Forage Orbit Garant Inc

TSX:OGD

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to Orbit Garant Drilling's Fiscal 2021 Fourth Quarter and Year-end 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 on Wednesday, September 29, 2021.I would now like to turn the conference over to Mr. Eric Alexandre, President and CEO of Orbit Garant. Please go ahead.

[Eric Alexandre, President, CEO & Director]

Thank you, Chris, 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, and I will conclude with comments on our outlook. We will then welcome questions.We had record-high revenue and meter drilled in the fourth quarter. Revenue totaled $51.1 million, up from $20.2 million in Q4 last year, when we were severely impacted by restrictions related to COVID-19. And we drilled approximately 502,000 meters in the quarter, compared to 186,000 in Q4 last year. These results reflect the strong recovery in customer demand following the initial negative impact of COVID-19 beginning late in the third quarter of fiscal 2020. The recovery is supported by continued strength in metal prices, with the spot price of gold currently at approximately USD1,735 an ounce, and copper priced at USD4.19 per pound.Our drilling activity in Canada returned to pre-pandemic levels in the second half of fiscal 2021 and surpassed those levels in recent months. We also drilled significantly more meter in West Africa and Guyana in Q4 this year compared to last year. In Chile, our drilling activity continues to be impacted by challenges related to COVID-19, and has not returned to pre-pandemic levels. However, demand in that market is ramping up. As I noted on our last conference call, we commenced a new long-term contract with a major copper producer in Chile during our third quarter.Our margins were impacted in the quarter by increased driller training, project mobilization and ramp-up costs as we continue to adapt our operation to meet the higher level of customer demand. Looking ahead, we expect higher labor costs in Canada due to an industry-wide shortage of experienced drillers and higher material costs due to supply chain issue related to the pandemic. However, we expect to offset these costs increase with higher contract pricing. We have already begun this process, and our customers have been receptive.We are well positioned to manage the shortage of experienced driller in Canada through our drilling training program and our computerized drill technology, which accelerates the learning process for less experienced driller. We currently have a significant number of new recruits and role in our training program. Overall, we expect that our capacity utilization and driller productivity will gradually increase as this positive business cycle progress enabling us to generate stronger margins. We will continue to carefully monitor the pandemic, taking all the necessary measures to prioritize the health and safety of our employees and other stakeholders, including the communities in which we operate.I will now turn the call over to Daniel to review our fourth quarter and fiscal 2021 financial results in more detail. Daniel?

[Daniel Maheu, Chief Financial Officer]

Thank you, Eric, and good morning, everyone. Our fiscal 2021 fourth quarter revenue totaled a record of $51.1 million, a significant increase compared to $20.2 million in Q4 a year ago, when our performance was negatively impacted by project suspension and slowdowns related to the pandemic.Canada revenue totaled $38.1 million in the quarter, up from $16.4 million in Q4 last year, reflecting strong domestic demand during the quarter and the negative impact of the pandemic in Q4 last year. International revenue was $13 million, up from $3.8 million in Q4 last year. The increase reflects increased drilling activity in West Africa, the commencement of a new project in Chile, and the negative impact of the pandemic in Q4 last year. Our drill utilization rate was approximately 66% in the quarter, compared to 42% in Q4 a year ago. The last time we had a quarterly utilization rate that high was the second quarter of fiscal 2018.Gross profit for the quarter increased to $3 million, compared to $2.3 million in Q4 last year. Adjusted gross margin, excluding depreciation expenses, was 9.8% compared to 23.3% in Q4 last year. Gross profit and margins were impacted by increased driller training and project ramp-up costs in Canada and significant mobilization costs related to new long-term contract in Guinea and Chile. The year-over-year decline in gross margins also reflects a lower level of financial support in Q4 this year from the Canadian Emergency Wage Subsidy program, or CEWS. Our cost of contract revenue was reduced by $0.1 million in Q4 this year due to the support of the CEWS program compared to $3.2 million in Q4 last year.G&A expenses were $3.9 million in the quarter or 7.7% of revenue, compared to $2.9 million or 14.1% of revenue in Q4 last year. The increase in G&A expenses reflects greater drilling activity. G&A expenses in Q4 last year were also reduced by $0.4 million due to the financial support from the CEWS program. There was no such reduction in Q4 this year.EBITDA for the quarter increased to $1.2 million, compared to $0.3 million in Q4 last year. Net loss was $2.2 million or $0.06 per share compared to a net loss of $2.7 million, or $0.08 per share in Q4 a year ago. The positive variances are a result of increased drilling activity. The net loss of Q4 this year reflects increased driller training, project ramp-up and mobilization costs, and the important reduction of the financial support from the CEWS program compared to Q4 a year ago.Turning to the results for the fiscal year-end June 30. Revenue for fiscal 2021 totaled $163.3 million, an increase of 18.5% compared to fiscal 2020, primarily reflecting increased drilling activities in Canada and West Africa. Canada revenue was $130 million, an increase of 19.2% compared to fiscal 2020. The increase reflects the ramp-up in our drilling domestic operation following the project shutdown and slowdown related to COVID-19, which began in late Q3 2020. As Eric noted, our drilling activity in Canada returned to pre-pandemic levels in the second half of fiscal 2021 and more recently surpassed those levels. International revenue totaled $33.3 million, an increase of 15.7% compared to fiscal 2020, reflecting increased drilling activity in Burkina Faso, Guinea and Guyana, partially offset by lower drilling activities in Chile and Argentina.Gross profit in fiscal 2021 increased to $20.3 million, compared to $12.9 million in fiscal 2020. Adjusted gross margin, excluding the depreciation expenses, was 17.9% compared to 16.3% in fiscal 2020. Gross profit and margin in fiscal 2021 was -- were positively impacted by increased drilling activity, improved operational efficiencies and cost reduction initiatives. These factors offset additional logistical challenges and related costs due to the COVID-19, significant mobilization costs in Guinea and Chile in the second half of fiscal 2021, and increased drilling -- driller training and project ramp-up costs in Canada during Q4 2021. The cost of contract revenue was reduced by $2.9 million in fiscal 2021 due to the fiscal support recorded from the CEWS program, compared to $3.2 million last year.G&A expenses in fiscal 2021 were $14.5 million or 8.9% of revenue, compared to $15.4 million or 11.2% of revenue in fiscal 2020. The decline in G&A expenses reflect the cost reduction measures that were implemented following the onset of the pandemic. G&A expenses were reduced by $0.3 million in fiscal 2021 due to the support financial recorded from the CEWS program, compared to $0.4 million in fiscal 2020.EBITDA increased to $17.6 million in fiscal 2021, compared to $6.8 million last year. Net earnings for fiscal 2021 were $2.3 million, or $0.06 per share, compared to a net loss of $7.4 million or $0.20 per share last year. The positive variance reflects improved gross margin and the reversal of a provision for litigation in Burkina Faso during Q3 2021, totaling $1.96 million. These factors were partially offset by increased driller training and project ramp-up costs during Q4 2021, and a new project mobilization cost during the second half of fiscal 2021.Now turning to our balance sheet. During fiscal 2021, our financing activities resulted in a $3.8 million reduction in debt and lease liabilities. Cash flow of $2.9 million were generated from financing activities in fiscal 2020. We repaid a net amount of $4.4 million on our credit facility in fiscal 2021, compared to a withdrawal of $3.2 million last year. Our long-term debt under the credit facility, including USD1 million drawn from our USD5 million revolving facility and the current portion, was $24.3 million as at fiscal year-end, compared to $28.7 million as at June a year ago. This decrease of $4.4 million has provided us improved financial flexibility. As at June 30, 2021, our working capital position was $54 million, compared to $52.1 million as at the end of fiscal 2020.I now turn the call back to Eric for closing comments. Eric?

[Eric Alexandre, President, CEO & Director]

Thanks, Daniel. We are well positioned to continue building on our strong momentum in Q4. This outlook is supported by strong market conditions. Global exploration activity is currently very high, and it is expected to continue growing. According to a recent report from S&P Global Market Intelligence, exploration budgets for nonferrous metals are expected to increase 25% to 35% in this calendar year from USD8.7 billion in 2020, and further growth is expected in 2022. With strong metal prices, precious and base metal mining companies are generating strong cash flows, and have a strong incentive to increase exploration spending.COVID-19 continue to be a concern. Canada is currently being impacted by a fourth wave, and we are carefully monitoring our other markets as well. However, we are encouraged by the steady uptick in global vaccinations. If operating restriction related to COVID-19 do increase in our markets, we are positioned to rapidly respond.With our highly skilled team, strong balance sheet, [ based ] after our technology and presence in leading copper and gold mining markets, we are well positioned to capitalize on what appears to be the beginning of a strong market cycle. As we expand our team of drillers in Canada and increase pricing on contracts, we expect to gradually generate increased profitability. We are pleased to have recovered so rapidly from the negative impact we experienced early in the pandemic, and look forward to pursuing further opportunities to grow our business and build shareholder value. That concludes our formal remarks.Daniel and I will now be pleased to answer any questions. Chris, please begin the question period.

[Operator]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Gordon Lawson, Paradigm Capital.

[Gordon Lawson, Senior Research Associate]

Congratulations on another excellent quarter. Could you please comment on your training, mobilization and ramp-up costs, and where we stand on these issues since quarter end?

[Eric Alexandre, President, CEO & Director]

Well, it's -- this is something that is very challenging right now according to what is happening in Canada, about the lack of experience and driller availability. So what we did in the past cycle -- upcycle, we did start the training program internally, and this had been started this year very early, I mean, in January, where we had the groups coming up -- and smaller groups according to COVID-19 restriction. So we're training people that are trained as basic employees, goes in as the third man in our operation, and those costs are extra cost to our operations. So we have to sustain this group of people inside the operation. And by the time that those people get to a point where they can be a driller helper and reaching a reasonable productivity, it takes a learning curve. Usually, it's like a 6-month period. So while we started this in January, and we keep going doing this because we are still missing people in our operation as other peers, we see that our operation will be impacted by this. But we are doing really well in the past cycle, and we do the same thing right now. And combined to this, we have the technology that helps us as well to train the people rapidly as opposed to conventional drills where it takes a longer time period to reach a reasonable target. So we do expect this to be a challenge moving forward. It is something that we -- sometimes we wake up in the night and say what we can do else to attract more people. But I think this situation is reflected in other industry as well, and we have been able in the past to do better than the others on that side.

[Gordon Lawson, Senior Research Associate]

And one more, if I may. As for the current commodity price environment, what are you seeing on your end in terms of gold versus copper demand for drilling contracts and particularly, as it relates to specialized drilling?

[Eric Alexandre, President, CEO & Director]

Well, if we start with gold, it's crazy. There is more -- a lot more demand than offer. So that creates an environment where we increase our prices as well as some of our costs are increasing, like the drilling consumables as well as the wages for the employees to be paid. And we have been able to manage this with the client by price increase and offset those increase on that side. So we do see gold, like improving everywhere in all our sector, like West Africa, it is the same. For copper, it's a little bit different because there is -- we are still challenging in Chile, especially because our operations are there with COVID-19 restriction. And despite the fact that the vaccination rate is very high, we do see more cases there in Chile that impact our operation right now and slow down our operation as well as for the other -- our peers. So we did not recover from pre-pandemic level there in Chile. What is encouraging is the price for copper, reserve or depleting again, and they will need some more exploration out there. So we know that at some point, this will come back to normal. Actually, we have to support some fixed costs in this branch without the revenue associated to it. And we do think that it's a temporary situation, and we hope that we're going to get back on track in this country with more demand.

[Operator]

[Operator Instructions] Your next question comes from [ Terry Bolima ].

[Unknown Analyst]

Was the adjusted gross profit margin in the quarter, somewhere between 20% to 25% without the training and upfront ramp-up costs?

[Eric Alexandre, President, CEO & Director]

Sorry, [ Terry ], I missed the last part. The line was bad. Could you repeat, please?

[Unknown Analyst]

Sure. Was the adjusted gross profit percent in the quarter, in the 20% to 25% area, if we exclude the training and upfront costs, ramp-up costs and so forth? The onetime cost? [indiscernible].

[Eric Alexandre, President, CEO & Director]

Yes, this is -- yes, well, it's difficult to say exactly, but you're right. We should expect those 20%, 25% gross margin moving forward. But you have to think that we still ramp up our operation, and there is still room for improvement in terms of revenue. So if we keep going in that pace and accepting new challenges there and putting more contracts out there, will need to support some training as well. But with price increase and everything happening in the market, we do expect margins improving.

[Unknown Analyst]

Okay. The second question, Orbit stock trades at 0.3x enterprise value to sales next 12 months pace. Major Drilling trades at 1.3x enterprise value to sales next 12 months pace. And your other publicly traded competitor FORACO, trades at 1x enterprise value to sales next 12 months pace. So Orbit stock would have to more than double just to catch up the FORACO valuation, and triple to reach Major Drilling valuation. What does management see as the reason or reasons for the big discrepancy in the valuations from Orbit? Yes.

[Eric Alexandre, President, CEO & Director]

Well, [ Terry ], it's difficult to answer this question because of -- there is many factors that impact this. First of all, Major is a larger company there. And we do see that we could be below their valuation out there because of the size. But -- and FORACO, then it's different because there was a debt reclassification in shares and everything. But we do see that we are under value, of course, as opposed to our peers. But this is an opportunity for a potential investor as well. It shows that our stock could go up compared to the others. So that means that it's time to get in. For me, that's what it says. And we're going to do what we have to do in order to address this for sure. And the first thing is continuing to managing this company carefully and continuing to grow, and staying very accurate on our strategy out there, and very disciplined in what we are doing. And this is what we did in the past, and this has paid off on the road. So we will continue to do that as is.

[Unknown Analyst]

Yes. Okay. Good. Lastly, does management see this cycle unfolding similar to 2004, so such that 2019 or 2020 is similar to 2004? And does it have the same factors to it? Do you think it's the same type of cycle that's coming up that went from 2004 to 2012?

[Eric Alexandre, President, CEO & Director]

Well, [ Terry ], it's a good question. In 2004, there was a lack of reserves, and reserves were more depleting. And there was like money that was not invested in exploration at that time, and was a lag between the discoveries and what the demand was asking. So that creates the perfect momentum to increase metal prices and increasing financing for our clients there. And that was generated for this. And at that time, we didn't have the manpower effect. I mean, we were able to attract some experienced driller at that time. Of course, we had the training program. But this time, we are more affected by this. This time, it's the same driver, where we didn't have any big discoveries in the last upcycle, which is a good news for us. This will request more drilling activity, as well as there is a lot more impact about health and safety and environmental protection. And that's another point. So that requires more specialized drilling down the road more and more performer like Orbit Garant to perform. So that's -- this is good news for us. As well as right now, this cycle is more pumped up by other things like the electric cars that was not present last time. So we have more drivers right now, and we do think that we are entering in a very good upcycle right now, and this is all good for our company. So we do -- we are very positive on what is coming up. Of course, we stay careful with the COVID-19 pressure and everything out there. So we still manage carefully, not to position ourselves in a difficult period where you see COVID-19 affecting your operation. But we are very encouraged with what we see so far with the demand we are receiving from our clients.

[Operator]

Thank you. There are no further questions at this time. Please proceed.

[Eric Alexandre, President, CEO & Director]

So thank you very much for participating. We will end this call. Thank you very much, and see you next quarter.

[Operator]

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