Tough times for drillers in 1H 2013

Delays to the start-up of drill programs will translate into a weak first half of 2013 for drilling companies, CIBC analysts forecast in a new report.

The analysts predict revenues for the drilling companies they cover will fall by about 18% year on year and believe that while activity will pick up in the second half of the year, “access to capital for the junior and intermediate mining companies remains a key in determining the extend of near-term drilling activity increases.”

In a survey of the exploration budgets of sixteen major and intermediate mining companies covered by CIBC mining analysts, the report concluded that for the majors, on a total dollar basis, the decrease in exploration budgets from 2012 to 2013 is about 10% and for intermediate companies the figure rises to about 32%.

The analysts estimate that 2013 revenues for Boart Longyear (BLY-A) will fall by about 9% year-on-year; while revenues for Major Drilling (MDI-T) will fall 16%; for Foraco International (FAR-T) (15%); and for Orbit Garant Drilling (OGD-T) (24%). As a percentage of revenue, the study adds, the majors account for about 80% for Major Drilling and more than 80% for Foraco and Orbit Garant.

While they predict utilization rates for the drillers will get better in the second half of 2013, the challenge, they say, is figuring out by how much.

“The question becomes will utilization rates improve to the point where the drillers re-establish pricing power for their drilling services,” they write. “While there have been reductions to exploration budgets among the majors, we believe, as a group, they still provide a solid revenue base for the drillers.”

The real key to creating more drilling activity, they argue, lies with the junior and intermediate companies, and specifically whether they can raise money.

“After showing an uptick in financing activity in December 2012, there has not been a strong follow through thus far in 2013,” they write. “That said, if there is a sustained pick-up in financings, we believe the junior and intermediate companies would more readily deploy that capital for exploration purposes.”

The analysts have cut their 12-18 month price targets for Major Drilling to $12 per share from their previous target price of $13 per share and from $3.75 to $2.50 per share for Foraco.