Major Drilling Group International Inc

TSX:MDI

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the Third Quarter 2020 Results Conference Call. I would now like to turn the meeting over to Denis Larocque, President and CEO. Please go ahead, Mr. Larocque.

[Denis Larocque, President, CEO & Non]

Thank you. Good morning, everyone, and welcome to our third quarter call. With me is Ian Ross, our CFO. You should have received our results last night. If you haven't seen them, they're on our website at majordrilling.com.Before we get started, I'd like to caution you, as usual, that during this call, we'll be making forward-looking statements about future events or the future financial performance of the company. And these statements are forward looking in nature, and actual events or results may differ materially.First of all, I'd like to congratulate our Canadian group who won for the third year in a row this year's PDAC Safe Day Everyday Gold Award in recognition of having worked over 1 million hours lost time injury free. Our Canadian crews have now worked more than 6 million hours over 5.5 years without a single lost time injury.The safety and well-being of our crews is our first and highest responsibility when we work on any project. And we work hard to earn the trust and support of our crews, and we are pleased to see their success recognized by a group of our clients and peers through the PDAC organization.Now regarding the third quarter, our results reflect a normal part of our operational pattern, as mining and exploration companies shut down operations, in some cases, for extended periods, over the holiday season. This quarter, we saw earlier shutdowns than last year, particularly in South America. Additionally, the company typically schedules substantial overhaul and maintenance work on its equipment during this slower period, which impacts margin.Despite the seasonal slowdown, we generated $2.7 million of EBITDA, and our net cash position remained positive at $4.5 million when you consider the impact of IFRS 16. During the quarter, capital expenditures were $8.8 million as we added 2 large drill and blast rigs, 1 underground rig and support equipment, in line with our specialized and diversification strategies. Also, we are continuing to improve the suite of services we offer our customers with new innovative solutions and improved equipment through increased hands-free rod handling capacity, computerized rigs and deep hole capacity. We have mutually beneficial partnerships in place with several of our senior customers to develop these innovative solutions.During the quarter, the company made the decision to close its operation in Colombia, as such, recorded a total charge of $3.6 million after tax, with $3 million of it being noncash charges. The Colombian operations represented approximately 1% of the total company revenue year-to-date.Ian will take you through with summary of our quarterly results and I'll come back from -- for the outlook.

[Ian Ross, Chief Financial Officer]

Thanks, Denis. Total revenue for the quarter was $81.7 million, up 2% from revenue of $80.4 million reported in the same quarter last year. The unfavorable foreign exchange translation impact for the quarter when comparing to the effective rates for the same period last year is estimated at $1 million on revenue, a negligible impact on net earnings. The result reflected a normal part of our operational pattern.The overall gross margin percentage for the quarter was 17.6% compared to 19.4% for the same period last year. Earlier-than-expected shutdowns, particularly in South America as well as our regularly scheduled overhaul and maintenance work impacted results in the quarter.G&A costs were up $100,000 at $12 million when compared to the same quarter last year. The additional G&A costs from the Norex acquisition were offset by the impact of the implementation of IFRS 16 and the closure of our Burkina Faso operations in the previous year. EBITDA was relatively flat at $2.7 million as compared to the same quarter last year. Despite the normal Q3 challenges, we were still able to generate positive cash flow from operations.The company recorded a restructuring charge of $2.1 million related to the closure of its Colombian operation, consisting primarily of noncash charges totaling $1.5 million and cash charges of $600,000 for other close-down costs, including severance.The income tax provision for the quarter was an expense of $300,000 compared to expense of $1.9 million for the prior year period. Tax expense for the quarter included a write-down of $1.5 million in deferred tax assets related to the closure of the Colombian operations. Also, the tax expense for the quarter was impacted by nondeductible expenses and nontax affected losses in certain regions while incurring taxes in profitable branches.Net loss for the quarter was $9.9 million or $0.12 per share compared to a net loss of $15.9 million or $0.20 per share for the prior year quarter.In terms of our financial strength, we continue to have one of the most solid balance sheets in our industry. During the quarter, our net cash position, now including $5.6 million in lease liabilities under IFRS 16, net of debt, remains positive at $4.5 million. The decrease in the prior quarter related to the closing of our Norex acquisition on November 1.The company also spent $8.8 million on capital expenditures, including 2 large drill and blast rigs and 1 underground drill to our fleet as well as support equipment, in line with our diversification strategy.We disposed of 15 rigs as we continue to focus on improving our fleet. With the addition of 22 rigs from the Norex acquisition, the total rig count is at 611. The new breakdown of our fleet and utilization is as follows: 310 specialized drills at 34%; 133 conventional drills at 29%; 168 underground drills at 48% utilization, for a total of 611 drills at 37% 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. 63% specialized, 4% conventional and 33% underground.Also, seniors and intermediates represented 87% of our revenue in Q3, while juniors were 13%. Despite gold maintaining prices not seen since the last upturn, junior financings remain challenging. However, we continue to foster our relationships with the senior and intermediates, allowing us to grow our market share with this customer base.In terms of commodities, gold projects represented 55% of our revenue, while copper was at 23% 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. The year 2020 marks the company's 40th anniversary. From its modest debut in 1980, Major Drilling has grown to become the industry leader and one of the largest mineral drilling companies in the world. As well, March 2020 marks the 25th anniversary of the company's share being listed on Toronto Stock Exchange. We will be celebrating this by ringing the opening bell of TSX on March 5.Going into our fourth quarter, as we saw last year, it was a slow start as many of our rigs only restarted by mid-February, as many of our customers finalized their plans for calendar 2020. As we look forward to fiscal 2021, senior and intermediate gold mining companies have increased their exploration budgets for calendar 2020 to help replenish depleting reserves. The price of gold, which historically has accounted for approximately 50% of the company's drilling activity, has now reached a 7-year high, remaining above the important level of $1,450 for the last 6 months. And we could see a pickup in junior financing in the coming months, although a potential increase will not translate in immediate drilling activity as it usually takes a few months to get a drilling campaign organized.In regards to base metals, the recent coronavirus outbreak has created economic uncertainty, which has caused copper prices to decline by more than 10% over the last couple of months. Despite this, many industry experts expect that both -- that most base metal will face a significant deficit position in the next few years due to the continued production and high-grading of mines, combined with the lack of exploration work conducted to replace these reserves. As well, the need for more infrastructure to support the growing demand for electric vehicles should increase demand for metals, such as copper and lithium.We continue to be very well positioned at this time and -- as the leader in specialized drilling. Our strong financial position gives us the ability to respond to meet our customers' demands in terms of rigs, rod handling, mobile equipment and technology, which is key to our success to remain the leader in specialized drilling. Also, having the financial resources and the best equipment allows us to attract the best people at a time when we are going into a labor crunch in our industry.I would like to salute our crews at the Windfall project for their incredible accomplishment. They achieved the longest diamond drill hole ever drilled in Canada at 3,467 meters. Imagine 3.4 kilometers of 3-inch pipe turning in the ground. The skills required to steer and manage this is what makes our company leaders in specialized drilling. And I'm proud of the work and expertise that our team has contributed along with Osisko Mining to reach this historic milestone in Canadian drilling.To conclude, I would like to invite our customers and investors to visit us at the Prospectors & Developers of Canada Convention, the PDAC, starting this week in Toronto. If you stop by our booth, you'll be able to view some of our innovative solutions, which we have proudly branded under the name Major Drilling Trailblazers.That concludes our formal remarks. And we'll open the floor to questions.

[Operator]

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

[Gordon Lawson, Senior Research Associate]

Just 2 questions for me. Could you talk more about the decision to close operations in Colombia and any residual costs for the next quarter? And can you also please expand upon the additional acquisition cost that is tied to EBITDA growth and your expectations on that front over the next few years?

[Denis Larocque, President, CEO & Non]

Okay. While on Colombia, basically, its -- what we saw there is there wasn't enough volume for us to warrant staying in the country. And we were looking -- we had to add capital at a time where we're seeing growth in other areas of the world. And so it was a capital allocation decision, and we didn't see enough volume or future work coming from there. And especially, we had -- you had the Continental Gold consolidation or taken over, so -- which we had done work for them in the past.So all of that basically is the reason why we decided to move out. We're moving equipment to other jurisdictions. Most of the costs that you see in our P&L are write-off of basically costs that had been capitalized and deferred tax. So that's $3 million of noncash write-offs. And then there's $600,000 of just cash costs just to move equipment and also severance for people. And -- sorry, your second question was?

[Gordon Lawson, Senior Research Associate]

The second question is in regards to the Norex acquisition. There's a caveat where there's an additional cost tied to EBITDA growth. So if you could please comment on your expectations on that front over the next few years.

[Denis Larocque, President, CEO & Non]

Yes. Well, the -- basically, we had -- when we announced the acquisition, we had said that the -- they had revenue -- ongoing revenue of $21 million and EBITDA of -- I think it was $4 million to $5 million. And basically, the ongoing earn-out is tied to those numbers to make sure that we meet those numbers. And at the moment, we don't see that changing. It's a region that is showing a lot of potential and a lot of activity. And although, during the quarter, they faced the same slowdown that our Canadian and the rest of the world saw, but activity is picking up and getting back to the run rate that we expect.

[Operator]

Our next question is from Daryl Young with TD Securities.

[Daryl Young, Mining Research Associate]

My first question is on M&A activity that we've seen in the gold space in the past 12 months. And just wondering if there's going to be any either negatives or positives to you from some of the consolidation that's happened in terms of winning or losing drilling contracts.

[Denis Larocque, President, CEO & Non]

Yes. Basically, I think, for the future, I think it's good for us because the bigger the company, the more they want to deal with bigger players. And therefore, when work comes up with the bigger players -- and I mean, when you look at the mix of our revenue, we're close to 90% with seniors and intermediates. And even at peak levels, we had a higher proportion of senior and intermediates than most of our competitors. And that's because senior and intermediates typically have higher standards, and they come in, they want to deal with companies that have higher standards. So for us, we see that as a positive.Now in the short term, what we're seeing, those consolidation, what it brings is that there is a bit of rejig in terms of priorities on projects and everything. And therefore, it's a slower process in terms of coming out with decisions or slower start-ups, which we think that, that would explain the slower start-up that we're seeing -- that we're talking about on the gold side is that -- again, you combine the 2 budgets, and they look at all the projects and then they rejig, there's a rejig of priorities. And so the decision process takes a bit longer to get to those decisions. That's -- we're just assuming that's what -- this is not based on anything necessarily we're hearing but just -- we're just assuming that, that's what we would be seeing.

[Daryl Young, Mining Research Associate]

Okay, good. Yes, that sort of parlays into my next question in terms of where the ramp-up stands today for the 2020 drilling programs. And maybe if you could just speak a little bit about whether it's ramping up greater than last year. I think you said out of the gate, it was sort of similar to last year.

[Denis Larocque, President, CEO & Non]

Yes. It's -- at this point, it's similar than last year, but we are having lots of conversations. And again, to my point about decisions taking a bit longer, every day, we seem to be adding a rig here and there. So it's really tough to call in terms of what level of activity we're going to see in calendar 2020 at this point because it's still a moving target. We're still adding rigs. It's still -- but we don't know at what level this is going to get. At the moment, like I said, we are -- things are on par with what we saw last year, maybe a low -- just a low bit of an uptick.So when you look at the gold, they have generated a lot of cash over the last 6 months. But at the beginning of the year, we would have expected them to -- that there would be a lot more money going into exploration. And when you listen to what gold companies are saying, they're all focused on dividend and share buybacks. And some of it is going to exploration, but that's not the main focus -- their main focus at this point. And there is -- at the Board level, every company is going through those questions in terms of how much do we put on growth and how much do we put on return to shareholders.And at the beginning of the year, if you -- again, if you go listen to all the mining company -- the gold mining company presentations, there's a lot of emphasis on return of capital, which is what we're seeing at this point. Again, it's in terms of decisions, but there is an increase in exploration. I'm not saying that there's no, it's just that with the amount of cash, we thought there might have been like a big uptick in January. And there is some uptick, but I think it's just delayed. I think they have to get going with increasing their reserves. They have to grow their reserves. And at one point, they're going to get to a point where they have to do more.And as well the junior financing, when you're above $1,600 gold, it starts to be interesting. And also, it starts to be interesting to add -- for the intermediates to add ounces to your reserves because that just pushes -- at $1,600, that really pushes your value up.So I think we're going to be seeing through this year. I think what we'll see is a steady growth of those programs. If I had the -- this is not necessarily guidance, this is just my personal opinion of how this could play out.Then on the base metal, like I said, you've got the -- at the moment, you've got that coronavirus that is putting a damper on the economy. So therefore, I suspect that base metal companies might be taking a prudent approach or -- to their budgets at this point. But they definitely have to do more to increase the -- again, their reserves because copper is going into deficit and it's starting in 2020 from what you read on -- from experts in the industry.So you've -- I think you're -- again, I think once that clears up, we're likely to see an uptick in budget. So it's -- so it creates a lot of uncertainty. But I mean, the good news is, is that we're starting with a really good base and we'll be growing on it for this year.

[Daryl Young, Mining Research Associate]

Okay, great. Maybe just one last one. On the early end of the drill programs, was that -- I guess, was that a -- was that project-specific issues that were happening? Or is there a market share loss or anything happening there to be concerned with? Or you need to...

[Denis Larocque, President, CEO & Non]

No. Frankly, it was across the board, and we've talked to several of our competitors, and they saw the same thing. It was just early shutdowns of programs that -- last year. Really, what we saw how the quarter played out, November was flat to last year. But we started the quarter with a higher level of activity, meaning that you had a slowdown earlier in the month of November. In December, our revenue was down compared to last year. And really, that's because you had a lot more shutdowns. And then in January, January was up compared to last year. So meaning that things are picking up. It's not up by a lot, but it was up.So for us, it was good news in terms of -- because we just -- that shutdown in December caught us a bit by surprise in terms of the timing that things got shut down earlier. But things are picking up again, and we're back at the same -- for the most part, we're back at the same projects that we were operating at last year.

[Operator]

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

[Ahmad Shaath, Research Analyst]

Maybe first to follow up on the last point. I'm not sure if you're able to maybe quantify the strength in January, February. I think you said it's similar or slightly better than last year. Are we talking low single-digit or low double-digit? Or I'm not sure if you're able to quantify that.

[Denis Larocque, President, CEO & Non]

Yes. We typically don't go in that granular detail. But it is -- like I said, I mean, the pickup in January is -- it's not big, but it was a bit of a -- it was a bit higher -- we had a few more rigs turning in January than we did in January last year. But it's still a slow going into February. And like I say, we add rigs day by day.But we're still in ramp-up mode, whereas in previous years, we get to February -- early February, you'd be already ramping up some of those. We're still in ramp-up mode, and we're still getting phone calls to add rigs here and there, and things are still growing. So...

[Ahmad Shaath, Research Analyst]

Is that a specific reason that this -- the trend this year is different? Maybe an increased level of -- like the number of rigs in total is higher? Or different locations?

[Denis Larocque, President, CEO & Non]

Well, I mean, like I said, I think the consolidation -- consolidations is touching a few companies. So therefore, right there, that's a lot of rigs that are affected by maybe a few -- and -- just a few weeks delays in terms of decisions or -- and so we're seeing that. But in terms of -- I don't have a real explanation why we're seeing that slow start. But I think people are getting organized and getting -- when you have a -- I went and I looked at our numbers back in 2012. And basically, January 2, almost everything was restarted. And -- but that's because they wanted to get as much drilling as they could in that calendar year. And it was kind of drilling from beginning of the year right up to -- get as many meters as you could in the year, whereas this year, they have a budget for meters. So whether they started January or February, they know they will be able to get their budget in this year. So they're getting organized -- doing it in an organized way. And so I think that's more of the trend at this point.

[Ahmad Shaath, Research Analyst]

Perfect. That's very helpful. And secondly, on the South American operation, I think, we talked previously on previous quarters about some political uncertainty causing some slowdown there. And I see the quarter was a little bit weaker compared to the last -- recent trends. Any persistence in this weakness from these impacts? Or is it just shutdowns and we should be back up to relatively normal levels going forward?

[Denis Larocque, President, CEO & Non]

Yes. I think the only one that I would point is Argentina. It's still -- like the political climate there in terms of investment is making investors maybe a bit more careful with their investment and how quick they ramp up. But I mean it's still a good place -- Argentina is still -- has still been a good place for us. But again, that might be one. But in Chile, the things that happened a few months ago in terms of -- I think things are back to normal. Chile is more affected by the copper. I mean most of the work coming out of Chile is related to copper. And then like I said, copper is down to -- in the 250s this morning a pound, which is down quite a bit. So that would cool off in terms of investment decisions. And that's probably what's affecting Chile the most. So those would be the 2 bigger ones for us.

[Ahmad Shaath, Research Analyst]

Perfect. And lastly, I'm not sure if you're able to comment on this. But from your view, what you've seen on the budgets, how are we looking compared to last year, years before, in terms of the -- I know directionally is up, but magnitude-wise, how would you describe that?

[Denis Larocque, President, CEO & Non]

Again, it's too early to tell what the drilling -- the amount of drilling that's going to get done. We're still hearing project by project, the plan is coming out. So to be frank, what we're seeing is, we're seeing a rig being added here and there. So that's why I say -- we're saying it's up, but it's still too early to tell how much up we're going to see.It's just -- I think it's going to evolve as the year progresses.

[Operator]

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

[Denis Larocque, President, CEO & Non]

Well, thank you. And again, I repeat the invite to come and visit us at PDAC. We're quite excited with all the innovative things, and we're going to be displaying some of that at our booth. So come and see what Trailblazers is all about. So thank you, and we'll talk next quarter.

[Operator]

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