5N Plus still a buy despite weak pricing environment, says Laurentian

Quebec-based 5N Plus (5N Plus Stock Quote, Chart, News: TSX:VNP) faces headwinds in the pricing of rare metals, but still has plenty of upside, says Laurentian Securities analyst Nick Agostino.

Tomorrow, after market close, 5N Plus will report its Q3, 2015 results. Agostino says that, owing mostly to the dropoff in metals prices, he expects the company will post an Adjusted EPS loss of two cents a share on revenue of (U.S.) $90.2-million, a topline that would be down 21% over last year’s third quarter.

Agostino says the Fanya Metals Exchange crisis has added to the uncertainty in metals pricing. In September, because it had stopped paying returns on its metals-backed investment products due to liquidity problems, investors kidnapped Shan Jiulang, who was head of China’s Fanya Metal Exchange and turned him over to police, according to a one source. Fanya was intended to be a rival to the London Metals Exchange, but ran into multiple issues almost immediately. Agostino says the hangover created by the scandal still weighs on pricing.

“Although demand generally speaking is holding in (as supported by VNP commentary on the Q2 call), pricing in the rare metals market continued to deteriorate across all relevant metals while noting some metals (including Bismuth) have shown a decelerating rate post Q3. As such we look for depressed YoY sales and margins from VNP’s 2 divisions, Eco-Friendly and Electronic Materials, with the US$6.5M inventory writedown in Q2 (for Bismuth and Selenium) possibly aiding Eco-Friendly margins QoQ on a reduced cost base. We continue to expect metals prices to remain depressed until a successful resolution to the Fanya Exchange crisis is brought forward allowing downstream customers to shift away from a current JIT buying mentality; this may include Chinese government intervention.”

In a research update to clients today, Agostino maintained his “Buy” rating and one-year target price of $2.50 on 5N Plus, implying a return of 104.9% at the time of publication.

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