Ouch! Major Drilling Disappoints Big Time

The dark days continue for the mining industry.

The Motley Fool

It was not a big surprise to see another difficult quarter for Major Drilling Group International Inc. (TSX: MDI) as was evidenced by the 14% decline in shares in the days leading up to the release.  However, earnings came in much worse than analysts expected – 300% to be exact.  Revenues also missed coming in roughly 14% below expectations.

The numbers

Revenue for the quarter was down 53% to $92.3 during the second quarter compared to $199.6 in the same period a year ago.  Gross profit as a percentage of sales slipped 90 basis points to 32.5% and EBITDA as a percentage of revenue fell 700 basis points to 17%.  All of this combined for an ugly quarter with earnings swinging to a loss of $19.1 or $(0.24) per share compared to positive earnings of $22.3 million or $0.28 per share during the same quarter in the prior year.

While earnings for the second quarter were not good, there were some significant nonrecurring and noncash charges.  Due to current market conditions, the company took a $12.1 million goodwill impairment charge related to operations in Chile.  The company also wrote down and unrecognized by $5.5 million certain Australian and Columbian deferred tax assets due to the poor near-term outlook for taxable income.  Lastly, the company took a $700 thousand charge related to ongoing restructuring in order to reduce costs.

Mining industry continues to struggle

Gold prices continue to slump adding to the depression among the miners.  Many projects have been delayed or cancelled altogether.  The poor demand for drilling services will continue to increase competiveness for projects and put pressure on margins.

Major saw substantial declines in revenue across all geographical locations.  Revenue in South and Central America plummeted 66% while the Asian, Australian and African operations saw revenue fall by 43%.  The company’s Canadian and U.S. operations were also weak with revenue sliding 54%.

As mentioned earlier the company recorded impairments and write downs associated with goodwill and deferred tax assets.  Both of these entries are further evidence the company does not expect a recovery in the industry any time soon, especially as it relates to its Chilean, Australian and Columbian operations.

In addition to low commodities prices, the company is also being negatively impacted by geopolitical factors.  Such factors have slowed exploration in Argentina, Columbia and Mongolia.  In Australia, projects have been completely cancelled due to high costs and new mining taxes.

Is there a silver lining?

It is hard to find a light at the end of the tunnel in the mining industry, but when things look the darkest is when you may just find that gold nugget.  Currently, most of the pros are predicting more of the same poor performance for most commodities and miners.  It certainly looks like bad news for as far as the eye can see.  However, it may just be all of this bad news which may serve as the catalyst for a turnaround in the metals markets.

Many projects have been delayed or cancelled, yet the world has not stopped using inventories of minerals.  Sure, you can argue that current supplies will keep a lid on prices for some time to come, but at some point the supply numbers will turn in the favor of the miners.  There are signs of an improving economy in the U.S. and other countries around the world which will expedite the industry’s transition to a more positive outlook.

Final thoughts

The management of Major has done a respectable job protecting the balance sheet.  The company’s net cash position continues to improve and was up $18.1 million to $48.5 million during the quarter.  The company’s operating cash flow remains in positive territory producing $22.07 million during the quarter and $24.78 million for the first six months of the fiscal year.

Management’s focus on the balance sheet and cost cutting should keep the company on stable ground while the industry works through the current supply glut.  Once the industry begins to turn, Major should be in good position to compete for projects and the recent steps taken to improve the cost structure should serve to make Major a solid performer when the time comes.

For now though, Major is heading into what is traditionally the weakest quarter of its fiscal year.  Many miners have extended shutdown periods over the holidays and many budgets are not yet in place.  The lack of budgets will put added pressure on the month of January when shutdown periods typically end as many projects, even if approved, will take time to get started.  This has all of the signs of a disappointing third quarter and should give investors pause if considering an investment in Major.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Alex Gray does not own shares in any companies mentioned in this article.  The Motley Fool does not own shares in any of the companies mentioned. 

More on Investing

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Building a $50,000 Portfolio That Can Weather Any Market Storm

This defensive investment portfolio uses three ETFs to ride out any recession.

Read more »

Two seniors float in a pool.
Retirement

Want to Retire Rich? 3 TSX Stocks to Add to Your Portfolio Now

These TSX stocks could deliver above-average returns in the long run, helping you build wealth over time and retire rich.

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

Top 3 TSX30 Winners: Understanding the Recent Stock Drop

Three TSX30 winners in 2024 have experienced price drops this year and continues to underperform due to massive headwinds.

Read more »

space ship model takes off
Dividend Stocks

Where to Put $12,000 in Today’s Market for Potential Long-Term Gains

There's no shortage of great investments that can provide potential long-term gains. Here's a look at three stellar options.

Read more »

Hand Protecting Senior Couple
Retirement

Avoid the OAS Clawback: Dividend Strategies Every Retiree Should Know

With a smart dividend strategy, the OAS clawback can be minimized or even avoided entirely for retirees. Here's how.

Read more »

Canadian dollars are printed
Dividend Stocks

How to Use $10,000 to Transform a TFSA Into a Cash Machine

Do you want growth and income? Consider these top investments that offer up monthly income in spades!

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

Building a $28,000 TFSA Portfolio One Contribution at a Time

Let’s take a look at how you can turn a $28,000 investment in a TFSA into a life-changing fund for…

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Making Your $25,000 TFSA Investment Work Harder for the Long Term

This strategy reduces risk while still providing a solid return.

Read more »