Summaries of Dicore International Case Study

* Dicore, a leading global drilling services provider in mining and water projects, was one of the largest drilling service providers in the world, with a presence in 27 countries across five different continents. * The company’s expected equipment utilisation rates were sub-par, but senior vice president was optimistic about expansion in southwestern US. * Senior vice president had to outline the expansion strategy with risks and action to tackle risks.

The Mining Industry

* The profitability is highly dependent on considerably fluctuating mineral price. The macroeconomic (supply and demand) trends had impact on mining industry. The decisions of extend of investment rely on prices, which even lead to stopping mining certain materials. * In the US, gold (54% of spending) and copper (31% of spending) are more in exploration market. In Canada, gold (49%) and copper (2nd driver). * In 2012, total nonferrous exploration spending increased to $21.5b, when $17.25b increase in 2011. * Industry condition in 2013 was less favourable. Mining industry profits in 2012 fell to $68b (49% drop), leading to decreased industry-wide spending in 2013. Annual capital expenditure across the top 40 mining companies was projected to be $110b in 2013 (21% drop from 2012), resulting from fewer profits. Stock price dropped 20% in season 1 of 2013, when overall stock condition was very good that S&P 500 was up over 14% by May 2013.

Mineral Drilling Service Providers

* Drilling service providers are hired by mining companies. * Reasons why need drilling service:
Mineral exploration
Gaining access to groundwater or draining groundwater
Blasting or ventilating underground mining operations
Drilling service providers are expertise. And equipment is pricy (some over $3m).
A slow process in remote areas.

Customers

* 1st, a RFP was issued about the scope of the work, then contractors provide proposals with details and price per meter. Finally, payment was made. * Dicore’s customers:
Majors: large, international mining companies, who had experiences, offer $5m annually, look at bid price, drilling companies’ safety record and the quality. They preferred to use same contractor.
Juniors: start-ups, who usually offer contracts spinning 6 months with $250,000, which is relatively low, but higher price per meter.

Drilling Technologies * Core Drilling (Diamond Drilling): Analyse a sample of the earth to determine the content of this ground. Cost $800,000 and highly skilled operators, who will have bonus based on depth. So they usually drill quickly to maximise bonus, leading to equipment being worn out fast. * Rotary Drilling: A destructive process that passes through ground to reach solid rock (mineral), also can be used to find groundwater, which is necessary in mine operations. Cost $3m, various utilisation, more advance and specifically skilled operators who are hard to find due to high price of equipment. Price may change and fewer companies offer this.

Dicore International * History
1963 - 2012: Water well drilling, 1963 (Public → Privatised, 1997), in Europe and Africa until hiring Calvin, 2006. Enter mineral exploration in 2006, then acquire small companies and opened Dicore’s Canadian, 2007 when sold shares on Toronto Stock Ex to raise capital to make more acquisitions: 2 in Australia, 1 in Brazil, 1 in Chile.
2013: $0.97 per share (kept raising steady since lowest $0.50 2008, but dropped from $5.12, 2012) and 80m share outstandings. Operations were divided 5 regions: Europe, Asia Pacific, Africa, Latin America, North America, all have own regional office autonomously and head office was in Europe. * Dicore North America: 2 offices (Western Canada and Easter Canada). Revenue attributed solely by mineral exploration. Operated in the US (most in northern Minnesota) by using Canadian assets and personnel since 2007. But Calvin believed if Dicore re-enter in the US, permanent operation should be established.
2012, North American division competed in core ($42.7m revenue, $12.85m cost, 6 drills) and rotary drilling ($21.3m revenue, $30.74 cost, 33 drills), while international drills were 330. Fiscal 2012 utilisation rates were 45% for core, 85% for rotary, Far lower than what Calvin liked! * Paul Calvin

Drilling In The Southwestern United States * Requirements
Difficult ground conditions in southwestern US and lots of ground water need high operational standards. Low grade and highly fractured deposits. The use of mud, additives, stabilisers and high skills were needed. Global shortage of drilling personnel (lack of experienced and competent drill operators) complicated operations without exception.
The mines needed extensive drilling during whole mining life. Other area in the US was ‘single purpose’ (only 1 kind of drilling), Calvin thought too many operators in this area.
Drilling license required before operating. Several grades of licenses – mining, oil, gas, water to do a full range of drilling service.
Environmental regulations in that area were high, but not follow international trends. But some procedure should follow highly required regulation in that area. Drill may shut down due to conditions, when violating a regulation, and client and contractor faced legal issues. Companies were responsible for recovering environment, some even bankrupted due to this.

Competitors * About 400 drills by 25 companies in southwestern region. Dircore’s 2 primary competitors (international companies): Boart Longyear, Major Drilling Group International (MD). Dicore competed with them in several countries around world. * Boart Longyear: 1,000 employees, over $2b revenue in 2012, the largest drilling service provider in the world with manufacturing its own equipment and selling them to others. It had lots of expertise and drilling services. But it had been struggling in southwestern region for years, due to high turnover and loss of experienced management. * Major Drilling International Group (since 1980): 2nd largest drilling service provider, Cdn$700m last year, with various services, but less reputation and experiences in rotary. It entered that area by acquisitions of smaller companies, became a primary company in that area as a core driller. * Others: Balance of competitors was smaller, operating 4 – 20 drills each. Usually run by BL or MD former employees locally, due to unwilling from employees to work in distance, while Dicore operated in other areas around world. 3 competitors: TonaTec Exploration (core), National EWP (core & rotary), Blackstone (rotary), were able to compete in hard projects, due to long-term relationships with majors.
Calvin believed they didn’t embraced trends in markets, so HSE performance below average.

Future Prospects * Dicore’s earning fell below expectation, share price reached lowest point. So it’s important to increase drill utilisation and minimise capital expenditure. Lock in contracts for 2014. Choose contracts that can promote potential shareholders in 2014. So need to ensure any expansion can serve by the end of 2014. Location of expansion should be based on current location where had half of mineral exploration in the US, to choose the best expansion. * Organic Growth
Begin by only core drilling with 4 drills ($475,000 each) and ancillary equipment ($225,000 per drill) transferred from Canada, due to cautions of high capital cost with rotary.
Expected long-term utilisation rates of 55%, but possibly 40%. Each drill gave $1.3m revenue annually, when 80% use rate. Transport fee $200,000. In-hole tools $100,000 per drill (bought in southwestern region). 5 vehicles ($40,000 each). Leased office and set-up ($50,000).
2 drill crews for 12-hour shifts, 7 day work. 1 driller, 1 drilling assistant for each drill. A foreman for 1 day shift. 5 crew members for same time 7 days work for 6 weeks, then 3 weeks off. Driller $37 ph average, assistant $24 ph. Foremen $475 pd. Depreciation, cost of sales 7% of revenue. Fuel, maintenance and other consumables 20% of revenue on credit. 40-day for receivables, 45-day for payables. JIT inventory.
5 ancillary employees (1 divisional manager $120,000+$30,000 bonus annually, 2 mechanics $100,000 annually, 1 secretary $40,000 annually, 1 administrative $50,000 annually). 20% for salaries.
3 months for finding employees, 2 months for working on 1st drill. Expected 20% hurdle rate, 5-year payback period. (This is Minimumal.) * The Blackstone Opportunity
Acquisition
Management

Decision