Drillers hurting as exploration lull continues

A stodgy market has combined with uncertainty over the future of government tax incentives to take some of the steam out of an exploration boom which permeated the Canadian wilderness between 1983 and 1987.

After spending almost $1.1 billion on exploration last year, Canada’s busiest mineral and metals explorers are now sitting back and assessing their strategies in preparation for what some observers say will be a renewed exploration drive this fall.

As a result, some of Canada’s largest drilling companies report that business is down by as much as 40% in areas like Val d’Or and Rouyn, Que., and they are having to reduce prices charged for drilling time.

Longyear Canada Inc., for example, which has six branches across the country, says only 11 drills in its North Bay, Ont., office are in use compared with 24 at this time last year. Rouyn, Noranda-based Philippon Diamond Drilling Inc. which operates in an area hit hard by the drop in exploration activity, has five of its 11 machines sitting idle.

Due to the reduced demand for drill rigs, companies like Morissette Canada Inc. have chopped their prices by as much as $4 per ft as they attempt to bid for the few available drilling contracts.

In some cases, diamond drillers are charging as little as $14 per ft compared with $20 a year ago, said Chris Gauthier, manager of Morissette’s Chibougamau, Que., branch. Diamond drills

Last year demand for diamond drills was so high that he was turning down contract offers entailing over 200,000 ft of underground diamond drilling. But times have changed and with over 70 rigs on standby, he claims to have laid off as many as 30 drill operators.

While the lack of activity is causing some concern in diamond drilling circles, industry observers say it isn’t surprising that the industry hasn’t been able to sustain 1987’s unprecedented spending levels.

“Since last year’s dramatic increase in exploration spending was fueled by fear of tax reform, it isn’t surprising that we are seeing a major correction to the normal growth trend,” said Prospectors and Developers Association of Canada Managing Director, Tony Andrews. (Exploration spending by 250 companies increased to $950 million in 1987 from $520 million in 1986 according to figures compiled by the PDAC).

Fearing that the government would begin to phase out the flow- through financing system which was largely responsible for the exploration boom, mining companies jumped on the bandwagon and exhausted their exploration budgets earlier this year, he said. MVP Capital

After raising $85 million through its 1987 partnership, Canada’s third largest exploration fund, MVP Capital Corp. could only raise $26 million in the 1988 Partnership because of the perception that flow-through would be phased out on June 30. The deals were structured so that all the money would be spend by the June deadline. “When the deadline was extended, there was nothing we could do about it,” said MVP President Ian McAvity, who called 1987 an aberration (in exploration terms) that will never be repeated.

Under the flow-through system which is being wound down Jan 1, investors were entitled to a tax write-off of $1.33 for each $1 spent on exploration in Canada.

Now that the federal government has announced plans to replace the old flow through financing system with a new scheme called the Canadian Exploration Incentive Program, the industry should see a consistent increase in exploration over the next three years, said Andrews. “But we won’t be able to confirm that until CEIP is in place.”

Scheduled to kick in on Jan 1, 1989, it will allow mining firms to claim 30% of grass-roots exploration costs up to $10 million per year. But since the federal government hasn’t yet spelled out how it will operate as an investment vehicle, CEIP may not work as well as the flow-through system said Bob Peters, manager of Midland Doherty’s Timmins office. Available properties

According to Peters, even if they can arrange for the necessary financing the number of available properties has been depleted by a 2-year exploration binge in which over 250 mineral exploration companies spent $1.5 billion.

“We are seeing a lot of small junior exploration companies raising small amounts (in the $400,000 to $500,000 range) while the larger juniors are finding joint venture partners to avoid dilution,” he said.

Nevertheless, all of the drilling companies which The Northern Miner talked to are confident that activity will increase during the fall and winter months.

“Everyone is going back to the market to raise funds but it will take a while before the effects are felt,” said George Copper, a branch manager in Longyear Canada’s Timmins, Ont. office.

“Most of the companies are putting their houses in order in preparation for a major push in the fall,” he said.