Major Drilling Group International Inc.

Good morning, ladies and gentlemen, and welcome to the second quarter 2022 results conference call. I would now like to turn the meeting over to Chantal Melancon. Please go ahead, Ms. Melancon.

Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the second quarter of fiscal 2022. On the call, we will have Denis Larocque, President and CEO, and Ian Ross, 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 Demi Vara. Please go ahead.

Thank you Chantal and good morning everyone and thank you for joining us today. Before we start I would like to acknowledge our Canadian operations for achieving quite a safety milestone this past month as they have now reached 7.5 million hours without a lost time incident which is quite remarkable. I'm very proud of what our teams are achieving globally as we continue to be a leader in safety in our industry, especially at a time when we are bringing a lot of new people to our industry. I must say we're very happy with our second quarter results as activity levels continue to increase in most regions. I'm particularly pleased with the progress that our team have made in developing our labor force, which enabled us to grow in high demand regions while maintaining our dedication to safety, productivity, and quality. The competition for skilled drilling crews continues to be a challenge facing our industry in the most operationally intense market, which is putting pressure on cost and productivity. However, our proactive training and retention efforts have allowed us to support our rapid growth and deliver value to our customers. Our strategy of holding rigs and inventory ready for immediate deployment to customers continues to deliver results. During the quarter, we secured a number of North American contract renewals with incrementally favorable terms, although this was somewhat offset by cost inflation for supplies and labor, which we're seeing across the industry. In South America, the lingering effects of the pandemic continued to cause some operational disruption, though we're seeing a gradual return to normal activity levels. In Australasia, our recently acquired McKay drilling operations continued to perform very well, and contributed to a marked improvement in the region. Finally, we have seen an increase in specialized drilling demand and activity across all of our operations. We attribute this to our increased market share and a resurgence of specialized projects as our customers turn to more challenging targets as the upcycle progresses. So with all that in place, we were able to grow our revenue by 50% and more than double our net earnings at $14.3 million as our operational leverage is starting to bear fruit. With that, Ian will walk us through the quarter financials, and I'd like to discuss the market outlook before opening up the call for questions. Ian?

Thanks, Denis. Revenue for the quarter was $170.7 million, up 50% from revenue of $114.2 million recorded in the same quarter last year, as elevated activity levels in our biggest markets continued building off the momentum we've seen in our industry. The unfavorable foreign exchange translation impact on revenue for the quarter, when comparing to the effective rates for the same period last year, was approximately $5 million, with a minimal impact on net earnings. The tremendous growth was made possible by having RIGS Ready, inventory on the shelf, and robust training programs to respond quickly to the increasing demands of our customers. The overall gross margin percentage, excluding depreciation, was flat for the quarter at 28.3% compared to the same period last year. Margins have steadily improved over the past few quarters as price increases are helping to offset the headwinds we are seeing on our direct costs in this current inflationary environment. G&A costs were up $2.5 million at $14.1 million when compared to the same quarter last year. The increase from the prior year was mainly attributed to the McKay acquisition and annual salary increases. Also, certain cost cutting measures in place for the prior year due to the pandemic have mainly been phased out as we've shifted our focus to meeting the demands of the market. The income tax provision for the quarter was $4.5 million compared to an expense of $2 million for the prior year period. The increase in the income tax expense was driven by an overall increase in profitability. Net earnings were $14.3 million, or $0.17 per share, for the quarter, compared to net earnings of $7 million, or $0.09 per share, for the prior year quarter. EBITDA grew 60% to $30.7 million, compared to $19.3 million in the prior year quarter. The operational leverage inherent in our business model is beginning to deliver excellent results as top-line growth and margin improvement generated substantial EBITDA growth. The balance sheet remains one of our greatest strengths as the quarter generated solid cash inflows as we improved our net debt position by $15 million compared to the previous quarter to end with $30 million in net debt, which includes contingent consideration in relation to the McKay acquisition. The company spent $11.1 million on CapEx, adding seven new rigs as well as ancillary equipment to support our existing fleet that was put in the field over the quarter. We disposed of nine older rigs in the quarter to finish the quarter with 603 drills. The new breakdown of our fleet and utilization is as follows. 304 specialized drills at 54% utilization, 118 conventional drills at 42% utilization, and 181 underground drills at 56% utilization. This gives a total of 603 drills at 52% 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 be increasingly important to our customers. In the second quarter, revenue from specialized work accounted for 68% of our total revenue, up from 64% in Q1. The growth in specialized drilling is driven by improved market share and supports the thesis that mining projects of the future will continue to come from deeper in the ground or more remote areas requiring a certain level of expertise to execute drilling programs. We expect this trend to continue as long as the demand is supported by elevated commodity prices. Conventional drilling made up 9% of our revenue for the quarter, mainly driven by the increased demand for work from junior mining companies. Finally, underground drilling revenue was down slightly compared to last quarter at 23% of total revenue. The underground operations remained constant, however, as a percentage of total revenue had decreased. We continue to see increases in junior activity as there's been a shift in our revenue mix. During the quarter, juniors accounted for 24% of our revenue, which is the highest it's been since the previous subsegment. Seniors and intermediates made up 76%. We continue to see an increase in tenders for junior programs in certain markets, which should have a positive impact on our industry as capacity gets soaked up. In terms of commodities, gold projects represented 55% of our revenue, while copper was at 17% this quarter. Gold continues to dominate our revenue mix, while copper lags slightly from historic norms. The acquisition of McKay has created additional commodity diversity with its exposure to iron ore, which now makes up 13% of our total revenue. With that overview on our financial results, I'll now turn the presentation back to Denis to discuss the outlook.

Thanks, Ian. We're now in our third quarter, which is traditionally the weakest quarter of our fiscal year as mining companies continue and exploration companies shut down for the holiday season. Additionally, we schedule substantial fleet review, overhaul and maintenance work on our equipment during this slower period to get prepared for the upcoming year. Given the history of mining cycles and the projected near-term supply deficit for many mining commodities, I believe we're in the early stages of a significant mining industry upcycle. We are encouraged that some of our senior gold customers are indicating higher levels of drilling activity for calendar 2022, and that junior mining companies continue to raise capital to fund exploration programs. While most base metal companies have yet to finalize their 2022 budgets, Copper prices have remained at historical highs for most of calendar 2021. We expect this to lead to substantial investment in copper and other base metal exploration projects in the near future as we help discover the metals that allow the world to accelerate its efforts towards decarbonization. Looking forward to calendar 2022, Major Drilling is in a unique position to react to this market dynamic. Our financial strength has allowed us to focus investment on safety, equipment, inventory, and innovation in order to meet the high standards of our customers. It's crucial that we continue to aggressively and successfully invest in the recruitment and training of new drillers to ensure Major Drilling remains both the operator and employer of choice in our industries. So to summarize, demand for our services continues to be strong. The shortage of experienced drill crews will continue to put pressure on labor and productivity, although we expect higher utilization rates to continue to drive a more positive environment as the cycle progresses. With that, we can open the call to questions. Operator?

Thank you. If you have a question, please press star 1 on the device's keypad. There will be a brief pause while the participants register. Thank you for your patience. The first question is from Daryl Young from TD Securities. Please go ahead. Your line is open.

Morning, guys, and congrats on a good quarter. Thank you. Thanks. So, first question is around the specialized drilling, and I think you used the words surging demand. It's good to see that again, and that's been a long-term thesis of mine, that the next drilling cycle is going to be more expensive and more pricing power than previous. But maybe you can just give us a little bit of color in terms of what type of specialized drilling, if it's deep hole or what's going on there, and how tight the market actually is for specialized rigs.

Yeah, a lot of it revolves around depot, but also remote jobs or fly-out jobs like in northern Canada and places like that that are harder to access. So if you remember our definition of which is our own definition, really. It's a discipline we have with specialized drilling. It's to focus on projects that are more difficult and that are related to areas more difficult to access. So it's whether it's deep in the ground, remote, or technically challenging. So it's a little bit of all of that, but I would say early on... We're running out of deep hole rigs. There is definitely more demand for those types of services.

From a CapEx perspective, would you expect there to be a ramp up here in the next year or two as there's increasing demand for more of these specialized services?

Well, when we started the fiscal year, we said our guidance was $50 million for CapEx. We're on that run rate right now, and that's pretty much our run rate. And a lot of it is going towards deep hole and underground, as we're also building our underground businesses.

uh and uh and growing in in that area as well so uh so it's a it's a bit of both okay um and then switching to the base metals outlook um a little surprised that we haven't seen a faster uptick in in base metals exploration just given all the the copper projecting shortfalls and um and battery metal demand but um maybe you can just give us a little bit of color conversations you're having with customers, base metal customers, and what plans maybe are being talked about now for next year?

Yeah. See, base metal companies tend to come up with their budget on a yearly basis. And if I take copper, for example, last year, when we got to November, December, when budgets are being put together. Copper had just started to move significantly. It reached $4 when we moved into 2022. So it was still early. At that time, there was COVID uncertainties a year ago. So budgets were kind of muted for 2021. which is kind of what we saw. So that's why we had a bigger uptick in our gold activity than we had in our base metal. Going into this budget season, what we're hearing in talking to some of our base metal companies is that what they're putting in their models is a higher commodity price just because copper has stayed above $4 for all of 2022 pretty much, all of 2021. So therefore, you've got to believe that when you use $4 copper, that there is a lot more appetite to grow reserves and things like that. So we're kind of basing our views that we're going to see an uptick in activity based just on that. because we haven't seen the budgets yet. So it's not based, right now we're still waiting. Early discussions, as always, this time of the year is always tough to predict for us because we do have a lot of conversations. But those are in the field and as companies get prepared. But the budgets have yet to be approved by boards the boards of those base metal companies. So until that gets approved, then we don't, or those people in the field don't have certainty of at what level of activity they're going to be operating. So it's still early, but there is certainly a positive vibe out there on the base metal for 2022.

Okay, great.

I'll get back in the queue.

Thanks, guys. Thank you.

Thank you. Once again, please press star 1 on the device's keypad if you have a question. The next question is from Ryan Henley from Lorentzen Bank Securities. Please go ahead. Your line is open. Hey, good morning, Danenian.

Good morning.

Good morning.

Thanks for taking my questions, and obviously congrats on a great quarter. I think you beat most of my numbers and all the key metrics there. Just wondering, though, we're kind of early in December here, but going through what's usually a weaker fiscal Q3, do you see some of the drill programs, or have you gotten any indications that they might go farther into the month of December and or possibly restart earlier? I'm just trying to get, I guess, a bit of a sense as to, for a seasonally weaker quarter, how it's going to compare to prior years.

Yeah, campaigns are getting pushed because some have started a bit later or you've got juniors that need to get done for this fiscal year. They need to complete their campaign. So things seem to be pushing a little bit later in this going towards Christmas. But the biggest uncertainty for us is always how quick do we start in January. And every year we hear of good intentions, of wanting to start early, but then there's things that get in the way, delays either unforeseen or it could be weather or it could be... And so it's always... it's always January for us that makes or breaks our, our Q2 or Q3, or, um, that, that basically gives us a better idea. So it's always tough to predict at this point, but it's definitely a bit more positive, uh, than previous years going towards Christmas. And it's going to come down to after Christmas, how quick do, do our teams get out? Um, uh, out there.

Got it. All right. Um, and then I guess maybe just switching over to the cost side, uh, obviously, uh, labor's a big challenge, but how about on the, uh, on the consumables, I guess, uh, just with some, I guess, volatile steel prices that probably hits you a little bit on things like drill rods and bits, but how has that been kind of tracking, uh, over the last little bit?

Well, definitely in 2021, we've seen quite a move in, in those costs, uh, but I mean, every industry, every, I mean, I'm sure you go to Home Depot and you would have seen, you know, movement in cost of material. And so we certainly weren't shielded from that. So there's been quite a move, you know, in the cost of our consumables. But the fact that we're, uh in an up cycle and so we're able to basically uh price those in our in our prices uh at the moment and uh and basically able to pass those costs through so um so yeah okay no perfect um

And then maybe just one quick last one here. I think you mentioned that just in the South and Central American region, things are kind of gradually returning to normal. I'm just wondering if you can provide maybe a little bit more color. I'm just trying to get a sense, I guess, as to how much COVID is still impacting drill programs in that region.

Yeah. During the quarter, at the start of the quarter, we still – There were still limitations in traveling in certain countries that have gotten better, and we started to move. But then, you know, going towards Christmas, there's some projects that just got delayed to after Christmas just because we were too late in the season. But certainly we've seen things are getting better from that front in most countries that In terms of mobility of crews and mobility of people and mining companies willing to get drill programs, get going, we're seeing more activity coming from that end.

Okay, perfect. That does it for me. Thanks again very much.

Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Larocque.

Thank you, Operator. Finally, I want to wish all of you the best for the holiday, especially to our more than 3,700 employees and families. And to our teams, I ask you to rest well during this holiday this time as calendar 2022 is shaping up to be a very busy year. So thank you all, and the best for the holidays.

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