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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to Orbit Garant Drilling's Fiscal 2024 Second Quarter Results Conference Call and Webcast. [Operator Instructions]
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. Please refer to the company's SEDAR filings for additional information on both risk factors and non-IFRS measures. This call is being recorded on Thursday, February 8, 2024.
I would now like to turn the conference over to Mr. Pierre Alexandre, President and CEO of Orbit Garant. Please go ahead, sir.
Thank you, operator, and good morning, ladies and gentlemen. With me on the call today is Daniel Maheu, 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 second quarter results were impacted by customer decisions to temporarily suspend or reduce activity on certain projects in Canada beginning in the fourth quarter of fiscal 2023. The reduced drilling activity impacted our revenue, and we did not have a corresponding reduction in cost because we chose to retain our drilling personnel on this project due to both the highly competitive market for drillers and our expectation of this project being gradually resumed.
We also faced additional ramp-up costs related to this project during the quarter, which further impact our margin. These suspended and reduced project 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.
Another important development in the quarter was the completion of our final 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 noted, we decided to seize operation in Burkina Faso due to ongoing political and stability and security concerns. In light of this decision, we determine that a full exit from West Africa made better business sense that maintaining our remaining operation in Guinea. 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 second quarter, 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 supported by near record gold price. 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 second quarter. Daniel?
Thank you, Pierre, and good morning, everyone. Revenue for the quarter totaled $43.4 million, a decrease of 16% compared to Q2 a year ago. Canada revenue was $29.6 million, a decline of 22.7% compared to Q2 last year, reflecting customer decision to temporarily suspend or reduce activity on certain projects in the first half of fiscal 2024. As Pierre noted, these projects start to gradually resume in August 2023 and were fully resumed by January 2024.
International revenue was $13.8 million, an increase of 3% from Q2 last year, reflecting increased drilling activity in Chile, partially offset by a reduction of drilling activity in Guyana and Burkina Faso.
Gross profit for the quarter was $2.8 million or 6.4% of revenue compared to $6.8 million or 13.1% 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 reduced 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.
General and administrative expenses were $4.1 million or 9.5% of revenue in the quarter compared to $3.9 million or 7.5% of revenue in Q2 last year. EBITDA was $1 million compared to $6.9 million in Q2 a year ago. Our net loss for the quarter was $1.7 million or $0.05 per share compared to a net earnings of $2.1 million 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 $1.6 million, 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 million.
Now turning to our balance sheet. On November 2, 2023, we entered into a fifth amended and restated credit agreement with National Bank of Canada in respect of our credit facility. The credit facility consists of a $30 million revolving facility and a USD 5 million revolving facility guaranteed by Export Development Canada. The credit facility expired on November 2, 2026. We repaid a net amount of $0.3 million on the credit facility in Q2 this year compared to a repayment of $2.9 million in Q2 a year ago.
Our long-term debt under the credit facility, including USD 2 million draw from the EDC facility and the current portion was $24.6 million at quarter end compared to $22.2 million as at June 30, 2023, our fiscal year-end. At quarter end, our working capital totaled $48.8 million compared to $50.4 million as at June 30, 2023.
I will now turn the call back to Pierre for closing comments. Pierre?
Thanks, 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 traded at all-time records level above USD 2,100 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 2/3 of our revenue from gold-related operation. Copper price are also at elevated level and industries 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 2024 came from major and intermediate customers compared to 69% in the same period in fiscal 2023.
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 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 Instructions] Our first question comes from [indiscernible].
Yes. Thank you. In the quarter, what were the losses at Burkina Faso?
The loss in Burkina Faso in the quarter is approximately CAD 0.5 million. So we stopped operation in December 2024. At the mine, we have one contract.
Okay. The international operations without Burkina Faso, do those operations in the quarter, did they have positive adjusted EBITDA?
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 we can say we expect to have a positive EBITDA from Chile and Guyana for Q3 as well.
Okay. So as the ramp-up costs and -- start to decline, they can improve their adjusted EBITDA. Because in the past, it was mainly start-up costs, ramp-up costs and so forth, if I have that correct.
Yes, that's correct.
Another quick 2 questions on the -- the Canadian sales impact of around $10 million sales in the quarter. So would your fiscal Q3 -- have the normal sales amount that you usually get of around $49 million and then add the $10 million that were missed in the Q2? Or would that be...
Yes, you're right. Technically, the Q3 will be as Q3 last year roughly in Canada, yes. Yes, that's correct. You see in Q2, we have 1/3 of the revenue and drill the meter drill in Canada, 1/3 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.
Okay. So it wouldn't be the $49 million that you usually get plus another $10 million that you are getting back from Q2 to get something in the high 50s for Q3?
No. You see last year in Q3, we have roughly in Canada, $38.5 million of income. This quarter in Q2, we have $29.6 million. So we should reach between $30 million and $34 million in Canada for Q3, probably yes. It would be better, but it won't be $38.5 million as last year.
Okay. And overall, for the calendar year 2024 -- for calendar year 2024, would $20 million to $30 million adjusted EBITDA for the entire company be a realistic target?
Hard to say because Q1 for the calendar year 2024, this is...
The fiscal year I now, but...
Okay. I would say it's a target for us. But based on what we have actually I would say $20 million EBITDA, it would be -- most of the EBITDA we could make in the calendar 2024.
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.
In Canada, the demand is still strong. We have space to add between $10 million, $15 million of revenue if the demand is there in Canada. And in -- principally in Chile, the demand is strong, we should have at least $25 million to $30 million 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%.
[Operator Instructions] Our next question comes from [indiscernible].
I know that for this -- for the second half of calendar 2023, the junior sell 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?
Pierre Alexandre speaking. I would say, of course, like you noticed, the financing for junior company has been reduced. It's pretty hard for the junior company to raise money. And there is some companies that are specific projects that are quite good. Those could finance. But I would say that this has been -- our revenue has been reduced because of this. And the major company are reducing their exploration -- money spend on exploration. But for the definition drilling and some of the -- most of the major companies are still spending money on definition drilling for their deposits. And there is some exploration, of course, like I said, that has 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 have been cut in exploration, but they are still keeping -- going with good number of meters we drill.
Okay. So it sounds like then the definition drilling has increased adequately to make up for the reduction in exploration in Canada?
Right. Right.
Got it.
Because gold producers are still doing good money because of the gold price [ opportune ]. 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 has been reduced a lot. And we feel that there's a reduction of drilling in medium too. So they just maintain the project as the -- 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. 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's a reduction of spending in the drilling to the exploration.
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?
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.
We have a follow-up question from [indiscernible].
Yes. Thank you. The company, if I have it correctly can -- is capable of doing $40 million to $50 million adjusted EBITDA in a good year. That would be on, let's say, $250 million 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 CAD 1 stock price. I mean would the management sell at something below CAD 1 Canadian share price?
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 centered on our plan saying increased drilling activity in Canada with major customers on specialized drilling and focus to have a margin of 20% on each contract and worked 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. The price of the share are unfortunately is under $1. And the market is very bad with all the drilling company, unfortunately.
Yes. I saw that, yes. The industry, even though the gold price is near -- they're staying around the USD 2,000, the gold miners are not near their highs. And so I've been watching that too on the chart. It's usually they zig and zag together, but they haven't been doing that for the last while. 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 million EBITDA possibilities, $50 million EBITDA possibilities.
Well, it's something that we are always -- to get the acquirer is 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 -- what we want to do for now is not focusing on the acquirer 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 some time too. I'm very optimistic on this. Our team is very -- our team is young. We are training drillers, but we are trading to management, and we're going [ to there ].
Okay. Lastly, would you repeat or clarify how January and 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.
Yes, yes. We have -- as I said, the number of meters we do -- in Canada, we do in surface 48,000 meters, and we expect to at least have 1/3 of that, so around 75,000 meters. So at the end, that means the quarter should be at least between $30 million and $34 million in Canada of income instead of $29.6 million in Canada as we have in Q2. But as I said, Q2 2023 was $38.5 million, which we won't reach in Q3 this year. It should be over $30 million, somewhere $33 million, $32 million in Canada in Q3 of this year.
Okay. And what is the guidance for the adjusted EBITDA for Q3? Was that said?
With this level of income, which is probably something around Q1 2024. In Q1 this year, we reached a $3 million EBITDA, with $33 million 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 $3 million.
There appear to be no further questions. I will turn the conference back to you.
So thanks everyone to participating today. We look forward to speaking with you again and after we report our fiscal third quarter results in [indiscernible].
Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.