Major Drilling Group International Inc
TSX:MDI
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Major Drilling Group International Inc
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Good morning, ladies and gentlemen. Welcome to the Q1 2019 results webcast and conference call.I would now like to turn the meeting over to Mr. Denis Larocque, President and CEO. Please go ahead, Mr. Larocque.
Good morning, everyone, and welcome to Major Drilling's Conference Call for the First Quarter of Fiscal 2019. With me is David Balser, our Chief Financial Officer. You should all have received a copy of our results, which were released yesterday evening. If you haven't, please contact our office or visit our website at majordrilling.com.Before we get started, I'd like to caution you, as usual, that during this conference call, we'll make forward-looking statements about future events or the future financial performance of the company. These statements are forward-looking in nature, and actual events or results may differ materially. Despite the recent volatility of commodity prices, activity levels continue to grow this quarter. This growth was led by our international operations, in South and Central American revenue was up 41%. Asian and African revenue was up 58%, all compared to last year. In Canada-U.S., our revenue was relatively flat as we concentrated on higher-margin contracts due to the high level of labor utilization experienced in these operations, while still facing competitive pressures. This allowed us to almost double our EBITDA as compared to last year. On the margin front, while pricing continues to improve in all regions, overall margins were impacted this quarter by higher seasonal transition cost than usual in South and Central America. The company's net cash position, net of debt, continues to be very healthy at $2.2 million. During the quarter, we spent $5.8 million on capital expenditures, adding 6 new rigs to our fleet, 5 of them underground rigs.David will take you through a summary of our quarterly results before I come back with the outlook.
Thanks, Denis. Total revenue for the quarter was $98.5 million, up 17% from revenue of $84 million recorded in the same quarter last year. The unfavorable foreign exchange translation impact for the quarter is estimated at $2 million on revenue when comparing to the effective rate for the same period last year, with a negligible impact on net earnings.The overall gross margin percentage for the quarter was 23.8%, up from 20% for the same period last year. While pricing continues to improve in all regions, overall margins were impacted by the seasonal transition costs in South and Central America.General and administrative costs were up 3% at $12.4 million when compared to the same quarter last year. Staffing levels and salaries have increased as the industry ramps up, and we continue to invest in recruitment and information technologies.General and administrative expenses as a percentage of revenue have decreased by 1.7% to 12.6% of revenue. The provision for income tax for the quarter was an expense of $1.2 million compared to recovery of $400,000 in the same quarter last year. Tax expense for the quarter was impacted by nontax-affected losses and nondeductible expenses. This combined for net loss of $2.5 million or $0.03 per share for the quarter compared to a net loss of $6.9 million or $0.09 per share for prior quarter year. In terms of our financial position, we continue to have one of the most solid balance sheets in the industry.During the quarter, our net cash position, net of debt, increased by $300,000 for a total net cash position of $2.2 million. The company spent $5.8 million on capital expenditures, adding 6 new rigs and support equipment to our fleet, while disposing of 7 older inefficient rigs. The total rig count is now 627.The new breakdown for our fleet and utilization is as follows: 301 specialized rigs at 38% utilization; 149 conventional rigs at 26% utilization; and 177 underground rigs at 43% utilization for a total rig count of 627 rigs at a 37% utilization for the quarter.As we've mentioned before, specialized work, in our definition, is not necessarily conducted with specialized rigs. Therefore, we should also give you a breakdown of our revenue by type of work. Specialized work represented 65%; conventional work, 10%; and underground work represented 25%.Also, intermediates and seniors represented 76% of our revenue in Q1, while juniors have increased, 24%. In terms of commodity, gold projects represented 58% of our revenue, while copper was at 21% this quarter.With that overview of our financial situation, I'll now turn the presentation back to Denis to discuss the outlook.
Thanks, David. Early indications of our second quarter show that the upward trend in activity level continues. Despite the recent drop in commodity prices, most senior mining companies are continuing with their original plan as they work to replace their mineral reserves. As we've seen in the last couple of years, we will have to see what mining companies do with their budgets in December in order to have an idea of what calendar 2019 will bring. But the fact remains that supply of all metals is dwindling and not getting replaced fast enough. 10 of the top senior gold mining companies have seen their mineral reserves decrease by almost 15% over the last 2 years, as well many industry experts expect the copper market will face a deficit position in the next few years due to continued production, high grade of mines combined with the lack of exploration work conducted to replace those reserves. And adding to this, on the demand side, electronic -- electric vehicles are gaining momentum and driving demand for a lot of metals, like lithium and cobalt and nickel, with copper being the biggest need, as an average EV contains 85 kilogram of copper versus 25 kilogram for a regular vehicle. That's 3.5x more copper, and this does not include all the charging stations that will need a lot of copper as well.In terms of drilling services, prices continue to improve in all regions, although these improvements are presently offset by an increase in consumable and labor cost, which is typical in a ramp-up environment. As utilization rates gradually improve, it will help absorb more of our fixed operational cost, giving considerable leverage to improve profits as we move forward.At the moment, we're seeing a lot of similarities with the upcycle from 2004 to 2012, which was briefly interrupted by the financial crisis of 2009 and '10. The industry and the company experienced many years of strong growth during that period. Indications support our belief that the industry is still early in the exploration cycle, with most industry watchers pointing to depleting mineral reserves for the foreseeable future as mining companies continue to search for significant discoveries.The large number of exploration projects is still very low compared to the last cyclical peak in 2012, confirming this lack of significant discoveries. As mining companies begin to discover meaningful levels of resources, they will have to engage in the period of enhanced infill drilling. With the easily accessible mineral reserves getting depleted around the world, attractive deposits will be in areas increasingly difficult to access and deeper in the ground, which will bring a resurgence in demand for specialized drilling.One of the challenges in drilling services is the shortage of experienced drill crews in the industry, especially in North America, a factor that will put some pressure on cost and productivity as we move forward. Therefore, we're continuing to make investments in innovation directed towards increased productivity, safety and meeting customers' demand, including mobile solutions in the field, providing tools to our crews necessary to excel in these areas. This falls in line with the enhancement of our recruiting and training systems as we bring in a new generation of employees. An example of these initiatives is our mobile underground computerized rigs, which are now mounted with broad handlers, meeting a growing demand from our customers. We are very pleased with where the company is positioned at this point in time still being the leader in specialized drilling. Coming out of one of the longest downturn in the industry with net cash on hand has allowed us to continue to improve our fleet to meet customers' demands in terms of rigs, rod handling, mobile equipment and technology, which is key to our success to remain the leader in specialized drilling. Also having the best equipment and the financial resources allows us to attract the best people at a time when we are going into a labor crunch in our industry. That concludes our formal remarks. We'll now open the call to questions.
[Operator Instructions] Our first question is from Jacques Wortman with Eight Capital.
So the senior producers are cashed up, and they're focusing on reserve replacement. There are recent reports that financings from the juniors and intermediates fell considerably in July and August. Can you speak in a bit more detail on the level of drilling activity at this end of the spectrum?
Yes. Well, basically, most of our work is conducted by seniors. And although we had something like, we had 24% of our revenue that came from juniors, a lot of that are with juniors that have the toehold from seniors that, basically, help finance their program. So what we're seeing is -- and again, I made mention that we're seeing a lot of similarities to 2004, to 2012. In 2004, the financing for juniors was not strong either. Yes, we were coming out. Commodity prices were just starting to pick up. But seniors were facing reserve issues. And one of the way for them to do exploration -- because they can't be spread out. And for them to do exploration campaign, it's much more efficient for them to spread money in a pile of juniors that have -- already have identified targets. And that's what we're seeing. So the financing right now is not happening. You're right. It's not happening on the market. And you guys would see it, but seniors are taking more and more. And there's been -- over the last few months, there's been announcements of seniors making investments in juniors, and that's what we're seeing. So that is what is fueling -- I said that we're seeing a -- the growth continuing. And basically, a lot of it is rigs being added on -- some are on junior projects, some are on senior existing projects, where they want to step out of an existing mine.
[Operator Instructions] Our next question is from Daryl Young with TD Securities.
Just wanted to know what the bid pipeline look like currently, given where commodity prices have fallen to recently, and just in terms of maybe what that looks like compared to 6 months ago.
Yes. The thing is, at this point, typically, the work that we have until October, November is already signed up. And the biggest wave of bids or where we start to get in bidding season starts in October, November for programs for 2019. So at this point, it's really hard to tell what we'll see because it's kind of we're in between 2 periods. As I mentioned, going into Q2, companies are continuing with their plans. We've been asked to add rigs to some projects. We are starting a few other projects, and things are basically proceeding. But I mean, the big unknown is -- and every year, it's been like that, and here we go again with the commodity prices, is when we get to November, December, and they make their decisions on bids and levels of work they'll want for calendar 2019, that's what will dictate what it looks ahead of us. So it's -- there is a lot of discussions again on reserves and companies being worried. As Jacques mentioned, the seniors are cashed up, so they do have issues they need to address. So how will they play it if commodity prices stay where they are? It's hard to tell. I suspect it's going to be a bit different depending on the companies. But I mean, a lot of things can happen from now until that time.
Got you. And are you seeing any risk of jobs being ended early -- earlier than expected or not, maybe completing all of the [ minerals ] that have been contracted to drill come the fall?
Yes. There's always -- like I said, at this point, we're not seeing it. But it's still early in the quarter. When we get to end of September, a campaign that would have gone into November will be then mid-October, we just don't know. At this point, we're not seeing much of that. But again, we're still early in the quarter. So that's all I can give you at this point.
Yes, fair enough. And then in terms of the competitive dynamics in Canada and the U.S. currently, it seems like it's still pretty aggressive there with the competition levels. Do you see any signs of that break anytime soon? Or...
Well, no. We've seen pricing picking up. Which is why if you look at our results in North America, our revenue is flat, even down a little bit, but our EBITDA in that region is up. And so we're -- that's an indication because prices are picking up. And there is a labor crunch, and a lot of competitors are feeling it. And when they have to put that extra rig in the field, that extra rig is going up -- is going at higher prices than the last one. And so it's a gradual pickup, but it is moving. It's just not moving as fast as we'd like it to, but it is moving in the right direction. And it all has to do with -- again, with labor. It's just everybody is struggling to find good drillers. So you know that, going forward, you're going to need better prices because, first of all, labor cost is going to go up, but also your productivity is going to start to get affected as you proceed forward.
Right. Okay. And then just one quick last question on what's happening in the Asia and Africa segment in terms of activity levels and demand.
Yes. Well, that's a sector that's doing fairly well for us. I mean, that sector, we have 3 main countries, which is Indonesia, Mongolia and Philippines. And again, when I talk about companies adding rigs, they're adding rigs to their -- most of those contracts are adding rigs here and there. And in the Philippines, the environment seems to be improving in terms of just activity levels. So that sector has been doing fairly well for us.
[Operator Instructions] There are no further questions registered at this time. I would like to turn the meeting back over to you, Mr. Larocque.
Well, thank you. And we do have our Annual General Meeting this week. It's going to be held in Montréal on Friday at 3:00 p.m., Eastern Time. And the -- if you go to our press release, you'll see the address and where we'll be holding it in downtown Montréal. Hoping to see many of you there. And on that note, we'll talk next quarter.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.