Geodrill Limited GEODF

TD 2

[retiredcf]

Geodrill Ltd.

(GEO-T) C$3.40

Strong 2023 Outlook; Focused on Margins and Cash Generation Event

Geodrill reported Q1/23 adj. EBITDA of $10.5mm, in line with TD's $10.3mm estimate, reflecting largely in line revenue and EBITDA margins (27.8%, TD: 27.7%).

Impact: NEUTRAL

Q1 results marked a strong start to 2023. Revenue increased 12.4% y/y to $37.6mm (effectively in line with TD), reflecting the benefits of GEO's more diversified geographic presence in Egypt and Chile, as well as continued strong results in West Africa. Geodrill's rig fleet is effectively operating at full capacity currently, with much of the growth coming from pricing and utilization (Geodrill's available rigs remained largely flat y/y in Q1/23 at 80).

On the surface EBITDA appears flat y/y. However, the prior year period included a $1.1mm gain on equity investments (related to the drill for equity program); excluding this, EBITDA increased 12% y/y.

Looking forward, management reiterated that it has a robust pipeline with demand for drilling very robust. However, growth will be somewhat tempered this year compared with what might be expected based on the strength of the market. This reflects Geodrill taking a pause on rig fleet growth following multiple years of expansion and geographic diversification as management looks to solidify its expanded operating base. Additionally, management is looking to prioritize price and margins and is not chasing contracts. We believe that this is the right approach, and should drive strong FCF generation. We currently model relatively flat EBITDA margins of ~26.7% for full-year 2023 (compared with adjusted 2022 margins excluding the one-time equity gains), which could prove conservative if management is successful in obtaining higher priced contracts. Management also indicated it is looking at reallocating rigs out of Burkina Faso given elevated terrorist-related risks - we do not anticipate this being a material revenue headwind given the robust demand across effectively all geographies.

TD Investment Conclusion

In our view, Geodrill is a high-quality driller doing a good job growing its geographic footprint, expanding its service offering, and winning new senior/intermediate mining customers. We believe that the gold industry has pivoted and is demonstrating a renewed appetite to increase production and reserves following the multi-year period of attrition, which we see Geodrill as being well-positioned to capitalize on.