Geodrill Ltd

TSX:GEO

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Wednesday, May 12 at 10:30 a.m. Eastern Standard Time and is being broadcast live via the Internet.During today's call, management will make statements regarding management's expectations for the company's future financial and operational performance. These statements are considered forward-looking statements. Each forward-looking statement speaks only as the date of this call, and actual results may differ materially from management expectations for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed from time to time in the company's SEDAR finding.I would now like to turn the call over to the President and CEO of Geodrill Limited, Mr. Dave Harper, who will review the company's operations and performance of the quarter. Geodrill's CFO, Greg Borsk, will then give us a more detailed review of our first quarter financial results, followed by an outlook from Mr. Harper.I will now turn the call over to Mr. Harper.

[David Michael Harper, President, CEO & Director]

Thank you, operator. Good morning and welcome to Geodrill's Q1 2021 Financial Results Call. I hope you and your families are staying well. As I report to you today from our head office in Accra at Ghana, I'm cautiously optimistic of the return to normalcy in coming months as vaccinations roll out, also look forward to seeing our analysts and shareholders again in person in due course.Today, I'm pleased to report Q1 was an exceptional quarter. In fact, it was our strongest ever in the history of this company. As reported earlier today, we generated record quarterly annual -- quarterly revenues of $30.7 million, which is a 70% year-over-year increase. We recorded EBITDA of USD 10 million or 33% of revenue, which is a 350% year-over-year increase. We realized strong profitability, significantly increasing net earnings to USD 5.7 million. We generated a return on capital employed at 22% and a return on equity of 17%. We also increased rig utilization to 75%, up from 50% a year ago.Throughout the quarter, we continued to sharpen our focus on our capital markets objectives as we undertook strategic initiatives to drive the long-term growth of the company. We leveraged opportunities by continuing to diversify geographically and increasing our revenue exposure beyond the shores of West Africa to Egypt in North Africa and Peru in South America. We also continued to benefit from a robust exploration environment, as evidenced by the extension of contracts in our core operations in Ivory Coast, Burkina Faso, Ghana and Mali.Throughout the quarter, the company also made significant strides towards meeting its environmental, social and governance objectives. Geodrill has always considered our ESG initiatives first and foremost and at the center of everything we do. Operating in the mining sector, our impact on the environment has been a key focus of the company as we continually strive to improve the way we operate. Our social impact has been focused on the communities we work in by giving back to the orphanages, schools and shelters but also making sure we transfer the expertise and knowledge of our most experienced employees in developing local content.During quarter 1, Geodrill took steps to systematically integrate ESG climate and broader sustainability factors into our operations beginning with energy solutions, including converting the company's head office in Accra at Ghana over to solar power and taking this facility 95% off grid.In summary, Q1 was a defining period for Geodrill. It is a quarter in which we proved our strategy is working and that now is the time to accelerate it. I'll now turn the call over to Greg. Thank you, Greg.

[Gregory Borsk, Chief Financial Officer]

Thank you, Dave. As a reminder, all figures are reported in U.S. dollars. The company generated record revenue of $30.7 million in Q1 2021, an increase of $12.7 million or 70% when compared to $18 million in Q1 2020. This is a significant achievement for the company. The company's revenue of $30.7 million also represents an increase on a quarter-over-quarter basis of $6 million or 24% for Q1 2021 compared to Q4 2020.A strong gold price and strong industry tailwinds continued to drive demand for our drilling services. A sustained gold price in and around $1,800 supports strong activity. The junior mining companies have raised significant capital for exploration, while the intermediate and senior mining companies continued to generate significant cash flow from their operations and are expanding their exploration budgets.The gross profit for Q1 2021 was $9.6 million being 31% of revenue compared to a gross profit of $3.1 million being 17% of revenue for Q1 2020. The company realized record EBITDA in Q1 2021 of $10 million being 33% of revenue compared to $2.2 million being 12% of revenue for Q1 2020. The company also realized record net income for Q1 2021, a $5.7 million or $0.13 per share.To keep pace with the increase in activity in Q1 2021, subsequent to quarter end, we increased our credit line to $10 million and secured a new medium-term loan facility of $6 million.Cash and working capital remained strong. We ended the quarter with cash of $5.9 million and still have $10 million available on our banking facilities. Our working capital in Q1 2021 was $39.6 million, and we believe we are well positioned to keep up with the increased demand.At this point, I will turn the call back to Dave.

[David Michael Harper, President, CEO & Director]

Thank you, Greg. It is clear from -- our financial operational performance is a testament to the strength of our business and the demand of our drilling services. Before we move to the Q&A portion of the call, I would like to provide a brief outlook for the remainder of 2021.We entered 2021 with strong market fundamentals, robust demand for drilling and strong tailwinds to drive another strong year. Our edge is our strong -- our style of operating. Geodrill's aim has been to build a company to stand the test of time by differentiating itself from its competitors.To digress a little here, when I arrived in Ghana in 1998, I had the privilege of meeting legendary boxer, Azumah Nelson, and we became good friends. Now most boxing fans and historians would know the name Azumah Nelson very well as he was a triple crown WBC Super Featherweight champion.Nelson's story is not that different to Geodrill's. He was relatively unknown in Ghana when in 1982, he was the decisive underdog in a WBC fight held at Madison Square Gardens. Though he lost on that occasion, his [ talk ] as a boxer arose to international prominence, and so he stuck with it. And 2 years later, he would eventually become the world champion.And as a champion, he reigned for the next 11 years, undefeated and never faltering and in doing so, had the respect from the entire boxing community worldwide. And though he has long since retired, Azumah is still today considered one of the greatest pound-for-pound boxers to have ever entered the ring.Now all of this captures one simple truth, and that is that every champ, which one's the contender. And like Azumah, Geodrill sets audacious goals every day striving to push limits of our potential and our unwavering commitment to our customers and our stakeholders.When Geodrill went public 10 years ago, we were the little guy. And along the way, we certainly had our share of trials and tribulations. But today, rig for rig, pound for pound, Geodrill is demonstrably punching above its weight certainly compared to its peers. And I do believe that today's Q1 results to be a testament to this.As I look ahead, I'm confident that Geodrill has the right platform and is investing in the right areas at the right time. We are deepening our competitive advantage and setting the foundations for sustained profitable growth. Thank you.And so this concludes today's prepared remarks. Thank you very much for participating in today's call. We are now pleased to -- we'll now be pleased to answer any questions that you may have. At this point, I will ask the operator to provide directions to anyone who has a question.

[Operator]

[Operator Instructions] Your first question comes from the line of Anthony Prost from Stifel.

[Anthony Prost, Associate]

Wanted to start off by asking about your activity in South America. So how many drills do you currently have turning? And I wanted to know if -- given the strong price movements for base metals, if you could provide some additional color on your bidding.

[David Michael Harper, President, CEO & Director]

So during the quarter, we basically just -- we really -- just before the end of quarter 4, we started in our first [ trial ]. So we didn't even get on the radar in quarter 4. Quarter 1 was the first month of activity that we had.We have 3 rigs currently in South America and one of those rigs is employed. So it's -- at this point in time, it's starting as you would expect any normal start-up. It's -- it will be a case of 30% utilization. And then as a -- as the other rigs come online, the utilization will increase.What I can say is that, from our initial kick-off contract, the customer is quite happy -- extremely happy actually with the work and the performance and the cost per layer. And we have -- had recently had that contract extended up well and truly over and beyond what was originally proposed. So that's now turned from a short-term contract and I guess, a [ start-up ] contract, if you like, to something much more substantial. It is a base metals project. And of course, base metals are kind of in vogue at the moment.The other thing I can say is that we are receiving a lot of interest. Whenever there's a new driller in town, you get -- you always get the opportunity, right? So we're bidding a lot of jobs at the moment, and I expect to see full utilization of those 3 rigs directly like imminently in the coming months. And beyond that, we'll then probably take a strategic decision as to the need to introduce more capital to service, that -- what we believe will be a fast-growing market for us.

[Anthony Prost, Associate]

Great. And switching gears a little bit. It seems that ESG has started increasing in importance for you right now. And I wanted to know, do you have like a formal plan in place? And if not, when can we expect one, given the growing importance both for you and for investors?

[David Michael Harper, President, CEO & Director]

Sorry. Just repeat the question, Anthony. I didn't catch that.

[Anthony Prost, Associate]

Sorry. Just wanted to gain a better understanding of your -- the -- how big a plan do you have in place for ESG. Like do you have a formal plan in the works right now and when can we expect one?

[David Michael Harper, President, CEO & Director]

So ESG is becoming -- and ESG reporting is something we're going to hear more of in the -- imminently. It's happening. You can't turn on your television today without -- and you don't even necessarily need to be on the business channel to see that -- probably 10% of airtime is now being taken by the ESG stories.ESG is not a new thing. It's been getting around for a long time. Although it's probably, in most cases, been under the guise of CSR. So Geodrill, we believe that doing -- we believe in doing what is right, not just doing what is required that the core of our vision and our values is a commitment to communities and environment in which we operate.So for us, corporate responsibility means running our business with honesty and integrity. All of that stuff that we've been doing for many, many years, it's basically taking on a kind of a different format these days, and so we've recognized that. We've realized -- we recognize how important that is. We recognize that's -- unless company is ESG compliant and ESG reporting that they will miss out on investment dollars.So it's important now that we take our [ erstwhile ] already robust CSR programs and essentially ramp them up into ESG. The program has been going on for about -- it's always been going. It's just that we've never truly operationalized it or formalized it. And so it is our intention now to be ESG reporting by the next quarter.So as -- until now, if ever we have done sort of things in the community, we've just loaded them on our website and left it at that. But now there seems to be more of a focus and attention being placed on reporting. And of course, reporting agencies are all getting involved. And at the moment, we're kind of at the stage where we're just positing ourselves as how we deal with that and how we truly measure those already great stacks that we've been producing.Just by example, in this last quarter, as I said, we -- on my notes, we solarized the Accra office. That's not a small exercise. That's a significant exercise, taking a commercial building and taking it completely off grid.Aside that, in the same quarter, we've -- on a project that we were previously working on, which was a safe shelter for victims of domestic abuse, one of our projects called Pearl Safe Haven, where we previously built the upper story for them. And the following quarter, we drilled a water well for them. Well, now we're looking at it and saying, "Well, perhaps we need to turn that water into potable water." So we've just bought them in this quarter a purification plant.That's -- I'm just giving you an example of some of the projects as I'm running through them on the list here that I'm looking at. We're very strong on sports and education, farming projects. Yes, it never seems to stop. And now essentially, we're just taking our CSR programs, and we're ramping them up and putting them on steroids and converting them to ESG and reporting. And we're looking forward to it because we're in a great position.The good news is we've already got all of this stuff already done, and we've received enormous amount of accolades from -- one from the President of Ghana to the former Australian High Commissioner who is out here. And yes, I think we're in pretty good shape. I think Geodrill has always been a company that has been best in class. And so what we do and how we do it as far as ESG goes will not be any different.

[Gregory Borsk, Chief Financial Officer]

Let me just quickly add on that, too, and Dave, excellent job. We're very excited about ESG. And as he said, we've done this since 1998, we've invested in the communities. And so for us, it's just -- I think what you'll see as we roll out Q2, Q3 and the other quarters, just a bit of a different reporting and maybe a little more into -- on how we train our local people and kind of the local content in not only what we get back to the communities in terms of CSR, but also transferring talent and skill sets. So we're pretty excited about the ESG initiative.

[Anthony Prost, Associate]

Perfect. One more question before I pass the line, just a small housekeeping one. Can you remind me how many drills you're sending to Egypt?

[David Michael Harper, President, CEO & Director]

Two. Have been sending since. They're on the way. They're on the high water as we -- high seas as we speak.

[Gregory Borsk, Chief Financial Officer]

And Anthony, that's initial, too. So I mean the plan is just like Peru and like every other country that we've run into. We get into a country. We get a contract. We prove ourselves. We deliver. And then we also use some of that local currency, et cetera, to kind of continue to leverage and build out our presence in that country. So I would just say we -- 2 rigs are being -- have been sent, and that's just the start.

[Operator]

[Operator Instructions] Your next question comes from the line of Ahmad Shaath from Beacon National Securities.

[Ahmad Shaath, Research Analyst]

Congrats on a great quarter. I guess, Dave, my first question on the South American front. Are we purely focused on Peru? Or how are you seeing the landscape there and other countries? And potentially, is there any discussion for other commodities as well? Or is it too soon to tell?

[David Michael Harper, President, CEO & Director]

So we have a completely open mind. We've already visited one South American country where we have incorporated with the intention that we will be expanding into that country imminently, but I just -- at the moment, I'm actually shorter rigs. I'll be honest. It's the only reason we're not there. We see that, that country has enormous potential.And we visited another country where we've also actually been tendering. So we actually love South America. If you look at South America, and it was connected to West Africa. So drilling in West Africa, drilling in South America is actually quite similar. The ground conditions are quite similar, the terrain is quite similar. It's just a different continent. But it's all part of the strategy of growing up and growing out.We recognized a long time ago we need to kind of ramp this up a bit. And it's not that -- it's actually -- it's all being driven by customer demand. Happy customers in West Africa, 2 friends, still 2 friends, still 2 friends. And suddenly, you go from 1 rig to 68 rigs in 20 years. Well, South America is really -- because customers of ours in West Africa have turned up working on projects in South America. They realize that there's an acute, let's say, deficit in the level of service that is on [ alpha ].And one thing that we do in West Africa is provide first-world drilling. We're basically a first-world drilling service in a developing nation. And I think that what happens in a lot of cases is contractors tend to think -- well, because I'm in a developing nation, and it tends to kind of garner this near enough is good enough approach. And that's just not the way we operate.And folks who worked with Geodrill in West Africa, that then have to go to South America and work with some of the contractors over there, I think they'll be bitterly disappointed, and that's where the opportunity came for us. Some of our customers said, "Look, get some rigs over here. We think there's a market here." And I have to agree with them. It's looking really, really interesting. Really, really interesting.And it's all part of also diversifying away from gold. We're already 90% gold and some battery metals, doing a bit of lithium drilling at the moment. But there's not really a lot of base metals in West Africa to drill for. If you go to Liberia, in countries like that, there is. But those markets just don't seem to be working that well at the moment.So for us, there's a very viable market in South America and early stages. It's just the altitude. That's the challenging thing. We're at 6,000 meters and things are looking up [ greatly ].

[Ahmad Shaath, Research Analyst]

That's great to hear. So what I gather from you is like you guys are tendering on 3 countries in total in South America at the moment, which is a good diversification for you guys.I guess, secondly, maybe more for Greg, just on the working capital drag. If I understand correctly from the language in the MD&A, it looks like you guys will be just doing the collection just for the quarter, so we should expect a nice bump in cash flow in Q2.

[Gregory Borsk, Chief Financial Officer]

Yes, exactly. I mean if you look at the working capital, the significant increase was the increase in the trade receivables, and that's pretty typical. The industry, some of the accounts wait until after quarter ends to pay. So we -- collections subsequent to the quarter were very good.So -- but again, we're busy. We continue to be busy in Q2. So -- but I think you're right. You will see the working capital, mainly the receivables, normalize. And that was kind of the increase in working capital in Q1. So...

[Ahmad Shaath, Research Analyst]

That's great. And last one for me. Dave, it's probably -- you mentioned you're short of rigs. I mean what is the internal thinking of discussions that you guys are having on expanding the rig fleet? And I'm not sure how far have you gotten along in discussions with your supplier, I guess, Sandvik, and their availability to provide rigs and the lead times.How are you seeing that? And what do you -- what should we consider as your options to grow your rig fleet? And is that the bottleneck for you to get more contracts in South America specifically?

[David Michael Harper, President, CEO & Director]

We haven't reported it yet because we're still in the planning stages, but we've actually got 8 rigs in the pipeline. So 4 of those rigs are being built in country at Geodrill, at our facility. 4 of those rigs are being sourced externally in kit form, and they will be assembled in country by us. And there's a number of reasons for that. The -- okay, drag into the esoterics a bit here, but maybe that's another conversation another time. But for the meantime, high level, 8 rigs currently being planned, exploration rigs.

[Gregory Borsk, Chief Financial Officer]

And Ahmad...

[Ahmad Shaath, Research Analyst]

Sorry.

[Gregory Borsk, Chief Financial Officer]

Finish up.

[Ahmad Shaath, Research Analyst]

No, no. Go ahead, go ahead.

[Gregory Borsk, Chief Financial Officer]

No, I was just going to say -- and Ahmad, that's just very consistent growth. So about 8 rigs, you will see kind of spread out over the year, the way we do things. And with 68 rigs already and the last rig we put in order was last year, which will take delivery of at the end of Q2. And it depends on the type of rig and what we're seeing from our clients.So certain rigs, definitely, there's more demand. So those are the ones that we have in the queue and we're lining up. And as Dave said, there's a few in the workshop that were busy. You see the -- and this is one of the things I try to communicate in the MD&A is the Geodrill, the -- our secret sauce for our success has been reinvesting in our balance sheet. It's either reinvesting in our PPE or reinvesting in our inventory, and you can see healthy levels of inventory support activity in Q2, a lot of rigs. So we're really ready to go. So hopefully, that helps.

[Ahmad Shaath, Research Analyst]

No, that's great to hear, and I appreciate that color. Congrats again on a huge quarter.

[Operator]

There are no further questions at this time. I'll turn the call back over to Mr. Dave Harper.

[David Michael Harper, President, CEO & Director]

And if there's no further questions, I'll thank everybody for making time to get on the call today. Have a wonderful day.

[Gregory Borsk, Chief Financial Officer]

Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.