Exploration Drillers Hit a Hard Patch

Fewer projects, downward pressure on pricing and no signs of a quick economic turnaround take a toll on most contract drilling companies’ revenues

By Russell A. Carter, Managing Editor

With almost every company in the mining industry experiencing economic effects from the collapse of the commodities boom in late 2008, drilling services companies generally expected the worst in early 2009—and for the most part, that’s what they got.

As first-half 2009 and end-of-fiscal-year financial reports from the larger contract drilling companies began to trickle out in mid- to late summer this year, the results were surprising only in the degree to which mineral exploration drilling revenues dropped in comparison with the prior year’s levels—in some cases falling 50% or even 60% from corresponding periods in 2008.

Although exploration budget axes initially began to fall in the fourth quarter of 2008, the carnage has continued well into 2009. Major Drilling Group International, one of the industry’s largest contract drilling companies, reported in mid-May that five of its international customers had postponed various projects that generated revenues of roughly $40 million alone in the second quarter of fiscal 2009. And, reflecting the sector-wide scramble for business among cash-starved drilling outfits, New Brunswick, Canada-based Major also said it decided to not retain some contracts where new pricing would have lowered margins to the point of unprofitability. In some cases, the company said, drilling services prices dropped more than 20% after October 2008 due to competitive pressures; other companies reported price drops of 30% or more.

Major’s results were fairly typical of early-2009 financial performance among larger drilling services companies involved in mineral exploration. Kansas, USA-based Layne Christensen Co. reported that revenues generated by its exploration division fell by 51.5% for the three months ended April 30, 2009, and it expected declines against 2008’s levels to continue throughout the balance of 2009.

Boart Longyear, which offers both drilling services and drilling-related products on a global basis, said its drilling services revenues in the first half of 2009 were down by 47% compared with first-half 2008, due to decreased drill rig utilization levels, lower pricing and unfavorable foreign exchange movements. Its Global Products business revenues for the 2009 period also fell by 65% compared with 2008, as customers cut back on capital equipment purchases and used less drilling consumables.

Not All Negative

Poor revenue performance wasn’t unanimous across the sector; drilling companies with broad involvement in gold exploration did somewhat better, as did those able to maintain ongoing business relationships or win new business with major producers and/or financially healthy intermediate clients.

Quebec, Canada-based Orbit Garant Drilling, for example, reported that its revenues for the nine months ended March 31, 2009 were C$76.9 million, a 35% increase over the comparable period in 2008, with net earnings of C$9 million compared with C$7.9 million during the same period last year.

The company attributed its performance to several factors: minimal foreign exchange risk, as 97% of its revenue is generated in Canada; high involvement in gold exploration, with 78% of its revenues derived from gold projects; and the ability to maintain and add contract services with both long-time and new customers.

The company operates 86 underground drill rigs and 49 surface rigs at 37 sites scattered throughout Canada, the U.S., Mexico and South America; however, 90 of its rigs are located within a six-hour travel radius from Val d’Or, Quebec, and those locations accounted for almost 80% of the company’s revenue during the quarter ended March 31, 2009.

It has recently added several new clients: Rubicon Minerals, which owns the Phoenix gold prospect in the Red Lake mining district and plans to conduct more than 80,000 m of exploration drilling there during 2009 and the first quarter of 2010; Agnico-Eagle, for which it is carrying out a three-year, specialized drilling contract at the Meadowbank gold project in Nunavut, Canda; and Newmont Mining, involving a three-year, extendable drilling contract at the company’s Hope Bay project, also in Nunavut.

For the most part, drilling company executives aren’t predicting any sort of significant turnaround for the balance of 2009, but there is some cause for hope. As Cabo Drilling Corp.’s President and CEO, John Versfelt, noted recently,”We are encouraged by the multi-million dollar financings that are taking place in Canada, as well as other international financial markets, for gold and silver projects.  This is resulting in more requests for bids for both surface and underground exploration and mining projects. We believe that the gold mining areas of Canada, as well as Latin America and Ontario will experience greater interest in drilling demand in the balance of 2009. However, we also expect lower demand for drilling from most of the base metal sectors in 2009. Copper and iron projects are showing some signs of renewed life.”

Preparing for the Future

Many drilling companies are taking advantage of the moribund market conditions to cut costs and maximize cash flow, often by workforce reductions and salary freezes, but also by canceling planned equipment purchases while retiring older, less cost-effective rigs—both as a survival tactic and to prepare themselves for a future rebound in exploration drilling demand when it occurs. As a supplier of drilling services as well as drilling equipment, Boart Longyear has had to cope with severe slumps at both ends of its business. But it’s not standing still—after slashing employee headcount by approximately 40% in 2008, reducing overall general administrative and other costs by 39%, and recapitalizing to reduce debt, the company is looking to 2010 for a rebound in drilling services demand and also plans to introduce several new products.

Boart Longyear’s North American underground core drilling manager, Bill Krasnozon, after experiencing a significant drop in business over the past three quarters, sees a flat-lined market for underground exploration drilling throughout the rest of the year. “Among the companies that are carrying out underground diamond-drilling programs—mostly major producers, with some intermediate-level companies as well—they’ve already taken care of what they should have [in terms of drilling activity] and there won’t be that much more business this year.”

Krasnozon, who recently took over responsibility for all North American UG drilling services business after managing its Canadian UG drilling activity, has experienced a decline in rig utilization in Canada compared to last year, but “I saw the writing on the wall last fall,” he explained, “and I targeted our efforts at gold companies, including some juniors and some just beginning to mine. A significant amount of our business now is in gold.”

Interestingly, Krasnozon noted that despite the sector’s increased competitive pressures, safety is still a primary concern among potential customers. “Essentially, your safety record is [the client’s] safety record once you’re on their site. Even before you submit a drilling tender offer,” he said, “you must submit your safety statistics—and if your accident frequency is high, you’re not going to be allowed on the property, or even allowed to tender.

“Sure, pricing is an important factor, but you also have to be able to provide quality work and experienced crews as well as a good safety record. If you can offer all those to the client, you still have a good chance of getting work even if you don’t bid the lowest price.”

He said he also benefits from the close coupling between the company’s drilling services and drill products groups, allowing him to offer newly developed rigs, tools and techniques for prospective jobs. Recent developments that he’s been able to take advantage of include hands-free rod handling systems on drills, and increased use of mobile underground rigs. One of the more effective techniques for diamond drilling developed fairly recently, said Krasnozon, is to use an ITH button bit to rapidly sink a core hole to near depth, and then use a diamond bit to core the end of the hole. “The customer has often already had the upper portion of the rock drilled and can get chip samples from the ITH drilling. All they want for core samples is the last 400 or 500 ft of rock.”

What’s New

Monika Portman, product manager for Boart Longyear coring products, said the company’s new product development efforts are focused on improving safety and performance. “There’s a lot of activity going on right now—with our core barrel products for example—on how to make them safer to use underground while increasing productivity. Similarly, in our diamond core bit product line, we’re always looking at ways to improve productivity in various ground conditions from fast drilling to hard drilling.”

Portman said the company’s Alpha Stage3 coring bit line has been gaining popularity due to its deeper crown and built-in “windows” which become new waterways as the crown wears, all of which combine to give the bit better penetration performance and longer life, along with reduced rod tripping requirements. It’s likely, she noted, that Boart Longyear will introduce a new Stage-series bit in the first half of 2010.