Geodrill Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. For today's call, phone participants are in a 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 Tuesday, August 8 at 10 am Eastern Standard Time and is being broadcast live via the Internet.

Operator

During today's call, management will make statements regarding management's expectations for the company's future financial and operational performance. 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 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 Preston and CEO of Teodrill Limited, Mr. Dave Harper.

Speaker 1

Thank you, operator. Good morning, and welcome to GeoDrill's Q2 2023 quarterly financial results conference call. I'll begin with an overview of our operations and performance for the quarter. Our CFO, Greg Bors, will then give a more detailed review of our second quarter financial results, after which I will discuss our outlook for the remainder of 2023. In quarter 2, we took a step back to reposition the company for future growth by sharpening our focus on favorable geographies.

Speaker 1

This decision consequently impacted our utilization and ultimately our financial results for the quarter. It is noteworthy that whilst our financial results were negatively impacted, we remain profitable, delivering positive EBITDA and net income, while also maintaining our sharpened focus underpinned by our strong reputation, which continues to drive revenue and earnings growth, while building long term value for shareholders via the continued strengthening of our balance sheet. As the global market, mineral drilling market remains robust, We are better positioned today than ever before with a focus on new geographies to capture market share and expand our footprint and to diversify our commodity exposure. Our strategy since inception has been to provide diverse mineral drilling services, backed by unparalleled access to technical and maintenance support via our full service workshops, which derives high utilization and performance to best service our customers' needs. Our objective remains steadfastly to keep our customers satisfied while continuing to improve our efficiencies and ultimately margins, while also expanding our geographical footprint to capture market share in favorable jurisdictions, which will ultimately drive value for shareholders in the long term.

Speaker 1

I'll now turn the call over to Greg, our CFO, to review our financial results in detail. Thank you, Dave.

Speaker 2

As a reminder, all figures are in U. S. Dollars. We generated revenue of 32 point $6,000,000 representing a decrease of $6,500,000 or 17% when compared to $39,200,000 for Q2 2022. While GEA Drill continues to experience strong demand for its drilling services, the comparative quarter of Q2 2022 was a record quarter in terms of revenue and EBITDA, setting very high comparables to match or beat.

Speaker 2

Of the $6,500,000 decline in revenue, Burkina Faso represented $3,200,000 on a quarter to quarter basis, which is representative of winding up drilling programs in that region and redeploying the rigs to more favorable regions. Gross profit for Q2 2023 was $7,800,000 being 24 percent of revenue compared to a gross profit of $12,400,000 being 32% of revenue for Q2 2022. On a year to date basis, gross profit is 28% compared to 31% for 2022. We recorded EBITDA of $6,200,000 or 19 percent of revenue compared to $11,200,000 or 29 percent of revenue for Q2 2022. Overall, we generated net income of $2,000,000 for Q2 or $0.04 per share compared to $5,900,000 for Q2 2022 or $0.13 per share.

Speaker 2

We ended the quarter with net cash of 6,400,000 dollars With the gold price averaging $19.65 during Q2, global exploration spending continues to be strong and provides strong fundamentals for the drilling industry going forward. At this point, I will turn the call back to Dave.

Speaker 1

Thank you, Greg. Before going to the Q and A portion of the call, I would like to provide a brief outlook and key growth opportunities for the remainder of 2023. For those investors on the call, Naomi, they would know that I like strategies, especially strategies that involve winning. I'm a huge fan of Formula 1 Motor Car Racing. Winning an F1 Grand Prix is now easy task.

Speaker 1

Apart from a great driver and a fast car, different F1 tracks need different race strategies. And so I can see many parallels between Formula 1 racing and drilling. Formula 1 teams must strategize during a race continually changing to meet evolving circumstances, example, weather, in which case the team's pit stop strategy can change midway through a race. Today, our strategy has delivered steady growth over multiple consecutive reporting periods and even years. Our strategy is simply to operate in geographies that provide the best growth opportunities.

Speaker 1

And therefore, simply put, the decision to divest out of Burkina Faso was strategically necessary in order to capture an increased market position in other regions that offer better opportunities. So in the end, it's really all just about winning. This concludes our prepared remarks and our financial results. I will now turn the call back to the operator. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer

Speaker 3

in Burkina Faso in Peru, can you elaborate on some of the other factors behind the year over year decline, particularly as it relates to Ghana?

Speaker 2

Well, I think what we're we were softer in Ghana in Q2 versus Q2, Q2 2023 versus Q2 2022. But I think if you look at how strong we were, Gordon, in Q1, we were actually ahead of our budget. We were stronger in Q1. So when you look at where we are through the 1st 6 months and we always have choppy quarters, through the 1st 6 months we're only off, I think 3% in terms of revenue. And that's really a strategic decision that we made in 2022 to exit Burkina Faso in conjunction with the drill programs that we have there winding up.

Speaker 2

So what we tried to highlight in the MD and A quarter to quarter, Q2 to Q2, out of the $6,500,000 decrease in revenue, Some of it was in our primary markets like Ghana, etcetera. However, those markets were extremely strong in Q1. But I think it's important to highlight approximately half of that loss in revenue on a quarter to quarter basis was from a country that we're exiting. And we've been able to redeploy those rigs and get them working in other countries, but it takes a quarter, it takes a bit of time to pull them out and get them back working.

Speaker 1

Hello?

Operator

Thank you. Your next question comes from the line of Ahmed Shahad from Beacon. Please go ahead.

Speaker 1

Ahmed, good morning.

Speaker 4

Good morning, Greg. I guess just maybe a follow-up on that. So looking ahead, what's the plan in terms of geographies or other markets that you want to take the Burkina and maybe the Peru rigs into? How does that look in?

Speaker 1

So some recent news that came out of Peru post quarter end is that we've secured a contract with First Quantum. And that's pretty much going to take us it will take the 2 rigs that are sitting in that country and possibly require more. We're also very busy down in Chile at the moment, although as I speak, rigs are actually shut down due to the winter. It gets too cold up in the Andes to drill at 5,000 meters. So they take like a 3 month break and we're on that break at the moment.

Speaker 1

We're due to resume in September and we'll resume with 3 rigs spinning and then they want to ramp that up to 5 rigs. So essentially in South America, we're going to be at 100% utilization.

Speaker 5

So we're

Speaker 1

looking to send more rigs. Exiting Burkina Faso, the decision was taken, it's not something we write down overnight. We actually began a slow nation breakup actually a year ago, and it's really just evolved in this last quarter. At this point in time now with the wet season coming upon us, we thought it was time to just accelerate the process and just nip it in the bud because we really only had 2 rigs spinning there. And to have 2 rigs spinning in one place, it essentially is turning money over and not making any.

Speaker 1

So we thought it better to accelerate that process. We exited Burkina Faso. And of course, in doing so, we needed to find viable markets for these rigs to go into so that we had soft exit for our client, but also soft entry points and revenues that could replace those that were coming to an end. So that work has been secured in other markets. For instance, we're expanding into Senegal, which is a new country for us, which we're quite excited about, signed a contract with one of our existing clients.

Speaker 1

And they have a mining operation there. They need to get drilling. So it's a congenial move. We know each other pretty well. And so we've got that going on.

Speaker 1

Ivory Coast continues to just keep chugging along. It's just a great market for us. And Ghana is suddenly getting very, very busy. The other market that we're really excited about is Egypt. So we're expanding our operations over there.

Speaker 1

It's our business and our customer base continues to increase. So we're sending additional equipment to Egypt. So basically 2 new markets, one being Senegal, the other being well, an expansion, if you will, into Egypt. Busy things starting to happen over in South America, very busy. Ghana and Ivory Coast, absolutely going gangbusters for us at the moment.

Speaker 1

Now that all sounds really silly looking at the numbers that you're looking at, I get that. But you've got to understand, you've got to appreciate that decision to shut down a country and redeploy rigs and decision to start up in another country is not something that happens overnight. There's mobilization, there's customs plans, there's all sorts of things. So essentially, it's just a fact of life that things have to fall apart in one place in order for them to regroup and come back bigger and stronger in other markets. Does that answer your question, Amit?

Speaker 4

No, that's great color, David. I appreciate it. So it sounds like if we could just take Burkina Faso out and with the new contract in Senegal and Peru resuming, I understand Q2 last year was a record quarter, but it sounds like we're back to the $35,000,000 $36,000,000 run rate pretty comfortably on adjusting for seasonality for a second. Is that fair assessment or is the market is in general just slowing down?

Speaker 1

Yes. No, the market is not actually slowing down. It's just that we're repositioning things to capture better opportunities elsewhere. We certainly aren't going to get a chance to do it later. And so as we speak and as I look at what we're looking at going forward, our quarter 3 will, at this point in time, come in as a stronger performance than our quarter 2.

Speaker 1

You've been doing our numbers for quite a few years now and you'll know that that's an anomaly in itself. At quarter 4, oddly could actually turn out to be our strongest quarter 4 for the year as we will close the year with a very strong run rate and utilization touching 80%, probably breaching it actually. So all of this, of course, is not going to come back in time to rescue our financial year. At this point in time, I would have to say that I think we are looking at a flat year over year fiscal year. That's about the best we can hope for at this point in time.

Speaker 1

And next year will be if you look at Jutile's history, we tend to go up in inventions. We spent 3 or 4 years in the 80s and then we jumped to 100. We've been in the ranging between 150 to, let's call it, 115 to 140 for the last 3 years. I think what you're about to see is a step change in the right direction. And it will be the result of repositioning REITs into, as I say, favorable geographies.

Speaker 1

But that comes with some pain. And we thought, well, better we do it now during quarter 3, which is traditionally a wet season quarter for us. It's easier on our clients and it was going to be easier just generally.

Speaker 2

And that's the history, Amit. Let me just reiterate that we grow in steps and Dave is absolutely right. If you look at the growth in 2020 to 2021, we grew the top line by 40%. Then in 2021 to 2022, it was 20%. So if we're able to and 2022 was a record year for us.

Speaker 2

We never had a year like 2022. So if we're able to repeat the year we had last year and invest in the company by moving out of unfavorable jurisdictions and getting those rigs in better countries, better areas, we're pretty excited. We're also extremely excited about what 2024 is going to look like. So to answer your question, yes, I think we'll be tracking more as we were anticipating in Q3 and Q4 than Q1.

Speaker 4

That's great. I appreciate all the color guys. One last one for me on, I guess, on the rig fleet plan, we're still not growing materially on the rig count. And maybe help me understand about $5,000,000 of CapEx, is it all on rigs or what was the maybe the pockets of spend in the quarter of about $4,900,000 And that's it for me.

Speaker 2

Yes. The rigs, right now what we do, we have a standardized fleet. We'll typically, we're going to add 1 or 2 more client demand. So the plan is to add a few more rigs here by the end of the year. We do have some rigs going through our workshop, which may be ready by the end of the year and in 2024.

Speaker 2

So it's more of a slow and steady growth, client driven, adding more standardized rigs to the fleet. And the reason that's the GeoDrill history, right? We grow organically from cash flow that we generate from operations and that's kind of what we're comfortable with and that's kind of been the reason we've been successful. In terms of CapEx, yes, like I said, you'll see a few more rigs. We're completing we're in new countries.

Speaker 2

So when we're in a new country, we invest in a base there. We invest in bases at some of our clients. So we'll put some CapEx into that. There's always new trucks and light vehicles and broad carriers, etcetera. So part of it is CapEx growth and part of it is just CapEx maintenance and we kind of balance both of those.

Speaker 2

So it's a mix of everything to keep the fleet and all the ancillary equipment kind of modern and up to date.

Speaker 4

That's great. And just a follow-up on that. So what should we expect of a maintenance CapEx number based on the current rig count

Speaker 2

and new draft of exposure? What we did in the first half of the year, we're anticipating to do in the back half. So just like I said, kind of consistent through cash flow from operations.

Speaker 4

Got it. Thank you. Thanks guys and I'll turn back in the queue. Thanks.

Operator

Thank you. We have a follow-up question coming from the line of Gordon Lawson from Paradigm

Speaker 3

fixed cost divided by less activity or was there something more fundamental such as the types of remaining contracts executed in the quarter?

Speaker 1

I didn't actually catch that, Gordon. Could you just repeat that again? Your line seemed a bit muffled.

Speaker 3

I'm sorry. Last quarter, we talked about fixed costs versus drilling activity. So I'm just curious if the profit decline on a percentage basis, is that more related to fixed costs and less truck drilling activity? Or is there something more fundamental such as the types of the contracts executed in the quarter and such?

Speaker 2

No, you're bang on it. It's the fixed cost in our cost of goods sold in the salaries and benefit line. We have certain fixed costs. And when you're mobilizing or moving rigs, etcetera, you have to keep those costs on because you're having usually the staff are able to take their leave or their breaks or their holidays, etcetera. So we're still paying our drillers and our staff.

Speaker 2

However, we're we could be in between contracts, moving rigs, etcetera. So that I think that gets a little bit exasperated when the revenue declines. You'll see through again through the 6 months year to date revenue declined by 3%, but the COGS was basically flat. So it's there is a fixed cost component in there. But it's not it doesn't alarm us.

Speaker 2

It's part of the business where it would alarm us if we didn't have things ramping up in Q3 and Q4. But it's just something we need to keep our people and keep them employed during a bit of a slower month or 2.

Speaker 3

Okay. Thank you very much.

Speaker 5

You're welcome.

Operator

Thank you. We have your next question coming from the line of Ray Gibbons. Please go ahead.

Speaker 5

So unlike Mark, my

Speaker 4

question is

Speaker 5

about the base

Speaker 1

Could you just I think your line is muffled.

Speaker 5

I'll try to speak a little louder, sorry, about this.

Speaker 1

That's

Speaker 5

better. That's good.

Speaker 2

That's fine.

Speaker 5

So if we speak about mines and mines don't get to pick themselves up and go anywhere, they don't get to respond to really anything. They do get evaluation well beyond what anyone will give you, but they just don't get to be nimble. My question is about the Burkina Faso base. When we get to the end of this, and I suppose you're just going to give out the land, what have you managed to get to other jurisdictions to help other jurisdictions? So what is left of the Burkina Faso base that hasn't been retrieved or made useful elsewhere?

Speaker 5

Just so we can understand how this works.

Speaker 1

So everything's basically been packed up and returned to the main base. And all the inventory is being returned, all of the rigs, the light vehicles. And as we speak, we have one rig finishing its last hole. So it's going to mobilize out of Burkina Faso in the next week. And when we do that, we'll be basically handing the keys back to the landlord.

Speaker 1

That was a leased property, and it will be given back as a shell. Everything that we needed that was there, we basically put aside the fact that we probably had a concrete pad that we needed to put the workshop on the workshop itself was a portable like a big dome workshop. So that was all packed up, put into a container and returned essentially and all this stuff will be redeployed to other projects elsewhere. So 0 loss really.

Speaker 5

That's pretty incredible. Incredible. EBITDA, incredible.

Speaker 2

Well, I think I can hear you, right. That was the impact on Burkina Faso Rey was the question?

Speaker 5

Well, I'm just saying that to be able to do what you just described is incredible. It's amazing. To be able to leave it to a fixed Yes.

Speaker 2

It's the geography too where we're fortunate to have operations in Cote D'ivoire. We're fortunate to have operations in Ghana and Mali. So these neighboring countries, they can use the rigs. They want the rigs that were working in Burkina. So we can now accommodate some of these other neighboring countries.

Speaker 2

And with the standardized rig fleet, it's not a big ask for us to move these rigs. Same with the inventory. The inventory that was at that base in Burkina, we can pack it up and we as Dave said, we've already sent some of it to each of those 3 neighboring countries based on what they needed. So it's just part of the GeoDrill model of operating for over 25 years in West Africa in these different countries, we can navigate between them.

Speaker 1

The big thing really, right, is it's just going to hit our revenues for the quarter. And during that time, our fixed costs don't take a holiday. So it affects our margin even more so. The But in sitting back and looking at these things, you've got to say, when is it going to be if we've taken a decision to do it, and we just need to figure out the best timing so that it has the least impact on our clients and the least impact on our shareholders. And so we felt the time was right heading into wet season, and we've done it.

Speaker 1

And it's we're going to have to take it on the chin for this quarter, but we'll pick that up pretty quickly. The rigs have already been contracted elsewhere. We really just need to get them back to the shop in Ghana and give them a going over and pump the tires up and clean the windscreen and send them out to jobs. No shortage of work. The opening line of the MD and A of the guidance remains robust.

Speaker 5

For Kiena Faso guys that you have that have become so skilled, can you keep them?

Speaker 1

Yes, yes. No, absolutely. We've taken Berkenazi employees and we've repositioned them into other West African markets, other French speaking West African markets. And that's worked very well for us. So no one's really lost the job.

Speaker 1

We've just the rigs are going to be actively employed elsewhere. Down in the lowest builds, in the heavy lifting sort of department, the laboring type people, well, of course, we can't keep everyone employed. But the technicians that we've spent a lot of time developing, they'll be transferred to work into our West African operations elsewhere.

Speaker 5

Great job, guys. Thank you. Sorry, my call is so low quality. Thanks.

Speaker 2

Thanks, Ray. Thanks, Jason.

Operator

Thank you. There are no further questions at this time. I'd now like to turn the call back over to Mr. Harper for any closing remarks.

Speaker 1

We have nothing else to say, and thank you very much for everybody on the call today. Have a great day. Thanks. Thank you.

Operator

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

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Geodrill Q2 2023
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