Geodrill Ltd

TSX:GEO

Earnings Call Analysis

Strategic Adjustments Drive Optimistic Outlook

In 2023, the company faced a 6% revenue dip to $130.5 million and a decrease in gross profit from 29% to 23%, with net income falling to $3.8 million from $18.9 million due to geopolitical and operational headwinds. Despite this, the firm has robust prospects with a strong 2024 order book, an anticipated gross margin target of 25-30%, and bolstered operations in core regions like Ghana and Egypt. South America looks promising with increased rig utilization, signaling an optimistic future amid a solid industry foundation supported by gold prices above $2000.

Geodrill's Financial Performance in 2023

In the fiscal year of 2023, Geodrill Limited experienced some headwinds, resulting in a revenue of $130.5 million, a 6% decrease from the $138.6 million seen in 2022. Gross profit dropped to $30.6 million, representing 23% of revenue, compared to 29% in the prior year. The company's net income also saw a considerable decrease to $3.8 million in 2023, down from $18.9 million in 2022.

Operating Challenges and Strategic Decisions

Geodrill's challenges included operational hurdles like rig repositioning after exiting Burkina Faso due to security concerns, and delays in South America. Despite this, revenue in Ghana, Cote d'Ivoire, and Egypt increased by $6.7 million collectively. However, Burkina Faso saw about an $11.2 million revenue decline, and Peru had a $1.8 million decrease due to delays in resuming operations.

Looking Ahead: 2024 Outlook

Starting 2024 on a strong note, Geodrill's partnerships in Ghana and Egypt are thriving, reflected in increased rig utilization—particularly in South America, reaching 85%. With a robust order book and positive adjustments in strategy, the company is optimistic about its revenue growth prospects, particularly expecting South America to be a significant revenue contributor going forward.

Earnings Call Transcript 2023-Q4

[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 Monday, March 4, at 10:00 a.m. Eastern 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 the 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 Quarter 4 and 2023 Fiscal Year Results. I will begin with an overview of our operations and performance for the fiscal 2023, after which our CFO, Greg Borsk, will discuss and present a detailed analysis of our results. Additionally, I will provide some insight into our outlook for quarter 1, 2024 and beyond.

In the latter half of the year, Geodrill encountered significant challenges. However, we firmly believe that the underlying fundamentals of our industry provide us with a strategic perspective. The market forces that affected overall performance over the past two quarters are in our assessment independent of the sustained development for resources in growing production economies. This demand is expected to persist over the long term.

Operationally, we faced hurdles related to rig repositioning following our exit from Burkina Faso. South America also posed unexpected delays, impacting both revenue and costs. Specifically, the winter shutdown in the region affected rig utilization, while operational costs remained high as we maintained readiness for Q4 ramp-up.

On the financial front, in fiscal 2023, our auditors enforced IFRS 9 due to an enduring aging debtor situation. This resulted in a noncash provision totaling $5.4 million in profit for the year. Despite these challenges, Geodrill remains resilient. As we pivot away from junior exploration companies, we recently secured a number of multiyear contracts with Tier 1 minus, including First Quantum, First Quantum Rio JV in Peru, Antofagasta Barrick JV in Chile, and in West Africa, we secured a number of multi-rig, multiyear contracts with Tier 1 customers.

Geodrill has operated in West Africa for 25 years and has invested a significant amount of capital into its drilling fleet. We believe Geodrill is poised to navigate the complexities of our industry, its determination adaptability and an active and experienced management team.

I'll now turn the call over to Greg, our CFO, to review the financial highlights for fiscal year 2023 and quarter 4 in detail. Thank you.

[Gregory Borsk, executive]

Thank you, Dave. As a reminder, all figures are reported in U.S. dollars. We generated revenue of $130.5 million for 2023, representing a decrease of $8.1 million or 6% when compared to $138.6 million for 2022. in Africa, our three primary countries in which the company operates being Ghana, Cote d'Ivoire and Egypt, revenue increased on a year-to-year basis by $6.7 million.

Notably, in Burkina Faso, revenue decreased by approximately $11.2 million on a year-to-year basis. Geodrill made a prudent decision to wind up its drilling programs due to the security concerns and redeployed the rigs to other countries. In Chile, revenue increased by $4 million. However, revenue decreased by $1.8 million in Peru as the company only recommenced drilling in Peru in the latter part of the third quarter.

Overall, gross profit for 2023 was $30.6 million, being 23% of revenue compared to a gross profit of $40.6 million, being 29% of revenue for 2022. EBITDA for 2023 was $20.6 million or 16% of revenue compared to EBITDA of $38.4 million or 28% of revenue for 2022.

The net income for 2023 was $3.8 million or $0.08 per share compared to net income for 2022 of $18.9 million or $0.41 per share. We ended the quarter with net cash, excluding right-of-use liabilities, up $3.7 million. With the gold price well above $2000, we are optimistic that global exploration spending will continue to be strong and will provide strong fundamentals for the mineral drilling industry going forward.

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

[David Harper, executive]

Thank you, Greg. As we transition to the Q&A segment, I will now share an outlook and highlight growth opportunities for the remainder of quarter 1, 2024 and beyond. We commenced 2024 on a positive trajectory. Our operations in Ghana and Egypt continue to excel, bolstered by partnerships with Tier 1 mining companies, and robust [multi-rig] multiyear contracts. Also notably, our utilization in South America has increased and currently stands at 85%.

Our 2024 outlook is robust with a strong order book in our core regions. South America, in particular, is poised to be a significant contributor to our revenue. Turning the corner, we firmly believe the changing quarters are now in our rearview mirror. Our strategic adjustments and resilience positions us for a positive trajectory. We continue to leverage our experience going upon decades of industry experience, and we remain committed to operational efficiency and allow our seasoned approach to guide us.

Our business philosophy embraces flexibility within the day-to-day realities, while our commitment to our core values and shareholders is unwavering.

This concludes our prepared remarks on our financial calls. I'll now hand over to the operator to commence the Q&A. Thank you.

[Operator]

[Operator Instructions] And your first question will be from Gordon Lawson of Paradigm Capital.

[Gordon Lawson, analyst]

My questions mostly revolve around modeling and helping to forecast some sort of EBITDA multiple here for valuation purposes? So are you able to expand on your outlook for 2024 in terms of regional growth and perhaps what we should expect for total revenue?

[Gregory Borsk, executive]

Sure. Regional growth, it's kind of the same. Right now, what we do, we're continue -- as I mentioned in my commentary, West Africa is -- we're doing extremely well in West Africa, our three primary countries being Ghana, CI, and Egypt. We're continuing to add rigs for clients there. We're also securing new jobs. We're securing larger jobs, multi-rig jobs, few more on the horizon that hopefully we can announce later in this quarter or in Q2. So very strong foothold in West Africa, and we expect that to continue in 2024.

Again, Egypt, we do extremely well in Egypt, and we're actually in the process of adding rigs there also for clients, existing clients and new clients. In South America, South America was challenging for us in 2023. We were really impacted by the weather, the winter shutdown. We made a decision to keep our staff there, keep our infrastructure, keep everything. Really, 2023, we needed to invest in South America. And what Dave said now and what you're seeing, we're busy in South America. We're drilling both in Chile and Peru, and we're looking at a few more opportunities.

So we're optimistic geographically that our existing markets will continue to improve. We'll continue to add rigs. And for South America, we think we have that one. Starting 2024, and as we get through Q2, Q3, Q4, we're a lot more optimistic on South America this year than we were in 2023.

[Gordon Lawson, analyst]

Yes. I mean I understand '23 had some certain political issues pulling out of countries, and that's seeing your costs increase through the year -- can we expect that to return to levels maybe not perhaps as high as 2022, where your gross profit was 29%, but would a midpoint between this year's '23 and 2022's number be a reasonable assumption?

[Gregory Borsk, executive]

Yes. If you look at the -- we target a gross margin between 25% to 30%. And if you go back years, it was 26%, 26%, 26%. It spiked up to 29% in 2022. And I think we've tried to tell everyone, 2022 was a record year for us. Revenue went up 20% over 2021. We went from $115 million all the way up to about $139 million. So that's why you really saw that, call it, an average of about 25%, 26%. 2022, we got up to 29%. 2023, we were below our expectation. We were below 25%. And we talked about the reasons.

South America is one, I won't revisit that. But the pulling out of Burkina, pulling out of Burkina was a strategic decision we made, and it's for the long term of the company. It's truly an investment. We had significant revenue in Burkina. We had very good accounts in Burkina. We did well in terms of drilling and profitability, but it wasn't safe.

The security concern in Burkina, just -- we had to move those rigs. And you just don't move rigs. It takes multiple quarters, but what we tried to communicate in the MD&A and when we're talking to analysts and investors, we're out of Burkina. We are totally out of Burkina. Those rigs have all been moved now. They've all been redeployed, and most of them are out drilling in other countries for other customers. So we really have Burkina Faso behind us now.

[David Harper, executive]

Yes. I'll just quickly jump in there, if you don't mind, Gordon, and just add just a little bit more color to what Greg is saying. And that is that in taking that decision strategically furthered away from Burkina, we also looked at our customer spread and realized that a lot of our problems are coming from -- as we alluded to on the call, the fact that we have to take a provision for some problematic customers in terms of not being able to raise capital and so on and so forth.

So whilst making the big adjustment, this big pivot that we did through quarter 2, 3 and 4, we've also really focused our marketing efforts towards the Tier 1s. And we've been very successful. We've actually come away following that exercise with probably one of the largest hall of contracts that I have ever seen in the history of this company.

Now a lot of these things are still being inked. We have provisional letters of intent in place, and rigs are actually currently mobilizing. But we'll be talking more about that a little later, probably some ways around when we announced our Q1, I guess, because we'll have everything -- in the mids will be mobilized and we'll be turning an earning. Then and only then will truly have an idea of what that margin is going to look like. But you can appreciate that working for a junior and an intermediate versus working for Tier 1 on a 3- to 5-year contract with double-digit numbers comes with margin compression. You appreciate that for sure.

But on the flip side of that, we're working for cash-generating customers that are not beholden to the capital markets. And this literally secures our future for the next wave of growth. So I'm really, really excited to be talking about that in a small part now, but we'll be able to expand on that commentary as the year progresses.

[Gordon Lawson, analyst]

And in the past you've provided separate press releases on major contracts. Is that something we should expect in the coming quarter or 2?

[David Harper, executive]

Yes.

[Operator]

Next question will be from Brad Virbitsky at Equinox Partners.

[Brad Virbitsky, analyst]

One question regarding the receivables. So there are $15 million of receivables that are 90 days or greater. And I guess the $5 million provision you took. So I'm curious if that's like a company that's now defunct and the remaining $15 million is with companies that are still around? Or is there just $20 million of receivables with a bunch of different companies that you're taking a provision assuming that -- just taking some provision there because -- 90 days or greater. I'm just wondering if there's any sort of more color you can give around those receivables and sort of the probability that they get paid?

[Gregory Borsk, executive]

Yes. Actually, it's the latter, the last one. We have to look at this on a portfolio -- we disclose it on a portfolio basis, so you're seeing overall, but within that, there's different companies. Management goes through an exercise where we look at the company. What is the expectation for us to get paid from that company? Are they a junior? Are they going to need to raise capital? We look at, are they a private company versus a public company? Some are even larger; some are producers that are just taking longer to pay. So it's not just one company, Brad, and we do a probability analysis. We put a lot of time and effort into this, and we update our models every quarter. And we monitor them, we have discussions with them. So a quick answer is it's just not one company, it's kind of a basket of all of our receivables. We look at all of our receivables. Some we don't have any provisions for. Some may actually pay early and they want a discount. There are these a few companies that are taking longer and it's skewing our agents. So we've taken a provision on them.

[Brad Virbitsky, analyst]

Are there -- 90 days and greater, are there any that are 180 days or greater or 360 days or greater?

[Gregory Borsk, executive]

Well, yes, some are old. We just disclosed them at over 90%, and then we have to take our percentage on that. But yes, we're working through. You can tell that kind of just -- I think we started really -- we disclose this every year. So we had the over 90 last year. Some get paid. Most pay the older balances and then if we're still drilling for them, switch to current, if you can follow that.

But yes, there are some that are over -- well over 90 days.

[Brad Virbitsky, analyst]

And what's your rule in terms of when you write them off? Like are they written out completely after a year? Obviously, you still go after them, but what's your rule around that?

[Gregory Borsk, executive]

Well, it's when do you fully provide for them? And that's when we have an expectation that we don't think we're going to get paid, we may then have to involve our corporate lawyers. Some of them just they're not -- they don't have the ability to pay. Some of them -- what's happened in most of these situations, if it's a junior, we'll take a deposit and we'll drill. Sometimes they go slightly over. And some of these ones are older ones that we've drilled for years, and I think their expectation at the start of 2023 was that they would be continuing to raise money. And that wasn't as easy as they thought.

So this has really been a 2023 problem. If you look at Geodrill, '20, '21, '22, we did not have significant provisions to be the odd one, but really saw in 2023, and mainly with the juniors, in the past, accounts that would raise money and drill and raise money and drill, et cetera, go through that cycle. They weren't actually able to raise that money. So we're continuing to work through these. Some were talking about being creative. Others, we have on small payment plans. But it's just -- it's a bit of a function of 2023, and I think the capital markets.

And as Dave said, we're moving away from these kind of accounts and I think everyone is, because the capital markets for juniors are pretty tough, and it's easier for us to get the larger accounts that have the ability to pay the producers, they want to pay early, et cetera. But yes, there are some receivables that we're continuing to work with.

[Brad Virbitsky, analyst]

So have you changed your rule in terms of -- like it seems like it would be prudent for you going forward to change in terms of how you decide to -- I don't know, just change how you're deciding to get paid or maybe you're not going to pay? Like I'm just curious what have you changed there?

[David Harper, executive]

These days in cash we trust. And as we take on a new client these days, we'd like to see their financials. If they're a private company with intentions of going public, it's cash up front. At least 50% of the contract will be up front before we mobilize. And that puts us in a situation where we have revenues coming in and we wouldn't have worked out that 50% by the time the account has too. And so if the account is not paid within our standard 30-day terms, how'd you turn [indiscernible] essentially demobilize.

Now, we're not going to find ourself in a situation like we found ourselves in 2023. The 2023 problem is -- we've been operating for 25 years to 25 years. So as Greg mentioned, we've only had one or two, it's a rare occasion when we have to take a provision. Last year 2023, we were hit left, right, and center. And once -- just looking at the window, what's happening out there? Capital markets are in a mess. Mining is not sexy. Very, very difficult for our customers to raise capital. So what are we doing about it? Well, first of all, you haven't got money. You can't come with a story that you're raising capital. That just doesn't work for us anymore. It's cash upfront, and we turn the rig off when you stop paying.

The other thing, of course, is that we've pivoted away from the junior and the town. And we've -- and even the mid-tiers to an extent, and focusing on those large names, those large names producing gold at 20 -- I think today's price, $2,100 an ounce with an all-in sustained price of $1,100, $1,200 an ounce, which would be the average across our customer base. So they're churning cash out. They're not having any problem at all drilling and paying. And so that's where we plan to be, and that's where we're going to settle for now. That's what we're doing. That's what we're doing. We're not sitting around waiting for this problem to sort itself out. We're fixing it. And to do that and to take that decision that we're going to pivot away, it's not a 5-minute exercise. It takes time. You have to winning -- winning a job with a Tier 1. It can take from the time of bid to the time of mobilization, it's a 6-month process.

[Gregory Borsk, executive]

So Brad, like, if you look at our balance sheet, we have $110 million in shareholders' equity. Even one of the -- we look at our accounts receivable, even after the provision, our trade receivables were $32.7 million. Our payables are only $23.4 million. So we still like we've had these collection issues and these collection problems. But in terms of Geodrill and the strength of our balance sheet and our 25-year history, we made the decision to pivot away from the juniors unless they can give us a significant deposit. But we'll get over this.

It's something that we've dealt with in 2023, and we'll continue to -- we'll always continue to support the juniors and drill for the juniors. It's just they have to pay a significant amount of the drill program, if not at all, upfront now. So -- and then if you look at the rigs, look at our rigs, just the strategy of moving towards the Tier 1s, there's less rigs available for the juniors. So we're working on it. And I think as we get through 2024, we'll continue to work our -- its way out for us.

[Brad Virbitsky, analyst]

Okay. Just one more question for me. When I'm thinking about your SG&A for this year, obviously, you had the $5 million -- I guess, $5.4 million write-off last year in it. If I were to think -- if I were to model it going forward, it would be the 2023 number minus the $5 million? Or is there other costs in there that should be lower? Or how should I think about that?

[Gregory Borsk, executive]

Yes. No, we're able to keep -- that's a good question, good point. The SG&A was skewed significantly by the allowance provisions. We try to model our SG&A at about 10%, 11% of revenue, okay? So we're hoping our SG&A is exactly what you said. We're hoping that the revenue, get the revenue up and only increase the SG&A incrementally.

[Operator]

[Operator Instructions] And at this time, since we have no other questions registered, it does conclude your conference call for today. We would like to thank you for attending today's call and ask that you please disconnect your lines. Have a good day.

[David Harper, executive]

Thank you.

[Gregory Borsk, executive]

Thank you.