Tough times for drillers in early 2013

Delays to 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 18% year-on-year, and believe that while activity should pick up in the second half of the year, “access to capital for the junior and intermediate mining companies remains key in determining the extent of near-term drilling activity increases.”

In a survey of the exploration budgets of 16 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 10%, and for intermediate companies the figure rises to 32%.

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

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

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

They argue that creating more drilling activity depends on whether junior and intermediate companies 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 add. “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- to 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. Their target price of $2 per share for Orbit Garant remains unchanged.

Major Drilling is their top pick among mineral drillers, they say, because of its “strong balance sheet and upside to better market conditions.”