“IN A YEAR IN WHICH PERSISTENT UNCERTAINTY IN THE MINING RESOURCES SECTOR DOMINATED THE HEADLINES, THERE WERE MANY NOTEWORTHY BOART LONGYEAR ACCOMPLISHMENTS THAT HAVE POSITIONED THE BUSINESS FOR SUCCESS.”
Dear Shareholders
2014 was another difficult period for the mining industry and for Boart Longyear, as commodity prices continued to decline and mining companies maintained their focus on maximising near-term cash flows. This resulted in most of the world’s mining companies continuing to significantly reduce their exploration, development and capital expenditures. The vast majority of the revenues from our Drilling Services and Products businesses are related to mining companies spending on exploration and development activities. Since peaking in 2012 at US$21.5 billion, non-ferrous annual exploration budgets declined to US$15.2 billion (down 29% against 2012) in 2013 and US$11.4 billion in 2014 (down 25% against 2013). As a result, Boart Longyear and the drilling services industry around the globe have experienced signifi cant declines in drill rig utilisation rates since the second half of 2012, and those declines have continued through most of 2014. In the last quarter of 2014, the rate of decline in drill rig utilisation appeared to slow down compared to the declines experienced during 2013 and the first half of 2014. Lower utilisation rates and lower pricing continued to adversely impact the Company’s and the industry’s financial performance.
In particular, excess supply has resulted in significant price reductions across the drilling industry since the second half of 2012. While our business saw relatively flat utilisation rates during the second half of 2014, continued pricing headwinds further hurt the Company’s financial performance. Pricing has, we believe, reached a level in the industry where many drilling services companies are operating at cash break-even. In fact, a number of drilling services companies have gone into administration or bankruptcy, or have elected to shut down their activities in certain countries around the world, including Australia. Unfortunately, while our Company has been impacted by the negative financial and cash flow impacts associated with low utilisation rates and ongoing pricing headwinds, we also have had to deal with the problems of entering this mining down cycle with far too much debt. As a result, we continue to take aggressive actions to reduce our costs while we work to reduce our absolute level of debt over time by aggressively managing fixed, variable and capital costs and improving effi ciencies through several ongoing initiatives, including:
- re-examining our global operating model and underlying support costs;
- completing the consolidation of certain financial service functions and leveraging our two shared services centers to consolidate other sales, general and administrative functions;
- exiting certain loss-making drilling services projects or territories;
- controlling SG&A and other overhead related costs; and
- capitalising on our significant investment in modernising our rig fleet from 2010 to 2012, which we believe positions us well for any market recovery and reduces our expected capital expenditure requirements over the next several years.
Reducing our debt load will take time and one of our major accomplishments of 2014 was to announce in October a comprehensive recapitalisation that provides a more sustainable capital structure and better positions the Company to successfully weather the current down cycle. As a result of the recapitalisation, we no longer face the material uncertainty we faced one year ago related to our potential inability to refinance our debt. We are also much better positioned, as a result of substantial and sustainable cost reductions, to provide increased earnings and cash flow when our markets recover. Highlights from the recapitalisation include:
- US$225 million in new loan financing provided by Centerbridge – Proceeds have been used to refinance the Company’s former revolving credit facility and repurchase existing US$105 million of the Company’s 10% Senior Secured Notes. The new financing package has eliminated the restrictive financial covenants associated with the revolving credit facility, providing us with more financial flexibility and other advantages.
- Approximately US$111 million in new equity capital – New capital was raised through two private placements of ordinary shares to Centerbridge totaling approximately US$27 million and an equal-access, renounceable rights offering which totaled approximately $US84 million.
- US$16 million Debt Equitisation – Centerbridge also agreed to convert its US$16 million holding of Boart Longyear Senior Unsecured Notes into US$16 million of equity.
- Equity-funded Share Repurchase Plan – The Company also sold Centerbridge approximately 8 million fully paid ordinary shares it acquired in an off-market share buyback launched in December.
- Centerbridge Ownership in Boart Longyear – As a result of the recapitalisation transactions, Centerbridge now owns approximately 465 million ordinary shares (or 49.9%) and 434 million preferred shares, which are convertible one-for-one into ordinary shares under certain conditions.
- Centerbridge nominees join Boart Longyear Board – Jonathan Lewinsohn and Connor Tochilin, from Centerbridge, were appointed to the Board of Directors in 2014. In February 2015, Bret Clayton and Marcus Randolph also joined the Board.
In a year in which persistent uncertainty in the mining resources sector dominated the headlines, there were many noteworthy Boart Longyear accomplishments that have positioned the business for success. Those successes include our businesses’ ability to protect market share while maintaining cost, capital expenditure, pricing discipline and product leadership. During the year, our Drilling Services division won several key contracts, and our Products division continued to invest in innovative new products designed to drive productivity and safety on-site.
The challenges we faced in 2014 did not cause us to compromise our high standards of safety or governance, which are vital to our long-term success and fundamental to our culture. In 2014, we achieved a Total Case Incident Rate (TCIR) of 1.35 recordable incidents and a Lost-Time Injury Rate (LTIR) of 0.11 lost-time injuries, compared to 1.62 and 0.19 for 20131. The TCIR rate is the lowest annual rate we have experienced since 2007.
Throughout 2015, we will continue to pursue improvements in our safety performance focusing on forward-looking safety indicators, such as increased interactions between managers and field employees, disciplined tracking and remediation of risks and increased training for our field supervisors and employees. Safety performance is central to the Company’s strategy of operational improvements and improved customer relationships. Management and the Company’s employees regard safety as not only a fundamental business value but also a significant commercial opportunity and risk, as blue-chip mining customers look to safety performance as a basis to differentiate their suppliers.
As we look forward, there are three key pillars that we will remain focused on:
- Safety: Relentlessly pursue innovation to enhance safety on-site and look for continuous improvement initiatives. Safety will remain a personal responsibility and concern of each of our employees.
- Customers: Growing our relationships with new and existing customers while optimising our commercial approach to the business. Also, expanding our drilling services offerings and pricing options and consistently investing in product development efforts that respond to customer needs for safety and productivity.
- Profitability: Continue to drive efficiencies and productivity throughout the business while ensuring pricing discipline. Focus on managing working capital, maintaining disciplined capital management and controlling all of our costs.
Also, as we look forward into 2015 and beyond, I am very pleased to welcome Marcus Randolph as Chairman of the Board of Directors. Marcus joins us after 35 years’ experience in global senior executive roles across the mining sector. I would also like to thank Barbara Jeremiah and Dave McLemore for their service and guidance as our two previous Board Chairs over the last several, difficult years and also recognise and thank Roy Franklin and Tanya Fratto for their insights, diligence and unwavering concern for our shareholders during their tenures.
I also thank each and every one of our employees for their contributions to keeping our Company strong. We have worked hard to navigate through the difficult market environment of recent years. As we enter our 125th year in 2015, we are energised by a renewed vigor and discipline that we believe positions us to grow far into the future and provide increased value to our shareholders. As we celebrate the many accomplishments of our past, we are moving confidently toward the future.
Yours sincerely,
Richard O’Brien
President and Chief Executive Officer
1. TCIR and LTIR are based on 200,000 hours worked.