Major Drilling Group International Inc

TSX:MDI

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2021 Results Conference Call. I would now like to turn the meeting over to Ms. 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 Fourth Quarter of Fiscal 2021. 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 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, President, CEO & Non]

Thank you, Chantal. Good morning, everyone, and thank you for joining us today. Due to the continuous improvement in activity level, I'm proud to announce today that for the fourth quarter of 2021, Major Drilling achieved its best quarterly revenue since 2013. Most of the revenue growth came from North America, which had a very busy ramp-up quarter where activity has now well surpassed pre-pandemic levels. Gold projects remains the key driver as we saw both senior and junior miners increased their activity. Despite some project timing delays in South America and in Asia caused by the pandemic, revenue for the quarter increased by 44% compared to last year, as activity grew steadily during the quarter and beyond, which provides a strong indication that we are well into the early phase of a mining up cycle. The strong growth experienced in North America during the quarter impacted margin as was seen in previous up cycle. Due to the ramp-up costs related to training, mobilization and setup costs to meet the strong pickup in activity. Other regions were impacted by delays in logistical challenges relating to the pandemic. Looking to the fiscal year, despite pandemic-related headwinds felt across the industry, the company was able to return to profitability and produced its highest revenue over the last 8 years. And we are still very early in this mining up cycle, which I'll discuss when talking about the outlook. Subsequent to the quarter end, we announced the acquisition of McKay Drilling PTY, with operations primarily in Western Australia, a key geographic region in the industry where Major Drilling did not have a presence. This highly accretive acquisition is a meaningful part of our growth strategy, providing us with immediate cash flow and a strong foothold in an important growth market with high barriers to entry. In addition to a fleet of state-of-the-art rigs, we welcome aboard a highly experienced team with local knowledge, long-standing regional relationships and existing contracts with leading blue-chip mining companies. Importantly, Major -- McKay and Major Drilling share similar cultural values, operational practices and a dedicated approach to sustainable resource development consistent with our global ESG framework. With that, Ian will walk us through the quarter's financials. Then I'd like to discuss our market outlook further before opening up the call for questions. Ian?

[Ian Ross, Chief Financial Officer]

Thanks, Denis. Total revenue for the quarter was $128.1 million, up 44% from revenue of $88.8 million reported in the same quarter last year, a strong demand for drilling services resulted in our best quarterly revenue since 2013. The unfavorable foreign exchange translation impact on revenue for the quarter, when comparing to the effective rates for the same period last year, it's approximately $8 million as the COVID-19 pandemic resulted in significant volatility in foreign exchange markets in the last quarter of the previous year. The impact on net earnings is minimal as expenditures in foreign jurisdictions tend to be in the same currency as revenue. The revenue growth was generated despite the continued challenges of COVID-19 in certain jurisdictions. However, the majority of these impacted countries are beginning to ramp up as restrictions ease. The overall gross margin percentage, excluding depreciation for the quarter, was 18.4% compared to 21.5% in the same period last year. A quick start-up, we saw in January, continued through February and March as the growth came at a rapid pace, resulting in enhanced margin pressure due to increased training, mobilization and consumable spending. We also encountered a number of COVID-19-related shutdowns and delays in the quarter as the third wave hit hard in certain regions. Demobilization and standby labor costs not covered by customers were incurred, which also had a negative impact on margins. With the startup cost behind us and COVID-19 restrictions loosening, we feel margins should improve moving forward as the cycle progresses. G&A costs were up $1.4 million at $12.5 million when compared to the same quarter last year. The increase is mainly due to the fact that in the prior year quarter, G&A was reduced by wage subsidies of $600,000 from the Canadian government in relation to the substantial impact COVID-19 had on our operations. The income tax provision for the quarter was $289,000 compared to an expense of $10.1 million for the prior year period. The significant decrease was caused by a $10 million derecognition of deferred tax assets in relation to the unknown impact of COVID-19 in the prior year. Net earnings were $2.3 million or $0.03 per share for the quarter compared to a net loss of $74.3 million or $0.92 per share in the prior year quarter. Prior year figures were impacted by goodwill impairment, restructuring charges and deferred tax write-downs totaling $71.2 million. Despite substantial ramp-up costs and COVID-19-related impacts, the company generated EBITDA of $12 million compared to $7.3 million in the prior year quarter. We continue to maintain a strong balance sheet in the quarter, which enabled us to respond quickly to growth opportunities presented to us. We ended the quarter with net cash addition of $6.9 million, down $7.3 million from previous quarter. As highlighted in the previous quarter, CapEx spending increased to $10.7 million, which was caused by delivery dates of drills ordered in Q3 that only arrived in Q4 as well as a necessary increase in support equipment to meet growing demand. During the quarter, the company added 7 drills, while retiring 9 older, inefficient rigs, ending the quarter, the total rig count of 588. With the increase in activity levels and inquiries from around the globe, we expect our CapEx budget in fiscal 2022 to be approximately $50 million. As Denis mentioned, subsequent to quarter end, the company completed the closing of the acquisition of all the outstanding shares in McKay Drilling PTY Ltd, specialized drilling company located in Western Australia. The deal structure included a cash portion on closing of AUD 39.7 million or approximately AUD 37.1 million, subject to working capital adjustments. The cash portion was funded using the company's cash balance and debt facilities as well as the issuance of 1.3 million common shares of Major Drilling. In addition, an earn-out of up to AUD 25 million will be payable in cash over the next 3 years based on the achievement of certain milestones. In the 12-month period ending March 31, 2021, McKay generated revenue of approximately 60 million and EBITDA of approximately AUD 17 million. In conjunction with the closing, effective June 7, 2021, the company successfully negotiated an increase to its main credit facility of $25 million to an aggregate of $105 million, of which $50 million is currently used. The new breakdown of our fleet and utilization is as follows: 292 specialized drills at 45% utilization; 120 conventional drills at 39% utilization; 176 underground drills at 59% utilization for a total of 588 drills and 48% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Rather, it has work that require 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 become increasingly important to our customers. In the fourth quarter, revenue from specialized work accounted for 60% of our total revenue, an increase of 5% from the prior quarter. We expect this trend to continue as long as elevated commodity prices support it. Our conventional drilling made up 11% of our revenue, which is mainly driven by the increased work from junior mining companies. And finally, revenue from our underground drilling operations was at 29% as we continue to grow our diversified services. As we continue to see junior capital raising deployed in the field, our percentage of junior revenue has maintained 19% of total revenue, contributing to the overall growth of our business. Senior and intermediates remained at 81% as a number of our customers have increased budgets for calendar 2021. In terms of commodities, gold projects represented 62% of our revenue, while copper was at 18% this quarter. Continuing last quarter's trend, we saw gold dominate our revenue mix while copper continued to lag from historic norms. With copper prices continuing to hold at multiyear highs 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 call back to Denis to discuss the outlook.

[Denis Larocque, President, CEO & Non]

Thanks, Ian. As I mentioned before, we're still very early in this mining recovery. The main factor that has facilitated growth over the last few months and increased our confidence in the future is that following 6 years of lack of exploration, gold replacement has been identified as a significant challenge by several senior gold companies with many having already made significant commitments to increase exploration activity and further develop existing projects. Also, gold prices have now risen to a level where junior mining companies have increased -- have seen increased success in obtaining funding for greenfield exploration. Although we have not seen much of an increase in activity from base metal players, the prices of copper and iron ore have recently hit historical highs, which should also translate into more exploration activity in the near future as mining companies seek to replenish their depleting reserves. At the same time, we have seen governments across the world unleashing significant stimulus programs targeting renewable energy and electric vehicles, which will require a huge amount of copper as well as battery metals. Looking ahead to fiscal 2022, we continue to see an increase in inquiries from all categories of customers. And if their budgets and plans progress as advertised, we expect to see utilization rates continue to improve as crews become. Available -- availability of skilled labor in busy markets continues to present an industry challenge. In North America, Major Drilling has increased efforts across our training centers with goals to improve our retention rates for new hires and to qualify candidates for our driller training programs. As competition to attract and retain the most experienced drillers heats up, we have also increased wages in certain areas to retain and attract the most experienced drillers, which are key to high-quality customer service. Although the shortage of experienced drill crews will put temporary pressure on labor cost and productivity, especially in our most active markets, we expect the wider industry shortages and higher utilization rates that continues to drive a more positive pricing environment and expedite margin recovery as we progress through the cycle. Further, as pandemic restrictions ease in South America, we expect to see an increase in activity as drilling programs resume in places like Chile and Argentina. So we believe that we're -- we are in the early stages of a strong upcycle in the drilling business, primarily due to the strong gold price environment and the growing need to mine for copper. Major Drilling is ideally positioned to participate in such an up cycle. For the last 2 years, we've 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 labor -- our customers' demand for rigs, rod handling, mobile equipment and technology. We believe the investments we have made ahead of the up cycle, including the McKay acquisition, 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 ensures we attract and retain the best people at a time when the industry is heading towards the labor crunch. Finally, Major Drilling more than 3,000 employees continue to be integral to our strength as a company, and I would like to express our ongoing appreciation to all. We also want to thank our loyal customers for their trust. As well, we wish to thank our shareholders for your continued support. Your company continues to be a unique, diversified market proxy for the mineral sector around the globe with a high-quality fleet and operations ideally positioned to capture the industry up cycle as we look forward to a brighter future. With that, we can open the call to questions. Operator?

[Operator]

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

[Gordon Lawson, Senior Research Associate]

So can you elaborate on the milestone achievements related to the McKay acquisition and your expectations of making these additional payments?

[Denis Larocque, President, CEO & Non]

Yes. Sorry, your second question, I didn't get your second question.

[Gordon Lawson, Senior Research Associate]

Your expectations of making the additional payments, I believe it's $25 million.

[Denis Larocque, President, CEO & Non]

Yes. Well, there's -- yes, the McKay acquisition for us, we're very happy. It's in the very busy market. And a market where we were not, it's probably around the world, the -- with Canada, the top 2 markets in terms of exploration at the moment. So for us, it was a market we were looking at for a while and McKay is one of the top industry players in the in that region. And so for us, it made a lot of sense. In terms of expectation for the payments, it is an earn-out basically over the next 3 years based on certain targets, achieving certain targets, and it will be paid over the next 3 years. There's amount slated for over the next 3 years to be paid again depending on achieving certain targets.

[Gordon Lawson, Senior Research Associate]

Okay. But you can provide a little more color on that?

[Denis Larocque, President, CEO & Non]

No. In terms of disclosing the target, that's -- no, we're not disclosing that information.

[Gordon Lawson, Senior Research Associate]

Okay. But the majority of the contracts with McKay, you mentioned different commodities. So are these iron ore related? And with the commodity prices where they are, are you planning on continuing to diversify away from gold?

[Denis Larocque, President, CEO & Non]

Yes. I mean, the Western Australian market is -- there's a lot of iron ore over there. So just the little more than half of the revenue comes from iron ore and then the bulk of the rest comes from gold. So for us, it gives us to your point, it gives us a little bit of diversification from gold with the iron ore presence over there. When you say looking -- that we'd be looking to diversify from gold that's -- we always say we drill a rock. The demand comes from which commodity is more active. And we expect that copper will be over the years to come that copper is going to play a bigger role with the shortage, the big deficit that's coming on copper and the fact that there hasn't been much exploration carried out by copper companies over the last 6, 7 years. So we expect copper and other base metals as well to factor into that, which will decrease our exposure to gold.

[Operator]

Our next question is from Daryl Young from TD Securities.

[Daryl Young, Mining Research Associate]

My first question is around the margins in the quarter. And I guess, if there's any detail you can give us on the magnitude of the cost drag by bucket. So just, I guess, what I'm trying to get to is, what would a normalized run rate EBITDA margin look like currently if some of these rig mobilization and ramp-up costs were stripped out?

[Denis Larocque, President, CEO & Non]

Yes. Well, I mean, the -- when you look at the margins that we had in our second quarter, that's probably the normal where we were. So the delta between those 2 would be that the shortfall if you might say. And that shortfall was really impacted. For example, in Canada, we grew -- just from the second quarter, we grew 33% of revenue. That's a big jump. And that was done through the quarter as we saw a progression in February to March to April and beyond. So basically, what happens in the field is when you mobilize those rigs, you've got mobilization costs that are all expensed upfront. We don't defer costs. Although the pricing of the job is we're going to make it -- we're going to make that money as the job going forward. But those upfront costs of consumables that are sent to the field, mobilization, training people, induction, all that, there's heavy. And then -- so when you have those big ramp-ups, all of a sudden, like I said, in Canada, you have like a 33%, that's a lot of people that going through the system and that's, again, a lot of upfront cost. So that was a big impact. And as well, the -- in South America and in Asia, we had still COVID-19 impacts in terms of job shutdowns or delays. And our approach with COVID has been and even, if we roll back the clock a year ago, we mentioned that -- or even back in March last year, we mentioned that our key was retention. So we still pay our people, although rigs might be idle. So that's another layer of cost sometimes that hits with COVID when you end up because, again, retention is key, and it's short-term pain for long-term gain because if we let those people go, they'll be going somewhere else. And then when we -- things basically recover, we'll be scrambling to find people. So those are all impacts that all hit this quarter. So I hope that answers your question.

[Daryl Young, Mining Research Associate]

Yes. No, that's good. That is good context. I guess that sort of parlaying into the second part of the question is when I think about South America getting up and running and COVID being the challenge it sounds like there, I guess, how big is the revenue opportunity in the current pipeline? I know you called out Chile and Argentina. And are you going to see a similar cost drag as you ramp up to achieve that pipeline in South America?

[Denis Larocque, President, CEO & Non]

Yes. Well, South America is a much smaller portion than our North American business. So the impact of the ramp up there would be smaller, plus we already have people in the system to be able to -- so we're not at the same point as we are in Canada in terms of labor shortages. Although it's still a low challenge, but it's not the same -- at the same level. So I wouldn't expect to have as much of an impact that we had with that ramp up in South America. And in terms of the ramp up on volume, it is gradual. It is improving week by week. But the situation -- I mean if you go read things are still evolving on COVID restrictions were just lifted in Chile. Heavy restrictions were lifted in May, and projects are starting to get organized and things are starting to get out there. So it's going to be a gradual pickup, plus Chile is heavily weighted on copper. So we're waiting for the copper pickup. And when copper comes, I think Chile will be a big will -- basically will be positively impacted from that.

[Operator]

The following question is from Anthony Prost from Stifel GMP.

[Anthony Prost, Associate]

Just one question for me today, sort of a follow-on to Daryl's question about normalized run rate EBITDA. Is there any sort of color you could provide on the expected pace of revenue increases? And how it lines up with costs?

[Denis Larocque, President, CEO & Non]

Yes. Well, we don't give guidance in terms of growth. But as I mentioned, What we've seen through this quarter is gradual growth month by month, and that is continuing. So I can give you some indication. The pace of growth that we've seen over the last month by month is continuing as we move through this first quarter. And then in terms of costs, the bulk of the -- we -- this quarter was exceptional in terms of the level of upfront costs as -- because we -- basically, we went from our third quarter, and we ramped up a lot of rigs all at once in the field, which basically have all these costs. Now it's more incremental as we progress going forward. So you shouldn't have the same impact on margins.

[Anthony Prost, Associate]

Margin-wise, Q4 might have just been an exception then.

[Denis Larocque, President, CEO & Non]

Yes.

[Operator]

A following question is from Ahmad Shaath from Beacon Securities.

[Ahmad Shaath, Research Analyst]

Maybe a couple of quick ones for me. Just confirming the currency impact on the top line was around negative $8 million, I think, Ian mentioned that at the beginning of the call.

[Denis Larocque, President, CEO & Non]

Correct.

[Ahmad Shaath, Research Analyst]

Okay. That's great. And then just maybe a follow-up on the ramp-up question. I'm not sure if you're able to give us more color, but maybe is that across all regions, you continue to see a ramp-up month-over-month? Or are you fully ramped up in North America while the other regions are catching up?

[Denis Larocque, President, CEO & Non]

Yes. It's still a lot driven by North America, but other regions are improving as well. So it is in all regions, but we're still -- North America still -- is still ramping up. And don't forget, we're adding McKay this quarter as well.

[Ahmad Shaath, Research Analyst]

Sure. That's great. And last one for me. You mentioned on labor might have put some lid on productivity as well, labor shortages. So if that wasn't an issue, how should we think about utilization and your productivity levels? And if it's possible to do is, I guess, it's only North -- impact in North America and not the other regions, if you can confirm that as well?

[Denis Larocque, President, CEO & Non]

Yes. The biggest impact on labor shortage is in North America. But going forward, our pricing -- as we add rigs, our prices are reflective of that because we're -- we -- our goal is to improve -- to basically improve margins. And so it needs to cover productivity and more going forward. So -- and our customers recognize that. They recognize that labor is an issue than wages. And so we're having lots of conversations with customers when it comes to that. And right now, it's more about getting a drill than basically discussions on price. Although there's always -- the price is always -- is always part of the discussion, but a lot less than it used to be because right now, it's more about what -- how many crews or rigs can you supply and when. So it's more about that.

[Ahmad Shaath, Research Analyst]

And I guess what I was trying to get at is that this labor shortage hasn't really hit utilization. Like you don't have to pause deployment just because you couldn't find skilled labor and you had to postpone that a little bit. This hasn't become an issue, right? It's just hitting a matter of cost and having to pay guys a little bit up to get going, if I get it correctly?

[Denis Larocque, President, CEO & Non]

Yes. Overall, no. But I would say that certain specific regions, for example, certain areas in Canada, it is an issue. It's -- sometimes in terms of scalability, we might not be able to -- for a specific region in terms of this labor, there's -- it's not that we can't supply rig right away -- it's just we can't supply it right away, it's more -- there's a training aspect and a timing aspect to it in terms of bringing it on. So -- but that's only very specific regions. It's not necessarily across the board, across the company. It's, again, localized. But it is not downplaying. It is still an industry issue that we're all facing.

[Operator]

[Operator Instructions] Following question is from James Vail from Arcadia Advisors.

[James Vail]

Denis, you said that South America was small. Is there any possible negative impact from what's going on in Peru?

[Denis Larocque, President, CEO & Non]

Well, we're not in Peru. So for us, there's no impact on that. Yes.

[James Vail]

Okay. And then just a quick follow-up. You had a positive impact from what appears to be a U.S. tax loss carryforward in the quarter. Was that onetime? Or is that going to continue for a bit?

[Denis Larocque, President, CEO & Non]

No, that was a onetime. We believe operations in the U.S. are growing.

[Operator]

A following question is from Ahmad Shaath from Beacon Securities.

[Ahmad Shaath, Research Analyst]

On the CapEx plans, would you be able to give us maybe some color on the number of rigs you're trying to add in any specific regions? It's a biggest number in about 8 or 7 years, that'll be great.

[Denis Larocque, President, CEO & Non]

Yes. The -- we're basically projecting $50 million. Part of that is just equipping rigs with trucks and salary equipment and everything as we put more rigs in the field. But as well, for example, in North America, we are -- demand is increasing on the underground part. So we're looking at adding more underground rigs to our fleet. And then as well, we're running out of deep hole rigs in Canada, and we're looking at adding some of those. And for the most part, all those rigs that are slated are going to be going to work right away. We've got rigs on order right now that will be coming basically throughout the year. And most of those rigs are already earmarked to go to work on specific contracts.

[Ahmad Shaath, Research Analyst]

Got it. Is it possible to give us maybe an indication where would you expect to end the fiscal year in terms of rig count?

[Denis Larocque, President, CEO & Non]

No, we don't go into that specific. It's going to be dependent on -- really on the market, how the market evolves.

[Operator]

So 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 want to thank our employees. This is our fiscal year, we just ended. And it's been quite a roller coaster when you consider that we started the year in the pandemic and you rolled back the clock at May 1, which was the start of our fiscal year, and we were wondering where the world be at this point in time and never -- we would have never guessed that we'd be where we're at. And we went from managing a probably one of our biggest downturn from the pandemic to then turning right away to an upturn and our management team and our employees have worked really hard during the year to basically handle all of that and handle that quick turnaround. And I want to thank all of you out there that have basically contributed to this and things are continuing to improve. So we're very happy in terms of where we're at and where things are going. So thank you, everybody, 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.