The booming exploration business

With a global exploration expenditure of over $8 billion in 2007 and a budget of some $10 billion this year, drilling companies are posting great results these days. Exploration (drilling, sampling and surveying) is feaured in the February issue of International Mining. The issue will also feature an interview with Boart Longyear’s CEO, Paul Brunner, and a thorough examintaion of Banro’s best-practice exploration and sampling in the DRC.

Major Drilling Group International is another example of the boom. It posted the highest quarterly revenue in its history with revenue of C$156.1 million, up 53.3% from the C$101.8 million recorded for the same quarter last year. Gross margin percentage for the quarter was 35% compared to 33.2% for the corresponding period last year, with good performance from all segments.

Francis McGuire, President and CEO said the strong results were driven by “a combination of additional investments in people and equipment, acquisitions and an improved pricing environment. During the quarter, we took delivery of 18 new rigs that contributed revenue this period. We also added 18 rigs through acquisitions. Overall margins continued to improve despite continuing costincreases in labour, training and safety, as well as African margins still lagging behind other regions. Investment in recruitment and training is crucial to our continuing growth but does affect overall operating margin growth as we incur both additional costs and lower initial productivity with new crews. In the last quarter, we have stepped up our already significant investments in training, and we are on track to meeting our goal of expanding our labour force by 20% this year.”

“The mineral drilling industry outlook remains positive.” He noted that gold accounts for just under half of the company’s activity, and base metals for about 35%. “We have also seen increased activity in uranium as more projects in that field are moving into the prefeasibility stage.”

McGuire expects “continued growth to come from additional investments in people and equipment, strong market conditions and its acquisitions.” In September the company acquired Harris y Cia in Chile, adding 11 drill rigs, “all of which are currently committed to work on a double shift basis conducting mainly specialised drilling in the active northern region of Chile. This acquisition, made for $23.5 million, is expected to generate additional revenue of approximately $11 million from the time of the acquisition to the end of our fiscal year on April 30, 2008,” said McGuire. In October the company acquired the assets of Paragon del Ecuador, which was the largest mineral exploration drilling contractor in Ecuador, operating seven rigs. “The purchase price for the transaction was $6 million and it is expected to produce additional revenue of approximately $3.6 million for the balance of our fiscal year.

“It is important to note that we are now in our third quarter, traditionally the weakest quarter of our fiscal year, as mining and exploration companies shut down operations, often for extended periods over the holiday season. Additionally, the company schedules substantial overhaul and maintenance work on its equipment during this slower period as it prepares for the busy fourth quarter. These factors result in reduced revenue, increased costs, and reduced margins in the quarter,” observed McGuire. “Weather conditions also have a significant impact on operations. Last year, weather conditions were very favourable; conditions to date have been more challenging. These factors increase the volatility of our third quarter results.”

Looking geographically at Major’s results for the last quarter, revenue from Canada-U.S. drilling operations was up C$12.6 million or 32.0% to C$52.0 million for the quarter. Additional equipment and improved pricing contributed to the growth in that region.

In South and Central America, revenue for the quarter was up C$15.5 million or 52.9%, to C$44.8 million. Revenue growth was driven primarily by Mexico, Chile (including the Harris acquisition) and Argentina. Australian, Asian and African drilling operations reported revenue of $59.3 million, up $26.1 million or 78.6%. About 40% of this growth is attributable to the African acquisition made in December 2006. Australia and a new operation in Armenia accounted for another 40% of the growth, with the rest coming from Tanzania, Mongolia and Indonesia.