Forage Orbit Garant Inc

TSX:OGD

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to Orbit Garant's Drilling's Fiscal 2024 Third Quarter Results Conference Call and Webcast. [Operator Instructions].

Please be aware that certain information discussed today may be forward-looking and that actual results could differ materially. Certain non-IFRS financial measures will also be discussed. Please refer to the company's SEDAR filings for additional information on both risk factors and non-IFRS measures. This call is being recorded today on Thursday, May 9, 2024. I would now like to turn the conference over to Mr. Pierre Alexandre, President and CEO of Orbit Garant. Please go ahead, sir.

[Pierre Alexandre, executive]

Thank you, Lester, and good morning, ladies and gentlemen. With me on the call is Daniel Maheu, CFO. Following my opening remarks, Daniel will review our financial results in greater detail, and I will conclude with comments on our outlook. We will then welcome questions.

Our profitability improved in the third quarter compared to Q3 last year, reflecting stronger operating performance from our international operations. Our drilling activity in Chile increased year-over-year, and we have no further activity in West Africa, where we complete our final program during our second quarter. In Canada, our operations normalized during the quarter. As we previously announced, we temporarily suspend our reduced activity on certain projects during the first half of fiscal 2024 due to customer decisions. These projects were fully resumed by January 2024 as expected.

Our drilling activity in Canada was relatively stable compared to Q3 last year and reflects continued strong demand for our services. Our revenue in the third quarter, which is seasonally slower period for our business, was $48.2 million, a slight reduction from 49.3% in Q3 last year.

Adjusted gross margin increased to 17.3% from 14.4% in Q3 last year, primarily reflecting the stronger performance of our international operations. We had operating earnings in our international operations of $0.2 million in the quarter compared to an operating loss of $2.1 million last year.

With our West African drilling operation, now season, we expect our future gross margins to improve as we focus on our core Canadian gold drilling operation and pursue attractive project in South America, while carefully managing our costs. Customer demand for -- from senior and intermediate mining company remains generally strong support by near record gold price and rising copper prices.

Subsequent to quarter end, we secured 2 large contract renewals on copper drilling project in Chile with senior mining companies. One of the contract renewal is for a term of 3 years with a customer option to extend for 2 years. And the other, which represents our largest contract in Chile is for a term of 5 years. Our operational performance in Chile has been improving. And these 2 large contract renewal will support our positive momentum in this important market going forward.

I will now turn the call to Daniel to review our results for the third quarter. Daniel?

[Daniel Maheu, executive]

Thank you, Pierre, and good morning, everyone. Revenue for the quarter totaled $48.2 million, a small reduction of 2.3% compared to Q3 a year ago. Canada revenue was $37.2 million, a decline of 3.5% compared to Q3 last year, reflecting decreased drilling activity on certain projects.

International revenue was $11 million, an increase of 1.8% from Q3 last year, reflecting increased drilling activity in Chile and Guyana, partially offset by our termination of activity in Burkina Faso and Guinea.

Gross profit for the quarter increased to $6.2 million or 12.8% of revenue compared to 4.8 -- excuse me, $4.6 million or 9.4% of revenue in Q3 last year. Adjusted gross margin, excluding depreciation expenses, was 17.3% compared to 14.4% in Q3 last year. The increase in gross profit, gross margin and adjusted gross margin was primarily attributable to increased drilling revenue in Chile and the cessation of our activity in Burkina Faso, which was unprofitable, partially offset by reduced drilling activity in Canada and certain current costs related to the termination of drilling activity in Guinea.

General and Administrative expense were $3.5 million or 7.3% of revenue in the quarter compared to $3.6 million or 7.2% of revenue in Q3 last year.

EBITDA was $3.9 million compared to $4.5 million in Q3 a year ago. The decrease primarily reflects a negative foreign exchange variances of $1.8 million, partially offset by the positive operating earnings in our international operation, which Pierre noted.

Net earnings for the quarter increased to $2 million or $0.05 per share compared to $0.2 million or $0.01 per share in Q3 last year. The increase reflects the positive operation earnings in our international operation and an income tax recovery of $1.3 million, partially offset by the negative foreign exchange variances.

Now turning to our balance sheet. We repaid a net amount of $1.3 million on the credit facility in Q3 this year compared to a withdrawal of $2.6 million in Q3 a year ago. Our long-term debt under the credit facility, including USD 3 million draw from the revolving facility and the current portion was $23.4 million at quarter end compared to $22.2 million as at June 30, 2023, our fiscal year-end.

At quarter end, our working capital totaled $48.8 million compared to $50.4 million as of June 30, 2023. I will now turn the call back to Pierre for closing comments. Pierre?

[Pierre Alexandre, executive]

Thanks, Daniel. We were pleased to generate solid year-over-year growth in margin in the third quarter. And we believe that we are well positioned for continued growth in profitability. As we complete our exit from West Africa, we are now a leaner company focuses on higher margin opportunities in Canada and South America. Our business is currently supported by very strong metal price.

Gold price reached record highs above USD 2,400 per ounce last month. Copper prices have also increased significantly during this calendar year. Accordingly, we expect to see continued strong customer demand from senior mining company and well financed intermediates. However, financing conditions remain challenging for a junior mining companies as well as some intermediate. This is impacting demand from these companies and overall contract pricing in our industry.

We recognize that these financing challenges could persist for some time, and we are prioritizing longer-term specialized drilling contract with senior and well-financed intermediate mining companies.

During the first 9 months of fiscal 2024, we generate 87% of our revenue from senior and intermediate mining company projects, up to 70% in the same period last year. Our strategy going forward has not changed. We focus on our 5-point plan, which include primarily focusing on Canadian gold drilling operation, prioritizing longer-term specialized drilling contract with major and intermediate customers pursuing international contract in South America and Chile, in particular, that offer attractive returns.

Continued investment in our driller training and computerized drilling technology and building a team-oriented leadership structure that fosters collaboration and personal accountability. We believe that the continued advancement of this strategy will drive performance improvements and stronger return for our shareholders.

Before opening up the line to questions, I would like to acknowledge the appointment of Andre Page to our Board of Directors yesterday. Andre has more than 30 years of experience in capital markets, including senior roles in institutional sales. He was formerly Managing Director with Desjardins Capital Markets prior to his retirement in November 2023. Andre extensive capital market experience will be beneficial as we continue to advance our growth objectives and focus on building value for our shareholders.

That concludes our formal remarks this morning. We will now welcome any questions. Lester, please begin the question period.

[Operator]

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from Terry Bill from a private investor.

[Terry Bill]

Congratulations. It seems like the company is turning the quarter -- turning the corner in the quarter. I had a few questions. West Africa, hurt EBITDA in the quarter by how much or the sales? Or was it very minimal?

[Daniel Maheu, executive]

Thank you first for your remark. Yes, we're turning the corner, we think. And West Africa have an impact of less than $1 million in the quarter.

[Terry Bill]

Okay. That was for the sales or for the EBITDA?

[Daniel Maheu, executive]

For the EBITDA. We incurred some expenses in Guinea for severance for employees and some in Burkina Faso in Q3, but -- and some transportation of the equipment to send Guinea equipment to Burkina Faso, but that's it. And these expenses are incurred in Q3. And technically speaking, no other expense should happen in next quarter related to West Africa.

[Terry Bill]

Okay. So do I have it correct the $3.9 million EBITDA for the quarter would have been up to $1 million more had it not been for West Africa. So West Africa hurt the $3.9 million. So is that correct? The $3.9 million has been higher?

[Daniel Maheu, executive]

It should be higher, not to 4.9%, but at least $600,000 or $700,000.

[Terry Bill]

Okay. Following up on the adjusted EBITDA, $3.9 million and then adding $1.8 million of the variance in the currency exchange, would that be an adjusted EBITDA? Or would you go over the $1.8 million, is that added to get an adjusted EBITDA?

[Daniel Maheu, executive]

Yes, we actually calculate our EBITDA without considering the effect of -- we include the effect actually in the 3.9% of the foreign exchange loss. So you're correct. If we, let's say, calculate an adjusted EBITDA, which we extract the gain of the loss of foreign exchange, we came to a $5 million EBITDA, you're right.

[Terry Bill]

Okay. The $1.8 million seemed like a high currency exchange for an EBITDA for -- is that something that is abnormal? Or is that something that was from some type of currency in 3 months, suddenly changed quite a bit or it just seems like a large number for 1 quarter.

[Daniel Maheu, executive]

Yes. Unfortunately, as you see this quarter in 2024, we have a loss of EUR 1 million a quarter a year ago. In Q3 2023, we have a gain of EUR 0.7 million. So essentially, it's related to the fluctuation between the pesos in Chile related to U.S. dollars. And it's all because it's a lot of variation in this currency, the CLP, the pesos in Chile compared to U.S.

And also, we have a lot of variation with the XOF in Burkina compared to U.S. So we still have -- we still have accounts receivable from customers and that make a lot of change. And also in Canada, we have impact of the decrease in Q3 2024 of the Canadian dollar compared to U.S. dollars. Unfortunately, that make a lot of, let's say, noise for the result, but technically, we had to record these foreign exchange gain or loss that way.

[Terry Bill]

Okay. I had 2 more questions for Canadian operations. I see where the publicly traded competitors in Canada have about 600 to 800 basis points higher gross profit margins. They have the mid-20s gross profit margins. And what is the main 1 or 2 reasons for the adjusted gross profit for Canada revenue, not at the market of the industry in the mid-20%.

[Daniel Maheu, executive]

In Canada -- in Quebec, we are in the -- we are strong in Quebec in the drilling area here, and we have a lot of competitors in this market in Quebec. That's why we try to target more specialized work with higher margin on the long-term contract as the one we renew in last November with a large Canadian company, and we pursued this kind of contract in Canada. And that's why, let's say, our margin actually in Canada is not so high, but we have to also consider the effect of the West Africa business that -- which had a negative impact on our consolidated results.

[Terry Bill]

Okay. My last question is South America. When things get going and is steady in South America, is the gross profit percent and the EBITDA percent similar to Canada? Or is it higher or lower?

[Daniel Maheu, executive]

Let's say in the -- since January 2023 until this quarter, the EBITDA percentage and the gross margin percentage is comparable to Canada. But -- now the demand is higher in Chile for copper. So price is -- are better right now. So it gives us the possibility to increase price. And as Pierre mentioned, and as is indicated in the press release, we renew a very large contract, 2 contracts, but one of them was a very large contract for our business at good margins.

So that's interesting for us for the business we have actually in Chile and the copper price is still increasing. So the margin actually in Q3 of 2023, 2024 is over Canadian margin and percentage of EBITDA in Chile.

[Terry Bill]

Okay. I have one more question. I think I should ask it now in case I can't get back into the queue. It happens to be with the gold price and the copper price being very high. And what, in your opinion, is the 1 or 2 reasons for the utilization and demand 2024, not as great as when the gold price was this high 2011 or 2012 area, where the sales for the company were much higher and utilization was much higher and so forth. The gold price is basically a little higher than back then, yet the sales for the company are -- and for the industry, for the drilling industry are not as high as 2010-'11, and '12, I mean, what would you say is the main 1 or 2 reasons for demand not as high given that the gold price is so high?

[Pierre Alexandre, executive]

Well, it's very tricky to answer, but what we hope for the next, I would say, next quarter or next year is that investors would get back to the stock market to invest in junior company. This would help to get more work and grow like organically. So this is our wish. But I have no crystal ball, but we don't really understand why junior financing is not there, but I hope that it will be there in the next month or next year.

But of course, we are -- like I said, we have 70% of our business with major intermediate company, and we are focusing on these gold and copper. And there is room in Chile to improve -- increase our operation organically and with our division here in Canada. That's where we'll be focusing on.

[Terry Bill]

Okay. What was the utilization this quarter over the last 6 months or recently for the utilization?

[Pierre Alexandre, executive]

It turns around 55%.

[Terry Bill]

Okay. So you have plenty of capacity. Maximum utilization would be 75% or so. Is that correct?

[Pierre Alexandre, executive]

Well, if we hit 70%, we'll be happy. Because if we still keep -- we still to keep in mind, none of us are -- we still to keep in mind that we need good labor to operate rigs.

[Terry Bill]

Yes. Understood. Exactly.

[Pierre Alexandre, executive]

[indiscernible] properly. That's why -- that's something else that we're focusing on. That's the reason why we're working with intermediate and major clients.

[Terry Bill]

Right -- labor safety, yes. Thank you for your time and answering the questions. Those were my questions..

[Operator]

[Operator Instructions] There are no further questions at this time. Mr. Pierre Alexandre, please proceed with your closing remarks.

[Pierre Alexandre, executive]

Thank you, everyone, for participating today. We look forward to speaking with you again after we report our fourth quarter results.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.