(MDI-T) C$8.56
Solid Q1; Outlook Remains Stable but Juniors Facing Headwinds Event
MDI reported Q1/F23 (ending July 31) EBITDA of $43.5mm, in line with TD's $43.3mm estimate (consensus: $42.0mm), reflecting the net impact of stronger-than- expected revenue, offset by slightly-weaker gross margins (30.8% vs. TD: 31.4%) and higher corporate costs.
Impact: MIXED
MDI reported in-line Q1/F23 results, with demand for specialized drilling strong and supportive of price increases to offset cost inflation. Revenue increased 32.3% y/y to $199.8mm, 4.5% above TD's $191.3mm estimate. Demand for complex specialized services in N.A. remains robust while results in S.A benefited from improved pricing and reduced COVID-19-related impacts in Argentina/Chile. Gross margins of 30.8% were a touch light versus our 31.4% estimate, but remain healthy overall as MDI continues to do a good job passing through labour, fuel, and supply- chain costs. At prior peaks, quarterly margins reached 35-37%.
In terms of the outlook, MDI indicated that demand remains stable, in spite of the recent volatility in metal prices and broader macro uncertainties. Management noted that the juniors are taking a slightly more cautious approach to drill programs given the weak financing markets (the juniors represented 25% of revenue during Q1/F23, down from 31% in Q4/F22). However, this is being offset by increased demand from senior miners (both base and precious metals) looking to grow reserves. At current metal prices, the seniors/intermediates are still generating solid FCF and prices continue to justify exploration and new project development.Encouragingly, MDI has already started booking rigs with senior customers for calendar 2023; this is the earliest we have seen, with discussions for next-year drill programs usually not occurring until late November/December. We believe this reflects the shortage of specialized rigs and experienced drill crews across the industry.
TD Investment Conclusion
We have reduced our estimates slightly to reflect the challenging junior fundraising environment and also trimmed our target multiple to 7.0x F2024 EBITDA (7.25x previously), reflecting the weaker metals market sentiment. However, we continue to believe that we have entered a new drilling cycle after years of underinvestment by both base and precious metal miners, and see Major as well-positioned to capitalize, given its strong balance sheet, specialized drilling capabilities, and demonstrated ability to recruit/train operators.