Geodrill Limited

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. If anyone has any difficulties hearing the call, please press star followed by zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Tuesday, August 8th at 10 a.m. 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. 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 CEDAR filings. I will now turn the call over to President and CEO of Geodrill Limited, Mr. Dave Harper.

Thank you, Operator. Good morning and welcome to Geodrill's Q2 2023 Quarterly Financial Results Conference call. I will begin with an overview of our operations and performance for the quarter. Our CFO, Greg Bourse, 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 two, we took a step back to reposition the company for future growth by sharpening our focus on favourable geographies. This decision consequently impacted our utilisation and ultimately our financial results for the quarter. It is noteworthy that whilst our financial results were negatively impacted, we remained 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 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. I'll now turn the call over to Greg, our CFO, to review our financial results in detail.

Thank you, Dave. As a reminder, all figures are in U.S. dollars. We generated revenue of $32.6 million, representing a decrease of $6.5 million, or 17%, when compared to $39.2 million for Q2 2022. While GeoDrill 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. Of the $6.5 million decline in revenue, Burkina Faso represented $3.2 million 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 $7.8 million, being 24% of revenue compared to a gross profit of 12.4 million 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 6.2 million or 19% of revenue compared to $11.2 million or 29% of revenue for Q2 2022. Overall, we generated net income of $2 million for Q2 or $0.04 per share compared to $5.9 million for Q2 2022 or $0.13 per share. We ended the quarter with net cash of $6.4 million. With the gold price averaging $1,965 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.

Thank you, Greg. Before going to the Q&A portion of the call, I'd like to provide a brief outlook and key growth opportunities for the remainder of 2023. For those investors on the call who know me, they would know that I like strategies, especially strategies that involve winning. I'm a huge fan of Formula One motor car racing. Winning an F1 Grand Prix is no easy task. 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 One racing and general drilling. Formula One teams must strategize during a race continually changing to meet evolving circumstances. Example, weather, in which case a 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. 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. Now, financial results, I will now turn it back to the operator. Thank you.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one. If you would like to withdraw your request, please press star followed by the number two. Your first question comes from the line of Gordon Lawson from Paradigm Capital. Please go ahead.

Hey, good morning, everyone. Beyond the loss of drilling in Burkina Faso and Peru, can you elaborate on some of the other factors behind the year-over-year decline, particularly as it relates to Ghana?

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 first six months, and we always have choppy quarters, Through the first six 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. So what we tried to highlight in the MD&A quarter to quarter, Q2 to Q2, I did a $6.5 million decrease in revenue. Some of it was in our primary markets like Ghana, et cetera. However, those markets were extremely strong in Q1. But I think it's important to highlight that 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.

Hello? Thank you.

Your next question comes from the line of Ahmed Shah from Beacon. Please go ahead.

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 is that looking?

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'll take the two 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 metres. So they take like a three-month break, and we're on that break at the moment. We're due to resume in September, and we'll resume with three rigs spinning, and then they want to ramp that up to five rigs. So essentially in South America, we're going to be at 100% utilisation. So we're looking to send more rigs. Next. Exiting Burkina Faso, the decision was taken, you know, this is not something we arrived at overnight. We actually began a slow-motion 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, you know, because we really only had two rigs spinning there. and had two rigs spinning in one place that essentially is turning money over and not making any. 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. 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, 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... So we've got that going on. 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 as our business and our customer base continues to increase. So we're sending additional equipment to Egypt. So basically two 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. And Ghana and Ivory Coast are absolutely going gangbusters for us at the moment. 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 a decision to shut down a country and redeploy rigs and a decision to start up in another country is not something that happens overnight. There's mobilization, there's customs claims, 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, Ahmed?

No, that's great, Khaled, 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, 36 million run rate pretty comfortably. If we ignore seasonality for a second, is that fair assessment, or is the market in general just slowing down?

Yeah, no, the market's 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 three will, at this point in time, come in as a stronger performance than our quarter two. which, you know, you've been doing our numbers for quite a few years now, and you'll know that that's, you know, that's an anomaly in itself. Our quarter four, oddly, could actually turn out to be our strongest quarter four 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. Yeah, that's about the best we can hope for at this point in time. And next year will be, you know, if you look at Judo's history, we tend to go up in benches. You know, we spent three or four years in the 80s, and then we jumped to 100, and we've been in the... ranging between 150 to, let's call it 115 to 140 for the last three years. I think what you're about to see is a step change in the right direction. And it'll be the result of repositioning REITs into, as I say, favourable geographies. But that comes with some pain. And we thought, well, better we do it now during quarter three, which is traditionally a wet-season quarter for us. it's easier on their clients, and it was going to be easier just generally.

And that's the history, Ahmed. Let me just reiterate that. We grow in steps, and Dave's absolutely right. If you look at the growth in 2020 to 2021, we grew the top line by 40%. Then in 2021 to 22, it was 20%. So if we're able to – and 2022 was a record year for us. 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. To answer your question, yeah, I think we'll be tracking more as we were anticipating in Q3 and Q4 than Q1.

That's great. I appreciate all the color, guys. One last one for me. I guess on the rig fleet plan, we're still not um growing materially on the on the rig count and maybe help me understand um about five million of of capex is it all on rigs or what was the maybe the pockets of spend in the quarter of about 4.9 million and that's it for me yeah the rigs um right now what we do you know we have a standardized fleet we'll

Typically, we're going to add one or two 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. 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 campbacks, yeah, like I said, you'll see a few more rigs. We're in new countries, 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, etc. Part of it is CAPEX growth, and part of it is just CAPEX maintenance, and we kind of balance both of those. So it's a mix of everything to keep the fleet and all the ancillary equipment kind of modern and up-to-date.

That's great. And just to follow up on that, so what should we expect of a maintenance CAPEX number based on the current rig count and new traffic exposure?

Just the same as... 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.

Got it. Thank you. Thanks, guys, and I'll jump back in with you.

Thanks. Thank you. We have a follow-up question coming from the line of Gordon Lawson from Paradigm Capital. Please go ahead.

Hey, thanks for taking my follow-up. Is that also related to fixed costs divided by less activity, or was there something more fundamental such as the types of remaining contracts executed in the quarter?

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

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

You're bang on. 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, et cetera, you have to keep those costs on because usually the staff are able to take their leave or their breaks or their holidays, et cetera. So we're still paying our drillers and our staff. However, we could be in between contracts, moving rigs, et cetera. So I think that gets a little bit exasperated when the revenue declines. You'll see, again, through the six months, year to date, revenue declined by 3%, but the COGS was basically flat. So there is a fixed cost component in there. It doesn't alarm us. It's part of the business. Where 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 two.

Okay, thank you very much.

Thank you. Ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touchstone phone. We have your next question coming from the line of Ray Gibbons. Please go ahead.

Hi, guys. Hi, Ray. So I'm like Mark. Thumbs up and move somewhere.

The question is about the base in... Ray, could you just... I think your line's muffled.

I'll try to speak a little louder. Sorry about this. That's better. That's good. That's fine. So if we speak about pines 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 up 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? Just so we can understand how this works.

So everything's basically been packed up and returned to the main base, and all the inventory's been 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. That was a leased property, and it will be given back as a shelf everything that we needed that was there, we basically put there, 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. Zero loss, really. That's a pretty incredible answer.

I mean, it's an incredible answer for just paying that two times EBITDA. You know, incredible.

That was the impact on Burkina Faso, Ray, was the question?

Well, I'm just saying that to be able to do what you just described is incredible. It's amazing.

Yeah, it's the geography, too, where, you know, 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. And with the standardized rig fleet, it's not a big ask for us to move these rigs. Same with the inventory. um 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 to each of those three neighboring countries uh based on you know what they needed so it's um it's just part of the geodrill uh model of being of operating for over 25 years for 25 years in West Africa in these different countries um we can navigate between them

The big thing really, Ray, 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, you know, it affects our margin even more so. But, you know, in sitting back and looking at these things, you've got to say, well, when is it going to be... If we've taken a decision to do it, then we just need to figure out the best timing so that, you know, 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 and it's 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 Garda and give them a going over and pump the tyres up and clean the windscreen and send them out to jobs. No shortage of work. The opening line in the MD&A is that it remains robust.

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

Yes, yes, no, absolutely. We've taken Burke & Arby 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 their job. We've just, you know, the rigs are going to be actively employed elsewhere. Down in the lower spills, you know, in the heavy lifting sort of department, you know, the labouring 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, you know, transferred to work into our West African operations elsewhere.

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

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.

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

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.