Geodrill Q3 2023 Earnings Call Transcript

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November 13, 2023

There are 4 speakers on the call.

Operator

ladies and gentlemen, and thank you for standing by. For today's call, phone participants are in listen only mode. Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you. I would like to remind everyone that this conference call is being recorded on Monday, November 13 at 10 am Eastern Standard Time and is being broadcast live via the Internet. During today's call, management will make statements regarding management's expectations for the company's future financial and operational performance.

Operator

These statements are considered forward looking statements. Each forward looking statement speaks only as of the date of this call and actual results may differ materially from management's expectations for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed from time to time in the company's SEDAR filings. I will now turn the call over to President and CEO of GeoDrill Limited, Mr. Dave Harper.

Speaker 1

Thank you, operator. Good morning and welcome to JELDEL's quarter 3, 2023 quarterly financial results call. I will begin with an overview of our operations and performance for the quarter. Our CFO, Greg Borsch, will then give us a more detailed review of our financial results after which I'll discuss our outlook for the remainder of 2023 beyond. In quarter 3, general phase cat witnessed on a number of fronts.

Speaker 1

I'll first begin with the repositioning of the rigs post the wind down of our Burkina Faso operations. This was met with slower than expected take up of rigs in other countries, which hit revenues and weighed on our costs. Well, from the outset, quarter 3 was always going to be a high bar. Recall that revenue in the corresponding quarter a year ago surprised us to the upside. This was due to a peculiar rather late wet season.

Speaker 1

In quarter 3 'twenty three, this quarter just finished, revenues were negatively impacted, firstly, by very low revenue in Burkina Faso, the country that we've just exited, and Mali, which was also slower than expected. And this was partially due to weather, inclement weather. It's also partially due to operations. It's partially due to capital markets. And when I say capital markets, I mean the difficulties faced with the junior exploration are facing in today's challenging markets.

Speaker 1

Also in South America, our Chile operations were completely shut down by the snow season. As a result, quarter 3 average utilization declined to 55% from what was 70% a year ago. This in turn drove meters down by 13%, which drove down revenues by 14%. And that's all she wrote. Regarding margins.

Speaker 1

In quarter 3, we were faced with some abnormal costs. In South America, we kept employees on in readiness for the post winter ramp up. The back story of this is that we recently secured contracts with new Tier 1 customers. We secured contracts with First Quantum Rio, which is a joint venture in Peru. And we've secured a contract with Antibagasto and Barrick, which is a joint venture in Chile, which I'm pleased to report, have since commenced operations and are both going well.

Speaker 1

In West Africa, the repositioning of rigs was met with higher costs and longer preparation times as we've pivoted away from juniors and intermediates towards senior miners and Tier 1 customers. Senior miners have higher specs in terms of with regards to trading, health and safety. For example, automated rod handling systems that need to be built or retrofitted to the rigs in order to operate on their sites. And senior miner working for senior miners also comes with greater community relations issues. And all of these things caused delays.

Speaker 1

All of the above drove costs higher. Higher COGS on lower revenue negatively impacted our margins. And that was that. The final piece with regards to financials was aging debtors. The aging debtors situation has triggered IFRS 9, which is a large noncash provision that significantly affected our year to date profit.

Speaker 1

And I believe Greg Borson will be speaking to this point a little bit more in detail. In any case, as a result of the foregoing and all other things considered, our Board of Directors took the prudent and necessary decision to sustain the pending second semiannual dividend. And this was purely communicated in the press release on the 31st August. Unsurprisingly, the market reacted negatively, taking our market cap down by 25 percent and we're currently trading at $1.80 a share. Now I'm just going to take a moment to reflect and remind investors that even after the provisions, our hard book value is CAD3.20 a share or US2.37 dollars a share.

Speaker 1

Our market cap today is now trading at effectively 6 months revenue on a 12 months trailing basis. And at that point, I will pass the call over to Greg, our CFO, to review the financial highlights in more detail. Thank you, Greg.

Speaker 2

Thank you, Dave. As a reminder, all figures are reported in U. S. Dollars. We generated revenue of $30,300,000 representing a decrease of $4,900,000 or 14% when compared to $35,200,000 for Q3 20.2.

Speaker 2

In our primary countries in Africa, being Ghana, Cote D'ivoire and Egypt, revenue increased on a quarter to quarter basis by $1,200,000 We had made the decision to wind up Burkina Faso and redeploy the rigs to other countries. And as a result, revenue decreased in Burkina Faso by 3,100,000 dollars in the quarter. Our gross profit for Q3 2023 was $5,800,000 being 19% of revenue compared to a gross profit of $10,900,000 or 31 percent of revenue for Q3 2022. We recorded EBITDA of $600,000 or 2% of revenue for Q3 2023. This includes a $3,600,000 non cash expected credit loss provision.

Speaker 2

Excluding this provision, EBITDA would have been $4,200,000 or 14% of revenue for Q3 Q3 2023. The net loss for Q3 2023 was $3,000,000 or a loss of $0.06 per share. Again, excluding the provision, we would have reported net income of $600,000 or $0.01 per share in Q3 2023. Overall, we ended the quarter with net cash excluding our right of use liability of 3,600,000 dollars With the gold price averaging $19.65 during Q3 2023, global exploration spending continues to be strong and provides strong fundamentals for the mineral industry going forward. At this point, I will turn the call back to Dave.

Speaker 1

Thank you, Greg. Before I move to the Q and A portion of this call, I'd like to provide a brief outlook for the remainder of 2023 and beyond. In spite of strong gold price, Precious Metals Equities continue to struggle in raising sufficient capital to fund their exploration programs. We have therefore begun shifting our focus to senior miners and Tier 1 operations with long term programs with reliable funding from mine production. Otherwise, Kippur is off to a pretty good start.

Speaker 1

Ghana, Cote d'Ivoire, Egypt are all performing well with multi rig, multiyear contracts. Senegal, which is our newest market, is off to a good start. We are looking to add a rig there, as is Egypt, where things are also going very well. So we're looking to add a rig there. And in South America, things are ramping up nicely, so we're also looking at adding rigs there.

Speaker 1

For 2024, our order book is strong in our core regions, especially in South America where we recently signed 2 new senior minors. And while on the subject of contracts, we still have a number of tenders that are ongoing at the moment. But for now, we believe the tough quarters are behind us. That said, I would hasten to add that top of mind and moving large is quarter 1 2024, which will be a tough one to beat, recalling the quarter 1 2023 was a behemoth quarter with revenues of 37.6 $1,000,000 which was a record for a quarter 1 and it was actually stronger than our quarter 2 by 14%. On aging debtors, we still have some work to do in keeping this situation in check.

Speaker 1

And as we return, we will continue to rely upon our decades of experience and operational efficiencies as we adjust to the conditions and challenges for the remainder of 2023 beyond. We take a long term approach that this that is flexible enough to adjust to the day to day realities of the business while maintaining a focus on our core values and our shareholders. This concludes our prepared remarks. I'll now hand back to the operator to move us to the Q and A portion of the call. Thank you.

Operator

Thank Your first question comes from Ahmad Shah with Beacon Securities. Please go ahead.

Speaker 3

Hey, guys. Hey, Amit. Thank you, Amit.

Speaker 1

Thank you, Amit.

Speaker 3

Appreciate all the color on the quarter. I guess my first question is, now that we're almost halfway through Q4, are we fully ramped up? Or how is the ramp up working in South America? And any color you can provide us on what should we expect from Q4? Is Q2 a good run rate?

Speaker 3

How are things working for the top line?

Speaker 1

So as I alluded to on the call, Amit, quarter 4 is actually off to a pretty good start. We had a pretty solid October. I think November is going to be flatter. And December, honestly, it's a little hard to say at this point in time. But quarter 4 is looking okay.

Speaker 1

It's looking okay. So as I was saying, I think the worst of these quarters is behind us. We're back to we'll get back to a semblance of normalcy. We will we're looking very much at this now as a 2024 story. And as I was saying on the call, I have something to add that recall our quarter 1 last year was actually our strongest month of the year.

Speaker 1

And you've been covering this story for a long time and you'll know that quarter 2 is normally our strongest quarter. So we do have a behemoth if we were to make a year on over year improvement in quarter 1, which at this stage would be a bridge too fast for sure. Quarter 4, just winding back, stepping back, it's said, we'll be okay. We'll actually, if anything, it's showing at this point in time, it's trending towards a single digit improvement. Beyond quarter 1 is where we will start to see the full benefit of the likes of South America, which is ramping up to what will become 100% utilization.

Speaker 1

We'll actually be at 100 percent utilization before December. But we'll be adding a rig in the latter part of the year. And so as we go to the 7th rig and get that into the field and get it commissioned and out to site, that will probably hit the tape for us around January on Dessin at this point. And so at this point in time, South America looks like it will be busy right up until the snow season next year. Full steam ahead.

Speaker 1

I'm not 100% sure that we're really shutting down for Christmas at this point. We haven't had that communicated back to us at the head office. At this stage, it appears we're going to be we may be drilling through.

Speaker 3

Okay. That's great color. So I guess it sounds like single digit growth unless we get a couple of weeks of seasonal shutdown, we might be flat year over year or something like that.

Speaker 1

For December? I'm sorry, for quarter 4?

Speaker 3

For Q4, yes.

Speaker 1

Q4

Speaker 2

Amit, I didn't hear what you said. Look, can you just did you say I think what we're communicating is the utilization will ramp up through the quarter, 55% we saw a strong October. We're seeing a strong November. And then December, we have to wait and see based on the holiday season.

Speaker 3

Got it. That's helpful. And then Dave, how should I look at like the change in your customer profile going forward with this mix to more seniors? And you mentioned the extra cost of training since the higher standard with the we should see some pressure on gross margins as we work through these. And are you able to help us understand maybe how much of those costs that you took on from the senior and front end costs?

Speaker 3

And how much is going to be just structural changes the way you do things because of the requirements of the seniors?

Speaker 1

Yes. So you'll definitely see margin compression as you move to seniors. Bigger jobs are more competitively big because of the long term duration and the fact that you're working for names that are not beholden to capital markets. So your paycheck is more or less guaranteed, so to speak. I mean, to that specifics of where we'll end up, I'll hand it to Greg.

Speaker 2

Yes. It's I think if you look at the year to date margin, Amit, we're 26%. We had a strong Q1 and then Q2 and Q3 were weaker. But it's a function of the capital markets. And in 2022, when the capital markets were open for juniors, they were drilling and they were able to raise money.

Speaker 2

We had some juniors with 4 or 5 rigs spinning. Spinning. Now they're lucky to have 1 spinning maybe 2. So it's just it's part of the reaction to where we are. And moving towards the intermediate and senior miners, you're right, there is a cost to that because a lot of times they are more competitively bid.

Speaker 2

But it eliminates a lot of the credit risk that we've seen over the last couple of years and especially this quarter because they're producers. They have the ability to pay and have the ability to pay on time. So it really will help the company, but it will take some time. And you're seeing this. It's not only in terms of moving to a higher tier customer, but it's also moving at a certain jurisdiction.

Speaker 2

So when we pulled all of the rates out of Burkina and we're redeploying them into other jurisdictions, it takes time. But I think in the long run, being in better, more secure, more stable jurisdictions, having more intermediated senior customers, I think it will serve geodrille much better in the long run.

Speaker 3

Got it. That's very helpful. So I guess we should look back at maybe 2020, 2021 period for margins, which was looking at like 25%

Speaker 1

Yes. Yes.

Speaker 2

I think if you look at the we had 3 years in a row, I think 2018, 2019, 2020, we had a 25% gross margin. We were happy with that. We modeled around that. 2021, it got up to 27%. And I think last year, 2022, our record year, it got up to 29%.

Speaker 2

But the reason it got so high is because the revenue spike. And like I said, drilling was open for everyone, juniors, intermediate, seniors. Our utilization rate was the highest it's ever been. So what you're seeing now with utilization coming in, we expect the margin will come back to years when we had it around 25%.

Speaker 3

That's very helpful. I appreciate it. I guess one last one for me and you guys touched on it. So in terms of the receivables and the account of the amount that's over the 90 days jumped about $9,000,000 in change. So how should we think about that on a go forward basis?

Speaker 3

Are you guys expecting to recoup settle that? Or should we consider the $9,500,000 going to be recognized as another provision? You guys have more

Speaker 2

No, we're working. Yes, we haven't written these amounts off for accounting. We've taken a provision against them because there's over $15,000,000 in our 90 days. So we've been collecting some of that subsequent to quarter end. We're working hard.

Speaker 2

But what you have to do with these provisions at the end of each quarter, we assess Dave and I assess where we are, how much were we able to collect. Some of it we're going to have to collect over time. And then just at the end of December, we'll look at our provision. What I can tell you is we took a big hit in Q3, dollars 3,600,000 and we're working hard with these accounts to collect the money and work with them. So we'll have the short answer is you look at this every quarter.

Speaker 2

So it's something we're working on.

Speaker 3

All right. I appreciate it. And from the credit facilities perspective that are secured by these, has that raised any issues or concerns there with lenders or how does that conversation is going? And I'll jump back in a queue. That's the last one for me.

Speaker 2

Yes. No issues. We have the security we have is receivables and we have some PPEs. So it hasn't been an issue. We have enough of a push in there.

Speaker 2

It's and there's no covenant. So it's we're fine on

Operator

that. Your next question comes from Gordon Lawson with Paradigm Capital. Please go ahead.

Speaker 1

Hey, good morning, everyone. With regards to your Latin American operations, how much revenue is currently attributed to that region? And if there's any guidance you can provide there for the next year that would be very helpful?

Speaker 2

Gordon, is that a question? We don't disclose that segment. It's less than 10%. So it's not material. But where we are now, we have about 7 rigs there.

Speaker 2

And in Q3, we only had 1 rig working near the end of the quarter. So effectively, we weren't really working in South America. As we sit here today, we're working both in Chile and Peru and our expectation for the accounts we're drilling for and some new ones is to continue to ramp up there. So we're hoping that continues to ramp up in Q4 and then into 2024 Q1 and Q2.

Speaker 3

And that's where you're seeing in terms of

Speaker 1

Sorry, go ahead.

Speaker 2

I was just going to say in terms of overall consolidated financial statements, it's still a smaller part of the business, but the intention is continue to grow.

Speaker 1

Okay. And

Speaker 3

I gather that's where you're seeing the highest competition for contracts?

Speaker 2

The higher sorry, I just missed that last question.

Speaker 1

Well, given Chile and Peru, can I assume that that's where you're getting the higher competition for these contracts?

Speaker 2

No. No really. Do you want to speak to competition or?

Speaker 1

Well, if you look at it, Gordon, it's actually where we're enjoying our highest utilization. I know looking at quarter 3, that sounds like a crazy statement, but the rigs in quarter 3 couldn't work because of the snow. So that was beyond our control. What was going on for us during that time is we were busy negotiating contracts with senior miners. We would we signed sign 2 new big names and they've effectively taken all of the rigs that we had.

Speaker 1

We're adding rigs to meet the demand. And when those rigs get into the field and drilling, we'll effectively be at 100% utilizations. And whenever we get to as you know, whenever we get to 70% or 80% utilization, we start looking at adding reach to all regions. So we're now faced with the good problem of potentially sending more rigs to that market. Is it competitive over there?

Speaker 1

Not for the type of drilling that we're doing. We entered that South American market providing a specialized disdirectional drilling service, something that most of the other drilling companies over there don't provide. And so that specialized in that specialized service space is far less competitive and generally comes with reasonable margins. The most competitive markets that we would operate in are U. S.

Speaker 1

African markets, Ghana and Ivory Coast. These are essentially our core markets and those markets are competitive. But again, we're busy in those markets. And aside the fact that we have gone through a massive repositioning exercise, taking rigs out of 1 country and in doing so, deciding to pivot away from juniors and intermediates or anyone basically holding to the capital markets. Toward the senior miner space.

Speaker 1

In this, we've been successful and we've signed a number of contracts and we're in the middle of tendering some much larger jobs, which are not news ready today, unfortunately, for this for today's quarter results. But we will be very busy in those markets come 2024. So very much at this stage in 2024 story. I think we can do at this point is recover what we can from the setbacks that we've had in 2023 and build the launching pad as it were for 2024 and beyond. Remindantly, that seems to be heading in the right direction.

Speaker 1

Although you'll see how that pans out, I guess, is 2024 on costs. Okay. That's great. You answered my second question. But that's good for me.

Speaker 1

Thanks, guys. Thank you.

Operator

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

Speaker 1

Thanks and I'll thank everybody for joining today's call. Thanks very much and have a great day. Thank you all.

Operator

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

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Earnings Conference Call
Geodrill Q3 2023
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