Geodrill Ltd (TSX: GEO) is an exploration drilling company. It mainly operates a fleet of multi-purpose, core, air-core, and grade control drill rigs. Most of its revenues are derived from the drilling services across multiple regions from Africa.

Key Positives

• Customer Mix: The company has well-established customer mix, with 80% senior mining top-tier customers and long-term client relationships. Typically, a longer-term client relationship for the company originally commenced as a short-term drill contract won under a competitive bidding process, which has been continually renewed as the respective drilling program of the client has progressed through various phases.
• Strong Balance Sheet: The company maintains a strong balance sheet with a debt-to-equity ratio of 2%, implies negligible balance sheet risk. Further, in the quarter, the group’s bolstered its cash position by USD 2.7 million to end to quarter with USD 9.9 million cash position.

Key Negatives

• Insiders Selling the Shares near Current Market Price: Post a free fall took place in the GEO shares in March 2020, insiders utilized the opportunity to buy shares at a discounted price and valuation. Strong insider’s buying pushed the stock to new a 52W High of USD 2.07 (on October 13, 2020), from year’s bottom of USD 0.80 (on March 16). However, since November, insiders turned net seller and sold stake near the current market price, which is an area of concern.

Insiders Activities. Source: Refinitiv (Thomson Reuters)

• Bearish Technical Indicators: At the last close, its shares traded well below the crucial short-term as well as long-term support levels of 50-day, 30-day and 200-day SMAs, which is a bearish technical indicator. Also, MACD is falling with the difference between 12-day, and 26-day EMA is negative, and MACD oscillator hovering below its 9-day SMA signal line, a bearish indicator. These indicators indicate that stock could fall further from the current market price.

Q3FY20: Financial Highlights

• The company registered a robust performance amid a challenging market condition, with EBITDA margin improved to 24% compared to 22% in Q319, Net income increased to USD 2 million or USD 0.04 per share compared to USD 0.8 million, or USD 0.02 per share for Q3-2019. Debt reduced to USD 1.6 million resulting in industry-leading Debt-to-Equity ratio of 2%. However, the company generated revenue of USD 18.9 million in the third quarter of 2020, a decrease of USD 1.4 million or 7% when compared to USD 20.3M in the third quarter of 2019. The decrease in revenue was due to a change in the mix of meters drilled in the quarter.
• Further, in light of the uncertain economic conditions, commodity prices remain strong, and gold prices continue to surge bolstering the demand for the group's drilling services. These positive market conditions are driving higher activity levels, increased drilling utilization rates and improved pricing. Further, recent contract wins and contract extensions in Cote D'Ivoire, Ghana, and Mali with new and existing customers, is a reflection of the strong drilling environment.

Risk: The next wave of COVID-19 outbreak could have a weigh on the group's drilling activities

Stock Recommendation: Geodrill reported decent performance in the third quarter of FY20, and company is continuing to see a recovery in the mineral drilling sector and is optimistic that the recovery will continue throughout the remainder of 2020. Also, during the quarter, GEO has advanced its growth strategy and are in the final stages of signing its first drilling contract with a global mining company in Peru.  The company remain confident in its strategic direction and continue to see positive trends as a result of their prudent growth and strategic initiatives.

However, insider's selling and bearish technical indicators indicate that stock is likely to remain in the bearish zone unless its shares registered a bullish breakout and moved above its 30-day and 50-day short-term crucial resistance levels. Therefore, based on the above rationale, we recommend a "Watch" stance on the stock at the closing price of CAD 1.57 on December 22, 2020.

Source: Refinitiv (Thomson Reuters)

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