Major Drilling Group International Inc

TSX:MDI

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2022 Results Conference Call.

I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Ms. Melanson.

[Chantal Melanson, IR]

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 2022.

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, President and CEO]

Thank you, Chantal. Good morning, everyone, and thank you for joining us today.

We're quite happy with the progress we are making as the up cycle in our industry continues to improve. Demand for our specialized drilling services continues to grow with customers turning to us to execute their increasingly challenging drill programs. Despite the COVID-19 Omicron variant that caused some minor delays to operations, the momentum we saw in January continued throughout the quarter.

I'm particularly pleased to see the efforts deployed by our teams over the last few years, both in terms of recruiting and preparation finally bearing fruit. Through this, we've been able to minimize downtime due to lack of labor or supplies, which is giving us a leading edge at a time when the drilling industry as a whole is struggling to keep up with demand.

Furthermore, at a time when the industry faces a shortage of qualified crews, we saw greater recognition from our customers for a superior value added services, which has allowed us to gain new contracts and renew contracts at improved terms and pricing.

Finally, our strategy of holding rigs and inventory ready for immediate deployment to customers also continues to deliver results, mitigating any potential supply chain disruptions experienced in the industry. With all of this in place, we were able to grow our fourth quarter EBITDA by 240% and turn a profit of 22.4 million.

With that, Ian will walk us through the quarter financials. Then I'd like to discuss our market outlook further before opening the call for questions. Ian?

[Ian Ross, CFO]

Thanks, Denis. Revenue for the quarter was 190 million up 48% from revenue of 128.1 million recorded in the same quarter last year, as demand for our drilling services remained robust. The foreign exchange translation impact on revenue for the quarter when comparing to the effective rates for the same period last year was negligible. We are pleased to see continued year-over-year top line growth in all regions, as the Company had demonstrated the ability to respond to customer demands in a busy industry.

The overall gross margin percentage, excluding depreciation was 31% for the quarter compared to 18.4% for the same period last year. Margins improved drastically over the prior year due to having ramp up costs behind us, improved productivity from training programs, as well as new pricing in effect that reflected the state of the industry. Despite the inflationary headwinds, we were pleased the contract rules were able to offset the increased costs we are seeing.

G&A costs were 15.2 million, an increase of 2.7 million compared to the same quarter last year. The increase was driven by the addition of the Australian operations, inflationary wage adjustments, and the resumption of some travel is COVID-19 restrictions loosened in most jurisdictions. Other expenses were 3.4 million up from 0.8 million in the prior year quarter, due primarily the higher incentive compensation expenses throughout the Company, given the increased profitability. The income tax provision for the quarter, the 6.5 million, compared to 300,000 for the prior year period. The increase in the income tax expense was related to an overall growth and profitability.

Net earnings were 22.4 million or $0.27 per share for the quarter compared to net earnings of 2.3 million or $0.03 per share the prior year quarter. EBITDA was 40.7 million compared to 12 million in the prior year quarter. Strong EBITDA growth versus the same quarter last year is a direct result of the increased activity level and illustrates the operational leverage potential as revenue levels continue to grow.

The balance sheet remains a competitive advantage for us despite the normal fourth quarter decrease in cash as receivables ramp up coming out of the seasonally impacted third quarter. We finished the quarter with net debt of 1.6 million after investing 14.9 million in capital expenditures, as we added 7 new drill rigs and support equipment for existing rigs going out in the field.

As we continue to keep our fleet modern, we dispose the four older, less-efficient rigs, bringing the total rig count to 603. The ability to have drills in good working order and the necessary support equipment to keep operations producing meters has been well received by our customers. In order to continue our growth trend and keep delivering value-added services to our customers, the Company will look to invest 65 million in capital expenditures next fiscal year, after spending 49.9 million this year in line with the forecast of mills.

The new breakdown of our fleet and utilization is as follows: 299 specialized drills at 50% utilization, 117 conventional drills at 48% utilization, 187 underground drills at 58% utilization for a total of 603 drills at 52% utilization. As utilization rates remain relatively low, we have been able to increase the number of shifts and improve productivity through our enhanced training programs, allowing us to generate more revenue per utilized drill.

As we've mentioned before, specialized work in our definition is not necessarily conducted with the specialized drill. Rather it is work that requires 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 fourth quarter, revenue from specialized work to counter for 63% of our total revenue, up slightly from the previous quarter, as we continue to see increased demand for our specialized services. Conventional drilling made up 12% of our revenue for the quarter as demand from juniors remain strong.

Finally, underground drilling revenue was down slightly compared to last quarter at 25% of total revenue. Underground projects helped steady while the growth in the quarter was driven by specialized in conventional programs. We continued to see junior active in the marketplace as they continued their spending during the quarter.

Our revenue from juniors now stands at 31% up from 28% last quarter. This level of revenue from junior activity has not been seen since the prior up cycle. Senior and intermediates make up the remaining 69%.

In terms of commodities, gold projects represent 49% of our revenue, which represents a drop from previous quarters as a lot of our growth came from the base metals. Copper was at 19% this quarter, up from 16% in the prior quarter, as we hit some new projects start up while also seeing Chile resume operations after lengthy COVID-19 slow down. The battery metals continue to get mainstream attention as we saw a substantial increase in lithium revenue during the quarter as well.

With that overview on our financial results, I'll now turn the presentation back to Denis to discuss the outlook.

[Denis Larocque, President and CEO]

Thanks Ian. Looking ahead to fiscal 2023, we continue to see an increase in inquiries from all categories of customers. Most senior companies expect to at least replicate the drilling efforts deployed in fiscal 2022 with many increasing their efforts some significantly. As well, we continue to see spending for juniors mining projects in both the Canadian and Australian markets.

Additionally, last month's announcement by the Canadian Government doubling the mineral expiration tax credit for critical minerals should help spark funding of exploration efforts going forward, driving more discoveries towards development in the future.

On the commodity side, gold projects accounted for 52% of our total drilling revenue this year. This is key for Major Drilling success as gold has led the mineral exploration recovery with the average gold mine life falling to a low of nearly 10 years due to lack of exploration over the last six years.

Because of this growing supply shortfall, several of our senior gold customers have committed to prioritizing value adding grassroots exploration and development. Many of the new mineral deposits in question are located in areas challenging to access, requiring complex drilling solutions and increasing demand for Major Drilling specialized services.

Turning to the base metals, we saw an increase in copper exploration in fiscal 2022, representing 19% of our revenue. Most industry experts believe that there is an urgent need to replenish copper reserves given the anticipated supply deficit. The global demand for electric vehicles continues to grow, which will only increase the need for metals like copper, nickel and lithium.

Against this backdrop, we have also seen governments across the world, unleashing significant stimulus programs, targeting renewable energy and upgrading their electric grids. This will require an enormous volume of copper and uranium, increasing pressure on the existing supply demand dynamic.

We expect all of this to lead to substantial additional investments in copper and other base metal exploration projects, as we help our customers discover the metals that will allow the world to accelerate its efforts towards decarbonization. With these fundamentals still firmly in place, the outlook for our company remains extremely positive with the need to add more specialized and underground drills in some of our busy markets.

As Ian said, the Company expects to spend approximately $65 million in capital expenditures in fiscal 2023, to continue to meet and exceed the rigorous standards of our customers. I think it's important to note that despite the fact we are approaching numbers we produced at the last peak, we are still very early in the cycle and have only seen a big push from Canada, U.S. and Australia at this point and a lot of it is driven by gold.

Because of our efforts over the last few years, we are in a much better position at this point in the cycle than in any previous cycles. And with the exploration and development drilling needed to resolve future supply deficits, we expect this cycle could be here to stay for several years.

Finally, I want to thank our 4,000 employees for your high energies, great ideas, amazing dedication and unquestionable loyalty that have been truly impressive. As I travel to our different sites across the Company, I'm always amazed by the passion and commitment of our crews and staff, the safety and getting the job done. This is what makes us a great company. Thank you for a great year and continue to stay safe.

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

[Operator]

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Our first question is from Gordon Lawson from Paradigm Capital. Please go ahead.

[Gordon Lawson, Paradigm Capital]

Good morning everyone and congratulations on another outstanding quarter. Could you please talk about your new contracts and how they break down in terms of specialized services and cost sharing to help us to get a sense for margin expectations this year?

[Denis Larocque, President and CEO]

Well, I mean a lot it, I mean, 63% of our revenue this quarter came from specialized drilling, and I think you can expect probably to see similar -- kind of a similar breakdown, really the what you signed Q4 in a lot of cases is illustrative of what's succumbed for the calendar year it's because of many of those contracts will continue throughout the year.

So, the mix that you see in Q4 and the pricing and everything a lot of it gets set in that January -- December, January time, and gets set for the year. And then there's some that come and go in terms of short term contracts. But for the most part, I think what you see there is what you can expect for the upcoming year.

[Gordon Lawson, Paradigm Capital]

Okay. Thank you. And in terms of your ability to quickly deploy rigs and inventory, are you able to provide a regional breakdown on that front and how it relates to employee availability?

[Denis Larocque, President and CEO]

Yes. Well in North America and Australia that's where we are facing the biggest pressure on labor. We've been able to -- as I mentioned, our teams have done a great job in terms of recruiting, but it's not easy. It is in the market and not just in our industry, in all industries, you'd hear it. You talk to entrepreneurs in all kinds of industries and labor availability in those markets is really tough.

In other markets, for example, in Latin America and in Asia, it's we are having a bit a better success just because it's been a slower recovery and there are still people from -- people available in the industry. Whereas in North America and Australia, we are training, we are bringing new people to the industry and having to train. So, I don't know if that give you a good idea in terms of that breakdown.

[Operator]

Thank you. A following question is on James Vail from Arcadia Advisors. Please go ahead.

[James Vail, Arcadia Advisors]

I've got a question for the -- I don't understand. I think I do this contingent consideration which was 22.9, I guess, is million dollars at the end of the fiscal year. Can you explain what that is?

[Denis Larocque, President and CEO]

Yes, that's tied to our McKay acquisition we did in Australia this year, and it's based on certain EBITDA milestones that need to be achieved over the next three years.

[James Vail, Arcadia Advisors]

Okay. So that leads to the second part. The current portion of that account is 8.6 million. So does that mean you have to pay it in -- in two more years it'll be gone. Is that correct?

[Denis Larocque, President and CEO]

Yes of the balance sheet. Well, assuming they meet their targets, yes. And year one, the amount we have on the balance sheet is what we're expecting to pay based on their first year performance.

[James Vail, Arcadia Advisors]

Okay, great. Now, finally, again, it's the Australasia, Africa breakdown where it looks like the margins in the fourth quarter were below what it was for the year. Did something happen there? Or is this contingent liability affecting the margins in the fourth quarter?

[Denis Larocque, President and CEO]

No, basically, it's more seasonality in -- for example, in Australia, they have a longer break over Christmas. Really things only came back in February, well, end of February, really where we really started to see a pickup and that's normal, but that was the first year that we had Australia with us. And so going forward, that's kind of what you can expect in terms of seasonality coming out of that region.

[Operator]

Thank you. The following question is from Ahmad Shaath from Beacon Securities. Please go ahead.

[Ahmad Shaath, Beacon Securities]

I guess my question was around maybe a breakdown of utilization and the other regions, but I think you guys touched on it with the answer around the labor. So I'll jump back in the queue. Thanks guys.

[Operator]

Thank you. Our following question is from Daryl Young from TD Securities. Please go ahead.

[Daryl Young, TD Securities]

Just looking at the CapEx number for the quarter, the 65 million or -- sorry for the full-year guidance. I think previous peak, you guys were around 80 million and is this just all drill rigs or is there support equipment and then maybe how much of that might be inflation versus previous peaks, just because I think you still have quite a bit of excess drill rigs that that could be deployed?

[Denis Larocque, President and CEO]

Yes, part of it is rigs and really it is rigs. There's two main categories that we're going to be looking at adding this year is, first of all, we're running out of depot rigs, particularly in Canada, U.S. and in a few other countries. So, it's more a type of rigs here, than so although overall utilization might be a bit low in Canada and the U.S. and the utilization is quite high and we need to -- if we want to continue growing in those markets, we need to add rigs.

As well, we're looking at in our busy markets, we're looking to add underground rigs because in order to grow our underground services, which is key to our diversification strategy. So, those are the two main areas where we're looking -- where we're looking to add rigs. But to your point, as well, as we put more rigs in the field rigs that are already on our shelves, we need to -- with each rig going out, there needs to be additional trucks and support equipment and everything.

And we're running out of some of that in terms of what's around because the downturn or the last peak was 10 years ago. And so, those pickup trucks have furlong gone. So, we need -- as we put more rigs in the field, we need to equip each rig going out with trucks and everything. So, that's what makes up that 65 million of CapEx. There is growth in there, but there's also replacement.

[Daryl Young, TD Securities]

And then the next question's maybe a little more theoretical, but the fundamentals of the industry, which you guys called out for both base and precious metals seem to be very, very sound, large cap, gold producers have really not done anything more than just to replace reserves for the past few years. It seems like there is a long runway still to go in the cycle. But when I look at the numbers, we are actually very quickly approaching the 2012 peak of 178 million. So, I guess I'm just wondering, how many drill contracts are you doing today versus then? Is it mostly pricing that's gotten you so much faster on the revenue and EBIDA side? Any just sort of color, I guess, you can give us on, what a peak cycle could look like this time around, or how long you think this can continue to run?

[Denis Larocque, President and CEO]

Well, there is a few parts to that question. So first of all, like you talked about margin or pricing versus peak, we are still a long way from margins we had. The margins we had at the peak were around 37% in a quarter. So, we are still -- we're not there. But even then, the improvement we saw in margins this year was not only, pricing is only part of it. We also had a higher volume.

The higher volume allows to absorb more of our fixed costs, which basically helps margin just the fact that we had higher volume. And also with better recruiting, we have been able to increase the number of shifts drilled per rig, which again is helping margins. Plus, we have seen an improvement in productivity as we get stability in our crews at each site. So, all those factors help margins. And like I said, pricing is just a part.

In terms of when you say approaching peak, I think we are not the same company as we were at the last peak. So, you could look at that and say, well, you are approaching your numbers of the last peak. And so, we must be getting to peak. But the global exploration is still far, the global exploration in 2012 was $21 billion.

And last year, I think last year was only $11 billion and they are forecasting something like 15% growth this year, although they are always -- on the way up and on the way down, they are always, they always miss it. They are always conservative. So, we are still a long way from where we were, and we are a long way from what is needed to replace those reserves.

So, I don't think looking at our numbers and thinking, well, you are heading, you're almost there, or almost where you were at the peak. I'm not sure is the right way to look at it. And we are a bigger company in a much bigger position. We got out of the starting blocks much earlier, much stronger. So, I think, it's more that in this cycle, we are much further ahead in this cycle than we were at the last time. So, I think that's probably a better way to look at it.

[Daryl Young, TD Securities]

Got it. Okay. And then just may be following on that. Is there any metrics that you would track in terms of success rate per meter? And I guess what I'm trying to just vet out is, intuitively, it makes sense that a lot of the easy deposits have been drilled up. But is there sort of hard data to say, we are drilling way more meters than we ever have with way lower success rate as an industry? And therefore, that structural change could come through in terms of way more drilling in this next cycle than we've ever seen before?

[Denis Larocque, President and CEO]

We don't track it because we don't have that data. You're probably in a better position because you track all the mining companies yourself to have that. But from our perspective, the one thing we're seeing is, this time around the holes are going deeper, much deeper than like the average hole is going much deeper than the previous cycle, which is in line with the theory that everything going forward is going to be deeper and more challenging to access.

And therefore, you're going need more meters to find the same amount of ore of gold or copper. So, that would be the data. And I don't have numbers in terms of average depth. I wouldn't be able to give you that. But one thing I know is that every time we get asked it the programs are deeper than what we used to hear. And again, that's a reason why we're chasing more depot rigs in Canada and U.S. and other and other countries.

[Operator]

Thank you. [Operator Instructions] The following question is from Ryan Hanley from Laurentian Bank. Please go ahead.

[Ryan Hanley, Laurentian Bank]

I think you touched on this a little bit before. I'm just wondering on the labor side of things. How much obviously you're able to pass I guess a lot of the training and retention costs forward with the given the improved margins there. Just wondering, how you see the labor market going forward. And I assume that's probably the biggest hurdle or I guess challenge with increasing utilization rates as well?

[Denis Larocque, President and CEO]

Yes, and again, it's not global, it's more in our main markets Canada, U.S. and Australia, where we're facing the bulk of that challenge. It's not going to be easy, and it is getting tougher and tougher as we go forward, because as I mentioned, the utilization rates of experienced drillers is that a 100%. So, any additional drills going out in the field, your facto are going to have newer drillers. In our case, as I mentioned, we've been doing a lot of work over the last few years, and we have -- and we're in the NHL playoff. So I can use the analogy.

We have a bench with -- and a firm team where we're able to graduate helpers that have been with us for a few years that are ready to take on drilling shifts. So on that front, we've been successful and that's been the key to our success. The hard part is to replace that helper that gets promoted with new helpers, because you need to replace that helper, plus you need to find that new driller a helper.

So, it's a double whammy when you put a rig in the field, and its finding and training those helpers that and that's where we're competing with all other industries from that perspective. And that's where all industries are facing those shortages. So -- but our teams are doing a great job of just finding those pockets of people where we're able to recruit and attract people to our industry.

[Ryan Hanley, Laurentian Bank]

I think Ian had mentioned the overall utilization rate was somewhere around 52%. I'm just wondering, is that in terms of -- I think peak utilization is probably around 75% to 80%. I'm just wondering, in terms of getting to that sort of a number, is that limited by labor or is it certain geographic regions, which still haven't fully picked up yet? Or is there another factor in there that is kind of keeping you around that 50-ish percent number?

[Denis Larocque, President and CEO]

It totally location, it's -- in US, Canada, Australia, and maybe I would say, Brazil, we're at full utilization pretty much or close to not quite full, but pretty much getting there. Whereas other countries it's still very early. So, overall on balance, that's where you get to that 52 when you average it all out. So, it's more, yes, it's more regional than just a lack of labor.

[Ryan Hanley, Laurentian Bank]

And is that still COVID restriction type things or is there other limiting factors in specific regions? I guess I'm just trying to figure out how to kind of unlock the rest of that utilization right there?

[Denis Larocque, President and CEO]

It's more related to, well, a couple of factors, first of all, for example, Chile, Argentina, there's a lot more copper projects down there, and we're just starting to see copper activity picking up and Chile, both Chile and Argentina had their political issues and those seem to be getting better in terms of -- from an investment perspective. So, we're expecting to see a pick up an activity in those regions, but that's been holding back those regions and other regions as well in terms of copper.

And also in terms of financing, it's much easier to get financing for a Canadian, U.S. or Australian projects than it is to get a financing for example in Argentina project. The threshold or the bar is higher for an Argentina project. So, therefore, we've seen juniors getting funded a lot more in Canada than they are in other parts of the world.

[Ryan Hanley, Laurentian Bank]

And then, I guess just maybe one last one from me is, we're all kind of talking about inflationary pressures. I'm just wondering, in terms of going forward aside from labor, are you feeling every, anything that's kind of hitting the margins a little bit, whether it be on things like drill rods or bits or anything like that, just from just overall inflation or anything that might hit the margins going forward?

[Denis Larocque, President and CEO]

Well, we got hit pretty hard in 2022 with inflation in terms of, I mean, steel and all those things. And I mean, just like -- again, just like any other industry, in our case, it just happened that we were on upswing in terms of up demand and everything. And we were able to pass these cost inflation in our prices.

Going forward, who knows, I mean, it's just like any industry. I mean, we don't know what's going to happen in the food or with the cars or anything. So, we are in the same boat. I can't tell you what's going to happen. But at this point, I think we have covered off the inflation that we're thrown at us up to this point.

[Operator]

Thank you. We have no further questions registered at this time. I would not like to turn the meeting back over to Mr. Larocque.

[Denis Larocque, President and CEO]

Thank you. And thanks to our investors for the confidence this year. And we hope that to continue to see your commitment to our company. Thank you.

[Ian Ross, CFO]

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