The Inexpensiveness of Energold Will Surprise You
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The “pick-and-shovel play,” which refers to corporations supplying mid-1800s gold rush prospectors with necessary mining tools/equipment, has recently been applied to players operating in non-mining industries. Suppliers working behind the scenes of highly fragmented industries including consumer electronics and automobiles, for instance, often include corporations that are somewhat removed from the intense competition in the end-consumer market and are often less expensive investment picks.
Despite the applicability of the example to companies operating in other industries, undoubtedly one of the most lucrative pick-and-shovel plays exists at home in the mining industry with Energold (NASDAQOTH: EGDFF.PK). Growing at an unbelievably astounding pace, and selling for around 6x 2013’s estimated earnings, Energold should be on all investors’ radar – whether they are gold lovers or not.
Energold is a relatively small (enterprise value $178 million) Canadian drilling contractor that primarily serves the mining and mineral exploration industries. Despite its size and the lack of press it receives in the investment community, Energold is actually an increasingly important piece of some drilling “majors’” operations, including big players like Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM), and Yamana Gold (NYSE: AUY). The company’s operations are currently focused on several of the industry’s most important growth markets, and mineral drilling revenues of $105.8 million in 2011 (79% of total revenues) represent a near 4.5x jump from 2009 levels.
Figures in millions of dollars
There are several key reasons why Energold will drastically outperform the market over the next several years:
Robust Industry Growth
The worldwide mining and mineral exploration industry, as expected, hardly escaped the global economic slowdown experienced in 2009. In terms of total dollars spent on exploration activities, the industry was nearly cut in half when compared to the 2008 drilling period.
Dollars in Billions
The industry has since experienced a huge rebound – driven primarily by weakened currencies and a subsequent rush to commodities – which is projected to enjoy a prolonged period of growth over the next several years (2013 estimate provided by Cormark Securities Metals Economics Group). Although Energold is still a relatively small player when compared to the $16.3 billion dollars spent worldwide in exploration activities, its share of the market has doubled (to 0.6%) since 2009. The corporation will continue to experience such industry-fueled growth as it gains relevancy points in its niche and exploration groups continue to spend more per year.
Organic Company Growth
As a drilling contractor, there are several key ways that Energold can continue to experience significant growth. First, the company has, and will continue to, expand its rig fleet. Its primary mineral drilling division currently has a rig fleet more than 125 strong, which represents a 155% jump from the start of 2008. Due to the extremely strong industry demand, essentially every new rig the corporation constructs already has placement – in fact, Energold cannot produce them fast enough.
Next, a higher utilization of the rigs will continue to drive top line growth. Not only have the total amount of meters drilled per year been increasing, but the average utilization (meters per rig) has also continued to expand.
- Meters Drilled
- 2008: 237,800 m
- 2009: 151,300 m
- 2010: 346,200 m
- 2011: 585,900 m
- Rig Utilization (total meters drilled / average rigs in the year)
- 2008: 3,590 m
- 2009: 1,922 m
- 2010: 3,569 m
- 2011: 4,965 m
The importance of higher rig utilization levels cannot be understated, as idle rigs are essentially dead assets.
Lastly, Energold’s organic growth will be fueled to new levels by higher prices per meter drilled. During the 2009 slowdown, the corporation placed many rigs with the industry “majors” (the larger and more influential players in the field) for use in brownfield projects. Brownfield projects, which are characterized by more competition and are in more easily accessed areas, naturally command lower prices and gross margins. Because business in 2009 was so terrible, Energold was forced to devote a meaningful portion of its rigs to longer-term and less profitable brownfield projects (some business is better than no business). Likewise, even though business has since improved, the corporation cannot simply take the rigs back and replace them in higher margin “frontier” zones, which are characterized by less competition, more specialized drilling projects, and less-accessible areas.
Energold is driving its price per meter two ways. First, as the market naturally improves, exploration jobs naturally command higher prices. Second, as the company continues to expand its rig fleet it can commit more rigs to higher margin frontier jobs and expand the portion of revenues that come from such frontier drilling zones. Both of these factors have led to natural price appreciation for Energold’s efforts, and continued top line growth will come naturally from both drivers going forward.
Competitive Advantage and Moat
None of these growth drivers would have significant relevance unless Energold was protected by significant barriers to entry. One of the corporation’s most unique characteristics, and the reason why it is able to successfully increase rig utilization and pricing per meter is its proprietary man-portable drilling rig solution.
Drilling exploration is an inherently capital intensive business – both in terms of the equipment required and the infrastructure investment needed to physically work at a given drill site. The more attractive frontier drilling zones, which are generally found in less affluent areas of the world (essentially jungles and the tops of remote, hilled areas), are not always accessible due to the lack of roads and bridges in the region. Energold’s man-portable rigs, which can be disassembled, man-transported, and reassembled on site, do not require the pre-investment in such infrastructure. This gives the corporation access to a relatively competition-free niche, and the longer Energold operates, builds relationships, and grows within the niche, the more difficult it will be for new entrants to emerge. Pictures of Energold’s man-portable rigs can be found here.
Likewise, because the corporation does not need to clear trees/build roads/etc. and destroy local ecosystems, and because it hires local workers to assist on the job site, it has been able to generate significant intangible points with larger explorers and local communities. Although these intangibles are often overlooked when evaluating a company, the longer-term impact they have on a corporation’s competitive moat cannot be ignored. Both of these aforementioned factors also drastically reduce operating costs – not having to pave roads (literally) and the ability to use local help for grunt work drastically reduces the marginal cost requirements that other larger competitors that are unable to operate in frontier zones would need to spend.
It is often difficult to find one corporation that has it “all” – opportunities for swift organic growth, a firm standing in a high growth industry, a focus on environmental responsibility (which customers and local constituents acknowledge and respect), and technology that insulates from the natural forces of competition. Energold not only commands all of these positives, but most importantly (and surprisingly) it is cheap. Such a swiftly growing company cannot continue to fly under the radar for long.
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