RE:Keystone Financial talks about GEO.TO againHere's the narrative. GLTA
With the price of gold poised to hit new all time highs, we update listeners on a stock we have recommended to our clients over the past two years which provides the tools necessary to find and increase the life of gold mines.
That company…
Geodrill Limited (GEO:TSX)
Recommendation: February 2021, Recommendation Price: $1.60
Price: $3.50 – stock is up 33.21% in 2023 and, over 120% including the dividend since KeyStone recommended the stock in 2022 at $1.60.
Market Cap: $ 163.99 Million
Yield: 1.71%
Company Description: Established in 1998, GeoDrill is a mineral exploration drilling services company to mining companies (primarily gold related) in West Africa, Zambia, and Peru. It offers reverse circulation, core, air-core, deep directional, reverse circulation grade control, water borehole, underground, mine blast hole, and horizontal drilling services. The company’s current fleet stands at 76 rigs (up 1 rig vs. Q3 2022), with an additional rig being manufactured and 4 currently being rented (will bring the total to 81). Approximately 60% of the fleet is tied up to existing customers over the next 3-5 years.
GeoDrill continues to expand globally, having signed its first ever contract in Chile this past quarter, as well as two new contracts in Egypt. The company’s client mix is made up of senior mining, intermediate and junior exploration companies.
What is Driving the Share Price?
- Recent Financials – A Strong 2022 – figures are in US dollars.
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- Revenue rose 20% to $138.6 million.
- Net income jumped 34% to $18.9 million or US$0.41 or CAD$0.56 per share.
- Achieved a Return on Capital Employed (ROCE) of 25% and Return on Equity (ROE) of 18%;
- Ended the year with net cash (excluding right of use liabilities) of $9.8 million
- Delivered CAD$0.06 in dividends to investors in 2022 compared to CAD$0.02 in 2021;
- Surge in the price of gold: From its lows in early November in the range of US$1,630, gold has risen 25% to US$2,040 – that is a significant rise in 4-months and bodes well for capital inflows into the sector at present. The more money that is raised in the sector, the more money goes into drilling and a company like GeoDrill can continue to benefit.
Our Take:
While the stock is up over 120% since our recommendation, from a valuation basis, GeoDrill currently trades at 5.8 times 2023 expected earnings and 2.65 times expected 2023 EBITDA.
A client recently asked if we saw GeoDrill as a takeover target. Firstly, we never make an investment in a company based on it being a takeover target as that is highly speculative. Having said this, go partially down this path, in terms of acquisition equivalents there is not an exact comparison, but Major Drilling (MDI:TSX) – the largest driller in this segment acquired McKay Drilling PTY Limited, a leading specialty drilling contractor based in Perth, Australia for an amount approximately C$75 million in 2021. This was approximately 4.7 times EBITDA. GeoDrill will have more than double the EBITDA of McKay this year, so it likely deserves a higher multiple. GeoDrill currently trades at roughly 2.65 times 2023 expected EBITDA. We would not buy GeoDrill or any company strictly on the basis of the business as a takeover target as this is poor strategy. What we do know is that GEO is likely to post a record earnings again in 2023. This have driven the share price over the past year and the current execution is strong.
Geodrill continues to offer a unique way to gain exposure to the gold price, without the geological and technical risk of mining. The stock trades at ~2.5x 2023 EBITDA, below its peers in the Americas and Australia which is not justified by the business fundamentals.
Caution: A word of caution – investing in commodity based stocks is very risky business. You have all the company specific risks you would find in any stock including the quality of the management team, the prospects for growth in the business, execution on stated targets, the cashflow, balance sheet, and price you are paying for the stock & and the market risk including general market sentiment & economic conditions PLUS you have commodity price risk. Typically, if the commodity the stock produces or is associated with goies higher, the stock does well, if the commodity moves lower, the stock does poorly – the degree to which the stock underperforms or overperforms the average of the sector can depend on the quality of the company, but the general direction is driven by the commodity price. So, even if management of a gold company does everything right in a given year, if the price of gold moves against them, it will likely not be a good year for the stock.