Foraco International ( Toronto - FAR ) -- Burns the Midnight Oil

Foraco International appears on track to produce good on target Q4 results.  The company is a leading provider of drilling services used by mining companies to identify new deposits.  More than 75% of its business is derived from major mining companies.  Those companies are better capitalized than so-called junior operators, and while they have scaled back in the face of declining economic activity their exploration efforts tend to remain consistent over time.  Even the majors deferred projects and cut back spending in other ways during the September period.  That caused Foraco to operate at 65% of capacity, instead of a predicted 75% rate.  Foraco works in both the northern and southern hemispheres, so some of its rigs always are idle due to weather conditions. 

Fourth quarter performance probably will dip sequentially due to the holidays, as well.  A 55% utilization rate seems realistic, in light of the fact overall industry conditions remain sluggish.  Budgeting plans now are being set for 2013, though, and Foraco's customers have begun to move forward now that conditions have stabilized, albeit at a reduced level.  Pricing is apt to be lower than in the past.  But Foraco focuses on the high performance end of the market where competition is less intense.  So decent margins are likely to be sustained.  Last year the company purchased 51% of a Brazilian driller.  The final 49% is expected to be bought out at the end of 2012.  Those revenues already were reflected in the company's accounts.  But the incremental earnings will be included now, too, bolstering bottom line results in the year ahead.

We estimate that income will rise modestly in 2013 to $.40 a share.  A year of consolidation could improve Foraco's competitive position, laying the groundwork for a stronger advance if the mining industry returns to normal in 2014.  Demand for metals is virtually certain to rise over the next decade as emerging economies mature.  At the stock's current price substantial appreciation potential could be realized.

 

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