MWG Focus Stock: MDI-TSX

Major Drilling Group International

Major Drilling Group International (MDI) is the leading global provider of specialized contract drilling services to the mining industry. Given the specialized labour force and equipment required, mining companies typically outsource exploration drilling to companies like MDI as a way to mitigate the cyclical risk that faces the sector. While the drilling equipment used is readily available for purchase, we believe there are substantial barriers to entry as the business is very cyclical and requires the ability to work in remote and challenging environments. The majority of MDI’s revenue is derived from copper and gold exploration but its drilling rigs can be used for most exploration drilling activity (e.g., for commodities such as nickel, iron ore, zinc and uranium).

We believe we are in the early stages of a very solid upturn for MDI. High commodity prices are stimulating the mining industry to increase exploration for new deposits and extensions to current deposits for the first time in almost a decade. Take copper for example; just Imagine the amount of new copper that will be needed to supply a world where electric vehicles dominate the roads. We believe copper prices will need to remain elevated for years to spur new mine development and meet demand. Figure 1 shows the effects of the last commodity cycle, associated with the industrialization of China, on MDI’s revenue.

Figure 1: MDI’s revenue is highly correlated with exploration budgets.

Source: Major Drilling

Major is currently contracted to expand the resources of some of the world’s largest mines, like Oyu Tolgoi in Mongolia (Rio Tinto), Grasberg (Freeport-McMoRan) in Indonesia and the Nevada Gold belt dominated by Newmont and Barrick. Figure 2 highlights the expected decline of gold and copper ore that will fuel an extended exploration boom.

Figure 2: Mine reserves will continue to fall without a significant rise in exploration activity.

These mining majors (including BHP Billiton) are expected to generate cumulative and combined cash flow from operations of US$207B from 2021-2023, a 77% increase over 2017-2019  (we are purposefully excluding 2020 given the short-term disruption from the COVID-19 pandemic). When combined with favourable financing conditions in the junior mining sector, we believe exploration budgets should continue to rise. The chart below shows that the industry, led by gold miners, has stepped up financing since the first quarter of 2020. Much of this money will be earmarked for exploration.

Figure 3: Financing activity has picked up in 2021

Source: Raymond James

MDI’s revenue peaked at almost $800 million in fiscal 2012 with the commodity boom sparked by the industrialization of China. It bottomed at just over $300 million a few years later as China’s need for commodities tapered. During the downturn, MDI focused on reducing debt and maintaining its fleet to be ready for the next cycle. We believe we are in the early innings of a new cycle as MDI’s revenue has increased to $400 million in fiscal years ‘20 and ‘21. Mining analysts are expecting 40% revenue growth in the current fiscal year ending April ’22, with further growth into 2023 and beyond.

We expect the current commodity boom to extend beyond 2025 given the lack of exploration since the last commodity boom and the demand from electrification. Given how highly correlated MDI’s stock price is to exploration budgets, we believe the stock can double as the mining industry invests its strong cash flow into exploration.

This Focus Stock is written by our CIO & CEO, Bruce Murray.

The purpose of this is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.

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