TSX Commentary

Outperform, Above Average Risk, Price Target: $23.00 (prev. $20.00)
In the face of tough industry conditions and H1N1 flu concerns, Transat finished the year with impressive Q4 results. Despite a revenue decline of 9%, Transat improved Q4 EBITDA margins by 200 basis points to 4.9%. Transat is benefiting from a number of tailwinds including: The new CanJet agreement which lowers seat costs, lower hotel costs, a strong C$, reasonable fuel prices and benefits of internal cost cutting. Although industry conditions remain difficult, RBC CM believes Transat is well-positioned to thrive and improve margins. Excess capacity will likely continue to weigh on the market and recent competitor failures will likely be replaced by new companies. Pricing is expected to remain weak; however, RBC CM expects this to be more than offset by the benefits of lower input costs and Transat’s cost management. RBC CM estimates Transat will generate $56MM of free cash flow in F2010E, or $1.48/share (a 7% free cash flow yield). Transat is trading at a large discount to its competitors at 4.6x 2010E EBITDA vs. peers at 6.1x. One multiple point of EBITDA adds $3.50/share.

Sector Perform, Average Risk, Price Target: 11.50
Pengrowth announced a 2010 capital budget of $285 million (lower than RBC CM’s previous forecast of $325 million) with 70% directed towards oil and liquids-rich natural gas. The largest portions of the budget will be spent on tight carbonate plays, including $27 million at Carson Creek and $21 million at Judy Creek, and heavy oil projects, including
$15 million on the SAGD pilot at Lindbergh. The $285 million E&D budget is up 30% from 2009, but is still well below the ~$400 million program in 2008. Management noted that the budget has been intentionally set below a payout ratio of 100% (incl. capex), which should give Pengrowth the ability to take advantage of acquisition opportunities while maintaining a stable balance sheet. RBC CM forecasts 2010E exit net debt/cash flow of 1.5x, in line with the trust group average.

Outperform, Above Average Risk, Price Target: $25.00 (prev. $22.00)
Yesterday Sino completed its offering of US$460MM convertible notes and 21.85MM shares. Both offerings were well oversubscribed and the 15% over-allotments were exercised. The notes pay 4.25% and mature in 2016 with a conversion price ofUS$21.16/share (~C$22.25 at US$/C$ US$0.95). The equity offering generated gross proceeds of C$367MM. In total, RBC CM estimates net proceeds of about US$775MM. As of the end of third quarter, Sino had about 475 k hectares under management, primarily in favourable growing regions. Including existing and the proposed Master Agreement in Guizhou, the company will have rights to an additional 975 million ha. Sino’s timber assets should be in hot demand for years to come, as China’s fiber demand far outstrips domestic supply. Sino-Forest continues to execute on its acquisition and operating plan. At the same time, the company is taking advantage of its position as China’s premier forest plantation operator. RBC CM is raising its target to C$25.00 (from C$22).

Outperform, Average Risk, Price Target: $13.00 (prev. $11.00)
RBC CM is assuming coverage of Groupe Aeroplan Average Risk and a one-year target of $13.00. A high quality name within the media sector – RBC CM views Aeroplan as a high quality name within the Canadian media sector reflecting (i) a healthy low-to-mid single digit organic revenue growth outlook; (ii) a strong balance sheet with net debt / adjusted EBITDA of 0.8x; and (iii) significant FCF generation ($1.35/share in 2010E excluding one-time costs). With the stock trading at 8.0x FTM EV/Adjusted EBITDA (excluding one-time costs), RBC CM sees attractive upside in the shares over the next 12 months for five reasons: 1. A favourable point in the cycle to overweight Canadian media stocks 2. Spreading its wings with a new global footprint 3. Escaping the “secular overhang” sector. 4. Data analytics is under-appreciated and 5. Company-specific risks are receding.

Outperform, Above Average Risk, Price Target: $16.00 (prev. $13.00)
RBC CM is increasing its price target to C$16.00 on its assumption that ANV proceeds with expansion plans at Hycroft. RBC CM assumes that Allied will proceed with a ~$25MM investment in 2010 on crushing and conveyors to handle harder, more siliceous ore, which will likely increase production to the 140k to 150k oz range beginning in 2011. Allied’s drill program is ongoing, which should upgrade the oxide and sulphide resources to the reserve category and determine the size of the higher grade, sulphide silver-gold Vortex zone. RBC CM also expects the company to complete a feasibility study for the sulphide mineralization at Hycroft by the end of 2010 or early 2011.

Sector Perform, Average Risk, Price Target: $60.00 (prev. $71.00)
Yesterday, Agnico-Eagle held a technical session, providing guidance on production, cash costs, and capex through 2014. 2010 is poised to be a transformational year for Agnico, as gold production more than doubles from 2009 levels, to over 1.0 million ounces. Beyond 2010, annual growth is forecast to continue, albeit at a reduced rate, rising to 1.4MMoz/yr by 2014. Annual production estimates were very close to RBC CM’ current model assumptions, and therefore neutral to its NAV for Agnico. Management outlined fairly consistent cash cost guidance of just under $400/oz for the next five years, which represented moderately higher levels than RBC CM had modeled in some of the years (often closer to $370/oz). As expected, the capital spending profile is forecast to decline from $463MM in 2010, to $178MM in 2011, before settling to a sustaining capital spending rate of $100MM/yr. RBC CM maintains its view that current difficulties experienced with the ramp-up of Agnico’s new mines are temporary and likely to be resolved over the next few quarters. However, cost revisions to the 5-year operating plan are negative to RBC CM’ overall NAV, leading to a reduction in its target price for AEM shares. With the continued short-term execution risk over the next few quarters, combined with the limited return potential suggested by its new target price, RBC CM maintains its Sector Perform rating on Agnico-Eagle shares.

Outperform, Above Average Risk, Price Target: $120.00
Strong Q3 results/outlook should help reaffirm RIM’s competitive strengths, consumer demand and business model. Strong Q3 Beat helped affirm RIM’s competitive strengths, consumer demand, business model. Q3 at $3.9B rev (41% Y/Y) and $1.10 EPS, beat street ($3.8B, $1.04). Dispelling pricing pressure fears, GMs/ASPs came inline with guidance (42.7%/$317) with stable ARPU. Cashflow was a record $1.1B (RBC at $600M), fully funding RIM’s 12M $775M share repurchase (adds $0.12/sh F11EPS). RIM appointed CAO Brian Bidulka (Molson’s) CFO, and Keith Pardy (Coke/Nokia) CMO. Knockout Q4 Guidance reflects continued momentum, pending launches, intact channel support. Q4 outlook for $4.2-4.4B rev and $1.23-1.31, beat street at $4.1B (RBC at $4.1-4.3B) and $1.12 (RBC at $1.15-1.21). Unit guidance for 10.6-11.2M (36-44% Y/Y) at strong 43.5% GMs, to us shows RIM’s business model remains healthy. ASPs at $320 (+1% Q/Q), inline. On 80%+ consumer mix, sub adds at4.4M beat expectations (4.0-4.3M guidance, RBC at 4.1M). On surging international sales (up 31% Q/Q), RIM shipped 10.1M handsets (22% Q/Q, highest in 6 Qtrs), vs 9.2-9.9M guidance. Enterprise remains soft (<20% of sub adds) on IT spending,
December 18, 2009 expected to recover 1H/CY10. RBC CM’ OP thesis remains: 1) leadership, share gains in large, underpenetrated opportunity; 2) sustained competitive advantages; 3) financial outperformance.

Veritas has also published a report on Research in Motion. Veritas believes that if the after market reaction to Research in Motion’s (“RIMM” or the “Company”) Q3-F10 is any indication, then the bulls must be heartened while those with a bearish outlook should be looking to hibernate. RIMM’s results for the quarter and its forecast for Q4-F10, imply that for F10 the Company’s device sales are likely to exceed Veritas’ estimated 36M units and its subscribers will surpass Veritas’ forecast of 39M. Accordingly, the analyst has revised its estimates for F10 and F11. Veritas now forecasts device sales of 47.5M units for F11 (44.5 earlier) and 59.1M units for F12 (55.5 earlier). The Company is selling more of its low end devices which are finding their way into the pre-paid segments. Clearly the upper end of the market doesn’t have the wherewithal to absorb higher end product from the likes of RIMM. Given Jim Balsillie’s comments surrounding “Turbulence in the ecosystem/channel”, Veritas believes that a deflation of at least 5% on the $320 ASP of Q4-F10 is highly probable. Veritas believes RIMM’s ASP for F11 is likely to approach $300. If the bearish thesis on RIMM falters, it will be at the altar of the service gross margin. Although ARPU per subscriber declined 12.3% YoY, the scalability of the entire operation and the 84% gross margin of the segment continue to provide the cash flow buffer that RIMM needs to compete in the devices segment. However, recurring outages and exploding data traffic growth, call for significant investment in upgrading and building out the network. More importantly, competitors such as Motorola and Nokia are looking to offer consumers the option of subscribing to services similar to those provided by RIMM at no cost to either the customer or the carrier. Veritas is fine tuning its valuation to $47.00, and is maintaining its sell rating.

Veritas Comment: Telus Corporation (T.A) – $31.03 – Unfriendly Past Adverse Future
SELL; Intrinsic Value: $29.00
Management’s goal of harvesting Telus’ free cash flow risks undermining the Company’s long term competitiveness – Veritas believes the cash should have been diverted to expeditiously building a fiber to the home (FTTH) network. Now shareholders find themselves in a no win situation with Telus’ free cash flow generation capability rapidly approaching a peak at a time when additional capital is required for reinvestment in the ILEC network. Veritas firmly believes that Telus’ board should tackle its competitive disadvantage head on, telegraph to the market that neither growth in the dividend nor its sustainability should be considered sacrosanct and that reinvesting capital in a FTTH project takes precedence over every thing else. In the interim Veritas maintains its SELL recommendation with an estimated intrinsic value of $29.00. Its valuation of Telus is more likely to be revised downwards than upwards.

Alberta’s December 16th land sale results were released. Province-wide, a total of 184,138 hectares (720 sections) of land were sold at average prices of $2,084/hectare, yielding a total “bonus” of $384 million. The size of this auction makes it the largest Alberta sale on record in the past four years (since December 2005, when natural gas peaked at over $9.60/mmbtu). The sale was primarily focused on the Kaybob (including Pine Creek, Cecilia and Fir) area, where $335 million of the total sale was allocated (as outlined in our focus area in Exhibit 1). At Kaybob, over 430 sections were sold at prices averaging about $770,000 per section, a sum substantially higher than the previous 6-year area average of $226,000. While not all lands had Montney mineral rights associated, the highest bids received were generally for Montney lands. Given recent industry success in the area through the implementation of horizontal drilling, RBC CM’s expectation is that a large portion of the sale was targeting Montney potential. Most lands also included rights deeper than the Montney, which some operators have identified as prospective shales. The majority of lands in the Kaybob area were purchased anonymously under broker. Given the sheer dollar value of the land purchased, the acquirer of these lands is most likely a large well-capitalized producer or a combination of several smaller mid-cap producers. RBC CM continues to believe that the Kaybob Montney play is top-decile when compared to all other Canadian natural gas plays. Within the junior/midcap universe, Celtic Exploration (CLT) and Orleans Energy (OEX) are both active in the Kaybob area. Other area operators include Trilogy Energy Trust, BP, Taqa, Conoco, CNRL and Tourmaline.

WIND launched service in Toronto on Wednesday morning and announced its various plans, pricing and handsets. WIND has 44 locations in Toronto (not all open yet), including 14 company stores, 13 Blockbuster kiosks, and the rest mall kiosks. WIND will expand to Vancouver and Edmonton in early 2010. Overall, the launch had a few hiccups (not all of the stores were open, payment problems, a congested website) but RBC CM was nonetheless impressed by the 5-day turnaround since receiving launch approval from the Government last Friday. While WIND could have waited until more stores were ready, the company effectively leveraged all of the newspaper coverage from its CRTC battle. RBC CM’s channel checks suggest WIND customers are generating $80 ARPU, targeting high-end customers. WIND has three voice plans ($15, $35 and $45) and four data plans. RBC CM visited a few stores on Wednesday and discovered that most customers were buying high-end phones (the Blackberry
9700) and were opting for the $45 unlimited national calling voice plan and $35 unlimited data plan. With customers generating $80 ARPU, which is actually higher than the incumbent postpaid averages, WIND is far from a disruptive discount price carrier targeting the 30% of Canadians without a cellphone, but rather seems to be a bigger threat to mid-to higher-end incumbent customers as well as an attractive wireline-replacement service. WIND launched three voice plans, consistent with the plans/prices leaked on the Internet. The plans offer an attractive discount to incumbents and come with no contract and the first month free. The $15 plan (100 minutes) is pretty close to existing pricing, with a few extra perks. The $35 province-wide plan is interesting, but customer reps were quick to upsell to the $45 plan, noting that once voicemail ($5) and text ($5) are added, the price is the same. All plans include unlimited WIND-WIND customer calling. Outside the Toronto calling zone, customers on all three plans are subject to a $0.25/min charge for out- and in-bound calls, $0.10 for SMS, and $0.10/25kB for data. For customers who travel, this could be a big variable cost at the end of the month. Non-Blackberry customers have the choice of doling out $35 for unlimited data or paying high per-use costs: $0.10/25kB, which would mean $4 for a 1MB attachment, or $0.60 per web page, by RBC CM’s estimate.