June 08, 2010

Cabo Drilling Sees Demand For Rigs Rising Throughout The Rest Of This Year As Capital Drilling Lists In London

By Charles Wyatt

Since John Versfelt switched the focus of Cabo Mining Enterprises back in 2004 with the acquisition of two Canadian drilling companies he has built a multi-ability drilling organisation that is up towards the mid-tier, though a long way way behind giants such as Boart Longyear, Layne Christensen and Major Drilling. Not only does Cabo Drilling now provide mining related and specialty drilling services throughout Canada from its divisions in British Columbia, Quebec, Ontario and Newfoundland, but it has also set up operations in Mexico, Panama, Spain and Albania and it also operates in the US and is moving into West Africa via Ghana. The secret of success is that it does not depend solely on the mining industry, but has the knowledge and experience to offer its clientele a variety of drilling services, including surface and underground coring, and directional, reverse circulation and geotechnical drilling.

Cabo’s range of ability helped to protect it during the dog days of 2008/9 when all mining companies, big and small, cut back on drilling to conserve cash. Now things are looking better according to the Metals Economics Group which, in its March-April 2010 Review, pointed out that the number of significant financings announced by junior and intermediate companies increased 14 per cent in the last period to 129, while the amount of money raised almost doubled to US$3.4 billion, returning to the levels of the second half of 2009 after a sharp drop at the beginning of 2010. For the first time since May 2009, base metals financings in April accounted for just over half of the monthly total raised, and bimonthly total amount raised in base metals financings in March – April 2010 is at its highest amount since the MEG survey begin May – June 2008. Both the proportion and amount raised through debt also increased significantly in March – April 2010. As long as funds are becoming available for exploration the outlook for drilling activity is good.

Talking of financings, it is timely that a company called Capital Drilling is just listing on the Main Board in London after raising £13.6 million in what are acknowledged to be not very easy conditions given that base metal prices have fallen by 21 per cent since April as recorded by the LME Index. Based on this funding the company is capitalised at nearly £83 million. Most of the money will be spent on new drilling rigs and associated equipment and around £2 million on refurbishing existing rigs. Capital owns and operates a fleet of 64 drilling rigs with established operations across countries in Tanzania, Zambia, Egypt, Pakistan, Mozambique, PNG, Eritrea, Hungary and Chile. Its corporate headquarters is in Singapore and it has administrative offices in South Africa and Serbia. The press release explains that drilling services are required by the minerals, environmental (including water) and energy industries but is sparse on hard facts. Eventually Clayton Bush sent over a copy from the company’s broker Liberum and it then became possible to do a quick comparison between Capital and Cabo as the company’s website is, to coin a phrase, as bare as a badger’s backside – no financial results and no presentation.

There is no doubt that Capital is the bigger of the two in term of revenue and profitability and it tends to stick to eight or more large mining companies which are the core of its customer list. In the press release it claims to have established operations in Mozambique and Eritrea but a little study of the website shows that it only went into Mozambique with six drills to work on two projects in July of last year and into Eritrea last November to work for Chalice Gold. A word with Tim Goyder, executive chairman of Chalice Gold reveals that this seems to be Capital’s only operation in that country, though it also works for Centamin Egypt a few hundred kms to the north. He explains that Jamie Boyton the executive chairman and Brian Rudd the chief executive are two Australians who set up Capital Drilling ‘four or five ‘ years ago and he is delighted to hear of their success. A call to Singapore confirms that neither of them are there which is no surprise as they are probably celebrating in London as another 11.7 million shares were placed at the same time to give the lucky founders £7.2 million.

Both companies have a wide geographical spread of operations, but Cabo is only capitalised at around C$11 million and it has 114 rigs while Capital is capitalised at £83million and has 64. John Versfelt makes the point that it is expensive to commence operations in a new country and usually takes two years before cash flow turns profitable. It is also complicated to bring equipment through customs , build up local drilling teams and arrange the overall logistics. This is why he focuses on countries he knows and thinks long and hard before moving elsewhere, unless it is just over the border. During the March quarter Cabo’s revenue was virtually level pegging with the same quarter in 2009 but John Versfelt points out that it is normally one of the slowest quarters due to the reduced activity because of seasonal conditions throughout Canada.

He went on to say when announcing the results at the end of last month “at this time, the company has drills operating in all operating regions. Drill utilization has increased in all divisions, with newly signed contracts in Newfoundland, British Columbia, Mexico and European divisions and a more substantial increase in the Ontario division. We expect modest revenue growth over the balance of the year.” He goes on to explain that drilling is a funny old business as there is always a competitive squeeze when demand is ramping up after a significant downturn. Customers expect lower prices, but the labour force wants higher wages. This sorts itself out provided companies stand firm over pricing and wait for utilisation of drills to improve. This is now happening and he expects pressure on margins to lessen during the rest of this year.

John goes on to elaborate by saying that he anticipates revenue of at least C$40 million in the year starting at the end of this month with 60 drills working. That still leaves plenty of capacity so more contracts can be undertaken and this could move revenue towards the C$58.6 million achieved in the year to end July 2008 when EBITDA was C$3.9 million. He sounds quietly confident and keeps raising a bit of money – C$870,00 last December and C$918,000 last month. In the year to end December 2009 Capital made pre-tax profits of US$6.559 million on revenue of US$59 million which, it has to be admitted, was a lot less than in 2008. Clearly Cabo is geared more highly to the level of activities among smaller companies, but it could be coming into its own next year if metal prices turn up again. The question that has to be asked if whether Capital is rated too high in terms of market capitalisation or Cabo too low. Only time will tell with Capital, but it will certainly help to focus the attention of investors on Cabo.