Major Drilling Group International Inc.

Good morning, ladies and gentlemen. Welcome to the first quarter 2021 results conference call. I would now like to turn the meeting over to Denis Laroque, President and CEO. Please go ahead.

Thank you, and good morning, everyone, and welcome to our first quarter conference call for fiscal 2021. As well on the call is Ian Ross, our CFO. You should have seen our results, which came out last night. If not, you can go to our website at majordwelling.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. These statements are forward-looking in nature, and actual events or results may differ materially. First of all, I want to start by acknowledging our employees and management for their effort to ensure we continue to operate safely and efficiently during these uncertain times. I also want to thank our customers with whom we have worked closely to find ways to operate and get back to work with the health and well-being of our employees and their families as our top priority. I must say that I'm pleased that the company was able to generate 14 million in EBITDA given the quarter started extremely slow as many projects remained shut down. Some of our operations were able to grow their revenue as compared to last year, while other larger operations, including Canada, US, Mexico, and Chile, were affected more than others by COVID-19. As the quarter progressed, we saw more and more projects resuming, but many of them would have reduced number of rates due to restrictions on travel and mining activities. As we look at busier times coming up, we continue to be the leader in specialized drilling, but we also bolstered our underground services by adding 12 underground rates this quarter, with half of those going to work immediately. Through this, we continue to maintain the strongest balance sheet in the industry. Ian will take us through our quarterly results, and I'll come back to discuss the outlook. Thanks, Denis.

Total revenue for the quarter was $89.4 million, down 24% from revenue of $117.5 million recorded in the same quarter last year. While COVID-19 impacts were felt heavily in May and the first part of June, activity levels started to ramp up in the latter half of the quarter. The foreign exchange translation impact on revenue, when comparing to the effective rates for the same period last year, is negligible, with a minimal impact on net earnings. The overall gross margin percentage, excluding depreciation for the quarter, was 27.8%, compared to 26.1% for the same period last year. Margins were positively impacted by approximately 1% due to government assistance programs available to the company in the hardest-hit regions. Also, the moderate price improvements we saw coming into calendar 2020 have aided margins and should continue into Q2. G&A costs were down $1 million and $11.2 million when compared to the same quarter last year. The decrease is mainly related to reduced travel and various government assistance programs for our administrative employees. These temporary reductions will subside once activity levels return in those impacted regions and government restrictions are eased. The income tax provision for the quarter was an expense of $1.2 million compared to an expense of $2 million for the prior year period. The income tax provision was impacted by non-deductible expenses and losses in certain jurisdictions not being tax effective. Net earnings were $2.1 million or $0.03 per share for the quarter compared to net earnings of $6 million or $0.08 per share for the prior year quarter. EBITDA was $14 million compared to $18 million in the prior year quarter. Although activity levels remain impacted in certain jurisdictions, our ongoing operations in other areas performed very well, and cost control initiatives implemented in the prior quarter allowed for a positive EBITDA result. In terms of our financial strength, despite the continued impacts of COVID-19 on the quarter, we maintain a very strong balance sheet. We ended the quarter with net debt, excluding lease liabilities of $2 million. The decrease is tied to an increase in net working capital, mainly related to an increase in receivables as activity levels picked up in the second half of the quarter. Also during the quarter, we repaid $20 million of the $35 million precautionary draw from our credit facilities made in the previous quarter. We will continue to monitor the situation and look to repay the remaining $15 million precautionary draw as the environment permits. As mentioned above, the increase in our accounts receivable was due to increased activity levels in the second half of the quarter. We have not had any collection issues related to COVID-19, and we do not expect any issues moving forward as our current customer mix is predominantly seniors and well-established intermediates. The company also spent $7.5 million on capital expenditures, adding a total of 13 drills, with 12 of them being underground drills in line with our diversification strategy. We took advantage of an opportunity to buy 10 rigs at a discount price, and we were able to put a number of them to work immediately. We dispose of seven rigs in line with our strategy of continuously improving the quality of our fleet. The total rig count is 613. As activity levels pick up, our CAPEX will mainly be focused on support equipment in the coming quarters. The new breakdown of our fleet and utilization is as follows. 308 specialized drills at 30% utilization, 129 conventional drills at 30% utilization, and 176 underground drills at 48% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Therefore, we should also give you the breakdown of our revenue by type of work for the quarter. 57% specialized, 10% conventional, and 33% underground. Also, seniors and intermediates represented 89% of our revenue in Q1, while juniors were 11% of our revenue. Our established relationship with seniors and intermediates continue to drive our revenue, However, the recent increase in junior finance could potentially change this mix going forward. In terms of commodities, gold projects represented 63% 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 Denis to discuss the outlook.

Thanks, Ian. As we look forward, the price of gold, which accounted for 63% of our activity this quarter, has increased to new historic highs. So in light of these existing conditions, we're seeing senior and intermediate gold miners generating strong free cash flows at a time where they face declining reserves as a result of the low exploration spending they had over the last few years. As well, over the last two, three months, we've seen a significant increase in mining financing, particularly for junior mining companies. It's important to note, though, that there is always a lag of four to six months between the closing of financings and the start of drilling programs. So we're just starting discussions with many of them at the moment. Regarding copper, which typically accounts for 20 to 25% of our drilling activity, Many industry experts expect that copper will face a deficit position in the next few years due to continued production and high grading of mines, combined with the lack of exploration work conducted to replace reserves, and that increases the need for more exploration. New infrastructure plans announced in China, India, Europe, and soon to be announced in the U.S., will require more copper and other metals, which should accelerate the depletion of those reserves. With these signs pointing towards an increase in exploration spending, we are preparing for an increase in activity later in the fall and well into 2021 calendar year and beyond. However, in the short term, operations will continue to be somewhat affected by COVID-19 restrictions which will slow down the ramp up of drilling programs. Also with the increased demand we are facing in North America, we are already starting to face a shortage of skilled labor and we expect labor costs to increase. This will in turn have to be reflected in drilling prices, which are expected to increase as we go into 2021. In conclusion, We continue to be very well positioned at this point in time as the leader in specialized drilling. Our strong financial position in the industry gives us the ability to respond to meet our customers' demand in terms of ribs, 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 where the industry is heading towards a labor crunch. That concludes our formal remarks, and we'll now open the call to questions.

Thank you. Once again, 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. The first question is from Eric Svirgold of Firestorm Capital. Please go ahead. Your line is now open.

Good morning and good work during a very difficult period. Could you talk a little bit to major drilling's efforts in some of the battery-oriented metals such as they may be outside of the copper market, whether it be cobalt or other metals outside of copper that are used in batteries for electronic vehicles and so on. Thank you.

Yeah. Well, I mean, we've done a lot of work for lithium over the last few years, and lately we've had a few companies call about lithium programs. So we're seeing work coming from there. We do a little bit of cobalt, but I mean, that is very, there's not necessarily a lot of drilling globally conducted for cobalt. And then you need to include nickel in there, and there's been an increase in inquiries for nickel programs as well. So all of that together, and I always come back to people focus on batteries and lithium and everything, but I always come back to an electric vehicle, whether it's buses, which countries are looking to increase the load, or you're talking about cars. There's three and a half more times copper in there than there is in a regular vehicle. And there's a lot that the whole electrification of the systems, there's going to be a lot more copper. I mean, again, the battery is... is a big aspect, but copper in terms of bringing electricity and also conducting electricity throughout the vehicle is the biggest piece of that. So out of that, I think copper, lithium, nickel, those are going to be the drivers from that perspective.

Thank you. That's helpful.

Thank you.

Thank you. The following question is from Daryl Young of TD Securities. Please go ahead.

Morning, gentlemen.

Morning.

I was just wondering if you could maybe give us a bit of an outlook or maybe what the pipeline of discussions looks like in terms of the workload. I guess what I'm trying to vet out is, what would activity levels look like if it weren't for COVID and how big is the market opportunity at this point as we ramp up in the drilling cycle?

Yeah. I mean, there's lots of discussions, as you can imagine, with the amount of financing that has been done over the last three months. There's lots of discussions happening right now. But Some of that will be, it's more of a timing issue than an activity level because some of these programs take longer to plan, not even just get started, just to plan around you need a bigger camp because right now usually you'd have people sharing rooms or even your kitchen area was limited and could get crowded, but you go with what you have. Whereas now you need a much bigger kitchen area and all those things which delays the ramp up. But there's no question that mining companies want to do more. So it's more of a timing than the volume because the discussions are certainly there. both with seniors and with junior companies.

Okay, so would it be fair to say then at this point you've had the conversations where a company says, you know, we're looking to do X number of meters, we just don't know how to get there at this point given these restrictions?

I wouldn't say we don't know how to get there. It's just something that would have been ramping up in August or September will be ramping up in October. That's kind of more what I'm pointing towards. And something that would have ramped up right away to four rigs will be starting with two and then they'll add one and add another one. But, for example, if they, in their mind, they still want to do a 20,000-meter campaign, they're still going to do 20,000 meters once they get going. It's just that it's the ramp-up that you need to... that is basically staggered. And also... Also compared to, I guess there's also the permitting and all the things take a bit longer than before as well because you need to have all these protocols approved and everything. So all these things take a bit longer than the previous upcycle.

Gotcha. Okay. And then it was encouraging to hear that the pricing is improving. It sounds like that may be offset by labor headwinds. Could you maybe just talk to the dynamic there in terms of price improvements for cost expectations inflation?

Yeah. I mean, there's no question that labor costs is going up. We've said before that already there's a lot of people that left the industry. So going forward, experienced labor crews, there's less than there was at the last peak. And so we're starting already with... with a low base now we're doing a lot of training and we're ramping up our training and also we've done with innovation we've been able to reduce training time but still when you talk about experience labour so labour cost is going to go up but pricing is going up as well we're at a point in in in certain regions where we're getting to high utilization. And when, you know, the higher you get, it's basically that the pricing gets adjusted accordingly. Because the next rate you put out, it's gonna be with greener crews, which means you're not necessarily going to get as many meters per shift which then impacts but we still need to generate a good amount of revenue per shift or revenue per rate so therefore pricing is going to be going up now one thing to mention is that North America is getting busy but Some other places are still facing some heavy COVID restrictions, places like Chile, Argentina, Mexico. So it's going to be slower in those regions. In terms of labor costs, you're seeing that in North America for us, but it's not the same necessarily globally.

Okay, those are all the questions for me. Thanks very much, guys.

Thank you.

Thank you. Once again, please press star 1 at this time if you have a question. The following question is from Ryan Hanley of Laurentian Bank. Please go ahead.

Hey, good morning to me and you. Good morning. Hi. Hi. I think you kind of touched on the ramp up in revenue. I'm guessing that, you know, May was a bit challenging, especially in places like Mexico that were shut down and maybe a bit better in June and July and continuing at that kind of pace. But are there any regions that, you know, have been a bit COVID challenged still where you expect that ramp up, you know, might run into some more challenges where countries maybe go a little bit backwards and start putting more restrictions back in?

I'll tell you, that's what makes this difficult to predict. I mean, every company in every industry is facing the same challenges in terms of you need to stay flexible in terms of your approach. But, yes, I mean, you could see that happening. Now, at the same time, mining companies and ourselves have gotten better in terms of all the protocols and, you know, So I think in a lot of cases you might have restrictions, but the restrictions will apply as long as you're able to follow certain rules, you'll be able to operate, and we've been able to put those rules in place. So, yeah, no, it could, but at the moment things are starting to fall into place. I mean, we'll see how it goes, but it's certainly a fluid situation.

Okay, fair enough. And then maybe just going to the comments earlier about adding about 12 underground rigs, was that the rationale behind that? Is it just you happen to find some at a very good price in an area where you're running, I guess, maybe at a high utilization rate that could easily be thrown on a job and you can use the other six elsewhere in the near term? Is that kind of the reasoning there?

Exactly. Basically, that's exactly it. It was a region where we were getting demand, and at the same time, we got an opportunity to get our hands on good quality rates, and that's what we did. those half of those went to work immediately. And we're already sourcing work and having discussions for for a few more of those.

Okay, perfect. And then maybe just one last super exciting modeling question for you. For fiscal 2021 is kind of like that 20 to $30 million in capex range. That's still a reasonable estimate. I'm guessing that's also for largely, you know, support equipment, like you mentioned before.

Yeah, I think it's more, every year over the last three years, I think we've said more like 30, and I think it's more, the thing is, is that every rig that goes out, additional rig, needs pickup trucks and needs compressors and needs stuff, so... So if volume goes up, there's going to be a requirement to equip those rigs with support equipment. So it's going to be heavy on support equipment initially. So, yeah, it would be more towards the $30 million.

Okay, perfect. Thanks very much, guys. That's it for me.

Okay, thank you.

Thank you. The following question is from Sebastian VanBerkum of VanBerkum Associates. Please go ahead.

Good morning, Dennis. I want to understand where we are in this cycle that has just commenced. Could you give us an idea of what is your current utilization rate and on how many shifts per day? And given the environment, what is your best guesstimate in terms of how utilization rate progresses over the next several years And do we have the same kind of peak earnings potential as last cycle? Thank you.

Yeah. Well, I mean, utilization this quarter was low, and our revenue was low. And, again, it was heavily impacted by COVID, but we were at 35% utilization. The one thing I'll remind you, though, is – Peak utilization for us is 75%. The way we count utilization is a rig that earns enough money in a quarter is counted, and if not, then it's not counted. We always have rigs that, for example, are in the Arctic. We leave them there. They only end up working five, six months of the year, so the other six months are They're unutilized, but they still make good money when they work. So for us, it's still good to have rigs there. And also you have rigs that move all the time and rigs that are in the shop. So maximum utilization for us is 75. So you need to kind of use our number on a 75% factor. So going forward, I mean, sure, if the demand – that we're seeing comes to fruition in 2021, the utilization rates are gonna go up. Can we get back to where we were before? I think so. I mean, it's a question of time, but what we're seeing now is a combination of the two, I would say the two peaks that we saw in the last 12 years or 10 years. We had the cycle from 2003 to 2008, which was driven by the lack of reserves coming from a lack of exploration from 1998 to 2003. And then all the mining companies ran out of reserves and they all rushed to replenish and when they do that it's a five year, five, six, seven year cycle which is what happens. Then we hit the financial crisis so there was an interruption of a year and a half and then things picked back up and kept going. What we saw after the financial crisis is another phenomenon that is at play at this point is you had to kickstart the economy, governments went in with infrastructure plans that basically required a lot of copper and gold price because of the uncertainty, gold price went to record highs at that time. And so the combination of those two drove our activity levels to record highs in 2012. This time around, we've got the lack of reserve combined with, well, the COVID impact, which basically brings uncertainty and governments looking to kickstart their economies with infrastructure programs. So it certainly looks like the stars are aligned for our industry to have a few years of very good activity. We still have the U.S. election coming in November, but there is still a lot of those factors are still going to remain in place even after that election.

So really, we're looking for a pretty good cycle again this time around.

Well, it certainly looks like that in terms of when you look at all the factors that are at play.

What is the principal thing that you worry about most as we enter this cycle?

Well, I mean, the COVID, again, like I said, makes things hard to manage because it's almost like a daily... You just never know what's around the corner. So that one makes it a bit harder to manage. But the labour as well. When you talk about can we get to that... to that peak again, labor is going to be a big factor because there's less people in the industry than there was when we were in the last up cycle. And so we're going to have to train and like I said, we're working hard. We've got lots of training classes ongoing. But it's labor is going to be the biggest factor for sure.

One final question, Benny. How about your major competitor? Is he weaker than last time? Do you think you can gain more market share because of his weakness? What do you think?

I don't like to talk about competitors, but I think the way it looks, I think it's... All boats are going to go up. The tide is going up. So there's going to be lots of opportunities from the looks of it. But, I mean, there's no question that we have a very strong position. We're the leader in specialized drilling, and that's when there's a difficult project where we're typically the go-to for mining companies. And our financial situation allows us to be able to, to ramp up rigs in the field and again, attract the best labor.

Yeah. Thank you very much, Denny.

Thank you.

Thank you. The following question is from James Vale of Arcadia Advisors. Please go ahead.

Good morning, gentlemen. Good morning. Danny, what's the status of the rigs that are not being used? Can they be put into service immediately, or is there some type of refurbishment that has to go, assuming some of these rigs have been idle for a while? Is that included in the 30 million potential capital spending? You know what I mean? Is the whole fleet ready to go at a moment's notice, or is there some type of preparation needed to be done to get them ready for service?

Very good question. Basically, the approach we've taken all the way through is we always tell our branches to have at least rigs ready to go to take on a 30% increase in activity. We do have a good fleet that's ready to go. Now, Having said that, it means that not all the rigs are all ready and that basically had we done that, we would have drained a lot of cash upfront. So our approach is as a rig goes in the field, we take one rig and bring in the shop and we refurbish it and put them on shelf. And that's going to be how we're going to operate. So therefore, to your point, Yes, part of the $30 million is going to be some refurbishment for rigs. As we go deeper in the cycle, we're going to have to, again, we will bring rigs. Some of those costs, depending on how much we need to spend, some of those costs flow through the margin, and some of those costs are going to, if it's more significant, where you need a brand-new motor and need to add fuel, significant items, then it'll make it to the CapEx.

Okay. And is there any new technology on the horizon that's going to change the way drilling is done, or is it still pretty much the same way?

It's still pretty much the same way. The technology that we're bringing is going to help on a couple of fronts. First of all, on the training. By having more computer consoles that transmits information to the drillers. It allows us to reduce the training time and basically help new drillers ramp up quicker. But also there's data that is retrieved from our drilling through those computers that we're able to share with our customers and it will help them refine their programs as they go forward and probably make better decisions in terms of just what's next. So I think those two are going to be, but it's still the drilling part of it is still going to be done the same way as it's done before. It's more the information gathering that basically we're getting much better at.

Great. Thank you so much and good luck.

Thank you.

Thank you. The following question is from Ahmad Shut of Beacon Securities. Please go ahead.

Good morning, guys. Congrats on a solid quarter. A couple of questions for me. First, on gross margins, I mean, even if we adjust them for the government assistance that you guys got, they look strong despite the decline of revenue. Maybe any comment on that in light of what you guys mentioned on the slower ramp-ups and the increased training costs. How should we think about gross margins if revenue picks up?

Yeah, well... We entered the year and pricing has improved as we entered the year in January. So what we saw this quarter is some of that pricing coming through because we didn't get to see that in our fourth quarter because we got hit with COVID and there was a lot of costs and that mixed into there. Whereas this quarter, it was probably a pure... quarter in terms of just all the costs. Some of that is pricing. Some of that is cost. Through this, we've realized some efficiencies which has improved our costs. It's going to be a bit of both. Going forward, as I mentioned, Drilling prices are going up in the market, but costs are going up as well. But I think we'll see some gradual margin improvement as the cycle progresses.

That's great. And maybe on the acquisition of the rigs that you guys spoke about, maybe a little bit more color to that. Was it sort of an opportunistic acquisition of Frigg Fleet? Can we take away that some of your smaller or regional players are struggling after COVID and that represented opportunity for you guys? Maybe a little bit more details on that front and the competitive landscape following COVID.

Yeah, it was an opportunistic. Those rigs became available, and I won't elaborate the reasons why they became available, but it was a company that wanted to leave that side of the business, and so we picked up... some good assets on there. And that's typical usually to these cycles when you come off the bottom, there's opportunities like that that come up. And the fact that we have a strong balance sheet allows us to take advantage of those opportunities.

Yeah, that's great. Thanks for taking my questions. I'll jump back in the queue. Thanks, guys.

Okay. Thank you.

Thank you. And there are no further questions registered at this time. I'll turn the meeting back over to Mr. Larocque.

Thank you. And just as a reminder, it's our annual... Our AGM, that basically, just give me a second here. I'm just gathering my notes. Our AGM, that will be held virtually tomorrow at 3 p.m. Eastern, and it can be accessed. If you go to our press release, there's a link where you'll find how to access our AGM. Thank you, and we'll be talking next quarter.

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