Major Drilling Group International Inc T.MDI

RBC Upgrade

[retiredcf]

Their upside scenario target is now $17.00. GLTA

March 4, 2022

Outperform

TSX: MDI; CAD 11.30

Price Target CAD 14.00 ↑ 12.00

Major Drilling Group

All the pieces are in place for a sustained drilling up-cycle

Our view: Management noted on the call that "miners aren't focused on price, they just want results”, which feels similar to the tone in 2010-13 (the prior peak in exploration spending). With most commodities at or near all- time highs, deficits on the horizon and balance sheets strong we expect a sustained increase in exploration drilling which could last several years, while cost inflation has been largely offset with higher prices. We reiterate our Outperform rating for MDI and take our price target to $14 from $12.

Key points:
Commodities continue to push higher: The tragic situation in the Ukrainehas created further tightness in already tight commodity markets with both precious and base metals and bulk commodities at or near all-time highs. Combined with strong balance sheets we anticipate an acceleration in mining drilling in 2022 and into 2023. MDI management noted in its quarterly results that programs were off to a faster start in 2022 and exploration budgets for large cap precious metals companies are up roughly 20% y/y (Exhibit 1). We forecast global exploration spending growing to $15.1B in 2022 from $11.2B in 2021, which is well up from $9.3B in 2019,  but remains below the prior peak of $20.5B in 2012.

Price target to $14: We rolled forward our estimates to F2023 which takes our price target for MDI to $14 from $12, and we continue to use 8.0x EBITDA which is in line with the historic average. MDI is currently trading  at 6.7x our F2023 estimate. As a downside case, if margins were 25% (vs. our 30% base case) and global exploration spending was flat vs. 2021, MDI would be trading at 13.1x 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 $17 share price at an 8.0x multiple (see page 3 for more details).

 Price increases offsetting cost inflation: As the drilling market remains tight with companies eager to explore and skilled drillers becoming more scarce, it has allowed MDI to increase prices which has offset cost inflation. Margins are up to 27% through FQ1-FQ3 vs. 26% in the same period last year despite higher ramp up costs and input inflation. In 2010-2011, margins averaged 25% before jumping to 32% in 2012-2013 during the peak years of the prior cycle. We could see a similar trend this time although the scarcity of skilled drillers remains an ongoing risk.

Improving FCF: FCF was $35.7M in FQ3. We forecast FCF of $82.6M in F2023, which implies a yield of 8%. Together with a strong balance sheet, we believe MDI could look to reintroduce a dividend at some point in the next 1-2 years. MDI was in a $28.3M net cash position at the end of FQ3 from net debt of $7.4M at the end of FQ2.