Is this under-the-radar gold-related stock ready to pop?

May 16, 2023

Gold is flirting with its record high. In October, the precious metal was trading around US$1,640 an ounce, but has since rallied sharply to more than US$2,000. The momentum is strong, and records sometimes beget new records. With the U.S. dollar weakening and crypto seen as very volatile, gold may have further room to run.

The metal’s good fortune has filtered through into many mining stocks. The VanEck Gold Miners ETF and VanEck Junior Gold Miners ETF

have powered higher since October last year. These ETFs are a good proxy for how gold-mining stocks are doing, as they hold many of the world’s large and mid-sized miners.

Here at Contra the Heard, we are not looking to add new miners to the portfolio or increase existing positions. As our moniker implies, we are contrarian investors. We buy into names when they are deeply out of favour, hold them tight and look to sell them when good times roll. To that end, years ago we made many investments in the precious metal sector, at a time when it was hurting. We are now sitting tight and assessing which positions may be due for a rebound or could even be sold.

One gold-related stock that has not participated in the rally since October but may be ready to pop is Major Drilling Group International Inc.

+0.50%increase . The Moncton-based company has been public since 1995 and conducts business around the world. It typically generates around half of its sales from gold miners, 20 per cent from copper miners, and the rest from nickel, iron ore and palladium companies. So far this year, the shares are down 5.6 per cent and trading at $9.93. We own the name here at Contra the Heard, with an average purchase price of $7.29.

We invested in Major because it is an industry leader, has a decentralized operating structure that empowers local drilling teams and offers a variety of services, including “specialized” drilling. The company describes specialized drilling as a segment which has a high barrier to entry, where the work’s depth, directional requirements or remote location demand special equipment and expertise. Major’s focus on this category should bode well for owners as the industry ventures into increasingly remote corners of the globe to unearth new deposits.

Major Drilling has well-established relationships with large and junior miners, and a modern fleet of drill rigs. Moreover, the organization is conservatively managed. This expresses itself in two ways: first, through the company’s focus on profitability over top-line growth at any cost; and second, via a strong balance sheet over time that holds high cash, low debt and ample working capital.

The latest quarterly results were good, with revenue up 7.5 per cent, net income growing 10.5 per cent and rig utilization expanding slightly. Management’s outlook for this year is positive, given gold’s rally, which should flow through to higher exploration spending among gold miners. While copper prices are flat on the year, the executive team is optimistic on drilling demand among copper and base-metal miners, particularly given the electrification of the power grid and adoption of electric vehicles. This said, there are big risks. Commodities are volatile, Major Drilling is facing hiring and labour challenges, and rig utilization rates are around 50 per cent, which means there is plenty of slack still in the system.

For those who are interested in this company, the next quarterly results are due in June. For our part, we will continue to watch, look for a pop and aim to sell the shares if it enters our sell target range of $15.50 to $18.00.