Tuesday, May 3, 2016

Another Precious Metals-Related Company Reported Weak Results

Foraco is world's third largest mineral drilling company. Today it released its 1Q 2016 report. Similarly to Caterpillar and Sandvik, these results were very weak. 
On the other hand, in the case of Foraco, the first quarter of each year is always the weakest one. What is more, this time 1Q was additionally weaker than usually. Let me cite the company:

"Our Q1 was quite weak as our customers took in average one month more than last year to launch their tenders and associated drilling campaigns: this has delayed considerably the 2016 ramp up. This recent trend to compress most of the drilling budget into the last 3 quarters of the year was detected a couple of years ago, and has been amplified this year by the further decrease of metal prices seen in the last quarter of 2015"

The table below summarizes basic measures:

                                    source: Simple Digressions

In this article I do not want to present an in-depth analysis of Foraco. Quite contrary, I want to discuss a few metrics that are important to show the current performance of the entire precious metals sector.

And, after a quick look at Foraco, one may say that this performance is still far from what gold bugs are expecting.

Firstly, the average revenue per operating rig (ARPOR) is still very depressed. In 1Q 2016 each rig delivered the average revenue of $79.9 thousand (a decrease of 27.5%, compared to 1Q 2015). As a result, in 1Q 2016 ARPOR was standing at its lowest level since 2009 (revenue delivered in 1Q 2016, for presentation reasons, was recalculated into a full year):

                                      source: Simple Digressions

Another indication of an industry slump is the so-called "Utilization rate". According to Investopedia, "Utilization rate" is:

"A ratio used in the oil services industry that measures the amount of rigs being used as a total percentage of a company's entire fleet"

In the case of Foraco, in 1Q 2016 this rate was also standing at a very depressed level of 25% (28% in 1Q 2015).

Summarizing - 1Q 2016 results, delivered by Foraco, in no way were an indication of the end of the industry slump. 

Note: Foraco is a global driller but, due to the industry slump, in 2015 the company shifted its operations mainly to developed economies:

                                   source: Simple Digressions

As the chart shows, in 2011, during a bull market in precious metals, only 26% of revenue was attributable to developed economies (North America and Europe). In 2015 as much as 40% of revenue was earned in developed economies. 
Well, I think that the company had to do it. Of the current fleet of 302 rigs, as much as 212 rigs (70% of total fleet) are diamond drilling rigs. Diamond drilling is the most expensive type of drilling so only major mineral companies can afford it. And in 2015 majors were cutting their spending heavily, mainly in riskier regions; hence Foraco's higher involvement in developed economies. 

I think that when the industry recovers, the company will shift its operations to undeveloped economies once again. However, it will take some time. 

Therefore, I believe that smaller and more dynamic drilling companies, operating in the regions of high mineral mining activity as, for example, Africa (especially West Africa) offer much better investment opportunities.  

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