Good morning, ladies and gentlemen. Thank you for standing by. For today's call, phone participants are in a listen only mode. Following the prepared remarks, the company will conduct a question and answer session and instructions will be provided at that time for you. I would like to remind everyone that this conference call is being recorded on Thursday, August 12 at 10 am Eastern Standard Time and is being broadcast live via the Internet.
During today's call, management will make statements regarding management's expectations for the company's future financial and operational performance. These statements are considered forward looking statements. Each forward looking statement speaks only as of the date of this call, and actual results may differ materially from management expectations for a variety of reasons, including market and general economic conditions and the risks and uncertainties detailed from time to time in the company's SEDAR filings. I will now turn the call over to President and CEO of GeoDrill Limited, Mr. Dave Harper, who will review the company's operations and performance for the quarter.
Geodrill CFO, Greg Borisk, will then give us a more detailed review of our Q1 financial results, followed by an outlook from Mr. Harper. I'll now turn the call over to Mr. Harper. Please go ahead.
Thank you, operator. Good morning. I hope you and your families are all staying well. In the first half of twenty twenty one, Kyodel recorded its highest ever quarterly revenues underpinned by strong market fundamentals, robust demand for drilling and a proven business model of operating a fleet of high performance rigs. In quarter 2, we generated revenues of $30,600,000 That's up 47% year over year.
We continued to realize strong profitability, increasing net income to US4 $1,000,000 We generated a return on capital employed at 21% and an ROE of 16%. We continue to maintain high utilization rate of 70%, supporting an increase in pricing power, and we increased our rig fleet to meet the strong demand in drilling activity. We continue to benefit from a robust exploration environment evidenced by extensions of contracts in our core operations in Ivory Coast, Burkina Faso, Ghana and Mali. We also continued to diversify geographically increasing our regional reach as we mobilized 2 rigs to Egypt and expect to be drilling in this current quarter. In addition to expanding our rig fleet, Kyugel also expanded its client base to include a mix of majors, intermediates and juniors, which has contributed to the increase in overall drilling activity and a well balanced mix of drilling services.
Strong tailwinds and a solid balance sheet positions us well to continue executing on our growth objectives for the remainder of the current year. I'll now turn the call to Greg Borst to comment on the quarter's overall financial performance.
Thank you, Dave. As a reminder, all figures are reported in U. S. Dollars. The company generated revenue of $30,600,000 in Q2 2021 being an increase of $9,700,000 or 47 percent when compared to $20,900,000 in Q2 2020.
This is a significant achievement for the company as this is the 2nd highest quarterly revenue ever recorded in the company's history. The increase in revenue is a result of the increase in demand for the company's drilling services. A strong gold price has increased cash flow of mining companies and their exploration budgets, which in turn is driving increased drilling activity. Geodrill has benefited from increased The gross profit for Q2 2021 was 8,300,000 dollars in 27% of revenue compared to gross profit of $6,600,000 in 32% of revenue for Q2 2020. For the 6 months ended June 30, 2021, the year to date gross profit was $18,000,000 or 29%.
The EBITDA for Q2 2021 was $7,400,000 being 24 percent of revenue compared to $6,500,000 being 31% of revenue for Q2 20 20. Overall, the net income for Q2 2021 was $4,000,000 or $0.09 per share compared to $3,300,000 for Q2 2020 or $0.07 per share. At this point, I will turn the call back to Dave.
Thank you, Greg. Before I go to the Q and A portion of the call, I'd like to provide a brief outlook for the remainder of 2021. Fueled by strong gold prices and increased utilization, our outlook for the second half of the year remains exceedingly positive. We entered the second half of twenty twenty one focused on growth and being drill ready. We continue to accelerate our growth by expanding our geographical footprint into South America and Egypt and strengthening our competitive advantage to drive profitability.
They're also strengthening our leadership in building a diverse, sustainable drilling company that encompasses all of our ESG initiatives. I'm proud to say that the GeoBuild team has made us a serious contender in our industry, equipped with a modern fleet of rigs, a clear vision and a solid financial foundation. GeoBuild is ready to achieve our audacious goal to be recognized as the customer referred partner in providing drilling services in West Africa, the African Copper Belt, Peru and ultimately outperforming our competitors. Thank you for participating in today's call. We'll now be pleased to answer any questions which you may have.
At this point, I'd like to ask the operator to provide directions for anyone who wishes to ask a question. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question comes from Anthony Prost, Stifel GMP. Anthony, please go ahead.
Anthony, good morning.
Hello, all. I wanted to ask you
a little bit
about, first off, the impact of cost inflation because it seems to be a theme for a lot of companies right now. So things like labor, fuel. Can you speak a little bit more about how you feel cost inflation is going to impact you in the second half of the year?
We're seeing costs rise, but to offset that, we're seeing drilling prices increase as well. So I think the result will be somewhat benign.
Thanks.
Just to add to that, Anthony, just reset our all salaries and that are done on an annual basis. So that's already been set for 2021. We don't expect a significant increase in the second half of the year.
Perfect. And have you seen any of the supply chain issues affecting your own inventory? Because I like it's my understanding that you pride yourself on having a well stockpiled inventory of drilling rods, things like that. I wanted to know if there's been any impact on your ability to source those inputs?
None whatsoever, Anthony. It's actually you're correct. We do pride ourselves on that. I can honestly say that during the entire COVID period, we lost zero time through lack of availability of inventory. We're almost 30% or 40% self sufficient at Geodal.
So we it's one of the things that is the General difference.
And you actually see that, Anthony, it's actually the opposite for us. If you just track the company back the last few quarters, we've been increasing inventory. So if you look at where we are at June 30, 2021, we have inventory of 25,500,000 dollars And that inventory is in the countries that we operate. It's cleared customs. It's ready to go.
And this is why we're able when a large drill program comes up and we can tender on it, we're ready to go. We have that inventory in place. So we looked ahead and actually thought that out and have significant and sufficient inventory in place. Perfect.
And one last question for me before I pass it over. I saw that you announced new underground contract. Wanted to get a better idea of how you see that part of the business evolving over the coming years? Do you expect it to be a bigger part of the company? And also if you could provide any sort of color on the margin profile, it would be appreciated.
Thanks.
So we entered the underground market in 2017, I believe it was, and it was the right decision for us to do that. It's a way of us expanding our services and focusing on mine based drilling, which is tends to be more countercyclical. And we have a fleet of 6 underground builds. Essentially, what this does is it takes the entire fleet. We have 100% utilization now across that particular unit.
At this point in time, we need to take a decision, do we need to expand that? And if we look at the standard digital operating model, it's based on each time we get 70% utilization, we start to expand the fleet. And whilst we have this year already made plans to expand the exploration surface fleet, This now accelerates our thinking in terms of adding to the underground fleet. In terms of margin, well, historically, underground margins are lower than surface margins and that's because of the larger longevity kind of style of production drilling as opposed to exploration drilling, which is typically characterized by 3 to 6 month contracts. Underground contracts are typically characterized by longer term, so lower margin style working.
But in the overall scheme of things, I don't expect it's going to affect us greatly. It will actually just improve the business model. We'll see increased revenues. And for that particular division, we will see lower margins. But overall, the blended margin is still kind of in the order of 25% across all of the business units in the company.
All right. Thank you so much.
Thank you. Your next question comes from Amit Shawa, Beacon Securities. Ahmed, please go ahead. Amit?
Good morning, Dave. I guess my question is maybe a little bit of an update on the South American initiative. How many rigs do you have right there right now and growth potential like how many rigs are you shipping, any bottlenecks, just a general update on the South American expansion?
So I can now say that we've got a quarter of drilling behind us in South America. We actually started into our 1st hole last week in December. So we just figured that as a bit of a training run. The quarter went very well, and the customer gave us an initial 3 month contract to see whether we would be able to deliver on what we said we could. Customer is very happy.
Contract has been increased 4 fold, and they've written a very nice testimonial for us. And I think what's important is we're hitting their targets and they're doing them on the budget. And it's something that hasn't been accomplished by that particular company in the past. So Brew, as far as that particular project is concerned, is we couldn't be happier with that outcome. As far as the country Peru is concerned, we've been dealing with COVID and we have been dealing with a contested election.
COVID is obviously, it is what it is and we are where we are. It's something that will resolve itself in time. Some countries are affected more so than others. Peru is certainly not alone in saying that it would have affected most companies' operations out there. We've actually done reasonably well.
We haven't lost any time because of COVID. We have had a couple of cases of COVID. We managed to isolate them very quickly and get back to business. So we haven't had any adverse effects on that particular project. However, I would say that it has put a couple of projects in terms of the tendering process on the whole.
And the other thing that has been going brewing in the background has been this contested election. So the good news is that contested election is now resolved. And regarding regardless of your political faction, who or who you don't support, which we now have some clarity as to who the President is. And I think that most international mining companies operating there are pleased to have a result. And as a result of that result, we are currently receiving an elevated amount of inquiries and tenders.
And as a result of that we're encouraged by that. And so we've actually added to the fleet by adding one additional drill, Even though we had 3 drills and only one of them was working, we see that as just being a short term thing. We're bullish for and so bullish that we've actually, on speculation, added a 1 new rig to the fleet. So we're currently at 4 rigs, and we're at 25% utilization, which doesn't sound right, but that needle will move very, very quickly. The most important thing we were looking for in South America was a soft start and a satisfied customer.
And that's all we've checked both boxes. The trick for us here going forward now is to increase our customer base. As we slowly start to roll out things like training and just the infrastructural working some workings of getting 3 rigs into the field and drilling and getting them vehicleed up and tooled up and personneled up. Sorry for the long winded answer, but it was not a and or yes, no, sort of correction.
So that's a great update. It's really what I'm looking for. Just to confirm, the 3 month contract was extended by another year. Did I catch that correctly?
Yes, and open ended. So it's a 4 fold increase in the initial contract. So what you were looking for was a customer that was basically saying that let's speak let our actions speak rather than out of their words. Let's vote with our purchase order book and give you guys a bit more work. And a 4 fold increase in the initial contract, you couldn't be happier with that.
We're very okay with
that. That's great. And I guess you're satisfied with having 4 rigs on the ground right now given what you're seeing the thundering activity. You think that will that's sufficient for now or any of the upcoming rig that you're planning to send over to South America as opposed to West Africa?
So looking at the current tendering landscape, if we were to win 1 or 2 of these jobs that we're tendering on, we'll be totally maxed out. So we've got a comfortable start up fleet, initial fleet in country, I believe. And we certainly don't want to leave our potential customers wanting. So as we speak, we plans are afoot to grow the surface fleet and some of that growth will find its way through to Peru based on how things play out over the next couple of months. But copper is not going down any time soon.
And Peru is the 2nd largest producer of copper in the world. So political situations come and go. Presidents come and go. COVID will come and go, but the need for copper will not go. It will only increase from here with all rollout of electrifying
vehicle market.
We're very bullish on green metals. And we didn't go to Peru chasing gold. We built plenty of gold in West Africa. We saw it as a grander. And the overall scheme of things is strategic geographical step out as much as it was a commodity mix.
That's great. And then the point just quickly, the point to reiterate on that rig is we were able to secure that rig in Peru. So that's significant because the busy as we are in West Africa, like we can't really send rigs that are working in West Africa to Peru. So we were very fortunate to be able to add a rig locally. And then you'll see the benefits of that through the economies of scale as we get all those rigs work.
So significant
And is that the case for the other 3 as well?
No, that was the one we started off with. That. What was the question? Sorry.
No, I was just wondering, the
other 3 rigs, were they secured in a similar fashion or did you ship them out of West Africa?
No. We shipped them out of West Africa. We have the opportunity at the time when we have the spare rigs. We don't have the spare rigs now. So when a rig became available in the immediate market, which present that is identical to the rigs that we had, we're sticklers for the standardization model.
And if we look at our 70 what is now first quarter end 70 rigs across that 70 rigs, we've only got 8 different type of rig. And so the when a rig becomes available in your immediate market, it just sits so well without our model of standardization. So, Russ, it was a total no brainer. It becomes available in our market identical to the rigs that we currently have. At some point in time, there's going to be there's going to be the need for that rig, so grab it.
And so we did.
Right. And maybe a couple of more follow ups and then I'll jump back on the queue. The first is operationally from the 1st 3 months of operation, you're confident with your margin profile and operational performance to be similar to what you've been achieving over the years in West Africa? And secondly, any bottlenecks on acquiring new rigs? How's the lead time on buying new rigs from your favorite supplier in light of the logistics kind of bottlenecks around the world as well?
And that's it for me.
So we're operating in an unusual world, right? This is a COVID stricken world. So the interesting thing that sort of sticks out when you look at today's numbers, I think the first thing that you see is why was revenue flat quarter over quarter when in fact we're basically citing that we have strong utilization. Then I guess the question is, well, what if that is typically a strong quarter in Q2 is usually stronger historically, the quarter 1. Why was it not the case this year?
Well, coming back to my point, we're living in a very different world these days. Effectively, if you recall, we had the maturity out of these, we had a very, very strong Q4, back to our strongest Q4 ever on record. And I believe the plant has been actually at the time our strongest ever quarter on record. And then we immediately back to back that with the stronger again quarter 1. So 2 very peculiar, very unusually strong quarters when you don't normally expect them.
And that is, to a large extent, the sort of wound up elastic band effect that you get when you're releasing because of the COVID slowdown. As we come into what is traditionally been our quarter 2, you would expect you would naturally expect a slightly stronger quarter 2 than quarter 1. Well, what was peculiar about this particular quarter 4 was that wet season came upon us a little earlier. So we did in fact have a very strong April, May. June was soft.
And so whilst it was a solid result, it's certainly it's eye catching the fact that it was weaker than quarter 1. But on that, the what normally happens and what in fact is happening is when we have an earlier than usual wet season, the wet season ends sooner than normal. And that is in fact the case. So whilst we have a soft June and a soft July, we're actually experiencing a very strong August and we'll see an even stronger September. So what I'm saying with our guidance is that whilst Q2 was, I think, a solid result and you'll be expecting to follow-up with a traditionally weak Q3, I think what you can look forward to, in fact, I know you can look forward to, is a very solid quarter thing.
In fact, it will at this point in time, it's shaping up to be our best quarter 3 on record. As far as margin is concerned, and Greg could speak to this better than I can. We put it in an extremely solid quarter 1 in the 30 plus range. But and we put in a 2024 or 25 this current quarter. A lot of these are just accounting issues where we get stock returns and things like this in the inventory.
But Greg, would you like to just jump in? I'm not sure if I'm answering that correctly.
I think, Amit, on the margins, what you really want to look at is the year to date margins. Because like Dave said, through Q1, we were ramping up. But that January was we started off strong. The holidays and this is what Dave said earlier. In Q4, we had a very strong Q4 2020 because we clients drilling up right up to the holidays and kind of even through the holidays.
Typically in Q1, it takes a while for clients to get back and ramp up after the holidays. Sometimes we don't get really going until mid January. What we saw in Q1 2021, which was a carryover from Q4 2020 is we saw activity, robust activity rate at the start of January. I think you communicated this when we did the Q1 call. So we had a very strong January 2021 and that continued to ramp up throughout Q1.
So we had an even stronger February and an even stronger March. And when that happens, your margins are higher. In Q2, what Dave was saying is we started to ramp down in Q2. So even though the revenue quarter 1 to quarter 2 is kind of the same within $100,000 we started to head into wet season a bit earlier. And that does affect the margin as you have you start to slow down, your revenue starts to slow down, but you still have some new labor costs and demote costs and needs, etcetera.
So I wouldn't there is a bit of choppiness between quarters, but I think if you look at where we are through the 1st 6 months of 2021, we're very, very comfortable with our margins. Like a gross margin of 29% is stellar. Our revenue, if you look at the year to date revenue, we're at 58% increase through the 1st 6 months of 2021 versus the 1st 6 months of 2020. So again, I would focus more on year to date and the fact that we're still very bullish on Q3 and Q4 and what we're seeing going forward. So we think 2021 is still shaping up to be it's going to be a spectacular year for us.
That's great color. What I was trying to get at is your margins in Peru, which you spoke about before, is that given your business model in West Africa, I was just wondering if you still believe that your margins improve given the pricing environment and how competitive is, you can maintain a similar profile in Peru as you ramp up there? I think the previous answer was yes, but just confirming if that's still the case given any changes in the landscape.
No, that is because, in fact, we're doing very well and we're very happy with the results. That's great. Exceeding our expectations. That's great. Thanks guys.
It's only
going to do better. It's only going to do better as we get more economies of scale.
Your next question comes from Brett Rosen. Brett, please go ahead.
Hey, Dave. Nice quarter. Congrats.
Hey, thanks. Thanks, Brett.
Wondering if you can talk about your CapEx here. So I think I saw $3,600,000 in the current quarter, which is higher for you guys, which is generally encouraging. But do you have any thoughts, I guess, on CapEx going forward, where that might be deployed? And also, I'm not sure I heard the answer on the last question, but what kind of delays are you seeing in procuring rigs right now?
So we Sorry, Greg, go ahead. No, no, you've got the CapEx numbers in front of you. I can speak to the delays, but you got the numbers quite been striking in the back.
Yes. CapEx, okay, I missed the sorry, Brett, I missed the second half of the question. But CapEx is, as you know, the GE drill model, we're very bullish on adding rigs to the fleet in that. That's kind of been our model. As Dave said, when we hit 70% utilization, we add rigs and when you add rigs, you add all the ancillary equipment, our boosters, rod carriers, motor vehicles.
So you'll see we through the first half of the year CapEx was about $5,600,000 We also had some CapEx in our prepayments that as soon as those rigs are shipped to us that will set from prepaid into CapEx. So right now, kind of what we budgeted for the year in terms of rig additions and ancillary equipment, we're right on schedule. We're a little behind if you just look at the PPE additions, but if you factor in what's in prepayments and which will flip to PPE additions in Q3, we're right on target. So we're very comfortable with kind of our what we budgeted at the start of the year in terms of additions and where we are. And you'll see I don't know if you look at the cash flow.
So what we've done is we've actually utilized some of our credit lines to make sure we have sufficient inventory and we're able to keep on our path of adding PPE. Right now, if you look at the working capital, there's a bit of money tied up in receivables. As you're bidding in Q1 and as you're busy in Q2, the receivables may either build or stay the same, our trade receivables and kind of that normalizes and you start to see that cash come in. So the point I'm trying to make is we're very fortunate that we have a strong balance sheet and that we can wait for certain things to normalize. We didn't let that hamstring us.
We were able to continue to continue on our path of adding PPE and inventory as we're extremely busy.
Okay. That makes sense. And are you envisioning kind of this run rate for the 1st 6 months? Is this more than likely what we're looking at, say, the next 6 months or the next year? This
CapEx budget is issued.
Yes. CapEx budget, yes, we try to do the CapEx budget, Brent, evenly throughout the year. So again, some of it is opportunistic If a rig comes up and it's available and it makes sense to us like the one in Peru, we'll grab it. But we try to our CapEx budget, we try to spread out kind of evenly throughout the quarter.
Okay. And are you guys seeing significant delays in rigs right now?
From the manufacturers, yes. But we're fortunate, Brett, in that we make a lot of stuff ourselves. So to the previous caller, I was saying we're about 30%, 40% sufficient self sufficient within our Anyon Quanta facility. And so what we tend to do is buy rigs in tip form, bring them to West Africa and assemble them. So we are experiencing some delays, but I think our situation is much better than our competitors, whatever they like.
Nothing that's going to affect business adversely there.
And as far as deploying those, do you guys kind of plan us in advance or is it kind of opportunistic as far as where those are deployed and anything you can offer directionally, I guess, on I guess where you see the best opportunities to deploy new rigs right now? Is it in Africa? Is it in Peru? Or I guess what are your best options?
So on the opportunistic question that you asked, so if we were to wait for when customer ordered a rig and then they decided to go and build it, we would have never expanded beyond our first two rigs. So modus operandi for us is we hit 70 utilization. Have a look at the macros. If gold's good, environment's good, everything's good, then and if we have the cash, then we go and just place orders for REACH knowing that eventually at some point in time, they're going to hit the go line and eventually someone going to one of our customers is going to take them. And that model has served us extremely well since the get go.
Where will they go? Well, I think it will just really determine where the business is when we got when rigs become available. At this point in time, we plan we have an expectation that things will ramp up in South America. We've just entered a new market, which no one's asked about on the call, funnily enough, Egypt. And that's an extremely interesting proposition for us.
We've just landed with 2 drills. Those 2 drills are booked for the next one and a half years. And whenever there's a new drilling company in town, there's always a lot of interest. And that's a market that has been left to probably one drilling company for the longest time. And now there's some real competition has arrived in which the arrival of GEO.
So I think most customers will be very, very keen to know that there's going to be some pricing, some service competitiveness into that market. And if the level of inquiries that we're receiving at the moment is anything you go by, I would say that Egypt is probably the next place I'll be considering expanding into. And this all plays very well into our geographical expansion and our diversification model. For the longest time, we have been strong in West Africa. But now it's time to go up and go out, both from a geography point of view and from a commodity point of view.
Currently, the job that we're drilling in Egypt is gold. South America gives us the commodity diversification with copper, zinc and base metals. And of course, we've got our bread and butter market, which is the West African market, which is also down. So where will all the new CapEx be deployed? I can't honestly say at this point in time.
I think it's going to be pretty much an even split between the three regions.
I appreciate that. Thanks a lot, Dave. Congrats again.
Thank you. Thanks, Brett. Cheers. Thanks for your questions. Thank you.
There are
no further questions at this time. I will now turn it back to Mr. Harper for closing remarks.
Welcome. And thank you very much, everybody, for participating on today's call. And have a great day. Thank you. Bye.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.