Saturday, August 20, 2016

Geodrill - An Idirect Exposure To The Precious Metals Market

Geodrill is one of my favorite companies indirectly exposed to the precious metals sector. To remind my readers - the company is active mainly in four African countries: Ghana, Burkina Faso, the Ivory Coast and Mali. Most recently these countries are encountering very high mining activity with a number of established, decent miners putting new gold mines online. I would say that Africa, especially its western part, is a place to be, as far as gold mining is considered.

A few days ago Geodrill released its 2Q 2016 report.

Let me summarize its results:

Well, the best thing is that the demand for the company's services is getting stronger. In 1H 2016 Geodrill drilled 391.8 thousand meters (a 47.2% increase, compared to 1H 2015):

However, the drilling prices were still lower than in 1H 2015 so it looks that we are at the very beginning of the gold cycle (higher demand for drilling services but drilling prices still well below their multi-year highs):

To mitigate the negative impact of still low prices, the company is cutting its direct costs of drilling (from $57.3 per one meter in 1H 2015 to $49.7 in 1H 2016, a drop of 13.3%).

Now, the best part. This year Geodrill shares went strongly up:

What is more, these shares were even stronger than precious metal miners shares (represented by GDX).

Despite this excellent performance, in my opinion, Geodrill is still cheap. For example, now its shares are trading at an EV / EBITDA multiple of 5.3 (it is much lower valuation than that offered by gold / silver stocks).

Last but not least - one of the biggest Geodrill shareholders, Maxam Opportunities Fund, took advantage of high share prices and on August 16 sold part of its stake (look at the high volume on the lower panel of the chart). Well, these guys are real investment masters - they bought 5.8 million of Geodrill shares in November 2015 (when nobody was interested in anything related to gold), paying C$0.45 a share, and sold 1.5 million shares in August for C$2.10 a share. Nice deal.

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