Advanced Drilling Rigs Will Meet Growing Demand For Critical Metals

Key Takeaways

• Foraco's advanced drilling technology and focus on stable, long-term contracts position them for stable revenue growth in key regions.
  
• Expansion into the U.S. market and strategic emphasis on critical metals and water services enhance revenue potential and gross margins.
  
• Revenue decline and regional instability, coupled with increased operational costs and geopolitical tensions, challenge Foraco's profitability and long-term growth prospects.

Catalysts

Provides drilling services in North America, Europe, the Middle East, Africa, South America, and the Asia Pacific.

• Foraco's ongoing deployment of state-of-the-art rotary drilling rigs, which have been well-received for their efficiency and innovation, offers significant growth potential by increasing revenue through higher demand in Australia and potentially other regions.
  
• The company's focus on long-term contracts with Tier 1 mining customers in stable jurisdictions is expected to provide stable and possibly increasing revenue streams, as these contracts mitigate risks associated with market fluctuations and reduce exposure to less reliable junior miners.
  
• Foraco's expansion into the U.S. market, with several rigs already operational and strong management in place, could enhance revenue and market presence significantly as the potential for increased demand for exploration and development in this region unfolds.
  
• The high demand for critical metals, like copper and other EV transition metals, positions Foraco favorably for future revenue growth as geopolitical emphasis on these resources increases the need for exploration and drilling services.
  
• The introduction of more efficient drilling technology and a strategic focus on expanding water services, particularly in resource-rich regions, is likely to drive improvements in gross margins as these operations capitalize on higher-margin opportunities.

Foraco International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Foraco International's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.4% today to 15.8% in 3 years time.
• Analysts expect earnings to reach $59.7 million (and earnings per share of $0.57) by about February 2028, up from $26.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.5x on those 2028 earnings, up from 6.2x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 13.4x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.9%, as per the Simply Wall St company report.

Foraco International Future Earnings Per Share Growth

Risks

• Revenue decreased significantly in Q3 '24 compared to Q3 '23, dropping from $95 million to $78 million, an 18% decrease, which can impact future earnings and financial stability.
  
• The company's EBITDA margin also declined, falling from 26% of revenue to 21%, signaling decreased profitability which could affect net margins.
  
• Revenue in South America and EMEA experienced dramatic decreases of 57% and 71%, respectively, indicating potential regional instability and dependence on fewer markets, impacting overall revenue.
  
• Foraco's decrease in gross margin, from 28% to 22%, suggests higher fixed operational costs relative to revenue, which could pressure profit margins if revenue doesn't recover.
  
• Rising geopolitical tensions and difficulties for juniors in securing financing could hinder growth opportunities and diminish exploration demand, affecting long-term revenue prospects.

Valuation

• The analysts have a consensus price target of CA$4.325 for Foraco International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$5.0, and the most bearish reporting a price target of just CA$4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $376.9 million, earnings will come to $59.7 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of CA$2.4, the analyst price target of CA$4.32 is 44.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.