Major Drilling Reports First Quarter Results for Fiscal 2017

MAJOR DRILLING GROUP INTERNATIONAL INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED JULY 31, 2016 AND 2015 (UNAUDITED)

(in thousands of Canadian dollars, except per share information)

1. NATURE OF ACTIVITIES

Major Drilling Group International Inc. (the "Company") is incorporated under the Canada Business Corporations Act and has its head office at 111 St. George Street, Suite 100, Moncton, NB, Canada. The Company's common shares are listed on the Toronto Stock Exchange ("TSX"). The principal source of revenue consists of contract drilling for companies primarily involved in mining and mineral exploration. The Company has operations in Canada, the United States, Mexico, South America, Asia, Africa and Europe. 

2. BASIS OF PRESENTATION

Statement of compliance

These Interim Condensed Consolidated Financial Statements have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board ("IASB") and using the accounting policies as outlined in the Company's annual Consolidated Financial Statements for the year ended April 30, 2016.

On September 6, 2016, the Board of Directors authorized the financial statements for issue.

Basis of consolidation

These Interim Condensed Consolidated Financial Statements incorporate the financial statements of the Company and entities controlled by the Company. Control is achieved when the Company is exposed, or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

The results of subsidiaries acquired or disposed of during the period are included in the Consolidated Statements of Operations from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Intra-group transactions, balances, income and expenses are eliminated on consolidation, where appropriate.

Basis of preparation

These Interim Condensed Consolidated Financial Statements have been prepared based on the historical cost basis except for certain financial instruments that are measured at fair value, using the same accounting policies and methods of computation as presented in the Company's annual Consolidated Financial Statements for the year ended April 30, 2016.

3. APPLICATION OF NEW AND REVISED IFRS

The following IASB standards, now in effect, have had no significant impact on the Company's Consolidated Financial Statements:

IFRS 10 (amended) Consolidated Financial Statements

IFRS 11 (amended) Joint Arrangements - Accounting for Acquisitions of Interests in Joint Operations

IAS 1 (amended) Presentation of Financial Statements

IAS 16 (amended) Property, Plant and Equipment

IAS 28 (amended) Investments in Associates and Joint Ventures

IAS 38 (amended) Intangible Assets

The Company has not applied the following revised IASB standards that have been issued, but are not yet effective:

IFRS 9 (as amended in 2014) Financial Instruments*

IFRS 15 Revenue from Contracts with Customers*

IFRS 16 Leases**

IAS 7 (amended) Statement of Cash Flows***

IAS 12 (amended) Income Taxes***

*Effective for annual periods beginning on or after January 1, 2018, with earlier application permitted

**Effective for annual periods beginning on or after January 1, 2019, with earlier application permitted

***Effective for annual periods beginning on or after January 1, 2017, with earlier application permitted

4. KEY SOURCES OF ESTIMATION UNCERTAINTY AND CRITICAL ACCOUNTING JUDGMENTS

The preparation of financial statements, in conformity with International Financial Reporting Standards ("IFRS"), requires management to make judgments, estimates and assumptions that are not readily apparent from other sources, which affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods, if the revision affects both current and future periods. Significant areas requiring the use of management estimates relate to the useful lives of property, plant and equipment for depreciation purposes, property, plant and equipment and inventory valuation, determination of income and other taxes, assumptions used in the compilation of share-based payments, fair value of assets acquired and liabilities assumed in business acquisitions, amounts recorded as accrued liabilities, contingent consideration and allowance for doubtful accounts, and impairment testing of goodwill and intangible assets.

The Company applied judgment in determining the functional currency of the Company and its subsidiaries, the determination of cash-generating units ("CGUs"), the degree of componentization of property, plant and equipment, and the recognition of provisions and accrued liabilities.

5. SEASONALITY OF OPERATIONS

The third quarter (November to January) is normally the Company's weakest quarter due to the shutdown of mining and exploration activities, often for extended periods over the holiday season.

6. PROPERTY, PLANT AND EQUIPMENT

Capital expenditures for the three months ended July 31, 2016 were $2,777 (2015 ‐ $5,236). The Company obtained direct financing of nil in the current quarter (2015 - $1,971).

7. INCOME TAXES

The income tax provision for the period can be reconciled to accounting loss as follows:

	Q1 2017				Q1 2016
Loss before income tax	$	(8,848	)		$	(8,353	)
Statutory Canadian corporate income tax rate		27	%			27	%
Expected income tax recovery based on statutory rate		(2,389	)			(2,255	)
Non-recognition of tax benefits related to losses		1,207				3,281
Other foreign taxes paid		291				453
Rate variances in foreign jurisdictions		137				(306	)
Permanent differences		1,170				1,546
Other		518				108
Income tax provision recognized in net loss	$	934			$	2,827

The Company periodically assesses its liabilities and contingencies for all tax years open to audit based upon the latest information available. For those matters where it is probable that an adjustment will be made, the Company records its best estimate of these tax liabilities, including related interest charges. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax laws. While management believes they have adequately provided for the probable outcome of these matters, future results may include favorable or unfavorable adjustments to these estimated tax liabilities in the period the assessments are made, or resolved, or when the statutes of limitations lapse.

8. LOSS PER SHARE

All of the Company's earnings are attributable to common shares therefore net loss is used in determining loss per share.

	Q1 2017				Q1 2016
Net loss	$	(9,782	)		$	(11,180	)
Weighted average number of shares - basic and diluted (000's)		80,137				80,137
Loss per share:
Basic	$	(0.12	)		$	(0.14	)
Diluted	$	(0.12	)		$	(0.14	)

The calculation of diluted loss per share for the three months ended July 31, 2016 excludes the effect of 3,710,913 options (2015 ‐ 3,921,796) as they were anti‐dilutive.

The total number of shares outstanding on July 31, 2016 was 80,136,884 (2015 - 80,136,884).

9. SEGMENTED INFORMATION

The Company's operations are divided into the following three geographic segments, corresponding to its management structure: Canada - U.S.; South and Central America; and Asia and Africa. The services provided in each of the reportable segments are essentially the same. The accounting policies of the segments are the same as those described in the Company's annual Consolidated Financial Statements for the year ended April 30, 2016. Management evaluates performance based on earnings from operations in these three geographic segments before finance costs, general corporate expenses and income taxes. Data relating to each of the Company's reportable segments is presented as follows:

9. SEGMENTED INFORMATION (Continued)

		Q1 2017				Q1 2016
Revenue
	Canada - U.S.*	$	43,797			$	51,031
	South and Central America		13,496				20,481
	Asia and Africa		11,796				12,422
		$	69,089			$	83,934
(Loss) earnings from operations
	Canada - U.S.	$	(3,318	)		$	826
	South and Central America		(1,900	)			1,205
	Asia and Africa		(1,625	)			(8,505	)
			(6,843	)			(6,474	)
Finance costs			47				70
General corporate expenses**			1,958				1,809
Income tax			934				2,827
Net loss		$	(9,782	)		$	(11,180	)

*Canada - U.S. includes revenue of $19,941 and $31,672 for Canadian operations for the three months ended July 31, 2016 and 2015, respectively.

**General corporate expenses include expenses for corporate offices and stock options.

		Q1 2017			Q1 2016
Capital expenditures
	Canada - U.S.	$	1,359		$	4,036
	South and Central America		970			687
	Asia and Africa		448			513
Total capital expenditures		$	2,777		$	5,236
Depreciation and amortization
	Canada - U.S.	$	7,133		$	6,724
	South and Central America		3,109			3,515
	Asia and Africa		2,011			2,604
Unallocated and corporate assets			353			373
Total depreciation and amortization		$	12,606		$	13,216

9. SEGMENTED INFORMATION (Continued)

		July 31, 2016			April 30, 2016
Identifiable assets
	Canada - U.S.*	$	223,397		$	223,606
	South and Central America		146,217			138,961
	Asia and Africa		100,382			95,554
Unallocated and corporate assets			35,501			45,180
Total identifiable assets		$	505,497		$	503,301

*Canada - U.S. includes property, plant and equipment at July 31, 2016 of $66,958 (April 30, 2016 - $70,527) for Canadian operations.

10. RESTRUCTURING CHARGE

During the previous year, due to ongoing market difficulties in the Republic of South Africa and Namibia, the Company decided to close its operations in those countries. 

These restructuring initiatives generated impairment losses calculated based on the determination of the fair value of assets less cost of disposal. Fair value was determined through the use of industry knowledge and specialists.

The costs related to these initiatives were recorded as part of the restructuring charge for a total of $6,432. This amount consisted of an impairment charge of $3,479 relating to property, plant and equipment, a write‐down of $1,304 to reduce inventory to net realizable value, employee severance charges of $387 incurred to rationalize the workforce, and other non-cash charges of $262. The remaining charge of $1,000 related to the cost of winding down operations.

11. FINANCIAL INSTRUMENTS

Fair value

The carrying values of cash, trade and other receivables, demand credit facility and trade and other payables approximate their fair value due to the relatively short period to maturity of the instruments. The carrying value of long-term debt approximates its fair value as most debts carry variable interest rates, and the remaining fixed rate debts have been acquired recently and their carrying value continues to reflect fair value. The fair value of the interest rate swap included in long‐term debt is measured using quoted interest rates. Contingent consideration is recorded at fair value and is classified as level 2 in accordance with the fair value hierarchy. 

• Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2 - inputs other than quoted prices included in Level 1 that are observable for the assets or liabilities, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and
• Level 3 - inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

11. FINANCIAL INSTRUMENTS (Continued)

There were no transfers of amounts between Level 1, Level 2 and Level 3 financial instruments for the quarter ended July 31, 2016. Additionally, there are no financial instruments classified as Level 3.

The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.

During the quarter, due to the level of EBITDA, the debt service ratio was not met under the debt agreement. The debt continues to be presented as long-term, consistent with the debt agreement, as the lenders provided a waiver during the quarter.

Credit risk

As at July 31, 2016, 87.0% (April 30, 2016 - 85.9%) of the Company's trade receivables were aged as current and 1.4% (April 30, 2016 - 7.2%) of the trade receivables were impaired.

The movements in the allowance for impairment of trade receivables during the three-month periods were as follows:

	July 31, 2016				July 31, 2015
Opening balance	$	3,554			$	4,204
Increase in impairment allowance		344				440
Recovery of amounts previously impaired		(63	)			(155	)
Write-off charged against allowance		(3,127	)			(192	)
Foreign exchange translation differences		22				109
Ending balance	$	730			$	4,406

Foreign currency risk

As at July 31, 2016, the most significant carrying amounts of net monetary assets that: (i) are denominated in currencies other than the functional currency of the respective Company subsidiary; (ii) cause foreign exchange rate exposure; and (iii) may include intercompany balances with other subsidiaries, including the impact on earnings before income taxes ("EBIT"), if the corresponding rate changes by 10%, are as follows:

	Rate Variance		USD/CAD		CFA/USD		ARS/USD		IDR/USD			Other
Exposure			$	2,898	$	2,655	$	1,067	$	(1,210	)	$	1,333
EBIT impact	+10	%		322		295		119		(134	)		147

11. FINANCIAL INSTRUMENTS (Continued)

Liquidity risk

The following table details contractual maturities for the Company's financial liabilities.

	1 year		2-3 years		4-5 years		thereafter		Total
Trade and other payables	$	36,951	$	-	$	-	$	-	$	36,951
Contingent consideration		3,000		5,347		-		-		8,347
Long-term debt (interest included)		4,226		4,263		2,158		88		10,735
	$	44,177	$	9,610	$	2,158	$	88	$	56,033