Little relief seen from industry downturn

The Canadian diamond drilling industry has plunged into another economic downturn and things could get worse before they get better. Tim Bremner, general manager of Logan Drilling and outgoing president of the Canadian Diamond Drilling Association, said member companies are feeling the pinch of declining revenues as mineral exploration winds down across the nation.

The largest contributor to this downturn was the phasing out of the flow-through share financing mechanism which had provided a tremendous burst of prosperity to the drilling industry for the past five or six years. This popular tax- reducing incentive channeled unprecedented amounts of money to mineral exploration across Canada, which in turn generated increased revenues for diamond drillers.

But the brief cycle of prosperity also brought a raft of small independent diamond drillers on the scene, and new equipment, so that competition for jobs among contractors is now fiercer than ever.

With too many drillers, loaded up with equipment, chasing too few jobs, the laws of supply and demand have kicked in to make the bidding process more competitive than ever, as companies fight to survive. A few years ago, diamond drillers were hard pressed to keep up with the demand for jobs and drills.

Bremner said the member companies hardest hit were those based in regions where flow-through financings brought about the biggest boom, particulary Quebec and the Maritimes.

“The effect on our business of the ending of flow-through was much greater in some areas than in others,” said Bremner at the association’s annual meeting, held recently in Vancouver.

British Columbia, for example, was a relative latecomer in the flow- through-generated exploration boom which, for one reason or other, channeled most of the funds to Eastern Canada, particularly Quebec and Ontario.

Although activity has now dropped off dramatically in much of Eastern Canada, B.C. is, by comparison, still reasonably active. However, most of this activity has been concentrated on several large exploration or development projects involving precious metals and/or base metals.

“B.C. is more dependent on base metal exploration which wasn’t funded as heavily as gold exploration, so it has a broader base to work from,” Bremner explained. “It has a healthier mining environment with some hard dollars being invested by the major mining companies. We think it’s going to stay busier here longer.”

In recent years, the fortunes of the diamond drillers have become intertwined with the fortunes of the junior mining sector. An unprecedented number of junior companies flourished and prospered in the flow-through years, but an industry shake-out is taking place and there is much less money available for exploration.

In addition to the end of flow- through, juniors will soon no longer have the Canadian Exploration Incentive Plan, a grant system which is being phased out by the federal government. A gold price below US$400, easing base metal prices, and lackluster equity markets have also made life tough for junior companies these days.

“The fact that juniors can no longer get financing as easily has had a dramatic impact on us,” Bremner conceded. “There is still some flow-through around but we have noticed a decrease of somewhere between 40-60% in levels of activity.”

And Bremner said the association is not expecting much recovery in the next 12-18 months.

“Some people say we haven’t hit bottom yet — some say we’re at the bottom now — but I tend to think we’re close to the bottom but not there yet. It could even get slower.”

While it has come as no surprise that exploration spending has slumped, last year drillers were expecting to be kept busy in 1990 with underground work as new mines, found and developed by flow-through funds, were brought into production.

That hasn’t quite been the case. A recent study by Metals Economic Group, Potential New Canadian Gold Production revealed that only 99 gold projects were in reserves development, feasibility or pre- production stages in early 1990, compared with 167 projects reported at the same time in 1989.

According to the study, the dramatic rise in the number of inactive gold development projects is largely the result of the decreased availability of flow-through funds and the relatively low gold prices throughout much of last year.

Add to this a number of mines that came on stream, failed to live up to expectations, and were closed. It appears safe to assume that new mine projects will continue to decline in the years ahead.

The only bright spot has been increased spending by major mining companies, most of which returned to healthier profits in the past several years with improved base metal prices.

But, almost in tandem, these same major companies have been reporting reduced earnings for the 1990 first quarter. The demand for, and prices of, most base metals has been easing in recent months as North American economies slow down and edge closer to the threshold of a recession.

“We are optimistic that the budgets of major mining companies will be maintained at healthy levels for at least the next few years,” said Bremner. “But after that things could change.”

Faced with all these economic uncertainties, Bremner said association members will place increased emphasis on increasing productivity to remain competitive and survive the downturn.

“In our past down-cycles we’ve always come through with some technological innovation that has increased productivity,” he explained. “So, once again, we will be looking to increase productivity by better equipment, safer working methods, and better utilization of our labor.”

Drill manufacturers, for example, are already busy developing a new generation of “higher productivity” hydraulic drills, although they recognize there is still a surplus of conventional equipment available.

On the other hand, wages aren’t expected to come down much as most member companies maintain a standard wage, recommended by the Canadian Diamond Drilling Association.

“We don’t cut our costs by reducing our wages to our field employees,” Bremner said.

But most member companies, including Logan Drilling which has offices in Nova Scotia and Newfoundland, have already experienced significant layoffs for both field employees and office and support staff.

“We are operating now with a skeleton crew in order to maintain some level of profitability,” said Bremner.

Member companies — many of which are large contractors in business for decades — are also finding tough competition in the bidding process for jobs from the smaller, independent drilling contractors.

So it comes as no surprise that some Canadian diamond drilling companies — both contractors and suppliers alike — are now looking at potential markets for their goods and services outside Canada.

“Canadian diamond drillers are recognized as some of the best diamond drillers in the world,” Bremner said. “A number of Canadian contractors have had overseas operations for a number of years, which have provided stability when domestic markets are quiet as they are now.”

The U.S. market, however, is considered to be well-serviced by local contractors and saturated with drills, so most companies have turned their attention to Latin and South America, Africa and the Middle East.

At home, productivity improvements are likely to be the order of the day for surviving the rough times ahead. But don’t look to the Canadian Diamond Drillers Association to endorse a move to one- man drills.

One of the more controversial presentations at this year’s conference examined the use of a specialized one-man drill in a Canadian operating mine under test conditions underground. According to the company involved in the new drill’s development, Longyear, there was little difference between its production performance and that of a traditional two-man operation.

“Our industry does not support the one-man operation at all because of safety concerns,” Bremner emphasized.

Brian Tricker, corporate product manager for Longyear, stressed in his presentation that the company does not advocate the use of one- man drilling operations.

Diamond drilling is still considered a hazardous business, so the Canadian Diamond Drilling Association has worked hard in the past several years to improve its safety record.

“We have made significant improvements in reducing our accident frequency in the last two years, mainly because compensation costs have skyrocketed,” Bremner said.

For example, the association is now looking to have the Ontario Compensation Board reassess its group rate, currently at the 16%- level, as was promised if its safety record improved.

“We’ve achieved the reduction in our accident frequency, but we’re still waiting for a corresponding reduction in the assessment rate,” Bremner added.

Along with safety issues, diamond drillers and the Canadian Diamond Drilling Association expect they will also be dealing with environmental issues on a larger scale than in the past.

Bremner said drill contractors are conscious that they are often the most visible people on the scene when concerned citizens arrive on an exploration site, and are aware of the importance of carrying out the work in a environmentally proper fashion.

“We respect the environment that we work in; we cut trees properly and only what we need; we don’t alter water courses, and we’ve switched completely from soluble oils to biodegradable lubricants.”

Land use conflicts are also of concern to the Association, according to Bremner, because potential land use restrictions, more expensive environmental requirements and tougher permitting procedures make it difficult for junior companies to develop mines.

On these types of issues, the Association lends its support to the lobbying efforts of other like- minded groups such as the Prospectors and Developers Association of Canada.

“We rely heavily on juniors for business,” explained Bremner. “And if it’s made very difficult in Canada for juniors to develop mines, they are not going to bother even looking.”