Four Reasons to Buy Sherritt - RBC

Shares of Sherritt International Corp. (SHERF.PK) have flatlined for months despite a strong run for metal prices. Robin Kozar, an associate analyst at RBC Capital Markets, wrote that the stock would need to rally 65% (based on historic multiples) just to return to its regular trading range at this point in the cycle.

He also provided four specific reasons why investors should buy right now.

1. Risks are overstated. Investors are worried about political risks in Cuba and around the Ambatovy project in Madagascar. Mr. Kozar expects those risks to diminish over time.

2. Plenty of leverage to nickel in the short term and long term. There aren't a lot of nickel plays around anymore, and Sherritt is one of them. RBC is bullish on the metal because of investment demand in China, falling inventories on the London Metals Exchange, signs of a rebound in stainless steel, scrap shortages, and the strike by Vale Inco (VALE) workers in Sudbury.

3. Sum-of-the-parts analysis points to "great value." At the current share price, Mr. Kozar calculated that investors are only paying for the "stable" coal and power assets and are getting the metals business for free. He even suggested that value could be realized by future spin-offs, acquisitions, or even a break-up (though none of those things are in the cards right now).

4. Attractive valuation. Sherritt is trading at a 41% discount to his net asset value estimate of C$9.02 a share. That is more than double the North American group average.

Mr. Kozar rates the shares "outperform" with a price target of C$7.00 a share.

Comments

[FIFOkid:]

I definitely see the author's point in liking the stock if you take the same view that Teck Cominco rebounded so should Sherritt but it doesn't hide the fact they expanded at a top in a cycle.

I think the biggest risk here is the ballooning capex requirements in all HPAL nickel laterlite projects as the cost so far for Ambatovy have been totally out of control and the tight credit markets don't help out matters.

Aug 09 01:59 PM