Major Drilling Group International Inc.

Good morning, ladies and gentlemen. Welcome to the second quarter 2020 results conference call. I would now like to turn the meeting over to Denis Larocque, President and CEO. Please go ahead, Mr. Larocque.

Thank you. Good morning, everyone, and welcome to Major Drilling's conference call for the second quarter 2020. With me is Ian Ross, our CFO. You should have seen our results that were posted on our website at majordrilling.com. Before we get started, I'd like to caution you as usual that during this conference call we'll be making forward-looking statements about future events or future financial performance of the company and these statements are forward-looking in nature and actual events or results may differ materially. I'm quite pleased with the progress that we made in all of our regions this quarter. In most markets, We've been able to grow our market share with senior and intermediate companies due to our specialized drilling expertise, our innovative solutions, and our safety culture. This quarter's performance, again, demonstrated the company's operational leverage as good revenue growth of 15% translated into a 31% increase in EBITDA. We continue to reap productivity benefits from the tools we've developed over the last couple of years and from our enhanced training and skilled labor force while keeping our administrative costs stable. The company improved its net cash position by $12.8 million to $22.5 million this quarter as we spent $5 million on capital expenditures adding one rig to our fleet as well as rod handlers and support equipment. And with the retirement of one rig, it brings our fleet total or keeps our fleet total unchanged at 601 rigs. Ian will take you through our financials in more detail, and I'll come back with the outlook.

Thanks, Denis. Total revenue for the quarter was $121.2 million, up 15% from revenue of $105.5 million recorded in the same quarter last year. Favorable foreign exchange translation impact for the quarter, when comparing to the effective rates for the same period last year, is estimated at $1 million on revenue, with a negligible impact on net earnings. The overall gross margin percentage for the quarter was 28.1%, compared to 27.4% for the same period last year. A good quarter operationally with solid production that was somewhat strengthened by a one-time revenue adjustment from escalation and currency clauses on one of our contracts. G&A costs were up $300,000 at $11.5 million when compared to the same quarter last year. The increase was mainly driven by our share-based compensation that was impacted by the positive upward movement in the share price in the quarter. Despite the revenue growth, our G&A costs remain relatively flat, providing good operational leverage for increased profitability. EBITDA was $20.5 million or 16.9% of revenue for the quarter, up 31% in the same quarter last year. Revenue growth and productivity gains aided this improvement. Income taxes for the quarter were $3 million versus $2 million in the same quarter last year. This results in an effective tax rate of 29% for the quarter. Net earnings for the quarter were $7.3 million or $0.09 per share, compared to net earnings of 3.3 million or 4 cents per share for the prior year quarter. 124% increase in earnings illustrates the company's strong position in the current market. In terms of our financial strength, we continue to have one of the most solid balance sheets in our industry. During the quarter, our net cash position, net of debt, increased by 12.8 million. The bulk of this increase was tied to capital inflow from revenue growth over the past two quarters. The company also spent $5.5 million on capital expenditures, adding one new rig to our fleet, as well as support equipment, including rod handlers. We disposed of one rig in line with our strategy of improving our fleet. The total rig count remains at 601. It's worth noting that the acquisition of NOREX closed on November 1st, with a payment issued that will be reflected in our Q3 results. The new breakdown of our fleet and utilization is as follows. 293 specialized drills at 39%, 137 conventional drills at 30% utilization, 171 underground drills at 49% utilization, for a total of 601 drills at 40% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Therefore, we should always give you the breakdown of our revenue by type of work for the quarter. 65% specialized, 9% conventional, and 26% underground. Seniors and intermediates represented 86% of our revenue in Q2, while juniors were 14%. The lower levels of junior activity is evidence of the current challenges they face in raising capital. However, our continued strength with the seniors illustrates the growth in market share we are achieving with this customer base. In terms of commodities, gold projects represented 52% of our revenue, while copper was at 22% this quarter. With that overview on our financial situation, I'll now turn the presentation back to the Dean to discuss the outlook.

Thanks, Ian.

We're continuing to improve our suite of services that we offer our customers with new innovative solutions and improved equipment through increased hands-free rod handling capacity, computerized rigs, and deep hole capacity. we have established mutually beneficial partnerships with several of our senior customers to develop these innovative solutions. Through this, we've been able to strengthen our relationships with our senior and intermediate customers and have seen revenue from these customers increase by 24% this calendar year, at a time when global mining exploration budgets or spending in calendar 2019 is down 3%. Our junior revenue is down 12% year-over-year, directly correlated to the 15% year-to-date decrease in mining financing for 2019. As Ian mentioned, as of November 1st, the company closed the transaction to acquire the shares of Norix Drilling Limited, and we are excited to welcome Norix and its 120 employees into the major drilling group. The acquisition of NOREX is a unique opportunity for major drilling to strengthen its position to service our customers in both surface and underground exploration in the prolific northeastern Ontario region. The culture and operational values of both companies are very similar in terms of personnel and strategies, and this will allow us to provide our customers with expanded drilling services in that region. It's important to note that we're now in our third quarter, traditionally the weakest quarter in our fiscal year, as mining exploration companies shut down often for an extended period over the holiday season. As usual, due to the time it takes to mobilize new contracts, a slow start-up pace is expected in January and February. Additionally, the company schedules substantial overhaul and maintenance work on its equipment during this slower period and these factors result in reduced revenue, increased costs and reduced margins in the third quarter. Looking forward to the fourth quarter and beyond, senior customers are still working through their budget process and have yet to decide on post-holiday exploration plans. The price of gold which historically has accounted for approximately 50% of the company's drilling activity, has remained above 1,400 an ounce for the last four months, which has produced some good cash flow generation and improved balance sheets for our senior customers. We are well positioned at this time as leader in specialized drilling. With a strong financial position, it allows us to continue to improve our fleet to meet our customers' demands in terms of rigs, rod handling, mobile equipment, and technology, which is key to our success to remain the leader in specialized drilling. Also, having the financial resources and the best equipment allows us to attract the best people at a time when we are going into a labor crunch in our industry. Finally, I'm pleased to announce that Ms. Sybil Veenman has been appointed to the company's board of directors. Ms. Veenman brings over 20 years of mining industry experience, both as a public company director and a senior executive. Previously, she was senior vice president and general counsel and a member of the executive leadership team at Barrick Gold Corporation. She currently serves as a director at Royal Gold, Ion Gold, NextGen Energy, and Narant Resources. That concludes our formal remark, and we'll open the call to questions.

Thank you. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift the handset before making your selection. If you have a question, please press star 1 on your telephone keypad. If at any time you wish to cancel the question, please press the pound sign. Please press star 1 at this time if you have a question. There will be a brief pause while the participants register. Thank you for your patience. Once again, please press star 1 on your telephone keypad. We have a question from Eric Swergold from Firestone Capital. Please go ahead. Your line is now open.

Good morning and congratulations on your excellent results in an environment that I would say is probably still pretty difficult. On the last call, I asked you about acquisitions and you mentioned you'd be extraordinarily disciplined. You went ahead and did one, so I assume that that acquisition offers tremendous upside as the cycle turns. And could you talk about what merger synergies there might be from that acquisition? And then secondly, could you give us an update on the competitive landscape in terms of at the last call you mentioned that there were a number of weaker players who lacked pricing discipline and whose equipment was degrading because they couldn't afford the CapEx? Can you perhaps talk about whether some of those competitors have failed or are closer to failing? and what kind of market share opportunities that might open up for you. Thank you.

Okay. Well, on the Norex acquisition, yes, for us, it is in a market that has been, in terms of, raising money and investment the Ontario market has been very good over the last little bit and it offers stability and therefore has been attracting investment including junior some of the junior funding that we've seen and for us we, the northeastern Ontario, we had a presence but not a big presence, and NOREX was the dominant player in that region. So for us, that's basically what we were looking at. And in terms of synergies, really, it's giving us, contracts, there's a labour force over there and combining our forces we are a large player in underground Norex didn't have much underground capacity, so we were able to combine our services to be able to service customers in that region. In terms of competition, the competitive landscape, things are still pretty competitive out there because we haven't seen a a recovery in the sector. But, I mean, we've been able to gain market share. As I mentioned, global exploration expenditures are down 3% globally, and that includes an increase of 12% in Australia. So, therefore, the rest of the world is down, I think, 10% globally. and our revenue is up this year. So from that, it means we've been able to gain market share, and we attribute that to the investments we've made in our equipment, rod handlers, and also things we bring to the table.

Thank you very much. Congrats again on very strong operating results. Thank you.

Thank you. The next question is from Daryl Young from TD Securities. Please go ahead. Your line is now open.

Good morning. Good morning. Just a couple quick ones for me. So first off on the margin performance was strong this quarter, but you did mention that there was a – one-time impact from a revaluation of a contract. Just wondering if you can kind of quantify that for us and explain that a little bit.

Yeah, basically you'd be looking at about a 1% improvement on the margins. So we had margins of 28.1% and 1% of that can be attributable to that adjustment.

Okay, great. And then just in terms of pricing and the environment, you sort of touched on some of the competitive factors already, but are you feeling pretty good about the ability to pass through future labor cost inflation at this point and sustain margins where they are, or should we think of these as maybe two steps forward, one step back as we move forward?

No, basically we think we're going to be able to pass through – increased costs or customers understand that there is some inflation. So we've been able to pass those through. But as I mentioned, the market is still – we're still not – Anywhere close to where we were, we're still at 40% utilization, and the industry as a whole is still... So there's still some capacity out there, and so therefore it's not like prices are going to be going up greatly, but they have been moving up to absorb cost inflation significantly. as we progress.

Okay, great. And then as we look out to 2020, I know it's still a little bit early in terms of the budgeting cycle, but I'm wondering on some of these larger senior contracts that you have, if there's any of them that are set to expire or need to be renegotiated next year or any kind of risk of losing any of these contracts that you've been winning over the past 12 months?

Yeah, most of the contracts are 12 months in nature. So, I mean, they all come back for renewal. So that's what makes it difficult for us. At this time of the year is always the part where we have the most uncertainty in terms of looking forward. And that's why we say we're still waiting for plans because for the most part, the contracts where we're on, We're having discussions about, you know, we're going to be on there next year. It's just the level of activity that each of those contracts is going to bring. Are they going to add rigs? We don't know. Or are they going to just be flat? That's the part that makes it a little bit difficult to predict for us. At this point, we're just waiting for what the budget is going to be. And typically, the way the process works is the budgets get approved at the board level of the senior or intermediate mining companies, and then it trickles down to projects. And then from the project, then it trickles down into how many meters of drilling. So that whole process takes time. takes a bit of time and we typically only find out by mid-January where that's going to take us for 2020.

Okay, so you wouldn't say necessarily that this year there's any more excitement or increased activity that you're expecting going into January, February? It's no different in terms of the early conversations?

No, it's Again, it's hard to tell. Although the price of gold has maintained and gold companies have generated good cash flows, we're not getting a lot of visibility into what they're thinking about exploration. We could be happily surprised once we get to January, but at this point, we're not... We're having lots of discussion in the field, but what's happening, again, the geos in the field are going to be, they need to get their budgets approved, and that basically starts from the top, and that's what basically we're waiting to see what's going to come through, and then, again, by the time it trickles down to the field, we're having discussions, ongoing discussions, and we'll see where that takes us.

Okay, and one last one. The amount of the SG&A that you have now and the headcount you have in terms of drillers, could you operate at a 15 or 20% higher level with the existing platform or would you need to make some additions and then bump up your spending in order to support higher activity levels?

Yeah, on the GNA, we've got an infrastructure that we can grow on without having to add really a whole lot. Maybe sometimes you end up with when you need more people on time and billing because all of a sudden you cross over a threshold. I don't know, if you go over 20 rigs, then you need one more person to process or but really not that much on the admin side. On the driller side, it's a direct correlation. It's variable costs. It's a direct correlation to the number of rigs we have turning. Our contract costs are directly correlated to our revenue, and those are in our margins.

Okay, great. Thanks very much, guys. Okay, thank you.

Thank you. The next question is from Barry Allen from Laurentian Bank Securities. Please go ahead. Your line is now open.

Yes, good morning, gentlemen. Just a further clarification, I guess, on your top-line growth. It was a good improvement year over year. But you did point out that South America and Central America was lagging well behind, certainly our expectations and I think probably yours. Do you see, and you did allude to the fact that it's somewhat politically uncertainty in a number of jurisdictions, but are you seeing any swing there at all as far as it coming back to a better level?

Well, just like everywhere else, right now it's too early to call for 2020. This quarter was impacted. I mean, like you saw the things that happened in Chile where we had a few jobs that were shut down directly because of that. And then there's a few other things that happened in the region that offset some good performance in Chile. in other branches. So it is, but for 2020, it is too early to tell at this point what we're going to see.

Okay. All right. Well, then maybe you could also, I apologize, Denny, if you've already given this guidance, but the kind of run rate you're expecting on Norex as far as carnivution to the top line, you know, and You've given us the kind of number of rigs, but what kind of revenue contribution are you kind of anticipating there?

Well, Norex had a run rate of $20 million over the last couple of years on average. So, I mean, we're starting from that base. We certainly... are looking to grow that just like the rest of our operation. It gives us a good base to do that in that region, especially if activity picks up in that region.

Sure. You mentioned that the cultures are quite compatible with yours. Does that also translate into a similar kind of gross margin?

Yeah. I mean, we compete on the same –

on the same projects and cost structures are are very similar yes yep okay then just on that gross margin if I heard correctly and and correct me if I'm wrong you know the improvement the gross margin probably half of that was pricing operational improvements is that about right to half the 1.6 gains but half of that was attributable just to better operations and or pricing

Yeah, you could say that.

Yep, okay, fair enough. And then taxes. Took a little bit of a tax hit this quarter. Is that going to continue going forward?

Well, our tax rate was 29%, which is very much in line with... Frankly, I don't understand your question, because 29% is a rate in the U.S. The rates are... are higher than that, and there's a lot of jurisdictions that are higher than 30%, so we have an effective tax rate of 29% this quarter.

It was the cash component, Denis, that I was referring to. It seemed like it was a very high payable tax rate.

Yeah, so we, you know, in 15 different countries, we pay taxes in local currencies, so it'll depend on which jurisdiction you're we're more taxable in, and then we reflect those timing differences based on those countries in our deferred. So our effective rate at 29% was very reasonable. And if you look at the same quarter last year, we actually improved this year on our cash taxes.

Okay. All right. Well, I appreciate that. That was a good quarter, gentlemen. Thank you.

Thank you. Once again, please press Per 1 if you have a question or comment. We have a question from Ahmad Sass from Beacon. Please go ahead. Your line is now open.

Hey guys, congrats on a good quarter. Maybe a couple of things you might have touched upon a little bit earlier. First, in terms of your investment cycle, both in terms of training and in terms of CapEx, I'm looking here, looks like we're almost done with maybe streamlining the rig fleet, given that you stayed flat on the rig fleet. And in terms of training costs, I know over the last two years you've been doing a lot of pre-spending would you say the bulk of pre-spending is done and we're steady going forward in terms of training and spending on the revenue growth?

Well, first of all, on the capex or the fleet, I wouldn't say the – see, when you consider that rigs are 15 years and we have a fleet of 600 rigs, That means that on average, there would be 40 rigs that would fall off every year. So we're on a trend that is less than that because we've been spending, we've been rebuilding rigs and really improving that fleet. But I wouldn't say that we're done retiring rigs. There will always be rigs that will come at the end of their life. Now we're in our third quarter. This is a time where we bring rigs in the shop. This is a time where we re-inspect rigs and some rigs, they just don't make the cut in terms of quality and you want to avoid breakdowns because that's that can be very costly on margins. It pays for itself in terms of having a new rig versus a rig that breaks down all the time. So there will continue to be rigs, and it's just the natural life of the rig fleet. In terms of training costs, or, well, first of all, the cost of... Getting prepared, you're right on the rig repairs. We've done, if you remember, a couple of years ago, we ramped up. Our margins was impacted somewhat for probably six quarters where we went on and we signaled it to the market ahead of time because we ramped up our repairs and put rigs on the shelf. rebuilds we by the way we don't capitalize our rake repairs so those are expense to our our margin so we we did uh we did do or doubled up if i might say on repairs to get rigs ready so the bulk of that is behind us now the repairs that are done are like the ongoing or you you you send a rig in the field you replace one on the shelf so On the training, though, training costs are going to continue as we add more people. It's just if we're going to be adding more people, we're bringing new people in the system, so we need to train, and so we're going to be doing that. But probably we probably spent a bit more a couple of years ago again than on a – in relative terms than what we are now. But we're still going to have training costs going forward.

Great. And maybe a little bit more on that. I mean, you guys are posting some of your strongest margins since, I mean, the peak of the last cycle. And given what you just told us in terms of cost structure, so if things turn a little bit on pricing, we should see significantly more torque in terms of your profitability. Are we right in thinking about that?

Well, from an EBITDA, the fact we're keeping our admin costs in check, then yes, the EBITDA, there's a lot of torque on the EBITDA from that perspective. On margins, there's going to be, as we ramp up, there's going to be headwinds on costs, so we just And that's what we said in our press release. We wanted to caution that, yes, if there's a ramp-up, usually the pricing environment improves, but also there is also cost inflation that comes with that.

Perfect. That's great. And one last one for me. You mentioned the talks on the ground are looking positive. Would you be able to give us a little bit more detail about that? I'm not sure if you have more color in terms of maybe directionally speaking, how much of these conversations are looking better than the years before in terms of the geos and the guys on the ground being really positive or maybe emphasizing the need for more exploration, or is it similar to each year conversation and really kind of come down to just the budget setting by the board?

Yeah, no, to be frank, it's the same as previous years. And in fact, there are some years where those conversations were positive, but budgets didn't come through. And there's been years where, you know, those conversations fanned out because the money was there. So although it's positive, it's really not necessarily – it just – indicative that if the budgets are there, we should be getting a fair share, but that's all we know. It's really tough to predict at this point what next year is going to bring. Even an outfit like S&P Global, which are experts in the field, have a hard time predicting year over year because it's so volatile. It can change even with price of commodities over the next month. So, yeah, we're sitting wait and we're just waiting and we'll see by mid-January, we're probably mid to end January, we'll have a better view on what the year is going to look like.

Perfect. Perfect. Thanks a lot, Denis, for answering the questions, and congrats again on a solid quarter. Thank you.

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

Well, thank you, and this is a time of the year where we like to wish everybody Happy holidays to our employees listening in. Please rest up for what could be hopefully a busy 2020. And to our investors, I want to thank you again for the confidence you put in the company and wish everybody happy holidays. Thank you.

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