Geodrill Limited

Good morning, 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. 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 Monday, November 13th 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'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 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 General'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 Borsk, will then give us a more detailed review of our financial results, after which I'll discuss our outlook for the remainder of 2023 and beyond. In quarter three, Gerald faced headwinds on a number of fronts. 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 leads in other countries, which hit revenues and weighed on our costs. Well, from the outset, quarter three was always going to be a high bar. The call for revenue in the corresponding quarter a year ago surprised us to the upside. This was due to a peculiar rather late wet season. In quarter 3-23, this quarter just finished, Revenues were negatively impacted, firstly, by very low revenue in Burkina Faso, a country that was just exiting, 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 junior exploration companies are facing in today's challenging markets. Also, in South America, our Chile operations were completely shut down by the snow season. As a result, quarter three 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%. Yeah, and that's all she wrote. Regarding margins, in quarter three, 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 to 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 Antofagasta Barracks, which is a joint venture in Chile, which I'm pleased to report have since commenced operations and are both going well. In West Africa, the repositioning of rigs was met with higher costs and longer preparation times as we pivoted away from juniors and intermediates towards senior miners and tier one customers. Senior miners have higher specs in terms of with regards to training, 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 working for senior miners also comes with greater community relations issues. And all of these things cause delays. All of the above. Droid costs higher. Higher cogs are low revenue. Negatively impacted our margins. And that was that. The final piece with regards to financials was aging debtors. The aging debtor situation has triggered IFRS 9, which is a large non-cash provision that significantly affected our year-to-date profit, and I believe Greg Walsh 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 suspend pending second semi-annual dividend. And this was purely communicated in a press release on the 31st of August. Unsurprisingly, the market reacted negatively, taking our market cap down by 25%, and we're currently trading at $1.80 a share. I'm just going to take a moment to reflect and remind investors that even after the provisions, our hardwood value is Canadian $3.20 a share, or U.S. $2.37 a share. The market cap today is now trading at effectively six months revenue on a 12-month trading 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.

Thank you, Dave. As a reminder, all figures are reported in U.S. dollars. We generated revenue of 30.3 million, representing a decrease of 4.9 million or 14% when compared to 35.2 million for Q3 2020.2. In our primary countries in Africa, being Ghana, Cote d'Ivoire, and Egypt, revenue increased on a quarter-to-quarter basis by 1.2 million. 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 3.1 million in the quarter. Our gross profit for Q3 2023 was 5.8 million, being 19% of revenue compared to a gross profit of 10.9 million or 31% of revenue for Q3 2022. We recorded EBITDA of $600,000 or 2% of revenue for Q3 2023. This includes a $3.6 million non-cash expected credit loss provision. Excluding this provision, EBITDA would have been 4.2 million or 14% of revenue for Q3 2023. The net loss for Q3 2023 was $3 million or a loss of $0.06 a 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 $3.6 million. With the gold price averaging $1,965 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.

Thank you, Greg. Before I move to the Q&A portion of the call, I'd like to provide a brief outlook for the remainder of 2023 and beyond. Despite a 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, Kepoor is off to a pretty good start. Ghana, Cote d'Ivoire, Egypt are all performing well with multi-rig, multi-year contracts. Senegal, which is our newest market, is off to a good start. We're 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. For 2024, our order book is strong in our core regions, especially in South America, where we recently signed two new senior miners. 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 looming large is quarter one 2024, which will be a tough one to beat. Recalling that quarter one 2023 was a behemoth quarter with revenues of $37.6 million, which was a record for a quarter one, and it was actually stronger than our quarter two by 14%. On ageing debtors, we still have some work to do. in keeping this situation in check. 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 and beyond. We take a long-term approach 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&A portion of the call. Thank you.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Ahmad Shatt with Beacon Securities. Please go ahead.

Hey, guys. Thank you. I appreciate all the call on the call. 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 call that you can provide us on what should we expect from Q4? Is Q2 a good run rate? How are things working for the top line?

So as I alluded to on the call, Q4 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 four is looking okay. It's looking okay. So as I was saying, I think the worst of these quarters is behind us. 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 hasten to add that we call our quarter one last year, it was actually our strongest month of the year. And you've been covering this story for a long time and you'll know that quarter two is normally our strongest quarter. So we do have a behemoth if we're to make a year-over-year improvement in quarter one, which at this stage would be a bridge too far, for sure. Quarter four, just winding back, stepping back a bit, will be okay. If anything, it's showing at this point in time it's trending towards a single-digit improvement. Beyond quarter one, 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. We'll actually be at 100% utilization before December, but we'll be adding a rig in the latter part of the year. And so as we go to the seventh rig and get that into the field and get it commissioned and out to site, that'll probably hit hit the tape for us around January, I'm guessing, at this point. And so at this point in time, South America looks like it'll be busy right up until the snow season next year. Full steam ahead. 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 may be going through.

Okay, that's a great call. So I guess it sounds like single-digit growth, unless we get a couple of weeks of seasonal shutdown, then we might be flat, you know, or something like that.

For December?

Sorry, for quarter four? For Q4, yeah.

Yeah, I didn't hear what you said. 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.

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 of more seniors, and you mentioned the extra cost of training since the higher standard with the seniors and all that. So on a go-forward basis, 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 that you took on from the seniors and how much is going to be just structural change in the way you do things because of the requirements of the seniors?

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. On the exact specifics of where we'll end up, I'll hand it to Greg.

Yeah, I think if you look at the year-to-date margin, Ahmed, 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 You know, in 2022, when the capital markets were open for juniors, they were drilling and they were able to raise money. We had, you know, some juniors with four or five rigs spinning. Now, you know, they're lucky to have one spinning, maybe two. 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, 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, you know, and you're seeing this. It's not only in terms of moving to a higher tier customer. It's also moving out of certain jurisdictions. So when we've pulled all of the rigs out of Burkina and we're redeploying them into other jurisdictions, it takes time. But I think, you know, in the long run, being in better, more secure, more stable jurisdiction, having more intermediate and senior customers, I think it will serve GeoDrill much better in the long run.

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

Yeah.

Yeah, I think if you look at the –

We had three years in a row, I think 18, 19, 20, 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%. But the reason it got so high is because the revenue spike. And like I said, you know, 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%.

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 account of the amount that all of the 90 days jumped to about $9 million and changed. So how should we think about that on a go-forward basis? Are you guys expecting to recoup some of that, or should we consider the $9.5 million going to be recognized as another provision? Do you guys have more?

No, we're working. We Yeah, we haven't written these amounts off for accounting. We've taken a provision against them because, you know, there's over $15 million in our 90-day. So we've been collecting some of that subsequent to quarter end. We're working hard. But what you have to do with these provisions is at the end of each quarter, you know, 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, you know, at the end of December, we'll look at our provision. What I can tell you is we took a big hit in Q3, $3.6 million. And, you know, we're working hard with these accounts to collect the money and work with them. So we'll have to short answer is you look at this every quarter. So it's something we're working on.

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

Yeah, no issues. The security we have is receivables, and we have some... PPE, so it hasn't been an issue. We have enough of a push in there. And there's no covenant, so we're fine on that.

Your next question comes from Gordon Lawson with Paradigm Capital.

Please go ahead.

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 next year, that'd be very helpful.

Gordon, is that a question? We don't disclose that segment. It's less than 10%, so it's not material. But the Where we are now, we have about seven rigs there, and in Q3, we only had one 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. And that's where you're seeing the... Sorry, go ahead. 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 to continue to grow it.

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

The higher, sorry, I just missed that last question.

Well, given Chile and Peru, can I assume that that's where you're getting the higher competition for these contracts? No.

Do you want to speak to competition?

Well, If you look at it, Gordon, it's actually where we're enjoying our highest utilisation. I know, looking at quarter three, that sounds like a crazy statement, but the reason, you know, the rigs in quarter three 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 were assigned, you know, two new big names. and they've effectively taken all of the rigs that we had. We're adding rigs to meet the demand, and when those rigs get into the field and drilling, they'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 rigs to our regions. So we're now faced with the good problem of potentially sending more rigs to that market. These are competitors over there. Not for the type of drilling that we're doing. We entered that South American market providing a specialised deep directional drilling service, something that most of the other drilling companies over there don't provide. And so in that specialised service space, it's far less competitive and generally comes with reasonable margins. The most competitive markets that we would operate in are the West 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. You know, aside the fact that we've gone through a massive repositioning exercise, taking rigs out of one 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. This... 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 today's quarter results. But we will be very busy in those markets come 2024. So very much at this stage, a 2024 story. I think what 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. Evidently, that seems to be heading in the right direction, although you'll see how that pans out, I guess, as 2024 uncults.

Okay, that's great. You entered my second question with that. Thanks, guys.

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There are no further questions at this time.

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

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