Major Drilling Group International Q1 2024 Earnings Call Transcript

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Provided by Quartr
September 6, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter 2024 Results Conference Call. I would now like to turn the meeting over to Chantal Melenchon. Please go ahead, Ms. Melenchon.

Speaker 1

Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the Q1 of for 2024. On the call, we will have Daniel Heroc, President and CEO and Ian Roth, our Chief Financial Officer. Our results were released yesterday evening and can be found on our website at www.majordrilling.com. We also invite you to visit our website for further information.

Speaker 1

Before we get started, we'd like to caution you that during this conference call, We will be making forward looking statements about future events or the future financial performance of the company. These statements are forward looking in nature and actual events or results may differ materially from those currently anticipated in such statements. I will now turn the presentation over to Denis Herak. Please go ahead.

Speaker 2

Thank you, Chantal, and good morning, everyone, and thanks for joining us today. We had another strong quarter as we continued to see steady growth month by month throughout the quarter. As expected, we saw increased activity from Copper, lithium, silver and nickel customers, which help offset the reduced demand from junior exploration companies as capital markets fundraising remains a challenge for some of those companies. Early in the summer, project delays due to permitting and forest Fires impacted our North American operations. However, by the end of the quarter, we saw the return of strong activity levels.

Speaker 2

We were particularly pleased with the result from our South American and Australasian operations, which are seeing a pickup in activity That bodes well for the future. The strong EBITDA generation combined with our now completely debt free position allows us To continue to create long term value for our shareholders as we initiated our share buyback program, executing on it at a very attractive level this quarter. Including these initiatives, we still ended the quarter with a net cash position of 60,800,000 With that, Ian will walk us through the quarter's financials and then I'll discuss the market outlook further.

Speaker 3

Yes. Thanks, Denis. Revenue for the quarter was $198,900,000 relatively flat revenue of $199,800,000 recorded in the same quarter last year. Activity levels remain elevated Despite some challenges in North America with forest fires and customer delays relating to permitting issues, a favorable foreign exchange translation impact on revenue and net earnings For the quarter, when comparing to the effective rates for the same period last year, it was approximately $6,000,000 $1,000,000 respectively. The overall gross margin percentage, excluding depreciation, was 30.1% for the quarter compared to 30.8% for the same period last year.

Speaker 3

We were able to maintain strong margin performance as inflation impacts continue to be covered by pricing adjustments in most markets. You're starting to see some stability with inflation in some of our direct costs as supply chains continue to improve. G and A costs were $16,500,000 an increase of $300,000 compared to the same quarter last year. The increase was driven by annual inflationary wage adjustments implemented at the start of the new fiscal year. Foreign exchange loss was $1,600,000 compared to a loss of $700,000 for the same quarter last year.

Speaker 3

While the company's reporting currency is the Canadian dollar, Various jurisdictions have net monetary assets or liabilities exposed to various other currencies. Company is struck to limit its exposure to the Argentine peso. However, Argentina generated significant portion of the loss during the current quarter as the currency phase continued devaluation. The income tax provision for the quarter was $7,200,000 compared to $7,300,000 for the prior year period. The income tax expense The quarter was impacted by lower utilization of previously unrecognized tax loss.

Speaker 3

Net earnings $21,800,000 or $0.26 per share for the quarter compared to net earnings of $24,200,000 or $0.29 per share for the prior year quarter. EBITDA is $40,300,000 compared to $43,500,000 in the prior year quarter. The operational leverage in our business model continues to deliver strong EBITDA results. We progress through these elevated activity levels. Turning to the balance sheet.

Speaker 3

We finished the quarter in a very strong net cash position of $60,800,000 With the continued high interest rate environment, the company repaid the remaining $20,000,000 of its long term debt. The facility remains available to us if needed, providing a tremendous competitive advantage and flexibility as we continue to focus the company on either organic or strategic M and A growth Opportunities. Company also took the opportunity at current valuations to make use of its normal course issuer bid spending $1,300,000 on share buybacks At an average price of $8.89 per share. We will continue to be opportunistic with our buyback plan with current valuations at historic lows. We remain committed to reinvesting in the business by spending $16,300,000 on capital expenditures, adding 5 new drill rigs and support equipment, while disposing of 4 older less efficient rigs, bringing the total rig count to 601.

Speaker 3

The new breakdown of our fleet and utilization It's as follows: 287 specialized drills at 46% utilization 115 conventional drills at 49% utilization, 199 underground drills at 54% utilization for a total of 6 0 1 drills 49% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill, Rather, it is work that requires we meet the rigorous standards of our customers in terms of technical capabilities, operational and safety standards and other related factors. These standards are becoming increasingly important to our customers. In the Q1, revenue from specialized work accounted for 65% of our total revenue as we continue to see increased demand for our specialized services. Conventional drilling, which is mostly driven by juniors made up 11% of our revenue for the quarter, while underground drilling revenue remained consistent at 24% of our total revenue.

Speaker 3

Seniors and Intermediates continue to drive our business, representing 76% of revenue this quarter as they value the high quality specialized services Major Drilling offers and remain committed to partnering on their drilling programs. With the continued challenges accessing capital, revenue derived from juniors remained constant from last quarter at 24%. In terms of commodities, following on trends seen in previous quarters, there has been a shift to battery metals with copper, nickel, lithium and silver projects combining 40% of our revenue. Gold, which historically represents 50% of our revenue, dropped to 41% this quarter, while Iron Ore contributed 11% of our revenue. With that overview on our financial results, I'll now turn the presentation back to Denis to discuss the outlook.

Speaker 2

Thanks, Ian. As we move in our Q2 of fiscal 2024, We expect to see the monthly growth that we experienced from the beginning of this calendar year to continue throughout the quarter. The need to replenish supply shortfalls on most metals remains a priority for mining companies despite the fluctuations we see in commodity prices. Those prices have remained well above the level needed to support exploration And we are already in discussion with several senior customers regarding their calendar 2024 program with many looking to book rigs early. I think it's important to highlight the reasons why Major Drilling is extremely well positioned for the future as the world continues to look to find new supplies of minerals to meet the growing demand in the world of electrification.

Speaker 2

First of all, Major Drilling is the leader in specialized drilling, meaning we are the go to drilling company for many mining companies with technically challenging programs, Whether it's remote, deep, high altitude, Arctic or directional. As a reminder, Major Drilling drilled the longest diamond drill hole ever drilled in Canada at the Esasco Mining Windfall Project site in 2020. As well, the company is now a significant player in the underground services sector, Growing our underground drilling revenue by 2 75% as compared to peak levels of 2012. By being the largest pure play drilling company in the industry, it gives us access to many technologies from our suppliers where we often become first adopters, which helps keep our leadership position in specialized drilling, but also as an innovative company in our industry. All of this wouldn't be possible without an experienced management team, which is the key to our success as this industry relies on expertise when faced with challenging projects.

Speaker 2

Finally and importantly, Financial discipline has permitted us to position ourselves as this with the strongest balance sheet in our industry, which allows us to have the resources ready to mobilize on some of the most demanding projects out there and maintain our position as both the operator and employer of choice in our industry. We are seeing more and more customers recognizing the impact of the higher quality of our services That can have on their overall drilling costs. Completing each hole And safe production are more important to most of our customers than the pure price per meter as these items can make a huge difference on their drilling program, especially when dealing with a specialized project. That is why we are keeping our commitment to investing in the development of our people and investing in our fleet. Looking forward, the global demand for electric vehicles continues to grow and will require an enormous amount of Copper and battery metals, which will increase the pressure on the existing supply demand dynamic.

Speaker 2

We expect All of this to lead to substantial additional investments in copper and other base metal exploration projects as we help our customers discover the metals that will allow the world to accelerate its effort towards a green economy. Many of the new mineral deposits in questions are located in areas challenging to access, requiring complex drilling solutions and continued demand for specialized services. Despite the urgent need to replenish mineral reserves, Both for gold and base metal, the industry is still early in the exploration cycle. We are only in the 3rd year of this Cyclical upturn and the last upturn lasted 10 years. The mining industry is still in the discovery phase and will have to go through an intense multiyear infill drilling period to develop new mines in order to fill the projected supply gap in the different commodities.

Speaker 2

With these fundamentals still firmly in place, the long term outlook for our company remains extremely positive. Major Drilling remains in a unique position to react to and benefit from these market dynamics. With that, we can open the call to questions. Operator?

Operator

Thank We have a first question from Gordon Lawson from Paradigm Capital. Please go ahead. Your line is now open.

Speaker 4

Hey, good morning and thanks for taking my question. Can you please provide some more color on the wildfires in terms of how many operations were affected and how much of these issues spilled into the current quarter?

Speaker 3

Yes. So for us in the quarter, the wildfires weren't a huge impact in terms of Number of projects, we had a few. It was more the permitting was probably the bigger impact on the quarter. Since then, the forest fires have subsided For us, our operations in Canada, we estimate approximately $5,000,000 in revenue or 5% of that region's Revenue was impacted in Q1 versus permitting and forest fires combined.

Speaker 4

Permitting specific to North America or are you also referencing Mexico there?

Speaker 3

Mainly North America.

Speaker 4

Okay. And one more if I may. Are you able to break down your Mexican operations in terms of major versus junior as well as gold and silver?

Speaker 2

We don't go in that granular detail, but obviously Mexico typically is gold and silver driven for the most part. That would be The majority of our revenue comes from that. And It's pretty much balanced between junior and senior, but Mexico typically has a bit of a higher Balance of junior projects typically than the rest of the world.

Speaker 4

So you expect the bigger impact there to be the junior financing rather than the mining legislation or is that too difficult to predict at this point?

Speaker 2

Well, I mean, one leads to the other. It's going to make it probably a bit more difficult to raise money for juniors With the government, so the juniors are going to be impacted From that, but as well, like you say, the financing overall Financing issues are probably affecting Mexico a bit more than other regions, yes.

Speaker 4

Okay. Thank you very much.

Operator

Thank you. We have a question from Ryan Hanley from The Laurentian Bank. Please go ahead. Your line is now open.

Speaker 5

Thanks and good morning, Dhanini. Just a couple of quick ones for you on some of the regional operations. I guess maybe to take it a step further on the forest fires. Have you got any indications that maybe some of the juniors are looking to ramp up their programs heading into the end of the calendar year? Like are there guys that Might be looking to add another rig or 2 to try to get caught up a bit after some of the forest fire related shutdowns.

Speaker 2

It's too early to tell at this point. There's the odd one here and there. Now Is that going to be a trend? It's too early to tell at this point. But every year, it seems like You get to the fall and budgets that whether it's junior or senior budgets that were not spent During the year tends to that's where sometimes you get the phone call in a panic and they 1 or 2 more drills because they're behind on budget and they want to make sure the budget is spent before the end of the year.

Speaker 2

So you do get that, but it's too early to tell at this point in terms because those typically happens In late September, October.

Speaker 5

Okay. Makes sense. And then in South and Central America, obviously, Mexico is pretty challenging, but in some of the other countries in the region, I think there's been a few other elections, especially on the regional level lately. Has there been any other impact in any other countries down there where Things have gotten a bit more challenging over the last, call it, 3 to 6 months?

Speaker 2

Well, The Mexico one that Gordon referenced, the new law There, we're going to see what kind of impact that's going to have. The only other one That will be interesting to watch is Argentina. There's an election coming in October. Other than that, things are in our other markets, things are going well. In Chile, I think the investment climate there has improved with a bit more certainty Or less uncertainty, I guess, around mining, with To things getting clarified and things put behind us on there.

Speaker 2

So I think we're going to be things are going to be fine going forward In Latin America, like I said, Argentina is the one where we're going to watch the election in October and see what kind of impact that might have.

Speaker 5

Perfect. That's really helpful. Thanks. Maybe just quickly switching gears to the finance side. Can you remind me on that contingent consideration, what period is that Payable over or what's the kind of time frame I should be looking at for that to be kind of wound down?

Speaker 3

Yes. So there is one it was over 3 years and the 2nd year payout would be due in the Q2 coming up and then 1 year from then is the last payout.

Speaker 5

Got it. Perfect. Thank you. And then the last one, because I'm guessing this is probably going to come up anyway, because it does on most calls. But given the great cash flow generation, you've now got no long term debt.

Speaker 5

I guess you're kind of somewhat limited in buybacks because you don't want to hurt your liquidity too much. Any updates you can provide on potential dividend in the future?

Speaker 2

At this point, No, there's no plan of that. I mean, it's always something that is Discussed internally, but at this point there's no plan.

Speaker 5

Okay, fair enough. That's it for me. Thanks again very much for taking my questions.

Speaker 2

Yes. And by the way, Ryan, that's because our focus is still on growth and we're still Very positive on the future and the possibility. So for us, we're still Very much focused on growth and also what could come out over the next couple of years with, as I mentioned, We're just right now, it's just exploration for the most part, but there's going to be a lot of infill drilling to bring those Projects and those to turn those into mines. So we want to make sure that we're well positioned to take advantage of that.

Speaker 5

Yes. Okay. Fair. That makes sense. Well, congrats on the great quarter and thanks again.

Speaker 3

Thank you. Thanks.

Operator

Thank you. The next question is from Dennis Scannell from Rutabaga Capital. Please go ahead. Your line is now open.

Speaker 6

Yes, yes. Good morning. Just a quick thing for me, looking at the segment information. So Ian, I think you talked about Permanent issues kind of hitting revenues by about $5,000,000 if I heard you correctly. We're still seeing a negative compare even if you add that back On the sales side, and I'm just wondering, is that reflective of just some lower activity by your customers or maybe some share To other operators, just additional color on what's going on in North America.

Speaker 6

Thank you.

Speaker 2

Yes. The bulk of that other piece that as you mentioned is related really to juniors. There's a bigger especially early on in the cycle, the juniors are more present In the big markets, Canada, U. S. And Australia.

Speaker 2

And with the financing issues that Basically those companies are facing North America was more impacted about for the Those junior projects and in fact, S&P Global, I think has mentioned that exploration globally, they were forecasting, I think would be down 20% this year. And so and I think the bulk of that Would be related to the lack of financing for juniors, which again impacts mostly North America.

Speaker 6

Yes. Okay. So and just kind of thinking then, comparisons start to get easier, what, in calendar 2024 or Just in terms of kind of your year over year comps, just out of curiosity.

Speaker 2

Yes, it probably went with The drop because we had a very good year in terms of junior. The junior Financing, the juniors were able to raise money in late 2020 2021, Which then fueled exploration projects by these companies in 2021 2022. So That's where we saw a big uptick from juniors in those years. And now the slowdown we're seeing Right now then so there's a bit of a reduction. So yes, so when you go to 2024, Things should be fairly stable.

Speaker 2

If everything remains the same, you're right, we then We should be on an even playing field, if I might say, in terms of comparisons.

Speaker 6

Great. Thank you for the clarification.

Speaker 3

Thank you.

Operator

Thank you. There is no further question registered at this time. I would like to turn back the meeting over to Mr. Laroche.

Speaker 2

Thank you. Please don't forget to join us for our AGM, which will be held virtually tomorrow at 3 pm Eastern Time, and you can find the details on our website. So hopefully, We talk to you tomorrow. Thank you for listening.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.

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