Foraco International SA (FAR) Earnings Call Transcript & Summary

Hello and welcome to the Foraco Investor Presentation Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Glen Akselrod, President, Bristol Capital Limited. Please go ahead, Glen.

Thank you very much, Kevin and thank you, everybody, for joining our webcast today with Foraco International. The purpose of today's presentation is to give our audience a better understanding of the business through a presentation and then Q&A with management. The presentation is going to be led by Daniel Simoncini, CEO and Chairman; and who is also joined by incoming CEO, Tim Bremner. You should see the presentation in the webcast. If you'd like a copy of this deck simply e-mail me at [email protected] I'll be happy to send you a copy. We'll break for questions at the end of the formal presentation. When we do break, we encourage those questions. And as Kevin mentioned, we're going to take questions through the web portal. If you're listening over the telephone, please access the web link that we sent earlier today to ask that question. Remember, you could submit a question at any time. I'll ask the questions on the air for everyone to hear and then Daniel or Tim will answer. I'm not going to reference any names but simply read the questions asked. And as we have a fairly large audience today, if I can't get to your question online and has not yet been addressed during the call and can be, I'll come back to you by e-mail. I'm not going to read the forward-looking statements but they do state that they apply and I reference them on Page 2 of this presentation. With that said, once again, thank you for joining us. Remember, this is fairly informal and we do encourage you to ask questions to help you better understand the business and its growth path. And now I'll turn the call over to Daniel to start his part of the discussion and presentation.

Thank you, Glen. Good morning, everyone. Let's start. Basically, as a snapshot, Foraco is a company which is dealing with mineral and water drilling services. We are not in the oil and gas business and we drill primarily for mining and for water commodities. We are the #3 largest drilling services in the world by number of drills. We are a leader -- renowned leader in water drilling and monitoring. We have a global presence all over the world. We work primarily in Canada, Australia, Chile, Brazil, West Africa and CIS. And we employ just shy of 3,000 employees and our fleet is about 302 rigs. Our customer base is mainly composed of Tier 1 companies like the Vale, Rio Tinto, Teck, BHP, et cetera. Where our services are demanded? It's throughout the life of mine. We can execute drilling services from the very, very early days of what will become a mine, is what we call greenfield, so basically exploration. Then when our customers find something underground, they want to know much more about it and they enter in kind of pre-feasibility study or feasibility stage. This is where you see the big blip in the drilling activity. And then during the mine construction, normally, we are not that well active on the mine sites. But as soon as a mine enter into production, we accompany the mine manager throughout the mine of the life -- the life of the mine. And our purpose in terms of drilling services are usually 4. #1 is to assess reserves. #2 is to assess the rock properties, what we call geotechnical, whether or not they can build an open pit or an underground mine. #3 is kind of metallurgical sample. How will the ore body and ore react during the process to become metal. And the last one and not the least is usually the water. Water, is their enough water to process the ore. Is there any problem with the underground water table. And we are involved in all of them during the life of a mine. In terms of ESG, Foraco is one of the very first drilling service company in the mineral space to publish since 2 years now, our green gas -- greenhouse gas generation, our energy consumption. And we are relatively in the early stage of setting up all kind of measurements throughout the company but we are fully dedicated to follow up that. We have adopted the SASB standards for -- in 2020 -- late 2020, early '21. And as far as the E is concerned, we are pretty good. As far as S, we are even better. We have a very stable workforce. We have a very good safety records, you can see. And as far as the G, the governance, we have a very, very strong and resilient governance -- corporate governance system. For those who are more interested, you can pull up from our website, our full ESG report. Now what makes our business going up or going down. Basically, we are -- the prime driver of our business is the metal prices. And as you know, the current period is very, very favorable to our activity and it is going to be even more. We are excessively, let's say, active in what we call the EV market or EV metal markets or electric vehicle or battery metals. This metals baskets are under very, very great tension for the moment, even if the price are still yo-yoing. We have grown up our business in lithium, for instance, over the last 2 years, big deal. Gold is still a very strong driver of the, let's say, global mineral drilling services. Gold is lagging in terms of exploration and reserve replenishment. And I would say that the big gold companies across the world are poised to increase their exploration and their, let's say, near mine site developments. We are also a large actor in, let's say, infrastructure metal like steel. So we drill for iron ore and we drill for coking coal, steel coal. And these 2 ingredients of steel are, again, are in good shape, even if, again, the price are yo-yoing somehow. But the U.S. I would say, infrastructure plan, the China economy, whether or not it's going to recover, will have a great deal of influence on steel. The big -- the -- let's say, the Tier 1 companies today are in full, let's say, underground drilling mode. They want to produce. They want to prepare for the, let's say, the copper shrinkage that they see coming. So I would say that the top league of the miners in the world are consistently, calmly, quietly and very actively drilling. The only, let's say, league, which is a bit kind of [ Celtics ], are the juniors, the explorers, because these guys are taking their money from the equities and from the financial markets and not from the cash flow, the production cash flow. And given the current situation of the financial markets, there is some of -- some difficulties. And therefore, I would say that in different -- in certain area like Australia or even Canada, I will let Tim comment, we have seen a kind of slowdown of the junior activity, which thankfully we are not sensitive about. So Tim, you can confirm that for Canada?

Yes, absolutely, Daniel. The junior market here is not as strong as it has been but we see that returning when the equity markets improve.

Okay. So basically, the market is made of 2 leagues, the Tier 1, the big guys and the junior league with very little bandwidth in between. We got a lot of questions about how big is your market and what is your market share, et cetera, et cetera, where can we find good stats about the market volume. The only thing we can tell you is that the market is split in at least 2 or 3 pieces. The one which is the most documented is what we call exploration, meaning anything which is not dealing with production or projects. And this is usually very well reported in the financials of all the miners and people like S&P, for instance, are collecting all this data and making some stats. So I would say that the upstream segment of our market is relatively well documented and you will see on the next slide. Whereas the -- what we call the downstream, which is the production, drilling or the near mine extension, et cetera, these expenses or these segments are not documented because basically, they are [ sunken ] into the production cost of the miners. So basically, you have to stick to one data -- set of data, which is exploration budgets. But it gives you a kind of good idea of what is the mood and what is the confidence that the miners have. And you can see on this slide that the nonferrous market exploration budget have peaked in 2012 at $20 billion, $21 billion. Today is back to, let's say, [ $12 billion, $13 billion ] after a very severe recession in the year '14 to '16. And you can see that most of the budgets are realized by the majors. As far as the rest of the markets, so the -- what I call the invisible segments, which are mine site and projects, we do think that usually you have to add 40% to 70% of the exploration to get a kind of a guesstimate of how many billion dollars are drilled in the ground in the mineral space. So our estimate for 2022 was between [ $18 billion and $22 billion ], just to give you an idea of our space. Now what is Foraco today? Foraco is a French company. We are listed on the TSX since 2007. We have gone through good days and bad days and the turnaround started in '17. And you can see on the slide that we went from $136 million of revenue to $330 million last year and our EBITDA went from 9% to 20%. We posted an excellent Q1 '23, thanks to the current demand from our customers, thanks to our, let's say, order book and thanks to the fact that today, after the recession plus COVID plus the energy transition coming as an [indiscernible] on the markets, the big miners, the Tier 1, have changed their way to deal with us. I mean when I say with us, is the drilling contractors. And they all wants to secure our capacity on a multiyear basis instead of on a 1-year basis they were used to a few years ago. And so they gave us a lot of visibility and we were able to book our largest ever order book in early '21. Because most of our contracts have been transformed from 1 year to 3 years. And is still in a very, very good shape. And of course, the more activity we have, the better profitability we can achieve. So at Foraco, we enjoy a very good situation today. We are improving our financials in terms of net debt. And we have kept a very good workforce throughout the different disruptions like the recession and the COVID years. Our strategy is relatively unique. We want to have the most resilient business model of the space. And this is coming through a very highly adaptive organization and a diversification of our risk exposures. So we want to have the strongest possible customer base, which is achieved. Next slide, we show you that. We have a top team to manage the company. Our top management has been very stable for the last 15 years. Our organization is very lean. The headquarters is basically 3 people or 5 depending. And we are very careful about not overexpose the company to one single risk, so #1, risk the customers. We don't want to work too much for the juniors because the juniors are relatively volatile. As soon as the financial market gets [indiscernible] then the business stops, as Tim said. So 85% of our business is made with the Tier 1 miners in the world, those who will never stop producing even if the commodity price is going down. That's #1. #2, we don't want to be too much on the early stage because early-stage spendings are the first, which are cut in terms of lousy metal prices. We got hit about 10 years ago. We learned the lesson. And today, our exposure to the downstream is approximately 60%. And when you count the water, which is usually downstream, you add 13%. So you can say that 2/3 of our business is made on the production, let's say, segment of the business. Then you got the geography, the commodities and the customers. Commodity, you can see that battery metals today accounts for 42% of our business in '22, 28% in gold, 13% in water and then steel ingredients 13%. It's a very unique kind of exposure. You can see our peers, you will see that most of them are much higher in gold, not that high in water and battery metals as well. We have consciously decided to diversify the metal and commodities that Foraco is exposed to because we don't want to become a gold driller or a lithium driller et cetera. So we are actually satisfied by this exposure. On the right, you can see the geography, North America and South America weighs the same, approximately 1/3 of our business in both regions. Europe, CIS was 14%; Africa, 6%; and Asia Pacific, 16%; Asia Pacific is mostly Australia with a little bit of [indiscernible]. Our ingredient for success, #1, our people. We have a very experienced international workforce. We spend a ton of energy and time, training them, coaching them, making sure that they work safely. We have put in place a lot of long-term incentive for our top management and middle management, which is working fine. And basically, the turnover Foraco is one of the lowest of the industry. Second, assets, class of asset, of course, our rigs, we are running 300 rigs. These rigs are quite, let's say, diverse, you can have smaller rigs with a tag price of $400,000 up to the big ones that we have in Australia, which can cost as much as [ $2.5 million ]. So approximately 2/3 of our fleet is diamond drilling. And the last 1/3 is mostly rotary and reverse circulation, which are large holes and deep holes. And you can see on the pie chart that approximately 60% of our fleet is less than 10 years old. A rig life is usually 10 years to 15 years but after that period when we perform a complete overhaul of the rig, it gain, again, let's say, a technical life of another 10 years. On top of this very good workforce and fleet we have, we have some -- developed some kind of unique innovative ways to make our clients happy. One of them is deep directional coring. Basically, it's a kind of 3D drilling, we can hit the target very deep with a very good precision. Maybe Tim, you can have a comment on that, what are our capabilities in precision?

Yes. So one of the innovations that we've done or value-added to our services since the last recession was the ability to drill the holes exactly where our customers want them. Steering a drill hole to intersect the target in multiple locations, as you can see in those diagrams, is a bit tricky and not only requires software but it requires an awful lot of skill in the directional technicians, who understands the way that the rocks behave, the way that they deviate and what you need to do to affect the trajectory of the hole. That's normally done by the customer. However, at Foraco, we've been able to bring that technique in-house, not necessarily replacing what our customers do but being able to do it alongside and that has added a tremendous amount of value for the customer. It's given us a much deeper understanding of what they're trying to accomplish. And it's added significant value to the services that we're providing. Not just normally drilling the core but steering the hole to the exact location. And one of the ways that we do that is with a proprietary steering tool called the Continuous Wedging Tool that is proprietary to Foraco in certain markets around the world. And it's enabled us to delineate ore bodies to depths over 2,500 meters. A lot -- most of that in Sudbury but a lot of it throughout Canada and Australia as well, where we're working for BHP at Oak Dam and also in South America. So it's a true value added to our services.

Thanks, Tim. Another thing we do well in -- at Foraco is to innovate. So we have been on the forefront of the development of certain techniques of drilling. You can see on this slide. We have been the first one to roll out remote-controlled rigs, so someone called them drones, where nobody is on the rig. So the clients are very happy that nobody can be hurt. Or we have developed some kind of very large coring system for Australia. And underground, we have developed a set of rigs, which can work in multipositions. Basically, all, what we try to do is to reduce nondrilling time and enhance the safety of our crews. Okay. Last thing where we are -- we have an undisputed leadership within the water well drilling segment. This expertise is getting more and more critical because more and more, the water is getting -- always kind of conflict -- conflictual subject between the miners, the local communities, the regulations -- the regulators and the local authorities. So water is being monitored more and more. And to monitor water, an underground water table, you have to drill a lot of monitoring bore holes, equip them with sensors, send that to satellite and then you get a kind of real-time data, set of data of where your water is and what kind of quality is it. So this is a very fast-growing segment of Foraco. Going forward, it's basically the continuation of the initial strategy we laid out during 2006 up to 2012. We expanded the footprint of the company into the main mining regions of the world. We are going now to focus on the most, let's say, mature and stable jurisdictions, so namely Canada, the U.S., Brazil, Argentina, Australia and Chile. And we are going to, let's say, increase our market share within our current portfolio. I would say that today, if you take Vale, BHP, Rio Tinto, Teck, et cetera, we don't represent more than a couple of percent of what they have. And so we have a very vast growth space within our current portfolio. We are relatively bullish and solicited for the, let's say, the lithium, the copper and the nickel which all goes into our -- the electric vehicles. We are a bit cautious on the lithium but it's a very good business today. You have very, very large start-upers and start-up company. When I say large, you're talking about $1 billion in the bank like Sigma. So we don't call them junior anymore but these guys will work with them on a long-term basis with them. And all that should allow us to increase our profitability, strengthen our cash generation, lower our net debt, which will allow us quite soon, I hope, to resume the dividend payouts. And meanwhile, we are preparing for the probable shortage of some metals that nobody seems to care too much today. But when that will happen, it will be a kind of a very, very big boom. So to summarize, Foraco is, I would say, is a kind of not known enough leader in the mineral drilling space. We have one of the best diversified activity portfolio, irrespective of the mix you are looking at. We are currently capitalizing on a very fast-growing segment of the metal sector. Our customer base is one of the strongest ever you can find in the market, of course. We have been outperforming our competitors on the ground of the profitability regularly for the last 15 years. And our offering is one of the best and the company is served by a very, very, let's say, experienced management team, which are totally aligned with the shareholders because up to now, Jean-Pierre, which is my partner and myself, we control 38% of the company. I will stop there and we'll be happy to get any questions. I think Glen is going to manage that, Glen?

Yes. Perfect. Thank you very much, Daniel. We do have quite a few questions in the queue and I know you've touched some of the topics here but maybe we'll go into a little bit more depth on each question. So first question is, can you comment on your current utilization rate, why it's below 60%? Is it repairs and maintenance of rigs? Is it that rigs are in the wrong locations? And what can you do to increase the utilization rate? And what, I guess, would be the optimal rate that you can get it to?

Okay. First of all, the utilization rate is calculated as per the company standard. There is not an international standard to calculate your utilization rates. Basically, at Foraco, we calculate the utilization rate by being the number of days -- calendar days that the rig has been active, active, meaning paid by the customer, divided by the number of days that the rig can work where it is. So I'll give you an example. When it is in the Arctic and speaking under team control, in the Arctic, we don't -- we cannot work -- nobody can work during the breakup and the freeze up. So basically, the most you can have is 6 months working period. And when a rig is working 3 months out of the 6 months its utilization rate is 50%. On the contrary, when you are working in Australia, in the middle of Australia, you can work 365 days. And usually, our rigs are working 310 days, okay? So the ratio is 92%. When you get a mix of that, you get the 60%. The 60% is not 100% because 40% is eaten up by, one, meteoro -- weather conditions. #2, preventive maintenance of -- or repairs. #3, mobilization time from one job to the other. And #4, standby between jobs. So technically, we never ever went over 74%. And the business model of the sector is such that, that's below 50%, you're doing so, so, 40%, you lose a ton of money. 60%, you make good money and 65%, you make a lot of money. Now how do we go from 60% to 65%. It's easy. We make sure that our customers fill up our order book and we locate the rigs where they are the most demanded. And so we gain 5% over a period of a year. So this is what we are going to do. Is it okay, Glen?

Yes, I think it's great. There's, I guess, a continuation or a follow-up on that question, which is, are the 40% that are idled, are these older rigs? And are your older rigs more expensive to operate? And then also and another question from a different person, can you talk about rig replacement, average rig life, things of that nature?

Okay. We don't have 40% of the rigs which are idle. We have globally 40% of all the rigs which are not paid during 40% of their calendar time of utilization. So -- but that being said, we have a certain number of rigs, I would say, like 15 to 40, depending on the years, which are relatively specialized rigs and which are not usually used on a full-blown fashion, like getting a contract and working 300 days. They are more specialized rigs and specific rigs doing specific task. And these rigs are paying off a ton of money when they are working but they are usually parked, okay? So that's a very small portion of our rig fleet. The rest of the fleet are more or less ready to go. A rig, take the operation life is a minimum 10 years, can be 15 years. So although we amortize all of our rigs over 7 years, accounting-wise and 70% of our rig is made of components that you can find on the shelf. So you can understand that unless everything is rotten, you can overhaul deeply a rig and then give him a new life. And usually, we do that because for 25% to 30% of a brand new rig price, we can have a brand new rig, okay? So at Foraco for the last 6, 7 years, we have been doing deep overhaul and recapitalizing the cost into our assets.

Perfect. Next question and I believe you touched on this. But could you just address the competitive landscape that you operate in, your major competitors in Tier 1, in Tier 2 and in the junior mining markets that you serve.

Okay. We start by the junior market, which is the most open and most competitive market in the world. Generically, typically, the junior companies when they raise $1 million, $2 million to drill, they go to the easiest path. They go see their buddies who have rigs. They don't care too much about safety. They don't care too much about price. They just care about time. So it's a very competitive market. As I said, it can evaporate overnight. We don't -- we are not exposed to this market a lot, more than 15%. And within this 15%, 98% is with the big juniors and other small juniors. And to serve the junior market, you have all kind of companies because in each and every country where you have a significant mining industry, you have mom-and-pop companies, intermediate-size companies and so you have kind of over competition. When you want to serve, on the contrary, the top of the pyramid, which we do, then you are facing much less competition because the Tier 1 companies are very well educated customers, very demanding customers, you have to be prequalified. You have to show that you are not hurting your people, that you have the balance sheet strong enough to follow them, et cetera, et cetera. So basically, on a pure international basis and as far as the Tier 1 customers are concerned, we regularly compete against 2 or 3 companies. And usually, you have one local champion plus 2 international companies like us or the 2 other big, listed company.

Okay. Perfect. And I guess sticking on this topic, what would you say is Foraco's biggest competitive advantage or competitive advantages versus, I guess, those top-tier competitors.

Probably our versatility and the quality of service. The reputation of Foraco is that we have -- we are a relatively expensive company, pricey. But that our quality of service is amongst the top. Am I correct, Tim?

Yes. I would say that, that's 100% correct. Our customers generally enjoy the experience of working with Foraco. We're very focused on that. We're very aware that they're on a schedule and very much provide value. And while -- as Daniel mentioned, we're known as pricey, we're also a value-driven company.

And I guess, Tim, you just touched on it, couple of questions from a couple of different people, regarding pricing power in the industry. What are the other substitute options for customers? And how long are these projects' times of sales cycle, et cetera?

I would say that -- I will let Tim comment on the latter part. On the first part, I would say that the power -- the pricing power is something which is kind of, I would say, both very difficult to reach and sometimes very, very easy to get. And this depends on the emergency or the sense of urgency that your customer has. But generally speaking, when the global drilling fleet utilization rate is below, let's say, 50%, nobody has any pricing power. Because there is a ton of capacity available on the market and therefore, some will go to the rock bottom to get the job. When you reach 50% plus, then you begin to firm up. And the more sophisticated is your customer or the more specialized or the more technical is a project, the more pricing power we get. And over the last, let's say, 2 years, we have been able to renegotiate all of our contract prices and to make them inflation bullet proof and restoring in the meantime, our, let's say, gross margin, big deal, like 10 points. And all over the spectrum of the big guys, and Tim has been one of the very, very key actors to renegotiate most of them and I will let Tim comment on that. But we have been able to sign off with 20, 30 plus percentage points price increase, right, Tim?

Yes, that's correct, Daniel. But the 1 point I would make is that while those price increases sound impressive and they are, you have to remember that we've come through one of the worst recessions starting in 2017. And there's always been a lag on pricing. COVID helped with that with inflation and it gave us legitimate cause to go back to our customers, seeking to make up for the cost increases. So those were the biggest increases that I've personally seen in my career but they were well substantiated. Customers understood. As Daniel said, some of it went to the margin but a great deal of it was just offsetting the cost increases that we've seen.

Sort of sticking quickly with this theme. You mentioned 2 major listed competitors. Can you name them?

Yes. Major Drilling International, MDI, which are listed on the same stock exchange like us in Toronto and [indiscernible] which is listed on the Australian Stock Exchange. These 2 companies are the biggest international drilling companies. We are -- Major is about 2x our size and [indiscernible] is about 3x our size. And 15 years ago, they were respectively 15x and 20x bigger than us.

Okay. Why have the rig count stayed at 302 if the market is starting to grow? And do you envision investment into expanding your rig capacity?

Good question. We have decided to stay at 300 rigs because our utilization rate was not satisfactory, #1. #2, we have constantly swapped new rigs for -- sorry, old rigs for new rigs within this 300. Over the last 5 years, I think we have bought 40 new rigs and retired 40 old rigs. So we have not remained inactive, of course. We are very, very alert on the, let's say, medium-term to long-term market demand. And we are scratching our head to see whether or not it is worthwhile to lay out a strategic plan with a more substantial investment in term of number of rigs. Bearing in mind that the rig is one part of the question but the most critical part of the game is the crew. And today in the world, there is a lack of crews. And we couldn't crew, for instance, an extra 20 rigs, brand new that could be parachuted somewhere. Because basically, there is not enough crews. So our growth rate in terms of absolute value of rigs put at work depends also on our ability to train crews, retain crews and make sure that they work safely. And this is why we have kept these 300 rigs number kind of optically stable.

Perfect. Next question sets up perfect. You just touched on it. Can you speak to your labor and turnover situation, how experienced is your workforce, i.e., average years experience in the mining industry and any other information you could talk about your employees.

Tim?

Sure. Happy to touch on that. In the mature jurisdictions, be it Canada, Australia and Latin America, we've got a pretty stable workforce. We've been in business in North America now for 17 years and a lot of the staff that joined us are still with us. The turnover rates lately have been quite satisfactory. Foraco is a very desirable company to work for. One of the reasons is because of the long-term contracts that we have which provide our crews in the field with not only some certainty of employment over the longer term but also a schedule that they can plan. And increasingly, lifestyle of our employees is more and more important. They've got young families, our workforce is getting younger. And being able to have a predictable schedule and have a lifestyle is extremely important to them. And with these long-term contracts, we're able to do that. There may be fly in, fly out but they're at a predictable location and they know exactly where they're going to be and when. Foraco doesn't pay the highest but we remunerate our employees above the top 75th percentile. We have good long-term incentive plans. We have pensions in place. And all of these things are quite attractive to our employees. The labor pool is not as deep as it was, again, because we went through that protracted recession. And a lot of the old generations have left the industry altogether. Right now, we're doing a great deal of training with people that are new to the industry. We have a great deal of success training people in Foraco, in the Foraco way, that have come up from the rigs as drillers' assistants to drillers and to supervisors. And that includes all demographics, the male, female, any demographic is included in our field ranks.

Okay. Can you talk a little bit more about your water drilling and water management services. And with the same competitors that you talked to about earlier, I guess, would be part of that competitive structure? Or are you dealing with different competitors?

Again, I will let Tim give you some kind of example of what we can do and what we do in Canada, which is very, very similar to what we are doing in Australia for the time being as far as the watering is concerned. Okay, Tim?

Sure. So with respect to water, there's really 3 categories. One is monitoring it and that's finding then what happens to groundwater when mining activity is in the proximity. In some jurisdictions like Latin America that is now legislated, where our customers need to drill monitoring wells to understand exactly what's happening to the water table as a result of their activities. So that's a big part of our business in Chile. The other aspect is the production of fresh water for human consumption. That's happening in the developing world, where we do a lot of deep water well work for aid agencies and whatnot, providing fresh water for humanity. That's a really feel good part of our business and something that we're quite proud of. The third element is industrial processing or getting rid of water to allow mining operations to proceed. So you can appreciate that in a large open pit, in order to be able to extract the ore, the water table unless it was dealt with, would fill the mine. So we drill dewatering wells on the perimeter to be able to draw the water table down and facilitate mining. The other area is the injection and extraction wells that can either be used for solution mining. So an injection well, we would inject fresh water into the formation, usually in a ring with an extraction well in the center. That is solution mining for magnesium or lithium, as an example of that. But also in removing contamination, you may have read in the news about selenium contamination into the groundwater in the [indiscernible] region of Western Canada, where selenium leaches out of waste dumps from mining operations. And these waste dumps are just generally old workings that are then filled up with waste rock. And over time, the selenium leaches out of this waste rock into the groundwater. And it's very hazardous and it contaminate wildlife and fish downstream. So our customers are asking us to drill in these waste dumps, which is very challenging drilling conditions. It can include broken rock. It can include steel, it can include tires, wood, you name it. And we must penetrate all of that material, construct a water well to be able to draw the selenium out. And in the -- sorry, in the -- in this environment, we're doing injection and extraction wells as well. The injection wells, we're injecting a bacteria, which attacks the selenium and then we're drawing it out of the extraction well. And then that selenium is tied up and our customer processes that water, removes it and discharges freshwater back into the environment. So it's an increasing part of our business. It's capital intensive. It's very technical work. It requires an extremely skilled workforce and a lot of capital investment on our side in terms of equipment. But it's a great part of the business and there's not a lot of competitors that do it. So it's a much smaller space in terms of competitors for us to work in.

Yes. And if you look at our financial reporting, Glen, you're going to see that we report by segment and water is one of the segments. And you can state -- you can observe that the gross margin generating by water services is about 10 points above the mining services.

Okay. That actually leads well into the next question. Are there margin differences for different metals that you're drilling for, for example, EV metals such as cobalt or copper, or iron ore, gold, water, et cetera?

No. The profitability depends on the projects with the exception of the water, I just mentioned. But across the board, whether or not, whether drilling for gold, for copper, for zinc, for whatever, the gross margin is dictated by the technicality and the risk-taking that we are accepting and managing on a project-per-project basis and not depending on the commodity we are drilling for.

Okay. I have 3 different individuals that are touching on M&A. So maybe you could talk about, first, what do you see in the industry in terms of consolidation and then more specific to Foraco from a strategy for M&A and buying companies like Geodrill potentially, et cetera.

The sector has been relatively acquisitive between 2005 and 2012, when the cycle was really up and the business was really hot. After the recession, everybody has gone very quiet. And even today, we saw Major buying McKay about 1.5 years ago, which is a kind of medium-sized. [indiscernible] is swamped with a debt. So the balance sheet is not enabling them to buy anyone. We at Foraco, we have bought, let's say, our bridgeheads during the first period. And going forward, we don't have any ambition to buy, let's say, any significant company, with one exception could be in the U.S., which is one of the biggest and the most stable market in the world. We are not in the U.S. and this is our top priority for the short term. So maybe we could have a look to an acquisition over there. But when you look at the space today, the space is very quiet in terms of M&A.

Okay. Next question. Since 2018, EBITDA margins have increased at an impressive rate. Can we expect similar margin expansion or what kind of margin expansion should investors think about over the next 3 to 5 years?

Yes, we could expect an improvement -- a further improvement of our gross margin. But there is something that we have a kind of glass ceiling, which is the education of our customers. When these guys are buying our services, the procurement department, they know very well how much cost, how much is our cost base. So they will probably refrain and start to raise eyebrows if we were to pass the 50% mark, on a project basis, I'm not talking about the consolidated basis. So we cannot make -- we cannot cream the market of the majors -- of the Tier 1 miners. We cannot cream it like somebody can cream the junior company desperate to drill it and it could accept, I would say, 70% gross margin. That doesn't happen in the mature and the large client base. So if you look again, if you look back to the historical numbers, you will see that at a consolidated level, for the same kind of volume of activity, we have not gone over, I would say, 30%, 32% of gross margin under IFRS, again, we report in full IFRS. So we still have room to grow our gross margin. But I would say that they will not double because basically, it's impossible, okay?

Okay. Next question. And I believe you addressed it through one of the slides but maybe just expand on it. Can you talk about where geographically are the majority of your operations? And have you had any slowdown of operations due to social unrest in South America?

So I put the slide again on the geography, which is on the right, so you can check that. We are not -- we have not been -- and we don't foresee any social unrests in Latin America for the time being. Would it be in Brazil, Argentina or Chile, these countries have had some kind of social unrest but it has not percolated towards the mine sites for the moment. And we enjoy a very good set of activity in most of the countries.

Okay. Some balance sheet, I guess and financial-type questions in our remaining 5 minutes. So first off, in the beginning, I think in your formal remarks, you mentioned historical dividend, potential dividend in the future with -- given that you're very profitable. The question is, what is the priority in free cash flow? Are you looking to aggressively pay down debt and shore up the balance sheet? And also comment on any share buyback that you have.

Up to today, we had a one single policy which was to deleverage the balance sheet. We have reached a certain level of profitability today where we can have 2 lines policy on that, which is resume the dividend payout as soon as we can. Our debt covenant do allow us to do so. So it's something that we would look at in the near future. But the priority #1 is to make sure that we reduce as much as we can our net debt. As far as the share buyback is concerned, we already have in place [indiscernible] which is a kind of regulated buyback. We have technical reasons, which prevent us to do a pure buyback. And this is related to our controlling shareholders' position with Jean-Pierre and myself, if the company was to buyback its own shares on a significant basis, [ mechanically ], we will be dilutive -- diluted. And therefore, we would go over the 20% each, which could trigger a takeover bid. So we are in a kind of position where the buyback -- the pure buyback program is not an option, okay?

Super. Can you talk about your current shareholder base? I know you mentioned yourself as one of the major shareholders. Are there major institutional shareholders?

We don't know officially because as you can scan our shareholder list. We know that there are a lot of institutions. But usually, they report under anonymity because they [ lodge ] our shares in different structures. So it's for us, it's relatively difficult. So the only person we know are either Jean-Pierre, myself, the management of the company and some former owners of company we bought, namely Brazil and Australia and Canada. So we know there are a certain number of million shares, which are still in their hands and they are very loyal and very patient and very, I would say, supportive shareholders. So that's all we know from them.

Okay. A couple more questions in the queue for you, Daniel and then we'll end the presentation. As part of your capital markets, have you considered or will you ever consider a U.S. NASDAQ uplisting?

We have been talking about that for years. We -- for the moment, we don't see the merits of that. because for the moment, the lack of interest of those markets for the small caps, make us relatively cold feet to engage a few million dollars worth of marketing and double listing. And so far, the leverage that we could get from that has not been that obvious. I'm not disregarding forever. But for the time being, we try to make sure that we do a good job in terms of IR and stock recognition and -- out of Toronto. Because we do estimate that there is room enough to make -- to push back the stock where it should be.

Okay. Perfect. And just last question, I guess, is a combination of that last statement by you. And I know personal discussions between you and I, and I'm sure other shareholders feel it. So over the past several years, metal prices have been relatively strong. Water resources globally are increasingly challenged, yet the share price has not risen despite the positive backdrop of Foraco services. What would you attribute this disconnect to? And what must Foraco do to change the improved investor perception of the company and its future prospects?

The historical share price has been, of course, damaged by the very poor result of Foraco during the recession, like our peers. The turnaround occurred in 2017. We got some kind of good rides and then it became choppy. We think that this came from, #1, the perception of our net debt, #1. #2, the relative illiquidity, optical illiquidity of the title of the stock. There are some shares to buy but more blocks than retail. And basically, today, what makes the stock of Foraco in terms of daily volume is purely retail and retail blocks. And therefore, we have to work on our shareholder basis to make sure that if someone wants 1 million share or 2 million shares, we can find them and as well as then can sell them. But we have not succeeded yet into having, let's say, a liquid stock enough. And this is very, very difficult to achieve and this is why we are here tonight. To increase the awareness of the market about the Foraco stock, which is by far undervalued, in our opinion.

Perfect. Well, I guess, in summary and to your point, we did have a very large audience attend this call and thank you, everybody who stayed in and listened. I see the majority have hung in. And Daniel, Tim, thank you for the presentation. We have no further questions and this will conclude the presentation.

Thank you, everyone.

Thank you. You may now disconnect and have a wonderful day. We do thank you for your participation today.