Tuesday, May 10, 2016

Geodrill - Yes, They Can!

A mineral drilling industry is in its cyclical slump. However, there is one company, which seems to be untouched by the problems encountered by its peers.

It is Geodrill. The company owns a fleet of 42 rigs, of which 37 are available for operations. Geodrill operates mainly in West African countries: Ghana, Mali, Burkina Faso and The Ivory Coast. 

My readers surely know that I am quite enthusiastic about West Africa. Despite some specific risks as, for example, the Ebola disease, these countries offer very decent conditions for mineral mining companies. Hence, a number of mining companies, mainly of Canadian origin, run very decent mining businesses there. And if there are active mines there is also the demand for drilling services in general and for Geodrill, in particular. Below I have enclosed the list of Geodrill clients, past and present: 

                                            source: Geodrill

As I noted above, despite the industry slump, Geodrill reports quite decent results. In 1Q 2016 the company was even profitable, reporting a small net income of $1.6 million. However, in my opinion, the most important thing is the fact that Geodrill has managed to increase the number of meters drilled:

                               source: Simple Digressions

As the chart shows, since 2014 Geodrill has been increasing the number of meters drilled. In 1Q 2016 the company broke its record, drilling 240.4 thousand meters, the highest number in its history. 

However, the prices obtained by Geodrill are still at their historical lows:

                                 source: Simple Digressions

It looks like there is the demand for drilling services but the conditions (prices) are set by the customers (mining companies).

Anyway, more meters drilled, even at low prices, means higher revenue and better financial results. For example, look at cash flow from operations (without working capital issues and taxes). For better clarity, I have plotted the average quarterly cash flows: 

                             source: Simple Digressions

Let me count one thing. $5 million a quarter means $20 million in annual cash flow from operations. Deduct from this cash flow:

  • $2 million in taxes
  • roughly $10 million in sustaining capital (to keep the company going)

and as much as $8 million is left for the company per year.

After discounting this figure by 10%, the business value (enterprise value) stands at $80 million. Because the company carries practically no net debt (cash = debt) the value of the business is equal to the market value of the company's stocks.

Today Geodrill shares are trading at $0.89 a share so the company's market value is $40 million. It looks like my quick valuation has disclosed that Geodrill is now 50% undervalued.

1 comment:

  1. Great analysis... looks like a good one although hard to buy it after it has recently doubled. But I will put on my watch list.