Major Drilling Group International Inc.
(MDI-T) C$11.94
Strong Finish to F2022; Positive Momentum Continuing in F2023 Event
MDI reported Q4/F22 (ending April 30) EBITDA of $40.7mm, 27.7% above TD's $31.9mm estimate (consensus: $30.5mm), reflecting stronger-than-expected revenue and gross margins (31.0% vs. TD: 28.0%).
Impact: POSITIVE
Q4/F22 results were very impressive, with MDI successfully passing through labour costs/inflationary pressure. Demand for specialized drilling services was strong and led to new contract wins and renewal of existing contracts with improved pricing/ terms. Additionally, the juniors made a comeback, representing 31% of revenue, the highest since last cycle. MDI's gross margins are improving as recently hired drill crews become more efficient and with initial rig mobilization costs subsiding.
Looking forward, management indicated that the outlook remains "extremely positive", with F2023 seeing increasing inquiries from all categories of customers and given strong fundamentals for both base (energy transition and EVs) and precious metals (several years of underinvestment driving reserve shortfall and few easy deposits remaining). However, management cautioned that availability of skilled labour will be a headwind as it is effectively at 100% utilization in key markets (Canada, the U.S., and Australia). Additionally, although overall rig utilization is relatively low at ~52% currently, MDI is running out of specialized rigs. Positively though, we expect that these capacity issues will keep pricing power in favour of the drillers in the event of any further inflationary pressure.
When asked about the current cycle, management indicated that it believes we are still in the very early innings, with global industry exploration spending at only ~$12bln currently versus >$21bln during the 2012 peak (Exhibit 2). Additionally, management highlighted that MDI is much better positioned coming into this upcycle, which has allowed it to capture share and achieve strong margins faster. Furthermore, MDI has been very targeted in reshaping its geographic presence across the downturn, positioning around strong regions and diversifying into more mine site services.
TD Investment Conclusion
In our view, we have entered a new drilling cycle after years of underinvestment by both base and precious metal miners, and we expect activity levels and margins to continue improving. Furthermore, we see Major as well-positioned to capitalize, given its strong balance sheet, specialized drilling capabilities, and demonstrated ability to recruit and train operators.