Denis Larocque - President and CEO David Balser - CFO

Daryl Young - TD Securities Larry Callahan - Wheelhouse Securities

Good morning, ladies and gentlemen. Welcome to the Major Drilling Group International Inc. Q4 2016 Results Webcast Conference Call. I would now like to turn the meeting over to Mr. Denis Larocque, President and CEO. Please go ahead, Mr. Larocque.

Thank you. Good morning, everyone. And welcome to Major Drilling’s conference call for the fourth quarter of fiscal 2016. With me is David Balser, our CFO. You should all have received a copy of our results which were released yesterday. If not, please contact our office or visit our website at 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 financial performance of the company. Such statements are forward-looking in nature and actual events or results may differ materially. As discussed in the third quarter release the calendar year got off to a slow start which made for a difficult quarter. Most of our customers have reduced their exploration budgets for calendar 2016 based on low commodity prices that were prevailing at the end of calendar 2015. Although some commodity prices have improved over the last four months, most mining companies remain cautious in their spending. During the quarter we had to adjust pricing to retain certain long term contracts, as well our repair cost were higher than usual as our efforts to prepare for a potential upturn continued. These initiatives affected our margins. We continue to focus on cash preservation and remain net debt free. Our net cash position improved by $3.2 million during the quarter to $38 million. Now David will take you through a more detailed review of our financial results before we turn to discuss the outlook.

Thanks, Denis. Total revenue for the quarter was $64.1 million, down 21% from revenue of $81.2 million recorded in the same quarter last year. We continue to see a decline in exploration revenue across most of the company due to the lack of funding for junior exploration companies and cost of spending by the senior mining companies. This was partially offset by an increase from the Percussive Drilling Division. The favorable foreign exchange translation impact for the quarter is estimated at $2 million on revenue with a negligible impact on net earning when compared to the effective rate for the same period last year. The overall gross margin percentage for the quarter was 18.8%, down from 25.5% for the same period last year due to pricing adjustments on some long-term contracts and higher repair cost as we prepare for the potential upturn. The company continues to manage its cost across the operations. Our general administration costs were $11.3 million relatively flat from the same quarter last year. Provision for income tax for the quarter was a recovery of $800,000 compared to an expense of $5.1 million for the same quarter last year. All of this combined for a net loss of $12.9 million or $0.16 per share for the quarter compared to a net loss of $13.1 million or $0.16 per share for the prior year quarter. In terms of financial position we continue to have one of the most solid balance sheets in our industry. During the quarter our net cash position increased $3.2 million for total net cash position net of debt of $38 million. During the quarter the company spent $1 million on capital expenditures all on support equipment. However six rigs were retired and disposed of. This brings the total rig count to 690. The breakdown of our fleet and utilization is as follows 336 specialized rigs at 20% utilization, 186 conventional rigs at 10% utilization and 168 underground rigs at 42% utilization. This brings it for a total fleet of 690 rigs at 23% utilization for the quarter. As mentioned before specialized work in our definition is not necessarily conducted with specialized rigs. Therefore we should also give you breakdown of the revenue by type of work for the quarter. Specialized work was 53%, conventional work was 6%, and underground work was 41% for the quarter. Also with the slowdown of juniors, senior and intermediates represented 92% of our revenue in Q4 while juniors accounted for only 8%. In terms of commodity, gold projects represented 52% of our revenue while copper was at 25% this quarter. With that overview of our financial situation I will turn the presentation back to Denis to discuss the outlook.

Thanks David. As we begin a new fiscal year we are encouraged by the recent increase in mineral financing. There is typically a lag though of six to nine months between the timing of these financings and the impact it can have on the drilling industry. Therefore we continue – we will continue our efforts to get prepared in anticipation of the possible recovery in demand for our services in the second half of our fiscal year. In the meantime we remain disciplined on pricing and focused on cost control. The company’s financial strength allows it to invest in safety to maintain its equipment in good condition and to retain many of its skilled employees strategically positioning us to react quickly when the industry recovers. Based on the current level of activity capital expenditures in fiscal 2017 are expected to be in-line with fiscal 2016, although we could invest more should we see a clear sign of a recovery. In the long-term we believe that most commodities will face an imbalance between the supply and demand as mining reserves continue to decrease due to the lack of exploration. Typically gold and copper projects represent over 70% of the company’s activity. So on the gold, mineral reserves of 10 of the top senior gold companies have decreased by almost 15% over the last two years. As well many industry experts expect the copper market will face a deficit position by no later than 2018 due to the continued production and hi-grading of mines combined with the lack exploration work conducted to replace reserves. It’s important to note that it takes 10 to 15 years to bring a mine into production from early exploration stages. Therefore it’s expected that 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 expect to see a resurgence in demand for specialized drilling. As we go through this challenging period, we continue to focus on cash preservation and cost control. And the company continues to have a variable cost structure where by most of its direct costs, including field staff go up and down with contract revenue. That concludes our formal remarks, and we'll now open the call to questions.

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question from Daryl Young of TD Securities. Please go ahead.

Hi everyone.

Good morning Daryl.

Just had a quick question. Wondering if you guys could please provide some color around the increased cost in the quarter. And specifically is this similar to Q3, '14 when you guys spent to refurbish the rigs in order to get them ready for deployment later in the year, or is this just the higher cost structure going forward?

Yeah. No, the cost structure has not gone up. You're right. I mean, the thing is that when you are at such a low volume, I mean just take $64 million of revenue and we've got 15 locations around the world. If we were to just spend 50,000 per location extra on repair costs, that would amount to $750,000 and the impact on our margin would mean, that if we would have been above 20% this quarter, had it not been for spending on those repairs. So basically we – that's what we're doing. We are spending, while times are slow, our repair shop – again the key is to keep skilled employees, and some of those skilled employees are mechanics in the shop. And while things are slow what we're doing is we're taking a rig from the back, bringing it in the shop and doing a good job on repairs. And what that means is that it we're taking parts that are on the shelf. So it's not necessarily costing us in terms of parts. But we are -- that gets expensed and also we are using the time of our people more effectively to get prepared for the upturn.

Great okay. And then you also mentioned that going forward that your costs are expected to remain elevated in the near term? So is that just leading into the next Q1, '17 or.

Yeah we want to continue that to prepare rigs. I mean it's not like we are putting a huge amount of rigs through the shops. We are doing it gradually and we are basically building up our fleet again to get prepared for the upturn.

Okay. And then with respect to the current bid pipeline, are you guys are seeing an improvement in bidding activity alongside the higher commodity prices and financings or is that still a little bit early to say?

It's still a little bit early. I mean we've seen a little bit of an uptick in terms of the inquiries and the demand. I mean we are getting more phone calls. But at this point it's not necessarily a huge amount of bids. But it's more phone calls, inquiries, okay, we're getting prepared, what if and would you have rigs available to do this type of program? So these are the calls we're fielding. So not enough to necessarily predict an uptick but it's certainly positive in terms of what we're seeing. And that's typically the signs of the recovery now in terms of again it's still very early because you need stability in the commodity prices before this returns.

Right. And then I guess with respect to pricing, you mentioned that there was concessions made on some of the longer term contracts. Can you just provide a little bit more color on that?

Yeah. I mean our approach is we want to keep in all our branches have a base contract to basically keep -- cover our costs and everything. So we've got long term contracts in lot of our branches where we've been operating for a long time. And some of those contracts came up for renewal in January. And to retain -- we had -- because of the present pricing environment we had to do -- to make some price concession, and although I mean there is not a lot left to give, but in certain cases we did some price concessions in return to locking down those base contracts for two to three years.

Right. Okay. And then I guess one final question would just be what percentage of the business is now related to the Taurus type underground Percussive drilling

Yeah. It's about 20% presently in terms of – I mean what we've seen is as a percentage it has grown. But really because it's been growing at the same time as the -- our exploration business has been decreasing and budgets are getting cut, the utilization in that business is still 80% to 90% because the production -- this is production drilling and production is continuing at the mine. That hasn't slowed down that much. We haven't seen a lot of mine closures. So basically that work is continuing. It's just that it has grown as a percentage of these -- as the exploration work has come down.

All right. Okay, great. That's it for me. Thanks very much guys.

Thank you.

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

Yes, good morning. You still have a substantial presence in Mongolian, was yesterday's news welcome news for you and can you give any further outlook on that?

No, we do – we kept our operation going in Mongolia, although there hasn't been much work over the last three years. But it is certainly key, and I mean that's a good example when we say we could have more cost savings if we wanted to, we could have cut back on Mongolia. But then we would be out of that market. And as we all know, I mean OT is a big project. We've done most of the work there since early 2000. So we are very well positioned and I mean we are encouraged by the pick-up of activity that Rio has announced, which should help again in that second half of the year.

Thank you.

Thank you. The following question is from Irvine Miller [ph], Private Investor. Please go ahead.

Good morning gentlemen.

Good morning.

Good morning.

This question is addressed to both of you. I did have a conversation with David about a month ago or so, and my impression, I believe very strongly in the future of this company, because I think your former President and CEO, Francis McGuire has done a fantastic unbelievable job of cutting the activities of this company to the size to fit the market that was dwindling in the last five years. But now I believe the turnaround is here, and I ask how come you are not more positive about what's coming. Everybody knows that better times are coming, but you are very tepid in your remarks. For example, you say there has been an improvement in pricing. No there hasn't been an improvement in the gold price There is been a spectacular improvement in the gold price of 20% in the last four months, one of the fastest increases in the gold price in the last two decades. That's not just an improvement, that's a tremendous improvement. Then you use the word possible recovery, it's not a possible recovery, it's just about a certain recovery. At least if you want to be more cautious you could say a more probable recovery, not possible. This recovery isn't possible. This recovery is going on for sure. Now as far as six to nine months delay, that is the delay under normal conditions. But when you're emerging from a drought of five years of drilling, the six to nine months is cut down sharply because people have not been doing anything and are anxious to do something more quickly. So I think you're being a little more negative with the six to nine months period. Because of the sharp rise in the gold price many gold companies are making money now good money and are starting to do things sooner than six to 12 months or nine months. So as I say, when I spoke to David, I got the impression from him at the time that he was shying away from saying how things are changing. That was a month ago. It's even [ph] better now and gold is up about $12 to $16 this morning. Gold will be $2,000 maybe $5,000 in a few years. You are only starting the recovery, but you people seem to be afraid that things are getting too good. I know as a CEO of a public mining company I have to cautious in my statements, but there is a limit. You can mislead people by being too positive, you can mislead by being too negative, which I think you have been too negative in regards to what the future of this company has coming in store. I also note on the 25 January, that 11 insiders of your company brought substantial quantities of stock. That was in the January 25 article. And now we are four months later when things have turned dramatically better, and you're still not that positive about it, but you're positive enough to buy tremendous amounts of stock, 11 of your people. I have to explain that conflict. I'll let you answer me now, thank you.

Yeah, well I mean you say we are negative. In fact we are positive in our comments. I think what you're referring to is we are maybe not as positive as you'd like. And to your point, I mean we can't guarantee, so what's going to happen with the gold, but to your point about I mean feeling, when we say possible recovery, I mean what we're saying is it's a possible recovery in the second half of our year, because the thing is that we can't assure that we're going to see. But I agree with you that in terms of a recovery it will come because to the point I made about the mineral reserves have decreased though. And in fact the mineral reserves of the top gold mining companies are lower than you have to go back to 2006 before to see the same level of reserve. So there is -- those reserves are coming down. And the only way to fix that is through more explorations. So you told me right that we will see a recovery, it's just the timing of it. And to your point about six to nine months, the thing is that when financings are done, it takes time for that money. It's not like the money, basically there is regulatory issues and then mining companies need to get organized in terms of the logistics, in terms of for example Rio got their money and it took the whole winter to get the camp organized. Because you need to get set up the camp to accommodate the people that are going to come in to do the work. So you can't turn on all these rigs and not have the camp. So there is all of these – that's what accounts for those delays. It's not a not a matter of they can turn on a dime. So in terms of the six to nine months, that's basically what we typically see. We typically see a delay in terms of -- we typically see a delay in terms of how quick mining companies can get organized. And so those are the things that we’re seeing. But we are certainly positive. I mean we are seeing positive signs in the industry and I mean, you are obviously very bullish, and I understand with your views in terms of the gold price and everything. The thing is that mining companies are still cautious in their spending on exploration, just because they need to see stability before they open, they start spending a whole lot more. And that’s the timing aspect I’m talking about. It’s more a timing aspect of that recovery. There will need to be more exploration on – there will be, there will be – we’ll need to have more exploration to fix it.

Okay, sir I want to make other two more points. I thank you for your answer. But one or two more -- first of all, let me praise you and your team because you’re continuing in the tradition of Mr. McGuire and I think you are doing an excellent job. I want to make that point clear. My point is, my question is why are you holding back so much in the positives that are coming? And that was the point. As far as reserves sir, I would focus on something else. For the last 16 years, the gold production in the world has been rising and last year it more or less stayed even. Now it’s starting to decline and it must decline in the next five years, may be 20% or 30% because the time to get a major project going, as you know, is at least five years to get a major project going, like if Barrick wants to resume Pascua Lama, it will take them five years till they get production out of it. So there is no way major production could come up in the next three-four years. So it’s not only the reserves are down 15%, it’s the actual production of gold worldwide will be down 20% or 30% in the next few years. And this anticipation makes your industry sitting in the [indiscernible] seat right now. As far as pricing yes, shoe is now going to come on the other foot. You have to give reductions to keep their contracts. I think in the future and not too far in the future, the companies will have to start pay you a premium if they want to get priority of your rigs. They want you more than you want them, because they know what’s coming, where the gold price is going. So I just wanted to make these points. So that people listening could understand what I know because I’ve been in the gold business for over 60 years. I’m a young and I'm only 76. I have another 50 or 75years to live, but for 60 years I have been following the gold price, since it saved the friend of my family when he had gold to get him out of Europe, when he couldn’t get out any other way. So I know the importance of gold. But this is what is coming and I want your audience to hear my point of view, because it’s going to be balancing a very tepid recovery that you’re talking about with my comments. Now we don’t know where it’s going afterwards. We don’t know. We’re not talking about the future, but where you’re sitting now you haven’t really reflected the positives that I think are there. You mentioned them, but in a very moderate, measured terms, that I think were not required.

Thank you. The following question…

I just, again I just wanted to reiterate that it’s a question of timing and not a view that the – not a view that the recovery is not coming. So it’s just -- these things take time and when we came out of it in 2000, this is a mining cycle -- when we came out of it 2000 the -- in 2003 that the situation was the same in terms of the shortages and it took two years to get back to a peak. So these things are gradual, but there is no question that there are shortages in terms of reserves out there and then it will come.

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

Yes, I may have missed this earlier. But did you discuss opportunities for consolidation in drilling industry? Thanks.

Well, in terms of consolidation there is a lot of players out there and a lot of small players. Our competition typically are smaller players in all the regions where we operate typically our competition is -- you'd have maybe one of the big players and then a whole bunch of smaller players. So consolidation has never been an avenue, we never felt that you can consolidate this because just the top five barely make 30% of the industry, and then after that you have the whole bunch of smaller players. But in terms of just acquisitions we certainly remain on the look, and in terms of looking at different things, there are -- we are also looking at growing our other services. So we always remain open to look at acquisition.

Thank you.

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

Thank you and we certainly feel positive again and as we mentioned for the second half and also in terms of just the outlook of the sector as a whole. Thanks for listening.

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