Monday’s analyst upgrades and downgradeS

Inside the Market’s roundup of some of today’s key analyst actions

While equity analysts at National Bank warn elevated inventories and potential supply growth are near-term headwinds for copper prices, they continue to see favourable long-term fundamentals, presenting opportunities for investors moving forward.

“At the start of the year, we anticipated copper price support from supply side disruptions related to the closure of Cobre-Panama, decreased guidance from Los Broncos and Quellaveco as well as potential delays in ramp-up of other significant projects throughout the year,” they said. “Despite improved conditions for copper prices as a result of these supply challenges, softer demand amidst persistently elevated interest rates has led to copper inventories building to four-year highs ahead of rising supply forthcoming throughout H2/24.

“Despite more negative fundamental headwinds than anticipated at the start of the year, renewed interest in the sector has led to an increase in speculative investment driven by the prospect of future copper demand growth stemming from Chinese stimulus, broader energy transition requirements and growing demand from AI data centers. While we buy-in to the longer-term view of persistent supply challenges, we anticipate softer than anticipated demand through H2/24 coinciding with rising supply from QB2, Mantoverde, Tucumã, Kamoa-Kakula and Tenke Fungurume as well as ramp-up of production from other operations. At current prices, we see more direct scrap incentivized into the market as well further bolstering supply, a more contrarian/cautious near-term view. Our near-term Base Case copper price of US$4.25/lb (was US$4.10/lb) remains below current copper prices of US$4.45/lb.”

In a research report released Monday, the analysts added ‘Dr. Copper’ has decoupled from historical correlations, suggesting price appreciation/volatility could persist.”

“Historically, copper prices have been used as a barometer for health of the broader economy,” they said. “In recent months, prices continue to trend higher despite rising physical inventories, a challenging manufacturing backdrop, slower consumer spending/construction activity and a decline in Chinese GDP growth. Copper prices now appear to be following broader equity markets higher rather than leading the way as it’s done historically. Not to say the broader economy won’t continue to gain traction as interest rates worldwide start to decline, but it does appear that while copper forges new correlations associated with the longerterm energy transition, we could see further price appreciation and potential volatility.”

With that view of a broader energy transition leading to higher copper demand and pointing to “inflationary pressures on the global cost curve for new projects,” the firm raised its long-term price projection to US$3.85 per pound from US$3.65.

“One of the key themes we outlined at the start of the year was the impact of delivering transformational growth projects for several companies within our coverage universe throughout 2024,” they said. “The flow of funds into the sector has delivered what we view as sustainable multiple expansion given long-term supply deficits in copper and its critical importance to the broader energy transition. Irrespective of copper price performance, delivering transformational growth or positive news flow to support greater value creation is expected to support further multiple expansion.

“Taking each company’s growth outlook into account as well as future catalysts, we continue to view TECK/B and CS as the names best positioned to deliver transformational growth and drive share price rerating in coming months with MTAL and ERO also standing apart from peers with respect to near-term operational improvements.”

The analysts made one rating change in the report with Rabi Nizami moving Adventus Mining Corp. (ADZN-X) to “tender” from “outperform” in response to its deal to be acquired by Silvercorp Metals Inc. (SVM-T).

“As the June 26 shareholder vote nears, and assuming the absence of any superior bid (positive) or special regulatory reviews (negative), we expect ADZN shares to move closer in lockstep to the proposed 0.1015 times ratio to SVM’s share price,” he said.

“ADZN shares have traded up since the announcement date, lifted partly by easing of the financing overhang private placement and the share price lifting further with market exposure to silver, lead and zinc operations within Silvercorp. We recognize risks include ongoing political, social and economic strife in Ecuador, regulatory approvals in Ecuador and Canada if any, implications of Canada-Ecuador Free Trade and International Arbitration. Any extraordinary news on these matters would lead us to revisit our rating.”

His target for its shares fell to 55 cents from 65 cents, below the 76-cent average on the Street.

They also made a series of target price adjustments across their base metals coverage universe. For their top picks, their changes are:

* Teck Resources Ltd. (TECK.B-T, “outperform”) to $82.50 from $77.50. The average is $74.80.

Analyst Shane Nagle: “Divestiture of the steelmaking coal business in Q3 will provide significant cash to bolster the balance sheet ahead of delivering the next leg of copper growth as well as returning cash to shareholders, both supportive of a higher multiple.”

* Capstone Copper Corp. (CS-T, “outperform”) to $12 from $11.50. Average: $12.24.

Mr. Nagle: “Management is solely focused on delivering the Mantoverde and Mantos Blancos expansion projects in H2/24, and in doing so, CS will be the name investors will pivot to under an improved backdrop for copper prices given several transformational growth projects in the pipeline.”

* Hudbay Minerals Inc. (HBM-T, “outperform”) to $16.50 from $15.50. Average: $15.88.

Mr. Nagle: “FCF inflection in 2024 is set to improve further as the gold prepay rolls off in August. Leverage to elevated copper/gold prices and a discounted valuation position the company favourably ahead of a possible partnership agreement/further advancement of Copper World.”

* Filo Corp. (FIL-T, “outperform”) to $38 from $36. Average: $33.91.

Mr. Nizami: “: Year-round drilling continues to expand into mineralization along the entirety of strike while infilling Aurora-Bonita, giving resolution to a large-scale open-pit scenario and maiden sulfide resource.”

Other changes include:

• Arizona Metals Corp. (AMC-T, “outperform”) to $4.50 from $5.50. Average: $6.90.
• Aura Minerals Inc. (ORA-T, “outperform”) to $16 from $15. Average: $16.
• Centerra Gold Inc. (CG-T, “outperform”) to $12 from $11.25. Average: $11.43.
• Eldorado Gold Corp. (ELD-T, “outperform”) to $26 from $25. Average: $23.86.
• Ero Copper Corp. (ERO-T, “sector perform”) to $32.50 from $33.50. Average: $34.86.
• Lundin Mining Corp. (LUN-T, “outperform”) to $19.50 from $18. Average: $17.85.
• Newmont Corp. (NGT-T, “sector perform”) to $68 from $67. Average: $63.50.
• Pan American Silver Corp. (PAAS-T, “outperform”) to $35.75 from $35.25. Average: $23.05.
• Taseko Mines Ltd. (TKO-T, “sector perform”) to $4.25 from $4. Average: $4.14.
• Torex Gold Resources Inc. (TXG-T, “sector perform”) to $27.50 from $27. Average: $27.61.

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Scotia Capital analyst Maher Yaghi thinks Corus Entertainment Inc.’s (CJR.B-T) likely loss of five channel trademark “leads to a material equity value reduction.”

After the bell on Friday, the Toronto-based media company announced Warner Bros Discovery has unexpectedly decided not to renew certain programming and trademarks output with Corus folllowing the end of calendar 2024.

“The decision will likely deprive Corus of trademarks and programming on 5 channels which together accounted for close to $155-million and $49-million of revenues and Operating Income in fiscal 2022 (last published CRTC data),” said Mr. Yaghi. “While Corus will work on backfilling the programming for those channels with other content, the loss of the trademark will likely push many subscribers currently on those channels to turn to other broadcasters/streamers who will end up landing those rights. Assuming that Corus could lose 50 per cent of the subs and advertising revenues, we believe the company’s valuation would be materially affected.”

That led Mr. Yaghi to downgrade his recommendation for its shares to “sector underperform” from “sector perform” previously, predicting a scramble between Corus and whichever company will end up with the content for a fight for the subscribers currently paying for access to these channels.”

“The channels in question are the Food Network Canada, HGTV Canada, Cooking Channel, Magnolia Network and the Oprah Winfrey Network … It is important to point out that the loss of trademarks and content coming from Warner Bros does not mean that all revenues will be lost. Corus will look to secure additional content from other producers in order to beef up the content on these channels, however the trademark of the channels themselves (the brand name of the channels) will go to whichever company secures the rights to those trademarks. What will follow could get very messy,” he said.

“We see the news as a significant negative to equity valuations. While Corus’ management has delivered significant cost-cutting protecting the company from the reduction in advertising dollars over the last 2 years, the loss of those 5 channels could be hard to fully offset. The 5 channels are very profitable, especially the Food network and HGTV, and securing content that would replace them will be a difficult task. We have assumed that of the close to $50-million in annual profit generation from those channels, Corus will be able to keep $25-million hence losing $25-million in annual profits. Given the static nature of the company’s debt, the loss of these profits has led to a material reduction in our equity valuation. While we expect the company to continue to generate positive FCF and earnings, until the debt is materially reduced, the equity value will likely remain under significant constraint. Hence, we have downgraded our rating on the shares at this point.”

Mr. Yaghi cut his target for Corus shares to 37 cents from 90 cents. The average is 63 cents.

Elsewhere, Canaccord Genuity’s Aravinda Galappatthige lowered his target to 25 cents from 65 cents with a “sell” rating.

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Despite acknowledging “persistent market factor volatility,” Desjardins Securities analyst Chris Li still thinks Saputo Inc. (SAP-T) is poised for an inflection point for earnings and free cash flow, “supported by factors largely within SAP’s control, including network optimization benefits, operational improvements, meaningfully lower Australian farm gate milk prices and cycling past high-cost inventory in Europe.”

“Combined with a significant capex reduction, FCF should accelerate, supporting share buyback initiation,” he added. “M&A is on the back burner as SAP is focused on organic growth.”

On Thursday after the bell, the Montreal-based dairy processor reported fourth-quarter 2024 adjusted EBITDA of $379-million, exceeding both Mr. Li’s $360-milllion estimate and the consensus projection of $366-million due largely outperformance from its U.S. and International segments. Its management also provided an outlook for its current fiscal year that the analyst thought was “cautiously optimistic, with steady improvements expected through the year.”

“While we share some investors’ skepticism given persistent volatile market factors limiting earnings visibility, our 16-per-cent EBITDA growth assumes similar negative EBITDA impact from market factors as in FY24,” said Mr. Li. “We expect growth to be largely supported by factors within SAP’s control, including network optimization benefits, operational improvements, non-recurring duplicative costs, potentially significantly lower Australian farm gate milk prices and EBITDA improvement in Europe as it cycles through high-cost inventory. Combined with a significant capex reduction (down 35 per cent) as investments in global strategic plans are largely complete, we expect FCF growth to accelerate meaningfully and support an increase in capital returns (initiation of buybacks). M&A is on the back burner as SAP is focused on organic growth and capital return.”

“Overall, while we see some signs of stabilization/ improvement, we expect volatility to persist near-term, which we view as the biggest risk. We expect the cheese‒milk spread to remain a headwind in 1H FY25 (especially in 2Q due to a tough year-ago comp). While the recent US cheese price recovery is encouraging, volatility could persist as there is the potential for U.S. cheese exports to ease as the U.S price discount to Oceania/Europe has eroded.”

After increasing his revenue and earnings expectations for fiscal 2025, Mr. Li raised his target for Saputo shares to $35 from $33, maintaining a “buy” recommendation. The average target on the Street is $33.56.

“At approximately 9 times NTM [next 12-month] consensus EV/EBITDA (near 10-year lows and not far from the trough of 8.5 times), we believe SAP’s valuation largely reflects limited earnings visibility in the near term and as investors continue to take a ‘wait and see’ approach,” he said.

Elsewhere, others making changes include:

* National Bank’s Vishal Shreedhar to $35 from $33 with an “outperform” rating.

“We expect investors to focus on execution of the strategic plan, in addition to commodity prices (which management indicated were showing sequential improvement),” said Mr. Shreedhar. “We acknowledge that Saputo is a show-me story which may take several quarters of solid execution before gaining meaningful traction. We believe that attractive valuation sufficiently compensates the investor.”

* CIBC’s Mark Petrie to $37 from $35 with an “outperformer” rating.

* BMO’s Tamy Chen to $35 from $34 with an “outperform” rating.

* TD Cowen’s Michael Van Aelst to $38 from $36 with a “buy” rating.

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After recently hosting investor meetings with its management in Europe, RBC Dominion Securities analyst Drew McReynolds reaffirmed his investment thesis on Telus Corp. (T-T), calling it “the growth and capital return leader.”

“TELUS has not been immune to cyclical impacts on TELUS International and TELUS Agriculture & Consumer Goods (TAC), inflation impacts on TTech, and incremental competitive impacts in the wake of the Rogers-Shaw and Quebecor-Freedom Mobile transactions,” he said. “Despite the more challenging operating environment, we expect TELUS to deliver industry-leading underlying growth and capital returns. We continue to see an attractive and improving growth and risk profile for the company reflecting: (i) a 2024-2027 NAV CAGR [net asset value compound annual growth rate] of 10.7 per cent underpinned by mid single-digit organic EBITDA growth, declining low double-digit capex intensity and double-digit FCF growth; and (ii) better visibility around (and confidence in) the company’s ability to sustain industry-leading underlying EBITDA and FCF growth almost irrespective of most industry growth, competition and regulatory outcomes.”

While he continues see a backdrop of “a more competitive and maturing Canadian telecom industry,” Mr. McReynolds thinks Telus is “focused on fully monetizing its completed accelerated FTTH build by deploying a ‘what’s next’ playbook of new value-added products and services (both domestically and internationally) that leverages FTTH/5G investment and sustains industry-leading EBITDA/FCF growth and capital returns.”

“While acknowledging another quarter or two of near-term cyclical headwinds, management is focused on incrementally monetizing FTTH/5G investment including via TELUS Health, TAC and TELUS Security (with TELUS Health and TAC revenues and EBITDA expected to grow double-digits),” he said. “Moving more into Eastern Canada subject to a supportive final TPIA framework. TELUS believes that incumbent operators should be given eligibility under the pending framework in out-of-footprint markets only. Should such a construct emerge, management would consider exploring profitable growth opportunities in Eastern Canada.

“Moving more outside of Canada. Acknowledging rising competition, commoditization, maturation and substitution within the Canadian telecom industry, management intends in addition to TI to export and scale globally what are growing TELUS Health, TAC and TELUS Security ecosystems comprising rich end-to-end data and applications thereby significantly expanding the company’s TAMs.”

The analyst maintained his “outperform” recommendation and $26 target for Telus shares. The average is

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Hannan & Partners analyst Jonathan Guy expects shares of Founders Metals Inc. (FDR-X) to outperform as it demonstrates the growth potential of the highly prospective Antino project and advances it through the exploration and development process.

In a research report released Monday, he initiated coverage of the Vancouver-based exploration company, believing “the potential scale of the project should make Founders an attractive acquisition target for top and mid-tier gold producers.”

“The Antino licence covers 20,000ha and has been exploited on a small and artisanal scale, providing Founders with extensive historical data,” said Mr. Guy. “Exploration in 2024 will continue to build understanding of the most advanced area of the deposit at Upper Antino, which includes the core Froyo zone, where drilling will test a newly identified parallel structure. Work will also be carried out on nearby targets – Eclaire, Cupcake and Donut – and on the Buese zone, 7km along strike from Antino, as well as other potential satellites at Parbo, Maria Geralda, Lawa, and Guananman. Mineralization is generally shear-zone hosted, high-grade and broad, with highlights including 15.5m at 30.7g/t, 12m at 19.22g/t, and 9m at 11.1g/t at Upper Antino. In addition, there is the potential for intrusion-hosted orogenic gold-associated deposits to be delineated.

“Antino sits within the Guiana Shield that stretches across northern South America and hosts several major gold deposits, including Newmont’s Merian and Zijin’s Rosebel operations. With 110Moz delineated across the shield, in 2023 Suriname produced 900koz, including output from a significant small-scale and artisanal sector. The country has a well-established mining code and a skilled workforce.”

With M&A activity accelerating in the gold sector, the analyst sees Founders as an enticing target moving forward.

“The gold price has risen to a record high since the beginning of 2024, supported by strong demand from both Chinese consumers and the People’s Bank of China, as well as other central banks,” said Mr. Guy. “This follows prolonged underinvestment in exploration by the global gold mining industry, with a lack of major discoveries over the past decade. This has spurred a phase of M&A at every level of the industry, including the recently announced acquisition of Reunion Gold, which owns the Oko West project in Guyana, and the acquisition of the Rosebel mine in Suriname by Zijin in 2023. With both grade and scale, we believe that the Antino project should be a clear acquisition target.”

Without specifying a rating for its shares, he set a target of $3.31, representing 85-per-cent upside from its current price. The average on the Street is $3.44.

“Founders is an early-stage pre-resource explorer,” he said. “There is, however, a significant amount of data from previous work. Based on the current mineralized envelope at Antino, split between Upper Antino and the Buese deposits, we see potential for at least 115Mt of mineralized material containing 4.5Moz of gold, which could sustain a long-life operation processing 6Mt/year and producing 215koz/year. We value Founders based on a blend of our calculated NAV for Antino, an assumed in-situ value and an assumed recent transaction comp value based on our provisional estimates of the project’s scale.”

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In other analyst actions:

* BMO’s Katja Jancic cut his targets for Algoma Steel Group Inc. (ASTL-T) to $14 from $15 and Stelco Holdings Inc. (STLC-T) to $55 from $58 with an “outperform” rating for both. The averages are $14.50 and $52.50, respectively.

* Jefferies’ Laurence Alexander raised his target for Methanex Corp. (MEOH-Q, MX-T) to US$60, exceeding the US$56.82 average, from US$56 with a “buy” rating.

* CIBC’s Kevin Chiang cut his Transat AT Inc. (TRZ-T) target to $2.30 from $2.70 with an “underperformer” rating. The average is $2.36.