Major Drilling Group International Inc

TSX:MDI

Earnings Call Analysis

Sustained Margins; Optimistic on Upcycle

In its earnings call, the company maintained a gross margin of 31%, steady from the previous year amidst inflation, thanks to moderate price improvements in some markets. General and administrative costs rose marginally due to inflationary payroll adjustments and increased travel costs, while foreign exchange losses and other expenses decreased. The company effectively repurchased shares for $7.3 million, reflecting a strong belief in self-investment as a value deliverance to shareholders. With a total rig count of 602, the company is well-equipped and financially robust, ready to capitalize on an anticipated upcycle in mining akin to 2003, driven by a supply shortage. The long-term outlook remains highly positive, buoyed by the company's specialization in technically challenging drilling projects and its ongoing share buyback program.

A Decade-High Revenue Amidst the Mining Upcycle

Major Drilling has hit a revenue peak, the highest in over ten years, signaling that it's currently in the early stages of a significant mining upcycle. This performance comes at a time when the copper market is facing a projected demand that far outstrips supply by 2025, attracting increasing awareness and action. Gold, too, has seen a resurgence, climbing above the $2,000 threshold, significantly above exploration requirements, even as reserves dwindle. The company's pivot towards copper and battery metals has proven to be a lucrative strategy, with revenues from these segments up by 40% compared to the previous year and now constituting over 30% of overall business activities. Meanwhile, revenue from gold explorations remains sturdy at around 40%. Geographical diversification has paid off, with growth in South American operations compensating for a slump in North America.

Robust EBITDA and Shareholder Value Propositions

The company's ability to generate strong EBITDA, along with its debt-free status, has enabled strategic moves to boost shareholder value, such as repurchasing over 875,000 shares at an average price of $8.31 each. This share buyback didn't inhibit their financial position; in fact, they ended the quarter with an $84 million net cash position, a substantial $23.4 million increase over the quarter's duration. This demonstrates a firm commitment to value creation which is balanced by prudent financial management.

Healthy Financials and Investment in Future Growth

For the reported quarter, revenues stood at $207 million, a moderate rise of 3% from the previous year's $201.7 million. Although this was strengthened by a $3 million favorable impact from foreign exchange translation, gross margins remained steady at 31%, reflecting the company's resilience to inflation via strategic price adjustments. The quarter saw an increase of $1.5 million in general and administrative costs, chiefly from wage inflation and higher travel expenses. Yet, other expenses fell, and the steady EBITDA of $43.6 million reflects successful cost management and financial discipline. Capital investments, including the addition of 6 new and the disposal of 5 old drill rigs, underline the firm's commitment to growth while an impressive net cash position underlines its financial health. Their fleet now stands at 602 rigs, varied across specialized, conventional, and ground drills, each with utilization rates near 48%, signaling efficient asset use.

Sustained Demand and the Electrification Drive

Looking ahead to 2024, customer demand is forecasted to remain robust, buoyed by a persistent shortfall in mineral commodities supply. The momentum for electrification world-over demands increased access to metals like copper, nickel, and lithium, and the company expects this shift to stimulate significant investments in copper and other base metal explorations. This trend, coupled with record-breaking gold prices, positions Major Drilling favorably in the market. The firm anticipates that these factors will lead to a continuation, if not an acceleration, of the demand for their specialized drilling services into the future.

Caution Amid Optimism: The Third Quarter Outlook

Despite a positive outlook, the company remains cautious, citing that the third quarter traditionally exhibits a downturn, as customers typically pause their operations during the holiday season. This effect has been evidenced by some early project shutdowns. Still, the company maintains its optimistic stance, citing their strategic positioning for what they see as a still-young mining upcycle, leaving room for continued growth and success.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen and welcome to the Second Quarter 2024 Results Conference Call. I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Ms. Melanson.

[Chantal Melanson, executive]

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 2024. 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. As you would have seen last night in our press release, we achieved the highest revenue in more than 10 years at a time when we see we are still very early in the mining upcycle. The fact that the copper supply should fall well short of demand by 2025 is starting to get more and more recognition. And over the last 2 weeks, we have seen gold return to above the $2,000 mark which is much higher than what is required for exploration at a time when the gold industry itself is facing depleting reserves.

At Major, we continue to see the strength in our business as the increase in demand from copper and battery metals' customers more than offset the slowdown in exploration from junior gold companies. During the quarter, we saw our combined revenue from copper and lithium increase by 40% compared to last year, now representing over 30% of our activity, while gold still represented approximately 40% of our revenue. In addition, growth from our South American operations outweighed the decline in North American revenue, showcasing the effectiveness of our global diversification strategy.

The strong EBITDA generation, combined with our now completely debt-free position allows us to continue to create long-term value for our shareholders. As we repurchased over 875,000 shares this quarter at an average price of $8.31 a share. Despite executing on the share buyback and an aggressive capital expenditure program to get ready for the future, we still ended the quarter with a net cash position of over $84 million, an increase of $23.4 million during the quarter.

With that, Ian will walk us through the quarter's financials and I'd like to discuss the market outlook further before opening the call for questions. Ian?

[Ian Ross, executive]

Thanks, Denis. Revenue for the quarter was $207 million, up 3% from revenue of $201.7 million recorded in the same quarter last year. Activity levels remained elevated as mining companies continued exploration and resource definition programs to address depleting reserves in the need for battery metals. The favorable foreign exchange translation impact on revenue and net earnings for the quarter when comparing to the effective rates for the same period last year was approximately $3 million and $1 million, respectively.

The overall gross margin percentage, excluding depreciation, was 31% for the quarter compared to 31.8% for the same period last year. Margins held relatively steady year-over-year as inflationary headwinds have been mainly offset by modest price improvements in some markets. G&A costs were $17.6 million, an increase of $1.5 million compared to the same quarter last year. The increase was driven by annual inflationary wage adjustments implemented at the start of the fiscal year along with high travel costs associated with increase in activity levels.

Foreign exchange loss was $900,000 compared to a loss of $1.1 million for the same quarter last year. While the company's reporting currency is the Canadian dollar, various jurisdictions have net monetary assets or liabilities exposed to various other currencies. Other expenses were $3.2 million, down from $4.7 million in the prior year quarter, primarily due to a decrease in the annual allowance for doubtful accounts as compared to the prior year quarter. The income tax provision for the quarter was $7.4 million compared to $7.5 million for the prior year period.

The tax provision was flat compared to the prior year as profit levels were consistent year-over-year. EBITDA was $43.6 million compared to $43 million in the prior year quarter. The operational leverage in our business model continues to deliver excellent financial results and strong cash generation. With the robust cash levels and challenging capital markets negatively impacting company valuations across the mining sector, we took the opportunity to allocate capital to our share buyback efforts.

In total, we spent $7.3 million in the quarter acquiring and canceling over 875,000 shares at a weighted average price of $8.31 per share. The company continues to view investment in the Normal Course Issuer Bid program as an effective method to deliver shareholder value while maintaining a financially proven capital structure. We also remain committed to reinvesting in the business by spending $17.4 million on capital expenditures, adding 6 new drill rigs and support equipment while disposing of 5 older, less-efficient rigs, bringing the total rig count to 602.

Despite significant capital allocated to buybacks and capital spending, the company still managed to grow its net cash position by $23.4 million, ending the quarter with $84.2 million leaving the company extremely well positioned moving into calendar 2024. The new breakdown of our fleet and utilization is as follows: 285 specialized drills at 46% utilization, 119 conventional drills at 48% utilization and 198 ground drills at 49% utilization, for a total of 602 drills at 48% utilization.

As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Rather, it is work that requires we meet the 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 second quarter, revenue from specialized work accounted for 65% of our total revenue as we continue to see increased demand for our specialized services.

Conventional drilling, which is mostly driven by juniors, made up 11% of our revenue for the quarter while underground drilling revenue remained consistent at 24% of total revenue. We continue to see the bulk of our revenue driven from seniors and intermediates representing 79% this quarter as they continue to address depleting reserves and increase their exploration efforts for battery metals. With the continued challenges accessing capital, revenue derived from juniors was down slightly from last quarter at 21%. The recent run-up in gold prices could help this customer base access funds needed to ramp up their drilling programs.

In terms of commodities, following on trends seen in previous quarters, there has been a shift to battery metals with copper and lithium now accounting for approximately 30% of our revenue. Gold, which historically represents 50% of our revenue was approximately 40% this quarter while iron ore contributed 10% of our revenue.

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

[Denis Larocque, executive]

Thanks, Ian. Looking at calendar 2024, customer demand is expected to remain strong as the growing supply shortfall in most mineral commodities should continue to drive demand for our services for several years. The growing global demand for electrification will only increase the need for metals like copper, nickel and lithium. The enormous volume of copper, battery metals and likely uranium required will further increase pressure on the existing supply-demand dynamics.

We expect all of this to drive substantial additional investment in copper and other base metal exploration projects as we help our customers discover the metals that will allow the world to accelerate its efforts towards decarbonization, as well with gold prices recently reaching record highs, this could have a positive impact on funding for junior mining companies. In the short term, it's important to note that we are now in our third quarter, traditionally the weakest quarter of our fiscal year as mining and exploration companies pause their drilling programs often for extended periods over the holiday season.

While conversations remain encouraging heading into calendar 2024, we have started to see several projects shutting down earlier than the previous year. Important to note that we feel, we are still very early in the mining upcycle and also how Major drilling is positioned for that upcycle. The last exploration upcycle we saw in the mining sector followed a 6-year downturn and that upcycle lasted 10 years. From 2003 to 2012, at which point reserves of both gold and base metals were fairly replenished. At that point, we saw a drop in commodity prices and a big drop in exploration spending that lasted for 8 years, while at the same time, mining companies continued to produce at high level, therefore, depleting their reserves given they were not carrying on the exploration efforts to replenish those reserves.

Then in 2021, we saw the start of the next up cycle with the same picture we saw in 2003 with mining companies facing a supply shortage and needing to ramp up their exploration efforts to catch up. At this point, we are still in the discovery phase, therefore, still early in the mining upcycle -- in the mining cycle. For mining companies to bring those projects into production, they need to then go through an intense phase of infill drilling while they develop those mines, which is what we saw the last time, which led us to peak levels.

Major Drilling is extremely well positioned at this point of the cycle to benefit from that potential uptake. We are the leader in specialized drilling, being the go-to drilling companies for many mining companies with technically challenging programs, whether it's remote, deep, high altitude, Arctic or directional. As well, our strong financial position has allowed us to invest in our fleet and training, which allows us to have the resources ready to mobilize on some of the most demanding projects out there and maintain our position as both the operator and employer of choice in our industry.

With these fundamentals drilled firmly in place, the long-term outlook for our company remains extremely positive. Major Drilling remains in a unique position to react to and benefit from the market -- these market dynamics. As well, the company continues to view investment in the share buyback program as an effective method to deliver shareholder value while maintaining a financially prudent capital structure to be able to take advantage of opportunities that might arise.

With that, we can open the call to questions. [indiscernible]

[Operator]

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

[Gordon Lawson, analyst]

Congratulations on a great quarter. There's been a lot of gold financings over the past few months. So I'm wondering if you're seeing higher demand going into 2024 from that sector as well as silver.

[Denis Larocque, executive]

Well, at this point, mining companies are preparing their budgets for next year. So we are having lots of conversations. It's still hard to predict how high the level of that exploration will be because it's still very early in that budget process. We go through that every year. But to your point, yes, it is -- there is a lot of positives out there with -- especially with gold that price that has crossed the $2,000 mark. That's certainly hopefully is going to help those discussions, those budget discussions and push exploration high into next year.

[Gordon Lawson, analyst]

Okay. And your ForEx [ lost ], as you mentioned, it has improved from last quarter and last year. So I'm wondering if you could elaborate on your local investment strategy, particularly with the Argentine peso but also [indiscernible]

[Ian Ross, executive]

Yes. I mean, we have -- yes, we've got kind of hedging mechanisms in place within Argentina, to kind of minimize the exposure. That is certainly a challenging jurisdiction. The rest of the FX is kind of made up of small amounts in various countries. But we've certainly -- Argentina would be the biggest challenge these days. And with the recent election, there's lots of uncertainty down there with that but we try and mitigate the exposure as much as possible.

[Operator]

[Operator Instructions] Our following question is from Ahmad Shaath from Beacon Securities.

[Ahmad Shaath, analyst]

Maybe first comment on the gross margin and the margins in general, you guys mentioned operating leverage but we typically expect better improvement in margin compared to revenue. But the trend year-to-date has been somewhat the opposite. Am I reading too much into that? I understand the magnitude, order of magnitude is small, which is on the deterioration margin. But can you give us any color that some one-offs in there? Or are you seeing some price pushbacks in the marketplace?

[Denis Larocque, executive]

Well, at this point, I mean, you see our revenue is just slightly up versus last year. So we've kind of -- there has been quite a growth in margin over the last couple of years and that was fueled by a big -- a lot of growth in activity. Now we basically have reached kind of a point -- at this point where things are -- the pricing pressures have come down. And so there is more of what I call regular or more into regular pricing at this point. But again, with the junior gold coming in, should we see junior gold coming in and adding a layer of activity, then that would certainly create a lot more tightness in the sector for sure.

[Operator]

[Operator Instructions] Our next question is from Steven Green from TD Securities.

[Stheven Green, analyst]

Just a question on the revenue mix by commodity. You mentioned the shift to battery metals, lithium and copper. Does that impact at all the type of rigs you're using on these jobs and the overall gross margins of those jobs versus kind of the prior mix?

[Denis Larocque, executive]

No, typically, we're pretty much agnostic to the commodity. We're -- I say we drill a hole to pull the rock out of the ground. So what's in it really doesn't matter to the process for the most part. And it's more where the demand is, kind of who want us to drill and where the demand is coming from. The only difference sometimes that we see is with iron ore where the rock is a lot harder and requires a bit more -- a bit of a different consumables. But other than that, it's pretty much the same.

[Stheven Green, analyst]

Okay. Great. And just on your comments on the holiday season, some of the shutdowns coming a little bit earlier than expected or than last year. Can you just give a little more color around that, what you're seeing there?

[Denis Larocque, executive]

Yes. Yes. I mean every year at this time, we start to see projects shutting down for the holidays and then restart in January. But last year, we had a few projects that got extended longer than usual and some going right to Christmas. But this year, we're seeing the more typical shutdown beginning end of November, beginning of December but this does not impact our views of calendar 2024. It's just the typical -- the typical Q3 shutdown that happens every year.

[Operator]

Following question is from Ahmad Shaath from Beacon Securities.

[Ahmad Shaath, analyst]

Just a follow-up, I guess, on capital allocation strategy, given the strong balance sheet and strong free cash flow generation you guys have and in light of what you've seen in the market, maybe it's a little bit too early but any changes to your CapEx growth given what's going on in the junior space? Or is it too early to make any conclusions based on that? And in regard of the share prices, I imagine we should expect it to continue to be as active on the NCIB, if not even more.

[Denis Larocque, executive]

On the CapEx growth we, basically we -- when we started the year, we had a CapEx budget of $80 million. And at this point, we're a little bit behind but really it's more related to deliveries than anything else. We have put orders in there. And if you remember, when we set our CapEx budget at that $80 million, it was because we had a view way back in April that 2024 was shaping up to be a busy year. We were already having conversations and people talking about doing more in 2024. That's why we kind of raised our CapEx budget and went in and put orders in. And so at this point, there's been some delays but those delays are for rigs that are on spec. And that we expect to basically put to work in the next fiscal year.

[Ahmad Shaath, analyst]

And I guess on the NCIB, can I get a [indiscernible]

[Denis Larocque, executive]

Yes. Yes. No, we continue to execute on that, the -- we trade at a multiple that is at pretty much the lowest multiple we've ever traded at. So we feel that executing on the share buyback at this point is a good use of our cash. So we -- yes, we are continuing to push on that.

[Operator]

[Operator Instructions] And so we have no further questions registered at this time. I would now like to turn the meeting back over to you, Mr. Larocque.

[Denis Larocque, executive]

Well, thank you and thank you for listening today. I want to wish you the best for the holiday season, including to our employees, rest up for what could be another busy year. Thank you.

[Operator]

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