Author: Peter Koven

Reports from the U.S. Department of Agriculture (USDA) show that farmers are getting off to a brisk start in the 2010 planting season. In its April 18th report, the USDA indicated that corn planting is 19% complete in 18 key states that produce the majority of U.S. corn production. By comparison, it was only 5% complete at the same point in 2009.

As a result of the quick planting, there is speculation in the market that crop yields will be higher this year. According to RBC Capital Markets analyst Fai Lee, that has likely contributed to crop price weakness and "negative" investor sentiment to fertilizer stocks.

Mr. Lee thinks this negative sentiment is a mistake. He does not see any clear linkage between early planting and higher yields, which means that the early planting should not be a concern to the fertilizer industry (which would only be affected if yields actually turn out to be high).

"Agronomic research indicates that late planting generally leads to lower yields. However, research data does not support the conclusion that early planting will lead to higher yields as suggested by recent media reports and industry prognosticators," Mr. Lee wrote in a note. He called the link between early planting and higher crop yields a "market myth".

He believes it is still too early to predict the outcome of the U.S. corn harvest. As such, he considers fertilizer stocks a potential buying opportunity if they are weighed down by more concerns that early planting will lead to high crop yields.

Peter Koven

A "buy" rating is not high enough for Goldcorp Inc., according to TD Newcrest analyst Greg Barnes. After visiting the company's brand new Peñasquito mine in Mexico, he is more confident than ever about its growth prospects. He upgraded the stock to "action list buy" from "buy".

In a lengthy research note, Mr. Barnes wrote that the start-up at Peñasquito is going well so far.

"The project is largely on budget and schedule and most key operating aspects are meeting or exceeding expectations — no small feat in the mining industry, especially given the scale and complexity of the project," he wrote.

Peñasquito will be Goldcorp's main growth driver over the next few years as the company aims to produce 3.8 million ounces of gold a year by 2014. Looking beyond that, Mr. Barnes believes Goldcorp should be able to boost output to 4.5 million ounces by 2015 or 2016 through the Eleonore and El Morro projects (though it faces a major legal challenge regarding ownership of El Morro).

"Reaching 4.5 million ounces by 2016 would be almost double the 2009 production of 2.4 million ounces and represents a compounded annual growth rate of almost 12%. In our view, this is far superior to Goldcorp's large-cap peers," Mr. Barnes wrote, adding that the company should be able to fund its growth through its own operating cash flow.

His target price on the stock is US$55.00 a share, roughly 40% above current levels. He noted that Goldcorp already trades at multiples that are well ahead of its peers: 1.76 times net asset value and 16.1 times estimated cash flow per share in 2011. However, he feels the premium valuation is justified given Goldcorp's strong growth profile, low-cost production and low political risk.

Peter Koven

Australian gold miner Lihir Gold Ltd. is on the block after it received a US$8.45-billion hostile bid from Newcrest Mining Ltd. According to Scotia Capital analyst David Christie, Newmont Mining Corp. should now look to acquire Lihir.

In a note to clients, Mr. Christie wrote that Lihir could immediately increase Newmont's production by 9%, and drop equity cash costs by 2%. That would bring Newmont's cash costs below US$500 an ounce.

"In our view, the Lihir mine would be a good fit for Newmont's Australia-Asia operating group, and [Lihir's] Bonikro mine and vast exploration ground would fit well into Newmont's African operating unit," he wrote.

Newmont needs to consider acquisitions because it has a negative growth profile. Mr. Christie wrote that production is expected to decline by 8.7% in 2015 compared to 2010. However, the company is also in a good position for M&A activity with US$5.8-billion in available liquidity, he noted.

Mr. Christie initiated coverage on Newmont with a "sector perform" rating and a one-year target price of US$67.00 a share. He wrote that Newmont trades at a price-to-net-asset-value multiple of 1.98 times, which is well ahead of its large-cap gold peers at 1.49 times. However, Newmont is cheaper than its rivals on other metrics.

Peter Koven

"Political risk" does not begin to describe the problems First Quantum Minerals Ltd. is currently facing in the Democratic Republic of the Congo (DRC). The company and its partners were recently ordered to pay an absurd US$12-billion in damages related to ownership of the Kolwezi project (that case is in international arbitration). And First Quantum's ownership of the DRC-based Frontier project is now being challenged as well.

Needless to say, these issues have weighed down First Quantum shares, which are off about 20% since mid-January. Paradigm Capital analyst Dave Davidson views this as a buying opportunity, despite all the political turmoil. He upgraded the stock to "buy" from "hold".

"There has been no fundamental change in the company's [net asset value] as a result of recent press concerning its legal problems in the DRC," he wrote in a note.

Mr. Davidson noted that the share price volatility will likely continue due to the "sporadic and incomplete" nature of the information that comes out of the DRC courts. But the drop in the stock price is reason enough for an upgrade, in his view. His price target is $94.00 a share.

Peter Koven

Last week, gold consultancy GFMS Ltd. predicted that the gold price will make a short-term correction down to US$1,050 an ounce. Scotia Capital analyst David Christie agreed that there could be some seasonal weakness prior to a rally in the fall, when "fabrication demand returns and typically so does investment demand."

More broadly, GFMS talked about investment demand being the key driver for gold. Not for the first time, it warned that if investment demand declines, the gold price may have to come down quite a lot before jewellery demand increases enough to pick up the slack.

Mr. Christie agreed that investment demand is the "only portion" of demand that can drive incremental changes in the gold price right now. But despite that risk, he expects investment demand to gain strength in 2010 and 2011, which is positive for gold.

Peter Koven

Early this year, the fertilizer sector underwent a dramatic recovery as farmers finally brought their applications back to normal levels. But now that pricing momentum has stalled, according to Goldman Sachs analyst Robert Koort.

"Despite expectations for robust spring demand, our channel checks suggest the planned domestic potash price hike is not going through and recent nitrogen and phosphate prices have weakened," he wrote in a note to clients.

"We also see increased risk from poor weather delaying field work and moderating [agriculture] commodity prices."

Mr. Koort downgraded both Potash Corp. of Saskatchewan Inc. and Mosaic Co. to "neutral" from "buy", noting that he sees "limited near-term momentum" for the fertilizer sector. He said that the next opportunity to re-establish higher pricing may come this summer, when new export orders are expected from South America. "Until then, we believe the stocks will be range bound as investors await confirmation that positive trends will return," he wrote.

Mr. Koort's price target on Potash Corp. is US$123.69 a share, and his target on Mosaic is US$64.00 a share. He cut each of them 6% from their prior levels.

Peter Koven

Emerging gold producer Gammon Gold Inc. had a rough first quarter, with worse-than-expected production results at its Ocampo mine as it ran into void areas that were mined out in the past. Analysts were also disappointed with cash costs, which were higher than expected.

On the other hand, the analysts are pleased with Gammon's announcement that it is nominating four new independent directors to its board, each of which has more than 20 years of mining industry experience. The new chairman will be Colin Benner, who has held many key management and board positions in the industry.

"We believe the addition of these independent directors improves the company's corporate governance and could provide investors a degree of comfort on [Gammon's] ability to turn things around operationally," UBS Securities analyst Dan Rollins wrote in a note to clients.

According to analyst Brian Christie of Desjardins Securities, the new director appointments offset the bad news from the Q1 production report.

Gammon has been a major underperformer of late, losing about 40% of its value since mid-January. BMO Capital Markets analyst David Haughton wrote that achieving operating targets is key to restoring investor confidence.

Peter Koven

Investors got a reminder on Wednesday of just how much political risk there is in Kyrgyzstan when the government was reportedly overthrown following violent protests.

Not surprisingly, shares of Centerra Gold Inc. took an 11.5% haircut on the news. Centerra's Kyrgyzstan-based Kumtor gold mine is its flagship asset, and the company reached a landmark agreement with the government covering Kumtor just last year. It was poised to make more investments in the project.

Now the future is a little less clear. Andrew Breichmanas, an analyst at BMO Capital Markets, wrote in a note that the current political situation highlights the "uncertainty of the operating environment and reintroduces considerable risk."

As a result, he downgraded Centerra stock to "market perform" from "outperform", even though he does not expect Kumtor to be affected by the political turmoil.

"Given the mine's importance to the country's economy, the state's ownership stake in Centerra, and the significant investments planned by the company, the likelihood of the asset being affected appears low," Mr. Breichmanas wrote.

He cut his target price on Centerra to $12.50 a share, down 24% from his prior target of $16.50. The new target reflects a price-to-net-present-value (NPV) multiple of 1.2 times, and a 10% discount rate. Mr. Breichmanas wrote that the peer average is 1.5 times NPV.

Kumtor accounts for 75% to 80% of his production forecasts for Centerra.

Peter Koven

The latest resource update from Exeter Resource Corp. added more value to the company's already-massive Caspiche project in Chile, and analysts are very encouraged.

In a new resource estimate, Exeter said the copper-gold deposit holds a staggering 24.3 million ounces of gold, 6.4 billion pounds of copper, and 60.3 million ounces of silver. Total gold equivalent ounces increased 29% from the last estimate. Caspiche is a huge low-grade deposit that is similar to the nearby Cerro Casale project, owned by Barrick Gold Corp. and Kinross Gold Corp.

"The updated resource represents a significant improvement in the size of the [Caspiche] deposit with comparable grades to the previous estimate released this past September," TD Newcrest analyst Daniel Earle wrote in a note to clients.

He also pointed out that Exeter moved a large portion of the resource from the inferred category to the indicated category, which is obviously good news. As of now, 59% of the contained ounces of gold are in the indicated category.

John Hayes, an analyst at BMO Capital Markets, pointed out that the new resource update was helped by higher commodity price assumptions. However, he noted that Exeter said more than half of the increase in resources came from new drilling.

Mr. Hayes also pointed to a report that Exeter has signed confidentiality agreements (CAs) with potential buyers (including Barrick and Kinross) and could get bought within a year. The company denied the report. However, Mr. Hayes said that if the story were true, it would come as no surprise that the company entered into CAs.

Peter Koven

TD Newcrest analyst Daniel Earle is disappointed with Agnico-Eagle Mines Ltd.'s friendly $762-million all-stock bid for Comaplex Minerals Corp. The implied valuation of $10.32 a share for Comaplex is significantly below his 12-month price target of $11.50 a share.

To make his point that the offer may be too low, he pointed to Agnico's 2007 acquisition of Cumberland Resources Inc., which gave it a gold project in Nunavut that is close to Comaplex's Meliadine deposit. The Cumberland transaction implies a comparable takeover price for Comaplex of $16.30 a share, Mr. Earle wrote in a note to clients.

"We therefore advise shareholders to reject this offer," he wrote.

He suggested that Agnico could pay more than $18.00 a share and still make this transaction accretive. The question, of course, is whether it will be forced to do that. Mr. Earle said there is a roughly 50-50 chance that a competing bid will be made by a rival company.

On the other hand, fellow TD analyst Greg Barnes wrote that this deal is a good one for Agnico. He estimated that it is paying about 1.17 times net asset value and US$133 per resource ounce for Comaplex, which he said are "reasonable." He is not surprised with the transaction, given that Agnico already owns 12.3% of Comaplex and is developing the nearby Meadowbank project (which it acquired in the Cumberland deal).

He maintained a "hold" rating on Agnico and a price target of US$67.00 a share.

Peter Koven

While the fertilizer market has certainly rebounded in the last few months, Desjardins Securities analyst John Redstone said poor grain prices continue to weigh it down.

Grain prices have been a disappointment so far in 2010 — corn, for example, has stayed stubbornly below US$4.00 a bushel, and wheat has floated around the US$5.00 range. Mr. Redstone does not expect a "significant" pick-up in fertilizer prices until the grain prices pick up as well.

"We see [corn prices at US$4.00 a bushel] as the trigger level at which farmers will begin purchasing more potash to take advantage of higher foodstuff prices — which should thus begin driving up the price of fertilizer. Thus far in 2010, we have not seen that happen," he wrote in a note to clients.

He pointed out that the next major event that could impact grain prices is the U.S. Department of Agriculture's crop production report, which is due out at the end of March.

In the meantime, spot potash prices have been improving, with prices getting as high as US$430 a tonne. Mr. Redstone expects 2010 prices to average US$525 a tonne and US$500 a tonne in domestic and overseas markets, respectively.

He has "hold" ratings on both Potash Corp. of Saskatchewan Inc. and Agrium Inc. His target prices ($127.35 a share on Potash Corp. and $70.00 a share on Agrium) are based on a multiple of eight times estimated earnings in 2011.

Peter Koven

Analysts are praising the proposed merger of equals between Quadra Mining Ltd. and FNX Mining Co. Inc.

The consensus view is that Quadra is sacrificing short-term dilution in order to achieve diversification and economies of scale. Fraser Phillips, an analyst at RBC Capital Markets, wrote in a note that his forecasts for earnings and cash flow per share fall by an average of 10% to 12% from 2011 through 2013 as a result of the transaction. But he considers that an acceptable trade-off given the long-term benefits.

"The merged company will provide investors with leverage to copper in a mid-size North American mining company, providing an alternative to First Quantum and Inmet," he wrote.

Tom Meyer, an analyst at Raymond James, wrote that the new Quadra FNX should be a serious player in the M&A space. He noted that the shortage of good management teams, along with the insane costs to finance projects, creates opportunities for acquisitions. Until now, the only mid-sized copper company in a good position to capitalize on them was First Quantum, he wrote.

UBS Securities analyst Onno Rutten highlighted the relatively high near-term operational risk of the company. But he still maintained a "buy" rating and $21.00-a-share target on Quadra, noting that it has attractive growth prospects with the Levack Footwall in the near term and Sierra Gorda in the long term.

Peter Koven

In 2009, mining giant Rio Tinto Ltd. fell out of favour with China, its largest customer. Rio backed out of a US$19.5-billion financing from state-owned Chinese firm Chinalco, it created an iron ore joint venture with BHP Billiton Ltd. that the Chinese government did not like, and four of its executives were arrested by China on corruption charges.

Given all that, the company needed to restore its relations with China in 2010. Analysts said Rio did just that with its new joint venture with Chinalco to develop the Simandou iron ore project in Guinea. Chinalco will invest US$1.35-billion in the project and earn a 44.65% stake.

"This deal should go a long way to repairing the [Rio-China] relationship, though it may also attract criticism from some who believe Rio should develop projects on its own given its strengthened balance sheet," RBC Capital Markets analyst Des Kilalea wrote in a note to clients. He also noted that the Simandou deal could provide a blueprint for other miners developing projects with commodities that China wants.

Damien Hackett, an analyst at Canaccord Adams, added that the joint venture helps Rio Tinto leverage China's influence in Guinea, where it has committed to a US$7-billion development package.

He also suggested that the joint venture means China may feel less threatened by Rio and BHP's iron ore joint venture.

Peter Koven

Finally, some good news out of Mexico for New Gold Inc. The Vancouver-based miner has been fighting a rough battle with anti-mining activists over its Cerro San Pedro mine. But the company won a landmark ruling from a federal court this week that allows the company to resume the use of explosives at the property. That overturns an earlier ruling that banned them

New Gold can now resume full operations at Cerro San Pedro, and the company is maintaining its 2010 production guidance of 95,000 to 105,000 ounces of gold from the project. The cash costs are estimated at US$390 to US$410 an ounce (including byproducts).

Andrew Kaip, an analyst at BMO Capital Markets, anticipated that the mine would not resume full operations until the middle of the second quarter, and would produce just 70,000 ounces (though he guided for slightly lower byproduct cash costs of US$364 an ounce).

He expects to increase his earnings forecast based on New Gold's guidance, even if the company only achieves the lower end of it. He rates the stock an "outperform" with a price target of $5.80 a share.

Peter Koven

The one victim of gold's sensational run over the last few years has been consumer demand, which has plummeted because of the high prices.

But that could change soon, according to UBS analyst Dominic Schnider. He expects jewellery demand to pick up in the coming quarters, noting that it tends to recover "with a lag" after a sharp increase in the gold price. He also pointed out that demand from India is already improving, though only marginally so far.

"With the solid economic recovery in emerging markets, wealth creation should provide the basis for demand growth and pent-up demand to find its way to the market," Mr. Schnider wrote in a note. "Mounting inflation in key emerging market economies will also render support."

He expects jewellery demand to recover by about 20% from 2009 levels, which is quite a lot by historical standards. That recovery will be needed to compensate for lower demand from investors, he noted.

He is using a target price on gold of US$1,250 to US$1,300 an ounce over the next 12 months, and views prices at or below US$1,100 as a good buying opportunity.

Peter Koven

With last year's acquisition of Sino Gold Mining Ltd., Eldorado Gold Corp.
has established itself as the world leader in gold mining in China. It
also increases the company's exposure to a rising Chinese currency.

The
government has loosened its peg of the renminbi (RMB) to the U.S.
dollar, but there is still a long way to go before it floats freely.
UBS economist Tao Wang wrote that the RMB could end the year 5%
stronger than it is now.

With that in mind, UBS analyst Dan
Rollins calculated the potential impact of a 5% RMB increase on
Eldorado, and his study shows that it is not that bad at all. He wrote
that the company's cash costs could go up 2% to US$355 an ounce, and
its net asset value (NAV) could decline 1.1%.

Not a big deal,
obviously. But his study also shows that greater currency appreciation
will have a more pronounced effect. If the RMB rises 10%, his NAV
estimate for Eldorado drops 2.1%. If the RMB rises 15%, then his NAV
falls 3%.

Given that China has not unveiled any plans to let its
currency increase, Mr. Rollins did not make any changes to his
valuation for Eldorado. He rates it a "buy" with a price target of
$15.00 a share.

Peter Koven

China completed the largest copper restocking in its history in 2009. But according to UBS Securities analysts Tom Price, Julien Garran and Peter Hickson, it is not nearly enough.

In a note that they appropriately title "Warning: China is Short Copper", the analysts suggested that most of the copper that China imported last year has already been converted into semi-manufactured products. By the end of the year, they estimate that China was working through pre-existing stockpiles as well. That is pretty remarkable considering that the country imported about 3.2 million tonnes of copper as the government implemented a massive fiscal stimulus program.

 "Basically, China is short of intermediate and refined copper products," the analysts wrote.

"Even a modest demand growth scenario for 2010 will require a robust restocking event, almost regardless of the constraints on trade posed by China's tightening credit markets."

They called for an "imminent lift" in China's copper import flows beyond current expectations. And as such, they are pretty bullish on copper. They expect a copper price above US$3.00 a pound over the next three years, before it declines back towards US$2.30 a pound in 2015.

Their favourite copper equities include Canadian companies First Quantum Minerals Ltd. and Quadra Mining Ltd., as well as foreign companies PanAust Ltd., Jiangxi Copper Co. Ltd., Kazakhmys PLC, and Freeport-McMoRan Copper & Gold Inc.

Peter Koven

BMO Capital Markets analyst Edward Sterck continues to have serious concerns about the finances of First Uranium Corp.

On Monday, the company reported a third quarter loss of US9¢ a share. More importantly, Mr. Sterck pointed out that First Uranium got environmental approval reinstated for its MWS tailings facility in South Africa, but cannot continue development because the approval has conflicting information. Not good.

As a result of this problem, the company is unlikely to complete development of a third gold plant at MWS by a June 1st deadline, and may therefore have to make a $42-million penalty payment to royalty company Gold Wheaton Gold Corp. First Uranium said that it requires US$50-million in external financing, and that does not include the potential Gold Wheaton payment, or the repayment of a US$22.4-million credit facility from Simmer & Jack Mines Ltd., which is due in August.

Mr. Sterck is assuming that the environmental approval is not received in time, that the penalty payment is made to Gold Wheaton, and that the Simmer & Jack facility is rolled over. Put together, he rates the stock an "underperform" with a price target of $1.20 a share.

"BMO estimates a fiscal 2011 funding gap of US$137-million, an amount which may be difficult to secure in the current environment," he wrote in a note to clients.

Peter Koven

The vastly improved financial condition of Teck Resources Ltd. suggests the company could reinstate its dividend, according to RBC Capital Markets analyst Fraser Phillips.

Teck dropped the payout (worth nearly $500-million a year) in late 2008, when its debt load from the acquisition of Fording Canadian Coal Trust looked unmanageable. But since then, the Vancouver-based miner has repaired its balance sheet through asset sales, debt payment deferrals and a huge bond sale.

"[First quarter] proceeds from asset sales, together with free cash flow in 2010, should allow the repayment of the remainder of the [Fording] bridge loan, the key condition Teck has set for the resumption of the dividend," Mr. Phillips wrote in a note to clients.

Mr. Phillips hiked his price target on Teck to $45.00 a share, up from $40.00. He expects that metallurgical coal markets will remain tight throughout 2010, with recovering demand in the developed world adding on to strong demand from China and India. His coal price forecast for 2010 is US$185 a tonne.

TD Newcrest analyst Greg Barnes pointed out another piece of good news for Teck: its new two-year coal shipping contract with Westshore Terminals LP. The deal includes fixed shipping rates that do not fluctuate with prices, something that Mr. Barnes believes Teck has wanted.

"The fixed rate should provide the company with more upside to coal prices over the next several years, a time during which we are expecting robust metallurgical coal prices," he wrote.

Mr. Barnes rates Teck stock an "action list buy", with a price target of $51.00 a share.

Peter Koven

The fourth quarter of 2009 was an awfully good one for junior mining companies, as they took advantage of positive metal market conditions to raise a boatload of money. But now investors may face a comeuppance.

In a note titled "Heading for Heartburn," the junior mining analysts at Canaccord Adams suggested that the TSX Venture Exchange could face selling pressure in March as a result of the wild capital-raising activities from last fall.

Analysts Wendell Zerb, Eric Zaunscherb and Nicholas Campbell broke down the Venture Exchange financings in the fourth quarter and found that the "bulk" of the capital raised by mining-related companies through private placements (about $700-million) closed in November. So in March, the four-month trading restrictions on those private placements will end, and a flood of new paper could suddenly hit the market.

"Although numerous factors influence the valuation of small cap mining-related stocks, the added selling pressure of new free-trading paper in what is already a low-liquidity environment should not be overlooked," the analysts wrote.

Just how negative the influence will be depends on other factors, like overall market sentiment. However, the analysts did point out that the share prices of a number of the companies that raised money in November have already fallen back to pre-rally levels, and investors would not be likely to sell those names if they have already lost money on them.

"The overhang of free-trading paper is more likely to create a ceiling that, if breached on the upside, will introduce new selling and as such create a sideways trend in the market," they wrote.

Peter Koven