Major Drilling Group International Inc T.MDI

TD

[retiredcf]

Currently have a $14.50 target. GLTA

Major Drilling Group International Inc.

(MDI-T) C$11.43

Solid Result in Seasonally Weak Quarter; Strong Outlook Provided Event

MDI reported Q3/F23 (ending January 31) EBITDA of $20.5mm, 8.0% above TD's $19.0mm estimate (cons: $19.3mm, excluding outliers), reflecting slightly higher revenues and margins (EBITDA margins: 13.7%, TD: 13.0%).

CC: 9:00 a.m. ET (416-340-2217); pw:7199282#

Impact: SLIGHTLY POSITIVE

Q3/F23 results were solid in what is typically MDI's seasonally slowest quarter due to the holiday shutdowns. Interestingly, management highlighted an acceleration in the shift towards copper and battery metals drilling, fueled by energy transition customers. In recent years, gold drilling has contributed >50% of revenue but in Q2/F23 it declined to ~45% and has declined further this quarter.

• Revenue increased 7.5% y/y to $149.2mm (1.9% above TD). Australasia & Africa was a highlight (+30.2% y/y) driven by strength in Asia reflecting new contracts signed in Q2 and others renegotiated with favourable terms. North America remains strong (+1.7% y/y), with growth from senior/intermediate activities more-than-offsetting a slowdown in junior activities. South/Central America (+1.7% y/y) experienced strong growth in Argentina offset by longer seasonal shutdowns in Brazil and Suriname.

• Gross margins increased 49bps y/y to 25.3%, reflecting higher productivity and increased pricing, which more-than-offset inflationary pressure. Recall margins are significantly impacted during Q3 due to the holiday work stoppage and additional expenses to prepare rigs for redeployment.

• FCF: -$2.3mm pre-w/c (+$23.7mm after w/c), slightly below TD's -$0.8mm estimate. In Q3/F23, MDI spent $15.6mm (TD: $17.5mm), driven by the acquisition of nine new rigs (10 older rigs were disposed). Total rig count: 602.

• Net cash (excluding leases) increased $22.8mm q/q to $74.1mm (cash: $109.6mm, debt: $19.8mm, McKay contingent consideration: $15.7mm), primarily reflecting the seasonal inflow of W/C as drilling programs conclude.

• Outlook: Management provided a strong outlook for calendar 2023 reflecting increased exploration budgets by its senior gold customers and growing demand for copper/battery metals related to the broader electrification transition. Strength in these areas is mitigating pockets of softer demand from junior gold customers following a less active 2022 for capital markets fundraising. However, management did highlight weather-related challenges in February which temporarily impacted its activity levels (our sense is its relatively minor, but will inquire further on the call).