Monday, March 20, 2017

Mineral Drilling Sector - Another Buying Opportunity In The Making

Since February 2017 the stocks of mineral drilling companies have corrected by around 16%, on average.

The chart below shows the so-called DRILL Index, an index created by the author of this site and replicating the share performance of the following drilling plays: Energold, Major Drilling, Orbit Garant, Geodrill and Capital Drilling.

For comparison reasons, in the lower panel of the chart I have plotted the price action of a broad precious metals stock market (represented by GDX):

First of all, note that since the summer of 2016 the DRILL Index has been much stronger than GDX. Despite GDX showing lower values than those printed in August 2016, the DRILL Index is still above the levels recorded last summer.

Further, the DRILL Index is once again close to its strong support (the green line on the upper panel of the chart). That is why I think the drilling companies present another interesting buying opportunity.

Apart from that, drilling companies are quite cheap now. Let me show two popular valuation measures.

The first one is a ratio of Enterprise value / EBITDA:

And the second one is a Price / Book Value ratio:

In my opinion, two companies are especially interesting: Geodrill and Capital Drilling. Both drillers are very cheap (EV / EBITDA ratio below 5) and operate mainly in Africa (Geodrill exclusively in this region) - the place where many decent miners develop or explore gold properties. 

Finally, let cite the Chairman of Capital Drilling:

source: Capital Drilling 2016 Annual Results, page 5

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