Foraco International ( Toronto - FAR ) -- Outlook Improves

Foraco (FAR.to $2.50) appears on track to report relatively poor Q4 results.  The company is the leading provider of high end drilling services used by mining companies to delineate potential targets.  Since the reserves haven't been exploited yet, drilling usually occurs in remote areas that require special expertise and original thinking.  Rates generally are elevated.  And demand tends to remain steady despite fluctuations in spot market commodity prices.  Mining companies normally expand their reserve base in a regular fashion.  Approximately 75% of Foraco's sales are provided by major mining companies.  So-called junior operators are more likely to cancel projects due to their reduced access to capital.  Foraco's performance nosedived during the second half of 2012 despite its relative strengths.  Worldwide demand for minerals skidded as third world economic growth stalled.  Foraco additionally suffered from management mistakes at its Chile subsidiary.  Those factors likely impacted December period results, as well.  A negative comparison is likely in the quarter.

New contracts are being signed at a solid clip.  A large portion of Foraco's contracts come up for renewal in the fourth quarter.  It appears the company has been successful in arranging work for most of its fleet of drilling rigs.  Prices probably are lower due to the industry's persistent weakness.  But a solid showing appears attainable in 2013, nonetheless.  Results will be reinforced by a series of acquisitions Forcao completed last year.  Those transactions took place after the industry declined, enabling Foraco to sign the deals at attractive prices.  Organic growth is likely to fall 10%-20% in 2013.  But overall sales are poised to increase 10% due to the acquisitions.  Income could advance 33%, bolstered by a return to profitability at the Chile subsidiary.

The long term outlook is uncertain.  If the world economy keeps struggling for several years the demand for commodities is certain to remain muted.  Even so, these shares could rise in value as Foraco's market share expands and free cash flow is invested in more accretive acquisitions.  If the "New Abnormal" winds down a more vigorous showing is possible.  Our projections assume a modest performance in 2013 as the U.S. and Europe endure an adjustment process to their government finances.  Once that foundation is established growth could re-accelerate.  In 2-3 years sales could reach $500-$600 million to support income of $.50-$.60 a share.  Applying a P/E multiple of 15x to the low end of the range suggests a target price of $7.50 a share, potential appreciation of 200% from the current quote.

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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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Foraco ( Toronto - FAR ) -- Order Rate Moderates

Foraco (FAR.to $4.00) reported excellent on target Q2 results.  Bolstered by an acquisition (51% of Brazil based Servitec) revenues improved 36% to $106.6 million.  Organic growth was 19%.  Non-GAAP income widened 33% to $.12 a share.  That improvement was impacted a higher tax rate, which is likely to persist in upcoming periods.  More work is being performed in higher tax countries.  Foraco maintained its operating rate at 76% in the quarter.  The rig count increased by six to 290 altogether.  Pricing was little affected because most work was performed under long term contracts.  Some activity was delayed, however, due to weak economic conditions.  The next round of bidding is slated for the fall.  Preliminary indications suggest order rates will moderate, although growth is likely to be sustained in most key mining regions.  Price hikes probably are a lost cause but significant discounting isn't anticipated.  Foraco remains the industry's high end leader. 

We are lowering our 2012 earnings estimate by a nickel to $.50 a share.  Higher taxes and slightly reduced margins likely will prevent income from accelerating sequentially over the rest of the year.  The new unit in Brazil could deliver some countervailing impetus, though.  We've reduced our 2013 estimate by the same amount to $.60 a share, reflecting the muted outlook.  Foraco is poised to benefit no matter which way the industry turns.  If China and other emerging nations lift commodity demand, earnings should improve directly.  And if conditions stay depressed, attractive acquisition opportunities could emerge. 

In 2-3 years income could reach $.75-$.95 a share.  Applying a P/E multiple of 12x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 150% from the current quote.

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Foraco ( Toronto - FAR ) -- Growth Intact

Foraco (FAR.to $4.85) reported excellent on target Q1 results.  Earnings climbed 50% to $.12 a share.  Sales improved 35% to $88.2 million.  Utilization rates improved by one percent to 71%.  Pricing improved, as well.  Backlog expanded in the quarter, setting the stage for additional gains in future periods.  Foraco purchased 51% of Brazil-based Servitec at the end of April.  That operation will be consolidated for two months in Q2.  A modest financial lift is expected right away, with bigger contributions possible down the road.  Incoming orders remain robust despite the recent drop in commodity prices.  Foraco drills exploratory wells for mining companies to delineate prospective deposits.  That work tends to be less volatile than actual production.  Further gains appear likely in 2013 as Foraco capitalizes on its expanding backlog and the Servitec business builds momentum.  Longer term, the company's niche water drilling business could become a more significant contributor.

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Foraco ( Toronto - FAR ) -- Scouting for Mineral Deposits

Foraco ( FAR $4.75) is a leading provider of exploratory drilling services for mining companies.  The company is hired by resource producers to delineate potential targets, estimate the degree of difficulty involved, and resolve any water issues.  Foraco operates about 200 rigs around the world.  It trains and provides its own crews, which generally are in short supply due to surging exploration activity.  Industry spending has expanded more than 200% over the past decade, fueled by booming demand for metals in Third World markets.  Foraco added nearly another 100 rigs in March when it purchased 51% of a major drilling services provider in Brazil.  Approximately 85% of revenue is generated by contracts with major mining companies.  The balance is derived from smaller operators that typically sign short term deals, enabling Foraco to keep its crews busy between major engagements.  More long term contracts are being signed, which is bolstering revenues and margins by reducing downtime.  Demand for exploratory drilling is continuing to grow despite the threats posed by economic uncertainty and volatile commodity prices.  That trend is apt to continue as consumption of metals outstrips production over the next several years.

Foraco specializes on the most technically challenging targets.  That's enabled the company to earn above average margins throughout its history.  It now is helping to expand market share, as well.  Like in the energy business, new discoveries increasingly are being found in remote locations that involve specialized talent.  In 2011 South America accounted for 42% of revenues; Africa, 28%.  Russia and Canada represent most of the balance.  Foraco has established a presence in those geographies through a combination of internal growth and effective acquisitions.  Most of those transactions, similar to latest deal in Brazil, involved purchasing a partial controlling stake to begin with.  A few years later, an option to buy the rest was exercised. 

Growth has been explosive.  Sales and earnings were unchanged in 2009 following the worldwide banking crisis.  Sales climbed 37% in 2010 as the industry regained its footing.  Another 84% gain was registered last year.  Earnings recovered from a temporary dip in 2010, jumping 162% to $.34 a share last year.  Backlog expanded 44% to $418 million, laying the groundwork for another strong performance in 2012.  Bolstered by the recent acquisition in Brazil, we estimate sales will improve 38% to $415 million to provide earnings of $.55 a share (+62%).

In 2-3 years income could attain $1.00 a share on sales of $600 million.  Applying a P/E multiple of 15x to those earnings suggests a target price of $15 a share, potential appreciation of 215% from the current quote.  A higher valuation is possible if environmental stress creates water shortages in Africa or elsewhere.  Foraco currently generates 5%-10% of sales by drilling wells for drinking water.  That business has the potential to exceed mining over the long haul if global warming creates substantial droughts.  Management owns 42% of the stock.  Foraco is based in Marseilles, France.

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