June 18, 2023
Geodrill is a drilling company that extracts mineral samples seeking gold and other ores for major, intermediate, and junior mining companies in Africa and South America. (Drilling for gold is 90%+ of revenues and the company operates in Burkina Faso, Cote d’Ivoire, and Mali in West Arica; Egypt in North Africa; and Peru and Chile in South America.) GEODF has highly recurring revenue, produces free cash flow, and is growing at 8-12% a year on both revenues and profits.
Gold mining is cyclical, and it is likely that a long cycle of growth for gold drilling has begun. As Geodrill produces ever more free cash flow, it can increase its dividends and share buybacks. Also, larger drillers are likely to purchase smaller drillers, which makes GEODF a take-over candidate.
Geodrill was founded in 1998 by Dave Harper, its current CEO and largest shareholder, with one rig and one contract. Over the last 24 years, it has grown organically into one of the leading exploration drilling companies in the world with a fleet of 76 drill rigs operating in Africa and South America.
Geodrill provides Reverse Circulation, Diamond Core, Air-Core, Deep Directional Navi Drilling, Geo-Tech, Grade Control, and Water Borehold drilling services. Geodrill’s multi-purpose rigs can provide both Reverse Circulation and Diamond Core drilling and can be switched mid-way through a hole with minimal effort or downtime. This lowers customers’ costs. GEODF also provides Air-core drilling, which is often used by junior exploration companies in early-stage exploration.
Geodrill has built an excellent reputation for reliability and quality in the drilling industry, which has translated into long-term contracts and relationships with major customers such as Kinross Gold (KGC), Newmont Mining (NEM), Barrick (GOLD), and others.
Because it can take decades to fully exploit a mine’s ore beds, these relationships last for long periods of time and are recurring in nature. Geodrill is involved in all the cycles of a mine’s life.
Here is a good writeup on Value Investors Club: https://valueinvestorsclub.com/idea/GEODRILL_LTD/5831765918
Gold mine drilling services will be greatly needed going forward. Here is a quote from the LBMA, the London Bullion Market Association:
In order to sustain production at or above current levels, significant capital will need to be deployed by miners in order to develop projects or expand existing operations to offset declining production from aging mines. With current prices, which at time of writing are around $1,850/oz, well in excess of the 90th percentile of the all-in sustaining cost curve, which sits at $1,300/oz, the vast majority of gold mines are making very healthy profits. These margins should allow the industry to deploy capital to develop new projects, with the average capital cost to construct a new gold mine approximately $200/oz over the life of mine.
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The market cap is $108.8 million. The company has $17.7 million in cash and $9 million in debt. Enterprise value is $100.1 million.
Here are the current multiples:
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- EV/EBITDA = 2.60
- P/E = 5.83
- P/B = 0.98
- P/CF = 5.34
- P/S = 0.77
Total insider ownership is 50%+. (Founder and CEO Dave Harper owns 39%.)
TL/TA (total liabilities/total assets) is 24.2%, which is excellent. ROE is 18.7%, which is good.
The Piotroski F_score is 8, which is very good.
Intrinsic value scenarios:
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- Low case: During a recession, the stock could fall 50% from $2.36 to $1.18.
- Mid case: 2024 EBITDA is approximately $44.8 million. The CEO Dave Harper, who owns 39% of the shares, is looking to sell for an EV/EBITDA of at least 5.0. That would be an EV (enterprise value) of $224.0 million. After subtracting $9.4 million in estimated debt and after adding $42.1 million in estimated cash, the equity would be worth $256.7 million. That translates into $5.58 per share, which is over 135% higher than today’s $2.36.
- High case: The stock could easily be worth a 6x EV/EBITDA, which would translate into an intrinsic value of $6.55. That is over 175% higher than today’s $2.36.
Risks
GEODF may be trading at a discount to its peers due to its exposure to the West African countries. There are often political upheavals in these countries. However, the groups of people involved in such upheavals still need the hard currency that mines and other commodities produce. So far, there have been no disruptions in Geodrill’s drilling programs due to any of these regime changes.
Also, Geodrill’s newer locations in Egypt, Peru, and Chile are much more stable politically than West Africa.
Finally, if there is a recession or a bear market, the stock could drop. But that would be a buying opportunity.
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