Major Drilling Group International Inc.

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All participants, please stand by. Your conference is ready to begin. Good morning, ladies and gentlemen, and welcome to the third quarter 2024 Results Conference Call. I would now like to turn the meeting over to Chantal Melanson. Please go ahead, Mrs. 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 2024. 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 Larocque. Please go ahead.

Thank you, Chantal, and good morning, everyone, and thank you for joining us today. Last night, we released our third quarter results, which typically is our seasonally weak quarter due to the holiday shutdowns. The company continues its cash generation as we see growing strength in demand from copper and battery metal customers. up eight percent over last year although as previously mentioned we saw several projects slow down earlier than last year during the quarter globally senior mining companies are well funded and are maintaining and in some regions expanding drilling programs even though calendar 2023 saw a slowdown in precious metal exploration driven primarily by the reduction of funding for juniors and intermediates. Recently, we've seen growth in several of our markets in South America, while in Canada, U.S., the reduction of junior activity has created a more competitive environment, but we remain disciplined on pricing. The balance sheet remains very strong and allows us to continue to invest in our fleet modernization and technologies in order to maintain our position as a market leader in our industry, which I will come back to after Ian walks us through the quarter's financials. Ian?

Thanks, Denis. Revenue for the quarter was $132.8 million, down 11% from revenue of $149.2 million recorded in the same quarter last year. Our third quarter results were impacted by the typical seasonality with drills pausing for the holiday season, but this occurred earlier in the quarter compared to last year where we experienced many companies drilling well into December. Foreign exchange translation impact on revenue and net earnings for the quarter when comparing to the effective rates for the same period last year was nil as rates were relatively stable year over year. The overall gross margin percentage excluding depreciation was 23.4% for the quarter, compared to 25.3% for the same period last year. Margins were down from the prior year as a result of earlier shutdowns. We also take the opportunity during the seasonal slowdown to conduct annual preventative maintenance on the fleet. This negatively impacts margins when comparing to other quarters during the fiscal year. G&A costs were $17.1 million, an increase of $700,000 compared to the same quarter last year, The increase was driven by annual inflationary wage adjustments implemented at the start of the new fiscal year, along with increased travel costs. Foreign exchange loss is 2.3 million compared to a loss of 0.3 million for the same quarter last year. While the company's reporting currency is the Canadian dollar, various jurisdictions have net monetary assets or liabilities exposed to various other currencies. During the quarter, the loss from Argentina was 2.9 million as they experienced a significant devaluation of the Argentine peso in December. following economic reforms implemented by the new government. The income tax provision for the quarter was an expense of $900,000 compared to an expense of $2.5 million for the prior year period. The decrease was driven by a reduced profitability. Net loss was $2.3 million or $0.03 per share for the quarter compared to net earnings of $6.3 million or $0.08 for the prior year quarter. The company generated EBITDA of $11.4 million compared to $20.5 million in the prior year quarter while increasing its net cash position by $12.2 million to finish the quarter with $96.4 million. With the robust cash levels, we continue to position the company for growth by investing $21.4 million on capital expenditures, adding six new drill rigs and support equipment while disposing of three older, less efficient rigs, bringing the total rig count to 605. We've also increased investment in our enhanced hands-free rod handling capacity, for which we are seeing increased demand from our key customers. We continued our share buyback efforts, spending $2.7 million in the quarter, acquiring and cancelling 317,000 shares at a weighted average price of $8.45 per share. The new breakdown of our fleet and utilization is as follows. 288 specialized drills at 43% utilization, 119 conventional drills at 38% utilization, and 198 underground drills at 40% utilization. for a total of 605 drills at 41% 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. These standards are becoming increasingly important to our customers. In the third quarter, revenue from specialized work accounted for 64% of our total revenue as we continue to see increased demand for our specialized services. Conventional drilling, which is mostly driven by juniors, dropped to 8% of our revenue for the quarter, down from 11% in the prior quarter, while underground drilling grew to 28% of our total revenue, as these projects are more stable through seasonal slowdowns. We continue to see the bulk of our revenue driven from seniors and intermediate, representing 80% this quarter, as they continue their elevated efforts to address depleting reserves. Juniors continue to have challenges accessing the necessary capital to fund exploration programs and made up 20% of our revenue this quarter. In terms of commodities, following on trends seen in previous quarters, we continue to see a shift in our revenue mix, with gold dropping to the lowest percentage in our company's history, making up 31% of our revenue, while copper continued its recent growth trend, matching gold at 31% of revenue. Lithium jumped to 8% of revenue, and we've seen a few uranium projects start up with its recent run-up in price. With that overview on our financial results, I'll now turn the presentation back to Denis to discuss the outlook.

Thanks, Ian. As we enter the fourth quarter, we anticipate reaching last year's activity levels by April, despite a slow start for the quarter due to the delayed mobilizations. We're encouraged to see these elevated activity levels returning in the coming months, driven by demand from copper and battery metals, while we wait for a rebound in activity and financing in the gold sector, which could bring the exploration industry to very high levels of activity at a time when reserves are dwindling on all those commodities. As well, future deposits will have to come from areas more difficult to access, which will improve the demand for specialized drilling, which is one of major drilling's core strengths. Despite economic volatility, worldwide consumption and mine production continue at high levels. Therefore, we believe most commodities will face the near-term imbalance between supply and demand as mining reserves continue to decrease due to the lack of exploration over the last several years. Remember, we're still at less than 50% of the activity levels of exploration we saw in 2012. Therefore, we feel we are still very early in the mining upcycle, and major drilling is very well positioned for that upcycle. We are the leader in specialized drilling, being the go-to drilling company for many mining companies with technically challenging programs, whether it's remote drilling deep, high altitude, arctic, or directional. As well, given robust cash generation, we maintain the industry's largest and one of the most modern fleets with continued investment in strategic innovation. Over the last two years, in partnership with some of our key customers, we've developed cutting-edge technologies, including digitizing our rates to capture drilling data and the introductions of analytics to optimize drilling operations. Moreover, we started partnering with some of these customers to leverage this drilling data for the development of their geologic models. Additionally, we made great progress in our enhanced hands-free rod handling capacity, a critical safety aspect valued by many of our key clients, and a growing trend in our industry. With these fundamentals still firmly in place, the long-term outlook for our company remains extremely positive. Major dwelling remains in a unique position to react to and benefit from these market dynamics. With that, we can open the call to questions. Operator?

Thank you very much. If you have a question now, please press star 1 at this time. Our first question is from James Bell from the Arcadia Advisors. Please go ahead.

Thank you. Good morning, guys. Good morning, James. How are you? Good. I'd like to expand on your comments about the fleet, so to speak. I've done some entry arithmetic and it seems that since 2019, revenue per rig is almost doubled. And so I guess that's from the investment you're making in the more higher technology rigs. But my question becomes, when you look at the overall balance of high technology rigs versus the others, are you at a point where you're satisfied that it meets your current business outlook? Or will you continue to invest in better and better rigs? Because the bottom line of my question is, at one point, you reach a max, and therefore your cash flow, free cash flow, starts to increase at a more rapid rate.

Yeah. Basically, there's a couple of things here. On the rigs itself, and in terms of buying rigs, we continue to buy rigs every quarter, Some of those are replacing rigs that are what I call less effective, and that's just like the natural updating of our fleet and everything. But one thing that's part of what we say on technology is one thing that we've been doing is investing in retrofitting some of our rigs that are still in very good shape, but just adding... drilling technology or consoles to the rigs that make those rigs then more efficient and also for our drillers it reduces training time because that's another key factor to to our growth in the future is that things turn, as you know, you've been around our industry for a while, things turn really quick and then labor becomes an issue real quick. So the training aspect is key to growth and so that part as well plays a role. So for us, in terms of growing When we look at growing the fleet, it goes through, again, updating the rigs themselves every quarter, but also investing in upgrading the fleet, which is part of what we've been doing over the last couple of years.

Okay, all right. And I just got now two very quick questions. Looking at the release and the balance sheet, Am I correct in that the payment to McKay will be satisfied this fiscal year?

Yeah.

Okay. And then finally, the stock that you buy back, is that retired or just put in Treasury?

Canceled, yes.

Oh, it's canceled. Okay. All right. Thank you so much. Good work in your difficult environment. Thank you.

Thank you very much. Our next question is from Gordon Lawson from Parag Dam Capital. Please go ahead.

Hey, good morning, and thank you for taking my question. A lot of other drilling companies have cited the Canadian market as a source of weakness, and you've moved to be the juniors of that group. Can you provide some color as to what other factors are at play here?

In terms of... Sorry, I...

weakness in North America.

Yeah. So you're saying what factors we're seeing?

Yeah, you cited decreased activity from the junior drillers and I'm wondering if there's anything else at play here we could perhaps build into our model or forecast.

Well, a lot of it has to do with that in terms of see a lot of money that has been raised over the last There's been some very good years in terms of raising money in 2021 and 2022 and even the end of 2020. A lot of that money was raised for Canada and the U.S. because it's easier to raise money closer to home for projects that are in more stable jurisdiction or established mining jurisdictions. And that's what we've seen. So the slowdown in that financing is affecting those regions. In fact, if you go look at the growth that we had early on in those years, 21, 22, the growth came from Canada and U.S. And so therefore, that's the big part of that slowdown. The slowdown of financing is affecting those areas because that's where, And then as well, the flow through, there's been a reduction in flow through money, which is totally a Canadian aspect of the Canadian exploration. So for all those reasons, that's why we're seeing that slowdown. But at the same time, the seniors in, for example, in South America, all of our growth is coming from senior companies. So we're... It's kind of going both ways.

Okay, thank you. With your cash balance over $100 million, are you considering increasing activity with your NCIB or even a potential dividend?

Well, on the NCIB, our primary focus is still on growth and And we've said that from the beginning. And when you consider that copper has grown in terms of activity over the last few months and the fact that, as we said, in April we're going to be back to last year's level of activity, our business is holding up very well at a time where, like we said, juniors are struggling to raise money for exploration. So with The gold price holding up at fairly high levels and the prospect that we've seen with copper, we're still very positive on the future. And that's why our focus continues to be on looking at opportunities to expand our operations, whether it's through organic growth, either adding to some of our operations or geographic expansion, or through acquisitions. And therefore, in terms of capital allocation, as I mentioned when we introduced the buyback, we mentioned that the focus was going to continue to be on growth. So we'll look at the buyback on an opportunistic basis, but again, our primary focus continues to be growth.

Okay, thank you very much.

Thank you. Once again, please press star 1 on your device's keypad if you have a question. Our next question is from Brett Carney from American Rebirth Opportunity. Please go ahead.

Hi, guys. Good morning. Thanks for taking my question. Good. Hello. Yeah, it's great to see the continued activity you guys are realizing in the copper battery metals market. It sounds like a lot of that strength coming from South America. It looks like there's plans to expedite the permitting and processing of extraction of critical battery and energy transition metals in Canada. I know it's pretty recent, but just curious what sentiment-wise you're hearing from some of your customers on potential for battery energy transition metals growth prospects in the North American region.

Well, I mean, there's definitely a lot of possibilities, and the demand and the need for those metals, I think, is well-documented. with everything that the world wants to do. When you talk of Canada, on one hand, you've got politicians that talk about having to invest in electric cars and doing all these things, but at the same time, I think from when you talk to mining companies, the permitting and all of that has never been so slow. It takes much longer than before. If we want to go after our ambitions, electric cars are not going to get on the road if you don't have the copper and the battery metal. There definitely needs to be more on that. We'll see. You're right, there are talks about expediting that process. Hopefully... PDAC next week, it'll be interesting to see if there's more talks about that, because I know the mining industry is certainly putting pressure to say, okay, if you want more electric cars on the road, we need to get on with this. So I'm certainly positive that This will come, but that will certainly help our industry when that happens.

Agreed. That's very helpful. And if I can sneak in one more, you know, with the balance sheet in as great a shape as you guys have gotten it to, I think the NCIB authorization expires later this month. Is it fair to think you guys would kind of reauthorize that? in the vein, as you mentioned, of being opportunistic, particularly with the shares and valuation where it is currently?

Yeah, we're certainly going to look at that. But again, as I mentioned, our focus continues to be on growth. We're very positive on the future, so we're focused on the growth, but the NCIB is part of our capital allocation, yes.

Okay, thanks so much.

Thank you. Our next question is from James Bell from Arcadia Advisors. Please go ahead.

Sorry to be a question hog, but I've been reading about this concern in the Canadian market of naked short selling. Have you seen any attempts by, I think I saw Eric's one of the sprats was trying to get that changed. Is there any progress made on that?

No, I don't believe so. A lot of the junior miners I know are complaining about that. I'm not aware of any updates on that.

Okay, thank you.

Thank you. The next question is from Stephen Green from TD Securities. Please go ahead.

Yeah, good morning, guys. Good morning. A question just to expand on your commentary on the Canadian market, given some of the junior weakness. You mentioned that April you're expecting to kind of hit the stride there, return to normal activity levels. Can you, I guess, quantify that a little bit? Would you expect Q4 in terms of activity levels to be similar to what it was last year, say, or a bit weaker given kind of the slow ramp-up?

Yeah, well, like you said, April, we expect to be back to last year's activity. Things in February were slower getting out for a few reasons. I mean, there was delayed mobilization, some weather-related, but some also this year we saw mining companies take a bit longer in terms of either making decisions on projects or just getting things organized, but things are now picking up, and that's why we say by April we'll be back to normal levels.

Okay, so would it be safe to say then that you'll probably be a bit lower in terms of revenue than last year?

Well, you can read through the lines.

Okay, that's helpful. Thanks.

Thank you. There are no questions registered at this time. I would now like to turn the meeting over to Mr. Dennis LaFox.

Well, thank you, everyone. And in closing, I would like to invite our customers and investors to visit our booth at the Prospectors and Developers Convention, PDAT, starting this weekend in Toronto. It's shaping up to be another very busy event, so we're looking forward to it. Thank you, everyone.

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