Major Drilling Group International Inc

TSX:MDI

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Third 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 third quarter of fiscal 2021 On our 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 to from those currently anticipated in such statements. I will turn the presentation over to Denis Larocque. Please go ahead.

[Denis Larocque, President, CEO & Non]

Thank you, Chantal. Good morning, everyone, and thank you for joining us today. We are pleased by the level of activity generated this quarter, both before and after the holiday period. Third quarter is always impacted by a seasonal shutdown over Christmas at certain projects, but November was a particularly good month and continued progression of the areas in the previous quarter.December is a usual anticipated reduction in operations over the holidays, while in Canada, January got off to a quicker start than previous years. These factors contributed to a revenue increase of 23% for the quarter, and it does provide a strong indication that we are moving into a mining up cycle. Margins, as is usual for this quarter were impacted by substantial line [indiscernible] overall workflow over the holiday period. Additionally, the company incurred significant training, mobilization and setup costs to meet the pickup of activity and increased demand we are seeing for our services as we move into the fourth quarter and beyond. This performance generated EBITDA of $8.7 million, an increase of 226% over last year, which turned into an increase of $6.6 million of net cash, bringing our net cash position to $14.2 million. I want to commend our employees throughout the organization, who have been able to work through strict protocol and logistical challenges and deliver this kind of growth while remaining safe and healthy. I also like to highlight our Canadian division's safety performance, which has now operated over 7.5 million hours over 6.5 years without a lost time injury. The safety and well-being for our crews is our first and highest responsibility, when we work on any projects. And we were hard to earn the trust and support of our crews, and we are pleased to see their success. With that, Ian will walk us through the financials, and then I'd like to discuss our market outlook further before opening up [indiscernible] the call. Ian?

[Ian Ross, Chief Financial Officer]

Thanks, Denis. Total revenue for the quarter was $100.4 million, up 23% from revenue of $81.7 million recorded in the same quarter last year. As drill programs continued later into December and started out early in January in our biggest [indiscernible] REITs. The unfavorable foreign exchange translation impact on revenue for the quarter when comparing to the effective rates for the same period last year, was approximately $2.5 million, with a minimal impact on net earnings. Despite the continued challenges of COVID-19 in certain jurisdictions, we're pleased to report our highest third quarter revenue in over 8 years as we are seeing increased demand driven by senior gold projects and juniors deploying the capital raise last year. The overall gross margin, excluding depreciation for the quarter was 20.3% compared to 17.6% for the same period last year. The seasonality of the third quarter, also had an impact on margins as we take our opportunity to overhaul rigs that shut down on the holiday season. Also this quarter, in response to the increased activity level and potential demand we are seeing in Q4 and beyond, we stepped up drilling efforts to ensure we can satisfy our customers' needs in what or shaping up to be busy calendar 2021. G&A costs were down $1 million and $11.7 million when compared to the same quarter last year. The decrease is mainly related to reduced travel and various FX impacts. The income tax provision for the quarter was low compared to an expense of $300,000 for the prior year period. The income tax provision was impacted mainly by losses not being tax-affected in certain regions. Net loss was $1.5 million or $0.02 per share for the quarter compared to a net loss of $9.9 million or $0.12 per share for the prior year quarter. EBITDA was $8.7 million compared to $2.7 million in the prior year quarter. Strong growth in the quarter versus the same quarter last year is a direct result of increased activity level and illustrates the operational leverage potential as revenue levels grow. Balance sheet remains in great shape as our net cash position grew by $6.6 million to end the quarter with $14.2 million and total liquidity of $93 million. The company spent $5.1 million on CapEx, which was lower-than-anticipated due to the delivery dates of some new drills being pushed into Q4. We, therefore, expect a slight CapEx increase in the fourth quarter as we continue to ramp up for what is shaping to be a busy calendar 2021. During the quarter, the company added 3 underground rigs and retired 14 older, less efficient rigs, ending the quarter with a total rig count of 590. A new breakdown of our fleet and utilization is as follows: 299 specialized drills at 39% utilization; 123 conventional drills at 38% utilization; and 168 underground drills at 52% utilization. For a total of 590 drills at 43% 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 that we meet the rigorous standards of our customers in terms of technical capabilities, operational and safety standards and other related factors. Over time, we expect these standards to be increasingly broaden by our customers. In the third quarter, revenue from specialized work accounted for 55% of our total revenue, relatively unchanged from the prior quarter. We expect this trend to continue as long as the demand is afforded by elevated commodity prices. Conventional drilling made up 11% of our revenue for the quarter, mainly driven by the increased demand for work from junior mining companies. Finally, underground drilling revenue was up slightly compared to last quarter of 34% of total revenue. However, up 28% on the same quarter last year as we continue to grow this portion of our business in line with our strategic initiatives. As junior financings has picked up over the past 9 months, we started to see a shift in our revenue mix. During the quarter, juniors accounted for 19% of our revenue, senior and intermediates making up the remaining 81%. We continue to see an increase in tenders for junior programs, which will soak up capacity in the drilling industry in certain jurisdictions. In terms of commodities, gold projects represented 62% of our revenue, while copper was at 17% this quarter. Following on the trend of Q2, we saw gold dominate our revenue mix, while copper lagged slightly from historic norms. With strong copper prices and government infrastructure spending on the green economy in the works, we expect to see an increase in demand for copper related drill programs in certain regions. 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. It seems like we're having sound problems. We're just trying to fix it at this point, we'll keep going. And if we -- just give me a second, we're working through it. Okay. We will just hang in there. We'll come back in with -- on a different line, it should only take a few seconds. Thank you.[Technical Difficulty] Thank you. So we're back with a -- what I think is a better line now. So sorry about that. So we'll keep going. I'm kind of take you through the outlook, and then we can move to questions. So at the start of the calendar year, we saw an increase in gold exploration spend from both seniors and juniors, particularly in Canada, which was the main driver of the initial pickup of activity.Copper prices have been -- have seen a recent surge, which should also translate into more exploration activity in the near future as mining companies focus capital allocation into replenishing their depleting reserves. In the last few weeks, we've seen the world wake up to the reality of a rapidly diminishing future copper supply. At the same time, we're seeing governments unleashing significant stimulus programs, targeting investment in renewable energy and electric vehicle infrastructure, all of which will require huge amounts of copper. This increase in industry activity has once again raised questions around the availability of skilled labor, particularly in North America. To medicate concerns over crew staffing, we've stepped up our efforts around the world and have reinstated many of the initiatives that proved successful in the last industry upturn.Additional trainees are being assigned to rigs, and retention programs are being reinstated. In North America, we have increased our efforts across our training centers with goals to improve our retention rate for new hires and to qualify candidates for a driller training programs.Wage increases will be applied in certain regions to retain and attract the most experienced drillers and to ensure our high-quality customer services maintained as competition heats up.As we look ahead to our fourth quarter and fiscal 2022, we continue to see a noticeable increase in inquiries from all categories of customers.And if their plans progress as advertised, we expect to see utilization rates continue to gradually improve as crews become available. Although the shortage of experienced drill crews will put temporary pressure on labor costs and productivity, especially in our most active markets, we expect the wider industry shortages to continue to drive pricing improvements, which should gradually translate into margin recovery. Many of our senior gold and copper customers have identified exploration and reserve replacement as an important part of their future plans. And so we are naturally optimistic given the commodity price environment. Additionally, junior mining companies continue to raise capital and are getting ready to deploy the capital raise recently on exploration projects. This pickup in financing activity is indicative of the changing sentiment in the capital markets.For a number of years, the mining industry has seen under investment and will need steady exploration activity and, of course, associated specialized drilling services to replenish reserves for 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 a strong gold price environment and the growing need to mine for copper.Major Drilling is very well positioned to participate in such an up cycle. We have been laser-focused on maintaining the condition and efficiency of our fleet and our strong financial position gives us the unique ability to respond to meet our customers' demand for rigs, rod handling, mobile equipment and technology. We believe that the investment we have made ahead of the up cycle will ensure we 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 and retain the best people at a time when 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 Daryl Young from TD Securities.

[Daryl Young, Mining Research Associate]

So a first quick question on the M&A environment. Throughout the cycle, the down cycle, I think you have mostly said that M&A was off the table. As we move into this up cycle and see the labor shortage, is there any change in the thinking on M&A? And what kind of opportunities might be out there?

[Denis Larocque, President, CEO & Non]

Yes, Daryl. We never seen it was off the table. It's just the -- we -- we're always been very focused on our strategy of specialized drilling. And what we've said is that there was a lot of companies with just access rigs and no employees or no crews that would come with it. If we look at businesses, we're always interested in different geographies or in specialized drilling. Those are kind of the 2 main places we'd be interested in making acquisitions as it would fit in our fold. So yes, we're always -- we've always been looking. We talk to a lot of companies that sometimes we get phone calls.Sometimes it's -- these are short conversations. And like I say, we're just -- we're always looking to grow. And if it makes sense, we'll certainly look at it. We'll certainly look at it.

[Daryl Young, Mining Research Associate]

Okay. Great. And then obviously, some very good results in Canada this quarter. And it sounds like there was still some COVID-related issues in South America and parts of Africa. Is there a way to kind of quantify or think about how much upside would have been there, if those markets were operating normally? And I guess what I'm trying to sort of vet out is how much -- and clearly, demand is very strong, but just sort of how much upside is pent-up in those markets?

[Denis Larocque, President, CEO & Non]

Yes. It's really hard to give you that because how much is related to COVID and how much is related to for example, Latin America being slower to pick up in an up cycle. In the -- if we look at history in the last up cycle, Canada took off first and then Latin America followed after. So there's a bit of that at play as well. So it's not all COVID, but certainly, COVID is playing a factor in a sense that if mining companies were thinking of investing all it's doing, it's delaying their investments. But I think that if history repeats itself, we should see those regions picking up in the near future because at these commodity prices, it makes sense to go look for -- there is a premium in there. When you look at copper being above $4, even copper being above -- we kept saying copper being above $3.25 would be -- there's still lots of money being made. So it still makes sense to look at it. So at $4, you got to believe that it's starting to make a lot of sense, and those reserves need to be replaced. And the same thing for gold. We used to talk about $1,350 as being -- once things are over $1,350, then there's lots of projects that make sense, and we're well above those thresholds. So I think the Latin American and like outside of North America, I think it's just a question of time really.

[Daryl Young, Mining Research Associate]

Okay. Perfect. And then just 1 final one. On the copper side and, I guess, other sort of battery-related metals, what kind of percentage of the mix do you think that, that could become over time? Because obviously, gold has historically been the most demanding in terms of the requirement for meters drilled, just given the nature of geology. But what kind of, I guess, upside or mix do you see there on the copper and battery metals? Super senior [indiscernible]

[Denis Larocque, President, CEO & Non]

Yes, when things were firing on all cylinders, gold wasn't even making it to 50%. We were like in the 45% to 50% of our revenue was gold. This quarter, we're at 62%, and that's pretty much the highest we've ever seen. And I think it's just because gold is taking off first.And copper is at 17%. And again, that would be a low for us on our revenue. So and when things get going on copper, I wouldn't be surprised that we would see a 50% gold, 25% copper. And then the other 25%, we always say it's the flavor of the day. If we go back 10 years ago, uranium was a big part of that, then we had coal that was a big part of that, and then iron ore. These days in that -- going forward, you're going to have lithium and platinum and cobalt that are going to be part of that 25% and nickel as well. And nickel as our -- we've already seen some pickup in nickel activity. So in the future, I would think that's probably what we can expect to see the mix become. And it's not because gold would reduce it's because the others are going to pick up. Right now, we're -- we've pretty much only seen gold -- like the pickup, we're seeing is mostly related to gold.

[Daryl Young, Mining Research Associate]

Got you. Okay. Great. Well, congrats on a good quarter, and I'll get back in the queue.

[Operator]

The next question is from Christoph Matern from HPS.

[Christoph Matern]

Perfect. Yes, I wanted to ask 1 thing on the rebound now clearly, we see all the raw material price moves on the commodity side and all of that. I was wondering, overall, like what else gives you sort of comfort that this is sort of the real-time because we have seen a couple of fall starts that the cycle is turning in a more -- in for now a multiyear level. I mean you look at the capital raisings at the minors, is it your conversations with the majors and their order books? You're getting from them? Or sort of what gives you real confidence that is here to last now for 2, 3 years.

[Denis Larocque, President, CEO & Non]

Yes. The -- really, we're driven by the supply side. And there is a need for mining companies to look for it. Gold is down, the reserves are down 35% from 2012. And then the copper are facing big supply issues upcoming, and it takes 10 to 15 years to bring a mine into production.So commodity prices are starting to reflect that. And mining companies on the senior and intermediate side are all -- have all become vocal about the need to explore more. So that gives us comfort that they're moving with plans and that they're serious about these plans. Despite over the last week, we've seen a bit of a dip in the gold price. And -- but the -- again, to my point earlier, $1,350 is still very healthy, very good money to be made. And gold is still well above that. And gold companies are still talking about having to do a lot of drilling, a lot of exploration to replenish their reserves.And on the junior side, there's been a lot of money raised over the last 6 months. And that money has to be spent. So even if everything came to a halt on the financing, there's money in the system that needs to be deployed. Some of that money was even raised on flow through. That means that it needs to get spent on exploration, no matter what. So we feel pretty good about the year that's coming up.

[Operator]

[Operator Instructions]We have a next question from Maggie McDougall from Stifel.

[Margaret Anne MacDougall, Head of Research]

I noticed in your commentary and some -- your comments on just labor and labor shortage and how that may or may not be impacting your business. I'd be very curious to hear as you look forward the next few quarters at potentially increasing utilization.So perhaps just some color on how you guys are dealing with that, whether or not customers are accepting price increases where it needs to happen in order to get people fast on cruise.And any other things you're doing to sort of help with that dynamic?

[Denis Larocque, President, CEO & Non]

Yes. Well, it is -- and it's not across the board. Here, we're seeing that in North America. In other regions, we're doing fine. But in North America, the industry, not just us, it's the whole industry is -- we're already facing issues or challenges to have experienced drillers. So we're -- we've ramped up our training. As I mentioned, we've increased our efforts at our training centers and to increase the number of trainees. And also, in times like these, what we do is sometimes we might have 1 or 2 helpers on the job. While we basically moved to 2 to 3 helpers on the job to increase our -- to increase our ability to train drillers because typically, that's to become a driller, you start as a helper. And so all these things we're doing. And on the pricing side, yes, we are having conversations. And most customers are recognizing, especially customers that have been through these cycles. They know how this plays out when things get tight on drillers. You need to lock drills and you want to lock your crews. Because if you don't, you might be -- it's like musical chair, you might be that the 1 standing up looking for a chair at the end. So there is -- we're already getting phone calls from certain customers that are worried about locking rigs.And so pricing has been moving up to soak up the extra cost, but also we should see margins gradually improve to -- because over the last 6 years, the pricing -- we're still at the beginning, we're still a long way from where we were in 2012. So pricing, we're still at low prices for this industry.

[Margaret Anne MacDougall, Head of Research]

Right. Have you seen cost inflation and any other major inputs aside from labor?

[Denis Larocque, President, CEO & Non]

We're starting to see it. And we've heard of iron ore or iron prices being up quite a bit. So that could impact supplies, cost of supplies going forward. We haven't seen it yet, but you've got to believe that as the whole industry moves up, that we're also going to see a little bit of cost increase. But again, we've got -- in our contracts, we've got escalation clauses to reflect that. And so it shouldn't impact our margin that much going forward.

[Margaret Anne MacDougall, Head of Research]

Okay. And then a final one for me. In terms of customer inquiries, which you noted remain robust. Is there any region worth noting where you're receiving more inquiries and/or any commodity where you're receiving more inquiries?

[Denis Larocque, President, CEO & Non]

Yes. It's still -- Canada is the -- Canada is hot right now in terms of inquiries. And that's because there's been a lot of money raised. I mentioned flow through and the flow-through money that gets raised has to be spent in on exploration in Canada. So there's been quite a bit of money raised in -- on that, and that money is getting deployed right now.But we're starting to see other regions -- inquiries that's picked up pretty much everywhere. And so that's why we're hopeful that it's going to turn into projects. Some of those we're waiting for budgets to be approved. And last week, over the last couple of weeks, mining companies have had their Board meetings and approvals of budgets.And typically, budgets then gets -- it trickles down to the field level to the -- sent to the projects, and that's where approvals -- things get approved, and that's where those inquiries turn into contracts. So I think, like I mentioned, Canada is the 1 that is where we're seeing a lot of activity increase right now. But I think the others are just -- are going to come fairly soon.

[Operator]

Next question is from Ahmad Shaath from Beacon Securities.

[Ahmad Shaath, Research Analyst]

Congrats on a good quarter. Maybe 1 question for me. You touched on it a little bit. So what's your view on how should we look at your potential for margin expansion, maybe directionally compared to previous cycles.It doesn't sound like it's going to be as significant as previous cycles, but we were -- still should be looking for margin expansion, given the pricing environment and the cost inflation you mentioned.

[Denis Larocque, President, CEO & Non]

Yes. This is playing out exactly like previous cycles, meaning that typically, the way it has worked is revenue takes off first. And then you've got upfront costs to get rigs in the field and training and to get crews. As they get trained, they get more productive, and then that's where you start to see margin improve, plus the pricing. The pricing picks up steam as things go. So typically, what you see is you see revenue take offers and margins tend to follow, to follow after. And that's kind of what we expect to see in this up cycle if things progress like they did in previous up cycles.

[Ahmad Shaath, Research Analyst]

Perfect. And I guess I was trying to get at a percentage point wise from the bottom of the cycle to the up cycle, the delta in margins, given the training cost that you have to go through right now, is it that directionally -- is it magnitude wise the same as the previous cycles? Or is it a little bit lower just because of that? What do you think you can successfully do similar to what you've done in any previous cycle in terms of passing through those costs?

[Denis Larocque, President, CEO & Non]

Well, as I mentioned, the -- there is cost upfront. So margins are -- the margin expansion is going to be limited. Pricing is going up, but some of that pricing increase is going to be soaked up by the extra cost upfront.But -- which is the part I mentioned about margins, not necessarily margin expansion, not picking up immediately -- well, substantially, I mean.And then -- but it's just -- as you move deeper in the cycle and things continue to pick up, that's where you start to see those margins move.

[Ahmad Shaath, Research Analyst]

Perfect. That's very helpful. And lastly, I think the line was cutting off. Just -- I missed the overall utilization number where we stand right now.

[Denis Larocque, President, CEO & Non]

Yes. And Ian, maybe you should go through all the stats.

[Ian Ross, Chief Financial Officer]

Yes. I'll read them. Apologies for that. So we had 299 specialized drills at 39% utilization, 123 conventional drills at 38% utilization, 168 underground drills at 52% utilization for a total of 590 drills at 43% utilization.

[Ahmad Shaath, Research Analyst]

43%. Perfect. Thank you. Thank you so much, guys. And congrats again.

[Operator]

There are no further questions registered at this time. I will return the call back to Deni Larocque.

[Denis Larocque, President, CEO & Non]

Well, thank you. And apologies again for the communication here. We picked up where we left off. We hope we didn't lose any of you through this ordeal. And -- but we're looking forward to a busy 2021. And as we move deeper in this cycle and looking forward to see what copper is going to do this year. Thanks, everyone, and we'll talk next quarter.

[Operator]

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