HUGHES DRILLING

HUGHES DRILLING

Brownfield Booming as Gold Exploration Contracts

Issue 67, December 2013

Drilling contractors, an underbelly indicator of confidence within the mining industry, are reporting a near total collapse in exploration spending, coupled with high levels of investment in existing operational mines.

On Wednesday, Canada’s Moncton-based Major Drilling reported 3-month sales of $92m, vs. $200m in the same period last year, saying declines had been led by a retreat from gold exploration. “Sources of funding for junior mining companies are limited,” said president Francis McGuire, a former theatre student, “and as such many of their projects, both in the base metals and gold sectors, have been delayed or cancelled.”

Peers Boart Longyear and Foraco are suffering rig idle rates as high as 65 per cent, slashing their headcounts in the face of negotiations with lenders. In South America, Foraco has reported a 67 per cent drop in sales, rising to 85 per cent outside of Brazil.

Market leader Ausdrill has also cut guidance, nearly halving shares in the the last month. Shares in Foraco have lost 90 per cent since their peak last year, with Major down by two-thirds.

The figures reflect the bunker mentality being adopted by junior miners and the narrow focus by majors on the immediate cash returns offered by their existing mines: contractors focused on brownfield drilling are reporting utilisation rates as high as 95 per cent.

Hughes Drilling, which generates 85 per cent of its sales from blast hole drilling predominantly in coal mines in Queensland, has lifted revenue 27 per cent in the last year as customers have ramped up rig numbers in their existing pits. The company has 50 per cent marketshare in its coal drilling niche, serving Peabody, BHP and contractors Leighton and Theiss.

Despite profit margins of over 20 per cent, shares have been hit by sentiment towards the wider sector, trading below 4 times annual earnings. Hughes has sought to capitalise on distress amongst peers, buying both its US-based rig supplier in March and an iron ore blast hole driller, JSW Australia.

Swick Mining, which specialises in underground drilling in existing mines, has meanwhile repurchased 9 per cent of its stock in the last year, having grown revenue by 7 per cent. The company is 15 per cent owned by managing director Kent Swick. 

“Many of their projects... have been delayed or cancelled.”

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