THURSDAY, JUNE 5, 2025 | THE GLOBE AND MAIL G B11 EYE ON EQUITIES DAVID LEEDER ALGONQUIN PO. AND UT. (AQN-NYSE) CLOSE US$5.92, DOWN 30¢ NOVAGOLD RESOURCES (NG-NYSE) CLOSE US$4.69, UP 92¢ EVERGEN INFRA. (EVGN-TSXV) CLOSE 50¢, UP 10¢ NFI GROUP (NFI-TSX) CLOSE $14.93, DOWN 20¢ TOREX GOLD RESOURCES (TXG-TSX) CLOSE $45.84, DOWN 43¢ While National Bank Financial analyst Rupert Merer feels it’s safe to declare Algonquin Power and Utilities Corp.’s “growth story is coming back” after a positive in- vestor update that included a launch of its “Back to Basics” cap- ital plan, he lowered his recom- mendation for its shares to “sec- tor perform” from “outperform” in response to steep recent price appreciation. Target: Mr. Merer’s target re- mains US$6.75, exceeding the consensus on the Street of US$5.92. Touting the potential from its partnership on the Donlin pro- ject, RBC Dominion Securities analyst Michael Siperco upgraded Novagold Resources Inc. to “out- perform” from “sector perform” previously. “We see valuation up- side in a bullish gold price envi- ronment over the next several years, starting with the resump- tion of work on an updated feasi- bility study work,” he said. Target: His target rose to US$7 from US$5, but it remains below the US$10 consensus. While acknowledging its first- quarter results came in “mixed” versus expectations, Desjardins Securities analyst Brent Stadler continues to see EverGen Infras- tructure Corp. offering investors “a unique opportunity to take early advantage of the RNG wave, which we believe is essential to reaching global decarbonization goal.” Target: Mr. Stadler cut his target by $1 to $2, matching the consen- sus, citing the results and recent private placement, with a “buy” rating (unchanged). Stifel analyst Daryl Young said he’s “encouraged” to see NFI Group Inc. finally has a compre- hensive debt package in place af- ter its new $600-million second lien notes offering and now pos- sesses “appropriate” liquidity with more than $300-million available following the close of the transaction later this month. Target: Maintaining his “buy” rating for NFI shares, Mr. Young cut his target by $1 to $22. Con- sensus is $20.40. After a site visit on Tuesday to To- rex Gold Resources Inc.’s More- los site in Guerrero Gold Belt of Mexico, Scotia Capital analyst Er- ic Winmill said he was “favorably impressed with the local team” and the “considerable” work completed since his last visit in May, 2023. “2025 production re- mains on track,” he said. Target: Reiterating a “sector out- perform” rating, he raised his tar- get to $50 from $48. Consensus is $54.46. I n turbulent markets, investors often reach for reliable tools such as high-interest savings accounts (HISAs) and guaran- teed investment certificates (GICs). They may hold these in- vestments to maturity and real- ize the intended yield, but they may not understand their actual profit. These so-called “risk-free” in- vestments have long been con- sidered cornerstones of conser- vative portfolios, but they de- serve a closer look. While GICs, term deposits and HISAs can protect against nomi- nal losses, they can also erode wealth in real terms, especially when inflation outpaces interest rates. That’s because these invest- ments set their yield on the over- night rate, which is tied directly to inflation. So, on an after-tax basis, there’s no way to beat in- flation with these assets aside from locking in rates for longer terms as inflation declines. With inflation potentially lin- gering, now is the time for advis- ers to revisit the conversation around capital preservation, in- flation risk and what safety really means. WHY ‘RISK -FREE’ ISN’T ALWAYS WITHOUT RISK Advisers are trained to evaluate investment options through vari- ous lenses, including risk toler- ance, time horizon and objec- tives, but clients often anchor on the emotional comfort of guaran- tees. That’s where the disconnect happens. The phrase “risk-free” implies security but fails to account for other forms of risk. These include inflation risk, opportunity cost, reinvestment risk and taxes. Edu- cating clients on these less visible risks is essential. They may not feel as immediate as a market drop, but over time, they can be just as damaging, especially for long-term financial goals. True safety comes down to un- derstanding an investment’s “re- al return,” which refers to the gain after accounting for infla- tion and taxes. Real return re- flects the true value of the in- crease in purchasing power that the investment delivers. From a technical standpoint, investments such as HISAs and GICs carry minimal credit risk. But the real-world performance of these products tells a more nu- anced story. Consider this example: a client invests $100,000 in a one-year GIC paying 4-per-cent interest. At first glance, that seems like a sol- id return. But if inflation is run- ning at 4.5 per cent over the same period, the client has actually lost purchasing power. Let’s also not forget about taxes; interest in- come is taxed at a higher rate than dividends and capital gains. Therefore, the real return is nega- tive. Over the longer term, the ero- sion of real wealth becomes sig- nificant. The client’s account bal- ance may grow nominally, but the lifestyle that money can sup- port will be diminished. EXPLORING ALTERNATIVES Clients may be receptive to inno- vative, inflation-conscious in- vestment strategies when these alternatives are explained in terms of real, after-tax outcomes. Private real estate is one exam- ple. It has historically served as a reliable hedge by generating in- come and preserving purchasing power through rising rents and asset values. A key opportunity lies in shifting the conversation from just nominal yields to more tax-efficient ways of generating income and preserving purchas- ing power. Take capital gains, for in- stance. While equities come with market risk, they offer preferen- tial tax treatment compared with interest income. Consider an investor who earns a 5.5-per-cent return through capital appreciation. On- ly half of that gain is taxable. So, for an investor in a 40-per-cent tax bracket, the effective tax is just 1.1 per cent. Subtracting that from the original 5.5-per-cent re- turn leaves a post-tax gain of 4.4 per cent. If inflation were at 3.5 per cent, the investor would be left with a real return of 0.9 per cent – signif- icantly better than the negative real return generated by GICs taxed as interest income in a non- registered account. Return of capital (RoC) is an- other powerful strategy for inves- tors seeking to generate cash flow in a tax-efficient way. Unlike interest or dividend in- come, RoC distributions are not taxable immediately. Instead, they reduce the adjusted cost base of the investment, with tax implications deferred until the asset is sold. Consider the example of an in- vestor who earns a 5.5-per-cent return. On a $10,000 investment in a private real estate invest- ment trust (REIT), the investor would receive $550 in RoC distri- butions without triggering any taxes in the current year. After ac- counting for inflation at 3.5 per cent, the real return is 2 per cent. This tax deferral and the avoidance of annual tax drag make RoC one of the most effi- cient income strategies available, particularly for investors in high- er tax brackets or those planning to withdraw funds during retire- ment when their tax rate may be lower. For clients willing to look be- yond traditional fixed-income in- struments such as GICs and HI- SAs, alternatives such as private REITs present a compelling path toward preserving wealth and maintaining purchasing power. The illusion of safety: Rethinking ‘risk-free’ investments TRAVIS FORMAN OPINION Portfolio manager at Strategic Private Wealth Counsel with Harbourfront Wealth Management Inc. in Surrey and Kelowna, B.C. W hat companies could benefit from U.S. aluminum tariffs on Canada? A relatively new subscrib- er sent me this question about a month ago. U.S. President Donald Trump has de- layed or even halted some of the tariffs he has introduced in his global trade war, and a federal trade court recently struck down others. However, the 25-per-cent tariffs on Canadian aluminum products have stuck and are actually set to in- crease to 50 per cent. Ironically, tariffs on inputs such as alu- minum are arguably some of the most counterproductive levies. As former U.S. Treasury secretary Larry Summers said in a recent Bloomberg interview, tariffs on inputs are especially bad because downstream industries often employ many times more people than industries producing commodities like aluminum. In addition to hurting these employees in downstream industries, it also makes downstream companies less competi- tive and forces them to increase prices on a multitude of end products from cars to pop cans. Macroeconomic concerns aside, I was able to answer this subscriber’s question. Years ago, I owned Century Aluminum Co., a producer with smelters located in the United States and Iceland. The com- pany is based in Chicago, has been incor- porated since 1981, and is 42.9-per-cent owned by mining giant Glencore. The or- ganization’s primary aluminum facili- ties are in Hawesville, Ky., and Sebree, Ky.; Mt. Holly, S.C.; and Grundartangi, Iceland. Additionally, they have a carbon anode facility in Vlissingen, Nether- lands, and a bauxite mining and alumina refinery in Jamaica. This enterprise stands apart from many of its peers, including Alcoa and Rio Tinto’s Alcan, because it does not have any assets in Canada. This explains why Century Aluminum has applauded the Trump administration’s tariffs, while Alcoa chief executive officer William Oplinger has argued firmly against them and the executive team at Rio Tinto has cast doubt over their effectiveness. In my response to the subscriber, I explained how I used to own Century, and why. Though I was nev- er able to perfectly time the top or bottom, between 2012 and 2024 I traded it a number of times. I took my first positions in 2012 and 2013 when the shares were around US$8, then sold most of the position at US$25.07 in 2014 before up- ping the stake again in 2015 at US$3.51. The position was then trimmed in 2018 at around US$22.38, and I exited the name entirely in 2022 at US$18.39. Between 2012 and 2022, Century Alu- minum was an excellent investment be- cause it had three unique features: a high beta, periods of clear over or undervalua- tion, and a strong balance sheet. The high beta – a measure of volatility – meant the ticker could go on crazy rallies but also endure terrible downturns. Fortunately, the balance sheet strength, which was made up of low lev- erage and a stable share count, provided investors with a degree of safety during those tough times because they could rest knowing that solvency and dilution risks were low. This meant investors with the gump- tion to pick up shares when they were cheap and hold their nose if they fell sig- nificantly, did well. The old “buy-low, sell-high” strategy works well for many stocks, but it goes into overdrive when it is applied to high-beta stocks that have good financials. The subscriber then e-mailed me back and asked if Century Aluminum was a worthy investment today. My answer was that it depends on your risk appetite. Today, Century can still go on wild rides, as it has a beta well over two. This said, it is not in a period where it is clearly overvalued or undervalued and – per- haps most important of all – the finan- cials are not what they were. Compared with when I first purchased the stock in 2012, the cash has declined 75.5 per cent and total debt has balloon- ed 83.1 per cent. The diver- gence has driven net debt to US$437.7-million from US$87.9-million. Though annual sales have grown 63 per cent over that time frame, shipments have on- ly increased to 677,967 tonnes from 602,142 tonnes annually. This means the balance sheet bloat has outpaced the growth of its business. Century’s shifting bal- ance sheet composition does not suggest it is in imminent danger, especially as tariffs will help their business. The orga- nization also benefits from an implicit backstop by Glencore, which presum- ably could swoop in and rescue the firm if it was in trouble (on its terms, of course). However, the changing financial con- dition does mean a core pillar of the for- mer investment thesis is gone. Those in- terested in owning Century Aluminum today can no longer do so while knowing the financials are rock-solid. Instead, they must accept the risks are higher than they were a decade ago. To make a long story short, over the past decade Century Aluminum has morphed from a rather low-risk and high-reward opportunity into a high-risk and high-reward prospect. Potential buyers would do well to keep that in mind. U.S. tariffs could make this aluminum producer shine Century Aluminum has morphed from a rather low-risk and high-reward opportunity into a high-risk and high-reward prospect PHILIP MacKELLAR OPINION CONTRA GUYS General manager at Contra the Heard Investment Newsletter Between 2012 and 2022, Century Aluminum was an excellent investment because it had three unique features: a high beta, periods of clear over or undervaluation, and a strong balance sheet. The Toronto Stock Exchange’s S&P/TSX composite index fell on Wednesday as lower oil prices weighed on energy shares and investors awaited greater clarity on the global trade outlook. The TSX ended down 97.64 points, or 0.4 per cent, at 26,329.00, after posting a record closing high on Tuesday. The U.S. government on Wednesday doubled the levies on steel and alumi- num to 50 per cent. Meanwhile Wall Street wavered and U.S. Treasury yields dropped on Wednes- day as investors monitored U.S. trade ne- gotiations and looked ahead to Friday’s critical employment report. Tech pushed the Nasdaq modestly higher, while the S&P 500 ended the ses- sion essentially flat and the Dow closed slightly lower. The Dow Jones Industrial Average fell 91.90 points, or 0.22 per cent, to 42,427.74, the S&P 500 rose 0.44 points, or 0.01 per cent, to 5,970.81 and the Nas- daq Composite rose 61.53 points, or 0.32 per cent, to 19,460.49. The dollar dipped and gold advanced. On the economic front, payrolls proc- essor ADP reported the U.S. private sec- tor added 37,000 jobs last month, or 69.2 per cent fewer than analysts expect the Labor Department’s more comprehen- sive employment report to show on Fri- day. The yield on benchmark U.S. 10-year notes fell 10.1 basis points to 4.359 per cent, from 4.46 per cent late on Tuesday. The two-year note yield, which typi- cally moves in step with interest rate ex- pectations for the Federal Reserve, fell 8.6 basis points to 3.871 per cent, from 3.957 per cent late on Tuesday. Crude prices turned lower as U.S. data showed larger-than-expected invento- ries, adding to supply concerns amid trade tensions and OPEC+ output in- creases. U.S. crude dipped 0.88 per cent to set- tle at $62.85 a barrel, while Brent settled at $64.86 a barrel, down 1.17 per cent on the day. On the TSX, the energy sector fell 1.8 per cent as the price of oil settled 0.9 per cent lower at $62.85 a barrel. GLOBE STAFF, REUTERS Markets waver as U.S. politics loom large REPORT ON BUSINESS |