A lot of people in the mining industry are suffering these days, but none more so than Canada’s diamond drillers.
Known throughout the mining world as the best in the business, Canadian drilling companies in 1992 are hurt by a triple whammy of reduced exploration budgets, a shift in exploration to other countries and a continuing hangover from the heady flow-through days of the late 1980s.
Shrinking exploration budgets are a cyclical matter. When metal prices are weak, mining companies simply don’t have the cash flow to maintain strong exploration programs and investors have little interest in funding grassroots plays. Given stronger economic activity, however, a growing demand for metals should revive prices and stimulate mineral exploration.
The shift to other countries is more worrisome. It reflects a growing inability of mining companies to do business in Canada.
Some Canadian drillers will easily adapt. For them, working in foreign countries is nothing new. Many have done work offshore for larger mining companies in the past and have already established a good reputation in Chile, Brazil, India and other countries. For the smaller companies, however, getting contracts abroad requires a major effort and the allocation of a large proportion of their resources. It’s not simply a matter of going to another country and picking up whatever work is available.
Meanwhile, in North America, projects requiring diamond drilling are getting more difficult to find. Comparatively high tax levels are one reason. For example, the overall tax rate in Chile and Mexico is 35% compared with 51%in British Columbia, 49% in Ontario and 44% in Quebec. Is it any wonder that mining activity is moving elsewhere?
And finally, as a backdrop to the industry’s other problems, there is the legacy of flow-through financing and the over-capacity it engendered among diamond drillers.
In the late 1980s it was almost heresy to speak against flow-through, the system of financing that provided a tax deduction to individual investors equal to 133% of what they invested in Canadian mineral exploration. Given an arbitrary deadline by which companies had to spend the millions of dollars raised through flow-through, mining promoters couldn’t dispose of the money fast enough. Even though the cost of drilling rose dramatically, the demand was insatiable. The result was that the drilling industry’s capacity grew dramatically. Drillers prospered and few questioned the long-term effect of flow-through.
Now, even the Canadian Diamond Drillers Association bemoans the flow-through heyday. “We became spoiled by a system that was doomed from its outset,” said CDDA President Frank Nolan at the association’s recent annual meeting. Definitive statistics on the drilling industry are difficult to come by, but CDDA tries to keep a tab on activity in order to measure long-term trends. According to reports from its members, there was a total of 9.5 million ft. of drilling completed in 1987. By 1991 that had fallen to 3.2 million ft. A lot of that excess capacity still exists. When exploration activity picks up, the industry will have to absorb it before it can really prosper again. Mining has always been a cyclical business, and the current cycle will eventually turn up. This time around, however, Canada’s diamond drillers are going to have to wait a little longer to enjoy the recovery.
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