Forage Orbit Garant Inc

TSX:OGD

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to Orbit Garant Drilling Fiscal 2021 Third 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, May 13, 2021.I would now like to turn the conference over to Mr. Eric Alexandre, President and CEO of Orbit Garant. Please go ahead, sir.

[Eric Alexandre, President, CEO & Director]

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, and I will conclude with comments on our outlook. We'll then welcome questions. We reported significantly stronger revenue and profitability in our fiscal third quarter compared to the same period a year ago. This performance was driven by increased drilling activity and improved operational efficiencies and cost reduction initiatives. We drilled approximately 431,000 meters in the quarter, an increase of 20.3% from 359,000 in Q3 last year. Customer demand continues to increase, reflecting the easing of COVID restriction on drilling activities and the resumption of drilling projects. This demand is also supported by the strength in current gold and copper prices. Our drilling activity in Canada and West Africa has now either returned to or surpassed the pre-pandemic levels. In Chile, drilling activity is still below pre-pandemic levels, but we are experiencing stronger demand in that market as well. As a result of the increase in customer demand in Canada, it is currently difficult to source additional experienced driller and support personnel. As a result, we are being more selective on new projects. During the quarter, we commenced new long-term contracts with a major copper producer in Chile and a major gold producer in Guinea, which are reflected in our increased modernization costs, including the expansion of our drill fleet in West Africa. These costs impacted our profitability during the quarter. However, our gross profit and margins still increased significantly compared to Q3 last year, as our improved operational efficiencies and cost reductions more than offset the higher mobilization costs and costs related to COVID-19 mitigation. Adjusted gross margin in the third quarter was 13.1% compared to 10.2% last year. We also generated stronger EBITDA and net earnings in the quarter compared to Q3 last year. In addition to higher margins, EBITDA and net earnings were positively impacted by the reversal of a provision for litigation in Burkina Faso worth approximately $2 million. Daniel will discuss that in more detail shortly. We are carefully monitoring the impact of COVID-19 in the regions in which we operate. I am pleased to say that we faced no major disruption to our operation during the quarter, despite rising COVID case counts in Canada and globally. We are continuing to uphold strict safety protocols to protect our employees and other stakeholders. We are also maintaining flexibility across our operations that enable us to respond rapidly to any changes in COVID related business restrictions.Finally, I want to talk briefly about our CFO succession. Alain Laplante retired from Orbit Garant at the end of April. He was CFO since our IPO back in 2008 and has played a key role in supporting our growth and development. We are grateful to him for all of his contribution to the company. Our new CFO, Daniel Maheu, was a natural choice to succeed Alain. He has been Orbit Garant's Corporate Controller since 2010. During that time, he has performed critical duties in finance and operations and has a true understanding of our business. Daniel also has experience as Controller and Chief Financial Officer at 2 transportation companies prior to joining Orbit Garant. We look forward to his leadership in this new role. Now I turn the call over to him to review our financial results in more detail. Daniel?

[Daniel Maheu, Chief Financial Officer]

Thank you, Eric, and good morning, everyone. Our fiscal 2021 third quarter revenue totaled $40.5 million, an increase of 12.5% compared to $36 million in Q3 a year ago. Canada revenue totaled $31.1 million in the quarter, up from $28.6 million in Q3 last year. Our drilling activities in Canada have returned to pre-pandemic level following a gradual ramp-up that began in the late half of fiscal 2020 fourth quarter. International revenue increased to $9.4 million in the quarter, up to (sic) [ from ] $7.4 million in Q3 last year. The increase reflects increased drilling activity in Burkina Faso and Guyana and a new project in Guinea, partially offset by a decline in drilling activities in Chile and Argentina. Our drilling activity rate was approximately 60% in the quarter compared to 56% in Q3 a year ago. This was our highest quarterly utilization rate since Q1 2020, which end on September 30, 2019. Gross profit for the quarter was $3.2 million compared to $1.3 million in Q3 last year. Adjusted gross margin, excluding depreciation expense, was 13.1% compared to 10.2% in Q3 last year. As Eric noted earlier, gross profit and margin were positively impacted by improved operational efficiency and cost reduction initiatives, which offset the additional logistical challenges and related costs to the COVID-19 as well as significant mobilization costs in West Africa and Chile for important new long-term contracts. G&A expenses were $3.7 million in the quarter or 9% of revenue compared to $4 million or 11.1% of revenue in Q3 last year. The decline in G&A expenses reflect the cost reduction measure we implement following the onset of the pandemic. EBITDA for the quarter increased to $3.6 million compared to $0.4 million in Q3 last year. Net earnings were $0.7 million or $0.02 per share compared to a net loss of $3.4 million or a loss of $0.09 per share in Q3 a year ago. The positive variances reflect improved gross margin and the reversal of a provision for litigation in Burkina Faso, partially offset by the higher mobilization costs. I would like to discuss the provision now in a bit more detail. Back in June 2020, a claim by a financial institution for damages against a subsidiary of ours in the amount of approximately $1.9 million was confirmed by a Burkina Faso court. We vigorously dispute this claim and filed an appeal. Nonetheless, given that the original claim was confirmed by the court in Burkina Faso, we recorded provision of approximately $1.96 million in our fiscal 2020 fourth quarter for this claim. On April 1, 2021, an appeal court ruled in our favor and overturned the original decision, resulting in a release of $1.93 million that we have deposited in a restricted cash account. Based on the assessment of our legal counsel in Burkina Faso, we consider this appeal to be unfunded. As a result, the recognized liability of $1.96 million was reversed during Q3 2021. Turning now to our balance sheet. During the quarter, our financing activities result in a $3.2 million increase in debt and lease liabilities compared to an increase of $0.7 million in Q3 a year ago. We withdraw an amount of $3.1 million on our credit facility compared to a withdrawal of $1.5 million in Q3 last year. Our long-term debt under the credit facility, including the current portion, was $24.7 million at quarter end. This compares to $28.7 million as at June 30, 2020, a decrease of $4 million, which has provided us with improved financial flexibility. During the quarter on March 8, 2021, we entered into a fourth amended and restated credit agreement with National Bank in respect of the credit facility. The facility consists of a $35 million revolving credit facility and a USD 5 million revolving credit facility guaranteed by Export Development Canada. The current term of the credit facility expired on November 2, 2022. Prior to this agreement, our credit facility was due to mature in November of this year. In February 2021, Orbit Garant Chile, our wholly-owned Chilean subsidiary, entered into a $2.6 million financing agreement with Banco Scotiabank in order to purchase the office building in Santiago that is rented for several years. This agreement bears interest at a rate of 3.3% per annum and has a term of 84 months. Our working capital position at quarter end was $59.4 million compared to $52.1 million as at June 30, 2020 or fiscal 2020 year-end. I now turn the call back to Eric for closing comments. Eric?

[Eric Alexandre, President, CEO & Director]

Thanks, Daniel. This is an exciting time for Orbit Garant. Customer demand is accelerating, providing an opportunity for us to continue generating significant growth in revenue and profitability in the quarter ahead. Elevated gold and copper prices has given mining companies a strong motivation to expand exploration and development spending, and they are doing just that. S&P Global Market Intelligence recently estimated that the global exploration budget for nonferrous metals could increase 15% to 20% in this calendar year if metal prices remain high. Demand in our market has been particularly strong, in part because these jurisdictions are focused on gold and copper mining. While the price of gold has declined from a high of more than $2,000 announced last summer, the current price of approximately $1,820 an ounce supports strong profitability for even the higher-cost producers. Meanwhile, copper reached an all-time high above $4.80 a pound this week. Copper demand is currently very strong, despite the impact of the pandemic on the global economy. Obviously, the pandemic has not gone away. We are maintaining our measures to ensure that our operations are conducted safely. And we remain prepared for the possibility that there are additional spikes in COVID cases and government decide to increase restriction on economic activity. But with the vaccination rising rapidly in many countries, including Canada and Chile, the impact of the pandemic on our business should dissipate in the weeks and months ahead. We are optimistic that there will be continued growth in demand for our services as macroeconomic conditions continue to stabilize. As our drilling activity increase, we are remaining highly disciplined. Our team has done an excellent job of identifying operating efficiencies and cost reductions since the start of the pandemic. We will work hard to maintain those efforts and support our margins in future quarters. With our highly skilled team, our focus on leading-edge technology, a solid balance sheet and our presence in leading gold and copper mining markets, combined with today's favorable market conditions, we are really well positioned to build market share and shareholder value.That concludes our formal remarks, and Daniel and I will now be pleased to answer any questions. Please, operator, begin the question period.

[Operator]

[Operator Instructions] Your first question comes from James Moore at JR Moore & Associates.

[James Moore]

Nice job in the quarter, Eric and Daniel.

[Eric Alexandre, President, CEO & Director]

Thank you very much, James.

[James Moore]

My first question, I was just wondering if you can talk about the opportunities in Chile and Guinea where you mentioned the new contracts. And when should we start to expect to see those revenues start to materialize?

[Eric Alexandre, President, CEO & Director]

Good question, James. First of all, to put everybody on perspective there about the COVID situation in the countries, the South American countries has been really affected by COVID cases. And Chile was not apart of this. Unfortunately, they had many cases in their second wave, which is equal to our third wave, I would say. On the other hand, they were one of the countries that promotes a lot of the vaccination. And they are like in advance like probably equal to U.S.A. in terms of vaccination. And we know historically that there was a shortfall of inventory of copper. And we were saying that in every presentation we made, we made in the past, and we were saying that the copper prices over $3 a pound would be a good key indicators that the market is back on track in copper. Now that it's above $4.50 and close to $5 a pound, which is historical high, we do see more demand in the countries. The majors there are asking for long-term contract right now. And we do see a lot more demand coming up, so we do see a good future out there. Our strategy in the last 2 quarter, while the Chilean market was really affected by COVID restriction, we moved some capacity in West Africa. And we plan to renew our surface drill fleet in the quarter to come, so that we will be in a better position to serve the market in Chile with high-quality machines moving forward. So we do see, to answer your question, that the Chilean division now will stop bleeding, I would say, and starting to generate flat to positive results moving forward starting in our Q4 and moving further.

[James Moore]

Okay, that's really helpful. And in terms of the specialty drilling, it looks like it's still a little lower than you guys have been historically. Could you maybe talk about maybe just the dynamics on the specialty drilling front? And is that mostly juniors that aren't engaging as much as you thought they might out or they historically have? Or is that more international?

[Eric Alexandre, President, CEO & Director]

Well, it's a combination of all of that. But while we are growing our business internationally, especially in West Africa, we have the chance to secure long-term contract out there. Which do not account in our specialized drilling, but was great opportunity for us to ramp up on our structure that we established from Burkina Faso. And it's also a question of mix of revenue right now. Moving forward, we will see some more specialized drilling work around here in Canada, especially in the Val-d'Or region where we will have 6 rigs involved in on barge drilling and some operations that are resuming now of north starting in March, with Agnico with our big contract out there, which is specialized as well. So you will see that kicking up in Q4 and Q1 and Q2 of this year as well. So you'll see a little bit more specialized drilling in our percentage of revenue.

[James Moore]

Okay. And towards the end of your prepared remarks, you mentioned about opportunities to take market share. Could you maybe elaborate on that a little bit?

[Eric Alexandre, President, CEO & Director]

Well, right now the situation is very, very good for us. While there is a lot of financing done in the last 3 months, we see a record financing. In March we reached a big height out there. And we do expect that this money would be spent. Usually, by the time the people finance and the money is going to the ground, there is a 6-, 8-month period. So we do see that demand will still be improving moving forward in the next 6 to 8 months justified by this level of financing. But on the other hand, there is a lot of demand compared to the offer. The drillers are now very busy, and it's very hard to get drillers, experienced driller in Canada right now. So we do start to train a lot of our guys here around, and we are trying to ramp up as we did in the past. Of course, we think that the technology we have in our fleet will help us to secure more or take more of this demand moving forward. And while we see that it will be very challenging to improve organically our situation in Canada, we do see opportunity in Chile, in South America, in West Africa, where we do not have this non-experienced availability of people challenge. So we do expect that some of the growth will come from the 2 other divisions. And the only way that we could increase significantly our operation in Canada would be probably to make some acquisitions and consolidate into our industry here in Canada.

[James Moore]

Okay. And that actually was I guess a bit of a good lead into my next question, which was just do you have any plans for the cash as you start to generate more cash with demand coming up? Is your primary focus on acquisitions or paying down debt? Or how do you think about that?

[Eric Alexandre, President, CEO & Director]

Again, a combination of all this. Of course, we are building now flexibility to move forward and to deliver on our strategic plan. So some money will go back to pay down debt and create this flexibility in order for us to be able making acquisition and continuing the growth of our company. But we will stay very disciplined in our approach, and we will not make any moves that doesn't make sense. And that's the way it goes, and we have been doing this for many years. So we know what we have to do. There is some opportunities in the market, and we are looking at it very carefully. But on the other hand, we will not position ourselves into a situation where we would take too much debt in doing something. So probably we'll do like strategic things with the money, including paying down debt and growing organically or by acquisition of a company.

[James Moore]

Okay, great. My last question is just on the average revenue per meter drilled. Can you give us a sense of where you expect that to head? Do you think this is kind of a low point? Or is it still possible that we'll see lower?

[Eric Alexandre, President, CEO & Director]

Well, it's bizarre to say because we say that market is increasing, the demand is increasing. Our price per drilling are increasing. And you look at the chart, historical charts of our price per meter basis, and it goes down. But the real explanation is that the mix of revenue has changed significantly while we do more RC drilling and rig control drilling in West Africa. And what we are looking more now is the bottom line, generating the margins that we do expect to generate right now, so the focus would be more on this. But where we look at the price now is probably where we should be right now. And there is a tendency that this could go up moving forward based on the demand we are seeing right now.On the other hand, you have inflation in other costs like manpower. Because people are rare to find, then you will have to pay them more to keep them busy. That's one point which represent a big chunk of our cost as well as drilling consumable. We do see that this will increase as well, while the inflation, it goes everywhere in the supply chain.

[James Moore]

Okay. So the lower average revenue per meter drilled is probably somewhat more international, but they have higher margins associated with them than maybe in Canada.

[Eric Alexandre, President, CEO & Director]

That's the point, yes, yes.

[James Moore]

Okay.

[Eric Alexandre, President, CEO & Director]

And now it's a question of business mix. So it's difficult to compare where we were like 3 years ago. It's simply not the same business mix.

[Operator]

[Operator Instructions] Next question comes from André Pagé at Desjardins.

[André Pagé]

[Foreign Language]

[Eric Alexandre, President, CEO & Director]

[Foreign Language]

[Operator]

And the next question is from [ Dean Trottier ], an investor.

[Unknown Attendee]

I'm still trying to understand the business just a little bit better. I was hoping you could help me. I guess one of the questions I have is how is this current cycle I guess different than the previous one? Or are you seeing the same typical behaviors? Or are the producers a little more reluctant to drill than in a prior cycle?

[Eric Alexandre, President, CEO & Director]

Well, as far as I'm concerned, we do run this business into a cyclical industry, and every cycle has their own particularity. But I would say that this cycle that we are entering it is motivated by the same drivers as the last one. Which is there was no discovery, major discovery done, and there is a shortfall of supply from the demand from all the things that we are looking for, for gold, copper and all the base metal out there while the economy is still suffer from COVID-19 restriction. And now that is coming back to, let's call it normal life, we do expect that there would be a big demand from those metals, especially from the base metal that are going to be pushed to the electric car. So that is different from the last cycle. Electric cars ask for 30% to 50% more copper as opposed to normal car, I would say. And there is a lot of other metals that would be needed to support the production of those cars as well. So we do expect that in this cycle, the demand will be stronger than it was in the last cycle. And at the same time, it's more difficult to find people. We do operate in a tough business. And the more we look forward, it's difficult for companies to find experienced people. And this is why we did decide in the past to invest into the technology where we are able to train faster and obtaining drilling productivity, reasonable drilling productivity very quickly as well, as opposed to a standard machine where you will have to take a lot of time by training the people to get decent productivity, which affect your margins as well.

[Unknown Attendee]

Okay, that's really helpful. Just one last one, is there sort of a minimum price where it's cost-effective to drill in Canada? My understanding is that a gold mine in Canada generally has higher costs than a gold mine in Africa or South America.

[Eric Alexandre, President, CEO & Director]

Your question is about the price of gold or price for drilling?

[Unknown Attendee]

Sorry, I guess the price, what would be sort of the minimum price of gold required to kind of continue drilling in Canada? So my understanding is that it would be high. It requires more drilling. Drilling in Canada is more expensive than other parts of the world. That's just -- again that's just my very...

[Eric Alexandre, President, CEO & Director]

Well, difficult to answer again.

[Unknown Attendee]

Yes.

[Eric Alexandre, President, CEO & Director]

But we do not see any pressure to drive the price of gold down in the years to come. Right now it's probably the opposite. But we did start more activity in the last cycle around $600, $700 an ounce. It's crazy how the mining industry is able to adapt itself to this situation. And I think that moving forward that the Canadian mines should invest in amortization. And this would reduce their cost for sure, because their big cost, as us, is the manpower into the mine. So we do see the mines that are moving forward with automatization in their work plan. So we think that this would be helpful moving forward.

[Operator]

There are no further questions at this time. You may proceed.

[Eric Alexandre, President, CEO & Director]

Okay. Thank you very much. If there is no more question, we'll terminate the call. Thank you, everyone, and see you next quarter. Thank you very much. Bye-bye.

[Daniel Maheu, Chief Financial Officer]

Thank you.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines. Enjoy the rest of your day.