Major Drilling sees surge in rig demand

TORONTO Tue Mar 22, 2011 5:14pm EDT

Major Drilling Chief Executive Officer Francis McGuire poses for a picture during the Reuters Mining Summit in Toronto, March 22, 2011. Major Drilling has been surprised by the rapid ramp-up of demand for its mine-drilling services this year, the mirror image of a collapse in demand in late 2008, its McGuire said on Tuesday. REUTERS/Mark Blinch

Major Drilling Chief Executive Officer Francis McGuire poses for a picture during the Reuters Mining Summit in Toronto, March 22, 2011. Major Drilling has been surprised by the rapid ramp-up of demand for its mine-drilling services this year, the mirror image of a collapse in demand in late 2008, its McGuire said on Tuesday.

Credit: Reuters/Mark Blinch

TORONTO (Reuters) - Major Drilling (MDI.TO) has been surprised by a rapid ramp-up of demand for its mine-drilling services this year, the mirror image of a collapse in late 2008, its chief executive said on Tuesday.

"We lost 65 percent of our business in 90 days and it looks like it's all coming back in 90 days," CEO Francis McGuire told the Reuters Global Mining and Steel Summit.

"It's an explosion of juniors. It's not stopping," he said, adding that majors and exploration companies were also vying for the company's services.

The Moncton, New Brunswick-based company has grown since the early 1980s into the world's second-largest provider of drilling services to miners, behind Salt Lake City, Utah-based Boart Longyear (BLY.AX).

"It takes three to five years to train a driller," McGuire said. "We're just not going to be able to ramp up the number of drillers to meet demand."

McGuire said the company could easily have a much larger number of rigs, but it lacked the crews to operate them.

The company sees prices for drilling services rising this year as utilization rates increase. He said the full benefit of this would not be reflected until 2012, as half its rigs had been contracted before the demand surge began early this year.

"This is going to be, (over) the next six months, a very difficult ramp-up period," McGuire said. "Before you get the full impact of pricing, it will be 2012."

Shares of the company, which were up early, fell almost 3 percent after it indicated that the benefits from the surge in demand would not be reflected in its results for a few months yet. They closed down 2.44 percent at C$15.97 in Toronto.

LABOR COSTS

McGuire, a former provincial politician who joined Major Drilling about a decade ago, said its margins were being pressured, as the company had been forced to increase wages faster than normal in an effort to retain talent.

But margins will begin to expand as the company pushes through price increases when it signs new contracts with miners later this year, McGuire said. He added that the company would look at contracting out some of its rigs on a day-rate basis as utilization rates creep higher.

McGuire noted that the industry moves fairly cautiously while pushing through price increases to miners.

"There's an expectation that pricing's going to hit our financials right away," McGuire said. "But that 30 percent we lost on pricing (in 2008) usually takes three years to get back, so that will give you an idea."

That said, McGuire argues that the industry is in a much stronger bargaining position now than it was two years ago.

The biggest challenge by far, McGuire says, is retaining talent within the company.

"I can go round Toronto all I want and try and find somebody," he said. "But give them two weeks with the freezing cold, the rain or the blackflies and they're going home. They've got to go see their girlfriend and that's it."

(Reporting by Euan Rocha, Matt Daily, Julie Gordon and Pav Jordan; Editing by Dale Hudson)