1
Investment Views
Thursday, October 30, 2014
Click to view full story
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Click to view synopsis
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Pertinent Revision Summary
3
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Edge at a Glance
6
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Company Comments
Canada
Agellan Commercial REIT
ACR.UN-T
Agnico Eagle Mines Limited
AEM-N, AEM-T
ATCO Ltd.
ACO.X-T
Barrick Gold Corporation
ABX-N, ABX-T
Cameco Corporation
CCO-T, CCJ-N
Canadian Utilities Limited
CU-T
Capstone Mining Corp.
CS-T
First National Financial Corporation
FN-T
Horizon North Logistics Inc.
HNL-T
HudBay Minerals Inc.
HBM-T, HBM-N
Lundin Mining Corporation
LUN-T
MEG Energy Corp.
MEG-T
Methanex Corporation
MEOH-Q, MX-T
PHX Energy Services Corp.
PHX-T
Sherritt International Corporation
S-T
Taseko Mines Limited
TKO-T, TGB-A
Teck Resources Limited
TCK.B-T, TCK-N
Steady Outlook; 2015 Should be a
Better Year
Pammi Bir
21
 
Tanya Jakusconek
25
 
Matthew Akman
27
 
Tanya Jakusconek
29
 
Ben Isaacson
31
 
Matthew Akman
37
 
Mark Turner
39
 
Phil Hardie
45
 
Pessimistic Call; Taking Down Our
Estimates
Vladislav C. Vlad
63
 
Q3/14 Results First Look: An Earnings
Miss but Constancia on Track
Orest Wowkodaw
71
 
Q3/14 Results First Look: Weak
Performance at Neves-Corvo but
Guidance Unchanged
Orest Wowkodaw
83
 
Op Cost Reductions Drive Higher
Netbacks
Jason Bouvier
88
 
Volume Beat; Geismar Capex 27%
Higher
Ben Isaacson
93
 
Déjà Vu: Record Q's & Capex Bumps
Continue
Vladislav C. Vlad
98
 
Q3/14 Results Below Expectations
Orest Wowkodaw 107
 
Q3/14 Financials First Look - Known to
Be Messy
Mark Turner 121
 
Solid Q3/14 Results & Modest Positive
Guidance Adjustments
Orest Wowkodaw 123
 
Q3/14 - IFRS Conversion Inflates
Depreciation
Structures Softening
Q3/14 - Mines Perform Well
Valuation Looks More Interesting
Capital Tracking
Another Quarter of Record Operating
Cash Flow; Underpinned by Impressive
PV Cash Costs
Solid Volumes, but Spread
Compression Contributes to Miss
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
Thursday, October 30, 2014
Timmins Gold Corp.
EPS in Line; Cash Declines $5.8M
QOQ
Yamana Gold Inc.
Q3/14 - Messy Quarter; Dividend Cut
60%
TMM-T, TGD-A
AUY-N, YRI-T
Ovais Habib 134
 
Tanya Jakusconek 142
 
Daniel Chan
51
 
Unprecedented Rainfall Snags A
Decent Quarter; 2015 Looks Weaker
Ben Isaacson
76
 
Solid Core Beat in Q3/14
Joanne Smith
79
 
Q3/14: A Welcome EPS Beat on Solid
Core Results
Joanne Smith
95
 
Tanya Jakusconek 106
 
Gavin Wylie
55
 
Old Media: Analysis of Univision's
Q3/14 Results
Andres Coello
60
 
Q3: Conference Call Highlights
Andres Coello
92
 
Ovais Habib 134
 
Andres Coello 137
 
Alfonso Salazar 140
 
U.S.
Flextronics International Ltd.
FLEX-O
Intrepid Potash, Inc.
IPI-N
Lincoln National Corporation
LNC-N
MetLife, Inc.
MET-N
Royal Gold Inc.
RGLD-Q, RGL-T
Q2/F15: INS Weakness Offset by Other
Segments
Q1/F15 - Good Quarter
Latin America
GeoPark Limited
GPRK-N
Grupo Televisa, SAB
TV-N, TLEVISA CPO-MX
Megacable Holdings
MEGA CPO-MX
Timmins Gold Corp.
TMM-T, TGD-A
Totvs SA
TOTS3-SA
Tigana - Pushing to Add >50%
EPS in Line; Cash Declines $5.8M
QOQ
Mixed Q3: Migration to SaaS Worth the
Pain
Usinas Siderúrgicas de Minas Gerais
Q3 Results First Look: Near-Term
SA - Usiminas
Outlook Blurs
USIM5-SA
Equity Event: Telecom & Cable 2015
145

Equity Event: Transportation & Aerospace 2014
146

Equity Event: Canadian Energy Infrastructure Conference
147

Equity Event: Mining Conference 2014
148

3
Pertinent Revision Summary
Thursday, October 30, 2014
Pertinent Revision Summary
(For Rating Changes: 24-Hour SC Pro Personal Trading Restriction Applies)
1-Yr
Rating
Risk
Key Data
Target
Year 1
Year 2
Year 3
Valuation
Agellan Commercial REIT (SP) (ACR.UN-T C$9.06)
Steady Outlook; 2015 Should be a Better Year
New -Old --
---
---
FFOPU14E: $1.16
FFOPU14E: $1.18
FFOPU15E: $1.26
FFOPU15E: $1.25
FFOPU16E: $1.28 10.75x AFFO (F'16 estimate)
FFOPU16E: $1.27 11x AFFO (F'15 estimate)
Valuation: 10.75x AFFO (F'16 estimate)
Key Risks to Price Target: Significant unitholder, inability to execute growth, rising interest rates
ATCO Ltd. (SP) (ACO.X-T C$48.66)
Structures Softening
New -Old --
---
$50.00
$52.00
Adj. EPS14E: $3.10
Adj. EPS14E: $3.26
Adj. EPS15E: $3.24
Adj. EPS15E: $3.75
Adj. EPS16E: $3.47
Adj. EPS16E: $4.00
---
Valuation: 20% discount to NAV
Key Risks to Price Target: Interest rates; Regulated ROE; Infrastructure construction
Cameco Corporation (SO) (CCO-T C$18.92)
Valuation Looks More Interesting
New -Old --
---
$24.00
$25.00
Adj. EPS14E: $0.85
Adj. EPS14E: $0.74
Adj. EPS15E: $1.03
Adj. EPS15E: $1.07
-- --- --
Valuation: 1.5x NAV, 13.5x 2015E EBITDA, 23.0x 2015E EPS
Key Risks to Price Target: Uranium S/D; uranium prices; CAD/USD
Canadian Utilities Limited (SO) (CU-T C$40.32)
Capital Tracking
New --
--
--
Adj. EPS14E: $2.21
Adj. EPS15E: $2.45
Adj. EPS16E: $2.60
Old --
--
--
Adj. EPS14E: $2.23
Adj. EPS15E: $2.53
Adj. EPS16E: $2.65
6.6% 2015E Free Cash Yield and 11.8x 2015E
EV/EBITDA
6.7% 2015E Free Cash Yield and 11.4x 2015E
EV/EBITDA
Valuation: 6.6% 2015E Free Cash Yield and 11.8x 2015E EV/EBITDA
Key Risks to Price Target: Interest rates; Regulated ROE; Spark spreads; FX
Capstone Mining Corp. (SO) (CS-T C$2.07)
Another Quarter of Record Operating Cash Flow; Underpinned by Impressive PV Cash Costs
New -Old --
---
---
Adj. EPS14E: US$0.11
Adj. EPS14E: US$0.13
-- Adj. EPS16E: US$0.40
-- Adj. EPS16E: US$0.39
---
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Price Target: Commodity price, operating, and technical risks, environmental and legal risks
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S. affiliates
are not registered/qualified as research analysts with FINRA in the U.S.
4
Pertinent Revision Summary
Thursday, October 30, 2014
First National Financial Corporation (SP) (FN-T C$23.24)
Solid Volumes, but Spread Compression Contributes to Miss
New -Old --
---
$24.00
$24.50
EPS14E: $1.87
EPS14E: $2.00
EPS15E: $2.37
EPS15E: $2.46
EPS16E: $2.65 10.1x 2015E EPS
EPS16E: $2.77 10x 2015E EPS
Valuation: 10.1x 2015E EPS
Key Risks to Price Target: Lower mortgage origination volumes, tighter funding spreads
Flextronics International Ltd. (SP) (FLEX-O US$9.83)
Q2/F15: INS Weakness Offset by Other Segments
New -Old --
---
$11.30
$11.70
EPS15E: $1.02
EPS15E: $0.97
EPS16E: $1.22
EPS16E: $1.15
EBITDA14E: $91
EBITDA14E: $107
EBITDA15E: $100
EBITDA15E: $140
-- 5.5x CY15E EV to EBITDA
-- 5.5x forward EV to FY16E EBITDA
Valuation: 5.5x CY15E EV to EBITDA
Key Risks to Price Target: Margin pressure could lower EPS
Horizon North Logistics Inc. (SP) (HNL-T C$3.20)
Pessimistic Call; Taking Down Our Estimates
New -Old --
---
$4.50
$6.50
-- --- --
Valuation: 6.0x our 2015 EV/EBITDA estimate.
Key Risks to Price Target: Commodity prices, labour supply, access to supplies, weather, contract risk, and FX.
Intrepid Potash, Inc. (SP) (IPI-N US$14.14)
Unprecedented Rainfall Snags A Decent Quarter; 2015 Looks Weaker
New -Old --
---
---
Adj. EPS14E: $0.05
Adj. EPS14E: $0.13
Adj. EPS15E: $0.14
Adj. EPS15E: $0.29
-- 12x 2015E EBITDA, DCF @ 10%, 40% RCN
-- 11x 2015E EBITDA, DCF @ 10%, 40% RCN
Valuation: 12x 2015E EBITDA, DCF @ 10% , 40% RCN
Key Risks to Price Target: Fertilizer supply/demand, crop and energy prices, weather
Lincoln National Corporation (SU) (LNC-N US$52.32)
Solid Core Beat in Q3/14
New --
--
--
Old --
--
--
Operating EPS14E:
$5.70
Operating EPS14E:
$5.51
--
-- --
--
-- --
Valuation: Target P/E of 10x on 2014E (30% weight); Target P/BV of 1.1x on 2014E (70% weight)
Key Risks to Price Target: Credit losses; Rating downgrades; Hedge effectiveness; Interest rate risk; Reserve adequacy; Regulatory risk
MEG Energy Corp. (SO) (MEG-T C$27.95)
Op Cost Reductions Drive Higher Netbacks
New -Old --
---
---
CFPS14E: $4.07
CFPS14E: $3.94
Valuation: 0.9x our risked 2P+RU NAV
Key Risks to Price Target: Commodity prices, timing of projects, and project execution.
CFPS15E: $4.79
CFPS15E: $4.82
-- 0.9x our risked 2P+RU NAV
-- 0.9x our risked 2P+2C NAV
5
Pertinent Revision Summary
Thursday, October 30, 2014
MetLife, Inc. (FS) (MET-N US$52.31)
Q3/14: A Welcome EPS Beat on Solid Core Results
New --
--
--
Old --
--
--
Operating EPS14E:
$5.65
Operating EPS14E:
$5.58
--
-- --
--
-- --
Valuation: Target P/E of 10x on 2014E (30% weight); Target P/BV of 1.1x on 2014E (70% weight)
Key Risks to Price Target: Capital flexibility; U.S. economic weakness; Variable Annuity risk; Regulatory risk; Rating downgr ades
Sherritt International Corporation (SO) (S-T C$2.86)
Q3/14 Results Below Expectations
New -Old --
---
$4.50
$5.00
Adj. EPS14E: $-0.70
Adj. EPS14E: $-0.61
Adj. EPS15E: $-0.28
Adj. EPS15E: $-0.25
Adj. EPS16E: $0.22
Adj. EPS16E: $0.27
---
50% of 7.5x 2015E EV/EBITDA + 50% of 8%
NAV
50% of 8.0x 2015E EV/EBITDA + 50% of 8%
NAV
Valuation: 50% of 6.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity Prices, Operational, Balance Sheet, Political
Teck Resources Limited (SO) (TCK.B-T C$18.42)
Solid Q3/14 Results & Modest Positive Guidance Adjustments
New --
--
--
Adj. EPS14E: $0.87
Adj. EPS15E: $1.19
Adj. EPS16E: $1.62
Old --
--
--
Adj. EPS14E: $0.83
Adj. EPS15E: $1.17
Adj. EPS16E: $1.63
Valuation: 50% of 7.5x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Price Target: Commodity prices, currency, operating, development, balance sheet and environmental
Timmins Gold Corp. (SP) (TMM-T C$1.39)
EPS in Line; Cash Declines $5.8M QOQ
New -Old --
---
---
EPS14E: US$0.08
EPS14E: US$0.09
---
-- --- --
Valuation: 1.10x NAVPS
Key Risks to Price Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risks
Source: Reuters; Scotiabank GBM estimates.
Table of Contents
6
Edge at a Glance
Thursday, October 30, 2014
Edge at a Glance
Agellan Commercial REIT (ACR.UN-T C$9.06)
Steady Outlook; 2015 Should be a Better Year
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Agellan reported Q3/14 FFOPU of $0.28 vs. $0.31 last year, slightly below our $0.29
estimate and consensus ($0.29).
Implications
■ Signs point to accelerating leasing & internal growth. Despite the 1.1% drop in SP NOI,
the 100bp QOQ lift in overall occupancy to 91% was encouraging. Based on tenant
discussions, management remains confident of a further 200bp-250bp uptick by mid2015. Should its leasing targets be hit, our ~1.5% 2015E-16E SP NOI may prove light.
■ Expect Parkway expansion update in November; acquisitions teed up. The $48M
expansion plans at Parkway remain intact, with a firm lease with the new dealership
expected in November. As a reminder, we estimate the project could add +3%-4% to our
NAV upon completion by 2017 and 5% to annual AFFOPU. Redeployment of proceeds
from the sale of Kiest is expected before year-end, with ACR targeting TX industrial,
though the timing delay has created a bit of cash drag.
■ Estimates tweaked; stronger growth on deck for 2015. Our revised 2013A (annualized)2015E AFFO CAGR is 4.5% (6.9% 2014E-16E), in line with its diversified peers, albeit
with growth skewed to next year.
Recommendation
■ SP, $10.25 target. Our outlook is unchanged from our recent initiation. At 9.8x 2015E
AFFO/8% implied cap rate/13.8% below NAV, we believe current levels offer longer
term investors a reasonable entry point with a chunky 8.6% and fully covered yield. Add
more actively ~$8.75.
Agnico Eagle Mines Limited (AEM-N US$28.08)
Q3/14 - IFRS Conversion Inflates Depreciation
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
--
$10.25
FFOPU14E
$1.16
$1.18
FFOPU15E
$1.26
$1.25
FFOPU16E
$1.28
$1.27
New Valuation:
10.75x AFFO (F'16 estimate)
Old Valuation:
11x AFFO (F'15 estimate)
Key Risks to Target:
Significant unitholder, inability to execute
growth, rising interest rates
CDPU (NTM)
$0.78
CDPU (Curr.)
Yield (Curr.)
$0.78
8.6%
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ AEM reported a Q3/14 loss of $0.07 (FD) and adjusted EPS of $0.01.
Implications
■ Earnings - Adjusted EPS of $0.01 vs. our estimate of $0.13 and consensus of $0.15. The
lower EPS versus our estimate reflects is primarily due to higher depreciation as a result
of IFRS conversion (~$0.11/sh) and exploration expenditures at CM and Amaruk
($0.02). Excluding these two items; EPS would have been ~$0.14/sh.
■ Q3/14 Operating Results - Gold production was 349 koz at total cash costs of $716/oz
vs. our estimate of 325 koz at $744/oz.
■ 2014 Guidance Adjusted - Guidance was adjusted upward slightly to 1.4 Moz from
previous guidance of 1.35-1.37 Moz at total cash costs of $650-$675/oz (unchanged).
AISC is unchanged at ~$990/oz on a by-product basis. Updated 2015 guidance was
reported at 1.6 Moz in line with our estimate. No cost guidance for 2015 was provided.
■ Canadian Malartic - The company expects throughput to average about 51-52 ktpd for
the next 6-12 months with ramp up to the full capacity of 55 ktpd over a one to two year
timeframe. Optimization plan results and updated three year guidance is expected in
February 2015.
■ IFRS Conversion - The conversion has resulted in a revaluation of PPE carrying values
resulting in higher future depreciation expense.
Recommendation
■ EPS was significantly weaker primarily due to the recent conversion to IFRS and higher
exploration. Operationally, Q3 was a good quarter. SO.
Rating:
Risk:
Target:
1-Yr
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.
SO
High
US$40.00
Adj. EPS14E:
$1.16
Adj. EPS15E:
$1.34
Adj. EPS16E:
$1.33
Valuation:
1.50x NAV
Key Risks to Target:
Commodity prices; technical and operational
risk; foreign exchange risk.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.32
$0.32
1.1%
7
Edge at a Glance
Thursday, October 30, 2014
ATCO Ltd. (ACO.X-T C$48.66)
Structures Softening
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ ACO reported Q3/14 adj. EPS of $0.74 vs our $0.69 est. ($0.73 Q3/13).
Implications
■ The underlying regulated utility business in ATCO is performing well but is fully offset
by weakness in the Structures business. Performance in Structures may further
deteriorate over the next 12 months, so we are cautious on the stock and continue with
our preference for CU.
■ Utility growth remains robust and growth should sustain at a double-digit pace through
2016/17. With visible 15%+ rate-base expansion in Alberta, the ATCO utilities
businesses rate at a premium. In addition, we think there is potential for operating and
financing cost savings that could boost returns on earnings beyond the rate of capital
expansion.
■ However, the core business in Structures (Modular manufacturing and installations) was
down 20% YOY in the first 9 months and will likely get worse before it gets better.
Several major projects are scheduled for completion over the next 6-9 months (Jansen
Potash, Carmon Creek) and little has been announced in the way of replacement activity.
■ We are significantly reducing our earnings estimates for Structures (from $84M/$91M in
2015/16 to $40M/$40M). As a result, the stock is now trading at a NAV discount of
~10% vs. historical ~20% discount.
Recommendation
■ There is no change to our SP rating because the underlying CU stock is attractive in our
opinion. However, we are reducing our TP by $2 to $50 and maintain our preference for
CU at this time (rated SO).
Barrick Gold Corporation (ABX-N US$12.83)
Q3/14 - Mines Perform Well
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Low
$50.00
$52.00
Adj. EPS14E
$3.10
$3.26
Adj. EPS15E
$3.24
$3.75
Adj. EPS16E
$3.47
$4.00
New Valuation:
-Old Valuation:
20% discount to NAV
Key Risks to Target:
Interest rates; Regulated ROE; Infrastructure
construction
Div. (NTM)
$0.89
Div. (Curr.)
Yield (Curr.)
$0.86
1.8%
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ ABX reported Q3/14 EPS of $0.11 and adjusted EPS of $0.19.
Implications
■ Earnings - Reported adjusted EPS of $0.19 vs. our estimate and consensus of $0.16. EPS
were better than our estimate on operating performance.
■ Operations - Gold production was 1.649 Moz at costs of $589/oz vs. our estimate of
1.577 Moz at costs $615/oz. Copper production was 131 Mlb at $1.82/lb vs. our estimate
of 110 Mlb at $2.03/lb. Better operating performance occurred in Nevada and Porgera
on the gold side. On the copper front, Lumwana also performed well.
■ 2014 Production Guidance Tightened; AISC Lowered - Production guidance was
tightened to 6.1-6.4 Moz (from 6.0-6.5 Moz) at total cash costs of $580-$630/oz
(unchanged). AISC guidance was revised slightly to $880-$920/oz (from $900-$940/oz).
Copper guidance was adjusted upward to 440-460 Mlb (from 410-440 Mlb) at costs of
$1.90-$2.00/lb (from $1.90-$2.10/lb). Capital costs remain ~$2.2B-$2.5B.
■ Thiosulfate Project - Modifications to the autoclave facility for the thiosulfate project are
almost complete and are expected to contribute ~350-450 koz annually over the first full
five years.
Recommendation
■ ABX had a solid operating quarter, leading to better EPS than our forecast. Balance
sheet remains strained with debt of $13.1B and cash and equivalents of $2.7B. Sector
Perform.
Rating:
SP
Risk:
Target:
1-Yr
High
US$17.00
Adj. EPS14E:
$0.63
Adj. EPS15E:
$0.92
Adj. EPS16E:
$1.05
Valuation:
1.00x NAV
Key Risks to Target:
Commodity prices; technical and operational
risk; geopolitical risk.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.20
$0.20
1.6%
8
Edge at a Glance
Thursday, October 30, 2014
Cameco Corporation (CCO-T C$18.92)
Valuation Looks More Interesting
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Q3 adjusted EPS of 23¢ is a beat on the Street's 20¢. We were at 22¢.
Implications
■ We think the mild beat to our estimate is due to better-than-expected sales volume, and
production costs at $18/lb vs. our $20.50/lb forecast.
■ Once again, CCO reduced its uranium production guidance for the year, this time to
22.6M to 22.8M, on the back of the McArthur River labour disruption. This is a good
thing, as it partially supports the uranium market as of late.
Recommendation
■ CCO is trading at its lowest P/NAV since Fukushima. It's also trading at near five-year
lows to average P/BV and P/Sales multiples.
■ While 2015E EV/EBITDA and P/E suggest fair value at 11.2x and 18.4x, respectively,
we note the Street will soon roll forward to 2016, where we see the stock trading at 8.8x
and 14.7x, respectively, or quite a bit below long-term multiples.
■ The challenge with a 'more interesting' valuation is that positive catalysts are few and far
between for CCO, which means we're partially back to relying on a sentiment shift to
help our cause. Regardless, at least valuation is more on our side now than before. We
think the stock outperforms the market on a one year out basis. Our target price moves to
$24 on a slightly lower 2015.
Canadian Utilities Limited (CU-T C$40.32)
Capital Tracking
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
High
$24.00
$25.00
Adj. EPS14E
$0.85
$0.74
Adj. EPS15E
$1.03
$1.07
New Valuation:
-Old Valuation:
1.5x NAV, 13.5x 2015E EBITDA, 23.0x 2015E
EPS
Key Risks to Target:
Uranium S/D; uranium prices; CAD/USD
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.40
$0.40
2.1%
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
Event
■ CU reported Q3/14 adj. EPS of $0.46 vs. our $0.43 est. ($0.43 Q3/13).
Implications
■ The earnings report highlights CU's premium organic regulated utility growth, its
improving business mix and its strategic capital management/deployment plants. The
Power business is predictably softer than last year but Utility is more than offsetting.
■ Adjusted Utility earnings were up organically ~50% YOY or a still robust ~20% even
excluding prior-period catch-up. Good news in that the Alberta regulator has raised the
interim inclusion of capital tracker spending to 90% from 60%. The full inclusion, as
opposed to 60%, is worth about $15M/year (half in our estimates).
■ Premium Utility growth should continue through at least 2017. With another ~$3.5B of
capital investment over the next two years, rate-base growth should average ~15% and
earnings could exceed that pace under Alberta's incentive regulatory framework.
■ The sale of non-core assets (IT, UK Power, Midstream) and re-deployment of capital to
infrastructure in Mexico is logical in our opinion. ATCO already has a strong LatAm
presence with its Structures business and modest diversification from Alberta is prudent.
Recommendation
■ CU's net growth (Utility increase net of Power decline) should rival that of peers FTS
and EMA. Yet, the stock trades at a meaningful discount (forward P/E of ~16x vs.
~19x). We would accumulate at these levels.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
Low
--
$47.00
Adj. EPS14E
$2.21
$2.23
Adj. EPS15E
$2.45
$2.53
Adj. EPS16E
$2.60
$2.65
New Valuation:
6.6% 2015E Free Cash Yield and 11.8x 2015E
EV/EBITDA
Old Valuation:
6.7% 2015E Free Cash Yield and 11.4x 2015E
EV/EBITDA
Key Risks to Target:
Interest rates; Regulated ROE; Spark spreads;
FX
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.10
$1.07
2.7%
9
Edge at a Glance
Thursday, October 30, 2014
Capstone Mining Corp. (CS-T C$2.07)
Mark Turner, MBA, P.Eng. - (416) 863-7484
(Scotia Capital Inc. - Canada)
Another Quarter of Record Operating Cash Flow; Underpinned by Impressive PV Cash Costs
Event
Pertinent Data
■ CS reported strong Q3/14 financial results, broadly in line with our estimates and
consensus (see Exhibit 1). Production and sale volumes had been previously announced.
■ The market's focus was on Pinto Valley cash costs and CS delivered. PV's C1 cash cost
of $1.90/lb for the quarter was 4% better than our estimate and an 11% improvement
over the $2.13 in Q2/14.
Implications
■ Another quarterly record was set for operating cash flow generation. Before changes in
WC the operations generated $57M or $0.14/share, in line with our estimate and
consensus. All-in CS, ended the quarter improving its net debt position to $121M,
including $176M of cash on the balance sheet at the end of the quarter - a 37% QOQ
increase.
■ Adjusted EBITDA of $71.4M was in line with consensus at $72.1M, and modestly
below our estimate of $77.6M on slightly lower revenue and higher operating costs
associated with sales than we had estimated.
■ Operating cash cost in the quarter bettered our estimates at all mines, achieving a
consolidated C1 cash cost of $1.84/lb; 7% better than our estimate and a 9%
improvement over the $2.03 achieved in Q2/14. Full year production was reiterated at
102 kt (225 Mlb) of copper in concentrate (+/-5%) as were C1 cash costs of $1.90 to
$2.00/payable lb.
Recommendation
■ Maintain our Sector Outperform rating and $3.50 target price.
First National Financial Corporation (FN-T C$23.24)
Solid Volumes, but Spread Compression Contributes to Miss
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
High
--
$3.50
Adj. EPS14E
US$0.11
US$0.13
Adj. EPS15E
-US$0.14
Adj. EPS16E
US$0.40
US$0.39
New Valuation:
-Old Valuation:
50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Target:
Commodity price, operating, and technical
risks, environmental and legal risks
Div. (NTM)
C$0.00
Div. (Curr.)
Yield (Curr.)
C$0.00
0.0%
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430
(Scotia Capital Inc. - Canada)
Event
■ Q3/14 EBITDA pre-FMV (fair market value adjustment) of $0.84/share was below our
estimate of $0.92/share.
Implications
■ Third quarter origination volumes were well ahead of our forecast but core earnings fell
short of expectations. Reported EPS of $0.56 was below our estimate and consensus of
$0.63 and $0.61, respectively.
■ Weaker-than-expected results were impacted by tighter-than-expected net securitization
spreads and higher interest expense offset by a more favourable funding mix. Tighter
mortgage spreads reflecting a highly competitive environment put pressure on
securitized net interest margins (NIMs), but the compression is expected to stabilize.
■ Adjusted net cash of $11.64/sh supports growth, provides a cushion to sustain dividend
during a prolonged slow down, and is a likely source of unrecognized value.
■ FN's multiple appears to be trending in line with its estimated 5-year average while other
non-bank lenders are trading at historical premiums.
Recommendation
■ Reducing target price to $24.00 (was $24.50), but maintaining Sector Perform rating.
Reflecting downward revisions to our estimates, we have reduced our target price.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
Med
$24.00
$24.50
EPS14E
$1.87
$2.00
EPS15E
$2.37
$2.46
EPS16E
$2.65
$2.77
New Valuation:
10.1x 2015E EPS
Old Valuation:
10x 2015E EPS
Key Risks to Target:
Lower mortgage origination volumes, tighter
funding spreads
Div. (NTM)
Div. (Curr.)
$1.58
$1.50
Yield (Curr.)
6.5%
10
Edge at a Glance
Thursday, October 30, 2014
Flextronics International Ltd. (FLEX-O US$9.83)
Daniel Chan, MBA - (416) 863-7552
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
Q2/F15: INS Weakness Offset by Other Segments
■ Flextronics reported Q2 results last night.
Implications
■ INS weakness offset by other business groups. Revenue of $6.5B and EPS of $0.26 were
largely in line with our expectations. INS continued to be weak, but was better than
expected. In fact INS, CTG, and HRS all performed better than the company expected,
which offset weaker than expected sales out of the IEI segment due to weakness in the
semicap space. FCF generation was good at $322M for the quarter and the company
bought back 9.3M shares or 1.5% of shares outstanding.
■ Guidance in line with expectations, but shows slowing growth. Revenue guidance of
$6.6B and EPS guidance of $0.26 at the midpoint is in line with expectations, but
indicates slowing growth. The company expects continued growth momentum out of
HRS and IEI, but CTG momentum will be challenging to maintain following strong
product ramps from Google, Microsoft, and Motorola last year.
Recommendation
■ Maintain Sector Perform. An improving business mix and more efficiency should
continue to drive margins higher, but we are cautious on FLEX's ability to maintain its
growth momentum to justify its relatively high valuation. The company does, however,
have the highest FCF yield in the group, which is likely due to the high asset velocity in
the CTG group; the CTG business is a double-edged sword and FLEX's high exposure to
it leave us with a Sector Perform rating on the name.
GeoPark Limited (GPRK-N US$8.65)
Tigana - Pushing to Add >50%
New
Old
Rating:
Risk:
---
SP
Med
Target:
1-Yr
$11.30
$11.70
EPS15E
$1.02
EPS16E
$1.22
New Valuation:
5.5x CY15E EV to EBITDA
Old Valuation:
5.5x forward EV to FY16E EBITDA
Key Risks to Target:
Margin pressure could lower EPS
$0.97
$1.15
Div. (NTM)
$0.00
Div. (Curr.)
Yield (Curr.)
$0.00
0.0%
Gavin Wylie - (403) 213-7333
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ GeoPark reported an impressive uptick to 3P reserves at the Tigana field following
appraisal drilling that indicated the field represented a single / larger combined trap.
Implications
■ Internal gross 3P reserves are now estimated at 45-65 mmboe (45% GeoPark / 55%
Parex) compared to the 14.6 mmboe (gross) estimated at year-end 2013 by an
independent reserve appraiser.
■ We reaffirm our Sector Outperform rating on GeoPark and our one-year price of $14.50
per share, based on our risked NAVPS estimate of $14.27.
Recommendation
■ In our minds, GeoPark's update is further evidence that the company has found its stride
operationally in Colombia and could have further running room on LLA-34.
■ Assuming net 2P reserve adds of ~16 mmbbl, we see the potential for a significant
increase of 23% at year-end versus 2013 net 2P reserves of 70.2 mmboe. We estimate
the value of barrels in Colombia (NPV12) to be $21-24/bbl that could imply an overall
mid-point net increase of 58% to our Base 2P NAVPS that current stands at $10.53.
Rating:
Risk:
Target:
1-Yr
CFPS14E:
CFPS15E:
SO
High
US$14.50
$4.21
$4.22
Valuation:
Based on our risked NAV ($14.27/share) that
also equates to 1.38x our 2P NAV.
Key Risks to Target:
Commodity prices, exploration, project
execution, political/regulatory.
Div. (NTM)
$0.00
Div. (Curr.)
Yield (Curr.)
$0.00
0.0%
11
Edge at a Glance
Thursday, October 30, 2014
Grupo Televisa, SAB (TV-N US$34.77)
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Event
Pertinent Data
■ Univision reported, in our view, soft Q3 results.
Implications
■ Consolidated revenues grew only 5.2% YOY. However, if we exclude the one-off
impact of US$51.4M related to the World Cup, Univision's adjusted revenues would
have fallen 2.2% YOY. Consolidated EBITDA grew 4.4% YOY, or 3.4% if excluding
US$3.1M related to the Cup. On the conference call, management said that, excluding
the World Cup, the Copa de Oro and other items, revenues and EBITDA grew only
1.2% and 4.7%, respectively, in Q3/14 (we understood that adjusted ad revenues we re
actually down slightly from the year before).
■ Of note, while old media struggles to grow at single digit rates (at best), Facebook
reported yesterday a 64.0% YOY increase in ad sales in Q3.
■ Univision managed to lower net debt, but only slightly, from an estimated US$8.37B in
Q2/14 to US$8.14B in Q3/14 (excluding the Televisa convertibles). At 6.7x estimated
net debt to LTM EBITDA, Univision remains one of the most leveraged broadcasters in
the U.S.
■ The company's ratings underperformed the rest of the industry. Primetime audiences
(C7) in the 18-34 group as reported by the company declined 8.7% YOY (vs. -4.9% for
the industry leaders), while in the 18-49 group they declined 7.4% YOY (vs. +0.4% for
the industry). The CAB reported drops in ratings for Univision and Unimas.
Recommendation
■ We value Univision using a generous 11x 2015E EV/EBITDA. Sell TV.
Rating:
Risk:
Target:
1-Yr
US$28.00
EPS14E:
EPS15E:
EPS16E:
MXN 1.70
MXN 2.85
MXN 2.74
Old Media: Analysis of Univision's Q3/14 Results
Horizon North Logistics Inc. (HNL-T C$3.20)
Pessimistic Call; Taking Down Our Estimates
SU
High
Valuation:
DCF - 5 years results, 7.4% WACC, terminal
growth rate of 3.6%
Key Risks to Target:
Decline of broadcast ratings in Mexico and the
U.S.; expensive acquisitions
Div. (NTM)
Div. (Curr.) (ADS)
Yield (Curr.)
US$0.07
US$0.07
0.2%
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
(Scotia Capital Inc. - Canada)
Event
■ Revising our estimates post-Q3 conference call.
Implications
■ No positive takeaways from the call, in our view. Management highlighted an initiative
to develop the market for modular permanent facilities to support manufacturing ops.
(hotels, offices, etc.). While positive from a diversification standpoint, we view this as a
negative read-through for the long-term demand outlook of HNL's core camp business.
While management noted delays on Fort Hills as well as inaccurate cost estimates
(which will see margins closer to 13% vs. 17% for the project), the comments do not
reconcile the divergence from guidance issued three months ago (-20% for 2H/14).
When pushed HNL noted they were previously too optimistic across the board.
■ HNL is calling for net capex in the $30M to $40M range for 2015, or ~500 beds (vs.
previous commentary of 1k-1.5k beds), highlighting the deterioration in visibility. While
no major contracts are expected to roll off in 2015, a handful of small camps will need to
be redeployed (~15% of beds). Our 2014E and 2015E EBITDAs reduce 15% and 28%.
Recommendation
■ We continue to believe LNG could act as a major catalyst for the space, which could
ultimately benefit HNL as they have been building land positions in Kitimat and Prince
Rupert (provided they have the financial flexibility to fund the project). That said, we are
not ready to give HNL the benefit of the doubt, and would look to other names to play
the LNG theme. Our one-year price target is reduced to $4.50 (from $6.50).
Pertinent Data
New
Old
Rating:
Risk:
---
SP
High
Target:
1-Yr
$4.50
$6.50
EBITDA14E
$91
$107
EBITDA15E
$100
$140
New Valuation:
-Old Valuation:
6.0x our 2015 EV/EBITDA estimate.
Key Risks to Target:
Commodity prices, labour supply, access to
supplies, weather, contract risk, and FX.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.32
$0.32
10.0%
12
Edge at a Glance
Thursday, October 30, 2014
HudBay Minerals Inc. (HBM-T C$8.65)
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
Q3/14 Results First Look: An Earnings Miss but Constancia on Track
Event
Pertinent Data
■ HudBay released its Q3/14 financial and operating results.
Implications
■ The company reported an adjusted Q3/14 EPS loss of $0.02 vs. our estimate and
consensus of earnings of $0.06.
■ Manitoba production of 9,798t of Cu, 22,653t of Zn, and 18,279 ozs of Au were 6.1%,
9.6%, and 19.9% below our forecast. However, the impact to the results was cushioned
by higher than expected Cu and Zn sales volumes.
■ HudBay reaffirmed its 2014 production and cash cost guidance.
■ Most important, the development of Constancia remains on track for start-up in Q4/14
with an unchanged budget of US$1.7 billion.
Recommendation
■ With an attractive relative valuation, an impressive near to medium term growth
trajectory, and a diminishing development and balance sheet risk profile, HudBay is
rated Sector Outperform. Our 12-month target of C$12.25 is based on a 50/50 mix of
6.0x our average 2015/16E EV/EBITDA ($14.74) and 1.0x our 8% NAV estimate
($9.91). In our view, any weakness in the shares related to the Q3 results represents a
buying opportunity as the re-rate on production growth is within sight.
Rating:
Risk:
Target:
1-Yr
Intrepid Potash, Inc. (IPI-N US$14.14)
SO
High
C$12.25
Adj. EPS14E:
Adj. EPS15E:
Adj. EPS16E:
$0.12
$1.13
$1.75
Valuation:
50/50 mix of 6.0x 2015/2016E EV/EBITDA and
1.0x 8% NAV
Key Risks to Target:
Commodity, operating, development,
financing, political
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.02
$0.20
2.3%
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Unprecedented Rainfall Snags A Decent Quarter; 2015 Looks Weaker
Event
■ IPI reported a 2¢ loss on Q3. The Street/us were looking for +5¢.
Implications
■ The quarter was actually decent. Top line for potash and langbeinite was 2% and 4%
higher than our forecast, respectively. This was due to volume strength, but partially
offset by a slightly lower realized prices than our estimate (-1% to -3%), although
sequentially higher QOQ. The robust sales volume result was likely due to IPI's
strategically located facilities, access to truck markets, and field warehouses, which
enables it to minimize the impact of domestic rail challenges.
■ Rain rain go away... Rainfall in September led to power outages at Carlsbad, as well as a
one week shutdown at the East facility. This resulted in lower production, and therefore,
elevated cash costs. Potash and langbeinite cash costs were 9% and 7% higher
sequentially QOQ.
■ 2015 looks weaker. Production gains from HB should be offset by lower production at
Wendover (IPI's lowest cost facility). Cash costs are therefore expected to be higher than
previously thought - likely the same as 2014 ($195 to $205/st). This, coupled with a
sustainable price advantage, lower realized prices, and flat sales, leads us to EPS of 14¢
next year.
Recommendation
■ We maintain a SP rating on IPI, as well as a $13.50 target. We think the stock is in fair
value territory, and therefore should remain range-bound
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Adj. EPS14E
Adj. EPS15E
Old
---
SP
High
--
$13.50
$0.05
$0.14
$0.13
$0.29
New Valuation:
12x 2015E EBITDA, DCF @ 10%, 40% RCN
Old Valuation:
11x 2015E EBITDA, DCF @ 10%, 40% RCN
Key Risks to Target:
Fertilizer supply/demand, crop and energy
prices, weather
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
13
Edge at a Glance
Thursday, October 30, 2014
Joanne Smith, CFA - (212) 225-5071
(Scotia Capital (USA) Inc.)
Lincoln National Corporation (LNC-N US$52.32)
Solid Core Beat in Q3/14
Event
Pertinent Data
■ LNC's Q3/14 core EPS of $1.51 increased 22% YOY and exceeded our and consensus
estimates of $1.37 and $1.42, respectively. The upside was primarily related to strong
performance in the Life Insurance business, which benefited from a clean mortality
quarter and continued in-force growth. Positive operating leverage and higher account
values drove better than expected annuity earnings. LNC's other businesses and
corporate expenses were in-line with our expectations.
Implications
■ While sales were weaker than expected and elevated disability claims continued to
impact Group Protection results, overall results were strong, on a 9% rise in account
balances, effective expense control and capital management. In addition, LNC boosted
its quarterly dividend by 25% and the results of the annual actuarial review were
modestly positive.
Recommendation
■ LNC earnings have clearly outperformed our expectations, but they have largely been
driven by a disproportional contribution from annuities. Under a normalized equity
market return scenario, we expect EPS growth to slow. We believe LNC needs to
demonstrate more earnings diversification to justify a higher valuation.
Lundin Mining Corporation (LUN-T C$5.28)
New
Rating:
Risk:
Target:
1-Yr
Old
---
SU
Med
--
$54.00
Operating EPS14E
$5.70
$5.51
Operating EPS15E
-$5.86
New Valuation:
-Old Valuation:
Target P/E of 10x on 2014E (30% weight);
Target P/BV of 1.1x on 2014E (70% weight)
Key Risks to Target:
Credit losses; Rating downgrades; Hedge
effectiveness; Interest rate risk; Reserve
adequacy; Regulatory risk
Div. (NTM)
$0.80
Div. (Curr.)
$0.80
Yield (Curr.)
1.5%
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
Q3/14 Results First Look: Weak Performance at Neves-Corvo but Guidance Unchanged
Event
Pertinent Data
■ Lundin released its Q3/14 financial and operating results.
Implications
■ The company reported an adjusted Q3/14 EPS of $0.05 vs. our estimate of $0.04 and
consensus of $0.07 (range of $0.04 to $0.10).
■ Due to relatively weak output at Neves-Corvo, total attributable copper production of
26.4kt was 10.1% below our estimate of 29.4 kt. Cash costs of $1.96/lb were 8.2%
above our estimate of 1.81/lb.
■ Zinc production of 38.0 kt was 7.3% above our estimate of 35.4 kt, although unit costs
of $0.48/lb were higher than our forecast of $0.28/lb.
■ Despite the relatively weak Q3, Lundin reaffirmed its 2014 production, cash cost, and
capital spending guidance.
■ The ramp-up of Eagle continues to make solid progress and is currently ahead of
schedule.
Recommendation
■ Lundin shares offer excellent exposure to Cu-Ni-Zn markets with a reasonable
development and balance sheet risk profile, at a very attractive relative valuation. We
reiterate our Focus Stock rating and our C$7.75 target price. Our C$7.75 target is based
on a 50/50 weighting of 6.0x our 2015 EBITDA estimate (C$8.02) and 1.0x our 8%
NAVPS estimate (C$7.57).
Rating:
Risk:
Target:
1-Yr
FS
High
C$7.75
Adj. EPS14E:
US$0.19
Adj. EPS15E:
US$0.53
Adj. EPS16E:
US$0.66
Valuation:
50% of 6.0x 2015E EV/EBITDA + 50% of 8%
NAV
Key Risks to Target:
Commodity, operating, financing,
development, political
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
14
Edge at a Glance
Thursday, October 30, 2014
MEG Energy Corp. (MEG-T C$27.95)
Op Cost Reductions Drive Higher Netbacks
Event
■ MEG announced Q3/14 results.
Implications
■ A 26% QOQ reduction in non-energy op costs drove higher netbacks. We anticipated
non-energy op costs of $9/bbl going in to Q3/14 with management guiding $8/bbl$10/bbl for 2014E. On the conference call management said that going forward, for
quarters that didn't include a turnaround, a sub-$8/bbl non-energy op cost would be
reasonable. We have reduced our near-term op costs estimate.
■ The 50% MEG Energy-owned Access pipeline was completed in Q3/14. While MEG's
Q3/14 production of 76.7 mbbl/d was in line with consensus, the volumes required to fill
the Access pipeline reduced MEG's sales volumes by approximately 6.1 mbbl/d of
bitumen.
■ Higher netbacks led to a CFPS beat. Our cash flow estimate, which included the impact
of the line fill, was $0.90/sh, which MEG was able to beat by 18% with higher netbacks.
■ 2014 discretionary spending looks to be cut. MEG had originally guided $1.8B for 2014
capex, including $0.2B in discretionary spending. MEG anticipates 2014 capex to be just
under $1.6B.
Recommendation
■ We maintain our Sector Outperform rating and $47/sh target price.
Jason Bouvier, CFA - (403) 213-7345
(Scotia Capital Inc. - Canada)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
High
--
$47.00
CFPS14E
$4.07
$3.94
CFPS15E
$4.79
$4.82
New Valuation:
0.9x our risked 2P+RU NAV
Old Valuation:
0.9x our risked 2P+2C NAV
Key Risks to Target:
Commodity prices, timing of projects, and
project execution.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Megacable Holdings (MEGA CPO-MX MXN 62.15)
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Event
Pertinent Data
■ Megacable held its Q3/14 conference call.
Implications
■ CEO Enrique Yamuni confirmed that the purpose of the coming October 31 meeting is
to convert "A" shares into CPOs. As foreign ownership restrictions were lifted in the
constitutional reform, holders of "A" shares can now take advantage of owning CPOs,
making it easier for them to divest their stake. In our view, the conversion of shares into
CPOs, as well as the exit of the families from the HSBC trust, could simplify a takeout
process.
■ Megacable expects to consolidate PCTV as of October 1, 2014. The asset was valued at
MXN 150M (but Mega bought 66.0%), generating total sales of MXN 17M to MXN
18M per month (including sales to Megacable, so the net figure could be lower), with an
EBITDA margin of ~12%. In our view, this implies a ~6.0x LTM EV/EBITDA multiple,
which we see as attractive given the potential to generate synergies. However, we expect
PCTV to contribute ~0.7% of EBITDA next year, which is not enough to move the
needle, in our view.
■ Management remains confident in sustaining a 42.5% margin going forward, which is in
line with the 42.8% we have in our model.
Recommendation
■ Trading at 10.0x 2015E EV/EBITDA, we believe Mega's share price reflects its solid
fundamentals and a certain M&A premium. We recommend current shareholders
maintain their positions.
Rating:
Risk:
Target:
1-Yr
Q3: Conference Call Highlights
SP
High
MXN 47.00
EBITDA14E:
5,003
EBITDA15E:
5,433
EBITDA16E:
5,879
Valuation:
DCF - 5 years results, 8.3% WACC, terminal
growth rate of 4.0%
Key Risks to Target:
Telmex entry into pay TV; Expensive
acquisitions
Div. (NTM)
Div. (Curr.)
2.24
0.99
Yield (Curr.)
1.6%
15
Edge at a Glance
Thursday, October 30, 2014
Methanex Corporation (MEOH-Q US$59.04)
Volume Beat; Geismar Capex 27% Higher
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Adjusted Q3 EPS of 69¢ is a beat on the Street's 64¢. Sales volume was higher than
expected, as MX sold 4% more produced methanol than it created (i.e., a slight
inventory drawdown). Accordingly, we do not view this as a non-recurring beat. The
quarter was fairly uneventful.
Implications
■ The two Geismar plants will cost $300M more than MX thought. At $1.4B, the 27%
increase is ~$100M more than the market expected, or ~$1/sh (pre-tax). Capex rises to
$700/mt for brownfield projects, which adds good support to our $900/mt greenfield
replacement cost estimate.
■ There is little doubt the focus on the call will be what a lower energy complex means for
methanol. MX stated "pricing has been resilient in the wake of the recent drop in oil,"
but we think it takes time for lower energy derivatives like naphtha/LPG to test the
competitiveness of methanol. Other questions we will try to answer include why Chinese
consumption declined last month, what will happen with record coastal methanol
inventory in China, and what is the commissioning status of new merchant MTO plants
in China through 2015.
■ MX posted a higher NA price ($499/mt vs. $482), which signifies the tight Atlantic, due
to temporary supply outages (similar to last year, but less extreme). The November
Asian contract was posted flat at $435/mt.
Recommendation
■ We maintain a SP rating on MX. A full note will follow the call.
Rating:
Risk:
Target:
1-Yr
MetLife, Inc. (MET-N US$52.31)
Q3/14: A Welcome EPS Beat on Solid Core Results
Event
■ MET's Q3/14 core of EPS of $1.52, were 8% and 7% ahead of our and consensus
estimates of $1.41 and $1.42 (excluding a pre-announced tax adjustment in LatAm),
respectively, on improved top-line growth, strong investment margins and good expense
discipline. Underwriting experience reverted back to normal, with the exception of the
dental line, which was below expectations. Normalizing for unusually low corporate
expenses, we would view true core EPS to be $1.48, still a solid beat.
Implications
■ After two consecutive misses, the upside surprise was welcome and reinforced our view
that the misses were attributed to underwriting results that can be volatile on a quarterly
basis. Sales, ex-VA and retail life, were generally strong. The ROE came in at a strong
12.1% annualized and the company repurchased 8.1M shares for approximately $400M,
the first time the company has bought shares since pre-financial crisis.
Recommendation
■ MET remains a top pick in the life sector. We continue to expect the company to
produce strong earnings and an improving ROE over the next few years and that more
significant capital management will be possible as regulatory uncertainty diminishes.
Moreover, we believe the stock remains attractively valued, at 8.5x 2015E EPS and 1.0x
2014E BVPS. Our 12-month price target remains $59.
SP
High
US$72.00
Adj. EPS14E:
Adj. EPS15E:
$4.17
$5.92
Valuation:
7.5x 2015E EBITDA, 12x 2015E EPS, DCF @
10.5%, 100% Adj. RCN
Key Risks to Target:
Natural gas supply security, methanol S/D,
energy prices
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.00
$1.00
1.7%
Joanne Smith, CFA - (212) 225-5071
(Scotia Capital (USA) Inc.)
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
FS
Med
--
$59.00
Operating EPS14E
$5.65
$5.58
Operating EPS15E
-$6.14
New Valuation:
-Old Valuation:
Target P/E of 10x on 2014E (30% weight);
Target P/BV of 1.1x on 2014E (70% weight)
Key Risks to Target:
Capital flexibility; U.S. economic weakness;
Variable Annuity risk; Regulatory risk; Rating
downgrades
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.40
$1.40
2.7%
16
Edge at a Glance
Thursday, October 30, 2014
PHX Energy Services Corp. (PHX-T C$11.85)
Déjà Vu: Record Q's & Capex Bumps Continue
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Adjusted EBITDA of $24.6M was a record, slightly below our $25.5M expectation (4%) and consensus of $25.0M.
Implications
■ Top line beat offset by softer margin. Revenue of $139M came in 4% ahead of
expectation and is 30% better YOY and 38% better QOQ. This was led by impressive
13% higher than expected ops days in the U.S. (+13% QOQ or +580 days), which was
partially offset by slightly lower than expected days in Canada (-4%) and internationally
(-8%). The margin squeeze was mostly in the U.S. where higher personnel costs (to keep
pace with growth), SG&A associated with the EDR business and likely the costs
associated with field testing new technology (our assumption) weighed on margins.
Also, internationally, weaker activity out of Russia, which is expected to rebound,
placed added pressure on margins. PHX's Peruvian and Colombian operations closed.
■ Market share capture has been impressive on older platform; however, we are getting
excited about the next wave of growth. PHX unveiled one of its new technologies,
Velocity, which is a guidance platform designed to not only improve reliability but also
collect formation measurements to provide real time engineering and enhance the
drilling process. PHX has a fleet of these systems in field tests across NAM and expects
them to be commercial during 2015. Capex bumped to $84M, up $7.5M in anticipation
of future growth.
Recommendation
■ We remain bullish on PHX; degree of share pullback not justified.
Rating:
Risk:
Target:
1-Yr
Royal Gold Inc. (RGLD-Q US$62.98)
Q1/F15 - Good Quarter
SO
High
C$17.00
EBITDA14E:
EBITDA15E:
$76
$89
Valuation:
8.4x our 2015 EV/EBITDA estimate.
Key Risks to Target:
Commodity prices, labour supply, new
technology, and FX.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.84
$0.84
7.1%
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ RGLD reported Q1/F15 EPS of $0.29 and adjusted EPS of $0.28.
Implications
■ Earnings - Adjusted EPS came in at $0.28 vs. our estimate of $0.26 and consensus of
$0.30. The beat compared to our estimate was due to higher revenue from Cortez.
■ Revenues - Revenue of $69M was up from $56M in Q1/F14, while earnings increased to
$19M from $15M in Q1/F14.
■ Mt. Milligan - This quarter, RGLD received revenue contribution of about $20M.
Thompson Creek Metals (TCM) expects ramp-up of production to reach 80% of design
capacity by calendar year-end.
■ Phoenix Gold - Remains on track for production in mid-2015 with mill construction on
schedule and underground development 24% complete.
■ Euromax transaction - Following quarter-end, RGLD announced that it has entered into
a $175M gold stream transaction with Euromax Resources. See within for more details.
■ Other transaction - RGLD acquired a 2.0% NSR and a 3% NSR on the Tetlin
polymetallic exploration project (Alaska) for $6.0M.
■ Conference Call - conference call at 12:00pm ET. The dial-in numbers are 866-270-1533
(US); 855-669-9657 (Cda) or 412-317-0797 (Intl).
Recommendation
■ FQ1/15 EPS was slightly better than our estimate mainly on higher revenues from
Cortez. Sector Perform rating maintained.
Rating:
SP
Risk:
Target:
1-Yr
High
US$85.00
Adj. EPS15E:
Adj. EPS16E:
Adj. EPS17E:
Valuation:
1.80x NAV
Key Risks to Target:
Commodity prices; non-operator.
$1.32
$1.33
$1.38
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.84
$0.80
1.3%
17
Edge at a Glance
Thursday, October 30, 2014
Sherritt International Corporation (S-T C$2.86)
Q3/14 Results Below Expectations
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Sherritt released its Q3/14 operating and financial results.
Implications
■ The company reported an adjusted Q3/14 EPS loss of $0.22 vs. our estimate of a loss of
$0.12 and consensus of a loss of $0.08. Adjusted EBITDA of $78.9M was 10.3% below
our forecast of $88.0M.
■ Total attributable nickel production of 8.4kt was 2.5% below our forecast of 8.6kt.
Ambatovy nickel production of 3.7kt increased by 3.9% QOQ, but was 11.5% below our
forecast. Total nickel cash costs of US$6.16/lb were modestly higher than our forecast of
US$5.95/lb.
■ Sherritt slightly reduced its total attributable 2014 nickel production guidance to 31.633.2kt (from 31.8-33.4kt).
■ After further tempering our ramp-up expectations and increasing our LOM cost
assumptions, we now forecast Ambatovy to become free cash flow neutral to Sherritt at
the end of 2015 (previously Q3/15).
Recommendation
■ Sherritt is rated Sector Outperform based on the company's significant leverage to rising
nickel prices, ongoing balance sheet de-leveraging, combined with easing ramp-up risk
at Ambatovy. However, we have reduced our 12-month target to C$4.50 per share (from
C$5.00) to reflect our lower estimates. Our revised C$4.50 target is based on a 50/50
mix of 6.0x our 2015E EV/EBITDA (C$3.27) and 1.0x our revised 8% NAV estimate of
C$5.84 per share.
Taseko Mines Limited (TKO-T C$1.58)
Q3/14 Financials First Look - Known to Be Messy
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
High
$4.50
$5.00
Adj. EPS14E
$-0.70
$-0.61
Adj. EPS15E
$-0.28
$-0.25
Adj. EPS16E
$0.22
$0.27
New Valuation:
-Old Valuation:
50% of 6.0x 2015E EV/EBITDA + 50% of 8%
NAV
Key Risks to Target:
Commodity Prices, Operational, Balance
Sheet, Political
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.07
$0.17
5.8%
Mark Turner, MBA, P.Eng. - (416) 863-7484
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ Q3/14 financials were released Wednesday after market close. Production and sales
volumes had been previously announced.
Implications
■ The high wall movement and shovel availability issues discussed with Q3/14 production
results in mid-October impacted Q3/14 costs more than we expected even when aware
of the longer hauls and contractor miner being moved to maintain mine production. Cash
costs increased 30% from Q2/14 to US$2.75/lb produced and were 11% higher than our
estimate of US$2.47/lb produced (US$2.56 on a C1 basis).
■ The Gibraltar mining fleet has now been moved to higher benches, the contract miner
has been released, and all major shovel maintenance is reported to have been complete
by mid-October. Normal expenditure levels are expected going forward, as per the
revised mine plan. Please see our October 13, 2014, note entitled, "High Wall Instability
Forcing Lower Grades for Next 18 Months".
■ Adjusted EBITDA of $1.9M was well below our estimate of $12.8M, as was adjusted
EPS of a loss of $0.06 compared with our estimate of a loss of $0.02 and consensus at
$0.00 (range -$0.02 to $0.04).
Recommendation
■ We maintain our Sector Perform rating and $2.50 target price ahead of adjusting our
estimates post quarterly conference call.
Rating:
Risk:
Target:
1-Yr
SP
High
C$2.50
Adj. EPS14E:
$-0.04
Adj. EPS15E:
$0.07
Adj. EPS16E:
$0.30
Valuation:
50% EV/EBITDA & 50% Adjusted NAV
Key Risks to Target:
Commodity price, operating, and technical
risks, environmental and legal risks
Div. (NTM)
$0.00
Div. (Curr.)
Yield (Curr.)
$0.00
0.0%
18
Edge at a Glance
Thursday, October 30, 2014
Teck Resources Limited (TCK.B-T C$18.42)
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
Solid Q3/14 Results & Modest Positive Guidance Adjustments
Event
■ Teck released its Q3/14 financial and operating results.
Implications
■ The company reported an adjusted Q3/14 EPS of $0.28 vs. our estimate of $0.28 and
consensus of $0.25.
■ Coal production and sales of 6.8 mt and 6.7 mt were 6.3% and 9.8% above our estimates
of 6.4 mt and 6.1 mt. While the realized coal price of US$110/t was in line with our
forecast, cash costs of $88/t were $5/t lower than our forecast of $93/t. Cu producti on
and sales of 78 kt and 82 kt were 6.5% below and in line with our forecasts of 83 kt and
82 kt, while costs of US$1.64/lb were higher than our estimate of US$1.55/lb.
■ Teck modestly improved its 2014 production and cost guidance ranges for coal, Cu, and
Zn. The capex budget was reduced by $0.4 billion.
■ There was no change to the dividend; we believe that the dividend can be maintained for
another 12+ months in the current coal environment.
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 per share.
Pertinent Data
New
Rating:
Risk:
Target:
1-Yr
Old
---
SO
High
--
$25.00
Adj. EPS14E
$0.87
$0.83
Adj. EPS15E
$1.19
$1.17
Adj. EPS16E
$1.62
$1.63
New Valuation:
50% of 7.5x 2015E EV/EBITDA + 50% of 8%
NAV
Old Valuation:
50% of 8.0x 2015E EV/EBITDA + 50% of 8%
NAV
Key Risks to Target:
Commodity prices, currency, operating,
development, balance sheet and
environmental
Timmins Gold Corp. (TMM-T C$1.39)
Div. (NTM)
$0.90
Div. (Curr.)
$0.90
Yield (Curr.)
4.9%
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
EPS in Line; Cash Declines $5.8M QOQ
■ Timmins reported Q3/14 adjusted EPS of $0.01, directly in line with our estimate and
consensus.
Implications
■ Cash costs for the quarter of $856/oz were 4% below our estimate of $889/oz due to
higher silver credits and a negative inventory adjustment. The company reported AISC
of $994/oz in Q3/14, up from $928/oz in Q2/14 due to higher cash costs offset by lower
corporate G&A expenses.
■ Timmins finished Q3/14 with cash and equivalents of $50.2M, ~$5M less than our
estimate and ~$6M lower than Q2/14. The lower cash position was due to a negative
$3.6M working capital adjustment and capex of $9.7M compared with our estimate of
$3.7M.
■ Recall the company pre-released Q3/14 production of 26.7 koz Au, which missed our
estimate by 8% due to record rainfall in Mexico in September. Open pit access was
restricted, leading Timmins to process lower-grade ore from stockpiles.
■ Timmins expects to achieve the high end of its 2014 guidance range (115-125 koz Au) at
a cash cost of ~$800/oz, and we model 2014 production of 122 koz Au at $798/oz. The
company also anticipates releasing drill results from its regional exploration program
shortly.
Recommendation
■ We rate Timmins Sector Perform with a C$2.00 one-year target price.
New
Rating:
Risk:
Target:
1-Yr
Old
---
SP
High
--
$2.00
EPS14E
US$0.08
US$0.09
EPS15E
-US$0.11
EPS16E
-US$0.07
New Valuation:
-Old Valuation:
1.10x NAVPS
Key Risks to Target:
Multiple contraction, commodity prices,
technical and operational risks, and
geopolitical risks
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
19
Edge at a Glance
Thursday, October 30, 2014
Totvs SA (TOTS3-SA R$36.65)
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
Event
Pertinent Data
■ Q3/14 sales were 1.1% above our numbers thanks to strong maintenance revenues
(+16.3% YOY), but EBITDA was weak on the back of migration to SaaS and macro
uncertainty in Brazil (9.2% below our estimates and up only 0.1% YOY). However,
TOTVS confirmed 2013-2016 guidance on margins, R&D, and international sales.
Implications
■ Migrating to SaaS means that customers that couldn't afford a significant down payment
for ERP licenses are now able to access them by paying a monthly fee. In Q3/14,
TOTV's license transactions increased 31.3% YOY, a remarkable figure amidst the
turmoil in Brazil.
■ However, migrating to SaaS also means that while the company has to defer the
recognition of revenues (average ticket down 30.7% YOY in Q3), it immediately faces
the costs of growing more robustly. Our view is that the short-term pain in margins from
migrating to a model where software penetration rises, where cash flows are more stable,
and where the impact of macro changes is reduced, is worth the long-term rewards.
■ With a net cash position of R$16.3M, TOTVS is well positioned to make accretive
acquisitions, especially in Mexico and the Andeans.
Recommendation
■ EBITDA growth in Q3 lagged Oracle and SAP. While the recent sell-off marginally
reduced the valuation premium against the giants, it remains substantial (29.3%). An
overly negative reaction to Q3 results could improve entry levels. We advise investors to
remain alert but neutral.
Rating:
Risk:
Target:
1-Yr
Mixed Q3: Migration to SaaS Worth the Pain
Usinas Siderúrgicas de Minas Gerais SA - Usiminas (USIM5-SA R$5.95)
Q3 Results First Look: Near-Term Outlook Blurs
EBITDA14E:
EBITDA15E:
EBITDA16E:
SP
Med
R$45.00
R$470
R$559
R$645
Valuation:
DCF - five years of results, 9.9% WACC,
terminal growth rate of 5.8%
Key Risks to Target:
Technology obsolescence; migration to SaaS;
price wars; competition
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
R$1.20
R$1.20
3.3%
Alfonso Salazar, MSc - +52 (55) 5123 2869
(Scotiabank Inverlat)
Event
Pertinent Data
■ Usiminas reported Q3/14 EBITDA of R$309M, well below our R$516M estimate driven
by weaker-than-expected revenue. Quarterly EPS of negative R$0.03 missed our R$0.08
forecast due to the lower operating profit and a higher foreign exchange loss of
R$164M.
Implications
■ Total revenue of R$2.9B (6% lower QOQ, 9% YOY, and 7% below our estimate) was
affected by a decline in shipments and prices at the steel and iron ore divisions. Steel
shipments of 1.4M tonnes, down 4% QOQ and 10% YOY, came in 5% below our
estimate, driven by weaker-than-expected domestic demand and an increase in steel
imports. Apparent demand for flat steel in Brazil contracted 5% YOY to 3.3M tonnes, of
which 18.8% was supplied by imports (up from 16% in Q2/14).
■ The average steel price contracted to R$1,911/tonne from R$2,004 in the previous
quarter, and came in 3% below our R$1,976/tonne estimate. EBITDA per tonne at the
steel division fell from R$306 in Q2/13 to R$244 in Q3/14.
■ The mining division reported revenue of R$107M, missing our estimate of R$166M due
to lower-than-anticipated shipments (1.24M tonnes vs. Scotiabank GBM estimate of
1.52M tonnes). EBITDA per tonne at the mining division stood at only R$8.9 (down
from R$46 in Q2/14).
Recommendation
■ Near-term challenges for Usiminas continue to pile up. Reiterate SP.
Rating:
Risk:
Target:
1-Yr
SP
High
R$8.00
Adj. EPS14E:
R$0.47
Adj. EPS15E:
R$0.62
Adj. EPS16E:
R$0.89
Valuation:
30% discount to DCF value per share
Key Risks to Target:
Commodity price, operating, technical,
political, environmental, and legal
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
R$0.00
R$0.00
0.0%
20
Edge at a Glance
Thursday, October 30, 2014
Yamana Gold Inc. (AUY-N US$5.38)
Q3/14 - Messy Quarter; Dividend Cut 60%
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
Event
Pertinent Data
■ YRI reported a Q3/14 loss of $1.17 and adjusted EPS of $0.03.
Implications
■ Earnings - Adjusted EPS came in at $0.03 (SC estimate) vs. our estimate of $0.03 and
consensus of $0.06. The main adjustments included impairment and deferred tax charges
totalling ~$1.13/sh.
■ Operations - Actual production came in generally in line at 391 kGEO at total cash costs
of $646/GEO (co-product) vs. our forecast of 394 kGEO at total cash costs of
$637/GEO. YRI had pre-released production of over 390 kGEO at AISC within the
annual guidance range. Copper production was in line with better costs.
■ 2014 Production Guidance Adjusted Slightly - Guidance was slightly adjusted to 1.41.42 MGEO versus previous guidance of over 1.42 MGEO. AISC was also maintained
at $825-$875/oz (by-product).
■ Dividend Cut 60% - The annualized dividend was cut to $0.06/sh from $0.15/sh. We
were not expecting a dividend cut.
■ Impairment Charge - YRI recorded a pre-tax impairment of $668.3M ($635M after-tax)
with respect to its C1 Santa Luz, Ernesto/Pau-a-Pique and Pilar assets. We were
expecting impairment charges.
Recommendation
■ Operationally, Q3 showed an improvement over Q2. Q4 is expected to be stronger. The
annual dividend was cut 60% to $0.06/sh despite better 2015 production growth, lower
capital and low AISC. Shares will likely open weaker. We will review our estimates
after the conference call.
Rating:
Risk:
Target:
1-Yr
Adj. EPS14E:
Adj. EPS15E:
Adj. EPS16E:
SO
High
US$9.00
$0.15
$0.26
$0.29
Valuation:
1.35x NAV
Key Risks to Target:
Commodity prices; technical and operational
risk; geopolitical risk.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.06
$0.13
2.4%
21
Company Comment
Thursday, October 30, 2014, Pre-Market
(ACR.UN-T C$9.06)
Agellan Commercial REIT
Steady Outlook; 2015 Should be a Better Year
Pammi Bir, CPA, CA, CFA - (416) 863-7218
(Scotia Capital Inc. - Canada)
pammi.bir@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
Ganan Thurairajah, MBA - (416) 863-2899
(Scotia Capital Inc. - Canada)
ganan.thurairajah@scotiabank.com
Target 1-Yr:
C$10.25
ROR 1-Yr:
21.7%
Valuation: 10.75x AFFO (F'16 estimate)
Key Risks to Target: Significant unitholder, inability to execute growth, rising interest rates
Event
■ Agellan reported Q3/14 FFOPU of $0.28 vs. $0.31 last year, slightly
below our $0.29 estimate and consensus ($0.29).
Implications
■ Signs point to accelerating leasing & internal growth. Despite the
1.1% drop in SP NOI, the 100bp QOQ lift in overall occupancy to 91%
was encouraging. Based on tenant discussions, management remains
confident of a further 200bp-250bp uptick by mid-2015. Should its
leasing targets be hit, our ~1.5% 2015E-16E SP NOI may prove light.
■ Expect Parkway expansion update in November; acquisitions teed
up. The $48M expansion plans at Parkway remain intact, with a firm
lease with the new dealership expected in November. As a reminder, we
estimate the project could add +3%-4% to our NAV upon completion
by 2017 and 5% to annual AFFOPU. Redeployment of proceeds from
the sale of Kiest is expected before year-end, with ACR targeting TX
industrial, though the timing delay has created a bit of cash drag.
■ Estimates tweaked; stronger growth on deck for 2015. Our revised
2013A (annualized)-2015E AFFO CAGR is 4.5% (6.9% 2014E-16E),
in line with its diversified peers, albeit with growth skewed to next year.
CDPU (NTM)
CDPU (Curr.)
Yield (Curr.)
$0.78
$0.78
8.6%
Pertinent Revisions
New
FFOPU14E
$1.16
FFOPU15E
$1.26
FFOPU16E
$1.28
New Valuation:
10.75x AFFO (F'16 estimate)
Old Valuation:
11x AFFO (F'15 estimate)
Old
$1.18
$1.25
$1.27
Recommendation
■ SP, $10.25 target. Our outlook is unchanged from our recent initiation.
At 9.8x 2015E AFFO/8% implied cap rate/13.8% below NAV, we
believe current levels offer longer term investors a reasonable entry point
with a chunky 8.6% and fully covered yield. Add more actively ~$8.75.
Qtly FFOPU (FD)
2013A
2014E
2015E
2016E
Q1
$0.21 A
$0.30 A
$0.30
$0.32
(FY-Dec.)
Funds from Ops/Unit
Adj. Funds from Ops/Unit
Cash Distributions/Unit
Price/AFFO
EV/EBITDA
EBITDA Margin
EBITDA/Int. Exp
AFFO Payout Ratio
Q2
$0.30 A
$0.29 A
$0.32
$0.33
Q3
$0.31 A
$0.28 A
$0.32
$0.33
Q4
$0.29 A
$0.29
$0.32
$0.31
Year
$1.11
$1.16
$1.26
$1.28
P/FFO
7.9x
7.8x
7.2x
7.1x
2012A
2013A
$1.11
$0.80
$0.72
10.9x
15.1x
54.7%
3.4x
90.7%
2014E
$1.16
$0.84
$0.78
10.8x
13.4x
53.7%
3.2x
92.7%
2015E
$1.26
$0.93
$0.78
9.8x
13.1x
53.9%
3.2x
83.4%
2016E
$1.28
$0.95
$0.78
9.5x
13.2x
54.1%
3.1x
81.2%
BVPU14E: $10.44
Cap Rate: 7.50%
NAVPU:
NAV
Prem/(Disc):
$10.51
-13.80%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Units O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$212
$315
$527
23
20
22
Bit Short, but Outlook Remains Positive; 2015 Should be a Better Year
■ Maintaining SP, $10.25 target. Overall, although Q3 results were a bit lighter than
expected, our thesis on ACR remains intact. The QOQ uptick in occupancy from its recent
post-IPO low is encouraging with momentum expected to carry into 2015, particularly in ON
and TX. The gains should translate to a stronger internal growth outlook next year, providing
a tailwind for AFFOPU and NAVPU expansion. Moreover, Parkway Place continues to
provide a decent value creation opportunity, with retail leasing progress underway. We
expect acquisitions will play a supporting role, though ultimately, ACR’s cost of equity will
likely dictate the pace. Our $10.25 one-year target price is unchanged and is based on 10.75x
2016E AFFO (we rolled our target multiple one-year forward vs. our prior 11x 2015E). The
units are trading at 9.8x 2015E AFFO/8% implied cap rate/13.8% below NAV vs.
13.9x/6.7%/-2.4% for the REIT sector (Exhibit 1). Net-net, we believe valuation fairly
balances ACR’s portfolio attributes, external management, reasonable growth profile, short
track record, and small cap status. That said, the sizable NAV discount and attractive 8.6%
yield present a decent entry for patient investors. We would build more actively ~$8.75.
■ Estimates tweaked; growth looks better in 2015 and stacks up well to peers. Our revised
2014E-16E AFFOPU (Exhibit 4) are $0.84 (-$0.02), $0.93 (+$0.01), and $0.95 (+$0.01). The
adjustments reflect the impact of the Q3 NOI shortfall and higher interest costs, offset by a
stronger occupancy driven SP NOI rebound in 2015 and lower G&A. Our 2013A
(annualized)-2015E AFFO CAGR edged up to 4.5% (+40bp) and is in line with its
diversified peers (4.6%), albeit with all of ACR’s growth skewed to 2015. Our 2014E-16E
AFFO CAGR is 6.9%.
Exhibit 1 – At Current Levels We Continue to View ACR as Reasonably Valued, Albeit with an Attractive NAV Discount
AX
CUF
REF
HR
Diversified
REIT Peers
CDN REIT
Sector
14.6%
21.8x
6.3%
-2.7%
-2.4%
5.9%
13.9x
6.7%
4.6%
-5.2%
6.5%
MRT
13.8x
6.6%
13.4x
7.0%
2013A-15E AFFO
2013A-15E
AFFOCAGR
CAGR
-20.1%
-7.3%
3.6%
14.0x
6.5%
17.8x
5.8%
13.2%
4.5%
Prem/(Disc) to
Prem/(Disc)
to NAV
NAV
-5.5%
4.8%
11.3x
6.9%
3.6%
-6.5%
4.5%
-13.8%
ACR
Implied Cap
Cap Rate
Implied
Rate
12.2x
6.9%
8.0%
2014E P/AFFO
P/AFFO
2015E
9.8x
26
22
18
14
10
6
2
-2
-6
-10
-14
-18
-22
US DIV. REITs
Source: Company reports; Scotiabank GBM estimates.
Signs Point to Improving Leasing Velocity and Internal Growth Ahead;
Value Creation Outlook at Parkway Place Intact
■ We expect occupancy momentum to build, but we’re more cautious than ACR.
Occupancy improved to 91% (+100bp QOQ, -150bp YOY) from encouraging gains in TX
(90%, +100bp QOQ), ON (92%, +200bp), and OH (90%, +300bp). By segment, the bulk was
driven by office (94%, +100bp QOQ) with strong increases at 240 Bank Street (Ottawa) and
11000 Corporate Centre Drive II (Houston). Industrial and retail were firm sequentially at
88% and 95%, respectively. Tenant prospect tours at Parkway Place (PP) have also picked up
with management confident that the 25K sf head lease expiring in March 2015 will be
backfilled (Exhibit 2), with potentially 50K-60K sf of leasing by Q2-Q3/15. Based on talks in
progress (particularly in ON and TX), management remains confident of occupancy rising to
93%-93.5% within ~2.5 quarters (say mid-2015). Nonetheless, in light of the slower progress
to date, we’ve taken a slightly more cautious view, with our Q4/15E at 93.3%.
■ Look for better internal growth in 2015 as occupancy rebounds. SP NOI was -1.1% YOY
(vs. +1.4% YOY in Q2/14) from a 70bp drop in SP-occupancy to 91.2%, primarily in a few
Houston industrial assets, partly offset by favourable F/X movements. Our 2015E-16E SP
23
NOI are +1.3% and +1.5% from 100bp-125bp of annual occupancy gains and +5% renewal
leasing spreads. Lease maturities look manageable with 24% of GLA expiring through 2016.
Admittedly, our assumptions could be conservative, particularly given ACR’s expectations in
some cases for “significant” rent bumps (e.g., Life Technologies lease renewal in talks in
Austin).
Exhibit 2 - Sizable Portion of Parkway Remains Head-Leased; Modest Lease Expiry Exposure in March 2015
Head Lease at Q2/14
Parkway Place
Parkway Place
Total
GLA (000s)
Head Property
Lease
Total
48
814
25
814
73
814
% of
% of
prop. total GLA
GLA (current)
5.9%
1.0%
3.1%
0.5%
9.0%
1.6%
Gross
Rent/sf
$28.03
$28.03
$28.03
Potential
Annual Rent
($000s)
$1,345
$701
$2,046
per
unit
$0.06
$0.03
$0.09
% of
2014E
AFFOPU
7%
4%
10%
Lease Term
From
To
25-Jan-13
24-Jan-18
25-Jan-13
31-Mar-15
Source: Company reports; Scotiabank GBM estimates.
■ Parkway value creation outlook in tact; expect leasing update Exhibit 3 – Parkway Place Provides Decent Value-Creation Opportunity
in November. As noted in our recent initiation report, “Hip to be
60
Square”, PP provides an attractive opportunity to unlock European car dealership/head office sf (000s)
embedded value. Plans are in progress to develop a 60K sf luxury Estimated net rent ($)
35.00
car dealership (incl. a corporate office; 20-year lease) and a 40K sf Estimated NOI ($000s)
2,100
mixed-use retail and parking facility on the northwest corner of the Estimated construction cost ($000s)
18,000
site. With respect to leasing discussions with the dealership, Land contributed by Agellan ($000s)
12,250
management noted a deal should be in place in November. For the Total cost ($000s)
30,250
retail and new parking structure, 15K-20K sf (30-50% of the retail Expected yield (incl. land)
6.9%
GLA) are currently in talks with 4-5 tenants, with deals possible in
Est. AFFOPU accretion
0.05
the next 30 days. As shown in Exhibit 3, we estimate the $48M
project could add ~$0.40 to our NAVPU on full build out by 2017.
New Retail (000s sf)
40
■ Should see Kiest sale proceeds redeployed this quarter;
Parking stalls
950
balance sheet remains steady. During the quarter, ACR
29.00
completed the US$11.6M sale of (7.4% cap rate, C$37/sf) Kiest Retail net rent/sf ($)
1,146
Distribution Center in Dallas, TX. Management expects to Estimated NOI
Estimated
construction
cost
($000s)
30,000
redeploy the capital into industrial properties in Houston and other
3.8%
parts of TX before year end, though pricing has become more Expected yield
aggressive (cap rates in the high-7% to low-8% range for ACR Est. AFFOPU accretion
(0.01)
target assets). Our forecasts reflect $25M of acquisitions in Q4,
followed by another $65M annually in 2015-16. As summarized in Combined (dealership + retail + parking):
Exhibit 4, the balance sheet is in good form with adequate Estimated sf (000s)
100
liquidity.
Estimated NOI ($000s)
3,246
Q3 Recap: Tad Light on NOI Shortfall
■ NOI a bit light relative to our call. ACR reported Q3/14 FFOPU
of $0.28 vs. $0.31 last year, slightly below our $0.29 estimate and
consensus ($0.29). The -$0.01/unit variance to our estimate was
mostly in NOI, with minor offsetting variances in G&A and
interest. On a YOY basis, FFOPU growth from acquisitions was
more than offset by lower SP NOI, dispositions, and financing
dilution.
Estimated development cost ($000s)
Expected yield (on cash cost)
AFFOPU
AFFOPU (% of 2014E)
48,000
6.8%
0.043
5.1%
Assumed market cap rate
Estimated value ($000S)
Value created (over cost, $000s)
NAVPU impact ($)
% of Scotiabank GBM NAV
5.75%
56,443
8,443
0.36
3.4%
NAVPU Impact - Sensitivity to Cap Rates / % of NAVPU
5.00%
5.25%
5.50%
5.75%
6.00%
$0.72
$0.59
$0.47
$0.36
$0.26
6.9%
5.6%
4.5%
3.4%
2.5%
Source: Company reports; Scotiabank GBM estimates.
24
Exhibit 4 - Forecast Summary, Variance Analysis, Leverage Snapshot
Forecasts
Estimates (C$ fully diluted)
FFOPU
AFFOPU
Distributions
AFFO payout ratio
Valuation
P/FFOPU
P/AFFOPU
EV/EBITDA
Distribution yield
AFFO yield
Pre-tax NAV / Cap rate
Premium/(discount) to NAV
Implied cap rate
Income Statement (C$ millions)
Revenues
Net operating income
EBITDA
NOI margin
EBITDA margin
2013
2014E
2015E
2016E
1.11
0.80
0.72
90.7%
1.16
0.84
0.78
92.7%
1.26
0.93
0.78
83.4%
1.28
0.95
0.78
81.2%
Condensed Quarterly
Variance Analysis
Property revenue
Operating expenses
Net operating income
NOI margin
7.8x
10.8x
13.3x
8.5%
9.2%
7.5%
7.2x
9.8x
12.0x
8.6%
10.3%
7.1x
9.5x
11.5x
8.6%
10.5%
58
35
32
60%
55%
74
43
40
59%
54%
82
48
44
59%
54%
93
55
50
59%
54%
Balance Sheet (C$ millions)
Total assets
Net debt
556
279
589
315
651
348
753
405
Leverage
Net debt/EV
Debt/GBV
Net Debt/EBITDA
EBITDA/net interest
58%
54%
8.2x
3.4x
60%
54%
8.1x
3.2x
60%
54%
7.9x
3.2x
61%
54%
7.8x
3.1x
Forecast Assumptions
(C$ millions, except where noted)
Same-property NOI growth
Acquisitions (IPP)
Assumed cap rate
Completed Developments
Assumed cap rate
G&A expenses
% of revenues
Maintenance capex reserve
% of revenues
Leasing cost reserve
% of revenues
2013
na
65.9
8.4%
na
na
2.8
4.9%
1.2
2.0%
2.9
5.0%
2014E
0.8%
45.6
8.0%
na
3.8
5.1%
1.5
2.0%
3.7
5.0%
2015E
1.3%
65.0
7.8%
na
4.0
4.9%
1.6
2.0%
4.1
5.0%
2016E
1.5%
65.0
7.8%
30.0
3.8%
4.3
4.7%
1.9
2.0%
4.7
5.0%
Q3/13A
% chg
Scotia
Q3/14E
Variance
per unit
18,152
5,941
12,211
67.3%
15,670
5,282
10,388
66.3%
16%
12%
18%
98
18,269
7,430
10,839
59.3%
(0.005)
0.006
(0.011)
794
861
4.7%
691
4.4%
25%
33
995
5.4%
(0.006)
(70)
11,350
62.5%
9,697
61.9%
17%
64
9,844
53.9%
(0.005)
864
Net interest expense
FV loss/(gain) on invest. prop.
Acquisition related costs
Depreciation and amortization
FV adj to financial instruments
Other
Deferred income taxes
Net earnings
3,256
1,522
2,210
4,362
2,295
504
1,414
5,484
42%
nm
nm
nm
nm
nm
nm
nm
2,960
3,990
2,894
0.006
nm
nm
nm
nm
nm
nm
nm
Funds from Operations
Net earnings
FV adj to investment properties
FV adj To financial instruments
Acquisition related costs
Deferred income taxes
Property taxes under IFRIC 21
Other
FFO
FFOPU - fully diluted
4,362
1,522
157
2,210
(1,620)
6,631
0.283
5,484
504
(246)
1,414
(1,091)
6,065
0.312
9%
-9%
2,894
3,990
6,884
0.294
(0.011)
Leverage/Liquidity Snapshot
Debt/GBV
Max limit
Net debt/EV
Net debt/NAV assets
Q3/14
54.3%
65.0%
59.7%
57.0%
General and administrative
% of revenue
7.9x
10.9x
12.5x
7.9%
9.2%
10.51
-13.8%
8.0%
Q3/14A
EBITDA
EBITDA margin
Mortgage Profile:
% due pre-2017
Average in place mortgage rate
Weighted average term (years)
2014E refinancing rate
2015E refinancing rate
4.7%
4.2%
5.8
4.3%
4.8%
Liquidity
Credit facility capacity
Undrawn amounts
Cash on hand (incl. restrict.)
Available liquidity
Assumed Equity Issuance
2014E issuance
Estimated timing
2015E issuance
Estimated timing
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
Q3/14
$000s
120,000
10,257
26,931
37,188
$000s
na
15,000
Q3/15
25
Company Comment
Wednesday, October 29, 2014, After Close
(AEM-N US$28.08)
(AEM-T C$31.32)
Agnico Eagle Mines Limited
Q3/14 - IFRS Conversion Inflates Depreciation
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
tanya.jakusconek@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Valuation: 1.50x NAV
Target 1-Yr:
Joanne van Ballegooie - (416) 863-7431
(Scotia Capital Inc. - Canada)
James Bender, CPA, CA - (416) 945-4648
(Scotia Capital Inc. - Canada)
US$40.00
ROR 1-Yr:
43.6%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.32
$0.32
1.1%
Key Risks to Target: Commodity prices; technical and operational risk; foreign exchange risk.
Event
■ AEM reported a Q3/14 loss of $0.07 (FD) and adjusted EPS of $0.01.
Implications
■ Earnings - Adjusted EPS of $0.01 vs. our estimate of $0.13 and
consensus of $0.15. The lower EPS versus our estimate reflects is
primarily due to higher depreciation as a result of IFRS conversion
(~$0.11/sh) and exploration expenditures at CM and Amaruk ($0.02).
Excluding these two items; EPS would have been ~$0.14/sh.
■ Q3/14 Operating Results - Gold production was 349 koz at total cash
costs of $716/oz vs. our estimate of 325 koz at $744/oz.
■ 2014 Guidance Adjusted - Guidance was adjusted upward slightly to
1.4 Moz from previous guidance of 1.35-1.37 Moz at total cash costs of
$650-$675/oz (unchanged). AISC is unchanged at ~$990/oz on a byproduct basis. Updated 2015 guidance was reported at 1.6 Moz in line
with our estimate. No cost guidance for 2015 was provided.
■ Canadian Malartic - The company expects throughput to average
about 51-52 ktpd for the next 6-12 months with ramp up to the full
capacity of 55 ktpd over a one to two year timeframe. Optimization plan
results and updated three year guidance is expected in February 2015.
■ IFRS Conversion - The conversion has resulted in a revaluation of
PPE carrying values resulting in higher future depreciation expense.
Recommendation
■ EPS was significantly weaker primarily due to the recent conversion to
IFRS and higher exploration. Operationally, Q3 was a good quarter. SO.
Qtly Adj. EPS (FD)
2011A
2012A
2013A
2014E
Q1
$0.44 A
$0.52 A
$0.31 A
$0.56 A
(FY-Dec.)
Gold Price (/oz)
Gold Prod (oz) (000)
Total Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Adj Earnings/Share
Cash Flow/Share
Free Cash Flow/Share
Price/Cash Flow
Q2
$0.47 A
$0.35 A
$-0.03 A
$0.28 A
Q3
$0.60 A
$0.73 A
$0.35 A
$0.01 A
Q4
$0.45 A
$0.41 A
$0.22 A
2012A
$1,669
1,044
$640
$1,051
$2.01
$4.18
$0.37
12.6x
2013A
$1,367
1,099
$672
$952
$0.85
$2.87
$-0.28
9.2x
2014E
$1,270
1,371
$657
$982
$1.16
$3.47
$0.68
8.1x
Year
$1.96
$2.01
$0.85
$1.16
P/E
18.5x
26.1x
31.1x
24.2x
2015E
$1,300
1,601
$625
$883
$1.34
$3.96
$1.21
7.1x
2016E
$1,300
1,605
$622
$883
$1.33
$3.94
$1.52
7.1x
NAVPS:
P/NAV:
$26.75
1.05x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$5,823
$1,121
$6,944
207
207
26
Q3/14 – IFRS Inflates Depreciation Resulting in Significantly Lower EPS
■ Earnings - AEM reported a Q3/14 loss of $0.07 (FD) and an operating EPS of $0.01 (SC
Calc; excluding one-time items). This compares to our estimate for EPS of $0.13 and
consensus of $0.15. Relative to our estimate, EPS was impacted primarily by higher
depreciation resulting from the conversion to IFRS (~$0.11/sh) and exploration expenditures
at CM and Amaruk ($0.02). Excluding these two items; EPS would have been ~$0.14/sh.
■ Q3/14 Operating Results - Gold production was 349 koz at total cash costs of $716/oz vs
our estimate of 325 koz at total cash costs of $744/oz. Turning to other metal production, the
company produced 820 koz of silver (sales of 829 koz; SC forecast of 0.7 Moz), 4.9 Mlb of
zinc (sales of 8.7 Mlb; SC forecast of 5.0 Mlb) and 2.2 Mlb of copper (sales of 2.2 Mlb; SC
forecast of 2.3 Mlb). The 7% better production and 4% better costs were experienced at most
of the operations; the Canadian operations showed better costs.
■ Realized Prices – For the quarter, AEM realized a gold price of $1,249/oz, $17.72/oz for
silver, $1.07/lb for zinc and $3.40/lb for copper vs. the average spot prices of $1,282/oz,
$19.71/oz, $1.05/lb and $3.17/lb, respectively.
■ 2014 guidance Adjusted and 2015 Production Guidance Introduced - Guidance was
adjusted upward slightly to 1.4 Moz from previous guidance of 1.35-1.37 Moz at total cash
costs of $650-$675/oz (unchanged). AISC is unchanged at ~$990/oz on a by-product basis.
Updated 2015 guidance was reported at 1.6 Moz in line with our estimate. No cost guidance
was provided for 2015 at this time.
■ Canadian Malartic Update –the mine is expected to produce 510-530 koz (100% basis)
with total cash costs of $695/oz (unchanged) in 2014. AEM expects the production level to
come in at the higher end of the range. The current crushing circuit has a nameplate capacity
of 55 ktpd and while this level has been exceeded on a monthly basis (September saw 59
ktpd). The JV expects throughput to average about 51-52 ktpd for the next 6-12 months with
ramp up to the full capacity of 55ktpd over a one to two year timeframe. The optimization
plan results for further increased throughput and updated three year guidance is expected in
February 2015.
■ Operations – At LaRonde, upgrading of the hoist drives provided better access to the higher
grade, deeper portions of the mine. Production in Q4/14 is expected to reach the 55-60 koz
range and the mine is expected to exceed 300 koz by mid-2016. At Goldex, given the
operational performance achieved to date, the mine may also open up other satellite zones.
Development of an exploration ramp into the Deep zone is being advanced in order to allow
drilling to delineate mineable reserves by late 2015/early 2016. At Lapa, gold grades
increased, as expected with the optimization of the mine plan and the start of mining in the
higher grade Zulapa 7 zone (expected in Q4/14, one quarter ahead of schedule). At
Meadowbank, a maiden resource is expected at Amaruq in early 2015 and studies are
currently underway to evaluate how the deposit can be incorporated into the Meadowbank
mine plan (with possible synergies to the Meliadine project). At Kittila, production was
lower due to the tie-in of the plant expansion. Q4/14 production is expected to return to
normal production levels and the expansion is expected to result in increased production
levels starting in 2015. At Meliadine, an updated technical study is expected in early 2015
(versus late 2014). In the southern business, at Pinos Altos mill throughput in the quarter was
lower due to an unplanned shutdown in July related to the replacement of the SAG mill
transformer. Mill throughput in September hit a new monthly record of 5,769 tpd. At
Creston Mascota, the new agglomerator and overland conveyors were in full operation in
the quarter which resulted in ~25% increase in throughput. At La India planned
modifications to the crushing and stacking circuits were completed during the quarter.
■ IFRS Conversion – The conversion to IFRS from US GAAP has resulted in a revaluation of
PPE, including Goldex. Consequently, the depreciable base has increased resulting in higher
depreciation expense and lower earnings.
■ Conference Call Details - 11:00am ET on October 30. 416-847-6330 or 866-530-1553.
■ Conclusion & Recommendation – EPS was significantly weaker primarily due to the recent
conversion to IFRS and higher exploration expenses. Operationally, Q3 was a good quarter
with higher production and sales at lower cash cost. Sector Outperform rating maintained.
27
Company Comment
Thursday, October 30, 2014, Pre-Market
(ACO.X-T C$48.66)
ATCO Ltd.
Structures Softening
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
matthew.akman@scotiabank.com
Rating: Sector Perform
Risk Ranking: Low
Valuation: 20% discount to NAV
Lukasz Michalowski, MBA - (416) 863-5915
(Scotia Capital Inc. - Canada)
Dario Neimarlija, CA, CFA - (416) 863-2852
(Scotia Capital Inc. - Canada)
Target 1-Yr:
C$50.00
ROR 1-Yr:
4.6%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.89
$0.86
1.8%
Key Risks to Target: Interest rates; Regulated ROE; Infrastructure construction
Event
Pertinent Revisions
■ ACO reported Q3/14 adj. EPS of $0.74 vs our $0.69 est. ($0.73 Q3/13).
Implications
■ The underlying regulated utility business in ATCO is performing well
but is fully offset by weakness in the Structures business. Performance
in Structures may further deteriorate over the next 12 months, so we are
cautious on the stock and continue with our preference for CU.
■ Utility growth remains robust and growth should sustain at a doubledigit pace through 2016/17. With visible 15%+ rate-base expansion in
Alberta, the ATCO utilities businesses rate at a premium. In addition,
we think there is potential for operating and financing cost savings that
could boost returns on earnings beyond the rate of capital expansion.
■ However, the core business in Structures (Modular manufacturing and
installations) was down 20% YOY in the first 9 months and will likely
get worse before it gets better. Several major projects are scheduled for
completion over the next 6-9 months (Jansen Potash, Carmon Creek)
and little has been announced in the way of replacement activity.
■ We are significantly reducing our earnings estimates for Structures
(from $84M/$91M in 2015/16 to $40M/$40M). As a result, the stock is
now trading at a NAV discount of ~10% vs. historical ~20% discount.
Target:
1-Yr
Adj. EPS14E
Adj. EPS15E
Adj. EPS16E
New
Old
$50.00
$3.10
$3.24
$3.47
$52.00
$3.26
$3.75
$4.00
Recommendation
■ There is no change to our SP rating because the underlying CU stock is
attractive in our opinion. However, we are reducing our TP by $2 to $50
and maintain our preference for CU at this time (rated SO).
Qtly Adj. EPS (Basic)
2013A
2014E
2015E
2016E
(FY-Dec.)
Free Cash Flow/Share
Dividends/Share
EV/EBITDA
Payout Ratio
EBITDA (M)
Debt/EBITDA
Tot. Debt/(Tot.Dbt+Eq.)
Enterprise Value (M)
Q1
$1.05 A
$1.00 A
$0.98
Q2
$0.78 A
$0.49 A
$0.56
2012A
$2.68
$0.66
7.7x
24.4%
$1,599
3.57x
0.54
$12,378
Q3
$0.73 A
$0.74 A
$0.82
2013A
$2.65
$0.75
8.1x
28.3%
$1,761
3.63x
0.52
$14,179
Q4
$0.84 A
$0.87
$0.89
2014E
$2.29
$0.86
8.7x
37.5%
$1,794
4.23x
0.54
$15,603
Year
$3.40
$3.10
$3.24
$3.47
P/E
13.7x
15.7x
15.0x
14.0x
2015E
$3.19
$0.99
8.9x
31.0%
$1,892
4.40x
0.56
$16,802
2016E
$3.51
$1.14
8.6x
32.4%
$2,067
4.30x
0.56
$17,780
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$5,603
$6,659
$15,584
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated. ^ Non-Voting
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
115
77
28
Exhibit 1 – ATCO Ltd. Financial Statement Summary
Income Statement ($M)
2013
2014E
2015E
2016E
Equity Earnings (operating after-tax)
Canadian Utilities
ATCO Structures & Logistics
Corporate & Other
Operating Earnings
Unusual/Non-recurring items
Net Income
Preferrred Dividends
$304
$96
($10)
$390
$27
$417
$0
$308
$60
($10)
$358
$74
$432
$0
$345
$40
($10)
$375
$0
$375
$0
$372
$40
($10)
$402
$0
$402
$0
Earnings Attributable to Class A & B
$417
$432
$375
$402
Average Shares Outstanding
Reported Earnings per Share
Operating Earnings per Share
114.8
$3.64
$3.40
115.7
$3.74
$3.10
115.8
$3.24
$3.24
115.9
$3.47
$3.47
Cash Flow per Share
Dividends per Share
EBITDA
$6.57
$0.75
$1,761
$6.74
$0.86
$1,794
$7.84
$0.99
$1,892
$8.26
$1.14
$2,067
Cash Flow Statement ($M)
Earnings
Depreciation
Other
Cash Flow from Operations
Changes in operating assets/liabilities
Cash Provided from Operating Activities
2013
$417
$530
$343
$1,290
$70
$1,360
2014E
$432
$589
$325
$1,346
$0
$1,346
2015E
$375
$689
$440
$1,505
$0
$1,505
2016E
$402
$758
$445
$1,606
$0
$1,606
($2,453)
$297
($2,156)
($2,313)
$381
($1,932)
($2,458)
$205
($2,253)
($2,279)
$188
($2,091)
($86)
($148)
$1,303
$1,069
($99)
($156)
$1,031
$776
($114)
($156)
$736
$466
($132)
($156)
$562
$274
Capital Expenditures - net
Other & Asset Sales
Cash Used in Investing Activities
Dividends paid to Class I and II shares
Dividends paid to non-controlling interests
Other Financing Activities
Cash Used in Financing Activities
Foreign Currency Translation
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Balance Sheet ($M)
($3)
$270
$470
$740
2013
$0
$0
$0
$190
$740
$931
($282)
$931
$648
($212)
$648
$437
2014E
2015E
2016E
Cash & Short Term Investments
Other Current Assets
PP&E
Intangibles & Goodwill
Other Assets
Total Assets
$740
$912
$13,381
$458
$519
$16,010
$931
$885
$14,886
$473
$545
$17,719
$648
$885
$16,421
$473
$545
$18,972
$437
$885
$17,725
$473
$545
$20,065
Current Liabilities
Long Term Debt
Other Liabilities
Non-controlling interests
Total Liabilities
Shareholders' Equity
Total Liabilities and Shareholders' Equity
$1,194
$6,218
$2,585
$3,153
$13,150
$2,860
$16,010
$1,376
$7,072
$2,903
$3,322
$14,672
$3,047
$17,719
$1,636
$7,812
$2,903
$3,480
$15,830
$3,142
$18,972
$1,877
$8,378
$2,903
$3,661
$16,819
$3,246
$20,065
Source: Company reports; Scotiabank GBM estimates.
29
Company Comment
Thursday, October 30, 2014, Pre-Market
(ABX-N US$12.83)
(ABX-T C$14.34)
Barrick Gold Corporation
Q3/14 - Mines Perform Well
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
tanya.jakusconek@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Valuation: 1.00x NAV
Target 1-Yr:
Joanne van Ballegooie - (416) 863-7431
(Scotia Capital Inc. - Canada)
James Bender, CPA, CA - (416) 945-4648
(Scotia Capital Inc. - Canada)
US$17.00
ROR 1-Yr:
34.1%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.20
$0.20
1.6%
Key Risks to Target: Commodity prices; technical and operational risk; geopolitical risk.
Event
■ ABX reported Q3/14 EPS of $0.11 and adjusted EPS of $0.19.
Implications
■ Earnings - Reported adjusted EPS of $0.19 vs. our estimate and
consensus of $0.16. EPS were better than our estimate on operating
performance.
■ Operations - Gold production was 1.649 Moz at costs of $589/oz vs.
our estimate of 1.577 Moz at costs $615/oz. Copper production was 131
Mlb at $1.82/lb vs. our estimate of 110 Mlb at $2.03/lb. Better
operating performance occurred in Nevada and Porgera on the gold
side. On the copper front, Lumwana also performed well.
■ 2014 Production Guidance Tightened; AISC Lowered - Production
guidance was tightened to 6.1-6.4 Moz (from 6.0-6.5 Moz) at total cash
costs of $580-$630/oz (unchanged). AISC guidance was revised slightly
to $880-$920/oz (from $900-$940/oz). Copper guidance was adjusted
upward to 440-460 Mlb (from 410-440 Mlb) at costs of $1.90-$2.00/lb
(from $1.90-$2.10/lb). Capital costs remain ~$2.2B-$2.5B.
■ Thiosulfate Project - Modifications to the autoclave facility for the
thiosulfate project are almost complete and are expected to contribute
~350-450 koz annually over the first full five years.
Recommendation
■ ABX had a solid operating quarter, leading to better EPS than our
forecast. Balance sheet remains strained with debt of $13.1B and cash and
equivalents of $2.7B. Sector Perform.
Qtly Adj. EPS (FD)
2011A
2012A
2013A
2014E
Q1
$1.01 A
$1.09 A
$0.92 A
$0.17 A
(FY-Dec.)
Gold Price (/oz)
Gold Prod (oz) (000)
Total Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Adj Earnings/Share
Cash Flow/Share
Free Cash Flow/Share
Price/Cash Flow
Q2
$1.12 A
$0.78 A
$0.66 A
$0.14 A
Q3
$1.39 A
$0.85 A
$0.58 A
$0.19 A
Q4
$1.17 A
$1.11 A
$0.37 A
2012A
$1,669
7,421
$592
$1,014
$3.83
$5.43
$-1.14
6.4x
2013A
$1,407
7,167
$590
$915
$2.53
$4.15
$-2.77
4.3x
2014E
$1,270
6,231
$601
$985
$0.63
$2.13
$-0.39
6.0x
Year
$4.69
$3.83
$2.53
$0.63
P/E
9.6x
9.1x
7.0x
20.5x
2015E
$1,300
6,089
$599
$1,009
$0.92
$2.62
$0.27
4.9x
2016E
$1,300
6,152
$593
$1,007
$1.05
$2.86
$0.23
4.5x
NAVPS:
P/NAV:
$17.10
0.75x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$14,943
$10,611
$28,104
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
1,165
1,165
30
Q3/14 Results – Beat Is on the Operating Front
■ EPS - Reported EPS of $0.11 compared to $0.17 in Q3/13. Adjusted EPS was $0.19 ($0.58
in Q3/13), vs our estimate and consensus of $0.16. EPS were better than our estimate on
operating performance.
■ Q3 Operations - Gold production was 1.649 Moz at total cash costs of $589/oz. vs our
estimate of 1.577 Moz at total cash costs $615/oz. Ounces sold was 1.578 Moz. Copper
production was 131 Mlb (sold 112 Mlb) at $1.82/lb vs our estimate of 110 Mlb at $2.03/lb.
Better operating performance occurred in Nevada and at Porgera on the gold side (5% better
production at 4% better costs). On the copper front, Lumwana also performed well.
■ Realized Prices – Gold price of $1,285/oz vs the spot price average of $1,282/oz. For its
copper sales, ABX realized a price of $3.09/lb vs average of $3.17/lb.
■ 2014 Production Guidance Tightened; AISC Reduced and Capital Maintained Production guidance was tightened to 6.1-6.4 Moz (from 6.0-6.5 Moz) at total cash costs of
$580-$630/oz (unchanged). North American production guidance was reduced to 3.7-3.9
Moz at AISC of $730-$780/oz from 3.8-4.0 Moz at AISC of $750-$800/oz. Australia Pacific
guidance was raised to 1.05-1.125 Moz at AISC of $885-$1,000/oz from 1.0-1.08 Moz at
AISC of $1,050-$1,100/oz. AISC guidance was revised slightly to $880-$920/oz (from $900$940/oz). Copper guidance was adjusted upward to 440-460 Mlb (from 410-440 Mlb) at
costs of $1.90-$2.00/lb (from $1.90-$2.10/lb). Capital costs remain ~$2.2B-$2.5B.
■ Pascua-Lama – The mine is currently on care and maintenance. The company is in the final
stages of preliminary engineering for the permanent water management system and is
discussing the permitting requirements necessary to obtain approval for construction with
Chilean regulators. The company expects to incur costs of about $300M in 2014 for the
ramp-down and environmental and social obligations.
■ Development Pipeline - ABX highlighted the following projects. At Cortez, a prefeasibility study to evaluate deeper mining below the currently permitted level is expected to
be completed by late 2015. Goldrush is currently in the pre-feasibility stage and the study
remains on schedule for completion in mid-2015. ABX believes there will be an underground
mining component at the asset and had submitted a permit application for twin exploration
declines in Q2. At Turquoise Ridge, the company is considering an additional shaft to
reduce haulage distance which could increase production by 75% for 5-8 years. A prefeasibility study on this is expected to be completed in early 2015 (pushed from late 2014).
The Spring Valley project (70% interest) is advancing through the feasibility study which is
also expected to be completed in late 2015. An initial resource estimate is expected with
year-end results. At the Thiosulfate project, modifications to the autoclave facility for the
thiosulfate project are almost complete and are expected to contribute ~350-450 koz annually
over the first full five years. Lower production is expected in Q4/14 at the Goldstrike
operation mainly as a result of an autoclave shutdown to facilitate start-up of the thiosulfate
project and also from lower grades as stripping begins for the next phase of the open pit.
■ Dividend – ABX announced a $0.05 per share quarterly dividend payable on December 15,
2014 to shareholders of record effective November 28, 2014.
■ Conference Call Details - at 9:30 am ET: 888-789-9572 (North America) or 416-695-7806
(International). Passcode: 8055612.
■ Conclusion – ABX had a solid operating quarter, leading to better EPS than our forecast.
The balance sheet remains strained with debt of $13.1B and cash and equivalents of $2.7B
given the current $1,200/oz gold price environment. Sector Perform.
ScotiaView Analyst Link
31
Company Comment
Wednesday, October 29, 2014, After Close
(CCO-T C$18.92)
(CCJ-N US$16.91)
Cameco Corporation
Valuation Looks More Interesting
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
ben.isaacson@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Carl Chen - (416) 863-7184
(Scotia Capital Inc. - Canada)
carl.chen@scotiabank.com
Target 1-Yr:
C$24.00
ROR 1-Yr:
29.0%
Valuation: 1.5x NAV, 13.5x 2015E EBITDA, 23.0x 2015E EPS
Key Risks to Target: Uranium S/D; uranium prices; CAD/USD
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.40
$0.40
2.1%
Event
■ Q3 adjusted EPS of 23¢ is a beat on the Street's 20¢. We were at 22¢.
Pertinent Revisions
Implications
■ We think the mild beat to our estimate is due to better-than-expected
sales volume, and production costs at $18/lb vs. our $20.50/lb forecast.
■ Once again, CCO reduced its uranium production guidance for the year,
this time to 22.6M to 22.8M, on the back of the McArthur River labour
disruption. This is a good thing, as it partially supports the uranium
market as of late.
Target:
1-Yr
Adj. EPS14E
Adj. EPS15E
New
Old
$24.00
$0.85
$1.03
$25.00
$0.74
$1.07
Recommendation
■ CCO is trading at its lowest P/NAV since Fukushima. It's also trading
at near five-year lows to average P/BV and P/Sales multiples.
■ While 2015E EV/EBITDA and P/E suggest fair value at 11.2x and
18.4x, respectively, we note the Street will soon roll forward to 2016,
where we see the stock trading at 8.8x and 14.7x, respectively, or quite a
bit below long-term multiples.
■ The challenge with a 'more interesting' valuation is that positive
catalysts are few and far between for CCO, which means we're
partially back to relying on a sentiment shift to help our cause.
Regardless, at least valuation is more on our side now than before. We
think the stock outperforms the market on a one year out basis. Our target
price moves to $24 on a slightly lower 2015.
Qtly Adj. EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.33 A
$0.07 A
$0.09 A
$0.19
(FY-Dec.)
Uranium Production (M lb)
Spot Uranium Price (US$/lb)
Term Uranium Price (US$/lb)
Realized Uranium Price ($/lb)
Cash Cost ($/lb)
Reserves & Resources (M lb)
Adj Earnings/Share
Price/Earnings
Q2
$0.02 A
$0.15 A
$0.20 A
$0.20
Q3
$0.21 A
$0.53 A
$0.23 A
$0.29
Q4
$0.11 A
$0.38 A
$0.33
$0.36
Year
$0.67
$1.14
$0.85
$1.03
P/E
29.3x
19.4x
22.2x
18.3x
2011A
22.4
$56
$67
$49
$18
1.0
$1.14
16.2x
2012A
21.9
$48
$60
$48
$20
1.1
$0.67
29.3x
2013A
23.6
$38
$51
$50
$18
1.1
$1.14
19.4x
2014E
23.1
$32
$43
$52
$22
2015E
29.5
$38
$51
$51
$20
$0.85
22.2x
$1.03
18.3x
BVPS14E: $13.90
ROE14E: 6.23%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$7,490
$983
$8,473
396
395
32
Investment Thesis
■ While spot uranium continues to inch higher, uranium
equities have headed south. We see several reasons why Exhibit 1 – Cameco NAV Buildup
equities are lower as of late: (1) a falling energy complex
NAV
($ M)
(coal/oil/gas) means nuclear becomes a less competitive base
Uranium
load power source, which could lead to a downtick in uranium
McArthur River/Key Lake
$3,377
Rabbit Lake
$281
demand; (2) the market doesn’t view the recent price recovery
Smith Ranch-Highland
$497
as being too relevant to the equities, likely due to limited
Crow Butte
$174
liquidity in the market; and (3) the broader market sell-off in the
Inkai
$1,033
Cigar Lake
$1,288
energy and materials space. Clearly, sentiment is at a low-point,
Uranium Repurchase Program
$185
which could signal a time to take another look at the space.
*Development Projects @ US$4.21/lb
$666
*Yeelirrie (Non 43-101) @ US$4.21/lb
$489
■ UPC tells us the same story. We estimate UPC is pricing in
$7,990
~US$35/lb, which translates into a ~4% discount over spot.
Other Segments
UPC enables the market to express its view on the uranium
Fuel Services
$943
outlook. Accordingly, the market is telling us there is little-to-no
NUKEM
$314
$1,257
upside in the uranium market over the near-term.
Corporate Adjustments
■ We like CCO for the long-term. Given its top-producer status,
Corporate G&A
-$1,477
high-grade deposits, low cash costs, organic growth in stable
Cash + S/T Investments
$508
jurisdictions, and healthy balance sheet, CCO remains our
Total Debt
-$1,491
PV of CRA Tax Assessment @ 50%
-$497
bellwether uranium producer. The company is in a good
-$2,957
position to capitalize on a recovery of the uranium market,
NAV
$6,290
given the tenure of its supply contracts. Additionally, these
contracts provide price support to further downside in the
P/NAV
uranium market. We have kept our Sector Outperform rating
Price Value, rounded
intact, as CCO should be the go-to stock for those who believe
uranium will recover.
Fully Diluted Shares (M)
*Forecast Exchange Rate (CAD/USD)
■ Valuation looks more interesting. CCO is trading at its lowest
P/NAV since Fukushima. It’s also trading at near five-year lows
to average P/BV and P/Sales multiples. While 2015E Source: Scotiabank GBM estimates.
EV/EBITDA and P/E suggest fair value at 11.2x and 18.4x,
respectively, we note the Street will soon (3 months) roll
forward to 2016 estimates, where we see the stock trading at Exhibit 2 – CCO’s Valuation Looks Interesting
significant discounts to long-term multiples (Exhibit 2).
■ The challenge with a ‘more interesting’ valuation is that
positive catalysts are few and far between for CCO (see
below), which means we’re partially back to relying on a
sentiment shift to help our cause. Regardless, at least valuation
is more on our side now than before. We think the stock
outperforms the group on a one year out basis, based on slightly
better visibility to uranium market recovery.
■ $24 target price. Applying a 1.5x P/NAV multiple to CCO’s
$15.89 NAVPS yields a price value of ~$23.75 per share, which
we use to help establish our target price. Our target P/NAV
multiple is above CCO’s post-Fukushima average multiple, as
our underlying NAV is likely lower than the Street due to our
decision to conservatively “charge” CCO’s NAV with the PV of
a 50%-risked CRA tax liability. Based on our three methods of
valuing CCO (see our tear sheet), our target price moves to $24
on a slightly lower 2015.
■ Key stock catalysts: (1) in 2015 and beyond, CCO becomes Source: Scotiabank GBM estimates.
more sensitive to spot price movements – see Exhibit 3; (2)
sustainably higher spot and term uranium prices, coupled with
improved market liquidity; (3) further high-cost capacity
rationalization; (4) demand improvements in Japan; and (5)
rising unfilled contracting requirements from utilities.
$/sh
($)
%NAV
(%)
$8.53
$0.71
$1.26
$0.44
$2.61
$3.25
$0.47
$1.68
$1.24
$20.18
54%
4%
8%
3%
16%
20%
3%
11%
8%
127%
$2.38
$0.79
$3.18
15%
5%
20%
-$3.73
$1.28
-$3.77
-$1.25
-$7.47
-23%
8%
-24%
-8%
-47%
$15.89
100%
1.5x
$23.75
396
0.90
33
Uranium Market Updates
■ Uranium price development. Spot uranium has rallied to
US$37 from US$28/lb, partially on the back of a recent safety Exhibit 3 – CCO’s Sensitivity to Uranium Price Moves Increases Next Year
approval received by Japan’s most probable nuclear reactor
restarts, the Sendai plants. Additional reasons include: (1)
market speculation surrounding Russian sanctions; (2) the
possible interruption of U.S. DOE inventory dispositions; and
(3) reduced supply from CCO’s labour disruption. We believe
spot uranium will remain range-bound in the N/T, at least until
sustainable fundamental catalysts appear on the horizon.
■ Sendai restarts inch forward. Council members of
Satsumasendai, the town where the two Sendai reactors are
located, recently voted to restart the plants. The next step to
restarting the reactors is consent from the surrounding prefecture
of Kagoshima, which will decide on the issue in November.
While the Satsumasendai vote is encouraging, restart approval is
likely more difficult to obtain in the neighbouring districts, as
those regions do not benefit from reactor-related job creations Source: Cameco.
and government subsidies. In addition to not receiving the
benefits of a restart, those surrounding regions face all of the
risks of a nuclear accident.
Exhibit 4 – UPC NAV Buildup
■ France reduces its nuclear energy dependence. France’s
Fund Implied U3O8 Prices
President Hollande introduced a new energy policy to reduce the
country’s reliance on nuclear power and boost development of
(1) Current UPC Market NAV Calculation
other renewable energy sources. Specifically, the government
intends to lower its reliance on nuclear energy to 50% from 75%
Current Share Price
($/sh)
$5.21
by 2025. Policymakers indicate the goal will be achieved
Current Exchange Rate
(CAD/USD)
0.89
through a combination of plant closures and growth of
Share Price
(US$/sh)
$4.64
renewable energy sources. With 58 nuclear operational reactors,
France’s nuclear fleet makes up ~12% of our 2015E uranium
Shares Outstanding
(M)
116.9
consumption. The bill is not expected to be ratified until next
Total UPC NAV
(US$M)
$542
year, but clearly this is a negative development for long-term
(2) UPC Holdings Value Calculation
uranium demand.
■ Macquarie acquires DB’s uranium book. The Australian bank
U3O8 Holdings
(M lb)
8.68
has reportedly acquired Deutsche Bank’s uranium book,
Spot U3O8 Price
(US$/lb)
$36.75
totalling ~$200M. Goldman Sachs and Deutsche Bank are
U3O8 Holdings Value
(US$M)
$319
exiting the uranium trading business due to increased regulatory
oversight and reduced profitability on the back of insufficient
UF6 Holdings
(M kgU)
2.15
liquidity. It’s unclear whether Macquarie will add some liquidity
UF6 to U3O8 Conversion Ratio
(US$/kgU)
to the spot and term markets, of it’s simply buying a call option.
2.61
Implied UF6 Price
(US$/kgU)
These banks entered the business in 2009, amid the optimism of
$96.02
$7.25
Conversion Cost
(US$/kgU)
a “uranium renaissance”, which quickly evaporated following
Total UF6 Equivalent Price
(US$/kgU)
$103.27
the Fukushima incident in 2011.
UF6 Holdings Value
(US$M)
$222
■ Niger approves Areva Deal. In October, Niger approved
-$3.5
Less: USEC Inventory Adjustment
(US$M)
AREVA’s uranium production licence, after two years of
Adjusted UF6 Holdings Value
(US$M)
$219
negotiation. As part of the deal, Areva agreed to fewer tax
breaks and higher royalty rates, in addition to infrastructure
Current Cash Position
($M)
$27.4
spending around Arlit. While Areva agreed to delay its ~11M lb
$24.4
Current Cash Position
(US$M)
Imouraren mine to “beyond 2017” in May, its Akouta and Arlit
Total UPC Holdings Value
(US$M)
$562
(total ~11M lb) are expected to continue production.
FIP Premium
(%)
-3.6%
■ Ranger ramp. Energy Resources of Australia (ERA) reported
Q3/14 production of ~1.3M lbs, as it continues to work toward a
Implied U3O8 Price, rounded
(US$/lb)
$35.00
progressive restart at its Ranger mine in Australia. The mine did
not produce uranium during 1H/14, due to a leach tank failure in Source: Scotiabank GBM estimates.
December. With offline capacity returning to production, this
could place some downward pressure on the spot market.
34
Notes from the Quarter
■ The quarter. Recurring Q3 EPS of 23¢ beat the Street’s 20¢ estimate, and came in a touch
above our 22¢ estimate. We think the mild beat to our numbers is due to better-than-expected
production cash costs at $18/lb vs. our $20.50/lb estimate. What also stood out in the quarter
was CCO’s cash cost of purchased uranium which dropped to $31/lb from $58/lb.
■ Write-down. CCO wrote off its full $184M investment in GE-Hitachi Global Laser
Enrichment, as the majority partner is reducing its funding commitment to the program.
■ Labour contract resolution. On October 6, unionized employees at McArthur River and
Key Lake agreed to a four-year contract that sees a 12% wage increase over that period.
■ Cigar Lake. Areva’s McLean Lake mill started producing uranium concentrate from Cigar
Lake ore in early October.
■ No movement to CRA dispute. All else equal, we expect to see CCO pay ~$600M to the
CRA through the end of 2016, which is 50% of cash taxes (where cash taxes are about 75%
of taxes payable), less $110M already paid in 2014, plus $72M of interest and installment
penalties through September 30. It’s unclear what elective deductions and tax loss carryovers
will be available to CCO over the next two years to reduce this cash outflow. If the outcome
to the dispute is favourable to CCO, we would expect the company to recover the outflow, as
well as $219M paid to date.
■ Guidance. CCO reduced 2014 uranium production guidance to 22.6M to 22.8M lb (down
from 22.8M to 23.3M lb) on the back of the McArthur River labour disruption, as well as a
more accurate assessment of Cigar Lake output. Also weighing on the outlook is a higher
cost forecast due to reduced McArthur River production and the continued payment of
standby costs. Full guidance vs. our estimates is below.
Exhibit 5 – Cameco’s 2014 Guidance vs. GBM Estimates
Consolidated
CCO
Guidance
Uranium
Fuel Services
CCO
Guidance
GBM
Forecast
CCO
Guidance
GBM
Forecast
Production
22.6M lbs
to 22.8M lbs
22.7M lbs
11 - 12M kgU
11.8M kgU
Sales Volume
31 - 33M lbs
33.0M lbs
-10% to -15%
+5% to +10%
+5%
+5% to +10%
+7%
Revenue Compared
to 2013
Scotia
Forecast
0% to -5%
-5%
Avg Unit Cost of Sales
(including D+A)
Direct Admin Costs
Compared to 2012
+0% to +5%
+5%
Exploration Costs
Compared to 2012
Tax Rate
Capex
-25% to -30%
Recovery of
40% to 45%
Recovery of 40%
$490M
$490M
Source: Company reports; Scotiabank GBM estimates.
NUKEM
CCO
Guidance
GBM
Forecast
-15%
7 - 8 M lbs
U3 O 8
8M lbs U3O8
0% to -5%
0%
-25% to -30%
-30%
+0% to +5%
+5%
-15% to -20%
-20%
+0% to +5%
0%
Expense of
30% to 35%
Expense of
30%
-30%
35
Operational Highlights & Outlook
Exhibit 6- Cameco Q3/14 Operational Highlights & Outlook
Quarterly Results
GBM Est.
Q4/14E
Actual
Q3/14
GBM Est.
Q3/14E
$812.9
$220.4
$0.33
$215.1
26%
$587.1
$168.5
$0.23
$142.9
24%
$586.4
$161.7
$0.22
$153.4
26%
%∆
Actual
Q2/14
%∆
Actual
Q3/13
%∆
Notes
in C$ unless otherwise stated
Overall
Revenues
EBITDA
Adjusted EPS
Gross Profit
Gross Margin as %
Uranium
Spot Uranium Price
Realized Uranium Price
Realized Uranium Price
$M
$M
$/sh
$M
%
0%
4%
5%
-7%
$502.0
$160.8
$0.20
$135.8
27%
17%
5%
16%
5%
$597
$283
$0.53
$228
38%
-2%
-40%
-57%
US$/lb
US$/lb
$/lb
$33.00
$51.15
$55.60
$31.80
$45.87
$49.83
$30.00
$46.50
$51.67
6%
-1%
-4%
$28.23
$45.93
$50.76
13%
0%
-2%
$34.75
$50.73
$52.29
-8%
-10%
-5%
Produced Uranium Cash Costs
Purchased Uranium Cash Costs
Total COGS (Include D+A)
$/lb
$/lb
$17.91
$30.91
$34.98
$20.50
$48.33
$34.41
-13%
-36%
$26.24
$58.15
$35.89
-32%
-47%
$17.68
$16.57
$26.33
1%
87%
$/lb
$21.95
$34.08
$36.78
Gross Margin
Gross Margin As %
$/lb
%
$18.82
34%
$14.85
30%
$17.26
33%
-14%
$25.96
50%
-43%
Total Sales Volume
Produced Volume
Purchased Volume
M lb
Total Production Volume
McArthur River/Key Lake
Rabbit Lake
Smith Ranch-Highland
Crow Butte
Inkai
Cigar Lake
M lb
Fuel Services
Total Sales Volume
Realized Price
Average COGS
Gross Margin
Gross Margin As %
M lb
M lb
M lb
M lb
M lb
M lb
M lb
M lb
9.7
8.5
1.2
9.0
7.2
1.8
8.0
6.9
1.1
7.6
3.7
1.9
0.5
0.2
0.9
0.5
5.4
3.1
0.9
0.5
0.1
0.8
-
5.9
3.6
0.5
0.5
0.1
0.8
0.3
2%
12%
4%
64%
-9%
-14%
64%
2%
-33%
2%
0%
$14.87
29%
-3%
0%
7.4
5.9
1.5
22%
4.0
2.1
0.6
0.5
0.1
0.7
-
35%
22%
20%
48%
50%
0%
0%
14%
0%
8.5
4.7
3.8
53%
-53%
5.8
3.8
0.4
0.5
0.2
0.9
-
-18%
125%
0%
-50%
-11%
0%
6%
-7%
6.8
$20.20
$12.76
$7.44
37%
3.1
$23.11
$21.55
$1.56
7%
4.0
$18.00
$14.60
$3.40
19%
-23%
3.3
$21.28
$16.46
$4.82
23%
9%
31%
-68%
3.8
$20.03
$16.63
$3.40
17%
-18%
28%
48%
-54%
Revenue
Gross Margin
$M
$M
$137.4
$50.6
$71.1
$4.8
$72.0
$13.6
-1%
-65%
$70.2
$15.9
1%
-70%
$76.8
$13.0
-7%
-63%
NUKEM
Uranium Sales
Revenue
Gross Margin
Gross Margin As %
M lb
$M
$M
%
2.0
$135
($14)
-10%
2.5
$97
$10
10%
2.1
$101
$2
2%
19%
-4%
373%
2.8
$62
$13
20%
-6%
-11%
57%
-25%
2.1
$93
($7)
-7%
15%
30%
-54%
-
1. Earnings per share came in higher than the street's estimate at $0.20/sh as well as our estimate of $0.22/sh. This was mainly
due to higher sales volumes and lower costs.
2. Spot uranium rebounded in the quarter, mainly on the back of two Japanese reactors receiving safety approval.
3. Realized prices in CAD were lower slightly compared to Q2/14, despite higher spot prices and stronger USD.
4. Purchased uranium costs went down significantly during the quarter despite the increase in spot. CCO noted that the increase
in uranium purchase cost in Q2 was due to legacy contracts, and should not longer impact uranium purchase prices going forward.
5. Sales volumes were up 6% compared to the same quarter in the prior year. They were also above our estimate by 12%. We
estimate CCO sold 1.8M lb of uranium from its inventory during the quarter.
6. Production volume in the quarter was weaker than Q3/13, mainly due to the labour disruption at McArthur River/Key Lake operations
as well as the slower ramp-up at Cigar Lake mine.
7. CCO trimmed its Fuel Services Q4/14 sales volume outlook slightly, mainly due to lower-than-expected final delivery from SFL
under the toll conversion contract.
Source: Company reports; Scotiabank GBM estimates.
2
3
4
33%
$/kgU
$/kgU
$/lb
%
M kgU
1
-37%
5
6
7
36
Exhibit 7 - Cameco Tear Sheet
Cameco Corporation
CCO.T; CCJ.N
1-Year Target:
$25.00
Last Price:
1-Year Total Return:
33.9%
Market Cap:
Rating:
SO
EV:
NTM Dividend:
$0.40
Avg Daily Volume:
Dividend Yield:
2.1%
FD Shares O/S:
Risk:
High
Float:
Insider Ownership:
0.1%
FY End:
Valuation: 1.5x NAV, 13.5x 2015E EBITDA, 23.0x 2015E EPS
Earnings ($M)
$18.97
$7,510
$8,802
0.8M
395.9M
99.9%
Dec-31
2011
2012
2013
2014E
2015E
Revenue
COGS
Gross Profit
EBITDA
Net Income
Adj EPS
2,384
1,608
776
802
450
$1.14
2,321
1,598
723
727
267
$0.67
2,439
1,832
607
721
318
$1.14
2,321
1,720
601
663
116
$0.85
2,706
2,044
662
785
409
$1.03
Balance Sheet ($M)
Cash & Equivalents
PP&E
Total Assets
2011
398
4,349
7,616
2012
750
5,249
8,215
2013
229
5,041
8,039
2014E
913
5,384
8,480
2015E
988
5,488
8,971
Short-Term Debt
Long-Term Debt
Total Liabilities
Liabilities & Shareholders' Equity
Free Cash Flow ($M)
98
810
2,693
7,616
107
1,309
3,271
8,215
91
1,293
2,690
8,039
0
1,530
2,976
8,480
0
1,691
3,217
8,971
2011
2012
2013
2014E
2015E
802
6
123
647
26
727
-23
87
1,310
-647
721
-45
178
898
-310
663
-62
-140
490
374
785
-10
128
430
236
EBITDA
Less: Cash Taxes
Less: NWC ∆
Less: Capex
Free Cash Flow
Operating Assets
Grade
Total
Reserves & Resources
Proven & Probable
Measured & Indicated
Inferred
Total
Development Assets*
Grade
Total
(% U3O8)
(M lb)
(% U3O8)
13.87%
0.73%
3.78%
8.92%
442.6
106.3
256.3
805.2
3.09%
5.90%
3.41%
(M lb)
Adj
Financial Metrics
Uranium Segment
Avg Spot Price (US$/lb)
Avg Realized Price ($/lb)
Avg Cash Cost ($/lb)
Production (M lb)
EV/Pdn ($/lb)
11.0x
16.7x
n.m.
2.1%
9%
6%
33%
34%
2012
P/E (x)
18.4x
2012
2013
2014E
2015E
$48.40
$47.61
$19.95
21.9
$402
$38.17
$49.73
$18.04
23.6
$373
$31.99
$51.89
$21.58
23.1
$381
$38.00
$50.94
$20.07
29.5
$298
NAV
$/sh
%NAV
$3,377
$281
$497
$174
$1,033
$1,288
$185
$8.53
$0.71
$1.26
$0.44
$2.61
$3.25
$0.47
54%
4%
8%
3%
16%
20%
3%
$666
$489
$7,990
$1.68
$1.24
$20.18
11%
8%
127%
$943
$314
$1,257
$2.38
$0.79
$3.18
15%
5%
20%
-$1,477
$508
-$1,491
-$497
-$2,957
-$3.73
$1.28
-$3.77
-$1.25
-$7.47
-23%
8%
-24%
-8%
-47%
$6,290
$15.89
100%
Uranium
McArthur River/Key Lake
Rabbit Lake
Smith Ranch-Highland
Crow Butte
Inkai
Cigar Lake
Uranium Repurchase Program
*Development Projects @ US$4.21/lb
*Yeelirrie (Non 43-101) @ US$4.21/lb
Other Segments
Fuel Services
NUKEM
Corporate Adjustments
Corporate G&A
Cash + S/T Investments
Total Debt
PV of CRA Tax Assessment @ 50%
Total NAV
n.m.
n.m.
n.m.
PDN
ERA
EFR
EFR
Production by Mine (M lb U3O8)
0x
CCO
40
Peer Comparison: EV/EBITDA (2015E)
Cigar Lake
25x
35
21.9x
Production (M lb)
30
15x
10.2x
11.2x
10x
5x
n.m.
n.m.
n.m.
ERA
PDN
EFR
0x
Inkai
Crow Butte
20x
EV/EBITDA (x)
2015E
13.3x
11.2x
22.2x
18.4x
20.1x
31.8x
2.1%
2.1%
2%
7%
1%
5%
26%
24%
29%
29%
DBRS: A (Low)
2011
10x
n.m.
2014E
$56.36
$49.18
$18.45
22.4
$393
Peer Comparison: P/E (2015E)
20x
2013
12.1x
12.2x
28.4x
16.7x
n.m.
n.m.
2.1%
2.1%
5%
6%
3%
4%
31%
25%
31%
30%
S&P: BBB+ (Stable)
NAV Buildup ($M)
(M lb)
284.9
227.9
37.7
18.9
322.6
246.8
* Includes Yeelirrie
2011
EV/EBITDA
P/E (Adjusted)
P/FCF
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
Credit Rating (Outlook)
25
Smith Ranch-Highland
Rabbit Lake
McArthur River/Key Lake
20
15
10
AREVA
CCO
URE
Notes:
Adj Resources and Reserves based on 100% of P+P, 80% of M+I, and 50% of Inferred
Forecast Exchange Rate (CAD/USD): 0.9
Peer Comparison based on GBM Est. for CCO & PDN; all other estimates based on Bloomberg
Source: Bloomberg; FactSet; Company reports; Scotiabank GBM estimates.
5
0
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Sorted
37
Company Comment
Thursday, October 30, 2014, Pre-Market
(CU-T C$40.32)
Canadian Utilities Limited
Capital Tracking
Matthew Akman, MBA - (416) 863-7798
(Scotia Capital Inc. - Canada)
matthew.akman@scotiabank.com
Lukasz Michalowski, MBA - (416) 863-5915
(Scotia Capital Inc. - Canada)
Dario Neimarlija, CA, CFA - (416) 863-2852
(Scotia Capital Inc. - Canada)
Rating: Sector Outperform
Target 1-Yr:
C$47.00 ROR 1-Yr:
Risk Ranking: Low
Valuation: 6.6% 2015E Free Cash Yield and 11.8x 2015E EV/EBITDA
19.3%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.10
$1.07
2.7%
Key Risks to Target: Interest rates; Regulated ROE; Spark spreads; FX
Event
Pertinent Revisions
■ CU reported Q3/14 adj. EPS of $0.46 vs. our $0.43 est. ($0.43 Q3/13).
New
Old
Adj. EPS14E
$2.21
$2.23
Adj. EPS15E
$2.45
$2.53
Adj. EPS16E
$2.60
$2.65
New Valuation:
6.6% 2015E Free Cash Yield and 11.8x
2015E EV/EBITDA
Old Valuation:
6.7% 2015E Free Cash Yield and 11.4x
2015E EV/EBITDA
Implications
■ The earnings report highlights CU's premium organic regulated utility
growth, its improving business mix and its strategic capital
management/deployment plants. The Power business is predictably
softer than last year but Utility is more than offsetting.
■ Adjusted Utility earnings were up organically ~50% YOY or a still
robust ~20% even excluding prior-period catch-up. Good news in that
the Alberta regulator has raised the interim inclusion of capital tracker
spending to 90% from 60%. The full inclusion, as opposed to 60%, is
worth about $15M/year (half in our estimates).
■ Premium Utility growth should continue through at least 2017. With
another ~$3.5B of capital investment over the next two years, rate-base
growth should average ~15% and earnings could exceed that pace under
Alberta's incentive regulatory framework.
■ The sale of non-core assets (IT, UK Power, Midstream) and redeployment of capital to infrastructure in Mexico is logical in our
opinion. ATCO already has a strong LatAm presence with its Structures
business and modest diversification from Alberta is prudent.
Recommendation
■ CU's net growth (Utility increase net of Power decline) should rival that
of peers FTS and EMA. Yet, the stock trades at a meaningful discount
(forward P/E of ~16x vs. ~19x). We would accumulate at these levels.
Qtly Adj. EPS (Basic)
2013A
2014E
2015E
2016E
(FY-Dec.)
Free Cash Flow/Share
Dividends/Share
EV/EBITDA
Payout Ratio
EBITDA (M)
Debt/EBITDA
Tot. Debt/(Tot.Dbt+Eq.)
Enterprise Value (M)
Q1
$0.70 A
$0.71 A
$0.72
Q2
$0.51 A
$0.32 A
$0.42
2012A
$2.28
$0.89
10.9x
38.9%
$1,432
3.93x
0.56
$15,592
Q3
$0.43 A
$0.46 A
$0.56
2013A
$2.74
$0.97
10.4x
35.4%
$1,592
3.95x
0.54
$16,528
Q4
$0.57 A
$0.71
$0.75
2014E
$2.76
$1.07
11.4x
38.8%
$1,645
4.58x
0.56
$18,739
Year
$2.21
$2.21
$2.45
$2.60
P/E
16.1x
18.3x
16.5x
15.5x
2015E
$3.09
$1.18
10.8x
38.1%
$1,837
4.50x
0.57
$19,873
2016E
$3.42
$1.29
10.4x
37.8%
$1,999
4.42x
0.56
$20,751
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$10,617
$7,887
$18,504
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated. ^ Non-Voting
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
263
124
38
Exhibit 1 - CU Ltd. Financial Statement Summary
Income Statement ($M)
2013
2014E
2015E
2016E
Utilities
Energy
ATCO Australia
Corporate, Other and Eliminations
Operating Earnings
Gain on Asset Sale/Unusuals
Reported Earnings
$338
$151
$45
$38
$572
($30)
$542
$411
$108
$50
$11
$580
$130
$710
$481
$111
$41
$16
$649
$0
$649
$524
$116
$42
$18
$700
$0
$700
Average Class A and B Shares o/s (mln)
Reported Earnings per share
Operating Earnings per share
258.4
$2.10
$2.21
262.7
$2.70
$2.21
265.4
$2.45
$2.45
268.6
$2.60
$2.60
Dividends Per Share
EBITDA
Cash Flow From Operations
Cash Flow Per Share
Cash Flow Statement ($M)
Earnings
Depreciation
Other (incl. dividends on pref shares)
Changes in operating assets/liabilities
Cash Provided from Operating Activities
Capital Expenditures
Other & Asset Sales
Cash Used in Investing Activities
Dividends paid to Class A and B shares
Other Financing Activities
Cash Used in Financing Activities
Foreign Currency Translation
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Balance Sheet ($M)
$0.97
$1,592
$1,109
$4.29
2013
$1.07
$1,645
$1,186
$4.51
2014E
$1.18
$1,837
$1,368
$5.15
2015E
$1.29
$1,999
$1,493
$5.56
2016E
$542
$478
$89
$1,109
$114
$1,223
$710
$497
($21)
$1,186
$0
$1,186
$649
$557
$162
$1,368
$0
$1,368
$700
$624
$169
$1,493
$0
$1,493
($2,331)
$179
($2,152)
($2,193)
$405
($1,788)
($2,338)
$205
($2,133)
($2,159)
$188
($1,971)
($116)
$1,198
$1,082
($178)
$1,016
$839
($188)
$685
$497
($209)
$510
$301
($6)
$147
$349
$496
2013
$1
$0
$0
$238
$496
$734
($268)
$734
$466
($177)
$466
$290
2014E
2015E
2016E
Cash & Short Term Investments
Other Current Assets
PP&E
Intangibles & Goodwill
Other Assets
Total Assets
$496
$607
$12,905
$319
$724
$15,051
$734
$576
$14,382
$296
$789
$16,777
$466
$576
$15,929
$296
$796
$18,064
$290
$576
$17,248
$296
$796
$19,205
Current Liabilities
Long Term Debt
Other Liabilities
Total Liabilities
Shareholders' Equity
Total Liabilities and Shareholders' Equity
$1,024
$6,291
$2,342
$9,657
$5,394
$15,051
$1,060
$7,533
$2,306
$10,899
$5,878
$16,777
$1,145
$8,273
$2,306
$11,724
$6,340
$18,064
$1,231
$8,839
$2,306
$12,375
$6,830
$19,205
Source: Company reports; Scotiabank GBM estimates.
39
Company Comment
Thursday, October 30, 2014, Pre-Market
(CS-T C$2.07)
Capstone Mining Corp.
Another Quarter of Record Operating Cash Flow;
Underpinned by Impressive PV Cash Costs
Mark Turner, MBA, P.Eng. - (416) 863-7484
(Scotia Capital Inc. - Canada)
mark.turner@scotiabank.com
Rating: Sector Outperform
Target 1-Yr:
Risk Ranking: High
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
C$3.50
ROR 1-Yr:
69.1%
Div. (NTM)
Div. (Curr.)
C$0.00
C$0.00
Yield (Curr.)
0.0%
Key Risks to Target: Commodity price, operating, and technical risks, environmental and legal risk s
Event
■ CS reported strong Q3/14 financial results, broadly in line with our
estimates and consensus (see Exhibit 1). Production and sale volumes
had been previously announced.
■ The market's focus was on Pinto Valley cash costs and CS delivered.
PV's C1 cash cost of $1.90/lb for the quarter was 4% better than our
estimate and an 11% improvement over the $2.13 in Q2/14.
Pertinent Revisions
Adj. EPS14E
Adj. EPS16E
New
US$0.11
US$0.40
Old
US$0.13
US$0.39
Implications
■ Another quarterly record was set for operating cash flow generation.
Before changes in WC the operations generated $57M or $0.14/share,
in line with our estimate and consensus. All-in CS, ended the quarter
improving its net debt position to $121M, including $176M of cash on
the balance sheet at the end of the quarter - a 37% QOQ increase.
■ Adjusted EBITDA of $71.4M was in line with consensus at $72.1M,
and modestly below our estimate of $77.6M on slightly lower revenue
and higher operating costs associated with sales than we had estimated.
■ Operating cash cost in the quarter bettered our estimates at all mines,
achieving a consolidated C1 cash cost of $1.84/lb; 7% better than our
estimate and a 9% improvement over the $2.03 achieved in Q2/14. Full
year production was reiterated at 102 kt (225 Mlb) of copper in
concentrate (+/-5%) as were C1 cash costs of $1.90 to $2.00/payable lb.
Recommendation
■ Maintain our Sector Outperform rating and $3.50 target price.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.02 A
$-0.01 A
$0.02
$0.08
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Price/Cash Flow
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.01 A
$0.04 A
$0.03
$0.08
Q3
$0.00 A
$0.04 A
$0.03
$0.12
Q4
$0.02 A
$0.04
$0.06
$0.11
Year
$0.05
$0.11
$0.14
$0.40
P/E
58.5x
17.5x
12.8x
4.7x
2012A
$0.17
$0.30
14.4x
8.1x
$328
$148
19.3x
n.m.
2013A
$0.05
$0.23
58.5x
12.5x
$368
$105
2.0x
30.5x
2014E
$0.11
$0.50
17.5x
3.7x
$758
$236
1.8x
14.1x
2015E
$0.14
$0.38
12.8x
4.9x
$688
$203
1.6x
13.1x
2016E
$0.40
$0.68
4.7x
2.7x
$834
$338
4.7x
34.8x
BVPS14E: $2.91
ROE14E: 3.67%
NAVPS:
P/NAV:
$5.19
0.36x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(Basic)
Float O/S (M) (Basic)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
C$791
$128
C$933
382
293
40
Additional Q3/14 Financials Details
■ Reported earnings, before adjustments, of a loss of $0.1M ($0.00/share) were a bit messy as
they included a $3.0M non-cash charge for the write-down of stockpiled ore inventory at
Minto, which was included within the production costs, as well as an $8.6M non-cash
impairment to the carrying value of the for-sale Kutcho project. With a sale process for
Kutcho underway it has to be held at the lesser of cost or fair value less cost to sell. In light
of the state of the market for selling development stage projects, an impairment charge was
taken, writing the value of Kutcho down to $51.4M. We do not ascribe any value to Kutcho
in our NAV or target price - any value realized would be upside to our valuation.
Exhibit 1 – Q3/14 Financial Results Compared with Estimates
US$
Actual
Q3/14
Scotia
Estimate
Difference
FactSet
Consensus
Gross revenue
TC/RCs and transportation
Net revenue
Operating cost and royalties
Depreciation
Gross profit
$204.0 M
$20.1 M
$183.9 M
$110.8 M
$41.7 M
$31.4 M
$214.9 M
$25.8 M
$189.1 M
$100.9 M
$38.3 M
$49.8 M
-5%
-22%
-3%
10%
9%
-37%
Difference
$188.3 M
-2%
Adjusted EBITDA
$71.4 M
$77.6 M
-8%
$72.1 M
-1%
Adjusted net earnings
EPS (adjusted; FD)
$14.1 M
$0.04
$25.1 M
$0.06
-44%
-33%
$21.6 M
$0.06
-35%
-33%
Operating cash flow (before working capital changes)
CFPS (before working capital changes; FD)
$57.1 M
$0.14
$58.0 M
$0.14
-2%
0%
$0.15
-7%
Source: Company reports; Scotiabank GBM estimates, Factset.
Exhibit 2 – Q3/14 Copper Sales, Production and Cash Cost
Actual
Q3/14
Copper Sales (Payable Mlb)
Cozamin
Minto
Pinto Valley
Total
Copper Production (Mlb)
Cozamin
Minto
Pinto Valley
Total
C1 Cash Cost (US$/lb payable produced, net)
Cozamin
Minto
Pinto Valley
Average
Source: Company reports; Scotiabank GBM estimates.
Scotia
Estimate
Difference
Actual
Q2/14
QOQ
Change
Actual
Q3/13
YOY
Change
11.2
14.1
40.0
65.3
Sales volumes previously
reported
11.5
8.0
35.8
55.3
-3%
76%
12%
18%
11.5
12.0
na
23.5
-3%
18%
na
nm
10.9
10.5
36.3
57.7
Production volumes previously
reported
11.4
11.3
38.4
61.1
-4%
-7%
-5%
-6%
11.6
7.3
na
18.9
-6%
44%
na
nm
$1.23
$2.46
$2.13
$2.03
5%
-11%
-11%
-9%
$1.20
$2.14
na
$1.57
8%
2%
na
nm
$1.29
$2.18
$1.90
$1.84
$1.42
$2.50
$1.98
$1.97
-9%
-13%
-4%
-7%
41
PV – Further Cost Improvements Still in the Plans; First Phase of PV3
Expansion Evaluation Still on Target for Year End
■ The focus on operational stability, predictability, and reliability paid off at PV with a much
improved C1 cash cost of $1.90, an 11% improvement over Q2/14 and 4% better than our
estimate. Despite what the improvements demonstrate, more can be made. As previously
announced, September’s production was negatively impacted by heavy rains that caused
some wet ore to slow the crushing circuit, and by a tear in the fine crushing plant conveyor.
The moly plant was also shut down for ~two months to be rebuilt and had been recommissioned by quarter end. With an un-impacted quarter and the moly plant up and
running we expect unit costs and by-product credits to continue to improve.
■ PV full year production and cash cost guidance remains unchanged at 63.5 kt (140 Mlb) of
copper in concentrate and 2.8 kt (6.2 Mlb) of cathode a cash cost of $1.90 to $2.00 per
payable pound of copper produced. We have left our full year production estimate unchanged
at 67.5 kt (148.7 Mlb) and tweaked our Q4/14 cash cost estimate to $1.94, from $1.95. We
now estimate full year cash costs at PV of $2.01 per payable lb produced, essentially at the
high-end of management’s guidance range.
■ Work continues on a Pinto Valley Phase 3 (PV3) study exploring development alternatives to
exploit the significant M&I resource that currently lies outside of the 2026 mine plan. The
first phase is targeted for completion by the end of this year at a cost of $2.6M and is to
include high level mine plans, tailings storage and flow sheet analysis for various expansion
cases. A 10,000 ft geotechnical drill program was completed in Q3. The second phase of the
study – to include delivery of a technical report in 2H/15 – is refinement of the options
engaging a consulting firm to assist with detailed cost and design work and is expected to
cost $8.0M.
Cozamin – Steady as Rock
■ Q3/14’s C1 cash cost of $1.29/payable lb was 9% better than our estimate of $1.42 on better
than expected on-site costs. By-product credits and selling costs were in line. As previously
announced, strong mill throughput and recoveries helped to partially offset lower than
planned grade. Improvement in the copper grade expected in September was somewhat
delayed as additional ground support impacted ore release from new mining areas. We model
improved copper and zinc grades in Q4/14 as ore is released from these new areas.
■ Full year copper production guidance remains unchanged at 20.0 kt (44 Mlb) at a cash cost of
$1.30 to $1.40/payable lb. With the copper head grade expected to improve in Q4/14, we
have left our full year production estimate unchanged and cash costs estimate essentially
unchanged at 20.4 kt (45.5 Mlb) and $1.24/lb, respectively.
■ 6,600m of surface drilling in 14 holes were completed in Q3/14 as part of the ~$3.0M
exploration program at Cozmin targeting Mala Noche Footwall type targets in fault splays
off the main Mala Noche Vein system. The strategy is to pinpoint underexplored structures
nearer to surface with a first pass program of drilling and then progressively drill deeper on
the most promising structures.
Minto – Cash Costs Improved QOQ When Processing More Stockpile?
■ As previously disclosed, throughput and recoveries continued as planned at Minto in Q3/14,
though modestly lower than Q2/14, as was grade. However, the modestly lower production
was more than offset on a cost basis with Area 118 (open pit) mining being completed in
September, and more stockpile ore processed (lower re-handling cash costs) to maximize
throughput. Minto’s Q3/14 C1 cash cost of $2.18 improved 27% over Q2/14, and was 13%
lower than our estimate. Precious metal by-product credits and selling costs were directly in
line with our estimate.
■ Full year copper production guidance remains unchanged at 18.5 kt (41 Mlb) a cash cost of
$2.45 to $2.55/payable lb. We have left our full year production estimate unchanged at
18.9 kt (41.6 Mlb) and have decreased our full year cash cost estimate to $2.33/payable lb
after incorporating the Q3/14 actual.
42
■ Mining from the M-Zone continued during Q3/14 and is to be completed in mid-November,
before moving back to Area 118 underground which has been moved forward in the mine
plan due to Minto North permitting delays. The currently permitted mineral reserves at Minto
run until late 2016, at which time the approvals under the new licenses must be in place and
required stripping and development performed to allow ore release and operations to
continue (which we believe they will).
SD – Permitting De-risking Making Progress
■ EIA remains on track for end of Q1/15 completion. CS’ responses to the first round of EIA
comments were submitted early in the third quarter with the regulatory authorities issuing the
second addendum request in early September. CS has until mid-December 2014 to submit
responses. SD’s greenfield port concession was approved by the Coastal Land Use
Commission in November 2013. The final step in the process is for the Chilean Armed
Forces to issue the formal concession with granting of the concession is expected this quarter
(Q4/14).
■ CS has begun to prepare for the EPC/EPCM bid process, which it aims to complete in Q1/15
and award a notice to proceed with the next stage. The stage would encompass advancing
engineering and permit application development. A financing structure for the project will
also be assessed prior to reaching the next decision point in 2015 when approval of the EIS is
expected.
Q3/14 Conference Call Thursday
■ Conference call details: Thursday, October 30, 2014 at 11:30 am ET. Dial-in numbers are
(888) 390-0546 in North America and (416) 764-8688 internationally. Live webcast at:
http://www.newswire.ca/en/webcast/detail/1420970/1578324
Valuation and Recommendation
■ We maintain our Sector Outperform rating and C$3.50 target price. Our target price
continues to be based 50/50 on 6.0x EV/EBITDA (implying a C$3.14/share target price) and
P/NAV8% of 0.7x given 33% of our mine site NAV owes to the development stage Santo
Domingo project (implying a C$3.93/share target price). CS remains one of the preferred
copper equities in our coverage universe. It currently trades at 2015E EV/EBITDA of 4.1x
and 2016 EV/EBITDA of 2.4x (when PV and Minto return to higher copper grades) versus
its large and mid-cap peer group at 5.8x and 4.0x, respectively. On P/NAV 8% basis CS trades
at 0.36x versus its large and mid-cap copper peer group at 0.69x.
Exhibit 3 - NAV Summary
Revised
Previous
NAV8%
NAV10%
Net Asset Value (US$M)
Operating Assets (after taxes)
Cozamin
Minto
Pinto Valley
Kutcho
Santo Domingo (70% Ownership)
Total Operating Assets
$334
$183
$1,094
$0
$784
$2,395
$304
$172
$968
$0
$596
$2,040
Corporate G&A
Minesite NAV and Corporate G&A
($257)
$2,138
$145
$8
($273)
$0
($120)
Cash and cash equivalents
Cash from exercise of warrants
Debt and capital leases
Equity investments
Net Cash Items
Net Asset Value
Total NAV
NAVPS (US$/share)
NAVPS (C$/share)
Source: Scotiabank GBM estimates.
$2,018
$5.19
$5.77
NAVPS8%
NAV8%
NAV10%
NAVPS8%
17%
9%
54%
0%
39%
119%
Net Asset Value (US$M)
Operating Assets (after taxes)
Cozamin
Minto
Pinto Valley
Kutcho
Santo Domingo (70% Ownership)
Total Operating Assets
$323
$184
$1,094
$0
$808
$2,409
$293
$173
$968
$0
$616
$2,050
($238)
$1,802
($0.66) (13%)
$5.50 106%
Corporate G&A
Minesite NAV and Corporate G&A
($218)
$2,190
($202)
$1,848
($0.56) (11%)
$5.63 108%
$145
$8
($273)
$0
($120)
$0.37
7%
$0.02
0%
($0.70) (14%)
$0.00
0%
($0.31) (6%)
Cash and cash equivalents
Cash from exercise of warrants
Debt and capital leases
Equity investments
Net Cash Items
$95
$8
($265)
$0
($162)
$95
$8
($265)
$0
($162)
$0.24
5%
$0.02
0%
($0.68) (13%)
$0.00
0%
($0.42) (8%)
$1,682
$4.32
$4.81
$0.86
$0.47
$2.81
$0.00
$2.02
$6.16
$5.19
(%)
100%
Net Asset Value
Total NAV
NAVPS (US$/share)
NAVPS (C$/share)
$2,029
$5.22
$5.80
$1,686
$4.34
$4.82
$0.83
$0.47
$2.81
$0.00
$2.08
$6.20
$5.22
(%)
16%
9%
54%
0%
40%
119%
100%
43
Exhibit 4 - Target Price Methodology
Target
Multiple
Per FDFF
Share
$2,138
($120)
$2,018
0.70x
1.00x
$3.85
($0.31)
$3.54
$203
6.0x
$2.82
US$M
Minesite NAV8% and corporate adjustments
Net cash items
Implied NAV based target price
Implied 2015 EV/EBITDA based target price
Implied target price per FD share (US$)
Assumed CAD/USD exchange rate
Implied target price per FD share (C$)
One-year target price (C$)
Implied 2015 target multiples
EV/EBITDA
P/E
P/CF
Source: Scotiabank GBM estimates.
$3.18
0.90
C$3.54
C$3.50
6.6x
21.6x
8.3x
Comment
33% of NAV in development assets
Based on 50% EV/EBITDA & 50% Adjusted NAV
44
Exhibit 5 – Capstone Mining – Financial and Operational Summary
Capstone Mining
October 29, 2014
Q1/14A
Q2/14A
Q3/14A
Q4/14E
2013A
2014E
2015E
2016E
($0.01)
$0.12
$0.00
$0.00
$2.85
$0.04
$0.15
$0.00
$0.00
$2.91
$0.04
$0.14
$0.00
$0.00
$2.86
$0.04
$0.09
($0.08)
$0.00
$2.91
$0.05
$0.23
$0.00
$0.00
$2.88
$0.11
$0.50
($0.08)
$0.00
$2.91
$0.14
$0.38
($0.16)
$0.00
$3.07
$0.40
$0.68
$0.23
$0.00
$3.50
39.2x
8.4x
2.1x
29%
22%
(1%)
(1%)
0%
17.8x
3.8x
3.9x
31%
20%
2%
2%
0%
13.1x
5.0x
4.2x
30%
13%
5%
4%
0%
4.8x
2.8x
2.4x
41%
8%
12%
11%
0%
Iron Ore 63.5% Fines, CFR China (US cents/dmtu)
Operations Parameters
Copper production (M lb)
Zinc production (M lb)
Lead production (M lb)
Iron Ore Production (M dry tonnes)
C1 cash costs (US$/lb payable Cu produced, net)
Net Asset Value (US$)
Cozamin
Minto
Pinto Valley
Kutcho
Santo Domingo (70% Share)
Total Operating Assets
Corporate G&A
Minesite NAV and Corporate G&A
Cash and cash equivalents
Cash from exercise of warrants
Debt and Obligations
Equity investments
Net Cash Items
Net Asset Value (US$)
NAVPS (US$/share)
NAVPS (C$/share)
Multiple to NAV
$1.00
$0.00
Oct-13
Apr-14
Oct-14
Relative Share Price Performance
$187.3
($130.7)
($39.5)
($6.4)
($1.1)
($2.8)
($2.9)
$3.8
($7.8)
($0.5)
($4.4)
($3.9)
379.3
401.8
$46.3
$193.4
($118.5)
($29.4)
($6.0)
($2.4)
($0.9)
($4.4)
$31.7
($15.2)
$0.0
$16.6
$16.6
381.5
403.5
$65.6
$204.0
($130.9)
($41.7)
($3.7)
($1.5)
($0.8)
($4.6)
$20.8
($10.8)
($10.1)
($0.1)
$14.1
381.9
403.4
$71.4
$173.5
($109.9)
($27.4)
($6.0)
($3.0)
($1.5)
($4.7)
$21.0
($5.9)
$0.0
$15.1
$15.1
381.9
403.4
$53.1
$368.4
($243.4)
($67.9)
($22.9)
($7.0)
($7.3)
($8.3)
$11.6
($15.6)
($5.4)
($9.4)
$18.3
379.9
400.2
$105.2
$758.2
($490.0)
($137.9)
($22.1)
($8.1)
($6.0)
($16.7)
$77.4
($39.7)
($10.6)
$27.1
$41.8
381.9
403.4
$236.4
$688.1
($456.0)
($106.3)
($20.0)
($3.0)
($6.0)
($15.4)
$81.3
($22.8)
$0.0
$58.5
$58.5
384.4
403.4
$203.0
$834.3
($462.9)
($98.8)
($20.0)
($7.0)
($6.0)
($9.7)
$229.9
($70.3)
$0.0
$159.7
$159.7
384.4
403.4
$338.4
$47.1
($4.0)
$43.1
($14.6)
$3.9
$32.4
$0.0
$135.9
$56.5
($34.4)
$22.1
($29.5)
($0.2)
($7.6)
$0.0
$128.6
$57.1
$50.2
$107.3
($49.3)
($9.4)
$48.6
$0.0
$176.1
$37.3
($0.2)
$37.1
($46.4)
($22.2)
($31.5)
($31.5)
$144.7
$85.5
$11.3
$96.8
($784.2)
$309.2
($378.2)
$0.0
$104.2
$198.1
$11.5
$209.6
($139.8)
($28.0)
$41.8
($31.5)
$144.7
$152.0
$0.9
$152.9
($128.3)
($82.7)
($58.1)
($64.3)
$86.5
$272.9
$5.0
$277.9
($119.4)
($67.2)
$91.3
$91.3
$177.8
$3.19
$0.92
$0.95
¢194
$3.09
$0.94
$0.95
¢166
$3.17
$1.05
$0.99
¢146
$3.10
$1.02
$0.95
¢134
$3.33
$0.87
$0.97
¢218
$3.14
$0.98
$0.96
¢160
$3.15
$1.10
$1.01
¢142
$3.40
$1.20
$1.10
¢137
60.9
3.6
1.1
0.0
$1.89
61.2
3.8
0.5
0.0
$2.03
57.7
3.3
0.4
0.0
$1.84
55.5
4.4
1.1
0.0
$1.95
113.8
17.8
2.8
0.0
$1.72
235.4
15.1
3.2
0.0
$1.93
207.7
20.1
5.4
0.0
$1.97
235.2
18.1
5.1
0.0
$1.73
2013A
2014E
2015E
2016E
8% NPV
$334
$183
$1,094
$0
$784
$2,395
10% NPV
$304
$172
$968
$0
$596
$2,040
($257)
$2,138
($238)
$1,802
$145
$8
($273)
$0
($120)
$145
$8
($273)
$0
($120)
$2,018
$5.19
$5.77
0.36x
$1,682
$4.32
$4.81
0.43x
Reserves & Resources (100% Basis)
Reported Reserves
Reported Resources (M&I)
Modeled Resources
$3.00
Balance Sheet (US$)
Current Assets
Long-Term Assets
Total Assets
$282
$1,625
$1,907
$275
$1,596
$1,870
$217
$1,618
$1,835
$302
$1,638
$1,940
Current Liabilities
Long-Term Debt
Other Liabilities
Shareholders' Eq.
Total Liabilities & Eq.
$142
$244
$429
$1,093
$1,907
$153
$184
$423
$1,111
$1,870
$133
$117
$404
$1,181
$1,835
$64
$117
$412
$1,347
$1,940
$764
$207
$0
$971
$791
$128
$0
$919
$796
$97
$0
$893
Enterprise Value (US$)
Market Capitalization
Net Debt
Other Assets
Enterprise Value
Sensitivity (2014E)
Cu (M lb)
5,465
16,669
5,776
Source: Company Reports, Factset, Scotiabank GBM estimates
Source: Company reports; Scotiabank GBM estimates.
EPS
CFPS
FCFEPS
NAVPS (8%)
$796
($61)
$0
$734
CS.TO
S&P TSX Metals & Mining
S&P TSX
1.5
1.0
0.5
Oct-13
Apr-14
Production and Cost Profile
250
$2.40
200
$2.00
150
$1.60
100
$1.20
50
0
$0.80
2013A
2014E
2015E
C1 Cost (US$/lb Payable Cu)
Scotiabank GBM Forecasts
SC Copper Price Forecast (US$/lb)
SC Zinc Price Forecast (US$/lb)
SC Lead Forecast (US$/lb)
$4.00
$2.00
Financial Ratios
Price/Earnings (P/E) (FD)
Price/Cash Flow per Share (P/CF) (FD)
EV/Adjusted EBITDA
Adjusted EBITDA Margin
Debt/[debt+equity]
ROE
ROIC
Dividend Yield
Income Statement (US$M)
Revenue
Operating Costs
Depreciation and Amortization
General and Administration
Exploration (expensed)
Stock Based Compensation
Other
Operating Earnings
Total Taxes
Other
Net Earnings
Adjusted Net Earnings
Shares O/S (million; basic; EOP)
Shares O/S (million; FD; EOP)
Adjusted EBITDA
Cash Flow Statement (US$M)
Operating cash flow (pre WC)
Change in non-cash WC
Cash from operating activities
Cash from investing activities
Cash from financing activities
Increase (decrease) in cash
Free cash flow to equity
Cash and equivalents at end of period
(CS-TO C$2.07)
Share Price History
Cu and Zn Production
Per share data (US$ per share)
Adjusted Net Earnings per share (FD)
Operating CFPS (pre WC) (FD)
Net Free Cash Flow per share (basic)
Dividend per share (basic)
Book Value per Share (basic)
2016E
Copper production (M lb)
Zinc production (M lb)
Cu C1 Cost
Santo
Minesite NAV Distribution
Domingo
(70%
Cozamin
Share)
14%
33%
Minto
7%
Kutcho
0%
Pinto
Valley
46%
% Change in parameter for 10% change in
Rating and Target
Cu Price Fe Price Zn Price
US$/C$
Rating
SO
51.8%
0.4%
0.8%
(4.0%)
Risk Ranking
High Risk
14.5%
0.1%
0.2%
(1.5%)
1-yr Target
C$3.50
205.2%
1.6%
2.8%
(45.1%)
1-yr ROR
69.1%
29.7%
7.5%
0.4%
(1.3%)
Valuation Method: 50% EV/EBITDA & 50% Adjusted NAV
Mark Turner - Metals & Mining Analyst - mark.turner@scotiabank.com - (416) 863-7484
45
Intraday Flash
Wednesday, October 29, 2014 @ 3:31:54 PM (ET)
(FN-T C$23.24)
First National Financial Corporation
Solid Volumes, but Spread Compression
Contributes to Miss
Phil Hardie, P.Eng., MBA, CFA - (416) 863-7430
(Scotia Capital Inc. - Canada)
phil.hardie@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
Valuation: 10.1x 2015E EPS
Target 1-Yr:
Michael Lee, CPA, CA - (416) 863-7826
(Scotia Capital Inc. - Canada)
Beam Ukarapong, MBA - (416) 945-4528
(Scotia Capital Inc. - Canada)
C$24.00
ROR 1-Yr:
10.0%
Div. (NTM)
Div. (Curr.)
$1.58
$1.50
Yield (Curr.)
6.5%
Key Risks to Target: Lower mortgage origination volumes, tighter funding spreads
Event
■ Q3/14 EBITDA pre-FMV (fair market value adjustment) of $0.84/share
was below our estimate of $0.92/share.
Implications
■ Third quarter origination volumes were well ahead of our forecast but
core earnings fell short of expectations. Reported EPS of $0.56 was
below our estimate and consensus of $0.63 and $0.61, respectively.
■ Weaker-than-expected results were impacted by tighter-than-expected
net securitization spreads and higher interest expense offset by a more
favourable funding mix. Tighter mortgage spreads reflecting a highly
competitive environment put pressure on securitized net interest
margins (NIMs), but the compression is expected to stabilize.
■ Adjusted net cash of $11.64/sh supports growth, provides a cushion to
sustain dividend during a prolonged slow down, and is a likely source
of unrecognized value.
■ FN's multiple appears to be trending in line with its estimated 5-year
average while other non-bank lenders are trading at historical
premiums.
Pertinent Revisions
Target:
1-Yr
EPS14E
EPS15E
EPS16E
New Valuation:
10.1x 2015E EPS
Old Valuation:
10x 2015E EPS
New
Old
$24.00
$1.87
$2.37
$2.65
$24.50
$2.00
$2.46
$2.77
Recommendation
■ Reducing target price to $24.00 (was $24.50), but maintaining Sector
Perform rating. Reflecting downward revisions to our estimates, we have
reduced our target price.
Qtly EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.36 A
$0.35 A
$0.49
$0.56
(FY-Dec.)
Earnings/Share
Revenues (M)
EBITDA (M)
Q2
$1.10 A
$0.44 A
$0.62
$0.68
Q3
$0.63 A
$0.56 A
$0.65
$0.73
Q4
$0.67 A
$0.52
$0.60
$0.68
Year
$2.75
$1.87
$2.37
$2.65
P/E
8.2x
12.4x
9.8x
8.8x
2012A
$1.76
$382
$153
2013A
$2.75
$453
$198
2014E
$1.87
$389
$187
2015E
$2.37
$443
$212
2016E
$2.65
$472
$235
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
BVPS14E: $6.15
ROE14E: 31.08%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$1,394
$411
$1,805
60
12
46
Outlook & Valuation
■ Very strong quarter for mortgage origination volumes but earnings fell short of
expectations. Third quarter mortgage origination volumes were strong, rising 20% YOY,
benefiting from improvements across both single-family and commercial lines. Although
origination volumes were solid, spread compression and higher interest expense resulted in
weaker-than-expected earnings in the quarter. Heading into 2014, management had initially
expected full year volumes of around $14B, relatively flat compared with last year. Year to
date volumes have totalled $12.1B and we expect First National to easily meet or exceed the
initial $14B expectation and are forecasting full year volumes of $15.7B, up just over 10%
from last year. First National has benefited from solid re-sale housing activity in addition to
market share gains, having reached the #1 position in market share in the broker channel in
the second quarter. The combination of robust originations and solid renewals continues to
support growth in Mortgages Under Administration (MUA) and growth in the company’s
portfolio of securitized mortgages. Growing MUA levels are expected to support mortgage
servicing income, a relatively high quality and steady recurring source of revenue. The
portfolio of securitized mortgages has experienced very solid strong growth and is a source
of recurring net interest income.
■ Tighter mortgage spreads reflecting a highly competitive environment put pressure on
securitized net interest margins (NIMs), but the compression is expected to stabilize.
Competition in the prime mortgage space has intensified, resulting in tighter mortgage
spreads. Exhibit 1 summarizes average 5-year mortgage spreads over 5-yr BOC yields from
2006 through Q3/14. The average mortgage spread in 2006 was estimated at 1.12% but
expanded to as high as 3.46% during the credit crisis in 2008 and averaged 2.68% that year.
Over the next three years as liquidity issues among large financial institutions abated and
competition for mortgages increased, spreads reverted from prior peaks and remained
relatively steady but stayed above pre-crisis levels. Interest rates dropped in mid-2011
following a U.S. credit downgrade, resulting in an increase in mortgage spreads through
2012, and then tightened again through 2013. Price competition increased in 2014 with
spreads compressing to levels not seen since 2007. That said, we estimate that mortgage
spreads have remained relatively stable through 2014. First National’s net interest margins on
its securitized portfolio have generally trended down over the last few years. This has likely
been a combination of higher spread loans originated in the 2008/2009 era rolling off the
book, as well as the more recent trend of competitive pressure driving lower spreads on new
mortgages (see Exhibit 2). We expect the level of compression to stabilize and are
forecasting NIMs in the 55 bp to 50 bp range over our forecast period.
Exhibit 2 – Net Securitization
Spreads
Net
Securitization Spreads
100
Net Securitization Spresds (bp)
300
Source: Company Reports.
40
30
20
10
Source: Company Reports; Scotiabank GBM estimates.
■ First National benefits from a diverse range of funding sources, but shifts in mix reduce
earnings visibility. A key strength which we believe has become increasingly recognized by
investors is its diverse range of funding sources, and its ability to nimbly adapt to changing
capital market conditions to exploit opportunities. Management note that current spreads
2016E
0
2015E
2014YTD
2013
2012
2011
2010
2009
2008
2007
0
50
2014E
50
60
2013A
100
70
2012A
150
80
2011A
200
90
2010A
250
2006
Average 5-year Mortgage Spread (bp)
Exhibit 1 – Average
Five-Year
Mortgage
Average
5- year
MortgageSpread
Spread for the Period
47
remain attractive for it to fund new originations through securitization. Prior to 2008 the
mortgages that First National originated had tight spreads, such that the company’s strategy
was to sell these mortgages to institutional investors and retain the servicing. The ability to
quickly shift fund mix from quarter to quarter represents a solid strategic advantage for First
National, but has reduced earnings visibility for investors, likely resulting in a somewhat
discounted valuation multiple.
■ Adjusted net cash of $11.64/sh supports growth, provides a cushion to sustain dividend
during a prolonged slowdown, and is a likely source of unrecognized value. First
National is relatively unusual in its approach to capital management in that it tends to balance
its working capital by holding mortgages accumulated for sale rather than cash. This tends be
overlooked by investors looking to calculate its capital position. We estimate First National’s
Q3/14 adjusted net cash at $11.64/sh (see Exhibit 3). The balance tends to be relatively
volatile and dependent on First National’s investment in securitization funding but has
trended upwards over the past few years (see Exhibit 4). With the adjusted net cash per share
representing roughly half of First National’s stock price, we believe this represents a source
of unrecognized embedded value. This strong level of working capital supports First
National’s growth potential during period of rising origination and securitization volumes,
and could also serve as a cushion to sustain the dividend during a prolonged slowdown.
Exhibit 4 – Adjusted Net Cash (Q1/12 - Net
Q3/14)
Cash Per Share
Adjusted Net Cash
Mortgages Held For Sale
Bank Debt
Debenture Loan Payable
Preferred Shares
Adjusted Net Cash
($M)
$1,589
($616)
($178)
($97)
$698
Adjusted Net Cash Per Share
$11.64
Source: Company Reports; Scotiabank GBM.
$16.00
$14.00
Net Cash Per Share
Exhibit 3 – Q3/14 Adjusted Net Cash
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14
Source: Company Reports; Scotiabank GBM.
■ Mortgage underwriting and fulfillment processing services agreement with TD Bank
expected to be launched in Q1/15 with positive contribution expected by mid-2015. On
July 16, 2014, First National announced that it entered into an agreement with TD Bank to
provide underwriting and fulfillment processing services for mortgages originated by TD’s
mortgage broker channel. Although the financial arrangement with TD was not disclosed,
management expects the new business to provide positive contribution and an additional
revenue stream. We view the deal positively as it provides a means for First National to
partially monetize the value of its Merlin platform and will still retain it as a strategic
advantage. First National will establish a separate division to provide these services to TD
and expects to launch the new business in Ontario in January 2015 and across Canada in mid2015. Under the agreement, First National will underwrite mortgages based on TD’s credit
policies and compliance standards, while TD is responsible for providing underwriting
guidelines, mortgage servicing, the client relationship and funding. Q4/14 is expected to see
elevated operating expenses as the company begins to increase hiring and training activities
ahead of the launch and management expects to start to see positive contribution from the
program in the back half of the year as it reaches full scale.
■ Downward revision to estimates. We have trimmed our forecast for securitization spreads
(NIMs) with the expectation that they remain in the 55 bp to 50 bp range over our forecast
period. Exhibit 5 summarizes the changes to our estimates and Exhibit 10 details our forecast
and key assumptions.
48
Exhibit 5 – First National Revision Summary Table
2014E
Old
Core EPS
Pre-FMV EBITDA
New
$2.00
$3.27
Old
$1.87
$3.12
2015E
New
$2.46
$3.62
Old
$2.37
$3.53
2016E
New
$2.77
$4.05
$2.65
$3.91
Source: Scotiabank GBM estimates.
■ Valuation multiple appears to be trending in line with estimated 5-year average, while
other non-bank lenders are trading at historical premiums. We estimate that FN stock
trades at roughly 9.6x NTM EPS estimate, in line with its 5-year average (see Exhibit 6). We
believe that FN should trade at a premium to its publicly traded peers (Home Capital,
Equitable Group), given its higher ROE, minimal mortgage credit exposure, unique business
model and competitive positioning. In contrast to First National, Home Capital and Equitable
are trending well above their historical 5-year averages (see Exhibit 7). We attribute the
valuation disparity to lower earnings visibility for First National and greater investor concern
on the earnings impact of a material slowdown in housing activity. In this context we believe
that First National is relatively oversold compared to its peers.
Exhibit 6 – Historical
P/E (NTM) – First National Financial
Historical P/E (NTM) Multiples - First National Financial
Exhibit 7 – Average (NTM) P/E Multiple
Average (NTM) P/E Multiple
20
13x
16
P/E (NTM)
14
12
+1 S.D.
10.6
10
9.8
P/E (NTM) Multiple
18
11x
9x
7x
8.9
8
- 1 S.D.
5x
6
4
2
Current
EQB
9.1x
HCG
11.3x
FN
9.6x
Regional Banks
10.4x
Big Six Banks
10.6x
LTM
8.5x
10.5x
9.7x
10.9x
10.1x
Past 5 Years
6.8x
8.7x
9.8x
10.5x
10.5x
Source: Bloomberg; Thomson; Scotiabank GBM.
Jul-14
Oct-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
Jul-11
Oct-11
Apr-11
Jan-11
Jul-10
Oct-10
Apr-10
Oct-09
Jan-10
0
Note: For comparability, multiples for FN use fully taxed earnings until end of 2010.
Source: Bloomberg; Thomson; Scotiabank GBM.
■ Lowering target price to $24.00 (was $24.50) but maintaining Sector Perform rating.
Reflecting our downward revision to our estimates, we have reduced our target price. Our
target price represents a 10.1x multiple of our 2015E EPS of $2.37.
Q3/14 Highlights
■ Q3/14 pre-FMV EBITDA came in below our forecast. Q3/14 pre-FMV (fair market value
adjustment) EBITDA of $0.84/share was below our estimate of $0.92/share. First National
reported Q3/14 EPS of $0.56, below our estimate of $0.63 and consensus of $0.61. The miss
was primarily driven by tighter-than-anticipated net securitization spreads and higher interest
expense. This was offset by a more favourable funding mix. Reported EPS was impacted by
$0.5M ($0.01 per share) of unrealized losses on financial instruments primarily related to
hedging strategies.
49
Mortgage Volumes Were Up Sequentially and YOY
■ Q3/14 mortgage originations came in
higher than expected. Total originations in Exhibit 8 - Quarterly Financial Summary (All figures in C$'000 except per share data or otherwise noted)
Q3/14 were $5.0 billion, up 7.4%
Income Statement ($000)
Q3-14
Q2-14
Q3-13
Q/Q
Y/Y
Interest revenue - securitized
$142,806
$134,783
$113,015
6.0%
26.4%
sequentially and 21.4% YOY. The increase
Interest expense - securitized
($114,018)
($105,757)
($85,362)
(7.8%)
(33.6%)
in mortgage origination volumes benefited
Net interest - securitized
$28,788
$29,026
$27,653
(0.8%)
4.1%
Placement fees
$47,058
$36,101
$47,073
30.4%
(0.0%)
from solid single-family residential and
Gains on deferred placement fees
$2,351
$2,620
$3,818
(10.3%)
(38.4%)
multi-unit residential and commercial
Mortgage Investment income
$15,412
$13,487
$14,446
14.3%
6.7%
Mortgage Servicing Income
$23,467
$22,822
$23,433
2.8%
0.1%
originations. Single family residential
Unrealized Gains / (Losses)
($542)
($8,217)
($1,263)
93.4%
57.1%
origination volumes came in at $4.1 billion,
Revenue
$116,534
$95,839
$115,160
21.6%
1.2%
above our forecast of $3.6 billion, and were
Brokerage Fees
$29,975
$21,372
$27,381
40.3%
9.5%
Salaries and benefits
$16,952
$16,184
$14,883
4.7%
13.9%
up 21.8% YOY, reflecting continued
Interest
$10,271
$8,853
$7,994
16.0%
28.5%
demand for housing. Multi-family and
Amortization of intangibles
$1,250
$1,250
$1,250
Other operating
$10,465
$9,963
$10,643
5.0%
(1.7%)
commercial volumes of $911 million were
Operating Expenses
$68,913
$57,622
$62,151
19.6%
10.9%
ahead of our forecast of $798 million and
Income before taxes
$47,621
$38,217
$53,009
24.6%
(10.2%)
Income Taxes
$12,290
$10,000
$13,610
22.9%
(9.7%)
increased 19.9% YOY (see Exhibit 9).
Non-recurring items
nmf
nmf
Core Earnings
$35,331
$28,217
$39,399
25.2%
(10.3%)
■ Total renewals declined due to lower
Preferred share dividends & Other
($1,163)
($1,162)
($1,163)
(0.1%)
multi-unit and commercial renewals over
Core Earnings to shareholders
$33,528
$26,348
$37,555
27.3%
(10.7%)
last year. Total renewals in Q3/14 of $1.4
Core EBITDA (pre-FMV adjustments)
$50,121
$48,392
$56,124
3.6%
(10.7%)
billion were down 10% from the previous
Per Share Metrics
Reported EPS
$0.56
$0.44
$0.63
27.3%
(10.7%)
year, reflecting lower renewals in the singleCore EPS
$0.56
$0.44
$0.63
27.3%
(10.7%)
family segment. Multi-unit and commercial
Core EBITDA (Pre-FMV) per Share
$0.84
$0.81
$0.94
3.6%
(10.7%)
renewals were $326 million, up 54.5%
Mortgage Origination By Asset Class ($M)
YOY. For the single-family segment,
Single-family residential
$4,085
$3,773
$3,355
8.3%
21.8%
Multi-unit residential and commercial
$911
$878
$760
3.8%
19.9%
renewals declined 20% YOY to $1.1 billion.
Total Originations
$4,996
$4,651
$4,115
7.4%
21.4%
■ MUA came in higher than expected, up
Mortgages Under Administration ($M)
12.4% YOY. First National’s Mortgages
Single-family residential
$64,827
$61,830
$56,034
4.8%
15.7%
Multi-unit residential and commercial
$18,364
$18,085
$18,008
1.5%
2.0%
Under Administration (MUA) of $83.2
Total MUA
$83,191
$79,915
$74,042
4.1%
12.4%
billion were higher than our estimate of
$82.8 billion, representing a sequential Source: Company reports; Scotiabank GBM.
increase of 4.1% and YOY increase of
12.4%. We expect MUA to reach $95 billion
by the end of 2015 and increase to $105 billion at the end of 2016.
Exhibit 9 - Mortgage Origination Volumes
(All figures in C$ millions)
Single-family residential (conventional)
Multi-unit residential and commercial
Total Mortgage Origination
Source: Company reports; Scotiabank GBM.
Q3-14
$4,085
$911
$4,996
Mortgage Origination
Q2-14
Q1-14
$3,773
$1,807
$878
$717
$4,651
$2,524
Q4-13
$2,496
$887
$3,383
Q3-13
$3,355
$760
$4,115
Q/Q
8.3%
3.8%
7.4%
Y/Y
21.8%
19.9%
21.4%
50
Exhibit 10 - First National Financial Summary
First National Financial
SUMMARY INFORMATION
Operating Activity
(Cdn $ billions except where noted)
2014E
Q2-14A
Q3-14A
2013A
Q1-14A
Mortgage Originations
Single-family residential
Multi-unit residential and commercial
Total Originations
Originations Growth (Y/Y)
$10.9
$3.1
$14.1
19.3%
$1.8
$0.7
$2.5
5.3%
$3.8
$0.9
$4.7
11.7%
Estimated Net Securitization Spreads
0.69%
0.61%
Mortgages Under Administration
Single-family residential
Multi-unit residential and commercial
Total MUA
MUA Growth (Y/Y)
$57.7
$18.0
$75.6
58.2%
2015E
Q2-15E
Q3-15E
Q4-14E
2014E
Q1-15E
$4.1
$0.9
$5.0
21.4%
$2.6
$0.9
$3.5
3.5%
$12.2
$3.4
$15.7
11.5%
$1.9
$0.8
$2.6
3.6%
$3.9
$0.9
$4.8
3.4%
0.60%
0.55%
0.58%
0.59%
0.58%
$58.9
$18.0
$77.0
12.4%
$61.8
$18.1
$79.9
12.2%
$64.8
$18.4
$83.2
12.4%
$66.4
$18.7
$85.2
12.6%
$66.4
$18.7
$85.2
12.6%
2013A
Q1-14A
2014E
Q2-14A
Q3-14A
Q4-14E
EPS - Fully Diluted
Core EPS - Fully Diluted
Core EPS Growth (Y/Y)
$2.75
$2.75
n.a
$0.35
$0.35
7.6%
$0.44
$0.44
38.4%
$0.56
$0.56
206.4%
Core EBITDA per Share
Core EBITDA Growth (Y/Y)
Core EBITDA Margin
$3.29
n.a
44%
$0.69
12.3%
55%
$0.81
(5.5%)
50%
Book Value Per Share
Regular Distribution Per Share
Special Distribution Per Share
$5.88
$1.40
$0.00
$5.87
$0.38
$0.00
$5.94
$0.38
$0.00
2013A
Q1-14A
Interest Revenue - securitized mortgages
Interest Expense - securitized mortgages
Net Spread from Securitized Mortgages
Placement Fees
Gains on deferred placement fees
Mortgage Investment Income
Mortgage Servicing Income
Realized/Unrealized losses on fin'l instruments
Total Revenue
$0.0
$0.0
$106.0
$145.4
$11.0
$54.2
$92.8
$43.9
$453.3
Brokerage Fees
Salaries and benefits
Interest
Amortization of intangibles
Other operating
Operating Expenses
Income Before Taxes
Profitability
(Cdn $ except where noted)
Income Statement Summary
(Cdn $ millions except where noted)
Q4-15E
2015E
2016E
$4.2
$1.0
$5.2
3.4%
$2.6
$1.0
$3.6
3.5%
$12.6
$3.6
$16.2
3.4%
$13.0
$3.8
$16.8
3.4%
0.58%
0.55%
0.55%
0.56%
0.55%
$67.3
$18.9
$86.2
12.0%
$70.2
$19.3
$89.5
11.9%
$73.3
$19.7
$93.0
11.8%
$74.9
$20.1
$94.9
11.5%
$74.9
$20.1
$94.9
11.5%
$83.2
$21.4
$104.6
10.2%
2014E
Q1-15E
2015E
Q2-15E
Q3-15E
Q4-15E
2015E
2016E
$0.52
$0.52
88.1%
$1.87
$1.87
(32.1%)
$0.49
$0.49
40.0%
$0.62
$0.62
41.2%
$0.65
$0.65
16.8%
$0.60
$0.60
15.6%
$2.37
$2.37
26.6%
$2.65
$2.65
11.8%
$0.84
(10.7%)
43%
$0.78
-12.0%
46%
$3.12
(5.4%)
48%
$0.75
8.8%
48%
$0.92
14.2%
47%
$0.97
15.6%
48%
$0.89
14.0%
49%
$3.53
13.3%
48%
$3.91
10.8%
50%
$6.01
$0.38
$0.00
$6.15
$0.39
$0.00
$6.15
$1.52
$0.00
$6.27
$0.39
$0.00
$6.52
$0.39
$0.00
$6.80
$0.39
$0.00
$7.00
$0.41
$0.00
$7.00
$1.59
$0.00
$8.05
$1.67
$0.00
2014E
Q2-14A
Q3-14A
Q4-14E
2014E
Q1-15E
2015E
Q2-15E
Q3-15E
Q4-15E
2015E
2016E
$125.1
($97.6)
$27.4
$17.8
$2.7
$12.4
$23.0
($8.2)
$75.1
$134.8
($105.8)
$29.0
$36.1
$2.6
$13.5
$22.8
($8.2)
$95.8
$142.8
($114.0)
$28.8
$47.1
$2.4
$15.4
$23.5
($0.5)
$116.5
$0.0
$0.0
$31.0
$28.9
$2.5
$16.0
$23.8
($0.5)
$101.7
$0.0
$0.0
$116.3
$129.8
$10.2
$57.3
$93.1
($17.5)
$389.2
$0.0
$0.0
$31.0
$21.8
$1.9
$16.2
$24.1
($0.5)
$94.5
$0.0
$0.0
$32.4
$40.1
$3.5
$16.4
$25.0
($0.5)
$116.8
$0.0
$0.0
$32.8
$43.0
$3.8
$16.6
$26.0
($0.5)
$121.7
$0.0
$0.0
$34.0
$30.2
$2.6
$16.7
$26.6
($0.5)
$109.6
$0.0
$0.0
$130.3
$135.0
$11.8
$65.9
$101.8
($2.2)
$442.7
$0.0
$0.0
$144.4
$138.3
$12.0
$66.8
$112.6
($2.2)
$472.0
$84.4
$62.0
$29.2
$5.6
$38.6
$219.8
$9.8
$16.2
$6.7
$1.3
$9.8
$43.8
$21.4
$16.2
$8.9
$1.3
$10.0
$57.6
$30.0
$17.0
$10.3
$1.3
$10.5
$68.9
$18.3
$17.1
$10.0
$1.3
$10.6
$57.3
$79.5
$66.5
$35.9
$5.0
$40.8
$227.6
$13.9
$17.3
$8.8
$1.3
$10.8
$52.0
$25.6
$17.5
$8.9
$1.3
$10.9
$64.1
$27.5
$17.6
$8.9
$1.3
$11.1
$66.4
$19.3
$18.0
$8.8
$1.3
$11.3
$58.6
$86.2
$70.4
$35.4
$5.0
$44.1
$241.1
$87.6
$74.0
$34.3
$5.0
$46.8
$247.7
$233.5
$31.3
$38.2
$47.6
$44.4
$161.5
$42.5
$52.7
$55.4
$51.0
$201.6
$224.3
Income Taxes
$61.4
$8.2
$10.0
$12.3
$11.6
$42.0
$11.0
$13.7
$14.4
$13.3
$52.4
$58.3
Net Income
Non-Recurring Items
Core Earnings
$172.1
$0.0
$172.1
$23.1
$0.0
$23.1
$28.2
$0.0
$28.2
$35.3
$0.0
$35.3
$32.9
$0.0
$32.9
$119.5
$0.0
$119.5
$31.4
$0.0
$31.4
$39.0
$0.0
$39.0
$41.0
$0.0
$41.0
$37.7
$0.0
$37.7
$149.2
$0.0
$149.2
$166.0
$0.0
$166.0
Core EBITDA
$197.6
$41.4
$48.4
$50.1
$47.0
$186.9
$45.0
$55.3
$57.9
$53.6
$211.8
$234.7
Preferred Share Dividends
($4.7)
($1.2)
($1.2)
($1.2)
($1.2)
($4.7)
($1.2)
($1.2)
($1.2)
($1.2)
($4.7)
($4.7)
Net Income to Shareholders
Core Earnings to Shareholders
$165.1
$165.1
$21.2
$21.2
$26.3
$26.3
$33.5
$33.5
$31.1
$31.1
$112.1
$112.1
$29.6
$29.6
$37.2
$37.2
$39.2
$39.2
$35.9
$35.9
$141.9
$141.9
$158.7
$158.7
Fully Diluted EPS (Reported)
$2.75
$0.35
$0.44
$0.56
$0.52
$1.87
$0.49
$0.62
$0.65
$0.60
$2.37
$2.65
Fully Diluted EPS (Core)
$2.75
$0.35
$0.44
$0.56
$0.52
$1.87
$0.49
$0.62
$0.65
$0.60
$2.37
$2.65
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
51
Company Comment
Thursday, October 30, 2014, Pre-Market
(FLEX-O US$9.83)
Flextronics International Ltd.
Q2/F15: INS Weakness Offset by Other Segments
Daniel Chan, MBA - (416) 863-7552
(Scotia Capital Inc. - Canada)
daniel.chan@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
John MaGee - (416) 863-7237
(Scotia Capital Inc. - Canada)
john.magee@scotiabank.com
Target 1-Yr:
US$11.30
ROR 1-Yr:
15.0%
Valuation: 5.5x CY15E EV to EBITDA
Key Risks to Target: Margin pressure could lower EPS
Event
■ Flextronics reported Q2 results last night.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Pertinent Revisions
Implications
■ INS weakness offset by other business groups. Revenue of $6.5B and
EPS of $0.26 were largely in line with our expectations. INS continued
to be weak, but was better than expected. In fact INS, CTG, and HRS
all performed better than the company expected, which offset weaker
than expected sales out of the IEI segment due to weakness in the
semicap space. FCF generation was good at $322M for the quarter and
the company bought back 9.3M shares or 1.5% of shares outstanding.
■ Guidance in line with expectations, but shows slowing growth.
Revenue guidance of $6.6B and EPS guidance of $0.26 at the midpoint
is in line with expectations, but indicates slowing growth. The company
expects continued growth momentum out of HRS and IEI, but CTG
momentum will be challenging to maintain following strong product
ramps from Google, Microsoft, and Motorola last year.
New
Old
Target:
1-Yr
$11.30
$11.70
EPS15E
$1.02
$0.97
EPS16E
$1.22
$1.15
New Valuation:
5.5x CY15E EV to EBITDA
Old Valuation:
5.5x forward EV to FY16E EBITDA
Recommendation
■ Maintain Sector Perform. An improving business mix and more
efficiency should continue to drive margins higher, but we are cautious on
FLEX's ability to maintain its growth momentum to justify its relatively
high valuation. The company does, however, have the highest FCF yield
in the group, which is likely due to the high asset velocity in the CTG
group; the CTG business is a double-edged sword and FLEX's high
exposure to it leave us with a Sector Perform rating on the name.
Qtly EPS (FD)
2013A
2014A
2015E
2016E
Q1
$0.22 A
$0.18 A
$0.25 A
$0.28
(FY-Mar.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.26 A
$0.22 A
$0.26 A
$0.30
Q3
$0.22 A
$0.26 A
$0.26
$0.33
Q4
$0.13 A
$0.24 A
$0.25
$0.31
Year
$0.84
$0.89
$1.02
$1.22
P/E
8.0x
10.4x
9.6x
8.1x
2012A
$0.84
$1.50
8.6x
0.5x
$29,388
$1,105
1.4x
68.9x
2013A
$0.84
$1.69
8.0x
0.5x
$23,569
$1,148
1.3x
-128.6x
2014A
$0.89
$1.62
10.4x
0.6x
$26,109
$1,090
1.2x
16.9x
2015E
$1.02
$1.94
9.6x
0.6x
$26,224
$1,245
1.3x
18.2x
2016E
$1.22
$2.12
8.1x
0.5x
$26,874
$1,305
1.4x
15.3x
BVPS15E: $4.16
ROE15E: 26.58%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$5,693
$599
$6,292
579
578
52
Recommendation: Maintain Sector Perform
■ Can the growth trajectory continue without the CTG grand slam? Flextronics has
displayed stellar growth over the LTM, with sales growing 14.6% and operating profit
growing 34.5% YOY. There has been steady growth out of the HRS and IEI business groups,
but we believe much of this outsized growth was driven by significant program ramps with
Google, Microsoft, and Motorola in the CTG segment. While we believe the company will
continue to do well in HRS and IEI, and thereby continue to improve margins, we believe
Flextronics will have a challenging time maintaining its growth trajectory in the CTG
segment without new major program ramps. This is evident from the guidance provided for
the December quarter, which forecast a decline in sales by 8.1% and growth in operating
profit by only 1.5% YOY. We remain cautious on the company’s high exposure to the
consumer segment, but note the good progress it has made in HRS and IEI. We are also
cautious on the company’s relatively high EV/EBITDA valuation, which is slightly balanced
out by its in line P/E valuation and discounted FCF yield. Net/net we maintain our Sector
Perform rating on the name, but remain cautious on future growth opportunities in the CTG
space.
INS Weakness Offset by Other Business Groups
■ Revenue and EPS slightly better than expected. Exhibit 1 outlines results for the quarter.
Consolidated revenue came in higher than expected due to outperformance in CTG, IEI, and
HRS more than offsetting weakness in INS. Slightly lower than expected gross margin was
offset by lower opex and lead to a 7% beat on the bottom line. Operating margin continues to
lag its peers, but has been improving for 6 consecutive quarters. Free cash flow came in
strong at $322M and exceeded the company’s expectations for $200M. The free cash flow
outperformance was largely due to better timing of receivables, which declined by $368M in
the quarter. The company also bought 9.3M shares in the quarter for $101M, representing
approximately 1.5% of shares outstanding.
Exhibit 1 - Q2 Results
US$
Q2 15A
Integrated Network Solutions
2,409
Industrial and Emerging industries 1,103
High Reliability Solutions
875
Consumer Technology Group
2,142
Sales (M)
6,529
Gross Profit
510
Gross Margin (%)
5.8%
EBITDA (M)
314
EBITDA Margin (%)
4.8%
EBIT
183
EBIT Margin (%)
2.8%
Adjusted EPS ($)
$0.26
Q2 15E B/ (W) %
2,459
-2.0%
1,147
-3.8%
856
2.2%
1,992
7.5%
6,453
1.2%
495
3.0%
6.0%
295
6.5%
4.6%
184
-0.3%
2.9%
$0.25
6.6%
Q2 14A
2,588
940
785
2,097
6,410
471
5.8%
259
4.0%
159
2.5%
$0.22
B/ (W) %
-6.9%
17.3%
11.4%
2.1%
1.8%
8.3%
21.3%
15.6%
22.2%
Q1 15A
2,503
1,134
846
2,160
6,643
509
5.8%
310
4.7%
183
2.8%
$0.25
B/ (W) %
-3.8%
-2.7%
3.4%
-0.8%
-1.7%
0.1%
Factset Q2 15E
2,449
1,139
850
2,012
6,438
Guidance
6,200 - 6,600
$0.24
$0.22-$0.26
1.3%
0.1%
6.7%
Source: Company reports; Scotiabank GBM estimates.
■ Integrated Network Solutions (INS) continues to show weakness. INS results were in line
with guidance for low single-digit sequential decline, but still represented a 7% YOY
decline. Telecom, server, and storage were down mid-single digits in the quarter, while, to
our surprise, networking rose modestly.
■ Industrial and Emerging Industries (IEI) was slightly weaker than expected, but still
exhibited strong YOY growth. The slight underperformance, compared to guidance for flat
sequential revenue, was due to softer than expected semicap equipment sales, following
several quarters of strength. On a YOY basis, however, IEI was the strongest performer,
growing 17%.
53
■ High Reliability Solutions (HRS) slightly outperformed expectations. The company had
guided to flat sequential revenue, but the company grew revenue by 3.4% sequentially and
11.4% YOY. Strength from medical and automotive likely contributed to the
outperformance.
■ Consumer Technology Group (CTG) came in stronger than expected. The relatively flat
sequential performance was better than the company’s guidance for a high single digit
decline. Broad-based strength across all programs helped its performance. Flextronics seems
to be doing very well in wearables technology where its flexible PCB business provides a
key capability in that product category. The company has 25 customers in the wearables
segment and seems to count Google as a key customer here. With the launch of the Apple
Watch, which Flextronics may also play a role in, the wearables segment may be a good
source of growth in the CTG space for FLEX.
Guidance Better than Expected
■ Guiding to $6.6B and $0.26 at the mid-point. This is in line with the Street’s expectations.
INS is expected to be stable QOQ as telecom stays flat, networking declines slightly, and
servers & storage offsets increases slightly to offset networking declines. The company
continues to expect weak performance out of this segment and deems flat YOY performance
as positive. This supports our view that the communications space will be challenged in the
near term. The company plans to offset some of this weakness by getting involved in more
programs with Chinese OEMs, such as Huawei and ZTE and next generation companies,
such as Palo Alto Networks and FireEye. IEI is expected to be stable sequentially as strength
in energy offsets some weakness in semicap and industrial. This would represent strong
double-digit growth YOY. Supporting this growth, IEI bookings in the quarter were well
above average, which should show up in the NTM as these programs ramp. HRS is also
expected to be stable QOQ as Medical and Automotive remain stable. HRS also had an
above average quarter of new bookings. CTG is expected to be up low single digits QOQ as
the December quarter tends to be a seasonally strong quarter; however, the guidance also
implies YOY declines in the segment. Last year, the company had 3 major new program
ramps: Chromecast, Xbox, and new Motorola programs. Supporting our view that last year’s
CTG performance is unlikely to be repeated this year, the Chromecast and Xbox One
programs are likely to decline YOY as these products are now a year old, while the Motorola
business is expected to be relatively flat due to the recently launched products. Overall,
margins are expected to improve slightly as the product mix continues to improve and as the
company drives more efficiency out of its operations.
Exhibit 2 - Changes to Our Model
New
2,442
Q3/F15E
Old
2,533
Delta %
-3.6%
New
9,629
F2015E
Old
9,832
Industrial and Emerging industries
High Reliability Solutions
Consumer Technology Group
Sales
1,101
1,008
9.3%
4,491
881
2,235
848
2,037
3.9%
9.7%
3,551
8,552
6,659
6,426
3.6%
Gross Margin (%)
EBITDA
EBITDA (%)
Adjusted EPS ($)
5.9%
320
4.8%
6.0%
298
4.6%
$0.26
$0.26
US$ M
Integrated Network Solutions
Delta %
-2.1%
New
9,148
F2016E
Old
9,439
Delta %
-3.1%
4,377
2.6%
4,940
4,793
3.1%
3,421
8,018
3.8%
6.7%
3,977
8,809
3,831
8,499
3.8%
3.6%
26,224
25,647
2.2%
26,874
26,562
1.2%
7.5%
5.8%
1,245
4.7%
5.9%
1,168
4.6%
6.6%
6.1%
1,305
4.9%
6.0%
1,274
4.8%
2.5%
0.4%
$1.02
$0.97
4.9%
$1.22
$1.15
5.2%
Source: Company reports; Scotiabank GBM estimates.
Highest Valuation in Our EMS Coverage
■ FLEX trades at a forward EV/EBITDA of 5.0x. This compares to CLS at 4.8x and JBL at
4.7x. FLEX’s valuation premium is likely due to its strong performance over the LTM,
where it grew sales by 14.6% and operating profit by 34.5%, significantly outperforming its
peers. While we believe HRS and IEI will continue to grow at a steady pace, we believe
F2017E
54
continuing that growth trajectory in CTG will be challenging Exhibit 3 - Valuation Table
next year unless they bring on new programs of a similar
magnitude. Despite the high EV/EBITDA multiple, we note the $US M
company trades in line with peers on a P/E basis and at a Current Price
discount on FCF yield. We currently forecast FLEX is trading at Sales (LTM)
a FCF yield of 12.1% this compares to Jabil at 10.3% and EBITDA (LTM)
Celestica at 9.4%. It is likely the high asset velocity in the CTG EBITDA%
Net Income (LTM)
group that helps the company generate more FCF.
■ Change of valuation multiple takes price target down to EPS
$11.30. We have made minor changes to our model and have Last 12 MonthsA
used a 5.5x EV/EBITDA multiple on our CY15E estimates. As a Next 12 MonthsE
result of our adjustments, our price target has declined to $11.30. 2014E
FLEX
JBL
CLS
$9.83
$27,079
$1,207
4.5%
$615
$20.05
$16,031
$824
5.1%
$125
$10.67
$5,644
$263
4.7%
$184
$1.01
$1.09
$1.01
$1.16
$0.60
$1.89
$0.57
$2.04
$1.01
$1.04
$1.01
$1.11
7.9%
27.9%
15.7%
213.7%
(74.3)%
258.7%
3.2%
21.4%
9.3%
9.0
9.7
8.5
10.6
35.2
9.8
10.3
10.6
9.6
$5,693
$599
$6,292
$3,971
$715
$4,686
$1,916
($578)
$1,338
$1,260
$1,228
$1,282
$1,007
$783
$1,079
$279
$266
$290
4.4%
18.2%
4.4%
22.2%
(31.0)%
37.9%
6.0%
8.6%
9.1%
EV/EBITDA Next 12
EV/EBITDA 2014E
EV/EBITDA 2015E
5.0
5.1
4.9
4.7
6.0
4.3
4.8
5.0
4.6
BVPS
P/BVPS
P/tBVPS
3.92
2.5
3.0
11.32
1.8
2.4
8.13
1.3
1.4
2015E
EPS Growth
NTM-E over LTM-A
2014E/2013A
2015E/2014E
P/E Next 12 E
P/E 2014E
P/E 2015E
Enterprise Value
Market Cap
Net Debt
EV
EBITDA Next 12 Months
EBITDA 2014E
EBITDA 2015E
EBITDA Growth
NTM-E over LTM-A
2014E/2013A
2015E/2014E
Source: Company reports; Scotiabank GBM estimates; Factset.
Exhibit 4 - FLEX is trading above its historical range
6.5
Forward EV/EBITDA
6
5.5
5
4.5
4
3.5
3
EV/EBITDA
Source: Factset.
EV/EBITDA 5-yr avg.
+1 ST Dev
-1 ST Dev
55
Company Comment
Wednesday, October 29, 2014, After Close
(GPRK-N US$8.65)
GeoPark Limited
Tigana - Pushing to Add >50%
Gavin Wylie - (403) 213-7333
(Scotia Capital Inc. - Canada)
gavin.wylie@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Jenna Halwa, M. Econ - (403) 213-7762
(Scotia Capital Inc. - Canada)
jenna.halwa@scotiabank.com
Target 1-Yr:
US$14.50
ROR 1-Yr:
67.6%
Valuation: Based on our risked NAV ($14.27/share) that also equates to 1.38x our 2P NAV .
Key Risks to Target: Commodity prices, exploration, project execution, political/regulatory.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Event
■ GeoPark reported an impressive uptick to 3P reserves at the Tigana
field following appraisal drilling that indicated the field represented a
single / larger combined trap.
Implications
■ Internal gross 3P reserves are now estimated at 45-65 mmboe (45%
GeoPark / 55% Parex) compared to the 14.6 mmboe (gross) estimated
at year-end 2013 by an independent reserve appraiser.
■ We reaffirm our Sector Outperform rating on GeoPark and our one-year
price of $14.50 per share, based on our risked NAVPS estimate of
$14.27.
Recommendation
■ In our minds, GeoPark's update is further evidence that the company has
found its stride operationally in Colombia and could have further running
room on LLA-34.
■ Assuming net 2P reserve adds of ~16 mmbbl, we see the potential for a
significant increase of 23% at year-end versus 2013 net 2P reserves of
70.2 mmboe. We estimate the value of barrels in Colombia (NPV12) to
be $21-24/bbl that could imply an overall mid-point net increase of 58%
to our Base 2P NAVPS that current stands at $10.53.
Qtly CFPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.77 A
$0.92 A
$0.93 A
$1.05
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Debt-Adj CF Multiple/Share
Price/Earnings
Prod-Oil (mbbl/d)
Prod-Nat Gas (mmcf/d)
Operating Cash Flow (M)
Net Cap Exp (M)
Q2
$0.84 A
$0.73 A
$1.26 A
$1.09
Q3
$0.63 A
$0.91 A
$0.97
$1.06
Q4
$0.62 A
$0.87 A
$1.03
$1.02
Year
$2.86
$3.43
$4.21
$4.22
P/CF
n.m.
2.9x
2.1x
2.0x
2011A
$0.00
$1.56
3.6x
2012A
$0.27
$2.86
4.4x
2.51
30.51
$69
$101
7.49
22.80
$126
$304
2013A
$0.47
$3.43
3.6x
21.2x
10.75
14.39
$159
$228
2014E
$1.15
$4.21
2.7x
7.5x
15.24
31.80
$251
$360
2015E
$1.19
$4.22
2.6x
7.2x
18.21
38.42
$257
$259
NAVPS:
P/NAV:
$10.53
0.82x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$501
$201
$734
58
26
56
Tigana - Pushing to Add >50%
■ GeoPark reported an impressive uptick to 3P reserves at the Tigana field following
appraisal drilling that indicated the field represented a single / larger combined trap.
Internal gross 3P reserves are now estimated at 45-65 mmboe (45% GeoPark / 55% Parex)
compared to the 14.6 mmboe (gross) estimated at year-end 2013 by an independent reserve
appraiser. In our minds, GeoPark’s update is further evidence that the company has found its
stride operationally in Colombia and could have further running room on LLA-34. Q3
production was previously released at 21,548 boe/d (+5% QOQ) with Colombia accounting
for just under 11,900 bbl/d (+15% QOQ). We see the success at LLA-34 as a key driver to
overall Colombian production growth and see this update as further establishing what has
become a compelling story at LLA-34. Since December 2013, Geopark has drilled 8 wells at
the Tigana field and put 7 wells onstream that are currently producing ~11,000 boe/d gross
with a ~3.5% water cut. GeoPark also believes that the increased field size reduces the
drilling risk and translates into 20-45 potential new drilling locations along with potential
cost savings.
■ While we continue to see great progression in Colombia, we also emphasize the potential for
Chile to begin to surprise to the upside with the Methanex plant maintenance coming to an
end (supportive of Q4 volumes), an additional point that could help to carve back some of its
multiple discount. We also view the company as financially sound under an $85/bbl Brent
price in 2015, given its $85M credit facility is largely undrawn and it held $125M of cash as
of June 30, 2014. For additional details and Brent sensitivity see our October 21 Daily Edge
entitled Running Oil Price Scenarios – When the Going Gets Tough.
■ We reaffirm our Sector Outperform rating on GeoPark and our one-year price of $14.50
per share, based on our risked NAVPS estimate of $14.27.
■ We maintain our position that GeoPark is attractively valued with the potential for more
growth to come from LLA-34. In the context of our 2P NAVPS estimate of $10.53,
GeoPark is trading at a P/NAV ratio of 82% and a 2015E DACF multiple of 2.7x,
versus its Colombian E&P peer group averages of 76% and 3.0x, respectively.
■ NAV Impact. In the context of its revised estimated gross OOIP of 140-170 mmbbl and
assuming a recovery factor of 25% (our estimate), we see the potential for gross 2P reserve
adds to be as high as 35 mmbbl (16 mmbbl net to GeoPark). That said, we recognize
additional evaluation / appraisal drilling underway (Tigana Sur-3) and upside around further
production data that could make our base recovery factor quite conservative. The company is
also in full push at the Tua field with 1 development well to be completed shortly and 2
appraisal wells planned prior to year end. Another exploration well that could provide
interesting results is Tilo which will be drilled to the north of the Tigana field. See Exhibit 1
for Field Map at LLA-34.
■ Assuming net 2P reserve adds of ~16 mmbbl, we see the potential for a significant
increase of 23% at year-end versus 2013 net 2P reserves of 70.2 mmboe. We estimate
the value of barrels in Colombia (NPV12) to be $21-24/bbl that could imply an overall
mid-point net increase of 58% to our Base 2P NAVPS that current stands at $10.53.
57
Exhibit 1 - GPRK - LLA-34 Field Map
Source: Company reports.
58
Exhibit 2 - GPRK - NAVPS Summary
$/Share
$45.00
Building Blocks of NAVPS
P/NAV
120%
$40.01
112%
$40.00
$35.00
$30.00
Unbooked
Upside
82%
85%
80%
$25.00
$14.27
61%
$20.00
$15.00
$10.53
40%
$10.00
31%
$5.00
22%
$0.00
-$5.00
Base
Strip
Base
Base 2P NAV
Chile / Other Gas - Fell / Tierra del Fuego
Brazil Gas - Manati
Chile / Other - L&M Oil - Fell / Tierra del Fuego
Brazil - L&M Oil - Manati
Colombia - L&M Oil - Llanos Basin
Chile Gas - TdF - Springhill / Tertiary Exploration
Chile Gas - Fell Springhill / Tertiary Exploration
Chile - L&M Oil - Fell - Tobifera Shallow / Deep Exploration
Chile - L&M Oil - TdF - Tobifera Shallow / Deep Exploration
Chile - L&M Oil - Fell / TdF - Sprinhill / Tobfiera Secondary
Chile - L&M Oil - Fell / TdF - Shale Oil (ECF / LCF) Exploration
Brazil - L&M Oil - Reconcavo Basin Exploration (# Prospects)
Brazil - L&M Oil - Potiguar Basin Exploration (# Prospects)
Colombia - L&M Oil - LLA34/32 Exploration
Colombia - L&M Oil - Llanos Exploration (LLA67 / 17 / Yamu / La Cuerva)
Balance Sheet/Land/Fx
Current Price
Target Price
P/NAV
Source: Company reports; Scotiabank GBM estimates.
$1.85
$0.79
$5.56
$0.06
$6.18
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
-$3.91
$8.65
$14.50
82%
Strip
Risked NAV
$1.85
$0.79
$4.10
$0.04
$4.95
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
-$4.01
$8.65
$14.50
112%
$2.02
$0.86
$6.23
$0.06
$7.33
$0.01
$0.01
$0.65
$0.60
$0.00
$0.00
$0.08
$0.14
$0.62
$0.11
-$4.43
$8.65
$14.50
61%
$2.01
$0.86
$4.49
$0.05
$5.85
$0.01
$0.01
$0.48
$0.44
$0.00
$0.00
$0.01
$0.02
$0.38
$0.07
-$4.43
$8.65
$14.50
85%
Base
Strip
All-In Identified Projects
$2.51
$2.48
$0.98
$0.99
$7.48
$5.21
$0.06
$0.05
$8.10
$6.45
$0.14
$0.13
$0.13
$0.12
$6.50
$4.78
$11.91
$8.79
$1.21
$0.61
$0.00
$0.00
$0.83
$0.15
$1.41
$0.25
$2.47
$1.53
$0.71
$0.44
-$4.43
-$4.43
$8.65
$8.65
$14.50
$14.50
22%
31%
0%
59
Exhibit 3 - GPRK - NAVPS Summary
US$ millions unless otherwise noted
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
Production
Crude Oil & NGLs (bbl/d)
246
550
1,970
2,509
7,492
10,746
15,243
18,208
19,131
Natural Gas (mcf/d)
18,865
34,622
29,862
30,506
22,803
14,395
31,805
38,419
41,759
Equivalent (boe/d)
3,390
6,320
6,947
7,593
11,292
13,145
20,543
24,611
26,091
% BOE growth
138%
86%
10%
9%
49%
16%
56%
20%
6%
% Natural Gas
93%
91%
72%
67%
34%
18%
26%
26%
27%
% Crude Oil
7%
9%
28%
33%
66%
82%
74%
74%
73%
Price Assumptions ($/boe)
$30.93
$19.44
$31.37
$40.26
$60.61
$70.52
$65.89
$67.44
$68.46
Operating Netbacks ($/bbl)
$22.27
$11.98
$23.24
$31.11
$37.58
$46.02
$43.07
$40.22
$39.90
35.5
42.2
49.6
47.9
56.9
70.2
N/A
N/A
N/A
Cash balance US$M
$6
$24
$99
$194
$48
$121
$120
$118
$106
Operating Cash Flow US$M
$17
$16
$41
$69
$126
$159
$251
$257
$262
Financing Cash Flow US$M
$40
$37
$91
$132
$26
$164
$128
$0
$0
$0.51
$0.44
$0.92
$1.56
$2.86
$3.43
$4.21
$4.22
$4.31
n.m.
-15%
110%
71%
83%
20%
23%
0%
2%
2P Reserves (Gross) mmboe
CFPS (D)
CFPS growth
Net Capital spending (US$M)
$58
$41
$61
$101
$304
$228
$360
$259
$274
Free cash flow (US$M)
($41)
($24)
($21)
($33)
($177)
($69)
($109)
($2)
($12)
7%
-5%
3%
3%
6%
9%
12%
10%
7%
P/CF
7.8x
9.9x
15.2x
4.6x
3.7x
2.9x
2.1x
2.0x
2.0x
Debt Adjusted Cash Flow (US$M)
$19
$18
$42
$74
$134
$178
$271
$277
$278
Debt-adj CF multiple
9.5x
12.5x
15.4x
3.6x
4.4x
3.6x
2.7x
2.7x
2.7x
D/CF
2.8x
2.5x
1.7x
-0.6x
1.1x
1.3x
0.9x
0.9x
0.9x
Net Debt/Cap
44%
32%
42%
-19%
30%
35%
30%
27%
26%
34,399
41,666
41,703
42,474
43,496
43,862
57,864
57,864
57,864
$48
$40
$67
-$39
$135
$201
$234
$236
$248
ROACE (%)
Valuation
Shares Outstanding (000)
Net Debt (Year End) (US$M)
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
60
Intraday Flash
Wednesday, October 29, 2014 @ 12:20:50 PM (ET)
(TV-N US$34.77)
(TLEVISA CPO-MX MXN
93.52)
Grupo Televisa, SAB
Old Media: Analysis of Univision's Q3/14 Results
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
andres.coello@scotiabank.com
Rating: Sector Underperform
Risk Ranking: High
Target 1-Yr: US$28.00
1-Yr: MXN 74.00
ROR 1-Yr:
-19.3%
Valuation: DCF - 5 years results, 7.4% WACC, terminal growth rate of 3.6%
Key Risks to Target: Decline of broadcast ratings in Mexico and the U.S.; expensive acquisitions
Div. (NTM)
Div. (Curr.)
(ADS)
Yield (Curr.)
US$0.07
US$0.07
0.2%
Event
■ Univision reported, in our view, soft Q3 results.
Implications
■ Consolidated revenues grew only 5.2% YOY. However, if we exclude
the one-off impact of US$51.4M related to the World Cup, Univision's
adjusted revenues would have fallen 2.2% YOY. Consolidated
EBITDA grew 4.4% YOY, or 3.4% if excluding US$3.1M related to
the Cup. On the conference call, management said that, excluding the
World Cup, the Copa de Oro and other items, revenues and EBITDA
grew only 1.2% and 4.7%, respectively, in Q3/14 (we understood that
adjusted ad revenues were actually down slightly from the year before).
■ Of note, while old media struggles to grow at single digit rates (at best),
Facebook reported yesterday a 64.0% YOY increase in ad sales in Q3.
■ Univision managed to lower net debt, but only slightly, from an
estimated US$8.37B in Q2/14 to US$8.14B in Q3/14 (excluding the
Televisa convertibles). At 6.7x estimated net debt to LTM EBITDA,
Univision remains one of the most leveraged broadcasters in the U.S.
■ The company's ratings underperformed the rest of the industry.
Primetime audiences (C7) in the 18-34 group as reported by the
company declined 8.7% YOY (vs. -4.9% for the industry leaders),
while in the 18-49 group they declined 7.4% YOY (vs. +0.4% for the
industry). The CAB reported drops in ratings for Univision and Unimas.
Recommendation
■ We value Univision using a generous 11x 2015E EV/EBITDA. Sell TV.
Qtly EPS (FD)
2011A
2012A
2013A
2014E
(FY-Dec.)
Earnings/Share
Free Cash Flow/Share
EV/EBITDA
Price/Earnings
Price/FCF
Revenues (M)
EBITDA (M)
Q1
0.31 A
0.53 A
0.38 A
0.30 A
Q2
0.64 A
0.49 A
0.63 A
0.77 A
Q3
0.77 A
0.79 A
0.84 A
-0.06 A
Q4
0.72 A
1.05 A
0.86 A
0.69
Year
2.44
3.07
2.71
1.70
P/E
24.1x
22.4x
29.1x
55.0x
2012A
3.07
3.28
8.8x
22.4x
21.0x
69,290
27,264
2013A
2.71
2.53
9.7x
29.1x
31.2x
73,791
28,668
2014E
1.70
0.16
11.1x
55.0x
n.m.
80,410
30,184
2015E
2.85
3.69
10.3x
32.8x
25.4x
86,944
32,310
2016E
2.74
3.42
10.3x
34.2x
27.4x
89,114
32,295
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(ADS)
Float O/S (M) (ADS)
US$20,111
US$4,958
US$21,137
BVPS14E: 29.47
ROE14E: 5.96%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
All values in MXN unless otherwise indicated. ^ Limited Voting
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
578
416
61
Univision's Audiences, as Reported in the Press Release
Exhibit 1 - Total U.S. Primetime Network Audience (in 000): 18-34 Segment, as Reported by Univision
18-34
years old
Q3/13
YOY
Q3/13
Q4/13
YOY
Q4/13
Q1/14
YOY
Q1/14
Q2/14
YOY
Q2/14
Q3/14
Q3/14
vs.
Q3/12
Q3/12
Q1/13
CBS
599
1,580
25.4%
774
-7.2%
704
17.5%
1,146
18.9%
1,009
-36.1%
662
-14.5%
711
1.0%
18.7%
TBS
477
596
-9.4%
523
3.8%
534
11.9%
515
-5.9%
515
-13.6%
437
-16.4%
405
-24.2%
-15.1%
ESPN
407
483
-15.3%
N/A
N/A
422
3.7%
672
22.4%
454
-6.0%
410
N/A
N/A
N/A
N/A
USA
531
534
6.2%
487
-0.2%
531
0.0%
506
1.2%
520
-2.6%
467
-4.1%
428
-19.4%
-19.4%
ABC
686
1,193
-2.4%
1,061
-6.4%
664
-3.2%
1,189
13.2%
1,049
-12.1%
1,038
-2.2%
634
-4.5%
-7.6%
Univision
919
901
-13.8%
824
-17.6%
784
-14.7%
679
-25.2%
654
-27.4%
682
-17.2%
716
-8.7%
-22.1%
Fox
1,147
1,648
-13.0%
1,104
-20.0%
922
-19.6%
1,399
-4.6%
1,759
6.7%
810
-26.6%
752
-18.4%
-34.4%
NBC
1,842
913
-37.9%
1,057
12.2%
974
-47.1%
1,650
11.1%
1,425
56.1%
829
-21.6%
958
-1.6%
-48.0%
826
981
-9.0%
833
-2.5%
692
-16.2%
970
3.0%
923
-5.9%
704
-15.5%
654
-4.9%
-20.4%
Q2/14
YOY
Q2/14
Q3/14
Q3/14
vs.
Q3/13
Q3/14
vs.
Q3/12
Average
Q2/13
YOY
Q2/13
Q3/14
vs.
Q3/13
YOY
Q1/13
Source: Company reports.
Exhibit 2 - Total U.S. Primetime Network Audience (in 000): 18-49 Segment, as Reported by Univision
18-49
years old
Q3/12
Q1/13
YOY
Q2/13
YOY
Q3/13
YOY
CBS
1,797
4,176
10.5%
2,369
-10.7%
2,026
836
955
-10.8%
N/A
N/A
890
TBS
937
1,149
-4.2%
971
1.0%
ABC
1,742
2,865
-6.3%
2,541
-11.3%
Univision
1,760
1,950
4.1%
1,764
-4.3%
USA
1,140
1,100
0.5%
986
Fox
2,342
3,524
-18.2%
NBC
4,414
2,237
Average
1,871
2,245
ESPN
Source: Company reports.
Q4/13
YOY
Q4/13
Q1/14
YOY
Q1/14
12.7%
3,299
-5.7%
2,903
-30.5%
2,118
-10.6%
2,057
1.5%
14.5%
6.5%
1,418
-0.5%
896
-6.2%
817
N/A
NA
N/A
N/A
990
5.7%
1,046
-6.0%
1,031
-10.3%
870
-10.4%
820
-17.2%
-12.5%
1,696
-2.6%
2,860
-2.7%
2,540
-11.3%
2,507
-1.3%
1,655
-2.4%
-5.0%
1,655
-6.0%
1,485
-21.3%
1,431
-26.6%
1,463
-17.1%
1,533
-7.4%
-12.9%
-6.1%
1,067
-6.4%
958
-2.9%
1,021
-7.2%
900
-8.7%
883
-17.2%
-22.5%
2,432
-24.0%
1,922
-17.9%
2,959
-0.6%
3,881
10.1%
1,963
-19.3%
1,719
-10.6%
-26.6%
-35.7%
2,545
7.1%
2,343
-46.9%
3,898
0.8%
3,616
61.6%
2,222
-12.7%
2,387
1.9%
-45.9%
-9.6%
1,944
-2.6%
1,574
-15.9%
2,240
-4.1%
2,165
-3.5%
1720
-11.5%
1,579
0.4%
-15.6%
62
Highlights of Univision’s Q3/14 Results
Exhibit 3 – Highlights of Univision’s Q3/14 Results (in US$000)
Television
Radio
Digital
Total Revenues
Q3/14
613,900
78,900
36,100
728,900
Q2/14
713,900
75,600
44,200
833,700
Q3/13
580,600
90,000
22,100
692,700
QOQ %
-14.0%
4.4%
-18.3%
-12.6%
YOY %
5.7%
-12.3%
63.3%
5.2%
Television
Radio
Digital
Total EBITDA
276,300
25,500
13,300
315,100
313,100
24,000
14,000
351,100
263,000
34,600
4,200
301,800
-11.8%
6.3%
-5.0%
-10.3%
5.1%
-26.3%
216.7%
4.4%
42,800
40,700
-15,900
5.2%
N/A
Net income
Source: Company reports; Scotiabank GBM estimates.
Calculation of Univision's Net Debt
Exhibit 4 - Calculation of Univision's Net Debt (in US$M)
Current portion of long-term debt and capital lease obligations
Long-term debt and capital lease obligations
Other long-term liabilities
-Cash
Net Debt
-Televisa's convertible bonds
Net Debt
LTM EBITDA
Net debt/LTM EBITDA
Q3/14
152
9,183
125
197
9,263
1,125
8,138
Q2/14
222
9,195
141
68
9,490
1,125
8,365
Q3/13
241
9,351
142
103
9,631
1,125
8,506
QOQ %
-31.6%
-0.1%
-11.5%
189.0%
-2.4%
0.0%
-2.7%
YOY %
-37.2%
-1.8%
-11.8%
90.0%
-3.8%
0.0%
-4.3%
1,214
6.7
1,200
7.0
1,114
7.6
1.1%
-3.8%
9.0%
-8.8%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
63
Intraday Flash
Wednesday, October 29, 2014 @ 3:59:47 PM (ET)
Horizon North Logistics Inc.
(HNL-T C$3.20)
Pessimistic Call; Taking Down Our Estimates
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
(Scotia Capital Inc. - Canada)
Sam Devlin, CFA - (403) 213-7332
(Scotia Capital Inc. - Canada)
vladislav.vlad@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
sam.devlin@scotiabank.com
Target 1-Yr:
C$4.50
ROR 1-Yr:
50.6%
Valuation: 6.0x our 2015 EV/EBITDA estimate.
Div. (NTM)
Div. (Curr.)
$0.32
$0.32
Yield (Curr.)
10.0%
Key Risks to Target: Commodity prices, labour supply, access to supplies, weather, contract risk, and FX.
Event
■ Revising our estimates post-Q3 conference call.
Pertinent Revisions
Implications
■ No positive takeaways from the call, in our view. Management
highlighted an initiative to develop the market for modular permanent
facilities to support manufacturing ops. (hotels, offices, etc.). While
positive from a diversification standpoint, we view this as a negative
read-through for the long-term demand outlook of HNL's core camp
business. While management noted delays on Fort Hills as well as
inaccurate cost estimates (which will see margins closer to 13% vs.
17% for the project), the comments do not reconcile the divergence
from guidance issued three months ago (-20% for 2H/14). When pushed
HNL noted they were previously too optimistic across the board.
■ HNL is calling for net capex in the $30M to $40M range for 2015, or
~500 beds (vs. previous commentary of 1k-1.5k beds), highlighting the
deterioration in visibility. While no major contracts are expected to roll
off in 2015, a handful of small camps will need to be redeployed (~15%
of beds). Our 2014E and 2015E EBITDAs reduce 15% and 28%.
Target:
1-Yr
EBITDA14E
EBITDA15E
New
Old
$4.50
$91
$100
$6.50
$107
$140
Recommendation
■ We continue to believe LNG could act as a major catalyst for the space,
which could ultimately benefit HNL as they have been building land
positions in Kitimat and Prince Rupert (provided they have the financial
flexibility to fund the project). That said, we are not ready to give HNL
the benefit of the doubt, and would look to other names to play the LNG
theme. Our one-year price target is reduced to $4.50 (from $6.50).
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$34 A
$37 A
$24 A
$32
$40 A
$33 A
$15 A
$25
$34 A
$41 A
$26 A
$23
$36 A
$16 A
$26
$21
$145
$126
$91
$100
EV /
EBITDA
6.0x
9.4x
5.3x
4.6x
2011A
$93
$92
$1
25.5%
27.9%
0.6x
$0.51
$0.12
2012A
$128
$131
$-3
27.5%
30.6%
0.9x
$0.68
$0.20
2013A
$87
$63
$24
22.8%
17.9%
0.9x
$0.46
$0.25
2014E
$83
$90
$-7
19.7%
7.6%
1.5x
$0.20
$0.32
2015E
$89
$40
$49
20.6%
9.6%
1.2x
$0.25
$0.32
(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:
$2.60
7.59%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$353
$148
$501
110
110
64
Exhibit 1 - Snapshot Summary
Horizon North Logistics Inc. (TSX: HNL)
Financial Statistics
Rating: Sector Perform
Valuation Analysis
2009
2010
2011
2012
2013
2014E
2015E
Share Price
$3.18
EV/EBITDA
6.2x
6.8x
5.5x
6.0x
9.4x
5.2x
4.5x
1-Yr Target Price
$4.50
P/CF
6.3x
6.6x
5.4x
5.9x
12.6x
4.2x
4.0x
52%
P/E
40.3x
17.6x
9.2x
10.1x
21.6x
16.0x
12.9x
Dividend
$0.32
P/BV
1.0x
1.8x
2.3x
2.8x
3.8x
1.2x
1.3x
Yield
10.1%
P/TBV
1.3x
2.1x
2.6x
2.9x
3.8x
1.2x
1.3x
FD Share Count
110 M
ROE (adjusted)
3%
10%
28%
31%
18%
8%
10%
Marker Capitalization
$351 M
ROA (adjusted)
2%
7%
17%
18%
11%
5%
6%
Net Debt (Net Cash)
$148 M
Enterprise Value
$499 M
Implied Return
Corporate Margins
2009
2010
2011
2012
2013
2014E
2015E
Gross
29.3%
26.6%
29.1%
30.8%
26.2%
24.3%
25.1%
EBITDA
23.1%
21.9%
25.5%
27.5%
22.8%
19.7%
20.6%
Debt Summary as of
Q3/14
Earnings Summary ($M)
2009
2010
2011
2012
2013
2014E
2015E
Net Debt (Net Cash)
$148 M
Total Revenue
$150
$239
$403
$527
$554
$459
$488
Facility Size
$175 M
EBITDA
$35
$52
$103
$145
$126
$91
$100
Draw on Facility
$139 M
EBIT
$9
$26
$63
$102
$63
$37
$38
Facility Remaining
$36 M
EBT
$8
$24
$60
$99
$59
$32
$33
Reported Earnings
$6
$16
$45
$73
$42
$24
$25
Adjusted Earnings
$5
$18
$55
$75
$51
$22
$27
$0.04
$0.17
$0.51
$0.68
$0.46
$0.20
$0.25
21%
%
Per FD Share (Adjusted)
Segmented Revenue
100%
Cash Flow Summary ($M)
2009
2010
2011
2012
2013
2014E
2015E
CFPS FD
$0.26
$0.45
$0.86
$1.16
$0.79
$0.75
$0.80
$30
$48
$93
$128
$87
$83
$89
Capex
Free Cash Flow
$14
$30
$92
$131
$63
$90
$40
$16
$17
$1
($3)
$24
($7)
$49
Dividends
$0
$0
$13
$22
$27
$35
$35
$0.00
$0.00
$0.12
$0.20
$0.25
$0.32
$0.32
Funds From Operations
75%
1
50%
25%
Per FD Share
0%
0%
nmf
nmf
114%
-507%
73%
Capex1/Cash Flow
Net Debt (Cash)/Cash Flow
0.5x
0.6x
1.0x
1.0x
0.7x
1.1x
0.5x
1.3x
0.9x
0.6x
0.9x
0.9x
1.5x
1.2x
Net Debt/Equity
0.2x
0.2x
0.3x
0.4x
0.3x
0.4x
0.4x
Operational Summary
2009
2010
2011
2012
2013
2014E
2015E
Large Camp Rentable Beds (exit)
NA
3,060
4,850
6,905
7,059
8,259
8,714
Drill Camp Rentable Beds (exit)
NA
1,000
950
871
882
820
820
Owned Access Mats (average)
13,289
12,771
9,152
13,812
17,057
19,109
19,859
Total Mats Sold
7,427
23,531
44,612
43,841
19,667
31,442
32,071
Large Camps
NA
48%
56%
60%
61%
61%
58%
Drill Camps
NA
9%
17%
29%
36%
28%
31%
Access Mats (includes sub-rentals)
48%
62%
78%
74%
74%
68%
69%
Payout From FCF
Camps & Catering
2015E
2014E
2013
2012
2011
2010
2009
0%
Matting
Company Profile
Horizon North Logistics Inc. is a full-service
workforce accommodation provider operating in
the WCSB. The company manufactures units
for rental and sale, and also provides catering
and camp management services. The company
also operates a matting manufacturing and
rental business. Horizon's client base has
historically been heavily weighted towards oil
sands development.
Analyst Contact Info
Fleet
Utilization Rates
Gross Margins
Vladislav C. Vlad, MBA, P.Eng.
Camps & Catering
28.4%
25.7%
28.7%
31.3%
25.5%
24.3%
25.3%
(403) 213-7759
Matting
32.9%
30.2%
26.9%
25.4%
30.1%
23.3%
23.6%
vladislav.vlad@scotiabank.com
Notes: (1) Cash capex may vary from corporate capital program due to timing differences.
Source: Company reports; Scotiabank GBM estimates.
65
Exhibit 2 – Q3/14 Results Summary
Q3/14
Figures in $M
YOY
QOQ
2014E
Actual
Estimated
∆
Q3/13
∆
Q2/14
∆
-11%
$137.9
-26%
$79.7
28%
New
2015E
Prior
∆
-8%
New
Prior
∆
-15%
Revenue
Camps & Catering
$102.3
$114.8
$398
$434
$423
$498
% Camp Rental & Catering Ops.
60.4%
57.4%
42.2%
73.8%
67.3%
65.2%
67.1%
67.5%
% Manufacturing Sales
36.0%
40.0%
55.6%
22.5%
29.6%
32.2%
29.9%
30.1%
% Relocatable Structures
3.6%
2.6%
2.2%
3.7%
3.1%
2.6%
3.0%
2.4%
Matting
$19.9
$21.5
-7%
$19.8
1%
$16.8
19%
$63
$71
-10%
$67
$78
-14%
Corporate
($0.3)
($0.5)
-39%
($0.3)
-12%
($0.4)
-24%
($2)
($2)
-10%
($2)
($2)
-10%
Total Revenue
$121.9
$135.8
-10%
$157.4
-23%
$96.1
27%
$459
$503
-9%
$488
$574
-15%
Gross Margin
25.5%
26.0%
24.3%
25.4%
25.1%
28.6%
Camps & Catering
$23.8
$27.6
-14%
$37.5
-37%
$15.0
58%
$90
$104
-14%
$99
$135
-26%
Matting
$5.0
$5.5
-10%
$6.6
-24%
$3.7
34%
$14
$16
-14%
$15
$20
-27%
Corporate
($2.7)
($2.9)
-6%
($2.8)
-2%
($3.3)
-17%
($13)
($13)
-1%
($14)
($15)
-8%
Total EBITDA
$26.0
$30.2
-14%
$41.3
-37%
$15.5
68%
$91
$107
-15%
$100
$140
-28%
EBITDA Margin
21.4%
22.2%
19.7%
21.2%
20.6%
24.5%
Operating Earnings
$0.07
$0.10
$0.21
$0.31
$0.22
$0.45
Discontinued/Non-Controlling Ops.
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Adjustments/Unusual Items
($0.01)
$0.00
NA
($0.00)
NA
($0.00)
NA
($0.01)
($0.00)
NA
$0.02
$0.02
0%
Adjusted Net Earnings
$0.06
$0.10
-37%
$0.16
-61%
$0.01
NA
$0.20
$0.31
-36%
$0.25
$0.47
-48%
CF From Operations
$0.23
$0.23
-2%
$0.34
-33%
$0.12
83%
$0.75
$0.83
-10%
$0.80
$1.06
-24%
Funds From Operations
$25.0
$25.5
-2%
$37.2
-33%
$14
82%
$83
$92
-10%
$89
$118
-25%
Net Capex
$17.2
$6.6
NA
$9.0
91%
$44.5
-61%
$90
$80
13%
$40
$82
-51%
Net Acquisition (Disposition)
$0.0
$5.0
NA
$0.0
$0
$10
NA
$0
$0
Cash Dividends
$8.8
$8.8
0%
$6.8
29%
$8.8
0%
$33
$33
0%
$35
$35
0%
Net Capex/Cash Flow
0.7x
0.3x
NA
0.2x
NA
3.2x
-79%
1.1x
0.9x
25%
0.5x
0.7x
-35%
$147.9
$130.7
13%
$71.2
NA
$128.0
16%
$123
$129
-5%
$104
$119
-13%
8,259
8,259
0%
8,714
9,262
-6%
29.2%
21.5%
EBITDA
26.2%
16.1%
F.D. Per Share Data
-24%
$0.17
-56%
$0.00
$0.01
NA
$0.00
-32%
-50%
Cash Flow Summary
Net Debt
$0.0
Operational Statistics
Large Camps
8,030
7,884
2%
6,771
19%
7,484
7%
432,746
415,000
4%
346,833
25%
394,262
10%
Large Camp Bed Utilization
62%
59%
Revenue per Bed Rental Day
$108
$120
Large Camp rentable beds (period end)
Bed Rental Days
54%
-10%
$128
60%
-16%
$117
-8%
1,680,828 1,664,582
1%
61%
61%
$122
$132
-8%
1,814,000 1,906,360
-5%
58%
60%
$120
$141
-15%
Drill Camps
828
890
-7%
782
6%
928
-11%
820
882
-7%
820
882
-7%
23,439
21,000
12%
23,884
-2%
9,395
NA
88,413
83,974
5%
92,834
88,173
5%
Drill Camp Bed Utilization
31%
25%
28%
25%
31%
27%
Revenue per Bed Rental Day
$163
$155
5%
$177
-8%
$155
5%
$169
$165
3%
$172
$167
3%
Catering Only Days
30,094
32,000
-6%
36,127
-17%
22,287
35%
113,948
117,854
-3%
117,936
121,979
-3%
Revenue per Catering Only Day
$125
$135
-8%
$118
5%
$124
1%
$129
$133
-3%
$133
$137
-3%
-4%
-1%
1,200
1,200
0%
50%
50%
Drill Camp rentable beds (period end)
Bed Rental Days
33%
11%
Catering Only
Manufacturing Sales
Capacity (hours)
288
300
% Allocated to Third Parties
63%
60%
Revenue per hour (third-party)
$202
$255
Owned Access Mats (average)
20,257
Sub-Rental Access Mats (average)
8,663
Acces Mat Utilization
78%
88%
Rental Revenue per Active Mat
$200
$200
0%
$218
New Mats Sold
5,789
6,800
-15%
Used Mats Sold
596
3,000
-80%
Total Mats Sold
6,385
9,800
-35%
% New Mats Sold
91%
69%
Revenue per Mat Sold
$745
$550
335
-14%
NA
1,127
1,138
79%
-20%
NA
55%
55%
-21%
$288
-30%
NA
$190
$223
-15%
$211
$250
-16%
18,177
11%
19,845
2%
18,579
9%
19,109
17,654
8%
19,859
17,945
11%
8,000
8%
5,848
48%
8,801
-2%
4,976
4,935
1%
4,976
4,935
1%
68%
75%
69%
82%
Access Mat Rentals
87%
82%
-8%
$200
0%
$201
$201
0%
$208
$208
0%
4,401
32%
6,806
-15%
24,960
30,971
-19%
25,459
32,055
-21%
1,510
-61%
2,663
-78%
6,482
9,886
-34%
6,612
10,232
-35%
5,911
8%
9,469
-33%
31,442
40,857
-23%
32,071
42,287
-24%
79%
76%
79%
76%
$646
$593
$659
$614
Mat Sales
74%
35%
$662
Note: Large camp bed rental days are inclusive of drill camps pre-2010.
Source: Company reports; Scotiabank GBM estimates.
72%
13%
$573
30%
9%
7%
66
Tough to Swallow Fourth Straight Miss
■ We are reducing our one-year price target to $4.50 (from $6.50). Our one-year target
price is predicated on 6.0x our 2015 EV/EBITDA estimate and is supported by comparative
valuation. Our price target compares to our one standard deviation historical trading band of
4.6x to 6.2x (Exhibit 3).
Exhibit 3 – Forward Year EV/EBITDA - Consensus Estimates
HNL
BDI
GBM OFS
- 1 σ HNL
Aug.14
Apr.14
Jan.14
Sep.13
Jun.13
Feb.13
Nov.12
Apr.12
Aug.12
Jan.12
Sep.11
Jun.11
Feb.11
Nov.10
Jul.10
Dec.09
Apr.10
2.0x
Jun.09
3.0x
2.0x
Sep.09
4.0x
3.0x
Feb.09
5.0x
4.0x
Jul.08
6.0x
5.0x
Nov.08
7.0x
6.0x
Apr.08
8.0x
7.0x
Dec.07
9.0x
8.0x
Sep.07
10.0x
9.0x
May.07
10.0x
+ 1 σ HNL
Source: Bloomberg; Company reports; Scotiabank GBM estimates.
■ Horizon trades at 4.5x 2015E EV/EBITDA versus the North American peer group average of
5.9x (see Exhibit 4). We continue to believe LNG could act as a major catalyst for the space,
which could ultimately benefit Horizon as they have been building land positions in Kitimat
and Prince Rupert (provided they have the financial flexibility to fund the project). That said,
we are not ready to give Horizon the benefit of the doubt, and would look to other names to
play the LNG theme.
Exhibit 4 – Comparable Company Analysis
Company
Camps & Logistics
Black Diamond Limited
Horizon North Logistics
ATCO Ltd.
Clean Harbors
Civeo Corp.
McGrath RentCorp
Average
Average - Canada
Average - United States
GBM
1
Ticker Analyst Rating
Share
Price
Target
Price
Total
Return
BDI
HNL
ACO/X
CLH
CVEO
MGRC
$20.15
$3.18
$48.77
$49.29
$12.03
$35.58
$28.00
$4.50
$52.00
43%
52%
8%
$14.00
19%
VV
VV
MA
BH*
SO
SP
SP
11
SP
2
2
Div. Mkt Cap EV/EBITDA
P/CF
P/E
Yield
($M)
2014E 2015E 2014E 2015E 2014E 2015E
4.5%
10.1%
1.8%
0.0%
2.2%
2.8%
3.5%
5.4%
1.6%
$884
$351
$4,950
$2,989
$1,284
$923
6.8x
5.2x
5.7x
7.4x
5.8x
7.2x
6.3x
5.9x
6.8x
6.0x
4.5x
5.1x
6.5x
6.5x
6.6x
5.9x
5.2x
6.5x
5.9x
4.2x
4.2x
5.6x
4.0x
3.6x
5.3x
7.4x
4.9x
4.8x
5.3x
5.2x
4.4x
7.4x
13.3x
16.0x
15.3x
27.4x
12.5x
21.0x
17.6x
14.9x
20.3x
11.5x
12.9x
13.2x
22.0x
nmf
18.1x
15.6x
12.6x
20.1x
Notes:
1. Number of analysts who make up consensus (i.e., Scotiabank GBM does not cover the name) or our rating.
2. Adjusted for stock-based compensation and non-recurring items. Net debt held static for CLH and MGRC given unavailable cash flow and/or capex estimates.
Figures for U.S.-listed companies are in U.S. dollars.
Analyst legend: VV = Vladislav Vlad, MA = Matthew Akman, BH = Blake Huchinson
Ratings legend: FS = Focus Stock, SO = Sector Outperform, SP = Sector Perform, SU = Sector Underperform.
Source: Bloomberg; Company reports; FactSet; Scotiabank GBM estimates; Howard Weil estimates (ratings and targets only for OIS).
EBITDA
67
Exhibit 5 – Operational Summary
Figures in $M
2008
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Revenue
Camps & Catering
$147
$132
$205
$344
$447
$126
$135
$138
$98
$497
$107
$80
$102
$109
$398
$423
% Camp Rental & Catering Ops.
NA
NA
NA
57%
63%
64%
47%
42%
56%
52%
76%
74%
60%
61%
67%
67%
% Manufacturing Sales
NA
NA
NA
40%
35%
34%
51%
56%
41%
46%
22%
22%
36%
36%
30%
30%
% Relocatable Structures
NA
NA
NA
2%
2%
2%
2%
2%
3%
2%
2%
4%
4%
3%
3%
3%
$36
$20
$37
$68
$91
$16
$15
$20
$11
$62
$16
$17
$20
$11
$63
$67
Matting
Corporate
($3)
($2)
($3)
($9)
($12)
($2)
($1)
($0)
($1)
($5)
($0)
($0)
($0)
($1)
($2)
($2)
Total Revenue
$181
$150
$239
$403
$527
$140
$148
$157
$109
$554
$122
$96
$122
$119
$459
$488
YOY Growth
89%
-17%
60%
68%
31%
9%
6%
31%
-22%
5%
-13%
-35%
-23%
10%
-17%
6%
31%
29%
26.6%
29.1%
30.8%
29.6%
25.3%
29.2%
18.9%
26.2%
23.7%
21.5%
25.5%
25.8%
24.3%
25.1%
Camps & Catering
$45
$35
$50
$94
$134
$36
$32
$37
$16
$121
$24
$15
$24
$27
$90
$99
Matting
$8
$6
$11
$18
$23
$4
$4
$7
$3
$18
$3
$4
$5
$2
$14
$15
Corporate, Other, & Adjustments
($8)
($6)
($8)
($9)
($12)
($3)
($3)
($3)
($3)
($12)
($4)
($3)
($3)
($3)
($13)
($14)
$100
Gross Margin
EBITDA
Adjusted EBITDA
$45
$35
$52
$103
$145
$37
$33
$41
$16
$126
$24
$15
$26
$26
$91
YOY Growth
94%
-23%
52%
96%
41%
6%
-19%
21%
-56%
-13%
-36%
-53%
-37%
63%
-28%
11%
EBITDA Margin
25%
23%
21.9%
25.5%
27.5%
26.2%
22.0%
26.2%
14.4%
22.8%
19.3%
16.1%
21.4%
21.5%
19.7%
20.6%
Operating Earnings
($0.89)
$0.05
$0.16
$0.41
$0.66
$0.15
$0.09
$0.17
($0.02)
$0.38
$0.07
$0.01
$0.07
$0.07
$0.21
$0.22
Discontinued Operations
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Adjustments/Unusual Items
$1.06
($0.01)
$0.01
$0.09
$0.02
$0.00
$0.04
($0.00)
$0.03
$0.08
($0.01)
($0.00)
($0.01)
$0.00
($0.01)
$0.02
Adjusted Net Earnings
$0.17
$0.04
$0.17
$0.51
$0.68
$0.15
$0.13
$0.16
$0.01
$0.46
$0.06
$0.01
$0.06
$0.07
$0.20
$0.25
CF From Operations
$0.33
$0.26
$0.45
$0.86
$1.16
$0.16
$0.22
$0.34
$0.08
$0.79
$0.20
$0.12
$0.23
$0.20
$0.75
$0.80
100%
-20%
72%
91%
35%
-41%
-32%
18%
-73%
-32%
23%
-43%
-33%
162%
-5%
7%
Funds From Operations
$36
$30
$48
$93
$128
$18
$24
$37
$9
$87
$22
$14
$25
$22
$83
$89
Capex
$48
$14
$30
$92
$131
$20
$3
$9
$31
$63
$22
$45
$17
$6
$90
$40
Net Acquisition (Disposition)
$0
$4
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Cash Dividends
$0
$0
$0
$9
$20
$5
$7
$7
$7
$26
$7
$9
$9
$9
$33
$35
F.D. Per Share Data
YOY Growth
Cash Flow Summary
Capex/Cash Flow
1.3x
0.5x
0.6x
1.0x
1.0x
1.1x
0.1x
0.2x
3.7x
0.7x
1.0x
3.2x
0.7x
0.3x
1.1x
0.5x
Net Debt (Cash)
$49
$41
$43
$57
$118
$137
$123
$71
$80
$80
$113
$128
$148
$123
$123
$104
Net Debt (Cash)/Cash Flow
1.4x
1.3x
0.9x
0.6x
0.9x
1.5x
1.2x
8,259
8,714
0.9x
Operational Statistics
Camps & Catering
Large Camps
NA
NA
3,060
4,850
6,905
7,310
7,152
6,771
7,059
7,059
7,139
7,484
8,030
8,259
587,622
324,925
468,517
782,900
1,358,043
431,261
433,151
346,833
362,986
1,574,231
403,820
394,262
432,746
450,000
Large Camp Bed Utilization
NA
NA
48%
56%
60%
66%
66%
54%
57%
61%
63%
60%
62%
60%
61%
58%
Revenue per Bed Rental Day
NA
NA
$164
$178
$156
$138
$122
$128
$111
$125
$155
$117
$108
$110
$122
$120
Drill Camp rentable beds (exit)
NA
NA
1,000
950
871
866
873
782
882
882
920
928
828
820
820
820
Bed Rental Days
NA
NA
31,245
60,450
83,254
54,560
16,014
23,884
21,510
115,968
31,579
9,395
23,439
24,000
88,413
92,834
Drill Camp Bed Utilization
NA
NA
9%
17%
29%
69%
20%
33%
27%
36%
38%
11%
31%
32%
28%
31%
Revenue per Bed Rental Day
NA
NA
$157
$166
$180
$177
$166
$177
$166
$173
$181
$155
$163
$165
$169
$172
Other rentable beds (exit)
NA
NA
740
495
724
750
750
750
750
750
750
750
750
750
750
750
Total rentable beds (exit)
NA
NA
4,800
6,295
8,500
8,926
8,775
8,303
8,691
8,691
8,809
9,162
9,608
9,829
9,829
10,284
Catering Only Days
NA
119,228
168,585
249,293
246,194
56,651
45,100
36,127
27,128
165,006
31,567
22,287
30,094
30,000
113,948
117,936
Revenue per Catering Only Day
NA
NA
$116
$93
$105
$100
$97
$118
$124
$107
$136
$124
$125
$130
$129
$133
Capacity (hours - 000s)
NA
NA
NA
NA
NA
287
NA
NA
NA
NA
262
276
288
300
1,127
1,200
% Allocated to Third Parties
NA
NA
NA
NA
NA
69%
NA
NA
NA
NA
48%
42%
63%
65%
55%
50%
Revenue per hour (third-party)
NA
NA
NA
NA
NA
$214
NA
NA
NA
NA
$189
$154
$202
$200
$190
$211
17,029
13,289
12,771
9,152
13,812
13,838
17,697
19,845
16,845
17,057
17,306
18,579
20,257
20,249
19,109
19,859
0
0
0
0
9,216
655
7,670
5,848
3,930
4,528
383
8,801
8,663
2,000
4,976
4,976
Access Mat Rental Days (000s)
1,757
2,350
2,888
2,593
6,215
689
1,835
2,049
1,238
5,812
658
2,049
2,072
1,234
6,013
6,216
Access Mat Utilization
28%
48%
62%
78%
74%
52%
79%
87%
65%
74%
41%
82%
78%
60%
68%
69%
Rental Revenue per Active Mat
$285
$215
$172
$278
$258
$223
$211
$218
$226
$218
$205
$200
$200
$200
$201
$208
20,093
7,427
23,531
44,612
43,841
6,836
2,962
5,911
3,958
19,667
11,588
9,469
6,385
4,000
31,442
32,071
NA
44%
50%
92%
86%
80%
84%
74%
12%
65%
85%
72%
91%
63%
79%
79%
$736
$568
$590
$749
$719
$720
$717
$662
$537
$665
$684
$573
$745
$550
$646
$659
Large Camp rentable beds (exit)
Bed Rental Days
1,680,828 1,814,000
Drill Camps
Catering Only
Manufacturing Sales
Matting
Access Mat Rentals
Owned Access Mats (average)
Sub-Rental Access Mats (average)
Mat Sales
Total Mats Sold
% New Mats Sold
Revenue per Mat Sold
Note: Large camp bed rental days are inclusive of drill camps pre-2010.
Source: Company reports; Scotiabank GBM estimates.
68
Exhibit 6 – Income Statement
Figures in $M
2008
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Gross
30.9%
29.3%
26.6%
29.1%
30.8%
29.6%
25.3%
29.2%
18.9%
26.2%
23.7%
21.5%
25.5%
25.8%
24.3%
25.1%
EBITDA
25.0%
23.1%
21.9%
25.5%
27.5%
26.2%
22.0%
26.2%
14.4%
22.8%
19.3%
16.1%
21.4%
21.5%
19.7%
20.6%
EBIT
-52.1%
6.2%
10.7%
15.6%
19.4%
16.6%
9.6%
17.4%
-1.5%
11.4%
9.4%
1.9%
10.4%
9.0%
8.0%
7.7%
Adjusted Earnings
10.4%
3.2%
7.5%
13.7%
14.2%
12.2%
9.9%
11.3%
1.1%
9.2%
5.4%
0.6%
5.8%
6.5%
4.8%
5.6%
Camps & Catering
$147
$132
$205
$344
$447
$126
$135
$138
$98
$497
$107
$80
$102
$109
$398
$423
Matting
$36
$20
$37
$68
$91
$16
$15
$20
$11
$62
$16
$17
$20
$11
$63
$67
Corporate/Other/Eliminations
($3)
($2)
($3)
($9)
($12)
($2)
($1)
($0)
($1)
($5)
($0)
($0)
($0)
($1)
($2)
($2)
$181
$150
$239
$403
$527
$140
$148
$157
$109
$554
$122
$96
$122
$119
$459
$488
($125)
($106)
($176)
($286)
($364)
($99)
($111)
($111)
($88)
($409)
($93)
($75)
($91)
($88)
($348)
($365)
($12)
($10)
($12)
($15)
($19)
($5)
($5)
($5)
($5)
($21)
($6)
($6)
($6)
($6)
($23)
($25)
$45
$35
$52
$103
$145
$37
$33
$41
$16
$126
$24
$15
$26
$26
$91
$100
Depreciation
($23)
($26)
($25)
($30)
($40)
($13)
($14)
($14)
($14)
($55)
($13)
($14)
($14)
($14)
($56)
($61)
FX (Loss) Gain
($0)
($0)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
($115)
$1
($0)
($10)
$0
$0
($4)
$1
($3)
($6)
$2
$1
$2
$0
$4
$0
$1
($0)
($0)
($0)
($1)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
($94)
$9
$26
$63
$102
$23
$14
$27
($2)
$63
$11
$2
$13
$11
$37
$38
Interest
($2)
($2)
($2)
($2)
($4)
($1)
($1)
($1)
($1)
($4)
($1)
($1)
($1)
($1)
($4)
($4)
Other
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
($97)
$8
$24
$60
$99
$22
$13
$27
($2)
$59
$10
$1
$11
$10
$32
$33
Total Tax
($1)
($2)
($7)
($15)
($26)
($6)
($3)
($8)
($0)
($17)
($3)
($0)
($3)
($2)
($9)
($8)
Net Earnings
($98)
$6
$16
$45
$73
$17
$10
$18
($3)
$42
$8
$1
$8
$7
$24
$25
$0
Margins
Revenue
Total Revenue
Expenses
Operating Costs
General and Administrative
EBITDA1
One-Time Charges
Income From Equity Holdings
Operating Income (EBIT)
Earnings Before Taxes (EBT)
Discontinued/Non-Controlling Ops.
Adjustments/Unusual Items
Adjusted Net Earnings
Cash Flow2
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$117
($1)
$1
$10
$2
$1
$5
($1)
$4
$8
($1)
($0)
($1)
$1
($2)
$2
$19
$5
$18
$55
$75
$17
$15
$18
$1
$51
$7
$1
$7
$8
$22
$27
From Operations
$36
$30
$48
$93
$128
$18
$24
$37
$9
$87
$22
$14
$25
$22
$83
$89
Funds From (For) Investments
($48)
($19)
($31)
($92)
($131)
($20)
($3)
($9)
($31)
($63)
($22)
($45)
($17)
($6)
($90)
($40)
Funds From (For) Financing
$26
($20)
($2)
$9
$45
$14
($20)
($58)
$3
($62)
$27
$7
$11
($34)
$11
($54)
Operating Earnings
($0.89)
$0.05
$0.16
$0.41
$0.66
$0.15
$0.09
$0.17
($0.02)
$0.38
$0.07
$0.01
$0.07
$0.07
$0.21
$0.22
Discontinued/Non-Controlling Ops.
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Adjustments/Unusual Items
$1.06
($0.01)
$0.01
$0.09
$0.02
$0.00
$0.04
($0.00)
$0.03
$0.08
($0.01)
($0.00)
($0.01)
$0.00
($0.01)
$0.02
Adjusted Net Earnings
$0.17
$0.04
$0.17
$0.51
$0.68
$0.15
$0.13
$0.16
$0.01
$0.46
$0.06
$0.01
$0.06
$0.07
$0.20
$0.25
CF From Operations
$0.33
$0.26
$0.45
$0.86
$1.16
$0.16
$0.22
$0.34
$0.08
$0.79
$0.20
$0.12
$0.23
$0.20
$0.75
$0.80
Book Value
$1.54
$1.61
$1.68
$1.98
$2.48
$2.59
$2.62
$2.72
$2.63
$2.63
$2.64
$2.58
$2.60
$2.60
$2.60
$2.52
Tangible Book Value
$1.15
$1.25
$1.41
$1.80
$2.37
$2.50
$2.55
$2.67
$2.59
$2.59
$2.61
$2.56
$2.58
$2.58
$2.58
$2.50
$0
$0
$0
$13
$22
$7
$7
$7
$7
$27
$9
$9
$9
$9
$35
$35
$0.00
$0.00
$0.00
$0.12
$0.20
$0.06
$0.06
$0.06
$0.06
$0.25
$0.08
$0.08
$0.08
$0.08
$0.32
$0.32
Payout From CF
0%
0%
0%
14%
17%
38%
29%
18%
80%
31%
40%
64%
35%
40%
42%
40%
Payout From FCF
0%
0%
0%
1754%
-791%
-353%
33%
24%
-30%
114%
-3094%
-29%
114%
54%
-507%
73%
Basic - Period End
110.4
105.2
105.2
106.8
108.7
108.9
109.4
109.6
110.1
110.1
110.2
110.3
110.3
110.3
110.3
110.3
Weighted Average - Basic
110.4
106.9
105.2
106.0
108.1
108.8
109.2
109.5
109.8
109.3
110.2
110.3
110.3
110.3
110.3
110.3
Weighted Average - F.D.
110.4
115.9
106.0
108.2
110.0
110.2
110.3
110.4
110.9
110.4
111.1
111.2
110.7
110.3
110.8
110.3
F.D. Per Share Data
Dividends
Per Share
Share Information (M)
Notes: (1) Adjusted for stock-based compensation, FX, unusual, and infrequent items. (2) Before changes in working capital.
Source: Company reports; Scotiabank GBM estimates.
69
Exhibit 7 – Cash Flow Analysis and Capital Expenditure Summary
Figures in $M
2008
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
$36
$30
($8)
($9)
$48
$93
$128
$18
$24
$37
($9)
($10)
($15)
($4)
($4)
($4)
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
$9
$87
$22
$14
$25
$22
$83
$89
($4)
($15)
($4)
($4)
($4)
($4)
($15)
($15)
Cash Flow Analysis
CF From Operations
less Maintenance Capital
less Sale of PPE
Distributable Cash Flow
less Expansion Capital
Free Cash Flow
less Cash Dividends
Excess (Short) FCF
$9
$11
$11
$9
$9
$2
$15
$7
$3
$27
$6
$4
$4
$0
$13
$0
$37
$32
$50
$91
$122
$16
$35
$40
$8
$99
$24
$14
$25
$19
$81
$74
($48)
($15)
($33)
($91)
($124)
($18)
($15)
($12)
($31)
($75)
($24)
($45)
($17)
($2)
($88)
($25)
($11)
$16
$17
$1
($3)
($2)
$21
$28
($23)
$24
($0)
($31)
$8
$16
($7)
$49
$0
$0
$0
($9)
($20)
($5)
($7)
($7)
($7)
($26)
($7)
($9)
($9)
($9)
($33)
($35)
($11)
$16
$17
($8)
($23)
($7)
$14
$21
($30)
($2)
($7)
($40)
($1)
$8
($40)
$13
less Acquisitions/Investments
($0)
($4)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
plus Disposition/Divestures
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
($11)
$13
$17
($8)
($23)
($7)
$14
$21
($30)
($2)
($7)
($40)
($1)
$8
($40)
$13
CF From (For) Financing
$26
($20)
($2)
$17
$66
$19
($13)
($51)
$10
($36)
$33
$16
$20
($25)
$44
($19)
Other/Non-cash w.c. changes
($16)
$11
($19)
($10)
($43)
($12)
($0)
$30
$20
$38
($26)
$24
($19)
$17
($4)
$6
($1)
$4
($4)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
($0)
$0
$56
$25
$42
$101
$139
$21
$18
$16
$35
$90
$28
$48
$21
$6
$103
$40
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Surplus (Deficit) Cash Flow
Net Change In Cash Position
Total Capex
Source: Company reports; Scotiabank GBM estimates.
Exhibit 8 – Capitalization, Valuation, and Ratio Analysis
Figures in $M
Capitalization Summary1
Share Price
2008
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
$0.87
$1.65
$2.97
$4.66
$6.87
$5.71
$6.35
$7.26
$9.95
$9.95
$8.36
$7.66
$5.08
$3.18
$3.18
$3.18
Market Capitalization
$96
$174
$316
$507
$759
$628
$701
$805
$1,112
$1,112
$931
$852
$560
$351
$351
$351
Net Debt
$49
$41
$43
$57
$118
$137
$123
$71
$80
$80
$113
$128
$148
$123
$123
$104
Enterprise Value
$145
$215
$359
$564
$877
$765
$824
$876
$1,192
$1,192
$1,044
$980
$708
$474
$474
$455
Net Debt (Cash)/EBITDA
1.1x
1.2x
0.8x
0.6x
0.8x
0.9x
0.9x
0.5x
0.6x
0.6x
1.0x
1.3x
1.8x
1.4x
1.4x
1.0x
Net Debt (Cash)/Cash Flow
1.4x
1.3x
0.9x
0.6x
0.9x
1.2x
1.2x
0.6x
0.9x
0.9x
1.2x
1.6x
2.1x
1.5x
1.5x
1.2x
Net Debt (Cash)/Equity
29%
24%
24%
26%
43%
48%
42%
24%
27%
27%
38%
45%
51%
43%
43%
37%
Net Debt/Total Capitalization
22%
20%
19%
21%
30%
32%
30%
19%
21%
21%
28%
31%
34%
30%
30%
27%
Net Debt/Enterprise Value
34%
19%
12%
10%
13%
18%
15%
8%
7%
7%
11%
13%
21%
26%
26%
23%
Capex/Cash Flow
1.3x
0.5x
0.6x
1.0x
1.0x
1.1x
0.1x
0.2x
3.7x
0.7x
1.0x
3.2x
0.7x
0.3x
1.1x
0.5x
Current Ratio
1.8x
1.8x
1.6x
1.7x
2.0x
2.6x
2.7x
2.0x
1.8x
1.8x
2.2x
1.8x
2.2x
1.9x
1.9x
1.9x
-41.6x
6.1x
13.4x
25.4x
28.7x
25.0x
19.8x
21.9x
16.6x
16.6x
13.9x
11.0x
6.2x
8.6x
8.6x
8.4x
EV/EBITDA
3.2x
6.2x
6.8x
5.5x
6.0x
5.2x
5.9x
6.0x
9.4x
9.4x
9.2x
10.2x
8.8x
5.2x
5.2x
4.5x
P/CF
2.6x
6.3x
6.6x
5.4x
5.9x
5.4x
6.7x
7.3x
12.6x
12.6x
10.1x
10.4x
8.1x
4.2x
4.2x
4.0x
P/E
5.1x
40.3x
17.6x
9.2x
10.1x
8.6x
10.7x
12.1x
21.7x
21.6x
23.0x
32.5x
36.4x
15.9x
16.0x
12.9x
P/BV
0.6x
1.0x
1.8x
2.3x
2.8x
2.2x
2.4x
2.7x
3.8x
3.8x
3.2x
3.0x
2.0x
1.2x
1.2x
1.3x
0.8x
1.3x
2.1x
2.6x
2.9x
2.3x
2.5x
2.7x
3.8x
3.8x
3.2x
3.0x
2.0x
1.2x
1.2x
1.3x
ROE
8.6%
2.8%
10.3%
27.9%
30.6%
28.2%
24.2%
23.4%
17.9%
17.9%
13.9%
9.1%
5.2%
7.6%
7.6%
9.6%
ROA
6.6%
1.9%
6.9%
17.3%
17.6%
16.2%
14.1%
13.9%
10.5%
10.5%
8.0%
5.2%
3.1%
4.5%
4.5%
5.5%
ROCE
-37.9%
4.3%
11.5%
23.8%
28.6%
25.6%
20.9%
21.7%
15.2%
15.2%
11.5%
8.8%
5.6%
8.6%
8.6%
8.6%
ROIC
7.7%
2.5%
8.0%
20.8%
21.0%
19.3%
16.7%
16.7%
12.7%
12.7%
9.6%
6.5%
4.2%
5.8%
5.8%
6.9%
Interest Coverage Ratio
Valuation Analysis
P/TBV
Ratio Analysis2
Notes:
(1) Historicals based on closing pricing.
(2) Based on two-year average capital and adjusted earnings.
Source: Company reports; FactSet; Scotiabank GBM estimates.
70
Exhibit 9 – Balance Sheet & Debt Position Analysis
Figures in $M
2008
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
Cash & Equivalents
$0
$4
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Accounts Receivables
$38
$23
$52
$83
$133
$141
$138
$117
$91
$91
$119
$93
$108
$93
$93
$85
Inventory
$10
$12
$14
$15
$13
$14
$11
$12
$16
$16
$10
$11
$14
$10
$10
$9
Prepaids
$1
$2
$9
$4
$3
$2
$5
$4
$3
$3
$2
$5
$4
$4
$4
$4
Income Tax
$1
$1
$0
$0
$0
$1
$1
$0
$4
$4
$2
$3
$3
$3
$3
$3
Other
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$50
$42
$75
$103
$149
$158
$156
$133
$114
$114
$134
$112
$129
$110
$110
$101
Risk Management Assets
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Future Income Tax
$0
$0
$6
$2
$2
$2
$2
$2
$1
$1
$1
$1
$1
$1
$1
$1
Investments
$6
$2
$2
$1
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Property, Plant, & Equipment
$148
$156
$162
$229
$330
$340
$330
$327
$349
$349
$362
$395
$400
$392
$392
$372
Intangibles
$43
$35
$27
$18
$10
$8
$6
$4
$3
$3
$2
$1
$1
$0
$0
$0
Goodwill
$0
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
Other
$0
$3
$3
$3
$3
$3
$3
$3
$3
$3
$3
$2
$2
$2
$2
$2
$247
$241
$278
$357
$496
$512
$499
$470
$471
$471
$503
$513
$535
$507
$507
$478
Bank Indebtedness
$11
$9
$13
$1
$1
$1
$1
$1
$1
$1
$2
$2
$1
$1
$1
$1
Current Long Term Debt
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
A/P & Accrued Liabilities
$14
$12
$25
$42
$60
$56
$53
$61
$57
$57
$55
$56
$55
$53
$53
$49
Income Tax Payables
$0
$0
$1
$4
$13
$1
$2
$3
$0
$0
$1
$1
$1
$1
$1
$1
Dividend Payables
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Other
$2
$2
$7
$14
$1
$1
$2
$1
$3
$3
$3
$3
$2
$2
$2
$2
$27
$23
$47
$61
$74
$60
$58
$67
$62
$62
$60
$62
$59
$57
$57
$54
Current Assets
Total Assets
Current Liabilities
2015E
Risk Management
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Credit Facility
$38
$36
$30
$55
$117
$136
$122
$70
$78
$78
$111
$126
$146
$122
$122
$102
Senior Notes
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Convertible Debentures
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Asset Retirement Obligation
$0
$0
$1
$1
$1
$1
$1
$1
$6
$6
$6
$6
$6
$6
$6
$6
Non-controlling Interest
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Future Income Taxes
$11
$13
$21
$23
$29
$30
$29
$30
$31
$31
$31
$32
$36
$36
$36
$37
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Total Liabilities
Other
$77
$72
$99
$141
$222
$228
$210
$168
$177
$177
$208
$226
$247
$221
$221
$199
Share Capital
$258
$245
$245
$173
$180
$180
$182
$182
$184
$184
$184
$185
$185
$186
$186
$188
$6
$12
$11
$10
$11
$11
$11
$12
$12
$12
$12
$12
$13
$13
$13
$13
($93)
($88)
($78)
$32
$83
$93
$96
$108
$98
$98
$97
$89
$88
$87
$87
$76
$0
$0
$0
$0
$0
$0
($0)
$0
$0
$0
$1
$1
$1
$1
$1
$1
Total Shareholders' Equity
$170
$169
$179
$216
$274
$285
$289
$302
$294
$294
$294
$287
$287
$286
$286
$278
Total Liabilities & Equities
$247
$241
$278
$357
$496
$512
$499
$470
$471
$471
$503
$513
$535
$507
$507
$478
Net Debt
Net Debt + NCWC1
$49
$41
$43
$57
$118
$137
$123
$71
$80
$80
$113
$128
$148
$123
$123
$104
$16
$18
$2
$14
$42
$38
$24
$4
$27
$27
$37
$76
$77
$69
$69
$56
Total Credit Facility
$81
$81
$60
$80
$150
$150
$150
$150
$150
$150
$150
$150
$175
$175
$175
$175
Drawn
$49
$36
$35
$50
$108
$127
$113
$61
$71
$71
$104
$119
$139
$114
$114
$95
Available Lines
$31
$45
$26
$30
$42
$23
$37
$89
$79
$79
$46
$31
$36
$61
$61
$80
Available Lines (%)
39%
55%
43%
38%
28%
15%
25%
59%
53%
53%
31%
21%
21%
35%
35%
46%
Contributed Surplus
Retained Earnings (Deficit)
Comprehensive Income/Other
Debt Position Analysis
Notes: (1) Working capital adjusted. (2) Definition matches traditional E&P net debt calculation.
Source: Company reports; FactSet; Scotiabank GBM estimates.
ScotiaView Analyst Link
71
Company Comment
Thursday, October 30, 2014, Pre-Market
(HBM-T C$8.65)
(HBM-N US$7.74)
HudBay Minerals Inc.
Q3/14 Results First Look: An Earnings Miss but
Constancia on Track
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
orest.wowkodaw@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
Dalton Baretto, MBA, CFA - (416) 863-7623
(Scotia Capital Inc. - Canada)
dalton.baretto@scotiabank.com
C$12.25
ROR 1-Yr:
41.9%
Valuation: 50/50 mix of 6.0x 2015/2016E EV/EBITDA and 1.0x 8% NAV
Key Risks to Target: Commodity, operating, development, financing, political
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.02
$0.20
2.3%
Event
■ HudBay released its Q3/14 financial and operating results.
Implications
■ The company reported an adjusted Q3/14 EPS loss of $0.02 vs. our
estimate and consensus of earnings of $0.06.
■ Manitoba production of 9,798t of Cu, 22,653t of Zn, and 18,279 ozs of
Au were 6.1%, 9.6%, and 19.9% below our forecast. However, the
impact to the results was cushioned by higher than expected Cu and Zn
sales volumes.
■ HudBay reaffirmed its 2014 production and cash cost guidance.
■ Most important, the development of Constancia remains on track for
start-up in Q4/14 with an unchanged budget of US$1.7 billion.
Recommendation
■ With an attractive relative valuation, an impressive near to medium term
growth trajectory, and a diminishing development and balance sheet risk
profile, HudBay is rated Sector Outperform. Our 12-month target of
C$12.25 is based on a 50/50 mix of 6.0x our average 2015/16E
EV/EBITDA ($14.74) and 1.0x our 8% NAV estimate ($9.91). In our
view, any weakness in the shares related to the Q3 results represents a
buying opportunity as the re-rate on production growth is within sight.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.02 A
$-0.06 A
$0.11
$0.46
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Revenues (M)
EBITDA (M)
Q2
$-0.01 A
$0.00 A
$0.12
$0.52
Q3
$0.03 A
$0.06
$0.41
$0.37
Q4
$-0.01 A
$0.09
$0.49
$0.41
Year
$0.03
$0.12
$1.13
$1.75
P/E
n.m.
73.4x
7.7x
4.9x
2014E
$0.12
$-0.09
73.4x
$615
$86
2015E
$1.13
$1.16
7.7x
$1,303
$547
2016E
$1.75
$3.34
4.9x
$1,874
$915
2017E
$1.48
$2.00
5.9x
$1,801
$865
2018E
$2.87
$3.41
3.0x
$2,613
$1,452
BVPS14E: $9.41
ROE14E: 1.25%
NAVPS:
P/NAV:
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$9.91
0.87x
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$1,488
$-408
$1,080
172
172
72
Q3/14 Results Below Forecast
■ HudBay reported headline Q3/14 earnings of $49.2 million or $0.22 per fd share. However,
after excluding a net $53.0 million of positive one-time items, including a $59.4 million
after-tax gain on the Augusta transaction, we estimate an adjusted loss of $3.8 million or
$0.02 per share. The adjusted loss was below our estimate of earnings $14.3 million or $0.06
per share and the consensus estimate of $0.06 (range of $0.01 to $0.10). The adjusted loss is
largely unchanged from the Q2/14 adjusted loss of $0.7 million or $0.00 per share and the
negligible Q3/13 adjusted earnings of $2.9 million or $0.03 per share.
■ Revenue of $185.4 million was 2.5% above our forecast due to higher deliveries. However,
the company’s gross margin (before depreciation) of $60.6 million (or 32.7%) was 18.7%
below our forecast of $74.6 million (or 41.2%) due to higher costs.
Operational Review: Weak Manitoba Results
■ Q3/14 copper production of 9,798 tonnes was 6.1% below our forecast of 10,432 tonnes due
to lower throughput through the Flin Flon concentrator as well as lower grades fed in from
777. However, copper production was flat with the Q2/14 level of 9,778 tonnes and increased
by 22.9% from the Q3/13 level of only 7,972 tonnes, due to incremental ore feed from Reed.
■ Zinc production of 22,653 tonnes was 9.6% below our estimate of 25,058 tonnes due to
lower throughput through the Flin Flon concentrator as well as lower grades fed in from 777,
which more than offset higher output at Lalor. Zinc production increased by 5.5% from the
Q2/14 level of 21,481 tonnes, but decreased by 8.7% from the Q3/13 level of 24,816 tonnes.
■ Gold and silver production of 18,279 ozs and 194,809 ozs were 19.9% and 19.1% below our
estimates of 22,814 ozs and 240,770 ozs due to lower throughput and grades at 777 and
lower grades at Lalor.
■ Copper cash costs of ~US$1.50/lb were largely in-line with our forecast of US$1.57/lb, but
decreased materially from the Q2/14 costs of US$2.46/lb. However, we note that these unit
costs are not very meaningful given the poly-metallic nature of the ore-body. Mining costs on
a per tonne basis were 4.7% and 6.5% higher at both 777 and Lalor.
■ Despite the disappointing production levels, copper and zinc sales volumes of 11,647 tonnes
and 28,835 tonnes were 10.4% and 2.7% above our estimates of 10,549 tonnes and 28,068
tonnes, as inventory levels were drawn down. However, gold and silver sales volumes of
21,150 ozs and 209,377 ozs were 6.5% and 17.1% below our forecast.
Constancia on Track
■ The Constancia project continues to advance and was 94% complete on a proportion spent
basis as at the end of September (up from 85% at the end of June). The project budget of
US$1.7 billion remains unchanged, with US$1.6 billion incurred to date.
■ Construction remains on track for start-up in late 2014 with commercial production expected
to be achieved in Q2/15 (we note that our estimates assume modest slippage to Q3/15).
Guidance Reconfirmed
■ HudBay reconfirmed its previously issued 2014 Manitoba production guidance of 36,000 –
45,000 tonnes of copper, 87,000 – 105,000 tonnes of zinc, and 99,000 – 120,000 ounces of
precious metals (silver converted to gold at 50:1). We note that YTD production represents
only 76%, 73% and 66% of the bottom end of each of the respective guidance ranges. The
company disclosed that due to lower ytd output and an unscheduled two week shutdown of
the 777 shaft in October, contained zinc, gold, and silver from Flin Flon are likely to be
below guidance. However, this shortfall is expected to be made up by Lalor and Reed.
73
Balance Sheet
■ As at September 30, 2014, the company had a cash balance of $418 million and total debt of
$1.1 billion, resulting in a net debt position of $687 million (or $3.07 per share). This
compares to a net debt position of $319 million (or $1.65 per share) as at June 30, 2014,
which reflects the ongoing spend on Constancia.
Investor Call on Thursday
■ HudBay will host an investor call on Thursday, October 30 at 10.00am EST. The dial-in
numbers are 416-849-1847 or 1-866-530-1554. We will formally adjust our estimates
following the investor call.
Conclusions
■ HudBay posted relatively weak Q3/14 results driven by lower than expected production and
higher costs in Manitoba. While the company reaffirmed its 2014 Manitoba production and
cost guidance, in our view annual production is tracking to the low end of guidance ranges.
In our view, investors should look through the earnings miss given the massive near-term
production growth driven by the impending start-up of Constancia and to a lesser extent,
Lalor Phase II. With the start-up of Constancia on track and on budget, the development and
balance sheet risk profile of HudBay continues to decline.
Valuation
■ HudBay shares are currently trading at a 2015E and 2016E EV/EBITDA of 5.1x and 3.3x,
and at a 0.87x multiple to our NAV of $9.91 per share. This compares to our base metals
producer universe average of 5.8x, 4.0x and a P/NAV multiple of 0.69x. We note that our
2015 estimates only include a half-year of EBITDA contribution from Constancia. While the
company trades at a premium to its peers on P/NAV, we believe the market is likely to focus
on near-term metrics.
Recommendations
■ With an attractive relative valuation, an impressive near to medium term growth trajectory,
and a diminishing development and balance sheet risk profile, HudBay is rated Sector
Outperform. Our 12-month target of C$12.25 is based on a 50/50 mix of 6.0x our average
2015/16E EV/EBITDA ($14.74) and 1.0x our 8% NAV estimate ($9.91).
74
Exhibit 1 - HudBay Minerals Q3 2014 Variance to Estimates
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
PRODUCTION
Copper (tonnes)
Zinc (tonnes)
Gold (ozs)
Silver (ozs)
9,798
22,653
18,279
194,809
10,432
25,058
22,814
240,770
-6.1%
-9.6%
-19.9%
-19.1%
9,778
21,481
16,982
194,350
0.2%
5.5%
7.6%
0.2%
7,972
24,816
22,601
238,486
22.9%
-8.7%
-19.1%
-18.3%
SALES
Copper (tonnes)
Zinc (tonnes)
Gold (ozs)
Silver (ozs)
11,647
28,835
21,150
209,377
10,549
28,068
22,623
252,693
10.4%
2.7%
-6.5%
-17.1%
8,366
24,351
18,741
191,098
39.2%
18.4%
12.9%
9.6%
6,514
26,782
20,055
170,283
78.8%
7.7%
5.5%
23.0%
$2.99
$1.10
$1,348
$22.20
$3.10
$1.07
$1,292
$22.84
-3.7%
3.0%
4.3%
-2.8%
$3.28
$1.03
$1,343
$21.95
-8.8%
6.8%
0.4%
1.1%
$3.43
$0.93
$1,265
$20.90
-12.8%
18.3%
6.6%
6.2%
$1.50
$1.57
-4.4%
$2.46
-39.0%
$1.28
17.1%
185,431
124,821
60,610
32.7%
29,489
31,121
11,857
2,754
7,223
(1,938)
3,451
(49,812)
57,586
8,338
14.5%
49,248
49,248
49,248
(53,000)
(3,752)
180,941
106,356
74,584
41.2%
26,384
48,200
12,000
3,250
(600)
2,500
(1,368)
1,700
30,718
16,438
53.5%
14,280
14,280
14,280
14,280
130,179
83,589
46,590
35.8%
19,838
26,752
10,643
6,473
(105)
1,267
(761)
2,901
(3,316)
9,650
6,665
69.1%
2,985
4,733
(1,748)
2,985
(100)
2,885
$0.22
($0.02)
($0.02)
$0.06
$0.06
$0.06
42.4%
49.3%
30.1%
-8.7%
48.6%
16.3%
11.4%
-57.5%
NM
-100.0%
NM
19.0%
NM
NM
25.1%
NM
-79.0%
NM
NM
100.0%
NM
NM
NM
NM
NM
NM
NM
REALIZED PRICES
Copper (USD/lb)
Zinc (USD/lb)
Gold (USD/oz)
Silver (USD/oz)
Copper Cash Cost (USD/lb)
INCOME STATEMENT (C$000s)
Total revenue
Operating costs
Gross margin
Gross margin %
Depreciation and amortization
Operating earnings
Selling and administrative expenses
Exploration and evaluation
Other operating income
Other operating expenses
Finance income
Finance expenses
Other finance losses (gains)
Net earnings before tax
Income taxes (recovery)
Net earnings from discontinued operation
Tax rate
Net earnings after tax
Attributable to owners
Attributable to minority interests
Net earnings after tax
Non-recurring items
Adjusted earnings
Earnings Per Share - Basic
Adjusted Earnings Per Share - Basic
Adjusted Earnings Per Share - FD
Source: Company reports; Scotiabank GBM estimates.
2.5%
17.4%
-18.7%
-20.7%
11.8%
-35.4%
-1.2%
-15.3%
NM
-100.0%
-41.6%
NM
NM
87.5%
-49.3%
NM
-72.9%
NM
NM
NM
NM
NM
NM
NM
NM $
NM $
NM $
139,329
101,503
37,826
27.1%
23,716
14,110
12,922
2,254
1,587
(912)
2,346
(10,930)
6,843
6,591
96.3%
252
252
252
(1,000)
(748)
0.00
(0.00)
(0.00)
33.1%
23.0%
60.2%
20.4%
24.3%
NM
-8.2%
22.2%
NM
NM
NM
47.1%
NM
NM
26.5%
NM
-85.0%
NM
NM
NM
NM
NM
NM
NM
NM $
NM $
NM $
0.03
0.03
0.03
75
Exhibit 2 - HBM Financial and Operating Summary
Annual Growth Profile
METAL PRICE FORECAST (US$ per LB)
LME copper
LME zinc
LME gold (per oz)
Cdn$/US$
PRODUCTION FORECAST
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
$3.42
$0.98
$1,226
$0.97
$4.00
$1.00
$1,572
$1.01
$3.61
$0.88
$1,669
$1.00
$3.33
$0.87
$1,414
$0.97
$3.14
$0.98
$1,271
$0.91
$3.15
$1.10
$1,300
$0.90
$3.40
$1.20
$1,300
$0.93
$3.60
$1.25
$1,300
$0.95
$3.85
$1.25
$1,300
$0.98
$4.00
$1.25
$1,300
$1.00
$4.00
$1.25
$1,300
$1.00
-6%
13%
-10%
-6%
0%
12%
2%
-1%
8%
9%
0%
3%
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
52
77
87
0.8
54
76
95
0.9
40
80
87
0.8
30
87
79
0.8
40
90
81
0.9
138
109
125
2.9
176
112
141
4.0
153
112
168
3.8
225
114
290
5.9
283
114
247
7.6
229
114
169
6.1
32%
4%
2%
12%
250%
21%
55%
241%
27%
3%
13%
36%
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Copper ('000 tonnes)
Mined Zinc ('000 tonnes)
Gold ('000 ozs)
Silver ('M ozs)
UNIT COST FORECAST (US$ per LB)
Average Copper Cash Cost
INCOME STATEMENT FORECAST (in millions)
Net Sales
Cost of Sales and Operating Expenses
Depreciation and Depletion
Selling, General, and Administrative
Exploration
Operating Earnings
Interest Expenses
Other Expenses (Income)
Income and Mining Taxes (Recovery)
Minority Interest
Net Earnings
NA
$0.32
$0.85
$1.81
$1.97
$1.18
$1.15
$1.06
$0.82
$0.83
$1.08
9%
-40%
-3%
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
$781
432
116
28
82
$123
1
13
68
(3)
$40
$891
483
104
39
47
$218
3
6
134
(10)
$75
$703
429
76
40
44
$115
53
9
73
(3)
($21)
$517
360
77
40
23
$17
49
24
53
(8)
($109)
$615
394
92
49
9
$71
(1)
16
46
(0)
$10
$1,303
598
171
40
20
$475
5
8
189
0
$272
$1,874
789
220
40
20
$806
92
8
283
0
$423
$1,801
798
220
40
20
$723
107
8
252
0
$357
$2,613
990
264
40
20
$1,299
120
8
477
0
$694
$3,098
1,040
299
40
20
$1,700
115
8
635
0
$942
$2,593
1,026
285
40
20
$1,222
69
6
465
0
$683
19%
9%
20%
23%
-62%
322%
NM
-34%
-14%
NM
NM
112%
52%
86%
-18%
124%
NM
NM
-51%
314%
NM
NM
44%
32%
28%
0%
0%
70%
NM
0%
49%
NM
55%
Adjusted Net Earnings
($21)
$198
$18
($3)
$25
$272
$423
$357
$694
$942
$683
NM
NM
55%
Net Earnings Per Common Share (FD)
Adjusted Net Earnings Per Common Share (FD)
EBITDA
$0.16
($0.12)
$227
($0.92)
$1.24
$323
($0.11)
$0.12
$181
($0.59)
$0.03
$1
$0.05
$0.12
$86
$1.13
$1.13
$547
$1.75
$1.75
$915
$1.48
$1.48
$865
$2.87
$2.87
$1,452
$3.90
$3.90
$1,892
$2.82
$2.82
$1,431
NM
337%
NM
NM
NM
NM
55%
55%
67%
CASH FLOW FORECAST (in millions)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
$89
106
$195
$75
180
$255
($21)
73
$52
($109)
122
$13
$10
(30)
($20)
$272
8
$281
$423
385
$808
$357
128
$485
$694
130
$824
$942
182
$1,124
$683
233
$917
NM
NM
NM
NM
NM
NM
55%
NM
188%
Cashflow Per Share (FD)
$1.29
$1.52
$0.30
$0.07
($0.09)
$1.16
$3.34
$2.00
$3.41
$4.65
$3.79
NM
NM
188%
Sustaining Capital
Project Capital Expenditures
Free Cashflow to Firm
($102)
(5)
$88
($60)
(173)
$22
($58)
(445)
($450)
($77)
(872)
($937)
($104)
(812)
($936)
($135)
(368)
($222)
($210)
(861)
($263)
($149)
(774)
($438)
($123)
(151)
$550
($127)
$997
($100)
$816
NM
NM
NM
NM
NM
NM
NM
NM
NM
Free Cashflow to Firm Per Share (FD)
$0.58
$0.13
($2.62)
($5.44)
($4.34)
($0.92)
($1.09)
($1.81)
$2.27
$4.12
$3.37
NM
NM
NM
($3)
$85
($2)
$20
$955
$504
$333
($604)
$477
($459)
($88)
($310)
$249
($15)
$300
($138)
$0
$550
($89)
$908
($963)
($147)
43%
NM
NM
NM
NM
NM
$0.56
$0.12
$2.93
($3.51)
($2.13)
($1.28)
($0.06)
($0.57)
$2.27
$3.76
($0.61)
($58)
(15)
2
$15
($0)
(34)
12
($3)
$0
(34)
(32)
$438
$0
(19)
(84)
($706)
$653
(4)
(477)
($286)
$0
(5)
88
($227)
$0
(48)
192
$129
$0
(48)
155
($32)
$0
(48)
14
$516
$0
(48)
(109)
$751
$0
(48)
(88)
($283)
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
118%
NM
Net Earnings
Depreciation, Deferred Taxes, & Minority Interest
Cashflow From Operations
Net Financing Activities (Ex. Equity/Dividends)
Free Cashflow to Equity
Free Cashflow to Equity Per Share (FD)
Equity Issues (Repurchases)
Dividends
All Other Sources (Uses) of Cash
Net Source (Use) of Cash
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
$902
78
116
14
$1,109
818
157
$2,084
$899
40
77
21
$1,038
1,203
208
$2,449
$1,337
53
58
79
$1,528
1,732
217
$3,476
$631
168
52
73
$925
2,665
254
$3,844
$345
75
94
40
$553
4,152
355
$5,060
$118
183
183
40
$524
4,395
355
$5,275
$247
161
138
40
$586
5,247
355
$6,189
$215
180
135
40
$570
5,951
355
$6,876
$731
261
196
40
$1,228
5,961
355
$7,543
$1,482
310
232
40
$2,064
5,789
355
$8,208
$1,199
259
194
40
$1,692
5,604
355
$7,652
-45%
-55%
80%
-46%
-40%
56%
40%
32%
-66%
144%
95%
0%
-5%
6%
0%
4%
109%
-12%
-25%
0%
12%
19%
0%
17%
Accounts payable and accrued liabilities
Other current liabilities
Total Current Liabilities
Total debt
Deferred Taxes
Deferred Revenue
Other Liabilities
Shareholders' Equity
Total Liabilities & Shareholders' Equity
134
92
226
16
208
1,634
$2,084
163
33
196
190
248
1,815
$2,449
206
139
346
480
215
391
392
1,653
$3,476
219
123
342
779
294
464
337
1,628
$3,844
225
142
367
1,036
311
672
399
2,276
$5,060
252
142
394
1,036
410
581
399
2,456
$5,275
253
142
395
1,036
609
727
399
3,023
$6,189
248
142
389
1,336
609
656
399
3,486
$6,876
359
142
501
1,336
609
553
399
4,146
$7,543
426
142
568
1,247
609
454
399
4,931
$8,208
357
142
498
284
609
383
399
5,478
$7,652
3%
15%
7%
33%
6%
45%
18%
40%
32%
12%
0%
7%
0%
32%
-14%
0%
8%
4%
1%
0%
0%
0%
49%
25%
0%
23%
17%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
76
Company Comment
Wednesday, October 29, 2014, After Close
(IPI-N US$14.14)
Intrepid Potash, Inc.
Unprecedented Rainfall Snags A Decent Quarter;
2015 Looks Weaker
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
ben.isaacson@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Carl Chen - (416) 863-7184
(Scotia Capital Inc. - Canada)
carl.chen@scotiabank.com
Target 1-Yr:
US$13.50
ROR 1-Yr:
-4.5%
Valuation: 12x 2015E EBITDA, DCF @ 10%, 40% RCN
Key Risks to Target: Fertilizer supply/demand, crop and energy prices, weather
Event
■ IPI reported a 2¢ loss on Q3. The Street/us were looking for +5¢.
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Pertinent Revisions
Implications
■ The quarter was actually decent. Top line for potash and langbeinite
was 2% and 4% higher than our forecast, respectively. This was due to
volume strength, but partially offset by a slightly lower realized prices
than our estimate (-1% to -3%), although sequentially higher QOQ. The
robust sales volume result was likely due to IPI's strategically located
facilities, access to truck markets, and field warehouses, which enables
it to minimize the impact of domestic rail challenges.
■ Rain rain go away... Rainfall in September led to power outages at
Carlsbad, as well as a one week shutdown at the East facility. This
resulted in lower production, and therefore, elevated cash costs. Potash
and langbeinite cash costs were 9% and 7% higher sequentially QOQ.
■ 2015 looks weaker. Production gains from HB should be offset by
lower production at Wendover (IPI's lowest cost facility). Cash costs
are therefore expected to be higher than previously thought - likely the
same as 2014 ($195 to $205/st). This, coupled with a sustainable price
advantage, lower realized prices, and flat sales, leads us to EPS of 14¢
next year.
New
Old
Adj. EPS14E
$0.05
$0.13
Adj. EPS15E
$0.14
$0.29
New Valuation:
12x 2015E EBITDA, DCF @ 10%, 40%
RCN
Old Valuation:
11x 2015E EBITDA, DCF @ 10%, 40%
RCN
Recommendation
■ We maintain a SP rating on IPI, as well as a $13.50 target. We think the
stock is in fair value territory, and therefore should remain range-bound
Qtly Adj. EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.27 A
$0.20 A
$-0.01 A
$0.05
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.25 A
$0.17 A
$0.07 A
$0.05
Q3
$0.38 A
$0.07 A
$-0.02 A
$0.03
Q4
$0.26 A
$-0.11 A
$0.01
$0.01
Year
$1.17
$0.33
$0.05
$0.14
P/E
18.2x
48.7x
n.m.
n.m.
2011A
$1.28
$2.47
17.6x
1.2x
$415
$204
5.6x
-236.4x
2012A
$1.17
$2.40
18.2x
1.1x
$422
$179
2.4x
-190.3x
2013A
$0.33
$1.68
48.7x
3.0x
$307
$83
2.6x
82.8x
2014E
$0.05
$1.24
n.m.
n.m.
$361
$83
5.1x
13.8x
2015E
$0.14
$1.44
n.m.
n.m.
$360
$89
6.3x
14.8x
BVPS14E: $12.47
ROE14E: 0.49%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$1,068
$79
$1,147
76
56
77
Operational Highlights
Exhibit 1 – Q3 Highlights and Q4 Forecast
GBM Est.
Q4/14E
Quarterly results
Production Volume
Potash
Langbeinite
Total
Sales Volume by Product
Potash
Langbeinite
Total
Net Sales by Product
Potash
Langbeinite
Total
Potash
Average net realized sales price
Cash operating cost
Average potash gross margin
Gross margin as %
Langbeinite
Average net realized sales price
Cash operating cost
Average gross margin
Gross margin as %
Overall
Revenues
EBITDA
Adjusted EPS
Gross Profit
Gross Margin as %
Actual
Q3/14
GBM Est.
Q3/14E
000 st
000 st
000 st
-
194
34
228
-
000 st
000 st
201
41
242
227
43
270
220
40
260
000 st
$000
$000
$000
$/st
$/st
$/st
$/st
$/st
$/st
$000
$000
$/sh
$000
Source: Company reports; Scotiabank GBM estimates.
%∆
3%
7%
4%
Actual
Q2/14
%∆
Actual
Q3/13
%∆
190
43
233
2%
-21%
-2%
167
40
207
16%
-15%
10%
235
62
297
-3%
-31%
156
22
178
46%
95%
-9%
52%
$67,335
$14,556
$81,891
$76,296
$15,059
$91,355
$74,800
$14,472
$89,272
2%
4%
2%
$77,315
$21,700
$99,015
-1%
-31%
-8%
$56,628
$7,646
$64,274
35%
97%
42%
$335
$202
$33
10%
$336
$204
$35
10%
$340
$190
$54
16%
-1%
7%
$329
$188
$51
16%
2%
9%
$363
$198
$98
27%
-7%
3%
$355
$193
$72
20%
$351
$206
$56
16%
$360
$185
$83
23%
$81,891
$20,163
$0.01
$9,515
12%
$91,355
$20,500
-$0.02
$6,888
8%
$89,272
$24,475
$0.05
$15,151
17%
-35%
-3%
11%
-33%
2%
-16%
nmf
-55%
$350
$192
$76
22%
$99,189
$27,792
$0.07
$16,818
17%
-31%
0%
7%
-26%
-8%
-26%
-127%
-59%
$353
$243
$14
4%
-64%
-1%
-15%
300%
$64,617
41%
$11,452
79%
$0.07 -130%
$12,903 -47%
20%
78
Exhibit 2 – IPI – Tear Sheet
Intrepid Potash
IPI.N
1-Year Target:
1-Year Return:
Rating:
NTM Dividend
Risk:
FY End:
$13.50
-4.5%
SP
$0.00
High
Dec. 31
Last Price:
$14.14
Market Cap:
$1.1B
EV:
$1.1B
Avg. Volume:
0.9M
FD Shares O/S: 75.5M
Float:
73.6%
Valuation: 12x 2015E EBITDA, DCF @ 10%, 40% RCN
Financial
EV/EBITDA
P/E (Adjusted)
P/FCF
P/BV
2012
6.4x
12.1x
n.m.
1.2x
2013
13.8x
43.4x
n.m.
1.1x
2014E
13.8x
n.m.
18.6x
1.1x
2015E
12.9x
n.m.
26.8x
1.1x
Dividend Yield
ROE
ROA
Gross Margin
EBITDA Margin
EBITDA Growth
0.0%
10%
9%
40%
42%
-12%
0.0%
2%
2%
25%
27%
-53%
0.0%
0%
0%
11%
23%
0%
0.0%
1%
1%
14%
25%
7%
Income Statement
Net Sales
COGS
Gross Profit
Potash
Langbeinite (Trio)
EBITDA
Net Income
Adj EPS (FD)
2012
422
237
170
168
3
179
87
$1.17
2013
307
217
78
74
8
83
22
$0.33
2014E
361
309
41
33
11
83
5
$0.05
2015E
360
295
52
37
15
89
10
$0.14
Balance Sheet
Cash & Equivalents
PP&E
Total Assets
2012
34
543
995
2013
0
690
1,175
2014E
90
782
1,156
2015E
153
756
1,170
0
0
89
0
150
241
0
150
215
0
150
218
Shareholders' Equity
906
934
941
952
Cash Flow Statement
Operating (post-WC)
2012
188
2013
65
2014E
124
2015E
102
Investing
Financing
Cash Δ
-170
-57
-40
-246
148
-33
Short-Term Debt
Long-Term Debt
Total Liabilities
Replacement Cost New
Calculated: $35/sh
Source: Bloomberg; Company reports; Scotiabank GBM estimates.
-34
-1
90
-40
0
62
Target:
Current:
40%
41%
Insider Ownership:
Institutional Ownership:
26.4%
73.6%
Target Valuation
Price to Earnings (2015E)
EV/EBITDA (2015E)
Replacement Cost New
Discounted Cash Flow
Multiple
12.0x
40%
10.0%
Value
$13.10
$13.91
$13.71
Weight
33%
33%
33%
Operational
Potash Volume (000 st)
Realized Price ($/st)
2012
839
$454
2013
692
$382
2014E
905
$329
2015E
905
$321
Trio Volume (000 st)
Realized Price ($/st)
124
$329
123
$351
182
$349
204
$341
2012
$0.27a
$0.25a
$0.38a
$0.26a
$1.17a
2013
$0.20a
$0.17a
$0.07a
-$0.11a
$0.33a
2014E
-$0.01a
$0.07a
-$0.02a
$0.01
$0.05
$0.19
2015E
$0.05
$0.05
$0.03
$0.01
$0.14
$0.32
Adj EPS Estimates
Q1
Q2
Q3
Q4
Total
Consensus*
Δ
2014E Sensitivity
Potash ($/st)
Potash Sales (000 st)
Potash Margin (%)
Trio ($/st)
Trio Sales (000 st)
Trio Margin (%)
$10
50
2%
$10
50
5%
EPS
+8.4¢
+3.4¢
+5.5¢
+1.6¢
+3.3¢
+2.7¢
Credit Metrics
Net Debt/EBITDA
Interest Coverage
Debt/Total Capital
Standard & Poor's/Moody's:
2012
n.a.
n.a.
n.a.
n.a.
2013
1.2x
n.a.
0.2x
2014E
1.2x
2.2x
0.2x
2015E
1.2x
4.2x
0.2x
Free Cash Flow
2012
2013
2014E
2015E
EBITDA
Less: Taxes
Less: NWC Δ
Less: CAPEX
Free Cash Flow
179
27
-7
246
-88
83
8
62
250
-237
83
1
-31
55
57
89
3
6
40
40
All figures in $M, unless otherwise noted.
* Bloomberg.
79
Company Comment
Thursday, October 30, 2014, Pre-Market
(LNC-N US$52.32)
Lincoln National Corporation
Solid Core Beat in Q3/14
Joanne Smith, CFA - (212) 225-5071
(Scotia Capital (USA) Inc.)
joanne.smith@scotiabank.com
Rating: Sector Underperform
Risk Ranking: Medium
Jeff Flynn, MBA - (212) 225-5039
(Scotia Capital (USA) Inc.)
jeffrey.flynn@scotiabank.com
Target 1-Yr:
US$54.00
ROR 1-Yr:
4.7%
Valuation: Target P/E of 10x on 2014E (30% weight); Target P/BV of 1.1x on 2014E (70% weight)
Key Risks to Target: Credit losses; Rating downgrades; Hedge effectiveness; Interest rate risk; Reserve adequacy; Regulatory ris k
Event
■ LNC's Q3/14 core EPS of $1.51 increased 22% YOY and exceeded our
and consensus estimates of $1.37 and $1.42, respectively. The upside
was primarily related to strong performance in the Life Insurance
business, which benefited from a clean mortality quarter and continued
in-force growth. Positive operating leverage and higher account values
drove better than expected annuity earnings. LNC’s other businesses
and corporate expenses were in-line with our expectations.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.80
$0.80
1.5%
Pertinent Revisions
Operating
EPS14E
New
$5.70
Old
$5.51
Implications
■ While sales were weaker than expected and elevated disability claims
continued to impact Group Protection results, overall results were
strong, on a 9% rise in account balances, effective expense control and
capital management. In addition, LNC boosted its quarterly dividend by
25% and the results of the annual actuarial review were modestly
positive.
Recommendation
■ LNC earnings have clearly outperformed our expectations, but they have
largely been driven by a disproportional contribution from annuities.
Under a normalized equity market return scenario, we expect EPS growth
to slow. We believe LNC needs to demonstrate more earnings
diversification to justify a higher valuation.
Qtly Operating EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.99 A
$1.02 A
$1.34 A
$1.43
(FY-Dec.)
Op Earnings/Share
Net Earnings/Share
Relative P/E
Price/Book
Q2
$1.09 A
$1.27 A
$1.47 A
$1.49
Q3
$1.27 A
$1.34 A
$1.56 A
$1.51
Q4
$1.10 A
$1.40 A
$1.35
$1.44
Year
$4.47
$5.03
$5.70
$5.86
P/E
5.8x
10.3x
9.2x
8.9x
2011A
$3.95
$0.70
0.3x
0.4x
2012A
$4.47
$4.56
0.4x
0.5x
2013A
$5.03
$4.52
0.6x
1.0x
2014E
$5.70
$5.68
0.6x
0.9x
2015E
$5.86
$5.86
0.5x
0.8x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$16,401
$3,218
$19,619
BVPS14E: $61.10
ROE14E: 10.47%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
313
312
80
Solid Core Beat in Q3
■ Solid Core Beat in Q3/14: LNC's Q3/14 core EPS of $1.51 increased 22% YOY and
exceeded our and consensus estimates of $1.37 and $1.42, respectively. LNC's Q3/14 core
EPS of $1.51 increased 22% YOY and exceeded our estimate of $1.37 and the consensus of
$1.42. The upside was primarily related to strong performance in the Life Insurance
business, which benefited from a clean mortality quarter and continued in-force growth solid
growth in the in-force business. Positive operating leverage and higher account values also
drove better than expected annuity earnings. LNC’s other businesses and corporate expenses
were in-line with expectations. While sales were weaker than expected and elevated
disability claims continued to impact Group Protection results, overall results were strong, on
a 9% rise in account balances, effective expense control and capital management. In
addition, LNC boosted its quarterly dividend by 25% and the results of the annual actuarial
review were modestly positive.
o YOY EPS Increase: Core EPS rose 22% YOY, with the majority of the increase
related to stronger results in the Annuity business, partially offset by a sharp decline
in Group Protection. Additional factors behind the growth in core EPS included
improved Life Insurance mortality experience and a 3% decline in the share count due
to the compound effect of share buybacks.
o Conference Call: LNC will hold a conference call Thurs., October 30th, at 10:00
AM. The dial-in number is (877) 776-4049 (domestic, U.S.) or (914) 495-8602 (int'l).
o Book Value, ROE & Share Repurchase: Book value per share excluding AOCI
increased 9% YOY, to $48.23, essentially in-line with our forecast. The core ROE
excluding AOCI, at 13.0%, was 120 bps higher versus Q3/13. During the quarter,
LNC repurchased 2.8M shares at a total cost of $150M, modestly above our estimate
of $125M.
o Weak Sales: Excluding COLI/BOLI sales, life insurance sales increased 1%. Sales in
the group business of $94M declined 12% YOY, reflecting price increases at
beginning of the year. VA sales of $3.2B were in line with our forecast, but fell 5%
YOY. Retirement Plan Services sales of $1.6B fell 13% YOY and fell short of our
forecast.
o Dividend Increased: LNC increased its quarterly dividend 25%, to $0.20 per share
from $0.16. The dividend yield now stands at approximately 1.5%.
o Modest Impact from Annual Actuarial Review: The annual review of actuarial
assumptions resulted in a modest positive impact of $37M to net income.
■ Estimates: We are increasing our 2014E EPS to $5.70 from $5.51 to reflect the upside in the
quarter while our 2015E EPS remains $5.86.
■ Investment Summary: LNC earnings have clearly outperformed our expectations, but they
have largely been driven by a disproportional contribution from annuities. Under a
normalized equity market return scenario, we expect EPS growth to slow. We believe LNC
needs to demonstrate more earnings diversification to justify a higher valuation.
Segment Details
■ Individual Annuity. Core operating earnings of $233M were solidly ahead of our $224M
forecast, and increased 18% YOY, largely driven by an 11% increase in account values, to
$120B, and positive operating leverage. Fee increases over the past couple of years for
certain guarantees and riders on new business have also provided improved returns. The pre tax margin increased to 33% from 28% in the prior year period.
o Variable annuity net flows of $800M were in line with our expectations and the
quarterly run-rate, but fell from $1.5B in the year ago quarter. VA sales of $3.2B
were down 5% YOY due to competitor product and pricing actions. VA deposits
that do not include a guaranteed living benefit rider increased to 24% of the total,
from 13% in Q3/13.
81
o
Net investment spreads fell 5 bps YOY, to 1.73%, due to lower interest yields,
partially offset by a reduction in crediting rates. Spreads declined 8 basis points
QOQ, from 1.81%.
■ Retirement Plan Services. Core earnings of $40M were modestly ahead of our $38M
forecast and increased 20% YOY, driven by an 8% rise in account values, to $53B and
effective expense control.
o Spreads decreased 15 basis points YOY, to 1.88%, as lower investment yields
more than offset the impact from reduced crediting rates. Spreads improved 3 basis
points compared to Q2/14.
o Total sales of $1.6B fell 13% YOY, driven by weakness in the mid-large case
market, which can be lumpy, while small market sales rose 24% YOY, to $449M.
Net flows of $50M were down from $200M in Q3/13.
■ Life Insurance. Core earnings of $150M were ahead of our forecast and increased 20%
YOY, reflecting a clean mortality quarter, strong alternative investment income and
continued growth in the in-force business and account values, which rose 5% and 7%,
respectively. Investment spreads improved 4 basis points QOQ, to 1.80%,.
o Total life insurance sales of $160M fell 5% YOY, but were slightly higher YOY
excluding COLI/BOLI products. Variable universal life sales increased
approximately 20% YOY, but were largely offset by weaker sales of guaranteed
universal life.
■ Group Protection. Core earnings, of $8M were modestly below our forecast, and down
versu$20M in Q3/13 on higher disability claim costs. The total non-medical loss ratio came
in at 77.6% in Q3/14, compared to 73.4% in Q3/13, and well-above the normalized range of
73%-74%. However, earnings improved versus Q2/14, which was negatively impacted by a
substantially elevated non-medical loss ratio of 80.3%. We expect results in this business to
remain under pressure.
o Sales in the group business of $94M declined 12% YOY, reflecting price increases
at beginning of the year. Employee-paid products accounted for 45% of sales, up
from 39% in Q3/13.
82
Exhibit 1 - LNC Summary Financial Model
($ millions, except per share)
Revenue
Pre-tax Operating Income
After-tax Operating Income
Net Income
2013A
2014E
2015E
1Q13A
2Q13A
3Q13A
4Q13A
1Q14A
2Q14A
3Q14A
4Q14E
12,243
1,846
1,385
1,244
13,187
2,044
1,529
1,522
13,785
1,993
1,515
1,515
2,934
375
285
239
3,049
471
351
317
3,073
487
367
337
3,187
513
382
351
3,233
481
365
329
3,286
532
394
398
3,363
563
414
439
3,305
468
356
356
5.03
4.82
5.70
5.62
5.86
5.86
1.02
1.07
1.27
1.20
1.34
1.24
1.40
1.31
1.34
1.34
1.47
1.43
1.56
1.51
1.35
1.35
Book Value (ex AOCI)
Book Value (with AOCI)
45.23
51.17
49.85
61.10
56.95
68.20
42.00
55.33
43.21
50.37
44.37
51.04
45.23
51.17
45.63
54.94
46.97
59.24
48.23
59.48
49.85
61.10
ROE (ex AOCI), %
11.5%
12.2%
11.6%
10.7%
11.7%
11.8%
12.1%
12.2%
12.6%
13.0%
11.3%
Growth (YoY%):
Revenue
After-tax Operating Income
Net Income
Operating EPS
"Core" EPS
6%
8%
-5%
13%
16%
8%
10%
22%
13%
17%
5%
-1%
0%
3%
4%
4%
-2%
0%
3%
9%
6%
10%
0%
17%
18%
5%
1%
-21%
5%
17%
8%
23%
10%
27%
22%
10%
28%
38%
31%
25%
8%
12%
26%
15%
18%
9%
13%
30%
16%
22%
4%
-7%
1%
-4%
3%
Book Value (ex AOCI)
10%
10%
14%
14%
13%
11%
10%
9%
9%
9%
10%
Segment Operating Income:
Retirement Solutions
Life Insurance
Group Protection
Other
Total
892
544
70
(121)
1,385
1,056
552
36
(115)
1,529
1,081
507
59
(132)
1,515
194
112
14
(35)
285
234
135
22
(40)
351
231
140
23
(27)
367
233
157
11
(19)
382
255
120
20
(30)
365
266
148
2
(22)
394
285
150
8
(29)
414
250
134
6
(34)
356
Business Mix:
Retirement Solutions
Life Insurance
Group Protection
Other
Total
64%
39%
5%
-9%
100%
69%
36%
2%
-8%
100%
71%
33%
4%
-9%
100%
68%
39%
5%
-12%
100%
67%
38%
6%
-11%
100%
63%
38%
6%
-7%
100%
61%
41%
3%
-5%
100%
70%
33%
5%
-8%
100%
68%
38%
1%
-6%
100%
69%
36%
2%
-7%
100%
70%
38%
2%
-10%
100%
Operating EPS
"Core" EPS
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
83
Company Comment
Wednesday, October 29, 2014, After Close
(LUN-T C$5.28)
Lundin Mining Corporation
Q3/14 Results First Look: Weak Performance at
Neves-Corvo but Guidance Unchanged
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
orest.wowkodaw@scotiabank.com
Rating: Focus Stock
Risk Ranking: High
Target 1-Yr:
Dalton Baretto, MBA, CFA - (416) 863-7623
(Scotia Capital Inc. - Canada)
dalton.baretto@scotiabank.com
C$7.75
ROR 1-Yr:
46.8%
Valuation: 50% of 6.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Target: Commodity, operating, financing, development, political
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Event
■ Lundin released its Q3/14 financial and operating results.
Implications
■ The company reported an adjusted Q3/14 EPS of $0.05 vs. our estimate
of $0.04 and consensus of $0.07 (range of $0.04 to $0.10).
■ Due to relatively weak output at Neves-Corvo, total attributable copper
production of 26.4kt was 10.1% below our estimate of 29.4 kt. Cash
costs of $1.96/lb were 8.2% above our estimate of 1.81/lb.
■ Zinc production of 38.0 kt was 7.3% above our estimate of 35.4 kt,
although unit costs of $0.48/lb were higher than our forecast of
$0.28/lb.
■ Despite the relatively weak Q3, Lundin reaffirmed its 2014 production,
cash cost, and capital spending guidance.
■ The ramp-up of Eagle continues to make solid progress and is currently
ahead of schedule.
Recommendation
■ Lundin shares offer excellent exposure to Cu-Ni-Zn markets with a
reasonable development and balance sheet risk profile, at a very attractive
relative valuation. We reiterate our Focus Stock rating and our C$7.75
target price. Our C$7.75 target is based on a 50/50 weighting of 6.0x our
2015 EBITDA estimate (C$8.02) and 1.0x our 8% NAVPS estimate
(C$7.57).
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.07 A
$0.02 A
$0.11
$0.15
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Revenues (M)
EBITDA (M)
Q2
$0.04 A
$0.07 A
$0.12
$0.16
Q3
$0.05 A
$0.04
$0.15
$0.17
Q4
$0.09 A
$0.05
$0.16
$0.19
Year
$0.25
$0.19
$0.53
$0.66
P/E
17.1x
24.4x
8.9x
7.2x
2013A
$0.25
$0.26
17.1x
$728
$398
2014E
$0.19
$0.14
24.4x
$853
$352
2015E
$0.53
$0.84
8.9x
$2,367
$1,057
2016E
$0.66
$1.05
7.2x
$2,291
$1,170
2017E
$0.88
$1.23
5.4x
$2,561
$1,380
BVPS14E: $6.39
ROE14E: 3.07%
NAVPS:
P/NAV:
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
C$3,085
$-221
C$2,839
C$7.57
0.70x
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
584
510
84
Q3/14 Results Negatively Impacted by Neves-Corvo
■ Lundin reported Q3/14 headline earnings of $33.7 million or $0.06 per fd share. However,
after excluding a net $5.3 million of positive one-time items, the company reported lower
adjusted earnings of $28.4 million or $0.05 per share. The adjusted earnings were more or
less in line with our estimate of $26.1 million or $0.04 per share but were modestly below the
consensus estimate of $0.07 (range of $0.04 to $0.10). The adjusted earnings compare to
Q2/14 adjusted earnings of $42.8 million or $0.07 per share and the Q3/13 adjusted earnings
of $30.3 million or $0.05 per share.
■ However, we note that the Q3 earnings benefitted from an unexpected $10.8 million of
income tax recoveries, principally from Sweden. Excluding these tax recoveries, we estimate
that the company would have reported lower adjusted earnings of only $17.6 million or $0.03
per share.
■ Revenue of $166.6 million was 11.7% below our forecast of $188.8 million due to lower
copper sales and realized prices. The company’s gross margin (before depreciation) of $49.0
million (or 29.4%) was well below our estimate of $73.5 million (or 39.0%).
■ Equity earnings from Tenke of $25.9 million was above our estimate of $20.6 million. The
company received attributable cash distributions from Tenke of $33.8 million, which was
also above our forecast of $28.3 million.
Operational Review: Weak Results at Neves-Corvo
■ Q3/14 attributable copper production (including Tenke) of 26,403 tonnes was 10.1% below
our forecast of 29,361 tonnes due to materially lower-than-expected output at Neves-Corvo.
Specifically, copper production at Neves-Corvo of 10,904 tonnes was 21.9% below our
forecast of 13,959 tonnes due to lower grades (2.3% Cu vs. our 2.5%) and lower recoveries
(77.6% vs. our 84.0%), as throughput of copper ore was in line. The company attributed the
weak production to a change in the short-term mine plan resulting from lower copper grades
encountered in an expected high-grade zone of lower Corvo, which forced the substitution of
more metallurgically difficult ores from Zambujal. This issue has begun to stabilize
according to management, and is unlikely to persist into 2015. Total copper production
decreased by 7.7% from the Q2/14 level of 28,592 tonnes and decreased by 2.1% from the
Q3/13 level of 26,977 tonnes, both due to Neves-Corvo.
■ Zinc production of 37,958 tonnes was 7.3% above our estimate of 35,364 tonnes due to
stronger output at both Zinkgruvan and Neves-Corvo. Zinc production increased by 2.0%
from the Q2/14 level of 37,202 tonnes, but increased by 13.4% from the Q3/13 level of
33,466 tonnes largely due to the ramp-up of the zinc circuit at Neves-Corvo.
■ Nickel production from Aguablanca of 1,958 tonnes was 2.9% below our forecast of 2,017
tonnes. Nickel production decreased by 11.5% from the Q2/14 level of 2,212 tonnes, but
increased by 9.5% from the Q3/13 level of 1,788 tonnes.
■ Copper cash costs at Neves-Corvo of $1.96/lb were higher than our forecast of $1.81/lb and
Q2/14 costs of $1.62/lb due to the lower production. However, unit costs were markedly
lower than the very high Q3/13 cash costs of $2.23/lb.
■ Zinc cash costs at Zinkgruvan of $0.48/lb were also higher than our forecast of only $0.28/lb,
Q2/14 costs of $0.17/lb, and Q3/13 costs of $0.06/lb.
■ Nickel cash costs at Aguablanca of $5.89/lb were well above our forecast of $4.72/lb, Q2/14
costs of $5.05/lb, and Q3/13 costs of $3.67/lb.
■ Attributable copper sales of 25,726 tonnes were 4.9% below our forecast of 27,055 tonnes
due to the weaker production levels. However, zinc sales of 30,882 tonnes were 9.8% above
our forecast of 28,124 tonnes.
■ The company’s realized copper price of $2.96/lb was 4.9% below our forecast of $3.11/lb.
While zinc price realizations of $1.07/lb were in line, nickel realizations of $6.89/lb were
also 10.3% below our estimate of $7.68/lb.
85
All Guidance Reconfirmed
■ With the exception of tweaking guidance for Tenke in line with Freeport’s recent disclosure,
the company reaffirmed its previously issued 2014 production guidance for copper, nickel,
and lead. Specifically, Lundin anticipates total attributable production of 109,400-117,400
tonnes of copper, 135,000-145,000 tonnes of zinc, 9,500-11,500 tonnes of nickel, and
32,500-36,500 tonnes of lead. We note that YTD production of copper, zinc, nickel, and lead
represents 72.5%, 77.6%, 60.5%, and 80.0% of the mid-point of the guidance ranges, which
suggests that the company is still largely on track to meet expectations this year, particularly
with the ramp-up of Eagle.
■ There was no change in the company’s 2014 unit cost guidance and capital expenditure
guidance.
Eagle Ramping up Well
■ In its first 30 days (from start-up on September 23 to October 22), the Eagle mill has
processed 1,543 tpd of ore, representing an impressive 77% of the nameplate capacity of
2,000 tpd. Nickel and copper recoveries of 77% and 94% are already close to design levels of
83% and 96%, respectively. The concentrate grade of 15% Ni and 29% Cu compares to
design of 11%-16% and 31%. The operation has produced 1,055 tonnes of nickel and 1,063
tonnes of copper. Eagle remains on track to meet to fully ramp up by Q2/15.
Investor Call on Thursday
■ Lundin will host an investor call on Thursday, October 30 at 8.30am EST. The dial-in
numbers are 416.340.2216 or 1.866.225.2055. We will formally adjust our estimates
following the investor call.
Conclusions
■ The Q3/4 results were below expectations due to a relatively weak operating performance at
Neves-Corvo. However, Lundin appears on track to meet its unchanged production and cost
guidance for 2014, as the operating issues at Neves-Corvo appear to be already largely
behind the company. To date, the initial ramp-up at Eagle appears ahead of schedule, which
is a positive. While we anticipate that the shares could be weak on Thursday based on the Q3
results, we view any share price weakness as a buying opportunity as our thesis remains
firmly intact.
Valuation
■ Lundin shares are currently trading at a 2015E and 2016E EV/EBITDA of 4.2x and 3.5x, and
at a 0.70x multiple to our 8% NAV of $7.57 per share. This compares to our base metals
producer universe average of 5.8x, 4.0x and a P/NAV multiple of 0.69x.
Recommendation
■ Lundin shares offer excellent exposure to Cu-Ni-Zn markets with a reasonable development
and balance sheet risk profile, at a very attractive relative valuation. We reiterate our Focus
Stock rating and our C$7.75 target price. Our C$7.75 target is based on a 50/50 weighting of
6.0x our 2015 EBITDA estimate (C$8.02) and 1.0x our 8% NAVPS estimate (C$7.57).
86
Exhibit 1 - Lundin Q3/14 Variances
Q2/14A
Sequential
Variance
% change
Q3/13A
Yr-Over-Yr
Variance
% change
-10.1%
-17.8%
7.3%
7.3%
0.0%
28,592
16,182
37,202
2,212
762
-7.7%
-15.5%
2.0%
-2.1%
14.3%
26,977
15,087
33,466
1,788
610
-2.1%
-9.4%
13.4%
21.1%
42.9%
27,055
14,863
28,124
1,210
871
-4.9%
-8.9%
9.8%
-1.9%
0.0%
25,362
12,516
31,087
1,342
762
1.4%
8.1%
-0.7%
-11.5%
14.3%
25,822
12,976
29,511
1,180
653
-0.4%
4.3%
4.6%
0.6%
33.3%
$2.96
$1.07
$0.99
$6.89
$9.99
$3.11
$1.06
$0.98
$7.68
$9.99
-4.9%
1.1%
1.1%
-10.3%
0.0%
3.23
0.97
0.97
10.37
$9.58
-8.4%
10.3%
2.1%
-33.6%
4.3%
3.39
0.85
0.95
6.41
$8.57
-12.7%
25.9%
4.2%
7.5%
16.6%
$0.48
$1.96
$5.89
$0.28
$1.81
$4.72
71.5%
8.2%
24.9%
$0.17
$1.62
$5.05
182.4%
21.0%
16.6%
$0.06
$2.23
$3.67
700.0%
-12.1%
60.5%
166,617
117,644
48,973
29.4%
36,575
11,930
6,042
(26,526)
(11,208)
6,584
25,576
(8,126)
-31.8%
33,702
5,300
28,402
188,768
115,220
73,547
39.0%
41,267
15,000
6,500
(20,564)
(532)
3,367
28,510
2,384
8.4%
26,126
26,126
-11.7%
2.1%
-33.4%
-13.1%
6.0%
-39.4%
NM
NM
-15.1%
NM
-33.7%
176,415
111,704
64,711
36.7%
34,811
11,034
5,808
(22,973)
70
3,905
32,056
4,122
12.9%
27,934
(2,400)
30,334
-5.6%
5.3%
-24.3%
-11.4%
-20.5%
-7.0%
NM
NM
NM
95.5%
-10.3%
-440.9%
NM
NM
NM
29.0%
NM
8.7%
191,763
111,010
80,753
42.1%
36,888
14,249
6,512
(24,463)
1,737
5,971
39,859
141
0.4%
39,718
(3,100)
42,818
Reported EPS - Basic
Reported EPS - Diluted
$0.06
$0.06
$0.04
$0.04
28.9%
28.3%
$0.07
$0.07
-15.2%
-15.4%
$0.05
$0.05
20.3%
19.9%
Adjusted EPS - Basic
Adjusted EPS - Diluted
$0.05
$0.05
$0.04
$0.04
8.6%
8.1%
$0.07
$0.07
-33.7%
-33.9%
$0.05
$0.05
-6.6%
-7.0%
Reported
Q3/14A
BNS est
Q3/14E
Variance
BNS Est.
Attributable Production:
Copper including Tenke (tonnes)
Copper ex Tenke (tonnes)
Zinc (tonnes)
Nickel (tonnes)
Cobalt (tonnes)
26,403
13,666
37,958
2,165
871
29,361
16,624
35,364
2,017
871
Metal Sales:
Copper including Tenke (tonnes)
Copper ex Tenke (tonnes)
Zinc (tonnes)
Nickel (tonnes)
Cobalt (tonnes)
25,726
13,533
30,882
1,187
871
Realized metal prices:
Copper (per lb)
Zinc (per lb)
Lead (per lb)
Nickel (per lb)
Cobalt (per lb)
Unit Costs:
Average zinc cash cost (per lb)
Average copper cash cost (ex. Tenke) (per lb)
Average nickel cash cost (per lb)
Income Statement: (000s US$)
Sales
Cost of Sales
Gross Margin
Gross Margin %
Amortization
Corporate Development and Exploration
General and Administration
Stock Based Compensation
Equity Interest in Tenke
Other (Income)/Expense
Interest Expense
Net Earnings Before Tax
Income and Capital Tax Expense
Tax Rate
Equity in income
Loss/(income) from discountinued operations
Net Income
Non Recurring Items
Adjusted Net Income Available to Common
Source: Company reports; Scotiabank GBM estimates.
-0.8%
-16.3%
-7.2%
NM
NM
-745.3%
10.3%
-35.8%
-5863.1%
5.1%
8.1%
4.0%
NM
NM
NM
NM
-20.2%
NM
NM
NM
20.6%
NM
-6.4%
87
Exhibit 2 - Lundin Financial and Operating Summary
Annual Growth Profile
METAL PRICE FORECAST (per LB)
LME Copper
LME Zinc
LME Nickel
LME Lead
LME Cobalt
LME Gold (per oz)
LME Silver (per oz)
PRODUCTION FORECAST
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
$3.42
$0.98
$9.89
$0.97
$18.66
$1,226
$20.21
$4.00
$1.00
$10.38
$1.09
$16.45
$1,572
$35.31
$3.61
$0.88
$7.95
$0.93
$13.29
$1,669
$31.16
$3.33
$0.87
$6.82
$0.97
$12.30
$1,414
$23.91
$3.14
$0.98
$7.74
$0.96
$13.95
$1,271
$19.26
$3.15
$1.10
$8.50
$1.01
$13.50
$1,300
$19.00
$3.40
$1.20
$10.00
$1.10
$13.00
$1,300
$19.00
$3.60
$1.25
$11.00
$1.15
$12.50
$1,300
$19.00
$3.85
$1.25
$11.00
$1.15
$12.50
$1,300
$19.00
$4.00
$1.25
$11.00
$1.15
$12.50
$1,300
$19.00
$4.00
$1.25
$11.00
$1.15
$12.50
$1,300
$19.00
-6%
13%
14%
-1%
13%
-10%
-19%
0%
12%
10%
5%
-3%
2%
-1%
8%
9%
18%
9%
-4%
0%
0%
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Attributable Copper ('000 tonnes)
Attributable Zinc ('000 tonnes)
Attributable Nickel ('000 tonnes)
Attributable Lead ('000 tonnes)
Attributable Cobalt ('000 tonnes)
110
90
6
40
2
107
111
41
3
102
122
2
38
3
117
125
8
34
3
132
142
10
37
3
269
158
26
32
4
234
157
30
34
4
249
159
26
33
4
227
153
19
31
4
247
155
14
30
4
262
168
11
28
4
13%
13%
32%
6%
18%
104%
12%
164%
-12%
10%
-13%
-1%
12%
5%
1%
UNIT COST FORECAST (per LB)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Average Copper Cash Cost
Average Zinc Cash Cost
Average Nickel Cash Cost
$1.20
$0.22
$8.39
$1.54
$0.29
N/A
$1.57
$0.15
$6.76
$1.57
$0.28
$3.70
$1.56
$0.30
$3.21
$1.70
$0.40
$2.64
$1.75
$0.32
$2.50
$1.69
$0.23
$2.31
$1.59
$0.12
$2.30
$1.63
$0.08
$2.29
$1.66
$0.18
$3.98
-1%
10%
-13%
9%
33%
-18%
3%
-22%
-6%
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
$849
368
123
24
19
$315
6
(43)
113
(79)
$317
$784
382
154
43
28
$177
13
24
51
(95)
$184
$721
385
122
66
27
$120
3
72
23
(102)
$123
$728
461
148
44
24
$51
13
1
(6)
(94)
$137
$853
530
176
54
26
$68
22
2
9
(82)
$116
$2,367
1,266
440
67
26
$568
78
147
(40)
$383
$2,291
1,154
407
63
26
$642
66
173
(72)
$476
$2,561
1,200
404
59
25
$872
59
244
(66)
$635
$2,157
985
333
41
25
$773
45
218
(138)
$648
$2,397
1,089
346
30
25
$906
28
264
(135)
$750
$2,526
1,198
361
30
25
$911
(6)
275
(127)
$769
17%
15%
19%
23%
11%
32%
74%
63%
NM
NM
NM
-15%
178%
139%
151%
24%
-1%
NM
250%
NM
NM
NM
NM
229%
-3%
-9%
-8%
-5%
0%
13%
-16%
NM
18%
NM
NM
24%
INCOME STATEMENT FORECAST (in millions)
Sales
Cost of Sales
Amortization
Corporate Development and Exploration
General and Administration & Other
Operating Earnings
Interest Expenses/(Income)
Other Expenses (Income)
Income and Capital Taxes (Recovery)
Minority Interest / Equity interest in Tenke
Loss/(income) from disc. operations
Net Earnings Applicable to Common
Adjusted Net Earnings Applicable to Common
$291
$239
$202
$148
$119
$383
$476
$635
$648
$750
$769
-20%
223%
24%
Fully Diluted Shares Outstanding
EBITDA (including Tenke)
$0.55
$0.50
581
577
$0.32
$0.41
583
495
$0.21
$0.35
584
428
$0.23
$0.25
585
398
$0.19
$0.19
611
352
$0.53
$0.53
718
1,057
$0.66
$0.66
718
1,170
$0.88
$0.88
718
1,380
$0.90
$0.90
718
1,357
$1.05
$1.05
718
1,487
$1.07
$1.07
718
1,488
-19%
-23%
4%
-12%
180%
175%
18%
200%
24%
24%
0%
11%
CASH FLOW FORECAST (in millions)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
$317
$184
$123
$137
$116
$383
$476
$635
$648
$750
$769
-15%
229%
24%
(40)
$277
125
$309
71
$194
17
$154
(32)
$84
221
$604
279
$755
251
$886
172
$820
127
$878
157
$925
NM
-45%
NM
NM
26%
25%
$0.48
($31)
($90)
($70)
$86
$0.53
($57)
($100)
($89)
$63
$0.33
($15)
($130)
($30)
$20
$0.26
$149
($110)
($134)
$59
$0.14
$105
($126)
($330)
(5)
($273)
$0.84
$83
($240)
($36)
(43)
$369
$1.05
$90
($231)
($11)
(24)
$578
$1.23
$83
($224)
$0
(41)
$703
$1.14
$217
($151)
$0
(39)
$847
$1.22
$33
($142)
$0
(60)
$709
$1.29
$29
($119)
$0
(76)
$759
-48%
-30%
NM
NM
NM
NM
NM
-20%
NM
NM
NM
NM
25%
8%
NM
NM
NM
57%
Free Cashflow to Equity
$0.15
(159)
($73)
$0.11
(11)
$52
$0.03
(11)
$8
$0.10
219
$279
($0.45)
1,558
$1,284
$0.51
(104)
$265
$0.81
$578
$0.98
$703
$1.18
$847
$0.99
$709
$1.06
(550)
$209
NM
NM
361%
NM
NM
-79%
57%
NM
118%
Free Cashflow to Equity Per Share
Equity Issues (Repurchases)
Dividends
All Other Sources (Uses) of Cash
Net Source (Use) of Cash
($0.13)
3
127
$57
$0.09
8
6
$66
$0.01
6
(4)
$10
$0.48
2
(439)
($158)
$2.10
604
(1,885)
$4
$0.37
$265
$0.81
19
$598
$0.98
$703
$1.18
$847
$0.99
$709
$0.29
$209
342%
NM
NM
NM
NM
-82%
NM
NM
NM
NM
118%
NM
NM
NM
125%
BALANCE SHEET FORECAST (in millions)
Net Earnings Per Common Share (FD)
Adjusted Net Earnings Per Common Share (FD)
Net Earnings
Amortization, Deferred Taxes, & Minority Interest
(includes equity interest in Tenke)
Cashflow From Operations
Cashflow Per Share (FD)
Tenke / Kokkola Free Cash Flow
Sustaining Capital
Project Capital Expenditures
Non-Controlling Interests
Free Cashflow to Firm
Free Cashflow to Firm Per Share (FD)
Net Financing Activities (Ex. Equity/Dividends)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
2016E
Cash and short term investments
Other Current Assets
Total Current Assets
Capital Assets
Other Assets
Total Assets
$199
271
$469
1,254
2,109
$3,833
$265
168
$434
1,242
2,189
$3,864
$275
166
$441
1,271
2,278
$3,990
$117
184
$300
1,785
2,347
$4,432
$120
296
$416
3,981
2,300
$6,697
$386
537
$922
3,816
2,324
$7,062
$983
510
$1,493
3,651
2,364
$7,509
$1,687
566
$2,253
3,472
2,423
$8,147
$2,533
480
$3,013
3,289
2,408
$8,711
$3,242
531
$3,773
3,085
2,595
$9,453
$3,451
558
$4,010
2,842
2,788
$9,640
3%
61%
39%
123%
-2%
51%
220%
81%
122%
-4%
1%
5%
155%
-5%
62%
-4%
2%
6%
Long term debt due within one year
Accounts payable and accrued liabilities
Total Current Liabilities
Long term debt
Other Liabilities
Shareholders' Equity
Total Liabilities & Shareholders' Equity
3
191
194
11
461
3,168
$3,833
22
146
168
6
393
3,298
$3,864
3
150
153
4
359
3,475
$3,990
3
171
174
3
585
3,670
$4,432
3
209
212
3
2,104
4,378
$6,697
3
349
352
3
1,944
4,763
$7,062
3
331
334
3
1,911
5,261
$7,509
3
368
371
3
1,875
5,898
$8,147
3
312
315
3
1,843
6,549
$8,711
3
345
348
3
1,800
7,302
$9,453
3
363
366
3
1,198
8,073
$9,640
-13%
22%
22%
-1%
260%
19%
51%
0%
67%
66%
0%
-8%
9%
5%
0%
-5%
-5%
0%
-2%
10%
6%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
88
Intraday Flash
Wednesday, October 29, 2014 @ 3:44:44 PM (ET)
(MEG-T C$27.95)
MEG Energy Corp.
Op Cost Reductions Drive Higher Netbacks
Jason Bouvier, CFA - (403) 213-7345
(Scotia Capital Inc. - Canada)
jason.bouvier@scotiabank.com
Ryan Galloway, CFA, CMA - (403) 213-7768
(Scotia Capital Inc. - Canada)
Jason McDougall, MBA, P.Eng. - (403) 213-7329
(Scotia Capital Inc. - Canada)
Rating: Sector Outperform
Target 1-Yr:
Risk Ranking: High
Valuation: 0.9x our risked 2P+RU NAV
C$47.00
ROR 1-Yr:
68.2%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Key Risks to Target: Commodity prices, timing of projects, and project execution.
Event
Pertinent Revisions
■ MEG announced Q3/14 results.
New
CFPS14E
$4.07
CFPS15E
$4.79
New Valuation:
0.9x our risked 2P+RU NAV
Old Valuation:
0.9x our risked 2P+2C NAV
Implications
■ A 26% QOQ reduction in non-energy op costs drove higher
netbacks. We anticipated non-energy op costs of $9/bbl going in to
Q3/14 with management guiding $8/bbl-$10/bbl for 2014E. On the
conference call management said that going forward, for quarters that
didn't include a turnaround, a sub-$8/bbl non-energy op cost would be
reasonable. We have reduced our near-term op costs estimate.
■ The 50% MEG Energy-owned Access pipeline was completed in
Q3/14. While MEG's Q3/14 production of 76.7 mbbl/d was in line with
consensus, the volumes required to fill the Access pipeline reduced
MEG's sales volumes by approximately 6.1 mbbl/d of bitumen.
■ Higher netbacks led to a CFPS beat. Our cash flow estimate, which
included the impact of the line fill, was $0.90/sh, which MEG was able
to beat by 18% with higher netbacks.
■ 2014 discretionary spending looks to be cut. MEG had originally
guided $1.8B for 2014 capex, including $0.2B in discretionary
spending. MEG anticipates 2014 capex to be just under $1.6B.
Old
$3.94
$4.82
Recommendation
■ We maintain our Sector Outperform rating and $47/sh target price.
Qtly CFPS (Basic)
2012A
2013A
2014E
2015E
Q1
$0.36 A
$0.03 A
$0.70 A
(FY-Dec.)
Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Q2
$0.30 A
$0.35 A
$1.16 A
2011A
$0.57
$1.53
73.3x
5.1x
Q3
$0.12 A
$0.64 A
$1.06 A
2012A
$0.10
$1.04
n.m.
n.m.
Q4
$0.27 A
$0.10 A
$1.15
2013A
$-0.50
$1.14
n.m.
n.m.
Year
$1.04
$1.14
$4.07
$4.79
P/CF
29.2x
26.9x
6.9x
5.8x
2014E
$1.35
$4.07
20.7x
0.8x
2015E
$4.63
$4.79
6.0x
0.2x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$6,234
$3,455
$9,689
223
136
89
Exhibit 1 - NAVPS Sensitivity
$140
Growth Properties
$120
Surmont 2
$100
$80
Surmont 1
$60
Target Price
Christina Lake 3C
$40
Christina Lake 3B
$20
Share Price
$0
Christina Lake 1 & 2
($20)
Net Debt & Other
($40)
Unrisked
Risked
Low Case
-$20/bbl WTI, -$1.00/mcf Henry Hub
Source: Company reports; Scotiabank GBM estimates.
Unrisked
Risked
Scotiabank GBM
Current Price Deck
Unrisked
Risked
High Case
+$20/bbl WTI, +$1.00/mcf Henry Hub
90
Exhibit 2 - NAVPS Details
Source: Company reports; Scotiabank GBM estimates.
91
Exhibit 3 - Operating & Financial Summary
ScotiaView Analyst Link
Source: Company reports; Scotiabank GBM estimates.
92
Intraday Flash
Wednesday, October 29, 2014 @ 2:41:04 PM (ET)
(MEGA CPO-MX MXN
62.15)
Megacable Holdings
Q3: Conference Call Highlights
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
andres.coello@scotiabank.com
Ivan Hernandez - +52 (55) 5123 2876
(Scotiabank Inverlat)
ivanb.hernandez@scotiabank.com
Rating: Sector Perform
Target 1-Yr: MXN 47.00 ROR 1-Yr:
Risk Ranking: High
Valuation: DCF - 5 years results, 8.3% WACC, terminal growth rate of 4.0%
Key Risks to Target: Telmex entry into pay TV; Expensive acquisitions
-20.8%
Div. (NTM)
Div. (Curr.)
2.24
0.99
Yield (Curr.)
1.6%
Event
■ Megacable held its Q3/14 conference call.
Implications
■ CEO Enrique Yamuni confirmed that the purpose of the coming
October 31 meeting is to convert "A" shares into CPOs. As foreign
ownership restrictions were lifted in the constitutional reform, holders
of "A" shares can now take advantage of owning CPOs, making it
easier for them to divest their stake. In our view, the conversion of
shares into CPOs, as well as the exit of the families from the HSBC
trust, could simplify a takeout process.
■ Megacable expects to consolidate PCTV as of October 1, 2014. The
asset was valued at MXN 150M (but Mega bought 66.0%), generating
total sales of MXN 17M to MXN 18M per month (including sales to
Megacable, so the net figure could be lower), with an EBITDA margin
of ~12%. In our view, this implies a ~6.0x LTM EV/EBITDA multiple,
which we see as attractive given the potential to generate synergies.
However, we expect PCTV to contribute ~0.7% of EBITDA next year,
which is not enough to move the needle, in our view.
■ Management remains confident in sustaining a 42.5% margin going
forward, which is in line with the 42.8% we have in our model.
Recommendation
■ Trading at 10.0x 2015E EV/EBITDA, we believe Mega's share price
reflects its solid fundamentals and a certain M&A premium. We
recommend current shareholders maintain their positions.
Qtly EBITDA (M)
2011A
2012A
2013A
2014E
(FY-Dec.)
Earnings/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
EBITDA/Int. Exp
Q1
Q2
Q3
Q4
Year
930 A
996 A
1,036 A
1,194 A
883 A
976 A
1,062 A
1,195 A
859 A
915 A
1,064 A
1,203 A
891 A
909 A
1,194 A
1,411
3,562
3,752
4,356
5,003
EV /
EBITDA
8.6x
7.8x
10.4x
20.1x
2012A
2.21
14.6x
0.9x
8,977
3,752
200.8x
2013A
2.62
16.9x
1.0x
9,841
4,356
-71.7x
2014E
2.74
22.7x
1.4x
11,436
5,003
578.6x
2015E
2.90
21.4x
1.3x
12,691
5,433
128.2x
2016E
3.07
20.3x
1.2x
13,821
5,879
104.1x
BVPS14E: 18.60
ROE14E: 14.49%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in MXN unless otherwise indicated. ^ Limited Voting
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
53,387
45,225
52,312
859
299
93
Company Comment
Thursday, October 30, 2014, Pre-Market
(MEOH-Q US$59.04)
(MX-T C$66.16)
Methanex Corporation
Volume Beat; Geismar Capex 27% Higher
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
ben.isaacson@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Carl Chen - (416) 863-7184
(Scotia Capital Inc. - Canada)
carl.chen@scotiabank.com
Target 1-Yr:
US$72.00
ROR 1-Yr:
23.6%
Valuation: 7.5x 2015E EBITDA, 12x 2015E EPS, DCF @ 10.5%, 100% Adj. RCN
Key Risks to Target: Natural gas supply security, methanol S/D, energy prices
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$1.00
$1.00
1.7%
Event
■ Adjusted Q3 EPS of 69¢ is a beat on the Street's 64¢. Sales volume was
higher than expected, as MX sold 4% more produced methanol than it
created (i.e., a slight inventory drawdown). Accordingly, we do not
view this as a non-recurring beat. The quarter was fairly uneventful.
Implications
■ The two Geismar plants will cost $300M more than MX thought. At
$1.4B, the 27% increase is ~$100M more than the market expected, or
~$1/sh (pre-tax). Capex rises to $700/mt for brownfield projects, which
adds good support to our $900/mt greenfield replacement cost estimate.
■ There is little doubt the focus on the call will be what a lower energy
complex means for methanol. MX stated “pricing has been resilient in
the wake of the recent drop in oil,” but we think it takes time for lower
energy derivatives like naphtha/LPG to test the competitiveness of
methanol. Other questions we will try to answer include why Chinese
consumption declined last month, what will happen with record coastal
methanol inventory in China, and what is the commissioning status of
new merchant MTO plants in China through 2015.
■ MX posted a higher NA price ($499/mt vs. $482), which signifies the
tight Atlantic, due to temporary supply outages (similar to last year, but
less extreme). The November Asian contract was posted flat at $435/mt.
Recommendation
■ We maintain a SP rating on MX. A full note will follow the call.
Qtly Adj. EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.41 A
$0.92 A
$1.65 A
$1.42
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Relative P/E
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$0.47 A
$1.02 A
$0.94 A
$1.33
Q3
$0.38 A
$1.22 A
$0.60
$1.54
Q4
$0.64 A
$1.72 A
$0.99
$1.63
Year
$1.91
$4.88
$4.17
$5.92
P/E
16.7x
12.1x
14.2x
10.0x
2011A
$2.14
$4.72
10.7x
0.7x
$2,608
$448
1.7x
7.3x
2012A
$1.91
$4.68
16.7x
1.0x
$2,673
$398
3.3x
5.6x
2013A
$4.88
$6.78
12.1x
0.7x
$3,024
$735
2.1x
18.9x
2014E
$4.17
$7.99
14.2x
0.9x
$3,450
$707
1.9x
17.5x
2015E
$5.92
$10.27
10.0x
0.6x
$4,009
$996
2.1x
18.1x
BVPS14E: $18.56
ROE14E: 23.31%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$5,746
$502
$6,181
97
97
94
Q3/14 Operational Highlights
Exhibit 1 – MX Q3/14 Operational Highlights
Methanol Production
Chile
Titan, Trinidad
Atlas, Trinidad (63.1%)
New Zealand
Medicine Hat
Egypt (50%)
Geismar I and II, USA
Total
Methanol Sales Volumes
Company produced
Purchased methanol
Commission sales
Total
(000 mt)
(000 mt)
(000 mt)
(000 mt)
(000 mt)
(000 mt)
(000 mt)
(000 m t)
(000 mt)
(000 mt)
(000 mt)
(000 m t)
Methanol Prices
Average Non-discounted Price
Average Realized Price
Average Realized Price
Discount (Actual)
Discount (Actual)
Quarterly Highlights
Revenue
Adj. EBITDA
Tax Rate
EPS
($/mt)
($/mt)
($/gal)
($/mt)
(%)
($M)
($M)
(%)
($/sh)
Actual
Q3/14
GBM Est.
Q3/14E
%Δ
Actual
Q3/13
10
185
234
595
130
50
1,204
44
168
186
577
142
87
1,204
-77%
26 -62%
203 -9%
191 23%
559 6%
138 -6%
99 -49%
1,216 -1%
6
128
254
349
130
168
1,035
1,258
694
191
2,143
1,204
640
195
2,039
4%
1,216
643
211
2,070
4%
1,045 20%
715 -3%
261 -27%
2,021 6%
$444
$389
$1.17
$442
$384
$1.15
0%
$523 -15%
$450 -14%
$1.35 -14%
$502 -12%
$438 -11%
$1.32 -11%
$55
12.4%
$58
13.2%
-6%
$73 -25%
14.0%
$64 -14%
12.7%
$730
$137
26.7%
$0.69
$796
$123
25.0%
$0.60
-8%
$791 -8%
$161 -15%
25.1%
$0.94 -27%
$758 -4%
$184 -26%
18.8%
$1.22 -44%
%Δ
10%
26%
3%
-8%
-42%
0%
8%
-2%
5%
1%
1%
12%
16%
Actual
Q2/14
3%
8%
-9%
%Δ
67%
45%
-8%
70%
0%
-70%
16%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
95
Company Comment
Thursday, October 30, 2014, Pre-Market
(MET-N US$52.31)
MetLife, Inc.
Q3/14: A Welcome EPS Beat on Solid Core
Results
Joanne Smith, CFA - (212) 225-5071
(Scotia Capital (USA) Inc.)
joanne.smith@scotiabank.com
Rating: Focus Stock
Risk Ranking: Medium
Jeff Flynn, MBA - (212) 225-5039
(Scotia Capital (USA) Inc.)
jeffrey.flynn@scotiabank.com
Target 1-Yr:
US$59.00
ROR 1-Yr:
15.5%
Valuation: Target P/E of 10x on 2014E (30% weight); Target P/BV of 1.1x on 2014E (70% weight)
Key Risks to Target: Capital flexibility; U.S. economic weakness; Variable Annuity risk; Regulatory risk; Rating downgrades
Event
■ MET's Q3/14 core of EPS of $1.52, were 8% and 7% ahead of our and
consensus estimates of $1.41 and $1.42 (excluding a pre-announced tax
adjustment in LatAm), respectively, on improved top-line growth,
strong investment margins and good expense discipline. Underwriting
experience reverted back to normal, with the exception of the dental
line, which was below expectations. Normalizing for unusually low
corporate expenses, we would view true core EPS to be $1.48, still a
solid beat.
Div. (NTM)
Div. (Curr.)
$1.40
$1.40
Yield (Curr.)
2.7%
Pertinent Revisions
Operating
EPS14E
New
$5.65
Old
$5.58
Implications
■ After two consecutive misses, the upside surprise was welcome and
reinforced our view that the misses were attributed to underwriting
results that can be volatile on a quarterly basis. Sales, ex-VA and retail
life, were generally strong. The ROE came in at a strong 12.1%
annualized and the company repurchased 8.1M shares for
approximately $400M, the first time the company has bought shares
since pre-financial crisis.
Recommendation
■ MET remains a top pick in the life sector. We continue to expect the
company to produce strong earnings and an improving ROE over the next
few years and that more significant capital management will be possible
as regulatory uncertainty diminishes. Moreover, we believe the stock
remains attractively valued, at 8.5x 2015E EPS and 1.0x 2014E BVPS.
Our 12-month price target remains $59.
Qtly Operating EPS (FD)
2012A
2013A
2014E
2015E
Q1
$1.37 A
$1.47 A
$1.37 A
$1.45
(FY-Dec.)
Op Earnings/Share
Net Earnings/Share
Relative P/E
Price/Book
Q2
$1.34 A
$1.43 A
$1.39 A
$1.54
Q3
$1.32 A
$1.34 A
$1.60 A
$1.56
Q4
$1.25 A
$1.37 A
$1.45
$1.59
Year
$5.28
$5.62
$5.65
$6.14
P/E
6.2x
9.6x
9.3x
8.5x
2011A
$4.38
$5.76
0.5x
0.6x
2012A
$5.28
$1.63
0.4x
0.6x
2013A
$5.62
$2.91
0.6x
1.0x
2014E
$5.65
$5.56
0.6x
0.8x
2015E
$6.14
$6.14
0.5x
0.8x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$59,754
$16,391
$76,145
BVPS14E: $62.19
ROE14E: 9.68%
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
1,142
936
96
MET Q3/14 EPS Beat Expectations on Solid Core Results
■ Core Earnings: MET's Q3/14 core of EPS of $1.52, were 8% and 7% ahead of our and
consensus estimates of $1.41 and $1.42 (excluding a pre-announced tax adjustment in
LatAm), respectively, on improved top-line growth, strong investment margins and good
expense discipline. Underwriting experience reverted back to normal, with the exception of
the dental line, which was below expectations. Normalizing for unusually low corporate
expenses, we would view true core EPS to be $1.48, still a solid beat.
o A Welcome Beat: After two consecutive misses, the upside surprise was
welcome and reinforced our view that the misses were attributed to
underwriting results that can be volatile on a quarterly basis, but are quite
stable over time. Sales, excluding VA and retail life, were generally strong,
and premiums, fees and other revenue benefitted from strong sales of
structured settlements and income annuities, which are large single-premium
transactions. The ROE came in at a strong 12.1% annualized and the company
repurchased 8.1M shares for approximately $400M, the first time the company
has bought shares since pre-financial crisis.
o Conference Call: MET will hold a conference call on Thursday, October 30th
at 8AM to discuss the results. The dial in number is 800-553-0288 or 612-3320335.
o Reported Earnings: MET’s reported operating EPS of $1.60 included five
items that adjusted to our estimate of core EPS of $1.52, which we then
adjusted for normalized corporate expenses to $1.48. Variable investment
income was above plan by $62M, or $0.05 per share. Favorable catastrophe
experience and prior-year development in the P&C operations added $38M to
earnings, or $0.03 per share. A favorable one-time tax adjustment was a
benefit of $32M, or $0.03 per share. The annual actuarial review realized a net
positive $16M, or $0.01 per share. The impact of Chilean tax reform resulted
in a one-time catch-up negative adjustment of $44M, or $0.04 per share.
o Book Value & ROE: BVPS, excluding AOCI, rose 7% YOY to $49.69, as
the net derivatives losses in the prior year turned into gains in the current
period. The annualized core operating ROE was 12.1%, up 90 bps from Q3/13.
o Estimates: We are raising our 2014E EPS to $5.65 from $5.58 to reflect the
upside to this quarter, but our 2015E remains $6.14, but both estimates are
under review.
o Sales: Sales, excluding VA and retail life, were generally strong, and
premiums, fees and other revenue benefitted from strong sales of structured
settlements and income annuities, which are large single-premium
transactions. Strengths included Corporate Benefit Funding, Latin America,
EMEA and Asia. VA sales fell 30%, but fixed annuity sales were strong.
Retail life sales were weak across the board.
o Spreads: Investment spreads rose 15 bps when including variable investment
income (VII), but contracted 16 bps excluding VII. After-tax VII was $273M,
$62M above expectations, and compared to $153M in the prior year period.
o Mortality/morbidity/combined ratio: Mortality experience returned to
normal.
■ Recommendation and Price Target: MET remains a top pick in the life sector. We
continue to expect the company to produce strong earnings and an improving ROE over the
next few years and that more significant capital management will be possible as regulatory
uncertainty diminishes. Moreover, we believe the stock remains attractively valued, at 8.5x
2015E EPS and 1.0x 2014E BVPS. Our 12-month price target remains $59.
97
Segment Results
o Retail Life & Other: Retail Life & Other core earnings of $273M rose 15% YOY and
were well ahead of our estimate on a return to more normal mortality experience and
controlled expenses Retail life sales fell 28%, on weak results across products.
o Annuities: Annuity core earnings of $359M declined 6% YOY, and fell short of our
forecast, on higher benefits and claims expense and lower investment spreads. Average
separate account annuity balances rose 3% YOY, to $161B. Net outflows of $1.9BM,
were associated with higher surrenders (a positive for a largely GMIB book, in our
view) and significantly lower deposits as MET had intentionally pulled back from this
market to reduce market-related risk. We expect the company to introduce new
products with a favourable risk profile within the next several months and that balances
will begin to grow again at some point in 2015. Investment margins declined 15 bps
YOY including VII, to 2.66%, and 30 bps when excluding VII, to 2.38%.
 Annuity Sales: Variable annuity sales were down 30% YOY, to $1.5B,
consistent with recent quarters, while fixed annuity sales more than
doubled to $505M.
o Corporate Benefit Funding: Core earnings increased 26% YOY to $375M, about 7%
above our forecast, as interest margins widened somewhat and underwriting results
were solid. General account net flows were $2.3B, while separate account net outflows
were $912M, the latter of which can be volatile due to the nature of the business. Net
interest margins expanded 38 bps YOY, to 1.95%, including VII, and 12 bps, to 1.46%,
excluding VII.
o Group, Voluntary & Worksite Benefits: Core earnings were flat YOY, at $214M,
and were slightly below our estimate, on a return to more normal mortality and
morbidity experience, with the exception of dental, which was below expectations, but
utilization rates were stable YOY. We intend to explore this more on today’s
conference call, as this is the second consecutive quarter of lower-than-expected results
in dental. Group premiums, fees and other revenues (PFOs) were up 6% YOY. In
group life, mortality was 89.9% versus 90.3% in the prior year. The interest-adjusted
non-medical health benefit ratio came in at 79.0% versus 80.6% in the year-ago period.
o Latin America: Core earnings of $193M, an increase of 53% on a reported basis and
61% on a constant currency basis, were well above our estimate, as a result of the
accretion from the ProVida acquisition and strong worksite benefits results in Mexico.
PFOs rose 24% (31% on a constant currency basis) YOY. MET expects ProVida to add
$190M-$200M to earnings in 2014.
o Asia: Core operating income of $316M declined 3% YOY on higher-than-expected
expenses. Sales rose 10% across the region and were particularly strong in Australia
and China.
o EMEA: Core earnings of $86M increased 6% YOY, 13% on a currency-adjusted basis,
on business growth in the Middle East and the conversion of certain operations to
calendar year reporting. PFOs increased 3% (4% on a currency adjusted basis) and
sales rose 12%, driven by 31% growth in emerging markets and strong employee
benefit sales in the Middle East.
o Corporate & Other: Adjusted operating losses totalled $98M, substantially below
expectation and the average over the last three quarters. Adjusting for more normalized
corporate expenses, we estimate the loss closer to $150M.
Summary: After two consecutive misses, the upside surprise was welcome and reinforced
our view that the misses were attributed to underwriting results that can be volatile on a
quarterly basis, but are quite stable over time. Sales, excluding VA and retail life, were
generally strong, and premiums, fees and other revenue benefitted from strong sales of
structured settlements and income annuities, which are large single-premium transactions.
The ROE came in at a strong 12.1% annualized and the company repurchased 8.1M shares
for approximately $400M, the first time the company has bought shares since pre -financial
crisis.
98
Company Comment
Thursday, October 30, 2014, Pre-Market
(PHX-T C$11.85)
PHX Energy Services Corp.
Déjà Vu: Record Q’s & Capex Bumps Continue
Vladislav C. Vlad, MBA, P.Eng. - (403) 213-7759
(Scotia Capital Inc. - Canada)
vladislav.vlad@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
Sam Devlin, CFA - (403) 213-7332
(Scotia Capital Inc. - Canada)
sam.devlin@scotiabank.com
C$17.00
ROR 1-Yr:
50.5%
Valuation: 8.4x our 2015 EV/EBITDA estimate.
Key Risks to Target: Commodity prices, labour supply, new technology, and FX.
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.84
$0.84
7.1%
Event
■ Adjusted EBITDA of $24.6M was a record, slightly below our $25.5M
expectation (-4%) and consensus of $25.0M.
Implications
■ Top line beat offset by softer margin. Revenue of $139M came in 4%
ahead of expectation and is 30% better YOY and 38% better QOQ. This
was led by impressive 13% higher than expected ops days in the U.S.
(+13% QOQ or +580 days), which was partially offset by slightly lower
than expected days in Canada (-4%) and internationally (-8%). The
margin squeeze was mostly in the U.S. where higher personnel costs (to
keep pace with growth), SG&A associated with the EDR business and
likely the costs associated with field testing new technology (our
assumption) weighed on margins. Also, internationally, weaker activity
out of Russia, which is expected to rebound, placed added pressure on
margins. PHX’s Peruvian and Colombian operations closed.
■ Market share capture has been impressive on older platform;
however, we are getting excited about the next wave of growth.
PHX unveiled one of its new technologies, Velocity, which is a
guidance platform designed to not only improve reliability but also
collect formation measurements to provide real time engineering and
enhance the drilling process. PHX has a fleet of these systems in field
tests across NAM and expects them to be commercial during 2015.
Capex bumped to $84M, up $7.5M in anticipation of future growth.
Recommendation
■ We remain bullish on PHX; degree of share pullback not justified.
Qtly EBITDA (M)
2012A
2013A
2014E
2015E
Q1
Q2
Q3
Q4
Year
$15 A
$17 A
$21 A
$26
$4 A
$1 A
$7 A
$7
$18 A
$20 A
$25 A
$30
$14 A
$15 A
$24
$26
$51
$49
$76
$89
EV /
EBITDA
7.5x
10.7x
7.4x
6.3x
2011A
$40.0
$40
$0.1
17.0%
16.2%
1.2x
$0.62
$0.49
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
$78.0
$43
$34.7
15.7%
16.6%
1.4x
$0.94
$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: $5.49
ROE14E: 13.64%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$447
$106
$553
38
38
99
Exhibit 1 - Snapshot Summary
PHX Energy Services Corp. (TSX: PHX)
Financial Statistics
Rating: Sector Outperform
Valuation Analysis
2009
2010
2011
2012
2013
2014E
2015E
Share Price
$11.85
EV/EBITDA
12.8x
14.1x
8.5x
7.5x
10.7x
7.4x
6.3x
1-Yr Target Price
$17.00
P/CF
11.3x
13.7x
7.5x
5.6x
7.8x
6.0x
5.7x
51%
P/E
20.1x
21.2x
17.2x
13.6x
25.1x
15.2x
12.7x
$0.84
P/BV
2.6x
3.6x
2.9x
2.5x
2.3x
2.1x
2.1x
7%
P/TBV
2.9x
4.0x
3.1x
2.7x
3.1x
2.9x
2.6x
38 M
ROE (adjusted)
12%
18%
16%
17%
9%
14%
17%
Marker Capitalization
$447 M
ROA (adjusted)
9%
12%
9%
8%
5%
7%
8%
Net Debt (Net Cash)
$106 M
Enterprise Value
$553 M
Implied Return
Dividend
Yield
FD Share Count
Corporate Margins
2009
2010
2011
2012
2013
2014E
2015E
Gross
28.7%
25.9%
28.0%
27.5%
24.1%
26.3%
26.9%
EBITDA
16.2%
14.2%
17.0%
16.8%
12.9%
15.0%
15.7%
Debt Summary as of
Q3/14
Earnings Summary ($M)
2009
2010
2011
2012
2013
2014E
2015E
Net Debt (Net Cash)
$106 M
Total Revenue
$115
$197
$260
$302
$381
$505
$567
Facility Size
$132 M
EBITDA
$19
$28
$44
$51
$49
$76
$89
Draw on Facility
$115 M
EBIT
$8
$14
$29
$28
$48
$46
$54
Facility Remaining
$17 M
EBT
$8
$13
$27
$24
$43
$42
$48
Reported Earnings
$11
$14
$18
$18
$37
$30
$34
Adjusted Earnings
$11
$17
$18
$19
$15
$28
$35
$0.41
$0.63
$0.62
$0.67
$0.50
$0.78
$0.94
13%
%
Per FD Share (Adjusted)
Segmented Revenue
100%
75%
50%
25%
Cash Flow Summary ($M)
2009
2010
2011
2012
2013
2014E
2015E
CFPS FD
$0.73
$0.97
$1.41
$1.64
$1.61
$1.97
$2.07
Funds From Operations
$20
$26
$40
$46
$48
$70
$78
Capex1
Free Cash Flow
$10
$43
$40
$42
$28
$73
$43
$10
($17)
$0
$4
$19
($3)
$35
Dividends
$22
$13
$14
$19
$22
$29
$29
$0.82
$0.47
$0.49
$0.66
$0.64
$0.84
$0.84
Per FD Share
nmf
nmf
nmf
nmf
115%
nmf
85%
Capex1/Cash Flow
Net Debt (Cash)/Cash Flow
0.5x
1.7x
1.0x
0.9x
0.6x
1.0x
0.6x
0.1x
1.0x
1.2x
2.1x
1.4x
1.6x
1.4x
Net Debt/Equity
0.0x
0.3x
0.4x
0.8x
0.3x
0.5x
0.5x
Operational Summary
2009
2010
2011
2012
2013
2014E
2015E
Canada
64
82
97
86
96
110
110
United States
44
58
72
94
88
101
101
Intermational
5
10
21
30
30
15
15
Canada
24%
40%
38%
32%
39%
43%
41%
United States
34%
48%
38%
37%
43%
51%
52%
Intermational
17%
27%
23%
26%
35%
69%
79%
Payout From FCF
Canada
United States
2015E
2014E
2013
2012
2011
2010
2009
0%
International
Company Profile
PHX Energy Services Corp. is a pure-play
horizontal and directional driller that has focused
on developing its own proprietary MWD
guidance systems. PHX primarily operates in
North America but also has operations in
Albania, Russia, and Colombia.
Analyst Contact Info
MWD Fleet (Exit)
Utilization Rates
Gross Margins
Vladislav C. Vlad, MBA, P.Eng.
Canada
30.1%
20.0%
22.0%
22.2%
(403) 213-7759
United States
11.4%
11.9%
17.8%
18.8%
vladislav.vlad@scotiabank.com
Intermational
26.0%
35.7%
30.6%
32.1%
Notes: (1) Cash capex may vary from corporate capital program due to timing differences.
Source: Company reports; FactSet; Scotiabank GBM estimates.
100
Exhibit 2 – Q3/14 Results Summary
Q3/14
Figures in $M
Actual
Estimated
Canada
$51
United States
$76
International
Corporate
YOY
QOQ
∆
Q3/13
∆
Q2/14
$55
-7%
$43
20%
$66
15%
$50
52%
$12
$12
-5%
$14
-17%
$0
$0
Total Revenue
$139
$134
4%
$107
Gross Margin
27.6%
29.8%
-7.3%
Canada
$11.4
$9.3
United States
$5.3
$8.2
International
$2.6
$3.5
-26%
2014E
2015E
∆
New
Prior
∆
New
Prior
∆
$22
NA
$183
$191
-4%
$191
$199
-4%
$66
15%
$270
$255
6%
$315
$281
12%
$13
-9%
$51
$51
-1%
$60
$66
-8%
$0
NA
$0
$0
0%
$0
$0
0%
30%
$100
38%
$505
$496
2%
$567
$546
4%
29.3%
-5.8%
20.9%
32.2%
26.3%
26.9%
-2.3%
26.9%
27.8%
-3.2%
23%
$10.2
13%
($6.7)
NA
$24
$21
14%
$26
$23
13%
-35%
$2.9
83%
$6.5
-19%
$22
$26
-15%
$29
$32
-9%
$4.5
-43%
$2.7
-4%
$11
$13
-13%
$15
$16
-11%
Revenue
$0
EBITDA
Corporate
$5.2
$4.5
17%
$2.8
89%
$4.1
27%
$18
$16
11%
$20
$18
12%
Total EBITDA
$24.6
$25.5
-4%
$20.4
21%
$6.7
NA
$76
$76
-1%
$89
$89
0%
EBITDA Margin
17.7%
19.1%
15.0%
15.4%
15.7%
16.3%
Operating Earnings
$0.37
$0.31
$0.85
$0.82
$0.91
$0.95
Discontinued Operations
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Adjustments/Unusual Items
($0.03)
$0.01
NA
($0.06)
-57%
($0.03)
-16%
($0.07)
($0.04)
92%
$0.02
$0.02
3%
Adjusted Net Earnings
$0.34
$0.32
9%
$0.31
11%
($0.06)
NA
$0.78
$0.78
0%
$0.94
$0.97
-4%
CF From Operations
$0.71
$0.59
20%
$0.67
7%
$0.15
NA
$1.97
$1.85
6%
$2.07
$2.06
0%
Funds From Operations
$25.0
$22.3
12%
$19.2
30%
$5
NA
$70
$67
4%
$78
$78
0%
Net Capex
$27.9
$25.9
8%
$3.9
NA
$6.8
NA
$73
$69
6%
$43
$43
0%
Net Acquisition (Disposition)
$0.6
$0.0
($22.1)
NA
$0.4
48%
$9
$8
8%
$0
$0
Cash Dividends
$7.4
$7.5
-2%
$5.2
42%
$7.3
1%
$29
$29
0%
$29
$29
Net Capex/Cash Flow
1.1x
1.2x
-4%
0.2x
NA
1.3x
-16%
1.0x
1.0x
2%
0.6x
0.6x
0%
$105.6
$105.9
0%
$107.0
-1%
$81.2
30%
$114
$113
0%
$112
$112
-1%
Canada
110
104
6%
93
18%
100
10%
110
108
2%
110
108
2%
United States
100
97
3%
92
9%
94
6%
101
100
1%
101
100
1%
International
15
18
-17%
30
-50%
18
-17%
15
18
-17%
15
18
-17%
Canada
48%
51%
48%
19%
43%
44%
41%
43%
United States
56%
50%
45%
53%
51%
49%
52%
49%
International
65%
59%
39%
55%
69%
59%
79%
73%
Canada
4,606
4,800
-4%
4,125
12%
1,819
NA
16,312
16,656
-2%
16,437
16,781
United States
4,955
4,400
13%
3,770
31%
4,375
13%
17,740
16,885
5%
19,093
17,734
8%
International
901
975
-8%
1,070
-16%
906
-1%
3,778
3,902
-3%
4,344
4,800
-10%
Canada
$11,097
$11,500
-4%
$10,351
7%
$11,885
-7%
$11,246
$11,446
-2%
$11,636
$11,839
-2%
United States
$14,125
$13,800
2%
$12,748
11%
$13,810
2%
$13,889
$13,741
1%
$14,871
$14,283
4%
International
$12,140
$11,750
3%
$12,909
-6%
$13,162
-8%
$12,253
$11,974
2%
$12,521
$12,362
1%
Canada
30.8%
25.0%
31.3%
-19.7%
22.0%
19.7%
22.2%
19.9%
United States
15.5%
21.6%
13.4%
21.6%
17.8%
20.0%
18.8%
21.1%
International
29.7%
38.0%
38.8%
32.3%
30.6%
34.6%
32.1%
34.9%
19.0%
6.6%
F.D. Per Share Data
20%
$0.37
-1%
($0.03)
$0.00
NA
$0.00
4%
-4%
Cash Flow Summary
Net Debt
0%
Operational Statistics
Directional Drilling Fleet
Utilization Rates
Operating Time
-2%
Average Day Rates
Gross Margins
Notes: Divisional cost breakdown related to intercompany rentals has been restated for 2013 and 2014.
Source: Company reports; Scotiabank GBM estimates.
101
Premium Valuation Warranted
■ We are maintaining our price target of $17.00. Our one-year target price is predicated on
8.4x our 2015 EV/EBITDA estimate and is supported by comparative valuation. Our target
price multiple compares with our one standard deviation historical trading band of 5.7x to
8.2x (see Exhibit 3).
Exhibit 3 – Forward Year EV/EBITDA - Consensus Estimates
CET
- 1 σ PHX
Aug.14
May.14
Oct.13
Jan.14
Jun.13
Mar.13
Nov.12
Apr.12
Aug.12
Oct.11
Jan.12
Jun.11
Mar.11
Nov.10
Apr.10
Aug.10
Jan.10
Jun.09
PHX
Sep.09
3.0x
Mar.09
3.0x
Nov.08
4.0x
Apr.08
5.0x
4.0x
Aug.08
5.0x
Jan.08
6.0x
Jun.07
7.0x
6.0x
Sep.07
7.0x
Feb.07
8.0x
Nov.06
9.0x
8.0x
Jul.06
9.0x
Apr.06
10.0x
Jan.06
10.0x
+ 1 σ PHX
Source: Bloomberg; Company reports; Scotiabank GBM estimates.
■ PHX Energy is currently trading at 6.3x 2015E EV/EBITDA versus its North American peer
group average of 5.3x (see Exhibit 4). We believe PHX’s premium valuation is warranted
given (1) history of market share growth, (2) new technology platform roll out which could
see a step change in PHX’s operations (i.e., via higher efficiency, better revenue rates and
lower costs), and (3) third highest dividend in OFS space at 7.1%.
Exhibit 4 – Comparable Company Analysis
Company
Other Services
Cathedral Energy Services
PHX Energy Services
Precision Drilling
Pason Systems
Ensign Energy Services
Baker Hughes
Halliburton
Nabors Industries
National Oilwell Varco
Schlumberger
Weatherford International
Average
Average - Canada
Average - United States
GBM
1
Ticker Analyst Rating
CET
PHX
PD
PSI
ESI
BHI
HAL
NBR
NOV
SLB
WFT
VV
VV
VV
VV
BS*
BS*
DW*
BS*
BS*
BS*
SO
SO
SO
7
SP
SO
SO
SO
SP
SO
SP
Share
Price
Target
Price
Total
Return
$3.33
$11.85
$9.57
$27.14
$12.58
$52.67
$54.42
$17.92
$72.73
$97.41
$16.53
$6.00
$17.00
$13.50
90%
51%
44%
$16.50
$64.00
$70.00
$28.00
$85.00
$120.00
$20.00
35%
23%
30%
57%
19%
25%
21%
2
Div. Mkt Cap EV/EBITDA
P/CF
P/E
Yield
($M)
2014E 2015E 2014E 2015E 2014E 2015E
9.9%
$125
7.1%
$447
2.9% $2,887
2.3% $2,250
3.7% $2,068
1.2% $22,785
1.1% $46,119
1.0% $5,371
2.1% $31,291
1.6% $125,347
0.0% $12,785
3.0%
5.2%
1.2%
5.1x
7.4x
5.5x
8.1x
5.3x
5.2x
6.8x
5.1x
6.2x
8.9x
6.5x
6.4x
6.3x
6.4x
4.0x
6.3x
5.0x
6.9x
4.8x
4.1x
5.4x
4.1x
5.1x
7.4x
5.2x
5.3x
5.4x
5.2x
3.9x
6.0x
4.0x
10.4x
4.2x
6.9x
9.2x
3.3x
9.9x
11.6x
6.4x
6.9x
5.7x
7.9x
3.4x
5.7x
3.7x
9.5x
3.6x
5.7x
7.3x
2.9x
8.9x
10.3x
4.7x
6.0x
5.2x
6.6x
15.3x
15.2x
11.2x
17.9x
14.9x
13.2x
13.5x
15.1x
12.2x
17.3x
15.0x
14.6x
14.9x
14.4x
10.0x
12.7x
10.2x
16.0x
12.0x
10.6x
11.0x
8.7x
10.9x
15.3x
10.1x
11.6x
12.2x
11.1x
Notes:
1. Number of analysts who make up consensus (i.e., Scotiabank GBM does not cover the name) or our rating (*Howard Weil).
2. Adjusted for stock-based compensation and non-recurring items.
3. Figures for U.S.-listed companies are in U.S. dollars.
Analyst legend: VV = Vladislav Vlad, BS=Bill Sanchez, DW=Dave Wilson
Ratings legend: FS = Focus Stock, SO = Sector Outperform, SP = Sector Perform, SU = Sector Underperform.
Source: Bloomberg; Company reports; FactSet; Scotiabank GBM estimates (CET, PHX, ESI, PD); Howard Weil estimates (ratings and targets only for BHI, HAL,
NBR, NOV, SLB, WFT).
EBITDA
102
Exhibit 5 – Operational Summary
Figures in $M
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Canada
$52
$99
$144
$127
$44
$12
$43
$48
$147
$59
$22
$51
$52
$183
$191
United States
$58
$85
$93
$138
$39
$40
$50
$53
$183
$57
$66
$76
$71
$270
$315
International
$4
$14
$22
$37
$9
$13
$14
$15
$51
$13
$13
$12
$13
$51
$60
Corporate
$0
$0
($0)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Total Revenue
$115
$197
$260
$302
$93
$65
$107
$116
$381
$129
$100
$139
$136
$505
$567
YOY Growth
-30%
72%
32%
16%
16%
12%
27%
45%
26%
39%
53%
30%
18%
33%
12%
29%
25.9%
28.0%
27.5%
29.1%
13.7%
29.3%
24.3%
24.1%
27.2%
20.9%
27.6%
28.1%
26.3%
26.9%
Canada
$28
$13
($4)
$10
$3
$17
$10
($7)
$11
$10
$24
$26
United States
$4
($0)
($3)
$3
$5
$6
$5
$7
$5
$5
$22
$29
International
$7
$1
$3
$5
$4
$14
$3
$3
$3
$3
$11
$15
Corporate, Other, & Adjustments
$11
$3
$4
$3
$3
$13
$3
$4
$5
$5
$18
$20
Revenue
Gross Margin
EBITDA
Adjusted EBITDA
$19
$28
$44
$51
$17
$1
$20
$15
$49
$21
$7
$25
$24
$76
$89
YOY Growth
-52%
51%
58%
15%
15%
-81%
13%
7%
-3%
23%
777%
21%
59%
54%
18%
EBITDA Margin
16%
14.2%
17.0%
16.8%
18.2%
1.2%
19.0%
12.9%
12.9%
16.0%
6.6%
17.7%
17.4%
15.0%
15.7%
Operating Earnings
$0.42
$0.52
$0.65
$0.63
$0.29
($0.16)
$0.37
$0.68
$1.23
$0.25
($0.03)
$0.37
$0.25
$0.85
$0.91
Discontinued Operations
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Adjustments/Unusual Items
($0.01)
$0.10
($0.03)
$0.05
($0.06)
($0.00)
($0.06)
($0.55)
($0.74)
($0.02)
($0.03)
($0.03)
$0.01
($0.07)
$0.02
Adjusted Net Earnings
$0.41
$0.63
$0.62
$0.67
$0.23
($0.17)
$0.31
$0.13
$0.50
$0.23
($0.06)
$0.34
$0.26
$0.78
$0.94
CF From Operations
$0.73
$0.97
$1.41
$1.64
$0.54
($0.01)
$0.67
$0.41
$1.61
$0.55
$0.15
$0.71
$0.55
$1.97
$2.07
-49%
33%
46%
16%
31%
-119%
0%
-16%
-2%
2%
-1649%
7%
34%
22%
5%
Funds From Operations
$20
$26
$40
$46
$15
($0)
$19
$13
$48
$19
$5
$25
$21
$70
$78
Capex
$10
$43
$40
$42
$10
$6
$4
$8
$28
$10
$7
$28
$28
$73
$43
Net Acquisition (Disposition)
$0
($4)
$0
$6
$0
$3
($22)
$0
($19)
$7
$0
$1
$0
$9
$0
Cash Dividends
$23
$12
$12
$19
$5
$5
$5
$6
$21
$7
$7
$7
$7
$29
$29
Capex/Cash Flow
0.5x
1.7x
1.0x
0.9x
0.6x
-23.6x
0.2x
0.6x
0.6x
0.5x
1.3x
1.1x
1.4x
1.0x
0.6x
Net Debt (Cash)
$2
$27
$48
$97
$101
$113
$107
$65
$65
$82
$81
$106
$114
$114
$112
Net Debt (Cash)/Cash Flow
0.1x
1.0x
1.2x
2.1x
1.6x
1.4x
Canada
64
82
97
86
101
94
93
96
96
106
100
110
110
110
110
United States
44
58
72
94
81
91
92
88
88
89
94
100
101
101
101
International
5
10
21
30
30
30
30
30
30
29
18
15
15
15
15
Canada
24%
40%
38%
32%
50%
12%
48%
48%
39%
58%
19%
48%
46%
43%
41%
United States
34%
48%
38%
37%
40%
41%
45%
47%
43%
49%
53%
56%
49%
51%
52%
International
17%
27%
23%
26%
24%
34%
39%
42%
35%
39%
55%
65%
69%
69%
79%
Canada
15
27
35
29
47
12
45
45
37
58
20
50
51
45
45
United States
16
25
25
32
35
36
41
42
38
43
48
54
49
49
52
International
1
3
5
8
7
10
12
13
10
11
10
10
10
10
12
Canada
5,352
9,888
12,760
10,567
4,197
1,071
4,125
4,166
13,559
5,237
1,819
4,606
4,650
16,312
16,437
United States
5,817
9,225
8,961
11,535
3,131
3,233
3,770
3,851
13,985
3,910
4,375
4,955
4,500
17,740
19,093
International
311
973
1,737
2,826
653
932
1,070
1,170
3,825
1,021
906
901
950
3,778
4,344
Canada
$9,809
$9,970
$11,318
$11,991
$10,567
$11,511
$10,351
$11,407
$10,834
$11,196
$11,885
$11,097
$11,200
$11,246
$11,636
United States
$8,735
$8,958
$10,567
$12,007
$12,480
$12,165
$12,748
$13,145
$12,663
$13,321
$13,810
$14,125
$14,200
$13,889
$14,871
International
NA
$13,544
$12,899
$13,273
$13,577
$13,468
$12,909
$12,165
$12,932
$11,597
$13,162
$12,140
$12,200
$12,253
$12,521
Canada
30.1%
37.5%
-22.6%
31.3%
14.6%
20.0%
25.2%
-19.7%
30.8%
27.0%
22.0%
22.2%
United States
11.4%
8.3%
3.9%
13.4%
17.9%
11.9%
17.4%
21.6%
15.5%
17.0%
17.8%
18.8%
International
26.0%
20.4%
36.2%
38.8%
38.9%
35.7%
28.4%
32.3%
29.7%
32.0%
30.6%
32.1%
F.D. Per Share Data
YOY Growth
Cash Flow Summary
1.4x
Operational Statistics
MWD Count (Exit)
Utilization Rates
Active MWDs
Operating Days
Average Day Rates
Gross Margins
Notes: Divisional cost breakdown related to intercompany rentals has been restated for 2013 and 2014
Source: Company reports; Scotiabank GBM estimates.
103
Exhibit 6 – Income Statement
Figures in $M
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Gross
28.7%
25.9%
28.0%
27.5%
29.1%
13.7%
29.3%
24.3%
24.1%
27.2%
20.9%
27.6%
28.1%
26.3%
26.9%
EBITDA
16.2%
14.2%
17.0%
16.8%
18.2%
1.2%
19.0%
12.9%
12.9%
16.0%
6.6%
17.7%
17.4%
15.0%
15.7%
EBIT
6.8%
6.9%
11.1%
9.1%
13.5%
-8.6%
14.4%
22.5%
12.7%
10.7%
0.3%
12.5%
11.0%
9.2%
9.6%
Adjusted Earnings
9.6%
8.6%
6.7%
6.3%
7.1%
-7.3%
8.3%
3.6%
3.9%
6.4%
-2.2%
8.7%
7.2%
5.5%
6.2%
Canada
$52
$99
$144
$127
$44
$12
$43
$48
$147
$59
$22
$51
$52
$183
$191
United States
$58
$85
$93
$138
$39
$40
$50
$53
$183
$57
$66
$76
$71
$270
$315
International
$4
$14
$22
$37
$9
$13
$14
$15
$51
$13
$13
$12
$13
$51
$60
Corporate/Other/Eliminations
$0
$0
($0)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$115
$197
$260
$302
$93
$65
$107
$116
$381
$129
$100
$139
$136
$505
$567
($82)
($146)
($187)
($219)
($66)
($56)
($76)
($87)
($289)
($94)
($80)
($101)
($98)
($372)
($414)
($17)
($27)
($32)
($34)
($10)
($8)
($11)
($13)
($44)
($15)
($15)
($14)
($15)
($58)
($65)
$19
$28
$44
$51
$17
$1
$20
$15
$49
$21
$7
$25
$24
$76
$89
($11)
($12)
($16)
($21)
($6)
($6)
($6)
($6)
($24)
($7)
($7)
($8)
($9)
($32)
($34)
FX (Loss) Gain
$0
$0
($1)
($1)
($0)
($0)
($0)
$0
($0)
($0)
$0
$1
$0
$0
$0
One-Time Charges
$3
$1
$5
$2
$2
$0
$2
$18
$23
$1
$1
$0
$0
$3
$0
Income From Equity Holdings
$0
$0
$0
($1)
($0)
($0)
($1)
($1)
($2)
$0
$0
$0
$0
$0
$0
$8
$14
$29
$28
$12
($6)
$15
$26
$48
$14
$0
$17
$15
$46
$54
Interest
($0)
($1)
($2)
($3)
($1)
($1)
($1)
($1)
($5)
($1)
($1)
($1)
($1)
($4)
($6)
Other
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$8
$13
$27
$24
$11
($7)
$14
$25
$43
$13
($1)
$16
$13
$42
$48
Margins
Revenue
Total Revenue
Expenses
Operating Costs
General and Administrative
EBITDA1
Depreciation
Operating Income (EBIT)
Earnings Before Taxes (EBT)
Total Tax
$4
$1
($8)
($7)
($3)
$2
($3)
($3)
($7)
($4)
($1)
($3)
($4)
($12)
($14)
Net Earnings
$11
$14
$18
$18
$8
($5)
$11
$22
$37
$9
($1)
$13
$10
$30
$34
Discontinued Operations
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Adjustments/Unusual Items
($0)
$3
($1)
$1
($2)
($0)
($2)
($18)
($22)
($1)
($1)
($1)
$0
($3)
$1
$11
$17
$18
$19
$7
($5)
$9
$4
$15
$8
($2)
$12
$10
$28
$35
Adjusted Net Earnings
Cash Flow2
From Operations
$20
$26
$40
$46
$15
($0)
$19
$13
$48
$19
$5
$25
$21
$70
$78
Funds From (For) Investments
($10)
($40)
($40)
($48)
($10)
($13)
($1)
($8)
($32)
($18)
($7)
($29)
($28)
($82)
($43)
Funds From (For) Financing
($8)
$26
$12
$28
$3
$9
($12)
($12)
($12)
$14
($1)
$18
($6)
$26
($32)
Operating Earnings
$0.42
$0.52
$0.65
$0.63
$0.29
($0.16)
$0.37
$0.68
$1.23
$0.25
($0.03)
$0.37
$0.25
$0.85
$0.91
Discontinued Operations
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
Adjustments/Unusual Items
($0.01)
$0.10
($0.03)
$0.05
($0.06)
($0.00)
($0.06)
($0.55)
($0.74)
($0.02)
($0.03)
($0.03)
$0.01
($0.07)
$0.02
Adjusted Net Earnings
$0.41
$0.63
$0.62
$0.67
$0.23
($0.17)
$0.31
$0.13
$0.50
$0.23
($0.06)
$0.34
$0.26
$0.78
$0.94
CF From Operations
$0.73
$0.97
$1.41
$1.64
$0.54
($0.01)
$0.67
$0.41
$1.61
$0.55
$0.15
$0.71
$0.55
$1.97
$2.07
Book Value
$3.20
$3.70
$3.73
$3.73
$3.91
$3.67
$3.86
$5.39
$5.39
$5.50
$5.29
$5.49
$5.55
$5.55
$5.71
Tangible Book Value
$2.89
$3.36
$3.44
$3.44
$3.62
$3.26
$3.46
$4.07
$4.07
$4.00
$3.81
$4.01
$4.14
$4.14
$4.49
$22
$13
$14
$19
$5
$5
$5
$7
$22
$7
$7
$7
$7
$29
$29
Per Share
$0.82
$0.47
$0.49
$0.66
$0.18
$0.18
$0.18
$0.19
$0.64
$0.21
$0.21
$0.21
$0.21
$0.84
$0.84
Payout From CF
111%
49%
34%
40%
33%
-1880%
27%
50%
46%
37%
146%
29%
36%
42%
38%
Payout From FCF
223%
-76%
10145%
501%
95%
-77%
34%
127%
115%
79%
-453%
-257%
-99%
-1005%
85%
Basic - Period End
26.5
27.5
28.1
28.2
28.4
28.6
28.8
34.2
34.2
34.4
35.0
35.1
35.1
35.1
35.1
Weighted Average - Basic
25.0
26.9
27.9
28.2
28.3
28.7
28.7
32.2
29.5
34.3
34.7
35.0
35.1
34.8
35.1
Weighted Average - F.D.
26.9
27.0
28.3
28.2
28.3
28.7
28.7
32.7
29.6
35.2
34.7
35.0
37.7
35.7
37.7
F.D. Per Share Data
Dividends
Share Information (M)
Notes: (1) Adjusted for stock-based compensation, FX, unusual, and infrequent items. (2) Before changes in working capital.
Source: Company reports; FactSet; Scotiabank GBM estimates.
104
Exhibit 7 – Cash Flow Analysis and Capital Expenditure Summary
Figures in $M
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Cash Flow Analysis
CF From Operations
less Maintenance Capital
less Sale of PPE
Distributable Cash Flow
less Expansion Capital
$20
$26
$40
$46
$15
($0)
$19
$13
$48
$19
$5
$25
$21
$70
$78
($15)
($48)
($49)
($10)
($5)
($5)
($5)
($12)
($27)
($8)
($8)
($8)
($8)
($32)
($43)
$5
$5
$9
$9
$4
$2
$3
$5
$13
$3
$4
$3
$0
$11
$0
$10
($17)
$0
$45
$14
($4)
$17
$6
$34
$15
$1
$20
$13
$49
$35
$0
$0
$0
($41)
($8)
($3)
($2)
($1)
($15)
($5)
($3)
($23)
($20)
($52)
$0
$10
($17)
$0
$4
$5
($7)
$15
$5
$19
$9
($2)
($3)
($7)
($3)
$35
($23)
($12)
($12)
($19)
($5)
($5)
($5)
($6)
($21)
($7)
($7)
($7)
($7)
($29)
($29)
($13)
($29)
($12)
($15)
$0
($12)
$10
($1)
($2)
$2
($9)
($10)
($15)
($32)
$5
less Acquisitions/Investments
$0
$0
$0
($6)
($0)
($3)
($1)
$0
($4)
($7)
($0)
($1)
$0
($9)
$0
plus Disposition/Divestures
$0
$4
$0
$0
$0
$0
$23
$0
$23
$0
$0
$0
$0
$0
$0
Surplus (Deficit) Cash Flow
($13)
($26)
($12)
($21)
$0
($15)
$32
($1)
$17
($6)
($9)
($11)
($15)
($41)
$5
CF From (For) Financing
$14
$39
$24
$46
$8
$14
($7)
($6)
$9
$22
$6
$25
$2
$55
($2)
Other/Non-cash w.c. changes
($11)
($7)
($12)
($29)
($6)
$2
($28)
$8
($24)
($12)
$3
($14)
$7
($17)
($3)
($10)
$6
($0)
($4)
$2
$1
($3)
$1
$1
$4
($0)
$0
($6)
($3)
$0
$15
$48
$49
$51
$13
$8
$7
$13
$42
$13
$11
$31
$28
$84
$43
Free Cash Flow
less Cash Dividends
Excess (Short) FCF
Net Change In Cash Position
Total Capex
Source: Company reports; Scotiabank GBM estimates.
Exhibit 8 – Capitalization, Valuation, and Ratio Analysis
Figures in $M
Capitalization Summary1
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14
Q4/14E
2014E
2015E
Share Price
$8.23
$13.32
$10.67
$9.17
$9.34
$10.68
$10.83
$12.53
$12.53
$13.21
$16.58
$13.72
$11.85
$11.85
$11.85
Market Capitalization
$235
$367
$326
$283
$289
$334
$340
$462
$462
$489
$623
$518
$447
$447
$447
$2
$27
$48
$97
$101
$113
$107
$65
$65
$82
$81
$106
$114
$114
$112
Enterprise Value
$237
$394
$374
$380
$391
$447
$447
$526
$526
$571
$705
$623
$561
$561
$559
Net Debt (Cash)/EBITDA
0.1x
1.0x
1.1x
1.9x
1.9x
2.3x
2.1x
1.2x
1.3x
1.4x
1.3x
1.6x
1.5x
1.5x
1.3x
Net Debt (Cash)/Cash Flow
0.1x
1.0x
1.2x
2.1x
2.0x
2.4x
2.2x
1.4x
1.4x
1.6x
1.4x
1.7x
1.6x
1.6x
1.4x
Net Debt (Cash)/Equity
2%
27%
42%
84%
84%
98%
88%
33%
33%
40%
41%
51%
54%
54%
52%
Net Debt/Total Capitalization
2%
21%
29%
46%
46%
50%
47%
25%
25%
29%
29%
34%
35%
35%
34%
Net Debt/Enterprise Value
1%
7%
13%
25%
26%
25%
24%
12%
12%
14%
12%
17%
20%
20%
20%
Capex/Cash Flow
0.5x
1.7x
1.0x
0.9x
0.6x
-23.6x
0.2x
0.6x
0.6x
0.5x
1.3x
1.1x
1.4x
1.0x
0.6x
Current Ratio
2.0x
1.9x
2.0x
1.7x
1.7x
1.7x
2.1x
2.0x
2.0x
2.2x
2.3x
1.8x
1.8x
1.8x
1.8x
Interest Coverage Ratio
36.3x
19.1x
13.8x
8.5x
7.9x
6.3x
6.3x
10.1x
10.1x
10.5x
12.6x
14.2x
10.6x
10.6x
9.2x
EV/EBITDA
12.8x
14.1x
8.5x
7.5x
7.4x
9.0x
8.6x
10.0x
10.7x
10.1x
11.3x
9.3x
7.4x
7.4x
6.3x
P/CF
11.3x
13.7x
7.5x
5.6x
5.3x
6.4x
6.5x
8.6x
7.8x
9.0x
10.1x
7.6x
6.4x
6.0x
5.7x
P/E
20.1x
21.2x
17.2x
13.6x
14.6x
21.3x
20.4x
27.7x
25.1x
28.3x
30.2x
21.7x
16.1x
15.2x
12.7x
P/BV
2.6x
3.6x
2.9x
2.5x
2.4x
2.9x
2.8x
2.3x
2.3x
2.4x
3.1x
2.5x
2.1x
2.1x
2.1x
2.9x
4.0x
3.1x
2.7x
2.6x
3.3x
3.1x
3.1x
3.1x
3.3x
4.3x
3.4x
2.9x
2.9x
2.6x
ROE
12.1%
17.6%
16.2%
16.6%
15.1%
12.7%
13.0%
9.4%
9.4%
10.1%
12.1%
13.5%
13.6%
13.6%
16.6%
ROA
8.9%
11.7%
8.8%
7.8%
6.9%
5.4%
5.5%
4.8%
4.8%
5.0%
5.9%
6.2%
7.2%
7.2%
8.3%
ROCE
8.2%
11.9%
18.5%
14.8%
15.4%
14.2%
14.4%
20.7%
20.7%
19.5%
21.8%
20.6%
15.1%
15.1%
16.1%
ROIC
11.3%
-12.1%
12.0%
10.6%
9.4%
7.8%
7.9%
7.2%
7.2%
7.2%
8.5%
8.9%
10.1%
10.1%
11.1%
Net Debt
Valuation Analysis
P/TBV
Ratio Analysis2
Notes:
(1) Historicals based on closing pricing.
(2) Based on two-year average capital and adjusted earnings.
Source: Company reports; FactSet; Scotiabank GBM estimates.
105
Exhibit 9 – Balance Sheet & Debt Position Analysis
Figures in $M
2009
2010
2011
2012
Q1/13
Q2/13
Q3/13
Q4/13
2013
Q1/14
Q2/14
Q3/14E
Q4/14E
2014E
Cash & Equivalents
$2
$9
$8
$4
$6
$7
$4
$6
$6
$9
$9
$3
$3
$3
$3
Accounts Receivables
$29
$50
$63
$67
$73
$54
$90
$98
$98
$106
$94
$112
$111
$111
$122
Inventory
$7
$10
$15
$22
$25
$27
$29
$30
$30
$31
$31
$32
$35
$35
$38
Prepaids
$2
$4
$4
$3
$4
$4
$3
$3
$3
$5
$5
$5
$5
$5
$5
Income Tax
$3
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Other
$0
$0
$0
$9
$11
$16
$0
$0
$0
$0
$0
$0
$0
$0
$0
$43
$73
$91
$106
$119
$108
$125
$136
$136
$151
$139
$153
$154
$154
$169
Future Income Tax
$0
$2
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Investments
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Property, Plant, & Equipment
$63
$92
$120
$144
$151
$153
$151
$166
$166
$172
$171
$192
$212
$212
$231
Intangibles
$0
$0
$0
$0
$0
$4
$4
$17
$17
$24
$24
$22
$20
$20
$13
Goodwill
$9
$9
$9
$9
$9
$9
$9
$31
$31
$31
$31
$31
$31
$31
$31
Other
$0
$0
$0
$5
$5
$8
$8
$0
$0
$0
$0
$0
$0
$0
$0
$115
$177
$220
$265
$284
$281
$297
$350
$350
$378
$366
$398
$418
$418
$444
Bank Indebtness
$4
$0
$0
$6
$8
$10
$6
$0
$0
$0
$0
$0
$0
$0
$0
Current Long Term Debt
$0
$0
$0
$15
$15
$15
$0
$0
$0
$0
$0
$0
$0
$0
$0
A/P & Accrued Liabilities
$17
$38
$45
$38
$42
$36
$49
$65
$65
$63
$57
$63
$67
$67
$73
Income Tax Payables
$0
$0
$0
$0
$2
$2
$3
$2
$2
$2
$2
$2
$2
$2
$2
Dividend Payables
$1
$1
$1
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
$2
Other
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Current Liabilities
$22
$39
$46
$61
$68
$64
$60
$70
$70
$68
$61
$68
$72
$72
$78
Credit Facility
$0
$36
$56
$80
$85
$96
$105
$70
$70
$91
$90
$108
$116
$116
$115
Senior Notes
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Non-controlling Interest
$0
($0)
($0)
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Future Income Taxes
$1
$0
$4
$9
$10
$7
$9
$10
$10
$14
$13
$16
$19
$19
$29
Current Assets
Total Assets
Other
2015E
$0
$0
$0
$0
$0
$0
$2
$2
$2
$2
$2
$2
$2
$2
$2
Total Liabilities
$23
$75
$106
$149
$163
$166
$175
$152
$152
$174
$167
$194
$209
$209
$224
Share Capital
$82
$91
$98
$99
$101
$104
$106
$165
$165
$167
$175
$176
$176
$176
$177
Contributed Surplus
$4
$5
$6
$8
$8
$7
$7
$6
$6
$6
$4
$4
$4
$4
$4
Retained Earnings (Deficit)
$9
$7
$11
$10
$13
$3
$9
$24
$24
$26
$17
$22
$27
$27
$37
($3)
($1)
($1)
($2)
($0)
$1
$0
$2
$2
$4
$2
$2
$2
$2
$2
Total Shareholders' Equity
Comprehensive Income/Other
$91
$102
$114
$115
$121
$115
$121
$198
$198
$203
$199
$204
$209
$209
$220
Total Liabilites & Equities
$115
$177
$220
$265
$284
$281
$297
$350
$350
$378
$366
$398
$418
$418
$444
$112
Debt Position Analysis
Net Debt
Net Debt + NCWC1,2
$2
$27
$48
$97
$101
$113
$107
$65
$65
$82
$81
$105
$113
$113
($21)
$2
$11
$35
$34
$52
$40
$4
$4
$8
$13
$23
$34
$34
$24
Total Credit Facility
$35
$50
$90
$130
$130
$131
$131
$131
$131
$133
$132
$132
$132
$132
$132
Drawn
$4
$36
$56
$101
$108
$120
$111
$70
$70
$91
$90
$108
$116
$116
$115
Available Lines
$31
$14
$34
$29
$22
$11
$20
$61
$61
$42
$42
$24
$16
$16
$17
Available Lines (%)
88%
28%
38%
22%
17%
8%
15%
46%
46%
31%
32%
18%
12%
12%
13%
Notes: (1) Working capital adjusted. (2) Definition matches traditional E&P net debt calculation.
Source: Company reports; FactSet; Scotiabank GBM estimates.
106
Company Comment
Wednesday, October 29, 2014, After Close
(RGLD-Q US$62.98)
(RGL-T C$70.76)
Royal Gold Inc.
Q1/F15 - Good Quarter
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
tanya.jakusconek@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Valuation: 1.80x NAV
Target 1-Yr:
Joanne van Ballegooie - (416) 863-7431
(Scotia Capital Inc. - Canada)
James Bender, CPA, CA - (416) 945-4648
(Scotia Capital Inc. - Canada)
US$85.00
ROR 1-Yr:
36.3%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.84
$0.80
1.3%
Key Risks to Target: Commodity prices; non-operator.
Event
■ RGLD reported Q1/F15 EPS of $0.29 and adjusted EPS of $0.28.
Implications
■ Earnings - Adjusted EPS came in at $0.28 vs. our estimate of $0.26
and consensus of $0.30. The beat compared to our estimate was due to
higher revenue from Cortez.
■ Revenues - Revenue of $69M was up from $56M in Q1/F14, while
earnings increased to $19M from $15M in Q1/F14.
■ Mt. Milligan - This quarter, RGLD received revenue contribution of
about $20M. Thompson Creek Metals (TCM) expects ramp-up of
production to reach 80% of design capacity by calendar year-end.
■ Phoenix Gold - Remains on track for production in mid-2015 with mill
construction on schedule and underground development 24% complete.
■ Euromax transaction - Following quarter-end, RGLD announced that
it has entered into a $175M gold stream transaction with Euromax
Resources. See within for more details.
■ Other transaction - RGLD acquired a 2.0% NSR and a 3% NSR on
the Tetlin polymetallic exploration project (Alaska) for $6.0M.
■ Conference Call - conference call at 12:00pm ET. The dial-in numbers
are 866-270-1533 (US); 855-669-9657 (Cda) or 412-317-0797 (Intl).
Recommendation
■ FQ1/15 EPS was slightly better than our estimate mainly on higher
revenues from Cortez. Sector Perform rating maintained.
Qtly Adj. EPS (FD)
2013A
2014A
2015E
2016E
Q1
$0.42 A
$0.21 A
$0.28 A
(FY-Jun.)
Gold Price (/oz)
Gold Prod (oz) (000)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Price/Cash Flow
Q2
$0.42 A
$0.16 A
2013A
$1,605
128
$1.35
$2.65
31.2x
15.9x
Q3
$0.37 A
$0.24 A
2014A
$1,343
131
$0.84
$2.50
90.6x
30.5x
Q4
$0.14 A
$0.23 A
2015E
$1,285
220
$1.32
$3.27
47.6x
19.3x
Year
$1.35
$0.84
$1.32
$1.33
P/E
31.2x
90.6x
47.6x
47.5x
2016E
$1,300
234
$1.33
$3.37
47.5x
18.7x
2017E
$1,300
229
$1.38
$3.39
45.5x
18.6x
NAVPS:
P/NAV:
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$47.20
1.33x
ScotiaView Analyst Link
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$4,056
$-348
$3,733
64
61
107
Company Comment
Wednesday, October 29, 2014, After Close
(S-T C$2.86)
Sherritt International Corporation
Q3/14 Results Below Expectations
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
orest.wowkodaw@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
Dalton Baretto, MBA, CFA - (416) 863-7623
(Scotia Capital Inc. - Canada)
dalton.baretto@scotiabank.com
C$4.50
ROR 1-Yr:
59.9%
Valuation: 50% of 6.0x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Target: Commodity Prices, Operational, Balance Sheet, Political
Div. (NTM)
Div. (Curr.)
$0.07
$0.17
Yield (Curr.)
5.8%
Event
■ Sherritt released its Q3/14 operating and financial results.
Pertinent Revisions
Implications
■ The company reported an adjusted Q3/14 EPS loss of $0.22 vs. our
estimate of a loss of $0.12 and consensus of a loss of $0.08. Adjusted
EBITDA of $78.9M was 10.3% below our forecast of $88.0M.
■ Total attributable nickel production of 8.4kt was 2.5% below our
forecast of 8.6kt. Ambatovy nickel production of 3.7kt increased by
3.9% QOQ, but was 11.5% below our forecast. Total nickel cash costs
of US$6.16/lb were modestly higher than our forecast of US$5.95/lb.
■ Sherritt slightly reduced its total attributable 2014 nickel production
guidance to 31.6-33.2kt (from 31.8-33.4kt).
■ After further tempering our ramp-up expectations and increasing our
LOM cost assumptions, we now forecast Ambatovy to become free
cash flow neutral to Sherritt at the end of 2015 (previously Q3/15).
Target:
1-Yr
Adj. EPS14E
Adj. EPS15E
Adj. EPS16E
New
Old
$4.50
$-0.70
$-0.28
$0.22
$5.00
$-0.61
$-0.25
$0.27
Recommendation
■ Sherritt is rated Sector Outperform based on the company's significant
leverage to rising nickel prices, ongoing balance sheet de-leveraging,
combined with easing ramp-up risk at Ambatovy. However, we have
reduced our 12-month target to C$4.50 per share (from C$5.00) to reflect
our lower estimates. Our revised C$4.50 target is based on a 50/50 mix of
6.0x our 2015E EV/EBITDA (C$3.27) and 1.0x our revised 8% NAV
estimate of C$5.84 per share.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$0.05 A
$-0.16 A
$-0.14
$0.01
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Revenues (M)
Adjusted EBITDA (M)
Q2
$0.01 A
$-0.15 A
$-0.10
$0.06
Q3
$-0.03 A
$-0.22 A
$-0.06
$0.05
Q4
$-0.13 A
$-0.17
$0.02 A
$0.10
Year
$-0.21
$-0.70
$-0.28
$0.22
P/E
n.m.
n.m.
n.m.
12.9x
2014E
$-0.70
$0.45
n.m.
$480
$286
2015E
$-0.28
$0.60
n.m.
$479
$380
2016E
$0.22
$0.63
12.9x
$472
$553
2017E
$0.55
$0.62
5.2x
$470
$678
2018E
$0.59
$0.65
4.8x
$465
$645
BVPS14E: $10.34
NAVPS:
P/NAV:
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$5.84
0.49x
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$849
$1,838
$2,687
297
297
108
Q3/14 Results Below Expectations
■ Sherritt reported a Q3/14 loss of $51.3 million (or $0.17 per share). However, after adjusting
for a $12.8 million non-cash one-time gain related to a positive arbitration decision, the
company reported an adjusted EPS loss of $64.1 million (or $0.22 per share), which
compared to our estimate of a loss of $36.8 million (or $0.12 per share) and the consensus
estimate of a loss of $0.08 per share (range of -$0.17 to $0.03). Adjusted EBITDA of $78.9
million (after excluding the one-time gain of $12.8 million) was 10.3% below our estimate of
$88.0 million. We present the variances to our estimates in Exhibit 1.
Exhibit 1 - Sherritt Q3/14 Variances
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
PRODUCTION (Sherritt's share)
Finished Nickel (tonnes)
Finished Cobalt (tonnes)
Fertilizer (tonnes)
Heavy Oil - Cuba ('000s bbl)
Light / Medium oil - Spain ('000s bbl)
Natural Gas - Pakistan ('000s boe)
Electricity (GWh)
8,357
765
74,631
927
22
28
223
8,576
788
71,350
966
32
29
188
-2.5%
-3.0%
4.6%
-4.1%
-33.2%
-5.0%
18.9%
7,472
661
78,777
950
32
29
224
11.8%
15.7%
-5.3%
-2.5%
-32.5%
-4.0%
-0.4%
6,756
607
70,479
992
27
30
130
23.7%
26.0%
5.9%
-6.6%
-20.1%
-8.8%
71.5%
SALES (Sherritt's share)
Finished Nickel (tonnes)
Finished Cobalt (tonnes)
Fertilizer (tonnes)
Heavy Oil - Cuba ('000s bbl)
Light / Medium oil - Spain ('000s bbl)
Natural Gas - Pakistan ('000s boe)
Electricity (GWh)
8,401
794
29,737
927
22
28
223
8,576
788
31,850
966
32
29
188
-2.0%
0.7%
-6.6%
-4.1%
-33.2%
-5.0%
18.9%
7,277
626
92,650
950
32
29
224
15.4%
26.8%
-67.9%
-2.5%
-32.5%
-4.0%
-0.4%
4,579
469
28,124
992
27
30
130
83.5%
69.1%
5.7%
-6.6%
-20.1%
-8.8%
71.5%
Adjusted EBITDA
Metals
Oil & Gas
Power
Corporate and Other
Overall Adjusted EBITDA
32.2
47.7
8.0
3.8
91.7
39.1
58.5
4.4
(14.0)
88.0
-17.7%
-18.4%
79.9%
NM
4.2%
24.7
57.5
6.5
(13.3)
75.4
30.4%
-17.2%
23.2%
NM
21.6%
8.9
58.4
3.7
(11.6)
84.8
261.8%
-18.4%
115.1%
NM
8.1%
102.9
65.4
37.5
36.4%
113.2
70.2
43.0
38.0%
-9.1%
-6.8%
-12.8%
130.2
79.1
51.1
39.2%
-21.0%
-17.3%
-26.6%
286.2
233.8
52.4
18.3%
-64.0%
-72.0%
-28.4%
13.2
24.3
14.1
28.9
-6.4%
-16.0%
20.4
30.7
-35.3%
-20.8%
24.0
28.4
-45.0%
-14.4%
Share of Earnings - Ambatovy
Share of Earnings - Moa
Other
Earnings from operations, associate and JV
(49.4)
10.8
12.8
(1.5)
(43.3)
11.3
(3.1)
NM
-4.1%
NM
NM
(50.9)
1.0
(19.2)
(0.7)
(0.4)
27.3
Net Financing Expense
Earnings before Tax
31.5
(33.0)
36.3
(39.4)
-13.3%
NM
17.0
(36.2)
Non Controlling Interests
0.0%
0.0%
NM
0.0%
Income Tax Expense (Recovery)
Income Tax Rate
18.3
-55%
(2.6)
7%
NM
NM
12.8
-35%
NM
NM
NM
NM
NM
85.3%
NM
NM
NM
NM
43.0%
NM
-
-
NM
(18.9)
(51.3)
(64.1)
(36.8)
(36.8)
NM
NM
(30.1)
(43.1)
NM
NM
1.1
(10.1)
NM
NM
($0.17)
($0.22)
($0.22)
($0.12)
($0.12)
($0.12)
NM
NM
NM
($0.10)
($0.15)
($0.15)
NM
NM
NM
$0.00
($0.03)
($0.03)
NM
NM
NM
INCOME STATEMENT (C$ Millions)
Total revenue
Cost of Sales (inc. depreciation)
Gross margin
Gross margin %
Administrative Expenses
Operating profit
Earnings from Discontinued Operations (net of tax)
Net Earnings
Adjusted earnings
Earnings Per Share - Basic
Adjusted Earnings Per Share - Basic
Adjusted Earnings Per Share - Fully Diluted
Source: Company reports; Scotiabank GBM estimates.
30.1
(2.8)
0.0%
(3.9)
139%
NM
NM
NM
NM
NM
4.7%
NM
NM
NM
NM
NM
NM
-
109
■ The weaker-than-expected results were driven by lower sales, lower realized prices, and
higher costs in both the Metals and the O&G businesses (Exhibit 2).
Exhibit 2 - Sherritt Q3/14 Realized Price and Unit Operating Cost Variances
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
REALIZED PRICES
Nickel (C$/lb)
$8.99
$9.08
-1.0%
$8.83
1.9%
$6.42
Cobalt (C$/lb)
$15.60
$15.22
2.5%
$14.13
10.4%
$13.24
17.9%
$367
$550
-33.4%
$417
-12.0%
$444
-17.5%
Fertilizer (C$/tonne)
Cuba - Heavy Oil (C$/bbl)
40.1%
$69.18
$71.93
-3.8%
$72.88
-5.1%
$70.27
-1.6%
$109.99
$110.84
-0.8%
$118.96
-7.5%
$114.91
-4.3%
Pakistan - Natural Gas (C$/boe)
Electricity (C$/MWh)
$9.02
$46.39
$8.25
$42.00
9.3%
10.5%
$8.67
$46.24
4.0%
0.3%
$8.35
$43.47
8.0%
6.7%
UNIT COSTS
Moa JV (US$/lb Ni)
Ambatovy (US$/lb Ni)
Cuba - Heavy Oil (C$/net boe)
Spain - Light / Medium oil (C$/net boe)
Pakistan - Natural Gas (C$/net boe)
Cuba - Electricity (C$/MWh)
$5.25
$7.26
$19.24
$39.30
$7.69
$13.39
$5.07
$6.85
$13.00
$50.00
$6.00
$30.00
3.6%
6.0%
48.0%
-21.4%
28.2%
-55.4%
$5.05
$7.19
$14.38
$30.37
$5.83
$15.62
4.0%
nm
33.8%
29.4%
31.9%
-14.3%
Spain - Light / Medium Oil (C$/bbl)
Source: Company reports; Scotiabank GBM estimates.
■ The Q3/14 adjusted loss of $64.1 million (or $0.22 per share) was markedly higher than the
Q2/14 adjusted loss of $43.1 million (or $0.15 per share), as well as the Q3/13 adjusted loss
of $10.1 million (or $0.03 per share), primarily due to weaker results in the Cuban O&G
business.
Nickel – Costs Rise at Moa; Ambatovy Ramp-Up Struggles Continue
■ Sherritt’s Nickel business generated a Q3/14 Adjusted EBITDA of $32.2 million, which was
17.7% lower than our forecast of $39.1 million, due to lower-than-expected contributions
from both mines. However, Adjusted EBITDA increased from $24.7 million in Q2/14 as
nickel sales and realized pricing improved, and was up markedly from the weak Q3/13 level
of $8.9 million due to higher realized pricing as well as sales from Ambatovy.
Moa Nickel (50%)
■ Attributable Q3/14 production at Moa of 4,614 tonnes of finished nickel was 6.2% above our
forecast of 4,346 tonnes. Nickel production improved by 19.2% from the Q2/14 level of
3,870 tonnes, but was in line with the Q3/13 level of 4,573 tonnes. The company attributes
the higher production levels to stable refinery operations, as scheduled maintenance was
conducted earlier in the year while the operation was already suffering mixed sulphide
availability issues. We have detailed our variances for the Moa Nickel business in Exhibit 3.
■ Moa sold 4,588 tonnes of nickel in Q3/14, which was 5.6% above our forecast of 4,346
tonnes, but more or less in line with production levels. The operation realized a nickel price
of $9.03/lb, which was in line with our forecast of $9.08/lb.
■ Moa Nickel Net Direct Cash Costs (NDCC) of US$5.25/lb were 3.6% higher than our
estimate of US$5.07/lb. The Q3/14 NDCC of US$5.25/lb increased from both the Q2/14
level of US$5.05/lb and the Q3/13 level of US$5.12/lb. Sherritt attributes the higher NDCCs
to lower fertilizer profitability (due to lower sales as well as higher natural gas prices) as well
as higher third-party feed costs. We have presented our forecasts for Moa’s nickel production
and NDCC in Exhibit 4.
■ Construction of the third acid plant remains scheduled to begin in Q1/15. Sherritt has signed
the contract with the technology supplier, and mobilization activities with the construction
contractor have commenced. Once on-line, the third acid plant is expected to reduce
operating cash costs at Moa by ~20%.
$5.12
nm
$12.50
$33.88
$4.68
$26.01
2.5%
nm
53.9%
16.0%
64.3%
-48.5%
110
Exhibit 3 - Moa Nickel Q3/14 Variances
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
Mixed Sulphide production (tonnes)
4,733
4,800
-1.4%
4,893
-3.3%
4,957
-4.5%
Finished Nickel
Production (tonnes)
Sales (tonnes)
Realized Price (C$/lb)
Net Direct Cash Costs (US$/lb)
4,614
4,588
$9.03
$5.25
4,346
4,346
$9.08
$5.07
6.2%
5.6%
-0.6%
3.6%
3,870
3,792
$8.74
$5.05
19.2%
21.0%
3.3%
4.0%
4,573
4,579
$6.42
$5.12
0.9%
0.2%
40.7%
2.5%
Finished Cobalt
Production (tonnes)
Sales (tonnes)
Realized Price (C$/lb)
438
433
$15.66
454
454
$15.22
-3.4%
-4.5%
2.9%
376
366
$14.68
16.5%
18.3%
6.7%
446
469
$13.26
-1.8%
-7.8%
18.1%
Fertilizer
Production (tonnes)
Sales (tonnes)
Realized Price (C$/lb)
64,670
17,325
$353
65,000
25,500
$550
-0.5%
-32.1%
-35.8%
68,905
81,929
$416
-6.1%
-78.9%
-15.1%
64,452
28,124
$444
0.3%
-38.4%
-20.6%
Revenue
Cost of Sales
Gross Margin
Gross Margin %
116.8
87.0
29.8
25.5%
117.8
83.5
34.2
29.1%
-0.8%
4.1%
-13.0%
122.9
99.0
23.9
19.4%
-5.0%
-12.1%
24.7%
92.7
82.8
9.9
10.7%
26.0%
5.1%
201.0%
MOA JV (50% Moa + 100% Fort Saskatchewan basis)
Source: Company reports; Scotiabank GBM estimates.
Exhibit 4 - Moa Nickel Forecast Nickel production and NDCC
5,000
$7.00
4,500
$6.00
4,000
tonnes
3,000
$4.00
2,500
$3.00
2,000
1,500
$2.00
1,000
$1.00
500
0
$0.00
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
Attributable Nickel Produced
2Q14
3Q14
4Q14E 1Q15E 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E
Cash Costs (US$/lb Ni)
Source: Company reports; Scotiabank GBM estimates.
Ambatovy (40%)
■ The giant Ambatovy mine in Madagascar continues to ramp up more slowly than expected,
after achieving commercial production in January 2014. On a 40% basis, Ambatovy
produced 3,743 tonnes of finished nickel in Q3/14, which was 11.5% below our forecast of
4,229 tonnes. Nickel production increased by 3.9% from the Q2/14 level of 3,602 tonnes,
despite HPAL plant utilization improving to 66% in the quarter versus 58% in Q2/14,
attributed to the natural lag of processing mixed sulphides into refined nickel. We have
detailed our variances for the Ambatovy Nickel business in Exhibit 5.
US$/lb Ni
$5.00
3,500
111
Exhibit 5 -Ambatovy Nickel Q3/14 Variances
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
Mixed Sulphide production (tonnes)
4,187
4,564
-8.3%
3,756
11.5%
2,622
59.7%
Finished Nickel
Production (tonnes)
Sales (tonnes)
Realized Price (C$/lb)
Net Direct Cash Costs (US$/lb)
3,743
3,813
$8.94
$7.26
4,229
4,229
$8.88
$6.85
-11.5%
-9.8%
0.6%
6.0%
3,602
3,485
$8.92
$7.19
3.9%
9.4%
0.2%
1.0%
2,183
2,445
71.5%
56.0%
NM
NM
Finished Cobalt
Production (tonnes)
Sales (tonnes)
Realized Price (C$/lb)
327
361
$15.56
335
335
$15.22
-2.3%
7.8%
2.3%
285
260
$13.26
14.7%
38.8%
17.3%
161
177
103.1%
104.3%
NM
Fertilizer
Production (tonnes)
Sales (tonnes)
Realized Price (C$/lb)
9,961
12,412
$158
6,350
6,350
$550
56.9%
95.5%
-71.3%
9,872
10,721
$153
0.9%
15.8%
3.3%
6,027
0
65.3%
NM
NM
Revenue
Cost of Sales
Gross Margin
Gross Margin %
89.8
79.3
10.5
11.7%
97.6
84.2
13.4
13.7%
-8.0%
-5.8%
-21.4%
77.8
69.7
8.1
10.4%
15.4%
13.8%
29.6%
AMBATOVY (40% basis)
Source: Company reports; Scotiabank GBM estimates.
■ Despite improving from Q2/14 levels, the HPAL plant utilization of 66% was lower than our
estimate of 70%. Sherritt attributes the lower utilization to scheduled maintenance, an acid
plant turnaround, and processing issues in the CCD and Raw Liquor Neutralization circuits.
While the company indicated that the issues in the Raw Liquor Neutralization circuit have
been resolved, the CCD circuit issues continue to be a focus. In addition, the company has
scheduled maintenance downtime in November similar to that incurred in September, and as
such, we do not expect a significant improvement in capacity utilization in Q4/14.
■ Sherritt anticipates the execution of scheduled maintenance, the resolution of the CCD issues,
and the completion of the second thickener all by the end of Q4/14 will position the plant for
an uninterrupted production run in H1/15. However, we note that a similar claim was made
for the May – September period this year during the site visit in April, during which time
utilization averaged a disappointing 58% in Q2 and 66% in Q3. As such, we continue to
believe that the achievement of the Production Completion Test (90% of capacity for 90 days
within a 100-day contiguous period) by September 2015 is overly optimistic. However, we
expect the partners to simply extend the completion test timeline with the lenders.
■ Ambatovy sold 3,813 tonnes of attributable nickel in Q3/14, which was 9.8% below our
forecast of 4,229 tonnes, but in line with production levels. The realized nickel price of
$8.94/lb was in line with our forecast of $8.88/lb.
■ Ambatovy Net Direct Cash Costs (NDCC) of US$7.26/lb were 6.0% higher than our estimate
of US$6.85/lb, and were marginally higher than the Q2/14 NDCCs of US$7.19/lb despite the
higher throughput and sales due to scheduled and unscheduled maintenance activities in the
quarter. We present our forecasts for Ambatovy’s nickel production and NDCC in Exhibit 6.
NM
NM
NM
112
Exhibit 6 - Ambatovy Forecast Nickel Production and NDCC
6,000
$7.50
$7.00
nameplate
capacity
$6.50
tonnes
4,000
$6.00
$5.50
3,000
$5.00
2,000
US$/lb Ni
5,000
$4.50
$4.00
1,000
$3.50
0
$3.00
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14E
Attributable Nickel Produced
1Q15E
2Q15E
3Q15E
4Q15E
1Q16E
2Q16E
3Q16E
4Q16E
Cash Costs (US$/lb Ni)
Source: Company reports; Scotiabank GBM estimates.
Oil & Gas – A Rare Weak Quarter, but still the Primary Driver of Profitability
■ Sherritt’s Oil & Gas (O&G) business generated an Adjusted EBITDA of $47.7 million in
Q3/14, which was 18.4% below our estimate of $58.5 million, due to a perfect storm of lower
sales, lower realized prices, and higher costs in the Cuban operations. The Q3/14 Adjusted
EBITDA also declined markedly from the Q2/14 level of $57.5 million and the Q3/13 level
of $58.4 million. We have detailed our variances for the O&G business in Exhibit 7.
Exhibit 7 - Sherritt O&G Q3/14 Variances
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
Cuba
Production and Sales (net) (bopd)
Average realized Price ($/bbl)
Unit Operating Costs ($/bbl)
10,071
$69.18
$19.24
10,500
$71.93
$13.00
-4.1%
-3.8%
48.0%
10,440
$72.88
$14.38
-3.5%
-5.1%
33.8%
10,779
$70.27
$12.50
-6.6%
-1.6%
53.9%
Spain
Production and Sales (net) (bopd)
Average realized Price ($/bbl)
Unit Operating Costs ($/bbl)
235
$109.99
$39.30
352
$110.84
$50.00
-33.2%
-0.8%
-21.4%
352
$118.96
$30.37
-33.2%
-7.5%
29.4%
294
$114.91
$33.88
-20.1%
-4.3%
16.0%
Pakistan
Production and Sales (net) (boepd)
Average realized Price ($/boe)
Unit Operating Costs ($/boe)
301
$9.02
$7.69
317
$8.25
$6.00
-5.0%
9.3%
28.2%
317
$8.67
$5.83
-5.0%
4.0%
31.9%
330
$8.35
$4.68
-8.8%
8.0%
64.3%
Revenue
Cost of Sales
Adjusted EBITDA
Adjusted EBITDA margin
$68.1
$18.7
$47.7
70%
$74.8
$14.4
$58.5
78%
-9.0%
30.3%
-18.4%
-10.4%
$74.7
$15.9
$57.5
77%
-8.9%
17.6%
-17.2%
-9.0%
$74.2
$13.5
$58.4
79%
-8.3%
38.6%
-18.4%
-11.0%
OIL & GAS
Source: Company reports; Scotiabank GBM estimates.
113
■ The Cuban O&G operations produced at a net rate of 10,071 barrels of oil per day (bopd),
which was 4.1% below our estimate of 10,500 bopd. The Q3/14 production rate was 3.5%
lower than Q2/14 production rate of 10,440 bopd, and 6.6% lower than the Q3/13 production
rate of 10,779 bopd. The company partially attributed the lower production rate to the
mechanical failure in a well in the Yumuri area that occurred in Q2/14, but noted that the
well has since been placed into production during Q4/14. Natural reservoir declines were
cited as a secondary cause for the production decline.
■ The company continues to wait for the approval of 4 new exploration blocks from the Cuban
government.
■ Sherritt has changed its reported metric for unit costs in Cuba to reflect costs on a gross
working interest basis, rather than a net basis. The company reported Cuban unit costs of
$9.98/gross bbl for Q2/14, which translates to $19.24/net bbl, a significant increase versus
our estimate of $13.00/bbl, Q2/14 unit costs of $14.38/bbl, and Q3/13 unit costs of
$12.50/bbl. The realized price of $69.18/bbl was 3.8% below our forecast of $71.93/bbl,
resulting in a total margin decline of $8.98/bbl versus our estimates.
■ The much smaller Spanish and Pakistani operations also struggled in Q3/14. The Spanish
operations produced at a rate of just 235 bopd in the quarter, at unit operating costs of
$39.30/bbl, which compares to our estimates of 352 bopd at unit operating costs of
$50.00/bbl. The Pakistani gas operations produced at a rate of 301 barrels of oil-equivalent
per day (boepd), at unit costs of $7.69/boe, versus our forecast of 317 boepd at unit costs of
$6.00/boe.
■ We present our forecasts for Sherritt O&G’s production rates and unit operating costs in
Exhibit 8 below.
Exhibit 8 - Sherritt O&G Forecast Production and Unit Operating Cost Profile
13,000
$25.00
$20.00
12,000
$15.00
11,500
11,000
$10.00
10,500
$5.00
10,000
9,500
$0.00
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Production Rate (boepd)
3Q13
4Q13
1Q14
2Q14
3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E
Unit Operating Cost ($/net boe)
Source: Company reports; Scotiabank GBM estimates.
Power – The Lone Bright Spot
■ Sherritt’s Power business generated Adjusted EBITDA of $8.0 million in Q3/14, which was
higher than our estimate of $4.4 million. The improvement versus our estimate was driven by
higher sales, higher realized prices, and lower operating costs. We have detailed our
variances for the Power business in Exhibit 9.
$/net boe
barrels of oil-equivalent per day
12,500
114
Exhibit 9 – Sherritt Power Q3/14 Variances
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
223
$46.39
$13.39
188
$44.00
$30.00
18.9%
5.4%
-55.4%
224
$46.24
$15.62
-0.4%
0.3%
-14.3%
130
$43.47
$26.01
71.5%
6.7%
-48.5%
$12.7
$3.4
$8.0
62%
$11.1
$5.6
$4.4
40%
15.3%
-39.8%
79.9%
55.9%
$12.7
$4.0
$6.5
51%
0.7%
-15.3%
23.2%
22.4%
$14.7
$9.9
$3.7
25%
-13.3%
-65.8%
115.1%
148.1%
Power
Production and Sales (attributable) (GWh)
Average realized Price ($/MWh)
Unit Operating Costs ($/MWh)
Revenue
Cost of Sales
Adjusted EBITDA
Adjusted EBITDA margin
Source: Company reports; Scotiabank GBM estimates.
■ Sherritt’s Power group generated, on an attributable basis, 223 GWh of electricity at unit
operating costs of $13.39/MWh, compared to our forecast of 188 GWh at unit costs of
$30.00/MWh. Power generation was in line with the Q2/14 level of 224 GWh, but increased
markedly from the Q3/13 level of 130 GWh. Q3/14 unit operating costs of $13.39/MWh
were 14.3% below Q2/14 unit costs of $15.62/MWh. We present our forecasts for Sherritt
Power’s production and unit operating costs in Exhibit 10.
Exhibit 10 - Sherritt Power Forecast Production and Unit Operating Cost Profile
250
$35.00
$30.00
200
150
GWh
$20.00
$15.00
100
$10.00
50
$5.00
0
$0.00
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
Attributable Electricity Sales (GWh)
4Q13
1Q14
2Q14
3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E
Unit operating cost ($/MWh)
Source: Company reports; Scotiabank GBM estimates.
2014 Guidance Adjustments – Modest Downward Revisions at Moa
■ Sherritt marginally reduced its 2014 attributable nickel production guidance at Moa to 18,500
tonnes from 19,000 tonnes. With no change to guidance at Ambatovy, Sherritt now expects
total attributable nickel production of 34,100 to 36,100 tonnes. YTD attributable nickel
production of 22,981 tonnes represents 64-67% of the revised annual guidance range, reflecting
the anticipated ramp-up at Ambatovy and improved Q4/14 production from the Moa JV.
■ The company reaffirmed its previous guidance for the oil and gas, along with the power
segment. Specifically, total oil-equivalent production rate guidance remains unchanged at
11,200 boepd (net) as does total attributable electricity production guidance of 750 GWh.
The company’s total oil-equivalent production averaged 11,160 boepd YTD.
■ Sherritt also reaffirmed its 2014 capex guidance of $187 million.
$/MWh
$25.00
115
Balance Sheet and Liquidity – De-leveraging Well Underway
■ At the end of Q3/14, Sherritt had a cash balance (including restricted cash and short-term
investments) of $980 million and a total debt balance of $2.2 billion, resulting in a net debt
position of $1.2 billion (or $4.15 per share). This is largely unchanged from the Q2/14 net
debt balance of $1.2 billion (or $4.03 per share). At the end of Q3/14, Sherritt’s debt balance
included $1.2 billion in senior unsecured debentures and $1.0 billion in Ambatovy partner
loans.
■ In early Q4/14, the company redeemed a total of $675 million of senior unsecured debentures
($275 million due in 2015, $150 million due in 2018, and $250 million due in 2020). This
was partially offset by raising $250 million of new senior unsecured debentures due in 2022.
■ In addition to the corporate level debt, Sherritt holds a 40% share of the US$1.9 billion in
debt related to Ambatovy that resides at the project level. However, we note that this debt has
recourse to the partners until the financial completion tests are completed (the company
anticipates this to occur in H1/15). We also note that Sherritt’s US$0.7 billion portion of the
debt is cross-guaranteed by the other partners and, as such, is effectively non-recourse to
Sherritt.
■ The partner loans were provided to Sherritt in 2009 by Sumitomo and Korea Resources
Corporation, its partners in the Ambatovy JV, in order to allow the company to meet its
capital commitments for the development of the project. These loans accrue interest on an
ongoing basis, with 70% of all Sherritt’s cash flows from Ambatovy pledged to the
repayment of the principal plus accrued interest once Ambatovy begins paying dividends
(which we forecast to begin in 2016). Exhibit 11 details the payout hierarchy at Ambatovy.
Exhibit 11 - Ambatovy Payout Hierarchy
Source: Company reports.
116
■ Based on our commodity price deck, we forecast Sherritt to generate negative free cash flow
of $155 million in 2014 (or -$0.52 per share), as we forecast Ambatovy to consume another
$183 million in cash this year. However, we forecast Sherritt to generate positive free cash
flow of $51 million in 2015 (or $0.17 per share), and a markedly higher $218 million in 2016
(or $0.74 per share), driven by the combination of an anticipated ramp-up at Ambatovy and
our expectation of higher nickel prices. We present our operating and free cash flow forecasts
for Sherritt in Exhibit 12.
Exhibit 12 - Sherritt Forecast Operating and Free Cash Flow per Share
$1.50
$1.00
$0.50
$0.00
2013
2014E
2015E
2016E
2017E
2018E
2019E
($0.50)
($1.00)
OCFPS
FCFPS
Source: Company reports; Scotiabank GBM estimates.
■ Based on our free cash flow estimates, we forecast a slightly higher net debt balance of $1.3
billion ($4.40 per share) as at year-end 2014 and a largely unchanged net debt balance of
$1.3 billion or $4.53 per share as at year-end 2015. We present our estimates of Sherritt’s
debt to capitalization and net debt per share in Exhibits 13 and 14.
■ Our estimates do not assume the company repurchases any of its shares in the open market
via its recently announced normal course issuer bid. Under the program, Sherritt could
repurchase up to 5% of its existing shares in the next 12 months (current market value of
~$40 million).
■ Sherritt announced a new cost reduction initiative that eliminates 10% of the company’s
workforce, including 25% at head office. The company also announced plans to sell its office
building. The restructuring initiatives are expected to incur a one-time cost of $9 million, but
result in ongoing savings of $10 million per annum.
2020E
117
Exhibit 13 - Sherritt Forecast Debt to Capitalization Ratio
Exhibit 14 - Sherritt Forecast Net Debt per Share
50%
$10.00
44%
45%
40%
37%
$8.08
40%
37%
36%
35%
40%
39%
38%
$9.35
$9.00
37%
$8.00
36%
32%
32%
30%
$7.00
$6.19
$6.00
$5.10
25%
$5.00
20%
$4.00
15%
$3.00
10%
$2.00
5%
$1.00
0%
$0.00
2009
2010
2011
2012
2013
2014E
2015E
2016E
Debt to Total Capitalization
Source: Company reports; Scotiabank GBM estimates.
2017E
2018E
2019E
2020E
$4.40
$4.53
$3.76
$4.12
$3.45
$2.66
$1.78
$0.77
2009
2010
2011
2012
2013
2014E
2015E
Net Debt (Cash) per share
Source: Company reports; Scotiabank GBM estimates.
Revisions to Estimates
■ We have adjusted our estimates to reflect Sherritt’s Q3/14 results and revised guidance.
Specifically:
■ Due primarily to a more tempered ramp-up expectation at Ambatovy, we now forecast
2014E-2016E attributable nickel production of 31,192 tonnes, 36,359 tonnes, and
37,557 tonnes, which compares to our previous estimates of 31,956 tonnes, 36,631
tonnes, and 37,577 tonnes, respectively.
■ We now forecast 2014E-2016E nickel cash costs at Ambatovy of US$7.01/lb,
US$6.50/lb, and US$5.55/lb, which compare negatively to our previous estimates of
US$6.66/lb, US$5.83/lb, and US$4.91/lb, respectively. At the Moa JV, we now forecast
2014E-2016E nickel cash costs of US$5.17/lb, US$5.19/lb, and US$5.22/lb, which are
largely unchanged from our previous estimates of US$5.05/lb, US$5.17/lb, and
US$5.20/lb, respectively.
■ We have made no material changes to our assumptions in the oil and power segments.
■ We forecast that Sherritt will need to invest another $65 million into Ambatovy in
Q4/14 ($183 million for the year), followed by a further $105 million in 2015. We now
forecast Ambatovy to become free cash flow neutral at the end of 2015. We forecast the
asset to generate positive free cash flow of $40 million attributable to Sherritt in 2016.
These estimates compare to our previous forecasts of negative $193 million this year,
$90 million in 2015, and a positive $106 million in 2016, respectively.
■ We have reduced our forecast SG&A costs by $5 million in 2015 and $10 million per
annum thereafter to reflect the company’s cost-cutting initiatives.
■ Our revised 2014-2016 EPS estimates of -$0.70, -$0.28 and $0.22 compare to our previous
estimates of -$0.61, -$0.25 and $0.27. Our revised 2014-2016 CFPS estimates of $0.45,
$0.60 and $0.63 compare to our previous estimates of $0.36, $0.52 and $0.57. Our revised
8% NAVPS of $5.84 is down 8% from our previous 8% NAVPS of $6.33, reflecting higher
LOM cost assumptions for Ambatovy. Our revised 10% NAVPS is $4.47. We note that net
of Partner loans, we value Sherritt’s stake in Ambatovy at -$244 million, or -$0.82 per share.
■ We profile Sherritt’s sensitivities to Nickel and Brent Crude pricing in Exhibits 15 and 16,
while our NAV breakdown is profiled in Exhibit 17.
2016E
2017E
2018E
2019E
2020E
118
Exhibit 15 - Sherritt Forecast Sensitivity to Nickel Prices
Exhibit 16 - Sherritt Forecast Sensitivity to Brent Crude Prices
-20%
($0.70)
-152%
-10%
($0.49)
-76%
0%
($0.28)
10%
($0.07)
76%
20%
$0.14
151%
FCFPS - 2015
$0.06
-62%
$0.12
-31%
$0.17
$0.22
31%
$0.28
62%
Adjusted EBITDA - 2015
230
-40%
305
-20%
380
455
20%
8% NAVPS
$2.22
-62%
$3.99
-32%
$5.84
$7.62
30%
EPS - 2015
-20%
($0.40)
-46%
-10%
($0.34)
-23%
0%
($0.28)
10%
($0.21)
23%
20%
($0.15)
46%
FCFPS - 2015
$0.04
-79%
$0.10
-39%
$0.17
$0.24
39%
$0.30
79%
530
40%
Adjusted EBITDA - 2015
322
-15%
351
-8%
380
409
8%
438
15%
$9.39
61%
8% NAVPS
$4.74
-19%
$5.29
-9%
$5.84
$6.40
9%
$6.95
19%
Source: Scotiabank GBM estimates. Base case assumes US$8.50/lb Ni.
EPS - 2015
Source: Scotiabank GBM estimates. Base case assumes US$100/bbl Brent Crude.
Exhibit 17 - Sherritt NAV Breakdown
Moa + Fort Sask.
Ambatovy (Inc. corporate debt)
Oil & Gas
Power
Operating Assets
10%
1,068
(384)
728
88
1,499
8%
1,243
(244)
823
102
1,925
Cash and Short-term Investments
Working capital (ex Cash, STI and STD)
Total Debt (ex. Ambatovy-related corporate debt)
Corporate SG&A
Environmental rehabilitation provisions
Corporate Tax Adjustments
Net Asset Value
Net Asset Value per share
483
223
(738)
(406)
(113)
380
1,329
$4.47
483
223
(738)
(469)
(113)
427
1,737
$5.84
Per share % of OP. NAV
$4.18
65%
($0.82)
-13%
$2.77
43%
$0.34
5%
$6.48
100%
$1.62
$0.75
($2.48)
($1.58)
($0.38)
$1.44
$5.84
% of NAV
72%
-14%
47%
6%
111%
28%
13%
-43%
-27%
-6%
25%
100%
Source: Scotiabank GBM estimates.
Conclusions
■ The Q3/14 results were modestly below our expectations due to a slower ramp-up at
Ambatovy and a weak quarter in the Cuban O&G business. While we have further tempered
our near-term ramp-up expectations for Ambatovy, and increased our LOM cost
assumptions, the further de-risking of the Ambatovy overhang is likely to be a significant
positive catalyst for the shares over the near to medium term. However, it now appears that
the anticipated step change in the operating performance at Ambatovy is not likely to be
achieved until sometime in 2015. We continue to view the targeted Q2/15 timeline for
meeting the production completion test at Ambatovy as overly optimistic given the ramp-up
to date. Separately, we view the company’s new initiative on head office cost-cutting as a
very positive development. In our view, the company’s balance sheet is significantly
improved with the recent debt refinancing, and is well positioned to shoulder the ramp-up
risk at Ambatovy and the volatility of nickel prices.
Valuation
■ Sherritt is currently trading at 2015E and 2016E EV/EBITDA multiples of 5.7x and 4.0x
along with a P/NAV multiple of 0.49x, versus its peer group average of 5.8x, 4.0x and 0.69x.
Given the global scarcity of nickel producers, we believe Sherritt is likely to command a
premium valuation during a period of rising nickel prices.
119
Recommendation
■ Sherritt is rated Sector Outperform based on the company's significant leverage to rising
nickel prices and ongoing balance sheet de-leveraging, combined with easing ramp-up risk at
Ambatovy. However, we have reduced our 12-month target to C$4.50 per share (from
C$5.00) to reflect our lower estimates. Our revised C$4.50 target is based on a 50/50 mix of
6.0x our 2015E EV/EBITDA (C$3.27) and 1.0x our revised 8% NAV estimate of C$5.84 per
share.
120
Exhibit 18 - Sherritt International Financial and Operating Summary
METAL PRICES
LME Nickel (US$/lb)
LME Cobalt (US$/lb)
Brent Crude (US$/bbl)
US$ per C$
2010A
$9.89
$18.74
$80
$0.97
2011A
$10.36
$16.44
$112
$1.01
2012A
$7.95
$13.48
$112
$1.00
2013A
$6.82
$12.30
$110
$0.97
2014E
$7.74
$13.95
$105
$0.91
2015E
$8.50
$13.50
$100
$0.90
2016E
$10.00
$13.00
$100
$0.93
2017E
$11.00
$12.50
$100
$0.95
2018E
$11.00
$12.50
$100
$0.98
2019E
$11.00
$12.50
$100
$1.00
2020E
$11.00
$12.50
$100
$1.00
Annual Growth Profile
2014E
2015E
2016E
14%
10%
18%
13%
-3%
-4%
-4%
-5%
0%
-6%
-1%
3%
PRODUCTION
Nickel (tonnes)
Cobalt (tonnes)
Fertilizer ('000s tonnes)
Heavy Oil ('000s bbl)
Light / Medium Oil ('000s bbl)
Natural Gas ('000s boe)
Electricity (GWh)
2010A
16,986
1,853
235
4,062
170
132
689
2011A
17,286
1,927
239
4,119
152
130
618
2012A
17,132
1,896
264
3,899
122
128
628
2013A
26,830
2,493
285
3,904
111
121
589
2014E
31,192
2,843
296
3,849
100
112
822
2015E
36,359
3,393
285
3,906
86
110
750
2016E
37,557
3,479
285
3,906
86
110
750
2017E
37,775
3,399
285
3,906
86
110
886
2018E
34,575
3,339
285
3,906
69
110
960
2019E
37,547
3,559
285
3,906
0
110
960
2020E
40,061
3,780
285
3,906
0
110
960
2014E
16%
14%
4%
-1%
-9%
-7%
39%
2015E
17%
19%
-3%
1%
-14%
-2%
-9%
2016E
3%
3%
0%
0%
0%
0%
0%
UNIT COSTS
Moa (US$/lb Ni)
Ambatovy (US$/lb Ni)
Heavy Oil - Cuba ($/net boe)
Light / Medium Oil - Spain ($/net boe)
Natural Gas - Pakistan ($/net boe)
Electricity ($/MWh)
2010A
$3.33
$0.00
$7.28
$27.37
$6.41
$11.62
2011A
$4.35
$0.00
$12.07
$49.96
$3.44
$20.05
2012A
$4.94
$0.00
$12.69
$46.51
$3.48
$16.62
2013A
$5.52
$0.00
$12.76
$26.14
$5.86
$25.09
2014E
$5.17
$7.01
$8.39
$39.15
$6.36
$18.25
2015E
$5.19
$6.50
$6.84
$40.00
$6.00
$30.00
2016E
$5.22
$5.55
$6.84
$40.00
$6.00
$30.00
2017E
$4.25
$5.28
$6.84
$40.00
$6.00
$30.00
2018E
$3.96
$4.89
$6.84
$40.00
$6.00
$30.00
2019E
$3.94
$4.67
$6.84
$40.00
$6.00
$30.00
2020E
$3.94
$4.68
$6.84
$40.00
$6.00
$30.00
2014E
-6%
NM
-34%
50%
8%
-27%
2015E
0%
-7%
-18%
2%
-6%
64%
2016E
1%
-15%
0%
0%
0%
0%
INCOME STATEMENT
Revenue
Cost of Sales (including depreciation)
Administrative Expenses
Associate earnings, net of tax (Ambatovy)
JV Earnings, net of tax (Moa)
Other
Earnings from Operations, Associate and JV
Net finance expense
Non-Controlling Interest
Income tax expense (recovery)
Loss from discontinued operations, net of tax
Net earnings
Adjusted Net Earnings
DILUTED earnings per share
Adjusted DILUTED earnings per share
Diluted shares outstanding
EBITDA
Adjusted EBITDA (including Moa/Ambatovy)
2010A
1,771
1,397
(8)
366
16
11
111
14
214
214
$0.71
$0.72
297
624
632
2011A
1,978
1,482
82
(3)
0
412
123
0
89
1
198
206
$0.67
$0.69
296
636
643
2012A
1,840
1,506
85
(1)
(6)
243
183
0
30
(4)
34
56
$0.12
$0.19
297
494
516
2013A
449
312
78
(0)
(24)
0
35
121
0
72
502
(660)
(60)
($2.22)
($0.21)
297
237
217
2014E
480
297
64
(194)
7
13
(55)
123
0
45
(41)
(181)
(207)
($0.61)
($0.70)
297
41
286
2015E
479
288
51
(131)
36
0
44
119
0
7
0
(82)
(82)
($0.28)
($0.28)
297
132
380
2016E
472
287
46
(19)
75
0
194
123
0
5
0
66
66
$0.22
$0.22
297
282
553
2017E
470
290
46
32
125
0
290
123
0
4
0
164
164
$0.55
$0.55
297
378
678
2018E
465
292
46
32
133
0
292
111
0
6
0
175
175
$0.59
$0.59
297
381
645
2019E
451
286
46
46
128
0
292
103
0
6
0
184
184
$0.62
$0.62
297
381
673
2020E
451
286
46
56
128
0
303
88
0
11
0
204
204
$0.69
$0.69
297
391
707
2014E
7%
-5%
-18%
NM
NM
NM
NM
1%
NM
-38%
NM
NM
NM
NM
NM
0%
-83%
32%
2015E
0%
-3%
-19%
NM
420%
NM
NM
-3%
NM
-84%
NM
NM
NM
NM
NM
0%
226%
33%
2016E
-2%
0%
-10%
NM
108%
NM
339%
3%
NM
-26%
NM
NM
NM
NM
NM
0%
113%
45%
CASH FLOW STATEMENT
Net Earnings
Depreciation and Amortization
Change in working capital
Other
Cash from operations
Cash Flow per share FD
Net cash flow from Moa
Net cash flow from Ambatovy
Capital Expenditures
Free Cash Flow to the Firm
Free Cash Flow to the Firm per share FD
Financing activities (ex equity raises and dividends)
Free Cash Flow to Equity
Free Cash Flow to Equity per share FD
Equity Issues (Repurchases)
Dividends
All Other Sources (Uses) of Cash
Net Source (Use) of Cash
2010A
228
258
18
5
509
$1.72
0
0
(1,306)
(797)
($2.69)
715
(82)
($0.27)
1
(42)
4
(119)
2011A
197
224
(89)
22
355
$1.20
0
(427)
(122)
(194)
($0.66)
51
(144)
($0.49)
2
(45)
30
(156)
2012A
33
253
(60)
44
270
$0.91
0
(396)
(138)
(264)
($0.89)
215
(48)
($0.16)
1
(45)
88
(4)
2013A
(159)
89
53
219
202
$0.68
2
(220)
(67)
(83)
($0.28)
300
217
$0.73
1
(50)
(15)
154
2014E
(222)
96
(25)
285
134
$0.45
0
(183)
(106)
(155)
($0.52)
(799)
(955)
($3.21)
1
(22)
760
(216)
2015E
(82)
88
(3)
177
179
$0.60
65
(105)
(89)
51
$0.17
0
51
$0.17
0
(12)
(0)
39
2016E
66
88
3
31
188
$0.63
70
40
(79)
218
$0.74
(28)
191
$0.64
0
(12)
0
179
2017E
164
88
1
(67)
185
$0.62
114
80
(80)
299
$1.01
(56)
243
$0.82
0
(12)
(0)
231
2018E
175
89
2
(74)
193
$0.65
126
97
(80)
335
$1.13
(311)
24
$0.08
0
(12)
0
12
2019E
184
88
6
(82)
197
$0.66
140
107
(80)
363
$1.22
(75)
289
$0.97
0
(12)
0
277
2020E
2014E
2015E
204
NM
NM
ScotiaView
Analyst
Link
88
7%
-8%
(0)
NM
NM
(91)
31%
-38%
201
-34%
34%
$0.68
-34%
34%
141
NM
NM
140
NM
NM
(80)
NM
NM
402
NM
NM
$1.35
NM
NM
(339)
NM
NM
63
NM
NM
$0.21
NM
NM
0
-29%
NM
(12)
NM
NM
0
NM
NM
51
NM
NM
2016E
NM
0%
NM
-82%
5%
5%
7%
NM
NM
332%
332%
NM
278%
278%
NM
NM
NM
363%
BALANCE SHEET
Cash and equivalents
Other Current Assets
Total Current Assets
Capital Assets
Investment in JV (Moa)
Investment in Associate (Ambatovy)
Other Assets
Total Assets
Short term debt
Trade accounts payable and accrued liabilities
Other Current Liabilities
Total Current Liabilities
Long term Debt
Other liabilities
Shareholders Equity
Total Liabilities and Shareholder Equity
2010A
331
1,186
1,517
8,099
0
0
1,106
10,722
86
384
113
583
3,501
3,128
3,510
10,722
2011A
175
1,214
1,389
1,430
1,053
0
2,625
6,498
57
180
136
372
1,688
706
3,732
6,498
2012A
171
1,143
1,314
1,418
1,090
0
2,937
6,758
0
197
138
335
2,040
711
3,673
6,758
2013A
324
712
1,036
393
1,653
352
3,024
6,458
365
105
85
554
2,125
672
3,107
6,458
2014E
108
793
901
435
1,581
369
1,937
5,223
1
126
69
197
1,788
164
3,074
5,223
2015E
147
798
945
436
1,554
340
1,937
5,212
1
128
150
279
1,867
165
2,901
5,212
2016E
326
793
1,119
427
1,496
345
1,937
5,323
1
126
236
363
1,924
166
2,871
5,323
2017E
557
792
1,349
419
1,447
355
1,937
5,507
1
126
324
451
1,953
167
2,936
5,507
2018E
569
788
1,357
410
1,382
363
1,937
5,449
1
124
414
540
1,730
167
3,011
5,449
2019E
845
779
1,624
401
1,321
351
1,937
5,635
1
121
506
628
1,746
168
3,094
5,635
2020E
897
779
1,676
393
1,237
338
1,937
5,582
1
121
598
720
1,498
170
3,194
5,582
2016E
122%
-1%
18%
-2%
-4%
1%
0%
2%
0%
-2%
57%
30%
3%
0%
-1%
2%
Source: Company reports; Scotiabank GBM estimates.
2014E
-67%
11%
-13%
11%
-4%
5%
-36%
-19%
-100%
20%
-18%
-65%
-16%
-76%
-1%
-19%
2015E
36%
1%
5%
0%
-2%
-8%
0%
0%
0%
2%
115%
42%
4%
1%
-6%
0%
121
Company Comment
Thursday, October 30, 2014, Pre-Market
(TKO-T C$1.58)
(TGB-A US$1.41)
Taseko Mines Limited
Q3/14 Financials First Look - Known to Be Messy
Mark Turner, MBA, P.Eng. - (416) 863-7484
(Scotia Capital Inc. - Canada)
mark.turner@scotiabank.com
Rating: Sector Perform
Target 1-Yr:
Risk Ranking: High
Valuation: 50% EV/EBITDA & 50% Adjusted NAV
C$2.50
ROR 1-Yr:
58.2%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.00
$0.00
0.0%
Key Risks to Target: Commodity price, operating, and technical risks, environmental and legal risk s
Event
■ Q3/14 financials were released Wednesday after market close.
Production and sales volumes had been previously announced.
Implications
■ The high wall movement and shovel availability issues discussed with
Q3/14 production results in mid-October impacted Q3/14 costs more
than we expected even when aware of the longer hauls and contractor
miner being moved to maintain mine production. Cash costs increased
30% from Q2/14 to US$2.75/lb produced and were 11% higher than our
estimate of US$2.47/lb produced (US$2.56 on a C1 basis).
■ The Gibraltar mining fleet has now been moved to higher benches, the
contract miner has been released, and all major shovel maintenance is
reported to have been complete by mid-October. Normal expenditure
levels are expected going forward, as per the revised mine plan. Please
see our October 13, 2014, note entitled, "High Wall Instability Forcing
Lower Grades for Next 18 Months".
■ Adjusted EBITDA of $1.9M was well below our estimate of $12.8M, as
was adjusted EPS of a loss of $0.06 compared with our estimate of a
loss of $0.02 and consensus at $0.00 (range -$0.02 to $0.04).
Recommendation
■ We maintain our Sector Perform rating and $2.50 target price ahead of
adjusting our estimates post quarterly conference call.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
$-0.01 A
$-0.02 A
$0.01
$0.06
(FY-Dec.)
Adj Earnings/Share
Cash Flow/Share
Price/Earnings
Price/Cash Flow
Revenues (M)
EBITDA (M)
Current Ratio
EBITDA/Int. Exp
Q2
$-0.05 A
$-0.01 A
$0.01
$0.07
Q3
$-0.01 A
$-0.02
$0.02
$0.08
Q4
$0.00 A
$0.00
$0.02
$0.09
Year
$-0.07
$-0.04
$0.07
$0.30
P/E
n.m.
n.m.
23.4x
5.3x
2012A
$0.01
$0.15
n.m.
20.8x
$254
$76
3.0x
14.2x
2013A
$-0.07
$0.15
n.m.
14.7x
$290
$25
2.0x
2.0x
2014E
$-0.04
$0.23
n.m.
6.8x
$417
$64
2.1x
3.1x
2015E
$0.07
$0.33
23.4x
4.8x
$405
$92
2.4x
4.2x
2016E
$0.30
$0.47
5.3x
3.3x
$469
$154
3.1x
7.3x
BVPS14E: $2.14
NAVPS:
P/NAV:
$3.45
0.46x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
(Basic)
Float O/S (M) (Basic)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$351
$231
$582
222
218
122
Additional Details
Exhibit 1 – Q3/14 Financial Results Compared with Scotiabank GBM and Consensus Estimates
Actual
Q3/14
C$
Gross Revenue
TC/RCs and transportation
Operating cost and royalties
Depreciation
Gross Profit
Adjusted EBITDA
Net earnings before adjustments
+ unrealized loss (gain) on hedge book (options)
+ write-down of marketable securities
+ unrealized foreign exchance loss
+ Curis acqusition costs
+ estimated tax effect of adjustments
Adjusted net earnings
EPS (adjusted; FD)
Adjusted operating cash flow (before working capital changes)
Adjusted CFPS (before working capital changes; FD)
Scotia
Estimate
Difference
$93.7 M
$10.9 M
$75.8 M
$12.9 M
($5.9 M)
$106.9 M
$16.1 M
$71.2 M
$12.0 M
$7.6 M
-12%
-32%
6%
8%
-178%
$1.9 M
$12.8 M
-85%
($20.9 M)
($0.7 M)
$0.4 M
$9.3 M
$0.5 M
$0.2 M
($11.2 M)
($0.06)
($3.2 M)
($0.02)
-250%
-200%
($3.1 M)
($0.02)
$8.7 M
$0.04
-136%
-150%
FactSet
Consensus
Difference
$106.2 M
-12%
-
$0.00
$0.09
-122%
Source: Company reports; Scotiabank GBM estimates, FactSet.
Exhibit 2 - Gibraltar Mine Sales, Production, and Cash Cost
Gibraltar (100% Basis)
Actual
Q3/14
Scotia
Estimate
Difference
Actual
Q2/14
QOQ
Change
Actual
Q3/13
YOY
Change
Sales
Copper (Mlb)
Molybdenum (klb)
38.1
700
Sales Volumes
Previously Reported
38.7
731
-2%
-4%
26.6
110
43%
536%
Production
Copper (Mlb)
Molybdenum (Mlb)
35.4
650
Production Volumes Previously
Reported
38.5
667
-8%
-3%
36.7
284
-4%
129%
Operating Cost
C1 Cash Cost (US$/payable lb produced)
Cash Cost (US$/lb produced)
$2.85
$2.75
$2.19
$2.12
30%
30%
$2.29
$2.21
24%
24%
$2.56
$2.47
11%
11%
Source: Company reports; Scotiabank GBM estimates.
■ Q3/14 cash and equivalents stood at $93.0M, a 20% increase from Q2/14 of $77.4M,
primarily a consequence of accounts receivable and receipt of $12.9M of a cash security,
which was replaced with a surety bond, with BC Hydro for Gibraltar’s electricity
consumption commitment. Working capital stood at $108.3M, a modest decrease from
$112.5 in Q2/14.
Conference Call Thursday
■ Conference call details: Thursday, October 30, 2014, at 11:00 am ET. Dial-in numbers are
(877) 303-9079 in North America and (970) 315-0461 internationally.
ScotiaView Analyst Link
123
Intraday Flash
Wednesday, October 29, 2014 @ 2:36:53 PM (ET)
(TCK.B-T C$18.42)
(TCK-N US$16.52)
Teck Resources Limited
Solid Q3/14 Results & Modest Positive Guidance
Adjustments
Orest Wowkodaw, CPA, CA, CFA - (416) 945-4526
(Scotia Capital Inc. - Canada)
orest.wowkodaw@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Target 1-Yr:
Dalton Baretto, MBA, CFA - (416) 863-7623
(Scotia Capital Inc. - Canada)
dalton.baretto@scotiabank.com
C$25.00
ROR 1-Yr:
40.6%
Valuation: 50% of 7.5x 2015E EV/EBITDA + 50% of 8% NAV
Key Risks to Target: Commodity prices, currency, operating, development, balance sheet and environmenta l
Event
■ Teck released its Q3/14 financial and operating results.
■ The company reported an adjusted Q3/14 EPS of $0.28 vs. our estimate
of $0.28 and consensus of $0.25.
■ Coal production and sales of 6.8 mt and 6.7 mt were 6.3% and 9.8%
above our estimates of 6.4 mt and 6.1 mt. While the realized coal price
of US$110/t was in line with our forecast, cash costs of $88/t were $5/t
lower than our forecast of $93/t. Cu production and sales of 78 kt and
82 kt were 6.5% below and in line with our forecasts of 83 kt and 82 kt,
while costs of US$1.64/lb were higher than our estimate of US$1.55/lb.
■ Teck modestly improved its 2014 production and cost guidance ranges
for coal, Cu, and Zn. The capex budget was reduced by $0.4 billion.
■ There was no change to the dividend; we believe that the dividend can
be maintained for another 12+ months in the current coal environment.
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 per share.
(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
21.2x
15.5x
2014E
$0.87
$3.09
21.2x
$8,611
$2,608
2015E
$1.19
$3.48
15.5x
$8,920
$2,795
2016E
$1.62
$3.85
11.4x
$9,255
$3,216
2017E
$1.67
$4.26
11.0x
$9,272
$3,343
2018E
$1.82
$4.37
10.1x
$9,369
$3,559
BVPS14E: $32.46
ROE14E: 2.67%
NAVPS:
P/NAV:
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in C$ unless otherwise indicated. ^ Subordinate Voting
$0.90
$0.90
4.9%
Pertinent Revisions
Implications
Qtly Adj. EPS (FD)
2012A
2013A
2014E
2015E
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
New
Old
Adj. EPS14E
$0.87
$0.83
Adj. EPS15E
$1.19
$1.17
Adj. EPS16E
$1.62
$1.63
New Valuation:
50% of 7.5x 2015E EV/EBITDA + 50% of
8% NAV
Old Valuation:
50% of 8.0x 2015E EV/EBITDA + 50% of
8% NAV
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
$10,614
$4,809
$15,423
$24.19
0.76x
ScotiaView Analyst Link
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
576
565
124
Q3/14 Results In Line with Our Estimates, but Above Consensus
■ The company reported adjusted Q3/14 earnings of $159 million or $0.28 per share fd, which
was in line with our estimate of $164 million or $0.28 per share fd, but slightly above the
consensus estimate of $0.25 (range of $0.14-$0.35). The results improved versus the Q2/14
adjusted EPS of $0.13 on higher zinc sales and higher realized copper and zinc prices, but
declined from the Q3/13 adjusted EPS of $0.44 largely due to sharply lower coal prices as
well as lower copper and coal sales. Our variances are detailed in Exhibit 1.
Exhibit 1 - Teck Resources – Q3/14 Variance Summary
Reported
Q3/14A
BNS
Q3/14E
Variance
with Est.
% Change
Reported
Q2/14A
Variance
Qtr-over-Qtr
% Change
Reported
Q3/13A
Variance
Yr-over-Yr
% Change
PRODUCTION (TCK'S SHARE)
Coal ('000 tonnes)
Copper ('000 tonnes)
Zinc ('000 tonnes)
Lead ('000 tonnes)
Molybdenum ('000 lbs)
6,800
78
169
29
1,645
6,400
83
149
27
2,135
6.3%
-6.5%
13.0%
9.2%
-23.0%
6,400
87
157
29
1,435
6.3%
-11.2%
7.8%
-1.0%
14.6%
6,707
91
156
23
1,668
1.4%
-14.4%
8.2%
24.4%
-1.4%
SALES (TCK'S SHARE)
Coal ('000 tonnes)
Copper ('000 tonnes)
Zinc ('000 tonnes)
Lead ('000 tonnes)
Molybdenum ('000 lbs)
6,700
82
196
64
1,568
6,100
82
189
53
2,135
9.8%
0.7%
3.6%
19.7%
-26.6%
6,800
87
111
1,303
-1.5%
-5.7%
75.8%
NM
20.3%
7,568
95
191
60
1,876
-11.5%
-13.3%
2.7%
6.7%
-16.4%
GROSS PROFIT (CAD millions)
Elk Valley Coal
Trail (incl power sales)
Red Dog
Highland Valley Copper
Antamina
Quebrada Blanca
Andacollo
Duck Pond
Inter-segment sales and other
Total
8.0
29.0
206.0
64.0
90.0
(8.0)
23.0
(2.0)
2.0
412.0
(9.2)
25.1
190.4
80.6
92.5
(2.8)
24.2
5.1
405.9
NM
15.4%
8.2%
-20.6%
-2.7%
NM
-4.9%
NM
NM
1.5%
23.0
34.0
80.0
90.0
75.0
(16.0)
12.0
(5.0)
293.0
-65.2%
-14.7%
157.5%
-28.9%
20.0%
NM
91.7%
NM
NM
40.6%
217.0
8.0
143.0
48.0
156.0
30.0
(6.0)
3.0
599.0
-96.3%
262.5%
44.1%
33.3%
-42.3%
NM
-23.3%
NM
-33.3%
-31.2%
2,250.0
1,500.0
750.0
33.3%
2,191.4
1,473.6
717.8
32.8%
2.7%
1.8%
4.5%
2,009.0
1,376.0
633.0
31.5%
12.0%
9.0%
18.5%
2,524.0
1,605.0
919.0
36.4%
-10.9%
-6.5%
-18.4%
Depreciation and amortization
Operating earnings
338.0
412.0
311.9
405.9
8.4%
1.5%
338.0
295.0
0.0%
39.7%
322.0
597.0
5.0%
-31.0%
General and administrative
Interest on long-term debt
Exploration
Research and development
Pricing Adjustments (increases)
Other Expenses (Income)
Net earnings before tax
Income taxes (recovery)
Minority interests
Tax rate
Net earnings after tax
Net earnings from discontinued operation
Net earnings (as reported)
22.0
79.0
14.0
5.0
28.0
28.0
236.0
151.0
1.0
64.0%
84.0
84.0
33.0
67.1
22.5
3.8
15.0
(5.3)
269.9
103.8
2.1
38.4%
164.0
164.0
-33.3%
17.7%
-37.8%
33.3%
86.7%
NM
-12.5%
45.5%
-53.2%
-48.8%
NM
-48.8%
30.0
75.0
14.0
4.0
(31.0)
52.0
151.0
66.0
5.0
43.7%
80.0
80.0
-26.7%
5.3%
0.0%
25.0%
NM
-46.2%
56.3%
128.8%
-80.0%
46.4%
5.0%
NM
5.0%
30.0
83.0
27.0
4.0
(24.0)
57.0
420.0
144.0
9.0
34.3%
267.0
267.0
-26.7%
-4.8%
-48.1%
25.0%
NM
-50.9%
-43.8%
4.9%
-88.9%
86.6%
-68.5%
NM
-68.5%
Non-recurring items
Adjusted earnings
75.0
159.0
164.0
NM
-3.0%
(8.0)
72.0
NM
120.8%
(15.0)
252.0
NM
-36.9%
-48.8%
-3.0%
-3.0%
$0.14
$0.13
$0.13
5.0%
119.1%
119.1%
$0.46
$0.44
$0.44
-68.5%
-36.9%
-37.2%
INCOME STATEMENT (CAD millions)
Total revenue
Operating costs
Gross margin
Gross margin %
Earnings Per Share - Basic
Adjusted Earnings Per Share - Basic
Adjusted Earnings Per Share - Fully Diluted
Source: Company reports; Scotiabank GBM estimates.
$0.15
$0.28
$0.28
$0.28
$0.28
$0.28
125
■ Q3/14 revenue of $2.25 billion was 2.7% above our forecast of $2.19 billion largely due to
the higher coal volumes. The company’s gross margin (before depreciation) of $750 million
was 4.5% above our forecast of $718 million. However, EBITDA of $651 million was
largely in-line with our estimate of $644 million.
Coal – Strong Sales Volumes; Operating Costs Better than Expected
■ Teck’s coal business generated gross profit of $8.0 million in Q3/14, versus our estimate of a
loss of $9.2 million, due to higher than expected sales and lower unit costs.
■ Q3/14 coal production of 6.8 mt was 6.3% above our forecast of 6.4 mt. Strong coal sales of
6.7 mt were 9.8% above our estimate of only 6.1 mt. However, coal sales decreased by 1.5%
from the relatively strong Q2/14 levels and decreased by 11.5% from the record Q3/13
levels. We note that Q2/14 sales volumes were higher than expected due to catch-up
shipments from Q1/14 (rail supplier issues), while Q3/13 sales were much higher than
expected due to improving sentiment at the time (according to the company).
■ The realized coal price of US$110/t was in line with our forecast of US$110/t, reflecting an
8.3% discount to the quarterly benchmark of US$120/t. Total cash costs (excluding inventory
writedowns) of $88/t (on-site costs of $50/t; transportation costs of $38/t) were $5/t lower
than our estimate of $93/t. Cash costs of $88/t were lower than the updated annual guidance
range of $89-$94/t, but were in line with Q2/14 costs (excluding inventory writedowns) of
$88/t. The company noted that all six of its coal mines reported positive cash margins in the
quarter, including sustaining capital and capitalized stripping.
■ Teck issued Q4/14 coal sales guidance (i.e., sales commitments reached to date plus expected
spot sales) of at least 6.5 mt, which was 7.1% below our estimate of 7.0 mt. While this
guidance was below our forecast, we note that the company had previously guided to Q3/14
sales of at least 6.0 mt, which compares to the 6.7 mt realized.
■ For the full year 2014, Teck now anticipates coking coal production of 26.5-27.0 mt
(previously 26.0-27.0 mt). We note that the production guidance remains below the current
installed capacity of 28.0 mt due to weak market demand. The company also modestly
adjusted its total cost guidance range to $89-$94/t (previously $89-$98/t), which reflects onsite costs of $52-$55/t and transportation costs of $37-$39/t. YTD production of 19.9 mt
reflects 74.5% of the mid-point of the revised full year guidance range, while YTD average
costs of $90/t are tracking near the bottom end of the updated guidance range.
Exhibit 2 - Teck Forecast Quarterly Coal Production/Sales Volumes
8,000
7,500
7,000
6,500
6,000
5,500
5,000
4,500
4,000
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
Coal sales volume ('000s tonnes)
Source: Company reports; Scotiabank GBM estimates.
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
Coal production volume ('000s tonnes)
4Q14E 1Q15E 2Q15E 3Q15E 4Q15E
126
Exhibit 3 - Coal Benchmark and Realized Pricing versus Unit Costs (Operating + Transportation)
350
300
250
200
150
100
50
0
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
Cost per tonne (C$/tonne)
4Q12
1Q13
2Q13
3Q13
4Q13
Realized price (US$/tonne)
1Q14
2Q14
3Q14
4Q14E 1Q15E 2Q15E 3Q15E 4Q15E
Benchmark Price (US$/tonne)
Source: Company reports; Scotiabank GBM estimates.
■ The company’s outlook for the coking coal market remains subdued. While ~25 mt of higher
cost capacity has been announced for closure, Teck noted that only a small portion is
expected to actually close before year-end. As such, the true impact of recent closure
announcements is unlikely to be reflected in the price until 2015. The company estimates that
additional closures of ~10 to 15 mt (over and above the ~25 mt already announced) are
required to balance the seaborne market given the ramp-up of low cost Australian tonnes.
The company believes that the seaborne market could return to balance by mid-2015 if
additional production cuts by higher cost producers materialize.
■ With regards to the Elk Valley Water Quality Plan, the company indicated that it continues to
develop the plan based on scientific input from a 3rd party Technical Advisory Committee
made up of various stakeholders. Teck has submitted its revised plan to the BC Ministry of
Environment, and anticipates the ministry to approve the plan by the end of 2014. The
company continues to expect to publish cost estimates by the end of 2014. However, Teck
advised that delays in obtaining approval of the plan could result in consequential delays in
permitting new mining areas, which could impact the company’s ability to maintain
production levels.
Copper – Weak Results Driven by Higher Costs
■ The copper segment generated a gross profit of $167 million during Q3/14, 16.3% below our
forecast of $200 million, due to lower than expected results at all of the mines.
■ Q3/14 copper production of 78 kt was 6.5% below our forecast of 83 kt, largely due to
Andacollo, where the failure of key electrical equipment resulted in unexpected mill down
time (repairs were completed by the end of September). However, copper production at
Highland Valley and Antamina were also 5.2% and 2.6% below our estimates, respectively.
Total copper production decreased by 11.2% from the Q2/14 level of 87 kt tonnes due to
lower output from Highland Valley and Andacollo, and by 14.4% versus the very strong
Q3/13 level of 91 kt due to lower output from Antamina and Andacollo.
■ Copper sales of 82 kt were in line with our forecast of 82 kt; however, copper cash costs of
US$1.64/lb were higher than our estimate of US$1.55/lb. Cash costs were in line with Q2/14
cash costs of US$1.64/lb, but lower than Q3/13 cash costs of US$1.71/lb.
■ The company adjusted its previously issued 2014 copper production guidance of 330-340 kt
(previously 320-340 kt), as well as its full year copper cash cost guidance range (after byproduct credits) to US$1.60-$1.70/lb (previously US$1.65-$1.75/lb). YTD, the company has
127
produced 250 kt of copper representing 74.7% of the mid-point of the revised guidance
range. YTD average cash costs of US$1.63/lb are tracking within the revised guidance range.
Exhibit 4 - Copper Forecast Quarterly Production and Cash Cost Profile by Mine
120
$2.00
Copper Production (000s tonnes)
$1.60
$1.40
80
$1.20
60
$1.00
$0.80
40
$0.60
$0.40
20
$0.20
0
$1Q11
2Q11
3Q11
4Q11
1Q12
Highland Valley
2Q12
3Q12
Antamina
4Q12
1Q13
2Q13
Andacollo
3Q13
4Q13
1Q14
Quebrada Blanca
2Q14
3Q14
Duck Pond
4Q14E 1Q15E 2Q15E 3Q15E 4Q15E
Cash cost (US$/lb)
Source: Company reports; Scotiabank GBM estimates.
Highland Valley (97.5%)
■ At Highland Valley, copper production of 29.7 kt was 5.2% below our forecast of 31.3 kt due
to lower than expected grades. Production declined by 16.1% from the Q2/14 level of 35.4
kt, also due to lower grades (in line with the mine plan), but increased by 16.5% from the
Q3/13 level of 25.5 kt due to the mill expansion. We note that throughput averaged 139 ktpd
in Q3/14, well above the modernized design capacity of 130 ktpd, and largely unchanged
from the 140 ktpd average in Q2/14. Grades are expected to remain lower in Q4/14 in
accordance with the mine plan.
Antamina (22.5%)
■ At Antamina, attributable Q3/14 copper production of 17.8 kt was 2.6% below our estimate
of 18.3 kt due to a lower proportion of copper-only ore milled (63% versus our estimate of
81%). Attributable copper production at Antamina was marginally lower than Q2/14
production of 18.1 tonnes, but declined markedly versus the Q3/13 level of 28.9 kt due to a
significant drop in the proportion of copper-only ore as well as lower grades as per the mine
plan. Grades are expected to remain at current levels in Q4/14, consistent with the mine plan,
as the operation mines lower grade zones and processes lower grade stockpiles.
■ As a result of the higher proportion of copper-zinc ore processed, attributable zinc production
of 16.5 kt was markedly higher than our estimate of 11.1 kt, Q2/14 output of 10.7 kt, and
Q3/13 output of 9.9 kt. The company continues to expect zinc production levels to increase
post-2014 as grades improve according to the mine plan.
■ Antamina received a strike notice from the union effective November 10. If a strike begins,
this would obviously impact Q4 production levels.
Carmen de Andacollo (90%)
■ At Andacollo, Q3/14 copper concentrate production of 14.9 kt was 14.3% below our forecast
of 17.4 kt due to lower throughput caused by an electrical equipment failure in September
(which has already been corrected). Including copper cathode, total copper production of
15.9 kt was 13.5% below our estimate of 18.4 kt. Total copper production was 13.6% below
the Q2/14 level of 18.4 kt and 18.5% below Q3/13 production of 19.5 kt.
Copper cash cost (US$/lb)
$1.80
100
128
Quebrada Blanca (76.5%)
■ At Quebrada Blanca, copper cathode production of 11.3 kt was 2.8% above our estimate of
11.0 kt. However, production decreased by 3.3% and 13.1% from Q2/14 and Q3/13 levels.
Work continues on the permitting process to extend the life of the supergene operation, with
the SEIA being submitted last quarter; the review and approval process is expected to take
~12 months.
Zinc – Another Strong Operating Quarter at Red Dog
■ The zinc segment generated a gross profit of $235 million during Q3/14, versus our forecast
of $216 million, driven by better than expected results at both Trail and Red Dog. At Trail,
the new acid plant has been online for a full quarter now, driving performance improvement.
■ At Red Dog, total zinc production of 147.7 kt was 9.8% above our estimate of 134.5 kt,
driven by strong throughput due to the processing of softer ore. Zinc production also
improved by 4.4% from the Q2/14 level of 141.5 kt and by 3.6% from the Q3/13 level of
142.5 kt, both due to higher throughput.
■ Red Dog zinc sales of 182.7 kt were 4.5% higher than our estimate of 174.8 kt and guidance
of 175.0 kt.
■ For the second time this year, Teck increased its 2014 full year zinc production guidance to
615-630 kt (previously 600-615 kt; original guidance was 555-585 kt). YTD production of
489 kt represents 78.6% of the mid-point of the revised guidance range.
Project Development Update – No News Is Good News
■ There was no material update to any of the company’s proposed projects (Quintette, QB2,
and Relincho). Teck continues optimization studies focused on reducing capital costs at QB2.
The company is currently looking into ways to manage exposure to commitments already
made, such as those on long-lead items and power purchase contracts. Teck has deferred
permitting activity on QB2 until further progress on the approval process for the supergene
SEIA has been made. Our estimates continue to assume that development of QB2 begins in
2018 with start-up in 2021.
■ The capital cost and development schedule for Fort Hills is unchanged; however, cash
payments have lagged expenditures with a deferral of $225 million in accruals from 2014
into 2015. Teck has indicated that development is on schedule, with engineering over 50%
complete.
■ The restart of Pend Oreille remains on track and on budget for start-up around the end of
2014.
Cost Reduction Initiatives Continue to Bear Fruit
■ Teck’s cost reduction initiatives continue to make progress. The company has realized $590
million in annualized reductions to date. We note that is slightly above the previous target of
$540 million.
The Balance Sheet – Sufficient Liquidity, but Minimal Near-Term Free
Cash Flow
■ 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 position increased from the Q2/14 net debt balance of $5.6 billion (or
$9.75 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 $6.6 billion (or $11.16 per share).
■ Based on our copper and coal price outlook, we now 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. Exhibit
5 details our operating and free cash flow per share estimates between now and 2020. We
129
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 20182021.
Exhibit 5 - Teck Resources forecast operating and free cash flow per share
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
2013A
2014E
2015E
2016E
2017E
2018E
2019E
($1.00)
($2.00)
CFPS
FCFPS
Source: Company reports; Scotiabank GBM estimates.
■ 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 ~13 years. 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 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 (Exhibit 6). In
order to supplement minimal near-term free cash flow generation, maintain a minimum cash
balance of ~$0.5 billion, maintain the dividend, meet medium-term debt maturities, and fund
the development of 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. 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. We note that if Teck were to defer the restart of Quintette and the development of QB2
longer than 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.
2020E
130
Exhibit 6 - Teck Resources forecast Net Debt and Net Debt / (Net Debt + Equity) ratio
35%
8,000
30%
7,000
5,000
20%
4,000
15%
3,000
10%
2,000
5%
1,000
0%
0
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Net debt (cash)
3Q13
4Q13
1Q14
2Q14
3Q14 4Q14E 1Q15E 2Q15E 3Q15E 4Q15E
Net debt / (Net debt + Equity)
Source: Company reports; Scotiabank GBM estimates.
How Long Can the Dividend Be Maintained? Probably Another 12+ Months
■ 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 (current yield of 4.9%) for some time. However, if
current prices for coal (US$119/t benchmark), copper (US$3.10/lb), and zinc (US$1.00/lb),
and a Canadian/US dollar exchange rate of 0.90 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 12-18 months, at which point we forecast that the company’s debt to debt + equity
ratio would creep above the 35% level, EBITDA/interest ratio would fall below the 8.0x
level, and debt to EBITDA ratio would creep above the 3.5x level, thereby jeopardizing the
company’s investment grade rating. Management suggested that the company would not
aggressively try to 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.
Revisions to Estimates
■ We have updated our estimates based on the Q3/14 results and revised guidance. In
particular, we have made the following material adjustments to our estimates:
o We now forecast 2014E-2016E coal production of 26.7 million tonnes, 27.0 million
tonnes, and 27.5 million tonnes, which compares to our previous forecasts of 26.3
million tonnes, 27.0 million tonnes, and 27.5 million tonnes.
o We now forecast 2014E-2016E copper production of 332,000 tonnes, 330,000 tonnes,
and 317,000 tonnes, which compares to our previous estimates of 338,000 tonnes,
332,000 tonnes, and 319,000 tonnes.
o We now forecast 2014E-2016E zinc production of 636,000 tonnes, 604,000 tonnes, and
586,000 tonnes, which compares to our previous estimates of 615,000 tonnes, 603,000
tonnes, and 585,000 tonnes.
$ millions
6,000
25%
131
o We have reduced our 2014E-2016E average coal cash cost estimates to $91/t, $93/t,
and $94/t, down an average of 1.2% from our previous forecasts of $92/t, $94/t, and
$95/t.
o We have modestly adjusted our 2014E-2016E average copper cash cost estimates to
US$1.61/lb, US$1.58/lb, and US$1.49/lb, which compare to our previous estimates of
US$1.60/lb, US$1.60/lb, and US$1.49/lb.
■ Our revised 2014E-2016E EPS estimates of $0.87, $1.19 and $1.62, compare to our previous
estimates of $0.83, $1.17 and $1.63, respectively. Our revised 2014E-2016E CFPS estimates
of $3.09, $3.48 and $3.85 compare to our previous estimates of $3.13, $3.18 and $3.79,
respectively. Our revised 2014E-2016E EBITDA estimates of $2.61 billion, $2.80 billion and
$3.22 billion compare to our previous estimates of $2.52 billion, $2.74 billion and $3.19
billion, respectively. Our revised 8% NAV increased to $24.19 per share (from $23.87),
while our revised 10% NAV increased to $17.00 per share.
Exhibit 8 – Forecast Sensitivity to Coal Price
Exhibit 7 – Forecast Sensitivity to Copper Price
-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%
$3,288
18%
8% NAVPS
$16.95
-30%
$20.66
-15%
$24.19
$27.84
15%
$31.11
29%
EPS - 2015
CFPS - 2015
$3.48
Source: Scotiabank GBM estimates. Note: Base case assumes US$3.15/lb copper 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%
EBITDA - 2015
$2,097
-25%
$2,446
-12%
$2,795
$3,144
12%
$3,493
25%
8% NAVPS
$8.40
-65%
$16.33
-33%
$24.19
$31.61
31%
$38.21
58%
EPS - 2015
Source: Scotiabank GBM estimates. Note: Base case assumes US$125/tonne coal price.
■ We have profiled 2015 financial statement sensitivities to coking coal and copper prices in
Exhibits 7 and 8. We note that our 2015 EPS estimate changes by 22% for a 10% change in
the copper price, and by 34% for a 10% change in the benchmark coal price.
■ We have also profiled the company’s forecast 2015 EBITDA mix by business line in Exhibit
9. Based on our commodity deck (US$125/tonne coking coal, US$3.15/lb Cu, US$1.15/lb
Zn), copper represents the biggest contributor to EBITDA at 41%.
Exhibit 9 - Teck Resources Forecast 2015 EBITDA Split by Business Segment
Zinc, 25.9%
Copper, 41.2%
Source: Scotiabank GBM estimates.
Coal, 32.9%
132
Conclusions
■ While the Q3/14 results were largely in line with our estimates, they appear above consensus
expectations. We were particularly impressed by the relatively strong level of coal sales
achieved in the quarter in light of the very weak market. With several minor positive
adjustments to 2014 guidance and no change to the dividend, we anticipate the shares to
outperform today. Our analysis suggests that Teck’s balance sheet should be able to
comfortably maintain funding its dividend for at least another 12 months in the unlikely
event that the current low pricing environment for coking coal continues indefinitely.
However, given the company’s forecast negligible free cash generation in the current coal
price environment resulting in rising debt levels, a reduction in the dividend would be a
prudent move in our view, despite the short-term negative impact on the shares.
Valuation
■ TCK.B shares are currently trading at a 2015E and 2016E EV/EBITDA of 6.1x and 5.6x, and
at a P/NAV 8% of 0.76x. This compares to our base metals producer coverage universe
average of 5.8x, 4.0x, and 0.70x, respectively. In our view, Teck shares warrant a premium
valuation given the company’s market capitalization and commodity diversification.
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 $24.19 per share. We note that we have modestly reduced our EV/EBITDA multiple
to 7.5x (from 8.0x) to reflect coking coal prices that remain below our forecast.
133
Exhibit 10 - Teck Resources Financial and Operating Summary
.
Annual Growth Profile
METAL PRICE FORECAST (US$ per LB)
2010A
2011A
2012A
2013A
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2014E
2015E
$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
$98
$0.91
$125
$3.15
$1.10
$1.01
$1,300
$10.00
$92
$0.90
$135
$3.40
$1.20
$1.10
$1,300
$10.50
$91
$0.93
$140
$3.60
$1.25
$1.15
$1,300
$11.50
$91
$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%
0%
-6%
0%
12%
5%
2%
-16%
-6%
-1%
8%
8%
9%
9%
0%
5%
-1%
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)
0%
ScotiaView Analyst
Link
2016E
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
$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)
Net Earnings
Depreciation, Deferred Taxes, & Minority
Interest
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%
20%
13%
18%
21%
26%
29%
31%
31%
30%
32%
33%
Net debt / (net debt + equity)
Source: Company reports; Scotiabank GBM estimates.
134
Company Comment
Wednesday, October 29, 2014, Pre-Market
(TMM-T C$1.39)
(TGD-A US$1.25)
Timmins Gold Corp.
EPS in Line; Cash Declines $5.8M QOQ
Ovais Habib - (416) 863-7141
(Scotia Capital Inc. - Canada)
ovais.habib@scotiabank.com
Ciara Sawicki - (416) 862-3738
(Scotia Capital Inc. - Canada)
ciara.sawicki@scotiabank.com
Rating: Sector Perform
Risk Ranking: High
Target 1-Yr:
C$2.00
ROR 1-Yr:
43.9%
Valuation: 1.10x NAVPS
Key Risks to Target: Multiple contraction, commodity prices, technical and operational risks, and geopolitical risk s
Event
■ Timmins reported Q3/14 adjusted EPS of $0.01, directly in line with
our estimate and consensus.
Implications
Div. (NTM)
Div. (Curr.)
$0.00
$0.00
Yield (Curr.)
0.0%
Pertinent Revisions
EPS14E
New
US$0.08
Old
US$0.09
■ Cash costs for the quarter of $856/oz were 4% below our estimate of
$889/oz due to higher silver credits and a negative inventory
adjustment. The company reported AISC of $994/oz in Q3/14, up from
$928/oz in Q2/14 due to higher cash costs offset by lower corporate
G&A expenses.
■ Timmins finished Q3/14 with cash and equivalents of $50.2M, ~$5M
less than our estimate and ~$6M lower than Q2/14. The lower cash
position was due to a negative $3.6M working capital adjustment and
capex of $9.7M compared with our estimate of $3.7M.
■ Recall the company pre-released Q3/14 production of 26.7 koz Au,
which missed our estimate by 8% due to record rainfall in Mexico in
September. Open pit access was restricted, leading Timmins to process
lower-grade ore from stockpiles.
■ Timmins expects to achieve the high end of its 2014 guidance range
(115-125 koz Au) at a cash cost of ~$800/oz, and we model 2014
production of 122 koz Au at $798/oz. The company also anticipates
releasing drill results from its regional exploration program shortly.
Recommendation
■ We rate Timmins Sector Perform with a C$2.00 one-year target price.
Qtly EPS (FD)
2012A
2013A
2014E
2015E
Q1
$0.03 A
$0.10 A
$0.05 A
$0.03
(FY-Dec.)
Earnings/Share
Price/Earnings
Cash Flow/Share
Price/Cash Flow
EBITDA (M)
Production (oz) (000)
Tot. Cash Cost ($/oz)
Rlzd. Gold Price (/oz)
Q2
$0.04 A
$0.02 A
$0.02 A
$0.03
Q3
$0.09 A
$0.03 A
$0.01 A
$0.03
Q4
$0.09 A
$0.03 A
$0.00
$0.03
Year
$0.26
$0.21
$0.08
$0.11
P/E
11.6x
5.1x
15.4x
11.7x
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
$0.08
15.4x
$0.28
4.5x
$43
121.7
$798
$1,270
2015E
$0.11
11.7x
$0.22
5.6x
$41
116.0
$782
$1,300
2016E
$0.07
18.0x
$0.20
6.3x
$35
123.1
$864
$1,300
BVPS14E: $1.61
ROE14E: 4.95%
NAVPS:
P/NAV:
C$1.79
0.78x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
C$244
$-41
C$198
176
169
135
Q3/14 Financials – EPS in Line; Cash Declines $5.8M QOQ
■ Exhibit 1 shows Timmins’ Q3/14 results vs. our prior estimates and comparable
quarters. Recall that the company pre-released its third quarter operating results. For
additional details, please see our DailyEdge comment from October 17 titled “Q3/14
Production Miss Due to Wet Weather”.
Exhibit 1 – Timmins’ Q3/14 Results vs. Our Prior Estimates and Comparable Quarters
Operating and Financial Statistics
Q3/14A Q2/14A
% Q3/13A
Operating Statistics - San Francisco
Ore processed (000's tonnes)
Average grade (g/t Au)
Low grade stockpiled (000's tonnes)
Average grade stockpiled (g/t Au)
Waste mined (000's tonnes)
Total mined (000's tonnes)
Strip ratio (waste:ore)
Gold placed on pads (oz)
Gold produced (oz)
Gold recovery (%)
Average ore processed (tpd)
Financial Statistics
Gold sold (oz)
Cash cost net of by-products ($/oz)
All-in sustaining cash cost ($/oz)
Average realized gold price ($/oz)
Metal revenues ($M)
Profit from operations ($M)
Earnings ($M)
Cash flow from operations ($M)
Quarter-end cash position ($M)
%
SC Estimates
Q3/14E
%
2,214
0.504
68
0.245
6,208
8,226
3.08
35,889
26,671
74%
24,062
2,184
0.650
399
0.245
5,810
8,217
2.36
45,649
32,932
72%
24,003
1%
-22%
-83%
0%
7%
0%
31%
-21%
-19%
3%
0%
1,816
0.771
446
0.255
5,442
7,703
2.58
45,009
29,139
65%
19,736
22%
-35%
-85%
-4%
14%
7%
19%
-20%
-8%
15%
22%
2,214
0.50
6,208
8,226
3.08
35,875
26,671
74%
24,062
0%
0%
0%
0%
0%
0%
0%
0%
0%
26,671
$856
$994
$1,284
$34.2
$3.9
$1.6
$4.8
$50.2
33,000
$730
$928
$1,284
$42.4
$7.2
$3.2
$18.7
$56.0
-19%
17%
7%
0%
-19%
-46%
-51%
-74%
-10%
28,637
$738
$898
$1,329
$38.1
$9.3
$4.8
$10.7
$14.4
-7%
16%
11%
-3%
-10%
-58%
-67%
-55%
249%
26,671
$889
$1,060
$1,284
$34.2
$3.9
$2.4
$7.5
$55.5
0%
-4%
-6%
0%
0%
1%
-35%
-36%
-10%
Source: Company reports; Scotiabank GBM estimates.
Valuation & Recommendation – Maintaining Our SP Rating
■ We maintain our Sector Perform rating and C$2.00 one-year target price. Our NAV
estimate decreases by 3.6% to C$1.79 after model revisions for the Q3/14 financial results.
o Timmins currently trades at a P/NAV of 0.78x and 2014E P/CF of 5.6x vs.
peers at 1.09x and 8.1x, respectively.
■ Moderate three-year cash build of $12.8 million at spot gold prices (excluding the equity
financing) from 2014 to 2016 could be used to install the third crushing circuit and
bring La Chicharra into production if warranted by a sustained higher gold price. We
currently model Timmins with the expansion to 30,000 tpd beginning in late 2015 along with
the corresponding pre-stripping at La Chicharra in 2016.
■ No margin for error in new mine plan. Although the new mine plan announced in
November 2013 increased the mine life, it came at the cost of higher capex, especially over
the next three years, which materially reduced our free cash flow outlook for the company.
We also see heightened operational risk as our production estimates over the next two years
are dependent on both sustained higher crusher throughput and increased gold recoveries.
136
Exhibit 2 – Free Cash Flow Forecast at $1,230/oz Spot Gold (2014E to 2018E)
Timmins Gold
unit
2014E
2015E
2016E
2017E
2018E
(US$/oz)
$1,274
$1,230
$1,230
$1,230
$1,230
Production/Cost Profile
unit
2014E
2015E
2016E
2017E
2018E
Gold Production (oz)
(oz)
121,724
115,984
123,116
136,308
136,308
Cash Costs (US$/oz)
(US$/oz)
$798
$782
$864
$864
$864
unit
2014E
2015E
2016E
2017E
2018E
Net Operating Cash Flow
US$M
$42
$30
$26
$30
$31
Capital Expenditures
US$M
($31)
($17)
($17)
($19)
($22)
Net Cash Provided by Financing Activities
US$M
($16)
($4)
$0
$0
$0
Free Cash Flow
US$M
($5)
$9
$9
$12
$10
US$/sh
($0.03)
$0.05
$0.05
$0.07
$0.06
n.m.
27.2x
26.1x
20.8x
24.7x
Gold Price
Cash Flow Profile
Free Cash Flow per Share
P/FCF
Source: Scotiabank GBM estimates.
ScotiaView Analyst Link
137
Company Comment
Wednesday, October 29, 2014, After Close
(TOTS3-SA R$36.65)
Totvs SA
Mixed Q3: Migration to SaaS Worth the Pain
Andres Coello - +52 (55) 5123 2852
(Scotiabank Inverlat)
andres.coello@scotiabank.com
Rating: Sector Perform
Risk Ranking: Medium
Ivan Hernandez - +52 (55) 5123 2876
(Scotiabank Inverlat)
ivanb.hernandez@scotiabank.com
Target 1-Yr:
R$45.00
ROR 1-Yr:
26.1%
Valuation: DCF - five years of results, 9.9% WACC, terminal growth rate of 5.8%
Key Risks to Target: Technology obsolescence; migration to SaaS; price wars; competitio n
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
R$1.20
R$1.20
3.3%
Event
■ Q3/14 sales were 1.1% above our numbers thanks to strong
maintenance revenues (+16.3% YOY), but EBITDA was weak on the
back of migration to SaaS and macro uncertainty in Brazil (9.2% below
our estimates and up only 0.1% YOY). However, TOTVS confirmed
2013-2016 guidance on margins, R&D, and international sales.
Implications
■ Migrating to SaaS means that customers that couldn't afford a
significant down payment for ERP licenses are now able to access them
by paying a monthly fee. In Q3/14, TOTV's license transactions
increased 31.3% YOY, a remarkable figure amidst the turmoil in Brazil.
■ However, migrating to SaaS also means that while the company has to
defer the recognition of revenues (average ticket down 30.7% YOY in
Q3), it immediately faces the costs of growing more robustly. Our view
is that the short-term pain in margins from migrating to a model where
software penetration rises, where cash flows are more stable, and where
the impact of macro changes is reduced, is worth the long-term rewards.
■ With a net cash position of R$16.3M, TOTVS is well positioned to
make accretive acquisitions, especially in Mexico and the Andeans.
Recommendation
■ EBITDA growth in Q3 lagged Oracle and SAP. While the recent sell-off
marginally reduced the valuation premium against the giants, it remains
substantial (29.3%). An overly negative reaction to Q3 results could
improve entry levels. We advise investors to remain alert but neutral.
Qtly EBITDA (M)
2013A
2014E
2015E
2016E
Q1
Q2
Q3
Q4
Year
R$98 A
R$114 A
R$136
R$156
R$99 A
R$111 A
R$134
R$154
R$105 A
R$105 A
R$145
R$167
R$101 A
R$140
R$145
R$167
R$402
R$470
R$559
R$645
EV /
EBITDA
16.5x
14.2x
12.1x
10.5x
2014E
R$1.62
R$0.99
14.2x
22.6x
2.7%
R$1,801
R$470
7.5x
2015E
R$1.89
R$1.20
12.1x
19.4x
3.3%
R$1,998
R$559
9.3x
2016E
R$2.22
R$1.50
10.5x
16.5x
4.1%
R$2,198
R$645
10.1x
2017E
R$2.47
R$1.75
9.5x
14.8x
4.8%
R$2,381
R$717
9.5x
2018E
R$2.71
R$2.08
8.6x
13.5x
5.7%
R$2,534
R$783
9.7x
(FY-Dec.)
Earnings/Share
Dividends/Share
EV/EBITDA
Price/Earnings
Yield
Revenues (M)
EBITDA (M)
EBITDA/Int. Exp
BVPS14E: R$12.10
ROE14E: 13.85%
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
R$5,991
R$-8
R$5,919
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in BRL unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
163
118
138
Highlights of Totvs' Q3/14 Results
Exhibit 1 - Highlights of Totvs' Q3/14 Results (in BRL million unless otherwise stated)
Q3/14A
New Clients Sales
Existing Clients Sales
Number of sales
Average Ticket
Q3/14E Act. Vs. Est.
Q2/14A
Q3/14A
QOQ %
YOY %
900
6,498
7,398
10,823
671
5,686
6,357
13,218
34.1%
14.3%
16.4%
-18.1%
774
5,924
6,698
13,871
895
4,738
5,633
15,628
16.3%
9.7%
10.5%
-22.0%
0.6%
37.1%
31.3%
-30.7%
License Fee Sales
Services
Maintenance
80,067
136,552
228,949
84,026
131,741
224,754
-4.7%
3.7%
1.9%
92,906
127,650
218,744
88,032
125,468
196,923
-13.8%
7.0%
4.7%
-9.0%
8.8%
16.3%
Total Net Sales
445,568
440,521
1.1%
439,300
410,423
1.4%
8.6%
Licensing Costs
Cost of Services
Operating Expenses
21,215
130,388
152,446
18,825
124,351
181,800
12.7%
4.9%
-16.1%
20,952
123,878
183,541
17,666
116,373
171,560
1.3%
5.3%
-16.9%
20.1%
12.0%
-11.1%
EBITDA
EBITDA Margin
Depreciation
Net financial expense (revenue)
Taxes
Net Income
EPS
104,966
23.6%
21,415
-2,874
18,203
68,102
0.42
115,546
26.2%
24,047
-293
27,219
64,433
0.39
-9.2%
-267
-10.9%
880.8%
-33.1%
5.7%
6.6%
110,929
25.3%
23,272
-3,445
27,044
64,020
0.39
104,824
25.5%
19,906
5,716
22,695
56,414
0.35
-5.4%
-169
-8.0%
-16.6%
-32.7%
6.4%
7.2%
0.1%
-198
7.6%
-150.3%
-19.8%
20.7%
21.7%
23,803
33,522
-29.0%
57,391
61,400
-58.5%
-61.2%
Capex
Source: Company reports; Scotiabank GBM estimates.
Exhibit 2 - Totvs' Growth Comparison Against Oracle and SAP( in US$M)
Source: Company reports; Scotiabank GBM estimates.
Totvs
Revenues
EBITDA
Q3/14
195
46
Q3/13
179
46
YOY%
9.0%
0.6%
Oracle
Revenues
EBITDA
Q3/14
8,596
3,670
Q3/13
8,372
3,408
YOY%
2.7%
7.7%
SAP
Revenues
EBITDA
Q3/14
5,658
1,878
Q3/13
5,380
1,701
YOY%
5.2%
10.4%
139
Exhibit 3 - Totvs' P/E* Performance Against International Peers
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
09/03/2006
09/03/2007
09/03/2008
09/03/2009
09/03/2010
09/03/2011
09/03/2012
09/03/2013
09/03/2014
Source: Bloomberg; Scotiabank GBM estimates. *Earnings as of the end of each fiscal year
Exhibit 4 - Software and Services Comparable Multiples
EV/sales
2014E
2015E
EV/EBITDA
2014E
2015E
P/E
2014E
2015E
Net Debt to
EBITDA LTM
Brazil
TOTVS
Linx
Brazil Average
3.3
7.2
5.3
3.0
6.4
4.7
12.8
25.7
19.2
10.8
22.2
16.5
22.6
36.1
29.3
19.4
28.2
23.8
0.0
-1.9
-1.0
International
Oracle
SAP
International Average
4.0
3.7
3.8
3.8
3.3
3.5
8.5
10.4
9.5
6.8
9.5
8.1
15.6
19.0
17.3
14.3
16.4
15.4
-1.1
-0.2
-0.6
Total Average
4.5
4.1
14.3
12.3
23.3
19.6
-0.8
Source: Bloomberg; Scotiabank GBM estimates.
ScotiaView Analyst Link
140
Company Comment
Wednesday, October 29, 2014, Pre-Market
Usinas Siderúrgicas de Minas Gerais SA Usiminas
(USIM5-SA R$5.95)
Q3 Results First Look: Near-Term Outlook Blurs
Alfonso Salazar, MSc - +52 (55) 5123 2869
(Scotiabank Inverlat)
alfonso.salazar@scotiabank.com
Christian C. Landi, MBA - +52 (55) 9179-5242
(Scotiabank Inverlat)
christian.landi@scotiabank.com
Rating: Sector Perform
Target 1-Yr:
R$8.00 ROR 1-Yr:
34.5%
Risk Ranking: High
Valuation: 30% discount to DCF value per share
Key Risks to Target: Commodity price, operating, technical, political, environmental, and legal
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
R$0.00
R$0.00
0.0%
Event
■ Usiminas reported Q3/14 EBITDA of R$309M, well below our
R$516M estimate driven by weaker-than-expected revenue. Quarterly
EPS of negative R$0.03 missed our R$0.08 forecast due to the lower
operating profit and a higher foreign exchange loss of R$164M.
Implications
■ Total revenue of R$2.9B (6% lower QOQ, 9% YOY, and 7% below our
estimate) was affected by a decline in shipments and prices at the steel
and iron ore divisions. Steel shipments of 1.4M tonnes, down 4% QOQ
and 10% YOY, came in 5% below our estimate, driven by weaker-thanexpected domestic demand and an increase in steel imports. Apparent
demand for flat steel in Brazil contracted 5% YOY to 3.3M tonnes, of
which 18.8% was supplied by imports (up from 16% in Q2/14).
■ The average steel price contracted to R$1,911/tonne from R$2,004 in
the previous quarter, and came in 3% below our R$1,976/tonne
estimate. EBITDA per tonne at the steel division fell from R$306 in
Q2/13 to R$244 in Q3/14.
■ The mining division reported revenue of R$107M, missing our estimate
of R$166M due to lower-than-anticipated shipments (1.24M tonnes vs.
Scotiabank GBM estimate of 1.52M tonnes). EBITDA per tonne at the
mining division stood at only R$8.9 (down from R$46 in Q2/14).
Recommendation
■ Near-term challenges for Usiminas continue to pile up. Reiterate SP.
Qtly Adj. EPS (FD)
2013A
2014E
2015E
2016E
Q1
Q2
R$-0.15 A R$-0.06 A
R$0.18 A R$0.11 A
R$0.18
R$0.15
R$0.21
R$0.22
Q3
R$0.07 A
R$0.08
R$0.16
R$0.24
Q4
R$0.00 A
R$0.10
R$0.14
R$0.21
Year
R$-0.14
R$0.47
R$0.62
R$0.89
P/E
n.m.
12.7x
9.6x
6.7x
2012A
R$-0.63
n.m.
24.4x
R$12.7
R$0.7
1.5x
2013A
R$-0.14
n.m.
12.5x
R$12.8
R$1.6
1.4x
2014E
R$0.47
12.7x
5.6x
R$12.5
R$2.1
3.6x
2015E
R$0.62
9.6x
4.9x
R$13.5
R$2.2
3.9x
2016E
R$0.89
6.7x
4.0x
R$14.6
R$2.5
7.5x
(FY-Dec.)
Adj EPS
Price/Earnings
EV/EBITDA
Revenues (B)
EBITDA (B)
EBITDA/Int. Exp
BVPS14E: R$17.00
ROE14E: 2.84%
NAVPS:
P/NAV:
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
R$6,032
R$5,850
R$11,882
R$11.48
0.52x
ScotiaView Analyst Link
All values in BRL unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
1,014
377
141
Q3/14 Results First Look: Near-Term Outlook Blurs
Exhibit 1 - Q3/14 Results Overview
Steel sales (kt)
Avg. Realized steel price (R$/t)
Revenue R$M
EBITDA R$M
EBITDA Margin
Net Income
Adj. EPS R$
Q3/2014
Q3/2013 Q2/2014 Actual Scotia Est.
1,565
1,456 1,401
1,475
1,884
2,004 1,911
1,976
3,198
3,106 2,908
3,140
486
478
309
516
15.2% 15.4% 10.6%
16.4%
71
114 -26.1
78
0.07
0.11 -0.03
0.08
Difference Reported vs.
Scotia Est. Q2/2014 Q3/2013
-5%
-4%
-10%
-3%
-5%
1%
-7%
-6%
-9%
-40%
-35%
-36%
-579 bps -474 bps -457 bps
-133%
-123% -137%
-133%
-123% -137%
Source: Company reports; Scotiabank GBM estimates.
ScotiaView Analyst Link
142
Company Comment
Wednesday, October 29, 2014, After Close
(AUY-N US$5.38)
(YRI-T C$6.01)
Yamana Gold Inc.
Q3/14 - Messy Quarter; Dividend Cut 60%
Tanya Jakusconek, MSc, Applied - (416) 945-4083
(Scotia Capital Inc. - Canada)
tanya.jakusconek@scotiabank.com
Rating: Sector Outperform
Risk Ranking: High
Valuation: 1.35x NAV
Target 1-Yr:
Joanne van Ballegooie - (416) 863-7431
(Scotia Capital Inc. - Canada)
James Bender, CPA, CA - (416) 945-4648
(Scotia Capital Inc. - Canada)
US$9.00
ROR 1-Yr:
68.4%
Div. (NTM)
Div. (Curr.)
Yield (Curr.)
$0.06
$0.13
2.4%
Key Risks to Target: Commodity prices; technical and operational risk; geopolitical risk.
Event
■ YRI reported a Q3/14 loss of $1.17 and adjusted EPS of $0.03.
Implications
■ Earnings - Adjusted EPS came in at $0.03 (SC estimate) vs. our
estimate of $0.03 and consensus of $0.06. The main adjustments
included impairment and deferred tax charges totalling ~$1.13/sh.
■ Operations - Actual production came in generally in line at 391 kGEO
at total cash costs of $646/GEO (co-product) vs. our forecast of 394
kGEO at total cash costs of $637/GEO. YRI had pre-released
production of over 390 kGEO at AISC within the annual guidance
range. Copper production was in line with better costs.
■ 2014 Production Guidance Adjusted Slightly - Guidance was slightly
adjusted to 1.4-1.42 MGEO versus previous guidance of over 1.42
MGEO. AISC was also maintained at $825-$875/oz (by-product).
■ Dividend Cut 60% - The annualized dividend was cut to $0.06/sh from
$0.15/sh. We were not expecting a dividend cut.
■ Impairment Charge - YRI recorded a pre-tax impairment of $668.3M
($635M after-tax) with respect to its C1 Santa Luz, Ernesto/Pau-a-Pique
and Pilar assets. We were expecting impairment charges.
Recommendation
■ Operationally, Q3 showed an improvement over Q2. Q4 is expected to be
stronger. The annual dividend was cut 60% to $0.06/sh despite better
2015 production growth, lower capital and low AISC. Shares will likely
open weaker. We will review our estimates after the conference call.
Qtly Adj. EPS (FD)
2011A
2012A
2013A
2014E
Q1
$0.21 A
$0.24 A
$0.16 A
$0.01 A
(FY-Dec.)
Gold Price (/oz)
Gold Prod (oz) (000)
Total Cash Cost ($/oz)
All-In Sust. Cost ($/oz)
Adj Earnings/Share
Cash Flow/Share
Free Cash Flow/Share
Price/Cash Flow
Q2
$0.25 A
$0.17 A
$0.07 A
$0.05 A
Q3
$0.26 A
$0.24 A
$0.09 A
$0.03 A
Q4
$0.25 A
$0.26 A
$0.01 A
2012A
$1,669
1,201
$525
$987
$0.91
$1.54
$-0.26
11.1x
2013A
$1,411
1,201
$595
$1,076
$0.33
$0.87
$-0.13
9.9x
2014E
$1,270
1,427
$615
$904
$0.15
$0.87
$-0.07
6.2x
Year
$0.97
$0.91
$0.33
$0.15
P/E
15.1x
18.9x
26.1x
35.2x
2015E
$1,300
1,572
$582
$817
$0.26
$1.15
$0.36
4.7x
2016E
$1,300
1,594
$546
$779
$0.29
$1.15
$0.30
4.7x
NAVPS:
P/NAV:
$6.60
0.82x
Capitalization
Market Cap (M)
Net Debt + Pref. (M)
Enterprise Value (M)
Shares O/S (M)
Float O/S (M)
ScotiaView Analyst Link
Historical price multiple calculations use FYE prices. Source: Reuters; company reports; Scotiabank GBM estimates.
All values in US$ unless otherwise indicated.
For Reg AC Certification and important disclosures see Appendix A of this report. Analysts employed by non-U.S.
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
$4,718
$1,816
$6,580
877
877
143
Q3/14 – Messy Quarter; Dividend Cut 60%
■ Q3/14 EPS – Reported a Q3/14 loss per share of $1.17 compared to EPS of $0.06 in Q3/13.
Adjusted EPS came in at $0.03 ($0.09 in Q3/13) compared to our estimate of $0.03 and
consensus of $0.06. The main adjustments included impairment and deferred income tax
charges totalling approximately $1.13/sh. The main difference between our forecast and
actual results was due to lower revenue offset in part by lower operating cost and G&A.
■ Q3/14 Operating Results – Actual production for the quarter came in at 391 kGEO
(thousand gold equivalent ounces) at total cash costs of $646/GEO (co-product). We had
been looking for 394 kGEO at total cash costs of $637/GEO. YRI had pre-released
production and cost guidance of over 390 kGEO at AISC within the annual guidance range.
Total amount sold was 341 kGEO (commercial) versus our 347 kGEO estimate. On the
copper front, Chapada copper production came in at 38 Mlb at total cash cost of $1.59/lb (we
had been looking for production of 38 Mlb at a total cash costs of $1.70/lb). Gold and
copper operations generally performed in line (Chapada had slightly better costs).
Q4/14 is expected to show stronger production growth.
■ Realized prices – Realized a gold price of $1,276/oz vs. the spot average of $1,282/oz and a
copper price of $3.14/lb vs. the average spot price of $3.17/lb.
■ 2014 Production Guidance Adjusted Slightly - For 2014, guidance was reduced slightly to
1.4-1.42 MGEO versus previous guidance of over 1.42 MGEO. All in sustaining costs are
expected to reach $825-$875/oz on a by-product basis (unchanged). Guidance beyond 2014
will be provided in early 2015.
■ Canadian Malartic Update – During the quarter, the mill processed an average of almost 53
ktpd and averaged over 58 ktpd in September. Fragmentation in the open pit continued to
improve, helping to increase the tonnage processed. Several optimization initiatives continue
to be reviewed and an optimization plan update is expected with year-end results in February
2015. YRI is confident that the optimization process will help reach a target of 55 ktpd by the
end of 2015 (AEM is more conservative). 2014 capital estimates were reduced slightly to
$155M from $170M as the optimization of the Goldie Pit and minor deferrals have been
pushed into 2015. Production on a 100% basis for 2014 was maintained at 510-530 koz (YRI
expects to be at the upper end of the range).
■ Development Pipeline – Commercial production was declared at Pilar effective October 1,
2014. Challenges continued during commissioning and the asset will be producing at a lower
production rate. Focus for the asset now is on reducing cost levels. C1 Santa Luz remains on
care and maintenance and Ernesto/Pau-a-Pique continues with reduced activity. Impairment
charges were taken on these assets (outlined below). At Cerro Moro, a formal construction
and development decision is expected by year-end. Production is expected to begin in late
2016/early 2017.
■ Impairment Charge – YRI recorded a pre-tax impairment charge of $668.3M ($635M aftertax) with respect to its C1 Santa Luz, Ernesto/Pau-a-Pique and Pilar assets. This was
expected.
■ Chilean Tax Change - In addition, it recorded an charge of $329.5M with respect to a tax
accrual on deferred tax liabilities resulting from the newly enacted Chilean tax laws in
September 2014. YRI has noted that this could result in the effective tax rate for the company
to be 35% in 2017 compared to the current 32%.
■ Dividend Decreased – YRI announced its fourth quarter dividend of $0.015 per share.
Shareholders of record at the close of business on December 31, 2014 will be entitled to
receive payment of the dividend on January 15, 2015. The annualized dividend has been
reduced to $0.06 annually from the previous $0.15. This was not expected as better
production and lower capital is expected in 2015 as well as low AISC. YRI’s
explanation is that the dividend level now provides a yield (now 1.1%) that is in line
with historic company levels and the industry average.
■ Conference call – YRI will host a conference call on October 30 at 8:30am ET. To connect,
dial 866-225-0198 (US & Canada) or 416-340-2218 (international).
144
■ Conclusion & Recommendation – Operationally, Q3 showed an improvement over Q2 (as
expected), with Q4 expecting to be stronger. Minor production guidance was done while
AISC were maintained. The annualized dividend has been reduced to $0.06 annually
from the previous $0.15. This was not expected as better production is expected in 2015,
as well as lower capital and low AISC. Given this dividend cut and the outlook for 2015,
we think the shares will likely open weaker. We will review our estimates after the
conference call.
ScotiaView Analyst Link
Equity Event
Wednesday, October 15, 2014
Equity Event: Telecom & Cable 2015
Insert graphic here
146
Equity Event
XXX, XXX XX, XXXX
Equity Event: Transportation & Aerospace 2014
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147
Equity Event
XXX, XXX XX, XXXX
xx
Equity Event: Canadian Energy Infrastructure
Conference
Insert graphic here
148
Equity Event
XXX, XXX XX, XXXX
Xs 2
Equity Event: Mining Conference 2014
Insert graphic here
149
Disclosures and Disclaimers
Thursday, October 30, 2014
Appendix A: Important Disclosures
Company
Agellan Commercial REIT
Agnico Eagle Mines Limited
ATCO Ltd.
Baker Hughes Incorporated
Barrick Gold Corporation
Cameco Corporation
Canadian Utilities Limited
Capstone Mining Corp.
Cathedral Energy Services Ltd.
Civeo Corporation
Emera Incorporated
Ensign Energy Services Inc.
First National Financial Corporation
Flextronics International Ltd.
Fortis Inc.
GeoPark Limited
Grupo Televisa, SAB
Halliburton Company
HudBay Minerals Inc.
Ticker
ACR.UN
AEM
ACO.X
BHI
ABX
CCO
CU
CS
CET
CVEO
EMA
ESI
FN
FLEX
FTS
GPRK
TV
HAL
HBM
Intrepid Potash, Inc.
Lincoln National Corporation
Lundin Mining Corporation
MEG Energy Corp.
Megacable Holdings
Methanex Corporation
MetLife, Inc.
Nabors Industries, Inc.
National-Oilwell Varco, Inc.
PHX Energy Services Corp.
Precision Drilling Corp.
Schlumberger
Sherritt International Corporation
Taseko Mines Limited
Teck Resources Limited
Thompson Creek Metals Company Inc.
Timmins Gold Corp.
Totvs SA
Usinas Siderúrgicas de Minas Gerais SA - Usiminas
Weatherford International, Ltd.
Yamana Gold Inc.
IPI
LNC
LUN
MEG
MEGA CPO
MEOH
MET
NBR
NOV
PHX
PD
SLB
S
TKO
TCK.B
TCM
TMM
TOTS3
USIM5
WFT
AUY
Disclosures (see legend below)*
I
P, T, VS170, VS185, VS60, VS149
S
V19
G, I, P, T, U, VS5, VS178
G, I, U, VS95, VS112
B33, G, I, S, U
I, P, T, VS132
J, T
V19
G, I, S, T, U
J
G, I, U
L, N2
G, I, S, U
G, I, U
M12, M4, T
I, N2, V19
G, I, N1, T, U, V25, VS66, VS101, VS174,
VS69
P, T
T
G, T, U, VS67
G
M12, M4
J, S
G, I, T, U
V19
H.P.241, V19
I, J, T, VS123
G, I, N1, T, U, VS102
J, V19
G, U, VS141
P, T, VS40, VS41, VS188
T, VS68
VS100
G, I, U, VS55
M12, M4
M14, M9
V19
G, I, N1, P, T, U, VS186
150
Disclosures and Disclaimers
Thursday, October 30, 2014
Each Research Analyst named in this report or any subsection of this report certifies that (1) the views expressed in this report in connection
with securities or issuers that he or she analyzes accurately reflect his or her personal views; and (2) no part of his or her compensation was, is,
or will be directly or indirectly, related to the specific recommendations or views expressed by him or her in this report.
This research report was prepared by employees of Scotia Capital Inc. and/or its affiliates who have the title of Analyst.
All pricing of securities in reports is based on the closing price of the securities’ principal marketplace on the night before the publication date,
unless otherwise explicitly stated.
All Equity Research Analysts report to the Head of Equity Research. The Head of Equity Research reports to the Managing Director, Head of
Institutional Equity Sales, Trading and Research, who is not and does not report to the Head of the Investment Banking Depart ment.
Scotiabank, Global Banking and Markets has policies that are reasonably designed to prevent or control the sharing of material non-public
information across internal information barriers, such as between Investment Banking and Research.
The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall
profitability of Scotiabank, Global Banking and Markets and the revenues generated from its various departments, including investment banking.
Furthermore, the research analyst’s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments,
including investment banking. Research Analysts may not receive compensation from the companies they cover.
Non-U.S. analysts may not be associated persons of Scotia Capital (USA) Inc. and therefore may not be subject to FINRA Rule 2711
restrictions on communications with subject company, public appearances and trading securities held by the analysts.
For Scotiabank, Global Banking and Markets Research analyst standards and disclosure policies, please visit
http://www.gbm.scotiabank.com/disclosures
Scotiabank, Global Banking and Markets Research, 40 King Street West, 33rd Floor, Toronto, Ontario, M5H 1H1.
*
Legend
B33
David A. Dodge is a director of Canadian Utilities Limited 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.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 services in
the next 3 months.
L
Scotia Capital (USA) Inc. has received compensation for non-investment banking services during the past 12 months.
M12
Ivan Hernandez, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
M14
Christian Castillo Landi, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat
S.A., which forms a part of Grupo Financiero Scotiabank Inverlat.
M4
Andres Coello, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
M9
Alfonso Salazar, an analyst, prepared this report and is an employee of the Research Department of Scotiabank Inverlat S.A.,
which forms a part of Grupo Financiero Scotiabank Inverlat.
N1
Scotia Capital (USA) Inc. had an investment banking services client relationship during the past 12 months.
N2
Scotia Capital (USA) Inc. had a non-investment banking securities-related services client relationship during the past 12 months.
151
Disclosures and Disclaimers
Thursday, October 30, 2014
P
This issuer paid a portion of the travel-related expenses incurred by the Fundamental Research Analyst/Associate to visit
material operations of this issuer.
S
Scotia Capital Inc. and its affiliates collectively beneficially own in excess of 1% of one or more classes of the issued and
outstanding equity securities of this issuer.
T
The Fundamental Research Analyst/Associate has visited material operations of this issuer.
U
Within the last 12 months, Scotia Capital Inc. and/or its affiliates have undertaken an underwriting liability with respect 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.
V25
Scotiabank acted as a financial advisor for HudBay Minerals Inc. in a precious metals stream transaction with Silver Wheaton
Corp.
VS100
Our Research Analyst visited Mt. Milligan, an operating mine, on October 9, 2013 and August 19, 2014. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS101
Our Research Analyst visited Constancia, a mine under development, on October 2, 2013. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
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.
VS112
Our Research Analyst visited McArthur River Uranium Mine, an operating mine, on September 18, 2013. Partial payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS123
Our Research Analyst visited Rocky View facility, Canadian operations and R&D facility, on January 17, 2014. No was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS132
Our Research Analyst visited Pinto Valley Mine and Cozamin Mine, primary mining assets, on March 31-April 3, 2014. Partial
payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS141
Our Research Analyst visited Ambatovy, a nickel mine, on March 28-29, 2014. Partial payment was received from the issuer for
the travel-related expenses incurred by the Research Analyst to visit this site.
VS149
Our Research Associate visited LaRonde and Goldex, underground mines and processing facilities, on May 21, 2014. Full
payment was received from the issuer for the travel-related expenses incurred by the Research Associate to visit this site.
VS170
Our Research Analyst visited Meliadine, a mine under development, on August 26. 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS174
Our Research Analyst visited the Constancia project, a copper mine, on September 8, 2014. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS178
Our Research Analyst visited Goldstrike, Cortez, and Goldrush, producing mines and exploration property, on September 17-18,
2014. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this
site.
VS185
Our Research Analyst visited Canadian Malartic, a producing mine, on September 30, 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS186
Our Research Analyst visited Canadian Malartic, a producing mine, on September 30, 2014. Full payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
152
Disclosures and Disclaimers
Thursday, October 30, 2014
VS188
Our Research Analyst visited the Gibraltar mine, primary mineral asset, on October 9, 2014. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS40
Our Research Analyst visited the Gibraltar mine, a 75% -owned operating mine, on November 29, 2012. No payment was
received from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS41
Our Research Analyst visited the Gibraltar mine, principal mining operations, on June 11, 2013. Partial payment was received
from the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS5
Our Research Analyst visited Pueblo Viejo, an operating mine, on February 28, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
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.
VS60
Our Research Associate visited La India, a gold mine, on September 20-21, 2013. Full payment was received from the issuer for
the travel-related expenses incurred by the Research Associate to visit this site.
VS66
Our Research Analyst visited mining assets at Flin Flon, Manitoba, on April 15-17, 2013. No payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS67
Our Research Analyst visited the Eagle project, a development mine, on September 26, 2013. Partial payment was received from
the issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS68
Our Research Analyst visited Highland Valley, an operating mine, on September 4, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
VS69
Our Research Associate visited 777, Lalor, Reed, the Flin Flon complex, and Snow Lake, mines and processing plants, on July
8-10, 2013. Partial payment was received from the issuer for the travel-related expenses incurred by the Research Associate to
visit this site.
VS95
Our Research Analyst visited Key Lake Mill, a mine and mill, on September 18, 2013. Partial payment was received from the
issuer for the travel-related expenses incurred by the Research Analyst to visit this site.
153
Disclosures and Disclaimers
Thursday, October 30, 2014
Definition of Scotiabank, Global Banking and Markets Equity Research Ratings & Risk Rankings
We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating
that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst.
Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Stat istical and judgmental factors
considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, consistency and predictability of
earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly
make the final determination of all risk rankings.
The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research a nalyst’s
12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that
differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace.
Ratings
Risk Rankings
Focus Stock (FS)
The stock represents an analyst’s best idea(s); stocks in this category are
expected to significantly outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Low
Low financial and operational risk, high predictability of financial results,
low stock volatility.
Sector Outperform (SO)
The stock is expected to outperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Sector Perform (SP)
The stock is expected to perform approximately in line with the average 12month total return of the analyst’s coverage universe or an index identified by
the analyst that includes, but is not limited to, stocks covered by the analyst.
Sector Underperform (SU)
The stock is expected to underperform the average 12-month total return of the
analyst’s coverage universe or an index identified by the analyst that includes,
but is not limited to, stocks covered by the analyst.
Medium
Moderate financial and operational risk, moderate predictability of financial
results, moderate stock volatility.
High
High financial and/or operational risk, low predictability of financial results,
high stock volatility.
Speculative
Exceptionally high financial and/or operational risk, exceptionally low predictability
of financial results, exceptionally high stock volatility. For risk-tolerant investors
only.
Other Ratings
Tender – Investors are guided to tender to the terms of the takeover offer.
Under Review – The rating has been temporarily placed under review, until
sufficient information has been received and assessed by the analyst.
Scotiabank, Global Banking and Markets Equity Research Ratings Distribution*
Distribution by Ratings and Equity and Equity-Related Financings*
Percentage of companies covered by Scotiabank, Global Banking
and Markets Equity Research within each rating category.
Percentage of companies within each rating category for which
Scotiabank, Global Banking and Markets has undertaken an
underwriting liability or has provided advice for a fee within the last
12 months.
Source: Scotiabank GBM.
For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than “buy,” “hold/neutral” and
“sell,” to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based
on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively.
154
Disclosures and Disclaimers
Thursday, October 30, 2014
General Disclosures
This report has been prepared by analysts who are employed by the Research Department of Scotiabank, Global Banking and Marke ts. Scotiabank,
together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of
The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc.
All other trademarks are acknowledged as belonging to their respective owners and the display of such trademarks is for informational use only.
Scotiabank, Global Banking and Markets Research produces research reports under a single marketing identity referred to as “Globally-branded
research” under U.S. rules. This research is produced on a single global research platform with one set of rules which meet the most stringent
standards set by regulators in the various jurisdictions in which the research reports are produced. In addition, the analyst s who produce the research
reports, regardless of location, are subject to one set of policies designed to meet the most stringent rules established by regulators in the various
jurisdictions where the research reports are produced.
Scotia Capital Inc. or an affiliate thereof owns or controls an equity interest in TMX Group Limited and in excess of 1% of the issued and outstanding
equity securities thereof. In addition, an affiliate of Scotia Capital Inc. is a lender to TMX Group Limited under its credit facilities. As such, Scotia
Capital Inc. may be considered to have an economic interest in TMX Group Limited.
This report is provided to you for informational purposes only. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer
to buy any securities and/or commodity futures contracts.
The securities mentioned in this report may neither be suitable for all investors nor eligible for sale in some jurisdictions where the report is
distributed.
The information and opinions contained herein have been compiled or arrived at from sources believed reliable, however, Scotiabank, Global Banking
and Markets makes no representation or warranty, express or implied, as to their accuracy or completeness.
Scotiabank, Global Banking and Markets has policies designed to make best efforts to ensure that the information contained in this report is current as
of the date of this report, unless otherwise specified.
Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any
transaction may be or could have been effected at those prices.
Any opinions expressed herein are those of the author(s) and are subject to change without notice and may differ or be contrary from the opinions
expressed by other departments of Scotiabank, Global Banking and Markets or any of its affiliates.
Neither Scotiabank, Global Banking and Markets nor its affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of
this report or its contents.
Equity research reports published by Scotiabank, Global Banking and Markets are available electronically via: Bloomberg, Thomson Financial/First
Call - Research Direct, Reuters, Capital IQ, and FactSet. Institutional clients with questions regarding distribution of equity research should contact us
at 1-800-208-7666.
This report and all the information, opinions, and conclusions contained in it are protected by copyright. This report may no t 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 referred to without the prior
express consent of Scotiabank, Global Banking and Markets.
Additional Disclosures
Canada: This report is distributed by Scotia Capital Inc., a subsidiary of The Bank of Nova Scotia. Scotia Capital Inc. is a member of the Canadian
Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.
Chile: This report is distributed by Scotia Corredora de Bolsa Chile S.A., a subsidiary of The Bank of Nova Scotia.
Hong Kong: This report is distributed by The Bank of Nova Scotia Hong Kong Branch, which is authorized by the Securities and Future Commission
to conduct Type 1, Type 4 and Type 6 regulated activities and regulated by the Hong Kong Monetary Authority.
Mexico: This report is distributed by Scotia Inverlat Casa de Bolsa S.A. de C.V., a subsidiary of the Bank of Nova Scotia.
Peru: This report is distributed by Scotia Sociedad Agente de Bolsa S.A., a subsidiary of The Bank of Nova Scotia.
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
Nova Scotia. Scotiabank Europe plc is authorized by the Prudential Regulation Authority (PRA) and regulated by the PRA and the Financial Conduct Authority
(FCA). Scotiabank Europe plc complies with all FCA requirements concerning research and the associated disclosures and these are indicated on the
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.