Geodrill Ltd

TSX:GEO

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Monday, November 13, 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's 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.

[David Harper, executive]

Thank you, operator. And a good morning, and welcome to Geodrill's Quarter 3 2023 Quarterly 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 for more details with you of our financial results, after which I'll discuss our outlook for the remainder of 2023 and beyond.

In quarter 3, Geodrill faced headwinds on a number of fronts. I'll first begin with the repositioning of the rigs post the wind down of our Burkina Faso operations, this was met with slower-than-expected takeup of rigs in other countries, which hit revenues and weighed on our costs. Well, from the outset, quarter 3 was always going to be a high bar. Recall that revenue in the corresponding quarter a year ago surprised us to the upside. This was due to a peculiar rather late wet season.

In quarter 3 2023, this quarter just finished. Revenues were negatively impacted, firstly, by very low revenue in Burkina Faso, the country that we've just exited and Mali, which was also slower than expected. And this was partially due to weather -- inclement weather. It's also partially due to operations, especially due to capital markets. When I say capital markets, I mean the difficulties faced with junior exploration companies are facing in today's challenging markets.

Also in South America, our Chile operations are completely shut down by the snow season. As a result, quarter 3 average utilization declined to 55% from what was 70% a year ago. This, in turn, drove [ meters ] down by 13%, which drove down revenues by 14%. Yes, and that's all she wrote.

Regarding margins, in quarter 3, we were faced with some abnormal costs. In South America, we kept employees on in readiness for the post-winter ramp-up. The next story of this is that we recently secured contracts with new Tier 1 customers. We secured contracts with first [indiscernible], which is a joint venture in Peru, and we've secured a contract with Antofagasta and Barrick, which is a joint venture in Chile, which I'm pleased to report have since commenced operations and are both going well.

In West Africa, the repositioning of reach was met with higher costs and longer preparation times has been pivoted away from juniors and intermediates towards senior miners and Tier 1 customers. Senior miners, but had higher specs in terms of -- with regards to training, health and safety. For example, automated robot handling systems that need to be built or retrofitted to the rigs in order to operate on their sites. Working for senior miners also comes with greater community relations issues, and all of these things cause delays.

All of the above drove costs higher, higher costs on lower revenue negatively impacted our market margins, and that was that.

The final piece with regards to financials. was aging debits. The aging debit situation has triggered IFRS 9, which is a large noncash provision that significantly affected our year-to-date profit and I believe Greg Borsk will be speaking to this point a little bit more in detail.

In any case, as a result of the foregoing and all other things considered, our Board of Directors took the prudent and necessary decision to suspend pending second semiannual dividend. And this was duly communicated in the press release on the 31st of August. Unsurprisingly, the market reacted negatively, taking our market cap down by 25% and we're currently trading at $1.80 a share. I'm just going to take a moment to reflect and remind investors that even after the provisions, our hard book value is CAD 3.20 a share or [ USD 2.37 ] a share. Our market cap today is now trading at effectively 6 months revenue on a 12-month trailing basis.

And at that point, I will pass the call over to Greg, our CFO, to review the financial highlights in more detail. Thank you, Greg.

[Gregory Borsk, executive]

Thank you, Dave. As a reminder, all figures are reported in U.S. dollars. We generated revenue of $30.3 million, representing a decrease of $4.9 million or 14% when compared to $35.2 million for Q3 2022. In our primary countries in Africa being Ghana, Côte d'Ivoire and Egypt, revenue increased on a quarter-to-quarter basis by $1.2 million. We had made the decision to wind up Burkina Faso and redeploy the rigs to other countries. And as a result, revenue decreased in Burkina Faso by $3.1 million. in order.

Our gross profit for Q3 2023 was $5.8 million being 19% of revenue, compared to a gross profit of $10.9 million or 31% of revenue for Q3 2022.

We recorded EBITDA of $600,000 or 2% of revenue for Q3 2023. This includes a $3.6 million noncash expected credit loss provision. Excluding this provision, EBITDA would have been $4.2 million or 14% of revenue for Q3 2023. The net loss for Q3 2023 was $3 million or a loss of $0.06 a share. Again, excluding the provision, we would have reported net income of $600,000 or $0.01 per share in Q3 2023.

Overall, we ended the quarter with net cash, excluding our right-of-use liability of $3.6 million. With the gold price averaging $1,965 during Q3 2023, global exploration spending continues to be strong and provides strong fundamentals for the mineral industry going forward.

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

[David Harper, executive]

Thank you, Greg. Before I move to the Q&A portion of the call, I'd like to provide a brief outlook for the remainder of 2023 and beyond. Despite a strong gold price, precious metals equities continue to struggle in raising sufficient capital to fund their exploration programs. We have, therefore, begun shifting our focus to senior miners and Tier 1 operations with long-term programs with reliable funding from mine production.

Otherwise, Q4 is off to a pretty good start. Ghana, Côte d'Ivoire, Egypt, are all performing well with multi-rig, multiyear contracts. Senegal, which is our newest market is off to a good start. We're looking to add a rig there. As is Egypt, where things are also going very well. So we're looking to add a rig there. And in South America, things are ramping up nicely. So we're also looking at adding rigs there.

For 2024, our order book is strong in our core regions, especially in South America, where we recently signed 2 new senior miners. And while on the subject of contracts, we still have a number of tenders that are ongoing at the moment. But for now, we believe the tough quarters are behind us. That said, I would hasten to add that top of mind and looming large as quarter 1, 2024, which will be a tough one to beat, recalling the quarter 1 2023, it was behemoth quarter with revenues of $37.6 million, which was a record for quarter 1 and it was actually stronger than our quarter 2 by 14%.

On aging debtors, we still have some work to do in keeping the situation in check. And as we said, we will continue to rely upon our decades of experience and operational efficiencies as we adjusted the conditions and challenges for the remainder of 2023 and beyond. We take a long-term approach that is flexible enough to adjust to the day-to-day realities of the business while maintaining a focus on our core values and our shareholders. This concludes our prepared remarks.

I'll now hand back to the operator to move us to the Q&A portion of the call. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Ahmad Shaath with Beacon Securities.

[Ahmad Shaath, analyst]

I appreciate all the color on the quarter. I guess my first question is now that we're almost halfway through Q4, are we fully ramped up? Or how is the ramp-up looking in South America? And any color you can provide us on what should we expect from Q4? Is Q2 a good run rate? How are things looking on the top line?

[David Harper, executive]

So as I alluded to on the call, Ahmad, quarter 4 is actually off to a pretty good start. We had a pretty solid October. I think November is going to be flatter. And December, honestly, respect it's a little hard to say at this point in time. But quarter 4 is looking okay. It's looking okay.

So as I was saying, I think the worst of these quarters is behind us. We'll get back to semblance of normalcy. We will -- we're looking very much at this now as a 2024 story. And as I was saying on the call, I had some to add that recall, our quarter 1 last year, it was actually our strongest months of the year. And you've been covering the story for a long time, and you'll know the quarter 2, normally our strongest quarter. So we do have a behemoth , if we were to make a year-over-year improvement in quarter 1, which at this stage would be a bridge to pass for sure.

Quarter 4, just winding back stepping back, I'd say, it will be okay. Actually, if anything, that's showing at this point in time, it's trending towards a single-digit improvement. Beyond quarter 1 is where we will start to see the full benefits of the likes of South America, which is ramping up to what will become a 100% utilization, will actually be at 100% utilization before December, but we'll be adding a rig in the latter part of the year. And so as we go to the 7th rig and get that into the field and get sort of commissioned and out to site, that will probably hit the tape for us around January, I'm guessing at this point.

So at this point in time, South America, it looks like it will be busy write up until the strong season next year, full steam ahead. I'm not a 100% sure that we're really shutting down for Christmas at this point. We haven't had that communicated back to us at the head office. At this stage, it appears we may be drilling through.

[Ahmad Shaath, analyst]

Okay. that's great color. So I guess it sounds like single-digit growth unless we get a couple of weeks of seasonal shutdown, we might be flat year-over-year or something like that?

[David Harper, executive]

After December -- sorry for quarter 4?

[Ahmad Shaath, analyst]

For Q4, yes.

[Gregory Borsk, executive]

Ahmad, I didn't hear what you said. Can you just -- did you say I think what we're communicating is the utilization will ramp up through the quarter, 55%. We'll -- we saw a strong October. We're seeing a strong November and then December, we have to wait and see based on the holiday season.

[Ahmad Shaath, analyst]

Got it. That's helpful. And then, Dave, how should I look at like the change in your customer profile going forward with this mix to more seniors and you mentioned your -- the extra cost of training since the higher standard with the seniors and all that? So on a go-forward basis, we should see some pressure on gross margins as we work through these? And are you able to help us understand maybe how much of those costs that you took on from the senior? And how much is going to be just structural changes in the way you do things because of the requirements of the seniors?

[David Harper, executive]

You'll definitely see margin compression as you move to seniors, bigger jobs are more competitively bid because of the long-term duration and the fact that you're working for names that are not beholden to capital markets. So your paycheck is more or less guaranteed, so to speak. On the exact specifics of where we'll end up, I'll hand that to Greg.

[Gregory Borsk, executive]

Yes. It's -- I think if you look at the year-to-date margin, Ahmad, we're 26%. We had a strong Q1 and then Q2 and Q3 were weaker. But it's a function of the capital markets. And in 2022, when the capital markets were open for juniors, they were drilling and they were able to raise money. We had some juniors with 4 or 5 rigs spinning. Now they're lucky to have 1 spinning rig, maybe 2. So it's just -- it's part of the reaction to where we are and moving towards the intermediate and senior miners. You're right, there is a cost to that, because a lot of times, they are more competitively bid. But it eliminates a lot of the credit risk that we've seen over the last couple of years and especially this quarter because they are producers. They have the ability to pay and have the ability to pay on time.

So it really will help the company, but it will take some time. And you're seeing this. It's not only in terms of moving to a higher tier customer. It's also moving out of certain jurisdictions. So when we pulled all of the rigs out of Burkina, and we're redeploying them into other jurisdictions, it takes time. But I think in the long run, being in better, more secure, more stable jurisdictions, having more intermediate and senior customers, I think it will serve you drill much better in the long run.

[Ahmad Shaath, analyst]

Got it. That's very helpful. So I guess we should look back at maybe 2020, 2021 period for margins, which was we're looking at like 25% .

[Gregory Borsk, executive]

Yes. I think if you look at the -- we had 3 years in a row, I think '18, '19, '20, we had a 25% gross margin. We were happy with that. We modeled around that. 2021, it got up to 27%. And I think last year, 2022, our record year, it got up to 29%. But the reason it got so high is because of the revenue spend. And like I said, drilling was open for everyone, junior, intermediate, seniors. Our utilization rate was the highest it's ever been. So what you're seeing now with utilization coming in, you expect the margin will come back to years when we had it around 25%.

[Ahmad Shaath, analyst]

That's very helpful. I guess one last one for me and you guys touched on it. So in terms of the receivables and the account of the amount that although the 90 days jumped to about $9 million in change. So how should we think about that on a go-forward basis? Are you guys expecting to recoup some of that? Or should we consider the $9.5 million going to be you recognized as another provision? You guys have more like...?

[Gregory Borsk, executive]

We -- yes, we haven't written these amounts on for accounting. We've taken a provision against them, because there's over $15 million in our 90 days. So we've been collecting some of that subsequent to quarter end. We're working hard. But what you have to do with these provisions is at the end of each quarter, we assessed -- Dave and I assessed where we are, how much were we able to collect. Some of it we're going to have to collect over time. And then just at the end of December, we'll look at our provision.

What I can tell you is we took a big hit in Q3, $3.6 million, and we're working hard with these accounts to collect the money and work with them. So we'll have to -- the short answer is you look at this every quarter. So it's something we're working on.

[Ahmad Shaath, analyst]

And from the credit facilities perspective that are secured by these, has that raised any issues or concerns there with your lenders? Or how is that conversation going?

[Gregory Borsk, executive]

Yes, no issues. We have the security, we have this receivables and we have some PPE. So it hasn't been an issue. We have enough of a push in there. It's -- and there's no covenant. So it's -- we're fine on that.

[Operator]

Your next question comes from Gordon Lawson with Paradigm Capital.

[Gordon Lawson, analyst]

With regards to your Latin American operations, how much revenue is currently attributed to that region? And if there's any guidance you can provide there for the next year, that would be very helpful.

[Gregory Borsk, executive]

Gordon, is that a question -- we don't disclose that segment. It's less than 10%. So it's not material. But the -- where we are now, we have about 7 rigs there. And in Q3, we only had 1 rig working near the end of the quarter. So effectively, we weren't really working in South America. As we sit here today, we're working both in Chile and Peru and our expectation for the accounts we're drilling for and some new ones is to continue to ramp up there. So we're hoping that continues to ramp up in Q4 and then into 2024, Q1 and Q2.

I was just going to say in terms of overall consolidated financial statements, it's still a smaller part of the business, but the intention continue to grow at.

[Gordon Lawson, analyst]

Okay. And I gather that's where you're seeing the highest competition for contracts?

[Gregory Borsk, executive]

The higher -- sorry, I just missed that last question?

[Gordon Lawson, analyst]

Well, given Chile and Peru, can I assume that that's where you're getting the higher competition for these contracts?

[Gregory Borsk, executive]

No. Dave you want to speak in addition?

[David Harper, executive]

Well, if you look at it, Gordon, it's actually where we're enjoying our highest utilization, I know looking at quarter 3, that sounds like a crazy statement that we -- the reason the rigs in quarter 3 couldn't work because of the snow. So that was beyond our control. What was going on for us during that time is we were busy negotiating contracts with senior miners. We were -- sort of signed 2 new big names and they've effectively taken all of the rigs that we had. We're adding rigs to meet the demand and when those rigs get into the field and drilling, will effectively be at 100% utilization. And whenever we get to -- as you know, whenever we get to 70% or 80% utilization, we start looking at adding rigs to all regions. So we're now faced with the good problem of potentially selling more rigs to that market.

Is it competitive over there? Not for the type of drilling that we're doing. We entered that South American market providing a specialized deep directional drilling service, something that most of the other drilling companies over there don't provide. And so that specialized -- in the specialized service space, it's far less competitive and generally it comes with reasonable margins. The most competitive markets that we would operate in are West African markets, Ghana and Ivory Coast. These are essentially our core markets. And those markets are competitive. But again, we're busy in those markets.

And aside the fact that we've gone through a massive repositioning exercise, taking rigs out of 1 country and in doing so, deciding to pivot away from juniors and intermediates or anyone basically we have hold into the capital markets towards the senior miner space. And this -- in this we've been successful, and we've signed a number of contracts and then in the middle of tendering some much larger drills, which are not news ready today, unfortunately, for this -- for today's quarter results. But we will be very busy in those markets come 2024.

So very much at this stage of 2024 story. I think we can do at this point is recover what we can from the setbacks that we've had in 2023 and build the launching pad as it work for 2024 and beyond. Evidently, that seems to be heading in the right direction, and we will see how that pans out, I guess, is 2024 on calls.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[David Harper, executive]

Thanks, [indiscernible]. Thank you, everybody, for joining today's call. Thanks very much. Have a great day.

[Gregory Borsk, executive]

Thank you all.

[Operator]

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