* Drilling company sees trend supporting gross margins
* CEO to manage rig utilization rate to boost profit
* Boart looking for large acquisition, CEO says
By Euan Rocha
TORONTO, March 5 (Reuters) - Boart Longyear, the world’s largest mineral exploration drilling company, says companies are likely to keep spending more on finding new resources this year, a trend that could boost its gross profit margins, its chief executive said.
Demand for Boart’s drilling services and its drill products is growing, and its order backlog in both business units has risen, Chief Executive Craig Kipp said during an interview at PDAC, the mining industry’s largest annual gathering.
“If costs stay in line - and that’s a big question here, both on materials and labor - then there is probably no reason why we won’t see gross margins moving higher,” Kipp said.
The convention, organized by the Prospectors and Developers Association of Canada, brings together delegates from around the world with ties to the industry, from geologists and CEOs to mining ministers and drillers. The Toronto event, which opened Sunday, attracted more than 26,000 attendees last year and an even larger turnout is expected this year.
Boart, which traces its history back over a century, reported record-high revenue and profit in 2011. Gross profit margins, which averaged 25 percent in 2010, rose to 28 percent in 2011.
Looking ahead, the company has forecast annual revenue rising almost 15 percent in 2012 to $2.3 billion, as demand remains robust.
“The big three are still solid: Canada, the United States and Australia,” said Kipp, referring to the countries that typically have attracted the most mineral exploration spending. “What’s changing though is we are seeing a lot of money flowing into Africa and South America.”
“Chile may be the hottest demand market in the world right now, bar none,” said Kipp. “And that’s saying a lot.”
A study by the Metals Economics Group released on Sunday, shows that global exploration spending rose 50 percent last year to $18.2 billion, and the industry consultancy forecasts further gains in 2012.
“We don’t see anyone lowering their exploration spending, we see a lot of them in fact going up 10, 20 or 30 percent this year,” said Kipp.
Despite a dramatic surge in exploration demand, Boart’s rig utilization rate, a measure of the number of rigs in use, only averaged about 75 percent in 2011, and the company intends to keep utilization rates at around these levels, said Kipp.
“It is a lesson I learnt during the last boom in 2007-08. We chased revenue, but at the end of the day we didn’t generate a lot more in terms of profit margins for our investors,” he said.
“It’s kind of like a factory,” said Kipp. “When a factory runs at 78 percent capacity you make a lot more money than, when it runs at 90 percent capacity, because you are over-driving the machines and paying more overtime.”
“To some extent we did that in 2007-08, so we are now managing our growth and that’s helping our bottom line,” said Kipp, who sees the company’s adoption of a new Oracle software system also helping it boost both its competitiveness within the market and its efficiencies.
Despite the existence of a few other large players, such as Major Drilling, Foraco and Energold Drilling , the global mineral exploration drilling sector remains fragmented and any consolidation is welcome, said Kipp.
After a series of small acquisitions in the middle of the last decade, Boart is now on the look out for a larger acquisition, said Kipp.
“What we are really interested in would be a large acquisition, something that actually moves the needle for Boart Longyear,” said Kipp. “And if you are going to buy somebody, you got to look at someone who is in Africa and Latin America.”