Geodrill Limited (OTCQX:GEODF) Q3 2023 Earnings Conference Call November 13, 2023 10:00 AM ET
Company Participants
Dave Harper – President and Chief Executive Officer
Greg Borsk – Chief Financial Officer
Conference Call Participants
Ahmad Shaath – Beacon Securities
Gordon Lawson – Paradigm Capital
Operator
Good morning, ladies and gentlemen, and thank you for standing by. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Monday, November 13, at 10 a.m. Eastern Standard Time and is being broadcast live via the Internet.
During today’s call, management will make statements regarding management’s expectations for the company’s future financial and operational performance. These statements are considered forward-looking statements. Each forward-looking statement speaks only as of the date of this call, and actual results may differ materially from management’s expectations for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed from time-to-time in the company’s SEDAR filings.
I will now turn the call over to President and CEO of Geodrill Limited, Mr. Dave Harper.
Dave Harper
Thank you, operator. And a good morning, and welcome to Geodrill’s quarter three 2023 quarterly financial results call. I will begin with an overview of our operations and performance for the quarter. Our CFO, Greg Borsk, will then give us for more details with you of our financial results, after which I’ll discuss our outlook for the remainder of 2023 and beyond.
In quarter three, Geodrill faced headwinds on a number of fronts. I’ll first begin with the repositioning of the rigs post the wind down of our Burkina Faso operations, this was met with slower-than-expected take-up of rigs in other countries, which hit revenues and weighed on our costs. Well, from the outset, quarter three was always going to be a high bar. Recall that revenue in the corresponding quarter a year ago surprised us to the upside. This was due to a peculiar rather late wet season.
In quarter three ‘23, this quarter just finished. Revenues were negatively impacted, firstly, by very low revenue in Burkina Faso, the country that we’ve just exited and Mali, which was also slower than expected. And this was partially due to weather – inclement weather. It’s also partially due to operations, especially due to capital markets. When I say capital markets, I mean the difficulties faced with junior exploration companies are facing in today’s challenging markets. Also in South America, our Chile operations are completely shut down by the snow season. As a result, quarter three average utilization declined to 55% from what was 70% a year ago. This, in turn, drove meters down by 13%, which drove down revenues by 14%. Yes, and that’s all she wrote.
Regarding margins, in quarter three, we were faced with some abnormal costs. In South America, we kept employees on in readiness for the post-winter ramp-up. The next story of this is that we recently secured contracts with new Tier 1 customers. We secured contracts with first [indiscernible], which is a joint venture in Peru, and we’ve secured a contract with Antofagasta and Barrick, which is a joint venture in Chile, which I’m pleased to report have since commenced operations and are both going well.
In West Africa, the repositioning of rig was met with higher costs and longer preparation times has been pivoted away from juniors and intermediates towards senior miners and Tier 1 customers. Senior miners, but had higher specs in terms of – with regards to training, health and safety. For example, automated robot handling systems that need to be built or retrofitted to the rigs in order to operate on their sites. Working for senior miners also comes with greater community relations issues, and all of these things cause delays. All of the above drove costs higher, higher costs on lower revenue negatively impacted our market margins and that was that.
The final piece with regards to financials was aging debits. The aging debit situation has triggered IFRS 9, which is a large non-cash provision that significantly affected our year-to-date profit and I believe Greg Borsk will be speaking to this point a little bit more in detail. In any case, as a result of the foregoing and all other things considered, our Board of Directors took the prudent and necessary decision to suspend pending second semiannual dividend. And this was truly communicated in the press release on the 31st of August. Unsurprisingly, the market reacted negatively, taking our market cap down by 25% and we’re currently trading at $1.80 a share. I’m just going to take a moment to reflect and remind investors that even after the provisions, our hard book value is CAD3.20 a share or USD2.37 a share. Our market cap today is now trading at effectively 6 months revenue on a 12-month trailing basis.
And at that point, I will pass the call over to Greg, our CFO, to review the financial highlights in more detail. Thank you, Greg.
Greg Borsk
Thank you, Dave. As a reminder, all figures are reported in U.S. dollars. We generated revenue of $30.3 million, representing a decrease of $4.9 million or 14% when compared to $35.2 million for Q3 2022. In our primary countries in Africa being Ghana, Cote d’Ivoire and Egypt, revenue increased on a quarter-to-quarter basis by $1.2 million. We had made the decision to wind up Burkina Faso and redeploy the rigs to other countries. And as a result, revenue decreased in Burkina Faso by $3.1 million in order. Our gross profit for Q3 2023 was $5.8 million being 19% of revenue, compared to a gross profit of $10.9 million or 31% of revenue for Q3 2022.
We recorded EBITDA of $600,000 or 2% of revenue for Q3 2023. This includes a $3.6 million non-cash expected credit loss provision. Excluding this provision, EBITDA would have been $4.2 million or 14% of revenue for Q3 2023. The net loss for Q3 2023 was $3 million or a loss of $0.06 a share. Again, excluding the provision, we would have reported net income of $600,000 or $0.01 per share in Q3 2023.
Overall, we ended the quarter with net cash, excluding our right-of-use liability of $3.6 million. With the gold price averaging $1,965 during Q3 2023, global exploration spending continues to be strong and provides strong fundamentals for the mineral industry going forward.
At this point, I will turn the call back to Dave.
Dave Harper
Thank you, Greg. Before I move to the Q&A portion of the call, I’d like to provide a brief outlook for the remainder of 2023 and beyond. Despite a strong gold price, precious metals equities continue to struggle in raising sufficient capital to fund their exploration programs. We have therefore begun shifting our focus to senior miners and Tier 1 operations with long-term programs with reliable funding from mine production.
Otherwise, Q4 is off to a pretty good start. Ghana, Côte d’Ivoire, Egypt, are all performing well with multi-rig, multiyear contracts. Senegal, which is our newest market is off to a good start. We’re looking to add a rig there. As is Egypt, where things are also going very well. So we’re looking to add a rig there. And in South America, things are ramping up nicely. So we’re also looking at adding rigs there.
For 2024, our order book is strong in our core regions, especially in South America, where we recently signed two new senior miners. And while on the subject of contracts, we still have a number of tenders that are ongoing at the moment. But for now, we believe the tough quarters are behind us. That said, I would hasten to add that top of mind and looming large as quarter one, 2024, which will be a tough one to beat, recalling the quarter one 2023, it was behemoth quarter with revenues of $37.6 million, which was a record for quarter one and it was actually stronger than our quarter two by 14%.
On aging debtors, we still have some work to do in keeping the situation in check. And as we said, we will continue to rely upon our decades of experience and operational efficiencies as we adjusted the conditions and challenges for the remainder of 2023 and beyond. We take a long-term approach that is flexible enough to adjust to the day-to-day realities of the business while maintaining a focus on our core values and our shareholders. This concludes our prepared remarks.
I’ll now hand back to the operator to move us to the Q&A portion of the call. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Ahmad Shaath with Beacon Securities. Please go ahead.
Ahmad Shaath
Hey, guys. I appreciate all the color on the quarter. I guess my first question is now that we’re almost halfway through Q4, are we fully ramped up? Or how is the ramp-up looking in South America? And any color you can provide us on what should we expect from Q4? Is Q2 a good run rate? How are things looking on the top line?
Dave Harper
So as I alluded to on the call, Ahmad, quarter four is actually off to a pretty good start. We had a pretty solid October. I think November is going to be flatter. And December, honestly, respect it’s a little hard to say at this point in time. But quarter four is looking okay. It’s looking okay.
So as I was saying, I think the worst of these quarters is behind us. We’ll get back to semblance of normalcy. We will – we’re looking very much at this now as a 2024 story. And as I was saying on the call, I had some to add that recall, our quarter one last year, it was actually our strongest months of the year. And you’ve been covering the story for a long time, and you’ll know the quarter two, normally our strongest quarter. So we do have a behemoth, if we were to make a year-over-year improvement in quarter one, which at this stage would be a bridge to pass for sure.
Quarter four, just winding back stepping back, I’d say, it will be okay. Actually, if anything, that’s showing at this point in time, it’s trending towards a single-digit improvement. Beyond quarter one is where we will start to see the full benefits of the likes of South America, which is ramping up to what will become a 100% utilization, will actually be at 100% utilization before December, but we’ll be adding a rig in the latter part of the year. And so as we go to the seventh rig and get that into the field and get sort of commissioned and out to site, that will probably hit the tape for us around January, I’m guessing at this point.
So at this point in time, South America, it looks like it will be busy write up until the strong season next year, full steam ahead. I’m not a 100% sure that we’re really shutting down for Christmas at this point. We haven’t had that communicated back to us at the head office. At this stage, it appears we may be drilling through.
Ahmad Shaath
Okay. That’s great color. So I guess it sounds like single-digit growth unless we get a couple of weeks of seasonal shutdown, we might be flat year-over-year or something like that?
Dave Harper
After December – sorry for quarter four?
Ahmad Shaath
For Q4, yes.
Greg Borsk
Ahmad, I didn’t hear what you said. Can you just – did you say I think what we’re communicating is the utilization will ramp up through the quarter, 55%. We’ll – we saw a strong October. We’re seeing a strong November and then December, we have to wait and see based on the holiday season.
Ahmad Shaath
Got it. That’s helpful. And then, Dave, how should I look at like the change in your customer profile going forward with this mix to more seniors and you mentioned your – the extra cost of training since the higher standard with the seniors and all that? So on a go-forward basis, we should see some pressure on gross margins as we work through these? And are you able to help us understand maybe how much of those costs that you took on from the senior? And how much is going to be just structural changes in the way you do things because of the requirements of the seniors?
Dave Harper
You’ll definitely see margin compression as you move to seniors, bigger jobs are more competitively bid because of the long-term duration and the fact that you’re working for names that are not beholden to capital markets. So your paycheck is more or less guaranteed, so to speak. On the exact specifics of where we’ll end up, I’ll hand that to Greg.
Greg Borsk
Yes. It’s – I think if you look at the year-to-date margin, Ahmad, we’re 26%. We had a strong Q1 and then Q2 and Q3 were weaker. But it’s a function of the capital markets. And in 2022, when the capital markets were open for juniors, they were drilling and they were able to raise money. We had some juniors with four or five rigs spinning. Now they’re lucky to have one spinning rig, maybe two. So it’s just – it’s part of the reaction to where we are and moving towards the intermediate and senior miners. You’re right, there is a cost to that, because a lot of times, they are more competitively bid. But it eliminates a lot of the credit risk that we’ve seen over the last couple of years and especially this quarter because they are producers. They have the ability to pay and have the ability to pay on time.
So it really will help the company, but it will take some time. And you’re seeing this. It’s not only in terms of moving to a higher tier customer. It’s also moving out of certain jurisdictions. So when we pulled all of the rigs out of Burkina, and we’re redeploying them into other jurisdictions, it takes time. But I think in the long run, being in better, more secure, more stable jurisdictions, having more intermediate and senior customers, I think it will serve you drill much better in the long run.
Ahmad Shaath
Got it. That’s very helpful. So I guess we should look back at maybe 2020, 2021 period for margins, which was we’re looking at like 25%.
Greg Borsk
Yes. I think if you look at the – we had 3 years in a row, I think ‘18, ‘19, ‘20, we had a 25% gross margin. We were happy with that. We modeled around that. 2021, it got up to 27%. And I think last year, 2022, our record year, it got up to 29%. But the reason it got so high is because of the revenue spend. And like I have said, drilling was open for everyone, junior, intermediate, seniors. Our utilization rate was the highest it’s ever been. So, what you are seeing now with utilization coming in, you expect the margin will come back to years when we had it around 25%.
Ahmad Shaath
That’s very helpful. I appreciate it. I guess one last one for me and you guys touched on it. So, in terms of the receivables and the account of the amount that although the 90 days we jumped to about $9 million and change. So, how should we think about that on a go-forward basis? Are you guys expecting to recoup some of that, or should we consider the $9.5 million going to be you recognized as another provision? You guys have more like…?
Greg Borsk
Yes. We haven’t written these amounts on for accounting. We have taken a provision against them, because there is over $15 million in our 90 days. So, we have been collecting some of that subsequent to quarter end. We are working hard. But what you have to do with these provisions is at the end of each quarter, we assessed – Dave and I assessed where we are, how much were we able to collect. Some of it we are going to have to collect over time. And then just at the end of December, we will look at our provision. What I can tell you is we took a big hit in Q3, $3.6 million, and we are working hard with these accounts to collect the money and work with them. So, we will have to – the short answer is you look at this every quarter. So, it’s something we are working on.
Ahmad Shaath
I appreciate it. And from the credit facilities perspective that are secured by these, has that raised any issues or concerns there with your lenders, or how is that conversation going? And I will jump back in the queue. That’s the last one for me.
Greg Borsk
Yes, no issues. We have the security, we have these receivables and we have some PPE show, it hasn’t been an issue. We have enough of a push in there. It’s – and there is no covenant. So, it’s – we are fine on that.
Operator
Your next question comes from Gordon Lawson with Paradigm Capital. Please go ahead.
Gordon Lawson
Hey. Good morning everyone. With regards to your Latin American operations, how much revenue is currently attributed to that region? And if there is any guidance you can provide there for the next year that would be very helpful.
Greg Borsk
Gordon, is that a question – we don’t disclose that segment. It’s less than 10%, so it’s not material. But the – where we are now, we have about seven rigs there. And in Q3, we only had one rig working near the end of the quarter. So effectively, we weren’t really working in South America. As we sit here today, we are working both in Chile and Peru and our expectation for the accounts we are drilling for and some new ones is to continue to ramp up there. So, we are hoping that continues to ramp up in Q4 and then into 2024, Q1 and Q2. I was just going to say in terms of overall consolidated financial statements, it’s still a smaller part of the business, but the intention is continue to grow at.
Gordon Lawson
Okay. And I gather that’s where you are seeing the highest competition for contracts?
Greg Borsk
The higher – sorry, I just missed that last question?
Gordon Lawson
Well, given Chile and Peru, can I assume that that’s where you are getting the higher competition for these contracts?
Greg Borsk
No. Dave, do you want to speak in addition?
Dave Harper
Well, if you look at it, Gordon, it’s actually where we are enjoying our highest utilization, I know looking at quarter three, that sounds like a crazy statement that we – the reason the rigs in quarter three couldn’t work because of the snow. So, that was beyond our control. What was going on for us during that time is we were busy negotiating contracts with senior miners. We were – sort of signed two new big names and they have effectively taken all of the rigs that we had. We are adding rigs to meet the demand and when those rigs get into the field and drilling, will effectively be at 100% utilizations. And whenever we get to – as you know, whenever we get to 70% or 80% utilization, we start looking at adding rigs to all regions. So, we are now faced with the good problem of potentially selling more rigs to that market. Is it competitive over there, not for the type of drilling that we are doing. We entered that South American market providing a specialized deep directional drilling service, something that most of the other drilling companies over there don’t provide. And so that specialized – in the specialized service space, it’s far less competitive and generally it comes with reasonable margins. The most competitive markets that we would operate in are West African markets, Ghana and Ivory Coast, these are essentially our core markets. And those markets are competitive. But again, we are busy in those markets. And aside the fact that we have gone through a massive repositioning exercise, taking rigs out of one country and in doing so, deciding to pivot away from juniors and intermediates or anyone basically we have hold into the capital markets towards the senior miner space. And this – in this we have been successful, and we have signed a number of contracts and then in the middle of tendering some much larger drills, which are not news ready today, unfortunately, for this – for today’s quarter results. But we will be very busy in those markets come 2024. So, very much at this stage, 2024 story. I think we can do at this point is recover what we can from the setbacks that we have had in 2023 and build the launching pad as it work in 2024 and beyond. Evidently, that seems to be heading in the right direction, and we will see how that pans out, I guess is 2024 on calls.
Gordon Lawson
Okay. That’s great. You answered my second question. Thanks guys.
Operator
[Operator Instructions] There are no further questions at this time. Please proceed.
Dave Harper
Thanks. Thank you everybody for joining today’s call. Thanks very much and have a great day.
Greg Borsk
Thank you all.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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