Major Drilling Group International Inc.

Good morning, ladies and gentlemen, and welcome to the fourth quarter 2021 results conference call. I would now like to turn the meeting over to Ms. Chantal Melançon. Please go ahead, Ms. Melançon.

Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the fourth quarter of fiscal 2021. On the call, we will have Denis Larocque, President and CEO, and Ian Roth, our Chief Financial Officer. Our results were released yesterday evening and can be found on our website at www.majordrilling.com. We also invite you to visit our website for further information. Before we get started, we'd like to caution you that during this conference call, we will be making forward-looking statements about future events or the future financial performance of the company. These statements are forward-looking in nature, and actual events or results may differ materially from those currently anticipated in such statements. I will now turn the presentation over to Denis Laroque. Please go ahead.

Thank you, Chantal. Good morning, everyone, and thank you for joining us today. Due to the continuous improvement in activity level, I'm proud to announce today that for the fourth quarter of 2021, major drilling achieved its best quarterly revenue since 2013. Most of the revenue growth came from North America, which had a very busy ramp-up quarter, where activity has now well surpassed pre-pandemic levels. Gold projects remain the key driver as we saw both senior and junior miners increase their activity. Despite some project timing delays in South America and in Asia caused by the pandemic, revenue for this quarter increased by 44% compared to last year as activity grew steadily during the quarter and beyond. which provides a strong indication that we are well into the early phase of a mining upcycle. The strong growth experienced in North America during the quarter impacted margins, as was seen in previous upcycles, due to the ramp-up costs related to training, mobilization, and setup costs to meet this strong pickup in activity. Other regions were impacted by delays in logistics logistical challenges relating to the pandemic. Looking to the fiscal year, despite pandemic-related headwinds felt across the industry, the company was able to return to profitability and produce its highest revenue over the last eight years. And we are still very early in this mining upcycle, which I'll discuss when talking about the outlook. Subsequent to the quarter end, we announced the acquisition of McKay Drilling PTY with operations primarily in Western Australia, a key geographic region in the industry where major drilling does not have a presence. This highly accretive acquisition is a meaningful part of our growth strategy, providing us with immediate cash flow and a strong foothold in an important growth market with high barriers to entry. In addition to a fleet of state-of-the-art rigs, we welcome aboard a highly experienced team with local knowledge, longstanding regional relationships, and existing contracts with leading blue chip mining companies. Importantly, McKay and Major Drilling share similar cultural values, operational practices, and a dedicated approach sustainable resource development consistent with our global ESG framework. With that, Ian will walk us through the quarter's financials. Then I'd like to discuss our market outlook further before opening up the call for questions. Ian?

Thanks, Nate.

Total revenue for the quarter was $128.1 million, up 44% from revenue of $88.8 million recorded in the same quarter last year. A strong demand for drilling services resulted in our best quarterly revenue since 2013. The unfavorable foreign exchange translation impact on revenue for the quarter, when comparing to the effect of rates for the same period last year, was approximately $8 million as the COVID-19 pandemic resulted in significant volatility in foreign exchange markets in the last quarter of the previous year. The impact on net earnings is minimal as expenditures in foreign jurisdictions tend to be in the same currency as revenues. The revenue growth was generated despite the continued challenges of COVID-19 in certain jurisdictions. However, the majority of these impacted countries are beginning to ramp up as restrictions ease. The overall gross margin percentage, excluding depreciation for the quarter, was 18.4%, compared to 21.5% for the same period last year. The quick start-up we saw in January continued through February and March as the growth came at a rapid pace, resulting in enhanced margin pressure due to increased training, Mobilization and consumable spending. We also encountered a number of COVID-19 related shutdowns and delays in the quarter as the third wave hit hard in certain regions. Demobilization and standby labor costs not covered by customers were incurred, which also had a negative impact on margins. With the startup costs behind us and COVID-19 restrictions loosening, we feel margins should improve moving forward as the cycle progresses. G&A costs were up $1.4 million at $12.5 million when compared to the same quarter last year, The increase is mainly due to the fact that in the prior year quarter, GNA was reduced by wage subsidies of $600,000 from the Canadian government in relation to substantial impact COVID-19 had on our operations. The income tax provision for the quarter was $289,000 compared to an expense of $10.1 million for the prior year period. The significant decrease was caused by a $10 million deregulation of deferred tax assets in relation to the unknown impact of COVID-19 in the prior year. Net earnings were $2.3 million, or $0.03 per share, for the quarter, compared to a net loss of $74.3 million, or $0.92 per share, in the prior year quarter. Prior year figures were impacted by goodwill impairment, restructuring charges, and deferred tax rate downs, totaling $71.2 million. Despite substantial ramp-up costs and COVID-19-related impacts, the company generated EBITDA of $12 million, compared to $7.3 million in the prior year quarter. We continued to maintain a strong balance sheet in the quarter, which enabled us to respond quickly to growth opportunities presented to us. We ended the quarter with a net cash position of $6.9 million, down $7.3 million from the previous quarter. As highlighted in the previous quarter, CAPEX spending increased to $10.7 million, which was caused by delivery dates of drills ordered in Q3 that only arrived in Q4, as well as a necessary increase in support equipment to meet growing demand. During the quarter, the company added seven drills while retiring nine older, inefficient rigs, ending the quarter with a total rig count of 588. With the increase in activity levels and inquiries from around the globe, we expect our CapEx budget in fiscal 2022 to be approximately $50 million. As Dean mentioned, subsequent to quarter end, the company completed the closing of the acquisition of all the outstanding shares in McKay Drilling Pty Ltd., a specialized drilling company located in Western Australia. The deal structure included a cash portion on closing of $39.7 million Australian dollars, or approximately $37.1 million Canadian, subject to working capital adjustments. The cash portion was funded using the company's cash balance and debt facilities, as well as the issuance of 1.3 million common shares of major journals. In addition, an earn out of up to $25 million Australian dollars will be payable in cash over the next three years based on the achievements of certain milestones. In the 12-month period ending March 31, 2021, McKay generated revenue of approximately $60 million and EBITDA of approximately $17 million Australian dollars. In conjunction with the closing, effective June 7, 2021, the company successfully negotiated an increase to its main credit facility of $25 million to an aggregate of $105 million, of which $50 million is currently used. The new breakdown of our fleet and utilization is as follows. 292 specialized drills at 45% utilization, 120 conventional drills at 39% utilization, 176 underground drills at 59% utilization, for a total of 588 drills at 48% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Rather, it is work that requires that we meet the rigorous standards of our customers, in terms of technical capabilities, operational and safety standards, and other related factors. Over time, we expect these standards to become increasingly important to our customers. In the fourth quarter, revenue from specialized work accounted for 60% of our total revenue, an increase of 5% from the prior quarter. We expect this trend to continue as long as elevated commodity prices support it. Our conventional drilling made up 11% of our revenue, which is mainly driven by the increased work from junior mining companies. And finally, revenue from our underground drilling operations was at 29%, as we continue to grow our diversified services. As we continue to see junior capital raising deployed in the field, our percentage of junior revenue has maintained 19% of total revenue, contributing to the overall growth of our business. Senior and intermediates remained at 81%, as a number of our customers have increased budgets for calendar 2021. In terms of commodities, gold projects represented 62% of our revenue, while copper was at 18% this quarter. Continuing last quarter's trend, we saw gold dominate our revenue mix while copper continued to lag from historic norms. With copper prices continuing to hold at multi-year highs and government infrastructure spending on the green economy in the works, we expect to see an increase in demand for copper-related drill programs in certain regions. With that overview on our financial results, I'll now turn the call back to Denis to discuss the outlook. Thanks, Ian.

As I mentioned before, we're still very early in this mining recovery. The main factor that has facilitated growth over the last few months and increased our confidence in the future is that following six years of lack of exploration, gold replacement has been identified as a significant challenge by several senior gold companies. with many having already made significant commitments to increase exploration activity and further develop existing projects. Also, gold prices have now risen to a level where junior mining companies have seen increased success in obtaining funding for greenfield exploration. Although we have not seen much of an increase in activity from base metal players, The prices of copper and iron ore have recently hit historical highs, which should also translate into more exploration activity in the near future as mining companies seek to replenish their depleting reserves. At the same time, we have seen governments across the world unleashing significant stimulus programs targeting renewable energy and electric vehicles, which will require a huge amount of copper as well as battery metals. Looking ahead to fiscal 2022, we continue to see an increase in inquiries from all categories of customers, and if their budgets and plans progress as advertised, we expect to see utilization rates continue to improve as crews become available. Availability of skilled labor in busy markets continues to present an industry challenge. In North America, major drilling has increased efforts across our training centers with goals to improve our retention rate for new hires and to qualify candidates for our driller training programs. As competition to attract and retain the most experienced drillers heats up, we have also increased wages in certain areas to retain and attract the most experienced drillers, which are key to high-quality customer service. Although the shortage of experienced drill crews will put temporary pressure on labor costs and productivity, especially in our most active markets, we expect the wider industry shortages and higher utilization rates to continue to drive a more positive pricing environment and expedite margin recovery as we progress through this cycle. Further, as pandemic restrictions ease in South America, we expect to see an increase in activity as drilling programs resume in places like Chile and Argentina. So we believe that we are in the early stages of a strong upcycle in the drilling business, primarily due to the strong gold price environment and the growing need to mine for copper. Major drilling is ideally positioned to participate in such an upcycle. For the last two years, we've been laser focused on maintaining the condition and efficiency of our fleet and our strong financial position gives us the unique ability to respond to meet our customers' demands for rigs, rod handling, mobile equipment, and technology. We believe the investments we have made ahead of the upcycle, including the McKay acquisition, will ensure we meet our customers' highest standards, which is key to our ability to remain the leader in specialized drilling and retain our contractor of choice status for major and intermediate producers. Our approach also ensures we attract and retain the best people at a time when the industry is heading towards a labor crunch. Finally, major drilling's more than 3,000 employees continue to be integral to our strength as a company, and I would like to express our ongoing appreciation to all. We also want to thank our loyal customers for their trust. As well, we wish to thank our shareholders for your continued support. Your company continues to be a unique, diversified market proxy for the mineral sector around the globe with a high-quality fleet and operations ideally positioned to capture the industry upcycle as we look forward to a brighter future. With that, we can open the call to questions. Operator?

Thank you. Please press star 1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Gordon Lawson from Perhading Capital. Please go ahead.

Hello. Thank you for taking my questions. So can you elaborate on the milestone achievements related to the McKay acquisition and your expectations of making these additional payments?

Sorry, your second question? I didn't get your second question.

Your expectations of making the additional payments. I believe it's $25 million.

Yeah. Yeah. Well, yeah, the McKay acquisition, for us, we're very happy. It's in a very busy market and a market where we were not. It's probably around the world with Canada, the top two markets in terms of exploration at the moment. So for us, it was a market we were looking at. for a while. And McKay is one of the top industry players in that region. And so for us, it made a lot of sense. In terms of expectation for the payment, it is an earn out basically over the next three years based on certain targets, achieving certain targets. and it will be paid over the next three years. There's amounts slated for over the next three years to be paid, again, depending on achieving certain targets.

Okay, but you can't provide a little more color on that?

No, in terms of disclosing the target, that's... No, we're not disclosing that information.

Okay. But the majority of the contracts with McKay, you mentioned different commodities. So are these iron ore related? And with the commodity prices where they are, are you planning on continuing to diversify away from gold?

Yeah, I mean, the Western Australian market, there's a lot of iron ore over there. So just a little more than half of the revenue comes from iron ore, and then the bulk of the rest comes from gold. So for us, it gives us, to your point, it gives us a little bit of diversification from gold with the iron ore presence over there. When you say that we'd be looking to diversify from gold, we always say we drill rock. The demand comes from which commodity is more active, and we expect that copper will be, over the years to come, that copper is going to play a bigger role with the the shortage, the big deficit that's coming on copper and the fact that there hasn't been much exploration carried out by copper companies over the last six, seven years. So we expect copper and other base metals as well to factor in into that, which will decrease our exposure to gold.

Okay, great. That's it for me. Thank you very much.

Thank you. Thank you. Our next question is from Daryl Young from TD Securities. Please go ahead.

Good morning, guys. My first question is around the margins in the quarter. And I guess if there's any detail you can give us on the magnitude of the cost drag by bucket. So just I guess what I'm trying to get to is, you know, what would a normalized run rate EBITDA margin look like? currently if some of these rig mobilization and wrap-up costs were stripped out?

Yeah. Well, I mean, when you look at the margins that we had in our second quarter, that's probably the normal where where we were. So, you know, the delta between those two would be the shortfall, if you might say. And that shortfall was really impacted. For example, in Canada, we grew just from the second quarter, we grew 33% our revenues. That's a big jump, and that was done through the quarter. We saw a progression, you know, February to March to April and beyond. So basically what happens in the field is when you mobilize those rates, you've got mobilization costs that are all expense up front. We don't defer costs. Although, you know, the pricing of the job is we're going to make it, we're going to make that money as a job, you know, going forward. But those upfront costs of consumables that are sent to the field, mobilization, training people, induction, all that, there's heavy. And then so when you have those big ramp-ups, all of a sudden, like I said, in Canada, you have like a 33%. That's a lot of people that are going through the system. And that's, again, a lot of upfront costs. So that was a big impact. And as well, in South America and in Asia, we had still COVID-19 impacts in terms of job shutdowns or delays. And our approach with COVID has been, and even if we roll back the clock a year ago, we mentioned that, or even back in March last year, we mentioned that our key was retention. So we still pay our people, although rigs might be idle. So that's another layer of cost sometimes that hits with COVID when you end up because, again, retention is key, and it's short-term pain for long-term gain, because if we let those people go, they'll be going somewhere else, and then when things basically recover, we'll be scrambling to find people. So those are all impacts that all hit this quarter. Yeah. So I hope that answers your question.

Yep. No, that's good. That is a good context. Thanks. I get that sort of parlaying into the second part of the question is when I think about South America getting up and running and COVID being the challenge, it sounds like there, I guess, how big is the revenue opportunity in the current pipeline? I know you called out Chile and Argentina. And are you going to see a similar cost drag as you ramp up to achieve that pipeline? in South America?

Yeah. Well, South America is a much smaller portion than our North American business. So the impact of the ramp up there would be smaller. Plus, we already have people in the system to be able to... So we're not at the same point as we are in Canada in terms of labor shortages, although it's still... a little challenge, but it's not the same at the same level. So I wouldn't expect to have as much of an impact as we had with that ramp up in South America. And in terms of the ramp up on volume, it is gradual. It is improving week by week. But the situation, I mean, if you go read, things are still evolving on COVID restrictions. We're just lifted in Chile. Heavy restrictions were lifted in May. And projects are starting to get organized and things are starting to get out there. So it's going to be a gradual pickup. Plus, Chile is heavily weighted on copper. So we're waiting for the copper supply. pick up and when copper comes, I think Chile will be a big will basically will be positively impacted from that.

Okay, that's great. Thanks very much. I'll get back in the queue.

Thank you. Our following question is from Anthony Prost from Stiefel GMP. Please go ahead.

Hey, good morning. Just one question for me today, sort of a follow-on to Daryl's question about normalized run rate EBITDA. Is there any sort of color you could provide on the expected pace of revenue increases and how it lines up with costs?

Yeah, well, we don't give guidance in terms of growth. But as I mentioned, what we've seen through this quarter is gradual growth month by month, and that is continuous. So if I can give you some indication, the growth that we've seen over the last month by month is continuing as we move through this first quarter. And then in terms of cost, The bulk of this quarter was exceptional in terms of the level of upfront costs because basically we went from our third quarter and we ramped up a lot of rigs all at once in the field, which basically have all these costs. Now it's more incremental as we progress going forward, so you shouldn't have the same impact on margins.

margin-wise, Q4 might have just been an exception then. Yes. Okay, great. Thank you so much. Thank you.

Thank you. Our following question is from Ahmad Shah from Beacon Securities. Please go ahead.

Good morning, guys. Maybe a couple of quick ones for me. Just confirming, the currency impact on the top line was around negative $8 million. I think Ian mentioned that at the beginning of the call.

Correct.

Okay, that's great. And then just maybe a follow-up on the ramp-up question. I'm not sure if you're able to give us more color, but maybe is that across all regions you continue to see ramp-up month over month, or are you fully ramped up in North America while the other regions are catching up?

Yeah, it's still a lot driven by North America, but other regions are improving as well. Okay. It is in all regions, but North America is still rising up. And don't forget, we're adding McKay this quarter as well.

For sure. That's great. Thanks, Vinny. And last one for me. You mentioned labor might have put some lid on productivity as well, labor shortages. Yes. If that wasn't an issue, how should we think about utilization and your productivity levels? And if it's possible to give us, I guess it's only impacting North America and not the other regions, if you can confirm that as well.

Yeah, the biggest impact on labor shortage is in North America, but going forward, our pricing changes. As we add rigs, our prices are reflective of that because our goal is to improve margins. It needs to cover productivity and more going forward. Our customers recognize that. They recognize that labor is an issue than, uh, wages. And so we're having lots of conversations with customers, uh, when it comes to that. And, uh, right now it's more about getting a drill than, um, than, uh, basically discussions on price. Although, you know, there's, there's always, the price is always, uh, is always part of the discussion, but a lot less than it used to be because right now it's more about, uh, you know, how many crews or rigs can you supply and when. So it's more about that.

And I guess what I was trying to get at is that this labor shortage hasn't really hit utilization. Like you wouldn't have to pause deployment just because you couldn't find skilled labor and you had to postpone that a little bit. This hasn't become an issue, right? It's just hitting a matter of cost and having to pay guys a little bit of opportunity to get going.

Overall, no, but I would say that certain specific regions, for example, certain areas in Canada, it is an issue. Sometimes, in terms of availability, we might not be able to, for a specific region, in terms of if labor is it's not that we can't supply rig right away. It's just we can't supply it right away. It's more there's a training aspect and a timing aspect to it in terms of bringing it on. But that's only very specific regions. It's not necessarily across the board, across the company. It's, again, localized. But it is not downplaying the... It is... still an industry issue that we're all facing.

That's great, Carlos. Thanks to me. I'll jump back in the queue. Thank you.

Thank you. Once again, please press star 1 at this time for any questions or comments. The following question is from James Vale from Arcadia Advisors. Please go ahead.

Thank you. Good morning, guys. Diddy, you said that South America was small. Is there any possible negative impact from what's going on in Peru?

Well, we're not in Peru. Okay. So for us, there's no impact on that. Yeah.

Okay. And then just a quick follow-up. You had a positive impact from... What appears to be a U.S. tax loss carry forward in the quarter, was that one time, or is that going to continue for a bit?

No, that was a one time. We believe operations in the U.S. are improving.

Okay, thank you.

Thank you. Our following question is from Ahmad Shah from Beacon Securities. Please go ahead.

Sorry, Denis, one more. On the CapEx plans, would you be able to give us maybe some color on the number of regions you're planning to add and any specific regions? It's your biggest number in about eight or seven years.

Yeah, we're basically projecting 50 million. Part of that is just equipping rigs with trucks and artillery equipment and everything as we put more rigs in the field. But as well, for example, in North America, demand is increasing on the underground part, so we're looking at adding more underground rigs to our fleet. And as well, we're running out of deep hole rigs, in Canada and we're looking at adding some of those and for the most part all those rigs that are slated are going to be going to work right away. We've got rigs on order right now that will be coming basically throughout the year and most of those rigs are already earmarked to go to work on specific contracts.

That's it. Is it possible to give us maybe an indication where would you expect to end the fiscal year at in terms of rate count?

No, we don't go into that specific. It's going to be dependent on really on the market, how the market evolves.

Great. Thanks.

Thank you.

Thank you. So we have no further questions registered at this time. I would now like to turn the meeting back over to Mr. LaRock.

Well, thank you. And again, I want to thank our employees. This is our fiscal year. We just ended. And it's been quite a roller coaster when you consider that we started the year in the pandemic and you roll back the clock at May 1st, which was the start of our fiscal year. And we were wondering where the world would be at this point in time. And we would have never guessed that we'd be where we're at. And we went from managing probably one of our biggest downturn from the pandemic to then turning right away to a nocturn. And our management team and our employees have worked really hard during the year to basically handle all of that and handle that quick turnaround. And I want to thank all of you out there that have basically contributed to this. And things are continuing to improve, so we're very happy in terms of where we're at and where things are going. So thank you, everybody, and we'll talk next quarter.

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