1 Investment Views Friday, December 19, 2014 Click to view full story Click to view synopsis Pertinent Revision Summary 3 Edge at a Glance 6 Industry Comments Global Fertilizers Uralkali Sees Weaker Potash Demand Next Year (As Do We) Ben Isaacson 18 Real Estate & REITs The REIT Stuff - New Edition Available Mario Saric & Pammi Bir 21 Telecom - Mexico Lovely Price Cuts Andres Coello 27 Telecommunications and Cable Government Committed to Putting More Spectrum in New Entrants' Hands Jeff Fan 32 Strengthening Position in Southeastern U.S. Patricia A. Baker 37 Ops Update Highlights Softer Environment Vladislav C. Vlad 39 George Doumet 40 Patrick Bryden 41 George Doumet 52 Benoit Laprade 53 Turan Quettawala 57 Reloading the Buyback Option Craig Johnston 59 2015 Capital Budget and Dividend Reduced Patrick Bryden 62 Vladislav C. Vlad 67 Mike Hocking 69 Patricia A. Baker 73 Company Comments Canada Alimentation Couche-Tard Inc. ATD.B-T Black Diamond Group Ltd. BDI-T Clearwater Seafoods Inc. CLR-T Eagle Energy Trust EGL.UN-T High Liner Foods Incorporated HLF-T Interfor Corporation IFP-T Mullen Group Ltd. MTL-T Pan American Silver Corp. PAAS-Q, PAA-T Penn West Exploration PWT-T, PWE-N PHX Energy Services Corp. PHX-T Rubicon Minerals Corporation RMX-T, RBY-A Saputo Inc. SAP-T Smooth Sailing Permian Proceeds Redeployed in Canada; 2015 Budget, Guidance Released; Distribution Cut Unlocking Reel Value Encore! Drawing a Line in the Sand in Uncertain Circumstances Conservative 2015 Budget Announced Update Largely In Line, UG Development Behind Plan and Above Budget; Pace said to Quicken Sale Of Bakery Division; Impact Minimal 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 Friday, December 19, 2014 Teck Resources Limited Stress Testing the Balance Sheet: Dividend Risk is High but Liquidity Risk is Low Timmins Gold Corp. Caballo Blanco Acquisition Helps Address Previous Concerns Orest Wowkodaw 75 Ovais Habib 85 William S. Lee 92 Ovais Habib 36 Ben Isaacson 84 Claudia Benavente A. 49 Craig Johnston 59 Alfonso Salazar & Orest Wowkodaw 74 Ovais Habib 85 Rodrigo Echagaray 95 Ovais Habib 36 Equity Event: Commodities Outlook 2015 97 Equity Event: 10th Annual Multi-Family Residential Panel Discussion 98 Equity Event: CAPP Scotiabank Investment Symposium 99 100 TCK.B-T, TCK-N TMM-T, TGD-A Twin Butte Energy Ltd. TBE-T Hunkering Down U.S. Alacer Gold Corp. ASR-T, AQG-AX The Mosaic Company MOS-N Study Shows Çöpler Pad Expansion is Possible A Small But Welcome Win Latin America Grupo Financiero Inbursa, SAB de CV GFINBUR O-MX Pan American Silver Corp. PAAS-Q, PAA-T Southern Copper Corporation SCCO-N, SCCO-LM Timmins Gold Corp. Inbursa Acquires Walmex's Banking Unit Reloading the Buyback Option Toquepala Concentrator Expansion EIA Approved TMM-T, TGD-A Caballo Blanco Acquisition Helps Address Previous Concerns Wal-Mart de México y Centroamerica, SAB de CV Divestiture of Banking Unit Not Necessarily a Positive WALMEX V-MX Global Alacer Gold Corp. ASR-T, AQG-AX Study Shows Çöpler Pad Expansion is Possible Equity Event: Daily Edge Holiday Schedule 3 Pertinent Revision Summary Friday, December 19, 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 Alimentation Couche-Tard Inc. (SO) (ATD.B-T C$42.54) Strengthening Position in Southeastern U.S. New -Old -- --- $46.00 $43.00 --- --- -- --- -- Valuation: 21x F16E EPS Key Risks to Price Target: Fuel Margin Volatility; Successful Integration of Acquisitions; Change in Economic Conditions. Black Diamond Group Ltd. (SP) (BDI-T C$14.40) Ops Update Highlights Softer Environment New -Old -- --- $20.00 $22.00 EBITDA14E: $141 EBITDA14E: $149 EBITDA15E: $135 EBITDA15E: $155 EBITDA16E: $149 EBITDA16E: $172 6.9x our 2016 EV/EBITDA estimate. 6.2x our 2016 EV/EBITDA estimate. Valuation: 6.9x our 2016 EV/EBITDA estimate. Key Risks to Price Target: Commodity prices, labour supply, access to supplies, weather, contract risk, and FX. Clearwater Seafoods Inc. (SP) (CLR-T C$12.20) Smooth Sailing New SP Old -- Medium -- $12.00 -- Adj EBITDA14E: $85.7 Adj EBITDA15E: $101.6 Adj EBITDA16E: $114.7 8.5x EV/Adj. EBITDA on 2016E Adj EBITDA14E: -Adj EBITDA15E: -Adj EBITDA16E: -- -- Valuation: 8.5x EV/Adj. EBITDA on 2016E Key Risks to Price Target: Changes in quotas; political risk; weather- and vessel-related risks Eagle Energy Trust (SP) (EGL.UN-T C$2.72) Permian Proceeds Redeployed in Canada; 2015 Budget, Guidance Released; Distribution Cut New -Old -- --- --- CFPU14E: $1.06 CFPU14E: $1.07 CFPU15E: $1.05 CFPU15E: $0.97 CFPU16E: $1.04 -CFPU16E: $0.85 -- Valuation: 0.8x our 2P NAV plus risked upside. Key Risks to Price Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success High Liner Foods Incorporated (SO) (HLF-T C$21.41) Unlocking Reel Value New SO Medium Old -- -- $27.00 -- Adj EBITDA14E: US$84.3 Adj EBITDA14E: -- Adj EBITDA15E: US$100.2 Adj EBITDA15E: -- Adj EBITDA16E: 9.0x EV/Adj. EBITDA on 2016E US$118.1 Adj EBITDA16E: -- -- Valuation: 9.0x EV/Adj. EBITDA on 2016E Key Risks to Price Target: Identifying and integrating acquisitions, cost inflation, customer preferences 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 Friday, December 19, 2014 Interfor Corporation (SO) (IFP-T C$18.65) Encore! New -Old -- --- $23.25 $21.25 --- EPS15E: $1.78 EPS15E: $1.56 EPS16E: $2.12 -EPS16E: $1.79 -- Valuation: 3.5x EV/Peak EBITDA Key Risks to Price Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$ Mullen Group Ltd. (SO) (MTL-T C$21.27) Drawing a Line in the Sand in Uncertain Circumstances New -Old -- --- $23.25 $27.00 --- EPS15E: $1.23 EPS15E: $1.59 -- --- -- Valuation: Equally wtd. DCF and 8.5x NTM EBITDA (one-year fwd.) Key Risks to Price Target: Slower-than-expected economic growth, acquisition integration issues and oil prices. Pan American Silver Corp. (SP) (PAAS-Q US$9.28) Reloading the Buyback Option New -Old -- --- $11.50 $11.60 Adj. EPS14E: $-0.04 Adj. EPS14E: $-0.03 Adj. EPS15E: $0.03 Adj. EPS15E: $-0.03 Adj. EPS16E: $0.30 Adj. EPS16E: $0.23 1.03x Q3/15E NAV 1.05x Q2/15E NAV Valuation: 1.03x Q3/15E NAV Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Penn West Exploration (SU) (PWT-T C$2.54) 2015 Capital Budget and Dividend Reduced New -Old -- --- --- CFPS14E: $1.88 CFPS14E: $1.84 CFPS15E: $1.29 CFPS15E: $0.99 CFPS16E: $1.60 -CFPS16E: $1.47 -- Valuation: 0.2x our 2P NAV plus risked upside. Key Risks to Price Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success PHX Energy Services Corp. (SP) (PHX-T C$7.40) Conservative 2015 Budget Announced New -Old -- --- $11.00 $12.00 --- EBITDA15E: $58 EBITDA15E: $62 EBITDA16E: $66 EBITDA16E: $71 8.1x our 2016 EV/EBITDA estimate. 8.2x our 2016 EV/EBITDA estimate. Valuation: 8.1x our 2016 EV/EBITDA estimate. Key Risks to Price Target: Commodity prices, labour supply, new technology, and FX. Rubicon Minerals Corporation (SP) (RMX-T C$1.19) Update Largely In Line, UG Development Behind Plan and Above Budget; Pace said to Quicken New -Old -- --- --- EPS14E: $-0.03 EPS14E: $-0.05 EPS15E: $-0.03 EPS15E: $-0.04 EPS16E: $-0.01 -EPS16E: $0.01 -- Valuation: 1x NAV Key Risks to Price Target: Commodity risk, multiple contraction, project development risk, mineral resource and exploration r isk 5 Pertinent Revision Summary Friday, December 19, 2014 Timmins Gold Corp. (SP) (TMM-T C$1.09) Caballo Blanco Acquisition Helps Address Previous Concerns New -Old -- --- --- EPS14E: US$0.07 EPS14E: US$0.08 EPS15E: US$0.01 EPS15E: US$0.11 EPS16E: US$-0.03 1.00x NAVPS EPS16E: US$0.07 1.10x NAVPS Valuation: 1.00x NAVPS Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Twin Butte Energy Ltd. (SP) (TBE-T C$0.88) Hunkering Down New -Old -- --- $1.75 $2.25 --- CFPS15E: $0.58 CFPS15E: $0.64 CFPS16E: $0.58 0.7x our 2P NAV plus risked upside. CFPS16E: $0.65 0.8x our 2P NAV plus risked upside. Valuation: 0.7x our 2P NAV plus risked upside. Key Risks to Price Target: Exploration and drilling execution risk; commodity price risk Source: Reuters; Scotiabank GBM estimates. Table of Contents 6 Edge at a Glance Friday, December 19, 2014 Edge at a Glance Global Fertilizers Uralkali Sees Weaker Potash Demand Next Year (As Do We) Ben Isaacson, MBA, CFA - (416) 945-5310 (Scotia Capital Inc. - Canada) Event ■ URKA updated its operational and market outlooks. Implications ■ 2015 S/D. URKA sees global potash shipments up to 3M mt lower next year, or to 57M 59M mt, from 59M - 60M mt in 2014. This is consistent with our 3M mt reduction to demand next year. We see most of the pullback occurring in granular markets like EU, NA, and Brazil (Exhibit 1). ■ Uralkali production. The combination of the S-2 mine flood (no update), increased utilization rates, and some debottlenecking benefit, means URKA should see 10.2M mt of 2015 production, down from 12M mt this year. ■ Chinese contract. URKA anticipates a Chinese contract being signed in early 2015, which would not be inconsistent with market expectations. We estimate the Street is neutral at $320/mt, or at a 5% hike over 2014. ■ Belaruskali. On December 3, we published a note highlighting how Belaruskali was becoming more aggressive. We understand that Belaruskali is: (1) disrupting the market in Brazil, with prices there falling to $365/mt from $380/mt; (2) shipping into the U.S. for the first time in years, following the recent removal of sanctions; and (3) is being "unhelpful" in Chinese contract negotiations. Accordingly, we think there is now a higher likelihood of disappointment to the Chinese contract, perhaps a flat price at $305/mt. Recommendation ■ We maintain a cautious view of the potash market, particularly for 2H/15. Real Estate & REITs The REIT Stuff - New Edition Available Mario Saric, CPA, CA, CFA - (416) 863-7824 (Scotia Capital Inc. - Canada) Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) Event ■ Our latest edition of The REIT Stuff, "We're back! Looking for Yield in All the Right Places" is available on ScotiaView. We plan on providing a more comprehensive look at yield in the new year. Implications ■ Relative REIT valuation has lost some lustre... On average, the relative REIT AFFO multiple (vs. P/E for other asset classes) has compressed between 0.1x (vs. banks) to 1.1x (telecom) points (down ~0.6x vs. utilities and lifecos), despite the 10-year GoC declining 97bp since Dec. 2013. Since 1998, REITs have outperformed the banks, lifecos, and telecom as bond yields fall (by 460bp/945bp/565bp), well ahead of what we've seen since Dec. '13 (-210bp/+315bp/-365bp/-275bp vs. banks/lifecos/telecom/utilities). ■ ...Despite solid growth outlook. Looking at valuation in isolation can be misleading as multiples reflect shifting capital structure, growth rates, and structural changes to fund flows (i.e., income trust legislation). While still exhibiting the highest PEG ratio amongst the group, we note the REIT delta to historical average (-1.2) exceeds the delta for banks (+1) and telecom (-0.4) as REIT investors are paying the same absolute AFFO multiple (~14x) for higher expected AFFOPU growth (2014E-2016E AFFOPU CAGR of 5.5% vs. ~4% historical). Recommendation ■ Don't be afraid to pay for growth. We still think REITs with superior NOI, NAV, and distribution/un growth should warrant a higher premium valuation in a rising rate environment. Top picks are unchanged, including Allied, BAM, BPY, Chartwell, CREIT, Granite, and WPT. 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. 7 Edge at a Glance Friday, December 19, 2014 Telecom - Mexico Lovely Price Cuts Andres Coello - +52 (55) 5123 2852 (Scotiabank Inverlat) Event ■ Telcel announced changes to prepaid and postpaid prices that reflect recent regulatory changes and imply some of the cheapest-ever wireless rates in Mexico. The move follows recent price cuts by Telefonica and Iusacell (see detailed price comparisons on pages 2 to 4.) ■ In our view, the entry of AT&T into Mexico and the elimination of LD charges in January are likely to continue heating competitive dynamics. Implications ■ Following Ifetel's pricing restrictions, Telcel changed its policy regarding the legendary three free on-net numbers (first five minutes) of the "Amigo Plus" prepaid plans; now users can choose free numbers to any carrier, a remarkable benefit for consumers but potentially impacting AMX's margins given asymmetric MTRs (rivals don't pay MTR, Telcel does). ■ Telcel also launched new prepaid plans called "Amigo On Life", where users recharging as little as MXN 100/month (US$6.90) get unlimited calls to three free numbers regardless of destination (first five minutes), 100 minutes, 100 SMS, and 100 MB, on top of free Whatsapp. This implies a per-minute rate of MXN 0.33, perhaps the lowest rate we have ever seen in Mexico. ■ In postpaid, the company launched the "Telcel Pro" plans, which for as little as MXN 199/month (US$13.70 if paid on time) includes three free numbers, 200 minutes, 200 SMS, and 400 MB (ex-handset). ■ Lower wireless prices should accelerate fixed-to-mobile substitution. Recommendation ■ M&A speculation may prevail over market dynamics. Remain Neutral on AMX. Telecommunications and Cable Government Committed to Putting More Spectrum in New Entrants' Hands Jeff Fan, CPA, CA, CFA - (416) 863-7780 (Scotia Capital Inc. - Canada) Event ■ Industry Canada (IC) announced measures to make more spectrum licenses available for mobile wireless services and backhaul capacity to ultimately support fixed or mobile wireless services. These include the AWS-3, 600 MHz, AWS-4, 3500 MHz, and backhaul spectrum licenses. Implications ■ This was an unprecedented quantity of spectrum being addressed. For our purpose, the key licences that are important in the near to medium term are the AWS and 600 MHz licenses. The new band plan, technical rules, and licensing framework for AWS-4 are relevant only if Dish Network (DISH) in the US decides to sell, deploy, or partner to enable services on this band. As for the 3500 MHz and backhaul licenses, we believe they are important to support rural fixed wireless and/or backhaul services and have less direct impact on retail mobile services in the urban and suburban markets. Recommendation ■ We remain concerned about the impact of these rules on the Big Three in 2015. We believe these government rules, particularly the CRTC roaming decision in Q1/15, will ultimatel y encourage the recapitalization of the 4th wireless operator. 8 Edge at a Glance Friday, December 19, 2014 Ovais Habib - (416) 863-7141 (Scotia Capital Inc. - Canada) Alacer Gold Corp. (ASR-T C$2.26) Study Shows Çöpler Pad Expansion is Possible Event Pertinent Data ■ Results of Alacer's heap leach pad expansion study show that the Çöpler leach pad's ultimate capacity could be expanded by 14% or ~7 Mt to 56 Mt, equivalent to approximately one additional year of production from oxide ore. Implications ■ Alacer estimates the cost of the expansion would be $30 million. This combines the previously planned heap leach phase four expansion with the new capacity increase to 56 Mt. $25 million of the $30 million is budgeted for 2015. Technical work over the next 12 months will assess the potential for a second heap leach pad to the west of Çöpler. ■ We currently model three more full years of oxide production (~130 koz/yr attributable to ASR) at Çöpler (2015-2017) followed by two years of residual leaching. A quick scenario analysis indicates that adding an extra year of oxide mine life at Alacer's stated capex would increase our company NAV by approximately 4%. ■ Our estimates are unchanged pending the results of the re-optimized mine plan that will be designed to leverage the expanded leach pad capacity (Q1/15E). We believe this study will provide data key to a more accurate model such as timing and grade of additional oxide ore. Recommendation ■ We rate Alacer Sector Perform with a C$3.00 one-year target. Rating: Risk: Target: 1-Yr Alimentation Couche-Tard Inc. (ATD.B-T C$42.54) Strengthening Position in Southeastern U.S. SP High C$3.00 Adj. EPS14E: US$0.16 Adj. EPS15E: US$0.08 Adj. EPS16E: US$-0.01 Valuation: 1.00x NAVPS Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Div. (NTM) $0.04 Div. (Curr.) Yield (Curr.) $0.02 1.0% Patricia A. Baker, MBA, PhD - (514) 287-4535 (Scotia Capital Inc. - Canada) Event ■ Couche-Tard announced this morning its purchase of The Pantry in an all-cash transaction valued at US$36.75 per share, with a total enterprise value of $1.7B. The purchase price represents a 27% premium over PTRY's closing price on December 16. Implications ■ The transaction is expected to close in the first half of 2015, subject to regular approvals. It will be an all-cash transaction that Couche-Tard expects to finance using available cash on hand, existing credit facilities and a new term loan, the details of which have not yet been announced. ■ The Pantry transaction will add 1,500+ stores in the Southeastern U.S. Couche-Tard already has 1,000+ locations in the areas occupied by PTRY, with Kansas being the only new state for ATD. With a #1 position in four different markets and #2 in two others, the PTRY network should strengthen the current network significantly. ■ PTRY's strategic agenda currently includes the optimization of fuel performance, strengthening merchandising and food service and upgrading the store base. These initiatives fall right in ATD's expertise and we expect the company to apply its usual integration effectiveness in combining the networks. Recommendation ■ We move our target up to C$46 based on our preliminary view of potential accretion, which assumes 50% debt financing and $75M in synergies to SG&A. These will be subject to fine-tuning. Pertinent Data New Old Rating: -- SO Risk: Target: 1-Yr -- Med $46.00 $43.00 EPS15E -US$1.77 EPS16E -US$1.87 New Valuation: -Old Valuation: 21x F16E EPS Key Risks to Target: Fuel Margin Volatility; Successful Integration of Acquisitions; Change in Economic Conditions. Div. (NTM) Div. (Curr.) Yield (Curr.) C$0.19 C$0.14 0.3% 9 Edge at a Glance Friday, December 19, 2014 Black Diamond Group Ltd. (BDI-T C$14.40) Ops Update Highlights Softer Environment Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759 (Scotia Capital Inc. - Canada) Event ■ BDI provided an operations update and revised 2015 outlook. Implications ■ Q4 EBITDA expected to be 20% to 25% lower YOY. Management pointed to lower Structures utilization and softer results out of Energy Services and its International (Australian) divisions. Q1/15 is expected to be moderately ahead QOQ while 2015 EBITDA is expected to be slightly behind 2014. This outlook is based on firm capital expenditures of $35M out of the $85M anticipated 2015 budget, implying 2015 might be similar (or possibly slightly higher) YOY with a fuller budget. ■ Dividend expected to be maintained given solid balance sheet. We reduced our 2015 EBITDA to $135M, down 13%. We estimate 2015 FCF post dividend of negative $2M: $122M CF less $85M capex less $39M cash dividends. We forecast $51M of available credit on its ~$154M lines as of 2015YE with ND/EBITDA of 1.5x. Recommendation ■ We maintain our SP rating and reduce our Price Target $2 to $20. With the continuous fall in oil prices and key SAGD players trimming estimates more than anticipated, this confirms our prior stance that absent-LNG we would not be bullish on BDI despite its top tier accommodation rental status. That said, we continue to believe LNG could be a material catalyst for the stock and are of the view Petronas is posturing to lower project costs. At this point, we view Petronas as more likely than not to make a positive final investment decision but see BDI's shares range-bound near term. We will revisit our stance with Q4 results. Clearwater Seafoods Inc. (CLR-T C$12.20) Smooth Sailing Event ■ We have initiated coverage on the common shares of Clearwater Seafoods Inc. (CLR). Please see our full report on ScotiaView. Implications ■ We like Clearwater's positioning (quotas, patented technologies, vessels, etc.) in a business with high barriers to entry and we expect the company to benefit from a weaker Canadian dollar and a rising price environment for harvested premium seafood. ■ We expect Clearwater to reach its targeted $100 million in adjusted EBITDA one full year ahead of schedule, largely driven by improved pricing (demand driven). We also expect a material step-up in earnings in 2016 as the company adds a new clam vessel to its fleet. ■ Clearwater shares are currently trading at 9.3x EV/Adj. EBITDA on our 2015E versus its estimated peer group average of 8.5x. We believe the shares should trade in line with the harvesting group given similar organic growth (beyond 2016E), return/efficiency metrics, and leverage. As such, we value the shares at 8.5x (2016E) and our one -year target is $12.00 per share. Recommendation ■ We like Clearwater for: (1) its strategic positioning and the high barriers to entry (quotas and vessels), (2) a positive near-term outlook for fish protein and strong pricing power, (3) a step-up in earnings profile expected in 2016, and (4) positive FX tailwinds, but project limited upside from current levels given today's premium valuation. Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SP Med $20.00 $22.00 EBITDA14E $141 $149 EBITDA15E $135 $155 EBITDA16E $149 $172 New Valuation: 6.9x our 2016 EV/EBITDA estimate. Old Valuation: 6.2x our 2016 EV/EBITDA estimate. Key Risks to Target: Commodity prices, labour supply, access to supplies, weather, contract risk, and FX. Div. (NTM) $0.90 Div. (Curr.) Yield (Curr.) $0.90 6.3% George Doumet - (514) 350-7788 (Scotia Capital Inc. - Canada) Pertinent Data New Rating: Risk: Target: 1-Yr Old SP Med N/A N/A $12.00 N/A Adj EBITDA14E $85.7 N/A Adj EBITDA15E $101.6 N/A Adj EBITDA16E $114.7 N/A New Valuation: 8.5x EV/Adj. EBITDA on 2016E Old Valuation: N/A Key Risks to Target: Changes in quotas; political risk; weather- and vessel-related risks Div. (NTM) Div. (Curr.) Yield (Curr.) $0.12 $0.12 1.0% 10 Edge at a Glance Friday, December 19, 2014 Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada) Eagle Energy Trust (EGL.UN-T C$2.72) Permian Proceeds Redeployed in Canada; 2015 Budget, Guidance Released; Distribution Cut Event Pertinent Data ■ Eagle Energy announced the acquisition of a 50% working interest in the Dixonville Montney "C" oil property along with a reduction in distribution and 2015 budget and production guidance. Implications ■ Montney acquisition represents first entry to Canadian market. On December 15 Eagle announced that it had received permission from shareholders to amend its trust provisions to allow the company to hold Canadian assets. Eagle has announced that it has entered an agreement with Spyglass Resources (TSX: SGL) to acquire a 50% nonoperated working interest in the Dixonville Montney "C" oil pool. ■ Asset details. The acquired assets are currently under horizontal waterflood and are located in north central Alberta. With the acquisition Eagle expects to add ~1,250 boe/d of 97% light sweet crude. The assets are characterized as having a stable production base and low ongoing sustaining capital requirement. ■ Financing a mix of cash and debt. The acquisition is expected to be funded with $55 mm of cash with the remainder coming from Eagle's existing credit facility. We view management's contrarian redeployment of its Permian proceeds as leveraged to crude oil prices and success at Dixonville. Recommendation ■ We maintain our SP rating and 1-year target price of $5.00/share. Grupo Financiero Inbursa, SAB de CV (GFINBUR O-MX MXN 36.81) Inbursa Acquires Walmex's Banking Unit New Rating: Risk: Target: 1-Yr Old --- SP High -- $5.00 CFPU14E $1.06 $1.07 CFPU15E $1.05 $0.97 CFPU16E $1.04 $0.85 New Valuation: -Old Valuation: 0.8x our 2P NAV plus risked upside. Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success CDPU (NTM) $0.99 CDPU (Curr.) Yield (Curr.) $0.99 36.5% Claudia Benavente A. - +562 2692 6568 (Scotia Corredora de Bolsa Chile SA) Event Pertinent Data ■ Inbursa announced it has reached an agreement to acquire Walmex's banking unit for about MXN 3,600M (~US$ 245M). The agreement allows it to use Walmex's 2,100 stores as correspondent agents. Implications ■ The acquired banking unit had ~MXN 5,400M in total loans in October 2014, mostly comprised of credit cards. It presented an NPL ratio of 5.2% and a 12-month average net interest margin of 14.5%. ■ While the acquisition price might seem steep at 1.7x P/BV for an unprofitable unit representing ~3% of Inbursa's total assets, we like the commercial agreement in that it allows Inbursa to better access the consumer segment by considerably expanding its distribution network. ■ We believe that the funds for the recent acquisitions have come from MXN 18,000M in reserve reversals the bank has been allowed. We believe Inbursa has been making good use of this benefit, either by acquiring strategic assets (i.e., Banco Standard Brasil), or by paying dividends. We estimate about MXN 9,000M in reserves will be reversed through 2016, which should allow this strategy to continue. Recommendation ■ The transaction is in line with the bank's strategy of expanding the consumer book, but while it has doubled the book in the last three years, it still represents only 10% of total loans. Therefore, we think Inbursa will face a few challenges given its limited experience in the consumer segment. We maintain our Sector Perform rating. Rating: Risk: Target: 1-Yr SP Med MXN 37.00 EPS14E: 2.76 EPS15E: 2.55 EPS16E: 2.64 Valuation: 2.48x 2015 BVPS estimate Key Risks to Target: Political, economic, capital flows, systemic, regulatory, interest rates, and credit. Div. (NTM) Div. (Curr.) Yield (Curr.) 0.83 0.76 2.1% 11 Edge at a Glance Friday, December 19, 2014 George Doumet - (514) 350-7788 (Scotia Capital Inc. - Canada) High Liner Foods Incorporated (HLF-T C$21.41) Unlocking Reel Value Event Pertinent Data ■ We have initiated coverage on the common shares of High Liner Foods Inc. (HLF). Please see our full report on ScotiaView. Implications ■ While we expect High Liner's U.S. foodservice business to continue to face near-term challenges arising, in part, from a difficult price pass-through environment, we see headwinds abating as early as 2015. Furthermore, we expect a meaningful improvement in near-term profitability on the back of supply chain improvements and, to a lesser degree, further growth and margin expansion in the company's other channels. ■ We value High Liner by applying 9.0x EV/Adj. EBITDA on our 2016 estimates versus its peer group trading at 10.6x (2015E). We believe the discount is warranted given High Liner's less-diversified seafood-only earnings stream, higher leverage, lower organic revenue growth, and modestly greater capital intensity. ■ Our one-year target of C$27.00 per share assumes High Liner attains the low end of its cost savings guidance of $20 million by 2016. We see an additional C$2.00 per share of potential upside if the company were to reach its upper end. Recommendation ■ We like HLF for: (1) expected cost take-out from supply chain initiatives, (2) upside from potential acquisitions and (3) positive long-term secular trend for seafood. Interfor Corporation (IFP-T C$18.65) Encore! New Rating: Risk: Target: 1-Yr Old SO Med N/A N/A $27.00 N/A Adj EBITDA14E US$84.3 N/A Adj EBITDA15E US$100.2 N/A Adj EBITDA16E US$118.1 N/A New Valuation: 9.0x EV/Adj. EBITDA on 2016E Old Valuation: N/A Key Risks to Target: Identifying and integrating acquisitions, cost inflation, customer preferences Div. (NTM) C$0.42 Div. (Curr.) C$0.42 Yield (Curr.) 2.0% Benoit Laprade, CPA, CA, CFA - (514) 287-3627 (Scotia Capital Inc. - Canada) Event ■ Interfor announced an agreement to acquire Simpson Lumber's four sawmills in the US Southeast (2), and the Pacific Northwest (2). Implications ■ Interfor is paying US$94.7M (plus working capital of ~US$30M) and contingent future payments tied to the financial performance of the Commencement Bay mill (min $10M in 3 years). ■ In other words, Interfor is paying about 5.2x 2014E EBITDA (9-month annualized) for 3 profitable mills and nothing upfront for an underperforming mill (Commencement Bay). ■ Before synergies, the acquisition is ~17% accretive to our 2015E EBITDA estimates and ~15% accretive to our 2015E EPS estimates (assuming a mid Q1/15 closing), while for 2016E this transaction is ~20% accretive to our EBITDA forecast and ~18% accretive to our EPS estimates. ■ The transaction adds about 30% to Interfor's production capacity and we believe there could be synergies to be surfaced given the physical proximity of the acquired mills to Interfor's operations in both regions. Interfor's U.S. capacity would increase from ~57% to ~67% pro forma this acquisition. Recommendation ■ We reiterate our Sector Outperform rating on IFP shares and increase our target price by $2.00 to $23.25 as a result of this acquisition. Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SO High $23.25 $21.25 EPS14E -$1.07 EPS15E $1.78 $1.56 EPS16E $2.12 $1.79 New Valuation: -Old Valuation: 3.5x EV/Peak EBITDA Key Risks to Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-thanexpected C$ Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% 12 Edge at a Glance Friday, December 19, 2014 Mullen Group Ltd. (MTL-T C$21.27) Drawing a Line in the Sand in Uncertain Circumstances Turan Quettawala, MBA, CFA - (416) 863-7065 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ MTL maintained its dividend and provided guidance for 2015. Implications ■ The significant headwind from falling crude prices is reflected in the guidance. The O/S segment will bear the brunt of the fall due to lower activity in various businesses particularly drilling and oil sands coring. This is expected to negatively impact volumes, pricing, and margins for MTL. In our opinion, this is adequately reflected in O/S guidance where revenues and EBITDA are expected to decline by 16% and 20% YOY. T/L should help offset some of the headwind, with EBITDA expected to grow by 21% YOY mainly due to the Gardewine acquisition. ■ The capex plan is down modestly at $80M, with half allocated to maintenance. In our view, the key here is that MTL management is conservative and the environment is very uncertain, so this guidance likely reflects a worst-case scenario. As such, a rise in crude prices or stronger cost control could lead to upside from current levels. Recommendation ■ We are maintaining our SO rating. Our favourable view is premised on a strong management team that has navigated well through many cycles, a solid 6% dividend yield with a dividend that has been maintained, and a strong B/S (~$250M room) that affords flexibility and room to pursue acquisitions which could drive higher estimates. We estimate that a $100M acquisition could be ~10% accretive based on historical metrics. Pan American Silver Corp. (PAAS-Q US$9.28) Reloading the Buyback Option New Rating: Risk: Target: 1-Yr Old --- SO Med $23.25 $27.00 EPS14E -$1.40 EPS15E $1.23 $1.59 New Valuation: -Old Valuation: Equally wtd. DCF and 8.5x NTM EBITDA (one-year fwd.) Key Risks to Target: Slower-than-expected economic growth, acquisition integration issues and oil prices. Div. (NTM) $1.20 Div. (Curr.) Yield (Curr.) $1.20 5.6% Craig Johnston, CPA, CA - (416) 860-1659 (Scotia Capital Inc. - Canada) Event ■ Pan American Silver announced that the TSX has accepted its proposed normal course issuer bid (NCIB), which gives the company the option to repurchase up to 5% of its outstanding shares until December 21, 2015. Implications ■ The new NCIB replaces the previous one which expired on December 4, 2014, under which no purchases were made. ■ Recall that on the Q3/14 conference call, management highlighted that its dividend policy ($0.50/share/annum) is much firmer than the market seemed to believe. Furthermore, management noted that, when the board approved the increase in the dividend to $0.50, that was a long-term sustainable decision to which they are committed. Pan American finished Q3/14 with $377.5 million in cash and short-term investments. ■ We expect Q4/14 to be strong quarter for Pan American, with San Vicente back in full swing, increased silver production at Alamo Dorado, and increased gold recoveries at Dolores. We anticipate silver production to be up 7% and cash costs to decline by 11%. ■ We have revised our Dolores estimates to conservatively assume Pan American does not move forward with the pulp agglomeration and underground development project given current silver prices. We have lowered our target price to $11.50 per share (from $11.60). Recommendation ■ We maintain our Sector Perform rating. Pertinent Data New Old Rating: -- Risk: Target: 1-Yr -- Speculative $11.50 SP $11.60 Adj. EPS14E $-0.04 $-0.03 Adj. EPS15E $0.03 $-0.03 Adj. EPS16E $0.30 $0.23 New Valuation: 1.03x Q3/15E NAV Old Valuation: 1.05x Q2/15E NAV Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Div. (NTM) Div. (Curr.) Yield (Curr.) $0.50 $0.50 5.4% 13 Edge at a Glance Friday, December 19, 2014 Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada) Penn West Exploration (PWT-T C$2.54) 2015 Capital Budget and Dividend Reduced Event Pertinent Data ■ Penn West announced a revised 2015 capital budget, reduced dividend and suspension of the DRIP program. Implications ■ 2015 capital budgeted revised. In the face of a difficult commodity price environment, Penn West has opted to reduce its 2015 capital budget by approximately 25%, from $840 mm to $625 mm. ■ Dividend rationalized. Penn West has reduced its quarterly dividend by approximately 80%, from $0.14/share to $0.03/share. While the dividend reduction is a difficult decision, we believe that it is a prudent step for the company, given the current challenges of the commodity price environment. Additionally, Penn West announced the suspension of its DRIP program, effective January 1, 2015. ■ Production guidance reduced. The company has reduced its production guidance for 2015 to a range of 90,000 -100,000 boe/d, a 5% reduction from the previous guidance range of 95,000 -105,000 boe/d. ■ Sustainability metrics improved, but still a challenge. Management has taken steps to solidify its balance sheet, however, we still see challenged sustainability metrics with 2015E D/CF of 4.4x and a 2015E effective payout ratio of 122%. At US$65/boe WTI and US$3.50 HH, we estimate these metrics to approach 8.0x and 200%, respectively. Recommendation ■ We maintain our SU rating and one-year target price of $4.25 per share. PHX Energy Services Corp. (PHX-T C$7.40) Conservative 2015 Budget Announced New Rating: Risk: Target: 1-Yr Old --- SU High -- $4.25 CFPS14E $1.88 $1.84 CFPS15E $1.29 $0.99 CFPS16E $1.60 $1.47 New Valuation: -Old Valuation: 0.2x our 2P NAV plus risked upside. Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program success Div. (NTM) $0.12 Div. (Curr.) Yield (Curr.) $0.12 4.7% Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759 (Scotia Capital Inc. - Canada) Event ■ PHX announced its 2015 capital budget. Implications ■ Planning for the worst, hoping for the best. PHX announced a conservative budget of $16M vs. $84M in 2014 (or 19% of 2014 level). This compares to our $32M expectation and the Street at $38M. About $11.5M will go towards the expansion into higher margin services such as the Velocity platform. The remaining $4.5M is for maintenance capex. With this update we also lower our 2015 and 2016 EBITDAs by 7% as we pared back our U.S. day rates and utilization expectations. ■ Increased flexibility suggests dividend should remain intact. Last Friday, PHX increased its lines by $70M to $200M. Our 2015 FCF post dividend is $4M: $49M CF less $16M capex less $29M cash dividends. We forecast $100M draw on its $200M lines as of 2015YE with ND/EBITDA of 1.7x. At this time, we see little risk of PHX's dividend being trimmed; its current dividend yield is 11.4%. Also, a NCIB was issued for purchase of up to 1.76M shares or 5% of shares outstanding. Recommendation ■ PT reduced to $11 with SP rating maintained. While we support management's decision and view PHX as a high quality directional driller, we continue to believe drill-bit driven OFS companies will continue to face headwinds in the current environment. A more optimal entry point could emerge as the NAM rig count pulls back. Pertinent Data New Old Rating: Risk: --- SP High Target: 1-Yr $11.00 $12.00 EBITDA14E -EBITDA15E $58 EBITDA16E $66 New Valuation: 8.1x our 2016 EV/EBITDA estimate. Old Valuation: 8.2x our 2016 EV/EBITDA estimate. Key Risks to Target: Commodity prices, labour supply, new technology, and FX. Div. (NTM) Div. (Curr.) Yield (Curr.) $76 $62 $71 $0.84 $0.84 11.4% 14 Edge at a Glance Friday, December 19, 2014 Rubicon Minerals Corporation (RMX-T C$1.19) Mike Hocking, MSc, P.Geo. - (416) 945-5228 (Scotia Capital Inc. - Canada) Update Largely In Line, UG Development Behind Plan and Above Budget; Pace said to Quicken Event Pertinent Data ■ RMX provided a construction update to its flagship Phoenix project. Implications ■ Underground development behind schedule. RMX has completed 47% of the underground (UG) development; accelerating the pace of development from 12m/day (June through August) to 18m/day to the end of November. Development work is currently 21% behind schedule but management expects that an increased pace and a 430m (5%) reduction in total development meters will bring them back on track in Q1/15. We estimate RMX will need to increase their pace by an additional 20% to meet their goal (post the 5% development reduction). ■ Increase to underground capex. There is C$85M in capex remaining to production including an C$11M capex increase for UG development; the mill is expected to be commissioned by Q2/15. RMX has begun to stockpile ore and is currently carrying out a trial Alimak stope on the 305m-244m level. ■ NAV unchanged. We forecast a short commissioning period in H1/15, resulting in the sale of ~19Koz Au from stock piled rock. We have adjusted for the $12M payment RGLD payment (Q2/15E) and have rolled over our NAV by a year. This has resulted in a 6 cent reduction to our NAVPS as results of a lower cash balance (Q4/15, post capex). Recommendation ■ We rate RMX as Sector Perform, with a one-year target of $1.40. Saputo Inc. (SAP-T C$32.79) Sale Of Bakery Division; Impact Minimal New Rating: Risk: Target: 1-Yr Old -SP -- Speculative -- $1.40 EPS14E $-0.03 $-0.05 EPS15E $-0.03 $-0.04 EPS16E $-0.01 $0.01 New Valuation: -Old Valuation: 1x NAV Key Risks to Target: Commodity risk, multiple contraction, project development risk, mineral resource and exploration risk Div. (NTM) $0.00 Div. (Curr.) $0.00 Yield (Curr.) 0.0% Patricia A. Baker, MBA, PhD - (514) 287-4535 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ Saputo announced the sale of its Bakery division to Canada Bread Company, a subsidiary of Mexican company Grupo Bimbo. The transaction is subject to regular approval and conditions and is expected to close in February 2015. Implications ■ In F2014, the Bakery division had sales of approximately $139M and represented less than 2% of consolidated revenues. The division, which produces, markets and distributes mainly snack-cakes, operates one manufacturing facility in Quebec and employs 642 employees. Recommendation ■ Given the non-core nature of the division, the transaction does not affect our thesis. Our estimates for F2015 and F2016 remain the same. We continue to believe that with a growing global platform, SAP is well positioned to seek new accretive M&A opportunities and to continue returning cash to shareholders. Rating: SO Risk: Target: 1-Yr Med EPS15E: EPS16E: C$37.50 $1.61 $1.76 Valuation: 21x F16E EPS Key Risks to Target: Drop in U.S. cheese prices; rising C$ Div. (NTM) Div. (Curr.) Yield (Curr.) $0.52 $0.46 1.4% 15 Edge at a Glance Friday, December 19, 2014 Southern Copper Corporation (SCCO-N US$27.45) Toquepala Concentrator Expansion EIA Approved Alfonso Salazar, MSc - +52 (55) 5123 2869 (Scotiabank Inverlat) Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ The Peruvian Ministry of Energy and Mining (MEM) has approved the Environmental Impact Assessment (EIA) for Toquepala's concentrator expansion. This approval is in line with our expectations despite coming a few weeks later than we originally anticipated. Implications ■ Southern Copper should now be able to start the expansion project, which is expected to be ready in Q4/16. ■ Once completed, the new 60ktpd concentrator should increase copper production by 100ktpa and molybdenum production by 3.1ktpa. We expect EBITDA to increase by $420M to reach $6.5B for 2017, and by $589M to $7.6B in 2018, supported by the Toquepala expansion. ■ We estimate the project adds $2.16 per share to our 2015E NAV. In our analysis, we model capex of $1.2B ($325M already disbursed) for the expansion project and additional copper capacity of 100ktpa. Recommendation ■ We expect the project's approval to be a short-term catalyst for the stock. This approval is in line with our expectation and supports our production growth estimates. We reiterate our Sector Outperform rating. Rating: Risk: Target: 1-Yr Teck Resources Limited (TCK.B-T C$14.93) Adj. EPS14E: Adj. EPS15E: Adj. EPS16E: SO High US$40.00 $1.58 $2.09 $3.16 Valuation: Scenario-Weighted NAV Key Risks to Target: Commodity price, operating, and technical risks, political, environmental, and legal risks Div. (NTM) Div. (Curr.) Yield (Curr.) $0.79 $0.48 1.8% Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526 (Scotia Capital Inc. - Canada) Stress Testing the Balance Sheet: Dividend Risk is High but Liquidity Risk is Low Event Pertinent Data ■ Given the market's current focus on Teck's liquidity and the associated sustainability of the dividend, we have stress tested the company's balance sheet under various commodity and dividend level scenarios. Implications ■ In the current spot commodity price environment, our analysis suggests that Teck has sufficient liquidity for at least another 3 years and possibly as long as 6 years depending on the dividend level. ■ While Teck has the liquidity to maintain the current dividend for some time, our analysis suggests that the company would likely jeopardize its investment grade rating in another 6-12 months based on spot prices. In our view, reducing the dividend by 50% in mid2015 would be a prudent financial move. ■ In our markedly more bearish commodity price scenario of spot less 10%, our analysis suggests that Teck would only have sufficient liquidity for another 2-3 years, irrespective of the dividend level. Recommendation ■ With limited near-term balance sheet and project development concerns, and likely bottom of cycle pricing for coking coal and copper, in our view, the current share price represents an attractive risk/reward trade-off. Teck is rated Sector Outperform with a C$25.00 target. Our C$25.00 target is based on a 50/50 mix of 7.5x our 2015E EV/EBITDA and 1.0x our 8% NAV of $24.19. Rating: SO Risk: Target: 1-Yr High C$25.00 Adj. EPS14E: $0.87 Adj. EPS15E: $1.19 Adj. EPS16E: $1.62 Valuation: 50% of 7.5x 2015E EV/EBITDA + 50% of 8% NAV Key Risks to Target: Commodity prices, currency, operating, development, balance sheet and environmental Div. (NTM) $0.90 Div. (Curr.) Yield (Curr.) $0.90 6.0% 16 Edge at a Glance Friday, December 19, 2014 The Mosaic Company (MOS-N US$44.59) A Small But Welcome Win Ben Isaacson, MBA, CFA - (416) 945-5310 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ The Tampa ammonia contract for January was settled $80 lower at $545/mt. Implications ■ All else equal, the ammonia contract improvement should lead to a $12/mt hike to MOS's DAP margin. If sustained for a year, we estimate this is the equivalent of up to $150M of incremental EBITDA. ■ MOS can partially thank itself for the lower ammonia price. MOS's decision to curtail DAP/MAP production through Q4 was specifically designed to relieve tightness in the ammonia market. However, MOS did get some help from: (1) the bankruptcy of MissPhos; (2) poor fall ammonia application demand in the U.S.; and (3) production cuts at OCP. We estimate MOS will return its phosphate operating rates to more normalized levels beginning in Q1. ■ Couldn't come at a better time. In the Tampa market, DAP moved $15 higher last week to $465/mt. The European season is now underway, with interest picking up in Brazil and in the U.S. domestic market. While India usually becomes less relevant for phosphate suppliers during Q1, we think importers there can forget about price ideas in the $450s, $460s, or $470s. We don't see China needing to concede to lower prices any time soon. Recommendation ■ We maintain a preference for MOS over POT (SP). Rating: Risk: Target: 1-Yr Timmins Gold Corp. (TMM-T C$1.09) Caballo Blanco Acquisition Helps Address Previous Concerns Event ■ Timmins has entered into an agreement to purchase 100% of the Caballo Blanco gold project from Goldgroup Mining Inc. Implications ■ The initial purchase price is ~$25M ($10M in cash and ~16.1M TMM common shares). Timmins has also agreed to pay to Goldgroup a $5M contingent payment when Caballo receives EIS approval or if Timmins undergoes a change of control. ■ Caballo Blanco is a PEA-stage open pit heap leach project located in Veracruz State, Mexico. A 2012 PEA outlined 994 koz Au of pit-constrained resources at an average grade of 0.58 g/t Au with a LOM strip of 1.7:1, cash cost of $784/oz, and initial capex of $84.8M. ■ We view the acquisition positively as we believe it helps address our previous concerns such as a shrinking mine life at San Francisco and a lack of share price catalysts. On a standalone basis, we estimate the deal is 8% NAV accretive. Caballo could generate significant production growth for Timmins, in our view, if the company can obtain environmental permits in a timely manner. Recommendation ■ We maintain our Sector Perform rating and C$2.00 1-yr target price. Given Caballo's past permitting friction, we believe Timmins will need to demonstrate tangible permitting progress before the market will be willing to recognize full value for the project. SO High US$52.00 EPS14E: EPS15E: $2.32 $3.17 Valuation: 8.5x 2015E EBITDA, 16x 2015E EPS, DCF @ 9.5%, 45% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Div. (NTM) Div. (Curr.) Yield (Curr.) $1.00 $1.00 2.2% Ovais Habib - (416) 863-7141 (Scotia Capital Inc. - Canada) Pertinent Data New Rating: Risk: Target: 1-Yr Old --- SP High -- $2.00 EPS14E US$0.07 US$0.08 EPS15E US$0.01 US$0.11 EPS16E US$-0.03 US$0.07 New Valuation: 1.00x NAVPS Old Valuation: 1.10x NAVPS Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% 17 Edge at a Glance Friday, December 19, 2014 Twin Butte Energy Ltd. (TBE-T C$0.88) Hunkering Down William S. Lee, P.Eng. - (403) 213-7331 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ TBE reduced 2015E guidance and its dividend. Implications ■ Hunkering down. TBE's 2015 capex program was reduced by $40M to $120M, with production now guided at 19.1 mboe/d (previously 21.5 mboe/d). The reduced dividend now sits at $0.01/sh monthly, or $0.12/sh annually, and the DRIP has been suspended as of January. Running our model at US$60/bbl WTI, we peg TBE's 15E D/CF at 2.0x and 72% drawn at 2015E year-end on its $365M bank facility (including working capital). The all-in payout ratio for 2015E sits at 93% under those commodity prices. TBE is ~50% hedged on its 2015 oil volumes, and unhedged for 2016 and beyond. ■ Thesis. In our view, TBE shares present good value at these levels, and its hedges offer good downside protection; however, the past year has been challenging and the nearterm commodity outlook will be tough for junior oil names. While the new dividend level and revised capex keep TBE sustainable next year at US$60/bbl WTI, we think that in order to attract positive sentiment, a few solid quarters are required. Recommendation ■ We maintain our SP rating; our target moves to $1.75/sh (from $2.25). Wal-Mart de México y Centroamerica, SAB de CV (WALMEX V-MX MXN 30.75) Divestiture of Banking Unit Not Necessarily a Positive New Rating: Risk: Target: 1-Yr Old --- SP High $1.75 $2.25 CFPS14E -CFPS15E $0.58 CFPS16E $0.58 New Valuation: 0.7x our 2P NAV plus risked upside. Old Valuation: 0.8x our 2P NAV plus risked upside. Key Risks to Target: Exploration and drilling execution risk; commodity price risk $0.59 $0.64 $0.65 Div. (NTM) $0.19 Div. (Curr.) $0.19 Yield (Curr.) 21.6% Rodrigo Echagaray, MBA, CFA - (416) 945-4405 (Scotia Capital Inc. - Canada) Event Pertinent Data ■ Walmex announced it has reached an agreement to sell its banking unit to Banco Inbursa for ~US$245 million. Implications ■ The transaction is not relevant in the sense that the proceeds represent less than 1% of Walmex's market cap (MXN.20 per share). However, this transaction indicates management remains focused on core retail operations and committed to divesting noncore assets. Also, EPS should increase ~2% in 2015 (losses at the banking unit account for ~2% of Walmex's earnings LTM). Finally, Inbursa's banking expertise could lead to faster growth in the loan book which could drive sales at stores (Banco Inbursa will essentially use Walmex stores as branches). From that perspective, it can be argued this is a positive announcement. ■ However, we don't think US$245M compensates for Walmex's time and effort put into this business since 2007. Also, we find it a bit disappointing that Walmex was not capable of finding the right strategy to grow its banking unit in what we think is an attractive market. Recommendation ■ We would not argue for a Chile Retail type model where the banking unit can be as, or more important than the retail operations, but we would argue there was an attractive market opportunity for Walmex to grow a profitable loan book while driving sales. We remain neutral on Walmex. Rating: Risk: Target: 1-Yr EBITDA14E: EBITDA15E: SP Low MXN 37.00 42,882 46,953 Valuation: 2014E-2020E DCF w/ 9.1% WACC; 13x (NTM) EV/EBITDA Key Risks to Target: Operating performance, consumer behavior, tax reforms Div. (NTM) Div. (Curr.) 0.81 1.24 Yield (Curr.) 4.0% 18 Intraday Flash Thursday, December 18, 2014 @ 2:04:23 PM (ET) Global Fertilizers Uralkali Sees Weaker Potash Demand Next Year (As Do We) Ben Isaacson, MBA, CFA - (416) 945-5310 (Scotia Capital Inc. - Canada) [email protected] Carl Chen - (416) 863-7184 (Scotia Capital Inc. - Canada) [email protected] Event ScotiaView Analyst Link ■ URKA updated its operational and market outlooks. Implications ■ 2015 S/D. URKA sees global potash shipments up to 3M mt lower next year, or to 57M - 59M mt, from 59M - 60M mt in 2014. This is consistent with our 3M mt reduction to demand next year. We see most of the pullback occurring in granular markets like EU, NA, and Brazil (Exhibit 1). ■ Uralkali production. The combination of the S-2 mine flood (no update), increased utilization rates, and some debottlenecking benefit, means URKA should see 10.2M mt of 2015 production, down from 12M mt this year. ■ Chinese contract. URKA anticipates a Chinese contract being signed in early 2015, which would not be inconsistent with market expectations. We estimate the Street is neutral at $320/mt, or at a 5% hike over 2014. ■ Belaruskali. On December 3, we published a note highlighting how Belaruskali was becoming more aggressive. We understand that Belaruskali is: (1) disrupting the market in Brazil, with prices there falling to $365/mt from $380/mt; (2) shipping into the U.S. for the first time in years, following the recent removal of sanctions; and (3) is being "unhelpful" in Chinese contract negotiations. Accordingly, we think there is now a higher likelihood of disappointment to the Chinese contract, perhaps a flat price at $305/mt. Recommendation ■ We maintain a cautious view of the potash market, particularly for 2H/15. Universe of Coverage Price AGU-N CF-N IPI-N MOS-N POT-N SDF-DE SQM-N YAR-OL US$95.77 US$258.00 US$13.48 US$44.54 US$35.07 €23.19 US$23.27 323.30kr Rating Risk SO SO SP SO SP SP SP SP Medium High High High High High Medium High 1-Yr ROR $120.00 $300.00 $13.50 $52.00 $34.00 €23.00 $28.00 300.00kr 28.6% 18.6% 0.1% 19.0% 0.9% 0.6% 22.7% -5.0% 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 Exhibit 1 – Potash Supply/Demand Outlook Producer GBM Est. 2014E (M mt) GBM Est. 2015E (M mt) North America China India SE Asia Europe & FSU Brazil ROW 10.0 12.2 3.9 8.6 10.5 9.1 3.7 9.5 12.2 3.5 8.2 10.0 8.1 3.5 DEMAND 58.0 55.0 POT MOS AGU 9.0 8.7 1.0 18.7 9.1 8.5 1.9 19.5 Scotia published forecast BELA URKA 10.3 12.0 22.3 10.3 10.2 20.5 Company guidance ICL SQM APC QSLP (China) 5.3 1.7 2.2 4.5 13.7 5.3 1.7 2.2 5.0 14.2 Scotia estimate 1.0 3.2 0.3 2.0 6.5 1.0 3.2 0.3 2.0 6.5 61.2 60.7 -3.2 -5.7 IPI K+S VALE China/Other SUPPLY Source: Scotiabank GBM estimates. Scotia published forecast Company guidance Company guidance Scotia published forecast Scotia estimate CRU Scotia published forecast Scotia published forecast Scotia estimate Scotia estimate 20 Pertinent Data Rating Risk 1-Yr Target Year 1 Key Data Year 2 Year 3 Valuation Agrium Inc. (AGU-N) Valuation: 7.5x 2016E EBITDA, 13x 2016E EPS, DCF @ 10%, 65% 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: 12x 2015E EBITDA, 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, 16x 2015E EPS, DCF @ 9.5%, 45% RCN Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather Potash Corporation of Saskatchewan, Inc. (POT-N) Valuation: 9.5x 2015E EBITDA, 17.5x 2015E EPS, DCF @ 9.5%, 50% RCN Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather K+S AG (SDF-DE) Valuation: 7x 2015E EBITDA, 13x 2015E EPS, DCF @ 10%, 25% RCN Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather Sociedad Quimica y Minera de Chile (SQM-N) Valuation: 11x 2015E EBITDA, 20x 2015E EPS, DCF @ 10.5% Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather Yara International ASA (YAR-OL) 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 21 Industry Comment Thursday, December 18, 2014, After Close Real Estate & REITs The REIT Stuff - New Edition Available Mario Saric, CPA, CA, CFA - (416) 863-7824 (Scotia Capital Inc. - Canada) [email protected] Pammi Bir, CPA, CA, CFA - (416) 863-7218 (Scotia Capital Inc. - Canada) [email protected] Event ■ Our latest edition of The REIT Stuff, "We're back! Looking for Yield in All the Right Places" is available on ScotiaView. We plan on providing a more comprehensive look at yield in the new year. ScotiaView Analyst Link Implications ■ Relative REIT valuation has lost some lustre... On average, the relative REIT AFFO multiple (vs. P/E for other asset classes) has compressed between 0.1x (vs. banks) to 1.1x (telecom) points (down ~0.6x vs. utilities and lifecos), despite the 10-year GoC declining 97bp since Dec. 2013. Since 1998, REITs have outperformed the banks, lifecos, and telecom as bond yields fall (by 460bp/945bp/565bp), well ahead of what we've seen since Dec. '13 (-210bp/+315bp/-365bp/-275bp vs. banks/lifecos/telecom/utilities). ■ ...Despite solid growth outlook. Looking at valuation in isolation can be misleading as multiples reflect shifting capital structure, growth rates, and structural changes to fund flows (i.e., income trust legislation). While still exhibiting the highest PEG ratio amongst the group, we note the REIT delta to historical average (-1.2) exceeds the delta for banks (+1) and telecom (0.4) as REIT investors are paying the same absolute AFFO multiple (~14x) for higher expected AFFOPU growth (2014E-2016E AFFOPU CAGR of 5.5% vs. ~4% historical). Recommendation ■ Don't be afraid to pay for growth. We still think REITs with superior NOI, NAV, and distribution/un growth should warrant a higher premium valuation in a rising rate environment. Top picks are unchanged, including Allied, BAM, BPY, Chartwell, CREIT, Granite, and WPT. 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. Dream Office REIT is a Related Issuer of Scotia Capital Inc. 22 We’re back! Looking for Yield in All the Right Places ■ Following a year-long hiatus, we are re-introducing The REIT Stuff heading into 2015. We hope you will view it as more of a gift than a lump of coal. As discussed in our recent 2015 outlook piece, we think REITs will be more the former than the latter next year. Given recent oil-driven TSX turmoil, we are ending the year looking at how REITs compare with their yield peers on valuation and growth; we think REITs stack up reasonably well on a PEG ratio basis. If the holidays aren’t exciting enough for you, we will provide a more comprehensive look at all of this in the new year. ■ Relative REIT valuation has lost some lustre… Canadian REITs are trading at 14.1x 2015E AFFO/6.6% implied cap rate/485 bp implied cap spread to 10-year Government of Canada bonds/5% discount to NAV (all excluding industrial REITs) versus the 14.3x/7.3%/415 bp/+4% average since Q2/05. On average, the relative REIT AFFO multiple (versus P/E for other asset classes) has compressed between 0.1x (versus banks) and 1.1x (telecom) – down ~0.6x versus utilities and lifecos – despite the 10-year yield declining 97 bp since December 27, 2013. Since 1998, REITs have outperformed (price only) banks, lifecos, and telecom as bond yields have fallen (by 460 bp/945 bp/565 bp), well ahead of what we have seen since December 2013 (-210 bp/+315 bp/-365 bp/-275 bp versus banks/lifecos/telecom/ utilities). Rising-rate periods sing a different tune, with REITs lagging banks, lifecos, and telecom by 620 bp/940 bp/570 bp (REITs have historically outperformed the utilities by 660 bp); all are price only. ■ … Despite solid growth outlook. Looking at valuation in isolation can be misleading as multiples reflect shifting capital structure (REIT debt to EBITDA has inched higher in recent years), growth rates, and structural changes to fund flows (i.e., income trust legislation). As highlighted in the exhibit below, we believe PEG ratios at least take growth into consideration, with REITs stacking up reasonably well. While REITs still exhibit the highest PEG ratio, we note the delta to the historical average (-1.2) exceeds the delta for banks (+1) and telecom (-0.4) as REIT investors are paying the same absolute AFFO multiple (~14x) for higher expected AFFOPU growth (2014E-2016E AFFOPU CAGR of 5.5% versus ~4% historical). Although there may arguably be some downside estimate risk under sustained oil weakness, we think 2%3% GDP growth supports ~2% same-property NOI growth (~4% levered). Throw in some developments and eventual resumption of acquisitions and our 5.5% appears achievable. ■ Don’t worry about paying for growth. We continue to recommend REITs with superior NOI, NAVPU, and DPU growth potential; conservative balance sheets aren’t bad, either. While they typically don’t screen cheap, we believe the premium valuations will expand in a potentially rising rate environment. Our unchanged top picks include AP, BAM, BPY, CSH, GRT, REF, and WIR. Exhibit 1 - Looking For Yield in All the Right Places….We Think REITs Stack Up Relatively Well Post Recent Unit Price Underperformance (vs. Most Yield Peers) 5-Yr Avg. Current PEG Ratio* 2015E Payout Current 8 Yield Ratio 7 6 5.7% / 83% 5 3.8 4 2.6 3 2 1 0 REITs Earnings Growth: 5.5% 2014E-2016E CAGR 3.9% 5-Yr Historical CAGR 3.2% / 40% 7.8 4.3% / 78% 1.7 1.3 1.2 4.1% / 70% 3.7% / 45% 2.1 2.3 1.3 n.m. CDN Life Co's Tel Co's Power/Utilities Banks 9.9% 1.4% 8.2% 7.8% 8.3% -0.3% 4.9% 8.8% Valuation Spread to REITs: Absolute Relative Current 14.1x +2.3x -1.5x -3.6x +2.9x Historical (since Q2/05) 14.3x +2.8x -0.4x -3.0x +3.0x *PEG Ratio Based on the following: Current: Calculated as 2015E Price / Earnings divided by 2014E - 2016E Earnings CAGR. Earnings: REITs = AFFO; Banks & CDN Life Co's = Operating EPS; Tel Co's & Power/Utilities = Free Cash Flow & Valuation: REITs = AFFO; rest = P/E Current Yield / 2015E Payout Ratio: Yield based on TSX GICS sectors; Payout ratio based on Scotiabank GBM estimates. Source: FactSet; Bloomberg; Scotiabank GBM estimates. SP SP SP SP InterRent REIT Killam Properties Northern Property REIT SP SP SP SP Choice Properties REIT Crombie REIT First Capital Realty RioCan REIT** SP SP SP Brookfield Canada Office Properties Dream Office REIT NorthWest Healthcare Properties SO SP SO Granite REIT Pure Industrial REIT WPT Industrial REIT (US$) Source: Company reports; FactSet; Scotiabank GBM estimates. SP SP SP Dream Global REIT H&R REIT Morguard REIT TSEC-TSE SP50 S&P 500 2,012.9 14,213.9 1,114.6 156.7 12/17/14 48.36 5.67 13.54 11.91 21.38 17.36 8.41 45.37 18.18 22.86 14.27 8.19 10.74 4.25 40.12 7.98 8.63 24.59 26.87 36.31 26.38 18.40 12.79 10.56 27.75 24.00 10.13 5.75 24.32 62.71 Price 12/17/14 8.9% 4.3% 24.9% 3.2% YTD Price Only 29,882 60,835 668 668 2,572 491 2,081 16,500 6,187 1,079 934 3,290 2,880 16,297 1,938 192 3,628 316 816 1,886 610 8,319 429 2,672 2,507 2,711 21,779 8,307 3,971 1,670 4,056 3,775 7,367 765 611 333 2,665 2,993 Market Cap ($m) 27.9% 8.3% 29.3% 29.3% 25.0% 25.8% 24.2% 6.3% 5.7% 10.9% 8.6% 8.3% 5.8% 20.9% 2.7% 2.3% 8.1% 31.0% -4.9% 9.0% -2.6% 0.5% -10.3% -7.6% 5.2% 14.8% 8.3% 11.7% 7.5% 0.5% 6.0% 16.0% 6.4% -8.3% 1.9% 10.9% 19.5% 7.9% YTD Tot. Return 1.2% 6.5% 7.1% 7.1% 5.6% 6.7% 4.6% 7.2% 6.6% 5.6% 9.5% 3.9% 8.1% 4.4% 7.6% 9.5% 7.1% 6.5% 7.3% 5.6% 8.8% 6.8% 9.3% 9.1% 4.7% 4.0% 5.8% 5.3% 4.7% 7.0% 6.2% 5.8% 5.6% 6.8% 6.3% 4.2% 4.9% 5.7% Yield FFO 2,079 15,685 1,738 13,060 874 147 Lo 3.04 0.69 1.20 0.86 1.80 1.72 0.88 3.04 1.91 1.30 1.48 1.26 1.03 0.41 3.38 0.99 0.98 2.82 1.65 2.39 1.72 1.11 1.15 0.92 2.01 2.48 0.78 0.47 1.69 3.56 2015E 52-wk 1,118 166 Hi 2.31 0.63 1.10 0.78 1.82 1.66 0.87 2.94 1.86 1.14 1.43 1.16 0.99 0.37 3.23 0.95 0.98 2.87 1.57 2.08 1.66 1.04 1.10 0.91 1.94 2.36 0.73 0.33 1.60 3.37 2014E 3.38 0.75 1.27 0.94 1.84 1.78 0.92 3.17 1.93 1.45 1.53 1.28 1.05 0.40 3.56 1.01 1.03 2.78 1.78 2.67 1.78 1.14 1.18 0.94 2.07 2.62 0.82 0.55 1.75 3.77 2016E AFFO 2.91 0.47 1.36 0.79 1.55 1.34 0.78 2.72 1.65 0.96 1.26 0.93 0.82 0.36 3.16 0.82 0.79 2.40 1.36 2.09 1.54 1.04 0.95 0.74 1.90 2.21 0.66 0.39 1.52 3.29 2015E -3.2% -9.4% -0.3% -5.6% Hi 15.8% 8.8% 27.5% 6.7% Lo % Chg from 52-wk 2.17 0.39 1.27 0.71 1.59 1.27 0.77 2.63 1.59 0.78 1.21 0.84 0.77 0.31 3.00 0.78 0.80 2.43 1.28 1.79 1.47 0.96 0.90 0.73 1.82 2.11 0.61 0.26 1.45 3.10 2014E 3.24 0.54 1.44 0.86 1.57 1.39 0.82 2.85 1.67 1.11 1.32 0.95 0.85 0.36 3.31 0.84 0.84 2.36 1.48 2.36 1.59 1.06 0.97 0.76 1.96 2.34 0.71 0.46 1.57 3.49 2016E TABLE OF COMPARABLES – REIT SECTOR *** Averages exclude BPY and companies on restriction (if any). AFFO CAGR excludes IIP. RMZ *Ratings Key: SO = Sector Outperform; SP = Sector Perform; ** FFO, AFFO, and payout ratio estimates exclude gains. RTRE-TSE TSX Composite BAM MSCI REIT Index 8.9% S&P/TSX REIT Index $52.00 NAV Brookfield Asset Management ($US) SO Lod.avg INN.un Sen.avg LW CSH.un Div.avg HR.un MRT.un DRG.un REF.un CUF.un BPY AX.un ACR.un Ind.avg WIR.u AAR.un GRT.un DIR.un Off.avg NWH.un D.un BOX.un AP.un Ret.avg REI.un FCR CRR.un CHP.un CWT.un Apt.avg NPR.un KMP IIP.un CAR.un BEI.un Symbol REIT.avg 20.3% 7.6% 13.5% 17.5% 9.5% 23.7% 20.0% 17.9% 28.4% 17.4% 20.8% 12.6% 26.7% 34.6% 23.2% 13.6% 25.0% 17.2% 37.2% 23.9% 33.3% 38.2% 12.6% 11.4% 15.1% 15.3% 13.4% 22.3% 12.7% 12.1% 20.6% 40.2% 17.4% 17.2% 9.7% 18.5% 1-Yr ROR 14.6x $5.70 $15.00 $12.50 $24.25 $19.50 $10.00 $51.50 $20.50 $24.75 $17.00 $10.25 $11.50 $5.00 $44.75 $10.25 $10.70 $31.75 $29.00 $39.00 $29.00 $20.00 $14.75 $11.25 $29.50 $32.00 $11.25 $6.50 $25.50 $70.75 1-Yr Target REIT Total Average*** 10.5x 12.5x 10.5x 14.5x 13.6x 15.5x 14.0x 12.25x 18.0x 12.25x 0.98x NAV 12.75x 10.75x 13.3x 13.5x 14.0x 13.5x 12.25x 15.6x 12.75x 13.5x 19.5x 16.5x 16.3x 18.0x 18.75x 15.0x 14.75x 15.0x 16.2x 13.75x 15.75x 14.75x 16.25x 20.25x GBM Valuation Multiple Sum/Average InnVest REIT Lodging SP SP Leisureworld Sum/Average SO Chartwell Retirement Residences Seniors Housing Sum/Average SP SO Brookfield Property Partners ($US) CREIT SP Artis REIT Cominar REIT SP SO Agellan Commercial REIT Diversified Sum/Average SP Dream Industrial REIT Industrial Sum/Average SO Allied Properties REIT Office Sum/Average SP Calloway REIT Retail Sum/Average SP CAP REIT Rating* Boardwalk REIT Multi-residential REIT 22.1% 5.5% 17.8% 17.8% 8.4% 6.3% 10.4% 3.6% -0.8% 4.5% 3.8% 4.1% 2.5% 19.1% 4.4% 6.9% 5.5% 5.3% 7.8% 5.0% 4.0% 5.8% 2.0% -1.5% 7.7% 14.8% 3.7% 4.0% 4.7% 4.0% 2.2% 3.8% 5.9% 5.3% 7.7% 33.9% 4.4% 6.1% AFFO CAGR (14E-16E) 22.2 14.7 14.6 14.6 13.7 10.7 16.8 12.6 13.4 13.7 11.0 17.3 11.4 29.3 11.8 9.8 12.9 14.0 13.8 13.4 10.2 15.5 10.7 10.1 21.1 20.3 16.2 17.9 19.1 14.2 14.5 15.2 17.4 11.4 16.6 22.2 16.8 20.2 2014E 16.6 13.6 12.1 12.1 12.6 10.0 15.1 12.2 13.8 12.9 10.8 16.7 11.0 23.9 11.3 8.8 11.8 13.0 11.9 12.7 9.7 14.6 10.9 10.3 19.8 17.4 15.5 17.2 17.7 13.5 14.3 14.6 15.2 10.9 15.3 14.7 16.0 19.1 2015E P / AFFO 14.9 12.9 10.5 10.5 11.6 9.4 13.8 11.8 13.6 12.5 10.2 15.9 10.9 20.7 10.8 8.6 11.5 12.6 11.9 12.1 9.5 13.6 10.3 10.4 18.1 15.4 15.0 16.6 17.4 13.1 13.9 14.2 14.1 10.3 14.3 12.4 15.4 18.0 2016E 29% 87% 103% 103% 74% 71% 76% 86% 85% 76% 105% 66% 91% 128% 89% 93% 89% 91% 102% 73% 90% 92% 99% 92% 97% 79% 92% 96% 88% 99% 89% 86% 81% 76% 102% 79% 81% 66% 22% 81% 74% 74% 65% 65% 65% 83% 93% 72% 97% 65% 88% 94% 84% 81% 82% 84% 87% 72% 86% 86% 95% 95% 90% 64% 87% 90% 84% 91% 85% 83% 77% 73% 96% 73% 77% 65% 2016E 30-year 10-year 5-year 2.331 1.807 1.361 CDN Bond Yields 23% 83% 86% 86% 69% 67% 70% 85% 91% 73% 103% 66% 89% 105% 86% 83% 82% 85% 88% 72% 85% 89% 101% 93% 94% 69% 88% 92% 84% 94% 88% 84% 79% 75% 98% 77% 78% 67% 2015E AFFO Payout Ratio 2014E 13.1 15.4 11.6 11.6 14.6 13.1 16.2 14.7 15.4 14.2 14.6 18.8 14.8 19.8 13.4 11.5 13.0 12.1 13.6 12.9 13.3 16.5 13.9 13.1 19.7 19.3 16.6 18.0 19.2 14.4 14.7 16.8 17.4 14.2 19.0 16.2 18.9 18.6 12.2 14.5 10.8 10.8 14.0 12.6 15.3 13.8 15.0 13.5 13.4 17.5 14.2 n/a 13.1 10.1 11.4 9.4 11.8 11.9 12.4 16.0 12.9 13.1 19.4 18.7 15.7 17.1 18.3 13.5 13.5 15.9 16.5 13.8 18.3 13.9 18.4 17.9 2016E EV/EBITDA 2015E 61% 51% 59% 59% 53% 55% 50% 55% 53% 55% 58% 39% 61% 62% 55% 62% 45% 50% 51% 19% 61% 49% 62% 53% 48% 33% 48% 43% 48% 55% 47% 45% 52% 50% 60% 57% 51% 40% EV Net Debt/ 30-year 10-year 5-year 2.730 2.138 1.609 U.S. Bond Yields n/a 49% 66% 66% 54% 57% 52% 51% 48% 46% 56% 48% 55% 46% 49% 54% 44% 51% 49% 23% 53% 45% 55% 47% 43% 36% 49% 45% 48% 53% 46% 52% 47% 48% 54% 50% 47% 36% GBV Debt/ 52.00 5.35 12.62 10.20 24.00 22.72 9.71 44.15 19.36 25.25 16.70 10.51 10.57 4.48 39.91 10.54 10.60 33.25 29.75 33.00 24.97 18.47 13.78 10.53 29.88 27.75 11.00 6.00 25.00 64.00 NAV n.m. 8.35% 8.48% 7.28% 6.21% 6.25% 6.91% 6.15% 6.65% 5.50% 6.66% 7.50% 6.90% 6.55% 8.71% 6.75% 6.79% 6.40% 5.30% 6.25% 5.96% 5.90% 6.50% 6.25% 6.00% 7.71% 6.10% 5.84% 5.45% 5.42% Cap Rate Used -7.0% -6.0% 6.0% 6.0% 12.0% 7.3% 16.8% -12.5% -10.9% -23.6% -13.4% 2.8% -6.1% -9.5% -14.6% -22.1% -6.9% 1.6% -5.2% 0.5% -24.3% -11.1% -18.6% -26.0% -9.7% 10.0% -1.8% 5.7% -0.4% -7.2% 0.3% -7.1% -6.1% -13.5% -7.9% -4.2% -2.7% -2.0% Prem (Disc) n.m. 6.81% 7.8% 7.8% 7.5% 8.2% 6.8% 7.1% 6.6% 7.1% 7.4% 6.0% 6.8% 5.7% 7.2% 8.3% 7.5% 6.8% 6.7% 8.7% 7.6% 6.6% 7.4% 7.5% 5.5% 5.8% 6.2% 5.8% 5.9% 6.7% 6.2% 6.3% 6.3% 8.4% 6.4% 5.8% 5.5% 5.4% Implied Cap Rate 23 Scotiabank GBM – REIT Comp Table Exhibit 2 - Real Estate & REITs - Comparative Valuation Table 24 Universe of Coverage Price AAR.UN-T ACR.UN-T AP.UN-T AX.UN-T BAM-N BEI.UN-T BOX.UN-T BPY-N CAR.UN-T CHP.UN-T CRR.UN-T CSH.UN-T CUF.UN-T CWT.UN-T D.UN-T DIR.UN-T DRG.UN-T FCR-T GRT.UN-T HR.UN-T IIP.UN-T INN.UN-T KMP-T LW-T MRT.UN-T NPR.UN-T NWH.UN-T REF.UN-T REI.UN-T WIR.U-T C$4.27 C$8.14 C$36.78 C$14.27 US$49.28 C$61.98 C$26.96 US$23.08 C$24.48 C$10.56 C$12.75 C$12.16 C$18.25 C$27.51 C$24.74 C$8.06 C$8.32 C$18.66 C$40.22 C$21.47 C$5.75 C$5.61 C$10.13 C$13.76 C$17.72 C$23.91 C$8.70 C$45.53 C$26.80 US$10.70 Rating Risk SP SP SO SP SO SP SP SO SP SP SP SO SP SP SP SP SP SP SO SP SP SP SP SP SP SP SP SO SP SO Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium Medium High High Medium High Medium Medium Medium Medium Medium Medium 1-Yr ROR $5.00 $10.25 $39.00 $17.00 $52.00 $70.75 $29.00 $24.75 $25.50 $11.25 $14.75 $12.50 $20.50 $29.50 $31.75 $10.25 $10.00 $20.00 $44.75 $24.25 $6.50 $5.70 $11.25 $15.00 $19.50 $32.00 $10.70 $51.50 $29.00 $11.50 24.4% 35.4% 10.0% 26.7% 6.9% 19.9% 12.2% 11.6% 9.0% 12.7% 22.7% 7.3% 20.4% 13.1% 37.4% 35.9% 29.8% 11.8% 17.0% 19.5% 17.2% 8.7% 17.4% 15.6% 15.5% 40.7% 32.2% 17.0% 13.5% 14.0% Pertinent Data Rating Risk 1-Yr Target Year 1 Key Data Year 2 Year 3 Valuation Pure Industrial REIT (AAR.UN-T) Valuation: 14x AFFO (F'16 estimate) Key Risks to Price Target: Exposure to single-tenant properties, tenant concentration, inability to execute growth Agellan Commercial REIT (ACR.UN-T) Valuation: 10.75x AFFO (F'16 estimate) Key Risks to Price Target: Significant unitholder, inability to execute growth, rising interest rates Allied Properties REIT (AP.UN-T) Valuation: 16.5x AFFO (F'16 estimate) Key Risks to Price Target: Toronto new supply, rising interest rates, inability to lease 250 Front St. West Artis REIT (AX.UN-T) Valuation: 12.75x AFFO (F'16 estimate) Key Risks to Price Target: Excess Calgary office supply, rising interest rates Brookfield Asset Management (BAM-N) Valuation: Forward NAV Key Risks to Price Target: Materially higher interest rates, fundraising slowdown, decelerating U.S. economy, lack of credit 25 Pertinent Data Rating Risk 1-Yr Target Year 1 Key Data Year 2 Year 3 Valuation Boardwalk REIT (BEI.UN-T) Valuation: 20.25x AFFO (F'16 estimate) Key Risks to Price Target: Alberta condo oversupply, rising interest rates Brookfield Canada Office Properties (BOX.UN-T) Valuation: 19.5x AFFO (F'16 estimate) Key Risks to Price Target: Protracted economic recovery, lack of credit availability, new supply growth, financial/energy sector consolidation Brookfield Property Partners LP (BPY-N) Valuation: 0.98x NAV Key Risks to Price Target: Spiking interest rates, inability to access capital markets, lack of direct comparables, U.S. contraction CAP REIT (CAR.UN-T) Valuation: 16.25x AFFO (F'16 estimate) Key Risks to Price Target: Capex requirements, excess Toronto condo supply, CMHC restructuring Choice Properties REIT (CHP.UN-T) Valuation: 14.75x AFFO (F'16 estimate) Key Risks to Price Target: Significant tenant concentration in Loblaw, majority unitholder Crombie REIT (CRR.UN-T) Valuation: 15x AFFO (F'16 estimate) Key Risks to Price Target: Geographic concentration, material exposure to Sobeys, potential for conflicts of interest. Chartwell Retirement Residences (CSH.UN-T) Valuation: 14.5x AFFO (F'16 estimate) Key Risks to Price Target: Significant weakening of housing markets, new supply, regulatory environment. Cominar REIT (CUF.UN-T) Valuation: 12.25x AFFO (F'16 estimate) Key Risks to Price Target: Geographic concentration, construction delays/cost overruns, prolonged economic recovery. Calloway REIT (CWT.UN-T) Valuation: 15x AFFO (F'16 estimate) Key Risks to Price Target: Material exposure to Wal-Mart Canada, potential for conflicts of interest. Dream Office REIT (D.UN-T) Valuation: 13.5x AFFO (F'16 estimate) Key Risks to Price Target: Speculative office developments, rising interest rates Dream Industrial REIT (DIR.UN-T) Valuation: 12.25x AFFO (F'16 estimate) Key Risks to Price Target: Inability to execute growth, significant unitholder, rising interest rates Dream Global REIT (DRG.UN-T) Valuation: 12.25x AFFO (F'16 estimate) Key Risks to Price Target: Tenant concentration (Deutsche Post), exposure to Europe 26 First Capital Realty Inc. (FCR-T) Valuation: 18.75x AFFO (F'16 estimate) Key Risks to Price Target: Grocery tenant concentration, construction delays/cost overruns, significant shareholder. Granite REIT (GRT.UN-T) Valuation: 13.5x AFFO (F'16 estimate) Key Risks to Price Target: Significant tenant concentration in Magna, inability to execute growth, foreign currency exposure H&R REIT (HR.UN-T) Valuation: 15.5x AFFO (F'16 estimate) Key Risks to Price Target: U.S. tenant bankruptcies, rising interest rates InterRent Real Estate Investment Trust (IIP.UN-T) Valuation: 14.75x AFFO (F'16 estimate) Key Risks to Price Target: Rising interest rates, CMHC restructuring, Ontario rent control, Lower liquidity InnVest REIT (INN.UN-T) Valuation: 10.5x AFFO (F'16 estimate) Key Risks to Price Target: Economic Recession, Credit Crunch, Material Housing Correction, Rising Interest Rates. Killam Properties Inc. (KMP-T) Valuation: 15.75x AFFO (F'16 estimate) Key Risks to Price Target: Execution of Ontario market entry, rising interest rates, new supply Leisureworld Senior Care Corporation (LW-T) Valuation: 10.5x AFFO (F'16 estimate) Key Risks to Price Target: Government regulation, redevelopment risks, refinancing risks Morguard REIT (MRT.UN-T) Valuation: 14x AFFO (F'16 estimate) Key Risks to Price Target: Competition from new-format retail, tenant specific risks, significant shareholder. Northern Property REIT (NPR.UN-T) Valuation: 13.75x AFFO (F'16 estimate) Key Risks to Price Target: Declining commodity prices, rising interest rates, New market entry, CMHC restructuring NorthWest Healthcare Properties REIT (NWH.UN-T) Valuation: 12.75x AFFO (F'16 estimate) Key Risks to Price Target: Speculative Office Supply, Rising Interest Rates, Liquidity, Adverse Provincial Regulatory Reform Canadian Real Estate Inv. Trust (REF.UN-T) Valuation: 18x AFFO (F'16 estimate) Key Risks to Price Target: Mezzanine loan exposure with Hopewell, new supply pressures in key markets. RioCan REIT (REI.UN-T) Valuation: 18x AFFO (F'16 estimate) Key Risks to Price Target: Rising interest rates, construction delays/cost overruns, key personnel. WPT Industrial REIT (WIR.U-T) Valuation: 13.5x AFFO (F'16 estimate) Key Risks to Price Target: Significant unitholder, inability to execute growth, rising interest rates Source: Scotiabank GBM estimates. 27 Intraday Flash Thursday, December 18, 2014 @ 4:01:15 PM (ET) Telecom - Mexico Andres Coello - +52 (55) 5123 2852 (Scotiabank Inverlat) [email protected] Lovely Price Cuts Ivan Hernandez - +52 (55) 5123 2876 (Scotiabank Inverlat) [email protected] Event ScotiaView Analyst Link ■ Telcel announced changes to prepaid and postpaid prices that reflect recent regulatory changes and imply some of the cheapest-ever wireless rates in Mexico. The move follows recent price cuts by Telefonica and Iusacell (see detailed price comparisons on pages 2 to 4.) ■ In our view, the entry of AT&T into Mexico and the elimination of LD charges in January are likely to continue heating competitive dynamics. Implications ■ Following Ifetel's pricing restrictions, Telcel changed its policy regarding the legendary three free on-net numbers (first five minutes) of the "Amigo Plus" prepaid plans; now users can choose free numbers to any carrier, a remarkable benefit for consumers but potentially impacting AMX's margins given asymmetric MTRs (rivals don't pay MTR, Telcel does). ■ Telcel also launched new prepaid plans called "Amigo On Life", where users recharging as little as MXN 100/month (US$6.90) get unlimited calls to three free numbers regardless of destination (first five minutes), 100 minutes, 100 SMS, and 100 MB, on top of free Whatsapp. This implies a per-minute rate of MXN 0.33, perhaps the lowest rate we have ever seen in Mexico. ■ In postpaid, the company launched the "Telcel Pro" plans, which for as little as MXN 199/month (US$13.70 if paid on time) includes three free numbers, 200 minutes, 200 SMS, and 400 MB (ex-handset). ■ Lower wireless prices should accelerate fixed-to-mobile substitution. Recommendation ■ M&A speculation may prevail over market dynamics. Remain Neutral on AMX. Universe of Coverage Price AMX-N AXTEL CPO-MX MAXCOM CPO-MX MEGA CPO-MX TV-N US$21.68 MXN 3.53 MXN 2.28 MXN 56.39 US$33.39 Rating Risk SP SU SP SP SU Medium Speculative Speculative High High 1-Yr ROR $19.00 0.01 3.30 47.00 $28.00 -10.7% -99.7% 44.7% -12.7% -15.9% 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 Understanding Telcel’s Price Cuts ■ Following our routine channel checks in Mexico City, we discovered several changes to Telcel’s prepaid and postpaid prices that reflect regulatory changes and continued pressure on pricing after the new rates announced by Iusacell’s Unefon (August 2014) and Telefonica (October 2014). ■ These changes include: 1. In the “Amigo Optimo” plans, the three free numbers are now to all destinations, not only on-net as in the past. While users can make as many free calls to these numbers as they want, the call is free only as long as it doesn’t surpass five minutes. If it does, then Telcel charges the standard rate included in the package. Another change to the Optimo packages is that they no longer include free social media in recharges of over MXN 200/month, but they now include additional free credit. Also, we think that for MXN 200/month subscribers can access postpaid plans with substantially better rates and free social media. Please see Exhibits 1 and 2. 2. In the “Amigo Tu” plan, the flat rate was left untouched at MXN 0.98/minute, but instead of free Whatsapp, the company is including one number for free to any destinations (first five minutes). 3. The company launched a completely new prepaid plan, “Amigo On Life”, in which subscribers recharging a minimum of MXN 100/month get access to three free numbers, free Whatsapp, 100 minutes, 100 SMS, and 100 MB, implying a MXN 0.33/minute/SMS/MB, perhaps the cheapest rate we have seen in Mexico. 4. Telcel also launched new postpaid plans called “Pro”, which start at MXN 199/month and include three free numbers, 200 minutes, 200 SMS, and 400 MB (ex handset). ■ Adjusting for the recent subscriber clean-ups, we estimate Q3/14 ARPU would have fallen to MXN 159, or a 4.7% decline, YOY in nominal terms (worst if considering inflation). In other words, telephony in Mexico continues to be a deflationary sector. In our view, the new price cuts, combined with the entry of AT&T to the Mexican market, as well as the elimination of long-distance charges by January 1, 2015, are likely to continue pressuring ARPU and margins as we enter 2015, in our view. ■ While investors remain focused on M&A activity related to AMX’s breakup in Mexico (and also the consolidation story in Brazil), we think that heightened competitive dynamics at home could eventually impact the price that potential buyers of the Mexican assets (e.g., Softbank) will be willing to pay. In any case, the many valuation scenarios we have explored in the past suggest that the current share price already reflects and optimistic breakup scenario despite regulatory hurdles. Hence, we continue advising investors to remain Neutral on AMX. Exhibit 1 - Telcel's Prepaid Rates NEW NEW Amigo TU Amigo On Life 1 Amigo On Life 2 $0.98 $0.98 Implied 0.33 ($1.98 after 100 minutes were consumed) Implied 0.33 ($1.98 after 200 minutes were consumed) $1.98 $1.98 $1.98 N/A N/A $0.98 $0.98 N/A N/A N/A $2.00 $2.00 $0.98 Implied 0.33 ($1.98 after 100 Megas were consumed) Implied 0.33 ($1.98 after 100 SMS were consumed) Implied 0.33 ($1.98 after 200 Megas were consumed) Implied 0.33 ($1.98 after 200 SMS were consumed) 1 2 3 "Amigo Optimo" "Amigo Optimo" "Amigo Optimo" Minute to domestic numbers, any destination $2.98 $1.98 United States and Canada per minute $2.98 Nine frecuent numbers, any destination $1.19 MB $2.00 SMS Unlimited calls to national numbers, any destination Minimum monthly recharge Source: Company webpage. $0.88 $0.88 $0.88 $0.98 3 (first 5 minutes) 3 (first 5 minutes) 3 (first 5 minutes) 1 (first 5 minutes) $0 - $150 (free credit of $20 in recharges above $100) 3 (first 5 minutes) From $100, free: $150 + $40 free credit $200 + 60 free credit 0 3 (first 5 minutes) From $200, free: 29 Prepaid Price Comparison Exhibit 2 - Prepaid Price Comparison 1 Local on-net, billed on a per-second basis Local mobile to fixed, billed on a per-second basis Local off-net, billed on a per-second basis Domestic long-distance, billed on a per-second basis United States and Canada, billed on a per-second basis SMS Unlimited calls to any company in Mexico, USA & Canada Data (per MB) Minimum recharge Combo internet for extra MXN$200 monthly, including social media Local on-net, billed on a per-second basis Local mobile to fixed, billed on a per-second basis Local off-net, billed on a per-second basis Domestic long-distance, billed on a per-second basis United States and Canada, billed on a per-second basis SMS Data (per MB) Minimum recharge Unlimited calls to 3 Iusacell or Unefon numbers, for 30 days (for the first 5 minutes) Prepago simple $0.85 $0.85 $0.85 $0.85 $0.85 $0.85 N/A $0.85 $0.00 N/A Viva Microrecarga Viva Regular Viva Preferente $3.98 $3.98 $3.98 $3.98 $3.98 $1.20 $36 for the first 2.5 MB, then $1.19 per MB $10-P$30 per month $2.98 $2.98 $2.98 $2.98 $2.98 $1.20 $36 for the first 2.5 MB, then $1.19 per MB $50-P$100 per month $1.98 $1.98 $1.98 $1.98 $1.98 $1.20 $36 for the first 2.5 MB, then $1.19 per MB $150 per month $59 $59 $59 Local on-net per minute Local mobile to fixed per minute Local off-net per minute Domestic long-distance per minute United States and Canada per minute Unlimited Numbers Minimum recharge to access rate Monthly Source: Companies Webpages 2 Prepago Doble (Double Credit for Free Prepago Doble (Double Credit for Free in Any Recharge Over $10) in Any Recharge Over $10) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $1.09 ($0.54 if including free credit) $1.09 ($0.54 if including free credit) 0 3 (first 5 minutes) $3.98 ($1.99 if including free credit) $3.98 ($1.99 if including free credit) $0-P$30 per week Over P$30 per week 200 MB + $0.98 per extra MB 200 MB + $0.98 per extra MB La Mejor Tarifa 1 La Mejor Tarifa 2 $0.98 $0.98 $0.98 $0.98 $0.98 0 $0 $0.50 $0.50 $0.50 $0.50 $0.50 0 $100 30 Postpaid Price Comparison Exhibit 3 - Comparison of Most Relevant Postpaid Plans in Mexico Telcel Pro (Without handset) 300 500 700 $299 $399 $499 200 $199 Monthly Rent Minutes included, local (on-net, off-net, fixed lines) Free Telcel numbers (nationwide, first five minutes) SMS Included 1,000 $699 200 30 500 300 420 3 3 3 3 3 1,000 200 300 500 700 400 MB 600 MB 1 GB 1.4 GB 2 GB Additional local on-net minute $0.98 $0.98 $0.98 $0.98 $0.98 Additional SMS $0.88 $0.88 $0.88 $0.88 $0.88 Internet Unlimited Social Media: Movistar Vas a Volar (without handset) 1 1.5 2 0.5 Monthly Rent 3 $349 $449 $549 $749 $999 On-net and Off-Minutes Unlimited Unlimited Unlimited Unlimited Unlimited SMS (on-net and off-net) Unlimited Unlimited Unlimited Unlimited Unlimited 1 GB 2 GB 3 GB 4 GB 6 GB Included Included Included Included Included Included Included Included Included Included Broadband Spotify Premium Roaming and long distance International long distance Monthly Rent On-net and off-net minutes or SMS included Broadband 199 $199 300 Plan Libertad Total (without handset) 299 399 499 699 $299 $399 $499 $699 700 1,400 2,100 Unlimited 500 MB 1 GB 2 GB 3 GB 4 GB Additional local minute $0.89 $0.89 $0.89 $0.89 $0.89 Additional national minute $0.89 $0.89 $0.89 $0.89 $0.89 Additional MB $0.89 $0.89 $0.89 $0.89 $0.89 Unlimited Social Networks Source: Companies Webpages 31 Pertinent Data Rating Risk 1-Yr Target Year 1 Key Data Year 2 Year 3 Valuation America Movil (AMX-N) Valuation: DCF - 5 years results, 8.3% WACC, terminal growth rate of 1.0% Key Risks to Price Target: Regulation in Mexico Axtel (AXTEL CPO-MX) Valuation: DCF - 5 years results, 8.8% WACC (including lower Mexico risk), terminal growth rate of 0.0% Key Risks to Price Target: Medium-term bankruptcy risk; Obsolescence of WiMAX technology Maxcom Telecomunicaciones (MAXCOM CPO-MX) Valuation: DCF - 5 years results, 8.2% WACC, terminal growth rate of 2% Key Risks to Price Target: Intense competition from cable competitors Megacable Holdings (MEGA CPO-MX) Valuation: DCF - 5 years results, 8.3% WACC, terminal growth rate of 4.0% Key Risks to Price Target: Telmex entry into pay TV; Expensive acquisitions Grupo Televisa, SAB (TV-N) Valuation: DCF - 5 years results, 7.4% WACC, terminal growth rate of 3.6% Key Risks to Price Target: Decline of broadcast ratings in Mexico and the U.S.; expensive acquisitions Source: Scotiabank GBM estimates. ScotiaView Analyst Link 32 Industry Comment Friday, December 19, 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] Government Committed to Putting More Spectrum in New Entrants' Hands Shay Nulman, MBA - (416) 862-3721 (Scotia Capital Inc. - Canada) [email protected] Event ■ Industry Canada (IC) announced measures to make more spectrum licenses available for mobile wireless services and backhaul capacity to ultimately support fixed or mobile wireless services. These include the AWS-3, 600 MHz, AWS-4, 3500 MHz, and backhaul spectrum licenses. ScotiaView Analyst Link Implications ■ This was an unprecedented quantity of spectrum being addressed. For our purpose, the key licences that are important in the near to medium term are the AWS and 600 MHz licenses. The new band plan, technical rules, and licensing framework for AWS-4 are relevant only if Dish Network (DISH) in the US decides to sell, deploy, or partner to enable services on this band. As for the 3500 MHz and backhaul licenses, we believe they are important to support rural fixed wireless and/or backhaul services and have less direct impact on retail mobile services in the urban and suburban markets. Recommendation ■ We remain concerned about the impact of these rules on the Big Three in 2015. We believe these government rules, particularly the CRTC roaming decision in Q1/15, will ultimately encourage the recapitalization of the 4th wireless operator. Universe of Coverage Price 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$52.97 C$70.68 US$56.29 C$20.87 C$26.85 C$31.82 C$44.81 C$31.11 C$42.15 US$33.51 US$146.35 US$47.05 Rating Risk SP SP SO T SP FS SP SO SP SU SO SO Medium Medium Medium High Medium Medium Medium Medium Medium Medium Medium Medium 1-Yr ROR $50.00 $64.00 $65.00 $26.50 $30.00 $35.50 $43.00 $32.00 $38.00 $36.00 $187.00 $54.00 -0.8% -7.5% 17.0% 29.6% 18.1% 11.9% 0.0% 6.4% -5.9% 13.0% 29.8% 19.4% For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S. 33 Government Committed to Putting More Spectrum in New Entrants’ Hands AWS-3: What’s New or Relevant? ■ The AWS-3 auction proposal was announced in July 2014, and yesterday’s announcement was the final decision. The auction is scheduled for March 3, 2015 and the application deadline is January 30, 2015. ■ There is no change to the set aside of 30 MHz (60% of available licenses) to new entrants or the opening bid prices. This will ensure that Wind (and Mobilicity if it can obtain funding) can acquire 30 MHz in ON, BC, and AB for approximately $56M and Quebecor can acquire 30 MHz in E.ON and PQ for approximately $30M. Moreover, IC has relaxed the timing of the deployment requirement to 8 years versus. 5 years previously, but increased the POP % coverage requirement slightly. ■ For the non-set aside portion, IC decided to separate the 20 MHz block to two separate blocks, as BCE and TELUS had requested. This is a net positive for the two incumbent operators as this would mean there are 3 potential bidders for 2 blocks, instead of a lone block in each region. 600 MHz: Starting the Consultation ■ IC is kick-starting a new consultation on repurposing the 600 MHz band for mobile use. This process has already begun south of the border, and the US auction is expected to take place early 2016. In Canada, there is no discussion of timing from the IC and there will likely need to be more certainty on the amount of spectrum and frequencies available in the US before a decision is made. However, we estimate the Canadian auction will closely follow the US time line and occur sometime in 2016. ■ IC expects that there will be between 20 MHz to 120 MHz of licenses available. In the US, the FCC will reserve up to 30 MHz of spectrum set-aside specifically for carriers that currently hold less than 1/3 of the available low-band spectrum in the area. The 30 MHz set aside is an upper limit and could be lower contingent on the amount of spectrum supplied by broadcasters, which has not yet been determined. The set-aside rules are positive for smaller carriers, mainly Sprint and T-Mobile US, as the low-band spectrum is complementary to their current high-band spectrum holdings. IC has not yet commented on whether there will be a reserve/set-aside/cap in the Canadian auction and this will likely be determined following an additional consultation process. However, the 600 MHz band is low-band spectrum similar to 700 MHz in quality, and we believe these licenses will complement the mid-to-high band holdings of the Canadian new entrants. ■ The 600 MHz band is currently used by over-the-air (OTA) TV broadcasters (many stations are owned by Rogers Media and Bell Media), remote rural broadband systems, lowpower apparatuses (wireless microphones and camera systems), TV white spaces, and wireless medical telemetry systems. Hence, IC has to undergo this consultation and wait for the US process to be completed. In the US, broadcasters will be compensated if they relinquish their existing spectrum licenses in what is being called a “reverse auction”. However, in Canada there is no discussion whether similar incentives will be provided and this too will likely be determined following an additional consultation process. AWS-4: Establishing Technical Rules, But Value Lies with DISH Decision ■ IC decided that it will establish a technical framework to align the AWS-4 band plan with what is currently being used in the US. Existing AWS-4 spectrum holders, Gamma (a subsidy of DISH) and TerreStar will have an opportunity to re-apply for new licenses within 30 days. If neither expresses interest, a consultation will be launched to determine how to allocate these licenses. However, the new band plan, technical rules, and licensing framework for AWS-4 are relevant only if DISH decides to sell or partner to enable deployment of services on this band in the US, which will encourage the development of a mobile ecosystem on these bands. 34 3500 MHz: Flexibility for Mobile Services ■ IC determined that it will open up the 3500 MHz band for mobile purposes; however it will give existing license holders the flexibility to continue to offer fixed wireless broadband services. This is of particular importance for Xplorenet, who currently provides fixed wireless high-speed internet services to customers in rural Canada. As a result of the IC decision, they will not have to relinquish their services if they meet certain deployment requirements. Bell and Rogers also own 3500 MHz licenses through their Inukshuk partnership. But, given a mobile ecosystem on these bands is likely years away, we believe this spectrum has a less direct impact on retail mobile services in the urban and suburban markets. 24, 28, 38 GHz, and Backhaul Spectrum Licenses: Not Significant for Retail Mobile Services ■ Industry Canada established rules to streamline licensing in the 24, 28, 38 GHz bands, as well as issue 2100 MHz of new spectrum for backhaul services. These bands are less significant from a retail wireless service perspective as they are predominantly used as part of the backbone for mobile networks. 35 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; 6.5% NTM FCF yield (fully-taxed); 12.5x 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: 6.2x NTM EBITDA; 9.8% NTM FCF yield (fully-taxed); 11.7x NTM EV/Cash EBIT Key Risks to Price Target: Cdn. IPTV and fiber expansion and content costs; acquisitions Comcast Corporation (CMCSA-Q) Valuation: 1-yr fwd: 8.2x NTM EV/EBITDA; 6.3% NTM FCF yield (fully-taxed); 11.6x 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: Acquisition by BCE at $26.50/share pending approval by the Competition Bureau 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, 4.8% NTM FCF yield (fully-taxed); 14.8x NTM EV/Cash EBIT Key Risks to Price Target: Pension funding, Further Allstream deterioration Quebecor Inc. (QBR.B-T) Valuation: 1-yr fwd: 7.0x NTM EBITDA; 6.3% NTM FCF yield (fully-taxed); 12.7x 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: 7.1x NTM EBITDA; 6.2% NTM FCF yield (fully-taxed); 13.4x 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: 8.8x NTM EV/EBITDA; 5.3% NTM FCF yield (fully-taxed); 14.1x 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; 5.0% NTM FCF Yield (Fully-Tax); 15.3x NTM EV/Cash EBIT Key Risks to Price Target: Wireless competition; Wireline business deterioration AT&T Inc. (T-N) Valuation: 13.4x NTM EPS 1-year forward; 11.8x NTM EV/Cash EBIT; 6.1x NTM EV/EBITDA; 6.4% 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: 7.1x NTM EV/EBITDA; 6.8% NTM FCF yield (fully-taxed); 11.2x NTM EV/Cash EBIT Key Risks to Price Target: U.S. economy; pension funding; VZW cash to support dividend Source: Scotiabank GBM estimates. 36 Company Comment Friday, December 19, 2014, Pre-Market (ASR-T C$2.26) (AQG-AX A$2.46) Alacer Gold Corp. Study Shows Çöpler Pad Expansion is Possible Ovais Habib - (416) 863-7141 (Scotia Capital Inc. - Canada) [email protected] Ciara Sawicki - (416) 862-3738 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: High Target 1-Yr: C$3.00 ROR 1-Yr: 34.6% Valuation: 1.00x NAVPS Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s Div. (NTM) Div. (Curr.) $0.04 $0.02 Yield (Curr.) 1.0% Event ■ Results of Alacer’s heap leach pad expansion study show that the Çöpler leach pad’s ultimate capacity could be expanded by 14% or ~7 Mt to 56 Mt, equivalent to approximately one additional year of production from oxide ore. Implications ■ Alacer estimates the cost of the expansion would be $30 million. This combines the previously planned heap leach phase four expansion with the new capacity increase to 56 Mt. $25 million of the $30 million is budgeted for 2015. Technical work over the next 12 months will assess the potential for a second heap leach pad to the west of Çöpler. ■ We currently model three more full years of oxide production (~130 koz/yr attributable to ASR) at Çöpler (2015-2017) followed by two years of residual leaching. A quick scenario analysis indicates that adding an extra year of oxide mine life at Alacer’s stated capex would increase our company NAV by approximately 4%. ■ Our estimates are unchanged pending the results of the re-optimized mine plan that will be designed to leverage the expanded leach pad capacity (Q1/15E). We believe this study will provide data key to a more accurate model such as timing and grade of additional oxide ore. Recommendation ■ We rate Alacer Sector Perform with a C$3.00 one-year target. Qtly Adj. EPS (FD) 2014E 2015E 2016E 2017E Q1 $0.05 A $0.02 $0.00 $0.00 (FY-Dec.) Adj Earnings/Share Price/Earnings Cash Flow/Share Price/Cash Flow EBITDA (M) Production (oz) (000) Tot. Cash Cost (/oz) Q2 $0.03 A $0.02 $0.00 $0.00 Q3 $0.04 A $0.02 $0.00 $0.00 Q4 $0.03 $0.02 $0.00 $0.00 Year $0.16 $0.08 $-0.01 $0.01 P/E 12.4x 24.5x n.m. n.m. 2014E $0.16 12.4x $0.42 4.7x $142 180.7 $552 2015E $0.08 24.5x $0.34 5.7x $113 158.7 $634 2016E $-0.01 n.m. $0.17 11.5x $49 116.5 $836 2017E $0.01 n.m. $0.20 9.7x $61 117.8 $758 2018E $0.18 10.9x $0.49 3.9x $174 172.6 $413 BVPS14E: $1.92 ROE14E: 8.16% NAVPS: P/NAV: C$3.01 0.75x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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$664 $-342 C$268 294 234 37 Company Comment Thursday, December 18, 2014, Pre-Market (ATD.B-T C$42.54) Alimentation Couche-Tard Inc. Strengthening Position in Southeastern U.S. Patricia A. Baker, MBA, PhD - (514) 287-4535 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Medium Target 1-Yr: Jean Marc Ayas - (514) 287-3626 (Scotia Capital Inc. - Canada) [email protected] C$46.00 ROR 1-Yr: 8.6% Valuation: 21x F16E EPS Key Risks to Target: Fuel Margin Volatility; Successful Integration of Acquisitions; Change in Economic Conditions . Event ■ Couche-Tard announced this morning its purchase of The Pantry in an all-cash transaction valued at US$36.75 per share, with a total enterprise value of $1.7B. The purchase price represents a 27% premium over PTRY's closing price on December 16. Div. (NTM) Div. (Curr.) Yield (Curr.) C$0.19 C$0.14 0.3% Pertinent Revisions Target: 1-Yr New Old $46.00 $43.00 Implications ■ The transaction is expected to close in the first half of 2015, subject to regular approvals. It will be an all-cash transaction that Couche-Tard expects to finance using available cash on hand, existing credit facilities and a new term loan, the details of which have not yet been announced. ■ The Pantry transaction will add 1,500+ stores in the Southeastern U.S. Couche-Tard already has 1,000+ locations in the areas occupied by PTRY, with Kansas being the only new state for ATD. With a #1 position in four different markets and #2 in two others, the PTRY network should strengthen the current network significantly. ■ PTRY's strategic agenda currently includes the optimization of fuel performance, strengthening merchandising and food service and upgrading the store base. These initiatives fall right in ATD's expertise and we expect the company to apply its usual integration effectiveness in combining the networks. Recommendation ■ We move our target up to C$46 based on our preliminary view of potential accretion, which assumes 50% debt financing and $75M in synergies to SG&A. These will be subject to fine-tuning. Qtly EPS (FD) 2013A 2014A 2015E 2016E Q1 $0.33 A $0.39 A $0.48 A $0.49 (FY-Apr.) Earnings/Share Dividends/Share Price/Earnings Revenues (M) EBITDA (M) EBITDA Margin Q2 $0.30 A $0.44 A $0.55 A $0.46 Q3 $0.27 A $0.31 A $0.39 $0.51 Q4 $0.20 A $0.22 A $0.35 $0.41 Year $1.10 $1.36 $1.77 $1.87 P/E 18.4x 20.7x 20.6x 19.5x 2012A $0.80 $0.09 18.0x $22,991 $817 3.6% 2013A $1.10 $0.10 18.4x $35,543 $1,373 3.9% 2014A $1.36 $0.12 20.7x $37,957 $1,568 4.1% 2015E $1.77 $0.18 20.6x $39,328 $1,860 4.7% 2016E $1.87 $0.20 19.5x $40,700 $1,903 4.7% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) C$24,184 $1,870 C$26,290 BVPS15E: $8.20 ROE15E: 23.29% Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. ScotiaView Analyst Link All values in US$ 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. 569 402 38 ■ Couche-Tard recorded $15.9B in fuel revenues in the U.S. during the last twelve months, with average gross margin of 19.8 cents per gallon. PTRY had $5.7B in fuel revenue during the same period, but earned a margin of only 12.2 cents per gallon. There is a significant opportunity here, with every 1 cent improvement on margin equating to $16.5M in EBITDA. Exhibit 1 – Preliminary Accretion Analysis Income Statement (last 4 quarters) Revenues COGS Gross profit SG&A EBITDA D&A EBIT Associate earnings Interest FX gain (loss) EBT Taxes Minority interest Net income EPS Shares o/s Market cap Total debt Capitalized leases Minority Interest Less: cash Enterprise value ATD.B PTRY Pre-synergies 38,179.1 (33,042.3) 5,136.8 (3,426.2) 1,710.6 (570.6) 1,140.0 18.3 (97.3) 7.9 1,068.9 (179.1) (1.1) 888.7 7,545.7 (6,714.9) 830.7 (609.8) 220.9 (112.2) 108.7 0.0 (85.2) 0.0 23.4 (7.8) 0.0 15.7 45,724.8 (39,757.2) 5,967.5 (4,036.0) 1,931.5 (682.8) 1,248.7 18.3 (182.5) 7.9 1,092.3 (186.9) (1.1) 904.4 $1.56 568.5 21,167.9 2,149.4 82.5 14.3 (594.9) 22,819.2 $0.68 23.0 676.6 933.4 0.0 0.0 (81.7) 1,528.4 EV/EBITDA ttm 13.3x 6.9x Margins Gross SG&A rate EBITDA EBIT Tax rate 13.5% 9.0% 4.5% 3.0% 16.8% 11.0% 8.1% 2.9% 1.4% 33.1% Acquisition PTRY market cap Premium paid Total cost 676.6 27% 859.3 % debt financing New debt rate 50% 3.00% Source: Company reports; Scotiabank GBM estimates. $1.59 568.5 Combined Synergies 75.0 (12.9) ScotiaView Analyst Link Post-synergies 45,724.8 (39,757.2) 5,967.5 (3,961.0) 2,006.5 (682.8) 1,323.7 18.3 (195.4) 7.9 1,154.4 (197.5) (1.1) 955.8 $1.68 568.5 21,167.9 3,512.5 82.5 14.3 (246.9) 24,530.3 12.2x 13.1% 8.8% 4.2% 2.7% 17.1% 13.1% 8.7% 4.4% 2.9% 17.1% 39 Company Comment Friday, December 19, 2014, Pre-Market Black Diamond Group Ltd. (BDI-T C$14.40) Ops Update Highlights Softer Environment Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759 (Scotia Capital Inc. - Canada) Sam Devlin, CFA - (403) 213-7332 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Medium [email protected] Target 1-Yr: C$20.00 ROR 1-Yr: 45.1% Valuation: 6.9x our 2016 EV/EBITDA estimate. Div. (NTM) Div. (Curr.) $0.90 $0.90 Yield (Curr.) 6.3% Key Risks to Target: Commodity prices, labour supply, access to supplies, weather, contract risk, and FX. Event ■ BDI provided an operations update and revised 2015 outlook. Pertinent Revisions Implications ■ Q4 EBITDA expected to be 20% to 25% lower YOY. Management pointed to lower Structures utilization and softer results out of Energy Services and its International (Australian) divisions. Q1/15 is expected to be moderately ahead QOQ while 2015 EBITDA is expected to be slightly behind 2014. This outlook is based on firm capital expenditures of $35M out of the $85M anticipated 2015 budget, implying 2015 might be similar (or possibly slightly higher) YOY with a fuller budget. ■ Dividend expected to be maintained given solid balance sheet. We reduced our 2015 EBITDA to $135M, down 13%. We estimate 2015 FCF post dividend of negative $2M: $122M CF less $85M capex less $39M cash dividends. We forecast $51M of available credit on its ~$154M lines as of 2015YE with ND/EBITDA of 1.5x. New Old Target: 1-Yr $20.00 $22.00 EBITDA14E $141 $149 EBITDA15E $135 $155 $149 $172 EBITDA16E New Valuation: 6.9x our 2016 EV/EBITDA estimate. Old Valuation: 6.2x our 2016 EV/EBITDA estimate. Recommendation ■ We maintain our SP rating and reduce our Price Target $2 to $20. With the continuous fall in oil prices and key SAGD players trimming estimates more than anticipated, this confirms our prior stance that absent-LNG we would not be bullish on BDI despite its top tier accommodation rental status. That said, we continue to believe LNG could be a material catalyst for the stock and are of the view Petronas is posturing to lower project costs. At this point, we view Petronas as more likely than not to make a positive final investment decision but see BDI's shares range-bound near term. We will revisit our stance with Q4 results. Qtly EBITDA (M) 2012A 2013A 2014E 2015E Q1 Q2 Q3 Q4 Year $26 A $41 A $42 A $36 $26 A $29 A $35 A $31 $31 A $33 A $34 A $34 $28 A $38 A $30 $34 $112 $141 $141 $135 EV / EBITDA 8.3x 10.3x 5.5x 5.9x 2012A $110 $164 $-54 42.4% 16.5% 0.9x $1.29 $0.67 2013A $141 $96 $46 40.7% 15.8% 1.1x $1.38 $0.82 2014E $147 $120 $27 35.8% 15.0% 1.3x $1.33 $0.95 2015E $122 $85 $37 36.7% 14.1% 1.6x $1.32 $0.96 2016E $135 $85 $50 36.8% 14.9% 1.5x $1.45 $0.96 (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: ROE14E: $9.16 15.02% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $589 $187 $776 41 41 40 Company Comment Friday, December 19, 2014, Pre-Market (CLR-T C$12.20) Clearwater Seafoods Inc. Smooth Sailing George Doumet - (514) 350-7788 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Medium Reinis Krams - (514) 287-4554 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$12.00 ROR 1-Yr: -0.7% Valuation: 8.5x EV/Adj. EBITDA on 2016E Key Risks to Target: Changes in quotas; political risk; weather- and vessel-related risks Event ■ We have initiated coverage on the common shares of Clearwater Seafoods Inc. (CLR). Please see our full report on ScotiaView. Implications ■ We like Clearwater's positioning (quotas, patented technologies, vessels, etc.) in a business with high barriers to entry and we expect the company to benefit from a weaker Canadian dollar and a rising price environment for harvested premium seafood. ■ We expect Clearwater to reach its targeted $100 million in adjusted EBITDA one full year ahead of schedule, largely driven by improved pricing (demand driven). We also expect a material step-up in earnings in 2016 as the company adds a new clam vessel to its fleet. ■ Clearwater shares are currently trading at 9.3x EV/Adj. EBITDA on our 2015E versus its estimated peer group average of 8.5x. We believe the shares should trade in line with the harvesting group given similar organic growth (beyond 2016E), return/efficiency metrics, and leverage. As such, we value the shares at 8.5x (2016E) and our one-year target is $12.00 per share. Recommendation ■ We like Clearwater for: (1) its strategic positioning and the high barriers to entry (quotas and vessels), (2) a positive near-term outlook for fish protein and strong pricing power, (3) a step-up in earnings profile expected in 2016, and (4) positive FX tailwinds, but project limited upside from current levels given today's premium valuation. Qtly Adj EBITDA (M) 2013A 2014E 2015E 2016E Q1 Q2 Q3 Q4 Year $10.8 A $10.2 A $12.4 $15.2 $17.0 A $20.3 A $26.6 $30.3 $28.9 A $30.9 A $31.8 $36.8 $22.3 A $24.2 $30.8 $32.4 $79.1 $85.7 $101.6 $114.7 EV / EBITDA 8.3x 10.9x 9.2x 8.1x 2013A 8.7% $389 20.4% $0.50 $0.61 3.1x 2014E 8.4% $445 19.3% $0.57 $-0.46 3.1x 2015E 3.0% $463 22.0% $0.69 $0.33 2.5x 2016E 8.8% $503 22.8% $0.82 $0.46 2.2x 2017E 4.4% $525 23.0% $0.86 $0.54 2.0x (FY-Dec.) FX Adj. Organic Growth (%) Revenues (M) Adj EBITDA Margin Adj Earnings/Share Free Cash Flow/Share Debt/EBITDA BVPS14E: $8.34 ROE14E: 0.41% Div. (NTM) Div. (Curr.) $0.12 $0.12 Yield (Curr.) 1.0% Pertinent Revisions New Rating: SP Risk: Medium Target: 1-Yr $12.00 Adj $85.7 EBITDA14E Adj $101.6 EBITDA15E Adj $114.7 EBITDA16E New Valuation: 8.5x EV/Adj. EBITDA on 2016E Old Valuation: N/A Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. Old N/A N/A N/A N/A N/A N/A $671 $247 $994 55 18 41 Company Comment Friday, December 19, 2014, Pre-Market (EGL.UN-T C$2.72) Eagle Energy Trust Permian Proceeds Redeployed in Canada; 2015 Budget, Guidance Released; Distribution Cut Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada) [email protected] Riley Hicks, CA, MBA - (403) 213-7760 (Scotia Capital Inc. - Canada) Justin Strong, MBA - (403) 213-7328 (Scotia Capital Inc. - Canada) Rating: Sector Perform Target 1-Yr: Risk Ranking: High Valuation: 0.8x our 2P NAV plus risked upside. C$5.00 ROR 1-Yr: 120.3% CDPU (NTM) CDPU (Curr.) $0.99 $0.99 Yield (Curr.) 36.5% Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program succes s Event ■ Eagle Energy announced the acquisition of a 50% working interest in the Dixonville Montney "C" oil property along with a reduction in distribution and 2015 budget and production guidance. Implications ■ Montney acquisition represents first entry to Canadian market. On December 15 Eagle announced that it had received permission from shareholders to amend its trust provisions to allow the company to hold Canadian assets. Eagle has announced that it has entered an agreement with Spyglass Resources (TSX: SGL) to acquire a 50% non-operated working interest in the Dixonville Montney "C" oil pool. ■ Asset details. The acquired assets are currently under horizontal waterflood and are located in north central Alberta. With the acquisition Eagle expects to add ~1,250 boe/d of 97% light sweet crude. The assets are characterized as having a stable production base and low ongoing sustaining capital requirement. ■ Financing a mix of cash and debt. The acquisition is expected to be funded with $55 mm of cash with the remainder coming from Eagle's existing credit facility. We view management's contrarian redeployment of its Permian proceeds as leveraged to crude oil prices and success at Dixonville. Pertinent Revisions CFPU14E CFPU15E CFPU16E New $1.06 $1.05 $1.04 Old $1.07 $0.97 $0.85 Recommendation ■ We maintain our SP rating and 1-year target price of $5.00/share. Qtly CFPU (FD) 2013A 2014E 2015E 2016E Q1 $0.40 A $0.32 A $0.24 Q2 $0.39 A $0.32 A $0.25 (FY-Dec.) Cash Distributions/Unit Price/Cash Flow Pre-tax Cash Yield 2012A $1.05 5.8x 13.7% Q3 $0.37 A $0.22 $0.20 2013A $1.05 5.6x 13.0% Q4 $0.28 A $0.21 $0.23 2014E $0.99 2.6x 36.5% Year $1.44 $1.06 $1.05 $1.04 P/CF 5.6x 2.6x 2.6x 2.6x 2015E $0.36 2.6x 13.2% 2016E $0.36 2.6x 13.2% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Units O/S (M) Float O/S (M) BVPU14E: $9.30 Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $93 $48 $141 34 33 42 The Eagle Has Landed (in Canada) ■ Montney acquisition represents first entry to Canadian market. On December 15 Eagle announced that it had received permission from shareholders to amend its trust provisions to allow the company to hold Canadian assets and subsequently created a Canadian operating subsidiary, Eagle Energy Canada Inc. Eagle has announced that Eagle Energy Canada has entered an agreement with Spyglass Resources (TSX: SGL) to acquire a 50% non-operated working interest in the Dixonville Montney “C” oil pool. ■ Asset background. The acquired assets span ~20 sections in north central Alberta, are currently under horizontal waterflood and produce 30° API oil. The Dixonville Montney oil pool is atypical; it is found at a depth of ~900 metres and is more conventional versus the majority of Montney formations found at a depth of ~2,000 metres and in tight, lowpermeability rock. Porosities are in the 20%-30% range. The pool was first discovered in 2003 and developed with vertical wells with limited success. It was not until 2004 that production and development ramped up with the success of horizontal wells; subsequently, waterflooding started in earnest in late 2009 to increase recovery. ■ Impressive waterflood response in Dixonville pool. Exhibit 1 highlights excellent waterflood response the Dixonville Montney oil pool has shown with a marked increase in oil production despite the declining oil well count. Exhibit 1 also shows the suppression in gas production with increased reservoir pressurization while Exhibit 2 shows the average per well production from wells drilled in the pool since 2004. Exhibit 1 - Dixonville Montney Oil Pool Waterflood Response 100,000 Average Oil Produced (bbl/d) Average Water Produced (bbl/d) GOR (m3/m3) Average Water Injected (bbl/d) 1000 PRD Well Count 10,000 1,000 100 Source: GeoScout; Scotiabank GBM estimates. 100 Pipeline incident - wells shut in GOR suppression from waterflood response 10 1 43 Exhibit 2 - Dixonville Montney Average Well Production 70 Raw boe (boe/d; calendar day) Dixonville Montney "C" Pool Average Well Production 60 Wells Since 2004 (210 wells) 50 40 30 20 10 0 1 4 7 10 13 16 19 Month 22 25 28 31 34 Source: GeoScout; Scotiabank GBM estimates. ■ Acquisition details. With the acquisition Eagle expects to add ~1,250 boe/d of 97% light sweet crude. The assets are characterized as having a stable production base and low ongoing sustaining capital requirement. Eagle estimates a decline from the asset at less than 10%. Included in the transaction is a 50% interest in a recently refurbished pipeline system. ■ Financing a mix of cash and debt. The acquisition is expected to be funded with $55 mm of cash with the remainder coming from Eagle’s existing credit facility. We view management's contrarian redeployment of its Permian proceeds as leveraged to crude oil prices and success at Dixonville. ■ Acquisition metrics. At US$70/bbl WTI Eagle estimates a 2015E netback of $12.7 mm ($27.00/boe) and a 2015E capital requirement on ~$1.3 mm. Eagle estimates a purchase price of $12.99 / 1P boe, $9.43 / 2P boe and $80,000 boe/d based on current production. On a purchase price/cash flow basis Eagle sees a multiple of 8x based on the aforementioned assumed netback. ■ Payout ratios improve but at expense of increasing leverage. 2015E simple and effective payout ratios improve significantly post-acquisition decreasing from 113% to 39% for simple payout and 180% to 87% for effective payout, based on our price deck assumptions. The changes to our estimates are summarized in Exhibit 3. While we do not see material accretion in cash flow, in part due to higher cost structure inputs in pro forma guidance, the transaction materially lowers decline rates and sustaining capital requirements, which we view positively. ■ Asset operator distress brings risk to transaction. The Dixonville Montney “C” assets are currently and will remain operated by Spyglass Resources. Spyglass is currently debt laden, having recently experienced a credit facility revision from $365 mm to $200 mm ($195 mm currently drawn) and has one of the lowest industry cash flow netbacks at under $15/boe. We currently rate Spyglass as a Sector Underperform with a 12 month target price of $0.25. Our 44 understanding is that operatorship transfers to Eagle should Spyglass divest of the remainder of its interests in Dixonville. Exhibit 3 - Summary Estimate Change 2015E Changes (Scotia Estimated) Production Average Cash Flow Per Share Payout Ratio - Simple Payout Ratio - Effective Net Debt/CF Target Price boe/d $/share % % x $/share Pre 2,007 $1.07 113% 180% (0.8) $5.00 Post 3,129 $1.05 39% 87% 1.4 $5.00 Change 1,122 ($0.02) -74% -93% 2.2 $0.00 2015E Guidance Update Production Average (mid-point) Capex Budget boe/d $Mm Pre --- Post 3,050 $15 Change --- % 55.9% -1.9% -65.1% -51.4% -268.8% 0.0% % --- Source: Company reports; Scotiabank GBM estimates. Distribution Lowered, 2015 Budget and Production Guidance Released ■ Distribution lowered by two-thirds. The December 2014 distribution, to be paid in January will be $0.03/unit, lowered from the previous monthly distribution of $0.0875/unit. Eagle also released its 2015 capital budget and production guidance of $15.0 mm and 2,950 – 3,150 boe/d, respectively. No previous budget or production guidance had been released, Eagle waiting instead until the Permian asset sale proceeds had been redeployed. A Transformative Transaction – Level of Contrarian Payoff Depends on Crude Oil Prices ■ What do the metrics mean? In our view, asset longevity can often obscure what the value of a transaction is, which in this case was represented by 1P and 2P reserve values in the range of $9.50/b to $13.00/b, while the flowing production and field netback were valued at $80,000 and 8x, respectively. In our view, discounted cash flows tell more of the story, albeit in this case we do not have full clarity with respect to detailed reserves information or price deck assumptions. ■ Where does value sit in commodity complex volatility? Exhibit 4 attempts to show the acquisition price and respective per barrel metrics, in conjunction with our estimate of Dixonville’s value at our Scotiabank GBM-Howard Weil price deck and the current futures strip. While this analysis is admittedly subject to assumption risks, our view is that management paid a price for the asset that can be justified by our current price deck outlook, based on the usage of a 9% after-tax discount rate. However, on the basis of the futures strip, the value of the asset is more challenged and reflects a much more aggressive discount rate assumption necessary to arrive at what Eagle paid. 45 Exhibit 4 - Estimated Value of Dixonville Under Different Price Deck Scenarios Value Proved Developed Producing Proved Proved and Probable Implied WACC vs. Futures Strip Eagle Purchase Price $100 $13.25 $12.99 $9.43 -1.6% $mm $/boe $/boe $/boe $/boe Scotia Price Deck $102 $13.52 $13.25 $9.62 -- Futures Price Deck $64 $8.42 $8.25 $5.99 -- Source: Company reports; Scotiabank GBM estimates. ■ How should we think about the purchase price? Management should be credited with a timely sale of its Permian assets to Athlon Energy Inc. while WTI prices were buoyant, and Athlon was in turn recently acquired by Encana Corporation, which further validated Eagle’s timing. We regard the sale as an appropriate move as the asset, in our view, was not right sized for Eagle given higher well costs and resource play considerations that logistically could be managed better by a larger entity. In our view, the redeployment of a significant portion of the proceeds into Dixonville helps provide greater certainty to unitholders with respect to cash flow generation and distribution sustainability. However, the degree of profitability found in the purchase price of Dixonville will be more dependent on what crude oil prices do over the next several years, as well as asset outperformance, given the differences observed between our price deck assumptions for WTI and the current futures strip, per Exhibit 5. We like contrarian tactics but the outcomes are always in context of timing, value, and price. Exhibit 5 - Comparison of Scotiabank GBM-Howard Weil WTI Forecast vs. Futures Strip $120 1.2 $100 1 $80 0.8 $60 0.6 Scotia-HW is +48% vs. Futures in 2023 $40 $20 Scotia-HW is +34% 0.4 0.2 $0 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 Scotiabank GBM-Howard Weil Price Deck Futures Price Deck Futures / (Scotia & HW) Source: Scotiabank GBM estimates. ■ Should we consider strategic value beyond the purchase price? While Eagle has migrated north this winter with an entry into Canadian assets, its initial plan was to remain south with an exclusive US-centric asset focus. Circumstances have shifted in the marketplace over time to enable consideration of Canadian assets. We still expect investors will take some time to adjust to this altered strategy but redeployment of capital into a more stable asset base likely makes good strategic sense in the long run, in our view. Indeed, the marketplace will similarly require some time to adjust to management’s renewed appreciation for longer life assets with a high proportion of PDP/1P and PDP/2P mix in 46 reserves, as this is materially different from its initial strategy to acquire low PDP component asset opportunities and convert PUDs and probable into PDPs over time. A lower treadmill speed potentially offers the business a much greater strategic advantage versus peers and the past, should capital efficiencies, and financial flexibility enable sustainability to ensue. Investment Thesis ■ Credit is due for endeavouring to remain financially healthy in a challenging commodity environment. Exhibit 6 is a comparison of 2015E metrics at pre-Permian disposition on our previous price deck and new (lower) price deck as well as pre - and postMontney acquisition stages. Of particular interest from pre-Permian disposition to postMontney acquisition is the improvement in D/CF and effective payout ratios. The D/CF ratio improves from 1.9x to 1.4x while the effective payout decreases from 155% to 87%. ■ We believe distribution cut offsets positive impacts from acquisition in interim. While prudent in times of a weakened commodity environment, we believe the distribution cut will have a negative impact on the stock. Regarding the asset acquisition, our initial reaction is Eagle paid a robust multiple to a distressed seller for an asset in which they will not control. While we do give Eagle credit for improved fundamentals, we remain tempered in our preliminary pro forma stance on the units in the face of operational and counter-party risks. Eagle currently trades at 4.1x 2015E EV/DACF versus the cross boarder income trust peer average of 6.1x. Our target price represents a 6.5x 2015E EV/DACF versus the cross boarder income trust peer average of 7.0x. 47 Exhibit 6 - 2015E Metric Comparison 2015E Metrics Comparison Fiscal Year End - December 31 Pre-Permian Disposition (Old Price Deck) 2015E Pre-Permian Disposition (New Price Deck) 2015E Post-Permian Disposition (Pre-Acquisition) (New Price Deck) 2015E Post-Montney Acquisition (New Price Deck) 2015E Price Deck Assumptions WTI Edmonton Par WCS Nymex Natural Gas AECO 30-Day Spot Exchange Rate US$/B C$/B C$/B US$/Mcf C$/Mcf US$/C$ $97.00 $101.62 $83.89 $4.25 -$0.93 $75.00 $78.85 $68.57 $4.00 -$0.88 $75.00 $78.85 $68.57 $4.00 -$0.88 $75.00 $78.85 $68.57 $4.00 -$0.88 Daily Production Total Oil & Liquids Natural Gas Total Production Change in Total Production Percentage Natural Gas B/d Mmcf/d Boe/d % % 3,418 -3,418 3% 0% 3,454 -3,454 4% 0% 2,007 -2,007 -28% 0% 3,129 -3,129 11% 0% Financial Estimates Cash Flow Per Unit - FD Distribution - Basic $/Unit $/Unit $1.51 $1.05 $1.46 $1.05 $1.07 $1.05 $1.05 $0.36 Netbacks Revenue (pre-hedging) Heging Gains (Losses) Royalties Operating Costs Transportation Costs Field Netback After-Tax Netback [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] $97.30 -$2.82 -$27.24 -$11.62 -$2.16 $53.46 $44.10 $77.67 $6.21 -$21.75 -$12.29 -$2.29 $47.56 $38.23 $81.40 $9.47 -$21.98 -$16.00 -$0.64 $52.26 $43.92 $74.47 $6.08 -$20.65 -$20.49 -$0.40 $39.00 $27.85 Valuation Measures EV/DACF EV/EBITDA P/E D/P EV per Boe/d x x x % $/Boe/d 6.1 6.0 11.7 17% $101,653 6.9 6.8 7.2 34% $100,606 2.0 2.0 15.7 39% $33,231 4.1 4.1 (14.2) 13% $43,300 Credit Capacity Credit facility % Drawn [$mm] % $99 58% $99 68% $63 56% $63 55% Net Debt & Debentures Net Debt & Debentures EBITDA Cash Flow Net Debt, Debentures & Equity EV $/Unit x x x % $2.17 1.4 1.5 0.3 24% $2.43 1.8 1.9 0.3 26% ($0.78) (0.8) (0.8) (0.2) -40% $1.23 1.3 1.4 0.2 31% Sustainability Payout Ratio - Simple Payout Ratio - Effective Capital Expenditures / Cash Flow % % % 70% 132% 62% 80% 155% 74% 113% 180% 68% 39% 87% 48% Hedging Percentage of Light & Medium Oil Percentage of Heavy Crude Oil Percentage of Natural Gas Producticn Percentage of Total Production % % % % 41% 0% 0% 41% 40% 0% 0% 40% 54% 0% 0% 54% 35% 0% 0% 35% Source: Company reports; Scotiabank GBM estimates. 48 Exhibit 7 - Financial & Operating Summary Fiscal Year End - December 31 2012A 2013A Q1/14A Q2/14A Q3/14A Q4/14E 2014E 2015E 2016E Price Deck Assumptions WTI Nymex Natural Gas Exchange Rate US$/B US$/Mcf US$/C$ $94.09 $2.76 $1.00 $98.01 $3.72 $0.97 $98.65 $5.06 $0.91 $103.15 $4.53 $0.92 $97.69 $4.53 $0.92 $78.76 $4.06 $0.88 $94.52 $4.54 $0.91 $75.00 $4.00 $0.88 $83.00 $4.00 $0.88 Daily Production Total Oil & Liquids Natural Gas Total Production Change in Total Production Percentage Natural Gas B/d Mmcf/d Boe/d % % 2,597 -2,597 89% 0% 3,004 -3,004 16% 0% 3,010 -3,010 0% 0% 3,341 -3,341 11% 0% 2,859 -2,859 -14% 0% 2,101 -2,101 -27% 0% 2,825 -2,825 -6% 0% 3,129 -3,129 11% 0% 3,119 -3,119 0% 0% Financial Estimates Cash Flow from Operations Investment Cash Flows - Internal Investment Cash Flows - M&A Financing Cash Flows Dist/Div [$mm] [$mm] [$mm] [$mm] [$mm] $35.2 -$43.5 -$115.9 $120.4 -$25.9 $44.3 -$30.3 -$35.7 $23.6 -$32.2 $10.3 -$11.5 -$5.3 $2.2 -$8.5 $10.5 -$6.4 -$0.1 -$2.4 -$8.7 $7.5 -$2.2 $150.1 -$87.6 -$8.9 $7.0 -$10.3 -$30.5 $33.7 -$7.0 $35.3 -$30.4 $114.3 -$54.1 -$33.1 $31.2 -$15.0 $0.0 -$16.2 -$12.3 $31.1 -$20.0 $0.0 -$11.1 -$12.4 Cash Flow Per Unit - FD EBITDA EPU Distribution - Basic $/Unit $/Unit $/Unit $/Unit $1.33 $1.43 $0.23 $1.05 $1.44 $1.25 $0.16 $1.05 $0.32 $0.36 $0.07 $0.26 $0.32 ($0.34) ($0.70) $0.26 $0.22 $0.52 $0.24 $0.26 $0.21 $0.21 $0.01 $0.21 $1.06 $0.76 ($0.38) $0.99 $1.05 $1.12 ($0.19) $0.36 $1.04 $1.10 ($0.19) $0.36 Netbacks Revenue (pre-hedging) Heging Gains (Losses) Royalties Operating Costs Transportation Costs Field Netback After-Tax Netback [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] $85.37 $0.51 -$23.58 -$12.37 -$2.11 $47.82 $36.92 $90.08 -$0.48 -$25.13 -$10.41 -$2.32 $51.74 $40.48 $98.02 -$3.02 -$26.19 -$15.03 -$2.51 $51.26 $38.14 $96.20 -$5.06 -$25.93 -$14.76 -$2.41 $48.05 $35.15 $89.60 -$2.38 -$24.42 -$15.77 -$0.62 $46.41 $29.31 $83.12 $12.47 -$22.56 -$18.20 -$0.59 $54.24 $36.79 $92.54 -$0.55 -$24.98 -$15.73 -$1.64 $49.63 $34.75 $74.47 $6.08 -$20.65 -$20.49 -$0.40 $39.00 $27.85 $82.75 $0.00 -$22.95 -$20.54 -$0.40 $38.87 $27.81 Valuation Measures EV/DACF EV/EBITDA P/E D/P EV per Boe/d x x x % $/Boe/d 7.5 7.2 11.8 39% $104,556 7.7 9.3 17.0 39% $118,736 6.3 6.0 20.9 19% $93,777 6.7 (6.8) (1.0) 39% $91,539 4.0 1.8 2.8 39% $43,620 4.9 4.8 69.9 30% $66,904 3.7 5.6 (7.2) 36% $49,744 4.1 4.1 (14.2) 13% $43,300 4.2 4.1 (14.3) 13% $43,494 Credit Capacity Credit facility % Drawn [$mm] % $48 84% $94 71% $99 88% $99 87% $62 0% $62 65% $62 65% $63 55% $63 54% Net Debt & Debentures Net Debt & Debentures EBITDA Cash Flow Net Debt, Debentures & Equity EV $/Unit x x x % $1.55 1.2 1.3 0.2 17% $3.02 2.5 2.2 0.3 27% $2.97 2.1 2.4 0.3 35% $2.79 (2.1) 2.3 0.3 31% ($1.78) (0.9) (2.1) (0.4) -50% $1.41 1.6 1.7 0.2 34% $1.41 1.9 1.4 0.2 34% $1.23 1.3 1.4 0.2 31% $1.21 1.3 1.3 0.2 31% Sustainability Payout Ratio - Simple Payout Ratio - Effective Capital Expenditures / Cash Flow % % % 76% 199% 124% 73% 141% 68% 82% 194% 111% 83% 144% 61% 121% 150% 30% 100% 246% 147% 94% 180% 86% 39% 87% 48% 40% 104% 64% Hedging Percentage of Light & Medium Oil Percentage of Heavy Crude Oil Percentage of Natural Gas Producticn Percentage of Total Production % % % % ----- ----- ----- ----- ----- 79% 0% 0% 79% 71% 0% 0% 71% 35% 0% 0% 35% 0% 0% 0% 0% Source: Company reports; Scotiabank GBM estimates. 49 Company Comment Friday, December 19, 2014, Pre-Market Grupo Financiero Inbursa, SAB de CV (GFINBUR O-MX MXN 36.81) Inbursa Acquires Walmex's Banking Unit Claudia Benavente A. - +562 2692 6568 (Scotia Corredora de Bolsa Chile SA) [email protected] Diego Ciconi - +562 2692 6292 (Scotia Corredora de Bolsa Chile SA) [email protected] Rating: Sector Perform Target 1-Yr: MXN 37.00 ROR 1-Yr: 2.8% Risk Ranking: Medium Valuation: 2.48x 2015 BVPS estimate Key Risks to Target: Political, economic, capital flows, systemic, regulatory, interest rates, and credit. Div. (NTM) Div. (Curr.) 0.83 0.76 Yield (Curr.) 2.1% Event ■ Inbursa announced it has reached an agreement to acquire Walmex's banking unit for about MXN 3,600M (~US$ 245M). The agreement allows it to use Walmex’s 2,100 stores as correspondent agents. Implications ■ The acquired banking unit had ~MXN 5,400M in total loans in October 2014, mostly comprised of credit cards. It presented an NPL ratio of 5.2% and a 12-month average net interest margin of 14.5%. ■ While the acquisition price might seem steep at 1.7x P/BV for an unprofitable unit representing ~3% of Inbursa's total assets, we like the commercial agreement in that it allows Inbursa to better access the consumer segment by considerably expanding its distribution network. ■ We believe that the funds for the recent acquisitions have come from MXN 18,000M in reserve reversals the bank has been allowed. We believe Inbursa has been making good use of this benefit, either by acquiring strategic assets (i.e., Banco Standard Brasil), or by paying dividends. We estimate about MXN 9,000M in reserves will be reversed through 2016, which should allow this strategy to continue. Recommendation ■ The transaction is in line with the bank's strategy of expanding the consumer book, but while it has doubled the book in the last three years, it still represents only 10% of total loans. Therefore, we think Inbursa will face a few challenges given its limited experience in the consumer segment. We maintain our Sector Perform rating. Qtly EPS (FD) 2013A 2014E 2015E 2016E Q1 0.24 A 0.37 A 0.58 (FY-Dec.) Return on TCE Return on Equity Return on Assets Return on RWA TCE to RWA PCLs % of Loans Q2 0.52 A 0.69 A 0.64 2012A 17.1% 11.3% 2.60% 4.05% 23.6% 2.75% Q3 0.49 A 0.91 A 0.66 2013A 29.3% 19.9% 4.65% 6.65% 21.9% 1.39% Q4 1.19 A 0.79 0.67 2014E 28.6% 19.4% 4.86% 6.31% 22.2% 0.96% Year 2.44 2.76 2.55 2.64 P/E 15.1x 13.3x 14.4x 13.9x 2015E 21.8% 16.0% 4.17% 5.00% 23.6% 1.55% 2016E 19.1% 14.8% 4.09% 4.42% 22.7% 1.97% Capitalization Market Cap (M) CET1 TCE/TA Shares O/S (M) Float O/S (M) 245,412 19% 25% Curr. BVPS: 13.86 Curr. ROE: 27.23% Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. ScotiaView Analyst Link All values in MXN unless otherwise indicated. For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S. 6,667 2,086 50 ■ It is also important to note that 67% of the acquired loan book is composed of credit card loans, which in our view, might pose quite a challenge for Inbursa given that it has not operated in the credit card segment since 2010 after the bank saw its NPL ratio level reach over 18% in the 2008 crisis. Also note that the deal is subject to regulatory approval. Exhibit 1 - Banco Walmart Summary Financials (In MXN million) Total Loans Non Performing NPL Ratio Oct-14 5,431 282 5.2% (In MXN million) Total Deposits Demand Deposits Total Equity Loan Loss Reserves LLR/Total Loans 602 11.1% Net Interest Income Net Interest Margin Net Income Oct-14 5,586 32.8% 2,106 LTM to Oct-14 718 15.0% -80 Source: CNBV; Scotiabank GBM. Exhibit 2 - Industry M&A Banking Industry M&A Country Target Co. Colombia Santander Colombia Helm USA City National Bank Peru MiBanco Inteligo Mexico Banco Walmart Transaction Multiples P/BV P/E 2.66x 15.60x 1.74x 14.20x 1.50x 12.90x 1.28x 17.70x 3.86x 15.50x 1.70x n.m. Source: Company reports; Scotiabank GBM. Exhibit 3 Banco Walmart - Non-Performing Loan Ratio 2011 - October 2014 6.00% 5.00% 5.20% 4.00% 3.00% 2.00% 1.00% F A J A O D F A J A O D F A J A O D F A J 2011 Source: CNBV; Scotiabank GBM. 2012 2013 2014 51 Exhibit 4 - Pertinent Stock Information - LatAm Banks Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 52 Company Comment Friday, December 19, 2014, Pre-Market (HLF-T C$21.41) High Liner Foods Incorporated Unlocking Reel Value George Doumet - (514) 350-7788 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Medium Reinis Krams - (514) 287-4554 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$27.00 ROR 1-Yr: 28.1% Valuation: 9.0x EV/Adj. EBITDA on 2016E Key Risks to Target: Identifying and integrating acquisitions, cost inflation, customer preferences Event ■ We have initiated coverage on the common shares of High Liner Foods Inc. (HLF). Please see our full report on ScotiaView. Implications ■ While we expect High Liner's U.S. foodservice business to continue to face near-term challenges arising, in part, from a difficult price passthrough environment, we see headwinds abating as early as 2015. Furthermore, we expect a meaningful improvement in near-term profitability on the back of supply chain improvements and, to a lesser degree, further growth and margin expansion in the company's other channels. ■ We value High Liner by applying 9.0x EV/Adj. EBITDA on our 2016 estimates versus its peer group trading at 10.6x (2015E). We believe the discount is warranted given High Liner's less-diversified seafood-only earnings stream, higher leverage, lower organic revenue growth, and modestly greater capital intensity. ■ Our one-year target of C$27.00 per share assumes High Liner attains the low end of its cost savings guidance of $20 million by 2016. We see an additional C$2.00 per share of potential upside if the company were to reach its upper end. Recommendation ■ We like HLF for: (1) expected cost take-out from supply chain initiatives, (2) upside from potential acquisitions and (3) positive long-term secular trend for seafood. Qtly Adj EBITDA (M) 2013A 2014E 2015E 2016E Q1 Q2 Q3 Q4 Year $21.3 A $27.2 A $25.2 $32.5 $19.3 A $16.7 A $22.6 $27.4 $22.1 A $19.0 A $25.8 $29.1 $22.7 A $21.4 $26.5 $29.0 $85.3 $84.3 $100.2 $118.1 EV / EBITDA 7.9x 10.9x 8.9x 7.2x 2012A $943 21.9% 9.4% $1.23 $4.29 276.2 3.49x 2013A $947 22.7% 9.0% $1.32 $0.81 282.4 3.83x 2014E $1,045 21.3% 8.1% $1.27 $0.73 305.1 4.08x 2015E $1,115 22.0% 9.0% $1.65 $1.39 310.0 3.14x 2016E $1,137 23.0% 10.4% $2.05 $1.81 310.0 2.66x (FY-Dec.) Revenues (M) Gross Margin Adj EBITDA Margin Adj EPS Free Cash Flow/Share Volumes (lbs) (M) Debt/EBITDA BVPS14E: $20.05 ROE14E: 3.36% Div. (NTM) Div. (Curr.) C$0.42 C$0.42 Yield (Curr.) 2.0% Pertinent Revisions New Old Rating: SO Risk: Medium Target: 1-Yr $27.00 Adj US$84.3 EBITDA14E Adj US$100.2 EBITDA15E Adj US$118.1 EBITDA16E New Valuation: 9.0x EV/Adj. EBITDA on 2016E Old Valuation: N/A Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) N/A N/A N/A N/A N/A N/A C$672 $340 C$1,066 ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. 31 15 53 Company Comment Thursday, December 18, 2014, After Close (IFP-T C$18.65) Interfor Corporation Encore! 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$23.25 ROR 1-Yr: 24.7% Valuation: 3.5x EV/Peak EBITDA Key Risks to Target: Weaker-than-expected U.S. housing recovery, lower-than-expected prices, stronger-than-expected C$ Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Event ■ Interfor announced an agreement to acquire Simpson Lumber’s four sawmills in the US Southeast (2), and the Pacific Northwest (2). Pertinent Revisions New Old Implications ■ Interfor is paying US$94.7M (plus working capital of ~US$30M) and contingent future payments tied to the financial performance of the Commencement Bay mill (min $10M in 3 years). ■ In other words, Interfor is paying about 5.2x 2014E EBITDA (9-month annualized) for 3 profitable mills and nothing upfront for an underperforming mill (Commencement Bay). ■ Before synergies, the acquisition is ~17% accretive to our 2015E EBITDA estimates and ~15% accretive to our 2015E EPS estimates (assuming a mid Q1/15 closing), while for 2016E this transaction is ~20% accretive to our EBITDA forecast and ~18% accretive to our EPS estimates. ■ The transaction adds about 30% to Interfor’s production capacity and we believe there could be synergies to be surfaced given the physical proximity of the acquired mills to Interfor’s operations in both regions. Interfor’s U.S. capacity would increase from ~57% to ~67% pro forma this acquisition. $23.25 $1.78 $2.12 $21.25 $1.56 $1.79 Target: 1-Yr EPS15E EPS16E Recommendation ■ We reiterate our Sector Outperform rating on IFP shares and increase our target price by $2.00 to $23.25 as a result of this acquisition. Qtly EPS (FD) 2013A 2014E 2015E 2016E (FY-Dec.) Earnings/Share Cash Flow/Share Price/Earnings Relative P/E Revenues (M) EBITDA (M) Current Ratio EBITDA/Int. Exp Q1 $0.32 A $0.43 A $0.48 $0.54 Q2 $0.28 A $0.32 A $0.47 $0.55 Q3 $0.00 A $0.16 A $0.50 $0.65 Q4 $0.18 A $0.15 $0.34 $0.39 Year $0.78 $1.07 $1.78 $2.12 P/E 17.2x 17.4x 10.5x 8.8x 2012A $-0.13 $0.84 n.m. n.m. $849 $50 2.1x 8.0x 2013A $0.78 $2.15 17.2x 0.6x $1,105 $134 2.1x 16.4x 2014E $1.07 $2.36 17.4x 0.7x $1,408 $174 2.1x 17.3x 2015E $1.78 $4.02 10.5x 0.4x $1,869 $294 1.9x 23.6x 2016E $2.12 $3.30 8.8x 0.4x $2,126 $326 2.6x 36.7x BVPS14E: $9.70 ROE14E: 11.53% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ unless otherwise indicated. ^ Subordinate 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. $1,244 $270 $1,513 67 66 54 The Expansion Continues Overview ■ Interfor announced an agreement with Simpson Lumber (“Simpson”) to acquire Simpson’s sawmill operations in the US Southeast (Meldrim, GA & Georgetown, SC), and the Pacific Northwest (Longview, WA & Commencement Bay, WA) for a total cash consideration of US$94.7 million, plus working capital (estimated at ~US$30 million) and contingent future payments tied to the financial performance of the Commencement Bay mill. ■ These sawmills have a combined annual capacity of 750 million board feet and anticipated to end 2014 with production of 555 million board feet. These assets would increase Interfor’s annual production capacity by 30% to 3.1 billion board feet. ■ This acquisition reinforces Interfor’s already strong position in the US Southeast and Pacific Northwest. The company now holds 67% of its total capacity in the US (from 57% previously). ■ The company will host a conference call on December 19, 2014 at 10am EST. Dial-in: 1866-233-4585. Purchase Price & Accretion ■ There are two parts to this transaction: 1. The Meldrim, Georgetown & Longview mills These mills were purchased for a total cash consideration of US$94.7 million, plus working capital and produced EBITDA of US$16 million in the first nine months of 2014, which is estimated to be ~$18 million on an annualized basis. This implies a purchase multiple of 5.2x vs. Interfor’s 2014E EV/EBITDA multiple (based on our previous estimates) of 8.3x, as of the last close prior to this announcement. These mills are expected to produce 390 million board feet in 2014. The company believes there is significant upside to the financial performance of these assets through “focused initiatives and targeted capital projects”. 2. The Commencement Bay mill As mentioned above, Interfor’s purchase price for this asset is contingent on mill’s future the financial performance. IFP’s upfront investment is limited to a working capital investment of ~US$13 million, while the contingent payment arrangement is structured as follows: Annual payments equal to 0.5x the Commencement Bay mill’s EBITDA for each of the 3 years post-closing. A final payment equal to 2.5x the Commencement Bay mill’s average annual EBITDA over the 3 year period. The total of both of the aforementioned points are set at a minimum amount equal to US$10 million. This mill generated EBITDA of negative $3 million during the first nine months of 2014 and is expected to produce ~165 million board feet of lumber this year. While this asset is currently underperforming, the mill is relatively new as it was built in 2001 for a total capital investment of $90 million. In 2004, this mill produced almost 400 million board feet vs. the 165 expected this year. Simpson is currently in the final stages of a US$5 million capital project at this mill that is expected to enhance the sawmill’s log processing flexibility and operating efficiency. Interfor believes that there are additional “non-capital” initiatives that could significantly improve the financial performance of this mill. We will be looking for further details on these initiatives during tomorrow’s call. 55 Exhibit 1 - Simpson Lumber Overview Source: Company reports ■ Our preliminary view on this transaction (barring Exhibit 2 - Accretion to Our Estimates any incremental information during tomorrow’s Before Simpson After Simpson conference call) is positive as it is accretive to our 2015E estimates. As shown in Exhibit 2, we estimate this EBITDA ($M) $250.6 $294.2 acquisition is ~17% accretive to our 2015E EPS $1.56 $1.78 EBITDA and ~15% accretive to our 2015E EPS. While for 2016E this transaction is ~20% accretive 2016E $271.9 $326.2 to our EBITDA forecast and ~18% accretive to our EBITDA ($M) $1.79 $2.12 EPS estimates. Note that we assume the acquisition EPS closes mid Q1/15 and we have not included any Source: Company reports; Scotiabank GBM estimates. potential synergies. Leverage ■ As of the end of Q3/14, the company’s net debt to invested capital ratio was 24%. Additionally, the company has in excess of $230 million available in its credit facilities. Assuming the company were to finance this acquisition with 100% debt, the net debt to invested capital ratio would increase to about 35%, which remains within the company’s comfort zone. On a pro-forma basis, we estimate this would translate into 1.8x net debt to LTM EBITDA vs. 1.2x at the end of Q3/14. ■ Interfor stated that in conjunction with this transaction, it will consider various longer term financing alternatives, including additional fixed rate long-term debt and/or equity to enhance its financial flexibility, depending on market conditions. Valuation & Recommendation ■ We reiterate our Sector Outperform rating on IFP shares and increase our target price by $2.00 to $23.25 as a result of this acquisition. We continue to like Interfor for (1) its exposure to the US South, where log costs are favourable due to several years of under-harvest, (2) the accretive potential of its recent acquisitions, (3) its pure-play lumber exposure and (4) its attractive valuation. Accretion 17.4% 14.6% 20.0% 18.2% 56 Exhibit 3 - Comps Table Company Name Ticker Price Currency 18-Dec-14 Market Cap (M) Enterprise Value (M) P/E 2014E 2015E 2016E 2014E 28.49 6.00 18.65 61.76 2.37 3,857 125 1,245 5,289 946 4,009 234 1,530 5,668 888 18.5x 10.0x 8.7x 24.5x 6.4x 4.0x 17.4x 10.5x 8.8x 18.0x 11.8x 10.7x 12.5x 7.5x 10.7x 18.2x 9.2x 8.6x 7.4x 10.3x 8.8x 9.4x 7.2x 8.6x 5.2x 5.0x 5.2x 6.4x 5.5x 5.4x 4.7x 3.8x 4.7x 5.9x 4.8x 4.8x CAD USD CAD/USD 3.11 16.46 24.51 752 2,370 1,138 1,009 2,146 1,518 n.m. n.m. n.m. n.m. 12.2x 5.9x n.m. 16.5x 18.3x 9.1x 15.3x 10.5x 24.7x n.m. 16.1x 20.4x 7.3x 12.2x 7.7x 9.0x CAD USD USD USD USD 15.10 42.02 42.06 27.41 35.30 253 7,391 1,707 3,474 18,702 324 10,702 1,945 4,153 22,484 n.m. 16.1x 14.3x n.m. 31.7x 27.0x 19.8x 20.4x 17.9x n.m. n.m. n.m. 25.1x 24.2x 19.1x 22.4x 23.1x 19.6x 16.2x 18.9x 11.8x 15.3x 13.3x 15.1x 19.4x 13.3x 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 OSB Ainsworth Lumber Co. Ltd. Louisiana-Pacific Corporation Norbord Inc.** Average ANS-CA LPX-US NBD-CA 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 Average 15.4x 12.7x EV/EBITDA 2015E 2016E Peak Net Debt/ 2014E EBITDA Dividend Yield 3.7x n.a. 3.1x 4.2x 3.5x 3.6x 0.3x 4.7x 1.6x 0.6x Net cash 1.8x n.a. n.a. n.a. 0.5% 3.4% 1.9% Scotiabank GBM Consensus Scotiabank GBM Scotiabank GBM Scotiabank GBM 4.4x 6.5x 5.1x 5.3x 2.9x 2.6x 2.7x 2.7x 6.3x Net cash 4.0x 5.2x n.a. n.a. 9.8% 9.8% Scotiabank GBM Scotiabank GBM Scotiabank GBM 14.6x 18.4x 10.8x 19.8x 12.7x 15.3x 13.4x 17.2x 9.9x 18.9x 11.3x 14.1x n.a. n.a. n.a. n.a. n.a. n.a. 3.4x 5.8x 1.5x 2.0x 2.2x 3.0x 5.5% 4.2% 3.6% 3.6% 3.3% 4.0% Consensus Consensus Consensus Consensus Scotiabank GBM 10.0x 8.5x 3.2x 3.0x 4.2% Estimate Source *Pro-forma sale of non-core assets. **Price in CAD. The rest in USD. ***Proforma the Simpson acquisition assuming 100% debt financing. Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 57 Company Comment Thursday, December 18, 2014, Pre-Market (MTL-T C$21.27) Mullen Group Ltd. Drawing a Line in the Sand in Uncertain Circumstances Turan Quettawala, MBA, CFA - (416) 863-7065 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Medium Target 1-Yr: Milan Posarac - (416) 863-7532 (Scotia Capital Inc. - Canada) [email protected] C$23.25 ROR 1-Yr: 15.0% Valuation: Equally wtd. DCF and 8.5x NTM EBITDA (one-year fwd.) Key Risks to Target: Slower-than-expected economic growth, acquisition integration issues and oil prices . Div. (NTM) Div. (Curr.) $1.20 $1.20 Yield (Curr.) 5.6% Event ■ MTL maintained its dividend and provided guidance for 2015. Pertinent Revisions Implications ■ The significant headwind from falling crude prices is reflected in the guidance. The O/S segment will bear the brunt of the fall due to lower activity in various businesses particularly drilling and oil sands coring. This is expected to negatively impact volumes, pricing, and margins for MTL. In our opinion, this is adequately reflected in O/S guidance where revenues and EBITDA are expected to decline by 16% and 20% YOY. T/L should help offset some of the headwind, with EBITDA expected to grow by 21% YOY mainly due to the Gardewine acquisition. ■ The capex plan is down modestly at $80M, with half allocated to maintenance. In our view, the key here is that MTL management is conservative and the environment is very uncertain, so this guidance likely reflects a worst-case scenario. As such, a rise in crude prices or stronger cost control could lead to upside from current levels. Target: 1-Yr EPS15E New Old $23.25 $1.23 $27.00 $1.59 Recommendation ■ We are maintaining our SO rating. Our favourable view is premised on a strong management team that has navigated well through many cycles, a solid 6% dividend yield with a dividend that has been maintained, and a strong B/S (~$250M room) that affords flexibility and room to pursue acquisitions which could drive higher estimates. We estimate that a $100M acquisition could be ~10% accretive based on historical metrics. Qtly EPS (FD) 2012A 2013A 2014E 2015E Q1 $0.60 A $0.49 A $0.51 A $0.41 (FY-Dec.) Earnings/Share Free Cash Flow (Basic)/Share Revenues (M) EBITDA (M) Operating Profit (M) Operating Ratio ROIC/Share EBITDA/Int. Exp Q2 $0.23 A $0.23 A $0.16 A $0.17 Q3 $0.35 A $0.46 A $0.39 A $0.33 Q4 $0.32 A $0.35 A $0.34 $0.31 Year $1.51 $1.52 $1.40 $1.23 P/E 13.9x 18.7x 15.2x 17.3x 2011A $1.55 $1.85 $1,387 $288 $207 85.1% 15.0% 7.9x 2012A $1.51 $2.13 $1,428 $294 $210 85.3% 14.5% 8.9x 2013A $1.52 $1.06 $1,437 $301 $215 85.1% 13.8% 11.4x 2014E $1.40 $1.64 $1,451 $292 $207 85.7% 13.9% 6.1x 2015E $1.23 $1.48 $1,498 $275 $181 87.9% 10.7% 8.9x BVPS14E: $9.82 ROE14E: 14.32% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $1,980 $544 $2,512 93 88 58 ■ Oilfield Services revenues and EBITDA expected to decline by 16% and 20% YOY. The weakness in O/S is directly linked to the decline in commodity prices, along with delays in pipeline approvals and LNG project uncertainties. MTL expects drilling activity in Western Canada to decline by 20% YOY, which would impact activity levels at TREO Drilling and other entities linked to the drilling business. Entities focused on servicing producing/existing wells are expected to be impacted to a lesser degree. In our opinion, while the O/S segment will bear the brunt of the fall in commodity prices to due lower activity in various businesses, this is adequately reflected in O/S guidance (revenue and EBITDA of $740M and $165M). ■ Trucking/Logistics should help offset some of the headwind. While T/L will not be going gangbusters in this environment, it should help to offset some of the headwind on the O/S side of the business. For T/L, growth will be driven by the Gardewine acquisition but as previously disclosed, margins are expected to decline slightly YOY (lower relative margins at Gardewine). MTL is guiding to T/L revenues and EBITDA of $760M and $110M, up 34% and 21% YOY, respectively. Exhibit 1 - MTL - Earnings Model Mullen Group MTL 1-Year Target: $23.25 1-Year Return: 15% NTM Dividend: Rating: Valuation: Last Price: ScotiaView Analyst Link $21.27 Shares O/S: 93 Market Cap: $1,980 FY End: Dec-31 $1.20 EPS Sector Outperform Risk: High Equally w td. DCF and 8.5x NTM EBITDA (one-year fw d.) 2012 2013 2014E 2015E Q1 $0.60 $0.49 $0.51 $0.41 Q2 $0.23 $0.23 $0.16 $0.17 Q3 $0.35 $0.46 $0.39 $0.33 Q4 $0.32 $0.35 $0.34 $0.31 Total $1.51 $1.52 $1.40 $1.23 Q4 2013 Q4 2014E Financial Q4 2013 Q4 2014E 2012 2013 2014E 2015E Cash Flow Statem ent ($M) Payout Ratio 85.7% 89.0% 66.4% 78.9% 85.6% 97.8% Operating (post-WC) $68 $74 $280 $214 $244 $214 ROE 15.5% 14.3% 16.0% 15.5% 14.3% 12.3% Capex (including acquisitions) -$32 -$40 -$129 -$149 -$115 -$252 Financing -$33 $229 -$115 -$144 $140 -$229 $41 $34 $171 $79 $149 -$38 ROA 8.8% 6.8% 8.5% 8.8% 6.8% 6.2% EBITDA Margin 19.4% 19.5% 20.6% 20.9% 20.1% 18.3% EBIT Margin 13.3% 13.6% 14.7% 14.9% 14.3% 12.1% Operating Ratio FCF Yield 86.7% 86.4% 85.3% 85.1% 85.7% 87.9% 4.0% 7.4% 9.4% 4.0% 7.5% -1.9% Free Cash Flow 2013 2014E 2015E Incom e Statem ent Oilfield Services ($M) Q4 2013 Q4 2014E 2012 2013 2014E 2015E Company revenue $149 $149 $625 $604 $592 $498 Contract revenue $76 $77 $268 $279 $290 $238 $1 $1 $5 $4 $4 $4 $226 $227 $897 $886 $886 $740 $157 Other Incom e Statem ent Consolidated ($M, Except per Share Figures) 2012 Total revenues Q4 2013 Q4 2014E 2012 2013 2014E 2015E Revenue $367 $368 $1,428 $1,437 $1,451 $1,498 Wages and benefits $40 $41 $162 $161 $157 Direct operating expenses $258 $256 $983 $983 $1,000 $1,042 Repairs and maintenance $25 $24 $91 $91 $92 S&A expenses $39 $40 $150 $153 $159 $182 Fuel Cost $15 $14 $52 $51 $51 $39 EBITDA $71 $72 $294 $301 $292 $275 Operating Supplies and contractors $76 $77 $309 $288 $296 $241 Depreciation on PP&E $19 $18 $65 $70 $69 $78 Other $20 $22 $84 $83 $84 $69 $200 $212 $206 $165 Amortization on intangibles EBIT (recurring) $4 $4 $18 $17 $15 $16 $49 $50 $210 $215 $207 $181 EBITDA $51 $50 $14 $12 Net income (recurring) $33 $31 $132 $140 $130 $113 Depreciation on PP&E EPS (recurring, diluted) $0.35 $0.34 $1.51 $1.52 $1.40 $1.23 Amortization on intangible assets Q4 2013 Q4 2014E 2012 2013 2014E 2015E Net Debt/ EBITDA 1.2x 1.3x 1.1x 1.2x 1.3x 1.9x Interest Coverage 11.4x 6.1x 8.9x 11.4x 6.1x 8.9x Debt/ Total Capital 32.1% 43.8% 34.4% 32.1% 43.8% 39.2% $50 $48 $52 $3 $3 $14 $12 $11 $12 $34 $35 $138 $150 $146 $101 Operating Ratio (%) 84.8% 84.6% 84.6% 83.1% 83.5% 86.4% EBITDA Margin 22.3% 22.3% 22.3% 24.0% 23.2% 22.2% Q4 2013 Q4 2014E 2012 2013 2014E 2015E Company revenue $71 $71 $247 $268 $281 $377 Contract revenue $70 $70 $287 $286 $285 $383 $0 $0 $1 $1 $1 $1 $142 $142 $536 $554 $567 $761 Wages and benefits $20 $21 $64 $76 $80 $83 Repairs and maintenance $10 $10 $34 $37 $40 EBIT Credit Metrics $48 $70 Incom e Statem ent Trucking & Logistics ($M) Other Total revenues Balance Sheet ($M) Cash & Equivalents PP&E Total Assets Q4 2013 Q4 2014E 2012 2013 2014E 2015E $58 $345 $123 $58 $345 $78 $924 $843 $903 $924 $1,099 Fuel Cost $9 $8 $28 $33 $35 $42 $1,911 $1,556 $1,588 $1,911 $1,815 Operating Supplies and contractors $65 $65 $255 $255 $258 $365 Other $16 $16 $56 $60 $64 $102 $22 $23 $98 $93 $91 $110 $4 $5 $14 $16 $18 $26 AP & Accrued liabilities $114 $148 $126 $114 $148 $150 Total current liabilities $123 $160 $149 $123 $160 $163 EBITDA Long-term debt $409 $695 $393 $409 $695 $575 Depreciation on PP&E Total Liabilities $687 $1,001 $729 $687 $1,001 $902 Amortization on intangible assets $1 $1 $4 $5 $4 $16 $16 $80 $72 $69 $80 Operating Ratio (%) 88.6% 88.4% 85.1% 86.9% 87.8% 89.4% EBITDA Margin 15.4% 16.0% 18.4% 16.8% 16.0% 14.4% EBIT Shareholders' Equity $59 $903 $1,588 $900 $910 $827 $900 $910 Source: Company reports; Fact Set; Scotiabank GBM estimates. $913 $3 59 Intraday Flash Thursday, December 18, 2014 @ 11:16:11 AM (ET) (PAAS-Q US$9.28) (PAA-T C$10.71) Pan American Silver Corp. Reloading the Buyback Option Craig Johnston, CPA, CA - (416) 860-1659 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Speculative James Steels - (416) 945-4527 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: US$11.50 ROR 1-Yr: 29.3% Valuation: 1.03x Q3/15E NAV Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s Event ■ Pan American Silver announced that the TSX has accepted its proposed normal course issuer bid (NCIB), which gives the company the option to repurchase up to 5% of its outstanding shares until December 21, 2015. Implications ■ The new NCIB replaces the previous one which expired on December 4, 2014, under which no purchases were made. ■ Recall that on the Q3/14 conference call, management highlighted that its dividend policy ($0.50/share/annum) is much firmer than the market seemed to believe. Furthermore, management noted that, when the board approved the increase in the dividend to $0.50, that was a longterm sustainable decision to which they are committed. Pan American finished Q3/14 with $377.5 million in cash and short-term investments. ■ We expect Q4/14 to be strong quarter for Pan American, with San Vicente back in full swing, increased silver production at Alamo Dorado, and increased gold recoveries at Dolores. We anticipate silver production to be up 7% and cash costs to decline by 11%. ■ We have revised our Dolores estimates to conservatively assume Pan American does not move forward with the pulp agglomeration and underground development project given current silver prices. We have lowered our target price to $11.50 per share (from $11.60). Div. (NTM) Div. (Curr.) $0.50 $0.50 Yield (Curr.) 5.4% Pertinent Revisions New Target: 1-Yr $11.50 Adj. EPS14E $-0.04 Adj. EPS15E $0.03 Adj. EPS16E $0.30 New Valuation: 1.03x Q3/15E NAV Old Valuation: 1.05x Q2/15E NAV Old $11.60 $-0.03 $-0.03 $0.23 Recommendation ■ We maintain our Sector Perform rating. Qtly Adj. EPS (FD) 2013A 2014E 2015E 2016E Q1 $0.26 A $0.08 A $0.00 $0.07 (FY-Dec.) Adj Earnings/Share Price/Earnings Cash Flow/Share Price/Cash Flow Silver Sales (Moz) Tot. Cash Cost ($/oz) All-In Sust. Cost ($/oz) Q2 $-0.07 A $0.01 A $0.01 $0.08 Q3 $0.08 A $-0.09 A $0.01 $0.08 Q4 $0.01 A $-0.05 $0.02 $0.07 Year $0.28 $-0.04 $0.03 $0.30 P/E 41.4x n.m. n.m. 30.7x 2013A $0.28 41.4x $0.79 14.8x 24.6 $10.81 $18 2014E $-0.04 n.m. $0.86 10.8x 24.6 $10.86 $16 2015E $0.03 n.m. $1.06 8.7x 25.9 $10.80 $15 2016E $0.30 30.7x $1.44 6.4x 26.9 $8.41 $12 2017E $0.40 23.3x $1.65 5.6x 25.6 $6.68 $10 BVPS14E: $14.22 NAVPS: P/NAV: $11.04 0.84x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. $1,406 $-325 $1,081 152 152 60 Looking Forward to a Strong Q4/14 ■ Production: On the Q3/14 conference call management provided directional guidance for the fourth quarter, with the trend being increased production and lower operating costs. We highlight management’s comments regarding Q4/14 relative to Q3/14 below, and our Q4/14 estimates in Exhibit 1: o La Colorada (Mexico) – steady production with slightly higher costs. o Dolores (Mexico) – similar silver production, 10% higher gold production, and 5% reduction in costs. o Alamo Dorado (Mexico) – better than a 10% increase in production and a 10% decrease in costs. o Peru (Morococha and Huaron) – similar silver production and higher costs on slightly reduced copper grades. o San Vicente (Bolivia) – production and costs similar to Q2/14. o Manantial Espejo (Argentina) – expect to end the year on plan for production and costs. Exhibit 1 – Q4/14 Estimates Scotia Q4/14E PAAS Q3/14A Alamo Dorado Payable Silver Moz 0.8 0.7 Gold Production oz 4,039 3,610 Cash Costs US$/oz $14.99 $17.04 All-in Sustaining Costs US$/oz $15.37 $13.84 Huaron Payable Silver Moz 0.8 0.8 Cash Costs US$/oz $8.58 $7.63 All-in Sustaining Costs US$/oz $12.66 $17.09 Morococha (92.2%) Payable Silver Moz 0.6 0.5 Cash Costs US$/oz $7.51 $6.86 All-in Sustaining Costs US$/oz $11.95 $13.84 La Colorada Payable Silver Moz 1.2 1.2 Cash Costs US$/oz $8.74 $8.58 All-in Sustaining Costs US$/oz $11.70 $11.53 Manantial Espejo Payable Silver Moz 1.0 1.0 Gold Production oz 17,182 13,230 Cash Costs US$/oz $10.99 $15.54 All-in Sustaining Costs US$/oz $18.56 $30.12 San Vicente (95%) Payable Silver Moz 0.9 0.7 Cash Costs US$/oz $11.83 $16.05 All-in Sustaining Costs US$/oz $12.79 $15.02 Dolores Payable Silver Moz 1.0 1.0 Gold Production oz 16,983 15,440 Cash Costs US$/oz $13.52 $14.57 All-in Sustaining Costs US$/oz $20.57 $21.36 Consolidated Silver Production Moz 6.6 6.2 Silver Sales Moz 6.3 6.2 Gold Sales oz 40,055 32,600 Total Cash Costs US$/oz $10.95 $12.29 All-in Sustaining Costs* US$/oz $16.00 $18.03 Note - All-in Sustaining Costs at the mine-level do not include Corporate *Q3/14 AISC excludes $2.47/oz of net realizable value adjustments. Source: Company reports; Scotiabank GBM estimates. % Δ PAAS Q2/14A %Δ QoQ 15% 12% -12% 11% 1.0 4,770 $11.11 $10.65 -24% -15% 35% 44% 3% 12% -26% 0.8 $8.49 $18.18 4% 1% -30% 1% 9% -14% 0.5 $16.74 $22.29 21% -55% -46% 0% 2% 1% 1.2 $8.26 $11.36 1% 6% 3% 8% 30% -29% -38% 0.8 14,510 $18.31 $9.48 29% 18% -40% 96% 34% -26% -15% 0.9 $12.96 $17.81 2% -9% -28% 1% 10% -7% -4% 1.0 16,960 $12.36 $24.90 -7% 0% 9% -17% 7% 6.6 1% 6.2 23% 37,690 -11% $12.06 -11% $18.23 G&A expense 1% 1% 6% -9% -12% 61 Reviewing Estimates and Valuation ■ We have updated our estimates following Q3/14 results, and have made the following material changes to our estimates: o Dolores – We no longer assume Pan American goes ahead with development of the 5,600 tpd pulp agglomeration circuit, including a 1,500 tpd underground operation. Recall that Pan American deferred a construction decision following the positive PEA on the expansion in June 2014, while it further derisked the project through additional studies. We have scaled back our estimates to assume a relative steady state heap leach operation. o Peru (Huaron and Morococha) – We have updated our estimates following review of the technical reports for both operations. At Huaron, we have increased our annual throughput estimates to 867,000 tonnes, from 821,000 tonnes; and at Morococha we have increased our annual throughput to 675,000 tonnes from 566,000 tonnes based on the plans within the respective technical reports. ■ Overall, our net asset valuation has decreased 1.2%, and we have decreased our target price to $11.50 per share (from $11.60 per share). We have lowered our overall target multiple to 1.03x compared with 1.05x previously. Our new breakdown is illustrated in Exhibit 2. Note – our net asset valuation and target price are based on a $19/oz long-term silver price. Exhibit 2 - NAV Breakdown and Target Price Generation Current Est. Alamo Dorado Huaron Morococha (92.2%) La Colorada Manantial Espejo San Vicente (95%) Navidad Dolores Waterloo Pico Machay and Calcatreu Total Mining Assets Cash and Cash Equivalents Working Capital (excl. WIP Inventory) Long-term Debt Marketable Securities In-the-money instruments Corporate G&A Corporate Assets Q3/15E % NAV (US$M) NAV (US$M) NAV Project Projected Multiple Value (US$M) $22 $122 $145 $317 $18 $121 $90 $476 $0 $0 $1,311 $377 $149 ($53) $0 $0 $17 $120 $141 $366 $16 $111 $90 $506 $0 $0 $1,368 $270 $192 ($36) $0 $0 1% 7% 8% 22% 1% 7% 5% 30% 0% 0% 81% 16% 11% -2% 0% 0% 1.00x 1.05x 1.05x 1.05x 0.75x 1.05x 1.00x 1.05x 1.00x 1.00x 1.04x 1.00x 1.00x 1.00x 1.00x 1.00x $17 $126 $148 $385 $12 $117 $90 $531 $0 $0 $1,426 $270 $192 ($36) $0 $0 ($112) $361 ($108) $318 -6% 19% 1.00x 1.00x ($108) $318 100% 1.03x Net Asset Value $1,673 $1,687 Fully Diluted (ITM) Shares (M) Projected Value (US$/sh) One-year Target Price (US$) 151.5 $11.04 151.5 $11.13 $1,745 151.5 $11.52 $11.50 Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 62 Company Comment Thursday, December 18, 2014, Pre-Market (PWT-T C$2.54) (PWE-N US$2.18) Penn West Exploration 2015 Capital Budget and Dividend Reduced Patrick Bryden, CFA - (403) 213-7750 (Scotia Capital Inc. - Canada) [email protected] Riley Hicks, CA, MBA - (403) 213-7760 (Scotia Capital Inc. - Canada) Justin Strong, MBA - (403) 213-7328 (Scotia Capital Inc. - Canada) Rating: Sector Underperform Target 1-Yr: Risk Ranking: High Valuation: 0.2x our 2P NAV plus risked upside. C$4.25 ROR 1-Yr: 72.0% Div. (NTM) Div. (Curr.) Yield (Curr.) $0.12 $0.12 4.7% Key Risks to Target: Crude oil and natural gas prices; CAD/USD exchange rate; drilling program succes s Event Pertinent Revisions ■ Penn West announced a revised 2015 capital budget, reduced dividend and suspension of the DRIP program. Implications ■ 2015 capital budgeted revised. In the face of a difficult commodity price environment, Penn West has opted to reduce its 2015 capital budget by approximately 25%, from $840 mm to $625 mm. ■ Dividend rationalized. Penn West has reduced its quarterly dividend by approximately 80%, from $0.14/share to $0.03/share. While the dividend reduction is a difficult decision, we believe that it is a prudent step for the company, given the current challenges of the commodity price environment. Additionally, Penn West announced the suspension of its DRIP program, effective January 1, 2015. ■ Production guidance reduced. The company has reduced its production guidance for 2015 to a range of 90,000 -100,000 boe/d, a 5% reduction from the previous guidance range of 95,000 -105,000 boe/d. ■ Sustainability metrics improved, but still a challenge. Management has taken steps to solidify its balance sheet, however, we still see challenged sustainability metrics with 2015E D/CF of 4.4x and a 2015E effective payout ratio of 122%. At US$65/boe WTI and US$3.50 HH, we estimate these metrics to approach 8.0x and 200%, respectively. CFPS14E CFPS15E CFPS16E New $1.88 $1.29 $1.60 Old $1.84 $0.99 $1.47 Recommendation ■ We maintain our SU rating and one-year target price of $4.25 per share. Qtly CFPS (FD) 2013A 2014E 2015E 2016E Q1 $0.52 A $0.52 A $0.25 $0.34 (FY-Dec.) Cash Flow/Share Dividends/Share Price/Cash Flow Pre-tax Cash Yield Q2 $0.56 A $0.59 A $0.28 $0.36 Q3 $0.55 A $0.44 A $0.26 $0.33 Q4 $0.27 A $0.33 $0.33 $0.36 Year $1.89 $1.88 $1.29 $1.60 P/CF 4.7x 1.3x 2.0x 1.6x 2012A $2.29 $1.08 4.7x 10.0% 2013A $1.89 $0.82 4.7x 9.2% 2014E $1.88 $0.56 1.3x 22.0% 2015E $1.29 $0.12 2.0x 4.7% 2016E $1.60 $0.12 1.6x 4.7% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) BVPS14E: $14.74 ROE14E: 0.50% Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $1,266 $2,299 $3,565 498 498 63 2015 Capital Budget and Dividend Reduced ■ 2015 capital budgeted revised. In the face of a challenging Exhibit 1 - Sustainability Metrics commodity price environment, Penn West has opted to reduce its Sensitivities 2015 capital budget by approximately 25%, from $840 mm to CFPS Current Scotia Deck $60 $65 $625 mm. The majority of the budget will be allocated to the Estimate: $1.29 Henry $2.00 $0.43 $0.66 Cardium and Viking core light oil areas. Hub $2.50 $0.47 $0.70 ■ Production guidance reduced. The company has reduced its production guidance for 2015 to a range of 90,000 -100,000 boe/d, a 5% reduction from the previous guidance range of 95,000 -105,000 boe/d. ■ Dividend rationalized. Penn West has reduced its quarterly dividend by approximately 80%, from $0.14/share to $0.03/share. While the dividend reduction is a difficult decision, we believe that it is a prudent step for the company, given the current challenges of the commodity price environment. Additionally, Penn West announced the suspension of its DRIP program, effective January 1, 2015. WTI $3.00 $3.50 $4.00 $4.50 $0.51 $0.55 $0.59 $0.67 $0.74 $0.78 $0.83 $0.90 $70 $0.89 $0.93 $0.97 $1.01 $1.06 $1.13 D/CF Sensitivities Current Scotia Deck Estimate: 4.3x Henry $2.00 Hub $2.50 $3.00 $3.50 $4.00 $4.50 $60 15.2x 13.8x 12.6x 11.6x 10.6x 9.3x $65 9.5x 8.9x 8.3x 7.9x 7.4x 6.7x $70 6.8x 6.4x 6.1x 5.8x 5.5x 5.1x $65 240% 226% 214% 202% 191% 176% $70 177% 170% 163% 156% 149% 140% $75 $1.12 $1.16 $1.20 $1.25 $1.29 $1.37 $80 $1.36 $1.40 $1.44 $1.48 $1.52 $1.60 $85 $1.59 $1.63 $1.67 $1.71 $1.76 $1.83 $75 5.2x 4.9x 4.7x 4.6x 4.4x 4.1x $80 4.1x 4.0x 3.8x 3.7x 3.5x 3.3x $85 3.4x 3.2x 3.1x 3.0x 2.9x 2.8x $75 141% 136% 131% 127% 122% 116% $80 117% 113% 110% 107% 104% 99% $85 100% 97% 95% 92% 90% 86% WTI Effective Payout Sensitivities Current Scotia Deck Estimate: 122% $60 Henry $2.00 371% Hub $2.50 338% $3.00 311% $3.50 288% $4.00 266% $4.50 236% WTI ■ Sustainability metrics improved, but still a challenge. The reduction of a material portion of the income stream is a Note: All other Scotiabank price deck assumptions unchanged in sensitivities. considerable setback for management; however, we note that this is a prudent decision for the company, given its challenged Source: Company reports; Scotiabank GBM estimates. sustainability metrics and the current commodity price environment. In our view, this will allow the company to protect its balance sheet while the company continues to focus on operational improvements. Exhibit 1 features our sensitivity analysis with new estimates incorporated and Exhibit 2 incorporates the change and impact. Exhibit 2 - Estimate Change Summary 2015E Changes (Scotia Estimated) Production Average Cash Flow Per Share Payout Ratio - Simple Payout Ratio - Effective Net Debt/CF Target Price boe/d $/share % % x $/share 2015E Guidance Update Production Average Capex Budget Funds Flow boe/d $Mm $Mm Pre 95,635 $1.07 60% 241% 6.3 $4.25 Pre $100,000 $840 $900 Post 92,376 $1.29 11% 122% 4.3 $3.75 Change (3,259) $0.22 -49% -119% (2.0) ($0.50) % -3.4% 21.0% -82.2% -49.3% -31.0% -11.8% Post 95,000 $625 $525 Change (5,000) (215) (375) % -5.0% -25.6% -41.7% Source: Company reports; Scotiabank GBM estimates. ■ High correlation to commodity price volatility. With no oil hedges in place for 2015, Penn West represents a highly operationally and financially leveraged equity in relation to oil price volatility. A rebound in commodity prices would ultimately benefit the share price of the company, and could create material potential gains for investors. On the flip side, further weakness in the commodity price environment would have a larger impact on Penn West when compared to peers. 64 ■ Foreign exchange hedges updated in estimates. Upon further discussion with management, we have realized that our treatment of the company’s foreign exchange hedges was previously incorrect, resulting in hedging losses of $2.54/boe in our prior 2015 estimates. Upon further consideration, we have updated our treatment of these hedges to better reflect the company’s forward positions, which has resulted in hedge gains of $0.50/boe for our 2015 and 2016 estimates. While we recognize that the fault for this modelling error falls upon our shoulders given that the third quarter statement showed a positive unrealized hedging gain, we also perceive the limited disclosure of the hedge position as a source of confusion, which impacted our ability to properly model the hedges. Our CFPS estimates therefore obscure the budget change impacts and management’s >40% reduction to its funds flow projection further highlights these impacts at lower prices. ■ Still lots of moving parts. The 2015 year was to be an important point in the 5-year plan outlined by management. To date, while we acknowledge better cycle times and well costs have been achieved, we also note this was in the context of constricted capital and more muted growth. Our view has remained that profitable per share growth would be required to foster greater investor attention, however, the current commodity price environment makes assessment of financial flexibility and sustainability of more paramount importance. A reduced budgetary outlook further constricts capital and, while industry is likely to garner incremental efficiencies in the context of high-graded projects and service cost reductions, it is more difficult to expect production can be maintained or even modestly grown. Central to this issue are the implications of what growth would do, namely: reduce operating costs, benefit from royalty incentives, and improve product mix and revenues from younger Cardium, Viking and Slave Point production. In our view, it may prove much tougher to achieve these envisioned wins embedded in the 5-year plan amid low prices. Furthermore, we are not entirely confident in what current operating costs and royalties should even be given we have only seen one recently reported clean quarter of restated financials so far. ■ Effectively unhedged and leveraged: dynamics at lower prices. As a reminder, fully 60% of 2015E production in the 5-year business plan is expected to be derived from non-core areas plus components of production from the balance of the portfolio’s three key resource plays are similarly mature in nature. Management noted it has decided to shut-in 2,000 boe/d of high cost production, which at its revised budget assumptions is expected to save the company $20 mm. Our math suggests these assets would have therefore otherwise operated at a funds flow loss of $27.40/boe or, alternatively, as an approximate $0.59/boe funds flow drag on the entire netback of the company. While only an example, the 2,000 boe/d represents approximately 2% of the production base and yet could have consumed approximately 3-4% of the company’s after-tax cash flow netback. If oil prices prove to be lower yet than anticipated by the budget, how many additional non-core areas become uneconomic due to the magnification effects of operational and financial leverage? While unhedged production could prove to be a massive boon for the enterprise should commodity prices rally from here in the New Year, and that is the central risk to our current viewpoint, the lack of hedges on the company’s oil and gas assets remains a near term concern for us. These considerations make a long position in the equity, in our view, more heavily predicated on speculation towards higher oil prices than based on investment in the here-andnow reality of prices offered in oil and gas futures curves or even our current price deck assumptions. Investment Thesis ■ A more tempered path chosen given market demanded it. Despite recent management assurances that the dividend would not be cut, it was our sense that the financial position of the company would ultimately result in a reduced capital budget and/or dividend, given the challenging commodity price environment. Ultimately, we view the board’s decision as a conservative one, but question whether the reduction will prove significant enough, given that a $625 mm capital budget exceeds management’s expected funds flow of $500-$550 65 mm, prior to the consideration of the annualized dividend of $0.12/share. In our view, it would be prudent of management to live within cash flow, given that the financial metrics of the company remain challenged relative to the peer group average. ■ Investment thesis maintained. We have maintained our rating of Sector Underperform and our one-year price target of $4.25/share as we endeavour to further assess the company’s ability to navigate the current downturn in commodity prices. Our target price represents a 2015E EV/DACF of 6.7x, which compares to the peer group average of 10.0x. Penn West currently trades at a 2015E EV/DACF of 5.5x versus the peer group average of 7.2x. 66 Exhibit 3 - Financial and Operating Forecasts Fiscal Year End - December 31 2011A 2012A restated 2013A restated Q1/14A restated Q2/14A Q3/14A Q4/14E 2014E 2015E 2016E US$/B C$/B C$/B US$/Mcf C$/Mcf US$/C$ $94.72 $95.37 $73.73 $4.01 $3.64 $1.01 $94.09 $87.12 $70.55 $2.76 $2.39 $1.00 $98.01 $93.42 $75.11 $3.72 $3.17 $0.97 $98.65 $99.51 $83.18 $5.06 $5.49 $0.91 $103.15 $106.67 $90.47 $4.53 $4.69 $0.92 $97.69 $98.31 $83.84 $3.93 $4.03 $0.92 $78.76 $82.25 $74.08 $4.06 $3.93 $0.88 $94.52 $96.64 $82.87 $4.39 $4.53 $0.91 $75.00 $78.85 $68.57 $4.00 $3.75 $0.88 $83.00 $88.00 $75.89 $4.00 $3.60 $0.88 Daily Production Total Oil & Liquids Natural Gas Total Production Change in Total Production Percentage Natural Gas B/d Mmcf/d Boe/d % % 103,208 359.3 163,094 -1% 37% 104,144 342.3 161,195 -1% 35% 85,097 300.0 135,092 -16% 37% 71,639 239.0 111,472 -10% 36% 69,408 224.0 106,741 -4% 35% 64,687 216.9 100,839 -6% 36% 64,651 198.3 97,703 -3% 34% 67,569 219.4 104,142 -23% 35% 64,232 168.9 92,376 -11% 30% 64,047 162.0 91,043 -1% 30% Financial Estimates Cash Flow from Operations Investment Cash Flows - Internal Investment Cash Flows - M&A Financing Cash Flows Dist/Div (actuals net of DRIP) [$mm] [$mm] [$mm] [$mm] [$mm] $1,456.0 -$1,846.0 $100.0 $226.0 -$328.0 $1,090.0 -$1,752.0 $1,615.0 -$822.0 -$395.0 $919.0 -$816.0 $525.0 -$633.0 -$360.0 $256.0 -$195.0 $213.0 -$234.0 -$54.0 $291.0 -$65.0 -$1.0 -$93.0 -$54.0 $219.0 -$225.0 $3.0 -$180.0 -$55.0 $162.7 -$325.0 $355.0 -$192.7 -$69.5 $928.7 -$810.0 $570.0 -$699.7 -$232.5 $560.7 -$625.0 $0.0 $64.3 -$59.8 $693.4 -$1,000.0 $0.0 $306.6 -$59.8 Cash Flow Per Share - FD EBITDA EPS Distribution - Basic $/Share $/Share $/Share $/Share $3.08 $3.81 $1.35 $1.08 $2.29 $4.06 $0.26 $1.08 $1.89 $2.29 -$1.20 $0.82 $0.52 $0.35 ($0.18) $0.14 $0.59 $0.82 $0.29 $0.14 $0.44 $0.47 ($0.03) $0.14 $0.33 $0.41 ($0.00) $0.14 $1.88 $2.06 $0.07 $0.56 $1.29 $1.63 -$0.13 $0.12 $1.60 $1.97 $0.14 $0.12 Netbacks Revenue (pre-hedging) Hedging Gains (Losses) Royalties Operating Costs Transportation Costs Field Netback After-Tax Netback [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] [C$/boe] $61.02 -$1.06 -$11.10 -$17.40 -$0.49 $30.96 $25.14 $53.60 $1.77 -$8.37 -$20.10 -$0.49 $26.41 $19.90 $57.71 $0.16 -$8.23 -$20.79 -$0.59 $28.26 $20.51 $68.59 -$1.99 -$10.17 -$20.33 -$0.60 $35.50 $26.83 $69.75 -$2.99 -$11.53 -$15.13 -$0.62 $39.48 $30.52 $63.49 -$0.65 -$8.95 -$20.80 -$0.65 $32.44 $24.79 $55.77 -$0.03 -$8.77 -$19.54 -$0.62 $26.82 $19.40 $64.61 -$1.45 -$9.89 -$18.93 -$0.62 $33.72 $25.52 $54.22 $0.50 -$8.59 -$19.86 -$0.56 $25.71 $17.93 $59.70 $0.47 -$9.53 -$19.93 -$0.54 $30.17 $22.17 Valuation Measures EV/DACF EV/EBITDA P/E D/P EV per Boe/d x x x % $/Boe/d 8.2 7.5 2.0 40% 82,497 6.4 4.2 10.2 40% 50,842 6.4 6.4 n/a 30% 52,447 3.3 5.6 n/a 21% 34,746 2.8 2.3 2.3 21% 34,558 3.7 4.0 n/a 21% 37,368 4.7 4.5 n/a 21% 37,252 3.4 3.6 36.0 21% 34,949 5.5 5.4 n/a 4% 40,885 5.1 4.8 19.3 4% 45,508 Credit Capacity Credit facility % Drawn [$mm] % $2,750 45% $3,000 27% $3,000 18% $3,000 12% $1,700 22% $1,700 6% $1,700 -2% $1,700 -2% $1,700 22% $1,200 84% Net Debt & Debentures Net Debt & Debentures EBITDA Cash Flow Net Debt, Debentures & Equity EV $/Share x x x % $8.35 2.2 2.7 0.3 29% $6.30 1.6 2.8 0.3 37% $5.62 2.5 3.0 0.3 39% $5.21 3.7 2.5 0.3 66% $4.76 1.5 2.0 0.2 64% $4.92 2.6 2.8 0.2 65% $4.61 2.8 3.5 0.2 63% $4.61 2.3 2.5 0.2 63% $4.89 3.5 4.3 0.3 64% $5.62 3.3 4.0 0.3 68% Sustainability Payout Ratio - Simple Payout Ratio - Effective Capital Expenditures / Cash Flow % % % 35% 161% 127% 47% 208% 161% 43% 132% 89% 27% 103% 76% 24% 46% 22% 32% 134% 103% 43% 242% 200% 30% 117% 87% 11% 122% 111% 9% 153% 144% Hedging Percentage of Light & Medium Oil Percentage of Heavy Crude Oil Percentage of Natural Gas Production Percentage of Total Production % % % % ----- ----- ----- ----- ----- ----- 86% 0% 64% 66% 28% 0% 88% 45% 0% 0% 41% 13% 0% 0% 41% 12% Price Deck Assumptions WTI Edmonton Par WCS Nymex Natural Gas AECO 30-Day Spot Exchange Rate Source: Company reports; Scotiabank GBM estimates. 67 Company Comment Thursday, December 18, 2014, After Close (PHX-T C$7.40) PHX Energy Services Corp. Conservative 2015 Budget 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$11.00 ROR 1-Yr: 60.0% Valuation: 8.1x our 2016 EV/EBITDA estimate. Key Risks to Target: Commodity prices, labour supply, new technology, and FX. Event ■ PHX announced its 2015 capital budget. Div. (NTM) Div. (Curr.) Yield (Curr.) $0.84 $0.84 11.4% Pertinent Revisions Implications ■ Planning for the worst, hoping for the best. PHX announced a conservative budget of $16M vs. $84M in 2014 (or 19% of 2014 level). This compares to our $32M expectation and the Street at $38M. About $11.5M will go towards the expansion into higher margin services such as the Velocity platform. The remaining $4.5M is for maintenance capex. With this update we also lower our 2015 and 2016 EBITDAs by 7% as we pared back our U.S. day rates and utilization expectations. ■ Increased flexibility suggests dividend should remain intact. Last Friday, PHX increased its lines by $70M to $200M. Our 2015 FCF post dividend is $4M: $49M CF less $16M capex less $29M cash dividends. We forecast $100M draw on its $200M lines as of 2015YE with ND/EBITDA of 1.7x. At this time, we see little risk of PHX's dividend being trimmed; its current dividend yield is 11.4%. Also, a NCIB was issued for purchase of up to 1.76M shares or 5% of shares outstanding. New Old Target: 1-Yr $11.00 $12.00 EBITDA15E $58 $62 EBITDA16E $66 $71 New Valuation: 8.1x our 2016 EV/EBITDA estimate. Old Valuation: 8.2x our 2016 EV/EBITDA estimate. Recommendation ■ PT reduced to $11 with SP rating maintained. While we support management's decision and view PHX as a high quality directional driller, we continue to believe drill-bit driven OFS companies will continue to face headwinds in the current environment. A more optimal entry point could emerge as the NAM rig count pulls back. Qtly EBITDA (M) 2012A 2013A 2014E 2015E Q1 Q2 Q3 Q4 Year $15 A $17 A $21 A $18 $4 A $1 A $7 A $2 $18 A $20 A $25 A $18 $14 A $15 A $24 $19 $51 $49 $76 $58 EV / EBITDA 7.5x 10.7x 5.2x 6.6x 2012A $46.1 $42 $3.7 16.8% 16.6% 2.1x $0.67 $0.66 2013A $47.6 $28 $19.2 12.9% 9.4% 1.4x $0.50 $0.64 2014E $70.2 $73 $-2.9 15.0% 13.6% 1.6x $0.78 $0.84 2015E $49.4 $16 $33.4 12.6% 7.9% 2.0x $0.42 $0.84 2016E $56.7 $28 $28.7 12.8% 10.1% 2.1x $0.51 $0.84 (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: $5.55 ROE14E: 13.64% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $279 $114 $393 38 38 68 Exhibit 1 – Estimate Revision Summary 2014E Figures in $M 2015E New Prior ∆ New Prior Canada $183 $183 0% $152 United States $270 $270 0% $254 International $51 $51 0% Corporate $0 $0 0% Total Revenue $505 $505 Gross Margin 26.3% Canada United States 2016E ∆ New Prior ∆ $152 0% $172 $172 0% $276 -8% $287 $312 -8% $53 $53 0% $56 $56 0% $0 $0 0% $0 $0 0% 0% $458 $480 -5% $515 $540 -5% 26.3% 0.0% 23.8% 24.1% -1.2% 24.1% 24.3% -1.2% $24 $24 0% $15 $15 0% $18 $18 0% $22 $22 0% $14 $18 -21% $17 $21 -20% International $11 $11 0% $11 $11 0% $12 $12 0% Corporate $18 $18 0% $18 $18 -2% $20 $20 -2% 0% -7% -7% Revenue EBITDA Total EBITDA $76 $76 EBITDA Margin 15.0% 15.0% Operating Earnings $0.85 $0.85 Discontinued Operations $0.00 $0.00 Adjustments/Unusual Items ($0.07) ($0.07) Adjusted Net Earnings $0.78 $0.78 CF From Operations $1.97 Funds From Operations Net Capex $58 $62 12.6% 12.8% $66 $71 12.8% 13.1% $0.40 $0.46 $0.00 $0.00 $0.49 $0.56 $0.00 $0.00 0% $0.02 $0.02 0% $0.42 $0.48 -5% $0.02 $0.02 -5% -13% $0.51 $0.58 -12% $1.97 0% $1.31 $1.41 -7% $1.50 $1.62 -7% $70 $70 0% $49 $73 $73 0% $16 $53 -7% $57 $61 -7% $32 -50% $28 $34 -17% F.D. Per Share Data 0% -13% -12% Cash Flow Summary Net Acquisition (Disposition) $9 $9 0% $0 $0 $0 $0 Cash Dividends $29 $29 0% $29 $29 0% $29 $29 0% Net Capex/Cash Flow 1.0x 1.0x 0% 0.3x 0.6x -46% 0.5x 0.6x -11% Net Debt $114 $114 0% $100 $111 -11% $118 $131 -10% Canada 110 110 0% 110 110 0% 110 110 0% United States 101 101 0% 101 101 0% 101 101 0% International 15 15 0% 15 15 0% 15 15 0% Canada 43% 43% 35% 35% 39% 39% United States 51% 51% 46% 48% 50% 53% International 69% 69% 71% 71% 73% 73% Canada 16,312 16,312 0% 14,200 14,200 0% 15,620 15,620 0% United States 17,740 17,740 0% 16,800 17,700 -5% 18,480 19,470 -5% International 3,778 3,778 0% 3,900 3,900 0% 4,017 4,017 0% Canada $11,246 $11,246 0% $10,673 $10,673 0% $10,993 $10,993 0% United States $13,889 $13,889 0% $13,592 $14,018 -3% $14,000 $14,438 -3% International $12,253 $12,253 0% $12,151 $12,151 0% $12,516 $12,516 0% Canada 22.0% 22.0% 18.7% 18.7% 19.1% 19.1% United States 17.8% 17.8% 15.0% 15.9% 15.4% 16.3% International 30.6% 30.6% 28.3% 28.3% 28.7% 28.7% Operational Statistics Directional Drilling Fleet Utilization Rates Operating Time Average Day Rates Gross Margins Notes: Divisional cost breakdown related to intercompany rentals has been restated for 2013 and 2014. Source: Company reports; Scotiabank GBM estimates. 69 Company Comment Friday, December 19, 2014, Pre-Market (RMX-T C$1.19) (RBY-A US$1.05) Rubicon Minerals Corporation Update Largely In Line, UG Development Behind Plan and Above Budget; Pace said to Quicken Mike Hocking, MSc, P.Geo. - (416) 945-5228 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Speculative Amir Ahmad - (416) 862-3875 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$1.40 ROR 1-Yr: 17.6% Valuation: 1x NAV Key Risks to Target: Commodity risk, multiple contraction, project development risk, mineral resource and exploration risk Div. (NTM) Div. (Curr.) Yield (Curr.) $0.00 $0.00 0.0% Event ■ RMX provided a construction update to its flagship Phoenix project. Pertinent Revisions Implications EPS14E EPS15E EPS16E ■ Underground development behind schedule. RMX has completed 47% of the underground (UG) development; accelerating the pace of development from 12m/day (June through August) to 18m/day to the end of November. Development work is currently 21% behind schedule but management expects that an increased pace and a 430m (5%) reduction in total development meters will bring them back on track in Q1/15. We estimate RMX will need to increase their pace by an additional 20% to meet their goal (post the 5% development reduction). ■ Increase to underground capex. There is C$85M in capex remaining to production including an C$11M capex increase for UG development; the mill is expected to be commissioned by Q2/15. RMX has begun to stockpile ore and is currently carrying out a trial Alimak stope on the 305m-244m level. ■ NAV unchanged. We forecast a short commissioning period in H1/15, resulting in the sale of ~19Koz Au from stock piled rock. We have adjusted for the $12M payment RGLD payment (Q2/15E) and have rolled over our NAV by a year. This has resulted in a 6 cent reduction to our NAVPS as results of a lower cash balance (Q4/15, post capex). New $-0.03 $-0.03 $-0.01 Old $-0.05 $-0.04 $0.01 Recommendation ■ We rate RMX as Sector Perform, with a one-year target of $1.40. Qtly EPS (FD) 2013A 2014E 2015E 2016E Q1 $-0.01 A $-0.01 A $-0.01 (FY-Dec.) Earnings/Share Cash Flow/Share Price/Earnings Relative P/E Revenues (M) Current Ratio Q2 $-0.01 A $-0.01 A $0.00 2015E $-0.03 $0.04 n.m. n.m. $82 0.0x Q3 $-0.01 A $0.00 A $-0.01 2016E $-0.01 $0.07 n.m. n.m. $128 0.0x Q4 $-0.01 A $0.00 $-0.01 2017E $-0.01 $0.09 n.m. n.m. $140 0.0x Year $-0.03 $-0.03 $-0.03 $-0.01 P/E n.m. n.m. n.m. n.m. 2018E $0.03 $0.13 39.4x 1.6x $140 0.0x 2019E $0.06 $0.20 16.3x 0.7x $202 0.0x NAVPS: P/NAV: Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. $1.36 0.88x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link All values in C$ 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. $442 $-85 $356 371 367 70 Capital expenditures – largely in line, UG development over budget and behind schedule; pace said to increase ■ We view the underground development as the critical area that will determine if the project remains on schedule. During the most recent 90 day period the completed development increased to 3,586m (~47% of total) from 1,930m (24% of total) at the end of August, but it is ~950m (21%) behind schedule. The total length of underground development could potentially be lowered from 8,023m to 7,593m. The 430m reduction will be from reduced sub-level development (30m sublevels vs. 15m sublevels) as sublevel heights will be increased where Alimak long-hole mining is utilized; note that RMX is currently developing an Alimak test stope on the 305-244 level. We estimate that the pace of development has increased to ~ 18.2m per day from 11.5m in the previous period (Exhibit 1); Rubicon management has noted productivity gains from contractor changes. ■ We estimate that the pace of development will need to increase by an additional 20% to 21.9m/day for RMX to complete their updated underground development (7,593m) by mid2015 (June 1, 2015), or by 33% (24.25m/day) to achieve their original underground development total of 8,023m. RMX have accelerated the pace of underground development since September; management expect that this, combined with the potential elimination of 430m of development, will bring development back on schedule in Q1/15 ■ Rubicon remains largely on budget; however, we note a C$11M increase to total capital expenditures during the period, which is largely caused by an increase to the underground development cost. This is a ~25% increase to the initial underground budget of $44M (Exhibit 2). Exhibit 1 – Underground development update Underground Development Update Completed Total % of Total Pace (m/day) % Change in Pace 31-May-14 875 8,023 11% 8.0 n/a 31-Aug-14 1,930 8,023 24% 11.5 42.9% 30-Nov-14 3,586 7,593 47% 18.2 58.7% Source: Company reports; Scotiabank GBM estimates. Exhibit 2 – Remaining capital (from updated) and estimates of capital spent during the period and the pace of expenditures. 31-Aug-14 31-May-14 All figures in C$M Remaining capital Mill Underground development On-site construction Indirects & definition drilling Remaining Capital (incl contingency) Capital spent (Oct 2011 to update) Total Capital (spent + remaining) Remaing Remaing $71.5 $42.0 $31.7 $22.3 $167.5 Total $205.2 $372.7 $55.0 $31.0 $28.0 $18.0 $132.0 30-Nov-14 Spent in Pace period ($/day) Remaing $16.5 $11.0 $3.7 $4.3 $35.5 Total $241.0 $373.0 $0.18 $0.12 $0.04 $0.05 $0.39 $27.0 $29.0 $19.0 $10.0 $85.0 Spent in Pace period * ($/day) $28.0 $13.0 $9.0 $8.0 $47.0 $0.31 $0.14 $0.10 $0.09 $0.52 Total $299.0 $384.0 *Note that we assume that the $11M increase in total capital expenditures was spent on UG development during the most recent period. Source: Company reports; Scotiabank GBM estimates. 71 Liquidity Update ■ ■ As of November end, the company has ~$140M in cash and equivalents (Q3 end was $143.2M). RMX expects to receive an additional $12M from the Royal Gold (RGLD-Q, Tanya Jakusconek, SP) streaming transaction. On Oct. 3, US$27.6M in payments remained during the construction period (following a payment of ~$17M), implying a payment of ~US$15.6M was received from Royal before November 30. The company is looking to secure debt to fund working capital needs, management believe they are likely to either secure that in Q1/15 or early Q2/15. Mill Construction ■ ■ ■ The mill has $27M in capex remaining towards production (previous Aug. 31 update was at $55M) and remains on budget (as per management commentary); implying a net spend of $28M. The company expects the mill to be fully commissioned in Q2/15. The drive train for the ball mill has been installed and aligned. The drive train for the SAG mill and Knelson gravity concentrators are currently being installed, with all structural steel in the mill (except stairwells) completed. The top rings and platforms for the carbon-in-leach tank shells are currently being installed; while, the paste plant filters and vacuum receivers have been placed and are ready to be installed. The construction of the refinery, mill thickener and cyanide destruction circuits are progressing as planned. Surface Infrastructure and On-Site Construction ■ Surface infrastructure activity remains on budget with $19M left in spending. Construction of a 2,500 tpd crushed ore bin has been completed and the tailings management facility is ready to receive tailings now and will have capacity to handle two years of potential production in early 2015. Valuation & Forecast ■ ■ Rolled NAV and forecast changes. We forecast a small commissioning period in H1/15, resulting in the sale of ~19Koz Au. Furthermore, we adjusted for the $12M payment in relation to RGLD (Q2/15E) and have rolled over our NAV by a year. This has resulted in lower NAV by six cents (due to lower year end cash balance). Premium valuation. At our blended discount rate of 7% (5% on M&I tonnes, 8% on inferred tonnes) and at our long term gold price of US$1300/oz RMX is trading at 0.9x NAV, at a spot gold price of $1200/oz the stock is trading at 1.1x NAV. Using a flat 5% discount rate the stock is trading at 0.77x NAV, at US$1300/oz, and 0.95x NAV at $1200/oz. 72 Exhibit 3 – NAV at flat $1300/oz gold price Net Asset Value (NAV) based on unlevered after-tax free cash flows Discount After-tax Location Ownership rate NPV Phoenix Canada 100% 7% 419 Gross asset value - Debt + Cash (Q4/15E) +/- Adjustments Net asset value (C$Mln) Fully diluted shares outstanding (fully-funded) Net asset value per share (CAD) Price/Net asset value 419 85 NPV per share 1.13 Target multiple 1.00x 1.13 0.23 505 371.6 1.36 0.88x Source: Scotiabank GBM estimates. Exhibit 4 - NAV at spot gold price of $1200/oz. Net Asset Value (NAV) based on unlevered after-tax free cash flows Discount Location Ownership rate Phoenix Canada 100% 7% Gross asset value - Debt + Cash (Q4/15E) +/- Adjustments Net asset value (C$Mln) Fully diluted shares outstanding (fully-funded) Net asset value per share (CAD) Price/Net asset value After-tax NPV 320 NPV per share 0.86 320 79 0.86 0.21 Target multiple 1.00x 399 371.6 1.07 1.11x Source: Scotiabank GBM estimates. ScotiaView Analyst Link 73 Company Comment Friday, December 19, 2014, Pre-Market (SAP-T C$32.79) Saputo Inc. Sale Of Bakery Division; Impact Minimal Patricia A. Baker, MBA, PhD - (514) 287-4535 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: Medium Target 1-Yr: Jean Marc Ayas - (514) 287-3626 (Scotia Capital Inc. - Canada) [email protected] C$37.50 ROR 1-Yr: 15.9% Valuation: 21x F16E EPS Key Risks to Target: Drop in U.S. cheese prices; rising C$ Div. (NTM) Div. (Curr.) $0.52 $0.46 Yield (Curr.) 1.4% Event ■ Saputo announced the sale of its Bakery division to Canada Bread Company, a subsidiary of Mexican company Grupo Bimbo. The transaction is subject to regular approval and conditions and is expected to close in February 2015. Implications ■ In F2014, the Bakery division had sales of approximately $139M and represented less than 2% of consolidated revenues. The division, which produces, markets and distributes mainly snack-cakes, operates one manufacturing facility in Quebec and employs 642 employees. Recommendation ■ Given the non-core nature of the division, the transaction does not affect our thesis. Our estimates for F2015 and F2016 remain the same. We continue to believe that with a growing global platform, SAP is well positioned to seek new accretive M&A opportunities and to continue returning cash to shareholders. Qtly EPS (FD) 2013A 2014A 2015E 2016E Q1 $0.30 A $0.34 A $0.37 A Q2 $0.32 A $0.34 A $0.39 A (FY-Mar.) Earnings/Share Cash Flow/Share Price/Earnings Relative P/E Revenues (M) EBITDA (M) Current Ratio EBITDA/Int. Exp 2012A $1.23 $1.29 17.6x 0.9x $6,930 $831 1.6x 33.7x Q3 $0.33 A $0.37 A $0.44 2013A $1.27 $1.62 20.3x 0.7x $7,298 $861 1.2x 25.2x Q4 $0.32 A $0.39 A $0.41 2014A $1.44 $1.67 19.3x 0.8x $9,233 $1,020 1.1x 14.8x Year $1.27 $1.44 $1.61 $1.76 P/E 20.3x 19.3x 20.4x 18.6x 2015E $1.61 $2.13 20.4x 0.8x $10,536 $1,154 1.4x 15.5x 2016E $1.76 $2.54 18.6x 0.7x $10,839 $1,219 1.2x 18.1x BVPS15E: $8.08 ROE15E: 21.04% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) $12,831 $2,012 $14,906 ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. 391 256 74 Intraday Flash Thursday, December 18, 2014 @ 3:45:15 PM (ET) (SCCO-N US$27.45) (SCCO-LM PEN 27.08) Southern Copper Corporation Toquepala Concentrator Expansion EIA Approved Alfonso Salazar, MSc - +52 (55) 5123 2869 (Scotiabank Inverlat) [email protected] Rating: Sector Outperform Risk Ranking: High Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: US$40.00 ROR 1-Yr: 48.6% Valuation: Scenario-Weighted NAV Key Risks to Target: Commodity price, operating, and technical risks, political, environmental, and legal risk s Div. (NTM) Div. (Curr.) $0.79 $0.48 Yield (Curr.) 1.8% Event ■ The Peruvian Ministry of Energy and Mining (MEM) has approved the Environmental Impact Assessment (EIA) for Toquepala's concentrator expansion. This approval is in line with our expectations despite coming a few weeks later than we originally anticipated. Implications ■ Southern Copper should now be able to start the expansion project, which is expected to be ready in Q4/16. ■ Once completed, the new 60ktpd concentrator should increase copper production by 100ktpa and molybdenum production by 3.1ktpa. We expect EBITDA to increase by $420M to reach $6.5B for 2017, and by $589M to $7.6B in 2018, supported by the Toquepala expansion. ■ We estimate the project adds $2.16 per share to our 2015E NAV. In our analysis, we model capex of $1.2B ($325M already disbursed) for the expansion project and additional copper capacity of 100ktpa. Recommendation ■ We expect the project's approval to be a short-term catalyst for the stock. This approval is in line with our expectation and supports our production growth estimates. We reiterate our Sector Outperform rating. Qtly Adj. EPS (FD) 2012A 2013A 2014E 2015E Q1 $0.73 A $0.59 A $0.39 A $0.43 (FY-Dec.) Adj Earnings/Share Cash Flow/Share Price/Earnings EV/EBITDA Price/Cash Flow Revenues (M) EBITDA (M) Q2 $0.66 A $0.44 A $0.40 A $0.49 Q3 $0.63 A $0.41 A $0.39 A $0.56 Q4 $0.63 A $0.48 A $0.39 $0.61 Year $2.65 $1.92 $1.58 $2.09 P/E 14.3x 15.0x 17.4x 13.1x 2012A $2.65 $1.12 14.3x 9.0x 33.9x $6,669 $3,751 2013A $1.92 $0.19 15.0x 9.1x n.m. $5,953 $2,928 2014E $1.58 $-0.27 17.4x 9.7x n.m. $5,764 $2,727 2015E $2.09 $0.45 13.1x 7.7x 61.6x $6,764 $3,457 2016E $3.16 $2.37 8.7x 5.4x 11.6x $8,685 $4,875 BVPS14E: $7.29 ROE14E: 23.72% NAVPS: P/NAV: $39.95 0.69x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) $22,877 $3,203 $26,111 ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. 833 146 75 Company Comment Thursday, December 18, 2014, After Close (TCK.B-T C$14.93) (TCK-N US$12.88) Teck Resources Limited Stress Testing the Balance Sheet: Dividend Risk is High but Liquidity Risk is Low Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: High Target 1-Yr: Dalton Baretto, MBA, CFA - (416) 863-7623 (Scotia Capital Inc. - Canada) [email protected] C$25.00 ROR 1-Yr: 73.5% Valuation: 50% of 7.5x 2015E EV/EBITDA + 50% of 8% NAV Key Risks to Target: Commodity prices, currency, operating, development, balance sheet and environmental Div. (NTM) Div. (Curr.) Yield (Curr.) $0.90 $0.90 6.0% Event ■ Given the market's current focus on Teck's liquidity and the associated sustainability of the dividend, we have stress tested the company's balance sheet under various commodity and dividend level scenarios. Implications ■ In the current spot commodity price environment, our analysis suggests that Teck has sufficient liquidity for at least another 3 years and possibly as long as 6 years depending on the dividend level. ■ While Teck has the liquidity to maintain the current dividend for some time, our analysis suggests that the company would likely jeopardize its investment grade rating in another 6-12 months based on spot prices. In our view, reducing the dividend by 50% in mid-2015 would be a prudent financial move. ■ In our markedly more bearish commodity price scenario of spot less 10%, our analysis suggests that Teck would only have sufficient liquidity for another 2-3 years, irrespective of the dividend level. Recommendation ■ With limited near-term balance sheet and project development concerns, and likely bottom of cycle pricing for coking coal and copper, in our view, the current share price represents an attractive risk/reward trade-off. Teck is rated Sector Outperform with a C$25.00 target. Our C$25.00 target is based on a 50/50 mix of 7.5x our 2015E EV/EBITDA and 1.0x our 8% NAV of $24.19. Qtly Adj. EPS (FD) 2012A 2013A 2014E 2015E (FY-Dec.) Adj Earnings/Share Cash Flow/Share Price/Earnings Revenues (M) EBITDA (M) Q1 $0.86 A $0.56 A $0.18 A $0.17 Q2 $0.53 A $0.34 A $0.13 A $0.12 Q3 $0.60 A $0.44 A $0.28 A $0.42 Q4 $0.61 A $0.40 A $0.29 $0.48 Year $2.60 $1.74 $0.87 $1.19 P/E 13.9x 15.9x 17.2x 12.6x 2014E $0.87 $3.09 17.2x $8,611 $2,608 2015E $1.19 $3.48 12.6x $8,920 $2,795 2016E $1.62 $3.85 9.2x $9,255 $3,216 2017E $1.67 $4.26 8.9x $9,272 $3,343 2018E $1.82 $4.37 8.2x $9,369 $3,559 BVPS14E: $32.46 ROE14E: 2.67% NAVPS: P/NAV: Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ unless otherwise indicated. ^ Subordinate Voting Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) $8,603 $4,809 $13,412 $24.19 0.62x 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. 576 565 76 Balance Sheet Well Positioned Based on our Price Deck ■ At the end of Q3/14, the company had total cash of $1.9 billion and total debt of $8.1 billion, resulting in a significant net debt position of $6.3 billion (or $10.89 per share). The company’s net debt to net debt plus equity ratio increased to 25% (vs. 23% at Q2/14). We forecast the company to exit this year with a slightly higher net debt position of $6.4 billion (or $11.16 per share). ■ Based on our copper and coal price outlook, we forecast negligible free cash flow of -$0.1 billion (-$0.25 per share) in 2015 and $0.1 billion (or $0.13 per share) in 2016, respectively. Exhibit 1 details our operating and free cash flow per share estimates between now and 2020. We note that our near-to-medium-term free cash flow estimates remain depressed as in addition to funding Fort Hills, we continue to assume that Teck will move ahead with the $0.7 billion restart of Quintette during 2018-2019 and the $5.6 billion development of QB2 during 2018-2021. Exhibit 1 - Teck Resources forecast operating and free cash flow per share $5.00 $4.36 $4.37 $4.26 $4.28 $4.21 $3.85 $4.00 $3.48 $3.09 $3.00 $2.00 $1.13 $1.22 $1.00 $0.17 $0.13 $0.00 2013A ($1.00) 2014E 2015E 2016E 2017E ($0.25) ($0.61) 2018E 2019E ($0.18) ($0.88) ($2.00) CFPS FCFPS Source: Company reports; Scotiabank GBM estimates. ■ We note that the company has minimal debt maturities in the next few years (only US$300 million due in 2015, US$600 million due in 2017, US$500 million due in 2018 and US$500 million due in 2019) and a weighted average debt maturity term of ~14 years. We note that the company’s public debentures have no financial covenants. The company’s credit facility has one financial covenant that requires the debt to debt + equity ratio to remain below 50%. Teck currently has $5.3 billion of total liquidity, derived from $1.9 billion of cash and its unused US$3.0 billion credit facility (maturity of 2019). ■ We forecast the company’s net debt balance to increase to $7.4 billion (or $12.90 per share) by the end of 2015 and to $8.2 billion (or $14.22 per share) by year-end 2016, respectively. In order to supplement minimal near-term free cash flow generation, maintain a minimum cash balance of ~$0.5 billion, maintain the current dividend of $0.5 billion per annum, meet medium-term debt maturities, and fund the development of Fort Hills, along with Quintette and QB2 late this decade, we forecast that the company will need to raise additional debt of $0.5 billion in 2015, $0.9 billion in 2016, $0.6 billion in 2017, $1.0 billion in 2018, $1.0 billion in 2019, and $1.0 billion in 2020, respectively. We assume that the majority of this funding will be sourced from the company’s existing US$3.0 billion revolver. Between now and the end of decade, we forecast a peak net debt balance of $9.9 billion (or $17.14 per share) and a peak net debt to net debt + equity ratio of 33.4% both in 2020, respectively. We note that if Teck were to defer the restart of Quintette and the development of QB2 longer 2020E 77 then we anticipate, our analysis suggests that Teck would not need to borrow any additional funds beyond 2017 based on our commodity price deck. In fact, under this scenario, we forecast that the company’s net debt position would only increase by $1.0 billion during the 2015-2017 periods. How Long Can the Dividend Be Maintained? ■ Based on our commodity price assumptions and the company’s rising but still reasonable debt leverage, in our view, Teck’s balance sheet should be able to maintain the current dividend of $518 million per annum for some time. ■ However, if current prices for coal (US$117/t benchmark), copper (US$2.90/lb), and zinc (US$0.95/lb), and a Canadian/US dollar exchange rate of 0.86 were to hold indefinitely, in our view, Teck’s balance sheet would likely be in a position to support the current dividend for only another ~6-12 months, at which point we forecast that the company’s EBITDA/interest ratio would fall below the 8.0x level and the debt to EBITDA ratio would creep above the 3.5x level, thereby jeopardizing the company’s investment grade rating (however the debt to debt + equity ratio would remain below the 35% level). ■ In its Q3/14 call, management suggested that the company would not aggressively try and protect its current mid-BBB rating, and that a one-notch downgrade to BBB-Low could be possible (this is still investment grade). The company’s long-term balance sheet targets include a debt to debt + equity ratio of ~30%, debt to EBITDA of ~2.5x, and EBITDA/interest of ~6.0x, although clearly the company is prepared to take these ratios above these targets in the current low price environment for coal. Stress Testing the Balance Sheet – Six Scenarios to Consider ■ We have stress-tested the company’s balance sheet and dividend under current spot prices (US$117/t benchmark coal, US$2.90/lb Cu, US$0.95/lb Zn, US$56/bbl WTI, and 0.86 CAD/USD FX rate) as well as a more punitive scenario of current spot prices less 10% (US$105/t benchmark coal, US$2.61/lb Cu, US$0.86/lb Zn, US$50/bbl WTI, and 0.86 CAD/USD FX rate). Under each of these commodity price scenarios, we also investigate the impact of three potential dividend decisions – no cut (ie. the status quo), a 50% cut, and a full elimination of the dividend, all beginning in 2015. Our findings are outlined in the sections below. We note that in all our commodity price and dividend decision scenarios outlined below, we include Fort Hills, but have assumed that Quintette, QB2 and Relincho do not move forward (given that these growth projects are not economic under lower commodity prices). Our analysis also assumes that Teck’s only external source of funding to bridge any cash shortfalls is the company’s existing US$3.0 billion revolver, which is currently undrawn (however, we assume that the maturity of the revolver is extended beyond 2019). At Spot Commodity Prices Scenario 1 – No cut to the dividend ■ At current spot commodity prices and assuming no change to the current dividend level, we estimate that Teck’s ~$5.3 billion in liquidity is sufficient to adequately fund the company until the end of 2017. However, we note that under this scenario, Teck would likely lose its investment grade credit rating by the end of 2015 as the company’s EBITDA to interest is forecast to be below 8.0x while the debt to EBITDA ratio is forecast to be at the 3.5x threshold. Our findings are outlined in Exhibits 2-4. Exhibit 2 - Estimated Cash, debt and leverage ratios - 2015 to 2020 - Current Spot Prices, no change to dividend C$ millions Cash Total Debt Net Debt (Cash) Debt to EBITDA Debt to Cap. EBITDA to Interest Source: Scotiabank GBM estimates. 2015e 609 8,293 7,684 3.5 31% 7.8 2016e 504 9,593 9,089 4.1 35% 7.0 2017e 521 10,613 10,093 4.5 38% 6.1 2018e (551) 10,057 10,608 4.4 38% 3.9 2019e (1,576) 9,500 11,076 4.1 38% 4.1 2020e (2,445) 9,500 11,945 4.1 39% 4.2 78 Exhibit 3 - Forecast Debt to EBITDA - Spot prices, no dividend cut Exhibit 4 - Forecast Net debt per share - Spot prices, no dividend cut 5.0 $25.00 4.5 4.4 4.5 4.1 $20.73 4.1 4.1 4.0 $20.00 $18.41 3.5 3.5 $17.52 $15.77 3.1 3.0 $15.00 $13.34 2.3 2.5 $11.16 1.9 2.0 1.5 $10.00 $8.59 $6.97 1.3 1.2 $19.22 1.0 $6.78 $4.48 $5.00 0.5 0.0 $- 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E Source: Scotiabank GBM estimates. 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E Source: Scotiabank GBM estimates. Scenario 2 – 50% cut to the dividend ■ At current spot commodity prices and assuming a 50% reduction in the current dividend level, we estimate that Teck’s ~$5.3 billion in liquidity is sufficient to adequately fund the company until the end of 2018. However, we note that under this scenario, Teck would likely lose its investment grade credit rating by the end of 2016 as the company’s EBITDA to interest is forecast to be below 8.0x while the debt to EBITDA ratio is forecast to climb above the 3.5x threshold. Our findings are outlined in Exhibits 5-7. Exhibit 5 - Estimated Cash, debt and leverage ratios - 2015 to 2020 - Current Spot Prices, 50% cut to dividend C$ millions 2015e Cash Total Debt Net Debt (Cash) Debt to EBITDA Debt to Cap. EBITDA to Interest 2016e 577 7,993 7,416 3.4 30% 8.1 501 9,043 8,542 3.9 34% 7.4 2017e 522 9,775 9,253 4.2 36% 6.7 2018e 2019e 568 10,057 9,490 4.4 38% 4.0 (171) 9,500 9,672 4.1 38% 4.1 2020e (747) 9,500 10,248 4.1 39% 4.2 Source: Scotiabank GBM estimates. Exhibit 6 - Forecast Debt to EBITDA - Spot prices, 50% dividend cut Exhibit 7 - Forecast Net debt per share - Spot prices, 50% dividend cut 5.0 $20.00 4.4 4.5 4.2 4.1 3.9 4.0 3.1 2.3 1.2 $8.00 1.3 $4.00 0.5 $2.00 2019E $8.59 $6.97 $6.00 1.0 2018E $12.87 $10.00 1.9 2.0 $16.79 $11.16 $12.00 2.5 $16.47 $14.82 $14.00 3.0 1.5 $16.06 $16.00 3.4 3.5 $17.79 $18.00 4.1 $6.78 $4.48 $- 0.0 2010A 2011A 2012A 2013A Source: Scotiabank GBM estimates. 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2010A 2011A 2012A 2013A Source: Scotiabank GBM estimates. 2014E 2015E 2016E 2017E 2020E 79 Scenario 3 – Elimination of the dividend ■ At current spot commodity prices and assuming a full elimination of the current dividend, we estimate that Teck’s ~$5.3 billion in liquidity is sufficient to adequately fund the company until at least the end of 2020. However, we note that under this scenario, Teck would likely lose its investment grade credit rating by the end of 2017 as the company’s debt to EBITDA ratio is forecast to climb above the 3.5x threshold by Q3/16, while the EBITDA to interest ratio is not projected to dip below 8.0x until 2017. Our findings are outlined in Exhibits 8-10. Exhibit 8 - Estimated Cash, debt and leverage ratios - 2015 to 2020 - Current Spot Prices, elimination of dividend C$ millions 2015e Cash Total Debt Net Debt (Cash) Debt to EBITDA Debt to Cap. EBITDA to Interest 2016e 643 7,793 7,150 3.3 30% 8.2 2017e 597 8,593 7,996 3.7 33% 8.0 2018e 511 8,925 8,414 3.8 34% 7.4 2019e 526 8,869 8,343 3.8 35% 4.4 2020e 492 8,712 8,220 3.7 35% 4.5 521 9,012 8,491 3.9 37% 4.4 Source: Scotiabank GBM estimates. Exhibit 9 - Forecast Debt to EBITDA - Spot prices, elimination of dividend Exhibit 10 - Forecast Net debt per share - Spot prices, elimination of dividend 4.5 $16.00 4.0 3.7 3.8 3.8 3.7 3.9 $14.60 $14.48 $14.27 2017E 2018E 2019E $13.88 $14.74 $14.00 $12.41 3.3 3.5 $12.00 3.1 $11.16 3.0 $10.00 $8.59 2.3 2.5 $8.00 $6.97 1.9 2.0 $6.78 $6.00 1.5 1.2 1.3 $4.48 $4.00 1.0 $2.00 0.5 $- 0.0 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E Source: Scotiabank GBM estimates. 2010A 2011A 2012A 2013A 2014E 2015E 2016E Source: Scotiabank GBM estimates. At Spot Commodity Prices less 10% Scenario 4 – Spot minus 10%, No cut to the dividend ■ At current spot commodity prices less 10% and assuming no change to the current dividend level, we estimate that Teck’s ~$5.3 billion in liquidity is sufficient to adequately fund the company until the end of 2016. Under this scenario, Teck would likely lose its investment grade credit rating by the end of 2015 as the company’s EBITDA to interest ratio is forecast to dip below 8.0x in early 2015, while the debt to EBITDA ratio is forecast to be well above the 3.5x threshold at this time. Our findings are outlined in Exhibits 11-13. Exhibit 11 - Estimated Cash, debt and leverage ratios - 2015 to 2020 – Spot minus 10%, no change to dividend C$ millions Cash Total Debt Net Debt (Cash) Debt to EBITDA Debt to Cap. EBITDA to Interest Source: Scotiabank GBM estimates. 2015e 510 8,693 8,183 5.4 33% 5.5 2016e 528 10,993 10,465 6.8 40% 4.4 2017e (1,485) 10,613 12,099 6.6 41% 3.9 2018e (3,232) 10,057 13,289 6.3 42% 2.7 2019e (4,979) 9,500 14,479 5.9 43% 2.9 2020e (6,639) 9,500 16,139 5.9 46% 2.9 2020E 80 Exhibit 13 - Forecast Net debt per share - Spot minus 10%, no dividend cut Exhibit 12 - Forecast Debt to EBITDA - Spot minus 10%, no dividend cut $30.00 8.0 $28.01 6.8 7.0 6.6 $25.13 $25.00 6.3 5.9 6.0 $23.06 5.9 $21.00 5.4 $20.00 $18.16 5.0 $14.20 $15.00 4.0 3.1 $11.16 3.0 $10.00 2.3 $8.59 $6.97 1.9 2.0 1.2 1.3 2010A 2011A $6.78 $4.48 $5.00 1.0 $- 0.0 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2010A 2020E 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E Source: Scotiabank GBM estimates. Source: Scotiabank GBM estimates. Scenario 5 – Spot minus 10%, 50% cut to the dividend ■ At current spot commodity prices less 10% and assuming a 50% reduction in the current dividend level, we estimate that Teck’s ~$5.3 billion in liquidity is sufficient to adequately fund the company until the end of 2016. Under this scenario, Teck would likely lose its investment grade credit rating by the end of 2015 as the company’s EBITDA to interest ratio is forecast to be below 8.0x, while the debt to EBITDA ratio is forecast to climb well above the 3.5x threshold. Our findings are outlined in Exhibits 14-16. Exhibit 14 - Estimated Cash, debt and leverage ratios - 2015 to 2020 - Spot Minus 10%, 50% cut to dividend C$ millions 2015e Cash Total Debt Net Debt (Cash) Debt to EBITDA Debt to Cap. EBITDA to Interest 2016e 498 8,418 7,920 5.2 32% 5.5 584 10,293 9,709 6.4 38% 4.6 2017e 2018e (452) 10,613 11,065 6.6 40% 4.1 2019e (1,913) 10,057 11,970 6.3 41% 2.7 (3,368) 9,500 12,868 5.9 42% 2.9 2020e (4,728) 9,500 14,228 5.9 45% 2.9 Source: Scotiabank GBM estimates. Exhibit 15 - Forecast Debt to EBITDA - Spot minus 10%, 50% dividend cut 7.0 6.4 Exhibit 16 - Forecast Net debt per share - Spot minus 10%, 50% dividend cut $30.00 6.6 6.3 5.9 6.0 5.9 $24.69 $25.00 5.2 $22.33 $20.77 5.0 $19.20 $20.00 $16.85 4.0 $13.75 $15.00 3.1 3.0 $11.16 2.3 $10.00 1.9 2.0 $8.59 $6.97 1.2 $6.78 1.3 $4.48 $5.00 1.0 $- 0.0 2010A 2011A 2012A 2013A Source: Scotiabank GBM estimates. 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2010A 2011A 2012A 2013A Source: Scotiabank GBM estimates. 2014E 2015E 2016E 2017E 2018E 2019E 2020E 81 Scenario 6 – Spot minus 10%, Elimination of the dividend ■ At current spot commodity prices less 10% and assuming the complete elimination of the dividend, we estimate that Teck’s ~$5.3 billion in liquidity is sufficient to adequately fund the company until the end of 2017. Under this scenario, Teck would likely lose its investment grade credit rating by the end of 2015 as the company’s EBITDA to interest ratio is forecast to be below 8.0x, while the debt to EBITDA ratio is forecast to climb well above the 3.5x threshold. Our findings are outlined in Exhibits 17-19. Exhibit 17 - Estimated Cash, debt and leverage ratios - 2015 to 2020 - Spot minus 10%, elimination of dividend C$ millions 2015e Cash Total Debt Net Debt (Cash) Debt to EBITDA Debt to Cap. EBITDA to Interest 2016e 539 8,193 7,654 5.1 32% 5.6 540 9,693 9,153 6.0 37% 4.9 2017e 2018e 377 10,613 10,237 6.6 40% 4.2 (805) 10,057 10,862 6.3 41% 2.7 2019e (1,972) 9,500 11,473 5.9 42% 2.9 2020e (3,039) 9,500 12,539 5.9 45% 2.9 Source: Scotiabank GBM estimates. Exhibit 18 - Forecast Debt to EBITDA - Spot minus 10%, no dividend 7.0 Exhibit 19 - Forecast Net debt per share - Spot minus 10%, no dividend $25.00 6.6 6.3 6.0 5.9 6.0 $21.76 5.9 $19.91 $20.00 5.1 $18.85 $17.77 5.0 $15.88 $15.00 4.0 $13.28 $11.16 3.1 3.0 $10.00 2.3 1.2 1.3 2010A 2011A $8.59 $6.97 1.9 2.0 $6.78 $4.48 $5.00 1.0 $- 0.0 2012A 2013A Source: Scotiabank GBM estimates. 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2010A 2011A 2012A 2013A 2014E Source: Scotiabank GBM estimates. Conclusions ■ In our view, the market is confusing dividend risk with liquidity risk. In the current spot commodity price environment, our analysis suggests that Teck has sufficient liquidity for at least another 3 years and possibly as long as 6 years depending on the level of dividend maintained. We do not envision a scenario where the company would violate its only covenant on the revolver, which would otherwise trigger an early liquidity crisis. While Teck has the liquidity to maintain the current dividend for some time, our analysis suggests that the company would likely jeopardize its investment grade rating in another 6-12 months. Therefore, in our view, reducing the dividend by 50% in mid-2015 would be a prudent financial move given the current commodity price environment. In our markedly more bearish commodity price scenario of spot less 10%, our analysis suggests that Teck would only have sufficient liquidity for another 2-3 years, irrespective of the dividend level. 2015E 2016E 2017E 2018E 2019E 2020E 82 Valuation ■ TCK.B shares are currently trading at a 2015E and 2016E EV/EBITDA of 5.4x and 5.0x, and at an 8% P/NAV multiple of 0.62x. This compares to our base metals producer coverage universe average of 6.3x, 3.9x, and 0.66x respectively. We note that this relatively attractive 2015E multiple is based on what we anticipate to be bottom of cycle pricing for coking coal and copper. The company has traded an average EV/EBITDA of 6.2x over the past five years. In our view, Teck shares warrant a premium valuation given the company’s market capitalization and commodity diversification. ■ Commodity price sensitivities to our estimates are profiled in Exhibits 20-22. We also note that every $0.01 depreciation in the CAD/USD F/X rate increases the company’s EBITDA by $60 million per annum. In addition, every US$10/bbl change in the oil price reduces the company’s operating costs by ~$10 million per annum. Exhibit 20 - Forecast Sensitivity to Copper Price Exhibit 21 - Forecast Sensitivity to Coal Price -20% $0.38 -68% -10% $0.79 -33% 0% $1.19 10% $1.59 34% 20% $1.98 67% CFPS - 2015 $2.45 -30% $2.97 -15% $3.48 $3.99 15% $4.50 29% $3,288 18% EBITDA - 2015 $2,097 -25% $2,446 -12% $2,795 $3,144 12% $3,493 25% $31.11 29% 8% NAVPS $8.40 -65% $16.33 -33% $24.19 $31.61 31% $38.21 58% -20% -10% 0% 10% 20% $0.56 $0.90 $1.19 $1.45 $1.71 -53% -25% 22% 44% $2.75 $3.13 $3.82 $4.16 -21% -10% 10% 19% EBITDA - 2015 $2,302 -18% $2,549 -9% $2,795 $3,042 9% 8% NAVPS $16.95 -30% $20.66 -15% $24.19 $27.84 15% EPS - 2015 CFPS - 2015 $3.48 Source: Scotiabank GBM estimates. Note: Base Case assumes US$3.15/lb Cu in 2015. EPS - 2015 Source: Scotiabank GBM estimates. Base Case assumes US$125/t met coal in 2015. Exhibit 22 - Forecast Sensitivity to Zinc Price -20% -10% 0% 10% 20% $0.87 $1.03 $1.19 $1.35 $1.51 -27% -14% 14% 27% $3.15 $3.31 $3.65 $3.82 -10% -5% 5% 10% EBITDA - 2015 $2,541 -9% $2,668 -5% $2,795 $2,922 5% $3,050 9% 8% NAVPS $21.67 -10% $22.93 -5% $24.19 $25.46 5% $26.71 10% EPS - 2015 CFPS - 2015 $3.48 Source: Scotiabank GBM estimates. Note: Base Case assumes US$1.10/lb Zn in 2015 Recommendation ■ With limited near-term balance sheet and project development concerns, and likely bottom of cycle pricing for coking coal and copper, in our view, the current share price represents an attractive risk/reward trade-off. Teck is rated Sector Outperform with a C$25.00 target. Our C$25.00 target is based on a 50/50 mix of 7.5x our 2015E EV/EBITDA ($25.23) and 1.0x our 8% NAV of $24.19. 83 . Exhibit 23 - Teck Resources Financial and Operating Summary Annual Growth Profile METAL PRICE FORECAST (US$ per LB) 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E $189 $3.42 $0.98 $0.97 $1,226 $15.88 $87 $0.97 $288 $4.00 $1.00 $1.09 $1,572 $15.81 $95 $1.01 $210 $3.61 $0.88 $0.93 $1,669 $12.65 $96 $1.00 $159 $3.33 $0.87 $0.97 $1,414 $10.21 $98 $0.97 $126 $3.14 $0.98 $0.96 $1,271 $11.85 $95 $0.91 $125 $3.15 $1.10 $1.01 $1,300 $10.00 $75 $0.90 $135 $3.40 $1.20 $1.10 $1,300 $10.50 $83 $0.93 $140 $3.60 $1.25 $1.15 $1,300 $11.50 $88 $0.95 $150 $3.85 $1.25 $1.15 $1,300 $12.50 $91 $0.98 $150 $4.00 $1.25 $1.15 $1,300 $12.50 $91 $1.00 $150 $4.00 $1.25 $1.15 $1,300 $12.50 $91 $1.00 -21% -6% 13% -1% -10% 16% -4% -6% 0% 0% 12% 5% 2% -16% -21% -1% 8% 8% 9% 9% 0% 5% 11% 3% PRODUCTION FORECAST 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E Coal Production (M tonnes) Coal Sales (M tonnes) Mined Zinc ('000 tonnes) Mined Copper ('000 tonnes) Mined Lead ('000 tonnes) Molybdenum (M lbs) Gold ('000 oz) Energy (MMbbls) 23.1 23.2 645 313 110 9 30 - 22.8 22.2 647 321 84 11 53 - 24.7 24.0 598 373 95 13 56 - 25.6 26.9 623 364 97 8 65 - 26.7 26.7 636 332 114 7 49 - 27.0 27.0 604 330 107 9 71 - 27.5 27.5 586 317 109 10 68 - 28.0 28.0 592 286 109 13 68 - 28.0 28.0 592 276 109 13 68 7 30.0 30.0 592 274 109 13 68 11 31.0 31.0 562 271 104 13 60 13 4% -1% 2% -9% 18% -20% -26% NM 1% 1% -5% -1% -6% 41% 46% NM 2% 2% -3% -4% 1% 4% -4% NM 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E $1.06 $91 $1.58 $106 $1.65 $109 $1.66 $89 $1.61 $91 $1.58 $93 $1.49 $94 $1.19 $95 $1.10 $95 $1.06 $95 $1.05 $95 -3% 2% -2% 2% -6% 1% Coal (per tonne) LME copper LME zinc LME lead LME gold Molybdenum WTI oil (per barrel) Cdn$/US$ UNIT COST FORECAST Est. Average Copper Cash Cost (USD per lb) Average Coal Cash Cost (per tonne) INCOME STATEMENT FORECAST (in millions) 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E Net Sales Cost of Sales and Operating Expenses Depreciation and Depletion Selling, General, and Administrative Research and Development Exploration Operating Earnings Interest Expenses Other Expenses (Income) Income and Mining Taxes (Recovery) Minority Interest Net Earnings $9,339 4,844 940 263 21 56 $3,215 565 (257) 932 115 $1,860 $11,514 5,726 911 110 17 105 $4,645 595 (116) 1,398 100 $2,668 $10,343 6,326 951 136 19 102 $2,809 577 740 615 66 $811 $9,382 5,723 1,233 129 18 86 $2,193 343 206 633 50 $961 $8,611 5,752 1,359 113 20 58 $1,309 300 188 408 16 $397 $8,920 5,921 1,388 120 20 63 $1,407 300 (23) 441 4 $684 $9,255 5,826 1,354 130 20 63 $1,863 321 (19) 617 9 $934 $9,272 5,714 1,385 130 20 65 $1,957 337 (25) 667 16 $963 $9,369 5,596 1,408 130 20 65 $2,151 546 (108) 649 17 $1,046 $9,510 5,717 1,502 130 20 65 $2,076 568 (162) 664 18 $989 $9,589 5,788 1,532 130 20 65 $2,055 603 (190) 662 17 $963 -8% 1% 10% -12% 11% -33% -40% -13% -9% -36% -68% -59% 4% 3% 2% 6% 0% 9% 7% 0% NM 8% -74% 72% 4% -2% -2% 8% 0% 0% 32% 7% NM 40% 129% 37% Adjusted Net Earnings $1,549 $2,468 $1,519 $1,004 $500 $684 $934 $963 $1,046 $989 $963 -50% 37% 37% $3.15 $4.51 $1.39 $1.67 $0.69 $1.19 $1.62 $1.67 $1.82 $1.72 $1.67 -59% 72% 37% $2.62 $4,155 $4.17 $5,346 $2.60 $3,807 $1.74 $3,344 $0.87 $2,608 $1.19 $2,795 $1.62 $3,216 $1.67 $3,343 $1.82 $3,559 $1.72 $3,577 $1.67 $3,587 -50% -22% 37% 7% 37% 15% Net Earnings Per Common Share (FD) Adjusted Net Earnings Per Common Share (FD) EBITDA CASH FLOW FORECAST (in millions) 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2014E 2015E 2016E Net Earnings Depreciation, Deferred Taxes, & Minority Interest $1,975 $2,768 $870 $1,010 $411 $684 $934 $963 $1,046 $989 $963 -59% 66% 37% Cashflow From Operations 768 $2,743 812 $3,580 1,497 $2,367 1,513 $2,523 1,366 $1,778 1,323 $2,007 1,283 $2,217 1,492 $2,454 1,471 $2,517 1,476 $2,465 1,464 $2,427 -10% -30% -3% 13% -3% 10% Cashflow Per Share (FD) Sustaining Capital Project Capital Expenditures Net Cash Flow from Fort Hills Free Cashflow to Firm $4.63 ($360) (459) (8) $1,917 $6.04 ($518) (1,160) (442) $1,460 $4.04 ($744) (1,372) (307) ($56) $4.36 ($1,192) (1,410) (276) ($355) $3.09 ($1,292) (287) (705) ($506) $3.48 ($1,322) (75) (756) ($146) $3.85 ($1,260) (73) (810) $74 $4.26 ($1,210) (71) (520) $653 $4.37 ($1,137) (845) 167 $702 $4.28 ($1,108) (1,749) 287 ($106) $4.21 ($1,090) (1,599) 359 $96 -29% NM NM NM NM 13% NM NM NM NM 10% NM NM NM NM Free Cashflow to Firm Per Share (FD) Net Financing Activities (Ex. Equity/Dividends) Free Cashflow to Equity $3.24 ($3,583) ($1,666) $2.46 $1,749 $3,209 ($0.10) ($310) ($366) ($0.61) ($77) ($432) ($0.88) ($144) ($650) ($0.25) ($176) ($322) $0.13 $585 $660 $1.13 ($312) $341 $1.22 $204 $906 ($0.18) $206 $100 $0.17 $768 $864 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 ($2.81) $33 (118) 1,254 ($497) $5.41 ($167) (354) 885 $3,573 ($0.63) ($127) (469) (176) ($1,138) ($0.75) ($175) (521) 633 ($495) ($1.13) ($5) (518) 101 ($1,072) ($0.56) $0 (519) ($841) $1.14 $0 (519) $141 $0.59 $0 (519) (0) ($177) $1.57 $0 (519) $387 $0.17 $0 (519) ($418) $1.50 $0 (519) $346 NM NM NM -84% 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 $832 1,094 1,380 $3,306 21,886 4,017 $29,209 $4,405 1,343 1,641 $7,389 23,150 3,680 $34,219 $3,267 1,285 1,783 141 $6,476 24,937 3,642 $35,055 $2,772 1,232 1,695 71 $5,770 27,811 2,602 $36,183 $1,700 1,089 1,814 63 $4,666 28,778 3,192 $36,636 $859 1,180 1,844 63 $3,947 28,787 3,948 $36,682 $1,000 1,233 1,927 63 $4,223 28,766 4,758 $37,747 $823 1,113 1,738 63 $3,737 28,662 5,278 $37,677 $1,210 1,124 1,757 63 $4,155 29,236 5,198 $38,588 $792 1,141 1,783 63 $3,779 30,591 5,043 $39,414 $1,138 1,151 1,798 63 $4,150 31,748 4,855 $40,752 -39% -12% 7% -11% -19% 3% 23% 1% -49% 8% 2% 0% -15% 0% 24% 0% 16% 4% 4% 0% 7% 0% 21% 3% Accounts payable and accrued liabilities Total Current Liabilities Total debt Deferred Taxes Other Liabilities Shareholders' Equity Total Liabilities & Shareholders' Equity 1,675 $1,740 4,948 5,223 1,311 16,052 $29,209 1,763 $2,122 7,035 5,342 2,358 17,721 $34,219 1,765 $1,820 7,215 5,581 2,230 18,075 $35,055 2,104 $2,163 7,723 5,908 1,637 18,597 $36,183 1,831 $1,911 8,129 6,124 1,847 18,567 $36,636 1,959 $2,039 8,293 6,156 1,739 18,733 $36,682 2,033 $2,113 9,193 6,245 1,631 19,149 $37,747 1,864 $1,944 9,125 6,303 1,523 19,593 $37,677 1,881 $1,961 9,569 6,358 1,615 20,120 $38,588 1,904 $1,984 10,012 6,374 1,707 20,591 $39,414 1,918 $1,998 11,012 6,378 1,799 21,035 $40,752 -13% -12% 5% 4% 13% 0% 1% 7% 7% 2% 1% -6% 1% 0% 4% 4% 11% 1% -6% 2% 3% Source: Company reports; Scotiabank GBM estimates. 84 Intraday Flash Thursday, December 18, 2014 @ 2:28:42 PM (ET) (MOS-N US$44.59) The Mosaic Company A Small But Welcome Win Ben Isaacson, MBA, CFA - (416) 945-5310 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Outperform Risk Ranking: High Carl Chen - (416) 863-7184 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: US$52.00 ROR 1-Yr: 18.9% Valuation: 8.5x 2015E EBITDA, 16x 2015E EPS, DCF @ 9.5%, 45% RCN Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather Div. (NTM) Div. (Curr.) $1.00 $1.00 Yield (Curr.) 2.2% Event ■ The Tampa ammonia contract for January was settled $80 lower at $545/mt. Implications ■ All else equal, the ammonia contract improvement should lead to a $12/mt hike to MOS's DAP margin. If sustained for a year, we estimate this is the equivalent of up to $150M of incremental EBITDA. ■ MOS can partially thank itself for the lower ammonia price. MOS's decision to curtail DAP/MAP production through Q4 was specifically designed to relieve tightness in the ammonia market. However, MOS did get some help from: (1) the bankruptcy of MissPhos; (2) poor fall ammonia application demand in the U.S.; and (3) production cuts at OCP. We estimate MOS will return its phosphate operating rates to more normalized levels beginning in Q1. ■ Couldn't come at a better time. In the Tampa market, DAP moved $15 higher last week to $465/mt. The European season is now underway, with interest picking up in Brazil and in the U.S. domestic market. While India usually becomes less relevant for phosphate suppliers during Q1, we think importers there can forget about price ideas in the $450s, $460s, or $470s. We don't see China needing to concede to lower prices any time soon. Recommendation ■ We maintain a preference for MOS over POT (SP). Qtly Adj EPS (FD) 2012A 2013A 2014E 2015E Q1 $1.03 A $0.95 A $0.52 A $0.72 (FY-Dec.) Earnings/Share Cash Flow/Share Price/Earnings Relative P/E Revenues (M) EBITDA (M) Current Ratio EBITDA/Int. Exp Q2 $1.05 A $1.02 A $0.70 A $0.91 Q3 $0.88 A $0.51 A $0.56 A $0.73 Q4 $1.14 A $0.36 A $0.54 $0.80 Year $4.08 $2.84 $2.32 $3.17 P/E 13.9x 8.3x 19.2x 14.1x 2011A $4.60 $6.32 11.0x 0.7x $11,108 $3,131 3.4x -167.4x 2012A $4.08 $6.52 13.9x 0.8x $9,974 $2,811 3.9x -149.5x 2013A $2.84 $5.18 8.3x 0.5x $9,021 $2,118 2.5x 347.3x 2014E $2.32 $4.62 19.2x 1.2x $8,573 $2,052 3.6x 18.8x 2015E $3.17 $5.05 14.1x 0.9x $9,149 $2,369 3.1x 18.0x BVPS14E: $28.75 ROE14E: 8.41% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) $16,761 $845 $17,606 ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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. 376 351 85 Company Comment Thursday, December 18, 2014, After Close (TMM-T C$1.09) (TGD-A US$0.97) Timmins Gold Corp. Caballo Blanco Acquisition Helps Address Previous Concerns Ovais Habib - (416) 863-7141 (Scotia Capital Inc. - Canada) [email protected] Ciara Sawicki - (416) 862-3738 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: High Target 1-Yr: C$2.00 ROR 1-Yr: 83.5% Valuation: 1.00x NAVPS Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks Event ■ Timmins has entered into an agreement to purchase 100% of the Caballo Blanco gold project from Goldgroup Mining Inc. Implications ■ The initial purchase price is ~$25M ($10M in cash and ~16.1M TMM common shares). Timmins has also agreed to pay to Goldgroup a $5M contingent payment when Caballo receives EIS approval or if Timmins undergoes a change of control. ■ Caballo Blanco is a PEA-stage open pit heap leach project located in Veracruz State, Mexico. A 2012 PEA outlined 994 koz Au of pitconstrained resources at an average grade of 0.58 g/t Au with a LOM strip of 1.7:1, cash cost of $784/oz, and initial capex of $84.8M. ■ We view the acquisition positively as we believe it helps address our previous concerns such as a shrinking mine life at San Francisco and a lack of share price catalysts. On a standalone basis, we estimate the deal is 8% NAV accretive. Caballo could generate significant production growth for Timmins, in our view, if the company can obtain environmental permits in a timely manner. Div. (NTM) Div. (Curr.) $0.00 $0.00 Yield (Curr.) 0.0% Pertinent Revisions New EPS14E US$0.07 EPS15E US$0.01 EPS16E US$-0.03 New Valuation: 1.00x NAVPS Old Valuation: 1.10x NAVPS Old US$0.08 US$0.11 US$0.07 Recommendation ■ We maintain our Sector Perform rating and C$2.00 1-yr target price. Given Caballo's past permitting friction, we believe Timmins will need to demonstrate tangible permitting progress before the market will be willing to recognize full value for the project. Qtly EPS (FD) 2012A 2013A 2014E 2015E Q1 $0.03 A $0.10 A $0.05 A $0.00 (FY-Dec.) Earnings/Share Price/Earnings Cash Flow/Share Price/Cash Flow EBITDA (M) Production (oz) (000) Tot. Cash Cost ($/oz) Rlzd. Gold Price (/oz) Q2 $0.04 A $0.02 A $0.02 A $0.00 Q3 $0.09 A $0.03 A $0.01 A $0.00 Q4 $0.09 A $0.03 A $0.00 $0.00 Year $0.26 $0.21 $0.07 $0.01 P/E 11.6x 5.1x 12.6x 62.7x 2012A $0.26 11.6x $0.40 7.5x $69 94.4 $743 $1,661 2013A $0.21 5.1x $0.44 2.4x $57 119.7 $717 $1,358 2014E $0.07 12.6x $0.28 3.4x $43 121.7 $798 $1,270 2015E $0.01 62.7x $0.19 4.9x $35 116.0 $848 $1,300 2016E $-0.03 n.m. $0.14 6.7x $23 107.4 $930 $1,300 BVPS14E: $1.48 ROE14E: 4.76% NAVPS: P/NAV: C$1.86 0.59x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in US$ 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$209 $-31 C$173 192 185 86 Caballo Blanco Acquisition Helps Address Previous Concerns ■ We view Timmins’ acquisition of Caballo Blanco positively as we believe it helps address our previous concerns such as a shrinking mine life at San Francisco and a lack of share price catalysts. We see potential for Timmins to leverage its Mexican platform and expertise at its operating San Francisco mine to realize synergies for the development of Caballo Blanco. The company is currently planning work to evaluate the potential for operating Caballo as a dump leach mine – but we note that if Timmins determines crushing is needed, it has an 8,000 tpd crusher sitting uninstalled at San Francisco that could potentially be moved down to Caballo. ■ On a standalone basis, we estimate the Caballo acquisition is 8% NAV accretive, which was partially offset by our decision to defer development of the La Chicharra deposit at the San Francisco mine. Our overall NAV for Timmins increased by 4% to C$1.86 after a myriad of model revisions were completed (see Exhibit 1). We apply a 0.60x multiple to Caballo, a 1.10x multiple to San Francisco, and a 1.00x multiple to corporate adjustments to end up at a weighted average target multiple of 1.00x NAVPS (down from 1.10x NAVPS). Exhibit 1 - Timmins Gold NAV Breakdown and Target Price Generation Projects Location Stage Valuation Ow nership % Valuation C$M Current NAV (C$/share) San Francisco Mexico Production DCF @ 3% 100% $260 $1.35 Caballo Blanco* Mexico Development DCF @ 5% 100% $66 $0.35 $326 $1.70 Subtotal - Operations Cash $42 $0.22 Total Debt ($11) ($0.06) Subtotal - Corporate $31 $0.16 Net Asset Value $357 $1.86 No. Com m on Shrs (M) 179.6 Basic Weighted Average Target Multiple 1.00x 191.8 Fully-diluted 1.00x NAVPS $1.86 12-month Target Price (C$/shr) $2.00 Source: Scotiabank GBM estimates. ■ Caballo Blanco could generate significant production growth for Timmins if the company can obtain environmental permits in a timely manner. Timmins sees production from Caballo Blanco beginning in 2H/16, increasing to over 220 koz Au in 2017 (+83% compared to the mid-range of 2014 guidance). We have taken a more conservative view and model initial production from Caballo in Q3/17 (see Exhibit 2), resulting in threeyear production growth of 24% (2017E vs. 2014E) vs. our prior estimate of 12% which assumed development of the La Chicharra deposit and concurrent ramp-up in the crushing rate at San Francisco from 24,000 tpd to 31,000 tpd. ■ We are maintaining our Sector Perform rating and C$2.00 one-year target price. Given Caballo’s past permitting friction (outlined in more detail below), we believe Timmins will need to demonstrate tangible permitting progress before the market will be willing to recognize full value for the project, and thus are maintaining our Sector Perform rating. 87 Exhibit 2 – Caballo Has the Potential to Nearly Double Timmins’ Gold Production While Helping Reduce Cash Costs $1,200 $1,000 Gold Production (koz) 200 $800 150 $600 100 $400 50 $200 0 $0 2013A 2014E 2015E San Francisco 2016E 2017E Caballo Blanco 2018E 2019E TCC (RHS) 2020E AISC (RHS) Source: Company reports; Scotiabank GBM estimates. ■ Upcoming potential share price catalysts. o Early 2015 - Assay results from regional drilling around the San Francisco mine in Sonora, Mexico. o Q3/15 – Revised technical report for Caballo Blanco including an updated mineral resource estimate, and potentially incorporating additional drilling and metallurgical work that Timmins plans to complete in 1H/15. Transaction Values Caballo at ~US$30M ■ Timmins has agreed to acquire 100% of Goldgroup’s Caballo Blanco gold project for an initial purchase price of ~$25M ($10M in cash and ~16.1 million TMM common shares). Timmins has also agreed to pay to Goldgroup a contingent payment of an additional $5M (payable in cash or shares at TMM’s option) when Caballo receives EIS approval or if Timmins undergoes a change of control. ■ The transaction is expected to close in late 2014 or early 2015, subject to customary closing conditions. We assume the deal closes with no issues by the end of 2014 and have incorporated Caballo into our estimates. ■ Timmins is paying $25/oz of M&I&I gold resources at Caballo, which compares favourably to recent acquisitions of gold developers. We estimate an average acquisition price of $54/oz over the past two years, or a median price of $66/oz over the past three years from Exhibit 3 Per-Ounce Cost Metrics (US$/oz) 250 88 Exhibit 3 – Comparable Gold Developer Acquisitions Deal Size Acquirer / Target SEMAFO / Orbis Gold2 Agnico / Cayden 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 Date (US$M) 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$608 Gold Resources (Moz) Acquisition Value (US$/oz) 1 P&P M&I Inf. P&P M&I M&I&I 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 $66 Premium (1) Premium to last closing price. (2) Deal announced but not yet completed. Source: Company reports; Scotiabank GBM estimates. 2012 PEA Showed Promising Project Economics but Past Permitting Friction a Concern ■ Caballo Blanco is a PEA-stage open pit heap leach gold project located in Veracruz State, Mexico. Exhibit 4 shows the project’s location relative to Timmins’ San Francisco mine in Sonora State. Exhibit 4 – Location of the Caballo Blanco Project Source: Company reports. Gold Price % of Gross (US$/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% 89 ■ Goldgroup completed a PEA for Caballo in 2012, key assumptions of the study included: o Total diluted mineralized tonnage of 49.3 Mt at an average grade of 0.54 g/t Au containing 853 koz Au using an $1,150/oz gold price. The PEA mine plan is based on M&I&I resources of 944 koz Au (52.9 Mt at an average grade of 0.58 g/t Au). o Initial capex of $85 million and sustaining capex of $31 million (quoted in 2012 U.S. dollars). o LOM production of 682 koz Au and 1.1 Moz Ag, or ~90 koz/yr over a 7.5year mine life. The PEA assumed contract mining and an average daily stacking rate of 19,200 tpd (7.0 Mtpa), a 1.7:1 strip ratio, and recoveries of 80% for gold and 30% for silver. o LOM average cash operating costs of $784/oz based on $1.60/t for waste mining, $2.40/t for ore mining, $2.24/t for heap leach processing, and $0.80/t for G&A. o The PEA estimated a pre-tax NPV of $128 million and an IRR of 37.5% at a $1,200/oz gold price and a 5% discount rate. A Primer on Caballo’s Permitting History ■ SEMARNAT needs to approve both the EIS (environmental impact statement), and the ETJ (change of soil use permit) before construction at Caballo can begin. The Secretariat of Environmental and Natural Resources (SEMARNAT) is a Mexican federal agency which is charged with protecting, restoring, and conserving the ecosystems, natural resources, assets and environmental services of Mexico with the goal of fostering sustainable development. ■ Goldgroup first submitted the EIS and ETJ in December 2011. The documents were returned in early 2012 for Goldgroup to address comments. The regulators were looking for additional details on rescue programs for protected flora, environmental mitigation measures, ecosystems affected by the projects, and socioeconomic benefits. ■ Also in early 2012, Veracruz State Governor Javier Duarte de Ochoa formally stated that the government of Veracruz is opposed to the installation of the Caballo Blanco mine. The main concerns of the state government centred around sustaining development with a particular focus on the operation’s water needs and its ability to manage water discharge. We understand that Mr. Duarte de Ochoa’s six-year term as governor will end in November 2016, at which point he will not be eligible for re-election (one term limit). ■ In June 2012 Goldgroup responded to SEMARNAT’s comments but later decided in September 2012 to defer SEMARNAT’s evaluation of the project while the changeover in the federal government was taking place. “Deferring the evaluation and approval process of the MIA complies with Goldgroup's objective of working further with the relevant authorities to ensure that the project is able to realize its social, community, environmental and business objectives.” ■ It appears as if no work was done on Caballo in 2013 or 2014 as Goldgroup’s focus shifted to its Cerro Prieto project acquired in early 2013. ■ We currently model 12 months for Timmins to complete its optimization studies and obtain the necessary permits to start construction. We are optimistic that Caballo will be a producing mine but do acknowledge what we see as higher-than-normal permitting risk. To Crush or Not to Crush? ■ Timmins plans to evaluate operating Caballo as a dump leach mine (i.e. with no crushing beyond fragmentation caused by blasting). We completed a scenario analysis that illustrated for our projected opex and capex savings from not crushing ore, the ROM gold recovery would need to be more than 65% to offset the lower production (see Exhibit 5). Key assumptions for the scenario included: o Initial capex savings of $25M for not installing a two-stage crushing circuit as we have assumed (in line with the PEA) for our base case. 90 o o o A 23% reduction in per-tonne cash operating costs. And a slight $5M savings in sustaining capital for crusher spare parts. We then determined that using a 65% gold recovery (down from the base case of 80%) would result in breakeven economics for the dump leach scenario. Exhibit 5 – Scenario Analysis Indicates Operating Caballo as a Dump Leach Mine Could Add Value Caballo Blanco SC Base Case Dump Leach LOM Avg. Scenario % Change Realized gold price ($/oz) $1,300 $1,300 - Daily ore processed (tpd) 19,100 19,100 - Strip Ratio (w:o) 1.70 1.70 - Average gold grade (g/t) 0.54 0.54 - Gold recovery (%) 80% 65% -19% Gold produced (koz) 85.0 69.1 -19% Cash operating cost per ounce ($/oz) $808 $767 -5% Cash operating cost per tonne ($/t) $11.15 $8.60 -23% ($/oz) $811 $775 -4% ($/oz) $903 $879 -3% Total Total Total cash cost per ounce Project all-in sustaining cost 1 Estimated mine life (yrs) 7.1 7.1 Development Capital ($M) $100.0 $74.8 -25% Sustaining & Exploration Capital ($M) $63.0 $58.0 -8% Total Capital ($M) $163.0 $132.8 -19% (C$M) $66.3 $66.3 -0% NPV5% - (1) Excludes corporate G&A. Source: Scotiabank GBM estimates. Model Overhaul – Incorporating Caballo and Deferring La Chicharra ■ We have incorporated Caballo into our estimates. Most of our key modelling assumptions are shown in Exhibit 5. Note that the $100M of development capital includes $10M for optimization studies and infill drilling in 2015 before full-scale construction begins. Our operating cost assumptions are also largely based on Timmins’ current costs which we believe are more realistic than those in the PEA. On timing – we assume commercial production at the start of Q3/17. ■ We have also deferred development of the La Chicharra deposit at San Francisco. La Chicharra is a satellite deposit at San Francisco that hosts 316 koz Au of gold in reserves (19.8 Mt at an average grade of 0.50 g/t Au). We agree with the company’s assessment that at the current gold price, the large pre-strip (~$16M in 2016) renders the deposit only marginally economic. As a result of deferring La Chicharra, we now value San Francisco at C$260M, down from C$274M previously. o The 8,000 tpd crusher sitting uninstalled on site at San Francisco could potentially be used at Caballo if Timmins’ determines that crushing is the optimal route. The crusher was ordered and delivered before Timmins 91 decided to defer La Chicharra and maintain the San Francisco crushing rate at 24,000 tpd. ■ Based on our conservative modelling assumptions for Caballo, we estimate the company will need a $25 to $35 million working capital facility in 2016, and also that it will be able to defer repayment of the C$13 million amount outstanding on its Sprott loan for two years. Exhibit 6 shows our free cash flow forecast for Timmins at $1,200/oz spot gold with a $25M credit facility being drawn down in 2016. Exhibit 6 – Free Cash Flow Forecast at $1,200/oz Spot Gold (2014E to 2019E) Timmins Gold 2014E 2015E 2016E 2017E 2018E 2019E Gold Price $1,266 $1,200 $1,200 $1,200 $1,200 $1,200 Production/Cost Profile 2014E 2015E 2016E 2017E 2018E 2019E 121,724 115,984 107,411 107,411 107,411 107,411 $798 $848 $929 $839 $830 $926 2014E 2015E 2016E 2017E 2018E 2019E $41 $26 $17 $40 $63 $47 ($41) ($22) ($67) ($45) ($19) ($20) Debt Service Costs ($6) ($1) ($1) ($18) ($17) ($11) Net Change in Cash $19 $3 ($26) ($23) $27 $17 Cash at Beginning of Period $23 $42 $45 $19 ($5) $23 Cash at End of Period $42 $45 $19 ($5) $23 $39 Free Cash Flow ($5) $3 ($51) ($23) $27 $17 ($0.03) $0.01 ($0.26) ($0.12) $0.14 $0.09 n.m. 81.4x n.m. n.m. 7.8x 12.8x Gold Production (oz) Cash Costs (US$/oz) Cash Flow Profile Net Operating Cash Flow Capital Expenditures 1 Free Cash Flow per Share P/FCF (1) 2014 includes $10M for the cash component of the Caballo Blanco purchase price. Source: Scotiabank GBM estimates. ScotiaView Analyst Link 92 Intraday Flash Thursday, December 18, 2014 @ 3:00:07 PM (ET) (TBE-T C$0.88) Twin Butte Energy Ltd. Hunkering Down William S. Lee, P.Eng. - (403) 213-7331 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: High Jennifer Dowdell - (403) 213-7754 (Scotia Capital Inc. - Canada) [email protected] Target 1-Yr: C$1.75 ROR 1-Yr: 120.5% Valuation: 0.7x our 2P NAV plus risked upside. Key Risks to Target: Exploration and drilling execution risk; commodity price risk Event ■ TBE reduced 2015E guidance and its dividend. Div. (NTM) Div. (Curr.) $0.19 $0.19 Yield (Curr.) 21.6% Pertinent Revisions Implications ■ Hunkering down. TBE's 2015 capex program was reduced by $40M to $120M, with production now guided at 19.1 mboe/d (previously 21.5 mboe/d). The reduced dividend now sits at $0.01/sh monthly, or $0.12/sh annually, and the DRIP has been suspended as of January. Running our model at US$60/bbl WTI, we peg TBE's 15E D/CF at 2.0x and 72% drawn at 2015E year-end on its $365M bank facility (including working capital). The all-in payout ratio for 2015E sits at 93% under those commodity prices. TBE is ~50% hedged on its 2015 oil volumes, and unhedged for 2016 and beyond. ■ Thesis. In our view, TBE shares present good value at these levels, and its hedges offer good downside protection; however, the past year has been challenging and the near-term commodity outlook will be tough for junior oil names. While the new dividend level and revised capex keep TBE sustainable next year at US$60/bbl WTI, we think that in order to attract positive sentiment, a few solid quarters are required. New Old Target: 1-Yr $1.75 $2.25 CFPS15E $0.58 $0.64 CFPS16E $0.58 $0.65 New Valuation: 0.7x our 2P NAV plus risked upside. Old Valuation: 0.8x our 2P NAV plus risked upside. Recommendation ■ We maintain our SP rating; our target moves to $1.75/sh (from $2.25). Qtly CFPS (FD) 2013A 2014E 2015E 2016E Q1 $0.13 A $0.15 A $0.15 (FY-Dec.) Oil Price (WTI, /bbl) (US$) Nat Gas (HH, /mmBtu) (US$) Prod-Equiv (mboe/d) Prod Growth Prod/Share Growth Production (% gas) CF from Ops (M) Net Cap Exp (M) Q2 $0.13 A $0.14 A $0.15 Q3 $0.14 A $0.15 A $0.15 Q4 $0.12 A $0.15 $0.15 Year $0.52 $0.59 $0.58 $0.58 P/CF 4.4x 1.5x 1.5x 1.5x 2012A $94.09 $2.76 14.7 92.9% -0.7% 15.9% $136.0 $66.3 2013A $98.01 $3.72 17.6 19.7% -22.8% 11.9% $137.4 $106.8 2014E $94.52 $4.39 21.5 22.4% 10.0% 9.0% $205.9 $145.0 2015E $75.00 $4.00 19.1 -11.3% -6.1% 8.0% $203.2 $120.0 2016E $83.00 $4.00 19.4 1.7% 4.0% 7.5% $206.0 $150.0 NAVPS: P/NAV: $1.78 0.49x Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in C$ 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. $316 $361 $676 359 310 93 Exhibit 1 - Company Overview Twin Butte Energy Ltd. (TSX: TBE, Sector Perform) December 18, 2014 Company Profile British Columbia Alberta Production and Financial Summary Saskatchewan Fort St. John Grande Prairie Lloydminster Heavy Oil Fairway Edmonton Saskatoon Calgary Regina Core Areas Lloydminster Target Zone(s) Colony, Waseca, Sparky, GP, Rex Company Management Jim Saunders, CEO Rob Wollmann, President Alan Steele, VP Finance & CFO David Middleton, COO Neil Cathcart, VP Exploration Claude Gamache, VP Heavy Oil Preston Kraft, VP Engineering 2013 Reserves Proven Probable P+P Proved Developed Producing Proved Non-Producing Proved Undeveloped Probable Reserve Engineers Depth [m] Type Prior Companies Prairie Schooner Petroleum Ltd. Penn West Exploration Bear Ridge Resources Ltd, Ketch Resources Ltd. Penn West Exploration Revolve Energy Ltd Napa Energy Ltd, Grey Wolf Exploration Inc Emerge, Husky Energy Inc. Oil [mbbl] 29,458 Gas [mmcf] 55,393 Total [mboe] 38,690 [% Gas] 24% 25,433 54,891 24,623 80,017 29,536 68,227 14% 20% % of 1P Res. 66% 9% 25% % of 2P Res. 37% 5% 14% 43% McDaniels RLI (P+P) 9.4x Commodity Price Assumptions WTI Edmonton Par Western Canadian Select Bow River Henry Hub AECO [US$/bbl] [C$/bbl] [C$/bbl] [C$/bbl] [US$/mcf] [C$/mcf] 2013A $98.01 $93.40 $75.05 $76.23 $3.72 $3.17 2014E $94.52 $96.78 $82.96 $83.63 $4.39 $4.53 2015E $75.00 $78.85 $68.57 $69.57 $4.00 $3.75 2016E $83.00 $88.00 $75.89 $76.89 $4.00 $3.60 Production Estimates Oil & Liquids Natural Gas Total % Gas YoY Growth YoY Per Share Prod. Growth [bbl/d] [mmcf/d] [boe/d] [%] [%] [%] 2013A 15,488 12.6 17,584 12% 20% -23% 2014E 19,600 11.6 21,527 9% 22% 10% 2015E 17,576 9.1 19,099 8% -11% -6% 2016E 17,974 8.7 19,423 7% 2% 4% [$/boe] [$/boe] [$/boe] [$/boe] [$/boe] [$/boe] [$/boe] [$/boe] [$/boe] [$/boe] [$/boe] 2013A $61.31 ($0.64) ($12.75) ($2.43) ($21.77) $23.72 ($1.94) ($1.68) $1.24 $0.00 $21.34 2014E $72.67 ($6.72) ($13.71) ($1.13) ($20.96) $30.15 ($1.77) ($2.22) $0.12 ($0.06) $26.21 2015E $59.87 $6.01 ($11.29) ($1.25) ($20.00) $33.34 ($1.64) ($2.26) $0.00 ($0.29) $29.15 2016E $66.65 $0.00 ($12.51) ($1.25) ($20.00) $32.89 ($1.60) ($2.03) $0.00 ($0.28) $28.97 [%] [%] 21% 0% 19% 74% 19% 48% 19% 0% [$000] [$000] [$000] [$000] [$000] [$/share] 2013A $137,358 $90,384 ($106,806) ($125,354) $148,149 $0.52 2014E $205,945 ($72,956) ($145,000) $5,899 $223,386 $0.59 2015E $203,214 ($83,214) ($120,000) $0 $218,999 $0.58 2016E $205,966 ($55,966) ($150,000) $0 $220,424 $0.58 [x] [x] 0.8x 2.6x 0.7x 1.7x 0.6x 1.5x 0.7x 1.5x 2012A 441,695 $34.94 $24.00 1.0x 2013A 328,074 $35.54 $27.76 0.9x Netbacks Revenue Hedging Royalties Transportation Costs Operating Costs Field Netback G&A Interest Other Cash Taxes Corporate Netback Royalties Hedged Prod. (go-forward) Cash Flows Cash Flow from Operations Financing Cash Flows Investment Cash Flows - Internal Investment Cash Flows - M&A DACF CFPS Internal Capex / CF Net Debt / CF NAVPS Estimate (Y.E. 2013 Blow-Down) Scotiabank GBM Price Deck [$/share] Historical Operational Metrics Net Undeveloped Land FD&A Proven FD&A P+P Recycle Ratio (P+P, excl. hedg.) [acres] [$/boe] [$/boe] [x] Share Price: $0.91 Target: 1-Yr: $1.75 Shares Outstanding (f.d.) [mm] Q4/14E 358,663 Market Cap (f.d.) [$mm] $326 Bank Debt Working Capital Deficit (Surplus) Convertible Debentures High Yield Debt Net Debt [$mm] [$mm] [$mm] [$mm] [$mm] $235 $40 $85 $0 $361 Enterprise Value [$mm] $687 Comparable Trading Statistics Valuation Metrics P/CF EV/DACF EV/Production D/CF P/NAVPS (Scotia) EV/Reserves (P+P) Peer Group Valuation Metrics P/CF EV/DACF EV/Production D/CF P/NAVPS (Scotia) EV/Reserves (P+P) 2011A 175,933 $58.95 $56.95 0.5x Capital Structure 2015E 2016E [x] [x] [$/boe/d] [x] 1.6x 2.9x $33,489 1.5x 1.6x 2.8x $32,226 1.5x [x] [$/boe] 0.5x $14.96 [x] [x] [$/boe/d] [x] [x] [$/boe] 2015E 3.7x 6.1x $69,550 3.4x 0.7x $21.94 Source: Company reports; FactSet; Scotiabank GBM estimates. $1.78 2016E 3.4x 5.7x $71,070 3.6x ROR: 113% Facility Room Room Size [$mm] [%] $365 $130 36% 94 Commodity Sensitivity: Running our Model under Varying WTI Oil Prices Exhibit 2 - Commodity Sensitivity WTI Crude Oil WCS Differentials [$US/bbl] [%] Current Estimates 2014E 2015E $94.52 $75.00 20.3% 20.0% 2016E $83.00 20.0% US$50 WTI / $3.50 AECO 2014E 2015E 2016E $94.52 $50.00 $50.00 20.3% 20.0% 20.0% US$60 WTI / $3.50 AECO 2014E 2015E 2016E $94.52 $60.00 $60.00 20.3% 20.0% 20.0% US$70 WTI / $3.50 AECO 2014E 2015E 2016E $94.52 $70.00 $70.00 20.3% 20.0% 20.0% Production % Gas Growth YOY Debt-Adj Prod/sh Growth YOY [boe/d] [%] [%] [%] 21,527 9% 22% 10% 19,099 8% -11% -6% 19,423 7% 2% 4% 21,527 9% 22% 10% 19,099 8% -11% -12% 19,423 7% 2% -16% 21,527 9% 22% 10% 19,099 8% -11% -10% 19,423 7% 2% -12% 21,527 9% 22% 10% 19,099 8% -11% -8% 19,423 7% 2% -6% Cash Flow CFPS (F.D.) Growth YOY [$MM] [$/share] [%] $206 $0.59 14% $203 $0.58 -3% $206 $0.58 1% $206 $0.59 14% $158 $0.45 -24% $44 $0.12 -72% $206 $0.59 14% $175 $0.49 -16% $93 $0.26 -47% $206 $0.59 14% $191 $0.54 -8% $142 $0.40 -25% Capex Capex/CF [$MM] [x] $145 0.7x $120 0.6x $150 0.7x $145 0.7x $120 0.8x $150 3.4x $145 0.7x $120 0.7x $150 1.6x $145 0.7x $120 0.6x $150 1.1x Dividends (Pre-DRIP) All-in Payout Ratio (Pre-DRIP) [$MM] [%] $67 103% $42 80% $42 93% $67 103% $42 103% $42 437% $67 103% $42 93% $42 207% $67 103% $42 85% $42 135% Free Cash Flow FCF per share [$MM] [$/share] Bank Line Capacity Q4 % Drawn (incl. wkg cap) Q4 Bank Line Available ($6) ($0.02) $41 $0.12 $14 $0.04 ($6) ($0.02) ($4) ($0.01) ($148) ($0.42) ($6) ($0.02) $12 $0.03 ($99) ($0.28) ($6) ($0.02) $29 $0.08 ($50) ($0.14) [$MM] [%] [$MM] $365 76% $89 $365 64% $130 $365 61% $144 $365 76% $89 $365 77% $85 $365 117% ($63) $365 76% $89 $365 72% $102 $365 99% $3 $365 76% $89 $365 68% $118 $365 81% $68 Net Debt D/CF (Trailing) [$MM] [x] $354 1.7x $313 1.5x $300 1.5x $354 1.7x $358 2.3x $507 11.5x $354 1.7x $342 2.0x $441 4.7x $354 1.7x $325 1.7x $375 2.6x $0.91 Mkt Price EV/DACF $1.75 Target Implied EV/DACF [x] [x] 2.9x 4.2x 2.8x 4.2x 3.9x 5.6x 12.8x 17.4x 3.5x 5.0x 6.8x 9.5x 3.1x 4.6x 4.4x 6.2x Source: Company reports; Scotiabank GBM estimates. ScotiaView Analyst Link 95 Company Comment Friday, December 19, 2014, Pre-Market Wal-Mart de México y Centroamerica, SAB de CV (WALMEX V-MX MXN 30.75) Divestiture of Banking Unit Not Necessarily a Positive Rodrigo Echagaray, MBA, CFA - (416) 945-4405 (Scotia Capital Inc. - Canada) [email protected] Rating: Sector Perform Risk Ranking: Low Karla B. Peña - +52 (55) 9179 5211 (Scotiabank Inverlat) [email protected] Target 1-Yr: MXN 37.00 ROR 1-Yr: 23.0% Valuation: 2014E-2020E DCF w/ 9.1% WACC; 13x (NTM) EV/EBITDA Div. (NTM) Div. (Curr.) Yield (Curr.) 0.81 1.24 4.0% Key Risks to Target: Operating performance, consumer behavior, tax reforms Event ■ Walmex announced it has reached an agreement to sell its banking unit to Banco Inbursa for ~US$245 million. Implications ■ The transaction is not relevant in the sense that the proceeds represent less than 1% of Walmex's market cap (MXN.20 per share). However, this transaction indicates management remains focused on core retail operations and committed to divesting non-core assets. Also, EPS should increase ~2% in 2015 (losses at the banking unit account for ~2% of Walmex's earnings LTM). Finally, Inbursa's banking expertise could lead to faster growth in the loan book which could drive sales at stores (Banco Inbursa will essentially use Walmex stores as branches). From that perspective, it can be argued this is a positive announcement. ■ However, we don't think US$245M compensates for Walmex's time and effort put into this business since 2007. Also, we find it a bit disappointing that Walmex was not capable of finding the right strategy to grow its banking unit in what we think is an attractive market. Recommendation ■ We would not argue for a Chile Retail type model where the banking unit can be as, or more important than the retail operations, but we would argue there was an attractive market opportunity for Walmex to grow a profitable loan book while driving sales. We remain neutral on Walmex. Qtly EBITDA (M) 2012A 2013A 2014E 2015E Q1 Q2 Q3 Q4 Year 8,350 A 8,856 A 9,120 A 10,066 8,755 A 9,141 A 9,653 A 10,186 9,057 A 9,551 A 9,146 A 10,701 13,698 A 13,199 A 14,963 16,001 39,860 40,747 42,882 46,953 EV / EBITDA 18.4x 14.6x 11.9x 10.7x 2011A 1.24 30.8x 18.0x 378,850 37,188 9.8% 2012A 1.29 32.8x 18.4x 412,060 39,860 9.7% 2013A 1.25 27.5x 14.6x 425,171 40,747 9.6% 2014E 1.30 23.6x 11.9x 445,062 42,882 9.6% 2015E 1.42 21.6x 10.7x 484,444 46,953 9.7% (FY-Dec.) Earnings/Share Price/Earnings EV/EBITDA Revenues (M) EBITDA (M) EBITDA Margin BVPS14E: 7.82 ROE14E: 20.24% Capitalization Market Cap (M) Net Debt + Pref. (M) Enterprise Value (M) Shares O/S (M) Float O/S (M) 541,368 -6,847 534,521 ScotiaView Analyst Link Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates. All values in MXN unless otherwise indicated. For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates are not registered/qualified as research analysts with FINRA in the U.S. 17,605 5,440 96 Exhibit 1 - Walmex Banking Unit Transaction Source: Company reports; CNBV, Scotiabank GBM estimates. Exhibit 2 - Credit as % of GDP Source: IMF, Superintendent of Colombia, Superintendent of Peru, CNBV, SBIF, Central Bank of Brazil. ScotiaView Analyst Link Equity Event Tuesday, December 09, 2014 x sx Equity Event: Commodities Outlook 2015 Insert graphic here 98 Equity Event XXX, XXX XX, XXXX Equity Event: 10th Annual Multi-Family Residential Panel Discussion Insert graphic here 99 Equity Event XXX, XXX XX, XXXX Equity Event: CAPP Scotiabank Investment Symposium Insert graphic here 100 Equity Event XXX, XXX XX, XXXX Equity Event: Daily Edge Holiday Schedule Insert graphic here 101 Disclosures and Disclaimers Friday, December 19, 2014 Appendix A: Important Disclosures Company Agellan Commercial REIT Agrium Inc. Alacer Gold Corp. Alimentation Couche-Tard Inc. Allied Properties REIT America Movil Artis REIT Axtel Baker Hughes Incorporated Banco de Chile SA Banco de Crédito e Inversiones SA Banco Santander-Chile SA BCE Inc. Boardwalk REIT Brookfield Asset Management Brookfield Canada Office Properties Brookfield Property Partners LP Calloway REIT Canadian Real Estate Inv. Trust CAP REIT Cathedral Energy Services Ltd. Choice Properties REIT Clearwater Seafoods Inc. Cogeco Cable Inc. Cominar REIT CorpBanca SA Crombie REIT Dream Global REIT Dream Office REIT Eagle Energy Trust Ensign Energy Services Inc. First Capital Realty Inc. Granite REIT Grupo Financiero Banorte, SAB de CV Grupo Financiero Inbursa, SAB de CV Grupo Financiero Santander México, SAB de CV Grupo Televisa, SAB H&R REIT Halliburton Company High Liner Foods Incorporated InnVest REIT Interfor Corporation InterRent Real Estate Investment Trust Intrepid Potash, Inc. K+S AG Killam Properties Inc. Leisureworld Senior Care Corporation Manitoba Telecom Services Inc. Maxcom Telecomunicaciones Megacable Holdings Ticker ACR.UN AGU ASR ATD.B AP.UN AMX AX.UN AXTEL CPO BHI CHILE BCI BSANTANDER BCE BEI.UN BAM BOX.UN BPY CWT.UN REF.UN CAR.UN CET CHP.UN CLR CCA CUF.UN CORPBANCA CRR.UN DRG.UN D.UN EGL.UN ESI FCR GRT.UN GFNORTE O GFINBUR O SANMEX B TV HR.UN HAL HLF INN.UN IFP IIP.UN IPI SDF KMP LW MBT MAXCOM CPO MEGA CPO Disclosures (see legend below)* I G, N1, T, U VS208 I, V23 G, I, T, U M12, M4 G, I, T, U M12, M4 V19 M7 M7 M7 B26, B8, G, I, S, U P, VS96 G, I, S, U T VS179, VS180, VS181 G, I, U G, I, U I, S, T J, T B40, G, I, U VS212 I, VS214 G, I, U M7 B25, G, I, U I, VS233 G, I, S6, T, U T, U J G, I, U G, I, U M7 I, M7 M7 M12, M4 I, T I, N2, V19 J, VS213 G, S, U I, P I, P, T P, T T G, I, T, U I B9, G, I, S, U M12, M4 M12, M4 102 Disclosures and Disclaimers Friday, December 19, 2014 Morguard REIT Mullen Group Ltd. Nabors Industries, Inc. National-Oilwell Varco, Inc. NorthWest Healthcare Properties REIT Pan American Silver Corp. PHX Energy Services Corp. Potash Corporation of Saskatchewan, Inc. Precision Drilling Corp. Pure Industrial REIT Quebecor Inc. RioCan REIT Rogers Communications Inc. Rubicon Minerals Corporation Saputo Inc. Schlumberger Shaw Communications Inc. Sociedad Quimica y Minera de Chile Southern Copper Corporation Teck Resources Limited TELUS Corporation The Mosaic Company Time Warner Cable Inc. Timmins Gold Corp. Twin Butte Energy Ltd. Verizon Communications Inc. Wal-Mart de México y Centroamerica, SAB de CV Weatherford International, Ltd. WPT Industrial REIT Yara International ASA MRT.UN MTL NBR NOV NWH.UN PAAS PHX POT PD AAR.UN QBR.B REI.UN RCI.B RMX SAP SLB SJR.B SQM SCCO TCK.B T MOS TWC TMM TBE VZ WALMEX V WFT WIR.U YAR I J, T V19 H.P.241, V19 I, T P, VS134, VS138, VS136 I, J, VS123 G, I, N1, T, U G, I, N1, U, VS102 G, I, U I G, I, U G, I, N1, S, U G, I, U, VS168 G, U J, V19 G, I, S, U G, N1, P, T, U M14, M9, P, T VS68 G, I, J, U I, T I G, I, U, VS55 I H.P.230 M13 V19 G, I, U, VS235 T 103 Disclosures and Disclaimers Friday, December 19, 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 Department. 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 d epartments, 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 B25 Paul D. Sobey is a director of Crombie REIT and is a director of The Bank of Nova Scotia. B26 Thomas C. O'Neill is a director of BCE Inc. and is Chairman of the Board of The Bank of Nova Scotia. B40 Thomas C. O'Neill is a director of Loblaw Companies Limited and is Chairman of the Board of The Bank of Nova Scotia. Choice Properties Real Estate Investment Trust is a subsidiary of Loblaw Companies. 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. H.P.241 Bill Sanchez, a member of Bill Sanchez's household and/or an account related to Bill Sanchez 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 De partment of Scotiabank Inverlat S.A., which forms a part of Grupo Financiero Scotiabank Inverlat. M13 Karla Pena, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A., which forms a part of Grupo Financiero Scotiabank Inverlat. 104 Disclosures and Disclaimers Friday, December 19, 2014 M14 Christian Castillo Landi, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A., which forms a part of Grupo Financiero Scotiabank Inverlat. M4 Andres Coello, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A., which forms a part of Grupo Financiero Scotiabank Inverlat. M7 Claudia Benavente A., an analyst, prepared this report and is an employee of the Research Department of Scotia Corredores de Bolsa Chile S.A. M9 Alfonso Salazar, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A., which forms a part of Grupo Financiero Scotiabank Inverlat. N1 Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months. N2 Scotia Capital (USA) Inc. had a non-investment banking securities-related services client relationship during the past 12 months. P This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit material operations of this issuer. S Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and outstanding equity securities of this issuer. S6 Dream Office REIT is a Related Issuer of Scotia Capital Inc. T The Fundamental Research Analyst/Associate has visited material operations of this issuer. U Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect to equity or debt securities of, or have provided advice for a fee with respect to, this issuer. V19 Howard Weil is a Division of Scotia Capital (USA) Inc., a U.S. registered broker-dealer and a member of the New York Stock Exchange and FINRA. Scotia Capital (USA) Inc. is a wholly owned subsidiary of Scotia Capital Inc., a Canadian registered investment dealer, and indirectly owned by The Bank of Nova Scotia. Howard Weil Research Analysts and Scotiabank Research Analysts are independent from one another and their respective coverage of issuers are different. In addition, because they are independent from one another, Howard Weil Research Analysts and Scotiabank Research Analysts may have different opinions on the short-term and long-term outlooks of local and global markets and economies. V23 Alimentation Couche-Tard Inc engaged Scotiabank as a financial advisor in the acquisition of Statoil Fuel & Retail ASA. VS102 Our Research Analyst visited PD's Marcellus operation, a drilling operation, on October 1, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS123 Our Research Analyst visited Rocky View facility, Canadian operations and R&D facility, on January 17, 2014. No was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS134 Our Research Analyst visited La Colorada, an operating mine, on April 2, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS136 Our Research Analyst visited Dolores, an operating mine, on March 31, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS138 Our Research Analyst visited Alamo Dorado, an operating mine, on March 31, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS168 Our Research Analyst visited the Phoenix Gold project, an underground mine development project, on April 9 and December 5, 2014. Partial payment was received 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. 105 Disclosures and Disclaimers Friday, December 19, 2014 VS180 Our Research Analyst visited various U.S. office assets, operating office buildings in New York, Los Angeles, and Houston, o n 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. 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. VS208 Our Research Analyst visited Çöpler Gold Mine, an operating mine, on September 24-25, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS212 Our Research Analyst visited the Lockeport processing plant, a processing facility, on October 15, 2014. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS213 Our Research Analyst visited the Lunenburg processing plant, a processing facility, on November 20, 201 4. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS214 Our Research Analyst visited Cogeco Data Services, a data centre operation, on November 2013. No payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS233 Our Research Analyst visited various properties located in in Frankfurt, Hamburg, and Berlin, income-producing properties, on April 11 to 13, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS235 Our Research Analyst visited various properties in Indianapolis, income-producing industrial properties, on September 30 to October 1, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS55 Our Research Analyst visited the San Francisco project, an operating mine, on October 22, 2012, and May 20, 2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS68 Our Research Analyst visited Highland Valley, an operating mine, on September 4, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. VS96 Our Research Analyst visited the Calgary apartment portfolio, income-producing apartment buildings, on July 10, 2012. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site. 106 Disclosures and Disclaimers Friday, December 19, 2014 Definition of Scotiabank, Global Banking and Markets Equity Research Ratings & Risk Rankings We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Stat istical and judgmental factors considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, consistency and predictability of earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly make the final determination of all risk rankings. The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research a nalyst’s 12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace. Ratings Risk Rankings Focus Stock (FS) 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/neutral” and “sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Und erperform ratings are based on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively. 107 Disclosures and Disclaimers Friday, December 19, 2014 General Disclosures This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Markets. Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital m arkets 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 infor mational use only. Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “Globally-branded research” under U.S. rules. This research is produced on a single global research platform with one set of rules which meet t he most stringent standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analysts who produce the research reports, regardless of location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various jurisdictions where the research reports are produced. Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1% of 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. 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