The world’s largest drilling company, Boart Longyear, has positioned itself to weather the difficult markets and emerge a leaner, more efficient company that has taken to heart lessons learnt in its recent overleveraged past.

CEO Richard O’Brien said the company was now positioned to perform better with its significantly reduced cost footprint.

“The plan is to keep the costs permanently off the balance sheet, even in the event of a rebound in market conditions,” O’Brien, who joined Boart Longyear this year from gold mining giant Newmont Mining, told Mining Weekly in an interview last week.

He blamed overenthusiastic outlook assumptions for the debt blowout and spending that left the company exposed to the recent downturn.

The Utah-based and Australia-listed company last month finalised the issuing of $300-million in senior secured notes to retire most of its $450-million in debt.

Despite the newly issued notes bearing a 10% coupon, the debt restructuring would give Boart at least some relief from debt covenants that had cast an uncertain shadow over its immediate future.

Boart functions as something of a bell- wether for the mining industry. In February 2012, the company announced record revenues of $2.02-billion for the 2011 financial year.

However, by August 2012, Boart could see what many others in the industry had not yet seen: a looming downturn, indicated by a drop in future contracts. At the company’s half-year earnings report that month, it cut its earnings outlook for the 2012 financial year by $300-million, making Boart the first firm of any significant size in the mining sector to signal the coming trough.

Resources Sector Boart’s businesses have been hard-hit by the downturn in the resources sector, with demand for its drilling rigs falling. Utilisation rates across its fleet have fallen from about 70% in June last year to just 45%, and the group cut more than 5 000 jobs, which saw its headcount plummeting from about 11 400 to about 6 100 during the same period. This was nearing levels experienced during the global financial crisis of 2007/8.

O’Brien said the company had managed to cut about two-thirds of its costs in recent times, shaving about $400-million off its expenditure in the last 12 months, and that it aimed to reduce costs by another $200- million. Boart had also shelved or cancelled about $2.1-million in capital expenditure.

“Moving forward, we will focus on keeping the reduced cost structure in place and never again allow it to expand. A focal point will be to continue reducing debt during any potential uptick in the market to better prepare the company for the next cycle,” he said.

Boart’s latest balance sheet issues were similar to those it experienced after its original ASX listing in 2007. The group, which once had a market capitalisation of more than $2.3-billion, was forced into an emergency equity raising at 85% of its issue price in 2009, after the global financial crisis hit.

Light at the End of a Long, Dark Tunnel?

O’Brien said the pace of the decline in demand appeared to be flattening out.

While it was too early to see the bottom of the trough, he said the rate of decline had slowed somewhat; however, a seasonal decline in contracts was still ahead as a result of the year-end holidays and the traditional activity scale-back during the northern hemisphere winter.

O’Brien pointed out that Boart’s consumable drilling products arm was seeing signs of a return of customers that previously had been destocking, and drilling services were expected to begin ramping up again early next year.

O’Brien confirmed that its clients, both big and small, had in general moved away from high-risk greenfield and brownfield projects, noting that the “big spending” was now almost exclusively focused on clients’ exiting operations.

“While our revenue stream is made up of about 30% greenfield projects, and the rest being brownfield and other revenue sources, the high utilisation rate of our underground drilling equipment could be a sign that companies are focused on sustaining their existing operations,” he said.

When asked about which world region he expected to see the most growth from in coming months, O’Brien pointed to South America as having the most potential for business recovery. He said the region had seen the most significant decline, and a number of positive factors were set to usher in a dramatic rebound of the region.

Among these confidence-inspiring factors were positive legislative reforms and expedited permitting in some countries, he said.

O’Brien added that established markets, including Australia and the North Americas, were also bound to generate significant business once a global economic recovery got under way. Recovery in the riskier jurisdictions in Africa and Central Asia was expected to take longer, being dependent on investors’ appetite for risk.

Boart’s ASX-listed shares had lost nearly 80% of its value from the start of the year, and hovered around A$0.425 apiece last week.