Francis McGuire - President and Chief Executive Officer Denis Larocque - Chief Financial Officer

Michael Mills - Beacon Securities Greg McLeish - GMP Securities Kam Mangat - Salman Partners Ben Jekic - Industrial Alliance

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Major Drilling Group International Inc. Third Quarter Results 2015 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Mr. Francis McGuire, President and CEO of Major Drilling. Mr. McGuire, you may begin your conference.

Thank you very much, operator and good morning, everyone and welcome to Major Drilling’s conference call for the third quarter of fiscal 2015. With me is Denis Larocque, our Chief Financial Officer. You should have all received a copy of our results which were released yesterday evening. And if not, please contact our office or visit our website at www.majordrilling.com. Before we get started, I would like to caution you as usual that during the course of this conference call, we will make forward-looking statements regarding future events or future financial performance of the company. Such statements are forward-looking in nature and actual events or results may differ materially. Our third quarter was extremely challenging. Year-over-year revenue was flat. The gains made with the addition of our new percussive drilling division were offset by the loss of revenue in our energy business and the closure of our operations in Australia and the Democratic Republic of Congo. Third quarter margins are typically impacted by a slowdown during the holiday season, but this quarter was hit particularly hard. The three main elements affecting margins were: reduced pricing, first of all; extensive mobilization and repositioning costs; and high repair and purchasing costs in anticipation of the post-Christmas startups. All of which are expensed before projects begin. We also had a significant decrease in higher margin specialized drilling and a much greater focus on production-related drilling, which generates lower revenue and has lower margins. Denis will provide you with more detail of our financial results before I return to discuss the outlook. Denis?

Thanks, Francis. Total revenue for the quarter was $69.8 million, down 3% from the same quarter last year. Looking at revenue by region, revenue for the quarter from Canada-U.S. drilling operations increased by 27% compared to the same period last year. The additional revenue provided by the Taurus acquisition was somewhat offset by the slowdown in the energy sector. South and Central American revenue was down 8% for the quarter. Chile and Argentina were affected by a reduction in work by juniors and the cancellation of certain projects, while Mexico saw a slight increase in demand compared to the same period last year. Australian, Asian and African operations reported revenue down 45% from the same period last year. The company closed its operations in Australia earlier in the year and also closed its operations in the DRC due to ongoing administrative difficulties associated with operating in that country. Also, Mongolia continues to be affected by political uncertainty around mining laws. The overall gross margin percentage for the quarter was 11.2%, down from 24.7% for the same period last year. Third quarter margins are typically impacted by a slowdown during the holiday season combined with higher than usual mobilizations, demobilizations and increased repairs during this period. Margins continue to be affected by reduced pricing due to increased competitive pressures. As well, customers are focusing on mine site drilling, especially underground drilling, which tends to have lower margins. General and administrative costs decreased 3% from last year at $11.7 million for the quarter despite an increase due to foreign exchange translation and the Taurus acquisition. With the decrease in activity, the company has reduced its G&A costs by implementing reductions of salaried employees and restructuring certain branches. Net loss was $19 million or $0.24 per share for the quarter compared to a net loss of $12.8 million or $0.16 per share for the prior year. In terms of our financial position we continued to have one of the most solid balance sheets in our industry. At the end of the quarter we had cash on hand of $51 million and total debt of $19 million for a total net cash position net of debt of $32 million, which will certainly help to finance cash flow required in an upturn. During the quarter we spent $2.6 million in capital expenditures adding two underground rigs while retiring 11 rigs. This brings the total rig count to 711. The new breakdown of our fleet and utilization is as follows. We had 360 specialized rigs at the end of the quarter with 26% utilization, 190 conventional rigs with 23% utilization, 161 underground rigs with 42% utilization again for a total of 711 rigs with 29% overall utilization. As we have mentioned before specialized work in our definition is not necessarily conducted with a specialized drill. So the revenue breakdown this quarter of – by type of work was 53% came from specialized projects 14% from conventional and 33% from underground projects. This illustrates the acquisition of Taurus which gets qualified at underground services. Also with the slowdown of juniors, seniors and intermediates represented 79% of our revenue in this third quarter, while juniors accounted for 21%. In terms of commodities gold projects represented 53% of our revenue, while copper was at 19% this quarter. Energy remains low at 4% of revenue given the slowdown in that sector. With that overview of our financial situation, I will turn the presentation back to Francis to discuss the outlook.

Thanks Denis. Due to the uncertainty around the world economy and the market – the mining market it is very difficult to forecast customer demand over the next 12 months as senior customers are still cautious about investing new and future projects. Some energy drilling could return later this year but the timing remains uncertain. The governments’ actions in a number of countries Magnolia and other Latin American jurisdictions are also difficult to forecast. And startup dates even once established can be delayed adding further uncertainty in terms of exact timing. We expect pricing to remain competitive until utilization rates pickup significantly. In 2014 our customers focused mostly on work on the mine site and production related activities. We expect this trend to continue right through 2015 and we will be shifting some of our emphasis to mine site activities while maintaining our competitive advantage in specialized drilling. The Taurus acquisition as Denis pointed out has allowed us to provide an even wider range of complementary services adding underground production drilling to our existing underground core drilling and we believe that there is further expansion to be had in that sector. In the short-term we expect that revenue and margin will return to their pre-holiday levels. We are in a unique position as the company’s financial strength has allowed us to invest in safety and to maintain our equipment in excellent condition. For these reasons we feel that we are one of the best equipped to react to any needs in the market. For the company finding the right balance between price and volume is our biggest challenge, facing competition throughout the industry. The company will continue to focus on its ability to generate cash project by project and region by region. During the downturn the goal is to maintain the strongest balance sheet in the industry. For this reason and given the current low commodity price environment and the uncertainty that continues to persist the company’s Board of Directors has approved an amended dividend policy declaring a cash dividend of $0.02 per common share payable on May 1, 2015 to shareholders of record as of April 7, 2015. The company believes that it is prudent to lower the amount of our semiannual dividend to ensure that we balanced our needs for cash flow with capital expenditure requirements as we see potential elements for growth. This will preserve our ability to adequately respond as well to future upturns in the mining industry and emerge as one of the strongest drilling companies in our sector. The dividend is designated as eligible dividend for Canadian tax purposes. Long-term, we believe that most commodities will face an imbalance between supply and demand as mining reserves continue to decrease due to lack of exploration. World consumption nevertheless continues despite the economic slowdown. At some point in the near future, the need to develop resources in areas that are increasingly difficult to access will significantly increase, at which time we see – we expect to see the resurgence of specialized drilling. That concludes my remarks, but Denis you have a comment.

Yes. I just wanted to mention that for those who might have known Mike Pavey, our former CFO, I regret to inform you that he passed away last Sunday and he will certainly be missed. So, with that operator, we are glad to take questions.

[Operator Instructions] Your first question comes from Michael Mills from Beacon Securities. Your line is open.

Good morning, guys.

Good morning.

I guess, let’s start on the margin story, obviously significant contraction, I am just trying to figure out how much of that is really pricing related, i.e., how much did pricing change or – have we seen a big drop say in the last three to six months and how much of that is just – you have spent significantly more moving rigs around and repairs and maintenance that type of thing?

Yes. Well, I mean, there is no question pricing plays in that equation given that, I mean, we have reduced costs over the last 18 months and there is only so much you can do in terms of costs until those price decreases hit the bottom line directly, but also I mean, this quarter, we – again, we prepared a lot of rigs to go in the field. The rigs that had not been touched in the last year, year and a half, because they had been parked going into the downturn. So, we brought them back in the shop, gave them there that since we are bringing them in the shop, we might as well do a good job and get them fully repaired, ready to go and so that they don’t have to come back for a full uplift for the next couple of years. So, we took that opportunity, but that certainly has an impact on costs. So, we are staying true to our strategy in terms of getting ready for the upturn having our rigs in good condition, but I mean that has an impact on our cost. And at the same time, to get those jobs going, we had to as usual in the third quarter we purchased a lot of items to get to jobs and stuff that we expensed at the point of purchase. So, all those things played into the equation, but there is no question that the main one or the biggest one is price.

Okay. So, it sounds like there is definitely some preparation for improved activity levels if that’s I guess more of a speculative move or is that based on some contracts in hand and I guess just on the back of that, how do things feel today versus say a year ago when you walk around PDAC talking to consumers?

A fair amount of that was done for contracts that we had. We are suffering a typical kind of somebody’s order 10 rigs. And once you get onsite and have paid to actually train people, get the stuff, they slashed the program to 6 rigs. So, we are ending up with more rigs than we thought. The original plan was to build towards just meeting their contractual need. So – and we are seeing a lot of delays too. We are seeing the typical, while we want you to be ready in February, and people are now saying well let’s start April 1. So, we are getting that kind of shuffle around as it works out we probably have appeared more rigs than we needed to, but that was not what we were seeing in November and December. And it’s a typical thing in this environment. I think all of the drillers are suffering from that. You get onsite, you train people, you – cost of bringing people on, mobilizing them, they usually have to go through at least a week’s free training at our costs and then bang, you can’t use them for 6 weeks. So, there is a lot of that unfortunately, but that’s the nature of the challenges we face. And again we hope to see things pick up in the April period, but again we see uncertainty is very unnerving because there are changes that are slight now. We have had a couple of good new stories, where people have said actually I want two more rigs. So, we are having a very, very hard time planning. And we also know though we don’t have a rig immediately available, they will go to somebody else. And so, at least in that sense, we now have rigs on the shelf that we can mobilize within days. So, yes, we over – I wouldn’t say overspend, because we spend to the target that we are given, but the target changed.

And we try to do that just because we have got the flexibility. Now those rigs are ready to go. We have got more rigs on the shelf ready to go and we try to do that than just not be able to respond.

Yes, it makes sense. Thanks guys.

Thank you.

Your next question comes from Greg McLeish from GMP Securities. Your line is open.

Could you just quantify what the impact of Taurus was for the quarter on revenue and EBITDA?

Basically, we don’t communicate that information, but it would be in the range of $8 million on revenue.

Great. And then what percentage of your revenue is derived in U.S. dollars?

About 50%.

Alright.

Canadian is about 30%.

Yes.

And then we have the Chilean peso and the Argentinean peso.

The other 20% is a variety of things.

Great. And maybe if I can just squeeze one more in, how are you started looking at CapEx for the next couple of years, I mean, are we – until we see a recovery, I mean you probably have the amount the drills you need, how should we be looking at that?

That’s one of the reasons when we talk about balancing our CapEx needs. We see some areas like the because of the Taurus stuff, where we see some pretty good opportunities. And so we expect to be spending a fair amount buying new drills. We have 39 now. I wouldn’t be surprised that in the short-term and we are still finalizing and discussing things, but we could certainly increase that by 10% to 20% over the next year. So those are expensive drills too. So, we are looking at that and there are occasional places where we also have to do fair modifications. So I think we are at a run rate often – right now of about $4 million a quarter. I would expect that and it could be more. And again when we do see opportunities to expand those businesses, we want to keep the flexibility to do so, and at the same time keep our cash balance healthy. I mean, we would like to end up with the kind of cash surplus that we have a year from now or 2 years from now. Hopefully, not 2 years from now. But that’s our – what we think that is for inventors, we think operationally keeping a strong cash balance is really very strategic.

And maybe just if I can squeeze one more and in the last quarter – in the last conference call, you indicated that you are hoping Q4 might be able to get up to Q2 levels on revenue, what’s your sort of view on that now?

Well, I think we have stated like our view is that’s what we believe will happen. With the all the caveats delays people shopping programs from what they are, but we think that we will return to pre-Christmas level both on margins and revenues in our Q4. So, that’s at today as we look at work in hand that’s what we believe will happen, but it is subject to change.

Thank you. I will get back in the queue.

Thanks.

And our next question comes from Kam Mangat from Salman Partners. Your line is open.

Good morning.

Good morning. Yes.

Just a quick question, I want to circle back to Taurus, your underground utilization rate is now 42%. Could you break that down for us and give more color on what the utilization rate was for your Taurus operation and your energy operations?

Yes, we don’t go to that extent, we don’t break out those numbers, but in terms of utilization, Taurus has the high utilization, that’s why we want to leave the room for CapEx we believe as that business does have opportunity as we go forward. And how much opportunity we will have to see, but the utilization rates there are very high, yes.

Okay. And the second question I had is you have amended your dividend rate from $0.10 to $0.02 semiannually, just wanted to get your thoughts or how those discussions went and why $0.02, why not $0.04 semiannually or the thoughts around that?

It really is what we hope will happen with our CapEx. Again, we believe that there is some real opportunity out there over the course of the year. And so it really was that balance and at the same time wanting to maintain a positive cash in hand balance sheet. So, we have looked at those two. And you do scenarios and that seemed to be like the right number to be able to do that. And again, will this CapEx forecast materialize, we have a fair amount of confidence, but all these things are very much subject to change. So, you are to a certain extent guessing. And I think our view is that as things do improve and we can get back up and restore the dividend that would be our goal. So, it was really that balance and also playing it a bit safe what we absolutely don’t want to do is change the game. This is our difficult decision for the Board and they really want to make sure that well, let’s do it once and not again.

Okay. Those are my two questions. Thanks.

Great, thanks Kam.

[Operator Instructions] Your next question comes from Ben Jekic from Industrial Alliance. Your line is open.

Good morning. Most of my questions have been answered, but I do have one. In terms of your tangible book value, there has been an increase on the equity side on the foreign currency reserve and a significant decrease in the goodwill and I kind of struggled to find the details about that. Can you illustrate that a little bit more?

Yes. Well, the foreign currency translation is really just the movement of our assets that are denominated in U.S. dollars that gets converted at the current rate at the end of the quarter. So, with the currency fluctuations that we have seen, so the value effectively of our assets in U.S., in all of our U.S. branches, all went up in value in Canadian dollars. So, that’s where you see they call it a translation gain, but it’s in the – that’s the amount that you would see on the statement of comprehensive earnings. That would explain that basically the amount you see on the comprehensive earnings is the increase that came from that line on the equity side. On the goodwill, all it is, it’s just a reclassification from goodwill to intangible, because during the quarter, we refined the purchase price allocation on the Taurus acquisition, so some of the goodwill has been allocated to intangible assets and as well the – we have discounted the contingent consideration for just for the time and money and that basically had somewhat reduced a little bit the goodwill.

Okay, great. Thank you.

[Operator Instructions] We have no further questions at this time. I turn the call over to the presenters.

Okay. Well, thank you very much everybody. And hopefully we might get a chance to see you around PDAC. We will be here for the week and so look forward to chatting with you. Thank you very much.

This concludes today’s conference call. You may now disconnect.