Major Drilling Group International Inc

TSX:MDI

Earnings Call Analysis

Transition from Junior to Senior Drilling and Geographic Shifts

The company observed a pivot away from junior drillers due to a slowdown in financing, particularly in North America. The years 2020 through 2022 saw strong fundraising, especially in Canada and the U.S. Now, senior companies, especially in South America, are driving growth, signifying a shift in the geographic focus for the business.

Capital Allocation and Growth Strategy Amid Financial Strength

With a robust cash balance of over $100 million, there's an emphasis on growth rather than immediate returns to shareholders through dividends or aggressive share buyback programs. The company mentions copper activities ramping up and strong gold prices as indicators of their positive outlook, focusing on either organic growth or acquisitions.

Prospects in North American Battery Metals

There's recognition of the growing demand for battery metals due to the global shift towards electric vehicles. While the Canadian government advocates for electric car investment, mining companies face slow permit processes, impacting the industry's pace. Talks of expediting these processes are ongoing, which could bode well for the industry's and company's future growth.

Return to Previous Activity Levels and Revenue Outlook

Despite a slower February, with delays due to weather and project decision-making, the company foresees a return to the previous year's activity levels by April. While no explicit revenue guidance is given, the conversation implies that the company might see a lower revenue compared to the previous year until normal operations resume.

Engagement and Visibility in the Industry

The company is participating in the upcoming Prospectors and Developers Convention (PDAC) in Toronto, signaling active engagement with the industry's community and potential for business development opportunities.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2024 Results Conference Call.

I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Mrs. 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 third 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. Last night, we released our third quarter results, which typically is our seasonally weak quarter due to the holiday shutdowns.

The company continues its cash generation as we see growing strength in demand from copper and battery metal customers, up 8% over last year. Although, as previously mentioned, we saw several projects slow down earlier than last year during the quarter.

Globally, senior mining companies are well funded and are maintaining and in some regions, expanding drilling programs, even though calendar 2023 saw a slowdown in precious metal exploration, driven primarily by the reduction in funding for juniors and intermediates.

Recently, we've seen growth in several of our markets in South America, while in Canada, U.S., reduction of junior activity has created a more competitive environment, but we remain disciplined on pricing. The balance sheet remains very strong and allows us to continue to invest in our fleet modernization and technologies in order to maintain our position as the market leader in our industry, which I will come back to, after Ian walks us through the quarter's financials.

Ian?

[Ian Ross, executive]

Thanks, Denis. Revenue for the quarter was $132.8 million, down 11% from revenue of $149.2 million recorded in the same quarter last year. Our third quarter results were impacted by the typical seasonality with drills pausing for the holiday season, but this occurred earlier in the quarter compared to last year, where we experienced many companies drilling well into December.

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 0 as rates were relatively stable year-over-year. The overall gross margin percentage, excluding depreciation, was 23.4% for the quarter compared to 25.3% for the same period last year. Margins were down from the prior year and as a result of earlier shutdowns. We also take the opportunity during the seasonal slowdown to conduct annual preventative maintenance on the fleet. This negatively impact margins when comparing to other quarters during the fiscal year.

G&A costs were $17.1 million, an increase of $700,000 compared to the same quarter last year. The increase was driven by annual inflationary wage adjustments implemented at the start of the new fiscal year, along with increased travel costs.

Foreign exchange loss was $2.3 million compared to a loss of $0.3 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. During the quarter, the loss in Argentina was $2.9 million as they experienced a significant devaluation of the Argentine peso in December following economic reforms implemented by the new government.

The income tax provision for the quarter was an expense of $900,000 compared to an expense of $2.5 million for the prior year period. The decrease was driven by a reduced profitability. Net loss was $2.3 million, $0.03 per share for the quarter compared to net earnings of $6.3 million or $0.08 from the prior year quarter.

The company generated EBITDA of $11.4 million compared to $20.5 million in the prior year quarter, while increasing its net cash position by $12.2 million to finish the quarter with $96.4 million. With the robust cash levels, we continue to position the company for growth by investing $21.4 million on capital expenditures, adding six new drill rigs and support equipment while disposing of three older, less efficient rigs, bringing the total rig count to 605.

We've also increased investment in our enhanced hands-free rod handling capacity, for which we are seeing increased demand from our key customers. We continued our share buyback efforts, spending $2.7 million in the quarter, acquiring and canceling 317,000 shares at a weighted average price of $8.45 per share.

The new breakdown of our fleet and utilization is as follows: 288 specialized drills at 43% utilization, 119 conventional drills at 38% utilization and 198 underground drills at 40% utilization for a total of 605 drills at 41% 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. These standards are becoming increasingly important to our customers. In the third quarter, revenue from specialized work accounted for 64% of our total revenue as we continue to see increased demand for our specialized services. Conventional drilling, which is mostly driven by juniors, dropped to 8% of our revenue for the quarter down from 11% in the prior quarter, while underground drilling grew to 28% of our total revenue as these projects are more stable through seasonal slowdowns.

We continue to see the bulk of our revenue driven from seniors and intermediates, representing 80% this quarter as they continued their elevated efforts to address the [ pleading ] reserves. Juniors continue to have challenges accessing necessary capital to fund exploration programs and made up 20% of our revenue this quarter.

In terms of commodities, following on trends seen in previous quarters, we continue to see a shift in our revenue mix with gold dropping to the lowest percentage in our company's history, making up 31% of our revenue, while copper continued its recent growth trend matching gold at 31% of revenue. Lithium jumped to 8% of revenue, and we've seen a few uranium projects start up with its recent run-up in price.

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. As we enter the fourth quarter, we anticipate reaching last year's activity levels by April despite a slow start to the quarter due to the delayed mobilizations. We're encouraged to see these elevated activity levels returning in the coming months driven by demand from copper and battery metals while we wait for a rebound in activity and financing in the gold sector, which could bring the exploration industry to very high levels of activity at a time where reserves are dwindling on all those commodities.

As well, future deposits will have to come from areas more difficult to access, which will improve the demand for specialized drilling, which is one of Major Drilling's core strengths. Despite economic volatility, worldwide consumption and mine production continue at high levels. Therefore, we believe most commodities will face the near-term imbalance between supply and demand as mining reserves continue to decrease due to the lack of exploration over the last several years. Remember, we're still at less than 50% of the activity levels of exploration we saw in 2012. Therefore, we feel we are still very early in the mining upcycle and Major Drilling is very well positioned for that up cycle.

We are the leader in specialized drilling, being the go-to drilling company for many mining companies with technically challenging programs, whether it's remote, deep, high altitude Arctic or directional. As well, given robust cash generation, we maintained the industry's largest and one of the most modern fleets with continued investment in strategic innovation. Over the last two years, in partnership with some of our key customers, we've developed cutting-edge technologies, including digitizing our rigs to capture drilling data and the introduction of analytics to optimize drilling operations.

Moreover, we started partnering with some of [indiscernible] customers to leverage this drilling data for the development of their geologic models. Additionally, we made great progress in our enhanced hands-free rod handling capacity, a critical safety aspect valued by many of our key clients and a growing trend in our industry.

With these fundamentals still 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 these market dynamics.

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

[Operator]

[Operator Instructions] Our first question is from James Vail from the Arcadia Advisors. Please go ahead.

[James Vail, analyst]

I'd like to expand on your comments about the fleet, so to speak. I've done some entry arithmetic and it seems that since 2019, revenue per rig is almost doubled. And so I guess that's from the investment you're making in the more higher technology rigs. But my question becomes when you look at the overall balance of high-technology rigs versus the others, are you at a point where you're satisfied that it meets your current business outlook? Or will you continue to invest in better and better rigs? Because the bottom line of my question is, at one point, do you reach a max, and therefore, your cash flow -- free cash flow starts to increase at a more rapid rate?

[Denis Larocque, executive]

Yes. Basically, there's a couple of things here. On the rig itself and in terms of buying rigs and -- we continue to buy rigs every quarter. Some of those are replacing rigs that are, what I call, less effective and that's just like the natural updating of our fleet and everything.

But one thing that -- and that's part of the -- part of what we say on technology is, one thing that we've been doing is investing in retrofitting. Some of our rigs that are still in very good shape, but just adding drilling technology or consoles to the rigs that make those rigs then more efficient and also for our drillers, it reduces training time because that's another key factor to our growth in the future is that things turn -- as you know, you've been around our industry for a while, things turn really quick and then labor becomes an issue real quick. So the training aspect, it is key to growth. And so that part as well plays a role.

So for us, in terms of growing -- when we look at growing the fleet, it goes through, again, updating the rigs themselves every quarter, but also investing in upgrading the fleet, which is part of what we've been doing over the last the last couple of years.

[James Vail, analyst]

Okay. All right. And I just got now two very quick questions. Looking at the release and the balance sheet, am I correct in that the payment to McKay will be satisfied this fiscal year?

[Denis Larocque, executive]

Yes.

[James Vail, analyst]

Okay. And then finally, the stock that you buy back, is that retired or just put in treasury?

[Ian Ross, executive]

Canceled. Yes.

[Operator]

Our next question is from Gordon Lawson from Paradigm Capital.

[Gordon Lawson, analyst]

A lot of other drilling companies have [ started ] to the Canadian market as a source of weakness. And you've moved to the juniors in [ that ] group. Can you provide some color as to what other factors are in play here?

[Denis Larocque, executive]

In terms of -- sorry, a...

[Gordon Lawson, analyst]

Weakness in North America.

[Denis Larocque, executive]

Yes. So you're saying what factors we're seeing...

[Gordon Lawson, analyst]

Yes. You [ stated ] decreased activity from the junior drillers. So I'm wondering if there's anything else in play here, we could perhaps build into our model or forecast.

[Denis Larocque, executive]

Well, a lot of it has to do with that. In terms of -- see a lot of money that has been raised over the last three years, there's been some very good years in terms of raising money in 2021 and 2022 and even the end of 2020. A lot of that money was raised for Canada and in the U.S. because it's easier to raise money closer to home, for contracts that are in more stable jurisdiction or established mining jurisdictions and that's what we've seen.

So the slowdown in that financing is affecting those regions because, in fact, if you go look at the growth that we had early on in those years, '21, '22, the growth came from Canada and U.S. And so therefore, that's the big part of that slowdown. The slowdown of financing is affecting those areas because that's where -- and then as well, the flow through, there's been a reduction flow through money, which is totally a Canadian aspect of the Canadian exploration. So for all those reasons, that's why we're seeing those -- that slowdown. But at the same time, the seniors in -- for example, in South America, all of our growth is coming from senior companies. So we're -- it's kind of going both ways.

[Gordon Lawson, analyst]

Okay. With your cash balance over $100 million, are you considering being or increasing activity with your NCIB or even a potential dividend?

[Denis Larocque, executive]

Well, on the NCIB, our primary focus is still on growth and we've said that from the beginning. And when you consider that copper has grown in terms of activity over the last few months and the fact that as we said in April, we're going to be back to last year's level of activity, our business is holding up very well at a time where, like we said, juniors are struggling to raise money for exploration.

So with the gold price holding up at fairly high levels and the prospect that we've seen with copper, we're still very positive on the future. And that's why our focus continues to be on looking at opportunities to expand our operations, whether it's through organic growth, either adding to some of our operations or geographic expansion or through acquisitions. And therefore, in terms of capital allocation, as I mentioned, when we introduced the buyback, we mentioned that the focus was going to continue to be on growth. So we'll look at the buyback on an opportunistic basis. But again, our primary focus continues to be growth.

[Operator]

[Operator Instructions] Our next question is from Brett [ Carney ] from American [indiscernible] Opportunity.

[Unknown Analyst]

Yes. It's great to see the continued activity you guys are realizing in the copper battery metals market. It sounds like a lot of that strength coming from South America. It looks like there's plans to expedite the permitting and processing of extraction of critical battery and energy transition metals in Canada. I know it's pretty recent, but just curious what sentiment wise you're hearing from some of your customers on potential for battery energy transition metals, growth prospects in the North American region?

[Denis Larocque, executive]

Well, I mean, there's definitely a lot of possibilities in the demand and the need for those metal, I think, is well documented with everything that the world wants to do. And I mean, when you [ thought ] Canada, on one hand, you've got politicians that talked about having to invest in electric cars and then doing all these things. But at the same time, the -- I think from -- when you talk to mining companies, the permitting and all of that has never been so slow. It takes much longer than before.

So if we're going to be -- we want to go after our ambitions. I mean, electric cars are not going to get on the road if you don't have the copper and the battery metal. So there's definitely needs to be more on that. We'll see if there's -- as -- you're right, there are talks about expediting that process. Hopefully -- and I mean with PDAC this week, it will be -- or next week, it will be interesting to see if there's more talks about that because I know the mining industry is certainly putting pressure to say, okay, if you want more electric cars on the road, you need -- we need to get on with this. So I -- I'm certainly positive that this will come, but that will certainly help our industry when that happens.

[Unknown Analyst]

Great. That's very helpful. And if I can sneak in one more. With the balance sheet in as great a shape as you guys have gotten [ into ], I think the NCIB authorization expires later this month. Is it fair to think you guys would kind of reauthorize that in the vein, as you mentioned, of being opportunistic, particularly with the shares and valuation where it is currently?

[Denis Larocque, executive]

Yes, we're certainly going to look at that. But again, as I mentioned, our focus continues to be on growth. I mean, lots of -- we're very positive on the future. So we're focused on the growth, but the NCIB is part of our capital allocation, yes.

[Operator]

Our next question is from James Vail from Arcadia Advisors.

[James Vail, analyst]

I've been reading about this concern in the Canadian market of naked short selling. Have you seen any attempts by -- I think I saw [ Eric's ] one of the [ sprats ] was trying to get that change. Is there any progress made on that?

[Denis Larocque, executive]

No, I don't believe so. And there's a lot of the junior miners, I know are complaining about that. I am not aware of any updates on that.

[Operator]

The next question is from Steven Green from TD Securities.

[Stheven Green, analyst]

A question just to expand on your commentary on the Canadian market, given some of the junior weakness. You mentioned that April, you're expecting to kind of hit the strides their return to normal activity levels. Can you, I guess, quantify that a little bit? Would you expect Q4 in terms of activity levels to be similar to what it was last year, say, or a bit weaker given kind of the slow ramp up?

[Denis Larocque, executive]

Yes. Well, like I said, April, we expect to be back to last year's activity. Things in February were slower getting out for a few reasons. I mean, there was a delay mobilization, some weather related, but some also this year, we saw mining companies take a bit longer in terms of either making decisions on projects or just getting things organized, but things are now picking up. And that's why we say by April, we'll be back to normal levels.

[Stheven Green, analyst]

Okay. So would it be safe to say then that you'd probably be a bit lower in terms of revenue than last year?

[Denis Larocque, executive]

Well, you can read through the lines.

[Operator]

Thank you. There are no questions registered at this time. I would now like to turn the meeting over to Mr. Denis Larocque.

[Denis Larocque, executive]

Well, thank you, everyone. And in closing, I would like to invite our customers and investors to visit our booth at the Prospectors and Developers Convention, PDAC, starting this weekend in Toronto. It's shaping up to be another very busy event. So we're looking forward to it. Thank you, everyone.

[Operator]

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