Denis Larocque - President and CEO David Balser - CFO

Wayne Lam - RBC Capital Markets Ahmad Shaath - Beacon Securities

Good morning, ladies and gentlemen. Welcome to the Major Drilling Group International Inc. Q1 2017 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.

Good morning, everyone. And welcome to Major Drilling’s conference call for the first quarter of fiscal 2017. With me is David Balser, our CFO. Before we get started, I'd 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. Most mining companies remain cautious in their spending, given their 2016 budgets were planned at the end of calendar 2015, when commodity prices were low. For example gold prices were in the 1060 range. However, we have seen an increase in activity in the last three months with revenue increasing by 8% over Q4 of last year as demand for our services has improved. Pricing has stabilized but will remain under pressure until we see a significant pickup in activity. With additional repair being carried out to prepare rigs, margins are lower than last year at almost 22%. The company's net cash position net of debt continues to be very healthy at 33.4 million. This quarter in preparation for a potential increase in activity levels, we purchased over 3 million of inventory mostly for rigs and consumables, and spent 2.8 million on capital expenditures which explains decrease in cash. Now David will take you through a more detailed review of our financial results before I return to discuss the outlook.

Thanks, Denis. Total revenue for the quarter was $69.1 million, down 18% from revenue of $83.9 million recorded in the same quarter last year, but up 8% from the prior quarter as demand for our services has improved. A favorable foreign exchange translation impact for the quarter, when comparing to the effective rate for the same period last year is estimated at close to $2 million on revenue with a negligible impact on earnings. The overall gross margin percentage for the quarter was 21.9, down from 25.8 for the same period last year due to pricing pressures and higher repair cost as we prepare for potential upturn. As the company continues to manage its costs across the operations, general and administrative costs were flat at $10.6 million when compared to same quarter last year. Provision for income tax for the quarter was an expense $900,000 compared to an expense of $2.8 million for the same quarter last year. This combined for a net loss of $9.8 million or $0.12 per share for the quarter, compared to a net loss of $11.2 million or $0.14 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 decreased $4.6 million for total net cash position net of debt of $33.4 million. The decrease this quarter was mainly due to the purchase of over $3 million in inventory and preparation for potential increase in activity levels. During the quarter the company spent $2.8 million on capital expenditures, adding one drill rig with the majority of the expenditures on support of women. However, 13 rigs were retired disposed of, 10 of which were part of our exit strategy plan in South Africa and Namibia. This brings the total rig count to 678 rigs. The new breakdown for our fleet and utilization is as follows. 335 specialized rigs at 21% utilization this quarter, 175 conventional rigs at 15% utilization and 168 underground rigs at 43% utilization. For total recount of 678 rigs at 25% utilization. As we have mentioned before, specialized work in our definition is not necessarily conducted with specialized drill. Therefore, we should also give you the breakdown of our revenue by type of work for the quarter. Specialized contracts made up 50% of our work, underground contracts 40% and conventional work was 10%. Also, seniors and intermediates represented 93% of our revenue in Q1, while juniors accounted for only 7% of our revenue. In terms of commodities, gold projects represented 57% of our revenue while copper was at 20% this quarter. With that overview of our financial situation I'll now turn the presentation back to Denis to discuss the outlook.

Thanks David. The next two slides are very important to understand why we feel drilling will be needed soon. We continue to see signs that most commodity prices will face an imbalance between supply and demand. At the moment mining reserves continue to decrease due to the lack of aspiration. In fact as we look at the largest cap gold reserves, they have decreased by almost 30% over the last three years and are back to pre-2007 levels. As well many industry experts expect that the copper market will be in a deficit position in less than two years, due to the continued production and hydrating of mines combined with the lack of exploration work conducted to replace reserves. It is important to note that it takes 10 years to 15 years to bring a mine into production from early exploration stages. So the industry is behind the eight ball to address the worlds' future mining commodities and will need to get back to exploration soon. Therefore, it is 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 resurgent in demand for specialized drilling. Commodity prices have improved over the last six months, fueling mineral financings. In fact, in June and July there was a noticeable increase in the number of financings on the TSX. However, there is typically a line between the timing of these financings and the impact they can have on the drilling industry. In fact if you were -- if you look at our revenue, this quarter only 7% of our revenue came from juniors, so it is kind of a proof that the activity from juniors does not come back yet in the fold. Therefore, we continue to focus our efforts on getting prepared in anticipation of a possible recovery in demand for our services. While remaining disciplined on pricing and focused on cost control. The company’s financial strength allows us to invest in safety, to maintain its equipment in good condition and to retain most of its skilled employees, strategically positioning us to react quickly when the industry recovers. As a final note, our Annual and Special Meeting of Shareholders will be held at the TMX Broadcast Centre Gallery which is at 130 King Street West in Toronto on Friday of this week, at 3:00 pm Eastern Time. That concludes our formal remarks and Melanie will be open for questions.

Thank you. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Wayne Lam of RBC Capital Markets. Please go ahead.

Just want to ask, given that you guys are seeing 90% of revenues from senior producers, that means we should continue to expect about a three, six month lag in junior activity or pickup in junior activity given that most companies come up with budget updates at the end of the year?

Well, basically the way things work with seniors is -- I always say the bigger the company it's more like a big cruise ship, it's hard to change plan half way through the year because you've got to make the decisions at the top, they need to trickle down to the field. So, typically what we see is we don't see seniors making big changes on their budget plans during the year and so those seniors set up their budgets back in, again in, at the -- in November 2015 for the most part and at that time copper was about to go or was below $2 and gold was at $1060 and at that time if you remember mining companies were still concerned and very conservative and a lot of them reduced their budgets going into this year. Now we're going into that period in the next three, four months, those seniors are going to be having discussions internally in terms of where they're going, some have already in the press have already hinted that they want to do more, or they need to do more to address their reserve problems. So, hopefully the gold prices and copper price hold up to the level they are now. I mean the same can be said for zinc so that when we get to that Christmas period and the budgets are reset, that we'll see increase in budgets for 2017. And again as far as juniors are concerned, the spike in financing has already -- has really only been in the last two months, so we haven't seen a big impact yet trickle down to the field from that. I'll remind you though that third quarter typically when you go past December from mid December, things started to slowdown, going into Christmas season and then December January are slow months because mining companies typically send their people home and go on breaks, so there is always that slowdown before we see a pickup in activity.

And then just wondering if you could clarify again on that split between different commodities. It was copper 20%, gold was sort of 70% or…?

57

Okay.

That’s probably close to the highest we have seen yet. Gold typically is always between 45% and 50%. 57% like I said is as high as we've seen it in a while, in the long time, and I think it's reflective of the commodity prices out there.

Okay thanks. And then just wondering on the repair cost as they were higher this quarter. What kind of impact that had on the overall gross margins, versus at normalized levels, whether we would have been closer to the 26% on the gross margins in Q1 of last fiscal year.

No, it's not that huge of an impact, I mean the biggest impact remains the pricing pressures. Again going in into this year we basically had to adjust our pricing due to the lower levels of budgets for senior mining companies. So we are working off of that at this point. The repair is of much lower impact, although it did have an impact on their margins.

Okay and then last question just on the pricing, just wondered if you guys are willing to compete on price giving the access capacity and fragmented market?

We certainly are, but as long as there is money in it, I mean we are not prepared to chase job just to have our rigs turning in basically use up our rigs. So there has to be at least some decent cash, so I mean what you see there -- that the margins you see there are pretty much what we'd like to go for at this point in the cycle but that’s as soon as things start turning that's where you basically look for more because the key and that’s going to be -- and there is already been report out there. People keep focusing on equipment and that’s not the issue, I mean sure there is all the equipment out there, but it's always been a peoples issue and again there has been reports out there. Just lately about how mining is going to face a big issue on labor and that is what's going to drive pricing when you run out of labor you can only put out so many rigs. That’s where you have to make the tough decisions and adjust your costs and adjust your pricing. So that’s how this is going to work out, it’s not necessarily going to be all about utilization rates or -- again this is going to be a labor issue, just like we had in previous cycles.

Thank you. [Operator Instructions] The following question is from Ahmad Shaath of Beacon Securities. Please go ahead.

Just wondering if you can provide some color on the movement in the rigs fleet. I know you guys added one big and ten were gone from the African operation, but those movements of three other rigs [indiscernible] Just give us more color about the rationale movement there and what is that [indiscernible] Thanks.

Okay, I’m not sure, your line is bad I guess. I’m not sure I got your question, but I think you're asking about the moment of rates. As you saw we disposed the 13 rigs, 10 of those last year when we decided to close down our operations in South Africa and Namibia. We had rigs in the region and some of those rigs for us were deemed not worth moving to other regions so they were kept in that region. And we found a home for that, we were able to sell them, get them cash for it and that’s what we did at this time. But we had breaking those rigs down to their market value back then, last year when we took our loss on a restructuring charge. So that’s basically what you saw there, those kind of rigs being sold and then the three rigs -- the three other rigs are just -- are to be regular life cycle of rigs.

Perfect, that answers my question.

Okay, thank you.

Thank you. [Operator Instructions] 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 hope to see some of you at our -- again our AGM is on Friday at 3PM Eastern, so hoping to see some of you over there. Thank you.

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