Underinvestment And Risks Will Constrain Returns While Opportunities Linger

Key Takeaways

• Expansion into specialized drilling and focus on electrification may not offset limited revenue growth due to persistent exploration underinvestment and capital access challenges for juniors.
  
• Geopolitical risks, resource nationalism, evolving metal demand, and rising operational costs threaten earnings stability and long-term market size for drilling services.
  
• Heavy client and commodity concentration, low asset utilization, and persistent cost pressures expose the company to volatile earnings, restricted growth, and ongoing margin challenges.

Catalysts

Provides contract drilling services to mining and mineral exploration companies in the United States, Canada, South and Central America, Australasia, and Africa.

• Although the company is well-positioned to benefit from the increasing need for advanced drilling solutions driven by resource depletion and declining ore grades, the persistent underinvestment in global exploration-2024 spending reached only 60 percent of 2012's peak in unadjusted terms-could limit the pace of revenue growth despite heightened secular demand.
  
• While their expansion into specialized drilling and increased exposure to key copper regions should help capitalize on the global push for electrification and decarbonization, ongoing difficulty for junior miners in accessing capital means the demand recovery remains concentrated among major mining companies, potentially capping medium-term margin improvements due to less diversified revenue streams.
  
• Even though Major Drilling's recent acquisition of Explomin and modern fleet investments strongly position it for geographic and operational diversification, the company is still exposed to geopolitical risks in emerging markets and resource nationalism, which could create uncertainty in project pipelines and result in unpredictable swings in cash flow and earnings over a multi-year horizon.
  
• Despite the growing global attention on critical minerals and supportive government messaging, technological advancements that reduce required metal intensity-such as battery chemistries that minimize copper or nickel usage-may eventually shrink the long-term addressable market for drilling services, dampening long-run revenue expansion more than presently appreciated.
  
• While the company continues to see robust demand for its specialized services as ore bodies become harder to access, inflationary wage pressures, increased start-up and mobilization costs, and the risk of tightening ESG regulations could weigh on net margins and restrict operating leverage, potentially delaying the return to historical profitability levels.

Major Drilling Group International Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Major Drilling Group International compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Major Drilling Group International's revenue will grow by 20.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.6% today to 5.6% in 3 years time.
• The bearish analysts expect earnings to reach CA$71.4 million (and earnings per share of CA$0.87) by about August 2028, up from CA$26.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, down from 27.7x today. This future PE is lower than the current PE for the CA Metals and Mining industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.5%, as per the Simply Wall St company report.

Major Drilling Group International Future Earnings Per Share Growth

Risks

• The company reported a sharp decline in net earnings for the quarter, with net earnings dropping to one million dollars from nine point nine million dollars in the prior year period due in part to increased start-up, training, and mobilization costs, which points to margin pressures that could persist and negatively impact future profitability.
  
• Utilization rates across drill types remain below fifty percent and North America continues to have excess capacity, indicating inefficient asset use and potential overinvestment in equipment that could weigh on return on assets, dampening long-term earnings and net margins.
  
• Over ninety percent of revenue is concentrated among senior and intermediate mining clients, with only eight percent coming from juniors, and junior activity remains suppressed due to limited access to capital; this reliance on a few large clients and a cyclical sector increases earnings volatility and creates risks for future revenue streams should commodity cycles or corporate budgets shift.
  
• While gold and copper are strong contributors to revenue, the company is highly exposed to just a handful of commodity markets, which could see long-term structural demand erosion due to industry decarbonization, recycling trends, or advances in alternative materials, ultimately limiting the growth of the addressable market and putting downward pressure on revenue.
  
• Significant ongoing capital expenditures are required to maintain a modern and competitive fleet, as shown by planned spending of seventy million dollars for 2026, but if cyclical upswings do not persist or demand softens due to geopolitical, regulatory, or industry headwinds, the high fixed cost base may compress net margins and restrain free cash flow.

Valuation

• The assumed bearish price target for Major Drilling Group International is CA$12.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Major Drilling Group International's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$17.0, and the most bearish reporting a price target of just CA$12.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CA$1.3 billion, earnings will come to CA$71.4 million, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 6.5%.
• Given the current share price of CA$8.79, the bearish analyst price target of CA$12.0 is 26.8% 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.