Geodrill Limited

Thank you, Operator. Good morning and welcome to Geodrill’s 2021 Q4 year-end financial results conference call.

I will begin with an overview of our operations and performance for the quarter. Our CFO, Greg Borsk, will then give a more detailed review of our fourth quarter financial results, after which I will discuss our outlook for the remainder of 2022.

This slide is our forward-looking slide. So, for those following the slide deck, we’re now on Slide 3, FY 2021 financial highlights.

So, we kicked off fiscal 2021 with outstanding momentum, delivering on all key financial metrics and strengthening our balance sheet. We generated record revenue of over $115 million, representing a 40% increase compared to fiscal 2020.

We also generated record EBITDA, $29.5 million USD, a 55% year-over-year increase, and record net income, $14 million USD, which was an 88% increase. And as a result of these three record dates we achieved for our investors, a return on capital employed of 22%, and a return on equity of 16%.

And that's up from 14% and 10%, respectively, a year ago. Geodrill’s balance sheet also remains one of our differentiating advantages, with net tangible book value up 18%, total shareholder equity $87.5 million USD.

That's up 20%. We have net cash of $2.4 million USD, and that's after decreasing debt of $3.4 million USD.

We delivered a 2% per share dividend. And the bottom line is that our strong balance sheet with low leverage, well positions us for future organic growth.

Moving through the slides, we are now discussing FY 2021 operational highlights and CAGR on Slide number 5. So, our focus on delivering steady revenue growth, strong net earnings, and strong balance sheet, enables Geodrill to invest in key growth opportunities.

We ended 2022 with the highest rig count in the company's history, and we have expanded our geographical footprint. In the past two months, we've announced over 130 million USD in new contracts, all with top tier gold producers, such as Perseus Mining, Centamin and Endeavour Mining.

These contracts will drive future revenue, and they signal that Geodrill continues to be a driller of choice in its core geographical territory of West Africa and beyond. And as we benefit from the strong gold price, the landscape is now changing and the supply demand factors are now starting to drive pricing leverage.

We have also increased our service offering. We have expanded our production drill service offering by expanding our underground drilling capabilities.

We have also launched mine last-haul drilling services, which we see as a natural extension of our platform of capabilities. But perhaps more significantly, since inception, our rig count has grown organically at a compounded annual growth rate of 20%.

During 2021, we advanced our growth strategy through significant investments in our drill rig fleet, adding four rigs to fleet, and strategically invested into inventory to mitigate supply chain challenges on production. This investment not only allows us to capture a larger market share, it makes a very big difference to our customers.

And underpinned by continuing strong demand, we expect to add a further seven rigs to our fleet this year. I'll now pass the call over to Greg Borsk, who will be discussing Slide 5.

That's FY 2021 highlights record revenue. Thank you, Greg.

Thank you. As a reminder, all figures are in US dollars.

In 2021, we exceeded our financial targets. The company recorded revenue of $115.2 million for 2021 compared to $82.4 million for 2020, an increase of 40%.

The increase in revenue is a result of the increase in demand for the company's drilling services. Geographically, in addition to west Africa, the company has generated revenue from both Peru and Egypt in 2021.

The gross profit for 2021 was $30.1 million or 26% of revenue, compared to a gross profit of $20.9 million or 25% of revenue for 2020. EBITDA was $29.5 million for 2021 or 26% of revenue, compared to only $19 million or 23% of revenue for 2020.

Net income was $14.1 million or $0.31 per share, representing an 88% increase compared to earnings per share of $0.17 for 2020. We ended the year with net cash of $2.4 million.

We also achieved seasonally strong financial results for the fourth quarter of 2021. The company recorded revenue of $26.7 million for Q4 2021, compared to $24.7 million for Q4 2020, representing an 8% increase.

The gross profit for Q4 2021 was $6.5 million compared to a gross profit of $6.9 million for Q4 2020. The SG&A for Q4 2021 was $2 million compared to $2.9 million for Q4 2020.

Overall, we had an exceptionally strong Q4. EBITDA was $7.3 million or 27% of revenue, compared to $5.7 million or 23% of revenue for Q4 2020.

Lastly, our net income for Q4 2021 was $2.8 million or $0.06 per share compared to net income of $2.2 million or $0.05 per share Q4 2020. At this point, I will turn the call back to Dave.

Thank you, Greg. It is clear from our financial performance, is a testament to our - the strength of our business and the demand for our drilling services.

Before we move to the Q&A portion of the call, I'd like to provide a brief outlook for the remainder of 2022. So, as a reminder, we are now on slide outlook 2022.

We have entered 2022 with strong market fundamentals and robust demand for drilling, underpinned by long-term multi-rig contracts. This accelerated growth is all against the backdrop of the global economy, increasing investor interest in gold, which is ultimately driving exploration budgets.

We have a strong balance sheet, allowing the company to reinvest in our business and our industry's future growth, prudently manage down debt levels and returned capital to our shareholders. As we look to the year ahead, there are a number of growth catalysts to look forward to.

With the most modern drilling fleet, extensive industry experience, long-term contracts, a robust balance sheet, and a cohesive leadership team with a proven track record, we believe these are the key drivers to our growth in 2022. Summarized, these include; expanding our full fleet - our full service offering with existing clients, increasing our rig fleet sign, increased drilling activity, driving higher rig utilization and price leverage, and strengthening the commodity prices.

This concludes our prepared remarks. Thank you for participating in today's call.

We’ll now be pleased to answer any calls you may have. At this point, I will ask the operator to provide directions for anyone who wishes to ask a question.

Thank you.

Good morning. Sorry, I’ve got a couple of questions.

Actually, first of all, could you - what - can you sort of tell me, what was the capital - the utilization in Q4 and where do we sit so far this year?

Q4 was average about 70%. As we entered it, it was a bit lower.

And as we exited, the exception of the Christmas shutdown, we were a bit stronger. I'd say through the quarter, we were about 70%.

As we enter the new year, the rig fleet has increased, and we are maintaining on the increased fleet size, utilization north of 70%. Currently as we speak, it is 73%, and it appears it may trend up to - well, it'll certainly go north of that.

And then what happens is new rigs arrive and then the rig count, the total rig count, the amount of rig spinning, is divided into a larger rig count. So, it tends to float in a range of 70 to 75 and sometimes 80%.

I imagine we'll peak out shortly. New rigs will be added, it'll come down just by natural function of increasing the rig fleet.

And then that demand will be taken up and the utilization number increases again. So, it's a constantly moving target.

Appreciate that. Just - sorry, one more question if I may.

The gross margin in Q4 was 24 versus 28 last year. I’m just curious about the reason for that.

I think if you look at the overall year, John, we came in at 26%.

I saw that. Yes.

Yes. The - what happened in last year, I don't want to go back too far to Q4 2020.

We had a very - we had a slow first nine months, if you remember, through COVID, Q1, Q2 Q3. Q3 2020 was exceptionally slow.

So, what happened in Q4 2020 is, we were extremely busy and we were busy in Q4 2020 to end that fiscal year. And so, that's kind of it.

It was a very busy fourth quarter last year, whereas this year Q4 2021, we were actually able to beat on the topline Q4 2020, but we also had significant investment this year in our workshops. So, we are expecting to be extremely busy in 2022.

So, what we did for Q4 2021 is we were full out on our workshops and our people getting ready for 2022. So, that’s kind of what you see in the cost of goods sold.

it's - you have to think of it as an investment in - although it hits cost of goods sold, it's really an investment in making sure we're ready to go for 2022, because 2022 is going to be extremely busy for us.

Okay. Appreciate that.

Thank you so much, and have a great day. Bye.

Morning gentlemen. Just following up on that comment for 2022 being extremely busy, which regions are you seeing probably the greatest demand?

And then, can you also give a bit of an update on what's happening in Egypt?

Demand is coming from all over. It is extremely busy.

All business models are busy. And with the exception at this point, the only place we really have capacity is in Peru.

And we believe that might change very soon. We're always bidding jobs and I believe what I'm hearing is that that could change very soon, and that will effectively max us out in Peru.

And if that happens, then we'll be looking at adding more rigs. And essentially, what we'll be looking at then is effectively a full hand.

So, everything and everything, gold is obviously particularly strong, and I see it, it just nudged $2,000 earlier today. And most folks are saying they think it's going to go beyond its previous high in August 2020, I think it was, $2,073 was the peak back then.

And whenever there's a peak, it usually sets up the next low and sets up the next peak. So, with all that's going on in the world, investors are looking for safe haven assets.

There is a no better a safe haven asset than gold. We drill for gold.

Of all the drillers, we are probably - as a percentage, we drill 95% gold. So, we’re in pretty good shape.

And Daryl, I would add that …

You also - sorry, Greg. You also asked, what's happening in Egypt.

Egypt is going very well. New market for us.

We only started drilling in the latter stages of quarter two last year. So, it flipped onto our radar.

Then we put in a solid quarter four. And during the quarter, we successfully negotiated a new contract in a large established gold mine with a very large name, Centamin Mining.

It’s the largest contract secured in the history of this - this company's history. And that will require fire bricks and the contractor has actually already begun in earnest, and it will ramp up as the year goes - rolls out.

And that contract is for five years, which is sort of a bit unusual in this industry. And that's all great news.

So, sorry. I'll pass over to Greg.

No. I was just going to add, Daryl, yes, Dave said, we just announced three major contracts that will - through 2022 and beyond.

So, we're extremely busy. The other thing too, it's - I don't want to talk about our competitors, but this is really a macro - at a macro level, too.

If you look at our competitors, they're busy, their revenues. Our revenues increased by 40% in 2021, but our competitors are also doing well.

So, it's not just Geodrill. We're fortunate because, as Dave says, we drill for gold and gold is close to $2,000.

I think it hit over $2,000 today. So, we're busy, but it's also at a macro level, the industry.

there's good metrics for the drillers these days.

Right. And then in terms of the labor dynamics, you're still able to get workers and add reasonable wages and attempt price pass-through?

It's certainly a challenge, Daryl, but as you can see, the challenges keep coming and we keep hitting the numbers. So, we kind of tend to plan for the worst, hope for the best, has always been our model.

And so, we've always got more capacity than we need. And certainly, one of the challenges - the industry habitually goes from peace to famine when you -suddenly you've got too much work or not enough work, and how do you keep everyone gainfully employed through a down cycle?

I think that's one thing that Geodrill has managed to do quite successfully. So, when the upcycle comes, it's not as disruptive for us to move the needle from say 60% utilization to 70% and 75%.

I think for other companies at the macro level, I think it's probably a bit more challenging because they're moving off lower basis. And so, they've got a lot more work to do.

And this is where I think Geodrill is uniquely repositioned.

Got it. And then just one last one in terms of the CapEx associated with the seven new rigs, just dollar figure there for 2022.

Yes, we - sorry. Go ahead, Dave.

It's just not the rigs itself. It's, general CapEx that's required.

We'll be investing in the business very significantly this year. We see it as a growth year.

But it's really not this - just this year we're looking at. we're on the first innings of an upcycle.

Upcycles follow down cycles and down cycles follow upcycles. We've just come off a brutal seven-year down cycle, and we believe that this is the first innings of what will be hopefully a long and sustained upcycle.

If history is anything to go on, we can probably say that the next six to seven years ahead look pretty bright. If you want to look at it conservatively, you could say five.

So, when we invest in 2022, we will not be investing for 2022. We’ll be rather looking at investing.

And so, the CapEx that we've allocated for next year is actually one of our biggest years. And at this point, I'll pass that over to Greg.

Yes. It's just - Daryl, I think you've been following the company for quite a while and you know the - our model is to keep our clients happy, to keep them satisfied.

And what we're seeing, we're seeing demand for rigs, additional rigs. So, some of our are larger clients that have multiple rigs, want to add one or two.

Some of the smaller accounts that may have one or two, want to add another rig, et cetera. So, the Geodrill model is, if you look at our free cashflow, our cashflow that we generate from operations, we reinvest that back into the business, and we've been doing that from day one.

started with one rig, we're up to 71. So, I think what we're trying to communicate, 2022 is going to be very similar where the intention is to reinvest the cash flow from the business into rigs and other ancillary equipment.

And that's to keep up with the client demand, make sure the client is happy. We don't purchase rigs on spec.

So, any rig that we order or any rig that comes out of the workshop, it goes out right away. We usually have a home for it and it can get out drilling fairly quickly.

So, same model as the previous kind of years where we will have significant CapEx for growth.

Perfect. Okay.

That's it for me. Thanks very much, gentlemen.

Hey, good morning. I guess my first question, maybe an update on kind of the geographical footprint of Geodrill right now, given the new contract wins in Egypt.

What is it now and what do you expect it to be by the end of the year? If you’re able to give us any color on that?

I was just wondering whether Greg was going to answer that call. Ahmad, good morning.

So, very busy. Currently, two rigs in Egypt and we're increasing that to - on the strength of this new contract that we just signed, we’ll be adding five or six rigs.

There may be some additional rigs that are destined for Egypt, but the challenge we've got now is that everything we have in west Africa is completely spoken for. The only play in the world where I've got any spare capacity is in Peru, where we have four rigs currently, of which two are spinning.

And as I was saying to the previous analyst I was speaking with, those two rigs will more than likely be taken up very soon. That's - we've bid three jobs and we're getting strong feedback from all three jobs.

And so, we believe that those rigs will be spoken for very shortly. Does that help your question?

No, that’s great. Thanks for the color, Dave.

And then …

Sorry. And you asked, how many rigs will we get to this year?

I believe Greg spoke to that and I also spoke to it. We will probably add seven new rigs during the course of the year, five of which are the rigs in Egypt.

And then we have some additional additions just coming into the exploration fleet. I think we tend to look at these things conservatively.

We always do. So, I think if we say we're going to end this year with seven additions, I think that number is conservative.

We also have limitations, like manufacturer bottlenecks and so on and so forth. Again, this is a little bit - we’re a little bit uniquely positioned, is that we're able to declutter some of those bottlenecks through the infrastructure that we're building out here.

But I think conservatively, we’ll end this year with call it 79 rigs, or probably just 80 realistically

That's very helpful. Thanks, Dave.

And are you able to give us maybe kind of a summary of how much of that is tied to a longer-term contract? We have seen the recent kind of news, the announced couple of big long-term contracts.

So, maybe just a general sense of how much of your rig fleet is secured by three-to-five-year contracts, if you're able to give us that

Currently looking at about 60% of the fleet completely tied up for the next three of five years.

And on those longer-term contracts, any clauses, escalation clauses, or anything to protect you from an inflation perspective in there? How do you structure them?

Anything over a one-year contract has a rise and fall. So, if - and then it's made up of a dozen or so indices.

If something moves up, like topical at the moment, fuel, cost of shipping, currencies, such things are all built into a formula, which basically says during the previous year, we had a factor of 2% or whatever. And then that just sticks as a one-off rise and fall charge on an annual basis.

So, you get past the first year and anything that's considered longer than a one-year contract, automatically we are able to invoke a preinstalled rise and fall contract, and this will become particularly important in contracts of say five years. We don’t know what our costs are going to be in five years.

We have no idea what the fuel price is going to be in five years, let alone - next week, let alone in five years. But what we can say is that things will go up.

we're in a period of what will become hyperinflation. And - but in some ways, we're somewhat hedged against that.

We drill for gold. There could not be a better thing to be drilling for at this point in time.

We’re the ultimate contrarian play in that respect.

That's great, Dave. Thanks for that.

And maybe this one is for Greg. I just noticed the SG&A benefited from a $1.5 million VAT refund.

Is it - are there any other kind of big lumpsum, like year-end bonuses or something like that? Or should we just add that $1.5 million VAT refund and take that number as a good run rate for a quarterly SG&A number?

Yes. No, the bonuses are throughout.

So - and they're based on results. But the - kind of the outlier there was really - there's two of them.

there's the - in the SG&A, you can see it's lower, and that's because we had a VAT refund in Q4. So, that was very positive for us.

And then we also had some other income in the results. So, you can see that.

So - but very, very good year in terms of SG&A. If you look at our SG&A, we were able to - really two things.

If you look at the margins, we were able to increase the revenue by 40%. And I think one thing we should highlight is, we maintained our margin, our gross margin.

So, not only did we maintain it, we beat it slightly. We went from 25% to 26%.

And as I said earlier, all of our, what I call investment, the cost of investing in our workshop and getting stuff ready for 2022, that's in your COGS. So, very, very important to highlight that.

Increased revenue by 40%, and also increased our gross margin. We're also happy with the SG&A.

If you look at our SG&A overall, 2020 SG&A was 12% of revenue. In 2021, we were able to bring that down to 10% of revenue, and the VAT refund that I'm talking about, that’s more of a quarter thing.

I don't want to distract you, but the - because there's VAT expense in the other quarters, Q1, Q2, Q3. And then when we receive the refund in Q4, you get the - it's more of a quarterly outlier versus the whole year.

So, what you should really look at is kind of the annual SG&A, and that was, like I said, very well managed at 10% of our revenue versus 12% for 2020.

Okay, sounds good. So, from what I gather, 10%, plus minus in that range is a good number for the SG&A aligned for 2022, right?

Correct. Yes.

we manage towards 10% SG&A.

Perfect thank you. And that's it for me.

I'll jump back in the queue. Thanks guys.

Hi, guys. Thanks for the call.

Congrats on the great results. I was wondering if it's possible to just talk about sort of the magnitude of growth that is possible over the next two years.

Like could we see a revenue number sort of close to 150 over the next two years? And is the - could the earnings be sort of north of $20 million?

Probably - sure. Go ahead.

No, I was just going to say, we don't give guidance, but I mean, if you kind of - what I said earlier, if you look at the macro, you look at kind of how - what our competitors, what their revenue, what their topline is increasing, we had a banner year last year. I mean, 40% revenue increase.

So, we're expecting, when we do our forecast and our budget, we're expecting another healthy 2022. So, but again, you have to work with your clients and we can add rigs as much as we can.

Dave said, we have visibility right now. We know we're going to add at least seven rigs, but that could increase significantly throughout the year.

And like I said, we have - we use our cash flow from operations to keep investing. If you look at our - I mentioned earlier, we have net cash.

So, one - there's no only one or maybe two other drillers that have net cash. So, we have a very strong balance sheet.

So, we can use our cash that we're going to generate in 2022. We can use our cash that we have on the balance sheet, plus we have credit lines that we haven't tapped.

So, there's still 7 million on our credit line and we still have a bit on the medium-term loans. So, as we get through 2022, growth could be significant, but again, I just - we don't forecast that, but I think if you kind of look at our past and look at the macro environment, we're pretty optimistic for 2022.

Brad, I think your numbers aren't that far out. I'll make it a bit easier for you.

I think - look, I've looked at our five-year CAGR using 31 December, 2021. It’s always a good time when you've had a stellar year to look back and reflect on what you've done for the last five years.

And as a matter of course, we do measure that on a five-year CAGR basis. If we look at what we've accomplished in the last five years, revenue on a CAGR basis, and considering we've come out in three - four of those - four of the last years have been a down cycle.

If we look at the numbers, we look at something in the order of about a 9% CAGR, 9% EBITDA, 9% net earnings, and about 10% total equity. Now, as I say, we - four and a half of the last five years have been down cycle.

Really this upcycle is just beginning. So, if you used those numbers conservatively and then bump them a little bit, I think you're going to end up somewhere around the number that you suggested.

I don't think 150, you'd be far from there two years from now. As to our net earnings, well, if you consider that we did 14, if you added 10 and then 10, you’re probably going to end up more like about 117, 118.

And again, I would think that would be conservative. And I would just actually add that these numbers have somewhat been skewed by the fact that we have had four and a half years of the five-year down cycle.

Does that help?

Okay, great. Yes, that's helpful.

Thanks. And just in terms of the operating environment in west Africa, do you have any commentary around that?

Has it gotten harder with the political uncertainty or is it sort of business as usual? How would you describe it?

I'd tell you what, I'd rather be here than in some parts of Europe at the moment. Africa always seems to get a bad rap for some reason.

I don't know why. I've lived here for 25 plus years, and I've had nothing but great experiences here.

That's where I'm speaking to you from today, is where my kids grew up. One of them was born here.

Most of them went to school here. So, for some reason or another, west Africa just keeps getting this rap.

Now, there is unquestionably, in some of the 54 countries of Africa, places that we will be reducing our operations. I won't mention them by name.

It's suffice to say that we have plenty of - we’re spoilt for choices, where to go to. I would just put it back to you, Brad, that if west Africa is such a concern, why are all of the major mining companies here?

How is it that Jack Dorsey was looking, before he retired, to establish, and I believe Twitter is going on to establish in Accra, Ghana. Ed Sheeran lived here for a couple years.

the music guy. Africa is not the - it shouldn't - it doesn't deserve the rap that it used to get, quite frankly.

And look, what do we drill for? Minerals, gold.

This was formally known as the gold coast, because there's a lot of gold here. We don't - we have no predilections in terms of where we operate.

We just happen to be here because of there's plenty of work for us to do there. So, this is where we've established the business, and this is where we've built our business.

But drill rigs are not bolted to the ground. They're not permanent fixtures.

They're mounted on crawler - dozer trucks, and we roll them on and off trucks and in and out of ships when we want to move them around. This just happens to be where our business is today.

And as you can see, we are moving up and we are moving out suddenly when one country doesn't suit us to be there any longer, we pack the rigs. We put them on a boat and we send them somewhere else.

It just happens to be where we're headquartered from, where we’ve beach-headed the business. And it makes sense to be here.

It makes a whole lot of sense to be here when you consider that Africa has the youngest population in the world, and this is a young man's business. I’m not sure if that answers your question.

Have I convinced you?

Yes. Fair enough.

Thanks. I mean, obviously, I'm perfectly comfortable with west Africa.

But yes, thanks for your time.

Yes, Dave, maybe one last follow-up from a high-level perspective. What are your views on this upcoming cycle from a margin expansion potential compared to previous cycles?

Any reasons why we should think differently about the potential margin expansion here the upcoming years as this upcycle continues for three, four years?

I think the - as I spoke to in my speaking notes, we're starting to see pricing leverage as the demand drivers shift to a supply demand, which is now weighted more favorably in the way of the supplier. And that's the key difference here.

As people need to drill out their reserves, they'll need to hire our rigs or someone's rigs to do that work. There’s a limited amount of rigs now in the market.

And what we are hearing through the industry is that our costs are going - sorry, that our competitors are all increasing their prices to capture increasing pricing costs, the cost of doing business. The cost moving a 40-foot container, by example, just to digress for a moment, has gone from what used to be $3,000 or $4,000 to $15,000, as shipping companies are gouging their industry.

And unfortunately, we are the customers. We have to pass that cost on somehow.

The cost of fuel has increased in the past couple of weeks 35% at the pump. So, all these costs are going to have to be passed on.

At the end of the day, I think what's going to happen is margins will remain flat to slightly north, frankly speaking.

That's great. Thanks, Dave.

That's it for me. Thanks, guys.

Just on that note, 25% to 26% of the DOW margins, in an environment where pricing is moving - costs are moving quickly, is still a very good result. And I saw your question there earlier about some of the additional - what were some of the additional abnormals?

Well, the fact of the matter is, we've managed to increase our revenue year-over-year by 40%. we've increased where it was down by 55%.

Even if you factored that back and said that the two moved in lockstep, that would still be an excellent result, because as things become busier, efficiencies are usually lost. One thing we've managed to do always through our growth and throughout our history is managed to move that needle starting with the top line and moving everything up in lockstep, or better than lockstep.

That's the plan anyway. Thanks.

Okay. So, on that note, I'll thank everyone for their time, and we wish everyone a great day out there.

Thank you very much.

Thank you, everyone.

Thank you.