Major Drilling Group International Inc

TSX:MDI

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the fourth 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]

Good morning, everyone, and welcome to Major Drilling's Conference Call for the Fourth Quarter and Fiscal -- of the Fiscal 2020. As well on the call is Ian Ross, our financial -- our Chief Financial Officer.You should all have seen our results that came out last night. And if not, you can go to our website at majordrilling.com. Before we get started, I'd like to caution you, as usual, that during this conference call, we'll make forward-looking statements about future events and the future financial performance of the company. These statements are forward-looking in nature and actual events or results may differ materially. In addition, during the call, certain data will be discussed on a reported and on an adjusted basis. Discussion of items on an adjusted basis are non-IFRS financial measures designed to give insight into certain trends of the operation.I want to spend some time on the challenges we face around COVID-19 and how we've managed it and how we see our business as we move forward. The health and well-being of our employees and their families as well as the communities we operate in is paramount, and that was our top priority in the early days of the pandemic. Our focus has been to react quickly and effectively to ensure that all necessary measures and safeguards are implemented to protect everyone and slow down the spread of the virus. While we had a good start to the quarter, by mid-March, operations were impacted by COVID-19. And in the second half of the quarter, we saw a significant decrease of activity in some of the regions where we operate as we started to see projects around the world temporarily shutting down as mining companies and governments put measures in place to deal with the pandemic.The impact was varied depending on the jurisdictions, but our Canadian operations were some of the most affected as we saw more than half of our rigs stop in mid-quarter as the bulk of our projects are in Ontario and Québec. We also saw complete shutdowns over the same period in Chile, Argentina and South Africa. In Asia, most of our projects continued to operate, whereas the rest of our operations around the world were also impacted by some stoppages.In order to remain cash flow positive, we adjusted our spending, including capital expenditures. I must say that our teams out there did an amazing job of managing the business at the same time as they were implementing all the protocols to keep our employees safe. As well, we're grateful for the dedication and commitment of our employees, especially on the front line, in the field and the workshops.On the financial highlights. Given the uncertainty surrounding the COVID-19 outbreak and the significant volatility seen in the equity markets on our valuation, there is a lot of noise in our earnings. This is why we added the adjusted earnings table in our press release to provide some sense of what our earnings look like when you exclude the onetime charges we had to take relative to the impairment indicators in place. Ian will take you through the various charges we had to take this quarter, but in essence, excluding these onetime charges, we were still able to generate $7.3 million of EBITDA, which is why our net cash position stayed positive at $7.1 million. This is still a strong position considering the impact that COVID-19 had on our industry.As we look forward, employee retention, access to supplies and having rigs ready will be key to success in a recovery, and given our financial situation, we have been able to address all those points and we're ready. I'll take you through how we are positioned on these points after Ian deciphers the different charges we had this quarter and take you through our quarterly results.

[Ian Ross, Chief Financial Officer]

Thanks, Denis. Total revenue for the quarter was $88.8 million, down 12% from revenue of $100.4 million recorded in the same quarter last year. The impact of COVID-19 were felt starting in mid-March, April being particularly challenging in certain jurisdictions. Favorable 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 with negligible impact on net earnings. The overall gross margin percentage, excluding depreciation, for the quarter was 21.5% compared to 23% for the same period last year. The impacts of COVID-19 were felt in our margins as we incurred normal fourth quarter ramp-up costs, but then our revenue streams abruptly stopped at many time.We also incurred standby labor charges in a few of those countries as we awaited activity levels to reduce. However, this was partially offset by a $1.1 million benefit related to the Canadian employment wage subsidy. General and administrative costs were down $100,000 and $11.1 million when compared to the same quarter last year. The additional G&A from the Norex acquisition was offset by reduced travel as well as a $600,000 benefit related to the Canadian employment wage subsidy.This quarter, we recorded a $58.7 million pretax noncash goodwill impairment charge. As the quarter unfolded, there was a significant decline in the global equity markets, including our own share price. Under IFRS accounting rules, a significant decline in our stock price is a potential impairment indicator of goodwill. The goodwill impairment reflects the impact and uncertainty COVID-19 is having on the company's Canadian and U.S. cash-generating units. This impairment is primarily driven by near-term impacts caused by COVID-19 as we believe longer-term cash flows are consistent with those forecasted prior to the pandemic. As well, due to the unknown near-term impacts caused by COVID-19, we have derecognized $14.7 million of deferred income tax assets related to previously recognized tax losses. Combined with the tax impact of the goodwill impairment, the company recorded a noncash charge of $10 million in deferred tax expense. The company also recorded an additional restructuring charge of $2.4 million, including $2.1 million in noncash charges, mainly related to the previously announced closure of its Colombian operations.COVID-19 has negatively impacted the ability to execute the initial restructuring plan, resulting in additional charges. These 3 COVID-19-related charges resulted in a $71.2 million negative impact on our fourth quarter results, of which $70.8 million was noncash. Net loss for the quarter was $74.3 million or $0.92 per share. However, adjusted net loss, excluding the onetime write-downs, was $3.1 million or $0.04 per share versus an adjusted net loss of $1.6 million or $0.02 per share in the same quarter last year.EBITDA was $7.3 million compared to $10.7 million in the prior year quarter. Despite the challenging situation, we were able to generate cash due to the diverse nature of our operations, cost-savings initiatives and management experience in dealing with sudden decreases in activity levels at a company as [ cyclical ]. In terms of our financial strength, we maintain a very strong balance sheet. Our net cash position, net of debt and excluding lease liabilities, decreased by $30 million but remained healthy at $7.1 million. As a strictly precautionary measure, during the quarter, the company drew down the remaining $35 million of its $50 million credit facility and place it into short-term deposit to ensure access to capital in case of a prolonged slowdown.As activity levels have stabilized for the time being, the company plans to repay $20 million of this in Q1. With respect to accounts receivable, we are well situated due to our customer mix in predominantly seniors and intermediates and well-capitalized juniors. At this time, there are no concerns with the collectability of our receivables. The company spent $7.1 million on capital expenditures in February and March, adding one new rig to our fleet to support equipment and a number of rig rebuilds in the expectation of a busier calendar year pre-COVID-19.We disposed of 5 rigs, in line with our strategy of continuously improving the quality of our fleet. Total rig count is at 607. The new breakdown of our fleet and utilization is as follows: 307 specialized drills; 132 conventional; and 168 [ underground ] for a total of 607 drills. 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: 65% specialized, 5% conventional and 30% underground.Also, seniors and intermediates represented 91% of our revenue in Q4, while juniors were at 9%. Our established relationships with seniors and intermediates continue to drive our revenue, while junior exploration activity remains suppressed. However, there have been some financings lately for gold-related projects. In terms of commodities, gold projects represented 57% of our revenue, while copper was at 21% 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 management team has managed successfully through several industry and economic cycles in the past, and we are confident that we have taken the necessary steps to position the company to effectively navigate through this pandemic, while maintaining our strong financial position. But we will continue to closely follow developments in each of the regions in which we operate, and we'll continue to take actions as warranted. In the short term, we're seeing most jurisdictions relaxing previously implemented measures and rigs are returning to work bit by bit. But this will understandably be a slow process as mining companies deal with the implementation of the different protocol in each project, and we need to take the proper precautions for the safety of our crews. Now there can be no assurance that certain countries will continue to allow mining and drilling-related activities as the impact of COVID-19 pandemic unfolds.As we look forward, we need to keep an eye on the long term and get ready for a recovery in activity. And I must say that our financial situation going into this crisis has allowed us to preserve our ability to respond on all fronts. Retention of our employees is key to our success. That is why, early on in the outbreak, we decided to reassure employees that their jobs and salaries would not be affected in the short term, given we are able to generate cash and are in a strong financial position. This not only served retention but helped with potential mental health issues as the situation is already stressful enough without having to wonder if you will be employed the next morning.One challenge that the industry is facing relates to supply chains of consumables, rods and drill parts. Supply chains and logistics have become challenging in certain regions, but we continue to evaluate alternatives to ensure jobs currently operating will continue. We do have a large inventory of rod consumable and parts, which should allow us to continue to service our customers despite issues with supply levels felt by many of our suppliers.Finally, given we were expecting a busier calendar year, we did spend more money to rebuild rigs and get support equipment in the first 3 months of this calendar year. This is reflected in our capital expenditure number this quarter as most of this was spent in the first half of the quarter as we were ramping up. The good news is that a lot of that work is now done, and we are ready to deploy these rigs in the field when demand comes.As far as the industry is concerned, the price of gold, which historically has accounted for 50% of our drilling activity, has increased above $1,700 level and is staying around that level. In light of existing conditions, industry experts are forecasting gold prices to remain at this level for the short to medium term, and we are seeing the return of decent financings for gold-related projects. Regarding copper, which typically accounts for 20% to 25% of our drilling activity, many experts expect that copper will face a deficit position in the next few years due to the continued production and high-grading of mines over the last few years, combined with the lack of exploration work conducted to replace those reserves.Now as demand for copper is concerned, the anticipated decrease in demand for base metals due to the slowdown in the global economy could be offset by new infrastructure stimulus programs currently being contemplated by many governments. Ongoing discussions regarding such stimulus plans, by default, require more conductive in battery metals, such as copper, lithium and cobalt.In the fiscal year just ended, we began the process of consolidating our already existing ESG efforts under a formalized ESG framework. We believe that Major Drilling's long-term sustainability depends on us serving as valued contributors to the communities where we operate, stewards of the environment where we work and therefore, be responsible corporate citizens in the eyes of our workforce, our clients, our shareholders and other external stakeholders. I'm particularly proud of all the efforts that our employees put in their communities in different forms, including recent efforts to help with food distribution and protective equipment in different parts of the world.In conclusion, we continue to be very well positioned at this point in time as the leader in specialized drilling. Our strong financial position in the industry gives us the unique ability to respond to meet our customers' demand 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 where -- when we could be going into a labor crunch in our industry. That concludes our formal remarks. And operator, we'll now open the call to questions.

[Operator]

[Operator Instructions] And the first question is from Daryl Young from TD Securities.

[Daryl Young, Mining Research Associate]

Just wondering if you can give a little bit of color on the near-term outlook. It sounds like things are starting to recover and ramp up. But I guess, just are you seeing any cancellations of drill programs? Or is it basically all deferred into the later half of the year, and so it should be a pretty busy year-end?

[Denis Larocque, President, CEO & Non]

Well, at the moment, most of our customers talked about deferrals, and so that's -- those are the discussions we're having. We're continuing to have discussions about restarting programs. Things are restarting in pretty much all of the jurisdictions where things were shut down. If you take Québec, for example, I mean, we restarted rigs there. We're not back to where we were, but bit by bit, we're adding rigs. And it's really -- all these restarts are really hampered in terms of -- by the -- all the protocol that needs to be put in place. So it's a slow restart. There are -- we're going to be -- there is challenges with camps, for example. So mining companies are increasing their camp facilities to allow for social distancing, places where maybe guys were sharing rooms, so you need to address that. So all of those things are going to take time, but things are certainly picking up, and we're having lots of conversations about drill programs with the same people we were having before COVID.So -- and there's been -- as you would have seen, there's been good financings happening. So we expect to see demand coming from those companies as well.

[Daryl Young, Mining Research Associate]

Okay. Excellent. And on the financing side, I think in the past, you said it sort of takes 4 to 6 months before you start to see any of the capital raise deployed in drill programs. Is that still correct?

[Denis Larocque, President, CEO & Non]

Yes, I think that's going to be the same. Companies -- there's always -- and probably more than ever because, again, with all the -- people are not rushing things. They're taking their time to put all the procedures in place. So yes.

[Daryl Young, Mining Research Associate]

Okay. And then in terms of the competitive outlook and the landscape, I know a lot of the public drillers are -- have pretty leveraged balance sheets. But I'm wondering if you've seen any smaller drillers fall away? And what you think that the utilization of the industry could look like going forward? Because I think we're still at about 50%.

[Denis Larocque, President, CEO & Non]

Yes. No, we haven't seen, but I mean everybody is coming -- I'd characterize coming out of hiding right now, so it's hard to know in what state the industry as a whole is in. But I mean there's no question that, like you say that there was a lot of drilling companies out there that were levered. So I don't know what this COVID period will have done. But there's no question that it's -- there's going to be some companies out there that will struggle. But like I mentioned -- I think I probably mentioned our strong financial position probably 10 times on this call and -- because it's something we want to make sure that our shareholders and our customers understand that we are in a very strong position going forward.

[Operator]

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

[Ryan Hanley, VP & Mining Analyst]

I think Daryl got a couple of my questions there, but maybe just to follow up a little bit. Just wondering -- so I think in the press release, you mentioned that towards the end of the quarter, you cut back a little bit on reduced forward inventory purchases and minimized some discretionary spending. I'm just wondering, where does that leave you if we get a sharper rebound in activity, maybe a little bit quicker than the slow and steady growth that you had mentioned before?

[Denis Larocque, President, CEO & Non]

Well, as I mentioned, we -- the nice part is we, lots of time, are spending on inventory, consumables and work we do on rigs and support equipment. It's front-end loaded at the beginning of the year because we typically get a sense of how busy the year looks, and that's where we put in orders and we get ready. So from that perspective, a lot of that was spent already. But I mean we do have -- we did have a few -- a couple of rigs on order that were still going through that are going to come in this quarter that are basically slated to go to work right away. But other than that, we have put a hold on capital expenditures for anything that is not absolutely required. Sometimes it's is an upgrade that will help. And -- but we're deferring all of those capital expenditures.And on the inventory, we're going to be using -- we've stocked up to be ready. That was done on purpose as we were looking at a ramp-up in activity, and we were worried about if there was a big ramp-up about the supply channels because a lot of suppliers have reduced through the downturn their production capacity. So therefore, this is serving us in this period where we do have inventory on hand. So we have reduced our ordering, but we do have good inventory on hand to get going. So if things were to -- like you say, to get a sharp recovery, we'd be assessing our inventory, and then we'd be putting in orders to basically cover off, but we'd be -- we'll be in great shape to deal with that.

[Ryan Hanley, VP & Mining Analyst]

Okay. Perfect. And then I guess maybe just to follow up on that. Given that you've got really strong inventory levels, and unlike a couple of competitors, you've been able to retain your employees, are you seeing any new contract wins, given that there's a few other drillers out there that are struggling much more through the crisis?

[Denis Larocque, President, CEO & Non]

Like I said, it's still very early, so probably too early to tell what impact that will have. We're having lots of discussions with mining companies about that. Some mining companies are calling us to inquire of our ability, but they're probably doing that with different companies as well in terms of inquiring about the ability to be able to ramp up quickly in terms of rigs being ready and people. So we are fielding calls like that. But in terms of giving you an idea of our relative position, it's too early to tell, I would say.

[Operator]

The next question is from Ahmad Shaath from Beacon Securities.

[Ahmad Shaath, Research Analyst]

Maybe a couple of questions for me. First, would you be able to give us color on utilization ahead of all the COVID-19 impact? How were we trending for the first half of the quarter? And secondly, maybe a little bit tied to that, what were you planning in terms of CapEx and inventory purchases or any other spending that you had to pare down and maybe a little bit more color on what was that relating to?

[Denis Larocque, President, CEO & Non]

Okay. Well, on the utilization, we were -- I mean in Q2, we had 40%, and so we were trending to be higher than that. And -- but -- so with COVID-19, I mean we ended up at 35%, but that 35%, again, is -- basically has that impact in there. And sorry, what was your second question?

[Ahmad Shaath, Research Analyst]

Sorry. Yes, regarding the CapEx program. Like you mentioned that you are paring down spending, you're not spending as you had planned to before. So maybe a little bit more color. Is the spending that you're doing ahead of COVID-19, did that -- like the activity level caused you to want to spend more? Was there more activity going on that you said, I want to buy more rigs or do more refreshment or prepare more rigs for more activity? Just trying to get a sense of the activity level, excluding the COVID-19 impact? And what would you be doing in that environment?

[Denis Larocque, President, CEO & Non]

Yes. Yes. No, we were getting ready for higher activity levels as we had pointed to that. And we were -- that's why when you look at the capital expenditure, when we say we cut back on capital expenditure and then you look at the number, and we spent $7.1 million. But basically, again, that was front-end loaded because we were -- we ordered support equipment, and we spent -- our shops were busy the first 3 months getting rigs -- or first 2.5 months to get rigs ready. So there was a lot of rig rebuilds and things like that. So yes, no, we were expecting a busier year than last year, and we were getting ready for that. And that's the thing. It hit just as we were hitting our peak on spending in a sense, because we have to do all of that in the first 3 months to then get things going and get things in the field and hit our stride, and then basically everything came to a stop. So that's why I say it's unfortunate we have that spending. But at the same time, now that a lot of that spending is behind us, so then we're ready to go. So that's basically how the situation worked out.

[Ahmad Shaath, Research Analyst]

That's great. And maybe one last follow-up with me and -- on the state of the industry and what happens following COVID-19. How is the market for rigs or potential acquisitions? Or have anything surfaced up in terms of certain pockets similar to your most recent acquisitions that you would like to get into in terms of geography or attractive jurisdictions that you're starting to think, hey, maybe towards the end of the year, we can pick up something there? Or is it still too early to discuss any potential M&A over the next 12 months?

[Denis Larocque, President, CEO & Non]

On rigs availability, there's no problem there. Most suppliers are back to production. And -- but I mean there's always the 3, 4 months' delay between the time you put in an order to get a rig. So that's -- no big impact there. On the acquisition front, we didn't -- I wouldn't say that we didn't get too many phone calls and we haven't been chasing, I must confess. We've been more focused on our operations. And with all the uncertainty out there, we basically didn't look too hard at acquisitions. Although we are keeping an eye on opportunity. There might be -- if there are some defaults out there, there might be some equipment that might become available cheap -- on the cheap, which we're certainly in a position to look at that. So that's basically how we've been approaching this over the last couple of months.

[Operator]

There are 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 please, everybody stay safe, respect all the measures out there, 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.