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Edited Transcript of MDI.TO earnings conference call or presentation 1-Mar-19 2:00pm GMT

Q3 2019 Major Drilling Group International Inc Earnings Call

Moncton Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Major Drilling Group International Inc earnings conference call or presentation Friday, March 1, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David D. Balser

Major Drilling Group International Inc. - CFO

* Denis Larocque

Major Drilling Group International Inc. - President, CEO & Non-Independent Director

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Conference Call Participants

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* Ahmad Shaath

Beacon Securities Limited, Research Division - Research Analyst

* Mengdi Li

TD Securities Equity Research - Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Q3 2019 Results Webcast Conference Call.

I would now like to turn the meeting over to Mr. Denis Larocque, President and CEO. Please go ahead, Mr. Larocque.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [2]

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Thank you. Good morning, everyone, and welcome to Major Drilling's conference call for the third quarter of fiscal 2019. With me is David Balser, our CFO.

You should have all -- have received a copy of our results, which were released yesterday evening. If you haven't, please visit our website at majordrilling.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 and future financial performance of the company. These statements are forward-looking in nature, and actual events may result -- or results may differ materially.

First of all, I'd like to congratulate our Canadian group who earned, for the second year in a row, this year's PDAC Safe Day Everyday Gold Award in recognition of working -- of having worked over 1 million hours, LTI free, during 2017. Our Canadian crews have now worked more than 5 million hours over 4.5 years without a single LTI, lost time injury. The safety and well-being of our crews is our first and highest responsibility when we work on any project. And we work hard at -- to earn the trust and support of our crews, and we're pleased to see their success recognized by a group of our clients and peers through the PDAC organizations. Good job, guys.

Now regarding the third quarter. Our results reflect a normal part of our operational pattern as mining and exploration companies shut down operations, in some cases for extended periods, over the holiday season. Additionally, we typically schedule substantial overhaul and maintenance work on our equipment during this slower period.

Despite the seasonal slowdown, we generated $2.8 million of EBITDA, and our net cash position improved by $5.3 million over the last 3 months to end the quarter at $20.2 million. During the quarter, we spent $6.3 million on capital expenditures as we added 7 rigs that fit our specialized innovation and diversification strategies.

During the quarter, the company made the decision to close its operations in Burkina Faso and, as such, took a charge of $8.1 million after tax, of which $7.2 million is noncash. This decision was based on the fact that this branch required significant additional investment to reach an acceptable return on investment at a time when political and security risks are increasing in that country.

David will take you through a summary of our quarterly results before I come back with the outlook.

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David D. Balser, Major Drilling Group International Inc. - CFO [3]

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Thanks, Denis. Total revenue for the quarter was $80.4 million, up 7% from revenue of $75 million recorded in the same quarter last year, with all regions contributing to this growth. The favorable foreign exchange translation impact for the quarter is estimated at $2 million on revenue when comparing to the effective rate for the same period last year, with a negligible impact on net earnings.

The overall gross margin percentage for the quarter was 19.4%, up from 17.6% for the same period last year. Margins were impacted by late start-ups due to extreme cold weather but were offset by improved pricing and operational efficiency.

General and administrative costs were down $200,000 at $11.9 million when compared to the same quarter last year despite higher volumes of activity. The company recorded a restructuring charge related to the closure of its Burkina Faso operation of $6.9 million, consisting primarily of noncash write-down of assets of $6 million and $900,000 of close-down costs relating to severance, lease terminations and moving costs.

Provision for income tax for the quarter was an expense of $1.9 million compared to a recovery of $3.7 million in the same quarter last year. Tax expense for the quarter included a write-down of $1.2 million in deferred tax asset related to Burkina Faso. Also, the tax expense for the quarter was impacted by nondeductible expenses and nontax-affected losses in certain regions while incurring taxes in profitable branches. The same quarter last year, tax recovery benefited from a onetime favorable adjustment of $1.6 million from a reduction of the U.S. federal corporate tax rates. This combined for a net loss of $15.9 million or $0.20 per share for the quarter compared to a net loss of $8.5 million or $0.11 per share for the prior year quarter.

In terms of our financial position, we continue to have one of the most solid balance sheets in the industry. During the quarter, our net cash position, net of debt, increased by $5.3 million for a total net cash position of $20.2 million. The company also spent $6.3 million on capital expenditures, adding 7 new rigs and support equipment to our fleet while disposing of 18 older inefficient rigs and selling 4 rigs to local contractors in Burkina Faso. The total rig count is now 610.

The new breakdown for our fleet and utilization is as follows: 300 specialized rigs at 34% utilization, 144 conventional rigs at 25% utilization and 166 underground rigs at 49% utilization, bringing the total rig count to 610 rigs at a 36% utilization for the quarter.

As we've mentioned before, specialized work in our definition is not necessarily conducted with specialized drills. Therefore, we'll also give you the breakdown of revenue by type of work for the quarter. Specialized work represented 57%, conventional work represented 9%, and underground work represented 34% for the third quarter. Also, seniors and intermediates represented 85% of our revenue in Q3, while juniors have decreased to 15%.

In terms of commodities, gold projects represented 50% of our revenue, while copper was at 21% this quarter.

With that overview of our financial situation, I'll now turn the presentation back to Denis to discuss our outlook.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [4]

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Thanks, David. Over the last 12 months, we've strengthened our relationships with many senior customers and have increased our revenue with seniors by 24% year-to-date as compared to last year. As well, while junior funding has been difficult, particularly in the last 6 months, we have built strong relationships with well-funded juniors looking for truly specialized drilling.

Many of those customers are still working through their exploration plans for 2019, and some of our rigs only restarted between late January and mid-February. But early indications are that most of these companies will be increasing their exploration on their existing projects in 2019.

With gold and copper reserves depleting fast and with grade declining, combined with the lack of exploration work conducted to replace these reserves, experts believe that both commodities will soon face imbalance between supply and demand. With all the talks of mergers happening in the gold sector, one thing to remember is that these mergers do nothing to solve the reserve issues that the gold industry is facing. It's basically -- it basically rearranges the chairs on the Titanic as far as gold reserves are concerned.

Global gold reserves have been declining for the last 6 years, down 35% since 2012 and are back at levels not seen since 2005. Experts say that many gold companies have less than 10 years of reserves left, which really is at critical levels when you consider that it takes 10 to 15 years to bring a mine into production.

The story on copper is not much different, as copper supplies are getting consumed much faster than they get replaced. Consumption is continuing to increase despite the whole China slowdown story. What is important to note is that while China's growth -- and here, we're not talking about the economy, but the growth is slowing, their consumption level is still growing and is much higher than it was in 2005. Therefore, a decline in reserves is accelerating while not getting replaced.

Adding to this story is the whole wave of electric vehicles coming to places like China. The Chinese government has invested over $60 billion in the last 10 years to build this industry while reducing the number of licenses for gas-powered cars in order to increase the demand for electric vehicles. If you add markets like India and Indonesia that are growing as well in terms of vehicles, that makes for a lot of electric cars.

In terms of its impact on copper, it's important to note that a regular car would typically have up to 50 pounds of copper, while an electric car would have up to 180 pounds of copper, which means 3.5x the amount of copper needed. And that is without counting what is needed for the charging stations.

Therefore, there's no question that there is a need to develop resources, and the easy finds have been found. So the next deposits will be in areas that are increasingly difficult to access, which should bring a resurgence in demand for specialized drilling, which continues to be our main focus.

As a reminder, Major Drilling is the industry leader in specialized drilling when it comes to difficult drilling projects. Whether it is remote, deep, difficult ground, very targeted, in high altitude, we deliver results in all those environments while maintaining high safety standards and developing innovative solutions for our customers.

We are continuing to make investments in innovation directed towards increased productivity, safety and meeting customers' demand. We keep growing our fleet of computerized rigs as well as retrofitting some of our newer rigs with computerized consoles. This falls in line with the enhancement of our recruiting and training systems as we bring in new generation of employees while strengthening our customer service. At the same time, we have several innovation initiatives, providing data aimed at improving productivity and better information for our customers.

That concludes our formal remarks, and we'll open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Mengdi Li from TD Securities.

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Mengdi Li, TD Securities Equity Research - Associate [2]

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This is Mengdi from TD with a question on behalf of Daryl Young. So the 2019 guidance was encouraging, and we were wondering if you could provide a bit of a breakdown of where you are seeing the increased spending. So specifically, what the mix of customers is in terms of seniors and juniors, what geographies you are seeing strength in and what types of drilling. For example, mine site, underground or greenfield.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [3]

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Yes. Well, basically, what we're seeing -- and we're quite happy with the progress we've made over the last 12 months, as I mentioned, the financing for juniors has been very difficult in 2018. And basically, that had an impact on the level of exploration these companies are carrying. So in 2018, we have made some headway. As I mentioned, our revenue with seniors is up 24% year-over-year. And we've been able to grow -- to build relationships with, well, new company seniors that we hadn't worked for before. And we've been able to build -- to add to our business, which is -- so I think the mix right now is 85% seniors and intermediates. And I think for 2019, the mix is going to be similar.

In terms of geography, it's hard to tell. It depends on how things are going to evolve. But North America is still -- with everything going on politically and everything relating to mining, Canada or the U.S. is still a place where there's more money being raised. So I think they're still going to be leaders in that.

And in terms of types of drilling, well, the other thing that we've done over the last 12 months is that we have strengthened our underground business as it's part of our strategy to diversify our services. And basically, I think when you look at the last year at the same time, our percentage of underground was 26%, and this quarter, we're at 34%. So we have more drills turning in the underground sector, which brings more stability. And so therefore, I think if -- to answer your question, when I bring it all together, I think it's going to be led by seniors, and there's going to be more underground until we see the recovery. But if gold and copper prices shoot up, then specialized drilling is going to shoot up as well.

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Mengdi Li, TD Securities Equity Research - Associate [4]

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Okay, perfect. And I guess just a quick follow-up question as well. If you could update us on what you're seeing for pricing right now and also whether you expect the ongoing labor shortage to continue to be an issue this year.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [5]

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Yes. In terms of pricing, it's still progressing, and it -- but I mean, again, without the junior market being at play, there's still a lot of competition at play. And so pricing is going to be moderate in terms of increases for the upcoming year. Unless things turn -- and then it leads me into your labor section, we're already -- in a lot of markets, particularly in North America, we're already facing labor crunch. And the next rigs going out are going out at higher prices just because our training costs are going to be higher if we need to bring more people in the system because we -- there's been a lot of people that left the industry, and we need to rebuild that. We'll be able to rebuild that. We have -- we've invested a lot in our training.

And then I mentioned the innovations we're doing, which will speed up the -- by having computerized rigs, it -- first of all, it caters to the new generation, but also, it helps speed up the training. And -- but there's no question that again, just like most of the industries, we are facing a labor crunch already. And therefore, the next rigs going out are going to be going out at higher prices because just our training cost is going to be -- and productivity is going to get affected, so we need a higher price just to stay whole.

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Operator [6]

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The next question is from Ahmad Shaath from Beacon Securities.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [7]

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Congrats on a good quarter. Just follow-up on the last question on pricing and labor costs. So I noticed continued improvement in gross margin starting maybe the second half of calendar '18. So do I understand from your comments on the last question, Denis, that we should expect those to stabilize going forward for a normal quarter or a normal period? And secondly, how do you compare the start of this calendar year compared to last year?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [8]

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Yes. On the margins, I mean, it's tough to predict. But certainly, we've made -- as you mentioned, we've made a lot of headway compared to -- because if you remember, in the last quarter, in the second quarter, we mentioned that we had taken the stance where there's a level of price related to labor where we just wouldn't go put rigs out anymore. So by doing that, we ended up -- our margins ended up increasing. And going forward, with extra rigs being put out, it's going to be at higher prices. I mentioned just to stay whole, but we do want to add to the margins. If we're going to put more rigs, we need to cover capital, we need to cover -- and therefore, we'll need better margins.

So as we grow, our goal is to improve margin as well. And that's the -- that's really the operational leverage in -- the power in the operational leverage that this company brings. If things turn, we have the infrastructure, we don't need to put a lot of money in G&A to be able to grow our revenue in there and also grow margins. So that's basically it. Sorry, I didn't write down. Your second question was...

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [9]

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The second question was on, how do you compare the start-up this year compared to last year?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [10]

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Yes, sorry. Yes, the start-up is pretty much the same as last year. The -- I would say the one little difference is that we face harsher winter conditions in Canada, which is a big part of our operations. So part of it brought more -- a bit more delays into late January, beginning of February. So there's a little bit of that, but it's not huge. And in terms of just -- I mean, last year, mining companies were late coming out or starting because compared to at the peak, the peak people would be starting. They'd be asking for us to start January 2. When you know that you have enough time in the year to do your drilling campaign, you're not as much in a rush. So therefore, things get organized and get started later. And that's what we've seen again this year.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [11]

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That's great. And just to follow on, on the first question. What would you say is the driver behind your ability to kind of put your foot down and say, "This is the pricing"? Are your clients more understanding of your labor costs? Is it not much excess capacity as before? What would you attribute this sort of a pricing power you're getting? Perhaps...

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [12]

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Well, I mean, the volume is up. Although we're still a long way from the peak, the volume is up quite a bit. And so from a competitive standpoint, we're all facing the labor issues. So I think we're all -- like the pricing, we've said before, the pricing that was there was not sustainable. I mean, nobody was making money at these prices before, and we're still not generating adequate return on our investment at the prices where we're at, but it's much better than it was. And everybody's facing the same thing. And so therefore, even from a competitive landscape, pricing has increased on bids from everybody. There's still the odd one out there that are desperate. There's a lot of drilling companies out there in financial difficulty. So sometimes you might see desperate attempts out there to put pricing at really low prices. But usually, they're -- when they're at that stage, they're not able to deliver. You get what you pay for. So therefore -- so yes, so it's more a matter of the market having increased. But also, when it comes to difficult projects, we're still the go-to people, and we typically sit down with our customers and negotiate an appropriate price. Again, as I mentioned, we're still not making adequate returns, but we're able to come up with a price that basically works for both us and our customers.

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Ahmad Shaath, Beacon Securities Limited, Research Division - Research Analyst [13]

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That's great, Denis. And lastly, on your fleet strategy, we noticed, like, over the last maybe 18 months, you've been kind of trimming down and shifting the mix of the fleet. So how -- what's your view on that going forward in terms of how would you like your fleet to be shaped, let's say, in the next 12 months and in terms of numbers and in terms of composition as well if you have any internal targets? Have you guys thought about it that way?

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [14]

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Yes. The -- now there's always -- when you consider that we're now at 610 rigs, and rigs tend to have a life of 10 to 15 years, so by definition, every quarter, there's going to be rigs that are going to be basically reaching the end of their life. So if you just do the math, you will see that -- and I don't know what that works out to when you -- if you were to do it, spread it. But -- so we always will have that. Now this quarter, we retired 18 underground rigs, and basically, that's because we are making a shift. We made a shift in terms of the quality of the equipment that we want to bring. And we are investing in that business. We are investing to grow that business. And if you go look, the last 4 quarters, a lot of the rigs -- when we say we bought rigs, a lot of the rigs, and if you look at the rig count, have been toward the underground business. And it's paid off for us because our revenue is up on the underground sector.

So going forward, we're probably going to see that continuing. We're -- you're probably going to see a bit more underground rigs. But at the same time, we have some specialized rigs that we're running out of in terms of just being fully utilized. In certain markets, we're out of deep-hole rigs. And it might be -- it might make more sense to buy a new one than move one from another region if that region is close to full capacity as well. So there's going to be a little bit of that as well. So that's how the -- I see the fleet kind of evolving.

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Operator [15]

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There are no further questions registered at this time. I will now turn the meeting back to Mr. Larocque.

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Denis Larocque, Major Drilling Group International Inc. - President, CEO & Non-Independent Director [16]

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Well, thank you. And we will be attending the PDAC mining convention in Toronto starting Sunday, and we invite you to come visit us at Booth 330. Plus, we'll be displaying one of our computerized mobile underground rigs in another area of the convention floor, so please come and see us.

Thank you.

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David D. Balser, Major Drilling Group International Inc. - CFO [17]

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Thank you.

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Operator [18]

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Thank you. The conference has now ended.

Please disconnect your lines at this time, and we thank you for your participation.