A Forecast for the Drilling Market: Funding and ProjectsThu, 10/17/2019 - 13:31
Q: From your vantage point as a leading drilling solutions company, how would you assess the uptake of the mining industry in Mexico?
A: Two years ago, the mining industry bottomed out, but every company has since been lifted up by the rising tide. Nevertheless, many exploration companies still cannot raise significant funds. They are trying to drill and keep their exploration activities going but fundraising is a challenge. The capital markets right now are not looking favorably at mining, and a company really has to be attractive and hold a good property to get financing. What we are finding is that more mid-tier clients are growing. They have to replace reserves and their issue is that as metal prices fall, their definition of the reserve’s cut-off is higher. The reserve base is falling and because of that, they have to spend money to widen it. There are two things driving this issue. Raising money has to do, primarily, with the Canadian market. The Australian market does not raise money for Mexico and private money is not going into mining. What we are seeing is a change in our mix. The juniors are not here and the intermediates are. The large ones like Fresnillo, are participating a bit with us but I am sure they are looking over their shoulder right now due to the political environment. The landscape is certainly better than in 2016 but we have not achieved a fully healthy market yet.
Q: What is the state of your current global operations and what are your plans in the Mexican territory?
A: Globally, we have 260 rigs but half of them are on energy projects. Some of our markets in South America are dead because of political issues. In West Africa, we are just recovering from Ebola. A great deal of work stopped there for three years. We are starting to see a recovery there but those countries are in total disarray so it is very difficult to work. Mexico is probably our biggest market. We see some hesitation regarding the political environment and the juniors are still having trouble raising money, but we will probably have about 40 percent of our rigs working in Mexico by April 2019 and this will be a function of the acquired contracts. Lately, we are signing a series of small contracts, which are easier for the client to cancel at any time. This is reflecting some uncertainty and it will be interesting to see what happens over the next months in Mexico.
Q: How does the company arrive at the right financing?
A: We have financing, but the problem in our business is working capital. In the last year and a half, we have expanded revenue by over US$20 million. This is receivable; when you run into juniors, they take much longer to pay than they used to. Rather than being paid in 60 days, now it is 120 days, which represents a third of a year. We are looking for working capital to continue growing. It is an issue that we have always worked with in the industry. If you look at all the major companies, their revenues are up, margins are still very tight and clients are looking for drilling companies to finance. With juniors, you have to identify which company is potentially raising money.
Q: How do you foresee the development of your business in 2019?
A: I believe 2019 will be a tight year for operators, unless there is an upturn. As a result, market players might go for further compression of pricing. This is one reason we developed the Badger 2 underground. This equipment will save mine operators a considerable amount of money; rather than using the traditional big rig that goes underground, it works as a surface rig but it is cheaper and the process of going in and out is easier. The machine is still capable of drilling what a conventional rig can drill.
Energold also wants to help its customers in other areas, like program planning. For instance, we worked with a client that has financial constraints and helped it reduce costs up to 30 percent. We usually charge for costs and overhead expenses, while adding a profit margin. This means that the more cost a company can absorb from expenses such as fuel and logistics, the less our company will charge on overhead profit margin. This strategy works very well for us because we can work on what we do best: drilling.