Denis Larocque - President and CEO David Balser - Chief Financial Officer

Michael Mills - Beacon Securities Kam Mangat - Salman Partners Cihan Tuncay - GMP Securities Larry Callahan - Wheelhouse Securities

Good morning, ladies and gentlemen. Welcome to the Major Drilling Group International Inc. Second Quarter 2016 Results Conference Call. I would now like to turn the meeting over to Mr. Denis Larocque, President and CEO. Please go ahead, Mr. Larocque.

Good morning, everyone. And welcome to Major Drilling’s conference call for the second quarter of fiscal 2016. With me is David Balser, our Chief Financial Officer. You should all have received the copy of our results which were released yesterday evening; if you have 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 the future performance of the Company. And such statements are forward-looking in nature and actual events or results may differ materially. We continued to see some stability in our activity levels this quarter. The stability in our ongoing contracts in the last few quarters has allowed us to optimize productivity and cost which is reflected in the quarter’s margins. Although volume and pricing are still not at profitable levels, we are generating cash and still investing in our equipment and training which is key in our plan to be ready for the next upturn. Revenue for the quarter was relatively flat compared to the same quarter last year and to the last three months at $84.7 million. Gross margin improved to 27.5% compared to 23.8% last year as we benefitted from favorable weather conditions but also from the stability of our contracts which allowed us to realize productivity efficiencies throughout the year. As we continued to generate cash, our net cash is up $0.2 million from three months ago with net cash net of debt at $33 million at the end of the quarter. David will now take you through a more detailed review of financials and I’ll return to discuss the outlook.

Thanks, Denis. Total revenue for the quarter was $84.7 million, down 3% from $87.2 million recorded in the same quarter last year. We continued to grow our percussive services during the quarter but this was offset by a slowdown in the operations in Chile and Argentina and the close down of our branch in Democratic Republic of Congo. The favorable foreign exchange translation impact for the quarter is estimated at $8 million on revenue with negligible impact on net earnings when compared to effective rates for the same period last year. The overall gross margin percentage for the quarter was 27.5%, up from 23.8% for the same period last year. Good margin performance attributable to favorable weather conditions combined with the stability of the Company’s ongoing contracts has allowed the Company to realize productivity efficiencies throughout the quarter. This margin is an indication that pricing appears to have now stabilized in part as a result of the Company’s discipline on pricing. General and administrative costs were down 4% from last year at $10.8 million for the quarter, despite an increase due to foreign exchange translation as the Company continues to manage its costs across the operations. The provision for income tax for the quarter was flat at $2.4 million compared to same quarter last year. Tax expense remains relatively high as we pay income taxes on our profitable operations but have ceased to record the benefit of tax losses in certain other jurisdictions. All of this resulted in net loss of $5.3 million or $0.07 per share for the quarter compared to a net loss of $10.1 million or $0.13 per share for the prior year quarter. In terms of our financial position, we continue to have one of the most solid balance sheets in our industry. During the quarter, our net cash position increased $0.2 million for a total net cash position, net of debt of $33.1 million. During the quarter, the Company spent $6.5 million on capital expenditures, adding five rigs including four underground percussive drills, while selling or retiring four rigs. This brings the total rig count to 699. The new breakdown of our fleet and utilization is as follows: 343 specialized rigs at 28% utilization; 189 conventional rigs at 16% utilization; and 167 underground rigs at 47% utilization. This brings us to a fleet total of 699 rigs at 30% utilization. As we’ve mentioned before, specialized work in our definition is not necessarily conducted with specialized drills. Therefore, we should also give you the breakdown of our revenue by type of work for the quarter. Specialized projects represented 66% of our work; conventional projects 12%; and underground projects represented 32%. As we continue to see a slowdown of the juniors, they accounted for only 12% of our revenue, while seniors and the intermediates represented 88% of our revenue in Q2. In terms of commodities, gold projects represented 53% of our revenue, while copper was at 17% this quarter. With that overview on our financial situation, I’ll now turn the presentation back to Denis to discuss the outlook.

Thanks David. Our customers continue to focus their work almost exclusively on mine sites, which means they have a much greater focus on production related drilling such as percussive and underground drilling. We’re continuing to adapt to the current conditions by investing in and growing our percussive operations and mine services. But for now, exploration efforts from our customers are expected to remain low, while most of our senior and intermediate mining companies -- or customers are still working through their mining plans for 2016. Given the recent decrease in all commodity prices over the last few months, it’s very difficult to predict how our customers will react and adjust their plans over the next year. We are however in a unique position to react quickly when the industry begins to recover, as the Company’s financial strength has allowed it to retain its key employees and to maintain its equipment in excellent condition. For these reasons, we feel we are one of the best equipped to react quickly to the needs of our customers. As we go through this challenging period, we continue to focus on cash generation. The Company continues to have a variable cost structure whereby most of its direct costs including field staff go up or down with contract revenue, and a large part of the company’s other expenses relates to variable incentive compensation, based on the Company’s profitability. It is important to note that we are now in our third quarter, traditionally the weakest quarter of our fiscal year as mining and exploration companies shut down often for extended periods over the holiday season. At this time, most senior and intermediate companies are still working through their budget process and have yet to decide on post holiday startup dates. As usual, due to the time it takes to mobilize once new contracts are awarded, the slow pace of startups is expected in January and February, which will impact third quarter revenue and margins and to some extent fourth quarter margins. We expect pricing to remain competitive until utilization rates pick up significantly. Long-term, the fundamental drivers of our business should improve with most metal -- with supply for most metals to tighten as reserves are being depleted and not replaced. We believe that in the medium-term, many commodities could face imbalance between supply and demand, and that the need to develop resources in areas that are increasingly difficult to access, will increase, which should increase demand for specialized drilling. Our challenge is to manage effectively in the interim. That concludes our formal remarks. And Melanie, we will open the call to questions.

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Michael Mills of Beacon Securities. Please go ahead.

Good morning, guys. Maybe I missed it but there wasn’t any mention of the energy business. I know it’s a small part of your business but maybe just give an overview of where you guys stand in that regard, if you’ve been able to keep some of the rigs turning, I guess particularly in the U.S., and what the outlook is, maybe over the next six or nine months?

Well, the energy business is down and there’s not a lot of activity on that sector. Obviously with the price of oil where it is and especially the high cost on shale gas, there’s been a big drop in that business. So, we’re not active. We’ve been able to redeploy those rigs into other kinds of services, which was always the idea when we went in -- if you remember about eight years ago when we went after that market, we always said we were using rigs that could be redeployed in the mineral sector. And that’s what we’ve done to a certain extent, using some of those rigs to do bigger rotary holes or even some water work around mines and things like that. But from the energy sector per se, not a lot happening on that sector.

Okay, fair enough. Just back on the main mineral business. So, in terms of your conversations with customers for 2016, I know it’s typically the December-January period where things get settled. Do things feel any different than they did a year ago at this time, in terms of the degree of uncertainty; do you have a bit more clarity or a bit less? Again, any color is appreciated.

No, at this point, we’re in the same boat we were last year where we just don’t know yet. The decisions are taking time to be made. So, it’s -- at this point, we don’t have a lot of visibility at all on 2016 from most of our customers.

Okay. And then, just looking specifically at South America, it looks like in terms of regions, that’s been the most volatile, if that’s the right word. And just in terms of quarter-by-quarter results, is there anything in particular happening there, is that the most challenging area of the world where you’re working either in terms of competition or pricing; and again, any kind of outlook you can provide for that region in particular?

Yes, it depends country by country, I guess. I mean, if you look at Mexico in terms of volatility, it can have some very good quarters and then it can go slow the next quarter. So, Mexico has been up and down; it’s [gold] [ph] driven. Then, you go to Argentina, and with the election that was looming now, there’s been some for the industry what looks to be positive results coming out of that election because, it looks like the new government in place will be more receptive or inviting foreign investment which should help the mining industry and restart investment in that country. So, Argentina is another one that’s been up and down. Chile, with the slowdown in copper and Chile has a lot of competition, so it’s very, very competitive. So basically, Chile is more about slowdown and a lot of competition. So, that’s how -- those are our main drivers in South America.

Okay. And final question is just around the Taurus earn-out. So, you guys paid, I guess for year one in the most recent quarter. Is that earn-out a step up earn-out in terms of there’s more dollars available in each successive year or did they not fully generate or fully earn their year one earn-out?

No, it is -- basically, it is an earn-out based on how much will get generated over three years. So, the whole earn-out that was put on the table is still up for grabs and it is growing. And it is going pretty much as planned because the idea was that it was going to be a step up that it was going to grow. And the idea of the earn-out, the way the deal was structured is that we paid upfront for the business that was existing. And we had discussions on growing going forward. And that’s the piece that we are paying in a form of earn-out is the growth aspect. So, the first year is going to be less and as it gathers steam, basically the growth -- as we benefit from the growth, then the earn-out will benefit as well.

And just in terms of those percussive rigs that you’ve added that’s towards -- I know it’s probably not Taurus anymore but that underground division, how much do those rigs cost on average?

It depends; there is some that are between $800,000 and $1 million like the big ones and then the small ones are in the $150,000 range. So it’s a…

Wide range, okay.

Wide range, yes.

Thank you. [Operator Instructions] The following question is from Kam Mangat of Salman Partners. Please go ahead.

Just circling back to I guess the percussive drilling operations, at the time you made the acquisition there, I believe 39 rigs, just wondering what the total number of rigs within that business is at this point in time?

We’d be around between 45 to 48 rigs but again, as the more -- as things progress, the businesses tend to cross over, so then it’s less of a clear demarcation between the two. But we’ve added rigs that basically would -- my guess that between 45 and 48 rigs.

Okay. And I guess this quarter you added four rigs, is that -- should we expect the similar run rate going forward? Obviously I know Q3 is a slower period, but after Q3 into Q4 and rest of calendar year 2016, is that a fair run rate?

It’s tough to say, because it all depends on what the mining plans are going to be for 2016. And we are -- that’s the thing we are adjusting. Our goal is to maintain our cash. So, we will be adjusting our CapEx in relation to the level of activity. But really when we’ve said when we started the year that the CapEx we were looking at CapEx to be in the $20 million range for the year, i.e. like $5 million per quarter type of range. So, going forward, probably -- unless there is a slowdown or a big upturn, either way, it could impact those numbers. But if things remain stable, I think that $5 million is probably, it’s going to be within that range and then it’s some quarters higher, some quarters lower.

And then just looking at revenues in Canada and the U.S., most of the growth was related to this particular ‘drilling services’; excluding this ‘drilling services’, was revenue growth negative?

The revenue growth, the revenue per se was relatively flat but then it was helped by the U.S. dollar. So activity levels were down year-over-year, yes; and most of that related to the energy sector.

Okay. So, was the revenue pretty flat, excluding the U.S. dollar impact?

You mean in North America?

That’s right.

Yes.

Okay. And then looking forward to Q3, last quarter margins were around 12% and I realize that it’s a difficult quarter to get any visibility around. But should we expect that margins will improve from that level at this point in time or like should we assume the 27.5% run rate going into Q3 but over two months?

No, the one thing, you should never take the Q2 margins and put an expectation into Q3. And I think last year is a good lesson of that. I mean when we started Q3, even ourselves, we didn’t expect them to be -- we didn’t expect margins to go as low as 12%. Because the big unknown is January; it’s a black box because we just don’t know when projects are going to start, even though we might have dates, we might be told we will be starting January 4th or 17th or whatever. Lots of times, things are delayed but we bring the staff on for those dates but then the revenue only starts flowing in, sometimes even in into February. And that has quite a bit of an impact when you have all the costs and no revenue in the month of January. And that’s and also when you working off a low level of revenue, it has an even bigger impact on margins. So, very tough to predict, but I wouldn’t take the level of margins that we had in the second quarter to bring that into third quarter, and by the way in the fourth quarter. Because historically, if you go look, you will see that fourth quarter, there is always a drop from the second quarter before and then you kind of rebuild. So typically margins historically, they go -- they start low in the fourth quarter, while even if you start with the third quarter which is also low but then fourth quarter, you build up and the first quarter goes a bit better and then the second quarter goes a bit more -- there is a bit more there. And it’s all because fourth quarter, you’ve got lots of startup delays, by the time things are clicking, you’re well into March. So, I wouldn’t carry the second quarter margins into fourth quarter as well.

Okay, that’s fair enough. And then just back to U.S. dollar, it benefited revenues by $8 million, does it also benefit your gross margin line or the costs also in U.S. dollars and it offsets the impact on gross margin?

Yes, our costs are kept in the same currency as our revenue. So, no, it doesn’t help; the currency doesn’t help the margins.

Thank you. The following question is from Cihan Tuncay of GMP Securities.

Good morning guys, this Cihan, on behalf of Greg McLeish. Most of the questions I think we had have been answered so far. Just one thing to follow up with is we were just wondering on the basis of the cost savings achieved from certain restructuring at the branch level, is that kind of in the -- have you guys seen the desired savings achieved so far or do you think there might be some more opportunities to save costs in that way?

No, we -- the cost savings are embedded into this quarter. I mean, if you look, our G&A was down 4% from last year but that’s despite the fact that we had a higher rate of conversion. So really they’re probably down and I am just -- I don’t have the numbers in front of me but they’re probably down by 8% over last year. And most of that relates to the restructuring that we’ve done across the operation.

Then, I guess is that kind of what your target was or do you want to -- is there plans to…

It’s in line with what we expected, yes.

Thank you. The following question is from Larry Callahan of Wheelhouse Securities. Please go ahead.

I was wondering if you could give any insight on what looks like maybe some encouraging news in Mongolia from Rio Tinto and any outlook for consolidation in your industry. Thanks.

Yes. While the Mongolia -- it’s been announced that the financing was approved and I think it’s December 16th that the financing for the project, the OT project is supposed to close, which is very good news for Mongolia and the mining activity there. Now, it’s going to take time for everything to restart. And they’re going in the winter season as well, so very harsh winter conditions. So, things are not going to restart from our perspective, at least until April. But even when it restarts, we don’t expect to see -- we expect to see a bit of activity when it restarts in April or May, but don’t expect to see it ramping up until probably the second half of 2016, at which point we don’t -- at this point, we don’t have a good idea of what that could entail. But it’s certainly very good news from the Mongolian perspective and for our Mongolian operation, at this point. In terms of consolidation, there is not -- right now, there is lots of people out there, lots of rigs parked, so we don’t see a lot of consolidation happening in our industry because everybody’s got rigs parked. So, we don’t see a lot of value in terms of consolidating the industry.

Thank you. There are no further questions registered at this time. I’d like to turn the meeting back over to Mr. Larocque.

Thanks everybody. And I’d like to wish you the best for the holiday season. And we’ll talk again next year.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.