GOLDCORP TOLD TO WAIT ON MERGERS

may be cleaning up its balance sheet by using the roughly $950 million in proceeds it received from selling its 25 per cent stake in Tahoe Resources Inc., but that hasn’t quelled M&A speculation.

Investors are concerned about the miner’s leverage, so the potential for major acquisitions is something the market is watching closely. This helped make Goldcorp one of the worst-performing gold stocks in the past three months.

As of the first quarter, the company had drawn approximately $1.1 billion from its credit facility. The cash from the Tahoe sale will dramatically reduce its needs, yet Goldcorp last week announced that it expanded its unsecured line of credit to $3 billion from $2 billion.

The borrowing rate Goldcorp is paying (Libor plus 120 basis points) is favourable, but Canaccord Genuity analyst Tony Lesiak thinks the need is questionable.

“We continue to believe that Goldcorp needs to focus on execution (which they say they are doing) and on the significant organic growth project pipeline and exploration potential already in the company,” he told clients.

It’s never a bad idea to have the firepower to act on opportunities when they emerge, but Lesiak noted that Goldcorp’s cupboard of organic growth opportunities is already fully stocked. As a result, he questions the unintended There is little debate that seasonality affects economic activity in everything from construction to retail pricing. Investors also tend to view financial market risk and volatility as vulnerable to seasonal trends, with studies backing up this view in specific markets over certain periods of time.

But some caution should be taken when attempting to project traditional concepts of seasonality onto today’s market, warns Warren Lovely, head of public sector research and strategy at National Bank Financial, who noted that seasonal trends aren’t as deep-rooted as many think.

“Indeed, statistical analysis reveal that, since the global economy began to recover, there’s little compelling evidence of identifiable seasonality in rates, credit, currencies, commodities, equities or even volatility,” Lovely said in a report. “It’s not that markets behave uniformly throughout the year, but rather that seasonal patterns are oftentimes and increasingly irregular.”

In terms of economic performance, disappointments in the U.S. have clearly been grouped in the spring and summer months. But Canada’s economic swings haven’t been nearly as reliable, with Lovely suggesting it will remain out of sync with the U.S.

The strategist’s recommended positioning often runs against old-school perceptions of market seasonality. For example, he’s underweight fixed income and overweight equities during a period many consider a dangerous one for stocks.

“Simply put, historical tendencies look to be losing sway, with waves of risk aversion and financial-market volatility less likely to be slaves to the Gregorian calendar,” Lovely said. “It’s all enough to see those preaching seasonality lose faith.” Since the primary trend in bond yields has been down since 2009, defensive yield stocks such as pipelines, utilities, REITs and telecoms have managed to outperform the broader market. These socalled bond proxies have risen 125 per cent since the market’s 2009 lows, versus a gain of 95 per cent by the S&P/TSX composite index.

But with bond yields rebounding this year, the defensive segment has become the worst performer on the TSX, which has Martin Roberge, portfolio strategist at Canaccord Genuity, wondering if that’s created a buying opportunity or a trap.

Based on mutual-fund flows in the Canadian equity space, he sees more weakness ahead for bond proxies.

Defining defensive flows as those going into balanced (50 per cent stocks) and dividend/ income equity funds, momentum is trending downward for both. Roberge noted that net redemptions of $1.4 million for dividend/income funds in messaging behind the line of credit increase.

The analyst can’t think of any existing producers that would be both accretive to Goldcorp’s net asset value and fit with its current strategy.

“A major acquisition of a producer is unlikely to be well received by the market,” Lesiak said, adding that a potential increase to Goldcorp’s 40-per-cent stake in the Pueblo Viejo in the Dominican Republic is a possibility. Barrick Gold Corp. owns the remaining 60 per cent.

Detour Gold Corp. has perhaps been the mostly widely discussed potential acquisition target. Goldcorp’s production is expected to peak in 2016-17, while the Detour Lake gold mine in Northern Ontario continues to ramp up to its expected full output of about 600,000 ounces of gold per year.

Given its Canadian base, large size and 20-plus-year mine life, TD Securities analyst Greg Barnes considers Detour Lake one of the few operating assets that would fit with Goldcorp’s asset portfolio. It could also help keep the company’s annual production between 3.5 million and four million ounces through 2021.

But with Goldcorp shares trading at or near a 52-week low, and two new projects still in the production ramp-up phase, Barnes thinks it would be better off pursuing a significant acquisition in six to nine months. 2015 so far mark the first such pullback in several years.

The strategist also pointed to the strong correlation between the trend in defensive fund flows and the relative performance of bond proxies.

“This is not a pretty picture,” he said. “What is more, the decline in ‘defensive’ flows is happening while the relative valuation of bond proxies to the S&P/TSX is still very rich. To the extent that the equity market is facing a rising interest-rate environment over the next year, other than REITs, valuation among bond proxies may not be low enough to attract new buyers.”

There has yet to be a meaningful shift in sentiment toward Canadian cyclical sectors, but Roberge nonetheless recommends investors look for dividend income in cheaper resource areas such as energy and materials, as well as in non-resource cyclical yielders like financials, industrials and consumer discretionary names.