Forage Orbit Garant Inc

TSX:OGD

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Orbit Garant Drilling Q3 2019 Conference Call. [Operator Instructions] This call is being recorded on Friday, May 10, 2019. And I would now like to turn the conference over to Eric Alexandre. Please go ahead.

[Eric Alexandre, President, CEO & Director]

Thank you, Joanna, and good morning, ladies and gentlemen. With me on the call today is Alain Laplante, CFO. Please be aware that certain information discussed today may be forward-looking and that actual result could differ materially. We will also be discussing certain non-IFRS measures. Please refer to our SEDAR filings for additional information on both our risk factors and non-IFRS measures. This call is being recorded and a replay will be available shortly. Instruction for accessing the replay can be found in our news release.Following my opening remarks, Alain will review our financial results and I will conclude with comments on our outlook and growth strategy. We will then welcome questions.We generated improved margins and EBITDA in the third quarter despite challenging market conditions in Canada from which we generate approximately 70% of our revenue. Our drilling activity in Canada declined from Q3 last year due to lower customer demand. We also faced higher employee-related fixed costs on a lower revenue base in Canada compared to Q3 last year and lower productivity due to adverse weather conditions. These impacts were partially offset by an increase in average revenue per meter drilled in our domestic operations. We had strong margin improvement in our international operations, primarily due to the conclusion of a large nonprofitable contract in Chile in Q3 a year ago and to the increase of drilling activity in Burkina Faso.Our increased activity in Burkina Faso was attributable to our acquisition of the drilling business of Projet Production International in October last year. We believe the lower customer demand we are experiencing in Canada reflects the slowdown in mining finance activity that began in June of 2018. Financing activity was particularly weak in January and February of this year. However, we were encouraged to see a significant increase in financing in March. Mining companies raised more equity capital in that month than the prior 2 months combined. Another positive sign for us is the recent rebound in utilization rates. Our drill utilization rate for the third quarter was 60%. While that was down from 64% in Q3 last year, it was higher than any other quarter since then.Now I'd like to turn the call over to Alain to review our financial results in more detail. Alain?

[Alain Laplante, VP, CFO & Corporate Secretary]

Thank you, Eric, and good morning, everyone. Revenue totaled $37.4 million in the third quarter compared to $43.1 million in Q3 last year. Drilling Canada revenue was $25.1 million compared to $30.2 million in Q3 a year ago, reflecting the decline in meters drilled during the quarter.Drilling International revenue net of intersegment revenue was $12.3 million compared to $12.9 million in Q3 last year. The decline was primarily attributable to the conclusion of a large drilling contract in Chile during Q3 last year, partially offset by increased drilling activity in Burkina Faso.Gross profit for the quarter increased to $3.1 million, up from $2.2 million in Q3 last year. Adjusted gross margin, excluding depreciation expenses, increased to 14.3% in the quarter compared to 9.8% in Q3 a year ago. As Eric noted earlier, our increase in gross profit and margins was attributable to our international drilling contracts.Our $300,000 increase in G&A expenses in the quarter was primarily due to integration costs related to the acquisition of the PPI drilling business in Burkina Faso. EBITDA totaled $1.4 million, up from $0.9 million in Q3 last year. We recorded a net loss of $1.4 million or $0.04 per share in the quarter compared to a net loss of $1.3 million or $0.04 per share in Q3 last year.Turning to our balance sheet. We repaid a net amount of $2.6 million during the quarter on our credit facility compared to a withdrawal of $2.1 million in Q3 last year. As at March 31, 2019, we had $24.8 million drawn under the credit facility compared to $18.1 million as at June 30 last year, our fiscal 2018 year-end. Our working capital position was $55.3 million at the end of the quarter, up from $53.3 million at fiscal 2018 year-end. We continue to maintain a solid balance sheet, providing us the flexibility to pursue further growth opportunities. I'll now turn the call back to Eric for closing comments. Eric?

[Eric Alexandre, President, CEO & Director]

Thanks, Alain. Despite the short-term slowdown in demand that we have experienced in Canada to date in fiscal 2019, our outlook is positive as we enter our fiscal fourth quarter, which is typically one of our strongest period of business activity in Canada. We are also encouraged by the opportunities we are seeing in our international business. Looking at the broader industry, S&P Global Market Intelligence reported in March of this year that global exploration budget for nonferrous metal rose to USD 10.1 billion in calendar 2018, an increase of 19% from the prior year. This was the second consecutive year of increases after 4 straight year of declines. S&P forecasts budget to increase by another 5% to 10% this year.Spending on gold exploration increased more than spending on any other nonferrous metal during 2018 according to S&P. This is no surprise to us. Major new discoveries in the gold sector have been rare in recent years and industry reserves have been contracting.Gold projects are our primary focus and made up nearly 70% of our revenue in the first 9 months of fiscal 2019. So we are well positioned to benefit from higher demand from the gold drilling as mining companies look to replenish reserves. We believe there is a compelling case for base metal mining companies to also expand exploration spending. Metal prices has rebounded from their lows last year. Underlying demand for metals remains solid.Given our advanced drilling technology and specialized drilling capabilities and the increased scale we have had -- we have added in the last 3 years in Canada, Chile and West Africa, we are very well positioned to win new business and boost market share, margins and profitability as customer demand increases.That concludes our formal remarks. Alain and I will now be pleased to answer any question. Joanna, please begin the question period.

[Operator]

[Operator Instructions] And your first question is from Julian Varaschin from Desjardins.

[Julian Varaschin, Associate]

A number of your customers, including Agnico-Eagle and Osisko, have publicly disclosed significant decreases in their exploration budgets. And other companies like Metanor have recently been acquired. Could you comment on how this will impact Orbit?

[Eric Alexandre, President, CEO & Director]

Okay. First, to answer your question, Julian, Agnico-Eagle has effectively announced that they have reduced their global exploration budget. On the other hand, we are not affected by this announce because we do work in their Nunavut, in their 3 main project which is Meliadine, Meadowbank and Amaruq. And we are also drilling for them to the mine which is not related to exploration. So the amount of meters to be drilled would be the same as it was last year and the same as planned. So there is no effect with this announcement from Agnico-Eagle. On the Osisko side compared to last year, of course, they have reduced. They were very aggressive that year before. But we still have the same amount of machine running on their project out there. So we still drill the same amount of meter for them on Osisko. And we also follow their development on the ground, which is an addition of what we have done with them so far, so we're still on track with them. On the side of Metanor now, it's been acquired by Bonterra. They have made a step-back for a couple of months. Now they resumed their operations. So we just restart the work with them starting a month ago, so we will get back on track with this contract. So there is no effect right now and we're moving forward with those 3 client.

[Operator]

[Operator Instructions] There are no further questions. You may proceed.

[Eric Alexandre, President, CEO & Director]

So if there are no further question, we will terminate the call. Thank you very much for participating.

[Alain Laplante, VP, CFO & Corporate Secretary]

Thank you, and have a nice day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.