Geodrill Limited

Thank you, operator. Good morning.

I hope you and your families are all staying well. In the first half of 2021, Geodrill recorded its highest-ever quarterly revenues underpinned by strong market fundamentals, robust demand for drilling, and a proven business model of operating a fleet of high-performance rigs.

In quarter 2, we generated revenues of US$30.6 million, that's up 47% year-over-year. We continue to realize strong profitability, increasing net income to US$4 million.

We generated a return on capital employed at 21% and an ROE of 16%. We continue to maintain high utilization rate of 70%, supporting an increase in pricing power.

And we increased our rig fleet to meet the strong demand in drilling activity. We continue to benefit from a robust exploration environment and evidenced by extensions of contracts in our core operations in Ivory Coast cleanup, and so Ghana or Mali.

We also continue to diversify, geographically increasing our regional reach as we mobilized 2 rigs to Egypt and expect to be drilling in this current quarter. In addition to expanding our rig fleet, Geodrill also expanded its client base to include a mix of majors, intermediates and juniors, which has contributed to the increase in overall drilling activity, and a well balanced mix of drilling services.

Strong tower wins and a solid balance sheet positions us well to continue executing on our growth objectives for the remainder of the current year. I'll now turn the call to Greg Borsk to comment on the quarter's overall financial performance.

Thank you, Dave. As a reminder, all figures are reported in U.S.

dollars. The company generated revenue of $30.6 million in Q2 2021, being an increase of $9.7 million or 47% when compared to $20.9 million in Q2 2020.

This is a significant achievement for the company, as this is the second highest quarterly revenue ever recorded in the company's history. The increase in revenue is a result of the increase in demand for the company's drilling services.

As strong gold prices increased cash flow of mining companies and their exploration budgets, which in turn is driving increased drilling activity. Geodrill has benefited from increased exploration budgets over the first half of the year, and is also well positioned for the second half of 2021.

The gross profit for Q2 2021 was $8.3 million in 27% of revenue, compared to gross profit of $6.6 million in 32% of revenue for Q2 2020. For the 6 months ended June 30, 2021, the year-to-date gross profit was $18 million or 29%.

The EBITDA for Q2 2021 was $7.4 million in 24% of revenue, compared to $6.5 million in 31% of revenue for Q2 2020. Overall, the net income for Q2 2021 was $4 million or $0.09 per share, compared to $3.3 million for Q2 2020 or $0.07 per share.

At this point, I will turn the call back to Dave.

Thank you, Greg. Before I go to the Q&A portion of the call, I'd like to provide a brief outlook for the remainder of 2021.

Fueled by strong gold prices and increased utilization, our outlook for the second half of the year remains exceedingly positive. We enter the second half of 2021 focused on both growth and being drill-ready.

We continue to accelerate our growth by expanding our geographical footprint into South America and Egypt, and strengthening our competitive advantage to drive profitability. We are also strengthening our leadership and building a diverse, sustainable billing company that encompasses all of our ESG initiatives.

I'm proud to say that the Geodrill team has made us a serious contender in our industry, equipped with a modern fleet of rigs, a clear vision and a solid financial foundation. Geodrill is ready to achieve our audacious goal to be recognized as the [custom inventory partner] [ph], in providing drilling services in West Africa, the African Copperbelt, Peru, and ultimately, outperforming our competitors.

Thank you for participating in today's call. We'll now be pleased to answer any questions which you may have at this point.

I would like to ask the operator to provide directions for anyone who wishes to ask a question. Thank you.

Anthony, good morning.

Hello, all. I wanted to ask you a little bit about, first off, the impact of cost inflation, because it seems to be a theme for a lot of companies right now, so things like labor, fuel.

Can you speak a little bit more about how you feel cost inflation is going to impact you in second half of the year?

We're seeing costs rise. But to offset that, we're seeing drilling prices increase as well.

So I think I think the result will be somewhat benign.

Thanks.

Just add to that, Anthony, too. Anthony, just we set our salaries and that are done on an annual basis, so that's all set for 2021.

So we don't expect a significant increase in the second half of the year.

Perfect. And have you seen any of the supply chain issues affecting your own inventory, because like it's my understanding that you pride yourself on having a well-stockpiled inventory of drilling rods, things like that?

I wanted to know if there's been any impact on your ability to source those inputs.

None whatsoever, Anthony. It's actually, you're correct, we do pride ourself on that.

And I can honestly say that, during the entire COVID period we lost zero time, through lack of availability of inventory. We're almost 30% or 40% self-sufficient at Geodrill.

So it's one of the things that, is the Geodrill difference.

And you actually see that, Anthony, it's actually the opposite for us. If you just track the company back the last few quarters, we've been increasing inventory.

So if you look at where we are at June 30, 2021, we have inventory of $25.5 million. And that inventory is in the countries that we operate.

It's cleared customs. It's ready to go.

And which is why we're able, when a large drill program comes up and we contender on it, we're ready to go. We have that inventory in place.

So we looked ahead and actually thought that out and have some significant and sufficient inventory in place.

Perfect. And one last question for me before pass it over.

I saw that you announced a new underground contract. I wanted to get a better idea of how you see that part of the business evolving over the coming years.

Do you expect it to be a bigger part of the company? And also, if you could provide any sort of color on the margin profile, it'd be appreciated.

Thanks.

So we entered the underground market in 2017, I believe it was. And it was the right decision for us to do that.

The way we're expanding our services and focusing on mine-based drilling, which is, it tends to be more counter-cyclical. And we have a fleet of 6 underground drills, essentially, what this does is it takes the entire fleet.

We have 100% utilization now across that particular unit. This point in time, we need to take a decision, do we need to expand it.

And if we look at the standard operating model, it's based on each time we get 70% utilization, we start to expand the fleet. And whilst we have this year already made plans to expand the exploration surface fleet, this now accelerates our thinking in terms of adding to the underground fleet.

In terms of margin, well, historically, underground margin is lower than surface margins. And that's because of the larger longevity kind of style of production drilling, as opposed to exploration drilling, which is typically characterized by 3 to 6 month contracts.

Underground contracts are typically characterized by longer-term, so lower margin style work. But in the overall scheme of things, I don't expect it's going to affect us greatly.

It'll actually just improve the business model. We'll see increased revenues.

And for that particular division, we will see lower margins. But overall, the blended margin is still in the order of 25%-plus across all of the business units of the company.

All right, thank you so much.

Ahmad?

Good morning, Dave. I guess, my question is maybe a little bit of an update on the South American initiative.

How many rigs do you have right there right now? And growth potential, like how many rigs are you shipping?

Any bottlenecks? Just a general update on the South American expansion.

So I can now say that we've got a quarter of drilling, the orders in South America. We actually started into our first hole, while last week in December, so we just created that as a bit of a training month.

The quarter went very well. And the customer gave us an initial 3 month contract to see whether we would be able to deliver on what we said we put, customers are very happy.

Contract has been in place 4-fold and very nice testimonial, of course. And I think, what's important is we're hitting their targets, and they're doing a monthly budget, and something that hasn't been accomplished by that particular company in the past.

So Peru, as far as that particular project is concerned, as we're going to be happier with that outcome, as far as the country Peru is concerned, we've been dealing with COVID and we have been dealing with a contested election. COVID is, obviously, it is what it is and we are where we are, something that will resolve itself in time.

Some countries are affected more so than others. Peru is certainly not alone.

In saying that, it would have affected most companies operations out there. We've actually done reasonably well.

We haven't lost any time, because of COVID. We have had a couple of cases of COVID, we managed to isolate them very quickly and get back to business.

So we haven't had any adverse effects on that particular project. However, I would say that it has put a couple of projects in terms of the tinkering process on the hole.

The other thing that has been going in the background has been this contested election. But the good news is that contested election is now resolved.

And regardless of your political faction, who you support and who you don't support, we now have some clarity as to who the President is? And I think that most international mining companies operating, we're pleased to have a result.

And as a result of that result, we are currently receiving an elevated amount of inquiries and tenders. And as a result of that, we're encouraged by that, so we've actually added to the fleet by adding one additional drill, even though we had 3 drills, and only one of them was working, we see that as just being a short-term thing.

We're bullish in Peru, and so bullish that we've actually on speculation added 1 or 2 rig to the fleet. So we currently have 4 rigs, and we're 25% utilization, which doesn't sound right.

But that definitely the needle will move very, very quickly. Most important thing we were looking for in South America was a soft start, and a satisfied customer.

And on that' why we were checking those boxes, the triggers are here going forward now is to increase our customer base. As we slowly started to roll out things like training, and just the infrastructural workings and workings of getting 3 rigs into the field, and drilling and getting them to be pulled up and tooled up, and personnel up.

Sorry for the long winded answer, but it's not a and/or, yes/no sort of question.

So that's a great update. And what I'm looking for, I just to confirm the 3-month contract whether it was extended by another year.

Did they catch that correctly?

Yeah, it's open ended. So it's a 4-fold increase in the initial contract.

So if what you were looking for was a customer that was basically saying that, let's face it and our actions speak a lot louder than words like let's bought with our purchase order book and give you guys a bit more work and a 4-fold increase in your initial contract. You couldn't be happier with that and we're very okay with that.

That's great. I guess, you're satisfied with having 4 rigs on the ground right now, given what it seems that entering activity of things?

I think now, that's the sufficient for now or any of the upcoming rigs that you're planning to sell into South America as opposed to West Africa?

So looking at the current tendering landscape, if we were to win 1 or 2 of these jobs that we're tendering on would be totally maxed out. So we've got a comfortable startup fleet, initial fleet, in country, I believe.

And we certainly don't want to leave our potential customers wanting, so as we speak, we plans are effort to grow the surface fleet. And some of that growth will find its way through to Peru, based on how things play out over the next couple of months.

But, copper is not going down anytime soon. And, Peru is the second largest producer of copper in the world.

So political situations will come and go, presidents will come and go, COVID will come and go, but the need for copper will not go. It will only increase from here with all these rollout of electrifying vehicle market with very bullish on grade metals.

And we didn't go to approve chasing gold, we've got plenty of gold in West Africa, and so it's a grand in the overall scheme of things geographical step out as much as it was a commodity mix.

That's great.

Yeah. I'm going to add some good point.

Just quickly, the point to reiterate on that rig is we were able to secure that break in Peru. So that's significant, because the busiest we are in West Africa like we can't really send rigs that are working in West Africa approved.

So we were very fortunate to be able to add a rig locally. And then we will see the benefits of that through the economies of scale as well as to get all those rigs were so significant towards.

And is that the case for the other 3 as well?

Yeah, we started off with - what was your question? Sorry.

No, I was just wondering, the other 3 rigs were they secured in a similar fashion? Or did you ship them out of West Africa?

Now, we ship them out to West Africa, we have the opportunity at the time when we have the spare rigs, we don't have the spare rigs now. So the - when a rig became available in the immediate market represent decades identical to the rigs that we had, we're sticklers for the standardization model.

And if we look at out 70, what is now? First quarter in the 70 rigs - across that 70 rigs, we've only got an 8 different type of rig.

And so, when a rig becomes available in the immediate market, it just 6 so well without our model and standardization. So for us, it was a total miner, it becomes available in our market identical to the rigs we currently have.

At some point in time, there's going to be the need for that rig, so grab it and so we did it.

That's great. And maybe a couple of more follow-ups, and then, I'll jump back on the queue.

The first is, operationally, from the first few months of operation. You're confident with your margin profile and operational performance to be similar to what you've been achieving over the years in West Africa?

And secondly, any bottlenecks on acquiring new rigs? How is the lead time on buying new rigs from your favorite supplier in light of the logistics kind of bottlenecks around the world as well?

That's it for me.

So, we're operating in an unusual world, right, which is a COVID stricken world. So the interesting thing that sort of sticks out when you look at today's numbers, I think the first thing that you see is why was revenue flat quarter-over-quarter, when in fact they were basically citing that we have strong utilization.

And then, I guess, the question is, if that is typically a strong quarter 2 - yeah, quarter 2 is usually stronger, historically as a quarter 1. Why was not the case this year?

Well, coming back to my point, we're living in a very different world these days. Secondly, if you recall, we had the peculiarities, we had a very, very strong Q4.

I guess, strongest Q4 ever on record, and I believe it might have been actually at the time as strong as the quarter on record. And then, we immediately back to back that the stronger again, quarter 1, so very peculiarly - very unusually strong quarters, when you don't normally expect them.

And that is to a large extent in sort of round up elastic band effect that you get when you release it, because of the COVID slowdown. As we come into what is traditionally than quarter 2, you would naturally expect slightly stronger quarter 2 than quarter 1.

What was peculiar about this particular quarter 4 was that wet season came upon us a little earlier. So we do in fact have a very strong April, May, June result.

And so whilst it was a solid result, it certainly an eye catching effect that it was weakening quarter 1. But on that, the - what normally happens and what in fact is happening is when we have an earlier than usual wet season, the wet season ends usually sooner than normal, and that is in fact the case.

So whilst we had a soft June and a soft July, we're actually experiencing a very strong August and we'll see an even stronger September. So what I'm saying without getting guidance, while Q2 was, I think, a solid result and we will be expecting to follow-up with a traditionally weak Q3.

I think what you can look forward to, in fact, I know, you can look forward to, is a very solid quarter 3. In fact, at this point in time, you're checking after the quarter 3 and on record.

As far as margin is concerned, Greg could speak to this better than I can. We put it in extremely solid quarter 1 in the 30-plus range.

But - and we put in a 24, 25 is current quarter. A lot of these are just accounting issues where we get stock returns and things like this in the inventory.

But Greg, would you like to just jump in? And just I'm not sure if I'm answering that correctly.

Yeah, I think on the margins, what you really want to look at is the year-to-date margins. It's like Dave said, through Q1, we were ramping up that January was, we started off strong, the holidays and this would Dave said earlier.

In Q4, we had a very strong Q4, 2020, because we had clients dealing up, right up to the holidays and kind of even through the holidays. Typically in Q1, it takes a while for clients to get back and ramp up after the holidays.

Sometimes we don't get really going until mid-January. What we saw in Q1, 2021, which was a carryover from Q4, 2020, as we saw robust activity rate at the start of January.

I think we communicated this, when we did in Q1 call. So we had a very strong January 2021 and that continued to ramp up through Q1, so we had even stronger February and an even stronger March, when that happens, your margins are higher.

In Q2, what Dave were saying, as we started to ramp down in Q2, so even though the revenues of quarter 1 and quarter 2, is kind of the same within $100,000. As we started to head into what gives in a bit earlier.

And that does affect the margin, as you have - you start to slow down, your revenue starts to slow down. But you still have some labor costs [and diesel costs of things] [ph] et cetera.

So I wouldn't - there is a bit of choppiness between the quarters. But I think if you look at where we are through the first 6 months of 2021.

We're very, very comfortable with our margins like a gross margin of 29%. Our revenue, if you look at the year-to-date revenue, we're at 58% increase through the first 6 months of 2021 versus the first 6 months of 2020.

So again, I would focus more on the year-to-date, and the fact that we're still very bullish on Q3 and Q4 and what we're seeing going forward to 2021 still shaping up to be, it's going to be a spectacular year for us.

That's great color. What I was trying to get out is, your margin in Peru, which you spoke about before is that given your business model in West Africa.

I was just wondering if you still believe that your margins in Peru given the pricing environment and how competitive is you can maintain a similar profile in Peru as you ramp up there. I think the previous answer was yes, but just confirming that's still the case given any changes in the landscape.

Now that is the case. In fact, we're doing very well and improve very happy with the results.

That's great.

Exceeding our expectations.

That's good. Thanks, guys.

I'll jump back in the queue.

That's only going to do better - it's only going to do better as we get more economies of scale. So…

Hey, guys, nice quarter. Congrats.

Hey, thanks, Brett.

I'm wondering, if you talk about your CapEx. So I think I saw $3.6 million in the current quarter, which is higher for you guys, which is generally encouraging.

But do you have any thoughts, I guess, on CapEx going forward, where that might be deployed? And also, I'm not sure I heard the answer on the last question, but what kind of laser you're seeing in procuring rigs right now?

Sorry. Greg, go ahead, please.

No. No.

You've got the CapEx numbers in front of you, the exact number, I can speak to the delays that you've got the numbers.

Yeah, CapEx - sorry, I missed the second half of the question. But CapEx is, as you know, the Geodrill model we're very bullish on adding rigs to the fleet in that, that's kind of in our model.

As Dave said, when we hit 70% utilization, we add rigs. And when we add rigs, you add all the ancillary equipment, [are boosters rod carriers or motor vehicle] [ph].

So you'll see, we - through the first half of the year, CapEx was about $5.6 million. We also have some CapEx in our prepayments that as soon as those which are shipped to us that will flip from prepaid into CapEx.

So right now, what kind of what we budgeted for the year in terms of recognitions in ancillary equipment, we're right on schedule. We're a little behind if you just look at the PPE additions, but if you factor in what's in prepayments, and which will flip to PPE additions in Q3, we're right on target.

So we're very comfortable with kind of what we budgeted at the start of the year in terms of additions and where we are. And you'll see, I don't know if you looked at the cash flow.

So what we've done is we've actually utilized some of our credit lines to make sure we have sufficient inventory. And we're able to keep on our path of adding PPE, which is right now, if you look at the working capital, there is a bit of money tied up in receivables.

As you're as busy in Q1 and as you're busy in Q2, the receivables may either build or stay the same are trade receivables. And kind of that normalizes, and you start to see that cash come in.

So the point I'm trying to make is we're very fortunate that we have a strong balance sheet and that we can wait for certain things to normalize. We didn't let that hamstring us.

We were able to continue to continue on our path of adding PPE and inventory as we're extremely busy.

Okay, that makes sense. I mean, are you envisioning kind of this run rate for the first 6 months?

Is this more than what we'd be looking at for, say, the next 6 months or the next year?

This CapEx budget for this year - sorry, go ahead.

Oh, yeah, CapEx budget, yeah, we try to do the CapEx budget, Bret, evenly throughout the year. So, again, some of it is opportunistic.

If a rig comes up and it's available, and it makes sense to us, like the one in Peru, we'll grab it. But we try to - our CapEx budget, we try to spread out kind of evenly throughout the quarter.

Okay. And are you guys seeing significant delays in rigs right now?

From the manufacturers, yes. But we're fortunate, Bret, we make a lot of stuff ourselves.

So to the previous caller, I was saying we're about 30%, 40% self-sufficient within our Anwiankwanta facility. And so, what we tend to do is buy rigs in kit form, bring them to West Africa, and assemble them.

So we are experiencing some delays, but I think our situation is much better than our competitors' over that way. Nothing that's going to affect business adversely now.

And as far as deploying those, do you guys kind of plan it in advance or is it kind of opportunistic as far as where those are deployed and - for directionally, I guess, on - I guess, where you see the best opportunities to deploy new rigs right now? Is it in Africa?

Is it in Peru? Or, I guess, what are your best options?

So on the opportunistic question that you ask, so if we were to wait for when a customer ordered a rig, and then we decided to go and build it, we would have never expanded beyond our first 2 rigs. So modus operandi for us is we hit 70% utilization, have a look at the macros, if gold is good, environment is good, everything is good, and if we have the cash, then we go and just place orders for rigs, knowing that eventually at some point in time, they're going to hit the go-live.

And eventually, someone's going to - one of our customers is going to take them. And that model has served us extremely well, since the get-go.

Where will they go? Well, I think it will just really concern where the business is, when rigs become available.

At this point in time, we have an expectation that things will ramp up in South America. We've just entered a new market, which no one's asked about on the call funnily enough, Egypt.

And that's an extremely interesting proposition for us. We've just landed with 2 drills.

Those 2 drills are booked for the next 1.5 years. And whenever there is a new drilling company in town, there is always a lot of interest.

And that's a market that has been left to probably one drilling company for the longest time. And now, there are some real competition has arrived in - with the arrival of Geodrill.

So I think most customers will be very, very keen to know if there's going to be some pricing, some service competitiveness into that market. And with the level of inquiries that we're receiving at the moment, if there is anything to go by, I would say that Egypt is probably the next place I'll be considering expanding into.

And this all plays very well into our geographical expansion and our diversification model. Now, for the longest time, we have been strong in West Africa.

But now, it's time to go up and go out, both from a geography point of view and from a commodity point of view. Currently, the drill bit we're drilling in Egypt is gold.

South America gives us the commodity diversification with copper, zinc and base metals. And, of course, we've got our bread and butter market, which is the West Africa market, which is also going.

So where will all the new CapEx be deployed, I can't honestly say at this point in time. I think it's going to be a pretty much an even split between the 3 regions.

I appreciate that. Thanks a lot, Dave.

Congrats again.

Okay, thank you.

Thanks. Thanks, Bret.

Cheers. Thanks for your questions.

Cheers.

Thanks.

Okay. And thank you very much, everybody, for participating on today's call, and have a great day.

Thank you. Bye.

Thank you, everyone.