Major Drilling Group International Inc T.MDI

Alternate Symbol(s): MJDLF

Metals & Mining Industrial Metals & Minerals

Major Drilling Group International Inc. is a Canada-based provider of specialized drilling services primarily serving the mining industry. The Company provides a complete suite of drilling services, including surface and underground coring, directional, reverse circulation, sonic, geotechnical, environmental, water-well, coal-bed methane, shallow gas, underground percussive/long hole drilling, surface drill and blast, a variety of mine services, and ongoing development of data-driven, high-tech drill side solutions. Its mineral drilling services include specialized drilling, conventional drilling, and underground drilling. The Company maintains field operations and offices in Canada, the United States, Mexico, South America, Asia, Africa, and Australia. It has two categories of customers: junior exploration companies and a diversified portfolio of senior/ intermediate companies, for which the Company provides greenfield exploration drilling and/or drilling at operating mines.

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Major Drilling Group International Inc

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Post by retiredcfon Sep 08, 2022 9:49am

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Post# 34949090

RBC 2

September 7, 2022
Major Drilling Group

Drilling market is still hot, even if the commodity complex is not

Our view: Major Drilling continues to take advantage of a robust exploration market despite a decline in commodity prices in recent months. Miners have strong balance sheets and appear committed to growing exploration in the coming years, which sets up revenue growth for MDI. We reiterate our Outperform rating and $15 price target following another strong quarter.

Key points:

Exploration spending remains strong: Major Drilling management acknowledged that the slowdown in financing from junior miners could have an impact on results going forward, but it is still seeing strong demand from senior companies, with several inquiring about 2023 contracts earlier
discussions occur later in the year and drilling campaigns may not start until February or March. Given the recent period of elevated commodity prices (before the recent declines), miners’ balance sheets are strong (our base metals coverage has a net debt to EBITDA of 0.4x) and they appear committed to spending more on exploration (which can be a low-cost way to create value). Junior miners represented 25% of MDI’s business vs. 10.9x senior/intermediate miners at 75% in FQ1 and spending by juniors is more leveraged to commodity prices; however, seniors appear willing to fill the void and juniors still have cash to deploy. Based on our commodity price estimates, we forecast global exploration spending growing from $11.2B in 2021 to $16.5B in 2022, which is well up from $9.3B in 2019 but remains below the prior peak of $20.5B in 2012.

Attractive risk/reward: Our $15 price target is based on 8.0x EBITDA, in line with the historical average. MDI is currently trading at 4.6x our F2023 estimate. As a downside case, if margins were 25% (vs. our 30% base case) and global exploration spending were flat vs. 2021, MDI would be trading at 9.9x, with an implied price of $7.00 at 8.0x. In an upside case where exploration spending and margins are better than expected, we could see EBITDA 30% above our estimates, which would imply a $19 share price at an 8.0x multiple (see page 3 for more details).

Focused on growth for now, dividends in time: Management is more focused on growing the business in the near term through rig purchases and tuck-in acquisitions; however, it could reinstate a dividend in the future. We forecast FCF of $48M in F2023 (vs. $45M in F2022), which implies a yield of 6.2%. Together with a strong balance sheet ($9M net cash), we believe MDI could look to reintroduce a dividend at some point in the next 1–2 years.