Jason Castelli, CFA June 12, 2015

Transcription

1 Weekly Trends Jason Castelli, CFA June 12, 2015 Don t CRY For Me The Thomson Reuters Commodity Index (CRY) has struggled since 2011 and is sitting just 15% off of its 2009 low. The S&P/TSX Materials Index is up 2.2% YTD, but down 4.2% over the last 12 months. The recent strength has been driven by the following sub-industries: precious metals producers, metals & glass and chemical producers. In our view, the weak commodity environment is a function of our new reality, a global economy that is stuck growing below trend for the foreseeable future. While we are underweight the sector we do believe there are pockets of strength that deserve our attention. We have a preference for gold producers, fertilizer and forestry subindustries. Precious metals. We are approaching the seasonally strong period for bullion, which generally begins in September; however, in more recent years we note this seasonality has shifted forward compared to the historical trend. Gold equities also typically experience a seasonal trend, which starts ahead of the commodity. We hold Franco-Nevada (FNV-T) and Detour Gold (DGC-T) in our Dividend Plus+ and Canadian Growth portfolios. Fertilizer. Our preferred ag play is Agrium (AGU-T), a global retail supplier of agricultural products and services. In the metal & glass sub-industry, we like CCL Industries (CCL B-T), a specialty packaging company operating in three segments, Label (66%), Avery (26%) and Container (8%). Equity Market YTD Returns (%) S&P/TSX Comp 0.8 S&P/TSX Small Cap 2.1 S&P Russell MSCI World 4.1 MSCI Europe 14.2 MSCI EAFE 6.8 MSCI EM Canadian Sector TSX Weight Recommendation Consumer Discretionary 6.7 Overweight Consumer Staples 3.8 Market weight Energy 20.3 Market weight Financials 35.1 Market weight Health Care 6.0 Market weight Industrials 8.0 Overweight Information Technology 2.4 Overweight Materials 10.9 Underweight Telecom 4.7 Market weight Utilities 2.1 Underweight Chart of the Week: Materials Sub-industry Performance YTD 40% 30% Precious Metals Chemical 20% Metal & Glass 10% Forest 0% Metals & Mining -10% Fertilizer & Ag -20% Silver -30% Steel -40% Gold -50% 31-Dec Jan-15 1-Mar Mar Apr May-15 Technical Considerations Level Reading S&P/TSX Composite 14, DMA 15,168.4 Downtrend 200-DMA 14,893.6 Downtrend RSI (14-day) 39.1 Neutral 16,000 15,500 15,000 14,500 14,000 13,500 13,000 12,500 12,000 11,500 S&P/TSX 50-DMA 200-DMA 11,000 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Please read domestic and foreign disclosure/risk information beginning on page 4 Raymond James Ltd King St W. Toronto ON Canada M5H 3Y West Georgia Street Vancouver BC Canada V6C 3L2.

2 13-Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb Jul Dec Oct Aug-14 Jun-2000 Jun-2001 Jun-2002 Jun-2003 Jun-2004 Jun-2005 Jun-2006 Jun-2007 Jun-2008 Jun-2009 Jun-2010 Jun-2011 Jun-2012 Jun-2013 Jun-2014 Weekly Trends June 12, 2015 Page 2 of 5 Wake Me Up Before You Go-Go Like WHAM! s 1984 hit, it appears commodities have failed to wake up. It s been 6 years since the financial crisis, and while equity markets have enjoyed a liquidity injected rally some commodities didn t appear to get the message. Copper, coal and iron ore prices have all trended lower since 2011; the Thomson Reuters Commodity Index (CRY) has struggled since 2011 and is sitting just 15% off of its 2009 low. In our view, the weak commodity environment is a function of our new reality, a global economy that is stuck growing below trend for the foreseeable future. We believe this is a function of: Too much debt. Developed economies facing rather oversized debt burdens private debt (Canada) and/or public debt (Japan) which pulls forward demand at the expense of future consumption. For public finances there is little relief insight given the future obligation owed to the aging baby boomers. China s slowing. No secret here; economic growth in China has been slowing for years. As the world s largest consumer of industrial metals it should not be a huge surprise metals prices have languished in lockstep with the deceleration of the Chinese s economic growth. US dollar strength. A strong US dollar weighs on commodity prices as commodities are priced in dollars. As such, as the dollar rises consumers can buy fewer and fewer units with the same level of dollars. We believe the US dollar will continue to strengthen based on the divergence in monetary policies between the US Federal Reserve (Fed) and other central banks. As the Fed looks to hike rates in 2015 and many central banks look to lower interest rates or implement QE, this should provide a supportive backdrop for the US dollar. Technical view. The Thomson Reuters Commodity Index has been making successive lower lows since While nothing goes straight down and there will be times of short-term strength in commodity prices, we do believe the longer term trend will remain negative until we see an improvement in growth from the emerging markets. Looking at the S&P/TSX Materials Index, the technical profile for the index remains bearish with the sector in a long-term relative downtrend. China GDP Slowing Commodity (CRY) Remain Under Pressure S&P/TSX Materials Relative Strength Falling trend - materials underperforming the TSX Rising trend - materials outperforming the TSX

3 Weekly Trends June 12, 2015 Page 3 of 5 You've Gotta Have Faith The S&P/TSX Materials Index is up 2.2% YTD, but down 4.2% over the last 12 months. The recent strength has been driven by precious metals producers, metals & glass and chemical producers. While we are underweight the sector we do believe there are pockets of strength that deserves particular attention. We have a preference for gold producers, fertilizer and forestry sub-industries with in the materials sector. Precious metals. We are approaching the seasonally strong period for bullion, which generally begins in September; however, in more recent years we note this seasonality has shifted forward compared to the historical trend. Gold equities also typically experience a seasonal trend, which starts ahead of the commodity. Gaining exposure to precious metals will depend on ones willingness to take on risk. We have identified producers that we believe can outperform by screening for gold producers that exhibit an improving free cash flow profile. We hold Franco-Nevada (FNV-T) and Detour Gold (DGC-T) in our Dividend Plus+ and Canadian Growth portfolios. For more conservative clients wishing to gain exposure to the sector we recommend FNV; for those with a higher risk tolerance we highlight DGC. Our positive view on DGC is based on the fact its operations are in the mining-friendly jurisdiction of northern Ontario. The company s most recent mine update de-risks the story as production and productivity improved. Management continues to forecast 2015 gold production of 475,000 to 525,000 ounces at total cash costs of US$780-$850/oz. We think there are two ways to win with DGC, either it is re-rated to a multiple that reflects recent improvements or DGC attracts potential suitors. DGC trades at a discount to NAV despite its improving FCF position, operating in a stable mining jurisdiction, long reserve life and improved execution. Shares trade at ~ 0.9x NAV, below the group average of 1.0x. Gold Seasonality 25 Year Average Chart 12% Gold - 25 Yr Average 10% Gold 2015 YTD 8% 6% 4% 2% We are here 0% -2% -4% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Gold Screen Improving Free Cash Flow Price Mkt Cap Consensus Company Name Ticker 06/11/15 ($mln) Target Price Upside Franco-Nevada Corp FNV $ ,187 $ % Tahoe Resources Inc THO $ ,019 $ % Eldorado Gold Corp ELD $5.34 3,827 $ % Yamana Gold Inc YRI $4.01 3,790 $ % Kinross Gold Corp K $3.09 3,530 $ % Detour Gold Corp DGC $ ,471 $ % B2Gold Corp BTO $1.95 1,797 $ % Centerra Gold Inc CG $7.42 1,752 $ % NOVAGOLD RESOURCES INC NG $4.80 1,523 NA NA IAMGOLD Corp IMG $2.80 1,096 $ % AuRico Gold Inc AUQ $3.78 1,065 $ % SEMAFO Inc SMF $3.47 1,020 $ % Primero Mining Corp P $ $ % First Majestic Silver Corp FR $ $ % Silver Standard Resources SSO $ $ %

4 Weekly Trends June 12, 2015 Page 4 of 5 Fertilizer. Our preferred ag play is Agrium (AGU-T). Agrium Inc., a global provider of crop inputs, is poised to benefit from increased demand from Asia and Latin America as well as improved ag sentiment in North America. The company offers a diversified way to play the fertilizer space, participating in potash, nitrogen and phosphates, as well as having a significant retail and distribution presence. In addition to the supportive operating environment, Agrium has exited a period of heavy capital investment expenditures, setting it up to generate excess cash flow for the foreseeable future. Capex is anticipated to have peaked at US$2.2 bln in 2014, however, management forecasts a future capital expenditure run rate of just US$800 mln, resulting in significant free cash flow growth and increased return of capital to shareholders. Within five years, management anticipates the company can potentially achieve greater than US$10/share per year in available free cash flow. Given Agrium s improved financial outlook, the company recently increased its targeted dividend payout ratio to 40-50% of normalized free cash flow and introduced a share repurchase program for 5% of outstanding shares. Forestry. Our equity specialist Larbi Moumni highlighted forestry as a particularly attractive industry in our June 1 Trends & Ideas. Our preferred name is Interfor (IFP-T), which we believe is best positioned for a recovering US housing market given 60% of revenues come from US markets (compared to WFT at 46% and CFP at 47%). Additionally, IFP is a pure-play lumber producer; avoiding exposure to pulp gives it an edge compared to its peers (WFT 23% from its pulp segment and CFP 33%). In the metal & glass sub-industry, we like CCL Industries (CCL B-T), a specialty packaging company operating in three segments, Label (66%), Avery (26%) and Container (8%). We believe CCL is leveraged to three favourable factors: 1) improving consumer spending trends; 2) weaker commodity prices; and 3) the tailwind of a weaker Canadian dollar. CCL generates ~90% of revenue outside Canada, primarily in the US and Europe. Approximately 80% of revenue is generated from global non-durable customer and healthcare companies. CCL s customer list includes wellknown companies such as Proctor & Gamble, Heineken, Merck, Johnson & Johnson and Pfizer. CCL has successfully grown its dividend for the last 25 years, most recently raising its quarterly payout by 25% to $1.50 annual (indicated yield of 1.0%). The dividend appears sustainable as it boasts a low payout ratio of just 22% and has consistently demonstrated the ability to generate free cash flow; 5-year annual free cash flow growth is 13.7%. Agrium (AGU-T) $150 $140 $130 $120 $110 $100 $90 $80 Agrium (AGU-T) Interfor (IFP-T) $25 $23 $21 $19 $17 $15 $13 $11 $9 $7 $5 Interfor (IFP-T) CCL Industries (CCL B-T) $180 $160 $140 $120 $100 $80 $60 CCL Industries (CCL'B-T) $40

5 Weekly Trends June 12, 2015 Page 5 of 5 Important Investor Disclosures Complete disclosures for companies covered by Raymond James can be viewed at: This newsletter is prepared by the Private Client Services team (PCS) of Raymond James Ltd. (RJL) for distribution to RJL s retail clients. It is not a product of the Research Department of RJL. All opinions and recommendations reflect the judgement of the author at this date and are subject to change. The author s recommendations may be based on technical analysis and may or may not take into account information contained in fundamental research reports published by RJL or its affiliates. Information is from sources believed to be reliable but accuracy cannot be guaranteed. It is for informational purposes only. It is not meant to provide legal or tax advice; as each situation is different, individuals should seek advice based on their circumstances. Nor is it an offer to sell or the solicitation of an offer to buy any securities. It is intended for distribution only in those jurisdictions where RJL is registered. RJL, its officers, directors, agents, employees and families may from time to time hold long or short positions in the securities mentioned herein and may engage in transactions contrary to the conclusions in this newsletter. RJL may perform investment banking or other services for, or solicit investment banking business from, any company mentioned in this newsletter. Securities offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Financial planning and insurance offered through Raymond James Financial Planning Ltd., not a Member-Canadian Investor Protection Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The results presented should not and cannot be viewed as an indicator of future performance. Individual results will vary and transaction costs relating to investing in these stocks will affect overall performance. A member of the PCS team responsible for preparation of this newsletter or a member of his/her household has a long position in the securities of Agrium (AGU-T), Detour Gold (DGC-T) and Interfor (IFP-T). Within the last 12 months, RJL has undertaken an underwriting liability or has provided advice for a fee with respect to the securities of Interfor (IFP-T). Information regarding High, Medium, and Low risk securities is available from your Financial Advisor. RJL is a member of Canadian Investor Protection Fund Raymond James Ltd.