Geodrill Ltd

TSX:GEO

Earnings Call Analysis

Geodrill's Q3 2024: Solid Growth and Strategic Contracts Drive Profitability

In Q3 2024, Geodrill reported a 13% revenue increase year-over-year, reaching $34.1 million, and a net income of $2.6 million. This rebound follows a strategic shift to more lucrative markets, with secured contracts worth $150 million and an additional $50 million in Chile. EBITDA soared to $7.6 million, a significant rise from the prior year. The company maintains gross margins of 26%, while its transition to Tier 1 clients ensures a stable, predictable revenue stream, further solidifying its growth outlook. The management is optimistic about continued profitability, supported by robust exploration spending amid favorable commodity prices.

Strong Revenue Growth Signals Operational Progress

In Q3 2024, Geodrill reported a remarkable revenue increase of 13% year-over-year, totaling $34.1 million compared to $30.3 million in Q3 2023. This growth was primarily attributed to securing two significant multi-rig, multi-year contracts earlier in the year, solidifying Geodrill's market presence and operational capabilities.

Positive Financial Metrics Reflect a Turning Tide

The company's financial performance showed a substantial improvement, with EBITDA soaring 22% year-over-year to $7.6 million, representing a remarkable 22% of revenue, compared to merely $600,000 or 2% for the same quarter last year. Furthermore, Geodrill recorded a net income of $2.6 million, or $0.06 per share, reversing the previous year's net loss of $3 million, also at $0.06 per share. This turnaround indicates effective operational and strategic adjustments.

Strategic Transition Fuels Growth

Geodrill's strategic decision to relocate its rig fleet from Burkina Faso to more advantageous jurisdictions has begun yielding results. Although this transition initially impacted 2023 revenue, the current quarter demonstrates a recovery and enhanced financial performance. This move has enabled the company to secure $150 million in contracts in core jurisdictions, contributing to greater revenue visibility.

Future Contracts Enhance Revenue Visibility

Following the quarter-end, Geodrill secured an additional $50 million in contracts in Chile, consisting of two substantial multi-rig agreements with a new Tier 1 customer and an extension with an existing customer. These contracts are set to bolster the company’s revenue and profitability in the forthcoming years, providing a stable and predictable revenue stream essential for navigating the cyclical nature of the mineral drilling industry.

CapEx Investments to Support Expansion Plans

The company has increased its capital expenditures (CapEx) in line with the contracts signed in Chile, showcasing proactive investment to support future growth. The increase is expected to aid operational expansion and enhance service capabilities, positioning Geodrill for increased demand in the mineral drilling sector.

Maintaining Strong Margins Amid Inflationary Pressures

Geodrill has successfully maintained a gross profit margin of 24% in Q3 2024, up from 19% in Q3 2023, demonstrating effective cost management in a challenging economic environment. The consistent gross margin reflects the company’s resilience and operational efficiency, crucial for sustaining profitability.

Immediate Future and Dividend Discussion

While discussions surrounding the reinstatement of dividends are ongoing, the focus remains on leveraging free cash flow to invest in growth and expansion. Geodrill is strategically aiming to utilize its cash resources to meet increasing demand for services, with potential plans for dividend reinstatement being considered as cash flow improves. Management has emphasized a balance between growth initiatives and returning value to shareholders.

Anticipating Seasonal Variations and Business Cycles

Geodrill typically experiences seasonal fluctuations, with Q1 and Q2 being the strongest quarters and Q3 often slower due to wet seasons in West Africa. However, management has reported that Q3 2024 exceeded expectations, showcasing profitability, and reflecting a robust demand, particularly from Tier 1 miners who are increasingly consistent with their drilling needs.

Looking Ahead: A Confident Outlook

With a solid foundation of long-term contracts and increasing global exploration spending driven by record-high gold prices, Geodrill is well-positioned for continued growth. The management underscored their confidence in delivering exceptional value to shareholders and establishing a substantial base for future success. The outlook remains positive, supported by a robust pipeline of contracts and strategic operational planning.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, everyone, and welcome to Geodrill's Q3 2024 Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, November 11, 2024.

Before we begin, certain statements made on today's call by management may be forward-looking in nature and, as such, are subject to various risks and uncertainties. Please refer to the company's press release and MD&A for more details on these risks and uncertainties.

I will now turn the call over to Mr. Dave Harper, President and CEO of Geodrill. Please go ahead.

[David Harper, executive]

Thank you, operator, and good morning, everyone. Thank you for joining us today to discuss Geodrill's third quarter results. Joining me also on the call today is Greg Borsk, our Chief Financial Officer.

In the third quarter of 2024, we delivered another solid financial performance. Some of the highlights were revenue increased 13% year-over-year. EBITDA also increased 22% year-over-year. Net income of USD 0.06 or 8% of revenue, which leads favorably to a USD 0.06 loss for the same quarter in 2023. And we further strengthened our balance sheet, which is now underpinned by more cash than debt, all of which we believe elevates the success of our financial planning.

We also believe these results are a testament to our operational and strategic planning success. For context on this latter point, recall 2023, our strategic decision to transition our rig fleet from Burkina Faso to more attractive jurisdictions. This has proven to be the right move, evidently. And while this decision initially impacted our revenue in fiscal 2023, we'd now bounce back and were stronger than ever.

This business is all about contracts. Our success in securing multiple recontracts in the new jurisdictions has significantly boosted our revenue visibility and profitability. It demonstrates our commitment to financial stability.

Also recall earlier in the year, secured contracts totaling USD 150 million in our core jurisdictions. These works are now well underway and strongly contributing to revenue and profitability and will do so for the next 3 to 5 years. Meanwhile, additionally, subsequent to the quarter end, we have secured new contracts in Chile, totaling circa USD 50 million. These include 2 very significant multi-rig, multiyear contracts the new Tier 1 customer. And we also secured a multi-rig contract extension with an existing customer.

With our strong portfolio, long-term contracts with Tier 1 customers, favorable pricing and a robust pipeline of opportunities, we are now confident in delivering exceptional value to our shareholders and establishing a strong platform for growth going forward.

At this point, I'll turn the call over to Greg Borsk, for a detailed review of our financial performance. Thank you, Greg.

[Gregory Borsk, executive]

Thank you, Dave. The company generated revenue of $34.1 million for Q3 2024, an increase of $3.8 million or 13% when compared to $30.3 million for Q3 2023. The increase in revenue for Q3 is primarily due to the successful win of 2 significant multi-rig, multiyear contracts earlier in the year. These contracts have not only bolstered our revenue but they have also reinforced our market presence and operational capabilities.

The gross profit for Q3 2024 was $8.4 million, being 24% of revenue, compared to a gross profit of $5.8 million being 19% of revenue for Q3 2023.

EBITDA for Q3 2024 was $7.6 million or 22% of revenue compared to only $600,000 or 2% of revenues for Q3 2023. Q3 2023 was impacted by a $3.6 million noncash credit loss provision relating to the aging of the company's trade receivables. Excluding the provision, EBITDA would have been $4.2 million or 14% of revenue for Q3 2023.

The net income for Q3 2024 was $2.6 million or $0.06 per share compared to a net loss for Q3 2023 of $3 million or a loss of $0.06 per share. We ended the quarter with net cash, excluding right-of-use liabilities of $3.5 million.

Building on Dave's comments, the record high gold prices are driving robust global exploration spending, which in turn solidifies the strong fundamentals for the mineral drilling industry moving forward.

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

[David Harper, executive]

Thank you, Greg. So just to recap, our strategic focus on securing long-term multi-rig, multiyear contracts with Tier 1 miners has provided us with a stable and predictable revenue stream, which is crucial in navigating the cyclical nature of the mineral drilling services business. This approach has optimized our resource allocation and operational efficiency, in turn significantly boosting our profitability.

The synergy between our strategic long-term contracts and the robust gold and copper market positions us exceptionally well for continued growth and success. We are poised to deliver exceptional value to our shareholders and establish a formidable foundation for future growth.

At this point, I'd like to thank -- extend our gratitude to our dedicated stakeholders, including our team, our shareholders and our loyal clients. Your unwavering support has been integral in our success. We remain committed to maintaining our high standard of service and furthering our position as an industry leader.

This concludes our prepared remarks. I'll now turn the call back to the operator if anyone has a question. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Gordon Lawson with Paradigm Capital.

[Gordon Lawson, analyst]

Congratulations on another good quarter. Your year-over-year revenue growth was once again impressive. I'm just wondering if this is mostly growth in Chile? Or has there been some outperformance in the African segment? And any disclosures you can provide on drill types and margins would also help.

[Gregory Borsk, executive]

The revenue, the year-over-year or the year-to-date, if you look at that, most of that growth is coming directly out of Africa. What we've disclosed, Gordon, in the Q2, the significant contracts in Chile, they're going to take effect starting in Q4 and they'll roll for 3 years through '25, '26 and '27. So what we had year-to-date mainly that's coming from Africa.

You had a question on the margins, too. I think on the margins, if you look at where we are year-to-date, significant margins. If you look, we were able to increase revenue year-to-date by 9% so, call it, $101 million to $110 million. And I think it's important to point out just in today's inflationary environment, et cetera, key to that, not only were we able to increase revenue by 9%, we were able to maintain our gross margin. So if you look at the gross margin, year-to-date 2023, the gross margin was 26%, we were able to match that in 2024. We were able to -- year-to-date, we also have a gross margin of 26%.

[Gordon Lawson, analyst]

Okay. That helps. Moving further down the financial statements here, your CapEx was a little higher this quarter than expected. Is that related to a higher volume of drill upgrades? Or is this more in line with expected run rate going forward?

[Gregory Borsk, executive]

The higher CapEx is for the contracts that we signed in Chile, which will be starting to turn in Q4. So we were ahead of that. A lot of the CapEx was spent in Q3 and will be spent in Q4 also.

[Operator]

[Operator Instructions] Your next question comes from John Sartz with Viking Capital.

[John Sartz, analyst]

So Dave, I thought your opening remarks feel very good. The only thing missing was you should have -- I think you should have said, "The board is therefore reinstating the dividend.

[David Harper, executive]

Yes. You took the words right out of my mouth, actually, and we just -- we had a lengthy discussion. We just finished up a board meeting this week. And perhaps Greg Borsk might take a comments on that.

[Gregory Borsk, executive]

Yes. I think the -- John, we do have a few levers to pull. As you're aware, we also have the NCIB we haven't used that. Particularly, we use that when the share price is depressed. So I think the share approaching $3, that doesn't really make sense. We also have a lot of institutional funds that are buying and looking to get into the stock.

In terms of the dividend, we discussed the dividend. We look at it. Even though we're net cash, we do have debt on the books. It's expensive debt, 9.35%. So there's a lot of opportunities for the cash we generate from operations. And as Gordon said also, we've signed some big contracts where we're operating, the demand for drilling services is -- we're keeping up, but our clients are constantly looking for more.

So it's a balance, if you will. It's a balance between growth, increasing the top line, continuing to add rigs and then key is keeping the customer happy. And then we will continue to look at any excess cash and what best to do with it. And dividends does come up, but -- as I mentioned earlier, we had significant CapEx to get ready for some of these ramp-ups that we're going to have in 2025 and 2026.

[John Sartz, analyst]

Okay. I still think you should reintroduce the dividend, but it's up to you.

[David Harper, executive]

No, no, no, John. I appreciate your comments, John, and it's a work in progress, believe me. But we've just gone through a really heavy period of CapEx to tool up and what happens when you sign a contract is the first thing you get is the costs are all front-end loaded. We've just got to get the rigs in the field get turning and earning and free cash will follow. And you can be assured the dividend will imminently be reinstated, just not immediately. I'm on it. We're working on it.

[Operator]

Your next question comes from [ Jesus Sanchez with Cast Iron Investment ].

[Unknown Analyst]

Congrats for another great quarter. I have a question about the book order that we have. We mentioned -- or you mentioned that we achieved new contracts of $150 million plus $49 million in Chile after this recent quarter. So that will add year-to-date an addition of $200 million in contracts. Can you disclose the total order book value?

[Gregory Borsk, executive]

Jesus, sorry, maybe this is confusing. That $49 million will be spread out. The new contracts, the $49 million that we signed subsequent to Q3, they will be spread out over 3 years. So they will not be year-to-date, if that was the question. And same with the $150 million. The $150 million that we announced early in the year, Q1, again, those are multi-rig, multiyear contracts.

[Unknown Analyst]

Yes. I understand that, but they were signed this year. So this year, we have signed $200 million in contracts will be recognized in our revenue in the following 3 to 5 years. I got that. My question is how much do we have before that? -- how much is -- what's our order book?

[Gregory Borsk, executive]

Yes. We don't disclose that. So -- and then maybe it's something we can look at disclosing going forward. We have long-term contracts, 5-year contracts that were disclosed 3 years ago. So we don't disclose that in the MD&A, but it's something if analysts and investors would like to know the order book going out over time, we could definitely consider that going forward.

[Unknown Analyst]

That would be great because, I mean, personally, that gives me some visibility about the revenue that is coming. My second question is a piggyback of the previous one that the other analyst made about the dividend and buyback. Why would you -- will be favoring dividends over buybacks at this price of the share?

[Gregory Borsk, executive]

The buyback, in the past, we've typically viewed it as like a floor. Kind of if the stock gets too low, we'll put in a bid so that -- we used the buyback years ago. And what we were finding years ago when there was not a lot of volume in the stock. A small amount of shares being sold could dramatically impact the price of the stock. So when we were using the NCIB years ago, it was kind of to put in a bit of a floor on the stock. You're not able to move your stock up by your NCIB, you're able to kind of match the current bid.

And what we found in the last 3 years is that there's been enough demand from investors and institutional funds, et cetera, where they're looking for stock. So it really didn't make sense for us. And the stock was increasing. We went from a low of less than $2 up to, I think, $3.65 or close to getting close to $4. So putting in the buyback didn't make sense. It was -- what we decided it was more prudent to actually implement dividends as a return of capital.

And then this is all tempered by what Dave said earlier, taking care of your customer and continuing to have that growth CapEx, et cetera, is kind of -- it's definitely in our balance of where do we spend our operating cash flow.

[David Harper, executive]

Yes. So if I can just jump in for a second, just to add to Greg's comments. We get the whole thing about share buyback. We get the whole thing about dividends. But the best thing is we can do with our free cash at the moment is just keep adding rigs because we had an ever-increasing demand for our services. As our rig fleet reaches 70% utilization, we automatically start looking at how much cash we've got and what we need to be buying to add into an ever-increasing demand for our services now.

And that's pretty much what we're doing at the moment. We've just had a bit of a purple patch in terms of signing contracts. Let's get these all into work, it's now generating some free cash. And then the decision between whether we go dividends, whether we do share buyback or a combination of both will simply be a great problem to have. And it's coming imminently. Not immediately, but imminently.

[Unknown Analyst]

Yes. For what it's worth, I totally agree with that strategy. We are in growth mode. We're still investing CapEx, new rigs, expanding. Time will be where we can give dividends or think about buybacks but right now, we are with our growth hat on.

[Operator]

Your next question comes from George Melas with MKH Management.

[George Melas, analyst]

I'm fairly new to the story. I have 2 questions. One relates to rig relocations. I understand that you moved some rigs from West Africa to South America last year, maybe earlier this year. So I'm trying to understand if that's largely done or if you have some rigs that you still need to relocate? And the second question relates to the seasonality of the business. I'm just trying to understand what is the seasonality and maybe if you could take that by geography.

[David Harper, executive]

Thanks. So yes, we took a strategic decision in quarter 2 last year to reposition our -- we had competing priorities, if I can put it that way. We had opportunities in other jurisdictions, and we were operating in a jurisdiction where we just saw better opportunities are. And so we took the decision to relocate, redeploy rigs from one region, some were absorbed into West Africa. In fact, most of them was absorbed into other countries in West Africa. I think maybe I'm not sure that any of them actually went to South America.

South America has effectively been pretty much a stand-alone operation. It started and it started to generate its own free cash from its own free cash. It's been growing nicely on time. We've grown that suite from we started 5 years ago with 3 or 4 weeks. Today, we're up to 13 rigs in that will be operating in that region. So we're effectively being funded from cash generated from operations. So we're doing quite well.

So the 2 businesses are going to continue to run independently and as and where we need to if we believe that there's per capacity in West Africa -- there doesn't seem to be at this point in time, but there should it be the case that we have spare capacity in West Africa that I'm sure it will be absorbed into either North Africa or South America.

[George Melas, analyst]

What about the seasonality of the business?

[Gregory Borsk, executive]

The seasonality, just if you look at the quarters, Q1 and Q2 are typically our strongest quarter. Q3, in certain regions in West Africa, were impacted by wet season. So typically, Q3 is our slowest quarter. And then Q4, we pick up again and then were only impacted in Q4 by the holidays. A lot of the larger Tier 1 clients, they will shut down in advance of Christmas. And then they will not start up until maybe the week after the new year. So -- but that's -- we've been doing this for a long time.

We know Q1, Q2, we start ramping up for Q1 and Q2 in like Q3 of this year. We're ready for it. We know those are the 2 busy quarters. Q3, typically, we have rigs come in. If they need an upgrade or a service, that's what we use Q3 for. And then Q4, again, we know we're going to slow down a bit in and around the new year, just before and just after. But that allows our staff to get rested, take their break and gear up for a very busy Q1 and Q2, and that's what you see. And that's what we communicate every quarter. So that's it.

And we were very pleasantly surprised with Q3 2024 when we used to kind of budget almost a breakeven. But now that we've moved to Tier 1 miners and significant clients that or drill more consistently, Q3 is now a profitable quarter for us. And you can see that where we are able to not only reinvest into the fleet and the equipment, we were also able to generate profits here in Q3 of $0.06 a share. So it was a very, very good quarter, very strong Q3 for the group.

[Operator]

No further questions at this time. I will now turn the call over to management for closing remarks.

[David Harper, executive]

Okay. If there's no other questions, thank you, everybody, for being on today's call, and have a great day.

[Gregory Borsk, executive]

Thank you.

[Operator]

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