Major Drilling Group International's (MJDLF) CEO Denis Larocque on Q3 2018 Results - Earnings Call Transcript

Major Drilling Group International Inc. (OTCPK:MJDLF) Q3 2018 Earnings Conference Call March 2, 2018 9:00 AM ET

Executives

Denis Larocque - President & CEO

David Balser - CFO

Analysts

Jacques Wortman - Eight Capital

Daryl Young - TD Securities

Operator

Good morning, ladies and gentlemen. Welcome to the Q3 2018 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.

Denis Larocque

Thank you, Valarie. Good morning, everyone and welcome to Major Drilling’s conference call for the third quarter of fiscal 2018. With me is David Balser, our CFO. You should all have received a copy of our results, which were released yesterday evening, if not, please see our website at majordrilling.com.

Before we get started, I'd like to caution you as usual, that during this conference call, we will make 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.

First of all, I'd like to congratulate our Canadian group winning this year’s PDAC Safe Day Everyday Gold Award in recognition of having worked a million hours lost time injury-free during 2016.

Our Canadian crews have now worked more than four million hours over 3.5 years without a single lost time injury. The safety and wellbeing of our crews is our first and highest responsibility when we work on any project and we work hard to earn the trust and support of our crews, and we are pleased to see their success being recognized by a group of our clients and peers.

Now regarding the third quarter, the company faced the usual slowdown in activity over the holiday season. While all regions were affected by loss of revenue and increased mobilization and maintenance costs, our teams were active preparing for a busier start up as compared to last year.

Most senior and intermediate companies have increased their exploration budgets for 2018 and have already added rage to their existing projects. The company's net cash position net of debt, continues to be very healthy at $14.4 million. This quarter, we spent $7.6 million on CapEx adding three new larger specialized rigs and additional support equipment to our fleet.

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

David Balser

Thanks Denis. Total revenue for the quarter was $75 million, up 7% from revenue of $70.1 million recorded in the same quarter last year. The unfavorable foreign exchange translation impact for the quarter, when comparing to the effective rate for the same period last year, is estimated at $3 million in revenue with negligible impact on earnings.

The overall gross margin percentage for the quarter was 17.6%, up from 13.4% for the same period last year. A higher volume of specialized work accounted for most of the gross margin increase. Third quarter margins are always impacted by a slowdown during the holiday season combined with higher mobilization and demobilization costs and increased repairs.

General and administrative costs were up 6% at $12.1 million when compared to the same quarter last year. Staffing levels and salary has increased as activity ramped up from a low level. As well, we continue to invest in recruitments and information technology as we continue to prepare for the upturn in the industry.

The provision for income tax for the quarter was a recovery of $3.7 million compared to recovery of $1.9 million for the same quarter last year. This combined for a net loss of $8.5 or $0.11 per share for the quarter compared to a net loss of $14.3 million or $0.18 per share for the prior year quarter.

In terms of our finance 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 $1.1 million for total net cash position of $14.4 million. The company spent $7.6 million on capital expenditures, adding three new rigs in support equipment to our fleet, while disposing of five older inefficient more costly rigs. The total rig count is now 643 rigs.

The new breakdown for our fleet and utilization is as follows; 321 specialized rigs at 29% utilization, 152 conventional rigs at 26% utilization, 170 underground rigs at 39% utilization, for total fleet of 643 rigs at 31% utilization for the quarter. As we've mentioned before specialized work in our definition is not necessarily conducted with specialized rigs. Therefore, we’ll also give you a breakdown for our revenue and type of work for the quarter.

Specialized work represented 57%, conventional work 14% and underground work 29%. Also, senior and intermediates represented 70% of our revenue in Q3, while juniors were at 22%. In terms of commodity oil projects represented 58% of our revenue or copper was at 15% this quarter.

With that overview of our financial situation I will turn the presentation back to Denis to discuss the outlook.

Denis Larocque

Thanks David. As we look forward, the fundamental driving the business continue to be encouraging for the quarter and into fiscal 2019 with gold and base metal prices remaining at healthy levels and the demand for drilling services continuing to increase. Given the sustained commodity prices over the last few months, we're seeing an increase in activity at most of our international operations.

In North America, we have been successful in renegotiating some of our lower margin contracts at better prices and have replaced a few others with new contracts at better pricing. We expect margins to improve going forward as increased demand drives improved pricing.

It is clear as we continue to manage our growth that developing human resources will be our biggest challenge as the industry moves deeper in the cycle. One of the challenges that is re-emerging in our sector is the shortage of experienced drill crews in the industry, particularly in Canada, a factor that will put some pressure on productivity and margins as we go forward.

For this reason, we continue to make investments in technology and enhancements to our recruiting and training systems. We focus on providing tools to our crews that will improve safety and productivity, particularly as we bring in a new generation of employees.

A recurring theme, we are hearing at all the mining investment and conferences these days by mining companies is the need to grow their depleting reserves after five years of sharp decline in exploration.

Reserves of the top 10 gold mining companies are down 35% over the last six years and are back to pre-2006 levels. For copper, it's projected to run into a supply deficit by the end of 2018 and the situation is going to get worse as we are seeing continued production and high grading of mines, combined with a lack of exploration work.

On top of that you add the growing demand for electric cars that will drive demand for not only copper, but lithium, cobalt and nickel. That is why we are seeing more and more seniors investing in juniors, which is the first sign of a mining exploration recovery.

For these reasons, we expect that at some point in the near future the need to develop resources in areas that are more difficult to access will significantly increase, driving demand for specialized drilling. We are already seeing a pickup in specialized drilling. We are already seeing a pickup in specialized drilling this year as mining companies are taking their exploration programs deeper to more remote locations and to high altitudes.

We are very pleased with where the company is positioned at this point in time. Having kept our capability and specialized drilling intact, coming out of one of the longest downturn in the industry with net cash on-hand allows us to improve our fleet to meet customer’s demands in terms of rates, right handling, mobile equipment and technology which is key to our success to remain the leader in specialized drilling.

Also, having the best equipment and financial resources allows us to attract the best people at a time when we are going into a labor crunch in our industry.

That concludes our formal remarks and will now open the call to question.

Question-and-Answer Session

Operator

Thank you. We will now take questions on the telephone lines. [Operator Instructions] Our first question is from Jacques Wortman with Eight Capital. Please go ahead.

Jacques Wortman

Good morning Denis. A quick question here, you noted in your comments there that executives have no need to replace reserves, but exploration spending per dollar of mining company revenue is at/or near all-time lows based on a S&P Global intelligence data that was released earlier this quarter.

Do you think this is the typical lag that we see between commodity prices and increased drill demand or increased activity? Typically, I think in the past we've seen about two quarters. So, are you thinking that this is going to be something that's going to sort of pick up maybe later this fiscal year or maybe in the fiscal 2019? I'm just trying to get a sense of the timing and if that kind of aligns with what you are seeing?

Denis Larocque

Yeah. It's really tough to call, when we'll see a pick up. But basically, when you look at his history, this really is playing out exactly like we saw in 2003, 2004 when the senior's ramped up their budget. And I mean, our activity is still increasing.

So, it's been increasing for I don't know how many quarters, but it's probably six quarters now, that basically exploration spend has been increasing. And basically, it's driven by the senior's. Juniors are still struggling to raise money.

But what we're seeing and that's exactly what we saw in 2003 and 2004 is, it’s the seniors that are financing and taking the opportunity that the juniors are kind of flying under their radar for investors. Investors are busy looking at the cryptocurrency and all the other stuff.

And so, the juniors are not getting the attention right now. But they are getting attention, the good projects are getting attention from the seniors. And we're seeing - that's what we're seeing, there's been quite a few seniors putting money in juniors, and that's what's driving the increased rate now.

But we all know that what really makes this industry take off is the investors coming back to the table and financing projects. And again, when you look at history the first sign is usually seniors putting money in juniors and then investor’s kind of wake up and they go, wow, there must be something here. If the seniors are seeing something and then you start seeing the interest coming back as basically these deals are getting done by seniors.

So, in terms of timing, when are we going to see investor interest coming back for mining for the juniors? I don't know. But at this time, it's the lack of reserves for seniors is needs to get addressed and is slowly getting addressed by the seniors by adding - as they're adding to their budgets to their exploration budgets.

Jacques Wortman

Okay. That's very helpful thanks Denis.

Operator

[Operator Instruction] Our next question is from Darryl Young with TD Securities. Please go ahead.

Darryl Young

Good morning gentlemen. Just wondering, if you could provide a little bit more context around what kind of net-net outlook is for margins? Sounds like pricing is starting to pick up, but obviously offset the continued shortage of labor. So just wondering what your view is there?

Denis Larocque

Yeah. I mean we don't - we never provide quantitative guidance because it's really tough to predict. But I mean that the trend is certainly pointing up because like I said pricing has come up particularly in Canada.

As you know people are focused on the number of rigs that are still idle or out there. But it's not a rig issue, it's a people issue and we are already facing that. There's a lot of people that left the industry with this long downturn. Some are coming back. Some are not. So, we are ready - and when I say we, it’s the industry not just us, everybody is facing the same labor crunch.

And so, therefore when we put we're at a point now where we're putting extra rigs in the field that we are demanding or we need better margins just because it's going to be harder and harder as we go forward to put extra rigs in the field.

So therefore, we need better pricing keep going. So basically, I think, the going forward - the price increase is going to at least cover our cost increases or maybe some of our productivity loss with new crews. And also, there should be an element - an additional element which will increase margins as we go forward.

Darryl Young

Got you. Okay. And then secondly around the new rig acquisitions, is that a reflection you mentioned investment in technology, and is that what's driving additional rig acquisitions? Is just upgrading in terms of capabilities of rigs compared to the stuff that's in inventory currently or maybe just a little more color there?

Denis Larocque

Yeah. So, this quarter the rigs that we bought are three specialized rigs, two that went to great control which is a service that we are growing. So, it's not driven, it's not like rigs with new technologies. But we are - part of our CapEx is invested in new technologies and we retrofitted a couple of rigs with while with computers and sensors and all kinds of things and we are putting those in the field. And we are basically investing in the mobility of our rigs.

So those things are in the CapEx, but it’s based – they are not like the three new rigs that we bought specifically this quarter were, they went to new jobs for which we had for. And then going forward, rigs will be adding, in a lot of cases will be either going to new jobs in jurisdictions because what's happening is, you get in a jurisdiction you run out of deep hole rigs and then you get a deep - an opportunity for the deep hole contract.

And most of the branches have need their deep hole rigs as they're chasing work. So, then we'll be buying a rate for that branch, if they need a rig. So that's how - basically that's how we're managing things is we're trying to maximize so we are on our specialized rig.

We feel that the utilization is going to keep going up, but at the same time we're going to have - in certain area, we're going to run out of certain types of rigs and we're going to have to add to our fleet as we go forward.

Darryl Young

Got you, okay. And so, would you expect to come over current levels of CapEx to continue or...

Denis Larocque

In terms of - it's tough to give you a number, it hinges on. Sometimes you get a phone call for a customer and they want two more rigs. And so, sometimes it just - it's a decision that gets made. It's not you know the return is there. But I think what you saw this quarter might be on my view a bit on the high end of CapEx.

But I wouldn't, it's not out of the realm of possibility that we'd be spending the same amount the next couple of quarters. But if we are, it's because we are chasing more work.

Darryl Young

Okay. Got you. Perfect. And maybe just one final question. The revenue decline in Canada and the U.S. areas of U.S percussive drilling contract, is that with a one large contract that's been going on for multiple years and their ability to replace them?

Denis Larocque

Yeah, it is one large contract that came to an end. The work was done because percussive is in, basically you're involved in the development of the mine or - so it's kind of the specific timing on it. And it was a large contract that came to an end and we are working on replacing and we've replaced some of it. It's just - we haven't we haven't caught up to replacing all of it. So basically, that's what we saw there.

So, the termination of that contract has been offset some weight by an increase in activity both in percussive and in exploration but we haven't made up made up that contract. And the sales cycle is longer on the percussive because it’s the type of thing, it’s not like in the exploration where you get a phone call and they want to rig for next Monday, you're into development of a mine.

So, it's longer sale cycle, decision time and everything takes longer. But when you land a contract you could be there for years in terms of just the development of that mine. So, it kind of goes both ways.

Darryl Young

Excellent. Thanks very much for your time.

Operator

Thank you. There are no further questions registered at this time. I would like to during the meeting back over to you Mr. Balser.

David Balser

Thank you. And it is - next week is PDAC in Toronto with a big mining conference. We're going to be - we're going to have a lot of people there, where we are a golf club sponsor this year. So, we will be - our name will be all around and we have lots of people around. So, if you're around just stop by our booth 330. And we'll be happy to have a chat with you. So, on that note thanks everyone for listening.

Operator

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