Major Drilling Group International Inc.
(MDI-T) C$9.36
Looking through Weak Q4 to Management's Extremely Strong Outlook
Event
MDI reported Q4/F23 (ending April 30) EBITDA of $37.2mm, 7.5% below TD's $40.3mm estimate (consensus: $42.2mm), reflecting lower revenues and higher- than-expected corporate costs (EBITDA margins: 20.1%, TD: 21.1%).
Impact: MIXED
Q4/F23 results were weaker than expected, primarily reflecting other corporate costs (higher incentive compensation and increased allowance for doubtful accounts) and weather impacts on revenue. However, we believe the weaker results are offset by management's commentary that activity levels returned to robust levels by the end of the quarter and that the outlook for fiscal 2024 remains extremely positive. Management's outlook is underpinned by increased exploration budgets by its senior gold customers and growing demand for copper/battery metals related to the broader electrification transition. This is mitigating pockets of weakness from junior gold customers as capital markets fundraising remains challenging. However, management provided interesting context around the juniors/intermediates, noting that many exploration/development projects are well advanced with permitting and drill programs in place, with financing the only missing piece. We believe that this could result in a more rapid deployment of funds into exploration once the financing window opens, versus the historical 6-9 month delay from time of capital raise.
Capex: MDI is targeting up to $80mm this year; management noted that capex is largely in line with recent years of ~$50-$60mm, with the additional amount targeted at acquiring new specialized and underground rigs which will support an expected increase in activity levels in F2025, with several larger customer projects expected to move-forward (effectively these rigs will already be spoken for, and we presume a relatively quick payback of <2yrs).
NCIB: MDI launched a NCIB this quarter for the first time in several years, with intentions of acting opportunistically to acquire its shares given they are now trading at trough levels and below its acquisition prospects.
TD Investment Conclusion
We have made minor revisions to our model and rolled-out our F2025 estimates. We continue to believe that we have entered a new drilling cycle after years of underinvestment by both base and precious metal miners, and we see Major as well-positioned to capitalize, given its strong balance sheet, specialized drilling capabilities, and demonstrated ability to recruit/train operators.