Geodrill Ltd

TSX:GEO

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. [Operator Instructions] 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.

At this time, I would like to turn the conference over to President and CEO of Geodrill Limited, Mr. Dave Harper. Please go ahead, sir.

[David Harper, executive]

Thank you, operator. Good morning, and welcome to Geodrill's Q3 2020 Financial Results Call. I will begin with an overview of our operations and performance for the quarter. Our CFO, Greg Borsk, will then give us a more detailed review of our third quarter financial results, after which I will give -- I will discuss our outlook for the remainder of 2022.

In the third quarter, we achieved a number of financial and operational milestones. High level, revenue increased 29% year-over-year to $35 million. EBITDA was USD 9.3 million or 26% of revenue, and that's up 96% year-over-year. And net income basically doubled to USD 3.6 million or USD 0.08 per share. We also continued to strengthen the balance sheet, increasing total equity to USD 6 million, up 22% year-over-year. We generated a return on capital in import of 26% and a return on equity of 18%, and we ended the quarter net cash of USD 5.7 million, that's up 100% on the previous quarter.

Now operationally and strategically, we expanded into a new geographical location by securing a contract in Chile. We were also awarded 2 additional surface drill contracts in Egypt. And we completed listing analyst on the OTCQX with a goal of increasing the shareholder visibility.

Our strategic decision to diversify geographically has been critical to Geodrill's growth trajectory. New long-term contracts with major exploration partners not only provides future cash flow, recurring revenue and visibility, but it also solidifies our reputation as a drill services provider to serve orders at West Africa.

Our focus on executing on our growth strategy was based on a strong position to continue to benefit from the strong demand for our services as we remain focused on our operational excellence and driving profitability.

I'll now pass over to Greg Borsk to discuss our financial performance. Thank you, Greg.

[Gregory Borsk, executive]

Thank you, Dave. As a reminder, all figures are reported in U.S. dollars. Geodrill reported our best third quarter ever, record revenue, EBITDA and net income, all on the back of strong demand in all geographical locations for our drilling services. The company generated revenue of $35.2 million for Q3 2022 compared to $27.2 million for Q3 2021, representing an increase of 29%.

The increase in revenue is a result of the increase in demand for the company's drilling services. In addition to West Africa, in Q3 2022, Geodrill also generated revenue from both Egypt and Peru. The company has invested significant amounts into capital into its drill rig fleet and has advantages in the form of experience in the marketplace, accuracy, reliability and safety, which positions Geodrill to secure contracts.

The gross profit for the third quarter of 2022 was $10.9 million, being 31% of revenue compared to a gross profit of $5.6 million being 21% of revenue for the third quarter of 2021. EBITDA for Q3 2022 was $9.3 million, being 26% of revenue compared to $4.7 million or 17% of revenue for Q3 2021.

Lastly, the net income for Q3 2022 was $3.6 million or $0.08 per share compared to $1.7 million or $0.04 per share for Q3 2021. At this point, I will turn the call back to Dave.

[David Harper, executive]

Thank you, Greg. It is clear, our financial position is a testament to the strength of our business and the demand for 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 2022.

Today, Geodrill is better positioned than it has ever been both financially and operationally. Supply and demand for many commodities, particularly gold, has started to reflect use of reduced capital expenditure under investment. Demand for commodities on the other hand, despite efficiency gains and substitution continues to grow, especially in the EV metal space.

And using this forms our view that we are in the early stages of a period that should see higher commodity prices and returns in several circumstances against the backdrop of global uncertainty, more specifically, inflation, creates a unique investment opportunity.

Expansion into new geographical regions as part of our growth strategy is attributable to both revenue and product going forward. With an established business and an impressive financial performance, we continue to believe Geodrill is strategically positioned to create high returns for investors than other industry players.

This concludes our prepared remarks on our financial reports, results. Thank you for participating in today's call. We will now be pleased to answer any questions you may have. At this point, I'll ask the operator to provide directions for anyone who does have a question. Thank you.

[Operator]

Thank you, sir. [Operator Instructions] And your first question will be from Daryl Young at TD Securities.

[Daryl Young, analyst]

Hoping to get a little bit more detail on the contract that you signed on for in Chile.

[David Harper, executive]

It's a specialized drilling contract and it is with a copper company. And it involves directional again. So we'll basically be drilling multi-intersectional deep holes down to sort of 2,000 meters and then doing multiple order branch at fill. And we have a previous history with the players in this particular company. We had a great association with them back in West Africa. And the roll batch they've got good history. And we think that that's going to be a great contract. The size and the state of the program was enough to give this the encouraging to mobilize couple of rigs down there.

And we've seen it's off to a pretty good start, actually a very good start. And I think it's going to go the a new country, new commodity, new customer, possibly, we're stepping up and sticking out.

[Gregory Borsk, executive]

And let me just add to Daryl. It was -- like Dave said, this is now our second country in South America. So that's exciting for us, and it's a large enough contract that allowed us to invest just to actually set up in Chile here and take that contract on. So we're very excited about that new contract.

[Daryl Young, analyst]

And it sounds like the bidding environment has still remained quite healthy. I would imagine maybe some fall off in some of the junior customers, but maybe you could just give us an overview of what you're seeing right now in terms of the juniors and where the demand is?

[David Harper, executive]

Juniors have fallen off a little bit, Daryl, but it's certainly been any slack has been taken up by the mid-tiers and the producers, and the Tier 1s. So you can imagine it is a bit tough in that in the junior space, which is beholden to the capital markets. Capital markets are not performing well, unfortunately, but only one that's producing gold at call it $1600, $1700, it seems to be moving around a bit, but it's very pleasing to see now moving in the right direction.

But the advantage of being in a market like we're in is that for the most part, our customers will in the sort of $1000 per ounce all-in sustaining cost quartile. And so that's where the gold goes to $1600, they're still profitable just less profitable. That's -- so -- and they're very busy replacing the ounces that they're always taking off to be mining off their balance sheet. So as I said, Juniors - there has been pushback in the Juniors space, but it's only being picked up again by the shortfall that has been taken up in the producing base and some.

[Daryl Young, analyst]

And then when I look at the results for Q3, the strength was that -- I'm assuming a lot of strength is from the new geographies you've added. But how was the rainy season in West Africa compared to prior years? And I guess what I'm just trying to get a sense of is, is this the type of quarter that you could post up in the future through the rainy season? Or was it an abnormally good rainy season?

[David Harper, executive]

A good question. It was actually a very peculiar wet season and that it came very late, very, very late. One stage, we're even wondering whether it was going to come at all. But it did eventually arrive in, call it, the last month of the quarter last year of the quarter. And so there will be some follow through where it basically chases us into Q4. But I mean, with season aside, if I was to just back out that it would have been a normal wet season. It was a great quarter.

[Daryl Young, analyst]

And then final question would just be on thoughts on additional rigs, just given how high the utilization has remained? Is that in the pipeline for 2023?

[David Harper, executive]

Well, we continue to grow the rig fleet. And whenever utilization gets to 70%, we start looking around it, looking at what cash we've got to reinvest in expanding our fleet. I think what we do need though, is start to focus on what we accomplished in the last few years and consolidate for a little while before we can sort of -- we need to build the next launch platform of growth.

And if you look at what we've done years gone by, we sort of go from the 60s and then we've been 2 or 3 years there. And then we were a few years in the 80s. And now we've -- since then, we've jumped from 87% to -- I think last year was 115%. This year we're going to end up, I don't know if it got us about 130-ish. We're very comfortable with that. And I'm not sure we're really ready to take over another 15% or 20% jump in the next year, not because the demand is not there. It's just because it's not how we operate. we use to spend a bit of time on solidifying and making sure that just I think the rigs is one thing, but you've got to have the workers, trained technicians and vehicles and support equipment. The way we do things, wherever we operate, we roll out a network of facilities. And we've expanded into a couple of new regions recently. So we need to look at those regions, stable have to within those regions after the doable standard as it were.

So I wouldn't be predicting at this point in time, another year at the same trajectory. I think what we need to do is just catch our breath and hold for a little while. I'm not saying what go sideways, but I'm just not sure that we'd be growing at the same rate next year as we were in this year that we're currently following on from the new before because we really need to just solidify consolidate our position before we can -- once we build the caught the launch pad, if you like, for the next level.

[Gregory Borsk, executive]

Yes. And I think, Daryl, let me just add to that, too. I think the important thing that we try to communicate to the investors and the analysts, it's -- we're all about reasonable growth in maintaining our margins. So it's not growth at any cost. So if you look at where we -- like Dave said, from '20 to 2021, we went from the -- in the '80s to 115. So we grew by 40%. And we were able to have a healthy margin, 27%.

This year, if we grow at 15% to 20%, year-to-date, our margin is -- we're up to 31% gross margin. So growth is important, but it's also maintaining that our high kind of industry-leading margin and expanding into some of these territories that we've committed capital and resources to. So that's why I was talking about Chile with the first job, it's -- if you look at the totality of things, but it's not significant, but it is our first job in Chile, and it allows us to bid the second and third job, et cetera.

And same with some of the other recent countries we've been in Peru and Egypt. So it's more of a focused approach as to where do we want to grow strategically and making sure we're maintaining our profitability as we do that.

[Operator]

[Operator Instructions] And your next question will be from Gordon Lawson at Paradigm Capital.

[Gordon Lawson, analyst]

Could you please add some color on the location of remaining rigs in Burkina Faso, with respect to the ongoing coup there ? And if there's trends on relocating these to safer or more profitable jurisdiction.

[David Harper, executive]

So, Burkina Faso at the moment is 21.75. We've only got a few rigs running up in Burkina Faso we're looking out to our key customers. it's very important that we make sure that they're well serviced. And they're operating areas that they're comfortable with and we're comfortable with. So the thing with gold mining, Gordon, is that it doesn't stop because there's some vertical situation that's going on with any one of the 55 countries that make up the continent.

At any one point in time is going to be sure one of them is going to be blocking the copybook, but they are not going to stop gold mining. They never stop mining. And so where coups occur, it is usually in the -- most in the capital cities never near the gold mines. The last thing I would do is shut down the gold money because it provides the country with a much needed Forex. And so our operations being relatively unaffected. We are slowly reducing the amount of numbers that we have in Burkina Faso. But that is more clear we have better opportunities elsewhere.

And it's just a competitive market space. That's all I would say. If we see a better opportunity in another jurisdiction, we'll take that opportunity. At the moment, we've inundated these inquiries on some of our other regions, and we have a competitive market space in Burkina Faso. So the best thing we can do is to a for some of our competitors whilst we take our recent land put them on in more profitable jobs in other jurisdictions. Does that make sense?

[Gordon Lawson, analyst]

Yes, it's fair enough. It's just other -- some of your competitors have commented are moving away from Burkina Faso obviously they're also not drilling having capital. There's still an ongoing risk that something could happen. So that's the only reason why I ask -- but moving on in terms of…

[Gregory Borsk, executive]

We're not expanding our operations there. But we're also mindful of our customers there, and we need to keep those customers service. So I have no feelings either way for Burkina Faso positively or negatively. For me, it's just about opportunity, and I have got better opportunities that the commercial opportunities and other jurisdictions I'll take the rigs out. For the meantime, the rigs that are there are working, and they may be money, then I'm happy for that to remain.

[Gordon Lawson, analyst]

And in terms of segment and revenue, are you able to give us an idea of how much revenue you're currently generating in Latin America? And can you give us some expectations from the new Chilean contract as you have with other new customers that you announced earlier this year?

[Gregory Borsk, executive]

It's -- that's more of a financial disclosure, and it's not really significant yet Gordon. Like I said, we're still predominantly a West African driller, where we've made significant strides are in North Africa and Egypt. But in terms of South America, it's still early stage for us. We've -- and when I say early stage, if you look at the number of rigs over there compared to the total rigs in the fleet, the Geodrill model, what we do is we start with one contract. Usually, 3 to 6 rigs in any location. And then as that becomes successful, we grow organically in that territory. So what we'll do, we'll reinvest our cash. So in Peru, we've added another rig. There's another rig forecasted again for that. Chile, we've just started in Chile really near the end of Q3. So we'll probably be able to give you a little bit more color on that when we speak in early 2023. But it's very early stage for us, but it's starting off well with contracts in 2 countries now.

[Operator]

And at this time, Mr. Harper, we have no other questions. Please proceed with any closing remarks.

[David Harper, executive]

Well, that's us. Thank you very much for everybody that made time to jump on the call today, and I'll say fair work. Thank you very much and cheers.

[Operator]

This does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Have a good weekend.