Views - The Sean Fahy Group

Transcription

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
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
PAAS-Q, PAA-T
Southern Copper Corporation
SCCO-N, SCCO-LM
Timmins Gold Corp.
Inbursa Acquires Walmex's Banking
Unit
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
(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.
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)
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: -- --
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
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)
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 --
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)
New -Old --
---
$11.00
$12.00
---
EBITDA15E: $58
EBITDA15E: $62
EBITDA16E: $66
EBITDA16E: $71
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
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.
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
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
Pammi Bir, CPA, CA, CFA - (416) 863-7218
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
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
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
Ovais Habib - (416) 863-7141
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)
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
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
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
Black Diamond Group Ltd. (BDI-T C$14.40)
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
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:
Old Valuation:
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
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
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
Patrick Bryden, CFA - (403) 213-7750
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.
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
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
High Liner Foods Incorporated (HLF-T C$21.41)
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:
Old Valuation:
N/A
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
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
$1.79
New Valuation:
-Old Valuation:
3.5x EV/Peak EBITDA
Weaker-than-expected U.S. housing recovery,
lower-than-expected prices, stronger-thanexpected C$
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
12
Edge at a Glance
Mullen Group Ltd. (MTL-T C$21.27)
Drawing a Line in the Sand in Uncertain Circumstances
Turan Quettawala, MBA, CFA - (416) 863-7065
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)
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.)
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
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
geopolitical risks
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.50
$0.50
5.4%
13
Edge at a Glance
Penn West Exploration (PWT-T C$2.54)
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)
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:
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%
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:
Old Valuation:
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
Rubicon Minerals Corporation (RMX-T C$1.19)
Mike Hocking, MSc, P.Geo. - (416) 945-5228
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)
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
Commodity risk, multiple contraction, project
development risk, mineral resource and
exploration risk
Div. (NTM)
$0.00
Div. (Curr.)
$0.00
Yield (Curr.)
0.0%
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
$1.76
Valuation:
21x F16E EPS
Drop in U.S. cheese prices; rising C$
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.52
$0.46
1.4%
15
Edge at a Glance
Southern Copper Corporation (SCCO-N US$27.45)
Toquepala Concentrator Expansion EIA Approved
Alfonso Salazar, MSc - +52 (55) 5123 2869
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
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
Commodity price, operating, and technical
risks, political, environmental, and legal risks
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.79
$0.48
1.8%
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
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
The Mosaic Company (MOS-N US$44.59)
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)
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
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
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
geopolitical risks
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
17
Edge at a Glance
Twin Butte Energy Ltd. (TBE-T C$0.88)
Hunkering Down
William S. Lee, P.Eng. - (403) 213-7331
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:
Old Valuation:
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
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
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)
[email protected]
Carl Chen - (416) 863-7184
[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.
Company guidance
Company guidance
Scotia estimate
CRU
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
Intrepid Potash, Inc. (IPI-N)
Valuation: 12x 2015E EBITDA, DCF @ 10%, 40% RCN
The Mosaic Company (MOS-N)
Valuation: 8.5x 2015E EBITDA, 16x 2015E EPS, DCF @ 9.5%, 45% RCN
Potash Corporation of Saskatchewan, Inc. (POT-N)
Valuation: 9.5x 2015E EBITDA, 17.5x 2015E EPS, DCF @ 9.5%, 50% RCN
K+S AG (SDF-DE)
Valuation: 7x 2015E EBITDA, 13x 2015E EPS, DCF @ 10%, 25% RCN
Sociedad Quimica y Minera de Chile (SQM-N)
Valuation: 11x 2015E EBITDA, 20x 2015E EPS, DCF @ 10.5%
Yara International ASA (YAR-OL)
Valuation: 5.5x 2015E EBITDA, 11.5x 2015E EPS, DCF @ 10.5%, 45% RCN
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
[email protected]
Pammi Bir, CPA, CA, CFA - (416) 863-7218
[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.
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.
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
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)
Key Risks to Price Target: Toronto new supply, rising interest rates, inability to lease 250 Front St. West
Artis REIT (AX.UN-T)
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)
Key Risks to Price Target: Alberta condo oversupply, rising interest rates
Brookfield Canada Office Properties (BOX.UN-T)
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)
Key Risks to Price Target: Capex requirements, excess Toronto condo supply, CMHC restructuring
Choice Properties REIT (CHP.UN-T)
Key Risks to Price Target: Significant tenant concentration in Loblaw, majority unitholder
Crombie REIT (CRR.UN-T)
Key Risks to Price Target: Geographic concentration, material exposure to Sobeys, potential for conflicts of interest.
Chartwell Retirement Residences (CSH.UN-T)
Key Risks to Price Target: Significant weakening of housing markets, new supply, regulatory environment.
Cominar REIT (CUF.UN-T)
Key Risks to Price Target: Geographic concentration, construction delays/cost overruns, prolonged economic recovery.
Calloway REIT (CWT.UN-T)
Key Risks to Price Target: Material exposure to Wal-Mart Canada, potential for conflicts of interest.
Dream Office REIT (D.UN-T)
Key Risks to Price Target: Speculative office developments, rising interest rates
Dream Industrial REIT (DIR.UN-T)
Key Risks to Price Target: Inability to execute growth, significant unitholder, rising interest rates
Dream Global REIT (DRG.UN-T)
Key Risks to Price Target: Tenant concentration (Deutsche Post), exposure to Europe
26
First Capital Realty Inc. (FCR-T)
Key Risks to Price Target: Grocery tenant concentration, construction delays/cost overruns, significant shareholder.
Granite REIT (GRT.UN-T)
Key Risks to Price Target: Significant tenant concentration in Magna, inability to execute growth, foreign currency exposure
H&R REIT (HR.UN-T)
Key Risks to Price Target: U.S. tenant bankruptcies, rising interest rates
InterRent Real Estate Investment Trust (IIP.UN-T)
Key Risks to Price Target: Rising interest rates, CMHC restructuring, Ontario rent control, Lower liquidity
InnVest REIT (INN.UN-T)
Key Risks to Price Target: Economic Recession, Credit Crunch, Material Housing Correction, Rising Interest Rates.
Killam Properties Inc. (KMP-T)
Key Risks to Price Target: Execution of Ontario market entry, rising interest rates, new supply
Leisureworld Senior Care Corporation (LW-T)
Key Risks to Price Target: Government regulation, redevelopment risks, refinancing risks
Morguard REIT (MRT.UN-T)
Key Risks to Price Target: Competition from new-format retail, tenant specific risks, significant shareholder.
Northern Property REIT (NPR.UN-T)
Key Risks to Price Target: Declining commodity prices, rising interest rates, New market entry, CMHC restructuring
NorthWest Healthcare Properties REIT (NWH.UN-T)
Key Risks to Price Target: Speculative Office Supply, Rising Interest Rates, Liquidity, Adverse Provincial Regulatory Reform
Canadian Real Estate Inv. Trust (REF.UN-T)
Key Risks to Price Target: Mezzanine loan exposure with Hopewell, new supply pressures in key markets.
RioCan REIT (REI.UN-T)
Key Risks to Price Target: Rising interest rates, construction delays/cost overruns, key personnel.
WPT Industrial REIT (WIR.U-T)
Key Risks to Price Target: Significant unitholder, inability to execute growth, rising interest rates
27
Intraday Flash
Telecom - Mexico
Andres Coello - +52 (55) 5123 2852
[email protected]
Lovely Price Cuts
Ivan Hernandez - +52 (55) 5123 2876
[email protected]
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.
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%
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)
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
Megas were consumed)
SMS were consumed)
Megas were consumed)
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)
0
3 (first 5 minutes)
$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)
Key Risks to Price Target: Telmex entry into pay TV; Expensive acquisitions
Grupo Televisa, SAB (TV-N)
Key Risks to Price Target: Decline of broadcast ratings in Mexico and the U.S.; expensive acquisitions
32
Industry Comment
Friday, December 19, 2014, Pre-Market
Telecommunications and
Cable
Jeff Fan, CPA, CA, CFA - (416) 863-7780
[email protected]
Jay Oduwole - (416) 945-4249
[email protected]
Government Committed to Putting
More Spectrum in New Entrants'
Hands
Shay Nulman, MBA - (416) 862-3721
[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.
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.
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%
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)
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)
Key Risks to Price Target: Wireless execution; IPTV competition; Newspaper/TV cyclicality
Rogers Communications Inc. (RCI.B-T)
Key Risks to Price Target: Wireless competition (from both incumbents and new entrants)
Shaw Communications Inc. (SJR.B-T)
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)
Key Risks to Price Target: U.S. economy; pension funding; VZW cash to support dividend
36
Company Comment
(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
[email protected]
Ciara Sawicki - (416) 862-3738
[email protected]
Rating: Sector Perform
Risk Ranking: High
Target 1-Yr:
C$3.00
ROR 1-Yr:
34.6%
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$3.01
0.75x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
C$664
$-342
C$268
294
234
37
Company Comment
Thursday, December 18, 2014, Pre-Market
(ATD.B-T C$42.54)
[email protected]
Rating: Sector Outperform
Risk Ranking: Medium
Target 1-Yr:
Jean Marc Ayas - (514) 287-3626
[email protected]
C$46.00
ROR 1-Yr:
8.6%
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)
Shares O/S (M)
Float O/S (M)
C$24,184
$1,870
C$26,290
BVPS15E: $8.20
ROE15E: 23.29%
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)
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
Black Diamond Group Ltd.
(BDI-T C$14.40)
Sam Devlin, CFA - (403) 213-7332
[email protected]
[email protected]
Target 1-Yr:
C$20.00
ROR 1-Yr:
45.1%
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:
Old Valuation:
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:
$9.16
15.02%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
All values in C$ unless otherwise indicated.
$589
$187
$776
41
41
40
Company Comment
(CLR-T C$12.20)
Smooth Sailing
[email protected]
Reinis Krams - (514) 287-4554
[email protected]
Target 1-Yr:
C$12.00
ROR 1-Yr:
-0.7%
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:
Old Valuation:
N/A
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
Old
N/A
N/A
N/A
N/A
N/A
N/A
$671
$247
$994
55
18
41
Company Comment
(EGL.UN-T C$2.72)
Eagle Energy Trust
Permian Proceeds Redeployed in Canada; 2015
Budget, Guidance Released; Distribution Cut
[email protected]
Riley Hicks, CA, MBA - (403) 213-7760
Justin Strong, MBA - (403) 213-7328
Target 1-Yr:
Risk Ranking: High
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)
Units O/S (M)
Float O/S (M)
BVPU14E: $9.30
$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%
%
---
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
--
■ 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)
■ 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
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%
$1.23
1.3
1.4
0.2
31%
Sustainability
Capital Expenditures / Cash Flow
%
%
%
70%
132%
62%
80%
155%
74%
113%
180%
68%
39%
87%
48%
Hedging
Percentage of Light & Medium Oil
Percentage of Heavy Crude Oil
Percentage of Natural Gas Producticn
Percentage of Total Production
%
%
%
%
41%
0%
0%
41%
40%
0%
0%
40%
54%
0%
0%
54%
35%
0%
0%
35%
48
Exhibit 7 - Financial & Operating Summary
2012A
2013A
Q1/14A
Q2/14A
Q3/14A
Q4/14E
2014E
2015E
2016E
WTI
Nymex Natural Gas
Exchange Rate
US$/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
$0.88
Daily Production
Total Oil & Liquids
Natural Gas
Total Production
B/d
Mmcf/d
Boe/d
%
%
2,597
-2,597
89%
0%
3,004
-3,004
16%
0%
3,010
-3,010
0%
0%
3,341
-3,341
11%
0%
2,859
-2,859
-14%
0%
2,101
-2,101
-27%
0%
2,825
-2,825
-6%
0%
3,129
-3,129
11%
0%
3,119
-3,119
0%
0%
Financial Estimates
Cash Flow from Operations
Investment Cash Flows - Internal
Investment Cash Flows - M&A
Financing Cash Flows
Dist/Div
[$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
$/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)
$0.36
Netbacks
Heging Gains (Losses)
Royalties
Operating Costs
Field Netback
After-Tax Netback
[C$/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%
EBITDA
Cash Flow
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%
$1.21
1.3
1.3
0.2
31%
Sustainability
%
%
%
76%
199%
124%
73%
141%
68%
82%
194%
111%
83%
144%
61%
121%
150%
30%
100%
246%
147%
94%
180%
86%
39%
87%
48%
40%
104%
64%
Hedging
Percentage of Natural Gas Producticn
%
%
%
%
-----
-----
-----
-----
-----
79%
0%
0%
79%
71%
0%
0%
71%
35%
0%
0%
35%
0%
0%
0%
0%
49
Company Comment
Grupo Financiero Inbursa, SAB de CV
(GFINBUR O-MX MXN
36.81)
Inbursa Acquires Walmex's Banking Unit
Claudia Benavente A. - +562 2692 6568
[email protected]
Diego Ciconi - +562 2692 6292
[email protected]
Target 1-Yr: MXN 37.00 ROR 1-Yr:
2.8%
Valuation: 2.48x 2015 BVPS estimate
Key Risks to Target: Political, economic, capital flows, systemic, regulatory, interest rates, and credit.
Div. (NTM)
Div. (Curr.)
0.83
0.76
Yield (Curr.)
2.1%
Event
■ Inbursa announced it has reached an agreement to acquire Walmex's
banking unit for about MXN 3,600M (~US$ 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%
All values in MXN unless otherwise indicated.
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
52
Company Comment
(HLF-T C$21.41)
[email protected]
Reinis Krams - (514) 287-4554
[email protected]
Target 1-Yr:
C$27.00
ROR 1-Yr:
28.1%
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:
Old Valuation:
N/A
Capitalization
Market Cap (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
31
15
53
Company Comment
(IFP-T C$18.65)
Encore!
Benoit Laprade, CPA, CA, CFA - (514) 287-3627
[email protected]
Risk Ranking: High
Target 1-Yr:
Luis Pardo Figueroa - (514) 287-3613
[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: $9.70
ROE14E: 11.53%
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
All values in C$ unless otherwise indicated. ^ Subordinate Voting
$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
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.
57
Company Comment
(MTL-T C$21.27)
Mullen Group Ltd.
Drawing a Line in the Sand in Uncertain
Circumstances
Turan Quettawala, MBA, CFA - (416) 863-7065
[email protected]
Target 1-Yr:
Milan Posarac - (416) 863-7532
[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)
Shares O/S (M)
Float O/S (M)
$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:
$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
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
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)
Craig Johnston, CPA, CA - (416) 860-1659
[email protected]
Risk Ranking: Speculative
James Steels - (416) 945-4527
[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)
Shares O/S (M)
Float O/S (M)
$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
$7.63
US$/oz
$12.66
$17.09
Morococha (92.2%)
Payable Silver
Moz
0.6
0.5
Cash Costs
US$/oz
$7.51
$6.86
US$/oz
$11.95
$13.84
La Colorada
Payable Silver
Moz
1.2
1.2
Cash Costs
US$/oz
$8.74
$8.58
US$/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
$15.54
US$/oz
$18.56
$30.12
San Vicente (95%)
Payable Silver
Moz
0.9
0.7
Cash Costs
US$/oz
$11.83
$16.05
US$/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
$14.57
US$/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.
%
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
62
Company Comment
(PWT-T C$2.54)
(PWE-N US$2.18)
[email protected]
Riley Hicks, CA, MBA - (403) 213-7760
Justin Strong, MBA - (403) 213-7328
Rating: Sector Underperform
Target 1-Yr:
Risk Ranking: High
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)
Shares O/S (M)
Float O/S (M)
BVPS14E: $14.74
ROE14E: 0.50%
$1,266
$2,299
$3,565
498
498
63
■ 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
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%
■ 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 $4.25/share as we endeavour to further assess the company’s
ability to navigate the current downturn in commodity prices. Our target price represents a
2015E EV/DACF of 6.7x, which compares to the peer group average of 10.0x. Penn West
currently trades at a 2015E EV/DACF of 5.5x versus the peer group average of 7.2x.
66
Exhibit 3 - Financial and Operating Forecasts
2011A
2012A
restated
2013A
restated
Q1/14A
restated
Q2/14A
Q3/14A
Q4/14E
2014E
2015E
2016E
US$/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
$0.88
Daily Production
Total Oil & Liquids
Natural Gas
Total Production
B/d
Mmcf/d
Boe/d
%
%
103,208
359.3
163,094
-1%
37%
104,144
342.3
161,195
-1%
35%
85,097
300.0
135,092
-16%
37%
71,639
239.0
111,472
-10%
36%
69,408
224.0
106,741
-4%
35%
64,687
216.9
100,839
-6%
36%
64,651
198.3
97,703
-3%
34%
67,569
219.4
104,142
-23%
35%
64,232
168.9
92,376
-11%
30%
64,047
162.0
91,043
-1%
30%
Financial Estimates
Dist/Div (actuals net of DRIP)
[$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
$/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
$0.12
Netbacks
Hedging Gains (Losses)
Royalties
Operating Costs
Field Netback
After-Tax Netback
[C$/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%
EBITDA
Cash Flow
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
%
%
%
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 Natural Gas Production
%
%
%
%
-----
-----
-----
-----
-----
-----
86%
0%
64%
66%
28%
0%
88%
45%
0%
0%
41%
13%
0%
0%
41%
12%
WTI
Edmonton Par
WCS
Nymex Natural Gas
AECO 30-Day Spot
Exchange Rate
67
Company Comment
(PHX-T C$7.40)
[email protected]
Risk Ranking: High
Target 1-Yr:
Sam Devlin, CFA - (403) 213-7332
[email protected]
C$11.00
ROR 1-Yr:
60.0%
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:
Old Valuation:
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)
Shares O/S (M)
Float O/S (M)
$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.
69
Company Comment
(RMX-T C$1.19)
(RBY-A US$1.05)
Update Largely In Line, UG Development Behind
Plan and Above Budget; Pace said to Quicken
Mike Hocking, MSc, P.Geo. - (416) 945-5228
[email protected]
Risk Ranking: Speculative
Amir Ahmad - (416) 862-3875
[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:
$1.36
0.88x
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$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 $44M
(Exhibit 2).
Exhibit 1 – Underground development update
Underground Development
Update
Completed Total % of Total Pace (m/day) % Change in Pace
31-May-14
875
8,023
11%
8.0
n/a
31-Aug-14
1,930
8,023
24%
11.5
42.9%
30-Nov-14
3,586
7,593
47%
18.2
58.7%
Exhibit 2 – Remaining capital (from updated) and estimates of capital spent during the period and the pace of expenditures.
31-Aug-14
31-May-14
All figures in C$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.
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
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
73
Company Comment
(SAP-T C$32.79)
Saputo Inc.
[email protected]
Target 1-Yr:
Jean Marc Ayas - (514) 287-3626
[email protected]
C$37.50
ROR 1-Yr:
15.9%
Key Risks to Target: Drop in U.S. cheese prices; rising C$
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)
Shares O/S (M)
Float O/S (M)
$12,831
$2,012
$14,906
391
256
74
Intraday Flash
(SCCO-N US$27.45)
(SCCO-LM PEN 27.08)
Toquepala Concentrator Expansion EIA Approved
Alfonso Salazar, MSc - +52 (55) 5123 2869
[email protected]
Risk Ranking: High
[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)
Shares O/S (M)
Float O/S (M)
$22,877
$3,203
$26,111
833
146
75
Company Comment
(TCK.B-T C$14.93)
(TCK-N US$12.88)
Stress Testing the Balance Sheet: Dividend Risk
is High but Liquidity Risk is Low
[email protected]
Risk Ranking: High
Target 1-Yr:
Dalton Baretto, MBA, CFA - (416) 863-7623
[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: $32.46
ROE14E: 2.67%
NAVPS:
P/NAV:
All values in C$ unless otherwise indicated. ^ Subordinate Voting
Capitalization
Market Cap (M)
Shares O/S (M)
Float O/S (M)
$8,603
$4,809
$13,412
$24.19
0.62x
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
■ 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
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
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
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
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
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2010A
2011A
2012A
2013A
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
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
2010A
2011A
2012A
2013A
2014E
2015E
2016E
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
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
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
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
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2010A
2011A
2012A
2013A
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
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
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2010A
2011A
2012A
2013A
2014E
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%
84
Intraday Flash
(MOS-N US$44.59)
The Mosaic Company
[email protected]
Risk Ranking: High
Carl Chen - (416) 863-7184
[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)
Shares O/S (M)
Float O/S (M)
$16,761
$845
$17,606
376
351
85
Company Comment
(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
[email protected]
Ciara Sawicki - (416) 862-3738
[email protected]
Risk Ranking: High
Target 1-Yr:
C$2.00
ROR 1-Yr:
83.5%
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)
Shares O/S (M)
Float O/S (M)
C$209
$-31
C$173
192
185
86
■ 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
■ 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)
■ 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
$66
Premium
(1) Premium to last closing price.
(2) Deal announced but not yet completed.
2012 PEA Showed Promising Project Economics but Past Permitting
Friction a Concern
■ Caballo Blanco is a PEA-stage open pit heap leach gold project located in Veracruz
State, Mexico. Exhibit 4 shows the project’s location relative to Timmins’ San Francisco
mine in Sonora State.
Exhibit 4 – Location of the Caballo Blanco Project
Source: Company reports.
Gold Price % of Gross
(US$/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.
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.
92
Intraday Flash
(TBE-T C$0.88)
Hunkering Down
William S. Lee, P.Eng. - (403) 213-7331
[email protected]
Risk Ranking: High
Jennifer Dowdell - (403) 213-7754
[email protected]
Target 1-Yr:
C$1.75
ROR 1-Yr: 120.5%
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:
Old Valuation:
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)
Shares O/S (M)
Float O/S (M)
$316
$361
$676
359
310
93
Exhibit 1 - Company Overview
Twin Butte Energy Ltd. (TSX: TBE, Sector Perform)
December 18, 2014
Company Profile
British Columbia
Alberta
Production and Financial Summary
Saskatchewan
Fort St. John
Grande
Prairie
Lloydminster
Heavy Oil Fairway
Edmonton
Saskatoon
Calgary
Regina
Core Areas
Lloydminster
Target Zone(s)
Colony, Waseca, Sparky, GP, Rex
Company Management
Jim Saunders, CEO
Rob Wollmann, President
Alan Steele, VP Finance & CFO
David Middleton, COO
Neil Cathcart, VP Exploration
Claude Gamache, VP Heavy Oil
Preston Kraft, VP Engineering
2013 Reserves
Proven
Probable
P+P
Proved Developed Producing
Proved Non-Producing
Proved Undeveloped
Probable
Reserve Engineers
Depth [m]
Type
Prior Companies
Prairie Schooner Petroleum Ltd.
Bear Ridge Resources Ltd, Ketch Resources Ltd.
Revolve Energy Ltd
Napa Energy Ltd, Grey Wolf Exploration Inc
Emerge, Husky Energy Inc.
Oil [mbbl]
29,458
Gas [mmcf]
55,393
Total [mboe]
38,690
[% Gas]
24%
25,433
54,891
24,623
80,017
29,536
68,227
14%
20%
% of 1P Res.
66%
9%
25%
% of 2P Res.
37%
5%
14%
43%
McDaniels
RLI (P+P)
9.4x
Commodity Price Assumptions
WTI
Edmonton Par
Western Canadian Select
Bow River
Henry Hub
AECO
[US$/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
$27.76
0.9x
Netbacks
Revenue
Hedging
Royalties
Operating Costs
Field Netback
G&A
Interest
Other
Cash Taxes
Corporate Netback
Royalties
Hedged Prod. (go-forward)
Cash Flows
DACF
CFPS
Internal Capex / CF
Net Debt / CF
NAVPS Estimate (Y.E. 2013 Blow-Down)
Scotiabank GBM Price Deck
[$/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%
2014E
2015E
2016E
$94.52
$60.00
$60.00
20.3%
20.0%
20.0%
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
95
Company Comment
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
[email protected]
Risk Ranking: Low
Karla B. Peña - +52 (55) 9179 5211
[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)
Shares O/S (M)
Float O/S (M)
541,368
-6,847
534,521
All values in MXN unless otherwise indicated.
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.
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
Appendix A: Important Disclosures
Company
Agellan Commercial REIT
Agrium Inc.
Alacer Gold Corp.
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
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
InnVest REIT
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
Morguard REIT
Mullen Group Ltd.
Nabors Industries, Inc.
National-Oilwell Varco, Inc.
NorthWest Healthcare Properties REIT
Potash Corporation of Saskatchewan, Inc.
Precision Drilling Corp.
Pure Industrial REIT
Quebecor Inc.
RioCan REIT
Rogers Communications Inc.
Saputo Inc.
Schlumberger
Shaw Communications Inc.
Sociedad Quimica y Minera de Chile
TELUS Corporation
The Mosaic Company
Time Warner Cable Inc.
Timmins Gold Corp.
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
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
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.,
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.,
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
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
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
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
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
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
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
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
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.
Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any
transaction may be or could have been effected at those prices.
Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrary from the opinions
expressed by other departments of Scotiabank, Global Banking and Markets or any of its affiliates.
Neither Scotiabank, Global Banking and Markets nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of
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This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or
in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be refer red to without the prior
express consent of Scotiabank, Global Banking and Markets.
Additional Disclosures
Canada: This report is distributed by Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia. Scotia Capital Inc. is a member of the Canadian
Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
Chile: This report is distributed by Scotia Corredora de Bolsa Chile S.A., a subsidiary of The Bank of Nova Scotia.
Hong Kong: This report is distributed by The Bank of Nova Scotia Hong Kong Branch, which is authorized by the Securities and Future Commission
to conduct Type 1, Type 4 and Type 6 regulated activities and regulated by the Hong Kong Monetary Authority.
Mexico: This report is distributed by Scotia Inverlat Casa de Bolsa S.A. de C.V., a subsidiary of the Bank of Nova Scotia.
Peru: This report is distributed by Scotia Sociedad Agente de Bolsa S.A., a subsidiary of The Bank of Nova Scotia.
Singapore: This report is distributed by The Bank of Nova Scotia Asia Limited, a subsidiary of The Bank of Nova Scotia. The Bank of Nova Scotia
Asia Limited is authorised and regulated by the Monetary Authority of Singapore, and exempted under Section 99(1)(a),and (b), (c) and (d) of the
Securities and Futures Act to conduct regulated activities.
United Kingdom and the rest of Europe: Except as otherwise specified herein, this report is distributed by Scotiabank Europe plc, a subsidiary of The Bank of
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research where applicable.
United States: This report is distributed by Scotia Capital (USA) Inc., a subsidiary of Scotia Capital Inc., and a registered U.S. broker-dealer. All
transactions by a U.S. investor of securities mentioned in this report must be effected through Scotia Capital (USA) Inc.
Non-U.S. investors wishing to effect a transaction in the securities discussed in this report should contact a Scotiabank, Global Banking and Markets
entity in their local jurisdiction unless governing law permits otherwise.

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