Don’t scare off mining producers with confusion on future royalties and taxes, Major Drilling tells Quebec
“In Australia, a key market for our drilling services, we’ve seen new business drop by 50 per cent since the public debate between federal and state governments on royalty rates became critical, so just don’t follow them,” McGuire said after addressing a Montreal investment group.
“The pre-election talk about raising Quebec royalties on mineral production from 16 per cent to 30 per cent is best forgotten,” he said. “Mining always was a highly cyclical industry and many commodity prices have come under pressure just when costs are rising rapidly.”
Major Drilling, which last year bought Rouyn Noranda’s Bradley Group Ltd. for $95 million to boost business in the gold mining camps of Northern Quebec and Northern Ontario, is the world’s second-biggest drilling services firm with operations on six continents, a 5,400-strong payroll, 739 rigs and a 72-per-cent utilization rate for the most profitable specialized high-tech units.
Specialized services include deep drilling ( almost 3,000 metres), directional drilling and remote and high-altitude operations. Its equipment can take on virtually any geological challenge working for gold, copper, iron ore, coal, uranium, zinc, nickel, energy and other commodities.
Almost half of Major Drilling’s $237.6-million revenue in the first quarter (July 31) of fiscal 2013 came from drilling and other services sold to gold miners operating in North America, Latin America, Africa and elsewhere. The topline was up 45 per cent from a year earlier and about half the gain came from the addition of Bradley. Earnings were a record $31.9 million or 40 cents a share, up from $17.9 million or 25 cents a share.
But McGuire is cautious about the rest of fiscal 2013 and beyond.
Giant gold producer Barrick Gold Corp. must replace 7 million ounces of bullion dug out each year from its global mining network and large new reserves are now found in increasingly remote areas where exploration and production costs are high.
He doesn’t doubt long-term demand for metals will continue to surge higher with population growth and urbanization, but this year’s slowdown in China, slow recovery in North America and Europe’s public debt crisis have made it very difficult for small mining companies (up to $50 million in annual mining revenue) to raise finance.
“This is affecting our business, though demand from intermediate-size and large companies should hold up for the main winter exploration season despite higher energy and materials costs,” he said. “It’s the smaller ones that are taking it on the chin.”
In the first quarter, senior and intermediate producers accounted for 74 per cent of revenue and junior companies, 26 per cent.
McGuire noted Major Drilling came through the severe 2008 financial crisis in good shape and is now a much bigger company. “We’re facing the present slowdown with only $15 million of debt (net of cash), allowing us to respond to any opportunities as they arise ... 20 per cent of our revenue now comes from drilling non-metallic projects.”
He has reduced Major Drilling’s annual capital spending to $70 million in fiscal 2013 from the previous estimate of $100 million. The conventional drilling fleet will continue to be modernized and training extended.
Orbit-Garant Drilling Inc., focused on the Quebec gold mining industry with a fleet of 224 rigs, told a similar story last week. Revenue for the year ended June 30 was $154,8 million, up from $127.7 million a year earlier. Junior mining firms were being forced to cut back exploration and development spending in the final quarter because of tight financial markets.
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