After a lengthy downturn across the industry, Orbit Garant Drilling (TSX: OGD) drilled more metres in fiscal 2017 than during any other year since the peak of the last cycle in fiscal 2012.
The company still posted a net loss of $5.9 million — or 17¢ per share — in fiscal 2017, which ended on June 30, but the fourth quarter marked the company’s tenth consecutive quarter of revenue growth.
“Demand for our mining drilling services continues to grow as the mining sector commits more money to exploration and mining development,” Eric Alexandre, the company’s president and CEO, tells The Northern Miner during a recent marketing trip to Toronto.
Drill-use rates have increased since the third quarter of fiscal 2015, he says, reaching 66% in the fourth quarter of fiscal 2017, up from 52% at the end of the first quarter. (By contrast, drill use was just 31% in the second quarter of 2014.)
And while pricing remains competitive across the industry, Alexandre says he sees pricing improvement in the company’s new contracts in Canada, which coincide with increasing use rates. He says the drilling services market is showing signs of life again, and the outlook will continue to get brighter as companies gain greater access to capital for exploration.
“In the last upcycle we were able to double the size of our company’s revenues, and we think we can do it again in a positive market,” says the Val d’Or-based driller. “In 2007 our revenues were about $70 million and they got up to around $156 million in 2011–2012. We were dragged back down to $80 million in the last drill cycle, but last year we posted $125 million in revenues, so we’re set up now to probably double that.”
Orbit Garant took advantage of the last downturn to make strategic acquisitions. In December 2015, it created a foothold in South America through its acquisition of Captagua Ingenieria, a Chilean drilling company based in Santiago, with 180 employees and expertise in surface drilling, water drilling and equipment.
In November 2010, the company acquired specialized technologies and equipment through its purchase of Advantage Control Technologies, a tech company based in Sudbury, Ontario. The deal provided Orbit Garant with base technology, from which it developed a line of underground rigs fitted with computerized monitoring and control.
The company is one of Canada’s largest drilling companies, with a fleet of 221 surface and underground drill rigs. It also designs and makes its own surface and underground drill rigs — often with customized features for customer projects — via its wholly owned subsidiary, Soudure Royale.
Alexandre says designing new rigs or modifying existing ones in-house to meet clients’ project requirements is a huge advantage. In some cases, it can make modified rigs at a fraction of the original cost and with a lead time as short as two weeks for a surface drill and one month for an underground drill. (Designing a next-generation computerized drill rig can take closer to a year.)
So far it has produced three generations of computerized underground rigs, one of which, the YU 1800, was made for the special needs of Anglo American (LON: AAL; NASDAQ: AAUK) at its Los Bronces project in Chile. The YU 1800 can drill deeper with larger diameters and also drill holes upward.
“They were looking for a company that was able to drill underground on a bigger HQ size and drill up from underground,” he says. “They were looking for a drill good for up to 600 metres and this machine didn’t exist in the industry, so we custom-built a rig to perform this kind of work, and we’re still working with them.”
Orbit Garant has 32 computerized drill rigs, all of which are for use underground. It also has several computerized surface drill rigs, but they are being used for training drillers and for research and development.
“Manufacturing new computerized surface rigs or retrofitting existing conventional surface rigs and deploying them to customer project sites is an important future growth initiative for the company,” Alexandre says.
Of its total drill fleet, 90 are underground drills (including 72 electric drills and 18 air drills) and 131 are surface drills (including 124 hydraulic drills and seven reverse-circulation drills).
Roughly 79% of the driller’s work is in Canada and 21% international, spread across Chile, Peru, Guyana, Burkina Faso, Ghana and, until recently, Kazakhstan, where it has completed work for Glencore (LON: GLEN) and is leaving the country.
Alexandre says his goal is to grow the company’s international work to 25% of the company’s revenues, with the rest stemming from Canada.
Majors and intermediates make up 79% of its clientele, including Goldcorp (TSX: G; NYSE: GG), Agnico Eagle Mines (TSX: AEM; NYSE: AEM), BHP Billiton (NYSE: BHP; LON: BLT), Hecla Mining (NYSE: HL), Anglo American and Glencore.
Orbit Garant’s two largest customers represented 29% of total revenue in fiscal 2017, Alexandre says, adding that it’s “important to note that these are long-term, or recently renewed, long-term contracts.”
Alexandre says that 75% of the company’s drilling involves gold and the rest is base and other metals. That positions the company well with the upturn in the gold market, he says.
The company has access to a $25-million revolving credit facility maturing this December, of which $13.6 million has been drawn down. Orbit Garant is in discussions with the lender to amend and renew the facility.
Alexandre’s father, Bernard, and uncle, Pierre, founded the company in their hometown of Val-d’Or in 1986, and were later joined by another uncle, Richard. All three men, now 69, 59 and 54, are still active in the company today, as are many cousins and other relatives.
“They built crews with family members — brothers, kids, cousins,” says Alexandre, who first worked for his father cleaning rigs in the family garage in his early teens. Now 41, Alexandre went on to study accounting at university (working as a driller in the summers) and became a chartered accountant. After a stint as a controller for a lumber company, and later as an account manager for National Bank of Canada, he rejoined the family business as a general manager.
In 2006, the company started a training school to teach skills to new drillers, and, in 2007, the family business merged with another family-owned drilling company called Garant & Brothers. Alexandre took the new company Orbit Garant public in a $60-million initial public offering (IPO) in 2008—the last IPO on the Toronto Stock Exchange before the financial crisis.
“We survived the financial crisis and we’re still in business,” Alexandre says. “We expanded the company in Canada and internationally. We know the industry — we are all former drillers — and that’s what differentiates us from many of our competitors.”
The company has 36 million common shares outstanding that are trading at $1.85 apiece for a market capitalization of just under $67 million. Insiders own 30% of Orbit Garant’s 38 million fully diluted shares.
“We have skin in the game — we like the industry and we’re passionate people,” Alexandre says. “We’re really excited about what’s coming up in the year ahead because of the health of the industry, and we see big potential.”