Foraco International : – MDA Q1 2024

FORACO INTERNATIONAL S.A.

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis ("MD&A") relates to the results of operations, liquidity and capital resources of Foraco International S.A. ("Foraco" or the "Company"). This report has been prepared by Management and should be read in conjunction with the Company's unaudited condensed interim consolidated financial statements for the three‐month period ended March 31, 2024, including the notes thereto. These quarterly unaudited interim financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS"). Following the decision taken by the Accounting Standards Board, IFRS became the accounting standards for all issuers in Canada on January 1, 2011. The Company adopted IFRS and made an explicit and unreserved statement that its consolidated financial statements comply with IFRS in 2004.

Except as otherwise stated in Note 2 to the unaudited interim condensed consolidated financial statements, these quarterly unaudited condensed interim consolidated financial statements were prepared using accounting policies and methods consistent with those used in the preparation of the Company's audited consolidated financial statements for the year ended December 31, 2023. Except when otherwise stated, all amounts presented in this MD&A are denominated in US Dollars ("US$"). The discussion and analysis within this MD&A are as at April 30, 2024.

Caution concerning forward‐looking statements

This document may contain "forward‐looking statements" and "forward‐looking information" within the meaning of applicable securities laws. These statements and information include estimates, forecasts, information and statements as to Management's expectations with respect to, among other things, the future financial or operating performance of the Company and capital and operating expenditures. Often, but not always, forward‐looking statements and information can be identified using words such as "may", "will", "should", "plans", "expects", "intends", "anticipates", "believes", "budget", and "scheduled" or the negative thereof or variations thereof or similar terminology. Forward‐ looking statements and information are necessarily based upon several estimates and assumptions that, while considered reasonable by management, are inherently subject to significant business, economic and competitive uncertainties and contingencies. Readers are cautioned that any such forward‐looking statements and information are not guarantees and there can be no assurance that such statements and information will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed under the heading "Risk Factors" in the Company's Annual Information Form dated March 7, 2024, which is filed with the Canadian regulators on SEDAR (www.sedar.com). The Company expressly disclaims any intention or obligation to update or revise any forward‐looking statements and information whether as a result of new information, future events or otherwise. All written and oral forward‐looking statements and information attributable to Foraco or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.

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This MD&A is presented in the following sections:

• Business Overview
• Interim Consolidated Financial Highlights
• Results of Operations
• Seasonality
• Effect of Exchange Rates
• Liquidity and Capital Resources
• Related‐Party Transactions
• Capital Stock
• Critical Accounting Estimates
• Non‐IFRS Measures
• Litigation and claims
• Subsequent Events
• Risk Factors

Business Overview

Headquartered in Marseille, France, Foraco is a worldwide drilling service provider and is present in 21 countries and 5 continents. On March 31, 2024, following the deconsolidation of EDC Russia, the Company had 2,359 employees and operated 290 drill rigs worldwide, providing a diverse range of drilling services to its customer base. The Company has developed and acquired significant expertise in destructive and non‐destructive drilling, as well as proprietary drill rig design capabilities. Through its global operations the Company services a range of industries focusing on mining and water.

The Company's strategy is to assist its customers in exploring or managing their deposits throughout the entire cycle, with a special focus on the life of mines extension activity. The Company intends to continue developing and growing its services across the world with a focus on stable jurisdictions, high tech drilling services, an optimal commodities mix including battery metals and gold ‐ with a significant presence in water related drilling services ‐ and a gradual implementation of advanced digital applications. The Company expects to execute its strategy primarily through organic growth and targeted acquisitions.

The Company addressed the environmental, social and governance (ESG) requirements, and implements a pragmatic and measurable approach to ESG with quantitative KPIs to maximize improvement and efficiencies.

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Interim Consolidated Financial Highlights

Income Statement

(1) includes amortization and depreciation expenses related to operations.

Three‐month period ended March 31, 2024 - Q1 2024

Revenue

• Q1 2024 revenue amounted to US$ 77.1 million compared to US$ 88.4 million in Q1 2023, a decrease of 13%.
• Q1 2024 revenue remains the second‐best first quarter of the last decade (+14% vs Q1 2022).
• In Q1 2023, most contracts were remobilized particularly early. Delays noted in the first part of Q1 2024 were partially compensated by a robust rebound in activity towards the end of the quarter.

Profitability

• Q1 2024 gross margin including depreciation within cost of sales was US$ 16.8 million (or 21.8% of revenue) compared to US$ 21.1 million (or 23.9% of revenue) in Q1 2023, the temporary revenue dip, leading to some under‐ absorption of fixed costs.
• During the quarter, EBITDA amounted to US$ 17.6 million (or 22.8% of revenue) compared to US$ 19.1 million (or 21.6% of revenue) for the same quarter last year.
• The Free Cash Flow for the period was US$ (19.0) million mainly explained by the working capital requirements resulting from the higher activity in the second part of the quarter and the capex required in the first quarter to support the upcoming activity.

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Selling, General and Administrative Expenses

The following table provides an analysis of the selling, general and administrative expenses (SG&A):

SG&A decreased compared to the same quarter last year. As a percentage of revenue, SG&A was stable at 8%.

Operating result

The following table provides a breakdown of the Company's operating result for Q1 2024 and Q1 2023 by reporting segment:

The operating profit was US$ 12.6 million compared to US$ 14.2 million in the same quarter last year. On March 15, 2024, the Company finalized the sale of its 50 % stake in Eastern Drilling Company (EDC) Russia. This transaction generated a net profit of US$ 2.1 million recorded in other operating income and expense within operating profit.

Finance costs

Net financial expenses were US$ 1.7 million in Q1 2024 compared to US$ 3.6 million in Q1 2023. This decreased is attributable to the more favorable interest rate of the new financing signed in Q4 2023.

Income tax

Q1 is a quarter that is seasonally lower. The income tax expense being recognized based on Management's best estimate of the average annual income tax rate expected for the full financial year on a tax jurisdiction by tax jurisdiction basis, the corporate income tax expense for Q1 2024 amounted to US$ 2.4 million compared to US$ 2.6 million in the same period for the previous year.

Seasonality

The worldwide presence of the Company reduces its overall exposure to seasonality and the influence this can have on the business activity. In Canada, seasonal slow periods occur during the winter freeze and spring thaw or break‐up periods. Depending on the latitude, this can occur anytime from October until late December (freezing) and from mid‐ April through to mid‐June (break‐up). Operations at mining sites continue throughout the year. In Asia Pacific and in South America, where the Company operates exclusively in the Mining segment, a seasonal slowdown in activity occurs around year‐end, during the vacation period. Certain contracts are also affected in Chile in July and August when the winter season peaks.

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Effect of Exchange Rates

The Company operates in many countries, each with its own functional currency, such as Euros, Canadian Dollars, Australian Dollars, Chilean Pesos, and Brazilian Reals, while the US Dollar is the presentation currency of the Group. The significant fluctuations in the value of the US Dollar over the previous quarters have had a substantial impact on the Company's financial statements.

The Company however, mitigates its net exposure to foreign currency fluctuations by balancing its costs, revenues and financing in local currencies, resulting in a natural hedge.

The exchange rates against the US Dollar for the periods under review are as follows:

Liquidity and Capital Resources

The following table provides a summary of the Company's cash flows for Q1 2024 and Q1 2023:

In Q1 2024, the cash generated from operations before working capital requirements amounted to US$ 17.6 million compared to US$ 19.1 million in Q1 2023.

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In Q1 2024, the working capital requirement was US$ 26.7 million compared to US$ 10.5 million in the same period last year. The increase in the working capital requirement is a consequence of the higher activity in the second part of the quarter.

During the period, Capex totaled US$ 6.2 million in cash compared to US$ 8.6 million in Q1 2023. Capex relates essentially to the acquisition of rigs, major rig overhauls, ancillary equipment and rods. Two large rigs were added to the fleet during the quarter.

As at March 31, 2024, the maturity of financial debt can be analyzed as presented in the table below:

As at March 31, 2024, cash and cash equivalents totaled US$ 18.3 million compared to US$ 34.3 million as at December 31, 2023. Cash and cash equivalents are mainly held at or invested within top tier financial institutions.

As at March 31, 2024, the net debt including operational lease obligations (IFRS 16) amounted to US$ 85.0 million (US$ 65.2 million as at December 31, 2023).

Bank guarantees as at March 31, 2024 totaled US$ 5.2 million compared to US$ 7.4 million as at December 31, 2023.

Cash Transfer Restrictions

Foraco operates in several countries where cash transfer restrictions may exist. The Company organizes its business to ensure that most payments are collected in countries where there are no such restrictions. No excess cash is held in countries where cash transfer restrictions are in force.

Related‐Party Transactions

For details of related‐party transactions, please refer to Note 14 of the unaudited condensed interim consolidated financial statements.

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Litigation and claims

Generally, the Company is subject to legal proceedings, claims and legal action arising in the ordinary course of business. The Company's Management does not expect ensuing costs in resolving these matters to have a material adverse effect on either the Company's consolidated financial position, results of operations or cash flows.

Subsequent Events

There are no significant post balance sheet events.

Risk Factors

For a comprehensive discussion of the important factors that could impact the Company's operating results, please refer to the Company's Annual Information Form dated March 7, 2024, under the heading "Risk Factors", which has been filed with the Canadian regulators on SEDAR (www.sedar.com).

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