Major Drilling Group International Inc

TSX:MDI

Earnings Call Transcript 2024-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2024 Results Conference Call. I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Ms. 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 Fourth 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 Denny Dada. Please go ahead.

[Denis Larocque, executive]

Thank you, Chantal, and good morning, everyone, and thank you for joining us today. First, I would like to start the call by thanking our more than 3,500 employees are on the conference for your enthusiasm, great ideas amazing dedication and unquestionable loyalty that has been truly impressive this year. I'm always amazed by the passion and commitment of our crews and staff to safety and getting the job done. This is one of the things that makes Major Drilling a great company. For the fiscal 2024, we posted some industry-leading safety stats with a total recordable incident rate of 1.14, a new record for the company, which is a testament to the employees focus on safety.

Financially, fiscal 2024 was a successful year for us as well, marking the third highest revenue in our history despite facing tougher market conditions due to declining commodity prices and challenging financing conditions for junior and intermediate mining companies throughout calendar 2023. In spite of these market challenges, we remained steadfast and continue to invest in our equipment, innovation and field crews anticipating that future demand will require significantly more drilling activity to address the supply shortfall currently driving commodity prices.

It's important to remember that mineral exploration efforts are still at less than 60% of those seen at the last peak, even as gold and copper prices have recently hit record highs due to supply not keeping up with demand. As expected and discussed on our last call, the fourth quarter saw a slow start in North America due to delayed mobilizations and reduced junior and intermediate funding. This was partly offset by increased activity from areas more exposed to copper like Chile, Mongolia and Brazil, which we expect to continue to grow.

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. I'll come back to discuss the outlook after Ian walks us through the quarter's financials.

[Ian Ross, executive]

Thanks, Denis. Revenue for the quarter was $168 million, down 9% from revenue of $185 million recorded in the same quarter last year. As we communicated last quarter, our fourth quarter results got off to a slow start due to delayed startups and our North American markets continue to be impacted by a lack of junior and intermediate financing. The unfavorable foreign exchange translation impact on revenue for the quarter -- when comparing to the effective rates for the same period last year was $2 million with minimal impact on net earnings as expenditures in foreign jurisdictions tend to be in the same currency as revenue.

The overall gross margin percentage, excluding depreciation was 26.9% for the quarter compared to 30.8% for the same period last year. Program delays in North America were the main driver of reduced margins as the company strategically retained extra drilling labor to prepare for heightened activity levels in the coming months. G&A costs were $17.6 million, an increase of $1.3 million compared to the same quarter last year. The majority of the increase was driven by annual inflationary wage adjustments implemented at the start of the new fiscal year.

Other expenses were $3 million, down from $4 million in the prior year quarter due to a decrease in the annual allowance for doubtful accounts as well as lower incentive compensation expenses given the decreased profitability as compared to the prior year quarter. The income tax provision for the quarter was an expense of $2.4 million compared to an expense of $5.3 million for the prior year period. The decrease in the income tax provision was related to an overall reduction in profitability. Net earnings were $9.9 million or $0.12 per share for the quarter compared to net earnings of $20.8 million or $0.25 per share for the prior year quarter. Company generated EBITDA of $25.3 million compared to $37.2 million in the prior year quarter.

While the typical fourth quarter working capital ramp-up impacted our cash flow, we still managed to finish the year with a very healthy $87.4 million net cash position. With no long-term debt on the balance sheet, the company remains well positioned to continue investing in its industry-leading fleet in order to respond to potential growth opportunities as the industry prepares for increased activity needed to support the global energy transition efforts. In line with this strategy, the company spent $18.5 million on capital expenditures in the quarter, adding 7 new drill rigs and support equipment while disposing of 6 older, less-efficient rigs, bringing the total rig count to 606.

Our annual CapEx spend of $74 million in fiscal 2024 allowed us to meet the rigorous standards of our growing senior mining customer base as we prioritize the latest technologies and innovative solutions, including hands-free rod handling. The new breakdown of our fleet and utilization is as follows: 293 specialized drills at 44% utilization 117 conventional drills at 39% utilization and 196 underground drills at 48% utilization for a total of 606 drills at 45% utilization. As we mentioned before, specialized work in our definition is not necessarily conducted with a 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 accounted for 66% of our total revenue as we continue to see increased demand for our specialized services. Conventional drilling, which is mostly driven by juniors, remained low at 8% of our revenue for the quarter while underground drilling revenue contributed 26% of total revenue as the company continues to look for diversity in its revenue streams. We continue to see the bulk of our revenue driven from seniors and intermediates representing 82% this quarter as they continue their elevated efforts to address depleting reserves.

Juniors continue to have challenges accessing the necessary capital to fund exploration programs and made up 18% 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 well below the 50% historical average, making up 38% of our revenue, while copper continues to drive growth in a few regions coming in at 27% of our total revenue. We also continue to see interest in lithium, representing 6% of revenue, while iron ore remained steady at 11%. 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. Throughout fiscal 2024, I've been proud of our investments and advancements in strategic innovation and the partnerships we've built with our key customers. We have developed cutting-edge technologies such as digitizing our rates to capture drilling data and introducing analytics to optimize drilling operations and more recently, we are working to leverage our drilling data to help in the development of customer models.

We anticipate more exciting progress in this area as we continue to strategically exploit solutions to further integrate our skills, data and processes into the services we provide our customers. As we move into our first quarter of fiscal 2025, drilling activity is returning to last year's levels. While looking ahead to fiscal 2025 and beyond, the outlook for major drilling remains positive amidst current market dynamics. As a reminder, copper and gold typically accounts for 65% to 75% of our activity. Demand for copper is projected to rise rapidly as substantial infrastructure investments are required for the green transition and the anticipated artificial intelligence revolution.

Industry experts predict -- this will result in significant supply deficits in the coming years, creating an urgent need to replenish reserves. Over the past 3 months, Copper prices have surged by 35% recently hitting record highs of $5 per pound due to concerns over supply shortages. Despite a pressing need to replenish mineral reserves for both gold and battery metals, the industry is still very early -- in the early stages of the exploration cycle. According to S&P Global Market Intelligence, global nonferrous exploration spending were at $12.8 billion in 2023, which is only 60% of the $21.1 billion spent at the peak of the last cycle in 2012.

The mining industry remains in the discovery phase and will need to undergo an intensive multiyear infill drilling period to develop new mines and address the projected supply gaps in various commodities. Many of these new mineral deposits will be in challenging hard-to-reach requiring complex drilling solutions and increasing the demand for major drilling specialized services. We remain 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 our robust cash generation, we maintain the industry's largest and one of the most modern fleets with continued investment in strategic innovation.

Over the next few weeks, we will be coming out with our sustainability report detailing all of our ESG initiatives in calendar 2023, and the work we've undertaken to advance our Environmental, Social and Governance strategy. We've made significant progress on a number of fronts, and I'd like to share a few key highlights. First and foremost, we've launched our decarbonization action plan to identify and implement keep emissions reduction opportunities across our global operations in order to meet our newly set target of reducing Scope 1 and Scope 2 GHG emissions by 5% by 2030 relative to 2022 levels. On water conservation, we've begun deploying a water-reducing technology. We double in-house called the Trailblazer AquaLink Remote Water Pump system.

Finally, in terms of diversity, we've put a strong emphasis on augmenting the representation of women in field position across the company. As a result, we saw a 72% increase of women in the field during calendar 2023. This continues to be a central focus of ours going forward. With these fundamentals still firmly in place, the long-term outlook for our company remains extremely positive. Major Drilling remains focused on growth and is in a unique position to react and benefit from these market dynamics. With that, we'd like to open the call to questions. Operator?

[Operator]

[Operator Instructions] The first question is from Don Angelo Volpe from Beacon Securities.

[Donangelo Volpe, analyst]

My question is mostly related to your technology advancements that you guys just mentioned on the call I just wanted to kind of get a little bit more of an in-depth analysis there. Kind of curious on how much of the $65 million in CapEx will be allocated there. And also, are you working to like -- are you working to leverage the customer data? Is there -- is this going to be a value-add service? Or are you guys planning on monetizing some of the new technology and data that you guys are coming across?

[Denis Larocque, executive]

Yes. really one of the items where we've spent over last year, and we have slated it in our CapEx budget for this year is the Rock [ sign ] technology, which is a console that we retrofit on our rigs, and it's basically capturing drilling data as we drill. And that data is helping our drillers -- it's helping on a few fronts. It's helping in terms of productivity, but also helping on the training. It's reducing the time it takes to train a new driller because basically, it's providing data that was not available to drillers before, where they needed to kind of figure it out. And I always knew the example of using a stethoscope or even a wrench on the rod to figure out what was going down the hole, whereas now we do have sensors and it's providing a lot of data.

And to that, over the last year, we found that we had a couple of customers that raised the idea that this data would be useful for them in their modeling. And we've partnered with customers to do that. And that is gaining momentum, and we're working with those customers that we're having more customers approach us for that. So we do see this as a value-add service going forward. And we're looking at other avenues as well to add to our services on that whole analytics data, everything that would help our customers get better, better in terms of field data that they get from our services. So we're looking to add more to that down the road. And I'm not sure if I answered all your questions?

[Donangelo Volpe, analyst]

Yes, you got it. I appreciate taking the time on that one.

[Operator]

The next question is from Brett Kerne for American Rebirth.

[Unknown Analyst]

I just want to commend you on getting the organization and the fleet prepared for what could be a pretty nice up cycle here. I know it's early, but just curious, geographically, as you look out this calendar year and even beyond where you're anticipating some of the new high-spec rigs you have coming into the fleet, we'll see the most opportunity for deployment. I know you called out Chile and Brazil. I know there's been some changes in Argentina, probably too early there. But anything you're seeing kind of positively or negatively there and whether you're seeing any initial signs of life or whether it's too early in North America on the precious metal side?

[Denis Larocque, executive]

Yes. On -- in terms of going forward, as you mentioned, Chile, Brazil are places, especially on the copper side that we've seen, but also in Brazil, gold has been a contributor. You mentioned Argentina. Well, Argentina since the election is getting more and more press and bottoming press. And in fact, there's a few states that have put -- I mean, interestingly enough, for those of -- you wine drinkers, the Mendoza state used to have a ban on mining because they were both completely focused obviously, on wine production.

And lately, that ban has been lifted, and we're starting to see more inquiries coming from the Mendoza region, and that's where our head office in Argentina is situated. So we could see Argentina coming through. And especially on copper, Argentina has said they want to be part of the whole copper movement that's coming. So we could see Argentina -- we could see some more activity coming down the road in Argentina. In terms of North America, the financing part is a big piece.

A couple of years ago, right after COVID, there was a big push or we saw a lot of financing happen and a lot of that money got spent in North America, and that gave us a big uplift in Canada and the U.S. With the slowdown, commodity prices went down last year and that slowed down the financing while almost shut it down, not much happened there. And that's what brought on the slowdown that we see. Now with copper price jumping from the $3.50 range or $3.80 well above $4.50 or -- and gold taking -- jumping up.

We could see financing picking up in that -- there is a quick turnaround on when financings happen in terms of money getting spent in drilling. So to your point, when you started your question about getting ready, that is our complete focus. We're focused on getting ready for that uptick. We're very optimistic with the commodity price as it is. And that's -- our focus is really to take full advantage of that.

[Unknown Analyst]

Excellent. That's very helpful. And if I could just sneak one last one in. I know historically, uranium has been somewhat represented in the company's revenue composition. My sense is that we're not seeing as much kind of exploration at this point and that commodity cycle. But anything you see on the horizon for yourselves or the industry drawing rigs into that commodity over the next few years?

[Denis Larocque, executive]

Yes. Yes, we haven't seen a whole lot coming from uranium, at least not in the markets where we are situated. There's been a low pickup, but it's certainly -- now uranium is seen as green again. And going forward, we're going to need a whole lot of electricity. Over the last 3 months, up to 3 months ago, we were talking about electric cars, electric cars, electrification. And now over the last 3 months, we're hearing an additional -- the AI basically bringing on even more, it's going to be very electricity intensive, so -- which means that copper and all these power plants that are going to need to be built.

And so uranium could be part of that. As a side note, just I saw, I saw an article a couple of days ago that Ireland had to put a moratorium on. Ireland has a lot of computer centers and they have put a moratorium on computer centers because they just couldn't supply enough power and their population has to reduce consumption, just because of the whole AI story. So the AI is now adding to the whole copper and uranium and electrification on top of everything else on vehicles. So yes, I could see uranium in the future, adding more to this equation.

[Unknown Analyst]

Excellent. Very helpful. Thank you, Denis.

[Operator]

[Operator Instructions] A following question is from Larry Callahan from [ Pertura ] Investments.

[Unknown Analyst]

Yes. I was wondering if you could give some idea of whether you're gaining market share and what the prospects are for industry consolidation, perceiving that the cost of having modern fleet might eliminate some competition, but I really have no idea.

[Denis Larocque, executive]

Yes. We have gained market share over the last 3, 4 years. In fact, when we plot our revenue against the global exploration dollars when you do that graph, you see that our percentage or revenue as a percentage of global exploration has gone up, which leads us to believe that we've increased our market share. And I would say that it's having a more modern fleet, but as well being ready, having invested in training, having people ready, having inventory on the shelves ready to go. Our balance sheet has allowed us to put ourselves in the position to be able to react quickly to when things turn around. And that's where we're continuing to focus.

As far as consolidation, the industry is still highly fragmented. There's a lot of small players in the industry -- to your point, there is as the -- especially in North America, where things are still a bit tough. It's going to be interesting to see it. Right now, it creates more competition in terms of pricing. But our approach to that is to keep focusing on specialized drilling. And that's where by having the -- focusing on the higher-end services than where smaller competitors don't like to go when you're you need to mobilize remote or it's very technical basically there's a lot less competition in that. And that's been our approach to this.

[Unknown Analyst]

And when you say you're at 60% of the $21 billion at the last peak, can you give some idea of if the cost, say, let's say, cost per foot to drill has come down over that time period or it's gone up just to try to figure out if the dollars -- if there was the same footage of drilling being done as there was at the last peak. Would that be above $21 billion or less just [indiscernible] cost?

[Denis Larocque, executive]

That's a very, very good question. The -- if you factor in, I mean, you're talking about 2012, that's 12 years ago. If you factor in all the inflation that we've seen since then, that means the dollars I'm quoting here are in absolute dollars. So if you discount for inflation, it means the activity, the volume of activity is probably more like we're probably just at less than 50% of what was carried out in 2012. So you've got -- basically, there's a lot of work that needs to be done to get back to those reserves.

And by the way, from history, this is the same as we saw from '98 to 2002, there was very, very little exploration done for 2003. That was slowed down in 6 years. And then we had a big uptick from 2004, right, to 2012 because of all the reserves had been depleted. The mining companies continued to produce. And then we saw that uptick. We've had the same thing from 2013 to 2019 and '20 when you -- we expanded because of COVID, very little exploration carried out, reserves depleted, continued to produce, but still -- but then replaced what was taken out of the ground. And now we're facing those reserve issues. And the only way to more of those metals is going to drill for it. So history is repeating itself.

[Unknown Analyst]

And would you say the technology that's being promoted by Ivanhoe, I can't claim to know whether it's legitimate or not but would you say that the technology -- what?

[Denis Larocque, executive]

By who?

[Unknown Analyst]

By Ivanhoe Electric. Their exploration technology, if it proved to be useful, do you think that would be additive to your business? Or would detract from your business?

[Denis Larocque, executive]

No, I think it would be great because it would identify drilling targets -- and so therefore, it would identify more targets to drill. Whereas now sometimes there's hesitation when you have a piece of land and you have -- you're going just on Rock or just a little bit of data. If you have more proof that there's something there, you still need to drill it to prove it. So for us, we see that as a positive because it would add more drilling targets to drill.

[Operator]

The next question is from Steven Green from TD Securities.

[Steven Green, analyst]

I wonder on the, if you can just, on the decline in activity in North America, you mentioned some of that was from delayed mobilizations and some weakness in the junior intermediates. I wonder if you can just kind of provide some color as to kind of how much was from the delayed mobilizations and how much of that was kind of the weakness at the start of the year in the junior market.

[Denis Larocque, executive]

Yes. Frankly, we don't have that stat in terms of identified. But if I was to give you an idea. I would say that delayed mobilization probably accounted for the drop that we had in total revenue because -- and -- which means that North America would still be lower than last year because we had a pickup in other regions. So I would say that's probably -- had we not had the delayed mobilizations and everything, we probably would have been close to last year's revenue.

[Steven Green, analyst]

Okay. Great. And on the positive side, you're saying that you're seeing it get back to kind of last year's levels now? Is that -- are all those mobilizations now complete and that's why you're seeing that?

[Denis Larocque, executive]

Yes, exactly. And that's why I say that, that now we're back to last year's, globally, back to about the same level of activity.

[Steven Green, analyst]

Actually, globally. Okay. Yes. Makes sense. And are you seeing now given the recent pickup in financings and stronger metals prices? Are you kind of seeing that in some of the junior intermediates yet? Or are you still kind of waiting for that to feed through the system?

[Denis Larocque, executive]

Yes, it's still too early because the financing is very recent. I mean the jump in copper is just in copper and gold is just what, 6 weeks old, there or maybe 2 months old. So -- and the financings are just -- have just been happening over the last month, we've seen a pickup. So -- so it always takes a few months to translate in the field. So -- but we're seeing more inquiries, more discussions at the moment. right?

[Operator]

Thank you. Thank you. We have no further questions registered at this time. I would now like to turn the meeting back over to you.

[Denis Larocque, executive]

Thank you. And again, thanks to our employees for a great year. I'm looking forward to seeing you on my road trips. Thank you.

[Operator]

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