1. business and industrial
2. energy
3. oil

EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
February 18, 2015
Price Target Revisions
! Advantage Oil & Gas Ltd.
! H&R REIT
! Mercer International Inc.
! Newalta Inc.
! Trinidad Drilling Ltd.
Summary
Glacier efficiency improvements shine through
Summary
In-line Q4/14 results; safety and stability through size and diversity
Summary
Pulping out free cash flow
Summary
FQ4/14E preview – Expect oil to guide share price; Getting leaner
Summary
Throttling back on both capital spending and costs
Summary
A more prudent, patient, and opportunistic approach to acquisitions this year
Summary
Preview: A noisy Q4/14 expected with Cu writedowns and hedging adjustments
Summary
Q4/14 results above expectations
Summary
Preview: In line Q4/14 expected after pre-release of operating results and guidance
Summary
Recent drilling supports possibility of a new body of zinc and copper sulphides beneath Big Zinc
Summary
First look at 2015 industry trends supportive of higher valuations
Summary
Quick take - 4Q14 results
Summary
Near-term challenges at Aurizona; Focus on a viable long-term solution
Summary
Q414 results lower than expected
Summary
Addressing oil prices head-on; GEI does not appear to be set for a collision
Summary
Accretive and strategic acquisition
Summary
Several Puts and Takes, but Only Modest Changes to Our Forecast Following 2Q
Summary
Ready for the next drop-down (K2)
Summary
Renovating the top line: Q4 results solid, outlook unchanged
Summary
Checking the foundation: RON reports solid Q4 results, outlook unchanged
Summary
Iron ore prices rebound while met coal prices continue to slide
Summary
Mutual fund industry flows off to a good start this year
Summary
Framing Capital Spending & Oil Growth
First Glance Notes
! AutoCanada Inc.
! Barrick Gold Corp.
! Capstone Mining Corp.
! Goldcorp Inc.
! Ivanhoe Mines Ltd.
! Progressive Waste Solutions
! Restaurant Brands International Inc.
! Sandstorm Gold Ltd.
! Western Forest Products Inc.
Earnings Preview
! Gibson Energy Inc.
Company Comments
! Crius Energy Trust
! DHX Media Ltd.
! Pattern Energy Group Inc.
! RONA Inc.
! RONA Inc.
Industry Comments
! Bulking Up - RBC's Weekly Review
! Canadian Asset Managers
! Energy Insights
! Global Mining Trends & Values
! Integrated Oil and Senior E&P
! Paper & Forest Products Weekly
Summary
Summary
So what WTIE price are the large caps discounting?
Summary
! - Action-Oriented Research
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 20.
EQUITY RESEARCH
! Precious Metals & Minerals Weekly
Summary
!
Summary
Valuation Tables
Q1/15 Global Mining Best Ideas
Portfolio
RBC International E&P Daily
!
! RBC Solar Weekly
! Uranium Weekly
Summary
Chart of the week: Highlighting Comex Speculative Positioning & ETF Holdings
BOE; TLW; RIG
Summary
Summary
Ux spot price unchanged at $38.25/lb; TradeTech down $0.10/lb to $38.05/lb
2
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
February 18, 2015
Price Target Revisions
! Advantage Oil & Gas Ltd.
! Analog Devices, Inc.
! ArcelorMittal
! Casey's General Stores, Inc.
! Contango Oil and Gas Company
! Ensco plc
! Exelon Corporation
! Genuine Parts Company
! Lennar Corporation
! Transocean Ltd.
! USA Compression Partners, LP
! Weingarten Realty Investors
Summary
Glacier efficiency improvements shine through
Summary
We continue to wait for this Dom Perignon to go on sale
Summary
Focused on cash flow
Summary
Rounding 3rd: Another strong SSS print for CASY, raising forecasts/target to $93
Summary
Hitting The Pause Button On D&C Spending Keeps Contango Limber
Summary
February Fleet Status Report
Summary
Continued Play on Capacity Performance
Summary
GPC – 4Q results slightly better; Outlook clouded by FX
Summary
Management meeting update
Summary
February Fleet Status Report
Summary
Showing Stability
Summary
Raising estimates, NAV and price target on strong outlook; New target is $42
Summary
Missed by $0.01 on another strong quarter of same store growth; new guidance sound
Summary
Ahead by $0.02 on NOI outperformance; Guidance increased
Summary
Preview: A noisy Q4/14 expected with Cu writedowns and hedging adjustments
Summary
Settlement with JNJ a Positive for the Stock; Premium Valuation Now Appears Justified
Summary
Strong results and guidance
Summary
Preview: In line Q4/14 expected after pre-release of operating results and guidance
Summary
FFO beat our estimate, acquisition activity was healthy, SS delivered modest growth
Summary
Strong Stand-Alone F3Q15 Results; Long Thesis Intact
Summary
A shift to supply chain productivity; Outperform
Summary
Preview: In line Q4/14 expected with a focus on the development project pipeline
Summary
PEB delivers a solid quarter; '15 appears to be another busy year
Summary
First look at 2015 industry trends supportive of higher valuations
Summary
Missed by $0.03 on higher interest expense, G/A; guidance unchanged
Summary
First look at 4Q14
Summary
Sue did your homework: data-center share gains
Summary
Sue did your homework: Cost synergies
Summary
Q4 Preview & Cheat Sheet
Summary
4Q14E Earnings Preview
Summary
Q4 Preview & Cheat Sheet
First Glance Notes
! Acadia Realty Trust
! American Assets Trust Inc.
! Barrick Gold Corp.
! Boston Scientific Corp.
! Chemed Corporation
! Goldcorp Inc.
! Healthcare Realty Trust Inc.
! Medtronic, Inc.
! Mondelez International, Inc.
! Newmont Mining Corp.
! Pebblebrook Hotel Trust
! Progressive Waste Solutions
! Realty Income Corporation
! Terex Corporation
Earnings Preview
! Arista Networks Inc.
! CommScope
! Homeaway, Inc.
! Mohawk Industries, Inc.
! TrueCar, Inc.
3
EQUITY RESEARCH
Company Comments
! AngloGold Ashanti Limited
! Crius Energy Trust
! Halcon Resources Corporation
! KB Home
! MFA Financial Inc.
! Rackspace Hosting, Inc.
! Rice Energy Inc.
! Textainer Group Holdings Ltd.
! Bank of New York Mellon
! ThyssenKrupp AG
! Vanguard Natural Resources
! Varonis Systems, Inc
Summary
Previewing FY14 results
Summary
Accretive and strategic acquisition
Summary
Posts Solid 4Q14 Production; Lowers FY15 CapEx Budget By 6% On Lower Service Costs
Summary
Tweaking estimates
Summary
Correction: Updating Estimates Post 4Q14 Results
Summary
4Q14 results in line; FX headwinds impact 2015 guidance
Summary
Taps The Brakes On 2015 Growth Plans, But Maintains Robust Trajectory
Summary
A good result, but headwinds persist
Summary
Updating model to reflect 4Q14 adjustment primarily related to FX litigation
Summary
Modest changes post 1Q15 results
Summary
Distribution Cut in Line with Expectations
Summary
Good not Great end to an Otherwise Strong Year
Summary
Iron ore prices rebound while met coal prices continue to slide
Summary
2015
Connectors & Sensors: Auto Demand Summary
Remains Positive
Energy Insights
Summary
Credit Stays Benign, Post-Holiday Paydowns Moderately Higher
Industry Comments
! Bulking Up - RBC's Weekly Review
! Card Issuer Trust Trends – January
!
Implications of January Data for APH, TEL, ST, and FLEX
!
Summary
! Global Mining Trends & Values
Summary
! Global Oilfield Services
Summary
! Health Care Services
Summary
! Health Care Services
! Home Builders and Building Products Summary
Framing Capital Spending & Oil Growth
!
! Negative January eCommerce
Summary
So what WTIE price are the large caps discounting?
Summary
January comScore eCommerce Results
!
! Positive Outlook for 2015 CCAR and
Summary
– Picture of the Week
Integrated Oil and Senior E&P
Datapoints
Paper & Forest Products Weekly
!
!
Summary
DFAST Stress Tests
Precious Metals & Minerals Weekly Summary
Valuation Tables
Q1 Trends in Online Advertising
Summary
Conference Call - Friday, February
20th
RBC European Industrials Daily
Summary
!
! RBC International E&P Daily
! RBC Metals & Mining
Investing for the Cycle Recovery
Exchange enrollment hits 11.4MM
News from Nashville
Hope (trade) springs eternal
Over Capitalized CCAR Banks Should Lead to Record Payouts to Shareholders
Chart of the week: Highlighting Comex Speculative Positioning & ETF Holdings
​ABI slips, Oil - cycle positioning/capex guidance
Summary
BOE; TLW; RIG
Summary
Steel stocks bounce as US HRC slides
4
EQUITY RESEARCH
UK & European Research at a Glance
February 18, 2015
Price Target Revisions
! ArcelorMittal
! Atlantia S.p.A.
! Orange SA
Summary
Focused on cash flow
Summary
Lower WACC and traffic prospects slightly improved
Summary
Focus on FCF
Summary
Previewing FY14 results
Summary
Maintaining Underperform after strong run
Summary
Modest changes post 1Q15 results
! Bulking Up - RBC's Weekly Review
! Global Mining Trends & Values
! Precious Metals & Minerals Weekly
Summary
Iron ore prices rebound while met coal prices continue to slide
Summary
Chart of the week: Highlighting Comex Speculative Positioning & ETF Holdings
!
Summary
Steel stocks bounce as US HRC slides
Summary
BPI transaction – high capital cost
Company Comments
! AngloGold Ashanti Limited
! SSAB AB
! ThyssenKrupp AG
Industry Comments
Valuation Tables
RBC Metals & Mining
Summary
In-Depth Reports
! CaixaBank SA
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
5
Price Target Revisions
Advantage Oil & Gas Ltd.(TSX: AAV; 6.36; NYSE: AAV)
Michael Harvey, P.Eng. (Analyst)
403 299 6998; [email protected]
Luke Davis (Associate)
403 299 5042; [email protected]
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
7.50
7.00
6.50
Outperform
8.00 ▲ 7.00
Glacier efficiency improvements shine through
AAV maintained a strong (+20%) YoY growth trajectory while trimming $110
million (41%) from the capital budget, largely reflective of improving well
performance. We reiterate our Outperform rating (target to $8/sh), reflective of
peer-leading operational efficiencies as well as an improved go-forward valuation
(2015 EV/DACF improves by 13%).
6.00
5.50
5.00
4.50
6000
4500
3000
1500
F
M
A
M
Close
2013A
2014E
2015E
2016E
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
CFPS Diluted Prev.
0.51
0.94
0.94↓
0.95
1.27↑
1.23
P/CFPS
12.5x
6.8x
6.8x
5.0x
All values in CAD unless otherwise noted.
• Production growth trajectory maintained in tandem with a 41% 2015 capital
reduction. AAV cut approximately $110 million (or 41%) from its 2015 capital
budget, but maintained production guidance of 155 mmcfe/d (25,800 boe/d).
• Well positioned operationally. Of the 33 wells recently drilled, 16 have been
completed and tested with a further 17 drilled and awaiting completion. The
Middle Montney continues to deliver encouraging results – with liquids yields
(from 7 wells) of over 50 bbl/mmcf and average test rates of over 6.5 mmcd/d
@ 6.5 MPa.
• Valuation and balance sheet both improve – trades at discount to peers despite
better growth. After adjusting our estimates and including the company's
updated hedge book, we highlight the stock's improved EV/DACF valuation
multiple. Advantage is now trading at 7.6x 2015 (previously 8.7x, peers 8.6x) and
5.9x 2016 (previously 6.3x, peers 6.4x). 2015E D/CF falls to 1.6x (peers 4.0x), with
ample liquidity available on the company's $400 million revolver.
• Year end reserves – strong finding costs and recycle ratio. 2P reserves increased
by 6% YoY, incorporating a finding cost (F&D) of about $6/boe, which is expected
to be top decile and in line with historical averages. Inclusive of the company's
2014 field netback of $20/boe recycles map to over 3x, which we expect to
be amongst the top of the pack. Of note, roughly 57 bcf of positive technical
revisions were realized as a result of improving well performance.
H&R REIT(TSX: HR.UN; 24.28)
Neil Downey, CFA, CA (Analyst)
(416) 842-7835; [email protected]
Kevin Cheng, CFA (Associate)
(416) 842-3803; [email protected]
Ben Halm, CPA, CA (Associate)
416 842 8720; [email protected]
Matt Logan (Associate)
416 842 3770; [email protected]
Rating:
Price Target:
Sector Perform
25.00 ▲ 24.00
In-line Q4/14 results; safety and stability through size and diversity
52 WEEKS
21FEB14 - 09FEB15
25.00
24.00
H&R REIT (“HR”) has posted in-line Q4/14 and 2014 results. 2015 will be a likely
be a "transitional year" for FFO/unit growth, due to temporary office vacancy
and de-leveraging related to the recently formed Industrial platform. Leasing and
(re-)investment progress are already evident, thus setting-up H&R nicely for 2016
FFO/unit growth. We've tweaked our target +$1, to $25, and reiterated our Sector
Perform rating.
23.00
22.00
21.00
4500
3000
1500
F
M
A
Close
2013A
2014A
2015E
2016E
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
FFO/Unit Prev.
1.79
1.86
1.81↑
1.80
1.89↓
1.91
F
• Q4/14 FFO/unit +2% – Q4/FFO/unit of $0.47 was +2% over Q4/13’s $0.45, and
in line with our $0.47E. 2014 FFO/unit of $1.86 was spot-on our $1.86E and +4%
YoY.
• Office occupancy steps back in Q4/14; the good news is that the issue has
been addressed – Q4 portfolio occupancy of 97.8% was -30bps YoY and -60bps
sequentially. Office was the swing-factor, -200bps sequentially, driven by a large
but known 274,000 sf Dec-31 expiry at 310-320-330 Front St. West, Toronto. The
good news is that HR has re-leased 231,000 sf of this area to a bank and an
existing tenant will expand into 53,500 sf, thus back-filling the vacancy. There will
be the better part of 12 months of down time, yet this is a solid accomplishments
amid difficult leasing market conditions.
6
All values in CAD unless otherwise noted.
• Target exposure is manageable – At ~$7.5MM of gross rent (equating to $0.025
in FFO/unit) H&R’s exposure to 9 Target stores seems very manageable.
• Adding U.S. apartments – HR has acquired 3 multi-res properties in TX (~1,100
rental suites / US$97MM). Having hired 2 individuals based in Texas in order to
grow the business, HR clearly intends to build a fourth platform with the goal of
further diversification and adding a new potential source of earnings growth.
• Pro-forma liquidity could top $600MM – Q4/14 corporate liquidity was +
$142MM, to $359MM. Post year-end asset sales and financings could boost this
figure to >$600MM. Leverage is at a very comfortable 48%.
• Price Target +$1 to $25; Sector Perform rating reiterated
Paul C. Quinn (Analyst)
(604) 257-7048; [email protected]
Hamir Patel (Analyst)
(604) 257-7145; [email protected]
Mercer International Inc.(NASDAQ: MERC; 13.64; TSX: MRI.U)
14.00
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
Outperform
18.00 ▲ 17.00
Pulping out free cash flow
Reiterating Outperform rating and raising target to $18 (from $17). NBSK markets
remain at elevated levels, and together with a weaker Euro/C$ and the recent
debt financing (which led to the elimination of the complicated restricted/
unrestricted structure), we see strong FCF.
12.00
10.00
8.00
2000
1000
F
M
A
M
J
J
Close
2014
A
S
O
N
Rel. S&P 500
EPS, Adj Diluted Prev.
2013A
(0.78)
2014A
1.11↑
1.01
2015E
1.46
2016E
1.58↑
1.52
D
2015
J
F
MA 40 weeks
P/E
12.3x
9.3x
8.6x
All values in USD unless otherwise noted.
• Q414 results better than expected – Adjusted EBITDA was $71MM, in line with
our $72MM forecast but materially higher than consensus of $64MM.
• Strong FCF generator – We see strong free cash flow growth ahead for Mercer
with elevated pulp prices and FX tailwinds in its producing regions of Germany
and Canada (MERC sees $4.65MM of additional EBITDA for every 1c decline in
the Euro and $3MM for every 1c drop in the Canadian dollar). We forecast FCF of
$2.32/sh in 2015 and $2.53/sh in 2016. We expect an average annual FCF yield
of 18% over 2015–18.
• Management outlook – Mercer expects NBSK list prices to weaken in Q1 as
the strengthening US$ has put pressure on many customers in Europe and Asia.
However, the company expects the strengthening US$ to more than offset these
list price declines. Mercer expects energy and chemical production and revenues
to increase q/q in Q1 due to the addition of Rosenthal's tall oil plant (completed
in Q4). Mercer expects flat fiber costs in Q115 as the continued weakness in both
the Euro and C$ offset slightly higher per unit prices.
Newalta Inc.(TSX: NAL; 14.21)
Steve Arthur, CFA (Analyst)
(416) 842-7844; [email protected]
Anthony Jin, CFA, P.Eng. (Analyst)
(416) 842-5338; [email protected]
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
22.00
Outperform
21.00 ▼ 24.00
FQ4/14E preview – Expect oil to guide share price; Getting leaner
We expect that oil price movements will continue to guide NAL prices, though Q4
results (due February 19th) should offer insight into the direct/indirect financial
impacts of oil price declines, timeline for the cost-reduction initiatives, and future
growth trajectory with lower Capex plans. With the recent share price pullback, we
see an attractive risk/reward proposition. Maintain Outperform. Target $21 (from
$24).
20.00
18.00
16.00
14.00
2500
2000
1500
1000
500
F
M
A
Close
2013A
2014E
2015E
2016E
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Revenue Prev.
783.4
847.3↓
848.1
586.3↓
618.3
569.8↓
613.4
F
• Solid value for longer-term investors; oil price volatility likely to guide share
price near-term: NAL shares have declined nearly 40% over the last 3 months,
following the sharp decline in WTI oil prices and the subsequent declines in endmarket activity levels. As recent trading shows, we expect the shares will likely
remain tied to oil price volatility. However, at 6.6x C2015E and 5.9x C2016E EV/
EBITDA, we see value in Newalta shares which now trade at a material discount
to their peer group average multiples of 9.9x and 8.7x, respectively.
All values in CAD unless otherwise noted.
7
• Expect oil price declines to weigh on Q4E results: We anticipate revenues of
$218MM (+7% y/y), adj. EBITDA of $43MM and adjusted EPS of $0.22, vs.
consensus estimates of $222MM, $46MM and $0.23, respectively.
• Sharp decline in benchmark commodity prices weigh on shares: Canadian oil
benchmarks Edmonton Par and WCS declined -20% y/y and -6% y/y, respectively,
on average in Q4. Positive FX tailwinds in Q4 helped offset the steep declines
through December.
• Updating estimates to incorporate recent cost cutting initiatives and updated
commodity and FX assumptions: Our revenue forecast now reflects 10%
2014E-2016E CAGR, down from 13% previously.
• Target to $21 (from $24) on revised forecast
Trinidad Drilling Ltd.(TSX: TDG; 4.46)
Dan MacDonald, CFA (Analyst)
(403) 299-2394; [email protected]
Matthew McKellar (Associate)
403 299 5045; [email protected]
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
12.00
Outperform
6.50 ▼ 7.00
Throttling back on both capital spending and costs
On the whole, we view land drilling stocks, including TDG, as among the best
offensive names for investors looking to increase sector weightings to play a
cyclical recovery later in 2015. Historically, land drilling stocks have been among
the best-performing stocks coming off business cycle lows, recognizing recovering
crude oil prices will be the primary driver initially.
10.00
8.00
6.00
4.00
6000
4500
3000
1500
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2013A
0.58
2014E
0.30
2015E
0.29↑
0.24
2016E
0.42↑
0.40
P/E
7.7x
14.9x
15.4x
10.6x
All values in CAD unless otherwise noted.
• 2015 capex reduced and cost-cutting measures implemented. TDG has scaled
back its rig build program and non-essential capital spending. In addition,
management has implemented staff reductions and wage rollbacks in light of the
current environment. SSee our prior comment.
• Estimates reduced on lower North American drilling activity; price target now
$6.50. Our estimate reductions are driven by a faster than forecast decline
in TDG's North American drilling activity and reduced new build/upgrade rig
program. These are partially offset by expectations that the rigs now forecast to
be running in the U.S. will be at higher margins than before given that all are
essentially under term contracts.
• U.S. rig fleet fast approaching contract only activity. TDG disclosed it is down
to 32 active rigs in the U.S., from a peak of 54 in Q4/14. We estimate this is
essentially TDG's contracted rig fleet, which we estimate in the 30-rig range.
We expect minimal further downside, with the bottom in TDG's US rig count
now expected in early Q2/15. Further declines would primarily need to be early
contract terminations, which carry with them one-time cash payments by the
E&P.
First Glance Notes
AutoCanada Inc.(TSX: ACQ; 48.24)
Steve Arthur, CFA (Analyst)
(416) 842-7844; [email protected]
Ben Holton, CFA (Analyst)
(416) 842-9949; [email protected]
88.00
80.00
72.00
64.00
Rating:
52 WEEKS
21FEB14 - 09FEB15
56.00
48.00
40.00
32.00
1600
1200
800
400
F
M
A
Close
M
J
J
2014
A
S
Outperform
A more prudent, patient, and opportunistic approach to acquisitions this year
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
F
• AutoCanada announced that it is holding its dividend at $0.25/quarter, instituting
a 2% Normal Course issuer Bid, and taking a more "patient and prudent"
approach to acquisitions.
• ACQ shares will likely soften in the immediate term as investors digest the
implications of potential shifts in acquisition timing, but we see no change
to the company's commitment to building the business through acquisitions
or its capacity to do so. In fact, we view it as prudent to be more patient
and opportunistic with acquisitions, given the changing landscape over the
past year (for oil, Alberta's economy, and presumably upcoming monthly auto
sales).
• Holding dividend constant at $0.25/quarter—a prudent move: We see the lack
of a dividend increase as a prudent move in this environment, recognizing the
8
All values in CAD unless otherwise noted.
economic uncertainty facing a substantial portion of AutoCanada's dealerships
(22 of 48 are in Alberta).
• 2% Normal Course Issuer Bid (NCIB): AutoCanada's shares have been extremely
volatile over the past ~9 months. We see the NCIB as a solid message and
mechanism to be opportunistic with the shares, buying back on any future
exaggerated dips, should they occur.
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Jamie Kasprowicz, P.Eng., CFA (Analyst)
(416) 842-8934; [email protected]
Barrick Gold Corp.(NYSE: ABX; 12.03; TSX: ABX)
Rating:
52 WEEKS
21FEB14 - 09FEB15
20.00
18.00
16.00
14.00
12.00
150000
100000
50000
F
M
A
M
J
J
Close
2014
A
S
O
N
Rel. S&P 500
D
2015
J
F
MA 40 weeks
All values in USD unless otherwise noted.
Rating:
52 WEEKS
21FEB14 - 09FEB15
2.40
2.00
1.60
1.20
20000
15000
10000
5000
A
Close
M
J
J
2014
A
S
O
Sector Perform
Q4/14 results above expectations
2.80
M
• While operating performance should be in line when ABX reports after the
market close February 18th, we expect 2014 financial results to be noisy with
non-cash asset write down of copper assets and negative mark-to-market
adjustments of the currency and energy hedges. We expect a strong Q4 from
Lagunas Norte driven by higher grades to be offset in part by (1) a weak Q4/14
at Cortez due to sequencing of ore and waste phases, and (2) a weak Q4/14 at
Goldstrike from lower grades and the thiosulphate project tie-in. Investors are
expecting a 2015 production rebound with improved costs at both Goldstrike and
Cortez Hills.
• 2015 Outlook: We forecast 2015 gold production of 6.5Moz at AISC of $892/oz,
copper production with the closure of Lumwana of 264MMlbs at $1.59/lb and
$2.0B in total capital. Delays in gold grades rebounding at Goldstrike and Cortez
Hills and failure to replace Reserves would disappoint the market.
• Copper: We expect higher grades at Lumwana to continue and estimate that the
proposed Zambian royalty increase to 20% from 6% make Lumwana uneconomic,
and we would expect its closure/write down. At Zaldivar we expect relatively flat
q/q production of 61MMlbs.
• Liquidity: We forecast a year-end cash and equivalents position of $2.9B,
long-term debt of $13.1B, and net-debt-to-total-capitalization of 45%. As of
September 30th, the company had $4.0B available under an undrawn credit
facility.
Capstone Mining Corp.(TSX: CS; 1.41)
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Wen Tian, CFA (Associate)
(416) 842-4126; [email protected]
Thomas Klein (Associate)
(416) 842-5339; [email protected]
Steve Bristo, CFA (Associate)
(416) 842-7826; [email protected]
F
Sector Perform
Preview: A noisy Q4/14 expected with Cu writedowns and hedging adjustments
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All market data in CAD; all financial data in USD.
F
• Q4/14 results slightly higher than expected: Capstone reported Q4/14 operating
CFPS before changes in working capital of $0.08, slightly below our estimate of
$0.09 and down slightly from $0.12 in Q3/14. Adjusted EPS of $0.04 excluding
unusual items came in just above our estimate of $0.02 and consensus of $0.01.
• Strong operational results: Average C1 cash costs were $1.88/lb Cu, below our
estimate of $2.08/lb with costs at all mines below our expectations. The realized
copper price was also slightly stronger than we were expecting at $3.06/lb
(excluding provisional pricing adjustments) versus our expectation of $3.00/lb.
• Pinto Valley: Capstone has decided to explore two cases in the PV3 PFS, which
is expected to be complete in Q3/15: a base case with a 10 to 15% increase in
throughput and possible mine life extension beyond 2026, and a second case
with throughput increased to 90,000 tpd and a potential mine life extension.
• Minto update: At current copper prices the economics of Minto are questionable
without Minto North. Capstone does not expect that Minto North will be stripped
as planned at the beginning of Q2/15 and is evaluating options to minimize losses
in the current copper price environment.
• Santo Domingo update: Capstone completed the tender process for EPC and
EPCM packages for project development and has selected POSCO as the
preferred EPC contractor.
• 2015 guidance maintained
• Conference call details: Capstone will hold a conference call on Wednesday,
February 18 at 11:30AM ET. Dial-in: 1-888-390-0546 or 416-764-8688.
9
Goldcorp Inc.(NYSE: GG; 22.87; TSX: G)
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Jamie Kasprowicz, P.Eng., CFA (Analyst)
(416) 842-8934; [email protected]
Rating:
52 WEEKS
21FEB14 - 09FEB15
28.00
26.00
24.00
22.00
20.00
18.00
80000
60000
40000
20000
F
M
A
M
J
J
Close
2014
A
S
O
N
Rel. S&P 500
D
2015
J
F
MA 40 weeks
All values in USD unless otherwise noted.
Recent drilling supports possibility of a new body of zinc and copper sulphides
beneath Big Zinc
52 WEEKS
21FEB14 - 09FEB15
1.50
1.25
1.00
0.75
7500
6000
4500
3000
1500
M
A
Close
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All market data in CAD; all financial data in USD.
Derek Spronck (Analyst)
(416) 842-7833; [email protected]
Walter Spracklin, CFA (Analyst)
(416) 842-7877; [email protected]
• We expect financial results to be in line with our numbers following pre-release of
operating results and guidance on January 12th. We expect investors to focus on
(1) the announced $2.3-$2.7B Cerro Negro write down and ramp-up at the mine,
(2) resolving the plant start-up issues at Eleonore, (3) details on plans for the
Borden Lake project, and (4) the y/y Reserve update, that should fully replace
2014 production. At Penasquito we expect an update on: (1) the Northern Well
Field project; (2) the company's CEP and pyrite leach projects; and (3) the Camino
Rojo project, which the company now expects could be a heap leach mine and
subsequently a source of primary ore for the Penasquito mill.
• 2.87Moz in 2014, reflecting ramp-up of Cerro Negro and Eleonore, and a rebound
in grades at Red Lake and Penasquito. We forecast 2015 AISC to improve to $887/
oz from $950/oz in 2014. Production should improve throughout the year as
higher grades are encountered at Penasquito and as Cerro Negro and Eleonore
ramp up.
• Asset Write-downs: As disclosed, the carrying value of Cerro Negro is expected
to be written down by $2.3B to $2.7B. We also expect the company to review
the values associated with reserves/resources at Red Lake with closure of the
Campbell zones and potentially Marlin after the recent increase in Guatemala
royalties, which combined may be in the $250MM range.
Rating:
Outperform
Risk Qualifier: Speculative Risk
1.75
F
Preview: In line Q4/14 expected after pre-release of operating results and
guidance
Ivanhoe Mines Ltd.(TSX: IVN; 0.74)
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Steve Bristo, CFA (Associate)
(416) 842-7826; [email protected]
Thomas Klein (Associate)
(416) 842-5339; [email protected]
2.00
Outperform
F
• Bottom line: Ivanhoe reported its fourth set of assay results from drilling at the
Kipushi mine. Results from the Big Zinc zone continue to highlight intercepts of
exceptionally high zinc grade (as much as 51% zinc) and confirm the presence
of precious-metals-rich copper and zinc zones. Hole KPU072 is the second
to intersect a zone of significant massive sulphide mineralization containing
sphalerite, chalcopyrite, and pyrite beneath the Big Zinc zone. Ivanhoe has so far
drilled 75 holes totalling 14,900 metres of its planned 20,000-metre underground
drilling campaign. Assays for 64 of the 75 holes have been released so far.
• Drilling has discovered a possible new body of zinc and copper massive sulphide
mineralization below Big Zinc zone: Hole KPU072, drilled through the Big Zinc
zone from the hanging-wall drift 1,272 m below surface, intersected significant
massive sulphide mineralization 140 m below the historical Big Zinc zone over 60
m. Ivanhoe is uncertain if the intersection forms a down plunge extension of Big
Zinc or is a separate body of mineralization. The mineralization appears similar
in style to Big Zinc, with sphalerite, chalcopyrite, and pyrite.
• Testing of down-plunge extension of Nord Riche zone intersected zones of
disseminated and massive sulphides
• Big Zinc assay results continue to highlight intercepts of exceptionally high zinc
grades and confirm the presence of precious-metals-rich copper and zinc zones
Progressive Waste Solutions(NYSE: BIN; 29.06; TSX: BIN)
Rating:
Outperform
First look at 2015 industry trends supportive of higher valuations
• Positive implications for BIN. As we get our first read on 2015 industry trends,
we remain positive on the potential for higher industry valuations. Waste
Management's (NYSE: WM) fourth quarter earnings and 2015 outlook this
morning confirmed that industry pricing remains robust, with waste volumes
10
52 WEEKS
21FEB14 - 09FEB15
30.00
28.00
26.00
24.00
2500
2000
1500
1000
500
F
M
A
M
J
J
Close
2014
A
S
O
Rel. S&P 500
N
2015
J
D
F
MA 40 weeks
All values in USD unless otherwise noted.
Restaurant Brands International Inc.(NYSE: QSR; 38.74; TSX: )
David Palmer (Analyst)
(212) 905-5998; [email protected]
Eric Gonzalez (Associate)
(212) 905-5970; [email protected]
Jack Kindregan, CFA (Associate)
(212) 618-7716; [email protected]
Rating:
41 DAYS
10DEC14 - 09FEB15
40.00
38.00
36.00
34.00
32.00
12000
8000
4000
19
D14
26
02
08
Close
J15
14
21
Rel. S&P 500
27
02
F15
06
MA 40 days
All values in USD unless otherwise noted.
Rating:
Outperform
Risk Qualifier: Speculative Risk
52 WEEKS
21FEB14 - 09FEB15
7.00
6.00
5.00
4.00
3.00
4000
3000
2000
1000
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2014
A
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O
• Results difficult to decipher; but SSS growth underscores strength of both brands:
While the business combination between Burger King and Tim Hortons makes for
a noisy release, the company reported strong SSS growth across both brands in
key markets. On a consolidated basis, global SSS growth was 4.1% at Tim Hortons,
including 4.1% and 5.1% for Canada and the US, respectively. In addition, global
SSS growth was 3.0% for Burger King, including 4.2%, 0.9%, 2.0%, 2.9%, for the US
& Canada, EMEA, LAC, and APAC segments, respectively. Notably, US & Canada
SSS growth of 4.2% was just outside the high end of the 3% to 4% range we had
expected, but demonstrates Burger King’s ongoing ability to gain share with value
in a highly competitive market.
• $0.09 dividend, 40% payout ratio: This morning, RBI announced a $0.09/share
quarterly dividend, equivalent to a 0.9% dividend yield and ~40% payout ratio,
versus ~35% for legacy Burger King. We believe this reinforces the company’s
commitment to rapidly improve free cash flow generation through cost cutting
and CAPEX reductions. On today’s conference call, we will be looking for
additional detail on the pace of cost savings initiatives and the ability of the
company to optimize its capital structure over time.
Sandstorm Gold Ltd.(TSX: SSL; 4.65; NYSE: SAND)
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
Mark Mihaljevic (Associate)
(416) 842-3804; [email protected]
8.00
Outperform
Quick take - 4Q14 results
42.00
15
expected to expand. Furthermore, as WM takes the lead in removing commodity
price volatility out of its operations, we see the net impact of lower recycling
prices becoming more muted industry wide and supportive of higher valuations.
• Looking to manage lower recycled commodity prices. On the call, WM clearly
indicated that they would not invest in recycling if they could not recoup their
processing costs; and as such, were increasingly including commodity price
participation in collection contracts.
• Court ruling could open up the acquisition market in Canada. In early January,
the Supreme Court of Canada struck down a move by the Competition Bureau
to undo a small merger in the oil-waste landfill sector. The decision could make
it easier for merging companies to convince the Competition Bureau that an
acquisition of a rival should be allowed if it creates efficiencies - such as those
created by economies of scale. This ruling is potentially significant for BIN as
management looks to execute and make strategic acquisitions in both the US and
within Canada.
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All market data in CAD; all financial data in USD; dividends paid in
CAD.
Near-term challenges at Aurizona; Focus on a viable long-term solution
• Active mining operations suspended at Aurizona - Luna Gold announced the
suspension of active mining operations at its Aurizona mine in Brazil, with the
company having built a stockpile for processing over the next 5 months. Given
the tailing facility has a remaining capacity of 900 Kt, the amount of ore that can
processed beyond the current stockpile is limited.
• Strategic review ongoing - As had been previously announced, Luna continues to
conduct a strategic review. Given Luna's current capital constraints and ongoing
operational challenges at the Aurizona mine, we believe investors had already
significantly discounted the potential value of the current operation/stream,
ahead of the conclusion of the strategic review. While the market may initially
react negatively to the near-term challenges, we continue to expect a solution
that can help unlock the long-term potential of the asset to be put into place.
• Restructured stream already assumed within our analysis - We had already
assumed the company's 17% gold stream is restructured into a 3% NSR. We
believe a 3% royalty is appropriate as it would continue to provide Sandstorm
a reasonable level of cash flow while improving the economics of Aurizona and
enhancing the attractiveness of Luna Gold to a potential suitor.
11
• Trading at a sizeable discount to peers at spot prices - Given the ongoing
overhang of operational challenges at Aurizona, Sandstorm continues to trade at
a sizeable discount to its royalty/streaming peers, trading at 1.32x NAV and 8.5x
2015-17 EV/AdjCF compared to its peers at 1.70x and 16.1x.
Western Forest Products Inc.(TSX: WEF; 2.61)
Paul C. Quinn (Analyst)
(604) 257-7048; [email protected]
Hamir Patel (Analyst)
(604) 257-7145; [email protected]
Rating:
Q414 results lower than expected
52 WEEKS
21FEB14 - 09FEB15
2.60
2.40
2.20
2.00
25000
20000
15000
10000
5000
F
M
A
M
Close
J
J
2014
A
S
O
Outperform
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All values in CAD unless otherwise noted.
• Q414 results lower than expected – Western reported normalized EPS of $0.03
in Q414, lower than our $0.04 estimate and consensus of the same. Adjusted
EBITDA of $15MM compared to our $16MM forecast and consensus of $20MM.
The $9.6MM y/y decline in EBITDA primarily reflected weaker prices in China
for both commodity lumber and logs, as well as reduced Japanese lumber
volumes. WEF's lumber shipments declined 3% y/y (with pricing +2%) while its
log shipments fell 18% (with average pricing 7% higher than a year ago). Export
log realizations actually declined 17% y/y in the quarter.
• Management outlook – WEF expects "marginally improved" lumber realizations
and volumes in North America supported by continued strength in the US
repair/renovation market (which is expected to lead to stronger prices and
volumes for WRC and Niche in 2015), further gradual improvement in US housing
starts, seasonally stronger NA lumber demand over H1, and FX tailwinds for C$
realizations.
• Export market outlook less rosy – In China, management expects log prices and
volumes to "remain under pressure" until excess inventories come into balance
to match lower demand levels. WEF anticipates its export log volumes into China
in early 2015 to be similar to Q414 levels. In Japan, management sees "limited"
growth for lumber through H115 but expects the weaker loonie to allow it to take
share from US producers. The company believes the Japanese housing market
has stabilized and will support improved pricing and demand in the spring.
Earnings Preview
Gibson Energy Inc.(TSX: GEI; 26.88)
Robert Kwan, CFA (Analyst)
(604) 257-7611; [email protected]
Michelle Zuliani (Associate)
604 257 7064; [email protected]
Rating:
Price Target:
52 WEEKS
21FEB14 - 09FEB15
Outperform
35.00
Addressing oil prices head-on; GEI does not appear to be set for a collision
Gibson has the highest direct exposure in our pipeline and midstream coverage
universe to declining commodity prices as well as narrower commodity spreads,
and the share price has also been one of the most negatively impacted in our
coverage. While a further decline in oil prices would likely negatively impact
the share price, we believe that Gibson's shares offer an attractive risk/reward
profile.
36.00
34.00
32.00
30.00
28.00
26.00
24.00
22.00
4500
3000
1500
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
ACFFO/Sh Diluted
2013A
2.03
2014E
2.13
2015E
2.37
2016E
2.57
All values in CAD unless otherwise noted.
F
• Our view: Gibson has the highest direct exposure in our pipeline and midstream
coverage universe to declining commodity prices as well as narrower commodity
spreads, and the share price has also been one of the most negatively impacted in
our coverage. While a further decline in oil prices would likely negatively impact
the share price, we believe that Gibson's shares offer an attractive risk/reward
profile.
• The total return narrative has not changed. Gibson is the next midstream stock
in our coverage universe that we expect to increase dividends. Specifically, we
expect Gibson to announce an increase to the annual dividend when it reports
Q4/14 results on March 3, 2015. We believe a dividend increase is supported by
Gibson’s relatively low payout ratio, strong balance sheet, and solid visibility into
future take-or-pay cash flow growth from new oil terminal infrastructure, most
of which is already under construction. On top of what we see forecast as an 8%
dividend increase, the shares are currently yielding almost 4.5%.
12
• The downside protection of take-or-pay contracts with torque to the upside if
oil prices increase. By 2016, new terminal infrastructure underpinned by longterm contracts is expected to result in approximately 17% of segment profit
coming from take-or-pay contracts. On top of this, 54% of segment profit is
expected to come from fee-for-service activities, leaving less than one-third of
the business exposed to commodity margins.
Company Comments
Crius Energy Trust(TSX: KWH.UN; 5.59)
Nelson Ng, CFA (Analyst)
(604) 257-7617; [email protected]
Kelsey Roste (Associate)
(604) 257-7383; [email protected]
52 WEEKS
21FEB14 - 09FEB15
5.40
Rating:
Sector Perform
Risk Qualifier: Speculative Risk
Price Target: 6.50
Accretive and strategic acquisition
We believe the TriEagle acquisition is accretive and strategic and diversifies Crius's
customer base. In addition, it should position the company for organic growth.
We continue to believe that the units of Crius are suitable for risk-tolerant
investors looking for an attractive yield.
4.95
4.50
4.05
3.60
600
400
200
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
F
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
ACFFO/Sh Diluted Prev.
2013A
0.66↓
0.67
2014E
0.63↓
0.66
2015E
0.82↑
0.81
2016E
0.99↑
0.87
All market data in CAD; all financial data in USD; dividends paid in
CAD.
DHX Media Ltd.(TSX: DHX.B; 9.54)
Haran Posner (Analyst)
(416) 842-7832; [email protected]
Drew McReynolds, CFA, CA (Analyst)
(416) 842-3805; [email protected]
52 WEEKS
• Agrees to acquire TriEagle Energy. Crius has agreed to acquire TriEagle Energy
(TriEagle), a Houston-based energy retailer with 200,000 residential customer
equivalents (RCEs) in Texas, Pennsylvania, and New Jersey. Approximately 65%
of TriEagle's customers are based in Texas and 60% are commercial (rather than
residential). The purchase price is US$22.2 million, which consists of US$18.8
million in cash and US$3.4 million in phantom unit rights, which will be settled in
cash over a two-year period. The acquisition is expected to close in early Q2/15,
and will be mainly funded by Crius's credit facility (US$48 million available).
• Acquisition makes strategic sense. We believe the acquisition is attractive for the
following reasons: i) provides access to Texas (largest U.S. energy retail market);
ii) improves the customer base (diversifies geography and increases the level of
fixed contracts); iii) provides an avenue for organic growth through the expansion
of the commercial sales platform and the launching of the network marketing
sales channel (Viridian) in Texas; and iv) provides synergies through consolidating
back-office functions.
• Acquisition price seems reasonable. The TriEagle transaction implies a purchase
price of US$110/RCE, which is within the US$87–120/RCE range that Crius
paid for two acquisitions in 2014. Financial details of TriEnergy (e.g., revenues,
gross margins, and EBITDA) have not been disclosed, but we estimate that the
purchase price implies a 3x EBITDA multiple.
Rating:
Price Target:
21FEB14 - 09FEB15
10.00
Sector Perform
10.00
Several Puts and Takes, but Only Modest Changes to Our Forecast Following 2Q
Despite several puts and takes in management's updated guidance, we make
only minor changes to our F2016–2017E estimates, which are the basis for our
unchanged $10 price target.
9.00
8.00
7.00
6.00
5.00
12000
10000
8000
6000
4000
2000
F
M
A
M
Close
2013A
Revenue
97.3
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
Prev.
F
Maintaining $10 price target and Sector Perform rating. 2Q revenue and EBITDA
(including stock comp) were $64.3MM (+112% YoY) and $22.8MM (+146%
YoY), respectively, below our estimates of $68.7MM and $24.7MM but in line
with consensus ($64.8MM and $22.2MM). We have made changes to our
forecast, mostly to reflect: (i) lower 2Q results versus our prior forecast; (ii)
modestly lower production and distribution revenue growth assumptions, offset
by modestly higher broadcasting revenue growth; (iii) further distribution gross
margin expansion consistent with management guidance; and (iv) higher quarterly
SG&A expenses. While our EBITDA estimate in F2015E decreases from $88MM to
13
2014A
2015E
2016E
116.1
244.4↓
291.3↓
$84MM (modestly above the ~$81MM midpoint of guidance), our F2016–2017E
estimates remain essentially unchanged.
249.2
293.2
All values in CAD unless otherwise noted.
Pattern Energy Group Inc.(NASDAQ: PEGI; 27.81; TSX: PEG)
Shelby Tucker, CFA (Analyst)
(212) 428-6462; [email protected]
Nelson Ng, CFA (Analyst)
(604) 257-7617; [email protected]
Kelsey Roste (Associate)
(604) 257-7383; [email protected]
34.00
Rating:
Price Target:
Outperform
35.00
Ready for the next drop-down (K2)
52 WEEKS
21FEB14 - 09FEB15
32.00
30.00
As expected, Pattern Energy (PEGI) issued equity to fund its drop-down
acquisitions. With 4Q14 cash flows appearing slightly better-than-expected, we
reiterate our Outperform rating and believe the company is tracking as planned to
deliver 10-12% annual dividend growth.
28.00
26.00
24.00
10000
8000
6000
4000
2000
F
M
A
M
J
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Close
2014
A
S
O
N
Rel. S&P 500
D
2015
J
F
MA 40 weeks
ACFFO/Sh Diluted Prev.
2014E
1.79
2015E
2.51↓
2.68
2016E
2.85↓
2.95
2017E
3.12
All values in USD unless otherwise noted.
RONA Inc.(TSX: RON; 13.93)
Irene Nattel (Analyst)
(514) 878-7262; [email protected]
Martin Gravel, CFA (Associate)
(514) 878-7264; [email protected]
Alex Carette (Associate)
(514) 878-7254; [email protected]
52 WEEKS
• Equity offering proceeds earmarked for growth. PEGI raised approximately $205
million (gross) through the sale of approximately 7 million shares. We expect
the proceeds will be used to fund the $113 million Logan's Gap acquisition
(announced in December 2014), and the K2 wind development, which we expect
will be dropped-down within the coming months. Pattern Energy Group LP (i.e.,
Riverstone) sold roughly 5 million shares ($146 million) through a secondary
offering, reducing its ownership interest in PEGI to 25% (from 35%). This is
consistent with our expectation that Riverstone will gradually divest its interest
in PEGI over the next two years.
• 4Q14 cash flows slightly higher-than-expected. PEGI released preliminary 2014
results in relation to several cash flow metrics. The mid-point in the preliminary
results imply 4Q14 ACFFO/share of $0.44, which is slightly higher than our
estimate of $0.40. The variance is due to higher-than-expected distributions from
non-controlling interest (likely South Kent). The full 4Q14 results will be released
in late February.
• ROFO list continues to be replenished. PEGI recently added the 147 MW Mont
Sainte-Marguerite wind development to the ROFO list, increasing the portfolio
to 977 MW (net). The ROFO addition should not be a surprise, as Hydro-Quebec
announced the PPA contract award in mid-December.
Rating:
Price Target:
Sector Perform
15.00
Renovating the top line: Q4 results solid, outlook unchanged
21FEB14 - 09FEB15
14.00
13.00
12.00
11.00
2014 ended on a solid note, with reduction in opex/GM and revenue gains driving
earnings growth. EPS $0.15 +45%, $0.03/share above forecast/consensus. While
RON has successfully achieved its targeted $77 MM of annual EBITDA run rate
improvements (actual gain: $79.6 MM), $18.2 MM reflects sales growth, which
may prove challenging to sustain given forecasted residential investment spending
headwinds.
Cost containment, banner repositioning underpin Q4 results...
3000
2000
1000
F
M
A
M
Close
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted
2013A
0.41
2014A
0.71
2015E
0.93
2016E
1.08
All values in CAD unless otherwise noted.
P/E
34.0x
19.6x
15.0x
12.9x
F
• RON's right-sizing of its cost base and successful re-positioning of its Réno-Dépôt
and TOTEM banners drove solid Q4 results and management continues to move
cautiously toward a growth agenda against the backdrop of competitive intensity,
cautious consumer spending and a sluggish macro environment.
... but macro headwinds abound
• We reiterate our view that the major renovation of the RON business model
against the backdrop of a challenging macro environment will not be easy, with
forecasted earnings growth primarily driven by the combination of right-sizing
the cost structure and the benefits of share repurchases. With a challenging
14
outlook for the Canadian housing market and modest consumer spending
growth, we believe RON will be challenged to generate meaningful sustainable
top line growth after the current period of easy comparables.
Tweaking estimates, target unchanged
• Reflecting Q4 results in our model drove EPS up 3% in each of 2015E and
2016E (intraday). Our EPS forecasts reflect progress on cost saving initiatives
and benefit of ongoing share repurchases partly offset by investment in product
offer/pricing, peaky housing market and cautious consumer spending. We
forecast EBITDA margin of 6.2% in 2015E rising to 6.3% in 2016E, levels not
seen since 2010 but still below the historical peak of 8.4%. However, a more
favourable macro environment is a likely pre-condition for RONA to return to
peak profitability.
RONA Inc.(TSX: RON; 12.92)
Irene Nattel (Analyst)
(514) 878-7262; [email protected]
Martin Gravel, CFA (Associate)
(514) 878-7264; [email protected]
Alex Carette (Associate)
(514) 878-7254; [email protected]
52 WEEKS
Rating:
Price Target:
Sector Perform
15.00
Checking the foundation: RON reports solid Q4 results, outlook unchanged
21FEB14 - 09FEB15
14.00
13.00
12.00
11.00
2014 ended on a solid note, with reduction in opex/GM and revenue gains driving
earnings growth. EPS $0.15 +45%, $0.03/share above forecast/consensus. While
RON has successfully achieved its targeted $77 MM of annual EBITDA run rate
improvements (actual gain: $79.6 MM), $18.2 MM reflects sales growth, which
may prove challenging to sustain given forecasted residential investment spending
declines for 2015.
2015 Outlook - Targeted expansion, focus on ROCE, share
repurchase
3000
2000
1000
F
M
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Close
M
J
J
2014
A
S
O
N
D
2015
J
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Ops Diluted Prev.
2013A
0.41
2014A
0.71↑
0.68
2015E
0.93↑
0.90
2016E
1.08↑
1.05
P/E
31.4x
18.3x
13.8x
11.9x
All values in CAD unless otherwise noted.
F
• Focus is moving to targeted network expansion, with two Réno-Dépôt stores
opening outside QC (Aurora, ON and Calgary AL). RON will also continue to focus
on maintaining top line momentum, controlling costs to continue to improve
ROIC/ROCE from current tepid 5.6% (+210 bps Y/Y), and share repurchase to drive
EPS growth/return of capital to shareholders. In November 2014, RON renewed
its NCIB at 9.2 MM shares (10% of the public float), of which 5.4 MM have been
repurchased to date. (Shares repurchased in 2014 totaled 7.3 MM.) Our model
assumes full execution of the buyback with a renewal in 2016.
EBITDA up nicely in both segments
• Adjusted EBITDA on a consolidated basis increased 45% to $52.5 MM (RBC CM:
$49.0 MM) driven by top line growth, and partly offset by investments in SG&A to
drive growth. Gross margin was flat at 27.0% and better than forecast of 26.1%.
Tweaking estimates, target unchanged
• Reflecting Q4 results in our model drives EPS up 3% in each of 2015E and
2016E. Our EPS forecasts reflect progress on cost saving initiatives partly offset
by investment in product offer/pricing, peaky housing market and cautious
consumer spending. Our forecasts also reflect the benefit of ongoing share
repurchases (cumulative impact of $0.10/share in 2016).
Industry Comments
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Bulking Up - RBC's Weekly Review
Chris Drew, CFA (Analyst)
+61 2 9033 3060; [email protected]
• What's Hot: Thermal coal prices rose this week for the fourth week in a row.
• What's Not: This week, Asia-Pacific metallurgical coal prices suffered their
heaviest loss since the start of 2015.
• Our View: Iron ore prices recovered this week as traders started to restock in
anticipation of strong demand after the Chinese New Year. Given the weak steel
fundamentals and the bearish market sentiment, we expect continued weakness
Ken Tham, CFA (Analyst)
+61 2 9033 3064; [email protected]
Wen Tian, CFA (Associate)
(416) 842-4126; [email protected]
Iron ore prices rebound while met coal prices continue to slide
15
All values in USD unless otherwise noted.
•
•
•
•
•
•
in iron ore prices through Q1/15, though weaker oil prices and low iron ore port
stocks could provide some support on the margin.
Iron ore inventories at Chinese ports decreased while iron ore inventories at
Chinese mills increased this week.
Chinese steel inventories held by traders and at mills both increased this week.
Metallurgical coal prices continued to trend down this week. Soft Chinese
demand, tight credit, and falling steel prices all exerted downward pressure on
met coal prices.
Thermal coal: Newcastle prices were steady this week. Richards Bay and CIF ARA
prices continued to rally, mainly driven by rising oil and gas prices, as well as
short-covering and potential tightening of Colombian export supply.
Iron ore prices bounced back this week, up 2.0% to $64.00/t. Many traders
started to take positions in anticipation of greater demand when Chinese endusers return to the market after the holidays.
Steel: HRC and rebar prices both fell in North America and Europe. In China,
export HRC prices were down while domestic HRC and rebar prices were up
slightly this week.
Geoffrey Kwan, CFA (Analyst)
(604) 257-7195; [email protected]
Canadian Asset Managers
Charan Sanghera (Associate)
604 257 7657; [email protected]
• January mutual fund industry net sales were +$5.3B, flat Y/Y but still positive
in our view considering both recent market volatility and harder Y/Y comps
given stronger flows in 2013 and 2014. Although no longer accelerating when
compared Y/Y, monthly net sales have remained resilient and last-12-months
(LTM) mutual fund net sales remain above +$55B. January saw a rebound in
equity fund net sales, but with the prospect of higher interest rates unlikely over
the next year, we are likely to see bond funds continue to sell well.
• Equity funds were the second-best sellers in January 2015, as net sales
rebounded after experiencing net redemptions in December 2014. January
equity fund flows were +$517MM (vs. +$1,055MM Y/Y). Balanced funds remain
the best sellers with net sales of +$4.1B (vs. +$4.2B Y/Y), while bond funds saw
net sales of +$314MM (vs. -$91MM Y/Y). Mutual fund industry AUM at the end
of January was nearing $1.2T and was +17% Y/Y and +3% M/M, although the
weaker C$ likely helped M/M AUM growth.
• For investors looking for quality and dividends (both yield and growth), CI
Financial is our favourite fundco while Gluskin Sheff is our favourite asset
manager stock.
All values in CAD unless otherwise noted.
Mutual fund industry flows off to a good start this year
Greg Pardy, CFA (Analyst)
(416) 842-7848; [email protected]
Energy Insights
Michael Harvey, P.Eng. (Analyst)
403 299 6998; [email protected]
• The collapse in Brent prices has forced energy producers globally to tighten their
belts and reengineer 2015 capital programs around substantially lower prices
than those envisioned just last autumn. Indeed, revised 2015 budgets have been
a recurrent theme this year.
• The good news is that reshaped capital spending plans are laying the foundation
of an oil price recovery during the second-half of 2015 and into 2016 through
tighter supply conditions. Specifically, we estimate that non-OPEC supply
growth will decelerate from approximately 1.0 million b/d in 2015 and fall by
approximately 200,000 b/d in 2016. Underlying this outlook is United States oil &
liquids production growth of 1.1 million b/d in 2015 and 0.4 million b/d in 2016.
This outlook is reflected in our Brent (calendar) forecast of $57/b in 2015 and
$82/b in 2016, with WTI prices of $53/b and $77/b, respectively. The plans of
the 154 integrated oil and exploration & production companies that RBC Capital
Markets covers provide a gauge of this thesis, particularly with respect to how
2015 supply conditions may play out.
• Our hit parade of oil-leveraged energy producers include BG Group, Suncor
Energy, Canadian Natural Resources, Devon Energy, MEG Energy Corp, Newfield
Exploration, Parex Resources, Lundin Petroleum and Whitecap Resources –
Mark J. Friesen, CFA (Analyst)
(403) 299-2389; [email protected]
Shailender Randhawa, CFA (Analyst)
(403) 299-6576; [email protected]
Kurt Hallead (Analyst)
(512) 708-6356; [email protected]
Dan MacDonald, CFA (Analyst)
(403) 299-2394; [email protected]
Franz Hargo Muljo, CA (Associate)
416 842 8588; [email protected]
Leo P. Mariani, CFA (Analyst)
(512) 708-6381; [email protected]
Scott Hanold (Analyst)
(512) 708-6354; [email protected]
Brad Heffern, CFA (Analyst)
Framing Capital Spending & Oil Growth
16
(512) 708-6311; [email protected]
Al Stanton (Analyst)
+44 131 222 3638; [email protected]
all rated Outperform. In oilfield services, we recommend Nabors Industries,
Schlumberger and Precision Drilling.
Nathan Piper (Analyst)
+44 131 222 3649; [email protected]
Biraj Borkhataria, CFA (Analyst)
+44 20 7029 7556; [email protected]
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; [email protected]
Andrew Williams (Analyst)
+61 3 8688 6578; [email protected]
All values in USD unless otherwise noted.
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Chris Drew, CFA (Analyst)
+61 2 9033 3060; [email protected]
Timothy Huff (Analyst)
+44 20 7653 4866; [email protected]
Des Kilalea (Analyst)
+44 20 7653 4538; [email protected]
Ken Tham, CFA (Analyst)
+61 2 9033 3064; [email protected]
Paul Hissey (Analyst)
+61 3 8688 6512; [email protected]
Global Mining Trends & Values
Commodity Price Performance:
• Metal prices were down on average 0.4% last week. Iron Ore was the best
performer up 5.2%, followed by silver up 3.8%, uranium up 2.0%, copper up 0.7%,
zinc up 0.1%, and thermal coal flat 0.0%. Moly was the worst performer down
8.9%, followed by coking coal down 3.1%, aluminium down 2.1%, nickel down
1.5%, lead down 0.9%, and gold down 0.4%.
Mining Share Price Performance:
• Mining shares were up on average 2.1% last week. The best performing group
was coal up 13.1%, followed by the diversified group up 7.7%, iron ore up 2.1%,
copper up 1.9%, nickel up 1.4%, miscellaneous up 0.8%, uranium down 1.2%,
mineral sands down 3.8%, and aluminium down 4.6%.
Valuation:
• Mining shares are now trading at a 2.1% discount to NAV at forward curve prices,
versus a 6.8% discount one week ago.
Long/Short Metal Positions:
• RBC CM's proprietary data for the LME shows that the net short positions in
aluminium, zinc, nickel, and lead decreased last week. Net short positions in
copper were unchanged last week.
Exchange Inventories:
• Total exchange inventories of aluminium and zinc decreased last week, while
total inventories of copper and nickel increased last week.
Greg Pardy, CFA (Analyst)
(416) 842-7848; [email protected]
Integrated Oil and Senior E&P
Franz Hargo Muljo, CA (Associate)
416 842 8588; [email protected]
• Based on our net asset value analysis, excluding Cenovus Energy, our large cap
independent and integrated coverage universe is currently discounting a longterm escalated WTI equivalent (WTIE) price of US$77/boe (vs. US$76/boe), up
1% from last week, and a long-term WTI price of US$92/b (vs. US$91/b), also up
1% from last week.
• Current WTIE implied prices would compare with prior 2009–2014 YTD peak
and trough levels of US$84/boe and US$61/boe, respectively, while current WTI
implied prices would compare with peak and trough levels of US$102/b and US
$62/b, respectively.
• Spot WTIE prices of US$45/boe (vs. US$44/boe) were up 2% from last week.
Long-dated (2015–2018) WTIE prices of US$55/boe were unchanged from last
week.
All values in USD unless otherwise noted.
Paul C. Quinn (Analyst)
So what WTIE price are the large caps discounting?
Paper & Forest Products Weekly
17
(604) 257-7048; [email protected]
Hamir Patel (Analyst)
(604) 257-7145; [email protected]
• Comparable valuation tables, commodity prices, and total return performance
for our North American Paper & Forest Products coverage universe.
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Precious Metals & Minerals Weekly Valuation Tables
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
• This week, we highlight the net speculative trading position of COMEX netcommercial gold futures, compared with the gold price and holdings of all gold
ETFs.
• The aggregate gold ounces under management at gold ETFs were down modestly
to 53.8 MMoz from 53.9MMoz the prior week and compared to the all-time
high of 84.6 MMoz made in December 2012 (Exhibit 1). Our expectation that
ETF holdings will remain around the 52MMoz level is predicated on the fact that
the last time holdings were observed at current levels was ~5 years ago, when
prevailing gold prices were closer to $1,000/oz.
• The COMEX speculative net long position decreased to 17.1MMoz from
20.3MMoz the prior week and compared to the all-time high of 30.8 MMoz made
in early December 2009. (COMEX data, released on Fridays, reflect the position
on the Tuesday of that week). The net speculative position remains near the highs
of the past two years and is up 60% since last year's close.
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; [email protected]
Jamie Kasprowicz, P.Eng., CFA (Analyst)
(416) 842-8934; [email protected]
Mark Mihaljevic (Associate)
(416) 842-3804; [email protected]
Paul Hissey (Analyst)
+61 3 8688 6512; [email protected]
Cameron Klutke (Associate)
+61 3 8688 6551; [email protected]
Jonathan Guy (Analyst)
+44 20 7653 4603; [email protected]
Chart of the week: Highlighting Comex Speculative Positioning & ETF Holdings
Timothy Huff (Analyst)
+44 20 7653 4866; [email protected]
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; [email protected]
Ioannis Masvoulas, CFA (Analyst)
+44 20 7653 4647; [email protected]
All values in USD unless otherwise noted.
Stephen D. Walker (Analyst)
(416) 842-4120; [email protected]
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Q1/15 Global Mining Best Ideas Portfolio
• We are publishing our weekly update to our Global Mining Best Ideas portfolio.
• For the quarter-to-date, the Q1/15 Global Mining Best Ideas List is up 9%
compared to the MSCI World Metals & Mining Index, which is up 4%.
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; [email protected]
Dan Rollins, CFA (Analyst)
(416) 842-9893; [email protected]
Des Kilalea (Analyst)
+44 20 7653 4538; [email protected]
Timothy Huff (Analyst)
+44 20 7653 4866; [email protected]
Jonathan Guy (Analyst)
+44 20 7653 4603; [email protected]
Chris Drew, CFA (Analyst)
+61 2 9033 3060; [email protected]
Andrew D. Wong (Analyst)
(416) 842-7830; [email protected]
Paul Hissey (Analyst)
+61 3 8688 6512; [email protected]
All values in USD unless otherwise noted.
Al Stanton (Analyst)
RBC International E&P Daily
18
+44 131 222 3638; [email protected]
BOE; TLW; RIG
Nathan Piper (Analyst)
+44 131 222 3649; [email protected]
Energy Insights - Framing Capital Spending & Oil Growth; BOE.V: Strategic Review
and Operations Update; TLW.L: Reduces 80% stake in Zumba prospect, offshore
Norway; Uganda - Visible Progress; RIG: February Fleet Status Report; Eni SpA –
What the big guys are saying
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; [email protected]
Haydn Rodgers, CA (Associate)
+44 131 222 4911; [email protected]
All values in USD unless otherwise noted.
Mahesh Sanganeria, CFA (Analyst)
(415) 633-8550; [email protected]
Shawn Yuan (Associate)
415 633 8565; [email protected]
All values in USD unless otherwise noted.
RBC Solar Weekly
• Solar stocks outperformed SP500 in the past week, mostly driven by higher oil
price.
• Tuesday at an investor conference, Tim Cook said that Apple is collaborating with
First Solar to build a solar power plant in Monterey County, California to power
Apple campuses, retail stores, and data centers.
• China NEA released 2014 China PV industry development status report. The
10.6GW total installation was in line with previously rumored 10.5GW installed
capacity. While it's short of the targeted 14GW, we believe the negative
sentiment has been priced in the current stock price and we don't expect any
significant trading activities on the news.
• We will get our first wave of solar company reports this week with SolarCity,
SunEdison and TerraForm Powers all reporting after market close on Wednesday
(2/18). A list of solar company and industry events in the next two weeks can be
found on page 5 of this note.
• We continue to see price decline for polysilicon, solar cell, and solar modules.
Average price for multi-crystalline cell and module declined -0.6% and -0.7%
respectively, while poly price dropped -0.3%.
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; [email protected]
Uranium Weekly
Steve Bristo, CFA (Associate)
(416) 842-7826; [email protected]
• Ux spot price indicator was unchanged at $38.25/lb and TradeTech was down
$0.10/lb to $38.05/lb.
• Ux term price indicator was unchanged at $49.00/lb, and TradeTech was
unchanged at $50.00/lb (quoted monthly at month-end).
• Uranium Participation Corp. (UPC) traded up 0.6% over the past week to close at
C$5.45 per share (vs. S&P/TSX +1.1%).
• We estimate UPC is discounting a uranium price of $33.18/lb, a 13.3% discount
to spot. Last week we estimated that UPC discounted a uranium price of $32.72/
lb, a 14.5% discount to the then-prevailing spot price.
• We rate Uranium Participation Corp. Outperform with a target price of C$6.00
per share.
Thomas Klein (Associate)
(416) 842-5339; [email protected]
All values in USD unless otherwise noted.
Ux spot price unchanged at $38.25/lb; TradeTech down $0.10/lb to $38.05/lb
19
Required disclosures
Non-U.S. analyst disclosure
Al Stanton;Nathan Piper;Victoria McCulloch;Haydn Rodgers;Neil Downey;Kevin Cheng;Ben Halm;Matt Logan;Paul C.
Quinn;Hamir Patel;Greg Pardy;Michael Harvey;Mark J. Friesen;Shailender Randhawa;Dan MacDonald;Franz Hargo Muljo;Biraj
Borkhataria;Andrew Williams;Geoffrey Kwan;Charan Sanghera;Steve Arthur;Ben Holton;Luke Davis;Fraser Phillips;Wen
Tian;Thomas Klein;Steve Bristo;Matthew McKellar;Irene Nattel;Martin Gravel;Alex Carette;Nelson Ng;Kelsey Roste;Haran
Posner;Drew McReynolds;Stephen D. Walker;Dan Rollins;Sam Crittenden;Jamie Kasprowicz;Mark Mihaljevic;Paul Hissey;Cameron
Klutke;Jonathan Guy;Timothy Huff;Richard Hatch;Ioannis Masvoulas;Robert Kwan;Michelle Zuliani;Chris Drew;Ken Tham;Des
Kilalea;Anthony Jin;Derek Spronck;Walter Spracklin;Andrew D. Wong (i) are not registered/qualified as research analysts with the
NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject
to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading
securities held by a research analyst account.
Conflicts disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses
to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/
Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,
the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 31-Dec-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
897
686
112
Percent
52.92
40.47
6.61
Investment Banking
Serv./Past 12 Mos.
Count
Percent
290
32.33
137
19.97
6
5.36
Conflicts policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to
https://www.rbccm.com/global/file-414164.pdf
or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South
Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.
Dissemination of research and short-term trade ideas
RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having
regard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary website
to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional
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receive our research via third party vendors. RBC Capital Markets also provides eligible clients with access to SPARC on the Firms
20
proprietary INSIGHT website, via email and via third-party vendors. SPARC contains market color and commentary regarding
subject companies on which the Firm currently provides equity research coverage. Research Analysts may, from time to time,
include short-term trade ideas in research reports and / or in SPARC. A short-term trade idea offers a short-term view on
how a security may trade, based on market and trading events, and the resulting trading opportunity that may be available. A
short-term trade idea may differ from the price targets and recommendations in our published research reports reflecting the
research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons,
methodologies and/or other factors. Thus, it is possible that a subject company's common equity that is considered a long-term
'Sector Perform' or even an 'Underperform' might present a short-term buying opportunity as a result of temporary selling pressure
in the market; conversely, a subject company's common equity rated a long-term 'Outperform' could be considered susceptible
to a short-term downward price correction. Short-term trade ideas are not ratings, nor are they part of any ratings system, and
the firm generally does not intend, nor undertakes any obligation, to maintain or update short-term trade ideas. Short-term trade
ideas may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and
investors should make their own independent decisions regarding any securities or strategies discussed herein. Please contact
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All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of
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indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.
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21
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