Geodrill Ltd

TSX:GEO

Earnings Call Transcript 2023-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 Tuesday, August 8, 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 President and CEO of Geodrill Limited, Mr. Dave Harper.

[Dave Harper, President and Chief Executive Officer]

Thank you, operator. Good morning and welcome to Geodrill’s Q2 2023 quarterly financial results conference call. I will begin with an overview of our operations and performance for the quarter. Our CFO, Greg Borsk, will then give a more detailed review of our second quarter financial results, after which I will discuss our outlook for the remainder of 2023.

In quarter two, we took a step back to reposition the company for future growth by sharpening our focus on favorable geographies. This decision consequently impacted our utilization and ultimately, our financial results for the quarter. It is noteworthy that whilst our financial results were negatively impacted, we remain profitable, delivering positive EBITDA and net income, while also maintaining our sharpened focus, underpinned by our strong reputation, which continues to drive revenue and earnings growth, while building long-term value for shareholders via the continued strengthening of our balance sheet.

As the global market mineral drilling market remains robust. We are better positioned today than ever before with a focus on new geographies to capture market share and expand our footprint and to diversify our commodity exposure. Our strategy since inception has been to provide diverse mineral drilling services. The unparalleled access to technical and maintenance support by our full service workshops, which derives high utilization and performance to best service our customers’ needs. Our objective remains steadfast to keep our customers satisfied while continuing to improve our efficiencies and ultimately, margins while also expanding our geographical footprint to capture market share in favorable jurisdictions, which will ultimately drive value for shareholders in the long-term.

I’ll now turn the call over to Greg, our CFO, to review our financial results in detail.

[Greg Borsk, Chief Financial Officer]

Thank you, Dave. As a reminder, all figures are in U.S. dollars. We generated revenue of $32.6 million, representing a decrease of $6.5 million or 17% when compared to $39.2 million for Q2 2022. While Geodrill continues to experience strong demand for its drilling services, the comparative quarter of Q2 2022 was a record quarter in terms of revenue and EBITDA, setting very high comparables to match or beat. Of the $6.5 million decline in revenue, Burkina Faso represented $3.2 million on a quarter-to-quarter basis which is representative of winding up drilling programs in that region and redeploying the rigs to more favorable regions.

Gross profit for Q2 2023 was $7.8 million being 24% of revenue compared to a gross profit of $12.4 million being 32% of revenue for Q2 2022. On a year-to-date basis, gross profit is 28% compared to 31% for 2022. We recorded EBITDA of $6.2 million or 19% of revenue compared to $11.2 million or 29% of revenue for Q2 2022.

Overall, we generated net income of $2 million for Q2 or $0.04 per share compared to $5.9 million for Q2 2022 or $0.13 per share. We ended the quarter with net cash of $6.4 million. With the gold price averaging $1,965 during Q2, global exploration spending continues to be strong and provides strong fundamentals for the drilling industry going forward.

At this point, I will turn the call back to Dave.

[Dave Harper, President and Chief Executive Officer]

Thank you, Greg. Before going to the Q&A portion of the call, I would like to provide a brief outlook and key growth opportunities for the remainder of 2023. For those investors on the call and me, they would know that I like strategies, especially strategies that involve winning. I’m a huge fan of Formula One, a motor car racing. Winning an F1 Grand pre, it’s no easy task. Apart from a grade driver and a fast car, different F1 tracks need different race strategies. And so I can see many parallels between Formula One Racing and drilling. Formula One teams must strategize during a race continually changing to meet evolving circumstances, for example, weather, in which case the team’s pitstop strategy can change midway through a race.

To date, our strategy has delivered steady growth over multiple consecutive reporting periods and even years. Our strategy is simply to operate in geographies that provide the best growth opportunities. And therefore, simply put the decision to divest out of Burkina Faso was strategically necessary in order to capture an increased market position in other regions that offer better opportunities. So in the end, it’s really all just about winning.

This concludes our prepared remarks and our financial results. I will now turn the call back to the operator. Thank you.

[Operator]

Thank you, sir. [Operator Instructions] Your first question comes from the line of Gordon Lawson from Paradigm Capital. Please go ahead.

[Gordon Lawson, Paradigm Capital]

Hi, good morning, everyone.

[Dave Harper, President and Chief Executive Officer]

Good morning, Gordon.

[Gordon Lawson, Paradigm Capital]

Beyond the loss of drilling in Burkina Faso in Peru, can you elaborate on some of the other factors behind the year-over-year decline, particularly as it relates to Ghana?

[Greg Borsk, Chief Financial Officer]

Well, I think what we were – we were softer in Ghana in Q2 versus Q2, Q2 2023 versus Q2 2022. But I think if you look at how strong we were at Gordon in Q1, we were actually ahead of our budget. We were stronger in Q1. So, when you look at where we are through the first 6 months and we always have choppy quarters. Through the first 6 months, we’re only off, I think, 3% in terms of revenue. And that’s really a strategic decision that we made in 2022 to exit Burkina Faso in conjunction with the drill programs that we have there winding up. So, what we tried to highlight in the MD&A quarter-to-quarter, Q2 to Q2 out of the $6.5 million decrease in revenue. Some of that was in our primary markets like Ghana, etcetera. However, those markets were extremely strong in Q1. But I think it’s important to highlight that approximately half of that loss in revenue on a quarter-to-quarter basis was from a country that we’re exiting. And we’ve been able the redeploy those rigs and get them working in other countries, but it takes a quarter – it takes a bit of time to pull them out and get them back working. Hello?

[Operator]

Thank you. Your next question comes from the line of Ahmad Shaath from Beacon. Please go ahead.

[Dave Harper, President and Chief Executive Officer]

Ahmad, good morning.

[Greg Borsk, Chief Financial Officer]

Hi, Ahmad.

[Ahmad Shaath, Beacon]

Good morning, Dave and Greg. I guess just maybe a follow-up on that. So looking ahead, what’s the plan in terms of geographies or other markets that you want to take the Burkina and maybe the Peru rigs into – how is that, locates?

[Dave Harper, President and Chief Executive Officer]

So some recent news that came out of Peru post quarter end is that we’ve secured a contract with first quantum and that’s pretty much going to take us – it will take the two rigs that are sitting in that country and possibly and possibly require more. We’re also very busy down in Chile at the moment although as I speak rigs are actually shutdown due to the winter. It gets too cold and needs to drill at 5,000 meters. So they take like a 3-month break, and we’re on that break at the moment, we’re due to resume in September and we’ll resume with three rigs spinning and then they want to ramp that up to five rigs. So essentially, in South America, we’re going to be at 100% utilization. So we’re looking to send more rigs. Exiting the Burkina Faso, the decision was taken. This is not something we arrived at overnight. We actually began a slow nation break up actually a year ago, and it’s really just evolved in this last quarter. At this point in time now with the wet season coming upon us, we thought it was time to just accelerate the process and just skip it in the butt because we really only had two rigs spinning there. And they have two rigs spinning in one place. It essentially is turning money over not making any. So we thought it better to accelerate that process.

We exited Burkina Faso. And of course, in doing so, we needed to find viable markets for these REITs to go into so that we had soft exit for our client, but also soft entry points and revenues that could replace those that were coming to an end. So, that work has been secured in other markets. For instance, we’re expanding into Senegal, which is a new country for us, which we’re quite excited about, signed a contract with one of our existing clients, and they have a mining operation there, they need to get drilling. So it’s a congenial movement. We know each other pretty well. So we’ve got that going on. Hybrid Coast continues to just keep chugging along. It’s just a great market for us. And Ghana is suddenly getting very, very busy. The other market that we’re really excited about is Egypt. So we’re expanding our operations over there as our business and our customer base continues to increase. And so we’re sending additional equipment to Egypt.

So basically two new markets, one being Senegal, the other being – well, an expansion, if you will, into Egypt, busy things starting to happen over in South America, very busy and Ghana and Ivory Coast, absolutely going gangbusters for us at the moment. Now that all sounds really silly looking at the numbers that you’re looking at, I get that. But you’ve got to understand, you’ve got to appreciate the decision to shut down a country and redeploy rigs and the decision to start up in another country is not something that happens overnight. There’s mobilization, there’s customs plans, there’s all sorts of things. So essentially, it’s just a fact of life that things have to pull apart in one place in order for them to regroup and come back bigger and stronger in other markets. Does that answer your question, Ahmad?

[Ahmad Shaath, Beacon]

Yes. That’s great color, Dave. I appreciate it. So it sounds like if we can just take Burkina Faso out and with the new contract in Senegal and Peru resuming I understand Q2 last year was a record quarter, but it sounds like we’re back to the $35 million, $36 million run rate pretty comfortably on adjusting for seasonality for a second, is that their assessment or as the market is, in general, just slowing down?

[Dave Harper, President and Chief Executive Officer]

No, the market is not actually slowing down. It’s just that we’re repositioning things to capture better opportunities elsewhere. We certainly aren’t going to get a chance to do it later. And so as we speak and as I look at what we’re looking at going forward, our quarter three will, at this point in time, come in as a stronger performance than our quarter two, which you’ve been doing our numbers for quite a few years now, and you’ll know that’s an anomaly in itself. Our quarter four oddly could actually turn out to be our strongest quarter for the year as we will close the year with a very strong run rate and utilization touching 80% probably breaching actually. So all of this, of course, is not going to come back in time to rescue our financial year. At this point in time, I would have to say that I think we are looking at a flat year-over-year fiscal year.

Yes, that’s about the best we can hope for at this point in time. And next year, we’ll be – if you look at Geodrill’s history, we tend to go up in benches. We spent 3 or 4 years in the ‘80s, and then we jumped to 100. And we’ve been in the ranging between $150 million to let’s call it, $115 million to $140 million for the last 3 years. I think what you’re about to see is a step change in the right direction. And it will be the result of repositioning REITs into, as I say, favorable geographies, but that comes with some pain. And we thought we better do we do it now during quarter three, which is traditionally a wet season quarter for us. It’s easy to only our clients, and it was going to be easier just generally.

[Greg Borsk, Chief Financial Officer]

And that’s the history, Ahmad. Let me just reiterate that. We grow in steps. And Dave is absolutely right. If you look at the growth in 2020 to 2021, we grew the top line by 40% then in 2021 and ‘22, it was 20%. So if we’re able to – and 2022 was a record year for us. We never had a year like 2022. So if we’re able to repeat the year we had last year and invest in the company by moving out of unfavorable jurisdictions and getting those rigs in better countries, better areas, we’re pretty excited. We’re also extremely excited about what 2024 is going to look like. So to answer your question, yes, I think we’ll be tracking more as we were anticipating in Q3 and Q4 than Q1.

[Ahmad Shaath, Beacon]

That’s great. I appreciate all the color, guys. One last one for me on I guess, on the rig fleet plan, we’re still not growing materially on the rig count and maybe help me understand about $5 million of CapEx. Is it all on rigs or what was the maybe the pockets of spend in the quarter of about $4.9 million? And that’s it for me.

[Greg Borsk, Chief Financial Officer]

The rigs right now, what we do, we have a standardized fleet. Typically, we’re going to add one or two more client demand. So the plan is that a few more rigs here by the end of the year. We do have some rigs going through our workshop, which may be ready by the end of the year and in 2024. So it’s more of a slow and steady growth client-driven, adding more standardized rigs to the fleet. And the reason that’s the Geodrill history, right? We grow organically from cash flow that we generate from operations. And that’s kind of what we’re comfortable with, and that’s kind of been the reason we’ve been successful.

In terms of CapEx, yes, like I said, you’ll see a few more rigs. We were completing. We’re in new countries. So when we’re in a new country, we invest in a base there. We invest in bases at some of our clients. So, we will put some CapEx into that. There is always new trucks and light vehicles and broad carriers, etcetera. So, part of it is CapEx growth and part of it is just CapEx maintenance, and we kind of balance both of those. So, it’s a mix of everything to keep the fleet and all the ancillary equipment kind of modern and up-to-date.

[Ahmad Shaath, Beacon]

That’s great. And just a follow-up on that, so what should we expect of a maintenance CapEx number based on the current rig count and new…?

[Greg Borsk, Chief Financial Officer]

What we did in the first half of the year, we are anticipating to do in the back half. So, just like I said, kind of consistent through cash flow from operations.

[Ahmad Shaath, Beacon]

Got it. Thank you. Thanks guys and I will jump back in the queue.

[Greg Borsk, Chief Financial Officer]

Thanks.

[Operator]

Thank you. We have a follow-up question coming from the line of Gordon Lawson from Paradigm Capital. Please go ahead.

[Gordon Lawson, Paradigm Capital]

Hi. Thanks for taking my follow-up. The profit decline [ph] is that also related to fixed cost divided by less activity, or was there something more fundamental to the types of remaining contracts that would get executed in the quarter?

[Greg Borsk, Chief Financial Officer]

I didn’t actually catch that, Gordon, could you just repeat that again? Your line seem to be muffled.

[Gordon Lawson, Paradigm Capital]

I am sorry, Last quarter, we talked about fixed costs versus drilling activity. So, I am just curious if the profit decline on a percentage basis, is that more related to fixed costs and less drilling activity, or is there something more fundamental such as the types of the contracts executed in the quarter and such?

[Greg Borsk, Chief Financial Officer]

You are bang on. It’s the fixed cost in our cost of goods sold, in the salaries and benefit line, we have certain fixed costs. And when you are mobilizing or moving rigs, etcetera, you have to keep those costs on because you are having – usually the staff are able to take their leave or their breaks or their holidays, etcetera. So, we are still paying our drillers and our staff. However, we could be in between contracts, moving rigs, etcetera. So, that – I think that gets a little bit exasperated when the revenue declines. You will see through – again, through the six months, year-to-date, revenue declined by 3%, but the COGS was basically flat. So, there is a fixed cost component in there. It’s not – it doesn’t alarm us. It’s part of the business. Where it would alarm us if we didn’t have things ramping up in Q3 and Q4, but it’s just something we need to keep our people and keep them employed during a bit of a slower month or two months.

[Gordon Lawson, Paradigm Capital]

Okay. Thank you very much.

[Greg Borsk, Chief Financial Officer]

You’re welcome.

[Operator]

[Operator instructions] We have your next question coming from the line of Ray Gibbins. Please go ahead.

[Unidentified Analyst]

[Technical Difficulty] I will try to speak a little loud. Got this?

[Greg Borsk, Chief Financial Officer]

That’s better. That’s good.

[Unidentified Analyst]

So, if we speak about fines and mines, don’t get to pick themselves up and go anywhere. They don’t get to respond to really anything. They do get a valuation well beyond what anyone will give you, but they just don’t get to be nimble. My question is about the Burkina Faso base. When we get to the end of this, and I suppose you are just going to give up the land, what have you managed to get to other jurisdictions to help other jurisdictions? So, what is left of the Burkina Faso base that hasn’t been retrieved or made useful elsewhere? Just so we can understand how this works.

[Greg Borsk, Chief Financial Officer]

So, everything is basically been packed up and returned to the main base. And all the inventories being returned, all of the rigs, the light vehicles, and as we speak, we have one rig finishing its last hole, so it’s going to mobilize out of Burkina Faso in the next week. And when we do that, we will be basically handing the keys back to the landlord. That was a leased property, and it will be given back as a shell. Everything that we needed that was there, we basically put there aside the fact that we probably had a concrete pad that we needed to put the workshop. On the workshop itself was portable like a big dome workshop. So, that was all packed up, put into a container and returned essentially and all this stuff will be redeployed to other projects elsewhere. So, zero loss really…

[Dave Harper, President and Chief Executive Officer]

That was the impact on Burkina Faso, Ray, was the question?

[Unidentified Analyst]

I was just saying that to be able to do what you just described is incredible. It’s amazing…

[Greg Borsk, Chief Financial Officer]

It’s the geography, too, where we are fortunate to have operations in Cote d’Ivoire. We are fortunate to have operations in Ghana and in Mali. So, these neighboring countries, they can use the rigs. They wanted the rigs that were working in Burkina. So, we can now accommodate some of these other neighboring countries. And with the standardized rig fleet, it’s not a big ask for us to move these rigs. Same with the inventory, the inventory that was at that base in Burkina, we can pack it up and as Dave said, we have already sent some of it to each of those three neighboring countries based on what they needed. So, it’s just part of the Geodrill model of being – of operating for over – for 25 years in West Africa in the different countries, we can navigate between them.

[Dave Harper, President and Chief Executive Officer]

I think the big thing, really, Ray, is it’s just going to hit our revenues for the quarter. And during that time, our fixed costs don’t take a holiday. So, it affects our margin even more so. But in sitting back and looking at these things, you have got to say when it’s going to be – we have taken the decision to do it, and we just need to figure out the best timing so that it has the least impact on our clients and the least impact on our shareholders. And so we felt the time was right heading into wet season. And we have done it, and it’s going to have to take it on the chin for this quarter. But we will pick that up pretty quickly. The rigs have already been contracted elsewhere. We really just need to get them back to the shop and gather and give them going over from the ties up and clean to wind screen and send them out to jobs. No shortage of work. The opening line in the MD&A remains robust…

[Unidentified Analyst]

Burkina Faso guys that you have become so skilled, can you keep them?

[Dave Harper, President and Chief Executive Officer]

No, absolutely. We have taken Burkina employees, and we have repositioned them into other West African markets, or the French speaking West African markets, and that’s worked very well for us. So, no one is really lost their job. We have just – the rigs are going to be actively employed elsewhere, down in the lowest build in the heavy lifting sort of department, the laboring type people. Well, of course, we can’t keep everyone employed. But the technicians that we have spent a lot of time developing, they will be transferred to work into our West African operations elsewhere.

[Unidentified Analyst]

[Technical Difficulty] Thanks.

[Greg Borsk, Chief Financial Officer]

Thanks Ray.

[Operator]

Thank you. There are no further questions at this time. I would now like to turn the call back over to Mr. Harper for any closing remarks.

[Dave Harper, President and Chief Executive Officer]

We have nothing else to say, and thank you very much everybody on the call today. Have a great day. Thanks.

[Greg Borsk, Chief Financial Officer]

Thank you.

[Operator]

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