Another Upgrade from TD now $3.00Geodrill Ltd. (GEO-T) C$1.87 Record Q4/20 and Very Strong Start to 2021
Event Geodrill reported Q4/20 financial results. Adj. EBITDA of $5.9mm, was 12.5% above TD's $5.2mm reflecting stronger-than-expected margins and slightly higher revenue.
Impact: POSITIVE
Revenue of $24.7mm was 3% above our estimate of $24.0mm and up 44% y/y reflecting strong demand from both senior and junior miners and given lowerthan-normal prior year revenues owing to the tragic militant attack in Burkina Faso. This was Geodrill's strongest Q4 on record with management noting that activity levels increased sequentially across the quarter, with December an extremely busy month leading up to and through the holiday season (traditionally, work stops in late-December and remains idled until mid- to late-January). Importantly, activity levels resumed rapidly in January with robust demand across all client segments and management indicated that it sees potential for another record result in Q1/21.
Gross margins of 27.9% were 220bps above TD's estimate of 25.7%, reflecting drilling mix and continued strong cost management despite COVID-19-related operating challenges. GEO continues to do a good job managing margins despite industry-wide labour cost inflation.
Looking forward, management is optimistic about its prospects for 2021 given robust commodity prices and with the financing markets open to junior miners once again. Management has initiated a C$0.01/sh semi-annual dividend (~1% yield), reflecting its confidence in the near-term outlook. This is consistent with our view that at $1,700/oz gold, companies will undertake new project development and greenfield exploration. Furthermore, we believe the return of the junior miners will help drive industry pricing and utilization higher, and shift the balance of power back towards the drillers, particularly given the industry-wide labour shortage.
TD Investment Conclusion We are maintaining our BUY recommendation but increasing our target price to C$3.00 from C$2.75 reflecting the roll-forward to 2022E. In our view, Geodrill is a high-quality driller that is doing a good job defending its niche position in West Africa, expanding its service offering, and winning new senior mining customers. We believe that GEO is well-positioned to capitalize on the resurgence in drilling activity, with gold at supportive prices for new project development/exploration. Also, we believe GEO's recent entry into South America will provide commodity diversification (copper) and growth opportunities.