Major Drilling Group International Inc

TSX:MDI

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the First Quarter 2025 Results Conference Call. I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Ms. Melanson.

[Chantal Melanson, executive]

Please go ahead, Ms. Monaco. Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the first quarter of fiscal 2025. On the call, we will have Denis Larocque, President and CEO; and Ian Ross, our Chief Financial Officer. Our results were released yesterday evening and can be found on our website at www.majordrilling.com. We also invite you to visit our website for further information.

Before we get started, we'd like to caution you that during this conference call, we will be making 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 from those currently anticipated in such statements.

I will now turn the presentation over to Denis Larocque. Please go ahead.

[Denis Larocque, executive]

Thank you, Chantal. And good morning, everyone, and thank you for joining us today. Before going into the quarter results, I'd like to talk about Major Drilling's strategic investment in DGI Geoscience and its affiliate, KORE GeoSystems. This investment marks a pivotal moment for our company as it allows us to fully leverage our Rock5 technology and continue to strengthen our position as the leader in the drilling industry.

Just to give you a bit of an overview, DGI Geoscience are experts at acquiring and interpreting data to advanced downhole survey and imaging services with the use of televiewers and other sensors to fully leverage drilling investments for mining companies. It's really using probes to capture data down the hole. KORE GeoSystems is a technology company that uses AI to automate various logging tasks, which streamlines the core logging process for our customers directly at the rig.

The fact that it produces consistent results at a fraction of the time it takes to log KORE, produces significant value for main companies. In fact, KORE GeoSystem won Goldcorp's disrupt mining competition at the 2017 PDAC, a potential technology that could revolutionize the future of mining. Rock5 is our own tool, developed in-house and is a device that collects data from our drilling and as we're drilling, which not only helps our drillers to be more productive, but also helps our customers by providing them with valuable data useful in their geotechnical analysis of their project.

So the real value for our investment lies in the combination of all those technologies with our specialized drilling to offer a unique and valuable service to our customers. And all of this happens right at the rig, which is why we're now calling this combined offer drillside Geo Solutions. This partnership should open up new opportunities for us in the specialized drilling sector, especially at a time where the demand for specialized services and data is growing. This move is a testament to Major Drilling's commitment to innovation and excellence and a move to reinforce our dominance in the drilling industry.

Now moving on to our first quarter results. We were able to increase our revenue from the previous quarter and maintain a solid level of activity despite a slowdown in junior financings and the dip in overall global drilling activity. We were particularly pleased with the results from our Australian and Chilean operations, which continue to show growth and helped offset a slowdown in North America, driven by the lack of junior funding. Our balance sheet remains very strong and allows us to continue to invest in our fleet modernization and technologies at a time where the future looks bright for our industry.

I'll discuss this further after Ian walks us through the quarter's financials.

[Ian Ross, executive]

Thanks, Denis. Revenue for the quarter was $190 million, down 4.5% from revenue of $198.9 million recorded over the same period last year, but up 13% from the prior quarter. As we communicated last quarter, results continued to be impacted by a lack of junior financings, particularly in North America. However, this was offset by strong results from our Australasian and Chilean operations. Favorable foreign exchange translation impact on revenue for the quarter when comparing to the effective rates for the same period last year was $1 million, with a minimal impact on net earnings as expenditures in foreign jurisdictions tend to be the same currency as revenue.

The overall gross margin percentage, excluding depreciation, was 28.9% for the quarter compared to 30.1% for the same period last year as margins were slightly impacted by a more competitive environment in North America. G&A costs were $18.5 million, an increase of $2 million compared to the same quarter last year. The increase from the prior year period was driven by annual wage adjustments implemented at the start of the new fiscal year, and nonrecurring professional fees related to strategic corporate initiatives.

The income tax provision for the quarter was an expense of $4.9 million compared to an expense of $7.2 million for the prior year period. The decrease in the income tax revision was related to an overall reduction in profitability. Net earnings were $15.9 million or $0.19 per share for the quarter compared to net earnings of $21.8 million or $0.26 per share for the prior year quarter. The company generated EBITDA of $34.3 million compared to $40.3 million in the prior year quarter. Given the strong performance in Australia, we're pleased to announce that our 2021 McKay acquisition successfully met all the EBITDA milestones in their earnout period and that the final contingent payment will be made in Q2.

With no long-term debt on the balance sheet and a net cash at $76.9 million, the company remains well positioned to continue investing in its industry-leading fleet in order to respond to potential growth opportunities as the industry prepares for increased activity levels needed to support global energy transition efforts. In line with this strategy, the company spent $21.3 million on capital expenditures in the quarter, adding 7 drill rigs and support equipment while disposing of 4 older, less-efficient rigs, bringing the total rig count to 609 drills.

As previously discussed, the company also made a $15 million strategic investment in DGI/KORE as we look to evolve our industry-leading specialized services by offering valuable incremental downhole data to our customers. The new breakdown of our fleet and utilization is as follows: 296 specialized drills at 44% utilization, 117 conventional drills at 44% utilization and 196 underground drills at 47% utilization for a total of 609 drills and 45% utilization.

As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Rather it's work that requires even rigorous standards of our customers in terms of technical capabilities, operational and safety standards and other related factors. These standards are becoming increasingly important to our customers. In the first quarter, revenue from specialized work accounted for 63% of our total revenue as we continue to see increased demand for our specialized services.

Conventional drilling, which is mostly driven by juniors, remained low at 11% of our revenue for the quarter, while underground drilling contributed 26% of our total revenue as the company continues to look for diversity in its revenue streams. We continue to see the bulk of our revenue driven from seniors intermediates, which represented 85% of our revenue this quarter as they continue their elevated efforts to address depleting reserves. Juniors continue to have challenges accessing the necessary capital to fund exploration programs and made up 15% of our revenue this quarter.

In terms of commodities, following on trends seen in previous quarters, we continue to see a shift in our revenue mix with gold remaining below the 50% historical average at 43% of our revenue while copper continues to drive growth in a few regions, coming in at 25% of our revenue. We also see continued interest in iron ore as it remains steady at 13% of our total revenue.

With that overview of our financial results, I'll now turn the presentation back to Denis to discuss the outlook.

[Denis Larocque, executive]

Thanks, Ian. As we enter our second quarter of fiscal 2025, we anticipate a slight decline in our revenue run rate relative to our first quarter, primarily due to subdued activity levels in North America. Market conditions, particularly for juniors, remain challenging with a continued lack of funding translating to decreased activity levels. However, the recent strengthening of gold and copper prices has shown sign of improved financing and investor sentiment, and we feel optimistic about calendar 2025.

Over the past 3 months, we've seen gold prices continue to surge recently hitting a record high of $2,500. On the copper side, demand is projected to rise rapidly as substantial infrastructure investments are required for the green transition and the anticipated AI revolution. Industry experts predict this will result in significant supply deficits in the coming year, creating an urgent need to replenish reserves. At the same time, we're seeing commodity -- stronger commodity prices continue to enhance the financial positions of most senior mining companies which is expected to lead to increased exploration budgets over time, particularly following a decade-long decline in mineral reserves.

Many of the new mineral deposits will be in challenging hard-to-reach areas, which will require complex drilling solutions and increased demand for Major Drilling's specialized services. Again, combined with our technology offering, we'll be in a position to offer a unique and valuable service to our customers. With these fundamentals still firmly in place, the long-term outlook for our company remains extremely positive. Major Drilling remains focused on growth and is in a unique position to react to and benefit from these market dynamics. Finally, please don't forget to join us for our AGM, which will be held in person and virtually today at 3:30 p.m. Eastern Time. All of the details related to the AGM can be found on our website.

With that, we can open the call to questions. Operator?

[Operator]

[Operator Instructions] Our first question is from Gordon Lawson from Paradigm Capital.

[Gordon Lawson, analyst]

So you mentioned that some of the weakness was continuing to the current quarter and that being the annual peak for the past several years. Are you expecting the seasonal high in revenue? Or is the weakness in North America and the junior is expected to overshadow this?

[Denis Larocque, executive]

Sorry, it broke up. Can you repeat your question? Sorry about that. It's just -- it was a breakup on our side.

[Gordon Lawson, analyst]

No problem. So you mentioned in the MD&A that some of the weakness was spilling into the current quarter. So I'm just -- I'm curious if we're still expecting your seasonal high fiscal Q2? Or is this weakness expected to overcome that?

[Denis Larocque, executive]

Well, I mean we're -- basically, what we said in our press release, we're expecting a slight decline from the present run rate. And really, it's brought on by juniors that -- I mean, the financing is tougher for juniors right now. And we expect -- from early discussion, we expect to see 2 projects slowing down earlier than last year. So when you talk about the seasonal -- the seasonal trend, what we're kind of seeing is an earlier shutdown and not much to kind of replace that on the junior funding.

In the past, when things are really hopping on the junior side, what you tend to see especially with the flow-through is a rush in September, October, November and sometimes even December, a rush to get the budget and the money spent and because of -- again, what we've seen on the financing side, we don't see that happening this year, which is why we're expecting that slight decline just for this upcoming quarter.

[Gordon Lawson, analyst]

Okay. And on the margin front, you've got a combination of increasing specialized drilling, however saw like slight decrease year-over-year in your EBITDA margin and such. So can we expect year-over-year comparisons to be in line with last year? Or are you expecting a decline owing to the competition and then other issues cited here?

[Denis Larocque, executive]

Yes. Well, what you're seeing as a run rate right now is where kind of we are in the market. With -- again, with the slowdown, there's some of our regions that are facing a bit more competitive pressures. So what you're seeing right now is probably reflective of the run rate at the moment.

[Operator]

Our following question is from Brett Kearney from American Rebirth Opportunity.

[Brett Kearney, analyst]

Denis and Ian, I know it's early days, but just curious how -- I guess, the planning and also the collaboration between your internal engineering teams and the DGI/KORE teams are going at this stage to really start working towards combining those services into that holistic, really unique solution you guys see.

[Denis Larocque, executive]

Yes. I mean, it's going very well. In fact, over the last month, we had the key -- the owners spent time at our head office with our management team. And last night, we had the 2 teams spend time together and get to understand the possibilities. And we're really, really encouraged in terms of what the future looks for all of this. It's -- the power of the combination of the 2 brings a very unique service to our customers for the future. And so it's early days, like you said. This is a long-term strategy.

KORE is just getting started. I mean our investment comes at a time where they've got a proven technology that's been tested with a few of our customers but very early and part of our investment will help them grow that part in terms of just bringing more capacity and will be -- then will have the offering on our side in terms of the market for that capacity. And at the same time, for us, it helps us bring again a different kind of service to our customers, which then improves our offering. And then the DGI Group brings a service that's already established in the market. and a service that's getting more and more recognition as things are -- the technologies are improving in the mining sector. So very, very excited about this.

[Brett Kearney, analyst]

Excellent. Very helpful. And if I could just ask 1 more geographically, good to hear the strength in Chile. Just more broadly on South America, what you're seeing, I guess, going forward, Chile, Argentina, I know there was recently a large transaction, more on the development side there, but also Colombia and some of the other geographies in that market.

[Denis Larocque, executive]

Yes. Chile, the -- we're seeing a lot of activity out of Chile. We're -- with the copper, we're seeing more and more investments come in the country a couple of years ago, they kind of stabilized on the political front in terms of the political environment for mining, which has improved the investments and we're seeing the same thing in Argentina right now. You're -- it seems like almost every week, we're reading positive news out of Argentina, mining companies coming back investments coming in the country.

So we see a lot of potential going forward in Argentina even for this upcoming calendar year. So those are markets that we're quite optimistic about. And -- but also other regions in South America. And South America seems to be a lot of it revolving around copper, but also there's gold opportunities as well.

[Operator]

[Operator Instructions] Our following question is from Donangelo Volpe from Beacon Securities.

[Donangelo Volpe, analyst]

Just on the CapEx side of things, I think it was $21.3 million for this quarter. Can you break down where the CapEx is being geographically utilized? And do you guys still expect $65 million in total CapEx for this fiscal year?

[Denis Larocque, executive]

Yes. On the geographic side, obviously, some of that went, as I mentioned, to South America with the growth we're seeing in Chile and also in Australia. Basically, the way our CapEx is going is we are -- there's regions where we're seeing growth and sometimes it's growth above the capacity that we have in the country, i.e., it might be deep hole rigs we're running out of in a certain country, and there's demand for more deep hole rigs.

So we're always left with the choice. Do we move rigs from another region that is going through what we think is a temporary slowdown and then you move rigs out of there and you're out of position when things turn around? Or do you just buy new rigs for that market that is kind of picking up. And that's kind of what we're doing.

So the rigs have been going to markets where we're seeing a pickup in activity. And to your question about the $65 million, yes, that's still what we're seeing for this upcoming year. This quarter was probably a bit heavier because there was a trickle from -- if you remember, last year, we had a heavier CapEx budget, and that was to get ready to have -- to position some rigs for an upcoming upturn. And those rigs were on order and kind of trickled in this quarter.

So that's why this quarter might be a bit higher than the run rate of the $65 million, but we still anticipate $65 million to be where we'll land at the end of the year. Operator?

[Operator]

Our next question is from Luke Bertozzi from TD Securities.

[Luke Bertozzi, analyst]

So Australasia had a very strong quarter. I believe it was a record quarter. While U.S. and Canada continues to lag on lower junior mining activity. What are kind of the differences in the markets that are driving that outperformance in Australia and Mongolia. Is there the junior market just less impactful there? Or is it stronger?

[Denis Larocque, executive]

Absolutely. Yes. In fact, in Australasia for us, I'm trying to think if we even have a junior. It's mostly, I would say, at least 95%, if not more of our revenue comes from seniors, established seniors that continue and really just to give you a perspective, Ian gave you the percentage of junior of revenue, but really year-over-year from last year, we're down 40%. Our revenue from junior is down 40% Our revenue from senior is up 7%. So we did grow our senior and there's regions where it grew more than others. So the seniors are continuing their activity levels, they've increased their activity levels globally and Australasia was a big benefactor of that.

[Operator]

So we have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Larocque.

[Denis Larocque, executive]

Well, thank you. And again, we invite you to attend our AGM later today and I hope to see you there. Thank you.

[Operator]

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