TECHNOLOGY

Top exploration drilling company confirms big mineral exploration downturn

One of the world's largest exploration drilling companies is seeing the impact of a major downturn in mineral exploration activity and will move into a loss in its fourth quarter.

Author: Lawrence Williams
Posted: Tuesday , 19 May 2009

LONDON - 

Major Drilling Group International (TSX: MDI) one of the world's largest drilling service companies primarily serving the mining industry, has confirmed the cautious outlook for 2009 it had previously expressed when releasing third quarter results in March.  At the time the company said that many companies, at the start of the year, had delayed or cancelled their exploration drilling plans due to the uncertainty in the economy, and these cutbacks were impacting the company's fourth quarter earnings, and would continue to do so for at least the first half of 2009.

Now, the company reports that, as expected, the fourth quarter of fiscal 2009 has proved difficult as the current economic environment impacted drilling worldwide, particularly on base metal projects. Many of Major's largest senior customers have cut their exploration programmes significantly to conserve cash. A large number of specialised projects, which tend to be more costly for customers than conventional projects, and where Major has historically placed its main focus, have either been cancelled or very heavily cut back.

Five of Major's largest worldwide customers alone have postponed various projects that generated revenues of approximately $40 million in the second quarter of fiscal 2009. The company also chose not to retain some contracts where new pricing would have lowered margins to the point that the contracts would not have been profitable.

As a result of these and other cancellations and delays, as well as general pricing pressures created by the current environment and ongoing geopolitical issues in some of the company's areas of activity, revenues for the quarter will be down approximately 60% when compared with Q4 of fiscal 2008 and the company will record a moderate net loss for the quarter.

Major reckons that the current economic environment will continue to impact drilling in the short to medium-term. However, it says it is beginning to see marginal increases in demand for its drilling services and if customers move forward with their stated plans, the company should see gradual gains as each month goes by. Even so, calendar 2009 will remain difficult. In calendar 2010, Major expects many of the supply issues, which face most commodities, to resurface and that even with moderate growth in the world economy, the need to explore and develop mines will increase, which should increase demand for specialised drilling.

There is thus little doubt that there has been a huge downturn in the exploration sector starting in the second half of 2008.  Anecdotal evidence certainly suggests that exploration drill rigs, which had been in short supply, are now readily available and this will also have affected drilling contractors' margins.  Gold has been a bit of a saviour though as the gold price has remained at a sufficient level for exploration activity to be maintained, but even so the necessity for many cash-strapped companies to reduce expenditures, even in gold exploration , will have impacted adversely work in even the most promising sectors.

What this will mean in the future is that there will be a hiatus in new mine development ahead which is bound to impact supply growth, and metals prices, as markets pick up in the medium to long term.