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EQUITY RESEARCH
CANADIAN RESEARCH AT A GLANCE
October 15, 2014
Price Target Revisions
! Semafo Inc.
Summary
Solid Production, Guidance Upgraded, May Need to Dig Deeper for OBS
Summary
Potential changes in Zambian taxation unlikely to have a large impact
Summary
IOC's Q3/14 production and sales results reported by Rio Tinto
Summary
Q3/14 production results show improvement
Summary
China reinstates coal import taxes; iron ore prices rebound
Summary
Where to hide from the sea of red
Summary
For the week of October 3–10, 2014
First Glance Notes
! First Quantum Minerals Ltd.
! Labrador Iron Ore Royalty Corp.
! Thompson Creek Metals Company
Industry Comments
! Bulking Up - RBC's Weekly Review
! Canadian Energy Infrastructure
! Canadian Equity Coverage Alert
! CommTech: Buying low and
Summary
managing risk in an unsettling capex
environment
Diversified Metals, Mining, Oil & Gas Summary
!
! Forest Products
! Global Mining Trends & Values
! Integrated Oil and Senior E&P
! International E&P Scorecard
! Q4/14 Global Mining Best Ideas
Portfolio
RBC Compass
!
! RBC International E&P Daily
! Uranium Weekly
Summary
Royalties from Rocks: Opportunities abound to create further value
NA Panel Stats – OSB production 7% higher y/y reflecting capacity re-starts
Summary
Summary
So what WTIE price are the large caps discounting?
Summary
Summary
Summary
What Rail Merger Scenarios are Most Likely if Regulator Gives the Green Light
Summary
DNO; WZR; PMO; PRE
Summary
Ux spot price unchanged at $35.65/lb; TradeTech up $0.20 to $35.50/lb
Investment Strategy Research
! Swing States
Summary
How Libya and Nigeria could control the marginal barrel
Quantitative Research
! Benchmarks
! QuaDS Score Model Portfolios
Summary
Summary
Top “Consistent Quality” S&P/TSX Composite Index Stocks
Priced as of prior day's market close, EST (unless otherwise noted).
For Required Non-U.S. Analyst and Conflicts Disclosures, see Page 13.
EQUITY RESEARCH
U.S. RESEARCH AT A GLANCE
October 15, 2014
Ratings Revisions
! SABMiller plc
Summary
Softening growth
Summary
Slightly better sales trends; Sector Perform
Summary
Expect a decent Q3 but upside limited over the longer term
Summary
Operating Margin Leverage of DCG and PCCG Continues to Fund Mobile & IoT
Summary
Solid Q3-14 result reflects strong cost control
Summary
Q3 First Look: Despite Headwinds, Demonstrating Earnings Growth
Summary
3Q14 production: Iron ore ramp-up on track
Summary
3Q14 Preview - Mix headwinds
Summary
3Q/14 preview – It’s still all about the (Enterprise) bookings
Summary
Decent Report
Summary
Strong 3Q EPS Beat. Slightly Raising Estimates
Summary
Updated capital plan and expense initiatives enhance EPS growth outlook.
Summary
Good Vibrations: Dreamforce Day 2 Takeaways
Summary
Some "Growing Pains" Adjustments
Price Target Revisions
! Brinker International, Inc.
! Deutsche Börse AG
! Intel Corporation
First Glance Notes
! CSX Corp
! Intel Corporation
! Rio Tinto plc
Earnings Preview
! Airbus Group NV
Company Comments
! athenahealth, Inc.
! J.B. Hunt Transport Services,
! Johnson & Johnson
! Metro Bancorp Inc.
! salesforce.com
! SM Energy Company
Industry Comments
! Asset Management & Custody Banks Summary
! Bulking Up - RBC's Weekly Review Summary
Summary
! CommTech: Buying low and
Sell-Off in the Alts Space Overdone, in Our View
!
! Diversified Metals, Mining, Oil & Gas Summary
Summary
! Forest Products
Summary
! Integrated Oil and Senior E&P
Summary
! International E&P Scorecard
Summary
! RBC Compass
Summary
! RBC International E&P Daily
! Thinking Through Ideas Given Recent Summary
Discussing strategy and fundamentals
!
We offer our thoughts on LLTC's new CFO
managing risk in an unsettling capex
environment
Dallas Restaurant Day
Summary
Reversal in IT Hardware/Supply Chain
Thoughts on LLTC: Read-Through on Summary
Results and CFO Succession
China reinstates coal import taxes; iron ore prices rebound
Royalties from Rocks: Opportunities abound to create further value
NA Panel Stats – OSB production 7% higher y/y reflecting capacity re-starts
So what WTIE price are the large caps discounting?
What Rail Merger Scenarios are Most Likely if Regulator Gives the Green Light
DNO; WZR; PMO; PRE
Remaining Selective on Market Reversal
2
EQUITY RESEARCH
Investment Strategy Research
! Swing States
Summary
How Libya and Nigeria could control the marginal barrel
Summary
3Q14: Business as Usual
Summary
3Q14: The Titan Marches Onward
Summary
Strong Operating Results Plus Continued L-T Progress on Improving Profitability
In-Depth Reports
! Wells Fargo & Co.
! JPMorgan Chase & Co.
! Citigroup Inc.
3
EQUITY RESEARCH
UK & European Research at a Glance
October 15, 2014
Ratings Revisions
! SABMiller plc
Summary
Softening growth
Summary
Expect a decent Q3 but upside limited over the longer term
Summary
3Q14 production: Iron ore ramp-up on track
Summary
3Q14 Preview - Mix headwinds
Summary
China reinstates coal import taxes; iron ore prices rebound
Price Target Revisions
! Deutsche Börse AG
First Glance Notes
! Rio Tinto plc
Earnings Preview
! Airbus Group NV
Industry Comments
! Bulking Up - RBC's Weekly Review
! CommTech: Buying low and
Summary
managing risk in an unsettling capex
environment
Global Mining Trends & Values
Summary
!
! International E&P Scorecard
! Uranium Weekly
Summary
Summary
Ux spot price unchanged at $35.65/lb; TradeTech up $0.20 to $35.50/lb
Investment Strategy Research
! Swing States
Summary
How Libya and Nigeria could control the marginal barrel
Find our Research at:
RBC Insight (www.rbcinsight.com): RBC's global research destination on the web. Contact your RBC Capital Markets' sales representative to
access our global research site, or use our iPad App "RBC Research"
Thomson Reuters (www.thomsononeanalytics.com)
Bloomberg (RBCR GO)
SNL Financial (www.snl.com)
FactSet (www.factset.com)
4
Price Target Revisions
Semafo Inc.(TSX: SMF; 4.01)
Jonathan Guy (Analyst)
+44 20 7653 4603; jonathan.guy@rbccm.com
Richard Hatch, ACA (Analyst)
+44 20 7002 2111; richard.hatch@rbccm.com
Rating:
Price Target:
52 WEEKS
18OCT13 - 10OCT14
Sector Perform
4.70 ▲ 4.60
Solid Production, Guidance Upgraded, May Need to Dig Deeper for OBS
Semafo has reported a solid third quarter with production of 64.7koz at Mana.
Management have increased guidance for the year to 230koz - 235 koz from
220koz - 225koz previously with lower cost guidance. We believe that this
morning's updated scoping study from OBS could, however, result in SMF needing
to offer a higher price to secure the company.
5.00
4.50
4.00
3.50
3.00
2.50
30000
20000
10000
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
EPS, Adj Diluted Prev.
2013A
(0.31)
2014E
0.14↑
0.12
2015E
0.24↓
0.26
2016E
0.11↓
0.12
All market data in CAD; all financial data in USD.
• Semafo has reported solid Q3 production results with Mana processing 750.3kt
at 2.91g/t and 92% recovery to produce 64.7koz (RBC 59koz), with the beat driven
by throughput. The company has upped guidance for the year to 230koz-235koz
from 220koz-225koz previously due to the performance of the Siou and Fofina
deposits. Cash cost guidance has been reduced from US$695/oz -US$745/oz tio
US$660/oz-US$675/oz. Capex should, however, be US$10 million higher at US
$58.5 million higher due to higher capitalized stripping. This is a solid quarter
from Semafo and highlights the strength of the company's production and cost
management and demonstrates that it is ready to take on a development project
at this time.
• Orbis (ABS.AU), which is currently subject to a bid by Semafo, released an
update to the scoping study for its Natougou project this morning. This brought
significantly higher grade material into the first year of the mine life and was
value accretive increasing our NAV for OBS from A$0.99/share to A$1.28/share.
SMF have bid A$0.62-A$0.65 per share for the company, valuing it at 0.5x NAV
- a discount to the emerging producer peers that are currently trading at 0.57x
NAV. Given the exceptional grade of the Natougou project we believe that SMF
may need to offer a higher price to secure the asset. We have assumed that
they need to offer 0.7x NAV, A$0.90/share, reflecting Natougou's status as a high
grade medium scale feasibility stage project. Should the deal complete it would
transform SMF into a >500koz/year producer by 2018E.
First Glance Notes
First Quantum Minerals Ltd.(TSX: FM; 18.62; LSE: FQM)
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Steve Bristo, CFA (Associate)
(416) 842-7826; steve.bristo@rbccm.com
Thomas Klein (Associate)
416 842 5339; thomas.klein@rbccm.com
Rating:
Potential changes in Zambian taxation unlikely to have a large impact
52 WEEKS
18OCT13 - 10OCT14
26.00
24.00
22.00
20.00
18.00
12000
8000
4000
O
2013
N
D
Close
J
F
M
A
2014
M
J
Sector Perform
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All market data in CAD; all financial data in USD; dividends paid in
CAD.
• Zambian government proposes higher royalties in place of corporate income
tax: The budget proposed for 2015 would increase royalties and remove
corporate income tax. For open pit mines, royalties would increase from the
current rate of 6%to 20%. The current corporate income tax rate in Zambia is 30%
in addition to a variable profits tax of 8–14%. First Quantum's effective tax rate
for Zambia was 43% in 2013.
• Earliest the changes could take effect is beginning of 2015: The proposed mining
tax changes would come into effect January 1, 2015, assuming they are approved
by parliament. If the president, whose health is currently in question, were to
leave office an election must take place within three months and any change to
the country's mining taxes could be delayed.
• Impact on First Quantum depends on metal prices: The elimination of corporate
income taxes would mean First Quantum would lose any capital allowances or tax
loss carryforwards it has accumulated. The company commented that it would
expect its overall effective tax rate in Zambia to decrease from 46% to 40%, and
that at current metal prices the impact to the company's net income would be
roughly neutral. At higher metal prices the company would expect to be better off
5
from the mining tax changes (as higher earnings would more than offset higher
royalty payments), while at lower metal prices it would expect to be worse off.
Labrador Iron Ore Royalty Corp.(TSX: LIF; 20.48)
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Melissa Oliphant (Associate)
416 842 4126; melissa.oliphant@rbccm.com
34.00
32.00
30.00
28.00
26.00
Rating:
52 WEEKS
18OCT13 - 10OCT14
24.00
22.00
20.00
3000
2000
1000
O
2013
N
D
J
Close
F
M
A
2014
M
J
J
A
S
O
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All values in CAD unless otherwise noted.
Rating:
52 WEEKS
18OCT13 - 10OCT14
3.15
2.80
2.45
2.10
6000
4500
3000
1500
D
Close
J
F
M
A
2014
M
J
J
A
S
Rel. S&P/TSX COMPOSITE INDEXMA 40 weeks
All market data in CAD; all financial data in USD.
Sector Perform
Q3/14 production results show improvement
3.50
2013
N
• Rio Tinto, which owns a 58.7% stake in IOC, today reported IOC's third quarter
production and sales results. Production results came in below previous quarters
and our expectations, while sales exceeded previous quarters despite coming in
slightly below our estimates. See page 2 for an overview of Q3/14 results vs. RBC
estimates and past quarters.
• Production results below our expectations: IOC produced 1.593Mt of
concentrates and 2.322Mt of pellets for total production of 3.915Mt, 14% below
our estimate. We expected production to build following IOC's concentrate
expansion program from capacity of 18Mtpa to 23.3Mtpa, and the third quarter
has historically been the seasonally strongest period for production. Pellet
production did improve by 5% YoY and 10% QoQ; however, overall production
was down 2% YoY and 3% QoQ as concentrate production declined by 11% from
last year and 17% QoQ.
• Although production declined from past quarters, total sales volumes
increased by 14% YoY and 12% QoQ, with concentrate sales of 2.288Mt and
pellet sales of 1.996Mt. Despite the shortfall in production versus our forecasts,
total sales volume came in only 3% below our expectation. After an unusually
cold start to the year hindered production and sales, third quarter shipments
improved as previously frozen material became available, allowing sales to
surpass production by 9%.
• Rio Tinto's full-year iron ore shipping and production guidance (which includes
IOC's operations) was maintained.
Thompson Creek Metals Company(TSX: TCM; 2.24; NYSE: TC)
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Steve Bristo, CFA (Associate)
(416) 842-7826; steve.bristo@rbccm.com
Thomas Klein (Associate)
416 842 5339; thomas.klein@rbccm.com
O
Outperform
IOC's Q3/14 production and sales results reported by Rio Tinto
O
• Mt. Milligan mill throughput shows modest improvement: Mill throughput for
Q3/14 averaged 40,445 tpd, up 4% from 38,967 tpd in Q2/14. Thompson Creek
remains confident it can achieve 80% (48,000 tpd) of design throughput of 60,000
tpd consistently by year-end.
• Mt. Milligan gold production up significantly while copper production and
concentrate production relatively flat: As copper production was up only 2%
versus throughput up 5%, either copper recoveries, copper grades, or both must
have been down from the prior quarter. Gold production was up 63%, implying
much higher gold grades and recoveries versus Q2.
• Increased concentrate production required in Q4 to meet guidance: The
company's current annual run-rate (Q1 + Q2 + (Q3 x 2)) for concentrate
production is 120,289 versus 2014 annual guidance of 125,000 - 140,000 dry
tonnes. We believe reduced downtime in Q4 should enable the company to
increase throughput and meet its guidance.
• Decision on Mt. Milligan secondary crusher still expected by year-end
• Received payment for all three Mt. Milligan shipments made in Q3
• Consolidated molybdenum production and sales above expectations due to
strong performance at Thompson Creek mine: The outperformance was due
to continued strong production at Thompson creek mine, but results should
deteriorate in the last quarter as Thompson Creek completed mining of Phase 7
ore in August and will complete the processing of stockpiled ore in December.
Industry Comments
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Bulking Up - RBC's Weekly Review
6
Melissa Oliphant (Associate)
416 842 4126; melissa.oliphant@rbccm.com
Chris Drew, CFA (Analyst)
+61 2 9033 3060; chris.drew@rbccm.com
Ken Tham, CFA (Analyst)
+61 2 9033 3064; ken.tham@rbccm.com
All values in USD unless otherwise noted.
China reinstates coal import taxes; iron ore prices rebound
• What's Hot: Iron ore prices rose with improved sentiment, with IODEX up 3.7%
to $83.50/t.
• What's Not: Coal prices declined after China announced the introduction of new
import taxes.
• Our View: China will introduce coal import tariffs at 3% for metallurgical coal and
anthracite, 6% for thermal coal and 5% for lignite. We expect this will result in
modest ($1-2/t) reductions in FOB prices. Australia is likely to be most impacted
given ~25% of its coal exports go to China. Indonesia is exempt under free trade
agreements. Met coal exporters in Canada and the US are likely to see flow-on
effects as benchmark prices are largely set FOB Australia.
• Iron ore inventories at Chinese ports and mills declined over the last two weeks.
• Steel inventories held by Chinese traders and at mills increased.
• Metallurgical coal prices generally declined this week, including premium LV
FOB Australia (-0.2%) and CFR China (-0.4%). Trading was quiet amid uncertainty
surrounding prospective effects of China's 3% import tax.
• Thermal coal: Newcastle, Richards Bay, and CIF ARA prices fell by 1.9%, 2.3% and
0.2%, respectively. Chinese buyers exerted downward pricing pressure to offset
the cost of China's upcoming 6% import tax.
• Iron ore: IODEX recovered to $83.50/t, boosted by improved market sentiment
as well as an uptick in steel prices at the end of the week. Declining port stocks
are expected to support higher seaborne prices.
• Steel prices were mixed in North America and Europe but fell in China.
Robert Kwan, CFA (Analyst)
(604) 257-7611; robert.kwan@rbccm.com
Canadian Energy Infrastructure
Nelson Ng, CFA (Analyst)
(604) 257-7617; nelson.ng@rbccm.com
• A barbell approach to the sector might work well. With the RBC Energy
Research Team's commodity base case calling for an improvement in oil prices,
we continue to recommend positions in the Pipeline and Midstream stocks.
However, while we have been historically cooler on the Regulated Utility stocks
due to lower growth, we believe that having a greater weighting in the defensive
stocks could prove to be fruitful. On the most defensive end, we would look at
Emera (EMA) and Fortis (FTS). While modestly less defensive, we continue to
favour Canadian Utilities (CU) due to the higher expected dividend growth.
• Pipeline and Midstream stocks: share price weakness reflects concerns about
medium-term growth and an overall sentiment shift. There is minimal direct
commodity price exposure for the Pipeline and Midstream stocks, and we
attribute the poor performance to concerns about future growth profiles due to
falling oil prices (i.e., oil and gas customers curtailing future production growth).
While RBC's Energy Research Team has highlighted that future drilling could
moderate if WTI moves lower to, or below, US$80/bbl for an extended time frame
(measured in months), that is not the base case.
• Historically, the sector has performed very well during major market
downturns. As shown on page 2 of this report, Energy Infrastructure stocks have
consistently outperformed the market during major downturns. Since 1975, the
group has outperformed the S&P/TSX Composite during 8 of 9 downturns, with
an average annualized outperformance of 30%.
Kelsey Roste (Associate)
(604) 257-7383; kelsey.roste@rbccm.com
Michelle Zuliani (Associate)
604 257 7064; michelle.zuliani@rbccm.com
All values in CAD unless otherwise noted.
RBCCM Global Research
(416) 842-7800; rbccm-ie-publishing@rbccm.com
Where to hide from the sea of red
Canadian Equity Coverage Alert
For the week of October 3–10, 2014
• Canadian Equity Coverage Alert is a weekly product that summarizes changes
made to ratings and price targets for companies under coverage, in addition to
highlighting initiations and discontinuation of research coverage.
Mark Sue (Analyst)
(212) 428-6491; mark.sue@rbccm.com
Ameet Prabhu (Associate)
(212) 618-3330; ameet.prabhu@rbccm.com
CommTech: Buying low and managing risk in an unsettling capex
environment
7
Spencer Green (Associate)
(212) 858-7153; spencer.green@rbccm.com
All values in USD unless otherwise noted.
• Expect better sentiment in CY15. Finisar and JDSU are trading at price/ tangible
book value of 1.5x and 2.1x, near historical trough price/tangible book levels of
1.4x and 1.9x respectively. The sentiment on the group is decidedly negative, yet
we highlight that service provider capex tends to be cyclical and we do see an
eventual healthy return to wireline capex spending next year, driven by metro
upgrades at carriers.
• Structural issues imply choppiness ahead for others. Near-term, the rate of
improvement in wireline carrier capex (3Q14, 4Q14) looks anemic and margin
pressures imply that both Juniper and Ciena may have quite a bit of work to do
to regain investor confidence on forward earnings. From an historical 5-year EV/
sales point of view, Juniper is 34% off its lows of 1.1x, while Ciena is 58% off its
lows of 0.6x, implying there may be some incremental downside in an unsettling
sentiment-driven equity market.
• Wireless vs. wireline capex… situation often reverts. Wireline telecom trends
have moderated in the back-half with mixed trends in North America given a shift
in focus to wireless, spending coupled with moving parts related to European
wireline upgrades. Additionally, we may not see the typical material year-end
capex flush in 4Q; next year is when we expect to see an uptick in wireline
spending with a better pipeline for projects. With spending depressed near-term
in wireline, we would be opportunistic on JDSU and Finisar, particularly as we
believe the industry structure is likely to improve in the future.
Dan Rollins, CFA (Analyst)
(416) 842-9893; dan.rollins@rbccm.com
Diversified Metals, Mining, Oil & Gas
Stephen D. Walker (Analyst)
(416) 842-4120; stephen.walker@rbccm.com
Shailender Randhawa, CFA (Analyst)
(403) 299-6576; shailender.randhawa@rbccm.com
RBC recently hosted its inaugural Royalties from Rocks Conference in Toronto.
Overall, the conference further reinforced our positive outlook on the industry as
a whole, highlighting the breadth of opportunities to create further shareholder
value as well as the strength of the underlying business model.
Mark Mihaljevic (Associate)
(416) 842-3804; mark.mihaljevic@rbccm.com
Deal flow remains strong
All values in USD unless otherwise noted.
Royalties from Rocks: Opportunities abound to create further value
• With tight equity/debt markets for mining companies, the sale of a royalty/
stream is often an attractive source of alternative financing, filling the gap left by
typical sources of project financing.
• On the energy front, royalties are less a source of financing as E&P's have greater
access to traditional capital providers. Accordingly, future value creation depends
on stimulating increased drilling activity on large legacy royalty landholdings and
growth via accretive acquisitions.
Upside driven by embedded optionality
• The royalty/streaming companies highlighted that the true long-term value of
transactions is driven by the optionality inherent within the business model,
including mine-life extensions and capacity expansions, at no cost to them.
• In the energy sector, this was highlighted by the perpetual ownership of
mineral rights which provides optionality on future exploration and exploitation
opportunities.
Syndication is likely to play an increased role in transactions
• Given the increased size of transactions, deals on assets in riskier jurisdictions,
and maturity of the sector, companies expect syndication to play an increasing
role in the space.
Continuing to return capital to shareholders
• Given limited ongoing capex needs, the companies have been able to generate
strong FCF which, beyond reinvesting in new deals, has been consistently
returned to shareholders.
Paul C. Quinn (Analyst)
(604) 257-7048; paul.c.quinn@rbccm.com
Forest Products
Hamir Patel (Analyst)
(604) 257-7145; hamir.patel@rbccm.com
• Production – NA OSB production increased 3.1% q/q to 5.2 Bsf in Q314 and was
7.0% higher than a year ago. Plywood production increased 0.2% q/q to 2.7 Bsf
in Q3 but was 1.8% lower y/y.
NA Panel Stats – OSB production 7% higher y/y reflecting capacity re-starts
8
All values in USD unless otherwise noted.
• Exports – NA panels exports fell 27% y/y (-22% q/q) with OSB volumes at 189
mmsf (-18% y/y) and plywood down 42% y/y to 79 mmsf. While these stats
are fairly negative, with NA panels exports representing only 3.4% of NA panels
consumption, they are not representative of demand for NA panel producers.
• Consumption – NA panels consumption increased 3.5% q/q (+5.5% y/y). OSB was
up 4.2% q/q to 5.0 Bsf (+8.2% y/y) and plywood increased 2.4% q/q to 2.8 Bsf
(+1.0% y/y).
• OSB pricing outlook – As discussed in more detail in our Q3 earnings preview,
we see North Central prices averaging $220/msf over 2014 (-30% y/y), $240 over
2015 (+9% y/y) and $275 over 2016 (+15% y/y). Prices ended October 10 at
$222/msf. With 3.6 Bsf of capacity added in the last 8 months, we believe US
housing starts of 1.2MM to 1.25MM (8-Mo YTD average = 976K) are required to
significantly tighten NA OSB markets and lead to materially higher pricing levels.
We do not anticipate this occurring until H215 at the earliest. We expect NA OSB
operating rates to average 84% in FY14, 87% in FY15 and 91% in FY16.
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Global Mining Trends & Values
Chris Drew, CFA (Analyst)
+61 2 9033 3060; chris.drew@rbccm.com
Timothy Huff (Analyst)
+44 20 7653 4866; timothy.huff@rbccm.com
Des Kilalea (Analyst)
+44 20 7653 4538; des.kilalea@rbccm.com
Ken Tham, CFA (Analyst)
+61 2 9033 3064; ken.tham@rbccm.com
Commodity Price Performance:
• Metal prices were up on average 0.0% last week. Silver was the best performer
up 3.2%, followed by zinc up 2.7%, gold up 2.7%, iron ore up 1.3%, copper up
0.5%, aluminium up 0.5%, uranium up 0.4%, and nickel up 0.2%. Moly was the
worst performer down 8.2%, followed by lead down 1.1%, thermal coal down
1.0%, and coking coal down 0.7%.
Mining Share Price Performance:
• Mining shares were down on average 5.5% last week. The best performing group
was mineral sands down 3.4%, followed by the diversified group down 3.4%, iron
ore down 4.8%, copper down 5.5%, aluminium down 5.7%, uranium down 6.2%,
miscellaneous down 7.6%, nickel down 7.8%, and coal down 14.6%.
Valuation:
• Mining shares are now trading at a 12.7% discount to NAV at forward curve
prices, versus an 11.8% discount one week ago.
Long/Short Metal Positions:
• RBC CM's proprietary data for the LME shows that the net long positions in
copper, aluminium, zinc, nickel, and lead all were unchanged last week.
Exchange Inventories:
• Total exchange inventories of aluminium, copper, and zinc decreased last week,
while total inventories of nickel increased last week.
Greg Pardy, CFA (Analyst)
(416) 842-7848; greg.pardy@rbccm.com
Integrated Oil and Senior E&P
Dillon Culhane, CFA, CA (Analyst)
(416) 842-7915; dillon.culhane@rbccm.com
• Based on our net asset value analysis, our large cap independent and integrated
coverage universe is currently discounting a long-term escalated WTI equivalent
(WTIE) price of US$72/boe (vs. US$76/boe), down 5% from last week; and a longterm WTI price of US$86/b (vs. US$90/b), down 4% from last week.
• Current WTIE implied prices would compare with prior 2009-2014 YTD peak
and trough levels of US$84/boe and US$61/boe, respectively; while current WTI
implied prices would compare with peak and trough levels of US$102/b and US
$62/b, respectively.
• Spot WTIE prices of US$68/boe (vs. US$74/boe) were down 8% from last week.
Long-dated (2015-2018) WTIE prices of US$69/boe (vs. US$70/boe) were down
1% from last week.
• Our implied WTIE price (defined as an equivalent barrel economically weighted
approximately 75% to WTI crude oil and 25% to Henry Hub natural gas) is the
long-term price incorporated into our collective net asset value analysis, which
Franz Hargo Muljo, CA (Associate)
416 842 8588; franz.muljo@rbccm.com
All values in USD unless otherwise noted.
So what WTIE price are the large caps discounting?
9
equates current share prices for our group to a P/NAV ratio of 100%. This analysis
incorporates an 8.5% after-tax discount rate. Please refer to Exhibit 1 for our WTI
equivalent price analysis.
Al Stanton (Analyst)
+44 131 222 3638; al.stanton@rbccm.com
Nathan Piper (Analyst)
+44 131 222 3649; nathan.piper@rbccm.com
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; victoria.mcculloch@rbccm.com
Haydn Rodgers, CA (Associate)
+44 131 222 4911; haydn.rodgers@rbccm.com
All values in USD unless otherwise noted.
Stephen D. Walker (Analyst)
(416) 842-4120; stephen.walker@rbccm.com
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
International E&P Scorecard
• The pullback in Brent and WTI crude oil prices has spurred inquiries regarding
just what our 2015 earnings/cash flow estimates—and balance sheets—would
look like across our global producer universe under a lower pricing scenario of
$89/bbl Brent and $80/bbl WTI.
• Our note Running a Downside Pricing Scenario published yesterday, we believe,
highlighted our International E&P universe performing well when compared to
US and Canadian Intermediate peers. On both Net Debt/Cash flow and EV/DACF
metric International E&Ps begin to look attractive. We will look for a recovery
once oil prices stabilize.
Q4/14 Global Mining Best Ideas Portfolio
• We are publishing our weekly update to our Global Mining Best Ideas portfolio.
• For the quarter-to-date, the Q4/14 Global Mining Best Ideas List is down 5%
compared to the MSCI World Metals & Mining Index, which is down 5%.
Sam Crittenden, P.Eng., CFA (Analyst)
(416) 842-7886; sam.crittenden@rbccm.com
Dan Rollins, CFA (Analyst)
(416) 842-9893; dan.rollins@rbccm.com
Des Kilalea (Analyst)
+44 20 7653 4538; des.kilalea@rbccm.com
Timothy Huff (Analyst)
+44 20 7653 4866; timothy.huff@rbccm.com
Jonathan Guy (Analyst)
+44 20 7653 4603; jonathan.guy@rbccm.com
Chris Drew, CFA (Analyst)
+61 2 9033 3060; chris.drew@rbccm.com
Andrew D. Wong (Analyst)
(416) 842-7830; andrew.d.wong@rbccm.com
All values in USD unless otherwise noted.
Walter Spracklin, CFA (Analyst)
(416) 842-7877; walter.spracklin@rbccm.com
RBC Compass
John Barnes (Analyst)
(804) 782-4020; john.barnes@rbccm.com
• CP overture may prompt regulator decision on mergers. Media reports over
the weekend unveiled that CP has made a merger / acquisition proposal to CSX,
which was subsequently rejected by CSX. While meaningful in and of itself, the
key question (and focus of this report) is not whether CP and CSX will merge,
instead it is whether the regulators will allow mergers between major Class 1
railroads at all. Key is that it is very unlikely any major merger decisions will be
made until that question is answered and once answered, CP and CSX will be only
one of many merger options to be considered and entertained.
• Conclusion: East-West U.S. rail combinations are most likely if go-ahead is
received. In Exhibit 1, we outline the merger scenarios that we consider to be
most likely based on several key criteria (size, competition, etc.). If the regulator
permits large mergers, we believe it is most likely that each of the two Western
U.S. carriers (BNSF and UNP) acquires one of the two Eastern U.S. carriers (CSX
and NSC). We also view CP as acquiring KSU in this scenario.
• Investment strategy. As indicated, we expect (at this stage) that the regulator
will not provide full support for Class 1 rail mergers. As a result, we continue to
favour Outperform-rated CNR, UNP and KSU. In the event full merger support
is provided, investors might consider gravitating toward the likely targets: CSX,
NSC and KSU.
Erin Lytollis, CFA (Associate)
(416) 842-7862; erin.lytollis@rbccm.com
Mike Fountaine (Associate)
(804) 782-4013; mike.fountaine@rbccm.com
All values in CAD unless otherwise noted.
What Rail Merger Scenarios are Most Likely if Regulator Gives the Green Light
10
Nathan Piper (Analyst)
+44 131 222 3649; nathan.piper@rbccm.com
RBC International E&P Daily
Al Stanton (Analyst)
+44 131 222 3638; al.stanton@rbccm.com
• DNO.OL: Updates operations; Swing states - How Libya and Nigeria could control
the marginal barrel; WZR.V: Pricing ahead of rights issue; PMO.L: Huntington
production restricted as expected; PRE.TO: ALFA's CFO expresses interest in
deepening PRE investment; RBC International E&P Scorecard
Victoria McCulloch, CA (Analyst)
+44 131 222 4909; victoria.mcculloch@rbccm.com
DNO; WZR; PMO; PRE
Haydn Rodgers, CA (Associate)
+44 131 222 4911; haydn.rodgers@rbccm.com
All values in USD unless otherwise noted.
Fraser Phillips, P.Eng. (Analyst)
(416) 842-7859; fraser.phillips@rbccm.com
Uranium Weekly
Steve Bristo, CFA (Associate)
(416) 842-7826; steve.bristo@rbccm.com
• Ux spot price indicator was unchanged at $35.65/lb and TradeTech was up $0.20
to $35.50/lb.
• Ux term price indicator was unchanged at $45.00/lb, and TradeTech was
unchanged at $45.00/lb (quoted monthly at month-end).
• Uranium Participation Corp. (UPC) traded down 1.0% over the past week to close
at C$5.02 per share (vs. S&P/TSX -3.5%).
• We estimate UPC is discounting a uranium price of $33.58/lb, a 5.8% discount to
spot. Last week we estimated that UPC discounted a uranium price of $34.16/lb,
a 4.2% discount to the then-prevailing spot price.
• We rate Uranium Participation Corp. Outperform with a target price of C$5.75
per share.
Thomas Klein (Associate)
416 842 5339; thomas.klein@rbccm.com
All values in USD unless otherwise noted.
Ux spot price unchanged at $35.65/lb; TradeTech up $0.20 to $35.50/lb
Investment Strategy Research
Helima Croft (Analyst)
helima.croft@rbccm.com
Swing States
Jay Govender, CMT (Analyst)
212 618 3539; jay.govender@rbccm.com
• Saudi Arabia currently shows no signs of taking an active role in stabilizing Brent
prices
• Our focus thus turns to Libya and Nigeria as potential candidates to help break
the fall in oil prices
• Both countries have seen significant increases in oil production in recent months
that could be quickly reversed due to intractable political and security challenges
How Libya and Nigeria could control the marginal barrel
Quantitative Research
Chad McAlpine, CFA (Analyst)
(416) 842-7869; chad.mcalpine@rbccm.com
Bish Koziol (Associate)
(416) 842-7866; bish.koziol@rbccm.com
Benchmarks
• At the beginning of each week, this report summarizes the recent performance
of the most commonly tracked North American benchmark indices.
• Also presented are the returns of the sectors and major industry groups of the
S&P/TSX Composite over the same periods.
• To better understand the relative performance of different investment strategies
over time, RBC has created and maintains style-specific composite indices.
Chad McAlpine, CFA (Analyst)
(416) 842-7869; chad.mcalpine@rbccm.com
QuaDS Score Model Portfolios
Bish Koziol (Associate)
(416) 842-7866; bish.koziol@rbccm.com
Methodology
Top “Consistent Quality” S&P/TSX Composite Index Stocks
• We first screened the S&P/TSX Composite and included only the stocks that
ranked in the top four deciles of the index based on our Predictability model.
Our aim was to remove names with lower-quality earnings and those that
have exhibited higher volatility historically. Once screened for Predictability,
we refined our strategy and ranked the list using ROE (Trailing 12-Month),
Indicated Dividend Yield, 5-Year Dividend Growth, and Total Return Stability.
11
These four factors were weighted equally when deriving our list of higherquality companies. In addition, only the index constituents with positive dividend
growth, ROE greater than 15%, and a dividend yield higher than 1% were included
in an attempt to narrow the list further.
12
Required disclosures
Non-U.S. analyst disclosure
Mark Sue;Dillon Culhane;Franz Hargo Muljo;Al Stanton;Nathan Piper;Victoria McCulloch;Haydn Rodgers;Robert Kwan;Nelson
Ng;Kelsey Roste;Michelle Zuliani;Chad McAlpine;Bish Koziol;Fraser Phillips;Melissa Oliphant;Chris Drew;Ken Tham;Paul C.
Quinn;Hamir Patel;Dan Rollins;Shailender Randhawa;Mark Mihaljevic;Walter Spracklin;Erin Lytollis;Timothy Huff;Des Kilalea;Steve
Bristo;Thomas Klein;Jonathan Guy;Richard Hatch;Sam Crittenden;Andrew D. Wong (i) are not registered/qualified as research
analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may
not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances
and trading securities held by a research analyst account.
Conflicts disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses
to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies,
clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to
RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report.
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated
by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories
- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/
Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,
the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings
RBC Capital Markets, Equity Research
As of 30-Sep-2014
Rating
BUY [Top Pick & Outperform]
HOLD [Sector Perform]
SELL [Underperform]
Count
858
683
98
Percent
52.35
41.67
5.98
Investment Banking
Serv./Past 12 Mos.
Count
Percent
308
35.90
151
22.11
8
8.16
Conflicts policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.
To access our current policy, clients should refer to
https://www.rbccm.com/global/file-414164.pdf
or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South
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Markets also provides eligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains market color and
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15