October 3, 2014; (2) Current US housing starts is the latest SAAR reading, August 2014.
Source: Company reports; Random Lengths; Scotiabank GBM
60
Exhibit 4 - Comparable Valuation
Ticker
Currency
Price
14-Oct-14
Market
Cap (M)
Enterprise
Value (M)
Lumber
Canfor Corporation
Conifex Timber Inc.
Interfor Corporation
West Fraser Timber Co. Ltd.
Western Forest Products Inc.**
Average
CFP-CA
CFF-CA
IFP-CA
WFT-CA
WEF-CA
CAD
CAD
CAD
CAD
CAD
23.22
7.25
15.74
51.82
2.09
3,248
152
1,050
4,498
834
OSB
Ainsworth Lumber Co. Ltd.
Louisiana-Pacific Corporation
Norbord Inc.
Average
ANS-CA
LPX-US
NBD-CA
CAD
USD
CAD
2.30
13.31
21.92
Timber
Acadian Timber Corp.
Plum Creek Timber Company, Inc.
Potlatch Corporation
Rayonier Inc.
Weyerhaeuser Company
Average
ADN-CA
PCL-US
PCH-US
RYN-US
WY-US
CAD
USD
USD
USD
USD
13.51
39.93
42.24
32.47
32.69
Company Name
Average
P/E
2014E 2015E 2016E
2014E
3,496
243
1,288
4,942
778
n.m.
15.6x
13.1x
16.6x
10.3x
13.9x
7.8x
5.7x
9.3x
9.9x
7.0x
7.9x
6.9x
4.0x
8.4x
9.1x
9.1x
7.5x
14.3x
8.5x
6.9x
8.2x
6.3x
8.9x
4.4x
4.3x
4.9x
5.5x
4.7x
4.8x
556
1,871
1,196
799
1,677
1,547
n.m.
n.m.
n.m.
n.m.
9.3x
4.4x
n.m. 13.2x
19.1x 9.6x
14.2x 9.1x
12.9x
17.1x
14.3x
14.8x
226
7,073
1,715
4,109
19,279
289
10,345
1,982
4,862
23,973
16.7x 14.3x 12.7x
34.9x 27.6x 22.7x
19.8x 18.4x 14.8x
n.m.
n.m.
n.m.
23.4x 23.1x 18.8x
23.7x 20.9x 17.3x
18.8x
13.8x
11.2x
EV/EBITDA
2015E 2016E
Net Debt/
2014E EBITDA
Dividend
Yield
4.0x
3.6x
4.6x
5.2x
4.1x
4.3x
0.4x
3.2x
1.3x
0.7x
Net cash
1.4x
n.a.
n.a.
n.a.
0.5%
3.8%
2.2%
Scotiabank GBM
Consensus
Scotiabank GBM
Scotiabank GBM
Scotiabank GBM
5.7x
9.1x
7.8x
7.5x
3.5x
4.9x
5.1x
4.5x
3.9x
Net cash
3.3x
3.6x
n.a.
n.a.
10.9%
10.9%
Scotiabank GBM
Scotiabank GBM
Scotiabank GBM
14.6x
18.8x
12.2x
15.5x
14.1x
15.0x
13.0x
18.1x
11.7x
16.9x
13.5x
14.6x
12.2x
15.9x
10.3x
15.4x
12.3x
13.2x
3.5x
5.9x
1.5x
1.5x
2.8x
3.0x
6.1%
4.4%
3.3%
3.7%
2.7%
4.0%
Consensus
Consensus
Consensus
Consensus
Scotiabank GBM
12.6x
9.2x
7.8x
2.5x
4.4%
Estimate Source
** Pro-forma sale of non-core assets
Source: Company reports; FactSet; Scotiabank GBM estimates.
ScotiaView Analyst Link
61
Intraday Flash
Tuesday, October 14, 2014 @ 3:06:57 PM (ET)
(CG-T C$5.96)
Centerra Gold Inc.
Injunction Issued on Kyrgyz Republic's Shares;
Ontario Ruling Could Impact Kumtor Restructure
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: High
Valuation: 0.50x NAV
Vitali Mossounov, CPA, CA - (416) 862-3910
(Scotia Capital Inc. - Canada)
Alex Watt, MBA - (416) 860-1429
(Scotia Capital Inc. - Canada)
Target 1-Yr:
C$6.50
ROR 1-Yr:
11.7%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.16
C$0.16
2.7%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
■ According to a press release from Stans Energy Corp, the Ontario
Superior Court issued an injunction prohibiting the Kyrgyz government
from selling or transferring 47 million of its 77 million Centerra shares.
Implications
■ The ruling is in support of a $118 million award obtained by Stans
Energy in Arbitration Court in Moscow against the Kyrgyz Republic.
To date, the government has not paid and according to Stans Energy the
Kyrgyz have failed to block the damage award in subsequent motions.
■ We note that the ruling seems to prevent the Kyrgyz from disposing of a
majority of their shares, but it does not transfer ownership. Stans Energy
appears likely to seek court approval to use the shares as compensation.
■ We see two potentially negative implications for Centerra. First a
portion of the Kyrgyz shares could be awarded to Stans Energy, thereby
reducing the value the government can exchange for a stake in the
proposed Kumtor joint venture. Secondly, if the issue with Stans
Energy is left unresolved, we feel an Ontario court would be unlikely to
approve the proposed Kumtor joint venture with the injunction in place.
■ Centerra and the Kyrgyz government continue to follow up on their
proposed restructuring transaction to create a 50:50 Kumtor joint
venture in exchange for the government's 32.7% stake in Centerra.
Recommendation
■ We maintain our Sector Perform rating pending further developments.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.21 A
$0.00 A
$0.01
$0.11
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (oz) (000)
Tot. Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Q2
$0.03 A
$-0.13 A
$0.04
$0.11
Q3
$-0.01 A
$-0.05
$0.08
$0.24
Q4
$0.45 A
$0.23
$0.08
$0.24
Year
$0.68
$0.06
$0.21
$0.71
P/E
6.0x
96.4x
25.6x
7.5x
2013A
$0.68
6.0x
$2.11
1.9x
$610
690.7
$404
$913
2014E
$0.06
96.4x
$1.35
3.9x
$247
633.0
$381
$877
2015E
$0.21
25.6x
$1.22
4.3x
$253
675.6
$549
$917
2016E
$0.71
7.5x
$1.86
2.9x
$358
768.7
$592
$962
2017E
$0.95
5.6x
$2.29
2.3x
$419
906.8
$435
$865
BVPS14E: $7.17
ROE14E: 0.82%
NAVPS:
P/NAV:
C$10.28
0.58x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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$956
$-416
C$489
160
159
62
Exhibit 1 - Financial and Operational Summary
2015E
$35
$35
$0.22
23.3x
$194
$1.22
4.9x
2016E
$120
$120
$0.75
6.8x
$295
$1.86
3.2x
$793
($226)
($16)
($63)
($327)
($5)
$3
$247
($81)
$160
($104)
65%
$56
($47)
($2)
$0.05
$0.06
$946
($371)
($20)
($45)
($317)
($1)
$19
$253
($65)
$211
($129)
61%
$81
($34)
$35
$0.21
$0.21
$1,153
($455)
($20)
($40)
($334)
$0
$18
$358
$25
$322
($139)
43%
$183
($51)
$120
$0.71
$0.71
($2)
$327
($68)
$257
$326
($36)
($242)
($271)
$19
$1.30
$35
$317
($158)
$194
$194
($104)
($202)
($202)
($112)
$1.15
$120
$334
($159)
$295
$295
($28)
($398)
($398)
($131)
$1.75
$542
$821
$518
$1,339
$76
$126
$0
$200
$1,139
$1,339
$695
$430
$710
$560
$1,270
$50
$0
$124
$1,146
$1,270
$659
$299
$579
$783
$1,361
$50
$0
$124
$1,237
$1,361
$528
M&I
Inf
5.5
3.7
Average Share Price (C$)
S/O (mm) - End of Year
Realized Gold Price (US$/oz)
Spot Gold Price Forecast (US$/oz)
Mine Gold Production and Costs
Kumtor Production (koz)
Boroo Production (koz)
Gatsuurt Production (koz)
Total Production ('koz)
Average Cash Costs (US$/oz gold)
All-in Sustaining Costs (US$/oz)
2013A
$5.14
236
$1,630
2014E
$6.50
159
$1,272
$1,272
600
90
691
$404
$913
583
50
633
$381
$877
2015E 2016E
$6.50
$6.50
159
159
$1,400 $1,500
$1,400 $1,500
659
17
676
$549
$917
1,000
660
108
769
$592
$962
$1,100
$1,000
800
$900
$800
600
400
$700
$600
.
$500
$400
200
Cash Cost (US$/oz)
2014E
($2)
($3)
$0.08
67x
$257
$1.62
3.7x
Gold Production (koz)
Ratio Analysis
2013A
Net Income (US$mm)
$158
Net Income Adjusted (US$mm)
$163
EPS (f.d.) (US$/sh)
$0.67
P/E (x)
7.6x
Operating CF bf. ch. in WC (US$mm)
$490
CFPS bf. ch. in WC (US$/sh)
$2.07
P/CF (bf. ch. in WC) (x)
2.9x
Income Statement Items (US$mm)
Total Revenue
$944
Operating Costs
($250)
Exploration
($30)
SG&A
($54)
Depreciation
($309)
Interest Expense
($9)
Other - gain (loss)
$0
EBITDA
$610
EBIT
$301
EBT
$293
Taxes - recovery (expense)
($127)
Effective Tax Rate
43%
Earnings bf. Minority Interests
$166
Minority Interest
$0
Reported Net Earnings
$158
Reported EPS (f.d.) (US$/sh)
$0.67
Adjusted EPS (f.d.) (US$/sh)
$0.68
Cash Flow Statement Items (US$mm)
Net Earnings
$158
DD&A
$309
Deferred Taxes
Other
$24
Operating CF bf. ch. in WC
$490
CF from Operating Activities
$484
CF from Financing Activities
($34)
CAPEX
($328)
CF from Investing Activities
($441)
Net Change in Cash
$9
CFPS bf. ch. in WC (f.d.) (US$/sh)
$2.08
Balance Sheet Items (US$mm)
Cash
$501
Current Assets
$983
Long-term Assets
$705
Total Assets
$1,688
Short-term Debt
$76
Current Liabilities
$142
Long-term Debt
$0
Total Liabilities
$213
Shareholders' Equity
$1,474
Total Liabilities & Shareholders' Equity
$1,688
Working Capital
$841
Mine Reserves/Resources
2P
Gold Reserves (Moz)
10.2
$300
0
$200
2013A
2014E
Kumtor Production (koz)
Gatsuurt Production (koz)
All-in Sustaining Costs (US$/oz)
Additional Ratio Analysis
Net Interest Coverage (x)
Gross Margin
ROE
ROA
EV/EBITDA (x)
Net Debt/Equity
Book Value (US$/sh)
Free Cash Flow (US$/sh)
NAV Analysis
Operating Mining Assets (C$mm)
Kumtor
Gatsuurt
Boroo
Exploration
Oksut
Total Mining Assets
Net Debt
Working Capital (Net of Cash and ST Debt)
In-the-Money Instruments
G&A, Expl, Reclamation
Net Asset Value
2015E
2016E
Boroo Production (koz)
Average Cash Costs
2013A
33.3x
1.3
11%
9%
1.5x
n.m.
$6.24
$0.66
2014E
-16.1x
1.3
(0%)
(0%)
1.7x
n.m.
$7.17
$0.53
C$M
$735
$286
$16
$13
$69
$1,118
$458
$252
$5
($185)
$1,649
2015E 2016E
-99.4x
n.m.
1.4
1.4
3%
10%
3%
9%
2.1x
1.8x
n.m.
n.m.
$7.21
$7.78
($0.05) ($0.65)
C$/Sh
$4.58
$1.78
$0.10
$0.08
$0.43
$6.97
%
45%
17%
1%
1%
4%
68%
$2.85
$1.57
$0.03
($1.15)
$10.28
28%
15%
0%
(11%)
100%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
63
Company Comment
Wednesday, October 15, 2014, Pre-Market
(UFS-N US$33.32)
(UFS-T C$37.66)
Domtar Corporation
Upgrading to Sector Outperform
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
Luis Pardo Figueroa - (514) 287-3613
(Scotia Capital Inc. - Canada)
[email protected]
US$50.00
ROR 1-Yr:
54.6%
Valuation: 5.0x NTM EV/EBITDA 1-Year Forward
Key Risks to Target: Lower-than-expected prices, stronger-than-expected C$
Event
■ We are upgrading Domtar's shares to Sector Outperform from Sector
Perform.
Implications
■ Domtar shares now provide and attractive rate of return of ~55% to our
revised one-year target of $50.00.
■ Although continued secular declines in paper demand and increased
imports into North America (currently their highest level in over 10
years making up 12.5% of the region's demand) have halted
expectations of uncoated free-sheet price increases, we believe this is
priced in the stock, which has declined ~21% since the company
reported its Q2/14. Should imports continue to rise, we believe the
company is capable of mitigating any weakness in pricing through
capacity closures.
■ We believe the company's personal care segment could provide the
company's shares with much needed catalysts, which include: (1)
incremental acquisitions; and (2) the impact on the financials of the
planned capacity expansion plans (expected late in 2014 and into 2015).
Recommendation
■ We are upgrading Domtar's shares to Sector Outperform from Sector
Perform, given the significant return to our target price. We note that
Domtar's shares are supported by a 4.5% dividend yield, which we see as
sustainable.
Qtly EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.48 A
$0.60 A
$0.89
$0.95
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.24 A
$0.61 A
$0.89
$0.86
Q3
$0.63 A
$0.85
$0.90
$0.87
Q4
$1.05 A
$0.88
$0.98
$0.90
Year
$2.37
$2.95
$3.65
$3.57
P/E
19.9x
11.3x
9.1x
9.3x
2012A
$3.23
$7.90
12.9x
0.8x
$5,482
$799
2.7x
9.9x
2013A
$2.37
$7.32
19.9x
1.2x
$5,391
$660
2.9x
7.4x
2014E
$2.95
$9.26
11.3x
0.7x
$5,586
$768
2.4x
7.5x
2015E
$3.65
$10.20
9.1x
0.6x
$5,539
$839
2.9x
8.1x
2016E
$3.57
$10.12
9.3x
0.6x
$5,483
$832
3.4x
8.0x
BVPS14E: $44.38
ROE14E: 6.85%
Div. (NTM)
Div. (Curr.)
$1.50
$1.50
Yield (Curr.)
4.5%
Pertinent Revisions
New
Rating:
Target:
1-Yr
EPS14E
EPS15E
EPS16E
Old
SO
SP
$50.00
$2.95
$3.65
$3.57
$52.00
$2.93
$3.94
$3.93
Capitalization
Market Cap (M)
Float Value (M)
S&P Weight
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$2,226
$2,226
0.0%
67
67
64
Company Comment
Tuesday, October 14, 2014, After Close
(LIF-T C$20.48)
Labrador Iron Ore Royalty Corp.
Q3/14 Sales Catching Up to Production
Mark Turner, MBA, P.Eng. - (416) 863-7484
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Target 1-Yr:
Risk Ranking: Medium
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
C$26.00
ROR 1-Yr:
33.8%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.40
$2.05
10.0%
Key Risks to Target: Commodity price, operating and technical risks, environmental and legal risks
Event
Pertinent Revisions
■ Rio Tinto (RIO) has released its Q3/14 Operations Review, including
Iron Ore Company of Canada (IOC) production and sales data.
Adj. EPS14E
Implications
■ IOC sold 4.3 Mt of iron ore product in the quarter, an 11.7% increase
over Q2/14, and a 13.6% increase over the same quarter last year;
despite being 12.2% less than our estimate of 4.9 Mt. Total production
of 3.9 Mt was 2.8% lower than last quarter and 2.3% lower than the
same quarter of 2013. Shipments exceeded production in the quarter as
previously frozen material became for sale.
■ We have updated our model for Q3/14 sales, making no other changes
to our assumptions. Our 2014 full-year sales estimate is now for 15.1
Mt as the CEP2 continues to be ramped up in 2H/14, and which we
forecast to increase to 20.2 Mt in 2015, the first full year after ramp-up.
■ On our 2015 assumptions - US$88/t 62% Fe fines CFR China, 25%
pellet premium, CAD/USD of 0.90, and 20.2Mt of production (12.2Mt
pellets and 8.0Mt concentrate) - we calculate LIF being able to
distribute a total dividend of ~C$1.50 per share or yield of
approximately 7.3% from the current share price.
■ Assuming current spot pricing of US$83.50/t and spot CAD/USD of
0.885, we calculate LIF being able to distribute a dividend of ~C$1.30
per share or yield of approximately 6.3% from the current share price.
New
$1.65
Old
$1.72
Recommendation
■ We maintain our SO rating and $26 per share target price.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.34 A
$0.42 A
$0.29
$0.25
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Revenues (M)
EBITDA (M)
Current Ratio
Q2
$0.61 A
$0.56 A
$0.42
$0.36
Q3
$0.64 A
$0.39
$0.44
$0.35
Q4
$0.73 A
$0.28
$0.49
$0.39
Year
$2.33
$1.65
$1.64
$1.35
P/E
14.8x
12.4x
12.5x
15.2x
2012A
$1.90
$1.17
18.1x
$124
$180
2.0x
2013A
$2.33
$1.81
14.8x
$139
$219
1.4x
2014E
$1.65
$1.82
12.4x
$116
$157
1.7x
2015E
$1.64
$1.16
12.5x
$130
$171
2.1x
2016E
$1.35
$1.08
15.2x
$119
$145
2.4x
BVPS14E: $8.95
ROE14E: 18.30%
NAVPS:
P/NAV:
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(Basic)
Float O/S (M) (Basic)
$24.90
0.82x
ScotiaView Analyst Link
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.
$1,311
$-36
$1,275
64
64
65
Exhibit 1 - Labrador Iron Ore Royalty Corporation
Per share data (C$ per unit)
Adjusted net earnings per share/unit- FD
Adjusted operating CFPS/U (pre WC) (FD)
Free cash flow to equity (basic)
Dividend per share/unit (basic)
Book Value per share/unit (basic)
Financial Ratios
Price/Earnings (P/E) (FD)
Price/Cash flow per share/unit(P/CF) (FD)
EV/EBITDA
EBITDA Margin
Debt/[debt+equity+NCI]
ROE
ROIC
Distribution yield
Income Statement (C$M)
Revenue
Newfoundland royalty taxes
Amortization of royalty/commissions
General and administration
Interest on subordinated notes
Equity earnings in IOC
Operating earnings
Total taxes
Other
Net earnings
Adjusted net earnings
Adjusted EBITDA
Adjusted EBIT
Shares/Units O/S (million; basic; EOP)
Shares/Units O/S (million; FD; EOP)
Cash Flow Statement (C$M)
Adjusted operating cash flow (pre WC)
Change in non-cash working capital
Cash from operating activities
Cash from financing activities
Increase (decrease) in cash
Free cash flow to equity per share
Cash and equivalents at end of period
Scotiabank GBM Iron Ore Forecasts
Fines CFR China (¢dmtu)
Pellets CFR China (¢/dmtu)
Freight Sept-Iles to China (US$/tonne)
Operations Parameters
IOC iron ore pellet sales (Mt)
IOC Iron ore concentrate sales (Mt)
IOC iron ore total sales (Mt)
Labrador Iron Ore Royalty Corp
Q1/14A
Q2/14A
Q3/14E
Q4/14E
2013A
2014E
2015E
2016E
$0.42
$0.43
$0.40
$0.40
$9.13
$0.56
$0.53
$0.46
$0.40
$9.28
$0.39
$0.61
$0.67
$0.50
$9.17
$0.28
$0.25
$0.26
$0.50
$8.95
$2.33
$1.81
$1.90
$1.88
$9.11
$1.65
$1.82
$1.79
$1.80
$8.95
$1.64
$1.16
$1.03
$1.15
$9.45
$1.35
$1.08
$1.19
$1.00
$9.79
8.8x
11.3x
5.9x
99%
0%
26%
5%
5.5%
12.4x
11.3x
8.0x
99%
0%
18%
(2%)
8.8%
12.5x
17.7x
7.5x
99%
0%
17%
5%
5.6%
(LIF-TO C$20.48)
Share Price History
$40.00
$27.2
$5.4
$0.8
$0.4
$0.1
$12.6
$33.1
$6.0
$0.0
$27.1
$27.1
$39.3
$38.5
64.0
64.0
$33.8
$6.7
$1.0
$0.6
$0.0
$18.2
$43.7
$7.8
$0.0
$35.9
$35.9
$51.4
$50.4
64.0
64.0
$27.8
$5.5
$1.2
$0.6
$0.0
$8.6
$29.1
$4.3
$0.0
$24.8
$24.8
$35.7
$34.5
64.0
64.0
$26.9
$5.3
$1.3
$0.6
$0.0
$4.7
$24.5
$6.5
$0.0
$18.0
$18.0
$31.0
$29.7
64.0
64.0
$139.3
$27.5
$3.7
$2.8
$0.4
$82.3
$187.1
$38.3
$0.0
$148.8
$148.8
$218.7
$215.0
64.0
64.0
$115.7
$22.8
$4.2
$2.4
$0.1
$44.1
$130.3
$24.7
$0.0
$105.7
$105.8
$157.4
$153.2
64.0
64.0
$129.8
$25.5
$5.7
$2.6
$0.0
$43.6
$139.6
$34.4
$0.0
$105.3
$105.3
$170.8
$165.1
64.0
64.0
$27.78
($1.93)
$25.8
($48.0)
($22.2)
$0.4
$30.5
$33.77
($4.54)
$29.2
($25.6)
$3.6
$0.5
$34.1
$38.87
$4.09
$43.0
($25.6)
$17.4
$0.7
$51.5
$15.81
$0.72
$16.5
($32.0)
($15.5)
$0.3
$36.0
$115.69
$6.00
$121.7
($96.0)
$25.7
$1.9
$52.6
$116.23
($1.66)
$114.6
($131.2)
($16.6)
$1.8
$36.0
$74.25
($8.40)
$65.8
($89.6)
($23.8)
$1.0
$12.2
¢194
¢252
$25
¢166
¢205
$22
¢146
¢191
$23
¢134
¢171
$25
1.9
0.6
2.5
1.9
1.9
3.8
Net Asset Value (C$)
Royalty and commission
IOC equity interest (15.1%)
Total Operating Assets
8% NPV
$850
$708
$1,558
10% NPV
$709
$639
$1,348
Cash and cash equivalents
Debt and capital leases
Net Cash Items
$36
$0
$36
$36
$0
$36
Net Asset Value
Total NAV - FD
NAVPS (C$/share)
NAVPS (US$/share)
Multiple to NAV
$1,594
$24.90
$22.41
0.82x
$1,384
$21.62
$19.46
0.95x
Estimated NTM total distribution per share
NTM distribution yield
$1.40
6.84%
IOC Reserves & Resources (100% Basis)
Fe (M tonnes)
Reported Resources (M&I)
2,465
Reported Resources (M&I+Inf.)
3,837
Source: Company Reports, Factset, Scotiabank GBM estimates
Source: Company reports; Scotiabank GBM estimates.
2.0
2.3
4.3
2.8
1.8
4.5
Balance Sheet (C$M)
¢218
¢258
$23
¢160
¢205
$24
¢142
¢177
$24
$35.00
$30.00
$25.00
15.2x
18.9x
$20.00
9.0x
98%
0% $15.00
14%
Oct-13
Apr-14
4%
4.9%
Relative Share Price Performance
$119.0
LIF-CA
$23.3
S&P TSX Metals & Mining
$5.7
S&P TSX
$2.6
$0.0 1.5
$28.6
$115.9
$29.7
$0.0
$86.2 1.0
$86.2
$145.0
$139.3
64.0
64.0 0.5
Oct-13
Apr-14
$69.31
$6.68
IOC Sales Forecast
$76.0
($64.0)
25
$12.0
$1.2
20
$24.2
¢137
¢165
$22
8.6
6.1
14.8
8.6
6.6
15.1
12.2
8.0
20.2
12.2
8.0
20.2
2013A
2014E
2015E
2016E
Current assets
Long-term assets
Total assets
$88
$687
$776
$63
$678
$741
$49
$716
$765
$54
$739
$793
Current liabilities
Subordinated notes
Other liabilities
Total liabilities
Shareholders' Eq.
Total liabilities & Eq.
$64
$0
$128
$192
$583
$776
$37
$0
$130
$168
$573
$741
$23
$0
$137
$161
$605
$765
$23
$0
$143
$166
$627
$793
$1,311
($36)
$0
$1,275
$1,311
($12)
$0
$1,298
$1,311
($24)
$0
$1,286
IOC Iron Ore Sales (Mt)
October 14, 2014
Calendar Quarter
Oct-14
Oct-14
15
10
5
0
2011A 2012A 2013A 2014E 2015E 2016E 2017E
Pellet Sales
Concentrate Sales
Minesite NAV Distribution
Enterprise Value (C$M)
Market capitalization
$2,199
Net debt
($53)
Other assets
$0
Enterprise value
$2,146
Sensitivity (2014E)
EPS
CFPS
NAVPS (8%)
% Change in parameter for 10% change in
Fe Price
US$/C$
9.2%
8.7%
2.2%
2.0%
19.1%
23.8%
Royalty
and
commissio
n
55%
IOC equity
interest
(15.1%)
45%
Rating and Target
Rating
SO
Risk Ranking
Medium
1-yr Target
$26.00
1-yr ROR
33.8%
Valuation Method: 50% EV/EBITDA & 50% Adjusted NAV
Mark Turner - Metals & Mining Analyst - [email protected] - (416) 863-7484
66
Company Comment
Tuesday, October 14, 2014, Pre-Market
(LYD-T C$0.68)
Lydian International Limited
Amulsar Tour Highlights and Photos
Trevor Turnbull, MBA, MSc - (416) 863-7427
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: Speculative
Valuation: 1.00x NAV
Vitali Mossounov, CPA, CA - (416) 862-3910
(Scotia Capital Inc. - Canada)
Alex Watt, MBA - (416) 860-1429
(Scotia Capital Inc. - Canada)
Target 1-Yr:
C$1.25
ROR 1-Yr:
83.8%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
C$0.00
C$0.00
0.0%
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
■ We attended a tour of Lydian's 100%-owned Amulsar gold project in
Armenia with management.
Implications
■ The Armenian infrastructure looked good and does not appear to be an
issue for the project. We have a better appreciation for the layout and
we do not see significant technical or permitting risks.
■ Lydian recently released its new feasibility study that maximizes early
cash flow through processing ore at a higher cut-off in the initial five
years. This not only increases value and reduces the payback period, but
also makes the project more attractive to lenders. Lydian forecasts lifeof-mine all-in-sustaining costs to be $701/oz (we calculate $779/oz).
■ We believe there are opportunities to enhance the mine plan with
steeper haulage roads, and potentially optimize the crushing circuit to
increase capacity. We also feel the geology indicates there may be
higher-grade structural zones that are not factored in, but could add
value once mining begins.
■ Our $1.22 per share valuation assumes $350 million in debt, a C$165
million equity financing at C$1.00 per share and eventual mine plan
additions of 958,000 oz. Our one-year target price is $1.25 per share.
Recommendation
■ In our opinion, Amulsar project is a straightforward and viable project
that is likely to receive its construction approval by early next year. We
feel it will either be built by Lydian or acquired.
Qtly Adj. EPS (FD)
2014E
2015E
2016E
2017E
Q1
$-0.01 A
$-0.01
$-0.01
$0.03
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (oz) (000)
Tot. Cash Cost (/oz)
All-In Sust. Cost ($/oz)
Q2
$-0.02 A
$-0.01
$-0.01
$0.03
Q3
$-0.02
$-0.01
$-0.01
$0.03
Q4
$-0.01
$-0.01
$-0.01
$0.03
Year
$-0.06
$-0.03
$-0.03
$0.12
P/E
n.m.
n.m.
n.m.
4.9x
2015E
$-0.03
n.m.
$-0.03
n.m.
$-10
0
$0
$0
2016E
$-0.03
n.m.
$-0.03
n.m.
$-10
0
$0
$0
2017E
$0.12
4.9x
$0.18
3.3x
$82
210
$554
$629
2018E
$0.22
2.7x
$0.28
2.1x
$129
247
$566
$630
2019E
BVPS14E: $0.27
NAVPS:
P/NAV:
C$1.22
0.56x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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$104
$-21
C$81
153
152
67
Armenia - Good Infrastructure and No Obvious Concerns
■ The country's infrastructure is good. The roads are well-paved directly to site from the
capital, Yerevan. Although, the highway is steep and curvy in places, we saw large transports
that did not appear to have any problems. Supplies will come from the country of Georgia to
the north and its port on the Black Sea. There is power everywhere and water is not an issue,
sourced either from seasonal collection for 6 months or drawing from the river for the other 6
months.
Amulsar - Viable High-margin Project
■ The Amulsar gold project is essentially out of sight high up in the hills above the small
village of Gndevaz. When we were there it was fog-shrouded much of the time, but on clear
days not much will be visible. The terrain is steep in places, but not sharply so like Torex's
Morelos project, more rolling hills. Mineralization begins at surface and the tops of two hills
will be taken down when mining begins. Exhibit 1 shows the view from the heap leach
processing area looking up to peaks on the skyline where open pits are centred.
Exhibit 1 - Heap Leach Facility Location with Amulsar Mining Area on Horizon
Source: Scotiabank GBM.
68
■ The waste rock storage area is in a flat bowl that creates an ideally stable area for a dump
with no danger of sliding even in a seismically active area like Armenia. The heap leach area,
shown in Exhibit 1, is down below and is not a stability issue either. There are short hauls to
the crusher area shown in Exhibit 2. The conveyor from the crusher site just below the pits
down to the heap leach pads will cover steep ground. It will be 6.2 km long, with one bend in
the alignment and it will generate 2 Mw of power.
■ The mine plan is straight forward, Lydian plans to use Belaz trucks from Belarus with aftermarket engines and General Electric wheel motors and retarders for enhanced braking
capabilities. Service contracts will start off from General Electric and the engine
manufacturer originally. There is obvious optimization potential in the plan from areas such
as the haul roads that are mandated at a 7% slope, but with the modern equipment, such as
the General Electric wheel motors and retarders, Lydian expects Armenia to allow 10%
grades to be used. All other mines in Armenia are using 10% despite the law which seems to
be precautionary due to the state of equipment usually used in the Armenian mining industry.
■ Lydian is also looking to crush to 19 mm versus the 12.5 mm in the feasibility study. There
appears to be no loss to recovery as the rock either breaks on fractures where the gold is or it
does not. In cases where it does not break the rock tends to be barren in a situation similar to
Detour Gold with its unmineralized pebbles. Lydian wants to monitor recoveries at 19 mm,
but it could result in optimizing the crushing plant so that it can run with open screens and
have slightly greater throughput.
Exhibit 2 - View from Crusher Area Looking Down Along First Section of Overland Conveyor Route
Source: Scotiabank GBM.
69
New Feasibility Study - Our Modeling Assumptions
■ Lydian’s updated feasibility study last month shows Amulsar to be a high-margin 2.5
million ounce gold heap leach project. The study indicated the project would have all-insustaining costs (AISC) of $701/oz for the 10-year life of mine. Our modeling is slightly
more conservative with life-of-mine AISC calculated to be $779/oz. Key points include:
 Operations – the project consists of three open pits with a life-of-mine (LOM) strip
ratio of 2.8:1 that are a short haul to a three-stage crushing area. The company plans
to use its own mining fleet and then convey the crushed ore 6.2 km to the heap leach
facility and processing plant. No agglomeration is needed.
 Metallurgy – the LOM gold recovery rate is 84.2% with over 70% expected in the
first 55 days and the remainder in the second 55 day period.
 Inferred resources – we factor in 70% conversion of the inferred resources within
the current pit design for an additional 445,000 ounces (24 million tonnes at 0.57
g/t). Further upside is possible as discussed subsequently.
 Capex – total capital costs are budgeted at $426 million inclusive of about a 11.5%
contingency. The breakdown includes $102 million for mining equipment and $178
million for the processing facilities. We model a 20% contingency and therefore
assume total capex of $460 million.
 Opex – the LOM total cash costs are projected at $642/oz after factoring in about
$61/oz of royalties that are partially offset by $30/oz of silver by-product credits.
Armenia’s mining royalty tax is 4% on gold and silver. There is another 12.5%
royalty after deductions for expenses that is lumped in with taxes. Newmont also has
a 3% royalty that can be bought back for $20 million.
Exhibit 3 - Amulsar Heap Leach Project Modeling Assumptions
Amulsar Operating Assumptions
Start of Production - Q1/2017
Life-of-Mine Avg.
Tonnes Stacked on Heap Leach Pad
Estimated Mine Life 1
Strip Ratio
Mining Costs
Processing Costs
General and Administrative
Total Cost per Tonne Processed (pre-royalty and by-products)
Gold Grade
Gold Recovery
Average Annual LOM Production
Total LOM Gold Production 1
Total Cash Cost
By-Product Credits
Royalty
Total Cash Cost (net of by-product credit)
Sustaining Capital
Corporate G&A
Exploration
All-In Sustaining Cash Cost
Initial Capital Costs
NPV at 8% Discount Rate
Scotiabank
2014
LOM Average Feas. Study
mtpa
(years)
US$/t
US$/t
US$/t
US$/t
9.9
15.0
2.7:1
$7.98
$3.91
$1.48
$13.35
10.0
10.4
2.8:1
$7.58
$3.72
$1.48
$12.78
(g/t)
(%)
(koz)
(koz)
0.73
84.2%
196
2,935
0.77
84.2%
205
2,100
(US$/oz)
(US$/oz)
(US$/oz)
(US$/oz)
(US$/oz)
(US$/oz)
(US$/oz)
(US$/oz)
(US$M)
(US$M)
$678
-$37
$60
$701
$32
$41
$5
$779
$460
$253
$611
-$30
$61
$642
$35
$24
$0
$701
$426
(1) Includes 958,000 oz of upside we model as conversion from resource to reserves.
(2) Lydian NPV at 5% is $306 million.
n.b. Lydian feasibility study done at $1,250/oz gold price. Scotiabank model uses $1,300/oz.
Source: Company reports; Scotiabank GBM estimates.
n.a. 2
70
Geologic Upside - High-grade Structural Zones and In-fill Drilling
■ We found the most interesting part of the geology to be the structural fault zones
running 5 m – 15 m wide in places. The gold grades jumped to several grams in places such
as shown in Exhibit 4 along a road cut with up to 5 m running 8 g/t – 9 g/t. These structural
zones are not drilled off at tight enough spacing to include in the model or resource
calculations. However, the faults can be traced in drill core and are continuous vertically. The
point being these high-grade pockets could represent some nice high-grade upside in terms of
tonnage that is currently modelled as relatively low-grade.
Exhibit 4 - Highly Oxidized and High-grade Structural Zone within Mine Plan (note ppm values equal to g/t)
Source: Scotiabank GBM.
71
■ All of the deposit is oxide and most of the rock is hard silicified volcanics with the gold on
fractures. It should leach well and column test work indicates 91% versus the 84% in
feasibility study. At least half of the 84% recovery comes in the first 55 days, the second half
in the next 55 days. These deposits continue to depth as oxide and there is upside from the
$900/oz pits in the feasibility study. See our report on this. We already factor in about a
million ounces of resource to reserve conversion through in-fill drilling and using a
$1,200/oz resource pit.
■ There are two places where we expect reserves are likely to increase for the Amulsar
project. The first is through further in-fill drilling that could convert a significant portion of
inferred resources to reserves. There are currently 636,000 ounces of inferred resources (34.7
million tonnes grading 0.57 g/t) within the open pit mine plan based on a $900/oz cut-off. We
factor in 70% conversion of these resources in our base case model, but the number could be
greater. Secondly, there are just over 1.0 million ounces (43.7 million tonnes grading 0.73
g/t) of indicated and inferred resources contained within a $1,200/oz cut-off pit, but not
within the $900/oz cut-off pit described above. We expect and model 50% of these to be
incorporated by the end of the mine life.
■ As shown in Exhibit 5, not only are these two areas of resource upside potentially
available with further drilling, but also the deposits at Amulsar remain open at depth.
Of note, the topography is favourable to mining with the stripping ratio unlikely to rise
quickly if further ounces are discovered at depth. It is also fortunate that the deepest drilling
to date indicates the mineralization is still oxide and therefore could be expected to leach as
well as the shallower sections.
Exhibit 5 – East-West Section of Erato Pit Showing Current Pit Plan and Resource Pit Plan Outlines in Relation to Resource Potential
Source: Lydian International Ltd.
72
Permitting - No Obvious Pushback
■ We did not meet with government officials, but according to Lydian there is broad support
and an interest in getting the project into construction. The previous hold-ups on mine site
layout approvals are resolved with the Lake Sevan Committee endorsing the new site layout
as a non-issue for the water transport tunnels in the area. The new layout is well away and
also well downhill from the water tunnel.
■ We believe the permit should be expected sometime in Q1/15. The two public hearings were
successfully completed with the mayors of the three local communities providing letters of
support for the project. The government completed its review of the project and presented its
positive analysis at the final meeting on September 27.
■ In our opinion, the minor issues raised by the NGOs were done without the required expertise
in geology and mining. For example, one complaint is that the area was prospected for
uranium in the 1950s and the NGOs (not local communities) are concerned mining will
disturb and distribute radioactive pollution. However, there was never any economic uranium
found and none will be mined. The NGOs also talk about geochemical samples that had
heavy metal pathfinder elements and they have extrapolated this data to argue a significant
amount of heavy metals will be mined. These are scientifically non-issues and they are not
getting any traction locally or federally.
Financing - The Biggest Hurdle
■ Lydian seeks to fund up to 70% of its capital needs with debt; we assume $350 million
in our modeling which includes a 20% contingency ($76 million versus Lydian’s $44
million). We also factor in overhead until production, working capital, a cash reserve
allowance and interest. The net result is a conservatively calculated requirement of an
additional $150 million. We model this as an equity issue at C$1.00 per share resulting in a
doubling of the shares outstanding. The company had about $21 million in cash as at June
30, 2013 and may look to supplement that in the near term.
■ Management may choose to pursue project debt through two of its largest shareholders, the
International Finance Corporation (IFC) and the European Bank for Reconstruction and
Development (EBRD). Whether or not these banks participate in a financing syndicate, their
endorsement of the project and Lydian’s adherence to the Equator Principles is attracting
numerous lending institutions. Lydian expects to have enough interest such that hedging is a
choice it makes rather than a requirement. The company states it would not seek to do any
price protection that would extend beyond the length of any loan.
■ As part of the financing process, all alternatives are being considered including potential
royalty and stream arrangements. We consider these a possibility for small amounts, but do
not expect this to make up a material portion of funds, if any.
■ We feel the biggest risk to valuation comes from the gold price environment and
market conditions that impact the terms for financing. Our base case net asset valuation
of $1.22 per share is done with an 8% discount rate reflecting the pending permits and final
financing parameters. We use a long-term gold price of $1,300/oz for our base case and we
factor in nearly 100% share dilution through an assumed equity financing at $1.00 per share.
■ However, our valuation is sensitive to both of our assumptions and in Exhibit 6 we provide a
number of different valuation scenarios at both an 8% and a 5% discount rate. Following
financing and commencement of construction we would be inclined to revisit our discount
rate assumption and bring Lydian in line with other developers nearing production such as
Torex that we value using 5%.
73
Exhibit 6 – Net Asset Valuation per Share Sensitivity to Changes in Long-term Gold Prices and Financing Terms
Gold Price
(US$/oz)
NAV8% Sensitivity to Gold Price and Equity Issue Price
$1.22
$1,100
$1,200
$1,300
$1,400
$1,500
$0.75
$0.48
$0.75
$1.04
$1.31
$1.57
Equity Issue Price (US$/sh)
$1.00
$1.25
$0.57
$0.63
$0.88
$0.99
$1.22
$1.37
$1.53
$1.71
$1.85
$2.06
$1.50
$0.69
$1.07
$1.48
$1.86
$2.23
Gold Price
(US$/oz)
NAV5% Sensitivity to Gold Price and Equity Issue Price
$1.66
$1,100
$1,200
$1,300
$1,400
$1,500
$0.75
$0.69
$1.04
$1.41
$1.76
$2.10
Equity Issue Price (US$/sh)
$1.00
$1.25
$0.81
$0.91
$1.22
$1.36
$1.66
$1.85
$2.06
$2.30
$2.46
$2.74
$1.50
$0.98
$1.47
$2.01
$2.49
$2.98
Source: Company reports; Scotiabank GBM estimates.
What to Watch For
■ The completion of the updated feasibility study last month paves the way for the
following permitting and development milestones:
 Approval of mining rights application – the two public hearings both went well
and took place in August and September, slightly sooner than anticipated. We
interpret this as a positive sign of the government’s level of engagement. The
legislated timetable indicates the government should respond within six to eight
months of the application submitted in July.
 Environmental and Social Impact Assessment (ESIA) – this documentation is
underway and will be released as a necessary part of securing international financing
for the project. A comprehensive stakeholder engagement plan is also being
structured.
 Debt mandate – lenders, in conjunction with the International Finance Corporation
(IFC) part of the World Bank Group and the European Bank for Reconstruction and
Development (EBRD), are expected to fund up to 70% of the capital required.
 Start of build – ideally Lydian would like to be permitted in time to start
development work early next year and have two summer seasons for construction for
production in late 2016.
ScotiaView Analyst Link
74
Company Comment
Tuesday, October 14, 2014, After Close
(MEOH-Q US$54.72)
(MX-T C$61.91)
Methanex Corporation
Beyond The Oil Proxy Trade: Why We're Not
Ready To Buy MX Just Yet
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
[email protected]
Carl Chen - (416) 863-7184
(Scotia Capital Inc. - Canada)
Christine Munroe, CPA, CA - (416) 863-5907
(Scotia Capital Inc. - Canada)
Rating: Sector Perform
Target 1-Yr: US$72.00 ROR 1-Yr:
Risk Ranking: High
Valuation: 7.5x 2015E EBITDA, 12x 2015E EPS, DCF @ 10.5%, 100% Adj. RCN
33.4%
Div. (NTM)
Div. (Curr.)
$1.00
$1.00
Yield (Curr.)
1.8%
Key Risks to Target: Natural gas supply security, methanol S/D, energy prices
Event
■ MX has retreated 22% in the past month. The go-to justification for
the sell-off is the retreat of oil, with Brent now in the $86/bbl area. If
the oil complex is indeed sustainable at current levels, then energybased methanol demand will be stymied, and methanol prices must fall.
Pertinent Revisions
Adj. EPS15E
New
$5.92
Old
$6.01
Implications
■ What is MX pricing in? We estimate MX is currently pricing in a L/T
realized methanol price of $377/mt. In energy-equivalent terms, this is
similar to an average long-term oil price of $94/bbl, which is wellabove where Brent is trading. If we assume Brent stabilizes in the mid$90s, the stock is still only fairly valued at $55, and therefore, a buying
opportunity has not yet presented itself, despite the sell-off.
■ In our note, we briefly highlight several reasons to justify the
weakness beyond the easy oil proxy trade, ranging from delayed
MTO start-up demand in China, to record-high methanol inventories, to
falling olefin prices, to weakening demand in Europe.
■ We also show how the recent pullback has put MX closer to its
historical average of where it trades relative to its replacement cost, but
not yet in ‘buy territory’, adding further support of fair value here.
Recommendation
■ We maintain a SP rating on MX. Our $72 price target remains unchanged,
but has downside risk if a lower energy complex becomes sustainable.
Qtly Adj. EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.41 A
$0.92 A
$1.65 A
$1.42
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.47 A
$1.02 A
$0.94 A
$1.33
Q3
$0.38 A
$1.22 A
$0.60
$1.54
Q4
$0.64 A
$1.72 A
$0.99
$1.63
Year
$1.91
$4.88
$4.17
$5.92
P/E
16.7x
12.1x
13.1x
9.2x
2011A
$2.14
$4.72
10.7x
0.7x
$2,608
$448
1.7x
7.3x
2012A
$1.91
$4.68
16.7x
1.0x
$2,673
$398
3.3x
5.6x
2013A
$4.88
$6.78
12.1x
0.7x
$3,024
$735
2.1x
18.9x
2014E
$4.17
$7.99
13.1x
0.8x
$3,450
$707
1.9x
17.5x
2015E
$5.92
$10.27
9.2x
0.6x
$4,009
$996
2.1x
18.1x
BVPS14E: $18.56
ROE14E: 23.31%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$5,325
$502
$5,761
97
97
75
Beyond The Oil Proxy Trade
Price / RCN Per Share (%)
■ MX has retreated 22% in the past month, and about 15%
in the past week alone. The go-to justification for the sell-off Exhibit 1 – What is MX Pricing In?
is the recent retreat of oil, with Brent now trading in the
@ $55/sh
Brent Equivalent
$86/bbl area. If the oil complex is indeed sustainable at
($/mt)
($/bbl)
current levels, then energy-based methanol demand will be
2015E P/E
$390
$98
stymied, and therefore, L/T methanol prices must come down.
■ What is MX pricing in? Based on our analysis, we estimate 2015E EV/EBITDA
$384
$96
MX is currently pricing in a L/T realized methanol price of
2016+
DCF
$357
$89
$357 (DCF) to $390/mt (P/E). In energy-equivalent terms, this
is similar to an average long-term oil price of $94/bbl, which
$377
$94
is still above where Brent is trading. In fairness, the 4:1
$344
$86
energy equivalency relationship is rule-of-thumb only, and Brent-Implied methanol price
shouldn’t be relied upon too heavily to trade MX. However, Source: Scotiabank GBM estimates.
even if we assume Brent stabilizes in the mid-$90s, the stock is
still only fairly valued at $55, and therefore, a buying
opportunity has not yet presented itself, despite the sell-off.
Exhibit 2 – Chinese Methanol Inventory is at a Record High
■ Beyond oil, there are several other reasons why we’re not
ready to buy MX yet, including: (1) record high methanol
inventory in China, which may be ‘dumped’ if producers see
weakening prices in the near-term – Exhibit 2; (2) delayed
MTO plants in China, which is where most new Chinese
demand growth is found – this equipment issue could expand
to MTO start-ups that were due later in 2015; (3) the recent
return of several global supply outages; (4) the Chinese
methanol futures price has fallen 7% in the past few weeks,
which could be initial inventory dumping manifesting itself;
(5) olefin derivative prices are heading south quickly, which is
reducing the profitability of CTO/MTO operations in China –
just look at ethylene oxide prices that are down ~25%
recently, while mono-ethylene glycol and polypropylene
prices are falling in Asia, and ethylene and propylene prices
are declining in Europe; and (6) European economic data does
not support methanol strength there. While an easing oil price
is the easy answer to justify the recent leg-down in the stock, Source: JJ&A Argus.
investors are now digging deeper, and may be surprised to
learn that several underlying issues won’t necessarily clear up
short-term even if oil prices rebound. This is one of the
Exhibit 3 – MX as a % of Replacement Cost is in Fair Value Territory
reasons why we moved to the sidelines on MX recently.
■ Replacement cost analysis supports our view that MX is
100%
only in fair value territory. Since we launched coverage of
MX in early 2012, we estimate the stock has traded at 78% of
90%
our replacement cost calculation. The recent sell-off has put
MX in the 75% area, which is certainly not a compelling
reason to buy the stock. We buy MX in the 70% area.
L/T Avg
80%
■ What signals should we look for to get interested in MX?
If MX rallies from here, it will likely be because the market
views energy-based weakness as unsustainable, or perhaps
70%
because Canadians have limited quality materials names
available. But, based on what we know today, we think MX is
fairly valued. Therefore, to get interested in the name, we
60%
would like to see a pull back to the low-$50 area, or a
meaningful recovery to the global energy complex.
50%
■ Our target price is at risk if we see data points supportive
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Oct-14
of a lower energy complex through the mid-term.
Source: Scotiabank GBM estimates.
76
Intraday Flash
Tuesday, October 14, 2014 @ 12:52:20 PM (ET)
(NAL-T C$19.40)
Newalta Corporation
CEO Succession Plan Announced
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: High
Target 1-Yr:
Sam Devlin, CFA - (403) 213-7332
(Scotia Capital Inc. - Canada)
[email protected]
C$23.00
ROR 1-Yr:
21.1%
Valuation: 8.6x our 2015 EV/EBITDA estimate.
Key Risks to Target: Customer acceptance of onsite, commodities, labour, regulatory, weather, and FX.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.50
$0.50
2.6%
Event
■ NAL announced John Barkhouse will succeed Al Cadotte as President
and CEO effective November 10, 2014. Mr. Barkhouse has also been
appointed to the Board of Directors; Mr. Cadotte will remain on the
Board of Directors until the AGM in 2015.
Implications
■ New leadership should be well received. While Mr. Cadotte's
retirement has been known for some time, the announcement should
provide clarity on succession planning while reinforcing NAL's focus
on the energy related side of their business. Mr. Barkhouse brings a
wealth of oilfield service experience most recently having held the
position of President at Bredero Shaw (Shawcor's largest subsidiary), a
world class OFS provider with a track record of operational excellence.
That said, Shawcor's core pipe-coating business is very different than
NAL's waste management services; as such, it could take some time to
see the impact of Mr. Barkhouse's leadership.
■ Industrial sale remains key catalyst. Timing of any transaction
remains uncertain with no one logical buyer for the entire division in
our view (see our April note). That said, the incoming CEO may
provide some added push to complete the process. NAL currently trades
at a 2.3x discount to Secure (SES-TSX; SO); we do not see NAL
trading in line with SES post-sale, but the valuation gap could narrow.
Recommendation
■ One-year $23 price target and Sector Perform rating unchanged.
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$36 A
$28 A
$28 A
$44
$30 A
$38 A
$44 A
$48
$43 A
$51 A
$59
$62
$33 A
$33 A
$53
$62
$142
$150
$184
$216
EV /
EBITDA
8.5x
9.2x
8.7x
7.7x
2013A
$121
$171
$-50
19.2%
7.5%
3.0x
$0.89
$0.43
2014E
$148
$180
$-32
20.7%
8.3%
3.1x
$1.01
$0.48
2015E
$186
$200
$-14
22.0%
10.7%
2.7x
$1.35
$0.50
2016E
$205
$220
$-15
22.5%
10.6%
2.6x
$1.44
$0.50
2017E
$225
$220
$5
23.0%
11.6%
2.5x
$1.70
$0.50
(FY-Dec.)
CF from Ops (M)
Capex (M)
Free Cash Flow (M)
Adj EBITDA Margin
Return on Equity
Net Debt/Cash Flow
Adj Earnings/Share
Dividends/Share
Curr. BVPS: $11.22
ROE14E: 8.35%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ 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.
$1,150
$436
$1,586
59
59
77
Company Comment
Wednesday, October 15, 2014, Pre-Market
(OTEX-O US$53.17)
(OTC-T C$60.08)
Open Text Corporation
Expecting a Solid Start to F2015
Paul Steep, MBA - (416) 945-4310
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: Speculative
Andy Ko, CFA, MBA - (416) 863-7993
(Scotia Capital Inc. - Canada)
[email protected]
Target 1-Yr:
US$67.00
ROR 1-Yr:
27.3%
Valuation: 11.0x NTM EV/EBITDA 1-yr fwd
Key Risks to Target: Increased competition from large vendors
Event
■ OTEX will report Q1/15 results on October 22, 2014 at 4:00 p.m.,
conference call at 5:00 p.m., dial-in: 1-800-319-4610. We forecast
revenues of $463M and adj. EPS of $0.87 (cons. $459M and $0.86).
Implications
■ Our view is that Open Text's Q1 results will reflect positive organic
licence revenue growth (easy prior-year comp) and the inclusion of
GXS results (mainly in Cloud segment), with solid operating margins
sustained by cost control efforts.
■ We believe that Open Text remains well positioned for F2015
supported by a completely updated core EIM product suite (Project Red
Oxygen followed by Project Blue Carbon). With momentum from a
new product cycle, the firm is focused on sales execution and a go-tomarket strategy in F2015. In addition, we anticipate that the firm will
deploy up to $3B for additional M&A over the next five years
following its proven acquisition strategy.
Recommendation
■ Our long-term thesis on Open Text remains (1) strong ROIC forecast at >
20%; (2) OTEX's position as a consolidator in the EIM markets; and (3)
potential acquisition target.
Qtly EPS (FD)
2014A
2015E
2016E
2017E
Q1
$0.69 A
$0.87
$1.03
$1.15
(FY-Jun.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
Q2
$0.79 A
$0.97
$1.18
$1.30
Q3
$0.84 A
$0.97
$1.14
$1.26
Q4
$1.05 A
$1.10
$1.30
$1.43
Year
$3.37
$3.91
$4.66
$5.14
P/E
14.2x
13.6x
11.4x
10.3x
2013A
$2.79
$2.70
12.3x
0.7x
$1,363
$409
1.4x
2014A
$3.37
$3.44
14.2x
0.9x
$1,625
$518
1.2x
2015E
$3.91
$4.73
13.6x
0.8x
$1,924
$649
1.6x
2016E
$4.66
$5.44
11.4x
0.7x
$2,083
$754
2.1x
2017E
$5.14
$5.91
10.3x
0.6x
$2,246
$820
2.7x
BVPS15E: $15.11
ROE15E: 27.20%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.69
$0.69
1.3%
Pertinent Revisions
Target:
1-Yr
EPS15E
EPS16E
EPS17E
New
Old
$67.00
$3.91
$4.66
$5.14
$65.00
$3.93
$4.65
N/A
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
$6,523
$769
$7,292
123
84
78
Q1/15 Preview
■ Our expectation is that the firm's Q1/15 results will continue to reflect solid organic licence
revenue growth (see Exhibit 1) against a relatively easy comparable prior-year period and
impact from the inclusion of GXS results in the Cloud Services and Maintenance segments.
We anticipate the company will continue to deliver on maintenance and services revenues,
and sustain operating margins supported by the firm's cost control efforts. In the quarter, we
anticipate the firm to take ~$3.6 million in integration and restructuring charges related to the
GXS acquisition.
Exhibit 1 – Solid Organic Licence Growth and GXS to Support Q1
($M except for per share figures)
Q1/15E
$59.7
$185.2
$60.8
$154.3
$462.8
Q1/14A
$55.3
$168.4
$59.1
$41.6
$324.5
% Diff.
8.0%
9.9%
3.0%
270.5%
42.6%
Q4/14A
$99.7
$183.9
$61.6
$148.9
$494.0
% Diff.
-40.1%
0.7%
-1.2%
3.6%
-6.3%
EBITDA (Reported)
EBITDA margin
$146.3
31.6%
$101.0
31.1%
44.8%
$169.3
34.3%
-13.6%
Net income - GAAP
Net margin
Net income - Adjusted1
Net margin
$55.9
12.1%
$106.3
23.0%
$30.6
9.4%
$81.5
25.1%
82.6%
$88.1
17.8%
$128.7
26.0%
-36.5%
EPS fully diluted - GAAP
EPS fully diluted - Adjusted1
$0.46
$0.87
$0.26
$0.69
76.8%
26.2%
$0.72
$1.05
-36.6%
-17.5%
Product license
Maintenance/Support
Services
Cloud Services
Total Revenue (Reported)
1
30.4%
Consensus
Q1/15E
$458.6
$148.2
-17.4%
$0.86
Adjusted for amortization of intangibles, other gains/losses on investments, income tax on equity gains,
restructuring charges and stock-based compensation.
Note: total revenues include the impact of foreign exchange - individual line items shown on a constant currency basis
Source: Company reports; Scotiabank GBM estimates; IBES estimates.
■ Operating environment reflects mixed results. Overall, we believe the environment for
enterprise IT spending remains mixed based on recent results reported by technology firms
that suggested resilient corporate software spending. According to Gartner's recent Q3/14
update, global IT spending is expected to increase 2.6% in 2014 (+3.2% in constant dollars)
with enterprise software spending growing unchanged at 6.9%.
■ For instance, Oracle recently reported softer-than-expected Q1 results with new software
licence down 2% (in constant currency basis) and software and cloud revenues up 6% at the
low end of previous guidance (+6% to 8% constant currency). For the next quarter, Oracle
guided for software and cloud revenue growth of between 5% and 8% year over year
(constant currency).
■ Industry M&A activities continue. In the quarter, the enterprise IT industry continues to
see increased M&A activity and supports our view that the market will continue to
consolidate. For instance, EMC is reportedly considering options that could include a merger
deal with a rival according to media reports. In addition, TIBCO Software recently
announced that the firm will be taken private by Vista Equity Partners for ~$4.3 billion.
■ New product cycle to drive revenue growth. A catalyst for Open Text’s stock over the next
year will be the release of a completely updated core EIM product suite (Project Red Oxygen
followed by Project Blue Carbon and Project Black Silicon). The firm is set to enter a new
product cycle that will simplify its go-to-market positioning and offer customers a migration
path from legacy products. With momentum from the new product cycle, the firm is focused
on sales execution and a go-to-market strategy in F2015 (adding global account teams and
inside sales coverage).
79
■ Evolving M&A strategy supported by FCF. We believe that Open Text is financially
positioned to undertake additional targeted M&A activity. Our expectation is that the GXS
purchase will expand the range of potential acquisition candidates for the firm as it moves
further into the business of transactional computing. Open Text anticipates that it could
deploy up to $3 billion in capital over the next five years as it continues to follow its proven
acquisition strategy. We anticipate to see a shift toward more transformational transactions in
the Information Exchange segment, with additional tuck-unders in the core enterprise content
management (ECM) market.
■ We expect Open Text to exit Q1/15 with LTM FCF of $446 million (25% FCF margins). We
estimate that Open Text’s leverage (pro forma GXS acquisition) at the end of Q1/F15 will be
~1.3x Net Debt/EBITDA (compared with 1.5x at the end of Q4/F14). Our expectation is that
the firm would delever rapidly over the remainder of F2015.
■ Short interest update. As of September 30, 2014, Open Text's consolidated short interest on
NASDAQ/TMX stood at ~5.3 million split-adjusted shares (~4.3% of shares outstanding)
compared with ~4.3 million shares (~3.5% of shares outstanding) at of the end of June 30,
2014 and with ~10.0 million shares (~8.4% of shares outstanding) at of the end of December
31, 2013.
■ Revising Estimates. We have revised our estimates to mainly reflect updated foreign
exchange rates based on Scotia Economics' most recent forecast (see Exhibit 2). We are also
releasing our F2017 estimates, which demonstrate continued growth in licence revenues and
a sustained margin profile.
■ Our target price moves to $67.00 per share (previously $65.00 per share) based on updating
our financial estimates and rolling forward our valuation period with no change to our
valuation multiple.
Exhibit 2 - Estimates Revisions
Revenue ($M)
EBITDA ($M)
EPS fully diluted - Adjusted1
1
Q1/15E
New
Previous
$463
$466
$146
$147
$0.87
$0.87
F2015E
New
Previous
$1,924
$1,949
$649
$652
$3.91
$3.93
F2016E
New
Previous
$2,083
$2,071
$754
$754
$4.66
$4.65
Adjusted for amortization of intangibles, other gains/losses on investments, income tax on equity gains, restructuring charges and stock-based compensation.
Source: Scotiabank GBM estimates.
F2017E
New
Previous
$2,246
n/a
$820
n/a
$5.14
n/a
80
Exhibit 3 - Comparable Company Valuations
EV/EBITDA
PRICE
MCAP
EV
CY14E
CY15E
EBITDA Growth
CY16E
CY15E CY16E
P/E
EPS Growth
CY14E
CY15E
CY16E
CY15E CY16E
EV/FCF
FCF Growth
CY14E
CY15E
CY16E
CY15E CY16E
Content Management
Adobe Systems Incorporated
ADBE-US
$61.68
$30,762
$29,310
25.2x
17.3x
NM
45%
NM
47.1x
28.4x
18.5x
66%
53%
28.2x
23.2x
17.6x
22%
32%
EMC Corporation
EMC-US
$27.54
$55,869
$56,223
7.3x
6.7x
6.1x
9%
10%
14.4x
12.7x
11.5x
13%
11%
10.6x
9.5x
8.6x
11%
10%
Hewlett-Packard Company
HPQ-US
$32.69
$61,009
$67,830
4.9x
4.9x
5.0x
-1%
-1%
8.7x
8.2x
7.7x
6%
6%
8.9x
9.5x
9.1x
-7%
5%
International Business Machines Corporation
IBM-US
$183.52
$183,078
$221,342
8.4x
7.9x
7.6x
6%
4%
10.2x
9.3x
8.6x
11%
8%
15.9x
13.2x
11.1x
21%
18%
Iron Mountain Incorporated
21%
IRM-US
$31.48
$6,098
$10,277
11.0x
10.7x
10.3x
3%
4%
21.8x
21.2x
19.6x
3%
8%
39.6x
29.3x
24.3x
35%
Oracle Corporation
ORCL-US
$38.23
$169,409
$155,398
7.3x
7.3x
7.3x
0%
0%
12.9x
12.0x
11.2x
7%
8%
11.0x
10.4x
10.0x
5%
4%
Microsoft Corporation
MSFT-US
$43.65
$359,669
$304,110
9.0x
8.4x
7.7x
7%
8%
16.3x
14.7x
13.1x
11%
13%
12.6x
11.7x
10.1x
8%
15%
TIBCO Software Inc.
TIBX-US
$23.21
$3,800
$3,879
18.9x
17.8x
NM
6%
NM
35.2x
32.7x
NM
8%
NM
42.7x
NM
NM
NM
NM
SAP SE
SAP-DE
$54.17
$66,548
$65,818
10.6x
9.7x
9.0x
10%
8%
15.6x
14.5x
13.3x
8%
9%
17.0x
15.2x
13.8x
12%
11%
Software AG
SOW-DE
$18.03
$1,567
$1,554
6.8x
6.6x
6.3x
3%
5%
10.4x
10.1x
9.5x
3%
6%
9.8x
9.6x
9.2x
2%
4%
Pegasystems Inc.
PEGA-US
$19.24
$1,468
$1,290
12.9x
10.7x
9.9x
20%
9%
24.2x
19.0x
17.8x
28%
6%
NM
NM
NM
NM
NM
JCOM-US
$49.24
$2,350
$2,254
j2 Global Inc
8.7x
7.9x
NM
10%
NM
14.7x
12.9x
12.1x
14%
7%
NM
NM
NM
NM
NM
Average
10.9x
9.7x
7.7x
10%
5%
19.3x
16.3x
13.0x
15%
12%
19.6x
14.6x
12.6x
12%
13%
Avg. excl. min & max
10.1x
9.3x
7.7x
7%
5%
17.6x
15.5x
12.8x
11%
8%
18.1x
13.2x
11.6x
11%
12%
11.9x
10.4x
9.3x
15%
12%
14.2x
12.4x
10.8x
15%
14%
14.0x
12.9x
11.2x
8%
15%
Open Text
OTEX-US
$53.02
$6,505
52 Week Range
$7,273
EBITDA Margin
Low
High
CY14E
CY15E
Net Income Margin
FCF Margin
CY16E
CY14E
CY15E
CY16E
CY14E
CY15E
CY16E
Content Management
Adobe Systems Incorporated
ADBE-US
$51.54
$74.69
27.7%
33.7%
NM
15.5%
21.5%
26.8%
24.8%
25.2%
26.9%
EMC Corporation
EMC-US
$23.15
$30.18
31.2%
31.8%
32.7%
15.8%
16.8%
17.4%
21.7%
22.5%
23.2%
Hewlett-Packard Company
HPQ-US
$22.40
$38.25
12.5%
12.6%
12.4%
6.3%
6.8%
7.2%
6.8%
6.5%
6.8%
International Business Machines Corporation
IBM-US
$172.19
$199.21
27.1%
28.6%
29.2%
18.3%
20.1%
21.4%
14.3%
17.1%
19.9%
Iron Mountain Incorporated
IRM-US
$25.17
$37.10
29.9%
30.2%
31.0%
8.9%
9.0%
9.7%
8.3%
11.0%
13.2%
Oracle Corporation
ORCL-US
$32.44
$43.19
54.2%
52.3%
50.5%
33.7%
34.8%
35.9%
36.3%
36.8%
36.8%
Microsoft Corporation
MSFT-US
$33.57
$47.57
36.5%
35.6%
35.9%
23.7%
23.9%
25.1%
25.9%
25.5%
27.4%
TIBCO Software Inc.
TIBX-US
$18.20
$26.58
19.4%
20.0%
NM
10.2%
10.7%
NM
8.6%
NM
NM
SAP SE
SAP-DE
€ 51.87
€ 63.30
35.5%
36.4%
36.8%
24.4%
24.6%
25.1%
22.2%
23.1%
24.0%
Software AG
SOW-DE
€ 17.84
€ 29.27
26.4%
27.1%
27.7%
17.3%
17.8%
18.3%
18.4%
18.7%
18.8%
Pegasystems Inc.
PEGA-US
$15.51
$25.77
16.5%
17.7%
18.1%
10.0%
11.4%
11.4%
NM
NM
NM
j2 Global Inc
JCOM-US
$41.09
$56.24
43.7%
44.0%
NM
27.1%
28.1%
NM
NM
NM
NM
Average
30.1%
30.8%
30.5%
17.6%
18.8%
19.8%
18.7%
20.7%
21.9%
Avg. excl. min & max
29.4%
30.5%
30.2%
17.1%
18.4%
19.4%
18.0%
20.4%
21.9%
32.4%
35.4%
36.2%
24.2%
26.5%
27.7%
27.6%
28.5%
29.9%
Open Text
OTEX-US
$35.05
$58.71
Note: Pricing as of October 10, 2014.
Source: Company reports; FactSet; Scotia Capital.
ScotiaView Analyst Link
81
Company Comment
Wednesday, October 15, 2014, Pre-Market
(SBSP3-SA R$20.33)
(SBS-N US$8.50)
SABESP
Thirsty for Value? Do Not Look Here Yet;
Trimming Price Target To R$21.0
Ezequiel Fernández López, CFA - +56 9 9991 9152
(Scotia Corredora de Bolsa Chile SA)
[email protected]
Rating: Sector Perform
Target 1-Yr:
R$21.00
Risk Ranking: Medium
Valuation: DCF, 7yr explicit period and 2.0% LT growth
ROR 1-Yr:
8.1%
Div. (NTM)
Div. (Curr.)
R$0.99
R$0.73
Yield (Curr.)
3.6%
Key Risks to Target: Regulatory risk, hydrology
Event
■ We are trimming our Sabesp price target by 16% to R$21 per share (or
US$8.6 per ADR), on heightened water provisioning risks.
Implications
■ Negative news flow regarding water supply intensified during recent
weeks. First, precipitation during September failed to materialize into
adequate water inflows. Second, the October-March rainy season
started uninspiringly. Third, weather forecasts for the next six months
continue to disappoint. Finally, Sabesp got ousted of the Cantareira
crisis management team after its level reached 5%.
■ We believe that this not only confirms our idea of a difficult 2015, but
also that the risk of seeing sub-par results in 2016 has increased. Of
note, given the extreme dry state of some reservoirs, it might require
both steady and strong rains for soils to just recuperate normal moisture.
■ The solutions for the Sao Paulo Metro Area water production system
(~77m3/s) still appear to be far into the future. The Atibainha
interconnection works (+5 to 7m3/s) could be ready by 2016, but it still
needs to be approved by the ANA. The new Sao Lourenço plant
(+7m3/s), already under construction, could be active by 2H/17.
Recommendation
■ Sabesp's current 1.0x PBV and 0.72x EV/Adj.RAB have historically been
associated with strong forward 12m returns. However, drought risks
temper the value stance. Still Sector Perform, prefer Copasa or Aguas/A.
Qtly EPS (FD)
2012A
2013A
2014E
2015E
Q1
R$0.72 A
R$0.73 A
R$0.70 A
R$0.49
(FY-Dec.)
Earnings/Share
Dividends/Share
EV/EBITDA
Price/Earnings
Revenues (M)
EBITDA (M)
Free Cash Flow (M)
Capex (M)
Q2
R$0.43 A
R$0.53 A
R$0.44 A
R$0.46
Q3
R$0.53 A
R$0.69 A
R$0.37
R$0.45
Q4
R$1.12 A
R$0.86 A
R$0.49
R$0.58
Year
R$2.80
R$2.81
R$1.99
R$1.98
P/E
10.4x
9.4x
10.2x
10.3x
2011A
R$1.79
R$0.62
3.7x
9.7x
R$7,703
R$3,217
R$174
R$2,448
2012A
R$2.80
R$0.85
5.5x
10.4x
R$8,273
R$3,611
R$194
R$2,677
2013A
R$2.81
R$0.73
n.m.
9.4x
R$8,871
R$4,004
R$-335
R$2,781
2014E
R$1.99
R$0.99
n.m.
10.2x
R$8,515
R$3,251
R$-177
R$2,797
2015E
R$1.98
R$0.70
n.m.
10.3x
R$8,774
R$3,494
R$421
R$2,400
BVPS14E: R$19.86
ROE14E: 10.09%
Pertinent Revisions
New
Old
Target:
1-Yr
R$21.00
R$25.00
New Valuation:
DCF, 7yr explicit period and 2.0% LT
growth
Old Valuation:
DCF, 7-yr explicit period & 2.0% LT
growth
Capitalization
Market Cap (B)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
R$13,896
R$8,293
R$13904031
683,509
340
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in BRL unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
82
Sabesp: Thirsty for Value? Do Not Look Here Yet
Exhibit 1 – Coverage Valuation Summary
Exchange
Share
Price
Price
Target
Rating
Mkt
Cap,
US$B
ADTV
6m,
US$M
EV / Adj. EBITDA
PE
2014E
2015E
2014E
2015E
Div Yield, %
PBV
2014E 2015E
2014E
1yr Total
Upside
AES Gener
Santiago
301
350
SO
4.3
1.4
10.5
10.1
32.9
17.6
4.7%
1.9%
1.79
21.0%
Colbún
Santiago
150
145
SU
4.4
2.1
10.7
10.0
18.9
19.5
0.4%
0.7%
1.28
-3.1%
ECL
Santiago
830
925
SO
1.5
2.1
7.6
7.1
19.3
21.7
2.5%
2.4%
0.92
14.0%
Endesa
Santiago
865
850
SP
11.9
10.0
10.6
10.3
24.4
19.3
3.5%
2.5%
2.20
1.7%
Enersis
Santiago
183
195
SP
15.0
17.9
7.5
6.9
17.3
12.2
4.5%
2.8%
1.34
11.2%
37.1
33.6
9.2
8.7
21.7
16.4
3.6%
2.4%
1.65
7.7%
LATAM POWER
Aguas Andinas
Santiago
354
375
SP
3.9
2.3
10.8
10.3
18.5
16.2
5.6%
5.4%
3.54
11.5%
Sabesp
São Paulo
20.3
21.0
SP
5.7
31.5
6.8
6.5
10.2
10.3
4.8%
3.4%
1.02
8.3%
Copasa
São Paulo
32.3
39.0
SO
1.6
3.1
5.6
5.0
8.7
7.0
3.3%
3.4%
0.88
24.0%
11.2
36.9
8.0
7.6
12.9
11.8
4.9%
4.1%
1.87
11.6%
6.9
4.7
21.6
15.5
35.1
27.0
2.4%
2.7%
2.92
2.0%
LATAM GAS
6.9
4.7
21.6
15.5
35.1
27.0
2.4%
2.7%
2.92
2.0%
TOTAL
55.1
75.2
10.5
9.3
21.6
16.8
3.7%
2.8%
1.85
7.8%
LATAM WATER
Ienova
Mexico DF
80.3
80.0
SP
Source: Company reports; Scotiabank GBM estimates.
Exhibit 2 – Supply Reservoir Mix for SP Metro Area
Exhibit 3 – Reservoir Levels, 14th of October
The SP Metro Area makes up for ~70% of Sabesp total sales.
Source: Company reports.
Cantareira level adjusted to include technical reserve..
Source: Sabesp Website.
83
Exhibit 4 – Cantareira Water Flow Dynamics, m3/s
Exhibit 5 – Sabesp EV/EBITDA, LTM
Source: ANA
Source: Bloomberg, company reports, Scotiabank GBM est.
Exhibit 6 – Sabesp PBV
Exhibit 7 – PBV vs. NTM Share Return
Source: Bloomberg, company reports, Scotiabank GBM est.
Source: Bloomberg, company reports, Scotiabank GBM est.
Exhibit 8 – Sabesp EV/Adj. RAB
Exhibit 9 – EV/Adj.RAB vs. NTM Share Return
Source: Bloomberg, company reports, Scotiabank GBM est.
Source: Bloomberg, company reports, Scotiabank GBM est.
84
Exhibit 10 – Sabesp Financials
P&L Driver, R$M
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Customers, thousands
13,013
13,402
13,807
14,228
14,821
15,184
15,488
15,798
Water
7,295
7,481
7,679
7,888
8,164
8,327
8,494
8,664
Sewage
5,718
5,921
6,128
6,340
6,657
6,857
6,994
7,134
YoY
3.0%
3.0%
3.0%
3.0%
4.2%
2.4%
2.0%
2.0%
7,100
7,703
8,273
8,871
8,515
8,774
10,819
11,452
YoY
7.7%
8.5%
7.4%
7.2%
-4.0%
3.0%
23.3%
5.9%
Revenue per Customer, R$
569
597
627
652
603
603
747
785
EBITDA
3,224
3,217
3,611
4,004
3,251
3,494
4,694
4,979
YoY
18.2%
-0.2%
12.3%
10.9%
-18.8%
7.5%
34.4%
6.1%
EBITDA Margin, %
45.4%
41.8%
43.7%
45.1%
38.2%
39.8%
43.4%
43.5%
248
240
262
281
219
230
303
315
1,870
1,714
2,011
2,193
1,535
1,662
2,337
2,505
144
128
146
154
104
109
151
159
1,631
1,224
1,912
1,924
1,363
1,353
2,015
2,241
Net Revenues
EBITDA per Customer, R$
NOPAT
NOPAT per Customer, R$
Net Income
EPS, BRL
2.39
1.79
2.80
2.81
1.99
1.98
2.95
3.28
EPS, YoY
8.2%
-25.0%
56.3%
0.6%
-29.1%
-0.7%
48.9%
11.2%
Payout, %
26%
26%
47%
26%
35%
35%
35%
40%
DPS, BRL
0.58
0.62
0.85
0.73
0.98
0.70
0.69
1.18
Dividend Yield, %
4.1%
3.6%
2.9%
3.1%
4.8%
3.4%
3.4%
5.8%
BS & Key Ratios Driver, R$M
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Total Assets
23,293
25,019
26,476
28,274
29,201
29,967
32,201
34,258
Total Liabilities
13,611
14,473
15,220
15,344
15,623
15,513
16,206
16,828
Total Equity
9,682
10,546
11,257
12,931
13,578
14,454
15,995
17,430
ROIC, %
16.3%
14.2%
15.1%
14.9%
9.3%
9.2%
12.2%
12.6%
ROE, %
18.0%
12.1%
17.3%
15.9%
10.1%
9.6%
13.2%
13.4%
Cash
1,988
2,142
1,916
1,782
1,207
543
1,390
2,390
Net Debt
6,221
6,281
6,959
7,668
8,293
8,957
8,610
8,110
1.93
1.95
1.93
1.91
2.55
2.55
1.83
1.63
2,211
2,448
2,677
2,781
2,797
2,400
2,250
2,306
Net Debt to EBITDA
Capex
31.1%
31.8%
32.4%
31.3%
32.9%
27.4%
20.8%
20.1%
FCF
Capex over Revs, %
265
174
194
-335
-177
421
1,448
1,652
Customers per Employee
849
900
919
948
1,000
1,030
1,030
1,040
34.8%
33.7%
33.6%
31.8%
30.0%
29.7%
29.3%
28.9%
Avg Share Price, R$
11.8
15.2
25.0
25.9
-
-
-
-
ADR Price, US$
6.8
9.2
12.9
12.2
-
-
-
-
5,513
5,822
9,428
7,148
-
-
-
-
ADTV, US$M
15.8
19.8
36.0
39.2
33.0
-
-
-
Avg EV/EBITDA, LTM
5.3
5.9
6.8
6.7
6.8
6.5
4.8
4.4
Water Losses Ratio, %
Market Data
Market Cap, US$M
Avg PE, LTM
5.2
6.9
11.9
9.0
10.2
10.3
6.9
6.2
Avg PBV
0.90
1.03
1.55
1.50
1.02
0.96
0.87
0.80
1,101
1,253
1,732
1,778
1,496
1,504
1,452
1,392
0.68
0.74
0.97
0.90
0.73
0.72
0.69
0.65
Avg EV/Customer, R$
Avg EV/Adj.RAB
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
85
Company Comment
Tuesday, October 14, 2014, After Close
(SMF-T C$4.16)
SEMAFO Inc.
SEMAFO Tests M&A Waters with Hostile NonBinding Proposal for Orbis Gold
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
[email protected]
Ciara Sawicki - (416) 862-3738
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Outperform
Risk Ranking: Speculative
Target 1-Yr:
C$4.75
ROR 1-Yr:
14.2%
Valuation: 1.20x NAVPS
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
■ SEMAFO announced a hostile non-binding proposal for Orbis Gold
Ltd. (OBS-AU, not covered) and reported Q3/14 operating results.
Implications
■ Orbis' main asset is the Natougou gold development project in Burkina
Faso (90% effective interest). The project currently hosts I&I resources
of 2.0 Moz Au (100% basis) at an average grade of 3.4 g/t Au.
■ SEMAFO's proposed all-cash transaction values Orbis at ~US$140M or
~$60/oz of global attributable mineral resources which is broadly in line
with gold developer acquisitions over the past few years. We view the
proposed Orbis transaction positively as it is 12.7% NAV accretive
based on our scenario analysis using conservative modelling
assumptions for Natougou.
■ The company also announced Q3/14 production of 64.7 koz Au, 18%
ahead of our estimate mainly due to higher ore tonnes processed (no
material impact from the rainy season in Burkina) with total cash costs
of ~$560/oz coming in 19% lower than expected.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Pertinent Revisions
Adj. EPS14E
Adj. EPS16E
New
US$0.09
US$0.34
Old
US$0.04
US$0.35
Recommendation
■ We rate SEMAFO Sector Outperform with a C$4.75 one-year target
price. The company has good operating momentum at Mana and
continues to trade attractively vs. peers, particularly now that the GDXJ
overhang is lifted.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.04 A
$-0.05 A
$0.07
$0.09
(FY-Dec.)
Adj Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (oz) (000)
Tot. Cash Cost ($/oz)
Rlzd. Gold Price ($/oz)
Q2
$0.02 A
$0.05 A
$0.08
$0.09
Q3
$0.00 A
$0.05
$0.08
$0.08
Q4
$-0.03 A
$0.04
$0.08
$0.08
Year
$0.04
$0.09
$0.32
$0.34
P/E
69.2x
40.5x
11.7x
10.8x
2012A
$0.28
12.0x
$0.57
6.0x
$94
236.1
$799
$1,680
2013A
$0.04
69.2x
$0.28
9.3x
$77
158.6
$777
$1,408
2014E
$0.09
40.5x
$0.41
9.0x
$116
234.7
$655
$1,271
2015E
$0.32
11.7x
$0.67
5.5x
$202
277.7
$567
$1,400
2016E
$0.34
10.8x
$0.62
5.9x
$191
253.2
$631
$1,500
BVPS14E: $1.81
ROE14E: 5.19%
NAVPS:
P/NAV:
C$3.92
1.06x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
C$1,188
$-112
C$1,062
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ 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.
286
285
86
SEMAFO Tests M&A Waters with Orbis – Maintaining Our SO Rating
■ We are re-iterating our Sector Outperform rating and C$4.75 one-year target price
following SEMAFO’s announcement of a non-binding proposal for Orbis Gold. Our
NAV increases slightly to C$3.92 (+0.7%) as we have updated our model for the Q3/14
operating results at Mana but flag that we have not updated our valuation for Natougou
pending a firm bid (friendly or otherwise) for Orbis.
■ We view the proposed Orbis transaction positively as it is 12.7% NAV accretive based
on our scenario analysis using conservative modelling assumptions for Natougou.
Higher grades at Natougou in years 1 and 2 of production are also a good strategic fit for
SEMAFO, in our view, as we currently see the high-grade Siou and Fofina deposits at the
company’s Mana mine being depleted by 2019. However, given that Orbis’ board of
directors has rejected SEMAFO’s proposal saying that it undervalues the company, for
SEMAFO to be successful in a bid for Orbis we believe it may need to sweeten the deal
which could be done by increasing the purchase price, adding a share-component to the allcash offer, or by offering to spin out Orbis’ exploration assets (Nabanga, Bantou, Korhogo in
Cote d’Ivoire, and other smaller regional exploration properties) into a funded SpinCo entity.
■ With timing on a firm bid from SEMAFO for Orbis uncertain, we continue to believe that
near-term upside to our valuation is likely to come from either a discovery at Pompoi
Nord as part of the $20 million 2014 exploration program or the company successfully
extending the mine life at Siou without decreasing the reserve grade.
■ No argument that SEMAFO is a top-tier junior producer, current valuation offers
attractive entry point particularly with the GDXJ overhang lifted. We view SEMAFO as
a top-tier company based on (1) its strong management team, (2) a solid track record of
meeting guidance (over the last six years), (3) its ability to generate significant estimated
positive free cash flow of $38 million in 2014 and $113 million in 2015 at spot gold prices,
and (4) near- and long-term production growth prospects from Siou, Fofina, and other
potential discoveries.
o Scotiabank’s Index Strategist Andrew Moffatt commented this morning
that he thinks SEMAFO will now remain in the Market Vectors Junior
Gold Miners Index (tracked by the GDXJ) as methodology changes were
announced Monday night that allow larger companies to qualify for the index.
Recall the shares were officially removed from the index on September 12,
2014, but were never sold by the GDXJ ETF.
o Now is the opportunity to gain exposure to a high-quality gold producer
at a good price. SEMAFO tends to trade at a premium to peers but is
currently trading at 1.06x P/NAV and 8.9x 2014E P/CF vs. peers at 0.83x and
8.0x, respectively.
■ Upcoming potential share price catalysts.
o Q4/14 - Exploration results from auger and reverse circulation drilling along
the Kokoi Trend and eastern contact of the Siou intrusive.
o Q4/14 – Results of deep diamond drilling at Siou. Two core rigs arrived on
site in June 2014 to carry out infill drilling between 180 and 225 meters of
vertical depth.
o Late 2014 – Mana expected to be connected to the national power grid.
87
Scenario Analysis for the Combined Company (SMF + OBS)
■ We are holding off on including Natougou in our Exhibit 1 - Natougou Modelling Assumptions for Scenario Analysis
valuation for SEMAFO pending a firm bid (friendly or
otherwise) for Orbis from SEMAFO, but have
Natougou
completed scenario analysis to illustrate what the
(Scenario Analysis)
Scotiabank
GBM
Forecast
combined company may look like. We stress that we
Life-of-Mine Avg.
have not changed our estimates at this time.
(t/d)
5,500
Ore Processing Rate
■ Exhibit 1 shows the modelling assumptions we used
for Natougou for the scenario analysis. Significant
waste:ore
12.5:1
Strip Ratio
differences in our estimate from the results of the
Mining Costs (per tonne mined)
US$/t
$3.58
October 2014 updated scoping study are higher capital
US$/t
$24.50
Processing costs
costs of $300M vs. $234M, higher sustaining and
US$/t
$5.25
General and Adminstrative
exploration costs of $109M, slightly higher per-tonne
operating costs, and a smoother grade profile in years 1
US$/t
$63.13
Total Cost per Tonne Processed
and 2 that results in gold production of 667 koz Au in
Mill Head Grade
(g/t)
3.60
those years vs. ~700 koz in the October 2014 updated
(%)
94%
Gold
Recovery
scoping study.
(oz)
202,300
Gold Production
■ The transaction is 12.7% NAV accretive based on
(US$/oz)
$633
Total Cash Cost (incl. royalties)
our estimates as Natougou’s NPV of C$283M (90%
basis) more than offsets the ~$140M all-cash proposed
Total
Orbis purchase price (see Exhibit 2).
(yrs)
6.5
Estimated Mine Life
Initial Capital
Sustaining Capex incl. Exploration
5%
NPV
(90% Basis)
(US$M)
$300
(US$M)
$109
(C$M)
$283
%
%
36%
17%
IRR
IRR incl. Acquisition Cost
Source: Scotiabank GBM estimates.
Exhibit 2 – Current vs. Pro-forma NAV Estimates
Location
Stage
Valuation
Ow nership
%
Scenario
Valuation
C$M
Scenario
NAV
(C$/sh)
Current
NAV
(C$/sh)
Mana
Burkina Faso
Production
DCF @ 3%
90%
$978
$3.43
$3.43
-
Natougou
Burkina Faso Development
DCF @ 5%
90%
$283
$0.99
-
n.m.
Other Exploration
Burkina Faso
Estimate
100%
$50
$0.18
$0.18
-
$1,311
$4.59
$3.60
27.5%
Cash (post-acquisition cost)
$22
$0.08
$0.39
-80.1%
Working Capital (net of cash and ST debt)
$41
$0.14
$0.14
-
In-the-Money Instruments
$22
$0.08
$0.08
-
Total Debt
($50)
($0.18)
-
n.m.
Corporate G&A
($83)
($0.29)
($0.29)
-
($48)
($0.17)
$0.32
-152.4%
$1,263
$4.42
$3.92
12.7%
Projects
Subtotal - Operations
Subtotal - Corporate Adjustm ents
Net Asset Value
Source: Scotiabank GBM estimates.
Exploration
Change
88
■ On a production basis, we estimate Natougou would boost SEMAFO’s 2018 gold
production by ~140% compared to the current mine plan for Mana, or ~170% compared
to our 2014 production estimate (see Exhibit 3).
Exhibit 3 – Combined SEMAFO and Orbis Production and Cost Profile
700
$900
Gold Production (koz)
$700
500
$600
400
$500
300
$400
$300
200
$200
100
$100
0
$0
2012A
2013A
2014E
Mana Production
2015E
2016E
2017E
Natougou Production
2018E
2019E
Total Cash Cost
Source: Company reports; Scotiabank GBM estimates.
■ Based on our estimates, the transaction would reduce SEMAFO’s 2016 and 2017 free
cash flow to negative $53M and negative $79M, from positive $93M and $77M,
respectively, at a spot gold price of $1,235/oz. We have assumed an initial credit facility of
$50M to help with funding the acquisition purchase price, but at spot gold prices, believe a
further $25M-$50M would be required to fully fund construction of Natougou (see
Exhibit 4).
2020E
Total Cash Costs ($/oz)
$800
600
89
Exhibit 4 – Pro-forma Cash Flow Forecast at $1,235 Spot Gold (yellow indicates additional funding required)
SEMAFO (Scenario incl. Natougou)
SC Gold Price Forecast
2014E
($/oz)
Production/Cost Profile
$1,275
2015E
$1,235
2014E
2015E
2016E
$1,235
2016E
2017E
$1,235
2017E
2018E
$1,235
2018E
2019E
$1,235
2019E
2020E
$1,235
2020E
Gold Production
(koz)
235
278
253
228
629
473
377
Cash Costs (US$/oz)
($/oz)
$655
$546
$605
$647
$469
$588
$659
Cash Flow Profile
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Net Operating Cash Flow
($M)
$117
$151
$121
$105
$442
$282
$192
Capital Expenditures
($M)
($219)
($64)
($175)
($185)
($32)
($32)
($32)
Net Cash Provided by Financing Activities
($M)
$54
($3)
($3)
($3)
($25)
($25)
$0
Increase in Cash and Cash Equivalents
($M)
($48)
$85
($56)
($82)
$385
$225
$160
Cash at Beginning of Period
($M)
$83
$34
$121
$68
($14)
$371
$596
Cash at End of Period
($M)
$34
$119
$66
($14)
$371
$596
$756
Free Cash Flow
($M)
($103)
$87
($53)
($79)
$410
$250
$160
Net Operating Cash Flow
Capital Expenditures
Net Cash Provided by Financing Activities
($M)
($M)
($M)
2014E
$117
($79)
$4
2015E
$151
($38)
$0
2016E
$121
($28)
$0
2017E
$105
($28)
$0
2018E
$141
($17)
$0
2019E
$46
($17)
$0
2020E
$49
($17)
$0
Increase in Cash and Cash Equivalents
Cash at Beginning of Period
Cash at End of Period
($M)
($M)
($M)
$42
$83
$124
$113
$124
$237
$93
$237
$331
$77
$331
$408
$124
$408
$532
$29
$532
$561
$32
$561
$593
Free Cash Flow
($M)
$38
$113
$93
$77
$124
$29
$32
SEMAFO (Base Case)
Source: Scotiabank GBM estimates.
Transaction Details and Gold Developer M&A Comps
■ SEMAFO has announced a non-binding proposal to acquire 100% of the issued share
capital of Australian-listed Orbis Gold Ltd. by way of a recommended transaction.
SEMAFO’s A$0.62 to A$0.65/sh all cash proposal values Orbis at approximately
A$156M-A$164M (US$136M-US$143M), and represents a 77%-86% premium over Orbis'
October 9 closing price, or a 68%-76% premium to Orbis' 30-day VWAP.
o Note that on October 10, 2014, Orbis announced that it had appointed
Merrill Lynch as its defense advisor “following recent confidential
approaches made to Orbis Gold in relation to a range of potential transactions,
at both a corporate and asset level”. Orbis shares rose 20% on Friday (Oct.
10). SEMAFO made its announcement on Sunday, October 12, following
which Orbis press released on October 12 (October 13 in Australia) that it
believed SEMAFO’s proposed bid undervalued the company.
o SMF believes its proposed deal is superior to the US$20M (A$0.42/sh)
conditional private placement to Greenstone Resources LP announced
September 23, 2014 (general meeting to approve the private placement
scheduled for October 24, 2014).
■ We estimate SEMAFO would be paying ~$60/oz of indicated and inferred JORCcompliant attributable mineral resources, broadly in line with the average acquisition
values for transactions over the past few years (see Exhibit 5). SEMAFO’s total acquisition
cost would be approximately $887/oz of LOM production from Natougou based on the
proposed purchase price, estimated LOM average all-in sustaining costs of $619/oz, and
$168/oz of initial capital (October 2014 scoping study).
90
■ We believe SEMAFO will finish 2014 with cash and equivalents of ~$124M and estimate
the company would need a ~$50M credit facility or other financing to complete an
acquisition of Orbis at the proposed terms. Orbis ended June 2014 with cash of A$5.1M and
we do not assume that SEMAFO would receive a material amount of cash from Orbis if the
transaction does proceed.
■ Timelines uncertain and proposed deal subject to numerous conditions. SEMAFO has
yet to make a firm bid for Orbis (hostile or friendly) and we are uncertain of if/when a bid
will actually be made but do note that similar to Canada, there are no significant barriers to
attempting a hostile takeover of an Australian company. SEMAFO’s proposed acquisition of
Orbis is subject to pre-conditions including limited scope due diligence, entry into
appropriate binding transaction documentation on terms and conditions considered
customary for a transaction of this kind, and the conditional Greenstone placement not
proceeding.
Exhibit 5 – Comparable Transactions for Gold Developer Companies
Deal Size
Acquirer / Target
SEMAFO / Orbis Gold2
Agnico / Cayden2
B2Gold / Papillon
Rio Alto / Sulliden
B2Gold / Volta
Teranga / Oromin
New Gold / Rainy River
Osisko / Queenston
Hochschild / Andina
Argonaut / Prodigy
Endeavour Mining / Avion
Yamana / Extorre
IAMGOLD / Trelawney
Average
Median
Gold Resources (Moz)
Acquisition Value (US$/oz)
Date
(US$M)
Premium1
P&P
M&I
Inf.
P&P
M&I
M&I&I
Oct-14
Sep-14
Jun-14
May-14
Oct-13
Jun-13
May-13
Nov-12
Nov-12
Oct-12
Aug-12
Jun-12
Apr-12
$140
$190
$570
C$325
$63
$57
$310
C$550
C$103
C$341
C$389
C$395
C$608
51%
28%
42%
47%
81%
69%
42%
20%
100%
57%
56%
68%
42%
54%
51%
1.02
1.45
4.03
6.60
0.83
-
1.08
4.18
2.43
4.86
3.78
6.17
2.17
8.88
6.25
1.65
1.36
0.93
1.23
0.45
4.07
1.01
0.96
2.28
1.95
1.18
0.35
2.49
1.05
5.94
n.m.
n.m.
n.m.
$281
n.m.
$90
$77
n.m.
$16
n.m.
$471
n.m.
n.m.
$129
n.m.
$126
$118
$16
$35
$50
$253
$12
$55
$235
$291
$654
$164
$122
$60
n.m.
$114
$71
$13
$28
$37
$133
$10
$52
$94
$164
$89
$72
$66
(1) Premium to last closing price.
(2) Deal not yet closed.
Source: Company reports; FactSet; Scotiabank GBM estimates.
SMF’s 2014 Guidance Revised Higher Following Strong Q3/14 Ops Results
■ SEMAFO announced Q3/14 production of 64.7 koz Au, 18% ahead of our estimate
mainly due to higher ore tonnes processed with total cash costs of ~$560/oz coming in 19%
lower. We had modeled conservative mining rates in Q3/14 to account for the company’s
first quarter of operating the new higher-grade Siou and Fofina pits during the annual rainy
season but clearly mining operations were not materially affected by the wet weather.
■ The company increased its 2014 guidance to 230-235 koz Au (+9% from 200-225 koz)
with a corresponding decrease in TCC to $660-$675/oz (from $695-$745/oz). Capex
guidance for 2014 has been revised slightly higher to $58.5M from $48.5M reflecting mainly
higher capitalized stripping costs due to the increased production guidance.
o We now model 2014 production of 235 koz Au at a total cash cost of
$655/oz.
■ SEMAFO continues to maintain a strong balance sheet with cash of $112M (+$7M vs.
our est.) and no debt at the end of Q3/14. Note that the company does not normally prerelease its operating results and we believe the release is opportunistic in light of its nonbinding proposal for Orbis Gold announced over the weekend.
Gold Price % of Gross
(US$/oz)
Metal Value
$1,223
$1,257
$1,245
$1,290
$1,350
$1,411
$1,414
$1,738
$1,730
$1,735
$1,610
$1,620
$1,654
5%
n.m.
9%
6%
1%
2%
3%
8%
1%
3%
6%
10%
5%
5%
5%
91
■ Q3/14 financial results to be released on November 11, before the TSX market open.
The company will host a conference call on November 11 at 10:00 a.m. ET to discuss the
results and provide an update on the corporation’s activities. Dial-in 647-788-4922 (Toronto
& overseas) or 877-223-4471 (North America).
GDXJ Overhang Removed with Market Vectors Methodology Change
■ Scotiabank’s Index Strategist Andrew Moffatt commented this morning that he thinks
SEMAFO will now remain in the Market Vectors Junior Gold Miners Index (tracked by
the GDXJ) as methodology changes were announced Monday night that allow larger
companies to qualify for the index.
■ Recall that it was announced on September 12, 2014, that SEMAFO would be removed
from the index but that the GDXJ ETF decided to hold on to its shares for what we
believed were tax reasons heading to quarter end. This caused some speculation, in our view,
that the ~25.8M SMF shares held by the ETF would be for sale this month.
Natougou Additional Project Background
■ Orbis' main asset is the development stage Natougou open pit gold project in Burkina
Faso. See Exhibit 6 for a map of Natougou’s location and surrounding mines and gold
projects. Orbis currently owns 100% of Natougou but the government of Burkina Faso will
be granted a 10% free carried interest in the local project holding company when the
exploration licence is converted to an exploitation permit (mining licence).
■ Orbis released an updated scoping study on October 13, 2014, based on updated
resources and an optimized mine plan that increases year 1 and 2 production to ~700
koz Au, up from ~530 koz in the October 2013 scoping study). For initial capex of
US$234M, the project is expected to produce 218 koz Au per year over a 6.7-year mine life.
Orbis projects AISC of $619/oz using an 11.7:1 strip ratio and 94% gold recovery.
■ Natougou currently hosts 1.2 Moz Au (7.1 Mt @ 5.1 g/t Au) in indicated mineral
resources and 0.8 Moz Au (11 Mt @ 2.3 g/t Au) in inferred mineral resources on a
100% basis. Orbis intends to complete a definitive feasibility study for Natougou by mid2015 in order to secure permits for the project in 2H/15.
Exhibit 6 – Natougou Project Location
Source: Orbis Gold company reports.
92
■ Drilling continues to define new mineralization at Natougou but funding constraints
have put major exploration activities on hold. See Exhibits 7 and 8.
Exhibit 7 – Potential Upside at Natougou from Stacked Structures
Source: Orbis Gold company reports.
Exhibit 8 – Large Gold-in Soil Anomalies Around Natougou Offer Near-Mine Exploration Targets
Source: Orbis Gold company reports.
93
Company Comment
Wednesday, October 15, 2014, Pre-Market
(VIV-N US$20.34)
(VIVT4-SA R$48.20)
Telefonica Brasil SA
Incorporating GVT into Our DCF Model
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
[email protected]
Rating: Sector Outperform
Risk Ranking: Medium
Ivan Hernandez - +52 (55) 5123 2876
(Scotiabank Inverlat)
[email protected]
Target 1-Yr:
US$26.00
ROR 1-Yr:
33.6%
Valuation: DCF - 5 years results, 8.6% WACC in US$, terminal growth rate of 4.0%
Key Risks to Target: Lower-than-guided synergies from GVT merger; expensive acquisitions
Event
■ Using as reference the general guidelines provided by TEF, we are
incorporating GVT into our VIV model. We are also updating FX
projections, rolling over our model, and updating WACC.
Implications
■ TEF is guiding that the €4.7B of synergies is the result of using a 10year DCF model that uses a WACC of ~12.0% (in R$). The company is
not disclosing the terminal growth rate (g) but we are using a proxy of
long-term inflation (4.0%.) Our DCF model considers five years of
results (2015-2019), so we are adding separately the synergies for the
years we are not modelling, as well as their terminal value.
■ GVT will remain a separate business unit during an initial period, which
may limit opex synergies at the beginning (2H/15E). Also, although we
estimate that shares outstanding will increase by ~46.5% as of Q1/15E,
GVT may not be consolidated until Q3, likely distorting ratios for 2015.
■ After the GVT merger, VIV is likely to emerge as one of the best
telecom assets in developing markets. We see wireless consolidation as
an optionality and VIV as the safest name to play the theme.
Recommendation
■ The incorporation of the GVT synergies has driven us to increase our
target to US$26.00/ADR from US$25.00 despite a more negative view on
the FX (R$2.60 by Q4/15 from R$2.16 before.) The dividend yield next
year may be impacted by the timing of the GVT merger; for 2016, we see
a yield of 6.9%. At 5.65x 2016 EV/EBITDA, valuation is attractive. Buy.
Qtly Revenues (M)
2013A
2014E
2015E
2016E
(FY-Dec.)
Earnings (ADS)/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q1
Q2
Q3
Q4
Year
$4,185 A
$3,649 A
$3,647
$4,119
$4,015 A
$3,864 A
$3,486
$4,090
$3,768 A
$3,839
$4,113
$4,120
$3,982 A
$3,839
$4,365
$4,380
$15,950
$15,192
$15,611
$16,709
Price/Rev
enue
1.35x
1.51x
2.15x
2.01x
2012A
$2.00
12.0x
0.7x
$17,197
$6,439
1.2x
14.5x
2013A
$1.51
12.7x
0.8x
$15,950
$4,866
1.3x
13.5x
2014E
$1.74
11.7x
0.7x
$15,192
$4,469
0.9x
9.8x
2015E
$1.20
17.0x
1.0x
$15,611
$5,095
1.0x
12.3x
2016E
$1.40
14.5x
0.9x
$16,709
$5,862
1.0x
12.9x
BVPS14E: $11.11
ROE14E: 10.37%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.18
$1.18
5.8%
Pertinent Revisions
New
Old
Target:
1-Yr
$26.00
$25.00
Revenues15E
$15,611
$17,723
Revenues16E
$16,709
$18,077
New Valuation:
DCF - 5 years results, 8.6% WACC in
US$, terminal growth rate of 4.0%
Old Valuation:
DCF - 5 years results, 9.01% WACC,
terminal growth rate of 3.0%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(ADS)
Float O/S (M) (ADS)
$33,537
$2,117
$35,654
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated. ^ Limited Voting
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.
1,649
432
94
Incorporating GVT Into Our VIV Model
■ We recently published valuation scenarios for VIV based on TEF’s synergy guidance. What
we are doing now is to incorporate GVT directly into our DCF model. Telefonica is guiding
that the €4.7B of synergies is the result of using a 10-year DCF model that uses a WACC of
~12.0% in Reais. The company is not disclosing the terminal growth rate (g) but we are using
the same as in our VIV model, which is a proxy of long-term inflation in Brazil (4.0%.)
■ As GVT will remain a separate entity at the beginning, we are modelling revenues, EBITDA,
depreciation, and capex separately; we then added the guided synergies. We think this is the
best method in terms of transparency regarding how guidance impacts financials.
■ Exhibit 1 shows the net present value of the synergies based on Telefonica’s guidance. The
addition of the synergies is exactly as guided by the company (€4.7B). However, as we are
modeling trends until year 2019, we are adjusting our DCF model to ensure that we are fully
incorporating the guidance on synergies: (1) we subtracted from terminal value the expected
synergies for 2019, so the number we obtained was exclusively for the business units on a
standalone basis; (2) we added the net present value of the synergies for the years we did not
model in our DCF valuation (2020-2024) and we added their terminal value (again, based on
the €4.7B guidance). As such, we believe our model captures 100% of the GVT benefits.
■ As a remainder, Telefonica indicated that the run rate of synergies by 2020 should be close to
€450M. Given the dynamics of the DCF model, we think this implies that synergies have a
bell-shaped trend, with 2020 potentially being the pick in terms of synergies. Although our
model fully incorporates the guided synergies (as per the above adjustments) we are
assuming a less steep curve for synergies, reaching a run rate of €350M by 2020.
■ Hence, there may be upside for our projections in the years we are considering in our DCF
model, but if we were to run these adjustments we would have to reduce the terminal
synergies too. Likewise, if we had decreased the synergies in the studied period, we would
have to increase the terminal value included in our model. In any case, some financial ratios
in the future could look cheaper than we are currently projecting, which is good from a
valuation standpoint (like the EV/EBITDA or P/E ratios).
Lower Depreciation for Vivo, FX and Other Updates to Our Model
■ In Q2/14, VIV’s depreciation came down 17.4% YOY. This was the result of a revision in the
useful life of certain assets, which we understand will continue impacting depreciation going
forward (Q2 also reflected the adjustment of Q1). As such, we are cutting the projected
depreciation for Vivo to approximately R$1.3B per quarter, against historical levels of R$1.4B.
■ We believe VIV will maintain its policy to distribute 100% of earnings. We see net
distributions (addition of interest on capital and dividends) of 6.9% by 2016 (first full year of
GVT consolidation). We see the yield at 7.6% by 2019E, the last year of our DCF model.
Exhibit 1 - Net Present Value of Synergies Incorporated to Our Model, Based on TEF's Guidance (in million BRL unless otherwise stated)
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Opex synergies
119
357
396
436
515
515
357
357
357
357
357
Capex synergies
91
274
305
335
396
396
274
274
274
274
274
Revenue synergies
82
247
274
302
357
357
247
247
247
247
247
Financial & other synergies
137
412
457
503
594
594
412
412
412
412
412
Total Cash Flow
430
1,289
1,433
1,576
1,862
1,862
1,289
1,289
1,289
1,289
1,289
NPV of Cash flow
430
1,151
1,142
1,122
1,184
1,057
653
583
521
465
415
PV of cash flows
8,515
Terminal value
5,397
NPV in BRL
NPV in EUR
13,912
4,700
Source: Scotiabank GBM estimates.
95
■ We are also taking this opportunity to incorporate more aggressive projections for the
Brazilian real against the U.S. dollar. Scotiabank Economics now expects the Real to close
2015 at R$2.60 per dollar, against our previous projection of R$2.16. This has a compounded
effect in our DCF model; our new model estimates that the Real will further depreciate to
R$2.90 by 2019.
■ We have conducted a discounted cash flow (DCF) analysis for valuing VIV shares, arriving
at a one-year target price of R$67.00/PN or US$26.00/ADR. Our target is based on a DCF
model that incorporates five years of results (2015E-2019E) and uses a weighted-average
cost of capital (WACC) of 8.6% (from 9.0% previously; it is worth noting that our DCF
model converts cash flows into US$, so our WACC is calculated on US$ against Telefonica's
calculation in Reais) and a terminal growth rate of 4.0% (from 3.0%; the change reflects the
better growth profile after the GVT consolidation but remains in line with long-term inflation
expectations for Brazil.) We reiterate our Sector Outperform recommendation.
Exhibit 2 - Detail of Our Projections for 2015E and 2016E (in million BRL unless otherwise stated)
Sales Vivo - standalone
Sales GVT - standalone
Sales Synergies
Consolidated Sales
Consolidated Sales in US$
2015E
36,257
3,125
82
39,464
15,611
2016E
37,154
6,707
247
44,108
16,709
2017E
38,011
7,093
274
45,378
16,683
EBITDA Vivo
EBITDA margin Vivo - standalone
EBITDA GVT - standalone
EBITDA margin GVT - standalone
EBITDA Synergies
Consolidated EBITDA
Consolidated EBITDA in US$
Consolidated EBITDA Margin
11,348
31.3%
1,337
42.8%
119
12,886
5,095
32.7%
12,128
32.6%
2,744
40.9%
357
15,476
5,862
35.1%
12,672
33.3%
2,901
40.9%
396
16,244
5,972
35.8%
Depreciation Vivo - standalone
Depreciation GVT - standalone
Depreciation
EBIT
Comprehensive financial result
Income Tax and Social Contribution
Financial and tax synergies
Net Income
EPS (R$)
EPADR (US$)
5,219
515
5,734
7,152
662
1,623
137
5,005
3.04
1.20
5,443
1,155
6,598
8,878
496
2,682
412
6,111
3.71
1.40
5,624
1,198
6,821
9,422
616
2,818
457
6,446
3.91
1.44
Capex Vivo - standalone
Capex GVT - standalone
Capex synergies
Net capex investment
Dividend Yield
6,345
1,250
91
7,504
5.82%
5,945
2,307
274
7,977
6.85%
5,968
2,326
305
7,989
7.10%
2.60
2.68
2.76
USD/BRL
Source: Scotiabank GBM estimates.
Incorporating only two quarters of GVT
sales in 2015
Incorporating one third of 2016E
synergies in 2015E given operation of
GVT as a separate unit during first
months of integration
Modest improvement on VIV's margins
as postpaid growth slows down
Incorporating only two quarters of GVT
EBITDA in 2015
Below guidance of 33.9% as GVT is
consolidated only two quarters
Includes depreciation savings of
R$100M per quarter as of Q3/14
Lower financial expenses in 2016
exclusively related to lower FX impact
22.3% YOY increase in 2016E net
earnings mostly from full GVT
consolidation and synergies
Assuming 100% payout ratio for all
years in our DCF model
Sharper depreciation of Brazilian real
vs. our R$2.16 estimate before
96
Summary of Our New Financial Estimates for VIV
Exhibit 3 - Summary of Our New VIV Model (in R$ Million Unless Otherwise Stated)
P & L Accounts
2013A
2014E
2015E
2016E
2017E
2018E
2019E
Fixed-line - Vivo
Mobile - Vivo
Total sales Vivo
Total sales GVT
Sales synergies (based on guidance)
Consolidated sales (including synergies)
Consolidated sales in US$
Labor costs
Cost of services
Cost of handsets (cost of sold merchandise)
Cost of commercialization of services
General and administrative expenses
Other revenues (costs)
Total operational costs - Vivo
EBITDA Vivo
EBITDA margin - Vivo
EBITDA GVT
EBITDA margin - GVT
Costs synergies (based on guidance)
Consolidated EBITDA (including synergies)
EBITDA in US$ million
Depreciation
EBIT
Comprehensive financial result
Income Tax and Social Contribution
Financial and tax synergies (based on guidance)
Net Income (including synergies)
EPS (R$)
EPADR (US$)
Balance Sheet
11,720
23,002
34,722
11,319
23,954
35,273
34,722
15,472
2,527
10,626
2,118
7,420
1,041
-415
24,146
10,576
30.5%
35,273
15,192
2,554
10,748
1,958
7,993
1,118
-528
24,899
10,374
29.4%
10,576
4,712
5,643
4,933
219
947
10,374
4,469
5,237
5,137
457
175
3,767
3.35
1.49
2013A
4,505
4.00
1.74
2014E
11,026
25,231
36,257
3,125
82
39,464
15,611
2,689
10,609
1,897
8,071
1,124
-519
24,909
11,348
31.3%
1,337
42.8%
119
12,886
5,095
5,734
7,152
662
1,623
137
5,005
3.04
1.20
2015E
10,620
26,534
37,154
6,707
247
44,108
16,709
2,824
10,349
1,814
8,308
1,152
-579
25,025
12,128
32.6%
2,744
40.9%
357
15,476
5,862
6,598
8,878
496
2,682
412
6,111
3.71
1.40
2016E
10,030
27,981
38,011
7,093
274
45,378
16,683
2,965
10,333
1,768
8,501
1,178
-593
25,338
12,672
33.3%
2,901
40.9%
396
16,244
5,972
6,821
9,422
616
2,818
457
6,446
3.91
1.44
2017E
9,473
29,761
39,234
7,300
302
46,836
16,712
3,099
10,515
1,716
8,775
1,216
-612
25,934
13,300
33.9%
2,985
40.9%
436
17,022
6,074
7,079
9,943
798
2,926
503
6,721
4.08
1.45
2018E
8,985
31,741
40,725
7,440
357
48,523
16,804
3,217
10,757
1,660
9,109
1,262
-635
26,641
14,084
34.6%
3,042
40.9%
515
17,998
6,233
7,241
10,757
865
3,166
594
7,321
4.44
1.54
2019E
Assets
Total current assets
Total non-current assets
Liabilities
Total current liabilities
Long-term debt
Shareholders capital
Free Cash Flow Statement
69,541
15,937
53,604
26,647
13,768
12,878
42,894
2013A
69,505
12,822
56,683
25,537
13,967
11,570
43,968
2014E
72,689
14,235
58,453
28,260
14,190
14,070
44,429
2015E
74,806
14,975
59,832
30,183
15,113
15,070
44,624
2016E
77,342
16,343
60,999
32,581
15,511
17,070
44,761
2017E
78,413
16,596
61,817
33,534
15,963
17,570
44,880
2018E
79,042
16,838
62,204
34,053
16,483
17,570
44,989
2019E
EBITDA
EBIT
Less: Taxes
Less: Capex
Less: Changes in Working Capital
10,576
4,933
1,578
6,033
-159
10,374
5,137
1,541
7,945
-104
12,886
7,152
1,499
7,504
-129
15,476
8,878
2,312
7,977
-155
16,244
9,422
2,407
7,989
-162
17,022
9,943
2,474
7,897
-170
17,998
10,757
2,631
7,627
-180
2,806
1,250
1.6
7.9%
784
335
1.7
8.6%
3,754
1,467
1.2
5.8%
5,033
1,896
1.4
6.9%
5,686
2,078
1.4
7.1%
6,481
2,299
1.5
7.2%
7,560
2,603
1.6
7.6%
Free cash flow
Free cash flow in US$
Dividend per ADR in US$
Dividend yield (%)
Source: Company reports; Scotiabank GBM estimates.
97
Exhibit 4 - Summary of Our New VIV Model (in R$ Million Unless Otherwise Stated)
Operational Metrics
2013A
2014E
2015E
2016E
2017E
2018E
2019E
Operational Metrics - VIVO
Mobile prepaid subscribers
Mobile postpaid subscribers
Total mobile subscribers
Mobile net additions
Churn rate
Fixed-line subscribers
Fixed-line net additions
Broadband subscribers
Broadband net additions
Video subscribers
Video net additions
Total Fixed RGUs
New fixed RGUs
Total RGUs (fixed and mobile)
Total New RGUs (fixed and mobile)
53,552
23,693
77,245
1,108
4.0%
10,750
104
3,922
189
641
41
15,313
334
92,558
1,442
52,488
28,569
81,057
3,812
3.6%
10,916
166
4,124
202
774
133
15,814
501
96,871
4,313
51,088
32,957
84,045
2,988
3.4%
10,609
-307
4,464
340
790
16
15,863
49
99,908
3,037
49,488
36,907
86,395
2,350
3.2%
10,181
-428
4,709
245
804
14
15,694
-169
102,089
2,181
47,888
40,462
88,350
1,955
3.0%
9,770
-411
4,941
232
817
13
15,529
-165
103,878
1,789
46,288
43,661
89,949
1,599
2.9%
9,360
-411
5,174
232
829
12
15,362
-166
105,311
1,433
44,688
46,540
91,228
1,279
2.7%
8,949
-411
5,406
232
840
10
15,195
-168
106,423
1,112
4,815
400
3,532
477
1,132
240
9,480
1,117
5,055
240
4,034
501
1,372
240
10,461
981
5,199
144
4,560
526
1,612
240
11,371
910
5,285
86
5,113
553
1,852
240
12,250
879
5,337
52
5,693
580
2,092
240
13,123
872
Operational Metrics - GVT
Fixed-line subscribers
Fixed-line net additions
Broadband subscribers
Broadband net additions
Video subscribers
Video net additions
Total Fixed RGUs
New fixed RGUs
Operational Metrics - Consolidated
Wireless subscribers
Wireline subscribers
Broadband subscribers
Video subscribers
Total RGUs - Consolidated
New RGUs
ARPU - VIVO
Wireless Voice ARPU
Wireless Data ARPU
Total Wireless ARPU
Fixed-line voce ARPU
Fixed-broadband ARPU
Video ARPU
Total ARPU per RGU
GVT - ARPU
Source: Company reports; Scotiabank GBM estimates.
77,245
10,750
3,922
641
92,558
1,442
81,057
10,916
4,124
774
96,871
4,313
84,045
15,424
7,996
1,922
109,388
4,154
86,395
15,236
8,742
2,177
112,550
3,162
88,350
14,969
9,501
2,430
115,250
2,700
89,949
14,645
10,286
2,681
117,562
2,312
91,228
14,287
11,099
2,932
119,545
1,984
16.1
7.5
23.6
51.6
79.5
66.0
64.5
15.2
8.7
23.9
46.1
77.2
69.9
60.6
14.3
9.9
24.2
41.8
76.7
69.2
58.0
13.6
11.1
24.7
38.5
75.2
68.3
56.1
13.2
12.3
25.4
35.0
72.9
66.1
53.5
12.6
12.5
25.1
33.1
70.4
66.1
52.0
12.8
13.3
26.1
32.0
71.1
66.1
51.0
56.9
56.1
54.1
52.2
52.5
98
Intraday Flash
Tuesday, October 14, 2014 @ 10:41:02 AM (ET)
Thompson Creek Metals Company Inc.
(TCM-T C$2.29)
(TC-N US$2.04)
Q3/14 Operating Results: Mt. Milligan Throughput
Struggles Continue
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
[email protected]
Rating: Sector Perform
Risk Ranking: High
Target 1-Yr:
Dalton Baretto, MBA, CFA - (416) 863-7623
(Scotia Capital Inc. - Canada)
[email protected]
C$2.30
ROR 1-Yr:
0.4%
Valuation: 50% of 7.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Target: Commodity, operating, development, balance sheet
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Event
■ Thompson Creek released its Q3/14 operating results.
Pertinent Revisions
Implications
■ In its 4th full quarter of operation, Mt Milligan produced 16.3 Mlbs of
Cu and 60,400 ozs of Au, which was 13.0% below and 16.4% above
our forecast of 18.7 Mlbs and 51,900 ozs, respectively. Throughput of
40,445 tpd (67% of design) improved only slightly from the Q2/14 level
of 38,543 tpd (64% of design), and was well below our forecast of
43,478 tpd (72% of design). While no other operating data was
released, TCM noted an improvement in Au grades and recoveries.
■ Molybdenum production of 6.6 Mlbs was 2.4% below our forecast of
6.8 Mlbs due to Thompson Creek.
■ The company did not comment on its previously released guidance, but
noted that throughput at Mt. Milligan is still expected to reach a
sustainable 80% of design capacity by year-end. In our view, this rampup target is likely to be a stretch given the YTD throughput challenges.
Adj. EPS14E
Adj. EPS15E
New
US$0.17
US$-0.12
Old
US$0.19
US$-0.13
Recommendation
■ In our view, a high debt level, ongoing ramp-up risk at Mount Milligan,
along with a poor outlook for molybdenum, are likely to overhang the
shares in the near term. TCM is rated Sector Perform. Our 12-month
target of C$2.30 per share is based on a 50/50 mix of 7.0x our 2015E
EV/EBITDA (C$2.48) and 1.0x our 8% NAVPS estimate (C$2.19).
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.00 A
$0.02 A
$-0.04
$0.00
(FY-Dec.)
Adj EPS
Cash Flow/Share
Price/Earnings
Revenues (M)
EBITDA (M)
Q2
$0.06 A
$0.10 A
$-0.04
$0.01
Q3
$-0.04 A
$0.06
$-0.03
$0.01
Q4
$-0.17 A
$-0.02
$-0.01
$0.02
Year
$-0.03
$0.17
$-0.12
$0.03
P/E
n.m.
11.9x
n.m.
63.6x
2014E
$0.17
$0.48
11.9x
$852
$239
2015E
$-0.12
$0.29
n.m.
$809
$165
2016E
$0.03
$0.40
63.6x
$894
$222
2017E
$0.11
$0.45
18.3x
$1,041
$246
2018E
$0.25
$0.67
8.3x
$1,088
$282
BVPS14E: $5.36
ROE14E: 2.90%
NAVPS:
P/NAV:
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
C$495
$498
C$1,052
C$2.19
1.04x
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
ScotiaView Analyst Link
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.
216
44
99
Ramp-up at Mt. Milligan Continues to Struggle
■ Thompson Creek released its Q3/14 high level operating results (the financials and full
operating results will be released in early November). We outline variances to our estimates
in Exhibit 1 below.
Exhibit 1 - Thompson Creek Metals Q3/14 Production and Sales Variances
Production
Mt. Milligan
Copper production - payable (Mlb)
Gold production - payable (koz)
Molybdenum mines
Thompson Creek Mine (Mlb)
Endako (Mlb)
Total Molybdenum mines (Mlb)
Sales
Mt. Milligan
Copper (Mlb)
Gold (koz)
Molybdenum mines
Thompson Creek Mine (Mlb)
Endako (Mlb)
Total Molybdenum mines (Mlb)
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
16.3
60.4
18.7
51.9
-13.0%
16.4%
16.0
37.0
1.7%
63.1%
1.0
1.9
na
na
4.1
2.5
6.6
4.5
2.3
6.8
-7.9%
8.2%
-2.4%
5.1
2.4
7.5
-19.7%
5.4%
-11.8%
5.7
2.8
8.5
-28.3%
-11.3%
-22.7%
16.5
57.9
18.7
51.9
-11.9%
11.6%
21.9
52.0
-24.8%
11.4%
1.0
1.9
na
na
4.0
2.7
6.7
4.5
2.3
6.8
-10.2%
16.9%
-0.9%
5.5
2.0
7.4
-26.9%
37.1%
-9.9%
5.5
1.9
7.4
-27.5%
41.1%
-9.8%
Source: Company reports; Scotiabank GBM estimates.
■ The ramp-up at the 100% owned Mt Milligan Cu-Au mine continues to make progress, albeit
slowly (Q3/14 is the fourth full quarter of operation). The mine produced 16.3 million lbs of
payable copper and 60,400 ozs of payable gold, which improved by 1.7% and 63.1% from
the Q2/14 levels of 16.0 million lbs and 37,000 ozs, respectively. While copper production
was 13.0% below our forecast of 18.7 million lbs largely due to lower throughput (see
below), gold production was 16.4% above our estimate of 51,900 ozs. TCM attributes the
strong gold production to higher grades and recoveries (actual figures not disclosed). Based
on the disclosed throughput and an assumed recovery rate of 67%, we estimate an implied
gold grade of 0.78 g/t milled in Q3/14, up from 0.52 g/t in Q2/14 (and compares to reserve
grade of only 0.39 g/t).
■ In Q3/14, Mt. Milligan averaged throughput rates of 40,445 tpd (or 67% of the nameplate
design rate of 60,000 tpd), which was only marginally better than the Q2/14 level of 38,543
tpd (or 64% of nameplate design), and below our estimate of 43,478 tpd (or 72% of
nameplate design). The company noted that throughput was impacted by downtime related to
various adjustments required to the grinding and flotation circuits, as well as some minor
mechanical and electrical issues. Despite the relatively weak Q3/14 and year-to-date
throughput levels, TCM reiterated its previous guidance of Mt. Milligan achieving 80% of
nameplate on a sustainable basis by year-end, which appears to be a stretch in our view. No
operating detail was provided with regards to grades or recoveries. The company expects to
announce definitive plans for a secondary crusher to deal with the ore hardness issues by
year-end (our estimates already assume the company moves forward with a secondary
crusher in H1/15 at a capital cost of $65 million).
■ We profile our revised forecast for Mt. Milligan’s copper and gold production and cash costs
in Exhibit 2.
100
Exhibit 2 – Forecast Mt. Milligan Production and Cash Cost Profile
70,000
$3.00
60,000
$2.50
50,000
$2.00
40,000
$1.50
30,000
$1.00
20,000
$0.50
10,000
0
$-
Q4/13
Q1/14
Q2/14
Q3/14
Q4/14 E
Q1/15 E
Q2/15 E
Copper production (000s lbs)
Q3/15 E
Gold production (oz)
Q4/15 E
Q1/16 E
Q2/16 E
Q3/16 E
Q4/16 E
Copper cash costs ($/lb)
Source: Company reports; Scotiabank GBM estimates. Note: Q3/14 cash costs are estimates.
■ At the moly mines, the company produced 6.6 million lbs of molybdenum, which was 2.4%
below our forecast of 6.8 million lbs, as slightly higher production at Endako (attributed to
mine and mill adjustments made in 1H/14) was offset by lower-than-expected production
from Thompson Creek. Total molybdenum production of 6.6 million lbs decreased by 11.8%
from the Q2/14 level of 7.5 million lbs, as production at Thompson Creek continues to wind
down in anticipation of closure around year-end (the mine is scheduled to be placed on care
and maintenance at the end of this year due to the company’s previous decision to cease
stripping the next phase of the pit to conserve cash).
Exhibit 3 - Forecast Molybdenum Production and Cash Cost Profile
12,000
$18.00
$16.00
10,000
$14.00
$12.00
$10.00
($/lb)
(000s lbs)
8,000
6,000
$8.00
4,000
$6.00
$4.00
2,000
$2.00
0
$Q1/11
Q2/11
Q3/11
Q4/11
Q1/12
Q2/12
Q3/12
Q4/12
Q1/13
Q2/13
Q3/13
Q4/13
Thompson Creek
Source: Company reports; Scotiabank GBM estimates. Note: Q3/14 cash costs are estimates.
Q1/14
Endako
Q2/14
Q3/14
Q4/14 E
Molybdenum cash costs
Q1/15 E
Q2/15 E
Q3/15 E
Q4/15 E
Q1/16 E
Q2/16 E
Q3/16 E
Q4/16 E
101
Sales
■ Q3/14 sales of 16.5 million lbs of payable copper and 57,900 ozs of payable gold were
generally in line with production levels but were 11.9% below our forecast of 18.7 million
lbs and 11.6% above our estimate of 51,900 ozs. Mt. Milligan made three concentrate
shipments in the quarter, and received provisional payment for all three.
■ Molybdenum sales of 6.7 million lbs were in line with our forecast of 6.8 million lbs, as well
as production of 6.6 million lbs.
Guidance
■ The company did not comment on its previously issued 2014 guidance of 65-75 million
payable lbs of copper and 185,000-195,000 payable ozs of gold at cash costs of $1.00-1.50/lb
Cu, along with 24.0-27.0 million lbs of molybdenum (15.0-17.0 million lbs at Thompson
Creek; 9.0-10.0 million lbs at Endako) at cash costs of $6.75-$7.75/lb.
Revisions to Estimates
■ We have modestly adjusted our estimates based on the Q3/14 operating results, as follows:
■ We now forecast 2014 payable production at Mt. Milligan of 66 million lbs of copper
and 188,000 ozs of gold at cash costs of $1.09/lb Cu, which compares to our previous
estimate of 69 million lbs and 190,000 ozs at costs of $1.10/lb. Our estimates now
assume lower throughput of 76% of nameplate design in Q4/14 (previously 80%).
■ We now forecast 2015 payable production at Mt. Milligan of 82 million lbs of copper
and 204,000 ozs of gold at cash costs of $0.95/lb Cu, which compares to our previous
estimate of 85 million lbs and 209,000 ozs at costs of $1.02/lb. Our estimates now
assume lower throughput of 87% of design (previously 92%).
■ We have made no changes to our estimates at Mt. Milligan for 2016 and beyond. We
have made no changes to our estimates for the molybdenum assets.
■ Our revised 2014-2016 EPS estimates of $0.17, -$0.12 and $0.03 compare to our previous
estimates of $0.19, -$0.13 and $0.03. Our revised CFPS estimates of $0.48, $0.29 and $0.40
compare to our previous estimates of $0.45, $0.32 and $0.43. Our revised 8% NAVPS is
C$2.19 (versus our previous NAVPS of C$2.22). Our revised 10% NAVPS is C$1.64.
■ Our sensitivities to molybdenum and copper prices are detailed in Exhibits 4 and 5.
Exhibit 5 - Thompson Creek sensitivity to molybdenum prices
Exhibit 4 - Thompson Creek sensitivity to copper prices
-20%
($0.19)
-57%
-10%
($0.16)
-29%
0%
($0.12)
10%
($0.09)
29%
20%
($0.05)
57%
CFPS - 2015
$0.20
-31%
$0.25
-16%
$0.29
$0.34
16%
$0.38
31%
217
31%
EBITDA - 2015
141
-14%
153
-7%
165
176
7%
188
14%
$3.91
78%
8% NAVPS (C$)
$1.15
-48%
$1.65
-25%
$2.19
$2.74
25%
$3.30
50%
-20%
($0.28)
-127%
-10%
($0.20)
-63%
0%
($0.12)
10%
($0.05)
63%
20%
$0.03
126%
CFPS - 2015
$0.13
-57%
$0.21
-29%
$0.29
$0.38
29%
$0.46
57%
EBITDA - 2015
113
-31%
139
-16%
165
191
16%
8% NAVPS (C$)
$0.48
-78%
$1.33
-39%
$2.19
$3.05
39%
EPS - 2015
Source: Scotiabank GBM estimates – based on a $3.15/lb 2015 copper price
EPS - 2015
Source: Scotiabank GBM estimates – based on a $10.00/lb 2015 moly price
Conclusions
■ Despite the very strong gold production, we view the Q3/14 operating results at Mt. Milligan
as below expectations as throughput challenges continue. In our view, the company’s
reiterated target of reaching a sustainable 80% of design capacity by year-end appears to be a
stretch given the year-to-date throughput challenges. While we still anticipate the company to
make its production and cost guidance this year, we believe that market expectations for next
year are likely to be revised downward given the ongoing throughput struggles.
102
Valuation
■ Thompson Creek shares are currently trading at a 2015E and 2016E EV/EBITDA of 6.7x and
5.2x, which compares to our base metals producer universe average of 5.7x and 3.9x,
respectively. On a P/NAV basis, TCM trades at a 1.0x multiple to our 8% NAVPS, versus
the peer group average of 0.68x.
Recommendation
■ In our view, a high debt level, ongoing ramp-up risk at Mount Milligan, along with a poor
outlook for molybdenum, are likely to overhang the shares in the near term. TCM is rated
Sector Perform. Our 12-month target of C$2.30 per share is based on a 50/50 mix of 7.0x our
2015E EV/EBITDA (C$2.48) and 1.0x our 8% NAVPS estimate (C$2.19).
103
Exhibit 6 - Thompson Creek Metals Financial and Operating Summary
Annual Growth Profile
METAL PRICE FORECAST (per LB)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
$15.88
$3.42
$1,226
$15.81
$4.00
$1,572
$12.65
$3.61
$1,669
$10.21
$3.33
$1,414
$11.85
$3.14
$1,291
$10.00
$3.15
$1,400
$10.50
$3.40
$1,500
$11.50
$3.60
$1,300
$12.50
$3.85
$1,300
$12.50
$4.00
$1,300
$12.50
$4.00
$1,300
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
33
-
28
-
22.4
-
29.9
10
20
26.3
66
188
10.8
82
204
10.8
83
237
17.7
87
233
24.7
78
250
17.9
76
273
UNIT COST FORECAST (per LB)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
Average Molybdenum Cash Cost
Average Copper Cash Cost
$5.96
$0.00
$7.94
$0.00
$10.09
NA
$6.49
$0.00
$6.66
$1.09
$10.02
$0.95
$9.95
$0.60
$9.77
$0.97
$10.01
$0.82
INCOME STATEMENT FORECAST (in
millions)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
595
316
50
31
9
$189
1
54
20
669
400
67
36
14
$151
5
(157)
11
401
380
64
36
2
($80)
14
563
(111)
$434
319
61
31
1
$22
26
275
(63)
852
544
124
39
1
$144
91
(0)
20
809
568
123
38
1
$79
85
21
894
590
123
38
1
$142
84
51
1,041
714
137
38
1
$151
79
47
$114
$292
($546)
($215)
$33
($27)
$7
114
124
(35)
($5)
36
(27)
7
$0.75
$1.73
($3.24)
($1.26)
$0.15
($0.12)
EBITDA
$0.75
239
$0.73
218
($0.20)
(16)
($0.03)
$82
$0.17
239
CASH FLOW FORECAST (in millions)
Molybdenum
LME copper
LME gold (per oz)
PRODUCTION FORECAST
Molybdenum (M lbs) - Contained
Copper (M lbs) - Payable
Gold ('000 ozs) - Payable
Net Sales
Cost of Sales and Operating Expenses
Depreciation and Depletion
Selling, General, and Administrative
Exploration
Operating Earnings
Interest Expenses
Other Expenses (Income)
Income and Mining Taxes (Recovery)
Minority Interest
Net Earnings
Adjusted Net Earnings
Net Earnings Per Common Share (FD)
Adjusted Net Earnings Per Common Share
(FD)
2014E
2015E
2016E
16%
-16%
ScotiaView
Analyst
Link 5%
-6%
-9%
0%
8%
8%
7%
2020E
2014E
2015E
2016E
14.0
88
217
-12%
NM
NM
-59%
24%
9%
0%
1%
16%
2019E
2020E
2014E
2015E
2016E
$9.87
$0.56
$8.40
$1.07
3%
NM
50%
-13%
-1%
-37%
2018E
2019E
2020E
2014E
2015E
2016E
1,088
721
139
38
1
$189
70
65
1,030
648
113
38
1
$230
54
87
972
593
112
38
1
$228
46
84
$25
$54
$89
$98
96%
71%
102%
25%
-36%
NM
257%
NM
NM
NM
NM
-5%
4%
-1%
-1%
33%
-45%
-7%
NM
5%
NM
NM
10%
4%
0%
0%
0%
79%
-1%
NM
145%
NM
NM
25
54
89
98
NM
NM
NM
$0.03
$0.11
$0.25
$0.40
$0.45
NM
NM
NM
($0.12)
165
$0.03
222
$0.11
246
$0.25
282
$0.40
293
$0.45
300
NM
189%
NM
-31%
NM
35%
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Net Earnings
Depreciation, Deferred Taxes, & Minority Interest
Cashflow From Operations
114
44
$157
292
(89)
$203
(546)
464
($83)
($215)
260
$45
32
68
$99
(27)
91
$64
7
82
$89
25
74
$98
54
93
$147
89
89
$177
98
97
$196
NM
-74%
122%
NM
34%
-36%
NM
-10%
38%
Cashflow Per Share (FD)
Sustaining Capital
Project Capital Expenditures
Free Cashflow to Firm
$1.03
($67)
(147)
($56)
$1.20
($72)
(629)
($498)
($0.49)
($39)
(725)
($846)
$0.21
($10)
(494)
($459)
$0.48
($21)
(53)
$26
$0.29
($61)
(65)
($62)
$0.40
($60)
$29
$0.45
($55)
$43
$0.67
($24)
$123
$0.81
($45)
$132
$0.89
($22)
$174
132%
NM
NM
NM
-39%
NM
NM
NM
38%
NM
NM
NM
Free Cashflow to Firm Per Share (FD)
Net Financing Activities (Ex. Equity/Dividends)
Free Cashflow to Equity
($0.37)
$228
$172
($2.95)
$470
($28)
($5.02)
$858
$12
($2.12)
$110
($349)
$0.13
($20)
$6
($0.28)
($8)
($71)
$0.13
$0
$29
$0.20
($48)
($4)
$0.56
($150)
($27)
$0.60
($200)
($68)
$0.79
$0
$174
NM
NM
NM
NM
NM
NM
NM
NM
NM
Free Cashflow to Equity Per Share (FD)
Equity Issues (Repurchases)
Dividends
All Other Sources (Uses) of Cash
Net Source (Use) of Cash
$1.13
$8
(22)
$158
($0.17)
$26
(20)
($22)
$0.07
$220
38
$269
($1.61)
$1
21
($328)
$0.03
$0
(10)
($3)
($0.32)
$0
($71)
$0.13
$0
(0)
$29
($0.02)
$0
0
($4)
($0.12)
$0
(0)
($27)
($0.31)
$0
($68)
$0.79
$0
$174
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
BALANCE SHEET FORECAST (in millions)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Cash and marketable securities
Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
Property, Plant and Equipment
Other Assets
Total Assets
$316
73
107
21
$517
1,696
105
$2,318
$295
79
114
15
$502
2,359
133
$2,994
$564
59
159
22
$804
2,539
67
$3,410
$236
54
188
18
$496
2,538
52
$3,086
$233
95
180
14
$523
2,465
75
$3,063
$163
96
182
14
$456
2,468
75
$2,999
$191
102
193
14
$501
2,405
75
$2,981
$187
117
221
14
$539
2,323
75
$2,937
$160
122
231
14
$528
2,208
75
$2,811
$92
116
219
14
$441
2,140
75
$2,656
$266
109
207
14
$596
2,050
75
$2,721
-1%
76%
-4%
-19%
5%
-3%
46%
-1%
-30%
1%
1%
0%
-13%
0%
0%
-2%
18%
6%
6%
0%
10%
-3%
0%
-1%
Accounts payable and accrued liabilities
Other current liabilities
Total Current Liabilities
Long-term debt debt
Deferred Taxes
Deferred Revenue
Other Liabilities
Shareholders' Equity
Total Liabilities & Shareholders' Equity
65
17
82
17
337
453
1,430
$2,318
186
32
218
361
262
365
59
1,730
$2,994
129
51
180
922
138
670
100
1,402
$3,410
105
76
181
907
13
759
119
1,106
$3,086
95
70
165
899
20
727
107
1,146
$3,063
96
72
168
891
25
689
107
1,119
$2,999
102
74
176
891
35
646
107
1,126
$2,981
117
74
191
843
42
604
107
1,151
$2,937
122
74
196
693
52
558
107
1,205
$2,811
116
74
189
493
65
508
107
1,293
$2,656
109
74
183
493
78
469
107
1,391
$2,721
-9%
-8%
-9%
-1%
46%
-4%
-10%
4%
-1%
1%
3%
2%
-1%
27%
-5%
0%
-2%
-2%
6%
3%
5%
0%
41%
-6%
0%
1%
-1%
Source: Company reports; Scotiabank GBM estimates.
Equity Event
Wednesday, October 15, 2014
Equity Event: Telecom & Cable 2015
Insert graphic here
105
Equity Event
XXX, XXX XX, XXXX
Equity Event: Transportation & Aerospace 2014
Insert graphic here
106
Equity Event
XXX, XXX XX, XXXX
xx
z
Insert graphic here
107
Equity Event
XXX, XXX XX, XXXX
Xs 2
Equity Event: Mining Conference 2014
Insert graphic here
108
Disclosures and Disclaimers
Wednesday, October 15, 2014
Appendix A: Important Disclosures
Company
AES Gener SA
Agrium Inc.
Aguas Andinas SA
Ainsworth Lumber Co. Ltd.
Algonquin Power & Utilities Corp.
AltaGas Ltd.
Arcan Resources Ltd.
ATCO Ltd.
AuRico Gold Inc.
BCE Inc.
Bell Aliant Inc.
Bellatrix Exploration Ltd.
Birchcliff Energy Ltd.
BlackPearl Resources Inc.
Brookfield Canada Office Properties
Brookfield Infrastructure Partners LP
Brookfield Property Partners LP
Brookfield Renewable Energy Partners LP
Canadian Natural Resources Limited
Canadian Utilities Limited
Canexus Corporation
Canfor Corporation
Canfor Pulp Products Inc.
Capital Power Corporation
Capstone Infrastructure Corporation
Cascades Inc.
Cenovus Energy Inc.
Centerra Gold Inc.
Chemtrade Logistics Income Fund
Cogeco Cable Inc.
Colbun SA
COPASA
Crew Energy Inc.
Domtar Corporation
E.CL SA
Emera Incorporated
Empresa Nacional de Electricidad SA
Empresas CMPC SA
Empresas Copec SA
Enbridge Inc.
ENERSIS SA
Fibria Celulose SA
Fortis Inc.
Fortress Paper Ltd.
Gibson Energy Inc.
IEnova
Imperial Oil Limited
Inter Pipeline Ltd.
Interfor Corporation
Intrepid Potash, Inc.
Ticker
AESGENER
AGU
AGUAS-A
ANS
AQN
ALA
ARN
ACO.X
AUQ
BCE
BA
BXE
BIR
PXX
BOX.UN
BIP
BPY
BEP.UN
CNQ
CU
CUS
CFP
CFX
CPX
CSE
CAS
CVE
CG
CHE.UN
CCA
COLBUN
CSMG3
CR
UFS
ECL
EMA
ENDESA
CMPC
COPEC
ENB
ENERSIS
FBR
FTS
FTP
GEI
IENOVA *
IMO
IPL
IFP
IPI
Disclosures (see legend below)*
M8
T
M8
J
G, I, U, V76
G, I, S, U
I, U
S
G, I, N1, P, T, U
B26, B8, G, I, S, T, U
G, I, T, U
G, I, U, VS176
I
G, I, U
T
I
VS179, VS180, VS181
G, I, U
G, I, N1, U
B33, G, I, S, U
G, I, T, U
P, T
P, T, VS85
G, I, T, U
T, VS50
G, I, N1, U
I, S
P, T
G, I, T, U
I, T
I, M8, N1
M8
G, I, U
G, I, N1, U
M8
G, I, S, T, U
M8
VS83, VS84, VS146
VS171, VS172
G, I, S, T, U
M8
P, T
G, I, S, U
T
G, I, N1, P, T, U
M8
I, U, V48
G, I, T, U
I, P, T
P, T
109
Disclosures and Disclaimers
Wednesday, October 15, 2014
K+S AG
Kelt Exploration Ltd.
Keyera Corp.
Labrador Iron Ore Royalty Corp.
LGX Oil + Gas Inc.
Long Run Exploration Ltd.
Louisiana-Pacific Corporation
Lydian International Limited
Manitoba Telecom Services Inc.
Methanex Corporation
Newalta Corporation
Norbord Inc.
Northland Power Inc.
NuVista Energy Ltd.
Paramount Resources Ltd.
Parkland Fuel Corporation
Pattern Energy Group Inc.
Pembina Pipeline Corporation
Potash Corporation of Saskatchewan, Inc.
Quebecor Inc.
RMP Energy Inc.
Rogers Communications Inc.
SABESP
Secure Energy Services Inc.
SEMAFO Inc.
Shaw Communications Inc.
Sociedad Quimica y Minera de Chile
Spartan Energy Corp.
Spectra Energy Corp
Superior Plus Corp.
Surge Energy Inc.
Telefonica Brasil SA
TELUS Corporation
The Mosaic Company
Thompson Creek Metals Company Inc.
Time Warner Cable Inc.
TORC Oil & Gas Ltd.
TransAlta Corporation
TransAlta Renewables Inc.
TransCanada Corporation
Trilogy Energy Corp.
Twin Butte Energy Ltd.
Verde Potash plc
Veresen Inc.
Verizon Communications Inc.
West Fraser Timber Co. Ltd.
Western Forest Products Inc.
Weyerhaeuser Company
Whitecap Resources Inc.
Yara International ASA
SDF
KEL
KEY
LIF
OIL
LRE
LPX
LYD
MBT
MEOH
NAL
NBD
NPI
NVA
POU
PKI
PEGI
PPL
POT
QBR.B
RMP
RCI.B
SBSP3
SES
SMF
SJR.B
SQM
SPE
SE
SPB
SGY
VIV
T
MOS
TCM
TWC
TOG
TA
RNW
TRP
TET
TBE
NPK
VSN
VZ
WFT
WEF
WY
WCP
YAR
T
G, I, U
G, I, T, U
I, T, V42, VS37
I, S
G, I, U, V65, V71
T
G, I, U, VS189
B9, G, I, S, T, U
J, S
G, I, U, VS33, VS158
G, I, N1, U
G, I, U
G, I, U
G, U
G, I, U
G, I, U
G, I, S, U
G, I, N1, T, U
I, T
G, I, U
G, I, N1, S, T, U
M8
G, I, U
VS127
G, I, S, T, U
P, T
G, I, U
T
I, VS87, VS88
G, I, U, V61
M12, M4
G, I, J, T, U
G, I, N1, T, U
VS100
I
I
G, I, S, T, U
G, I, U
G, I, S, U
G, I, U
G, I, U
T
G, I, S, U, V75
H.P.230
P, T, VS86, VS104
G, I, P, U
I, P
G, I, U
T
110
Disclosures and Disclaimers
Wednesday, October 15, 2014
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.
B33
David A. Dodge is a director of Canadian Utilities Limited and is a director 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.
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.
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.
M12
Ivan Hernandez, 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.
M8
Ezequiel Fernandez Lopez, an analyst, prepared this report and is an employee of the Research Department of Scotia Corredora
de Bolsa Chile S.A.
N1
Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months.
111
Disclosures and Disclaimers
Wednesday, October 15, 2014
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.
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 t o equity or
debt securities of, or have provided advice for a fee with respect to, this issuer.
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.
V61
Scotia Capital Inc. acted as financial advisor to Surge Energy Inc. with respect to an asset acquisition from Renegade Petroleum
Ltd.
V65
Scotiabank has been retained as strategic advisor by Long Run Exploration Ltd. in its acquisition of assets from Crew Energy
Ltd.
V71
Scotiabank acted as strategic advisor to Long Run Exploration Ltd on its acquisition of Crocotta Energy Inc.
V75
Scotiabank acted as a financial advisor to Veresen Inc. on its acquisition of interest in the Ruby pipeline system.
V76
Scotiabank is acting as a financial advisor to Algonquin Power & Utilities Corp. in its acquisition of Park Water Company.
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.
VS104
Our Research Analyst visited the Armour sawmill, an operating sawmill, on October 11, 2013. 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.
VS146
Our Research Analyst visited the Talagante plant, a tissue plant, on April 24, 2014. Partial payment was received from the is suer
for the travel-related expenses incurred by the Research Analyst to visit this site.
VS158
Our Research Associate visited the MacKay River SAGD Onsite Project, SAGD operations with onsite waste processing, on
June 10, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Associate
to visit this site.
VS171
Our Research Analyst visited Empresas Copec SA, the company's head office, on April 21-25, 2014. No payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS172
Our Research Analyst visited Nueva Aldea, an operating pulp mill, on April 23, 2014. Full payment was received from the issuer
for the travel-related expenses incurred by the Research Analyst to visit this site.
VS176
Our Research Analyst visited Ferrier, a drilling site and compression station, on September 16, 2014. Full payment was receiv ed
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS179
Our Research Analyst visited various U.S. industrial and retail assets, operating assets in New Jersey and Los Angeles, on
January and March, 2014, respectively. Partial payment was received from the issuer for the travel-related expenses incurred by
the Research Analyst to visit this site.
VS180
Our Research Analyst visited various U.S. office assets, operating office buildings in New York, Los Angeles, and Houston, on
August 2013, March 2014, and June 2013, respectively. No payment was received from the issuer for the travel-related
expenses incurred by the Research Analyst to visit this site.
112
Disclosures and Disclaimers
Wednesday, October 15, 2014
VS181
Our Research Analyst visited various properties in the London, UK, office portfolio, operating office buildings, on October 2012.
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.
VS33
Our Research Analyst visited Drayton Valley Facility and Niton Junction Facility, oilfield waste processing facilities, 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.
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.
VS50
Our Research Analyst visited Cardinal Power, an operating power plant, 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.
VS83
Our Research Analyst visited Empresas CMPC, the company's head office, on April 3-5, 2013. No payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS84
Our Research Analyst visited the Laja Mininco pulp mill, an operating mill, on April 3-5, 2013. No payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS85
Our Research Analyst visited the Northwood Pulp Mill, an NBSK pulp mill, on September 2013. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS86
Our Research Analyst visited sawmills and plywood, BCTMP, and NBSK pulp mills, operations in Quesnel, BC, on September
2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this
site.
VS87
Our Research Analyst visited Port Edwards chemical plant, and Twin Oaks and Marcus Hall terminals, chemical plant and
heating oil terminals, on September 10-12, 2012. Partial payment was received from the issuer for the travel-related expenses
incurred by the Research Analyst to visit this site.
VS88
Our Research Analyst visited Mininco, Chile, a sodium chlorate plant, on April 4, 2013. 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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Disclosures and Disclaimers
Wednesday, October 15, 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. Statistical and jud gmental factors
considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, anal yst 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 analyst’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)
The stock represents an analyst’s best idea(s); stocks in this category are
expected to significantly outperform 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.
Low
Low financial and operational risk, high predictability of financial results,
low stock volatility.
Sector Outperform (SO)
The stock is expected to outperform 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.
Sector Perform (SP)
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
the analyst that includes, but is not limited to, stocks covered by the analyst.
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.
Medium
Moderate financial and operational risk, moderate predictability of financial
results, moderate stock volatility.
High
High financial and/or operational risk, low predictability of financial results,
high stock volatility.
Speculative
Exceptionally high financial and/or operational risk, exceptionally low predictability
of financial results, exceptionally high stock volatility. For risk-tolerant investors
only.
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.
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Disclosures and Disclaimers
Wednesday, October 15, 2014
General Disclosures
This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Marke ts. Scotiabank,
together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses 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 informational 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 stringent
standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analyst s 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 the 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
transaction may be or could have been effected at those prices.
Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrary from the opinions
expressed by other departments of Scotiabank, Global Banking and Markets or any of its affiliates.
Neither Scotiabank, Global Banking and Markets nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of
this report or its contents.
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in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without the prior
express consent of Scotiabank, Global Banking and Markets.
Additional Disclosures
Canada: This report is distributed by Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia. Scotia Capital Inc. is a member of the Canadian
Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
Chile: This report is distributed by Scotia Corredora de Bolsa Chile S.A., a subsidiary of The Bank of Nova Scotia.
Hong Kong: This report is distributed by The Bank of Nova Scotia Hong Kong Branch, which is authorized by the Securities and Future Commission
to conduct Type 1, Type 4 and Type 6 regulated activities and regulated by the Hong Kong Monetary Authority.
Mexico: This report is distributed by Scotia Inverlat Casa de Bolsa S.A. de C.V., a subsidiary of the Bank of Nova Scotia.
Peru: This report is distributed by Scotia Sociedad Agente de Bolsa S.A., a subsidiary of The Bank of Nova Scotia.
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Asia Limited is authorised and regulated by the Monetary Authority of Singapore, and exempted under Section 99(1)(a),and (b), (c) and (d) of the
Securities and Futures Act to conduct regulated activities.
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transactions by a U.S. investor of securities mentioned in this report must be effected through Scotia Capital (USA) Inc.
Non-U.S. investors wishing to effect a transaction in the securities discussed in this report should contact a Scotiabank, Global Banking and Markets
entity in their local jurisdiction unless governing law permits otherwise.