Orbit Garant Drilling Q3 2024 Earnings Call Transcript

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May 9, 2024

Key Takeaways

  • Adjusted gross margin improved to 17.3% from 14.4% year-over-year, driven by profitable international operations and exit from unprofitable West African projects.
  • Q3 revenue was $48.2 M, down 2.3% YoY, with Canadian revenue flat and international revenue up 1.8%, partially offset by the cessation of activities in Burkina Faso and Guinea.
  • Secured two large contract renewals in Chile, including a 5-year agreement (the largest in the region) and a 3-year extension with a 2-year customer option to extend further.
  • Net earnings rose to $2.0 M (CAD $0.05/share) versus $0.2 M (CAD $0.01/share) last year, benefiting from operational improvements and a CAD $1.3 M income tax recovery.
  • Challenging financing conditions for junior and some intermediate mining companies may constrain demand and contract pricing, leading the company to prioritize longer-term specialized contracts with senior and well-funded intermediate miners.
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Earnings Conference Call
Orbit Garant Drilling Q3 2024
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Orbi Goran's Billings Fiscal 20 24 Third Quarter Results Conference Call and Webcast. At this time, all lines are in a listen only mode. Following the management's remarks, we will conduct a question and answer session. Please be aware that certain information discussed today may be forward looking and that actual results could differ materially. Certain non IFRS financial measures will also be discussed.

Operator

Please refer to the company's SEDAR filings for additional information on both risk factors and non IFRS measures. This call is being recorded today, Thursday, May 9, 2024. I would now like to turn the conference over to Mr. Pierre Alexander, President and CEO of Corbit Gorant. Please go ahead, sir.

Speaker 1

Thank you, Lester, and good morning, ladies and gentlemen. With me on the call is Daniel Mayeux, 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 profitability improved in the 3rd quarter compared to Q3 last year, reflecting stronger operating performance from our international operations.

Speaker 1

Our drilling activity in Chile increased year over year and we have no further activity in West Africa, where we complete our final program during our Q2. In Canada, our operations normalized during the quarter. As we previously announced, we temporarily suspend our reduced activity on certain projects during the first half of fiscal twenty twenty four due to customer decisions. These projects were fully resumed by January 2024 as expected. Our drilling activity in Canada was relatively stable compared to Q3 last year and reflect continued strong demand for our services.

Speaker 1

Our revenue in the Q3, which is seasonally slower period for our business was $48,200,000 a slight reduction from $49,300,000 in Q3 last year. Adjusted gross margin increased to 17.3% from 14.4% in Q3 last year, primarily reflecting the stronger performance of our international operations. We had operating earnings in our international operations of $200,000 in the quarter, compared to an operating loss of $2,100,000 last year. With our West African drilling operation now seasoned, we expect our future gross margins to improve as we focus on our core Canadian gold drilling operation and pursue attractive project in South America, while carefully managing our costs. Customer demand from senior and intermediate mining company remains generally strong, support by near record gold price and rising copper prices.

Speaker 1

Sequent to quarter end, we secured 2 large contract renewal on copper drilling project in Chile with senior mining companies. 1 of the contract renewal is for a term of 3 years with a customer option to extend for 2 years and the other, which represent our largest contract in Chile, is for a term of 5 years. Our operational performance in Chile has been improving. And these 2 large contract renewal will support our positive momentum in this important market going forward. I will now turn the call to Daniel to review our results for the Q3.

Speaker 1

Daniel?

Speaker 2

Thank you, Pierre, and good morning, everyone. Revenue for the quarter totaled $48,200,000 a small reduction of 2.3% compared to Q3 a year ago. Canada revenue was $37,200,000 a decline of 3.5% compared to Q3 last year, reflecting decreased drilling activity on certain projects. International revenue was $11,000,000 an increase of 1.8% from Q3 last year, reflecting increased drilling activity in Chile and Guyana, partially offset by our termination of activity in Burkina Faso and Guinee. Gross profit for the quarter increased to $6,200,000 or 12.8 percent of revenue compared to $4,600,000 or 9.4 percent of revenue in Q3 last year.

Speaker 2

Adjusted gross margin, excluding depreciation expenses, was 17.3% compared to 14.4% in Q3 last year. The increase in gross profit, gross margin and adjusted gross margin was primarily attributable to increased drilling revenue in Chile and the cessation of our activity in Burkina Faso, which was unprofitable, partially offset by reduced drilling activity in Canada and certain current costs related to the termination of drilling activity in Guinea. General and administrative expense were $3,500,000 or 7.3 percent of revenue in the quarter compared to $3,600,000 or 7.2 percent of revenue in Q3 last year. EBITDA was $3,900,000 compared to $4,500,000 in Q3 a year ago. The decrease primarily reflects a negative foreign exchange variances of $1,800,000 partially offset by the positive operating earning in our international operation, which Pierre noted.

Speaker 2

Net earnings for the quarter increased to $2,000,000 or $0.05 per share compared to 200,000 dollars or $0.01 per share in Q3 last year. The increase reflects the positive operation earning in our international operation and an income tax recovery of $1,300,000 partially offset by the negative foreign exchange variances. Now turning to our balance sheet. We repaid a net amount of $1,300,000 on the credit facility in Q3 this year compared to a withdrawal of $2,600,000 in Q3 a year ago. Our long term debt under the credit facility, including US3 $1,000,000 draw from the revolving facility and the current portion, was $23,400,000 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?

Speaker 1

Thanks, Daniel. We were pleased to generate solid year over year growth in margin in the Q3, and we believe that we are well positioned for continued growth in profitability. As we complete our exit from West Africa, we are now a leaner company focuses on higher margin opportunities in Canada and South America. Our business is currently supported by very strong metal price. Gold price reached record highs above $2,400 per ounce last month.

Speaker 1

Copper price have also increased significantly during this calendar year. Accordingly, we expect to see continued strong customer demand from senior mining company and well financed intermediate. However, financing condition remain challenging for junior mining company as well as some intermediate. This is impacting demand from these companies and overall contract pricing in our industry. We recognize that these financing challenges could persist for some time and we are prioritizing longer term specialized drilling contract with senior and well financed intermediate mining companies.

Speaker 1

During the 1st 9 months of fiscal 2024, we generate 87% of our revenue from senior and intermediate mining company projects, up to 70% in the same period last year. Our strategy going forward has not changed. We focus on our 5 point plan, which include primarily focusing on Canadian Gold drilling operation, prioritizing longer term specialized drilling contract with major and intermediate customers. Pursuing international contract in South America and Chile in particular 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 that the continued advancement of this strategy will drive performance improvements and stronger return for our shareholders.

Speaker 1

Before opening up the line to questions, I would like to acknowledge the appointment of Andre Pager to our Board of Directors yesterday. Andre has more than 30 years of experience in Capital Markets, including senior roles in institutional sales. He was formerly Managing Director with Desjardins Capital Markets prior to his retirement in November 2023. Andre's extensive capital market experience will be beneficial as we continue to advance our growth objectives and focus on building value for shareholders. That concludes our formal remarks this morning.

Speaker 1

We will now welcome any questions. Lester, please begin the question period.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. Your first question comes from Terry Beale from a Private Investor. Your line is now open.

Speaker 3

Thank you. Congratulations. It seems like the company is turning the quarter turning the corner in the quarter. I had a few questions. West Africa hurt EBITDA in the quarter by how much or the sales or was it very minimal?

Speaker 2

Thank you first for your remark. Yes, we're turning the corner, we think. And West Africa have an impact of less than $1,000,000 in the quarter.

Speaker 3

Okay. That was for the sales or for the EBITDA?

Speaker 2

For the EBITDA.

Speaker 3

Okay.

Speaker 2

So we incurred some expenses in Guinee for severance for employees and some in Burkina Faso in Q3, but and some transportation of the equipment to send Guinee equipment to Burkina Faso, but that's it. And these expenses are incurred in Q3. And technically speaking, no other expense should happen in next quarter related to when that becomes.

Speaker 3

Okay. So do I have it correct? The $3,900,000 EBITDA for the quarter would have been up to $1,000,000 more had it not been for West Africa. So West Africa hurt the $3,900,000 So is that correct? The $3,900,000 has been higher?

Speaker 2

Yes. It should be higher, not to $4,900,000 but at least $600,000 or $700,000

Speaker 3

Okay. Following up on the adjusted EBITDA, dollars 3,900,000 and then adding $1,800,000 of the variance in the currency exchange, would that be an adjusted EBITDA? Or would you go over the $1,800,000 is that added to get an adjusted EBITDA?

Speaker 2

Yes. We actually calculate our EBITDA without considering the effect of we include the effect actually in the 3.9 percent of the foreign exchange loss. So you're correct. If we, let's say, calculate an adjusted EBITDA, which we extract the gain of the loss of foreign exchange, we will came to a $5,000,000 EBITDA. You're right.

Speaker 3

Okay. The $1,800,000 seemed like a high currency exchange for an EBITDA for is that something that is abnormal or is that something that was from some type of currency in 3 months suddenly changed quite a bit or it just seems like a large number for 1 quarter.

Speaker 2

Yes. Unfortunately, as you see this quarter in 2024, we have a loss of $1,000,000 This quarter a year ago in Q3 2023, we have a gain of 0.7 $1,000,000 So essentially, it's related to the fluctuation between the pesos in Chile related to U. S. Dollars. And it's also because it's a lot of variation in this currency, the CLP, the puzzles in Chile compared to U.

Speaker 2

S. And also we have a lot of variation with the XOF in Burkina compared to U. S. So we still have account receivable from customer and that make a lot of change. And also in Canada, we have impact of the decrease in Q3 2024 of the Canadian dollar compared to U.

Speaker 2

S. Dollar. Unfortunately, that make a lot of, let's say, noise for the result. But technically, we have to

Speaker 3

Okay. I have 2 more questions. For Canadian operations, I see where the publicly traded competitors in Canada have about 600 to 800 basis points higher gross profit margins. They have the mid-20s gross profit margins. And what is the main one or two reasons for the adjusted gross profit for Canada revenue, not at the market of the industry in the mid-twenty percent.

Speaker 2

In Quebec, we are in the we are strong in Quebec in the drilling area here. And we have a lot of competitor in this market in Quebec. That's why we try to target more specialized work with higher margin on long term contract as the one we renew in last November with a large Canadian company. And we pursued this kind of contract in Canada. And that's the why, let's say, our margin actually in Canada is not so high.

Speaker 2

But we have to also consider the effect of the West Africa business that which had a negative impact on our consolidated result.

Speaker 3

Okay. My last question is South America. When things get going and is steady in South America, Is the gross profit percent and the EBITDA percent similar to Canada or is it higher or lower?

Speaker 2

Let's say in the since January 2023 till this quarter, the EBITDA percentage and the gross margin percentage is comparable to Canada. But now the demand is higher in Chile for copper. So price is are better right now. So it gives us the possibility to increase price. And as Pierre mentioned and as is indicated in the press release, we renew a very large contract, 2 contracts, but one of them was a very large contract for our business at good margins.

Speaker 2

So that's interesting for us, for the business we have actually in Chile. And the copper price is still increasing. So the margin actually in Q3 of 2023 2024 is over Canadian margin and percentage of EBITDA in Chile.

Speaker 3

Okay. Sounds I have one more question. I think I should ask it now in case I can't get back into the queue. It happens to be with the gold price and the copper price being very high. And what in your opinion is the 1 or 2 reasons for the utilization and demand 2024 not as great as when the gold price was this high 2011 or 2012 area where the sales for the company were much higher and utilization was much higher and so forth.

Speaker 3

The gold prices is basically a little higher than back then. Yet the sales for the company are and for the industry, for the drilling industry are not as high as 20 10 2011 2012 I mean. What would you say is the main one or two reasons for that for demand not as high given that the gold price is so high?

Speaker 1

Well, it's very tricky to answer, but what we hope for the next, I would say next quarter or next year is that investor would get back to the stock market to invest in junior company. This would help to get more work and grow like organically. So this is our wish, but I have no crystal ball, but we don't really understand why junior financing is not there, but I hope that it will be there in the next month or next year. But of course, we are like I said, we have 70% of our business with major and intermediate company and we're focusing on these, gold and copper. And there is room in Chile to improve increase our operation organically and with our division here in Canada.

Speaker 1

That's where we'll be focusing on.

Speaker 3

Okay. What was the utilization this quarter or the last 6 months or recently for the utilization?

Speaker 1

It turns around 55%.

Speaker 3

Okay. So you have plenty of capacity. Maximum utilization would be 75% or so. Is that correct?

Speaker 1

Well, if we hit 70, we'll be happy. Because we still to keep in mind, none of us are, we still to keep in mind that we need good labor to operate rigs.

Speaker 3

Yes, understood. Sure. Exactly. To buy

Speaker 1

them properly. That's why that's another something else that we're focusing on. That's the reason why we're working within Intermedian and major client.

Speaker 3

Right. The safety has yes. Thank you for your time and answering the questions. Those were my questions. Thank you.

Speaker 1

Okay. Have a good day, sir. Thank you for the question.

Operator

There are no further questions at this time. Mr. Pierre Alexander, please proceed with your closing remarks.

Speaker 1

Thank you everyone for participating today. We look forward to speaking with you again after we report our 4th quarter results. Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.

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