After an unusually long stay in the portfolio, Geodrill is shown the door.

A Modest Success – But It Took Too Long!

Geodrill is a contract drilling rig operator servicing the gold mining community in Western Africa. I bought my first share of Geodrill way back in June of 2013 at a price of 84 c per share. I recently sold off my last share at $1.45. Technically, that’s a gain of 73%, but it doesn’t feel like much of a win because of the excruciatingly long time it took for this story to play out. I generally hold on to the companies I buy for a year or two. By then, the investment will have either lived up to my expectations or it will be clear that it is time to move on to better opportunities elsewhere. But in Geodrill’s case, better times always seemed to be just around the corner and it ended up spending almost 6 years in my portfolio. This means my returns from first buy to last sale would have worked out to an annualized gain of around 10% per year. Not bad, I suppose. I’ve certainly had worse. But it felt like quite a slog.

The first 10 years of this century saw gold in a rocking bull market. From its low in April of 2001 to its peak in August of 2011, the price of gold rose from below $400 an ounce to just over $2000 per ounce. For a while near the peak, all the talk in the local coffee shop was of gold and the latest penny mining stock. Then in the Spring of 2013, the bubble finally burst, and investors’ attention moved on to the next new thing.

In the summer of 2013, the price of gold had dropped to $1300 an ounce and I thought I spied what could be a good turnaround candidate in Geodrill. Here was a company that had been making strong profits a year earlier when the price of gold was riding high, had a modern fleet of cutting-edge drilling rigs and a very modest level of debt. With the collapse in the price of gold, they were losing money, but if you backed out the depreciation expense of their rigs, they were cash flow positive. I could buy into this company at close to half of their tangible book value and only 3 times the level of their previous peak earnings. The risk was obviously that the price of gold would stay down or continue to nosedive and that drilling activity in the sector might stay depressed for a very long time.

And that is more or less what happened. The price of gold did manage to pull out of its tailspin and solidify around the $1300 mark, but drilling activity never fully recovered to its previous frenetic levels and excess capacity in the industry kept pricing down. The company lost money in 2013, 2014 and 2015. I watched as my investment in this company slowly deflated, with the stock price slumping down to the 50 cent mark on several occasions during 2015. However, even as the stock price was plumbing new depths, the financial statements were showing some encouraging signs of life. Revenue was picking up and, once you made the proper adjustments, the company was flirting with profitability. Their strong balance sheet and positive cash flow had seen them through the worst of the downturn and gave me the confidence to hang on for an eventual recovery.

In 2016, Geodrill’s fortunes improved significantly. They were making money again and earnings for the year came in at 17 c per share. The stock price rocketed up from its lows of under 50 c to a peak of around $2.50 by the end of the year. In hindsight, this would have been a good spot to take my profits and run, but things were looking good. Even after the share price gains, the valuation was still relatively modest and the company was actively adding new rigs to its fleet and expanding into new territories. This had metamorphosed from a turnaround situation into a potential high-flying growth story.

I held on.

However, the early gains were not followed by further fireworks. Profits plateaued at this level and so did the stock price. For a couple of years, the stock price meandered around the $2.00 mark. Profits were decent and the valuation was low enough to keep me invested. With low debt levels, a low p:b value and a reasonable p:e ratio, I saw no good reason to sell and the stock gave me a nice exposure to the gold mining industry and the price of gold that I didn’t otherwise have.

Then, on Jan 1, 2018, the Burkina Faso government jacked up its withholding taxes and the stock price started to slide. The company does quite a bit of business in the country and the higher withholding taxes on the top line lead to a punishing income tax rate of 61% in the first half. However, strong sales gains were overcoming the higher tax rates and earnings stayed strong through the first half of 2018. The higher taxes on the top line meant the company was a lot more sensitive to shortfalls in revenue though, and weaker sales in Q3 led to a large quarterly loss. In the final analysis, despite record high sales in 2019, taxes ate up almost all of Geodrill’s profits for the year and the company limped out of the year with a profit of only 2 c per share. The market was not impressed and the stock ended the year down significantly from where it began. I wasn’t overly impressed either and finally decided that I had enjoyed Geodrill’s company long enough.

Longer term, I think the company still has promise. By some measures this is still a value stock. It is trading in-line with its tangible book value. The balance sheet is strong and they have a modern fleet of drilling rigs to win future business with. Profitability has been hurt by this tax change, but the company may be able to partly address this by trying to move more of its operations out of Burkina Faso and into other Western African countries. Alternatively, if the price of gold shoots up, as many gold bulls believe it will, then a surge in drilling activity could more than compensate for the higher tax rates.

So this is not a high conviction sell. However, after staying along for the ride for the past 6 years, I do not particularly want to stick around for the next 6. I sold my shares and will be moving this money into other opportunities as they present themselves.

Full Disclosure: I do not own shares in Geodrill.