Geodrill Quick Update - $GEO.to

Quick update after Q3 2023

Working through the backlog from my week off.

Price: $1.90 CAD / $1.35 USD

MC: 67.8 mil USD

EV: 64.5 USD

1 year performance:

GEO reported earlier this week and held a conference call. 2023 is trending below what I was expecting at the end of last year and this quarter was on par with my expectations given they issued a press release indicating they would be taking a non-cash credit loss provision. They also cut the semi-annual dividend to free up cash.

Quarter Recap

• Revenue of 30.3 mil (down 14%)

• EBITDA of 0.6 mil (including the 3.6 mil non cash charge)

  • 4.2 removing the non-cash charge

• Added 4 new contracts this quarter

  • 2 in South America, 1 in Ivory Coast, 1 in Eqypt

• Wound down operations in Burkina Faso this quarter

• Intermediate and senior mining companies continue to drill and will drive demand in the short term

  • Juniors have been capital market constrained

• Bidding market remains robust

Call Notes

• They had a hard comp to last year given the timing of the wet season

  • Last year the wet season was delayed and pushed into Q4

• The wind down of Burkina Faso has been met with slower than expected uptake in the available rigs

• Juniors are struggling to raise capital to drill so they are going to pivot to more senior and established miners

  • This will impact their profitability for these contracts as bidding on these contracts is more competitive

  • Seniors are also more likely to run into delays due to local community relations issues

  • As well some of these contracts will require some additional considerations like minor rig modification and additional safety training for employees

• Expecting lower gross margins from senior miners (approx. 25%)

• Q4 is off to a good start and ramping well

• They feel the rough quarters are behind them

Closing Thoughts

The company has definitely stumbled this year. I was caught off guard by the loss provision. Some of it was out of their control (timing of weather/wet season) and some was in there control (shifting to senior miners). I think the decision to pull out of Burkina Faso was the right one, although it does come with some frictional costs. The pivot to seniors makes sense for the durability of the business, but will come with lower margins. Such is the way of things with microcaps in cyclical industries. So here with sit with a high water mark in 2022 and the potential to meet or exceed that in 2024 and beyond.

They still have 9.2 mil in 91+ days receivables net of the loss provision. That’s up from 6.3 at the end of 2022. As a percent of the total receivables the 91+ days is still higher than any other time since 2019 (excluding q2 2023) when they have fully disclosed the mix is. I am hopeful that the loss provision of total receivables can gradually trend back to historical averages.

Given the seasonality in the business, I look at GEO on a ttm basis. Looking at some averages in 2021 and 2022 I see 26 mil in adj EBITDA as the floor. I don’t see why 15 mil in FCF before working capital isn’t achievable. I would expect a modest recovery as we move ahead through 2024. They do have more rigs than 2021, so fixed costs are higher.

Gold is still under 2000 and seems to be stuck. I think a meaningful breakout above 2000 will bring more eyes into the sector. Canadian microcaps are definitely not seeing much in the way of fund flows, so I think we could see a big run in the share price without much business change. Price drives narrative and such.

We have a business trading at 2.7x EV/EBITDA and less than 5x FCF (my low end EBITDA and FCF) that I feel brings a nice diversification to a portfolio. I took opportunity to add to my holdings in the 1.70s. GEO has not been kind to my portfolio so far, so I’m hoping that I am not throwing good money after bad.

Thanks for reading.

Dean

* long GEO.to