first quarter top picks 2013 · 2013. 2. 12. · a disclosure fact sheet is available on pages...

A Disclosure fact sheet is available on Pages 31-32 of this report.

FIRST QUARTER TOP PICKS 2013

Pricing as of December 31, 2012

Changes to Q1 2013 Top Picks

Added:

Atna Resources Ltd. (T-ATN)Avigilon Corporation (T-AVO)FirstService Corporation (Q-FSRV; T-FSV)Geodrill Ltd. (T-GEO)Parkland Fuel Corporation (T-PKI)Sonde Resources Corp. (T-SOQ)Trevali Mining Corporation (T-TV)

Removed:

Copper Mountain Mining (T-CUM)Palliser Oil & Gas Corporation (V-PXL)Points International Ltd. (T-PTS; Q-PCOM)Strongco Corp. (T-SQP)SunOpta Inc. (T-SOY; Q-STKL)WestJet Airlines Ltd. (T-WJA)

Atna Resources Ltd.(T-ATN)

Avigilon Corporation(T-AVO)

CanElson Drilling Inc.(T-CDI)

FirstService Corporation (Q-FSRV; T-FSV)

Geodrill Ltd.(T-GEO)

Sonde Resources Corp.(T-SOQ)

Parkland Fuel Corporation(T-PKI)

Trevali Mining Corporation(T-TV)

Q412 Top Picks

PI Top Picks 0.9%

TSX Index 0.9%

TSX Small Cap Index -2.7%

2 | Q113

TABLE OF CONTENTS

2012: A Year of Macro Events 3

Consumer Products and Special Situations

Sector Review 6 FirstService Corp. (Q-FSRV; T-FSV) 8

Special Situations

Sector Review 9

Parkland Fuel Corporation (T-PKI) 11

Energy Services

Sector Review 12

CanElson Drilling Inc. (T-CDI) 14

Oil and Gas

Sector Review 15

Sonde Resources Corp. (T-SOQ) 17

Base Metals Mining

Sector Review 18

Trevali Mining Corporation (T-TV) 20

Precious Metals Mining

Sector Review 21

Atna Resources Ltd. (T-ATN) 23

Technology

Sector Review 24

Avigilon Corporation (T-AVO) 26

Transportation and Industrial

Sector Review 27

Geodrill Ltd. (T-GEO) 30

Disclosure Fact Sheet 31

3 | Q113

2012: A YEAR OF MACRO EVENTS

In a year that was largely defi ned by macroeconomic issues, our Top Picks fi nished ahead of the S&P/TSX Small Cap Index. In 2012, our Top Picks gained 4%, roughly even with the S&P/TSX Composite Index at 4% and ahead of the 5% decline in the S&P/TSX Small Cap Index.

After a very volatile year we are entering 2013 with a much more positive outlook. Our optimism is driven by a number of macro economic factors including; more signs the global economy has bottomed and showing signs of recovery; emerging markets, notably China, are staging a cautious recovery; Europe’s crisis is moderating; and a continuing improvement in the US economy, notably in housing and employment.

While the US ‘fi scal cliff’ is far from over, the last minute partial agreement has lifted markets markedly over the past couple of weeks. We expect continued volatility with equity markets as the much more diffi cult US expenditure/debt debate to continue to challenge for US policy makers.

42%

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31%

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2010 2011 2012

PI's Top Picks S&P/TSX Composite Index S&P/TSX Small Cap Index

Source: PI Financial Corp.

4 | Q113

Q4 Top Picks Outperform Small Cap Index

Our Top Picks were in line with the S&P/TSX Composite and ahead of the S&P/TSX Small Cap Index in the fourth quarter of 2012. PI’s picks, in aggregate, gained 0.9% in the Q4 period (September 28, 2012 to December 31, 2012) versus a gain of 0.9% on the S&P/TSX and a 2.7% loss on the Canadian Small Cap Index.

0.9%

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S&P/TSX Composite Index S&P/TSX Small Cap Index PI's Top Picks


Our top performer was our Base Metals Mining Top Pick, Copper Mountain Mining Corporation (T-CUM), which increased 16.6% while the S&P/TSX Capped Diversifi ed Mining and Metals Index increased 12.6%. Although copper prices were, for the most part, fl at during the quarter, high expectations are built into the CUM share price for a “turn-around” fourth quarter, when the problematic mill is expected to fi nally be able to maintain high production levels and ultimately produce ~20M lbs of copper-in-concentrate during the quarter. The strong share price performance during the quarter is refl ective of these high expectations. Although there has been no formal update on the mill performance given by CUM, we note that management did state the mill was operating at an availability rate of ~88% during the beginning of October which is a good sign of the mill being able to maintain high production levels.

Our Industrials/Transportation Top Pick, WestJet Airlines Ltd. (T-WJA), gained 14% in Q4 compared to the S&P/TSX Transportation Index, which increased 8.6%. The Company continues to fi nd demand for its expanding fl eet, thanks to its push into the business traveler and leisure segments, as well as expanded code shares and interline relationships. Results in Q312 exceeded expectations and solid traffi c and operating data points to further improvement. During the quarter, the Company provided a number of details on its next phase of growth including details on premium economy seating, new in-fl ight entertainment and the Company’s new regional carrier “Encore”. Supporting these initiatives, new information systems are expected to drive earnings growth substantially over the next several years.

CanElson Drilling Ltd.’s (T-CDI) stock, our Top Pick for Q412 was 1% lower in the quarter as the Energy Equipment and Services Index lost 6.8%. The sector reported weaker-than-expected Q312 results as E&P companies’ cash fl ow were hampered by weak natural gas prices and wide regional differentials in Canadian crude and liquid prices thus causing post spring break-up activity in Canada not to pick-up as strongly as we had expected. As predicted, CDI reported more resilient earnings because of its high exposure to the oil producing regions, sound execution and superior operations which produces above-average utilization rates and margins. Moreover, CDI further advanced its bi-fuel initiatives thus provided a positive catalyst for its stock.

Our Oil and Gas Top Pick, Palliser Oil & Gas Corporation (V-PXL), declined 1.5% while the S&P/TSX Capped Energy Index declined 4.3%. Getting only partial recognition for the strides demonstrated by way of increased

5 | Q113

volumes and lower operating costs – Palliser’s share price refl ects the impact of a 26% decline in WCS crude pricing in the quarter - PXL’s benchmark crude. Operationally, Palliser’s High Volume Lift (“HVL”) strategy has already delivered 14 consecutive quarters of growth. Now coupled with an in-house water disposal strategy, Palliser appears poised to become the lowest cost producer in the Junior and Midcap heavy oil space. Look for a mid-January press release to show the Company met (or exceeded) its 2012 exit guidance of 2,700 boe/d (97% heavy oil). Also worthy of mention, our Oil and Gas Top Pick for both Q2 and Q3 (but not Q4) was Strategic Oil & Gas Ltd. (V-SOG) which turned out to be the top performing domestic energy stock in Q4 –up~70%.

Points International Ltd. (T-PTS; Q-PCOM) saw its share price fall 2.7% during the fourth quarter. Points lagged behind the Info-Tech sub-index, which was up 11.1% during the quarter as a result of an increase in Research in Motion’s share price. We note that Points’ shares have picked up momentum with an increase of 6.3% over the past month due to an announced deal with Southwest Airlines.

Strongco Corp. (T-SQP), our Special Situations Top Pick, declined 8.5% over the quarter while the S&P/TSX Canadian Industrials Index gained 7.4%. Despite its profi tability, the Company’s Q3 earnings report indicated that inventory levels were rising along with debt levels. Investors were not happy with these developments, though a strong Q4 could be able to bring both fi gures down.

Our Consumer Products Top Pick in Q412 was SunOpta Inc. (Q-STKL; T-SOY). While SOY generated an 11% return in 2012, in the fi nal quarter it declined 11%. This materially underperformed the S&P/TSX Canadian Consumer Staples Index which increased 8.7% in the quarter and 20% for the full year. In the quarter, SOY reported its third consecutive quarter of record results. Strong EBITDA and operating margin growth refl ecting improved operating effi ciency was not refl ected in share performance. We expect continued improving results to be reported in Q412 and into 2013 with volume growth.

Performance of the Q412 Top Picks

Q4/12 Top Picks

Value

Sep 28/12

Value

Dec 31/12 Return

Comparable

Sub-index

Return Sub-index

S&P/TSX Composite Index 12,317 12,434 0.9% n/a

S&P/TSX Cdn. Small Cap Index 601 585 -2.7% n/a

Copper Mountain Mining Corporation $3.37 $3.93 16.6% 12.6% Diversifi ed Metals & Mining

WestJet Airlines Ltd. $17.45 $19.81 14.0% 8.6% Transportation

CanElson Drilling Inc. $4.98 $4.88 -1.0% -6.8% Energy Equipment and Services

Palliser Oil & Gas Corporation $0.65 $0.64 -1.5% -4.3% Oil & Gas

Points International Ltd. $11.30 $11.00 -2.7% 11.1% Technology

Strongco Corp. $5.08 $4.65 -8.5% 7.4% Industrials

SunOpta Inc. $6.29 $5.60 -11.0% 8.7% Consumer Staples

Average 0.9% 5.3%


* To calculate Top Pick performance we assume an equal weighted purchase of each of our recommendations. Top Picks are sold at the end of each

quarter and the total proceeds are reinvested equally in each of our new Top Picks for the next quarter. Transaction fees are not included. The S&P/

TSX Composite index is calculated based on a market capitalization weighting versus our Top Picks performance which uses an equal weighted

percentage change that includes dividend payments.

6 | Q113 Sheila Broughton, MBA, CFA

SECTOR OVERVIEW

The North American markets were volatile in 2012 with gains in Q1 offset by losses in Q2, followed by generally positive returns in both Q312 and Q412. In Q412, the S&P/TSX rose 0.9%, the DJIA declined 2.5%, while the S&P/TSX Consumer Discretionary Index gained 4.9% and the Consumer Staples Index gained 8.7%.

As a group, our Consumer Products covered companies generated a negative 6.2% return in Q412. Our BUY rated Consumer Products covered companies generated a negative return of 2.9% in Q412. For the full year our Consumer Products covered companies generated a 9.2% return and our BUY rated stocks generated a 15% return.

These returns compare to a full year return of 4.0% for the S&P/TSX Index, a 19% return for the S&P/TSX Consumer Discretionary Index and a 20% return for the S&P/TSX Consumer Staples Index.

Amongst our covered consumer products companies, our best performer in 2012 was Liquor Stores N.A. Ltd. (T-LIQ) which generated a 31% return. This was followed by MEGA Brands Inc. (T-MB) and Coastal Contacts Inc. (T-COA; Q-COA) each up 18%.

SECTOR OUTLOOK

The partial fi scal cliff solution has led to early 2013 investor confi dence, but we caution that there is more work ahead to address remaining issues. Additionally, the expectation of continued economic and political challenges in Europe are also expected to weigh on overall global investor confi dence. Offsetting this, indications of stronger economic growth in Asia are supportive of stronger commodity demand in 2013.

In Canada, Q312 GDP grew at a lower than expected annualized rate of 0.6% down from 1.7% growth in Q212. Economists generally agree that the US recovery is key to Canadian economic strength and currently the Bank of Canada is forecasting Q412 GDP growth of 2.5%, and 2013 growth of 2.3%. In the US, Q312 economic growth was revised upwards with real GDP increasing 3.1% on an annual basis up from an earlier 2.7% estimate and 1.3% in Q212. While Q412 GDP is forecast to rise only 1.2%, the OECD predicts 2% US growth in 2013 and 2.8% in 2014.

We remain cautiously optimistic for continuing strong returns from consumer products stocks in 2013 following 2012 results. We continue to focus on companies with effi cient operations, strong cash fl ow and solid capital structures with the capacity to support growth. We also continue to look for investment opportunities amongst companies that are repositioning their businesses to improve their operations to increase shareholder value.

COVERAGE LIST OVERVIEW

Coastal Contacts Inc. (T-COA; Q-COA) is a rapidly growing direct-to-consumer online retailer of vision care products. COA is rolling out their online glasses program in the US in a similar manner to the rollout initiated in Canada in 2008. Online contact lens sales continues to generate steady cash fl ow providing fi nancial support to drive glasses growth.

COA’s shares generated a 7.7% loss in the fourth quarter and an 18% gain for the full year. In the fourth quarter, COA fi led and subsequently postponed a proposed US$40M fi nancing. We anticipate management will re-address the equity markets in 2013 to support a more aggressive US glasses rollout to allow rapid market share gains. Additionally, COA recently reported Q412 results in line with Company guidance. Q412 revenue increased 4.2% to $50.7M. Glasses sales increased 27% to $13.8M, including a 100% increase in glasses sales in the US. We are forecasting FY13 revenue to increase 8.4% to $213M, adj. EBITDA of $104K and a net loss of $2.6M or $0.08/share. We maintain our BUY recommendation, 12-month target of $9.00/share and ABOVE AVERAGE risk rating.

FirstService Corporation (T-FSV; Q-FSRV) is a diversifi ed real estate services company providing commercial real estate services, residential property management services and property improvement services. In the quarter, FSV shares increased 0.5% and were up 4.2% for the year.

FirstService reported Q312 results that missed our expectations. Strong Commercial Real Estate and Property Management results were offset by a 46% decline in Property Services revenue primarily related to decreased foreclosure activity in the US. We expect foreclosure results to remain weak in the near-term refl ecting lower industry volumes. We believe FirstService’s globally diverse operations will continue to drive sustainable, profi table growth. We retain our BUY recommendation, 12-month target of US$40.00 and AVERAGE risk assessment.

Great Canadian Gaming Corp. (T-GC) operates and develops casinos and racetracks with associated hospitality and entertainment facilities in British Columbia, Ontario, Nova Scotia and Washington State. GC shares declined 4.9% in the quarter and generated a 14% return in 2012. GC recently reported Q312 results that missed expectations. Q312 net revenue increased 0.8% to $101.8M from $101.0M in Q311 as growth from River Rock, GC’s fl agship facility was offset by results from declines at other facilities especially Boulevard Casino, the BC Racinos and Casino Nova Scotia.

CONSUMER PRODUCTS

Sheila Broughton

MBA, CFA

604.664.2695sheilab@pifi nancialcorp.com

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While Q312 operating results were softer than expected, we continue to believe the Ontario gaming redevelopment is key to GC’s mid-term growth. GC has over $400M of cash and credit available to address potential new opportunities. We believe GC is well positioned for long-term growth. We currently rate GC as NEUTRAL with a 12-month target of $9.60 and an AVERAGE risk rating.

Liquor Stores N.A. Ltd (T-LIQ) is a liquor retailer based in Alberta with operations in Canada and the US. LIQ reported strong Q312 results. Q312 sales increased 4.7% to $165M with Canadian same store sales increasing 2.5% to $119M while US same store sales were down 0.4% to US$35.0M. This was the 8th consecutive quarter of same store sales growth in Canada partly offset by a small decline in the US after 6 quarters of US same store sales growth. LIQ generated a 0.6% return in the quarter and a 31% return in 2012 including dividends. LIQ’s $0.09/share monthly dividend, ($1.08/share annually) provides approximately a 5.8% yield. We continue to recommend Liquor Stores (T-LIQ) as a BUY with a 12-month target of $25.00 and an AVERAGE risk rating.

MEGA Brands Inc. (T-MB) is a global designer, manufacturer and marketer of quality toys, stationery and activities products. Brands include MEGA BLOKS, MEGA PUZZLES, MEGA GAMES, ROSE ART and BOARD DUDES.

MEGA Brands generated a 2.8% return in the quarter and an 18% return in 2012. MB reported Q312 net sales increased 5.0% to $140M with a 5.4% increase in Toys sales to $112M and a 3.4% increase in Stationery and Activities sales to $28.4M. We expect Barbie and Hot Wheels licensed construction toy lines will be key growth drivers for MB in both the near and long-term. We continue to recommend MEGA Brands (T-MB) as a BUY with a 12-month

target of C$12.00. Our target refl ects a 5.9x EV/EBITDA and a 0.8x sales multiple based on our 2013 forecast. We continue to assess MB as an ABOVE

AVERAGE investment risk.

Premium Brands Holdings Corp. (T-PBH) is a manufacturer, marketer and distributor of high quality, branded food products primarily in western Canada. PBH shares generated a negative 2.8% return in the quarter and a positive 10% return for investors in 2012 including dividends.

In the quarter, PBH reported softer than expected Q312 results. Q312 revenue increased 24% to $255M, adjusted EBITDA increased 14% to $20.2M while net earnings to shareholders decreased 25% to $4.5M or $0.21/share (fd). Management is now expecting 2012 EBITDA to be at the low-end of their $70M-$75M guidance range. This compares to 2011 EBITDA of $55M refl ecting the impact of material acquisitions as well as internal growth. We maintain our BUY recommendation, AVERAGE risk rating and 12-month target of $22.00. Our target represents an EV/EBITDA multiple of 9x our 2013 forecast and a 5.3% yield.

SunOpta Inc. (T-SOY; Q-STKL) is a global company focused on natural, organic and specialty foods. SOY was our Consumer Products Top Pick in Q412. While SOY generated an 11% return in 2012, in the fi nal quarter it declined 11%.

In the quarter, SOY reported its third consecutive quarter of record results. Strong EBITDA and operating margin growth refl ecting improved operating effi ciency was not refl ected in share performance. We expect continued improving results to be reported in Q412 and into 2013 refl ecting both operating effi ciency gains and the positive leverage of volume growth. We retain our BUY recommendation, 12-month target of US$9.25 and AVERAGE risk rating for SunOpta Inc. (Q-STKL; T-SOY). Our target valuation refl ects a 9.0x EV/EBITDA multiple based on our 2013 forecast.

CRH Medical Corporation (T-CRH) is a direct-to-physician distributor of its proprietary product to treat hemorrhoids in the US. CRH reported Q312 revenue increased 23% to $1.7M, leading to net income increasing 19% to $338K, CRM’s 7th consecutive profi table quarter. We are forecasting 2012 sales to increase 25% to $6.9M leading to full year gross margin of $3.1M or 45.1% of sales, EBITDA of $1.8M (26.4% margin) and net income of $1.4M or $0.03/share. CRH is a micro-cap stock with limited share liquidity with limited cash reserves. CRH is NON-RATED, SPECULATIVE risk and we do not provide a target price.

Ten Peaks Coffee Company (T-TPK), based in Burnaby, BC, is a chemical free, organic decaffeinated coffee processor. TPK owns the Swiss Water Decaffeinated Coffee Company Inc. (SWDCC) and Seaforth Supply Chain Solutions Inc. In the quarter, TPK shares generated a 1.29% return. TPK is a micro-cap stock with limited share liquidity which could lead to material share price volatility. TPK pays a quarterly dividend of $0.0625/share ($0.25/share annual dividend) resulting in an approximate yield of 9%. TPK is a NON-RATED company and we do not provide a target price. We assess an investment in TPK with a SPECULATIVE risk rating.

TOP PICK: FIRSTSERVICE CORPORATION (Q-FSRV; T-FSV)

Shares Market Net Cash P/E 12-MosStock Recent O/S FD Cap. (Debt) Current Target Total Stock Volatility/

Symbol Price (Million) (Million) (Million) FY11A FY12E FY13E FY11A FY12E FY13E FYE Price Return Rating RiskCoastal Contacts Inc. T-COA $6.00 30.9 $185 $14.1 $183 $196.1 $212.5 ($0.19) ($0.17) ($0.08) N/A $9.00 50% BUY ABVCRH Medical Corp T-CRH $0.27 53.5 $14.4 US$4.3 US$6 US$7 US$9 US$0.02 US$0.03 US$0.04 6.8x N/R N/A N/R SPECFirstService Corp.* Q-FSRV US$28.23 30.4 US$858 (US$345) US$2,224 US$2,310 US$2,465 US$1.81 US$1.81 US$1.89 14.9x US$40.00 42% BUY AVGGreat Canadian Gaming Corp. T-GC $9.55 74.9 $715 ($359) $388 $402 $417 $0.32 ($0.33) $0.56 17.1x $9.60 0.5% NEUTRAL AVGLiquor Stores N.A. Ltd. † T-LIQ $18.56 22.9 $425 ($149) $592 $631 $694 $1.08 $1.01 $1.36 13.6x $25.00 41% BUY AVGMEGA Brands Inc. T-MB $9.84 29.6 $291 (US$149) US$377 US$409 US$432 US$0.45 US$0.77 US$0.92 10.7x $12.00 22% BUY ABVPremium Brands Holdings Corp. † T-PBH $17.15 21.0 $360 ($285) $794 $992 $1,091 $0.68 $0.79 $1.17 14.7x $22.00 35% BUY AVGSunOpta Inc. Q-STKL US$5.63 68.8 US$387 (US$161) US$1,082 US$1,084 US$1,098 US$0.16 US$0.38 US$0.48 11.7x US$9.25 64% BUY AVGTen Peaks Coffee Company Inc. T-TPK $2.72 6.7 $18.2 ($8.0) $61 $63 $66 $0.12 $0.18 $0.24 11.3x N/R N/A N/R SPEC

† PI Financial Corp. has received compensation for acting as fiscal agent or advisor for the subject company over the preceding 12-month period

Company Name

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Revenue (Million) Earnings Per Share (FD)

CONSUMER PRODUCTS


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Opinion and Share Information

Risk: AVERAGECurrent Price*: US$28.23 / C$28.08Potential Return: 42%52 week High / Low: US$32.39 / US$24.62Shares Outstanding: 30M (basic)Shares Outstanding: 30M (fd)Market Capitalization: US$847M (fd)Market Float: 22MQuoted Market Value: US$621M30 Day Av. Daily Volume: 22,000Net Debt: $345MNet Debt/Capital: 59%CEO: Jay HennickPresident & COO: Scott Patterson

*Current price as of December 31, 2012

Financial Summary

(FYE Dec. 31)($M’s except EPS) 2010 2011 2012e 2013e

Revenue 1,986 2,224 2,310 2465Adj. EBITDA 147 162 161 187Adj. EBITDA % 7.4% 7.3% 7.0% 7.6%Adj. net earnings 48.8 55.4 55.0 57.5Adj. EPS (fd) $1.61 $1.81 $1.81 $1.89EV/EBITDA 9.3x 8.8x 8.8x 7.1x

Quarterly FY12 Q1 Q2 Q3 Q4e

Revenue 490 593 590 637 Adj. EPS (fd) ($0.10) $0.45 $0.60 $0.87

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Company Description

FirstService Corporation (T-FSV; Q-FSRV) is a global, diversifi ed real estate services company providing com-mercial real estate, residential property management and property improvement services.

FIRSTSERVICE CORPORATION (Q-FSRV; T-FSV)

Rating: Buy, Target: US$40.00

POSITIVE COMMERCIAL REAL ESTATE OUTLOOK

We have selected FirstService Corp. (Q-FSRV; T-FSV) as our Q113 Consumer Products Top Pick. FSV recently reported Q312 results. Commercial real estate (CRE) revenue increased 17% to $296M and residential property management (RPM) revenue increased 8.6% to $227M offset by a 46% decline in Property Services (PS) revenue to $67.4M due to a 63% decline in revenue from foreclosure services. CRE revenue growth was driven by a 24% revenue increase in the US refl ecting the continued success of FSV’s investment in recruiting brokers and developing their US business.

Q312 adjusted EBITDA increased 2.4% to $48.8M from $47.6M in Q311 and EBITDA margin increased to 8.3% from 8.1% primarily refl ecting operating leverage in the CRE division. This led to adjusted net earnings of $18.1M or $0.60/share compared to Q311 results to $18.5M or $0.61/share largely refl ecting the impact of lower foreclosure results offsetting the commercial real estate and property management gains.

Outlook/Forecast:

FirstService has over 1.2B square feet of commercial real estate under management and remains well capitalized for growth.

Our 2012 forecast includes Commercial Real Estate revenue growth of 16% to $1,152M with a 100 basis point increase in EBITDA margin to 6.2%. Looking ahead to 2013 we are forecasting CRE revenue to increase 7.0%. We caution that visibility is limited within the commercial real estate sector generally and that volatility risks remain high amidst global economic challenges.

FSV which has long been the largest Residential Property Management company in the US is now also the largest RPM company in Canada refl ecting recent acquisitions. FSV’s North America platform now includes over 5,600 properties and 1.3M residential units.

FSV continues to effectively increase its market share organically and through acquisitions. We are forecasting the RPM group will grow 10% in 2012 to $837M and expect RPM to generate an 8.5% EBITDA margin in 2012 comparable to 2011. In 2013, we are forecasting 7.0% revenue growth for the RPM group.

We are forecasting Property Services revenue to decline 32% to $321M in 2012 with a full year EBITDA margin of 9.3% down from 13.2% in 2011 refl ecting lower foreclosure volumes and margins. We are forecasting 5.0% revenue growth for the Property Services group in 2013.

FirstService has approximately US$150M of cash and available credit to support growth and further acquisitions and targets acquiring 5% of previous year’s EBITDA annually while generating annual organic growth of 5%.

Valuation and Recommendation

FirstService has a convincing track record of exceeding its annual growth targets, it has a solid capital structure and disciplined acquisition and organic growth strategies. We have confi dence in management’s ability to execute their business plan to drive long-term shareholder value. We believe FirstService’s globally diverse operations and improved cost leverage will continue to support sustainable, profi table growth.

We retain our BUY recommendation and 12-month target of US$40.00. Our target refl ects a 9.0x EV/EBITDA multiple based on our 2013 forecast. With a solid track record of fundamental growth we continue to view FSV as an AVERAGE risk for long-term investors. FSV is a globally diversifi ed real estate services company with three related but separate businesses that provide both growth and risk diversifi cation.

CONSUMER PRODUCTS | TOP PICK


9 | Q113 Jason Zandberg, B.B.A, CFA

SECTOR OVERVIEW

The S&P/TSX Composite ended the quarter up just 0.9% but that was better than the S&P/TSX SmallCap Index which declined 2.7% during the same period. The S&P/TSX Dividend Index did slightly better but the 1.3% positive return this index posted in Q4 was hard to get excited about.

From the Special Situations coverage list only two names had positive returns – Parkland Fuel (T-PKI, up 15.5%) and Rocky Mountain Dealerships (T-RME, up 9.4%). Parkland outperformed as fuel margins have been strong throughout 2012 but Hurricane Sandy enhanced margins as refi ned fuel was in short supply. Rocky had a good fourth quarter despite a soft agriculture market. Lower than predicted canola yields put a damper on ag stocks and the drought in the US and parts of Canada hurt corn yields.

SECTOR OUTLOOK

We did not have high expectations for fourth quarter returns and unfortunately we were correct. Markets do not typically perform well after a US election and this year was no different. We had also expected grain prices to soften in the fourth quarter (which they did) and we feel that prices will probably continue to soften until seeding intentions are announced in March 2013.

The fi rst quarter equity returns in Canada are typically strong due in part to RRSP contributions in the fi rst two months of the year. We anticipate good returns for the fi rst quarter as we believe the markets have been dwelling on the negative recent events (fi scal cliff in particular) and have set expectations low.

As mentioned, we feel grain prices could rally by the end of the fi rst quarter while we feel the construction sector should continue making gains in 2013. This is good news for our equipment dealer stocks (Cervus Equipment (T-CVL), Rocky Mountain (T-RME), Strongco (T-SQP) and Wajax (T-WJX)). If infrastructure spending picks up we may see some lost momentum return to Pure Technologies (T-PUR) as well.


Our Q113 Special Situations Top Pick is Parkland Fuel Corp. (T-PKI) which markets and transports fuel across Canada. PKI shares were up 15.5% in Q4. During the quarter, Parkland reported very strong Q3 FY12 results. Revenue was up 1% to $1.1B, EBITDA was up 41% to $60.5M and EPS was $0.44 compared to $0.36 last year. Fuel volumes were down 1% year-over-year as both retail volumes (down 3%) and commercial volumes (down 15%) contracted. Supply and wholesale volumes made up for some of the declines as these volumes increased 32% year over year.

Parkland also announced its acquisition of Elbow River Marketing in December. The accretive nature of this deal (we expect it to add $0.15 per share in earnings next year) meant that our one-year target price increased to $21.00 (from $19.00). We are maintaining our BUY rating (risk: ABOVE

AVERAGE).

Ag Growth International Inc.’s (T-AFN) shares were down 0.9% in Q4. During the quarter, the Company reported Q3 FY12 fi nancial results with revenue increasing 1% to $83.9M, adjusted EBITDA decreasing 15% to $12.5M and EPS increasing from $0.36 to $0.52. Ag Growth had success in Eastern Europe, especially among repeat customers – a strong indicator of future growth. Ag Growth suffered from a poor corn harvest in the US but Ag Growth’s inventory levels and its channel are in reasonable shape. Overall channel inventory was estimated by management to be up just $3M. Relative to the approximately $240M in annual sales in North America, this increase does not represent a material hurdle. We are maintaining our NEUTRAL

(risk: ABOVE AVERAGE) rating along with our 12-month target of $32.50.

Cervus Equipment Corp. (T-CVL) fi nished the quarter down 3.4%. The Company received some unexpected news from the Canada Revenue Agency with respect to its Vasogen arrangement in 2009. This arrangement allowed Cervus to convert into a corporation from a limited partnership while utilizing Vasogen’s extensive loss carry forwards. If CRA deems this transaction as tax avoidance then CVL would need to pay the $16M it has used in tax savings to date. We feel there it is likely that Cervus will be reassessed and thus reduced our target to $24.00 from $24.50. We continue to recommend Cervus Equipment with a BUY rating (risk: ABOVE AVERAGE).

Pure Technologies Ltd.’s (T-PUR) shares fi nished Q4 down 4.4%. Pure Technologies released Q3 FY12 results in mid-November. Revenue increased 57% to $13.4M, EBITDA increased to $1.1M compared to a loss of $2.4M in Q3 FY11 and fully diluted EPS improved to a loss of $0.02 compared to a loss of $0.05 last year. These result were lower than we anticipated as revenue we expected to be reported in Q3 fell into Q4. We slightly lowered our FY12 and FY13 expectations but maintained our BUY rating (risk: ABOVE AVERAGE). We reduced our target price to $5.75 from $6.00.

Rocky Mountain Dealership Inc.’s (T-RME) shares were up 10% during the quarter. Rocky Mountain Dealerships released Q3 FY12 results on November 7th. Revenue was up 21% to $248M, EBITDA was up 13% to $13.5M and normalized EPS was up to $0.45 from $0.35 last year. New equipment sales were up 21% as both the ag and construction equipment increased by 20% and 26% respectively. New ag sales growth improved from 8% yoy growth

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last quarter while new construction sales are a step down from the 43% growth in Q2 FY12.

We remain bullish on both the ag sector and construction sector in Canada. Favourable grain prices and strong construction market in Alberta should fuel growth heading into FY13. We continue to rate Rocky Mountain Dealerships Inc. as a BUY (risk: ABOVE AVERAGE) with a recently decreased 12-month target of $13.50.

Strongco Corp.’s (T-SQP) shares were down a disappointing 8.5% in Q4. Strongco released Q3 FY12 results during the last three months. Revenue was up 10% to $119.2M, EBITDA was up 15% to $15.3M and EPS was down to $0.19 from $0.28 last year. Western Canada reported strong growth as Alberta continues to develop its natural resource markets. This region grew 31% year over year led by strong equipment sales of 35%.

The Company’s overall results showed moderate year over year growth but were all below our expectations. Also, inventory levels have risen more than expected for the second straight quarter as has the debt used to leverage those assets. We decreased our growth expectation in Eastern Canada and the US region and as a result our FY13 sales estimate decreased to $524M (previously $536M) and our FY13 EPS estimate decreased to $1.09 (previously $1.20). We continue to rate Strongco Corporation (T-SQP) with a BUY rating (risk: ABOVE AVERAGE) and a 12-month target of $8.50.

Viterra Inc.’s (T-VT) shares were fl at in Q4. The acquisition of Viterra by Glencore International Plc (L-GLEN) closed in December after it received approval from the Chinese government (VT owns a canola crushing plant in China). The transaction has taken much longer to complete than was originally expected as it was given approval by the Australia Foreign Investment Review Board (FIRB) on July 26th and Canada’s Industry Minister Christian Paradis on July 15th but the approval from the Ministry of Commerce of the People’s Republic of China (MOFCOM) took until mid-December (coincidentally after Canada approved the Chinese take over of Nexen). We had a TENDER for VT shareholders with a target price is $16.25 (risk rating: AVERAGE).

Wajax Corp.’s (T-WJX) share price was off 6.4% this quarter. Wajax Corporation released its Q3 FY12 results during the quarter. Revenue was down 2% to $356M, EBITDA was down 2% to $27.6M and EPS was $0.95 compared to $1.06 last year. The biggest source of weakness was the Power Systems Group which reported that sales dropped 23%, more than offseting revenue gains in the Equipment and Industrial Components groups.

We reduced our growth outlook for FY13 as growth during Q3 FY12 was below expectations. The primary cause for concern is a slow down in the oil & gas sector, especially for the Power Systems group but growth in all segments has slowed. In response to these results, we reduced our rating to NEUTRAL (from BUY) for Wajax Corporation (T-WJX) (risk: AVERAGE) and lowered our 12-month target to $46.00 (previously $55.00).

Westport Innovations Inc.’s (T-WPT) shares fi nished the quarter down 4.1%. Westport pre-warned the market of a weak Q3 result. The Company also dropped its guidance stating that “recent feedback from Original Equipment Manufacturers (OEM) and fl eet customers in North America and automotive OEM customers in Europe” will impact revenue. We also feel that heightened uncertainty in the economy and delayed availability of liquefi ed natural gas (LNG) infrastructure will hamper future growth. We continue to recommend Westport with a SELL recommendation, SPECULATIVE risk-rating and 12-month target price of C$19.00.

Winpak Ltd. (T-WPK) ended Q4 down 5.7%. Winpak reported its third quarter results for the period ending September 30, 2012. During the quarter, revenues were down 3.0% to $165.4M, EBITDA was up 8.0% to $31.5M and EPS was $0.26 compared to $0.22 last year. These results were below our expectations and represent the second consecutive sluggish quarter. We were looking for $186M in revenue and $0.31 in EPS.

Part of the recent weakness in WPK’s results has been the slowdown of its biggest customer. In recent weeks, this customer reported strong results which could mark the resumption of its historical buying patterns with Winpak. We continue to rate Winpak with a BUY rating (risk: AVERAGE) and a 12-month target of $18.00.

TOP PICK: PARKLAND FUEL (T-PKI)

Shares Market Revenue (Million) Earnings Per Share (FD) P/E 12-MosStock Recent O/S FD Cap. Indicated Current Target Total Stock Volatility/

Symbol Price (Million) (Million) Yield FY11A FY121E FY13E FY11A FY12E FY13E FYE Price Return Rating RiskAg Growth International Inc. T-AFN $31.36 12.5 $392 7.7% $306 $317 $349 $1.95 $1.67 $1.94 16.2x $32.00 9.7% NEUTRAL ABVCervus Equipment Corp. T-CVL $18.74 15.4 $289 4.0% $560 $738 $826 $1.22 $1.59 $1.88 10.0x $24.00 32% BUY ABVParkland Fuel Corp. † T-PKI $18.93 75.5 $1,429 5.4% $3,980 $4,274 $5,444 $0.73 $1.41 $1.33 14.2x $21.00 16% BUY ABVPure Technologies Ltd. T-PUR $4.59 49.7 $228 N/A $43.1 $73.3 $88.6 ($0.14) $0.12 $0.22 20.9x $5.75 25% BUY ABVRocky Mountain Dealerships T-RME $11.90 18.9 $225 2.3% $803 $948 $1,038 $1.12 $1.21 $1.81 6.6x $13.50 16% BUY ABVStrongco Corp. T-SQP $4.65 13.2 $61 N/A $423 $476 $524 $0.76 $0.74 $1.09 4.3x $8.50 83% BUY ABVWajax Corp. T-WJX $40.74 17.0 $691 8.0% $1,377 $1,456 $1,526 $3.77 $3.97 $4.08 10.0x $46.00 21% NEUTRAL AVGWestport Innovations Inc.* T-WPT $26.32 54.9 $1,446 N/A US$265 US$347 US$388 (US$1.26) (US$1.48) (US$1.09) N/A $19.00 -28% SELL SPECWinpak Ltd. T-WPK $14.75 65.0 $959 0.8% US$652 US$682 US$743 US$0.98 US$1.08 US$1.21 12.2x $18.00 22% BUY AVG

Company Name

*Westport's FY10A reflects year ending March 31, 2011. FY11e reflects nine months ending December 31, 2011.† PI Financial Corp. has received compensation for acting as fiscal agent or advisor for the subject company over the preceding 12-month period

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PARKLAND FUEL CORPORATION (T-PKI)

Rating: BUY, Target: $21.00

TURNAROUND COMPLETE BUT STOCK STILL HAS

HIGH YIELD

Parkland Income Fund is the largest independent fuel marketer in Canada, specializing in service stations located in non-urban areas and specialty fuel distribution.

Parkland recently signed a defi nitive agreement to acquire the assets of Elbow River Marketing, a subsidiary of AvenEx Energy Corporation (T-AVF). Elbow River capitalizes on arbitrage pricing between different geographic markets and matching supply and demand imbalances. The company stores fuel at strategically located facilities and transports the fuel via its 1,200 rail cars. We feel this acquisition is a very good fi t within Parkland and should better utilize Parkland’s pre-existing storage facilities.

Of all the companies in our coverage list that reported earnings last quarter, Parkland beat consensus estimates, PI’s estimates and last year’s results by the largest margin. EBITDA was up 41% to $60.5M and EPS was $0.44 compared to $0.36 last year. Consensus estimates called for EBITDA of $45.1M and EPS of $0.23.

The reason for the strong performance: Parkland increased its commercial fuel gross margin to 8.54 cents (vs. 7.30 last year) and SG&A was down 15% to $51.7M. This was the third consecutive quarter of cost reductions.

The balance sheet continues to strengthen as Parkland has used its windfall profi ts to pay down debt and increase its cash position. Total debt has declined $254M during the last six quarters to $246M while the cash balance now sits at $44M. The net debt to EBITDA currently sits at 1.0x, down from a high of 3.3x in Q1 FY11. Return on equity using the last four quarters of earnings is 24% – the highest it has been since Q4 FY09.

PKI dividend yield is 5.4%, above the median yield of 4% for Canadian dividend stocks. The average payout ratio for Canadian dividend stocks yielding between 4% - 6% is 75% whereas Parkland’s payout ratio is at 46%. In addition, Parkland management has stated in the past that the board would consider raising the dividend when the payout ratio drops below 50% - we feel there is a high likelihood that an increase is in the near future.

We have a BUY rating for Parkland Fuel Corp. (T-PKI) (risk: ABOVE

AVERAGE) and a 12-month target price of $21.00.


Risk: ABOVE AVERAGECurrent Price*: $18.9352-week High/Low: $19.42 / $12.66Indicated Yield: 5.4%Shares o/s (‘000): 66,020 Shares o/s (fd) (‘000) : 75,538 Market Cap (fd) (‘000): $1,420,870Market Float Value (‘000): $1,208,928Average Trading Volume: 83,230 Cash (‘000): 43,948 Debt (‘000): 246,470 CEO: Bob EspeyCFO: Michael LambertShareholders: Mgmt/Insider 3% Institutional 35%


Financial Summary

(YE Dec. 31st)$CAD FY10a FY11a FY12e FY13e

Revenue ($M) 2,891 3,980 4,274 5,444 EBITDA ($M) 99 151 215 230EBITDA (%) 3.4% 3.8% 5.0% 4.2%Net income ($M) 27 44 107 103 EPS 0.44 0.73 1.41 1.33 EV/EBITDA 16.4x 10.8x 7.5x 7.1xP/E 42.6x 25.9x 13.4x 14.2x

Quarterly EPS ($) Q1a Q2a Q3e Q4e

FY12 0.26 0.37 0.44 0.42

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Company Description

Parkland Income Fund is the largest independent fuel marketer in Canada, specializing in service stations located in non-urban areas and specialty fuel distribution. The Company also distributes heating oil, propane, lubricants and other fuel-related products.

SPECIAL SITUATIONS | TOP PICK


12 | Q113 Roy Ma, B.Comm, CFA

SECTOR OVERVIEW

The S&P/TSX Energy Equipment & Services Index lost 6.8% in Q412, which underperformed the S&P/TSX Composite which gained 0.9%. Most of the sector reported weaker-than-expected Q312 results as E&P companies’ cash fl ow were hampered by continued weakness in natural gas prices and as Canadian crude and liquid prices continue to trade at large discounts to US prices which led to a slower-than-normal post Canadian spring break-up ramp-up of activity. Moreover, US rig count continues to fall as oil rig count reached a plateau and gas rigs continue to decline affecting the performance of Canadian listed energy services companies who have US operations. The other factor that affected Q412 stock performance in the sector is the realization that E&P’s may close the year’s capital programs early and carryover some of their planned spending in the new year.

SECTOR OUTLOOK

Based on the capital budgets announced by Canadian E&P companies, all indications are that the industry will see normal levels of winter drilling but will likely lag last winter’s brisk pace. However, larger questions loom over activity levels post spring break-up 2013. Many service companies report a lack of visibility on their E&P customers’ spending plans after the winter. As well, some of the smaller junior and intermediate E&P’s continue to have moderate to higher levels of debt and are thus sensitive to changes in their cash fl ow from commodities price fl uctuations and the equity market’s appetite for new fi nancings. Our belief is activity may level off after winter drilling and spring break-up and E&P’s will set their spending levels depending on commodity price outlook and industry conditions at that time.


Calfrac Well Services (T-CFW): CFW’s shares fi nished 5.9% higher in Q412, beating its sector index’s performance and was the second best performer in our coverage universe. For its Q312 results, CFW’s Canadian operations achieved more resilient results than its US business because of its co-market leadership position which it shares with competitor Trican Well Service (T-TCW). We expect this dynamic to continue in 2013 until the US market achieve equilibrium. CFW established a conservative 2013 capex which we consider to be prudent given that the North American pressure pumping market continues to be oversupplied. While both the Canadian and US pressure pumping markets stand to benefi t from an improvement in the natural gas market, the Canadian market will also need help from improvement in infrastructures to help narrow the regional differentials between Canadian liquid and crude prices and US prices. Our 12-month target price for CFW is $33.75 and we carry a BUY rating (ABOVE AVERAGE risk).

Trican Well Service (T-TCW): TCW’s shares advanced 2.6% in Q412, ahead of the performance of the S&P/TSX Equipment & Services Index which declined 6.8%. TCW reported weaker-than-expected Q312 results as US operating losses widened to $23.2M from $22.1M in Q212 which compared to our expectations for an improvement. Like its competitor CFW, TCW’s Canadian results were more resilient than its US business reaffi rming their co-market leadership positions. TCW announced a 2013 capital budget which is about 93% lower than its 2012 capex which we thought is prudent given that TCW undertook large capital expenditures in 2011 and 2012. It followed its budget announcement with the acquisition of i-Tec, a Norwegian-based supplier of well completion and intervention tools including the growing market for horizontal cemented liner completion systems for cash of US$30M, 2.4M TCW shares (valued at ~$31M) and a deferred payment of up to US$47.1M. We believe that trading in TCW’s stock could be volatile in the fi rst half of 2013 until the market has better visibility on the North American pressure pumping market. However, we believe that the market recognizes TCW’s strong franchise value in Canada and its option value in Russia which makes it an attractive takeover target and will thus lend some support to its stock price. We rate TCW with a BUY rating and $15.00 12-month target price (ABOVE AVERAGE risk).

Ensign Energy Services (T-ESI): ESI’s stock outperformed the S&P/TSX Energy Equipment & Services Index achieving a 1.8% gain. ESI outperformed our expectations in its Q312 results. ESI’s stock typically experiences less price volatility than its Canadian peers because of its conservatively managed balance sheet and prudent capital allocation decisions. In November 2012, it increased its quarterly dividend rate by 4.8% which we view as a symbolic gesture to continue the Company’s track record of increasing its dividend every year after establishing a dividend in the 1990’s. We carry a BUY rating (ABOVE AVERAGE risk) and 12-month target price of $19.25 per share on an investment in ESI.

Precision Drilling (T-PD): PD’s shares rose 6.3% in Q412, the best performer in our coverage universe and outpacing the S&P/TSX Energy and Equipment Index’s -6.8% performance. PD reported weaker-than-expected Q312 results for two consecutive period of quarterly “miss”. PD continues to offer one of the better growth profi les in the land drillers segment as it will have increased its fl eet by about 11% year-over-year by early-2013 with all newly built drilling rigs supported by long term contracts. In December 2012, PD initiated a quarterly dividend of $0.05/share which gives its stock a current yield of 2.4%. Importantly, we believe that this announcement gave PD’s stock some short-term support as the Company also announced the write-down in the carrying value of some of its older equipment. We carry a BUY rating (ABOVE AVERAGE risk) and 12-month target price of $9.75 per share on an investment in PD.

Roy Ma

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403.543.2823rma@pifi nancialcorp.com

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Savanna Energy Services (T-SVY): SVY’s share price under-performed the Energy Equipment & Services index for back-to-back quarters posting an 8.9% loss. SVY reported lower-than-expected Q312 results as its Oilfi eld Services Division consisting of SVY’s well servicing and rental businesses underperformed despite two acquisitions of Canadian based service rigs in mid-2011. We believe that SVY’s stock has been losing momentum because it has already been pricing-in the incremental benefi ts from the changes made to its drilling fl eet. The disappointing results from its Oilfi eld Services Division and slow ramp-up of Australian operations to make a meaningful impact to the Company’s bottom-line has been contributing to the market’s adoption of a “show-me” attitude toward SVY’s stock. We believe that SVY could surprise the market positively as it rolls-out its latest converted TDS3000 rigs and as utilization on its Australian equipment improves. We recommend SVY as a BUY rated stock with a 12-month target price of $9.00 (ABOVE AVERAGE risk).

Trinidad Drilling (T-TDG): TDG’s shares held ground in Q312, rising 0.4% which outpaced the S&P/TSX Energy and Equipment Index’s -6.8% performance. In Q312, TDG’s Canadian operations overcame a 26% YoY decline in average active rig count to deliver a 7% YoY improvement in operating profi ts. The sequential decline in TDG’s US results matches the performance of the broader US rig market. While we see little catalysts for TDG’s stock in the near-term, the Company’s strategy to commit a high proportion (~65%) of its rigs to contracts provide for better earnings visibility in 2013. We continue to expect TDG’s stock to benefi t from the Company’s debt-to-EBITDA falling below 2x in 2013. We maintain a BUY rating (ABOVE AVERAGE risk) and $10.00

target price for TDG’s stock.

CanElson Drilling (T-CDI): CDI’s shares were 2.0% lower in Q412 compared to a -6.8% performance for the S&P/TSX Energy Equipment Index. CDI reported better-than-expected Q312 results which continue to validate its ahead-of-peers operations. We remain positive about CDI’s strategy to advance its bi-fuel initiative which allows the engines and boilers of its rigs to be powered by diesel or natural gas thus capturing the superior fuel economics of natural gas over diesel that currently exists. By Q113, 16 of CDI’s 23 Canadian rigs will be operating on bi-fuel systems. Furthermore, CDI has been expanding its fl eet of natural gas compressors and transportation containers to address producers’ fl are gas regulatory restrictions. We also like CDI’s exposure to the oil prone regions in North America, its above average growth profi le, strong free cash fl ow generation and under-leveraged balance sheet. We carry a BUY

rating (ABOVE AVERAGE risk) and $6.75 target price for CDI’s stock.

Essential Energy Services (T-ESN): ESN shares lost 13.6% in trading in Q412 which underperformed its index. ESN reported Q312 results which were below our forecast. The Company incurred extra costs to hire and train personnel in anticipation of taking delivery of the deep coil tubing units and pumpers which it has committed to building. Delays in the delivery of its new equipment have been adding to ESN’s cost structure until it takes delivery on its new assets. Going forward, we believe that demand will be strong for well servicing, especially for well clean-outs and workovers offset by continued weakness in well completion activities due to general cautiousness toward new drilling by producers. We remain positive about ESN’s Tryton Multi-Stage Fracturing System business as well as its conventional packer systems operations. We expect ESN to generate strong free cash fl ow in 2013 which gives it fl exibility in its capital deployment. We carry a BUY rating on ESN (ABOVE AVERAGE risk) with a $3.00 12-month target price.

PHX Energy Services (T-PHX): PHX’s shares gained 0.5% in Q412 which was ahead of its sub-index. PHX posted better-than-expected Q312 results as the Company’s US and international business showed strength. The Company appeared to be recovering from inconsistent results by delivering two consecutive quarters of above-expectations results. However, PHX had $99M of its $135M credit facilities drawn at 9/30/2012. We want to see evidence of positive free cash fl ow from the Company to lower its debt and support its dividend before we will reconsider our investment stance on its stock. PHX’s stock is trading at 6.6x/5.2x our 2012E/2013E EV/EBITDA which compares with the rest of the universe at 5.5x/4.9x. We carry a NEUTRAL rating on PHX with a $10.00 per share 12-month target price (ABOVE AVERAGE risk).

TOP PICK: CANELSON DRILLING INC. (T-CDI)

Shares Market Net Cash Revenue (Million) EBITDA (Million) EV/EBITDA 12-MosStock Recent O/S FD Cap. (Debt) Current Target Total Stock Volatility/

Symbol Price (Million) (Million) (Million) FY11A FY12E FY13E FY11A FY12E FY13E FYE Price Return Rating RiskCalfrac Well Services Ltd. T-CFW $25.05 44.7 $1,120 ($346) $1,537 $1,631 $1,718 $421 $288 $308 0.1x $33.75 35% BUY ABVCanelson Drilling Inc. T-CDI $4.88 76.0 $371 ($17.7) $189 $224 $264 $66.1 $81.9 $93.4 4.2x $6.75 38% BUY ABVEnsign Energy Services Inc. T-ESI $15.37 153 $2,349 ($503) $1,890 $2,201 $2,291 $497 $566 $586 4.9x $19.25 25% BUY ABVEntrec Transportation Services Ltd. V-ENT $1.53 78.2 $119.7 ($48.6) $19.7 $132 N/A $2.8 $29.2 N/A N/A N/A N/A N/R SPECEssential Energy Services Ltd. T-ESN $2.10 124 $260 ($35.2) $317 $348 $362 $72.4 $72.2 $82.3 3.6x $3.00 43% BUY ABVHigh Arctic Energy SVC Inc. T-HWO $2.15 46.1 $99.1 $6.5 $127 $147 N/A $33.4 $41.3 N/A N/A N/A N/A N/R SPECLeader Energy Services Ltd. V-LEA $0.28 30.8 $8.6 ($16.1) $34.3 $39.1 N/A $10.5 $13.6 N/A N/A N/A N/A N/R SPECMatrrix Energy Technologies Inc. V-MXX $0.80 30.8 $24.6 $17.4 $3.8 N/A N/A ($0.1) N/A N/A N/A N/A N/A N/R SPECPHX Energy Services Corp. T-PHX $9.17 28.2 $259 ($95.3) $260 $306 $340 $44.2 $53.7 $68.1 5.2x $10.00 9% NEUTRAL ABVPrecision Drilling Corporation T-PD $8.48 276 $2,343 ($980) $1,951 $2,010 $2,087 $679 $651 $674 4.9x $9.75 19% BUY ABVRMS Systems Inc. V-RMS $0.22 48.3 $10.6 ($0.6) $4.6 $7.5 N/A ($2.1) ($0.3) N/A N/A N/A N/A N/R SPECSavanna Energy Services Corp. T-SVY $7.18 85.5 $614 ($203) $611 $678 $731 $136 $163 $169 4.8x $9.00 25% BUY ABVTrican Well Service Ltd. T-TCW $13.12 149 $1,953 ($589) $2,310 $2,309 $2,373 $627 $268 $351 7.2x $15.00 14% BUY ABVTrinidad Drilling Ltd. T-TDG $6.88 121 $832 ($543) $797 $833 $838 $252 $278 $284 4.8x $10.00 45% BUY ABVWenzel Downhole Tools Ltd. T-WZL $1.89 35.4 $66.9 ($17.1) $89.7 $82.7 N/A $27.1 $21.5 $19.8 4.2x N/A N/A N/R SPEC

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Risk: ABOVE AVERAGECurrent Price*: $4.88Total Return: 42.4%Implied Yield: 4.1%Price Return: 38.3%Shares Outstanding, Basic (MM): 76.0Market Capitalization (MM): $370.8Net Debt (MM): $17.7Enterprise Value (MM): $388.552-Week Range: $5.56 / $3.7630-Day Average Volume: 81,233


Financial Summary

(FYE Dec. 31) (C$ MM) 2010A 2011A 2012E 2013E

Revenue $73.3 $189.1 $223.7 $264.4EBITDA $13.9 $66.1 $81.9 $93.4Net Income $4.8 $31.3 $40.2 $44.6Net Debt $2.8 $4.1 $33.9 -$7.7Organic Capex $27.7 $57.0 $92.1 $25.0EPS ($/Sh) $0.12 $0.45 $0.53 $0.57 CFPS ($/Sh) $0.32 $0.87 $1.01 $1.11 Valuation

P/E 39.8x 10.8x 9.2x 8.5xP/CFPS 15.4x 5.6x 4.8x 4.4xEV/EBITDA 28.0x 5.9x 4.7x 4.2x

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Company Description

CanElson Drilling Inc. (T-CDI) is a land drilling contractor that operates in Canada, the US and Mexico. CDI’s core drilling rig offering is primarily comprised heavy and ultra-heavy tele-doubles, which are ideal rigs for servicing the Company’s primary operating areas – Saskatchewan, Manitoba, North Dakota and West Texas.

CANELSON DRILLING INC. (T-CDI)


MULTIPLE CATALYSTS EXPECT TO WORK IN FAVOUR

OF THIS STOCK

We select CanElson Drilling Inc. (T-CDI) as our Top Pick for Q113. CDI has multiple growth drivers which will act as catalysts for the stock in 2013.

One of the most exciting growth initiatives for CDI is its bi-fuel systems. By powering its drilling rig engines and boilers using natural gas and still retain the ability to use diesel to generate power, CDI should be able to capture the superior economics of using natural gas when this fuel is available and use diesel as its back-up fuel. Because of the low price of natural gas, drilling rigs which are powered by natural gas can generate as much as 50% to 70% in fuel cost savings compared to a rig that runs only on diesel for fuel. CDI intends to install bi-fuel systems on 16 of its 23 Canadian rigs by Q113 with possible installation on its remaining Canadian rigs and some of its US rigs to follow. CDI has secured the supply of natural gas from SaskEnergy through a formal agreement. It is also expanding its fl eet of natural gas compressors and containers to 1) support its bi-fuel initiative and 2) compress and transport produced natural gas to plants and facilities for its E&P customers who would otherwise encounter fl are gas restrictions if the targeted commodity is oil and produced liquids.

From a fl eet expansion perspective, CDI added two new rigs in Q412, one in Canada and one in west Texas and will add a third rig in west Texas in Q113. Additionally, CDI is designing a triple derrick rig to meet its customers’ demands in the North Dakota and Texas markets. CDI historically preferred the versatility of a mechanical heavy double rig so in designing a triple derrick rig, it will seek more advanced mobility features to cut down the longer rig-up, tear-down and moving times that are usually associated with a triple. We expect an announcement from CDI on this initiative in 2013. We will also be looking for CDI to advance its Mexico strategy in 2013. It currently operates two service rigs with its local joint venture partner and is leasing a drilling rig from Sinopec in Mexico. As Pemex moves towards production sharing arrangements with its service providers and drilling contractors, we expect CDI to become more aggressive in expanding its Mexican operations which CDI has seen limited growth in the last two years.

CDI has a lowly leveraged balance sheet and is expected to generate strong free cash fl ow to give it the fl exibility to fi nance its growth initiatives and possibly increase its dividend. CDI’s stock is trading at 4.2x our 2013E EV/EBITDA which compares with an average of 4.8x for the Big-Four Canadian Drillers which we have research coverage on. We think that it should trade at a premium multiple compared to the Big-Four because of its superior growth profi le. We have a BUY Rating (ABOVE AVERAGE risk) and a $6.75 target price for CDI’s stock.

ENERGY SERVICES | TOP PICK

15 | Q113 Alistair Toward, B.Comm, CFA

OIL & GAS

SECTOR OVERVIEW

The S&P/TSX Composite index was effectively fl at during the quarter (up 0.9%) while the Capped Energy Index was down 4.3% despite WTI price declines of only 0.4%.Irrespective of an almost 40% increase in AECO C pricing, impressive performance from gas producers were still not enough to help the energy index.

SECTOR OUTLOOK

Looking fi rst at the oil weighted producers, investors and producers alike continue to grapple with the realities that ours is a land locked basin currently producing at rates which exceed our infrastructure’s takeaway capabilities. With an ever increasing proportion of our production leaving by rail, marginal pricing has stunted economics for virtually for all producers in the basin. Even with 2.9mmb/d of additional pipeline projects currently being proposed – none of which has thus far been approved. Regardless of the specifi cs of when, and to what degree, we might see relief; current market perception and investor sentiment is dampened by a perceived lack of scarcity. Absent this sense of scarcity, producer growth strategies are being met with tepid (if not frosty) investor interest. Still in need of new capital to sustain current volumes, producers are increasingly changing their stripes by rebranding themselves into “income opportunities”. Success, as measured within the growth space, is frequently at odds with those characteristics which defi ne good income investments – the latter being most suited to a mature and stable production base. Regardless, with no near term indication that bond yields will soon rise, look for oil producers to capture an ever growing slice of the income pie.

Currently the most affected subset within the oil producer universe has been heavy oil producers. Over and above transportation constraints, these producers were subjected to short term refi nery constraints that saw WCS differential increasing from 17% of WTI in Q3 to 36% of WTI in Q4. Even as product pricing is being hurt by short term outages (BP’s Whiting refi nery), valuations in the space are arguably more impaired by the demonstrated vulnerability. This combined with the fact that numerous large bitumen projects are set to come on at regular intervals –the next being Imperial’s Kearl expected to introduce an additional 110,000 bbl/d of non-upgraded bitumen into the market place in January. Long lead time initiatives are troublesome as they do not yield to market conditions in the same way that a price correction might cause a slowing of industry wide drilling activity.

Still on the subject of gluts, we turn to the gas producers who, for much of the Q4, were the sectors outperformers. Investors who exhibited optimism this summer, as pricing was at the lowest levels seen in a decade, were rewarded amid widespread expectations of a cooler than normal winter. We are quick to characterize this rally as a short term trade opportunity – given the industry’s demonstrated ability to quickly bring on volumes. Put another way, the gas rally may not have peaked just yet, but the recent trajectory nevertheless appears unsustainable.

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Edm-$31

WTI-$22

Source: Bloomberg; PI Financial Corp.

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$40

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$60

$70Cars/wk WCS Diff

Source: Bloomberg; PI Financial Corp.

Turning to our forecasts, we begin by acknowledging that FY12 WTI averaged $94.15/bbl (in line with our US$95/bbl forecast). Looking ahead to FY13 and FY14 we maintain a reference WTI forecasts US$90/bbl – with a WTI-Edmonton light differential of $10/bbl.

Our FY13 NYMEX natural gas forecast is now $3.50/MMbtu. And, neutralizing the impact, our basis differential is now ~$0.90/MMbtu (from ~$0.40). Look for Canadian producers to disproportionately bear the burden of the self correcting mechanism of normalizing gas prices. With U.S. gas production at 69 Bcf/d, a new record, it is clear that producers south of the border aren’t buckling in response to pricing. Coupled with fl at demand, the U.S. is meeting 81% of its own needs – a degree not witnessed since 1992. Burdened by a more onerous cost structure, Canada has been reluctantly relegated to the roll of swing-producer. Collectively, we are not seeing Canadian producers embracing the notion of higher pricing through scarcity. While overall gas production (and gas weightings) are declining, the impact is dampened by our increasing reliance on liquids rich gas pursuits.

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403.543.2824atoward@pifi nancialcorp.com



Our Oil and Gas Top Pick, Palliser Oil & Gas Corporation (V-PXL), declined 1.5% while the S&P/TSX Capped Energy Index declined 4.3%. Getting only

partial recognition for the strides demonstrated by way of increased volumes and lower operating costs – the share price refl ects the impact of a 26% decline in

WCS crude pricing for the quarter - PXL’s benchmark crude. Operationally, Palliser’s High Volume Lift (“HVL”) strategy has now delivered 14 consecutive quarters

of growth. Now coupled with an in-house water disposal strategy, Palliser is poised to become the lowest cost producer in the Junior and Midcap heavy oil space.

Look for a mid-January press release to show the Company met (or exceeded) its 2012 exit guidance of 2,700 boe/d (97% heavy oil).

Arcan Resources Ltd. (V-ARN, Target $1.50, BUY, SPECULATIVE risk rating. Potential return – 47%) Down 80% in 2012, and with annualized Q3 debt to cash

fl ow at 12X, Arcan’s fate arguably rests with how successful its water fl oods proves in arresting corporate production declines. Beyond the activity of third-parties

on farm-in land, we anticipate limited drilling activity in FY13. Respectively controlling 19% and 17% of the outstanding shares, Crescent Point and PetroBank remain

as potential suitors. While encouraging, these offer no assurances that a take-over is in the offi ng – again it boils down to the water fl ood. With results pending, we

encourage shareholders to capitalize on evidence of early success – at this point we are more optimistic regarding the water fl ood’s near term impact of the than

we are of the longer term success.

Arsenal Energy Inc. (T-AEI, Target $1.00, BUY, SPECULATIVE risk rating. Potential return –89%) – up 6% for the quarter. Our BUY thesis for Arsenal is based on

its large inventory of mostly undrilled Bakken locations – these being heavily discounted by the market. A considerable debt burden ($57MM) prevents the Company

from aggressively getting after its Bakken inventory on its own. While other mechanisms (sale or spin-out) do exist, we see no evidence to suggest the Company

is looking to quickly capitalize on the current valuation gap. We can fi nd cause for near term optimism in Arsenal’s four well Glauc winter program at Princess. That

said such activity pales relative to the scale of existing Bakken bookings. Our target of $1.00 is based on a ~40% discount to NAV.

Border Petroleum. (V-BOR, Target $0.40, BUY, SPECULATIVE risk rating. Potential return 158%). With ~32 sections of largely untested acreage, Border offers

investors tremendous optionality to the Red Earth Slave Point play. The Company has followed up on its less than stellar initial wells with indications of a large dolomite

intersect on its third well – coupled with high oil saturations. While no test rates have yet been released, we are expecting production results to be far in excess of

those achieved on its fi rst two horizontal Slave Point wells. Upcoming wells were to move evaluation further west and south – but on the strength of indications

arising out of the third well the Company is now planning an offset location. At this juncture an ‘average’ result could drive the share price back above $0.20 and all

signs point to better than average result from the next well.

Equal Energy Ltd. (T-EQU, Target $5.00, BUY, SPECULATIVE risk rating. Potential return – 62%) – Having offi cially wrapped up its strategic review in Q4 the

share price is down 9%. Equal emerges as a Canadian domiciled growth/dividend company (yielding 6.5%) with a single producing asset, specifi cally ~7,800 boe/d

from the Hunton formation in Oklahoma. Its propane biased production base exhibits much greater cash fl ow volatility than its peers. Consider that each $0.10/gallon

increase in propane prices adds $3.7MM in cash fl ow –this when the 52-week range for propane has been $0.50-$1.20/gallon. Equal’s answer to this volatility is a

clean balance sheet –with net debt at 0.9x our FY13E CF of $33MM. Our FY13 propane forecast is $0.90/gallon while our $5.00 target refl ects a long term propane

outlook of $1.00/gallon -- relative to a fi ve year average of $1.10/gallon. That said Q4 saw propane pricing slip from ~$0.90/gallon down to ~$0.65/gallon.

Sonde Resources Corp. (T-SOQ, Target $3.00, BUY, SPECULATIVE risk rating. Potential return 84%) Announcing an exit (with optionality) from North Africa

in Q4 Sonde is our Top Pick for Q1. In Q4 negotiations removed impediments to such a sale causing the share price to increase by ~120% – this after delays securing

such agreements caused a 58% share price to decline in the previous quarter. Beyond relieving Sonde of future drilling commitments (minimum ~$0.75 per share) a

sale of North Africa could see Sonde recover investments made in North Africa (~$1.00/ share in the past 2 years). Most important, a sale would leave the Company

free to focus on its domestic light oil agenda – most notably its 86,000 acres assembled in the Duvernay. During Q4 we increased our 12-month target of to $3.00

(from $2.50).

Strategic Oil & Gas Ltd. (V-SOG, Target $1.80, BUY, SPECULATIVE risk rating. Potential return - 53%) – Again our TOP PICK for Q2 and Q3 (but not Q4),

Strategic was up 70% in the quarter. With volumes reaching 3,000 boe/d in Q4, the Company showed that Q3 outages resulting in an average of ~1,900 boe/d)

were short term in nature. More signifi cant, the second half saw Strategic’s Steen land holdings increased to 350,000 acres from 77,000 acres. Finally, an acquisition

completed late in the year secures ownership of (and control over) virtually all road and infrastructure not already owned in the region. This expanded opportunity

comes just as the program shifts from conventional Keg River targets to more resource like opportunities, the Sulfur Point and Muskeg Stack. Our $1.80 target is

based on a 7x EV/DACF multiple with $0.20/share for Maxhamish.

TOP PICK: SONDE RESOURCES CORP. (T-SOQ)

Shares Market Net Cash Cash Flow Per Share (FD) Earnings Per Share (FD) P/E 12-MosStock Recent O/S FD Cap. (Debt) Current Target Total Stock Volatility/

Symbol Price (Million) (Million) (Million) FY11A FY12E FY13E FY11A FY12E FY13E FYE Price Return Rating RiskAnglo Canadian Oil Corp. V-ACG $0.03 244 $7.3 $5.2 N/A N/A N/A N/A N/A N/A N/A RESTRICTED N/A RESTRICTED RESTRICTEDArcan Resources Ltd.† V-ARN $1.02 106 $108 ($319) $0.49 $0.50 $0.34 ($0.01) ($0.24) ($0.04) N/A $1.50 47% BUY SPECArsenal Energy Inc. T-AEI $0.53 172 $91.0 ($65.1) $0.17 $0.19 $0.26 ($0.02) ($0.01) $0.03 18.0x $1.00 89% BUY SPECBorder Petroleum Corp. V-BOR $0.16 351 $54.4 $2.2 ($0.03) ($0.01) ($0.01) ($0.06) ($0.09) ($0.01) N/A $0.40 158% BUY SPECEqual Energy Ltd T-EQU $3.08 38.0 $117 ($23) $1.96 $1.22 $0.94 ($0.44) $0.22 ($0.42) N/A $5.00 62% BUY SPECPalliser Oil & Gas Corp. † V-PXL $0.64 62.4 $39.9 ($35.9) $0.10 $0.34 $0.53 ($0.12) $0.05 $0.10 6.4x $1.20 88% BUY SPECSonde Resources Corp. T-SOQ $1.63 65.7 $107 $21.2 $0.10 ($0.00) $0.07 ($0.65) $0.29 ($0.11) N/A $3.00 84% BUY SPECStrategic Oil & Gas Ltd.† V-SOG $1.18 194 $229 ($12.3) $0.01 $0.14 $0.26 ($0.18) $0.02 $0.09 13.6x $1.80 53% BUY SPEC

Company Name


OIL & GAS


-

500

1,000

1,500

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2,500

3,000

Jan-12 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

200 day 50day


Risk: SPECULATIVECurrent Price*: $1.63Potential Return: 84%Basic Shares O/S: 62.3MMF.D. Shares O/S: 65.7MMMarket Capitalization: $102MM52-Week Range: $3.02 / $0.6330 day Ave Trading Volume: 249,369Enterprise Value: $80MM


Financial Summary

(FYE Dec. 31) FY10a FY11a FY12e FY13e

Oil (US$/bbl) $79.50 $95.11 $95.00 $90.00Gas (US$/MMBtu) $4.38 $4.03 $2.50 $3.50Liquids (bbl/d) 649 765 800 725Gas (mcf/d) 13,324 12,187 9,600 10,050Boe/d (6:1) 2,870 2,796 2,400 2,400Cash Flow (MM) $4.0 $6.4 $0.0 $4.1CFPS (FD) $0.07 $0.10 $0.00 $0.07Net Debt Y/E (MM) -$34.4 $18.5 -$20.9 -$15.0NAVPS (Engineering) $2.15 Price/NAVPS 76% EV/P+P Reserves (boe) $12.61 EV/Production(boe/d) $23,389 $42,920 $33,607 $36,079EV/DACF 13x 14x 147x 21xTarget Implied EV/DACF 29x 24x 303x 42.5x

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Company Description

Sonde Resources Corp. is engaged in the exploration for, and acquisition, development and production of

petroleum and natural gas with operations in Western

Canada and North Africa.

SONDE RESOURCES CORP. (T-SOQ)

Rating: Buy, Target: $3.00

NARRATIVE CHANGING FROM N. AFRICA TO THE

DUVERNAY

RECENT ACTIVITY: Negotiations undertaken during Q4 saw the removal of key impediments preventing a sale (in whole or in part) of the Company’s North Africa assets. Most notably, Joint Oil has allowed Sonde to enter the second term of its ESPA without fi rst drilling (or paying $15MM apiece in lieu of) three exploration commitment wells. This cleared the way for ratifi cation of the unitization agreement and production scheme for Zarat – Sonde’s ~51MMbbls recoverable oil discovery in Tunisia. This, in turn cleared the way for a farm-out leaving Sonde with a carried 33% share in the project. Under the agreement Sonde is able to recover its sunk costs and receives a 33% share in all profi t oil.

CATALYSTS: With the farm out announced late in Q4 Sonde is our top pick for Q1. This relieves Sonde of future drilling commitments in North Africa (minimum ~$0.75 per share) and this has arguably been recognized by the market –with a ~$0.60 increase in share price in the last week of 2012. Not yet refl ected, in our opinion, is the value of Sonde’s remaining working interest in North Africa –along with sunk costs to be recovered. Unrisked and undiscounted, our initial calculations put this total at over $450MM paid out over a decade starting in 2015. Furthermore, Sonde is now poised to focus on its domestic light oil agenda – most notably its 86,000 acres assembled in the Duvernay. As the narrative surrounding this shift to the Duvernay (from Africa) we expect a complete revaluation of the Company. Although Sonde has yet to complete a well in the Duvernay, the management has demonstrated great prowess on the play – specifi cally selling 24,383 net acres for $75MM after having acquired it for under $2MM. Albeit at just over $3,000/acre this works out to roughly a third of what PetroChina recently paid Encana for Duvernay lands. Sonde currently holds some 86,000 acres of Duvernay acreage. Now to be clear, much of Sonde’s remaining acreage is held not on the gas-phase of the Duvernay but in the oil-phase of the play. Furthermore, the oil-prone portion of the Duvernay play generally (and Sonde’s lands specifi cally) have yet to be validated. Reluctant to draw too aggressive on valuing the Duvernay lands – our sum of the parts values Duvernay land at $300/acre – this after PetroChina paid ~33x that value.

FORECAST: Refl ected in our forecast, a stronger gas pricing environment should see much of Sonde’s shut in gas volumes brought back on line. That said, Sonde’s gas biased legacy production base is not the valuation driver, rather it is the oil biased opportunity base. Not refl ected in our forecast, as the timing has yet to be confi rmed, spending in FY13 is expected to be almost entirely directed to advancing Sonde’s domestic light oil agenda.

VALUATION/RECOMMENDATION: Our BUY recommendation and $3.00 target (based on a sum-of-the-parts valuation approach) implies an 84% return from year-end pricing. This is with values for the Duvernay and North Africa at the low end of our expectations – respectively $25.8MM (~$0.40/share) and $30MM (~$0.48/share.) Sonde carries our TOP PICK recommendation with a SPECULATIVE risk rating.

OIL & GAS | TOP PICK

AL | Q113 Aleem Ladak, B.Sc.

SECTOR OVERVIEW

The S&P/TSX Global Base Metals Index increased 10% during the fourth quarter and the S&P/TSX Capped Diversifi ed Metals & Mining Index increased 12.6% during the quarter. During the quarter, base metal equities continued to benefi t from strong copper prices which, conversely, were fl at thus far into the quarter. However, weakness can be expected in the copper price going forward as inventories of the refi ned metal have increased by 77,000 tonnes from October 1 - December 18, 2012. This increase in inventories occurred mostly during the month of December and could be from metal distributors and producers placing metal onto the LME for their own de-stocking purposes and less to do with contracting demand.

Chinese copper premiums (money paid by Chinese consumers for immediate delivery of copper) fell slightly in the third quarter from US$65/tonne to US$45/tonne (at the time of writing) – indicating some weaker demand.

SECTOR OUTLOOK

Although inventories of copper have come up rather abruptly in December, we believe this is a natural de-stocking cycle for producers and distributors and should not be seen as an overhang. However, once the New Year begins, copper imports into China will contract due to the Lunar New year at the end of January effecting imports for both January and February 2013.

Unfortunately, copper prices will likely remain subdued due to continuing fears and weakness in economic condition in Europe – one of China’s largest customers for its industrial output. Ultimately, a clear long-term uptrend in to the economic growth is required for copper prices to reach the historical highs reached in the last few years (over US$4.25/lb). Until then, we maintain our 2013 copper price estimate of US$3.60/lb.

For zinc, 2013 will be the year of the fi rst major closure of the fi ve zinc mines expected to close between 2013 and 2016 – the 275,000 tonne/yr Brunswick Mine. Between now and 2016, very little zinc capacity is expected to come onstream to offset this supply contraction; to add insult to injury, the majority of the supply expected to come onstream is from the Gansberg deposit in South Africa which is at a very early stage of development. Starting in 2013, the market should begin to appreciate the structural problems facing the zinc market and support higher long-term prices.


Copper Mountain Mining Corporation (T-CUM) – High expectations are present for the 75%-owned Copper Mountain Mine to perform well during Q412 as evidenced by the strong price performance during Q412 (CUM shares were up 16.6% during the quarter). The mine is expected (by management) to produce ~20M lbs of copper-in-concentrate during the quarter. To produce this, the mine must operate at minimal ~32,000 tonnes/day during each day of the quarter. Signs of achieving this are positive as management stated an 88% availability rate during the beginning of December which compares to the design rate of 92%.

Our target price of C$5.00/share is based on full mill production being reached in 2013 generating 80M lbs of copper in concentrate.

We maintain our BUY recommendation, SPECULATIVE risk rating and our 12-month target price of C$5.00/share based on a EV/EBITDA and P/E multiple valuation method.

Capstone Mining Corporation (T-CS) – Unfortunately, the bankable feasibility study on the Santo Domingo project has been delayed by one year (from January 2013 to January 2014) as management has pushed back the development timeline of the project by one year due to infrastructure bottle-necks in Chile. These bottle-necks are not only being experience by Capstone, but also by other mine projects in the country such as the Relincho project owned by Teck Resources. This production push back along with benign results from the 100%-owned Minto and Cozamin mines resulting in the shares of Capstone falling 3.6% during Q412.

We maintain our BUY recommendation, ABOVE AVERAGE risk rating and our 12-month target price of C$2.95/share based on a EV/EBITDA and P/E multiple valuation method as well as adding half of our estimate of the net asset value of the Santo Domingo project.

Taseko Mines Ltd. (T-TKO) – Commissioning of the GDP3 expansion project at the 75%-owned Gibraltar Mine in BC has started in mid-December as planned. First ore is expected to be delivered in January and commercial production levels (60% of design capacity of the new capacity of 77,100 tonnes/day) are expected at the end of March 2013. We continue to forecast total output from the mine (100% basis) of 178M lbs of copper-in-concentrate.

Aleem Ladak

B.Sc

647.789.2415aladak@pifi nancialcorp.com

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S&P/TSX Global Base Metals Index

S&P/TSX Capped Diversified Metals & Mining

MINING: BASE METALS


MINING: BASE METALS

Unfortunately, the media and project opponents continue to make harsh and un-supported comments about the project suggesting the Federal Government noticed “inconsistencies” in the Environmental Impact Statement. In reality, the Federal Government simply issued a Information Request to Taseko and advised further Information Requests will be forthcoming. This is common in environmental reviews and frequently occur many times during individual reviews. Federal approval of the project is still expected in Q213. As a result of the continued negative media coverage, as well as a reported production shortfall in the third quarter of 2012, the shares of Taseko were down 7.9% during Q412.

We maintain our BUY recommendation, SPECULATIVE risk rating and our 12-month target price of C$4.75/share based on a EV/EBITDA and P/E multiple valuation as well as adding one quarter of our estimate of the net asset value of the New Prosperity project.

Trevali Mining Corporation (T-TV) – 2013 will be a big year for Trevali as the Santandar Mine begins production in the fi rst quarter and the Caribou Mill is expected to begin production in the fourth quarter of the year. Santandar will begin operations at an initial rate of 2,000 tonnes/day and has been designed to allow for an eventual capacity increase to between 4,000-5,000 tonnes/day at the discretion of Trevali and its partner Glencore International plc.

The newly acquired Caribou Mill is also expected to begin production in the fourth quarter of this year at 3,000 tonnes/day. Between now and then, Trevali will be re-furbishing the mill as it has been on care and maintenance since 2008 but kept in a satisfactory condition. Ore fed to the mill will initially be from the Halfmile mine located ~10am away. Once the Caribou Mine has been dewatered (its currently fl ooded), we expect ore from that mine to feed the mill as well. The shares of Trevali were unfortunately down 12.3% during Q412 - we believe this share price fall was due to investor concerns over the closing of the Caribou Mine and Mill transaction. However the transaction has now closed and we view the current share price level as an excellent buying opportunity as Trevali is a near-term base metal producer.

We maintain our BUY recommendation, SPECULATIVE risk rating and our 12-month target price of C$1.55/share based on a EV/EBITDA and P/E multiple valuation as well as adding our estimate of the net asset value of the Bathurst Mining Camp assets (Caribou Mine and Mill and the Halfmile deposit, not the Stratmat deposit).

TOP PICK: TREVALI MINING CORPORATION (T-TV)

Shares Market Net Cash Revenue (Million) Earnings Per Share (FD) P/E 12-MosStock Recent O/S FD Cap. (Debt) Current Target Total Stock Volatility/

Symbol Price (Million) (Million) (Million) FY11A FY12E FY13E FY11A FY12E FY13E FYE Price Return Rating RiskCopper Mountain Mining T-CUM $3.93 104 $410 $27.7 $66.5 $242 $330 ($0.12) $0.20 $0.90 4.4x $5.00 27% BUY SPEC Capstone Mining Corp. T-CS $2.41 401 $967 $489 $353 $323 $324 $0.15 $0.12 $0.12 20.1x $2.95 22% BUY ABVTaseko Mines Ltd. T-TKO $3.03 194 $575 $200 $252 $246 $486 $0.13 ($0.03) $0.40 7.5x $4.75 57% BUY SPEC Trevali Mining Corp. T-TV $1.07 228 $242 $4 $0 $0 $71 ($0.10) ($0.04) $0.07 16.0x $1.55 45% BUY SPEC

Company Name


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Dec-11 Mar-12 May-12 Jul-12 Oct-12 Dec-12$-

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$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80


Risk: SPECULATIVECurrent Price*: $1.0752-week High/ Low: C$1.71 / 0.74Cash Yield: 0.0%Shares Outstanding: 197.1 (basic) 228.2 (fd)Market Capitalization: C$233MMarket Float: 144.6M3-Month Avg. Daily Volume: 625,735Long-term debt: C$3.8MEnterprise Value: C$260M


Financial Summary

(YE Dec. 31st) FY11 FY12e FY13e

Revenue (C$M) 0 0 $71Gross Profi t (C$M) ($5) ($5) ($28)Adjusted FD EPS ($0.10) ($0.04) $0.07

EPS fd (C$M) Q1a Q2a Q3 Q4

FY12 -$0.02 -$0.01 -$0.01 -$0.01FY13 $0.01 $0.02 $0.02 $0.02 CFPS fd (C$M) Q1a Q2a Q3 Q4

FY12 -$0.02 -$0.06 $0.00 $0.00FY13 $0.03 $0.05 -$0.02 -$0.02

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Company Description

Trevali Mining Corporation is a Canadian base metal mining company who’s 100%-owned Santander Mine in Peru is about to start production; in addition, the company is working to develop its Bathurst Mining Camp assets which include two zinc deposits and the acquisition of a currently un-operational zinc mill.

TREVALI MINING CORPORATION (T-TV)


2013 WILL BE A BIG YEAR FOR TREVALI

We are making Trevali Mining Corporation (T-TV) our top pick for Q113 as we expect:

The 100%-owned Santandar Mine in Peru to begin production in 1. 1Q13

The market is expected to continue to realize the structural problems 2. facing the zinc market

The Bathurst Mine in New Brunswick is expected to close in March 3. 2013

Santandar. The 100%-owned Santandar Mine in Peru is expected to begin production in 1Q13 at an initial rate of 2,000 tonnes/day. We forecast total zinc production from this mine of ~60M lbs and all production from Santandar will be sold to Glencore International plc who will take care of transportation costs from the mine to its global distribution network. Glencore International plc will also have closed its acquisition of Xstrata and currently its controls 60% of the global spot zinc market (excluding China) – it is a very powerful partner to have.

Zinc Price. The fi rst major market signal of the structural problems facing the zinc market has been known to the market since March 2012 – the closure of the 275,000 tonne/yr capacity Bathurst Mine in New Brunswick. This will be the fi rst of fi ve major zinc mines around the world to close by 2016.

As a result of these mine closures, a zinc concentrate supply defi cit will emerge forcing zinc smelters and refi neries to lower output levels and thus balance the zinc market and eventually move the market into a defi cit which will begin to deplete the currently high inventories of zinc. This market direction change should support our long-term price estimate of US$0.90/lb.

We maintain our BUY (SPECULATIVE risk) recommendation and $1.55/share

target price. Our target price is based on a EV/EBITDA and P/E multiple valuation applied to the operational results expected from Santandar in 2013 as well as adding our estimate of the net asset value of the Bathurst Mining Camp assets (Caribou Mine and Mill and the Halfmile deposit, excluding the Stratmat deposit).


MINING: BASE METALS | TOP PICK

PK | Q113 Philip Ker, P. Geo., MBA.

SECTOR OVERVIEW

During Q4/12, the S&P/TSX Global Gold Index decreased 15.7% while the resource dominated TSX-Venture Exchange decreased 9.9%. This compares to the senior and junior based ETF of the GDX and GDXJ declining 13.6% and 19.9%, respectively while gold and silver lost 5.8% and 12.1%, respectively.

The weak performance of the sector supports our view that investors were “risk-off” during Q4/12, which particularly hurt equities within the junior space. We believe there is continued long term interest in the precious metals group as a safe haven from riskier investments, which should result in a stronger relative performance for gold in the upcoming quarter and over the year ahead.

With depressed valuations for equities in the precious metals space, three signifi cant M&A transactions occurred within equities we track and are summarized in Exhibit 1. We believe the market is ripe for M&A activity and should continue into 2013 as advanced quality projects become targets for more senior companies looking to replenish their depleting ore reserves and take advantage of current low valuations metrics.

Additional support for investments in real assets such as gold was demonstrated by the strong infl ux of gold buying by several central banks; including Brazil, Turkey and Khazakstan. This may be an indication that central banks are looking to increase their exposure to the yellow metal. We can only speculate what effect an increase by China to its reserves could have on the gold price, as well as the possibility of gold becoming a tier 1 asset under the classifi cation by the Bank of International Settlements. If gold became a tier 1 asset, it would allow commercial banks to lend against 100% of gold’s value rather than at 50% as a tier 3 asset. A breakdown of central bank reserve holdings as of December, 2012 is shown in Exhibit 2.

EXHIBIT 1: M&A ACTIVITY Q4/12

Date Aquirer Premium Transaction Details10/15/2012 Argonaut Gold Prodigy Gold Wawa, Ontario $341 54% AR to offer $1.08/sh or 0.1042 of an AR share11/12/2012 Osisko Mining Queenston Mining Kirkland Lake, Ontario $550 45% OSK to offer $6/sh or 0.611 of an OSK share17/17/2012 First Majestic Orko Silver Durango, Mexico $387 69% FR to offer $2.72/sh or 0.1202 of an OK share

Target Asset LocationEquity Value ($M)

Source: Bloomberg

EXHIBIT 2: RESERVE BANK HOLDINGS

Central Bank Tonnes (t) Gold as % of Reserves

USA 8,134 76.1%

Germany 3,391 73.2%

Italy 2,452 72.5%

France 2,435 72.0%

China 1,054 1.7%

Source: World Gold Council

SECTOR OUTLOOK

Despite a late Q4/12 selloff in gold and silver prices, we are optimistic prices will resume their uptrend in 2013. With the US’s ‘fi scal cliff’ issues far from over, surging US defi cits and wide range of macro economic challenges still ahead, we believe investors will continue to look to precious metals as a hedge. Bringing down the US debit and defi cit will be not be easy. We note that there is a strong correlation between rising gold prices and rising US debt as shown on exhibit 3. This charts indicates that with every $1 trillion in US debt there has been a $100 oz increase in the price of gold. In exhibit 4 we outline our metals forecast for 2013.

Philip Ker

P. Geo., MBA

647.789.2407pker@pifi nancialcorp.com

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75

80

85

90

95

100

105

110

115

120


S&P/TSX Venture Composite Index

S&P/TSX Global Gold Index

MINING: PRECIOUS METALS


EXHIBIT 3: U.S. DEBT VS. GOLD PRICE (10YR CHART)

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

Go

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- (

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0

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4

6

8

10

12

14

16

18

US

De

bt - ($

Trillio

ns)

Gold Price ($/oz)US Debt ($T)

Source: Bloomberg

EXHIBIT 4: PRECIOUS METALS FORECASTS

2012 2013 2014 2015 2016 LT

Gold ($/oz) 1668 1800 1750 1700 1600 1500

Silver ($/oz) 31 36 35 34 32 30


Atna Resources Ltd. (T-ATN, $1.13, Target $2.55, BUY, SPECULATIVE risk rating) – Since initiating coverage of ATN on October 9, 2012, its share price has slightly declined by 16.2% as compared to a 15.7% dip for the S&P/TSX Global Gold Index over the quarter. We view this as a great entry point for the stock as Atna is making excellent progress at its Pinson underground and anticipate increased production levels from Briggs in Q4/12. We forecast total corporate production to more than double in 2013 to ~86,000oz of gold and should be re-valued upon delivery of profi table production at its Pinson underground mine. The addition of Pinson production should demonstrate growth in earnings and cash fl ow to investors as the mine ramps up over 2013. We consider Atna as one of the best value and growth opportunities in the junior gold producer space. Thus far at Pinson, Management has been achieving its milestones and project deadlines in a timely fashion and expect further success as commercial production is set to commence in Q2/13.

Kootenay Silver Inc. (V-KTN, $0.97, Target $1.60, BUY, SPECULATIVE risk rating) – Kootenay Silver’s share price has slightly dipped 11.7% through Q4/12 since initiating on November 14, 2012. This compares to the broader “risk-off” sentiment as seem in the decline of 9.9% of the TSX-V. The primary investment thesis of Kootenay is based on anticipated growth of its Promontorio deposit through a 30,000m drill program which should provide steady news fl ow over H1/13. We are optimistic Kootenay will continue to delineate additional mineralization in the NE and SW zones. Additional upside exists with several holes planned for the nearby Dorotea target which produced positive assay results in previous drilling that included elevated gold grades greater than 1.5g/t over considerable widths. We continue to favor Kootenay as an emerging silver, lead and zinc explorer in Mexico.

Timmins Gold Corp. (T-TMM, $3.01, Target $3.90, BUY, ABOVE AVERAGE risk rating) – We recently initiated coverage on Timmins Gold on December 13, 2012 and was one of the best junior gold producers over 2012 gaining more than 54% during the year. We anticipate further growth for the story into 2013 as the Company aims to continue its throughput expansion plans and target 130,000oz of annual gold production, up from the 100,000oz/yr level of 2012. Additionally, Timmins has been aggressively drilling along strike at its San Francisco and La Chicharra pits and believe a longer mine life will be realized upon further delineation of these mineralized structures. Timmins is un-hedged and combined with strong gold prices and low cash costs (~$715/oz), they rapidly adding cash to its balance sheet and could become a participant in some M&A activity in 2013. We consider Timmins as a good option for exposure into the junior gold producing space and provide upside to investors with its growth strategies.

TOP PICK: ATNA RESOURCES LTD. (T-ATN)

Shares Market Net Cash Revenue (Million) Earnings Per Share (FD) P/E 12-MosStock Recent O/S FD Cap. (Debt) Current Target Total Stock Volatility/

Symbol Price (Million) (Million) (Million) FY11A FY12E FY13E FY11A FY12E FY13E FYE Price Return Rating RiskAtna Resources Ltd T-ATN $1.09 140 $152 $21 $52 $60 $155 $0.14 $0.05 $0.35 3.1x $2.55 134% BUY SPEC Kootenay Silver Inc. V-KTN $0.98 57 $55 $8.3 N/A N/A N/A N/A N/A N/A N/A $1.60 63% BUY SPECTimmins Gold Corp. T-TMM $2.99 143 $428 $8.8 US$91 US$165 US$220 $0.15 $0.24 $0.37 8.1x $3.90 30% BUY ABV

Company Name

MINING: PRECIOUS METALS


-

1,000

2,000

3,000

4,000

5,000

6,000

Dec-11 Mar-12 May-12 Jul-12 Oct-12 Dec-12$-

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60


Risk: SPECULATIVECurrent Price*: $1.0952-week High/ Low: $1.54 / $0.76Shares Outstanding: 139.7M (basic) 153.1M (fd)Market Capitalization: $157.9MMarket Float: 113.7M3-Month Avg. Daily Volume: 485.8KLong Term Debt: $4.6MEnterprise Value: $156.6M


Financial Summary

(YE Dec. 31st)

Q1/12 Q2/12 Q3/12 Q4/12E FY13E

Revenue ($M) 15.8 13.2 14.2 16.7 155.1

EBIT ($M) 4.0 2.4 1.5 2.5 53.2

Gold Sales (K oz) 9.4 8.1 8.6 9.6 86.0

Cash Cost ($/oz) 897 943 1037 970 930

Q1/12 Q2/12 Q3/12 Q4/12E 2013E

EPS fd $0.02 $0.02 $0.02 $0.01 $0.01 $0.35CFPS fd $0.04 $0.03 $0.03 $0.02 $0.41P/E - - - - 3.2P/CF - - - - 2.8

Thou

sand

s

Company Description

Atna Resources Ltd. is a Golden, Colorado based junior gold producer with a portfolio of development and advanced exploration projects all located within western USA. Atna is producing gold at its Briggs mine and will bring its second mine, the high-grade Pinson gold mine, into production in Q1 2013. Atna has global gold resources amassing 5.6Moz, including 1.2 million ounces of proven and probable reserves.

ATNA RESOURCES LTD. (T-ATN)


PINSON TO DRIVE GROWTH IN 2013

We are making Atna Resources (T-ATN) our top pick for Q113 as we expect:

The Company to continue its development at Pinson1.

Stronger production performance with lower costs at Briggs2.

2013 Production Growth: Atna is one of the few junior gold producers that aim to more than double gold production in 2013. With the current developments on-going at its Pinson underground mine in Nevada, we anticipate the Company receiving its water quality permit and moving from a small miner’s permit of 36,500tpa to target 400,000tpa once in full production. Management believes this permit should be received in Q1/13 and could commence commercial production in Q2/13. With signifi cant underground development being completed, Atna should have signifi cant underground headings in order to ramp up production from 250tpd to target 700tpd by year end. Additionally, Atna benefi ts from having previously negotiated processing arrangements of its sulphide ore to be sent to Barrick Gold facilities and have minimal Capex requirements remaining for 2013.

By adding Pinson to its portfolio of producing assets, Atna is on target to more than double its expected annual production from its current Briggs mine for 2013. We believe Atna should achieve ~45,000oz of payable gold from Pinson and target 86,000oz of total production for 2013. We believe this growth in production should be refl ected into Atna’s valuation over 2013. Presently, the Company is trading at only 2.8x our cash fl ow per share estimate of $0.41 for 2013, which is well below its peer group average of approximately 7.3x. We suspect a signifi cant re-rating of Atna’s valuation upon delivery and success of commercial production at its Pinson operation.

Briggs Operations: Despite downtime experienced in Q2/12 due to repairs and replacement of a secondary crusher replacement, increased equipment utilization was realized over Q3 and into Q4 and should help realize stronger production and performance numbers. For Q4/12, we are forecasting production of 9,600oz of gold which is considerably better than Q3/12 of 8,600oz. With the increased production and lack of one-off associated expenditures attributed to the operations cash costs in Q3/12, cash costs for Q4/12 should come down from $1,037/oz in Q3/12 to our estimate of $970/oz for Q4/12. Additionally, with more reasonable equipment utilization expected for 2013 and production from some higher grade zones at Briggs, total production from the mine should rise from the 36,000oz level in 2012 to target 40,000oz in 2013.

Valuation/Recommendation. Our thesis and analysis for gold producers relies on our gold forecast of $1,800/oz for 2013. For Atna, our valuation is derived using a 60/40 weighting of 0.8x our NAV (5% discount, $1,500/oz long-term gold) and 7.2x our cash fl ow per share estimate of $0.41. Due to the considerable growth anticipated for Atna in 2013 and thereafter through its pipeline of projects, we believe this is a great opportunity for investors to gain exposure to a junior gold producer in a politically safe jurisdiction. Our $2.55 target price and BUY recommendation (risk rating: SPECULATIVE) represents a 126% return to potential investors.


MINING: PRECIOUS METALS | TOP PICK

24 | Q113 Pardeep S. Sangha, B.A. Sc., MBA

TECHNOLOGY

SECTOR OVERVIEW

Technology stocks push ahead. The InfoTech sub-index increased 11.1% in the fourth quarter, compared to an increase of 0.9% in the S&P/TSX Composite index. The InfoTech sub-index was positively affected by Research in Motion (T-RIM; Q-RIMM), which increased 69.5% in the quarter. In the United States, the Nasdaq-100 Index fell 5.7% in Q4, compared to the Dow Jones Industrial Average and the S&P 500 index, which fell by 2.5% and 1.0% respectively.

From our coverage list, Avigilon (T-AVO) was the top gainer in the fourth quarter with an increase of 38% in its share price. Avigilon was followed by LOREX Technology Inc. (LOX-V), which increased 36% in Q4 as a result of the Company being taken over by FLIR Systems Inc. (FLIR). Peer1 was up 34% in the quarter due to Cogeco Cable’s recent offer to buy the Company.

SECTOR OUTLOOK

IT spending expected to rise 2.5% In 2013. The global fi scal crisis and economic slowdown are expected to continue negatively affecting it spending in 2013. According to a November report by Gartner Inc., global IT spending is expected to rise 2.5% in 2013 to 2.68 Trillion compared to 2.60 Trillion in 2012. IT spending is expected to be resilient over the long run as most enterprises have already cut discretionary IT spending over the past several years and have little room to reduce IT spending further. We are expecting the second half of 2013 to be stronger than the fi rst half. Mobility and cloud computing-related expenditures continue to be drivers in the enterprise. Manufacturing, natural resources and banking sectors are expected to be strong in 2013, while IT spending in the government sector remains weak.


Absolute Software Corp. (T-ABT) – Absolute continues to be hampered by a decline in laptop and PC desktop sales due to the increasing penetration of iPad and smartphone devices. The Company reported weaker than expected fi nancial results for Q1FY13. Absolute reported Sales Contracts of $20.6M which was decline of 19% compared to the same period last year. The Company also reported Adj. Operating Income of $1.4M for Q1FY13, falling short of the $2.7M reported in Q1FY12. Absolute also announced a tuck-in acquisition of privately-held LiveTime Software.

We currently have a target price of $4.00 for Absolute Software (T-ABT) with a NEUTRAL recommendation. We rate the Company with a SPECULATIVE risk rating.

Avigilon Corporation (T-AVO) – Avigilon had another great quarter as the Company’s share price increased 38% in the period. Avigilon is one of the fastest growing companies in Canada. During the quarter the Company reported strong results for Q3FY12 which beat consensus estimates. Avigilon’s growth is being driven by an accelerating shift to digital, high-defi nition camera systems. Avigilon is suffi ciently capitalized, with $45M in capital on its balance sheet.

We currently have a BUY recommendation on Avigilon Corp. (T-AVO), with a 12-month target price of $14.00. Our target price represents a 3.2x EV/Sales multiple and a 16.6x EV/EBITDA multiple of FY13 estimates. We assign Avigilon a SPECULATIVE risk rating.

Descartes Systems Group Inc. (T-DSG; Q-DSGX) – During the quarter, Descartes announced the acquisition of Exentra Transport Solutions for approximately US$17M in cash. Exentra gives Descartes a stronger presence in the UK and broadens the Company’s MRM product portfolio. During the quarter Descartes reported Q3 fi nancial results that beat expectations and management is providing record guidance for Q4.

We currently have a BUY recommendation on Descartes and increased our 12-month target price this past quarter to US$10.60. Our target price represents a 4.4x EV/Sales multiple and a 14.1x EV/EBITDA multiple of our FY14 estimates. We rate Descartes with an ABOVE AVERAGE risk rating.

Hemisphere GPS Inc. (T-HEM) – Hemisphere’s new CEO, Rick Heiniger, announced the Company’s corporate strategy will be to focus exclusively on the Precision Agriculture sector. The Company’s headquarters will be relocated to Hiawatha, Kansas and the Calgary offi ce will be closed. We are assuming the Company’s revenues will decline in FY13 as a result of divesting its non-Agricultural businesses, but Hemisphere should have higher profi ts and greater growth in FY14.

We are maintaining our NEUTRAL recommendation for Hemisphere GPS (T-HEM) with a 12-month target price of $0.65. We remain bullish on Hemisphere’s long-term outlook, but we need to see a return to growth before we can upgrade our recommendation. We assign a SPECULATIVE risk rating given the small market cap and share volatility.

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Pardeep S. Sangha

B.A.Sc., MBA

604.718.7528psangha@pifi nancialcorp.com

85

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100

105

110

115

120



S&P/TSX Capped Technology Index


LOREX Technology Inc. (V-LOX) – LOREX’s share price increased 36% during the quarter as the Company agreed to be acquired by FLIR Systems Inc. (FLIR) for CDN $1.30 per share in cash. LOREX de-listed from the TSX Ventures Exchange on December 20th, 2012.

Mediagrif Interactive Technologies Inc. (T-MDF) – Mediagrif raised $35m in equity capital during the fourth quarter. The Company intends to use the proceeds of the offering to pay down debt and fi nance future acquisitions. Mediagrif reported another solid quarter with revenue increasing 20% and EBITDA increasing 45% YoY; EBITDA margin improved to 43% of revenue. The Company’s positive results were driven by the LesPAC acquisition.

We currently have a BUY recommendation for Mediagrif with a 12-month target price of $21.00. We rate Mediagrif with an ABOVE AVERAGE risk rating. Our target price represents an EV/Sales multiple of 4.7x and an EV/EBITDA multiple of 10.4x.

OpenText Corp. (T-OTC; Q-OTEX) – OpenText had mixed results this past quarter. OpenText’s License revenue declined 14% to $55.7M in Q1FY13 compared to $65M in the same quarter last year. This decline is particularly disappointing given management’s stated goal to increase License revenue. On a positive note, OpenText launched its “OpenText Cloud” which is based on the recent EasyLink acquisition.

We are maintaining our NEUTRAL recommendation on OpenText with a 12-month target price of US$60.00. Our target price represents a 2.6x EV/Sales multiple and 9.3x EV/EBITDA multiple of our FY14 estimates. We rate this investment with an AVERAGE risk rating.

Peer1 Network Enterprises Inc. (T-PIX) – Peer1 received a takeover offer from Cogeco Cable on December 21st, 2012 for $3.85 per share in cash. The offer values Peer1 at a market cap of approximately $544M. We are expecting this deal to close given the strong support from the locked up shareholders representing 62% of the total outstanding shares. Peer1’s share price increased 118% in 2012 due to strong operating results and the Cogeco Cable bid.

We are recommending that shareholders TENDER their shares pursuant to the takeover offer. We have increased our target price from $3.50 to $3.85 and we rate the investment opportunity with an ABOVE AVERAGE risk rating.

Points International Inc. (T-PTS; Q-PCOM) – Points’ share price has increased 9.2% over the past month due to the Company announcing a multi-year agreement with Southwest Airlines (NY-LUV). Including the Southwest deal, Points has now closed over $50M of new deals this year. We are forecasting aggressive growth for the Company with a revenue target of $250M in FY14 as we are expecting the Company to announce additional contracts similar in size to the Southwest Airlines deal.

We currently have a BUY recommendation with a $20.00 target price for Points International (T-PTS; Q-PCOM) based on the Company’s large sales pipeline. We rate this investment opportunity with a SPECULATIVE risk rating.

TIO Networks Corp. (V-TNC) – Customer concentration remains a concern at TIO who reported disappointing fi nancial results for its Q1FY13 due to a decline in revenue from Cricket Wireless, which is its largest billing partner. We are now forecasting 7% revenue growth in FY13 for TIO Networks which is lower than its growth rate in previous years. This has led to a decline in the Company’s share price of 31% in FY12.

We currently have a BUY recommendation and 12-month target price of $0.60 for TIO Networks. Our target price represents an EV/Sales multiple of 0.5x and EV/EBITDA multiple of 7.7x. We rate the Company with a SPECULATIVE risk rating.

TOP PICK: AVIGILON CORPORATION (T-AVO)

Shares Market Net Cash Revenue (Million) EBITDA (Million) EV/EBITDA 12-MosStock Recent O/S FD Cap. (Debt) Current Target Total Stock Volatility/

Symbol Price (Million) (Million) (Million) FY11A FY12E FY13E FY11A FY12E FY13E FYE Price Return Rating RiskAbsolute Software Corp T-ABT $5.10 47.6 $243 US$72.5 US$79.1 US$88.7 US$84 US$7.4 US$11.7 US$8.6 19.8x $4.00 -22% NEUTRAL SPECAvigilon Corp † T-AVO $11.70 40.2 $470 $45.6 US$60.0 US$98.2 US$143 US$6.6 US$12.4 US$27.8 15.3x $14.00 20% BUY SPECDescartes Systems Group Inc Q-DSGX US$9.30 65.6 US$610 US$40.4 US$99.2 US$114.0 US$127 US$26.6 US$33.2 US$38.0 15.0x US$10.60 14% BUY AVGHemisphere GPS Inc T-HEM $0.73 71.0 $51.8 US$3.0 US$67.8 US$69.5 US$67 US$3.1 (US$0.0) US$9.1 5.4x US$0.65 -11% NEUTRAL SPECMediagrif Interactive Technologies In T-MDF $19.24 13.8 $265.5 $5.8 $47.1 $53.8 $63.0 $15.1 $17.4 $26.3 9.9x $21.00 11% BUY ABVNorsat International Inc. T-NII $0.51 58.0 $29.6 (US$3.3) US$38.4 US$42.5 US$45.3 US$4.1 US$5.0 US$5.8 5.7x N/R N/A N/R SPECOpen Text Corp. Q-OTEX US$55.89 61.2 US$3,420 (US$287.0) US$1,033 US$1,208 US$1,414 US$295 US$333 US$409 9.1x US$60.00 7% BUY AVGPeer 1 Network Corp T-PIX $3.83 142 $544 (US$103.2) US$113 US$134 US$166 US$26.8 US$34.3 US$46.3 14.0x $3.85 1% TENDER ABVPNI Digital Media Inc T-PN $0.40 34.3 $13.7 $5.6 $23.7 $23.6 $25.7 $3.6 $2.6 $3.3 2.5x N/R N/A N/R SPECPoints International Ltd. T-PTS $11.00 15.6 $172 US$13.8 US$123 US$145 US$184 US$5.8 US$8.5 US$12.7 12.4x $20.00 82% BUY SPECTio Networks Corp V-TNC $0.33 49.2 $16.2 $4.4 $36.6 $42.2 $45.0 $1.8 $1.4 $1.8 6.6x $0.60 82% BUY SPEC

Company Name


TECHNOLOGY


0

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Jan-12 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00


AVIGILON CORPORATION (T-AVO)

Rating: BUY; Target: $14.00

GLOBAL SALES EXPANSION UNDERWAY

Avigilon’s share price increased 189% in 2012. Avigilon is one of the fastest growing companies in Canada. The Company is well positioned to benefi t from the shift away from analog to digital security systems. Management’s long-term goal is to grow the business to over $500M in 2016 as the Company’s innovative HD technology is experiencing rapid and widespread global adoption.

Avigilon reported exceptionally strong results for Q3FY12. Avigilon’s revenue increased 69% for Q3FY12 (ending September 30, 2012) to $25.5M compared to $15.1M revenue reported in Q3 of last year and better than the consensus estimate of $24.0M. The Company reported quarterly EBITDA of $4.1M in Q3FY12, which was signifi cantly higher than EBITDA of $1.5M reported last year and easily beat the consensus estimate of $1.4M.

We are expecting Avigilon to report strong Q4FY12 results in March of 2013. Avigilon’s growth and operating results can be attributed to the Company’s new product introductions over the past year, entry into new markets globally, increased brand awareness, and higher gross margins.

US market remains healthy while the Company expands its global sales. The United States made up 50% of total sales in the past quarter and increased 71% YoY. Avigilon recently entered a number of new regions such as Latin America, Asia Pacifi c, the Middle East and Eastern Europe. These efforts in expanding the Company’s presence worldwide will have a positive effect in future quarters.

Plenty of cash for growth. As of September, 2012, Avigilon had cash of $45.6M, compared to cash of $12.4M on December 31, 2011. Last quarter Avigilon raised $26.5M in a bought deal fi nancing with 4.132M aggregate shares issued at a price of $6.40 per share. We believe Avigilon’s current cash position and future projected cash fl ows are suffi cient to fund the Company’s ongoing cash requirements.

We are forecasting 46% growth in FY13 and 36% growth in FY14. We believe revenue growth will be driven by the expansion of Avigilon’s sales networks, the launch of new products and expansion into new geographies. Our estimate for FY13 is for revenue of $143.2M, EBITDA of $27.8M, and $0.50 EPS (fd). For FY14, we are forecasting revenue of $194.8M, EBITDA of $46.7M, and $0.85 EPS (fd).

We currently have a BUY recommendation for Avigilon Corporation (T-AVO), and a 12-month target price of $14.00. Our target price represents an EV/Sales multiple of 3.2x and EV/EBITDA multiple of 16.6x. We rate the investment with a SPECULATIVE risk.


Risk: SPECULATIVECurrent Price*: $11.7052-week High / Low: $12.50 / $3.80Shares Outstanding: 36.2 M (basic) 40.2 M (fd)Market Capitalization ($M): 423.230-Day Avg. Daily Volume: 45,982Net Cash: $45.6 M CEO: Fernandes, AlexanderCFO: Bardua, BradleyInsider Ownership: 24.5%


Financial Summary

(FYE Dec 31st) FY10 FY11 FY12e FY13e

Revenue ($M) 32.3 60.0 98.2 143.2EBITDA ($M) 2.8 6.6 12.4 27.8Net Income ($M) 1.0 3.8 7.8 20.1EPS 0.05 0.14 0.21 0.50 EV/Sales 11.7x 6.3x 3.8x 2.6xEV/EBITDA NMF NMF 30.3x 13.6xP/E NMF NMF 55.0x 23.3x Quarterly (FY12) Q1 Q2 Q3 Q4e

Revenue ($M) $17.8 $24.4 $25.5 $30.5 EPS $0.02 $0.04 $0.06 $0.09

Thou

sand

s

PI Financial Corp. has received compensation for acting as a fi s-

cal agent for AVO in the previous 12 months. See the disclosure

section for additional details.

Company Description

Avigilon is a Vancouver-based company that designs, manufactures and markets high-defi nition, network-based video surveillance systems and equipment.

TECHNOLOGY | TOP PICK


27 | Q113 Chris Murray, P.Eng, MBA, CFA

SECTOR OVERVIEW

The S&P/TSX Capped Industrial Index increased 7.4% in Q412, while the broader S&P/TSX Composite Index was fl at. While the US election, ‘fi scal cliff’ and ongoing European issues were the primary focus of the fi nancial media, the slow but tractable recovery continued in the US and Canada helping to generally push shares in manufacturing companies higher during the quarter.

The top performing company in the Industrial Index during Q412 was Transcontinental Inc, which experienced a 33.5% increase in share price, while the worst performing industrials member was Genivar, which saw its share price decline 12.4%.

SECTOR OUTLOOK

In the US, a budget deal struck to avert the ‘fi scal cliff’ has allowed the market some comfort, although we expect the shift of possible sequestration to March 1 and upcoming negotiations on spending authorizations and the US Debt ceiling could prove to be contentious with impacts particularly for defense linked stocks and other government services related businesses. Overall the general lack of clarity in the US may prove to be somewhat of a drag on early cycle performance for certain names, although we believe ultimately there will be a resolution over time. We note the FY13 US Defense Authorization Act was signed concurrently with the budget deal, in-line with initial requests from the White House, which should see defense spending fl at on a real basis over the next several years. Sequestration, which remains on the table, could see a further $500B+ cut over the next 10 years required, although we believe there will be some form of agreement, although we anticipate further reductions in defense spending, both in the US and globally are likely.

While US budget issues may remain a key driver of investor sentiment, recent data points support a continued slow improvement in many economies including the US and Canada as well as other international and developing markets. We continue to see slow improvement in housing, employment and travel demand and expect the trend of successive gains in recent months to continue which supports our bias that improving fundamentals will be positive for share prices in our universe.


Air Canada (T-AC.A; T-AC.B) – Air Canada’s share price increased 37.8% in Q412, as an absence of labor issues and continued strength in operational data pushed the Company’s share price to annual highs. While recent media attention on the Company has focused on the launch of low-cost carrier operation “Rouge”, we believe the real catalyst for share price appreciation in 2013 will be the continued efforts by the Company to improve cost effi ciencies. With management indicating the booking curve remains strong, we believe that capacity discipline currently being exhibited by carriers should help maintain fare prices. We continue to believe cost containment and reductions in 2013 will be the primary driver of earnings and share price appreciation.

We maintain our BUY recommendation (risk: SPECULATIVE) and our 12-month target price of $2.50 based on a 4.0x multiple of our 2013e EBITDAR.

Discovery Air Inc. (T-DA.A) –Discovery Air’s shares fell 27.1% during Q412, as investor’s continue to wait for a clear strategic direction from the new management team. The quarter was overall a mix for the Company, as it reported weaker than expected quarterly results driven by a softer than anticipated pricing for fl ight hours, but on a positive note received a three year extension on its Top Aces contract. We expect the Company’s newly appointed president and CEO, Mr. Jacob Shavit will begin to clarify his vision in Q1 and Q2 of 2013, which will likely prove to be a more signifi cant catalyst for share prices than quarterly results. Overall, DA.A shares trade at a substantial discount to fair value, however we believe further clarity from management and a demonstration of sustainable fi nancial performance and growth should lead to higher share prices in 2013.

We are maintaining our BUY rating (risk: SPECULATIVE) and 12-month target price of $4.50. Our target price is based on the average of a 3.75x multiple of our forecast FY14e EBITDA and an 8.0x multiple of our FY14e adjusted FD EPS supported by our discounted cash fl ow methodology.

Exchange Income Corp. (T-EIF) – Exchange Income Corp.’s shares rose 3.0% during Q412, as investors appear to have become accustomed to strong earnings growth and dividend increases. While WesTower should prove to be the primary driver of revenue and profi tability growth in FY13, investor’s appear to be waiting for the next signifi cant acquisition. Management maintains that the pipeline of potential deals is strong, and with the availability of internally generated cash fl ows as well as signifi cant credit facilities available, indicates there is potential for up to $185M in potential acquisitions based on current leverage ratios. Exchange has a strong track record of not overpaying for acquisitions, and we expect the prudence management is demonstrating resulted in not rushing into any acquisition in Q412. Given the Company’s strong trading multiples, which we believe result from its dividend policy, the arbitrage on acquisitions is the largest lever to share price appreciation. We anticipate further acquisitions are likely in FY13.

We are maintaining our BUY rating (risk: AVERAGE), and our target price of $30.00. Our 12- month target price is based on a 7.0x EBITDA multiple and 15.0x FD EPS supported by our dividend discount methodology based on our estimates for the 12-month period ending December 2013.

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OM

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Chris Murray

P.Eng., MBA, CFA

416.883.9047cmurray@pifi nancialcorp.com

85

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100

105

110

115



S&P/TSX Transportation Composite Index

S&P/TSX Capped Industrials Index

TRANSPORTATION AND INDUSTRIAL PRODUCTS


Geodrill Inc. (T-GEO) – Geodrill’s shares declined 31.6% during the quarter, as quarterly results were impacted by a weak mining fi nance environment, lab delays in West Africa, and an unusually harsh wet season resulting in an average drill rig utilization below 50% for the quarter. While the results were disappointing, investors appear to have been excessively punitive from a valuation perspective, particularly when one considers that the Company was in a position to weather the temporary storm, as well as make some tactical and strategic changes to mitigate the current challenges. Following a conversation with Geodrill’s president, Dave Harper, we are increasingly confi dent that the Company is at an infl ection point for activity, earnings and share prices, upgrading the shares to a BUY rating. Geodrill shares are currently trading at multiples well below their peers, though we believe investors have overreacted, and that fundamentals will eventually trump sentiment.

We are maintaining our rating of BUY (risk: SPECULATIVE) and our target price of C$2.00 based on valuation and our expectations for improved FY13 operating and fi nancial performance. Our target price is based on the average of a 3.25x multiple of our FY13e EBITDA and a 7.0x multiple of our FY13e adjusted FD EPS supported by our discounted cash fl ow methodology and assuming a C$/US$ exchange rate at par.

Bombardier (T-BBD.B) – Bombardier’s share price increased 1.9% during the Q412, as weakness in Q312 fi nancial results were offset by a number of signifi cant orders for BA, and increased Chinese rail stimulus that should benefi t BT. What recovered share prices from annual lows following the announcement of the Q312 results as well as the delay in fi rst fl ight for the CSeries, were orders from Delta Airlines for up to $3.3B in CRJ, and potentially record $8.0B order by VistaJet for up to 142 Global aircraft. The orders helps with near term cash fl ow (due to deposits), alleviating a major investor concern to a certain degree, but more importantly the orders reaffi rm that BA’s product line up is relevant and should not be looked at as a CSeries only proposition. We expect many of the challenges that BT faced in FY12 to be resolved in H113, and the fi rst CSeries fl ight to be signifi cant catalysts in FY13.

We maintain our BUY rating (risk: ABOVE AVERAGE) and our 12-month target price of C$5.50. Our target price is based on the average of 6.5x EBITDA and a 10.0x EPS multiple of our FY13e assuming a C$/US$ exchange rate at par.

CAE Inc. (T-CAE) – During the fourth quarter of 2012 CAE’s share price decreased 4.4%, as Q213 results were weaker than forecast, and concerns that forecast weakness in the military segment will not be offset by strength in the civil segment in the near term. During the quarterly conference call management indicated that military contracts are taking longer than anticipated to sign, and we continue to expect CAE to experience negative growth in the military segment in both FY13 and FY14 as key defense customers will likely still be working through fi scal diffi culties for several budget cycles. We believe sentiment may keep shares range bound until some clarity is obtained.

We maintain our NEUTRAL rating (risk: AVERAGE) and $11.00 target. Our 12-month target price is based on the average of 7.0x our estimated EBITDA and 13.0x our estimated FD EPS for FY14 supported by our discounted cash fl ow methodology.

WestJet Airlines Inc. (T-WJA) – WestJet’s share price increased 13.5%in Q412, as the Company continues to fi nd demand for its expanding fl eet, thanks to its push into the business traveler and Quebec leisure segments, as well as expanded code shares and interline relationships. The addition of premium economy seating and a new in-fl ight entertainment system are being used to further entice consumers who seek amenities beyond basic economy. The next leg of growth for the Company will come from the “Encore” regional carrier, which is expected to begin service mid-year FY13. At maturity the regional operation is expected to have a national presence including operations in both western and eastern Canada, as well as serving US transborder destinations. In the near-term, continued operational and earnings strength will be the primary catalysts for share price.

We maintain our BUY recommendation (risk: ABOVE AVERAGE) and 12-month target price of $23.00. Our target price is based on a 5.0x multiple of our FY13e EBITDAR and a 12.0x multiple of our FY13e FD EPS supported by our discounted cash fl ow analysis.

Progressive Waste Solutions (T-BIN) – Progressive Waste shares increased 6.1% in Q412, as shares recovered from weaker than expected Q312 results. Recent weak quarterly performance is almost entirely attributable to the Company’s Northeast operations, and they are more than simply macroeconomic issues. Management indicated it is working vigorously to structure the segment’s business model towards growth and higher profi tability, but we continue to believe this issue will continue to hamper earnings into FY13. The Company indicated that it is taking steps to drive higher internalization rates towards 50%, forecast to be completed in FY13 with the ultimate goal of achieving a 66% internalization rate in the segment over the next several quarters. While we believe management is very capable of achieving these longer-term goals there are a number of factors, including further tuck-in acquisitions, that we believe are required in order to better adjust the balance between landfi ll and collection assets in the segment.

We are maintaining our NEUTRAL rating (risk: AVERAGE) and our 12-month target price of $21.00 (risk: AVERAGE). Our target price remains based on a 7.0x EV/EBITDA multiple applied to our FY13e EBITDA, a multiple in-line with the Company’s peers and a C$/US$ exchange rate at par supported by our discounted cash fl ow analysis.

New Flyer Industries (T-NFI) – New Flyer Industries shares increased by 11.1% in Q412, as weak Q312 results driven by an order delay were not enough to sink investor enthusiasm for the growing order book and industry prospects. Given the size of the backlog and bid universe, we believe that the Company will need to consider increasing its production rate above the current 36 EU per week to meet customer demand at some point in FY13. With only 15 weeks needed between order confi rmation and delivery driven by the lean optimization the Company has been implementing over the past several years,




we expect changes remain a likely probability, particularly if order intake rates continue at levels reported during the quarter. We believe the conversion of the order pipeline to new orders remains the single largest driver for share prices. With bids in process and bids submitted 2.5x greater than this time last year, we are anticipating signifi cant order intake, although the exact timing does remain uncertain.

We maintain our BUY recommendation (risk: ABOVE AVERAGE) and 12-month target price of C$9.00. Our price target is based on a 6.5x EBITDA and a 13.0x price to earnings multiple of our FY13e adjusted FD EPS as well as a C$/US$ exchange rate at par.

TOP PICK: GEODRILL LTD. (T-GEO)

Shares Market Net Cash Revenue (Million) EBITDA* (Million) EV/EBITDA 12-MosStock Recent O/S FD Cap. (Debt) Current Target Total Stock Volatility/

Symbol Price (Million) (Million) (Million) FY11A FY12E FY13E FY11A FY12E FY13E FYE Price Return Rating RiskAir Canada T-AC.B $1.75 369 $646 ($4,927) $11,612 $12,078 $12,341 $1,242 $1,312 $1,435 3.9x $2.50 43% BUY SPECBombardier Inc. T-BBD.B $3.76 1,755 $6,599 (US$3,196) US$18,347 US$17,574 US$19,517 US$1,526 US$1,307 US$1,740 5.6x $5.50 46% BUY ABVCAE Inc. T-CAE $10.07 262 $2,642 ($995) $1,631 $1,821 $2,086 $373 $415 $467 7.8x $11.00 9% NEUTRAL AVGDiscovery Air Inc. T-DA.A $2.26 14.6 $33.0 ($157) $151 $192 $225 $41.9 $44.4 $42.7 4.4x $4.50 99% BUY SPECExchange Income Corp. T-EIF $25.78 20.2 $521 ($201) $510 $786 $841 $74.8 $97.8 $111.3 6.5x $30.00 16% BUY AVGGeodrill Ltd. T-GEO $1.08 43.9 $47.4 (US$5.4) US$70 US$67 US$87 US$22 US$14 US$27 2.0x $2.00 85% BUY SPECProgressive Waste Solutions Ltd. T-BIN $21.48 118 $2,532 (US$1,454) US$1,840 US$1,880 US$2,012 US$534 US$519 US$547 7.3x $21.00 -2% NEUTRAL AVGNew Flyer Industries † T-NFI $8.61 44.4 $382 (US$172) US$926 US$891 US$959 US$80 US$65 US$91 6.1x $9.00 5% BUY ABVWestJet Airlines Ltd. T-WJA $19.81 141 $2,797 $556 $3,072 $3,415 $3,697 $597 $731 $780 2.9x $23.00 16% BUY ABV* Adj. EBITDA for New Flyer Industries and EBITDAR for WestJet Airlines and Air Canada.

Company Name



-

500

1,000

1,500

2,000

2,500

3,000

Dec-11 Feb-12 May-12 Jul-12 Oct-12 Dec-12$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

GEODRILL LTD. (T-GEO)

Rating: BUY; Target: C$2.00

RIGS MOBILIZING, MULTIPLES TO MOVE

We are making Geodrill Ltd. (T-GEO) our top pick for Q113 as we expect Q412 fi nancial results, improved rig utilization and improved customer quality will restore faith in the business, resulting in higher trading multiples. Geodrill’s shares declined 31.6% during the quarter, which was impacted by a weak mining fi nance environment, lab delays in West Africa, and an unusually harsh wet season resulting in an average drill rig utilization below 50% for the quarter. While the results were disappointing, investors appear to have been excessively punitive from a valuation perspective, particularly when one considers that the Company was in a position to weather the temporary storm, as well as make some tactical and strategic changes to mitigate for the current environment.

Following his purchase of additional shares in the open market and a conversation with Geodrill’s president, Dave Harper, we are increasingly confi dent that we are likely at an infl ection point for activity, earnings and share prices. Mr. Harper indicated that utilization rates are improving, moving towards more normalized levels (we would expect ~ 80-85%), and that the customer base is becoming more diverse in terms of stage (moving toward more senior) and focus (less focused on gold). We do not believe that any of these changes will have an impact on profi tability, but instead provide greater insulation from exogenous shocks. Based on current bookings, Mr. Harper expects to see a very strong start to Q113 with a number of rigs booked in January which, which will restore rig utilization rates. This contrasts comments from various drilling services companies which have been more conservative in the outlooks for early FY13. While most companies see FY13 evolving similar to FY12 in total, many indications are for a back end loaded year.

Geodrill shares currently trade at 1.8x and 3.8x our revised FY13e EBITDA and FD EPS estimates respectively, against peers which trade at 3.6x and 8.4x on similar metrics despite outperforming peers on a number of factors including margins, return on capital and leverage. Geodrill has limited liquidity risk, remains in a net cash position, and is expected to generate ongoing positive free cash fl ows from operations into FY13 as capital spending for new equipment is expected to be substantially lower with only two rig additions forecast. On a tangible book value basis, shares trade at 0.76x, below the mean average of 1.32x for peers. We believe this is an opportune moment for value oriented investors to consider an investment in Geodrill shares with valuations so depressed. The Company is trading at a signifi cant discount to peer and historical multiples. Trading in the drilling services space can be highly volatile and the change in share prices can be extreme as seen in past cycles. We believe Q312 likely marked the trough of the most recent cycle and expect to see signifi cant improvement as we move into FY13.

We are maintaining our BUY recommendation, ABOVE AVERAGE risk rating and 12-month target price of $21.00. Our target price is based on a 5.0x multiple of our 2013e EBITDAR and a 12.0x multiple of our 2013e FD EPS supported by our discounted cash fl ow analysis.


Risk: SPECULATIVECurrent Price*: $1.0852-week High/ Low: $3.75 / $0.87Cash Yield: 0.0%Shares Outstanding: 42.5M (basic) 43.9M (FD)Market Capitalization: C$49.7MInsider Ownership: 45.9%3-Month Avg. Daily Volume: 121.1KNet Cash (MRQ): $5.4MEnterprise Value: $44.3M


Financial Summary

(FYE Dec. 31st) FY11 FY12e FY13e

Revenue ($M) $70.1 $67.1 $86.7Adjusted EBITDA ($M) $21.7 $14.4 $26.6Adjusted FD EPS $0.21 $0.04 $0.27 EBITDAR ($M) Q1 Q2 Q3 Q4

FY11 $3.9 $5.3 $6.1 $6.5 FY12 $7.9 $6.2 ($3.4) $3.6 FY13 $6.5 $6.8 $6.6 $6.7 Adjusted FD EPS Q1 Q2 Q3 Q4

FY11 $0.07 $0.08 $0.07 ($0.00)FY12 $0.10 $0.06 ($0.15) $0.02 FY13 $0.06 $0.07 $0.06 $0.07

Thou

sand

s

Company Description

Geodrill Limited provides exploration, drilling, andmining support services to intermediate and junior goldmining companies with exploration and developmentoperations primarily in Ghana and Burkina Faso.


TRANSPORTATION AND INDUSTRIAL PRODUCTS | TOP PICK

31 | Q113

Disclosure Fact Sheet

Ratings Price Volatility / Risk

Analyst Certifi cation

I, Sheila Broughton, Philip Ker, Aleem Ladak, Roy Ma, Chris Murray, Pardeep Sangha, Alistair Toward, and Jason Zandberg, hereby certify that all of the views expressed in

this report accurately refl ect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly

related to the specifi c recommendations or views expressed in this report. I am the research analyst primarily responsible for preparing this report.

Research Disclosures

Company Disclosure Particulars

Atna Resources Ltd. 4

Avigilon Corporation 3, 4

Canelson Drilling Inc. 4

FirstService Corporation 4

Geodrill Ltd. 4

Parkland Fuel 4

Sonde Resources Corp. 4

Trevali Mining Corporation 4, 9

Applicability

1) PI Financial Corp. and its affi liates’ holdings in the subject company’s securities, in aggregate exceeds 1% of each company’s issued and outstanding securities.

2) The analyst(s) responsible for the report or recommendation on the subject company, a member of the research analyst’s household, and associate of the research

analyst, or any individual directly involved in the preparation of this report, have a fi nancial interest in, or exercises investment discretion or control over, securities is-

sued by the following companies.

3) PI Financial Corp. and/or its affi liates have received compensation for investment banking services for the subject company over the preceding 12-month period.

4) PI Financial Corp. and/or its affi liates expect to receive or intend to seek compensation for investment banking services from all companies under research coverage

within the next 3 months.

5) PI Financial Corp. and/or its affi liates have managed or co-managed a public offering of securities for the subject company in the past 12 months.

6) The following director(s), offi cer(s) or employee(s) of PI Financial Corp. is a director of the subject company in which PI provides research coverage.

7) A member of the research analyst’s household serves as an offi cer, director or advisory board member of the subject company.

8) PI Financial Corp. and/or its affi liates makes a market in the securities of the subject company.

9) Company has partially funded previous analyst visits to its projects.

10) Additional disclosure:

BUY : recommendation: stock is expected to appreciate from its current price level

at least 10-20% in the next 12 months.

NEUTRAL : recommendation: stock is expected to trade in a narrow range from its

current price level in the next 12 months.

SELL : recommendation: stock is expected to decline from its current price level at

least 10-20% in the next 12 months.

U/R : Under Review

N/R : No Rating

TENDER: Investors are guided to tender to the terms of the takeover offer.

Analyst recommendations and targets are based on the stock’s expected return over

a 12-month period or may be based on the company achieving specifi c fundamental

results. Under certain circumstances, and at the discretion of the analyst, a recom-

mendation may be applied for a shorter time period. The basis for the variability in

the expected percentage change for a recommendation, relates to the differences

in the risk ratings applied to individual stocks. For instance stocks that are rated

Speculative must be expected to appreciate at the high end of the range of 10-20%

over a 12-month period.

SPECULATIVE : The Company has no established operating revenue, and/or bal-

ance sheet or cash fl ow concerns exist. Typically low public fl oat or lack of liquidity

exists. Rated for risk tolerant investors only.

ABOVE AVERAGE : Revenue and earnings predictability may not be established.

Balance sheet or cash fl ow concerns may exist. Stock may exhibit low liquidity.

AVERAGE : Average revenue and earnings predictability has been established;

no signifi cant cash fl ow/balance sheet concerns are foreseeable over the next 12

months. Reasonable liquidity exists. Price Volatility/Risk analysis while broad based

includes the risks associated with a company’s balance sheet, variability of revenue

or earnings, industry or sector risks, and liquidity risk.

32 | Q113

General Disclosure

The affi liates of PI Financial Corp. are PI Financial (US) Corp., PI Financial Services Corp., and PI Capital Corp.

Analysts are compensated through a combined base salary and bonus payout system. The bonus payout is amongst other factors determined by revenues generated directly

or indirectly from various departments including Investment Banking. Evaluation is largely on an activity-based system that includes some of the following criteria: reports

generated, timeliness, performance of recommendations, knowledge of industry, quality of research and investment guidance, client feedback. Analysts are not directly

compensated for specifi c Investment Banking transactions.

None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written

permission of PI Financial Corp.

PI Financial Corp.’s policies and procedures regarding dissemination of research, and stock rating and target changes can be reviewed on our corporate website at www.

pifi nancial.com (Research: Research and Confl ict Disclosure)

The attached summarizes PI’s analysts review of the material operations of the attached company(s).

Analyst Company Type of Review Operations / Project Date

Philip Ker Atna Resources Ltd. Management Mtg Briggs, Pinson, Reward 09/12

Pardeep S. Sangha Avigilon Corp. Management Earnings Call Vancouver BC 11/12

Roy H. Ma CanElson Drilling Inc. Site Visit Nisku AB 08/12

Sheila Broughton FirstService Corp. Management Mtgs Vancouver BC 06/10

Chris Murray Geodrill Ltd. Analyst Tour Kumasi, Ghana 01/12

Jason Zandberg Parkland Fuel Corporation Management Mtg Vancouver BC 09/11

Alistair Toward Sonde Resources Corp. Management Mtg Calgary AB 11/12

Disclosure to US Residents

PI Financial (US) Corp. is a U.S. registered broker-dealer and subsidiary of PI Financial Corp. PI Financial (US) Corp. accepts responsibility for the contents of this research

report, subject to the terms and limitations as set out above. U.S. residents seeking to effect a transaction in any security discussed herein should contact PI Financial (US)

Corp. directly.

Global Stock Distribution

Recommendations Number of Recommendations Percentage

BUY 46 64.79%

NEUTRAL 9 12.68%

SELL 3 4.23%

TENDER 1 1.41%

U/R 0 0.00%

N/R 12 16.90%

TOTAL 71

Stock Rating and Target Changes

For reports that cover six subject companies or more, the reader is referred to our corporate web site for information regarding stock ratings and target changes. www.

pifi nancialcorp.com (Research: Research and Confl ict Disclosure)

33 | Q113

34 | Q113

35 | Q113

Participants of all Canadian Marketplaces. Members: Investment Industry Regulatory Organization of Canada, Canadian Investor Protection Fund and AdvantageBC International Busi-

ness Centre - Vancouver. Estimates and projections contained herein are our own and are based on assumptions which we believe to be reasonable. Information presented

herein, while obtained from sources we believe to be reliable, is not guaranteed either as to accuracy or completeness, nor in providing it does PI Financial Corp. assume any

responsibility or liability. This information is given as of the date appearing on this report, and PI Financial Corp. assumes no obligation to update the information or advise on

further developments relating to securities. PI Financial Corp. and its affi liates, as well as their respective partners, directors, shareholders, and employees may have a position

in the securities mentioned herein and may make purchases and/or sales from time to time. PI Financial Corp. may act, or may have acted in the past, as a fi nancial advisor,

fi scal agent or underwriter for certain of the companies mentioned herein and may receive, or may have received, a remuneration for their services from those companies. This

report is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities and is intended for distribution only in those jurisdictions where PI Financial Corp.

is registered as an advisor or a dealer in securities. Any distribution or dissemination of this report in any other jurisdiction is strictly prohibited.

For further disclosure information, reader is referred to the disclosure section of our website.

Capital Markets Group

Bert Quattrociocchi, BA, CFA

Executive Vice President, Head of Capital Markets

604.664.2925

Research Analysts

Quantitative & Technical AnalystRob Davies, B.B.A, CFA647.789.2413

Consumer Products & Special SituationsSheila Broughton, MBA, CFA604.664.2695

Energy ServicesRoy Ma, B.Comm, CFA403.543.2823

MiningAleem Ladak, B.Sc647.789.2415

Philip Ker, P.Geo, MBA647.789.2407

Oil & GasAlistair Toward, B.Comm, CFA403.543.2824

Transportation & Industrial ProductsChris Murray, P.Eng, MBA, CFA416.883.9047

TechnologyPardeep S. Sangha, B.A.Sc., MBA604.718.7528

Special SituationsJason Zandberg, B.B.A, CFA604.718.7541

Research AssociatesNeil Bakshi, B.Comm604.718.7557

Todd Brady, MBA, CFA, CGA647.789.2406

David Seymour, M.Sc., MBA403.543.2828

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Head of Institutional SalesJim Danis, B.Sc. (Hons.)604.718.7551

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Investment Banking

VancouverJim Locke, CFA604.664.2670

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Jim Mustard, B.A.Sc., P. Eng604.664.3655

Carol Ellis, MBA, P.Geo604.664.3606

Leo Wilson, CA, CBV604.718.7510

TorontoJovan Stupar, P. Eng, MBA416.883.9049

CalgaryArthur Kwan, MBA, CFA403.543.2918

Equity Capital Markets/SyndicationErica Williamson604.664.3637

Kinga Gadomska604.664.3604

Marketing and Publishing

Ida Chan604.664.2707

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Vancouver, BC, Canada V6C 3N1

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PI Financial Corp. www.pifi nancialcorp.com

first quarter top picks 2013 · 2013. 2. 12. · a disclosure fact sheet is available on pages...

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