Major Drilling Group International Inc

TSX:MDI

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the Second Quarter 2021 Results Conference Call. I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Ms. Melanson.

[Chantal Melanson]

Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the second quarter of fiscal 2021. 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, President, CEO & Non]

Thank you, Chantal. Our revenue increased by 28% over the last 3 months as many projects resumed operations on the back of stronger metal prices, easing of restrictions related to COVID-19 and an improving long-term outlook. Although the pandemic continues to impact our operations in certain regions, we are seeing junior mining companies increase their levels of activity, particularly in Canada, which is reminiscent of the beginning of the previous up cycles in the mining industry. We are encouraged that we were able to produce good results despite the fact that several of our operations are still seeing levels of activities affected by heavy restrictions related to COVID-19. Additionally, the recent surge in copper prices has not yet translated into increased exploration in copper. While short-term headwinds remain due to the pandemic in certain regions, our intermediate and long-term outlooks are very positive. As the pandemic is brought under control and exploration plans translates to drilling activity, we expect to see continued improvement in our activity levels. I would like to salute our crews at the Oyu Tolgoi copper project in Mongolia for their incredible accomplishment. We achieved a new drilling record by completing a 2,000-meter hole of PQ size, which is the largest size of core sample in our industry. This is an extremely deep hole for PQ that required highly specialized expertise and equipment. Calendar 2020 has been a banner year for us in terms of specialized drilling, given we also achieved the longest drill hole ever drilled in Canada at the Windfall projects for Osisko Mining at 3,467 meters, reaffirming our reputation as the leader in specialized drilling in the industry. I'll discuss our market outlook further after Ian runs through our financials. Ian?

[Ian Ross, Chief Financial Officer]

Thanks, Denis. Total revenue for the quarter was $114.2 million, down 6% from revenue of $121.2 million recorded in the same quarter last year, but up 28% from Q1 as activity levels continue to recover in a number of jurisdictions. As Denis stated, we are still being impacted by COVID-19 in certain jurisdictions, but this has been offset by growth in other regions as senior gold projects and junior miners bring increased demand. The unfavorable foreign exchange translation impact on revenue for the quarter when compared to the effective rates for the same period last year, was approximately $2 million with a minimal impact on net earnings. The overall gross margin percentage, excluding depreciation, for the quarter was 28.3% compared to 28.1% 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. We expect minimal impact from these programs moving forward. General and administrative costs were down $500,000 at $11.6 million when compared to the same quarter last year. The decrease is mainly related to reduced travel and various company-assisted programs for administrative employees. These temporary reductions will start to subside over the next couple of quarters. The income tax provision for the quarter was an expense of $2 million compared to an expense of $3 million for the prior year period. The income tax provision was positively impacted by the utilization of unrecognized tax losses. Net earnings were $7 million or $0.09 per share for the quarter compared to net earnings of $7.3 million or $0.09 per share for the prior year quarter. EBITDA was $19.3 million compared to $20.5 million in the prior year quarter. EBITDA margins remained flat year-over-year at 16.9%. Although activity levels remain impacted in certain jurisdictions, our ongoing operations in other areas performed very well. Combined with our operational leverage, this provided a positive EBITDA result. We are focused on maintaining a strong balance sheet as the company repaid $15 million in debt in the quarter. The company spent $8 million on CapEx, with the majority on ancillary and support equipment needed to respond to the growing demand we are seeing in certain regions. The company added 1 rig while retiring 13 older inefficient rigs, ending the quarter with a total rig count of 601. Our receivables increased in the quarter, which relates to growth in revenue from Q1. Importantly, we have not had any collection issues related to the pandemic as our current customer mix remains predominantly seniors and well-established intermediates. The company ended the quarter with net cash net of debt of $7.6 million, an increase of $9.6 million from the end of the prior quarter. Inclusive of amounts available under our credit facilities, the company had $87 million in liquidity as of the end of the quarter, and it's very well positioned financially as we prepare for what is shaping up to be a busy calendar 2021. The new breakdown of our fleet and utilization is as follows: 304 specialized drills at 36%; 123 conventional drills at 35% utilization; and 174 drills at 56% utilization for underground. This is giving a total of 601 drills and a combined rate of 41% 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 that we meet the rigorous standards of our customers in terms of technical capabilities, operational and safety standards and other related factors, such as those met during our record-breaking PQ hole in Mongolia. Over time, we expect these standards to be increasingly important to our customers. In the second fiscal quarter, revenue from specialized work accounted for 56% of our total revenue, which is relatively unchanged in the prior quarter but lower than the same quarter in the prior year, mainly due to increased drill programs around existing mines as mining companies look to define reserves. We expect this trend to continue as long as elevated commodity price is supported. Our conventional drilling made up 12% of our revenue, which is up from 10% in the prior quarter and directly relates to increased work from junior mining companies. Finally, our underground drilling remained relatively flat at 32% compared to the last quarter, but up 20% from the same quarter last year as a result of executing on our diversification strategy. As junior financings have picked up over the past 6 months, we've started to see a shift in our revenue mix. During the quarter, juniors made up 20% of our revenue, while senior and intermediates were 80%. The increase in junior activity is a positive sign for the industry moving forward. In terms of commodities, gold projects represented 64% of our revenue, while copper was at 18% this quarter. This is one of our lowest quarters of copper-generated revenue in recent history, which is a direct result of the impact COVID-19 had on copper prices and exploration budgets. With the recent surge in copper prices and increased demand from stimulus packages, we are expecting copper activity to increase from current levels in 2021. With that overview on our financial results, I'll now turn the presentation back to Denis to discuss the outlook.

[Denis Larocque, President, CEO & Non]

Thanks, Ian. For reasons I will discuss shortly, we have a very optimistic business outlook. In the short term, however, we expect to see some seasonal weakness in our third quarter, which is traditionally the weakest quarter of our fiscal year as mining and exploration companies shut down for the holiday season. During this period, we typically perform fleet review, overhaul and maintenance work on equipment as we prepare for the upcoming year. But looking past the holiday season, the price of gold, which recently has accounted for more than 60% of the company's drilling activity, has remained historically high, which has produced some good cash flow generation and improved the balance sheet of our customers. Many of our senior gold customers have identified exploration as an important part of their future plans. And although these customers have not formally announced their budgets for the upcoming year, we're naturally optimistic, given the commodity price environment. Additionally, junior companies are continuing to raise capital and getting ready to deploy the capital raised recently on exploration projects. The industry, particularly on the junior side, has seen an underinvestment for a number of years, and the pickup in activity is indicative of the changing sentiment in the industry and the capital markets. Finally, while there has been a good deal of focus on the rise in gold prices, copper prices have also increased significantly and have risen by more than 50% since the bottom seen 8 months ago. Industry experts expect the global refined copper market to hit a deficit this year at the same time as large infrastructure plans are being developed globally. We expect this dynamic will lead to significant investments in copper exploration projects and drilling activity in years to come. To conclude, we believe that we are in the early stages of a strong up cycle in the drilling business due to strong gold price environment and the need to mine for copper. Major Drilling is very well positioned to participate in an up cycle. We have been very focused on maintaining the condition of our fleet and our strong financial position gives us the unique ability to respond to meet our customers' demands for rigs, rod handling, mobile equipment and technology. We believe that the investments that we've made will ensure we can meet our customers' highest standards, which is key to our ability to remain the leader in specialized drilling and retain our contractor of choice status for major and intermediate producers. Our approach also allows us to attract the best people at a time when we believe the industry is heading towards a labor crunch. With that, we can open the call to questions. Operator?

[Operator]

[Operator Instructions] The first question is from Maggie MacDougall with Stifel.

[Margaret Anne MacDougall, Head of Research]

Wanted to touch on the comment you made at the end of your commentary around expectations for an upcoming labor crunch. I'm wondering what it is that's leading you to anticipate that? And if you could just comment on how you compare versus your competitors in terms of attracting skilled labor?

[Denis Larocque, President, CEO & Non]

Yes. Basically, the labor challenges are different from between markets. In North America, we're facing some big challenges, whereas everywhere else in the world, we're pretty good. In Canada, particularly, I mean, we're facing the -- we're facing a big upturn. The junior mining, a lot of the money that's been raised by junior companies has been for Canada. And there's a lot of rigs going out in the field -- well, right now in -- after Christmas. And there's a big draw on the labor pool. And what we've seen in Canada, with the 6-year downturn, is that we've seen people who have left the industry, and now we're trying to reattract some of those people, and it's -- again, it's not easy. So we're going to have to basically do a lot of efforts on training and bringing people in the fold. In terms of how we compare to our competitors, we are leaders. We're seen as the employer of choice in our industry. We're -- with our standards, all the training, all the training schools we have, we've got a very good program to bring people online. So we've been putting a lot of efforts over the last 5, 6 years just developing our infrastructure for training, for recruiting. And I'm confident we're going to be able to face this challenge. But the issue is that, again, there's the -- things are growing fast, and we're going to have to basically ramp up our efforts. But again, I'm confident that we're going to be able to face that challenge.

[Margaret Anne MacDougall, Head of Research]

Okay. And one follow-up on that. Obviously, it sounds like you've done a lot of preplanning around attracting new labor. Do you anticipate there to be inflation in your labor cost that would be material within the next 6 months in light of the ramp-up in activity that's currently happening?

[Denis Larocque, President, CEO & Non]

Yes. Well labor costs have already gone up even this quarter. We've had to put retention bonuses in place, and that is something that has been attracting a lot of people to our company. So labor cost is going up, but prices are going up as well. And what we're seeing right now with most of our customers is they recognize that. They know, and there's been -- there's -- I've seen a few articles come out in the news where there was a few mining executives that were pointing out that getting good quality drillers is going to be a challenge going forward. And we're having those discussions with our customers, and they're coming to the table to basically help us with the labor. So yes, labor cost is going up, but those costs are being covered by -- and more by price increases that we're seeing.

[Margaret Anne MacDougall, Head of Research]

Okay. And then one final question for me. Your balance sheet is in really good shape. You ended the quarter in a net cash position. Sort of as you think through capital allocation in the next 12 months to 2 years, could you rank for us your preferences? So I guess the options would be adding rigs for growth, acquisitions, initiating a dividend, and then also there's a share buyback option as well?

[Denis Larocque, President, CEO & Non]

Yes. Well, there's -- we're in growth phase right now. So there's -- definitely, our priority is on our operations and to fund. And initially, when you go into a growth phase like we are today, there is cash need. First of all, you mobilize a lot of rigs. And also, we need to buy some ancillary equipment. And also, there are certain markets where we're running out of rigs, for example, in Canada. Deep hole rigs were running out. They are -- they're pretty much going to be at full utilization. So we're going to need to buy a few more. And so that's where initially, in the first year -- like to your point, 1 year to 1.5 years, that's where our focus is going to be. And in terms of acquisition, we're always looking. There are opportunities but we do have high standards. So basically, we're focused on companies that would fit within our fold in terms of the standards we have. And we'll see. You just don't know. It all depends how these opportunities come up, but that's certainly something that we're looking at as well. So that would be for the next, I would say, next 1.5 years, that's going to be our focus.

[Operator]

The next question is from Daryl Young with TD Securities.

[Daryl Young, Mining Research Associate]

So congrats on a good performance in Canada and the U.S. It seems like you've been able to get back to work much quicker there. Just wondering if you could maybe outline some of the challenges in South America and Africa? And maybe if there's any -- or I guess what I'm trying to get at is how much longer do you expect there to be delays there related to COVID-19 logistics issues? And can you implement similar operating practices there that you have in North America to get the rigs turning again and get operations moving?

[Denis Larocque, President, CEO & Non]

Yes. The issues in South America are not related to the procedures. We did implement the procedures across our operations. They're more related to logistics where, for example, Chile was under a curfew for most of the quarter or a big part of the quarter. And Argentina has some heavy restrictions in mobility of people between provinces, so mobility of labor rigs and things like that. And Mexico is facing the same thing, heavy restrictions. So it's government-imposed restrictions that are limiting activity. And mining companies, because of those restrictions, have been very limited in their activity levels. So that's -- so those 3 regions have really been heavily impacted. And on top of it, for Chile, Chile is pretty much all copper. And copper companies, because the copper -- copper price only picked up just very recently. So copper exploration globally is down 20% this year versus last year. So Chile, it's a little bit of a double whammy where you had the heavy COVID restrictions. At the same time, copper companies, because of that, have not been in a rush to get out and carry exploration. So that's been the impact that we saw this quarter. Going forward, we're seeing Mexico picking up. We're seeing more and more rigs firing up over there. Argentina, the same. We're getting more and more rigs. It's still not to the level at previous times, but it's certainly encouraging. But it is hard to call just because things evolve on a daily basis and you get -- sometimes you might have a project that shuts down because either there was a case at the project or because there's new government restrictions. So it's going to be an evolving situation. But the fact remains that we're having lots of conversations about wanting to get going and it's just a matter of time before these get going. And Chile, with copper price where they are, I wouldn't be surprised that Chile will follow suit very soon.

[Daryl Young, Mining Research Associate]

Excellent. That's great color. Maybe following on that, on the copper discussion as well. You mentioned in your remarks that you expected copper -- revenue from copper to be higher in 2021 versus 2020. And how -- I guess, if you look at that on a 3-year average, because obviously, 2020 was very depressed. Are we, at this point, thinking we're going to be significantly higher than where you've been in the last couple of years on the copper side?

[Denis Larocque, President, CEO & Non]

Well, I mean, this is more of a personal opinion. I mean, there's no doubt out there to help us project that. But I'm a bull on copper. You look at the deficit that we've been talking about for 2, 3 years now, and we're heading towards that. And now the infrastructure plans are coming. And the one thing -- if I make a parallel to the financial crisis, during the financial crisis -- coming out of the financial crisis, we had our 2 best years. And a big part of that was driven by copper, and that's because copper price went up quite a bit following infrastructure plans that were put in place to get the -- to kickstart the economy. And right now, the numbers that are being talked about by governments around the world, I mean, back at the financial crisis, a lot of that -- those infrastructure plans were coming from the U.S. and more Canada and places like that. This time around, this is a global phenomenon, and the numbers being talked about in infrastructure plans are much higher than what was put in place back in the financial crisis at a time where copper reserves are much lower than they were back in the financial crisis. So all those factors make me a bull on copper. So if you ask me, I think that, yes, we're going to see copper have a lot more exploration going forward because of those factors.

[Operator]

[Operator Instructions] The next question is from Ryan Hanley with Laurentian Bank.

[Ryan Hanley, VP & Mining Analyst]

Denis and Chantal, first off, congrats again on a nice quarter, and I see things continuing to move in the right direction. Ian, when you were running through the utilization numbers there, just to make sure I got this correctly. I believe it was 41% for your overall utilization with 601 drill rigs?

[Ian Ross, Chief Financial Officer]

That's correct.

[Ryan Hanley, VP & Mining Analyst]

Perfect. And you had a breakdown, I guess, between specialized, conventional, underground. Are you able to provide any kind of color on utilization by geography? I guess what I'm trying to work out here is are we kind of at full utilization in, say, Canada, and we still have lots of capacity in, say, Central and South America?

[Denis Larocque, President, CEO & Non]

I mean, we're not at full utilization anywhere. There's still room, but there are regions that are busier than others. And Canada is getting busier. I mean, we're still -- there's still a lot of room in Canada for growth. I mean, Canada is one of our biggest -- or is our biggest branch. But the activity levels have certainly picked up from the low levels that we saw. And in South America, while there's regions where, for example, Brazil is very busy for us. But Chile, Argentina and Mexico, as we mentioned, are slower regions because of the factors that we mentioned.

[Ryan Hanley, VP & Mining Analyst]

Okay. Perfect. And then I guess in terms of getting more rigs out there, especially if you're looking at places like Canada where the demand, I guess, is highest, are you limited fully by labor or by having enough ancillary equipment or inventory at this point? Like is there anything preventing you from getting a drill turning in the field right now in areas like Canada?

[Denis Larocque, President, CEO & Non]

No. It's -- on the inventory. If you remember, we have used some of our cash to put stuff on the shelf, and exactly to be ready because when things turn, everybody is ordering at the same time and then there's big delays. So we took those steps and put stuff on the shelf. We've invested in our equipment to get rigs ready. On the labor, that's where -- the labor is probably where it might be the limiting factor to the speed of growth. I mean, there is a limit. I mean, we can't double in 2 months, for example, because there's a limit to how many people we can put in the system and put in the field. But we do have good systems in place to be able to grow at a steady pace going forward. But again, labor is going to be the biggest issue. But at the same time, that's what's driving prices in the industry. It's not a rig issue. People are -- sometimes get focused on utilization of rigs. In Canada, and you can talk to your customers, it's going to be -- they know it's going to be drillers, that's going to be the issue. So -- and that's an industry-wide phenomenon.

[Ryan Hanley, VP & Mining Analyst]

Okay. And is it fair to say that kind of on a very high level, without getting into too much detail, that the increase in labor cost is being offset by the increase in pricing? It's a pretty lock-in step kind of movement, there's no huge swings in either direction?

[Denis Larocque, President, CEO & Non]

Yes. You're right. We -- like I mentioned, there are customers -- we're having conversations with our customers, and they're very aware of the labor -- market and labor issue. And we're -- we've been able to manage that with them.

[Operator]

The next question is from Ahmad Shaath with Beacon Securities.

[Ahmad Shaath, Research Analyst]

Congrats on a good quarter. Just a quick one for me. How should we think about your margin profile in this upcoming cycle compared to the previous up cycles? Any parallels we can draw there, whether it's positive or negative?

[Denis Larocque, President, CEO & Non]

Yes. No, I think the margin profile, like you say, is probably going to be similar to what we saw in the previous cycle in a sense that as activity increases, the market forces are basically going to be pushing prices up. And we're already seeing that, and we don't expect any big difference from previous cycles. The one thing I might say that might be different from our perspective is that through the down cycle, we've put a lot of effort into logistics and technology and things like that, that has improved their productivity at the rig. So with the same prices, I think we should be able to produce better margins just because of the better productivity that will come out of it. But that's the only change in the profile that I would see. I think we can -- we had some very good margin at the -- during the last cycle, and I don't see any reason why we can't get back to those types of margins.

[Operator]

Thank you. This will conclude the question-and-answer session. I would now like to turn the meeting over to Mr. Larocque.

[Denis Larocque, President, CEO & Non]

Thank you. And I want to take this opportunity to wish all our employees happy holidays. Please rest up for what's lining up to be a busy year. And to our investors, happy holidays and look forward to a positive 2021. Thank you.

[Operator]

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