Geodrill Ltd

TSX:GEO

Earnings Call Transcript 2021-Q2

[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 Thursday, August 12 at 10 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 of 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 filings. I will now turn the call over to the President and CEO of Geodrill Limited, Mr. Dave Harper, who will review the company's operations and performance for the quarter. Geodrill 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'll now turn the call over to Mr. Harper. Please go ahead.

[David Michael Harper, President, CEO & Director]

Thank you, operator. Good morning. I hope you and your families are all staying well. In the first half of 2021, Geodrill recorded its highest ever quarterly revenues underpinned by strong market fundamentals, robust demand for drilling and a proven business model of operating a fleet of high-performance rigs. In quarter 2, we generated revenues of USD 30.6 million, that's up 47% year-over-year. We continued to realize strong profitability, increasing net income to USD 4 million. We generated a return on capital employed of 21% and an ROE of 16%. We continue to maintain high utilization rate of 70%, supporting an increase in pricing power. And we increased our rig fleet to meet the strong demand in drilling activity. We continue to benefit from a robust exploration environment, evidenced by extensions of contracts in our core operations in Ivory Coast, Burkina Faso, Ghana and Mali. We also continued to diversify geographically increasing our regional reach as we mobilize 2 rigs to Egypt and expect to be drilling in this current quarter. In addition to expanding our rig fleet, Geodrill also expanded its client base to include a mix of majors, intermediates and juniors, which has contributed to the increase in overall drilling activity and a well-balanced mix of drilling services. Strong tailwinds and a solid balance sheet positions us well to continue executing on our growth objectives for the remainder of the current year. I'll now turn the call to Greg Borsk to comment on the quarter's overall financial performance.

[Gregory Borsk, Chief Financial Officer]

Thank you, Dave. As a reminder, all figures are reported in U.S. dollars. The company generated revenue of $30.6 million in Q2 2021 being an increase of $9.7 million or 47% when compared to $20.9 million in Q2 2020. This is a significant achievement for the company as this is the second highest quarterly revenue ever recorded in the company's history. The increase in revenue is a result of the increase in demand for the company's drilling services. A strong gold price has increased cash flow of mining companies and their exploration budgets, which in turn is driving increased drilling activity. Geodrill has benefited from increased exploration budgets over the first half of the year and is also well positioned for the second half of 2021. The gross profit for Q2 2021 was $8.3 million and 27% of revenue compared to a gross profit of $6.6 million and 32% of revenue for Q2 2020. For the 6 months ended June 30, 2021, the year-to-date gross profit was $18 million or 29%. The EBITDA for Q2 2021 was $7.4 million and 24% of revenue compared to $6.5 million and 31% of revenue for Q2 2020. Overall, the net income for Q2 2021 was $4 million or $0.09 per share compared to $3.3 million for Q2 2020 or $0.07 per share. At this point, I will turn the call back to Dave.

[David Michael Harper, President, CEO & Director]

Thank you, Greg. Before I go to the Q&A portion of the call, I'd like to provide a brief outlook for the remainder of 2021. Build by strong oil prices and increased utilization, our outlook for the second half of the year remains exceedingly positive. We ended the second half in 2021, focused on growth and being drill ready. We continue to accelerate our growth by expanding our geographical footprint into South America and Egypt and strengthening our competitive advantage to drive profitability. We are also strengthening our leadership in building a diverse, sustainable drilling company that encompasses all of our ESG initiatives. I'm proud to say that the Geodrill team has made us a serious contender in our industry, equipped with a modern fleet of rigs, a clear vision and a solid financial foundation. Geodrill is ready to achieve validations goal to be recognized as the customer reform partner in providing drilling services in West Africa, the African copper mill, Peru and ultimately outperforming our competitors. Thank you for participating in today's call. We'll now be pleased to answer any questions, which you may ask. At this point, I would like to ask the operator to provide directions for anyone who wishes to ask a question. Thank you.

[Operator]

[Operator Instructions] Your First question comes from Anthony Prost, Stifel GMP.

[Anthony Prost, Associate]

I wanted to ask you a little bit about, first off, the impact of cost inflation because it seems to be a theme for a lot of companies right now. So things like labor, fuel. Can you speak a little bit more about how you feel cost inflation is going to impact you in the second half of the year?

[David Michael Harper, President, CEO & Director]

We're seeing costs rise. But to offset that, we're seeing drilling prices increase as well. So I think the result will be somewhat benign.

[Gregory Borsk, Chief Financial Officer]

Just to add to that answer, too, Anthony, just we said all salaries and that are done on an annual basis. So that's already been stacked for 2021. So we -- you don't expect a significant increase in the second half of the year.

[Anthony Prost, Associate]

Perfect. And have you seen any of these supply chain issues affecting your own inventory because like it's my understanding that you provide yourself on having a well stockpiled inventory of drilling rigs, things like that. I wanted to know if there's been any impact on your ability to source those inputs.

[David Michael Harper, President, CEO & Director]

Not much so ever, Anthony, it's actually -- you're correct, we do pride ourselves on that. I can honestly say that during the entire COVID period, we lost 0 time through lack of availability of inventory. We're almost 30% or 40% self-sufficient at Geodrill. So we -- it's one of the things that is the Geodrill difference.

[Gregory Borsk, Chief Financial Officer]

And you actually see that, Anthony, it's actually the opposite for us. If you just track the company back the last few quarters, we've been increasing inventory. So if you look at where we are at June 30, 2021, we have inventory of $25.5 million. And that inventory is in the countries that we operate. It's declared customs, it's ready to go, and this is why we're able when a large drill program comes up and we can tender on it, we're ready to go. We have that inventory in place. So we looked ahead and actually brought that out and have certain significant and sufficient inventory in place.

[Anthony Prost, Associate]

Perfect. And one last question for me before I pass it over. I saw that you announced a new underground contract. I wanted to get a better idea of how you see that part of the business evolving over the coming years, do you expect it to be a bigger part of the company? And also, if you could provide any sort of color on the margin profile, would be appreciated.

[David Michael Harper, President, CEO & Director]

So we ended the underground market in 2017, I believe it was, and it was the right decision for us to do that. It's the way of us expanding our services and focusing on mine-based drilling, which is -- it seems to be more countercyclical. And we have a fleet of 6 underground drills. Essentially, what this does is it take in entire fleet. We have 100% utilization now across that particular unit. At this point in time, we need to take a decision, do we need to expand it? And if we look at the standard 0 operating model, it's based on each time we get 70% utilization. We start to expand the fleet. And whilst we have this year already plans to expand the exploration surface fleet, this now accelerates our thinking in terms of adding to the underground fleet. In terms of margin, well, historically, underground margins are lower than surface margins, and that's because of the larger longevity kind of style of production drilling as opposed to exploration drilling, which is typically characterized by 3 to 6-month contracts, underground contracts are typically characterized by longer term. So lower-margin style work. But in the overall scheme of things, I don't expect it's going to affect us greatly. It will actually just improve the business model. We'll see increased revenues. And for that particular division, we will see lower margin. But overall, the blended margin is still kind of in the order of 25-plus percent across all of the business units of the company.

[Operator]

Your next question comes from Ahmad Shaath, Beacon Securities.

[Ahmad Shaath, Research Analyst]

I guess my question is maybe a little bit of an update on the South American initiative. How many rigs do you have out there like now and growth potential like how many rigs are you shipping, any bottlenecks? Just a general update on the South American expansion.

[David Michael Harper, President, CEO & Director]

So I can now say that we've got a quarter of drilling behind us in South America. We actually started into our first hole of last week of December. So we just treated that as a bit of a training month. The quarter went very well. And the customer gave us an initial 3-month contract to see whether we would be able to deliver on what we say we would. Customer's very happy. Contract has been increased fourfold. And they're a very nice testimonial for us. And I think what's important is we're hitting their targets, and we're doing them on the budget. And something that hasn't been accomplished by that particular company in the past. So Peru, as far as that particular project is concerned is we couldn't be happier with that outcome. As far as the country Peru is concerned, we've been dealing with COVID, and we have been dealing with a contested election. Revenues obviously, it is what it is. I mean we are, where we are. It's something that will resolve itself in time. Some countries are affected more so than others. Peru is certainly not alone in saying that it would have affected most companies' operations out there. We've actually done reasonably well. We haven't lost any time because of COVID. We have had a couple of cases of COVID. We managed to isolate them very quickly and get back to business. So we haven't had any adverse effects on that particular project. However, I would say that it has bought a couple of projects in terms of the tendering process on the whole, the other thing that has been going -- growing in the background has been this contested election. So the good news is that, that contestation election is now resolved. And regarding the atlas of the political faction, who we support or we don't support, we do now have some clarity as to who the President is. And I think that most international mining companies operating their are pleased to have a result. And as a result of that result, and we are currently receiving an elevated amount of inquiries and tenders. And as a result of that we're encouraged by that. So we've actually added to the fleet by adding on 1 additional drill. Even though we had 3 drills and only 1 of them was working, we see that as just being a short-term thing. We're bullish through and so bullish that we're actually on speculation, added 1 new rig to the fleet. So we're currently at 4 rigs, and we're at 25% utilization, which doesn't sound great, but that move will let us move very, very quickly. The most important thing we were looking for in South America is a soft start and a satisfied customer. And that's all we've checked those boxes. The trick is here going forward now is to increase our customer base. As we slowly start to roll out things like training and just the infrastructural working to some drill things of getting 3 rigs into the field and drilling and getting the vehicle up -- and tooled up and personnel up. Sorry for the long-winded answer, but it was not and/or yes, no, sort of quickie.

[Ahmad Shaath, Research Analyst]

No. That's a great update and it is what I'm looking for. Just to confirm, the 3-month contract whether it was extended by another year, did I catch that correctly?

[David Michael Harper, President, CEO & Director]

Yes, and open ended. So it's a fourfold increase in the initial contract. So what you were looking for was a customer that was basically saying that the actions speak louder than their words. Let's vote with our purchase order book to give you guys a bit more work and a fourfold increase in the initial contract, you couldn't be happier with that. We're very happy, right? We're very, very okay with that.

[Ahmad Shaath, Research Analyst]

That's great. And I guess you're satisfied with having 4 rigs on the ground right now given what you're seeing with the tendering activity. You think that will -- that's sufficient for now or any of the upcoming rigs that you're planning to sell to South America as opposed to West Africa?

[David Michael Harper, President, CEO & Director]

So we're looking at the current tendering landscape, if we were to win 1 or 2 of these jobs that we're tendering on would be totally maxed out. So we've got a comfortable start-up, fleet, initial fleet in country, I believe. And we certainly don't want to leave our potential customers wanting. And so as we speak, we plan our foot to grow the surface fleet. And some of that growth will find its way through to Peru based on how things play out over the next couple of months. But copper is not going down anytime soon and Peru is the second large producer of copper in the world. So political situations come and go, presidents come and go. COVID will come and go, but the need for copper will not go. It will only increase from here with all these rollout of electrifying vehicle market. We're very bullish on green metals. And we didn't go to Peru chasing gold. We drilled plenty of gold in West Africa. We saw it as a brand that in the overall scheme of things is strategic, geographical step out as much as it was a commodity mix.

[Gregory Borsk, Chief Financial Officer]

And then Ahmad, the point -- just quickly, the point to reiterate on that rig is we were able to secure that rig in Peru. So that's significant because as busy as we are in West Africa, like we can't really be sending rigs that are working in West Africa to Peru. So we are very fortunate to be able to add a rig locally and then you'll see the benefit of that through the economies of scale as once we get all those rigs to work. So significant [indiscernible].

[Ahmad Shaath, Research Analyst]

And is that the case for the other 3 as well?

[Gregory Borsk, Chief Financial Officer]

Yes. When we started off with...

[David Michael Harper, President, CEO & Director]

Go ahead. Sorry Greg.

[Gregory Borsk, Chief Financial Officer]

What was the question, sorry?

[Ahmad Shaath, Research Analyst]

I was just wondering -- The other 3 rigs, were they secured in a similar fashion or did you ship them out of West Africa?

[David Michael Harper, President, CEO & Director]

No, we shipped them out of West Africa. We had the opportunity at the time when we had the spare rigs. We don't have the spare rigs now. So the -- when a rig became available and the immediate market would present that rigs are identical to the rigs that we have, we're sticklers for the standardization model. If we look at our 70 -- what is now first quarter end, 70 rigs. Across that 70 rigs, we've only got 8 different type of rigs. And so the -- when a rig becomes available in the immediate market, it just fits so well with our model and standardization. So Russia was a total [indiscernible]. It becomes available in our market identical to the rigs that we currently have at some point in time, there's going to be the need for that rig so grab it. And so we did.

[Ahmad Shaath, Research Analyst]

And maybe a couple of more follow-ups, and then I'll jump back in the queue. The first is operationally from the first 3 months of operation, you're confident with your margin profile and operational performance to be similar of what you've been achieving over the years in West Africa. And secondly, any bottlenecks on acquiring new rigs, how is the lead time on buying your rigs from your favorite supplier in light of the logistics kind of bottlenecks around the world as well? And that's it for me.

[David Michael Harper, President, CEO & Director]

So we're operating in an unusual world, right, which is a COVID-stricken world. So the interesting thing that sort of sticks out when you look at today's numbers, I think the first thing, which you see is why was revenue flat quarter-over-quarter when in fact, we're basically citing that we have strong utilization. And I guess the question is, well, why that is typically a strong quarter in -- quarter 2 is usually stronger historically over quarter 1, why was it not the case this year? Well, coming back to my point of we're living in a very different world these days. Secondly, if you recall, we had the procuring out of these. We had a very, very strong Q4. That's our strongest Q4 ever on record. And I believe we have been actually at the time our strongest ever quarter of [indiscernible]. And then we immediately back to back that with a stronger again in quarter 1. So 2 very peculiar, very unusually strong quarters when you don't normally expect it. And that is to a large extent is sort of round up elastic band effect that you get when you release it because of the COVID slowdown. As we come into what is traditionally been our quarter 2, you would expect that you would naturally expect a slightly stronger quarter 2 than quarter 1. What was peculiar about this particular quarter 4 was that wet season came upon us a little earlier. So we did, in fact, have a very strong April, May. June was soft. And so whilst it was a solid result, it's certainly is high catching the fact that it was weaker than quarter 1. But on that, the -- what normally happens and what in fact is happening is when we have an earlier than usual wet season, the wet season is usually sooner than normal. And that is, in fact, the case. So whilst we had a soft June and a soft July, we're actually experiencing very strong orders, and we'll see an even stronger September. So what I'm saying with our guidance is that whilst Q2 was I think, a solid result, and you'll be expecting to follow up with a traditionally weak Q3. I think what you can look forward to, in fact, I know you can look forward to is a very solid quarter 2. In fact, it will at this point in time it's shaping up to be our best quarter 3 on that. As far as margin is concerned, and Greg could speak to this better than I can. We put in a extremely solid quarter 1 in the 30-plus range, but -- and we put in a $20 million, $24 million or $25 million this current quarter. A lot of these are just accounting issues where we get stock returns and things like this in the inventory. But Greg, would you like to just jump in and just -- I'm not sure if I'm answering that correctly.

[Gregory Borsk, Chief Financial Officer]

Yes. I think, Ahmad, on the margins, what you really want to look at is the year-to-date margins. Just like Dave said, through Q1, we were ramping up. And that January was -- we started off strong. The holidays and this is what Dave said earlier. In Q4, we had a very strong Q4 2020 because we have clients drilling up right up to the holidays and kind of even through the holidays. Typically, in Q1, it takes a while for clients to get back and ramp up after the holidays. Sometimes we don't get really growing until mid-January. What we saw in Q1 2021, which was a carryover from Q4 2020 as we saw activity, robust activity right at the start of June. I think we connected this when we did the Q1 call. So we had a very strong January 2021, and and that continues to ramp up through Q1 to with an even stronger February and an even stronger March. And when that happens, your margins are higher. In Q2, that Dave was saying is we started to ramp down in Q2. So even though the revenue quarter 1 and quarter 2 is kind of the same within $100,000 you started to head in the wet season a bit earlier. And that does affect the margin because we have -- you start to slow down, your revenue starts to slow down, but you still have some labor costs and demo costs and needs et cetera. So I wouldn't -- there is a bit of choppiness between quarters. But I think if you look at where we are through the first 6 months of 2021, we're very, very comfortable with our margins. Like a gross margin of 29% is stellar. The -- our revenue, if you look at the year-to-date revenue, we're at 58% increase through the first 6 months of 2021 versus the first 6 months of 2020. So again, I would focus more on the year-to-date and the fact that we're still very bullish on Q3 and Q4 and what we're seeing forward. So we think 2021 is still shaping up to be -- it's going to be a spectacular year for us.

[Ahmad Shaath, Research Analyst]

That's great color. What I was trying to get at is your margins in Peru, which we spoke about before, is that -- given your business model in West Africa, I was just wondering if you still believe that your margins in Peru given the pricing environment, how competitive it is you can maintain a similar profile in Peru as you ramp up there? I think the previous answer was yes, but just confirming if that's still the case given any changes in the landscape.

[David Michael Harper, President, CEO & Director]

No, that is the case. In fact, we're doing very well and very, very happy with the results. Exceeding our expectations. In fact, it's only going to do better. It's only going to do better as we get more economies of scale. So...

[Operator]

[Operator Instructions] Your next question comes from Brett Rosen.

[Unknown Analyst]

Nice quarter, congrats. I wonder if you can talk about your CapEx here. So I think I saw $3.6 million in the current quarter, which is just higher for you guys. It is just generally encouraging. But do you have any thoughts, I guess, on CapEx going forward, where that might be deployed? And also, I'm not sure I heard the answer on the last question, but what kind of delays are you seeing in procuring rigs right now.

[Gregory Borsk, Chief Financial Officer]

So we...

[David Michael Harper, President, CEO & Director]

Sorry, Greg...

[Gregory Borsk, Chief Financial Officer]

You go ahead, please.

[David Michael Harper, President, CEO & Director]

No, no, you've got the CapEx numbers in front of you the -- I can speak to the delays, but you've got the numbers quite demonstrated in there.

[Gregory Borsk, Chief Financial Officer]

Yes, CapEx -- okay, I missed this -- sorry, Brett, I missed the second half of the question, but CapEx is, as you know, the Geodrill model, we're very bullish on adding rigs to the fleet in that. It's kind of in our model. As Dave said, when we hit 70% utilization, we add rigs and when we add rigs, we add all the ancillary equipment, [indiscernible], rod carriers, order vehicles. So you'll see we -- through the first half of the year, CapEx was about $5.6 million. We also have some CapEx in our prepayments that as soon as those rigs are shipped to us, that will flip from prepaid into CapEx. So right now, kind of what we budgeted for the year in terms of redivisions and ancillary equipment, we'll right on schedule. We're a little behind, if you just look at the the PPE additions, but if you factor in what's in prepayments and which will all flip to PPE additions in Q3, we're right on target. So we're very comfortable with kind of our -- what we budgeted at the start of the year in terms of additions and where we are. And you'll see -- I don't know if you look at the cash flow. So what we've done is we've actually utilized some of our credit lines to make sure we have sufficient inventory, and we're able to keep on our path of adding PPE right now, if you look at the working capital, there's a bit of money tied up in receivables. As you're bridging in Q1 and what you're bridging in Q2, the receivables may either build or stay the same, our trade receivables and kind of that normalizes and you start to see that cash come in. So the point I'm trying to make is we're very fortunate that we have a strong balance sheet and that we can wait for certain things to normalize. We didn't let that hand string us. We were able to continue to -- continue on our path of adding PPE and inventory as we're extremely busy.

[Unknown Analyst]

Okay. That makes sense. I mean are you envisioning kind of this run rate for the first 6 months as more than what we're looking at for say, the next 6 months or the next year?

[David Michael Harper, President, CEO & Director]

Yes. CapEx budget, yes, we issued -- sorry, Greg.

[Gregory Borsk, Chief Financial Officer]

Yes. CapEx budget, yes. We tried to the CapEx budget, Brett, evenly throughout the year. So again, some of it is opportunistic if a rig comes up and it's available and it makes sense to us like the 1 in Peru, we'll grab it, but we try to -- our CapEx budget we try to spread out kind of evenly throughout the quarter.

[Unknown Analyst]

Okay. And are you guys seeing significant delays in rigs right now?

[David Michael Harper, President, CEO & Director]

From the manufacturers, yes. But we're fortunate, Brett, that we make a lot of stuff ourselves. So to the previous caller, I was saying we're about 30%, 40% sufficient -- self-sufficient within our [indiscernible] facility. And so what we tend to do is why we've seen tiptoeing and bring them to West Africa and kind of assemble them. So we are experiencing some delays, but I think our situation is much better than our competitors have in their way. Nothing that's going to affect business adversely there.

[Unknown Analyst]

And as far as deploying those, do you guys kind of plan this in advance or is it kind of opportunistic as far as where those rigs are deployed? And you think you can offer directionally, I guess, on I guess where you see the best opportunities to deploy new rigs right now? Is it in Africa, is it in Peru? Or I guess, what are your best options?

[David Michael Harper, President, CEO & Director]

So on the opportunistic question that you asked. So if we were to wait for when a customer ordered a rig and then they decided to go and build it, we would have never expanded beyond our first 2 rigs. So we might have [indiscernible], we hit 70% utilization. Have a look at the macros of gold's good, environment's good, everything is good, then -- and if we have the cash, probably go just place orders for rigs knowing that eventually, at some point in time, they're going to hit the go line and eventually someone going to -- one of our customers is going to take them. And that multiple has served us extremely well since the get go. Where will they go? Well, I think it will just really determine where the business is when we got -- when rigs become available. At this point in time, we plan -- we have an expectation that things will ramp up in South America. We've just entered a new market, which no one's asked about on the call funnily enough, Egypt, and that's an extremely interesting proposition for us. We've just landed with 2 drills. Those 2 drills are booked for the next years. And whenever there's a new drilling company in town, there's always a lot of interest. And that's a market that has been left to probably 1 drilling company for the longest time. And now there's some real competition has arrived in the arrival of Geodrill. So I think our most customers will be very, very keen to know that there's going to be some price and some service competitiveness into that market. And if the level of inquiries that we're receiving at the moment, is anything to go by, I would say that Egypt is probably the next place we shall be considering expanding into. And this all plays very well into our geographical expansion and our diversification model. Now for the longest time, we have been strong in West Africa. But now it's time to go up and go out, both from a geography point of view and from a commodity point of view. Currently, the job that we're drilling in Egypt is gold. South America gives us the commodity diversification with copper, zinc and base metals. And of course, we've got our bread and butter market, which is the West African market, which is also of value. So where will all the new CapEx be deployed? I can't honestly say at this point in time. I think it's going to be pretty much an even split between the 3 regions.

[Operator]

There are no further questions at this time. I will now turn it back to Mr. Harper for closing remarks.

[David Michael Harper, President, CEO & Director]

Okay. And thank you very much, everybody, for participating on today's call, and have a great day. Thank you. Bye.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.