Orbit Garant Drilling Q2 2024 Earnings Call Transcript

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February 8, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Orbit Garren Drilling's Fiscal 2020 Second Quarter Results Conference Call and Webcast. At this time, all lines are in listen only mode. Following management's remarks, Please be aware that certain information discussed today may be forward looking and that actual results could differ materially. This call is being recorded on Thursday, February 8, 2024. I would now like to turn the conference over to Mr.

Operator

Pierre Alexandre, President and CEO of Orbit Garrote. Please go ahead, sir.

Speaker 1

Thank you, operator, and good morning, ladies and gentlemen. With me on the call today is Daniel Maou, CFO. Following my opening remarks, Daniel will review our financial results in greater detail, and I will conclude with comments on our outlook. We will then welcome questions. Our 2nd quarter results were impacted by customer decisions to temporarily suspend or reduce activity on surgeons project in Canada beginning in the Q4 of fiscal 2023.

Speaker 1

The reduced drilling activity impacted our revenue and we did not add the corresponding reduction in cost because we chose to retain our drilling personnel on this project due to both the highly competitive market for Drudgers and our expectation of this project being gradually resumed. We also face additional ramp up costs related to this project during the quarter, which further impact our margin. These suspended and reduced projects began to gradually ramp back up in August 2023. And as expect, All of them were fully resumed by January 2024. So this issue is now behind us.

Speaker 1

Another important development in the quarter was the completion of our finance drilling project in Burkina Faso and Guinea. We are currently in the process of exiting West Africa altogether. We are pursuing potential sales of our equipment there to local companies and may also ship equipment to our operation in Canada and South America. As we previously note, we decided to cease operation in Burkina Faso due to ongoing political instability and security concerns. In light of this decision, we determined that a full exit from West Africa made better business sense than maintaining our remaining operation in Guinea.

Speaker 1

We believe that our exit from West Africa will positively impact our future margin. Going forward, we will continue to primarily focus on our core Canadian gold operation, while selectively pursuing attractive opportunities in South America. During the Q2, we renewed a large specialized drilling contract in Canada with an important senior gold mining customer for a term of 3 years. We will continue to operate 15 to 20 surface and underground drill rigs on this customer's project site over the term of the contract. Customer demand for our drilling service remains strong in Canada and is support by near record gold price.

Speaker 1

We are also experiencing increased demand and improved performance in our Chilean operation. I will now turn the call over to Daniel to review our results for the Q2. Daniel?

Speaker 2

Thank you, Pierre, and good morning, everyone. Revenue for the quarter totaled $43,400,000 a decrease of 16% compared to Q2 a year ago. Canada revenue was $29,600,000 a decline of 22.7% compared to Q2 last year, reflecting customer decision to temporarily suspend or reduce activity on certain project in the first half of fiscal twenty twenty four. As Pierre noted, these projects start to gradually resume in August 2023 and were fully resumed by January 2024. International revenue was $13,800,000 an increase of 3% from Q2 last year, reflecting increased drilling activity in Chile, partially offset by a reduction of drilling in Guyana and Burkina Faso.

Speaker 2

Gross profit for the quarter was $2,800,000 or 6 0.4% of revenue compared to $6,800,000 or 13.1 percent of revenue in Q2 last year. Adjusted margin, excluding depreciation expenses was 12.2% compared to 18.1% in Q2 last year. The decline in gross profit, gross margin and adjusted gross margin was primarily attributable to the reduction of drilling activity in Canada and our decision to retain our drilling personnel on suspended or reduce customer project as Pierre noted earlier. We also incurred additional ramp up costs related to These projects, we are pleased to note that these projects were all fully resumed last month. So we are now seeing a positive margin contribution from these projects.

Speaker 2

General and administrative expenses were $4,100,000 or 9.5 percent of revenue in the quarter compared to $3,900,000 or 7.5 percent of revenue in Q2 last year. EBITDA was $1,000,000 compared to $6,900,000 in Q2 a year ago. Our net loss for the quarter was $1,700,000 or $0.05 per share compared to a net earning of $2,100,000 or $0.06 per share in Q2 last year. The year over year declines are due to the factors already discussed and a negative foreign exchange variances of $1,600,000 partially offset by increased drilling activity in Chile. Our net loss in Q2 this year was also impact also partially offset by an income tax recovery of $1,000,000 Now turning to our balance sheet.

Speaker 2

On November 2, 2023, we entered into a 5th amended and restricted credit agreement with National Bank of Canada in respect of our credit facility. The credit facility consists of a $30,000,000 revolving facility and a $5,000,000 revolving facility Guaranteed by Export Development Canada. The credit facility expired on November 2, 2026. We repaid a net amount of $300,000 on the credit facility in Q2 this year compared to a repayment of $2,900,000 in Q2 a year ago. Our long term debt under the credit facility including US2 $1,000,000 draw from the EDC facility and the current portion was US24 $600,000 at quarter end compared to $22,200,000 as at June 30, 2023, our fiscal year end.

Speaker 2

At quarter end, our working capital totaled $48,800,000 compared to $50,400,000 as at June 30, 2023. I will now turn the call back to Pierre for closing comments. Pierre? Thanks,

Speaker 1

Daniel. With all of our drilling projects in Canada now fully resumed, we are well positioned to capitalize on strong customer demand and drive profitable growth. Gold price recently trade at all time records level above US2100 dollars an ounce. Gold mining is a highly profitable business at current price, And mining companies have a strong incentive to increase exploration spending and expand their reserves and resources. We generate nearly 2 thirds of our revenue from gold related operation.

Speaker 1

Copper price are also at elevated level And industry's forecast indicates solid growth in demand in the coming years. The positive outlook is being driven by copper's critical role in electric transport, electricity transmission grids and renewable power generation. Much more copper will be needed to help with the worst decarbonization efforts and we expect to see continued strong demand for our copper mining customers in Chile. We have been increasing our focus on senior and intermediate customer in the mining sector, while continuing to work with a select group of well financed juniors. Approximately 90% of our revenue in the first half of fiscal twenty twenty four came from major intermediate customer compared to 69% in the same period in fiscal 2023.

Speaker 1

Looking ahead, we remain committed to our 5 point plan, which include primarily focusing on Canadian Gold drilling operation, prioritizing longer term specialized drilling contract with major and intermediate customer, Pursuing international contracts that offer attractive returns, continued investment in our driller training and computerized drilling technology and building a team oriented leadership structure that fosters collaboration and personal accountability. We believe by sticking to this plan we will drive profitable growth and build shareholder value. That concludes our formal remarks for this morning. We will now welcome any questions. Operator, please Begin the question period.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Thank you. Our first question comes from Terry Belina from Shareholder. Please go ahead.

Speaker 3

Yes, thank you. In the quarter, what were the losses at Burkina Faso?

Speaker 2

The loss in Burkina Faso in the quarter is approximately CAD 500,000. So we stopped operation in December 2024. At the mine, we have one contract.

Speaker 3

Okay. The international operations without Burkina Faso, Do those operations in the quarter, did they have positive adjusted EBITDA?

Speaker 2

Yes. We talk with Chile and Guyana, yes, we have a positive EBITDA in Chile and Guyana in the quarter, And it was the same in Q1 also. And

Speaker 1

we can

Speaker 2

say we expect to have a positive EBITDA from Chile and Guyana for Q3 as well.

Speaker 3

Okay. So as the ramp up costs and start to decline, they can improve their adjusted EBITDA because in the past it was mainly startup costs, ramp up costs and so forth, if I have that correct?

Speaker 2

Yes, that's correct.

Speaker 3

Another quick two questions on the Canadian sales impact of around $10,000,000 sales in the quarter. So would your fiscal Q3 have the normal sales amount that you usually get of around 49,000,000 And then add the $10,000,000 that were missed in the Q2 or

Speaker 1

Yes, you're right.

Speaker 2

Yes, you're right. Technically, the Q3 We'll be as Q3 last year roughly in Canada. Yes, yes, that's correct. You see in Q2, we have a third of the revenue and drill The meter drill in Canada, a third is was lost based on the suspended project in Canada. So this should came back in Q3 and Roughly in Canada, the revenue should be the same as Q3 last year around.

Speaker 3

Okay. So it wouldn't be the 49 that you usually get plus another 10 that you are Getting back from Q2 to get something in the high 50s for Q3?

Speaker 2

No. You see last year in Q3, we have Roughly in Canada $38,500,000 of income. This quarter in Q2 we have $29,600,000 So We should reach between €30,000,000 €34,000,000 in Canada for Q3, probably, yes. It would be better, but it won't be 38.5% as last year.

Speaker 3

Okay. And overall for the calendar year 2024 For calendar year 2024, would $20,000,000 to $30,000,000 adjusted EBITDA for the entire company be a realistic target?

Speaker 2

Hard to say because Q1 okay, for the calendar year 24. This is

Speaker 3

a The fiscal year is June, I know, but yes. Okay.

Speaker 2

I will say it's a target for us, but based on what we have actually, I would say $20,000,000 EBITDA, It will be most of the EBITDA we could make in the calendar 2024.

Speaker 3

And that is with Canada, Is it true or am I correct that the profitability is solid and the pricing is solid. And so the outlook For EBITDA is mainly from the international operations not helping as much?

Speaker 2

In Canada, the demand is still strong. We have space to add between €10,000,000 €15,000,000 of revenue if the demand is there in Canada. And principally in Chile, The demand is strong. We should have at least €25,000,000 to €30,000,000 of Income again in Chile in 2024. So I would say that We should have an increase of income in 2024 calendar year of anywhere from 5% to 10%.

Speaker 3

Okay. Those were all my questions. Thank you. I appreciate it.

Speaker 2

Thank you very much, Thierry.

Operator

Thank you. Our next question comes from Sarah Haberil from Mill Road Capital. Please go ahead. Your line is open.

Speaker 4

Hi, thanks for taking my question.

Speaker 2

Hi, Sabine.

Speaker 4

I know that for the second half Calendar 2023, the junior fell to only 10% of your revenue, which was a significant decline from 31% of your revenue in the first half of the year. Could you just elaborate on What you're seeing in terms of activity from the juniors currently and what your expectations for them are in calendar 2024? And do you expect their drilling activity to continue to decline in 2024 versus 2023?

Speaker 1

Pierre Alexandre speaking. I would say, of course, like you noticed, the Financing for junior company had been reduced. It's pretty hard for a junior company to raise money. And There is some companies that are specific project that are quietly good. Those could finance, but I would say that this had been our revenue had been reduced because of this.

Speaker 1

And the major company are reducing their exploration money spend on exploration. But for the definition drilling and some of Most of the major company are still spending money on definition drilling for their deposit. And there is some exploration, of course, like I said, that had been cut too. But It seems to be especially in the gold mining, we don't feel that it's the same, I would say. And for gold and copper, of course, there's some exploration money that had been cut in exploration, but They are still keeping going with good number of meters we drill.

Speaker 4

Okay, thanks. So it sounds like then the definition drilling has increased adequately to make up for the reduction in exploration in Canada?

Speaker 1

Right.

Speaker 4

Got it.

Speaker 3

Because

Speaker 1

Gold producer are still doing good money because of the gold price, offer 2. Of course, there's I would say in lithium, there was I shouldn't speak in the past, but there is still some movement over there. But like you know, the lithium price had been reduced a lot and we feel that there's a Reduction of drilling in lithium 2. So they just maintain the project as they that they are Putting into, I would say, to they spend the money that they have to spend for their exploration budget, but there is not more money coming to this project. So I couldn't tell from now if this project like in Quebec would go into production.

Speaker 1

There is some I still talk about lithium. There is some that are keep going, but with the reduction of the lithium price, we feel that there is a Reduction of spending in the drilling tool in the exploration.

Speaker 4

Got it. And so I guess despite that backdrop, Did I hear correctly earlier on that you still expect your revenue from Canada to hold up?

Speaker 2

We expect in Canada to have let's say, I talk about the calendar year 2024. We should have an increase between 5%, 10% in Canada, yes.

Speaker 4

Thanks. That's all from me.

Speaker 2

Thank you, sir.

Operator

Thank you. Thank you. We have a follow-up question from Terry Vienna from Shareholders. Thank you.

Speaker 3

Yes, thank you.

Speaker 2

The company,

Speaker 3

if I have it correctly, Ken, is capable of doing $40,000,000 to 50,000,000 Adjusted EBITDA in a good year, that would be on, let's say, $250,000,000 of sales, a little bit higher pricing, 20% EBITDA margin. And so other companies that are in the industry must be seeing that also. And would it be something that management would Think about or would the company not be something for sale, let's say, below CAD1 stock price. I mean, would the management sell It's something below CAD1 share price.

Speaker 2

As you know, Terry, the all drilling company actually are very low. The stock price is very low, and we don't make exception to this. But we don't have any Capability on that, the only thing we can do is concentrate on our plan saying Increased drilling activity in Canada on with major customer on specialized drilling and focus to have a margin of 20% on each contract and work hard on this. And The good news is Chilean operations since calendar since January 2023 make A positive EBITDA, they made margin now around 20%. So we are on track for that.

Speaker 2

The price of the share unfortunately is under $1 and the market is very Bad with all the drilling company, unfortunately.

Speaker 3

Yes. I saw that, yes. The industry, even though the gold price is near this thing around the 2000 U. S, The gold miners are not near their highs. And so I've been watching that too on the chart.

Speaker 3

It's usually they zig and zag together, but they haven't been doing that for the last To a follow-up on that on my question, so would management be open to being acquired Since it might be it might help the stock price In the short term or is management more focused on waiting for the turn and looking at the $40,000,000 EBITDA possibilities, dollars 50,000,000 EBITDA up possibilities?

Speaker 1

Well, it's something that we are always to get acquire It's something that we always look for, but at this price at this stock price, I couldn't see what type of deal we could do because no, no, we need to what we want to do for now is not focusing On the acquire or do a deal with someone else, we need to focus on our 5 points and get the company to pay its debt and get better financial results. That's what we're looking for now. It might take some time, but we will be there sometime too. I'm very optimistic on this.

Speaker 3

Okay.

Speaker 1

Our team is very our team is young. We are training drillers, but we are training to management and we're going to dare.

Speaker 3

Okay. Lastly, would you repeat or clarify how January February, not February, but you said January, things are back to a normal Sales and margin for Canada and for international also, did I hear that correctly or was that Okay.

Speaker 2

Yes, yes. We have as I said, the number of meter we do In Canada, we do in surface 48,000 meters And we expect to at least have a third of that, so around 75,000 meters. So At the end that means the core should be at least between $30,000,000 and thirty $4,000,000 in Canada of income instead of $29,600,000 in Canada as we have in Q2. But as I said, Q2 2023 was €38,500,000 which we won't reach In Q3 this year, it should be over €30,000,000 somewhere €33,000,000 in Canada in Q3 of this year.

Speaker 3

Okay. And what is the guidance for the Adjusted EBITDA for Q3,

Speaker 1

was that said?

Speaker 2

With this level of which is probably something around Q1 2024. In Q1 this year, we reached a €3,000,000 EBITDA With a $33,000,000 of income in Canada, that should be around that in Q3. So technically, Without the pressure of West Africa, we should have an EBITDA around The one in Q1 this year, so around scenario.

Speaker 3

Okay. Yes, the other questions were answered. Those were all my questions. I appreciate it. Thank you.

Speaker 1

Thank you, Terry. Thank you.

Operator

Thank you. There appear to be no further questions. I'll return the conference back to you.

Speaker 2

So thanks everyone to participating today. We look forward to Speaking with you again and after we report our fiscal 3rd quarter result in this press.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.

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Key Takeaways

  • Revenue in Q2 fell 16% year-over-year as Canadian projects were temporarily suspended, but all affected operations were fully resumed by January 2024.
  • Completed the full exit from West Africa (Burkina Faso and Guinea) and plan to redeploy equipment to Canada and South America, which is expected to improve future margins.
  • Renewed a 3-year contract with a senior Canadian gold miner to operate 15–20 rigs, supported by near-record gold prices and strong customer demand.
  • International revenue rose 3% with the Chilean operation achieving positive adjusted EBITDA in Q2, reflecting increased demand in South America.
  • Q2 results included a net loss of CAD 1.7 million (EPS CAD 0.05) and EBITDA declined to CAD 1 million from CAD 6.9 million a year ago, driven by reduced activity and ramp-up costs.
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Earnings Conference Call
Orbit Garant Drilling Q2 2024
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