Major Drilling Group International Inc

TSX:MDI

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the First Quarter 2021 Results Conference Call. I would now like to turn the meeting over to Denis Larocque, President and CEO. Please go ahead.

[Denis Larocque, President, CEO & Non]

Thank you, and good morning, everyone, and welcome to our first quarter conference call for fiscal 2021. As well on the call is Ian Ross, our CFO. And you should have seen our results, which came out last night. If not, you can go to our website at majordrilling.com. Before we get started, I'd like to caution you as usual that during this conference call, we will be making forward-looking statements about future events or future financial performance of the company. These statements are forward-looking in nature, and actual events or results may differ materially. First of all, I want to start by acknowledging our employees and management for their effort to ensure we continue to operate safely and efficiently during these uncertain times. I also want to thank our customers with whom we have worked closely to find ways to operate and get back to work with the health and well-being of our employees and their families as our top priority. I must say that I'm pleased that the company was able to generate $14 million in EBITDA given the quarter started extremely slow as many projects remained shut down. Some of our operations were able to grow their revenue as compared to last year, while other larger operations, including Canada, U.S., Mexico and Chile, were affected more than others by COVID-19. As the quarter progressed, we saw more and more projects resuming, but many of them with a reduced number of rates due to restrictions on travel and mining activities. As we look at busier times coming up, we continue to be the leader in specialized drilling, but we also bolstered our underground services by adding 12 underground rigs this quarter, with half of those going to work immediately. Through this, we continue to maintain the strongest balance sheet in the industry. Ian will take us through our quarterly results, and I'll come back to discuss the outlook.

[Ian Ross, Chief Financial Officer]

Thanks, Denis. Total revenue for the quarter was $89.4 million, down 24% from revenue of $117.5 million recorded in the same quarter last year. While COVID-19 impacts were felt heavily in May and the first part of June, activity levels started to ramp-up in the latter half of the quarter. The foreign exchange translation impact on revenue, when comparing to the effective rates for the same period last year, is negligible with a minimal impact on net earnings. The overall gross margin percentage, excluding depreciation for the quarter was 27.8% compared to 26.1% for the same period last year. Margins were positively impacted by approximately 1% due to government assistance programs available to the company in the hardest-hit regions. Also, the moderate price improvements we saw coming into calendar 2020 have aided margins and should continue into Q2. G&A costs were down $1 million and $11.2 million when compared to the same quarter last year. The decrease is mainly related to reduced travel and various government assistance programs for our administrative employees. These temporary reductions will subside once activity levels return in those impacted regions and government restrictions are eased. The income tax provision for the quarter was an expense of $1.2 million compared to an expense of $2 million for the prior year period. The income tax provision was impacted by nondeductible expenses and losses in certain jurisdictions not being tax effective. Net earnings were $2.1 million or $0.03 per share for the quarter compared to net earnings of $6 million or $0.08 per share for the prior year quarter. EBITDA was $14 million compared to $18 million in the prior year quarter. Although activity levels remain impacted in certain jurisdictions. Our ongoing operations in other areas performed very well and cost control initiatives implemented in the prior quarter allowed for positive EBITDA results. In terms of our financial strength, despite the continued impact of COVID-19 in the quarter, we maintained a very strong balance sheet. We ended the quarter with net debt, excluding lease liabilities of $2 million. The decrease is tied to an increase in net working capital, mainly related to an increase in receivables as activity levels picked up in the second half of the quarter. Also during the quarter, we repaid $20 million of the $35 million precautionary draw from our credit facilities made in the previous quarter. We will continue to monitor the situation and look to repay the remaining $15 million precautionary draw as the environment permits. As mentioned above, the increase in our accounts receivable was due to increased activity levels in the second half of the quarter. We have not had any collection issues related to COVID-19 and we do not expect any issues moving forward as our current customer mix is predominantly seniors and well-established intermediates. The company also spent $7.5 million on capital expenditures, adding a total of 13 drills, with 12 of them being underground drills in line with our diversification strategy. We took advantage of an opportunity to buy 10 rigs at a discount price, and we were able to put a number of them to work immediately. We disposed of 7 rigs in line with our strategy of continuously improving the quality of our fleet. The total rig count is 613. As activity levels pick up, our CapEx will mainly be focused on support equipment in the coming quarters. The new breakdown of our fleet and utilization is as follows: 308 specialized drills at 30% utilization; 129 conventional drills, 30% utilization; and 176 underground drills, at 48% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Therefore, we should also give you the breakdown of our revenue by type of work for the quarter, 57% specialized, 10% conventional and 33% underground. Also, seniors and intermediates represented 89% of our revenue in Q1, while juniors were 11% of our revenue. Our established relationships with seniors and intermediates continue to drive our revenue. However, the recent increase in junior financings could potentially change this mix going forward. In terms of commodities, gold projects represented 63% of our revenue, while copper was at 22% this quarter. With that overview on our financial situation, I'll now turn the presentation back to Denis to discuss the outlook.

[Denis Larocque, President, CEO & Non]

Thanks, Ian. As we look forward, the price of gold, which accounted for 63% of our activity this quarter has increased to new historic highs. So in light of these existing conditions, we're seeing senior and intermediate gold miners, generating strong free cash flows at a time where they face declining reserves as a result of the low exploration spending they had over the last few years. As well, over the last 2, 3 months, we've seen a significant increase in mining financing, particularly for junior mining companies. It's important to note though that there is always a lag of 4 to 6 months between the closing of financings and the start of drilling programs. So we're just starting discussions with many of them at the moment. Regarding copper, which typically accounts for 20% to 25% of our drilling activity, many industry experts expect that copper will face a deficit position in the next few years due to continued production and high grading of mines combined with the lack of exploration work conducted to replace reserves and the increase -- and that increases the need for more exploration. New infrastructure plans announced in China, India, Europe and soon to be announced in the U.S., will require more copper and other metals, which should accelerate depletion of those reserves. With these signs pointing towards an increase in exploration spending, we are preparing for an increase in activity later in the fall and well into 2021 calendar year and beyond. However, in the short term, operations will continue to be somewhat affected by COVID-19 restrictions, which will slow down the ramp-up of drilling programs. Also, with the increased demand we are facing in North America, we are already starting to face a shortage of skilled labor, and we expect labor costs to increase. This will, in turn, have to be reflected in drilling prices, which are expected to increase as we go into 2021. In conclusion, we continue to be very well positioned at this point in time as the leader in specialized drilling. Our strong financial position in the industry gives us the ability to respond to meet our customers' demand in terms of rates, rod handling, mobile equipment and technology, which is key to our success to remain the leader in specialized drilling. Also having the financial resources and the best equipment allows us to attract the best people at a time where the industry is heading towards a labor crunch. That concludes our formal remarks, and we'll now open the call to questions.

[Operator]

[Operator Instructions] The first question is from Eric Swergold of Firestorm Capital.

[Eric Benjamin Swergold]

Could you talk a little bit to Major Drilling's efforts in some of the battery-oriented metals, such as they may be outside of the copper market, whether it be cobalt or other metals outside of copper that are used in batteries for electronic vehicles and so on?

[Denis Larocque, President, CEO & Non]

Yes. Well, I mean, we've done a lot of work for lithium over the last few years. And lately, we've had a few companies call about lithium program. So we're seeing work coming from there. We do a little bit of a little bit of cobalt. But I mean that is very -- there's not necessarily a lot of drilling globally conducted for cobalt. And then you need to include nickel in there, and there's been an increase in inquiries for nickel programs as well. So all of that together, and I always come back to people focus on batteries and lithium and everything. But I always come back to electric vehicle, whether it's buses, which countries are looking to increase the load or you're talking about cars, there's 3.5 more times copper in there than there is in a regular vehicle. And there's a lot that the whole electrification of the systems, there's going to be a lot more copper I mean, again, the battery is a big aspect. But copper in terms of bringing electricity and also conducting electricity throughout the vehicle is the biggest piece of that. So out of that, I think, copper, lithium, nickel, those are going to be the drivers from that perspective.

[Operator]

The following question is from Daryl Young of TD Securities.

[Daryl Young, Mining Research Associate]

I was just wondering if you could maybe give us a bit of an outlook or maybe what the pipeline of discussions looks like in terms of the workload? I guess what I'm trying to vet out is what would activity levels look like if it weren't for COVID? And how big is the market opportunity at this point as we ramp-up in the drilling cycle?

[Denis Larocque, President, CEO & Non]

Yes. I mean, there's lots of discussions, as you can imagine, with the amount of financing that has been done over the last 3 months, there's lots of discussions happening in the -- right now, and -- but some of that will be -- it's more of a timing issue than an activity level because some of these programs take longer to plan, not even just get started, just to plan around, you need a bigger camp because right now, usually, you'd have people sharing rooms or even your kitchen area was limited and could get crowded, but you go with what you have, whereas now you need a much bigger kitchen area and all those things which delays the ramp-up. But there's no question that mining companies want to do more. So it's more of a timing than the volume because the discussions are certainly there, both with seniors and with junior companies.

[Daryl Young, Mining Research Associate]

Okay. So would it be fair to say then at this point, you've had the conversations where a company says, we're looking to do x number of meters, we just don't know how to get there at this point given these restrictions?

[Denis Larocque, President, CEO & Non]

I wouldn't say it's -- we don't know how to get there, it's just something that would have been ramping up in August or September will be ramping up in October. That's kind of what -- more of what I'm pointing towards. It's -- and something that would have ramped up right away to the 4 rigs will be starting with 2, and then they'll add 1 and add another 1. But for example, if they -- in their mind, they still want to do a 20,000-meter campaign, they're still going to do 20,000 meters once they get going. It's just that it's -- the ramp-up it's the ramp-up that you need to -- that is basically staggered. And also compared to -- I guess, there's also the permitting and all the things take a bit longer than before as well because you need to have all these protocols approved and everything. So all these things take a bit longer than the previous upcycle.

[Daryl Young, Mining Research Associate]

Got you. Okay. And then it was encouraging to hear that the pricing is improving. It sounds like that may be offset by labor headwinds. Can you maybe just talk to the dynamic there in terms of price improvements versus per cost expectations, inflation?

[Denis Larocque, President, CEO & Non]

Yes. I mean, there's no question that labor cost is going up. We've said before that already, it was -- there's a lot of people that left the industry. So going forward, experience labor crews, there's less than there was at the last peak. And so we're starting already with a low base. Now we're doing a lot of training, and we're ramping up our training and also we've done with innovation. We've been able to reduce training time. But still, when you talk about experienced waiver. So labor cost is going to go up. And -- but pricing is going up as well. We're at a point in certain regions where we're getting to high utilization. And when the higher you get, it's basically that the pricing gets adjusted accordingly because the next rate you put out, it's going to be with greener crews, which means you're not necessarily going to get as many meters per shift, which then impacts, but we still need to generate the good amount of revenue per shift or revenue per rig. So therefore, pricing is going to be going up. Now the one thing to mention is that North America is getting busy, but some other places are still facing some heavy COVID restrictions, places like Chile, Argentina, Mexico, so it's going to be slower in those regions. So it's just -- it's -- in terms of labor costs, you are seeing that in North America for us, but it's not the same necessarily, globally.

[Operator]

[Operator Instructions] The following question is from Ryan Hanley of Laurentian Bank.

[Ryan Hanley, VP & Mining Analyst]

I think you kind of touched on the ramp-up in revenue. I'm guessing that May was a bit challenging, especially in places like Mexico that were shut down and maybe a bit better in June and July and continuing at that kind of pace. But are there any regions that have been a bit COVID challenged still where you expect that ramp-up might run into some more challenges where countries maybe go a little bit backwards and start putting more restrictions back in?

[Denis Larocque, President, CEO & Non]

That -- I'll tell you, that's what makes this difficult to predict. And I mean, every company and every industry is facing the same challenges in terms of -- you need to stay flexible in terms of your approach. But yes, I mean, you could see that happening. Now at the same time, mining companies and ourselves have gotten better in terms of all the protocols and your -- so I think in a lot of cases, you might have restrictions, but the restrictions will apply as long as you're able to follow certain rules, you'll be able to operate, and we've been able to put those rules in place. So yes -- no, it could. But at the moment, things are starting to fall into place. I mean, we'll see how it goes, but it's certainly a fluid situation.

[Ryan Hanley, VP & Mining Analyst]

Okay. Fair enough. And then maybe just going to the comments earlier about adding the 12 underground rigs. Was that the rationale behind that? Is that just you happen to find some of that at a very good price in an area where you're running, I guess, maybe at a high utilization rate that could easily be thrown on a job and you can use the other 6 elsewhere in the near term? Is that kind of the reasoning there?

[Denis Larocque, President, CEO & Non]

Exactly. That's we -- basically, that's exactly -- it was a region where we were getting demand. And at the same time, we saw -- we got an opportunity to get our hands on good quality rates and that's what we did. And those -- half of those went to work immediately, and we're already sourcing work and having discussions for a few more of those.

[Ryan Hanley, VP & Mining Analyst]

Okay, perfect. And then maybe just one last super exciting modeling question for you. For fiscal 2021, it's kind of like that $20 million to $30 million in CapEx range. Is that still a reasonable estimate? I'm guessing that's also for largely support equipment, like you mentioned before?

[Denis Larocque, President, CEO & Non]

Yes. I think it's more -- every year over the last 3 years, I think we've said more like $30 million. And I think it's more -- the thing is that every rig that goes out, additional rig needs pickup trucks and needs, compressors that need stuff. So if volume goes up, there's going to be a requirement to equip those rigs with support equipment. So it's going to be heavy on support equipment for initially. So yes, I'd be more -- it will be more towards the $30 million.

[Operator]

The following question is from Sebastian Van Berkom of Van Berkom Associates.

[Joannes Sebastian Van Berkom]

I wanted to understand where we are in this cycle that has just commenced? Could you give us an idea of what is your current utilization rate? And on how many ships per day? And given the environment, what is your best guesstimate in terms of how utilization rate progresses over the next several years? And do we have the same kind of peak earnings potential as last cycle?

[Denis Larocque, President, CEO & Non]

Yes. Well, I mean, utilization this quarter was low, and our revenue was low. And again, it was heavily impacted by COVID, but we were at 35% utilization. The one thing I'll remind you though is peak utilization for us is 75%. The way we count utilization is a rig that earns enough money in the quarter is counted. And if not, then it's not counted. And we always have rigs that, for example, are in the Arctic, they are -- we leave them there. They only end up working 5, 6 months of the year. So the other 6 months, they're unutilized, but they still make good money when they work. So for us, it's still good to have rigs there. And also, you have rigs that move all the time and rigs that are in the shop. So maximum utilization for us is 75%. So you need to kind of use our number on a 75% factor. So going forward, I mean, sure, if the demand that we're seeing comes to comes to fruition in 2021, utilization rates are going to go up. Can we get back to where we were before? I think so the -- I mean, it's a question of time, but the -- what we're seeing now is a combination of the 2, I would say, the peaks that we saw in the last 12 years or 10 years. We had the cycle from 2003 to 2008, which was driven by the lack of reserves coming from a lack of exploration from 1998 to 2003 and then all the mining companies ran out of reserves, and they all rush to replenish and when they do that, it's a 5-year -- 5-, 6, 7-year cycle, which is what happened, then we hit the Financial Crisis. So there was an interruption of 1.5 years. And then things picked back up and kept going. And what we saw after the Financial Crisis is another phenomenon that is at play at this point is you had to kickstart the economy, governments went in with infrastructure plans that basically required a lot of copper and gold price because of the uncertainty, gold price went to record high at that time. And so the combination of those 2 drove our activity levels to record highs in 2012. This time around, we've got the lack of reserve combined with -- while the COVID impact, which basically brings uncertainty and governments looking to kickstart their economies with infrastructure programs. So it certainly looks like the stars are aligned for our industry that have a few years of very good activity. We still have the election -- the U.S. election coming in November, but there is still a lot of -- a lot of those factors are still going to remain in place even after that election.

[Joannes Sebastian Van Berkom]

So really, we're looking for a pretty good cycle again this time around?

[Denis Larocque, President, CEO & Non]

Well, certainly, it look like that in terms of when you look at all the factors that are at play.

[Joannes Sebastian Van Berkom]

What is the principal thing that you worry about most as we enter this cycle?

[Denis Larocque, President, CEO & Non]

Well, I mean, the COVID, again, like I said, makes things hard to manage because it's almost like a daily -- you just never know what's around the corner. So that one makes it a bit harder to manage but the labor as well, when you talk about, can we get to that peak again, labor is going to be a big factor because there's less people in the industry than there was when we were in the last upcycle. And so we're going to have to train. And like I said, we're working hard. We've got lots of training classes ongoing, but it's -- labor is going to be the biggest factor, for sure.

[Joannes Sebastian Van Berkom]

One final question, Denis. How about your major competitor? Is he weaker than last time, do you think you can gain more market share because of its weakness? What do you think?

[Denis Larocque, President, CEO & Non]

I don't like to talk about competitors. But I think the way it looks, I think it's all boats are going to go up, the tide is going up. So there's going to be lots of opportunities from the looks of it. And but I mean there's no question that we have a very strong position. We're the leader in specialized drilling. And that's when there's a difficult project, we're typically to go to for mining companies. And our financial situations allows us to be able to ramp-up rigs in the field and again attract the best labor.

[Operator]

The following question is from James Vail of Arcadia Advisors.

[James Vail;Arcadia Advisors;Founder]

Denis, what's the status of the rigs that are not being used? Can they be put into service immediately? Or is there some type of refurbishment that has to go assuming some of these rigs have been idle for a while. Is that included in the $30 million potential capital spending? You know what I mean, is the whole fleet ready to go at a moment's notice or is there some type of preparation needed to be done to get them ready for service?

[Denis Larocque, President, CEO & Non]

A very good question. And basically, the approach we've taken all the way through is we always tell our branches to have at least rigs on ready to go to take on a 30% increase in activity. So we do have a good fleet that's ready to go. Now having said that, it means that not all the rigs are all ready, and that basically had we done that, we would have drained a lot of cash upfront. So our approach is, as a rig goes in the field, we take one rig and bring in the shop and we refurbish it and put it on shelf. And that's going to be how we're going to operate. So therefore, to your point, yes, part of the $30 million is going to be some refurbishment per rig as we go deeper in the cycle. We're going to have -- again, we'll bring rig. Some of those costs, depending on how much we need to spend some of those costs flow through the margin, and some of those costs are going to -- if it's more significant, where you need a brand-new motor and need to add significant items, then he'll make it to the CapEx. So...

[James Vail;Arcadia Advisors;Founder]

Okay. And is there any new technology on the horizon that's going to change the way drilling is done? Or is it still pretty much the same way?

[Denis Larocque, President, CEO & Non]

It's still pretty much the same way. The technology that we're bringing is going to help on a couple of fronts. First of all, on the training. By having more computer consoles that transmit information to the drillers, it allows us to reduce the training time and basically help new drillers ramp-up quicker. But also, there is data that is retrieved from our drilling to those computers that we're able to share with our customers. And they will help them refine their programs as they go forward and probably make better decisions in terms of just what's next. So I think those 2 are going to be -- but it's still -- the drilling part of it is still going to be done the same way as it's done before. It's more the information gathering that basically, we're getting much better at.

[Operator]

The following question is from Ahmad Shaath of Beacon Securities.

[Ahmad Shaath, Research Analyst]

Congrats on a solid quarter. So a couple of questions for me. First, on gross margins, I mean, even if we adjust then for the government assistance that you guys got, they looked strong despite the decline of revenue. Maybe any color on that in light of what you guys mentioned on the smaller ramp-ups and the increased training cost assumption? How should we think about gross margins if revenue picks up?

[Denis Larocque, President, CEO & Non]

Yes. Well, we entered the year and pricing has improved as we entered the year in January. So what we saw this quarter is some of that pricing coming through because we didn't get to see that in our fourth quarter because we got hit with COVID and there was a lot of cost and that mixed into there. Whereas this quarter, it was probably a pure quarter in terms of just all the costs. So some of that is pricing, some of that is cost. We've -- through this, we've realized some efficiencies in -- which has improved their costs. So it's going to be a bit of both. Going forward, as I mentioned, drilling prices are going up in the market, but costs are going up as well. And -- so -- but I think we'll see some gradual margin improvement as the cycle progresses.

[Ahmad Shaath, Research Analyst]

That's great. And maybe on the acquisition of the rigs that you guys spoke about, maybe a little bit more color on that. Was it sort of an opportunistic acquisition of rig fleet? Is it -- can we take away that some of your smaller or regional players are struggling after COVID and that represented opportunity for you guys? Maybe a little bit more details on that front and the competitive landscape following COVID?

[Denis Larocque, President, CEO & Non]

Yes. It was an opportunistic. Those rigs became available, and I won't elaborate the reasons why they became available, but it was -- it was a company that wanted to leave that side of the business. And so we picked up some good assets on there. And so -- and these are -- that's typical usually through these cycles when you come off the bottom, there is opportunities like that, that come up. And the fact that we have a strong balance sheet allows us to take advantage of those opportunities.

[Operator]

Thank you. And there are no further questions registered at this time. I'll turn the meeting back over to Mr. Larocque.

[Denis Larocque, President, CEO & Non]

Thank you. And just as a reminder, it's our annual -- our AGM and that basically -- just give me a second here, just gathering my note -- our AGM that will be held virtually on tomorrow at 3:00 p.m. Eastern and it can be accessed, if you go to our press release, there's a link where you find the access -- how to access our AGM. Thank you, and we'll be talking next quarter.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.