Boart Longyear weathers downturn

When Richard O’Brien left his post as CEO of Newmont Mining (NYSE: NEM; TSX: NMC) in December 2012, after five years in the job and seven at the company, he wasn’t ready to “hang up his pick” just yet.

But the 59-year-old knew he wanted a different kind of challenge, and so agreed to take the helm of international drilling and product services firm Boart Longyear (ASX: BLY; US-OTC: BOARF) and help the company navigate an industry downturn — the likes of which the mining veteran says he hasn’t seen in his nearly three decades in the business.

The global downturn’s impact on mining activity has been swift and painful for drilling companies like the Utah-headquartered Boart Longyear. The company has 45% of its drill rigs operating — down from 75% in June 2012. And its drill-rig count has fallen at the same time, from 1,200 to 1,035.

At the end of August 2013, O’Brien announced cost-cutting measures amounting to US$90 million — following the US$70 million in cuts unveiled in December 2012 by his predecessor. Both rounds of cuts have been made, and the company is on track to realize the initial US$70 million in savings by year-end.

The cost-cutting has been felt across the company,with the headcount plunging from 11,400 in June 2012 to 6,300 today. And Boart Longyear has chopped its operating and capital costs. For the 12 months ended June 2013, the company spent US$1.7 billion, down US$400 million from the US$2.1 billion it spent during the 12 months ended June 2012.

In an effort to take the pressure off its balance sheet, Boart Longyear announced a US$300-million debt offering last month to pay outstanding loans under its revolving credit facility. “It doesn’t mean we’re bulletproof for the next decade,” O’Brien says in an interview. “But we are pretty well-positioned to weather a more prolonged downturn, which gives me confidence about the most important things, such as focusing on customers, employee safety, and being as efficient as we can be — so that every dollar of revenue we get will be used for the bottom line and to pay off debt.”

O’Brien adds that “we’re in much better shape than we were, say, two months ago.”

O’Brien says that the company, which earns 75% of its revenue from drilling services and 25% from drilling products, first noticed the downturn in the U.S. and Australia, but today the impact seems to be the worst in South America, where in some cases use rates for its drilling services have fallen below 30%.

Looking ahead, O’Brien is reluctant to forecast when business might improve, but notes that the “market is declining maybe at a slower rate than it was in May, June and July.”

And given the seasonally cyclical nature of the drilling business, he expects use rates will keep trending downward before next year. Drilling activity “won’t pick up to the 70% utilization rates that we had in 2012,” he concedes, but he does believe things will improve in the medium- to long-term — but whether that is in 18 months, 24 months or 36 months, he isn’t willing to hazard a guess.

“I have a firm belief that the market will improve — the question is when,” he says. “It will improve because mining companies need to replace their reserves, which means they will continue to spend on exploration. Over time they will be back in the market, maybe not in June 2012 numbers . . . but I do believe that we will see spending cuts reduce over time.”