2 natural resource stocks

It’s tough to get analysts excited about natural resource stocks these days. Words like ‘neutral’, ‘hold’ and ‘average’ reflect the mood of the street for many Canadian natural resource companies.

Pretium Resources Inc. (TSX—PVG)

In an early 2018 research note, CIBC World Markets precious metals analyst Jeff Killeen covered a development that saw Vancouver-headquartered Pretium Resources announce its production tally for the fourth quarter of 2017.

The analyst (who has since left CIBC and is now director of policy and programs at the Prospectors and Developers Association of Canada) acknowledged that the 2017 result fell short of his projection and downgraded the company’s stock to ‘neutral’ because of what he called near-term uncertainties. He said that CIBC saw a considerable number of question marks around the company’s operating expectations that would probably curb the stock’s ability to outperform its peers over the near-term period. Mr. Killeen handed down a $14.50 price target.

Flash forward a year

A year later, CIBC Capital Markets precious metals analysts Anita Soni and Terry Tsui say in a follow-up research note dated Jan. 10, 2019 that Pretium reported anemic production results for the fourth quarter of 2018 and also missed guidance for the second half of last year due to lower-than-expected mill grades.

“The grades came in at 11.5 grams of gold per tonne of ore (g/t) versus the reserve grade of 14.5g/t,” say the analysts. “We are revising down our grade assumption for 2019 from 14.5 g/t to 12.5g/t and a gradual increase to reserve grade of 14.5g/t by 2022 versus our prior assumption of 14.5 g/t in 2019 and beyond.

“Consequently, we have lowered our price target to $11 from $13 previously. The performance of the Brucejack mine [anticipated to become a high-grade gold mine] is the key driver for the stock, and we are looking for consistent ore grade delivery in the coming quarters to build market confidence. We maintain our Neutral rating.”

Husky Energy Inc. (TSX—HSE)

In a Jan. 17, 2019 research note, Desjardins Capital Markets analysts Justin Bouchard and Petur Radevski say that Calgary-based oil and gas stock Husky Energy’s hostile takeover attempt for fellow Calgary-based MEG Energy Corp. (TSX—MEG) has expired.

“Husky announced the abandonment of its hostile takeover bid for MEG, following the expiration of the tender deadline yesterday,” say the analysts. “Husky indicated that its minimum threshold requirement (approximately 66.6 per cent of outstanding MEG shares tendered) was not met and it declined to extend the deadline, even though the proportion of shares tendered exceeded 50 per cent.

Analysts surprised, confounded

“The abandonment of the bid is surprising. While the number of MEG shares tendered did not meet Husky’s approximately 66.6 per cent threshold, the offer garnered more than 50 per cent of outstanding shares. Husky could have extended the tender period, and in fact, our expectation was that the company would have done just that. After all, securing over 50 per cent of the shares was a good first step, so the company could have extended the deadline to see how things play out. Given the progress made, it would have been a relatively small additional step in the overall process and stopping at this point is, in our view, confounding.”

The analysts, who stick with their ‘Hold’ recommendation, ‘Average’ risk rating and $22 share price target, say that Husky’s move to back down from its takeover attempt leaves more questions than answers.

This is an edited version of an article that was originally published for subscribers in the February 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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