Major Drilling Group International Inc.

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All participants, please stand by. Your conference is now ready to begin. Good morning, ladies and gentlemen. and welcome to the third quarter 2022 results conference call. I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Ms. Melanson.

Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the third 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 after market closed, 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 Larocque. Please go ahead.

Thank you, Chantal, and good morning, everyone, and thank you for joining us today. Once again, I'm pleased to report that we are seeing strong evidence of an industry upcycle, most clearly demonstrated by Major Dwelling's best third quarter performance in 10 years. In November, we saw elevated activity levels that continued well into December, until the usual holiday shutdowns. And despite the Omicron variant causing minor delays, January got off to a much earlier start than in previous year and than expected. I must credit our teams that worked extremely hard and long hours over the holiday period to get rigs repaired and deployed in the field. Thank you for all your efforts to ensure continuity of operations for both Major Dwelling and our customers. We continue to see increased demand for specialized services as customers turn to more challenging drill programs as the upcycle progresses. I'm really pleased to see that our proactive staff training and retention efforts have allowed us to support this early start to the year and deliver reliable service and value to our customers. Our strategy of holding rigs and inventory ready for immediate deployment to customers also continues to deliver results as the industry deals with supply chain disruptions. During the quarter, we benefited from both new contracts and contract renewals with incrementally favorable terms, which more than offset the impacts of our annual maintenance and overhaul work carried out over the holiday period. Inflationary headwinds continue to impact our industry on both the labor and supply fronts. However, we have made mitigation efforts through our new contracts and renewals that have taken this into account and don't expect to see impacts on margins in the near term. With all of this in place, we were able to grow our EBITDA by 110% and turn a profit of 5.7 million in a traditionally slow quarter. With that, Ian will walk us through the quarter's financials, and then I'll come back to discuss the outlook. Ian?

Thanks, Denis. Revenue for the quarter was $138.8 million, up 38% from revenue of $100.4 million recorded in the same quarter last year, as drill programs continued later into December and started up early in January in our biggest regions. 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 $3 million, with a minimal impact on net earnings. We are pleased to see continued year-over-year top-line growth, as the company has demonstrated the ability to respond to customer demands amidst favorable market conditions. The overall gross margin percentage for the quarter, excluding depreciation, was 24.2%, compared to 20.3% for the same period last year. Margins are typically lower in the third quarter due to seasonal slowdowns and significant scheduled maintenance, However, this year, there was less impact in North America, as many drill programs minimized their holiday shutdown plans. Australasia encountered a typical seasonal slowdown, while the South and Central American region was negatively impacted by seasonality, as well as ramp-up costs in certain jurisdictions as activity levels began to recover from the impacts of the pandemic. G&A costs were $14.1 million, an increase of $2.4 million compared to the same quarter last year. The increase was driven by the addition of Australian operations, inflationary wage adjustments, and the resumption of some travel as COVID-19 restrictions loosened in most jurisdictions. The income tax provision for the quarter was $1.3 million compared to nil for the prior year period. The increase in the income tax expense was related to an overall growth in profitability. Net earnings were $5.7 million or $0.07 per share for the quarter compared to a net loss of $1.5 million or $0.02 per share for the prior year quarter. EBITDA was $18.4 million compared to $8.7 million in the prior year quarter. Strong EBITDA growth in the quarter versus the same quarter last year is a direct result of the increased activity level and illustrates the operational leverage potential as revenue levels continue to grow. The quarter saw strong cash generation as the balance sheet remains a competitive advantage for us in the industry. After taking on debt to complete the McKay acquisition in June of 2021, We are pleased to see the return to a net cash position of $6.1 million after generating $36 million in cash during the quarter. We have achieved this cash generation while spending $12.2 million on capital expenditures during the quarter, adding five new drill rigs and support equipment for existing rigs being deployed in the field. We also disposed of eight older, less efficient rigs, bringing the total rig count to 600. In order to respond to current market demand and stay out of supply chain challenges, we expect to take possession of at least eight drills next quarter. These rigs will be immediately deployed in the field. The new breakdown of our fleet and utilization factoring in seasonality is as follows. 302 specialized drills at 44% utilization, 117 conventional drills at 40% utilization, 181 underground drills at 56% utilization, for a total of 600 drills at 47% utilization. As 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 third quarter, revenue from specialized work accounted for 62% of our total revenue, down slightly from the previous quarter, but specialized work is typically prone to more seasonality. So we expect this percentage to grow moving forward as we continue to see increased demand for our specialized services. Conventional drilling made up 10% of our revenue for the quarter, mainly driven by the increased demand for work from junior mining companies. Finally, underground drilling revenue was up slightly compared to last quarter at 28% of total revenue. Underground projects typically have less seasonality, as most operating mines minimize their holiday shutdowns to keep producing. Juniors continue to raise money to fund their drilling programs, evidenced by our evolving revenue mix. They now account for 28% of our revenue in the quarter, as many juniors kept drilling late into December. Senior and intermediates make up the remaining 72%. In terms of commodities, gold projects represented 54% of our revenue, while copper was at 16%. We continue to see gold dominate our revenue mix, while copper lags slightly from historic norms. We've seen an increase in our nickel revenue in recent months, as the need for battery metals continues to provide strong tailwinds for the industry. With that overview on our financial results, I'll now turn the presentation back to Denis to discuss the outlook. Thanks, Ian.

The early start to operations we saw in January provides a strong indication of increased activity as we moved into the calendar 2022, which is reinforcing the market backdrop and pointing to exciting times ahead for us at major drilling. Going forward, we expect our new pricing to offset cost inflation of supply and labor, while competition for skilled drilling crews is still a challenge across the industry, particularly in the most operationally intense markets. Supply chains continue to face disruptions in many industries around the world, but are magnified in the drilling industry as it enters a rapid growth phase. However, our strategy of using Major Drilling's strong balance sheet to stockpile inventory early has allowed us to stay ahead of delays on consumables, which keeps drills turning for our customers. We have experienced some minor delays on new drill orders. However, as we've been proactive in placing orders, we've minimized the impact and have seen no effect on the business. We are seeing most senior companies increasing their definition drawing efforts on this, on existing discoveries on both gold and base metals, as well the amount of financing raised over the last 12 months by junior companies. We've seen a considerable increase in exploration activity by these customers as the mining industry continues to try and replace depleting reserves. As of today, There are numerous positive drivers influencing the outlook for major drilling and the wider industry. When you look at things like the gold price that is at high levels as reserves remain low and mining companies continue to struggle to replace resource depletions, you've got copper prices that have more than doubled over the last two years and have recently reached all-time highs. At a time where the world is accelerating its efforts towards decarbonization, which will require enormous amounts of copper, which won't help solve the projected supply deficit. Nickel prices are up more than 40% over the last year as the world races to secure supplies for electric vehicle batteries. You've got the lack of exploration throughout the recent industry downturn that has led to depleting reserves. And finally, it takes 10 to 15 years to bring a mine into production, while new mineral deposits will come from areas more difficult to access, which will require more specialized drilling. But with all these fundamentals in place, the outlook for the company and the pricing environment through our fiscal fourth quarter and beyond remain extremely encouraging. Finally, Kelly Johnson, Senior Vice President Operations for North America and Africa, has announced his long-planned intention to retire in June of this year. Mr. Johnson will retain his position as Senior Vice President, continuing to assist in the strategic management of operations of the company until June, after which he will provide valuable consulting services to the company. Kelly started in the drilling industry in 1978 with Midwest Drilling until its acquisition by Major Drilling in 1998, and he held a broad range of leadership roles across the company's operations. With a career that spans more than four decades with the company, his leadership has made a significant contribution to Major Drilling's success, and he has certainly left his mark on the industry through his experience and knowledge. Kelly has been a mentor to many in the company, including myself, and his influence has made a lasting impact on generations of people. He leaves us close with an impressive managed leadership team, fully prepared to respond to future challenges and to meet the increasing expectations of our loyal customers. Going forward, the regional management of North America will be reporting directly to the CEOs. With that, we can open the call to questions. Operator?

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

Morning, gentlemen, and congrats on a good quarter. Thank you. First question is around the capital discipline by some of the senior miners that we're seeing and commitment there to manage margins. are you seeing any pushback on pricing or is that, um, it sounds like you're able to get, get, um, cost increases pushed through. And then secondly, has it changed the way they're bidding, uh, jobs with, with drillers? Are they looking for longer term contracts or anything there? Any color you can provide there?

Yeah. Um, well, first on, in terms of, um, you talk about, uh, cause discipline and everything. What we're seeing in our discussions is not as much a focus on price anymore, more about delivering service. Last year, there's a few companies, well, many companies that weren't able to achieve the... amount of drilling they wanted to do when they started the year for different reasons, either, I mean, you had COVID, but also either they didn't have the quality they needed or things like that. And so this year, that explains the early start, for one, because they want to make sure they get the drilling, their drilling budgets drilled. So when we have discussions this round, the discussions have been more with operational people than it's been with the purchasing department. And really, that's been really good because we're having conversations about getting the job done, and that's the main focus, which really helps. It's not just pricing, it helps on the productivity as well because then you get full cooperation and you get the best results for both. That reduces when things go well and productivity is good, it reduces their overall cost because they get more meters for their dollars. From that perspective, I wouldn't say that there's been a pressure on pricing It's been more about working together to deliver. In terms of looking for long-term, it was more early on when pricing was better. We were getting requests to lock those prices for five years because they knew what was coming. We do get those conversations, but those conversations, again, are not necessarily about price. It's about, okay, can I make sure I'm going to have these rigs for the next two years because I've got lots to do and I want to make sure I'm going to have the rigs. So it's more those types of conversations in terms of long-term than pricing.

Gotcha. Okay. Then just one other question. With regards to greenfield exploration budgets, tracking some of the senior gold exploration budgets, it looks like they're relatively flat year over year. Can you just give us a little bit more color on where some of the really robust demand is coming from? We're certainly seeing it across the entire industry. All the drillers are seeing it. But just trying to reconcile the flat gold budgets with the really robust outlook.

Yeah. On pure greenfield exploration, you're right. The seniors, from the looks of it, didn't increase their effort by much going into calendar 2022. But what we're seeing is we're adding rigs to existing projects on definition, on defining existing projects that they have, and they're ramping up They're ramping up their efforts in terms of trying to bring mines into production over the next few years. So that's where the drilling efforts are going on the senior side. We're seeing an uptick on that side. And that side, when they get going, it's more intense and it takes years to define deposits and things like that. So that That's one part of the uptick that we're seeing. And then Ian gave you the numbers. Juniors is up 28%. And just a year ago, we were below 20% of our total revenue and a much smaller revenue number. So therefore, juniors are doing a lot more as well and because they've raised money and they're going out and they're going to be the ones that are going to add to the exploration. So when S&P Global come out with their numbers for 2022 in a year from now, I suspect that it's going to be much higher in terms of growth of exploration dollars, much higher than the what seniors have been projecting because the juniors are going to pick up the slack on that part.

Got it. Okay, that's terrific. I'll turn the call over to someone else. Thanks, guys. Thank you.

Thank you. The next question is from James Vale from Arcadia Advisors. Please go ahead. Your line is open. Good morning, gentlemen. Good quarter. Good morning, Tim.

Thank you. I'm well. I'm well. Thank you. You talk about availability more key. You talk about lack of new copper supply, gold, et cetera, et cetera. It seems to me this cycle is setting you up to have extremely better margins than you did in the last up cycle. Is that a reasonably good assumption? Yeah.

I mean, we're still a long way from where we were in 2012 in terms of the peak of the cycle. But the outlook, when you look, it takes, again, the key is it takes 10 to 15 years to bring a mine into production. That's the part that you need to look at. And we're still, we're only in year like two of this upcycle. And the last up cycle that went from 2004 to 2012 really, you know, lasted eight, nine years. So there's a long, a long runway ahead of us, but I, I, I won't give you that. There's certainly a positive possibility of us having better margins than the last peak. At this point, our margins are, are already better than they were in the second year of the last upcycle. I'll let you draw your own conclusion on what that could be for the future. Great. And then just a second question.

You went through the utilization rates of all your different rigs. In all practicality, what is the highest utilization you can get to? I mean, you can't go to 100%, but Is 47% a lot left to go from these numbers, or are you getting close to where you're essentially at full utilization?

Yeah. We've always said the highest utilization, the way we count utilization, because not everybody counts it the same way, the way we count utilization is if a rig is earning its keep. So every quarter you have rigs that are moving around, being mobilized, demobilized, plus we have rigs that are in the, in the Arctic that will only work six months of the year. So for those reasons, 75%, uh, is, is kind of the max at the very peak when there was nothing available. Uh, we were at 78%. Uh, that's the highest we've ever achieved. And I think that's the highest that we can probably achieve as the utilization. The 47% is, well, for the third quarter. So this was lower than what we had in the previous two quarters. And also, you know, it's indicative of, you know, we've entered the quarter with that 47%, but things are picking up week by week. And, you know, so I think you're going to see that utilization keep growing as we go through the year. Great. Okay. Thank you so much.

Thank you. Once again, please press star 1 on the device's keypad if you have a question. The next question is from Maggie McDougall from Stifel. Please go ahead. Your line is open.

Good morning.

Good morning.

so must ask the question if you've got any exposure to Eastern Europe that we should be aware of or that we should you know be thinking through if there's a supply chain effect from that or anything of that nature because clearly really difficult situation in that part of the world right now yeah very unfortunate what what's going on there and on our part we don't see a

much impact on our operations. We don't have any operations in Russia or Eastern Europe. Our closest operation would be in Mongolia, which is a small operation for us. But even there, the supplies are coming from other directions that should not be impacted from what's going on. So for us, we don't see... unless things change in the world, then all bets are off. But we don't see an impact on our operation.

Okay, thanks. And it sounds as though you are in a great position, as a few people have highlighted here, on the demand side with regards to pricing, given commodity inflation and... just generally a lack of new reserve additions over the last decade. On the flip side, we are seeing fuel costs at almost back-to-peak levels last seen in 2006-2007. It's possible that they overshoot just with what's going on in the world. And I'm wondering on the consumable side, the fuel side, and against a backdrop of the constructive discussions you've been having with your clients, Are you at all thinking ahead about how to position yourself in the event that inflation and inputs does become somewhat out of control and perhaps begins to outpace pricing?

Yeah, on the fuel side, we have escalation clauses specific to fuel in all of our contracts. And in a lot of cases, the fuel is supplied by the mine themselves. So that one shouldn't be an issue going forward. On the consumables, we have in our pricing, we are expecting, we started the year expecting inflation on consumables with everything going on. And our pricing, our last round of pricing is reflective of that. But we do have escalation clauses in there as well. should it go beyond a certain percentage. So then we have mechanisms to sit down with our customers and revise our pricing. So right now, when we say that we've renewed contracts with favorable terms, those are the terms that in the downturn that we were not able to get in our contracts, put escalation clauses to make sure that we're covered for things like that.

Okay, good. And when you look out around at your competitors, how do you feel going into this type of environment? It does seem as though you have prepared for the upcycle for some time, both in terms of inventory, just getting the fleet ready, and with the balance sheet that you've maintained in a very clean shape. Do you think that there will be some who find themselves kind of stuck, lacking inventory, perhaps without appropriate pricing pass-throughs? I wouldn't mind hearing your comments on that because it does seem like you may be in a strong competitive position both for organic market share gains, but then also if you were to see someone sort of struggling for some tuck-in acquisitions.

Well, on the supply, we're already seeing ourselves, we're already seeing issues in terms of delays on everything, which is why we stocked up. So we have that buffer and the way we operate is we're not letting that buffer go. In other words, as we take something off the shelf, we place an order to replace on the shelf to replace that buffer. and that's how we're managing. If you don't have that buffer and you have to put rigs in the field, it's quite a struggle right now because there's delays on everything and then you have to wait, which to your point, I think it is a great competitive advantage by having that extra inventory on hand. On the On the acquisition front, just like before, we continue to get phone calls from companies. For the most part, they're small private companies looking to sell. for us, it's always, it comes down to quality of equipment. Uh, it needs to fit our strategy, specialize or on the ground or, uh, and, um, and also, you know, uh, it needs to, needs to, um, to have good people, um, that comes with it. And, and for us, that's what we look at. Um, and also there, there's, Sometimes also valuation, we've had people, they tend to have big valuation because they want to sell on the future. For us, there needs to be something for our shareholders if we're going to make those. That's all I'm going to say. We get those phone calls on a regular basis, we've been getting those for the last three years. And it's just when the time is right, when it makes sense, then we sit down and look at it. But, uh, right now, uh, Mickey is the last one that, uh, that made sense for us.

Yeah. Last question for me. Uh, I'm watching the 10 year yield fall like a, like a stone today. And, uh, we've talked a lot about how the base metals copper cycle is potentially going to be the big one. However, it looks like in the near term, gold could be a really good place to be. What has been sort of the scuttlebutt amongst your client base? Are you seeing more activity in one versus the other?

The gold is still, interestingly, I would have thought that moving into 2022 that we'd see a bigger uptick on base metal, but gold has kept up with base metal in terms of the demand or the increased demand that we've seen going into this year. So pretty much all commodities are doing more. They all have reserve issues because they've all cut back on exploration through the last six years. So So I wouldn't say that there's one more than the other these days. They're all busy going out looking for stuff at the moment.

Okay. Well, thanks so much for your time. I will get back in the queue if I have further questions.

Thank you. Thank you. There are no further questions registered at this time. I will return the call back to Monsieur Larocque. Oh, I'm sorry. Back to Monsieur Larocque. Sorry. Yes.

Okay. Thank you. And we'll be talking next quarter.

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