AN INTERVIEW WITH FRED DAVIDSON
PRESIDENT AND CEO WITH ENERGOLD DRILLING
(As of March 31, 2009)
We are here with Fred Davidson, who is the boss of Energold
Drilling, a story we’ve been writing about a lot lately because
we figure with gold attracting so much attention, sooner or
later the drillers are going to be very busy trying to find out
whether all those gold miners have what they think they
have…or not.
David Pescod: Now Fred, you’ve just come back from a trip
to New York and you are telling us that a lot of the financial
types in that City are acting as if it is the end of the world.
Fred Davidson: Yes, it was quite interesting. The feeling
was definitely suicidal. On the good side, they were looking
at alternatives to the U.S. dollar and they are looking at any-
thing in terms of mining – specifically precious metals.
D.P: Now let’s talk about the precious metals. A lot of the
gold miners have had seen their stocks bounce lately and a
lot of them are now getting financed. So do you see yourself
a lot busier down the road?
F.D: Gold and silver used to be about 50% of our business
and I think it is going to get up to about 70% of our business.
Two reasons. One, companies can obviously get financing
and get the rigs out there, and two there are still a lot of
gold miners producing gold and not replacing it. As you
know, companies traditionally look around head frames to
replace ounces and people like Goldfields, etc., who are big
producers, simply haven’t replaced them. How many major
discoveries have been there in the last five years? Almost
nil. So what they are doing is going into places that they
haven’t traditionally gone before because of constraints
whether it be environmental, social or infrastructure and
quite frankly that’s what we call “Frontier Drilling” and that
is what we specialize in.
D.P: You have lightweight equipment and you notice the
difference between your type of equipment and the tradi-
tional bigger equipment. What is the difference to those new
to the business?
F.D: Our equipment is actually modularized. That is, we can
break it down into pieces that are less than 400 pounds.
We can carry it into a site without having to build roads
(especially if there aren’t roads there in the first place) without
doing any significant environmental damage and we use the
locals to help us do that. So we’ve made a positive social foot-
print and we leave a very small environmental footprint. We
get to the site and we basically assemble the rig right on site.
It only takes us 45 minutes. And that rig, with our latest ver-
sion, will get down to 800 metres which is pretty deep consid-
ering in mining, you’ve got to go down and get it. These rigs
are probably marginally faster to drill with and certainly as
efficient as a conventional rig. So it allows us to deal with cli-
ents who want to go into these areas and especially the ma-
jors, who are always concerned about the impact they make.
We can do it with a very gentle hand.
D.P: You’ve spread out your equipment over quite an interest-
ing geography of the world, haven’t you?
F.D: We have. I guess it’s to places you wouldn’t want to visit
as a tourist. That’s also an indication of where the mining
companies are going now to make the next big discovery.
Gone are the days where they sort of explored in our backyard.
Places like the Democratic Republic of Congo, Colombia,
throughout Africa, Madagascar and through South America
and even some of the areas where we drill in Mexico are up in
the high Sierra Madres, which you simply can’t get into any
other way. Most of our jobs consist of one and two rigs at a
time, not ten or 20. As a result, we have developed a unique
logistical support system in order to keep rigs going that have
two-day plus trips in from the nearest roads. We specialize in
it, we charge a premium for it (obviously) and we do a darn
good job doing it.
D.P: Now we hear that you have about a quarter of your rigs
turning right now, which is a double from just a few weeks
ago. How do you see usage by mid-year and of course this is
a straight-forward business – if there are a lot of rigs busy, you
are making a lot of money…
F.D: You are right. Right now our industry is very cyclical.
For about a month on either side of Christmas, we don’t drill
period. So, January we never drill and in December we are
very slow. We normally expect to see the rigs turning or start-
ing to turn February/March and this year has been a little de-
layed because a) the juniors aren’t there to fill in the gaps and
b) the majors like everybody else was wondering what was
going on. We normally negotiate our contracts with the majors
in November/December and this year we negotiated with them
in January/ February. So everything has been set back a cou-
ple of months. On a going-forward basis, we are seeing an
awful lot of activity out there. I suspect by mid to late summer,
we are probably going to be back to normal utilizations with all
of our rigs.
D.P: Of course it is tougher times around the world in every
business, are you able to get what you hoped for on rig rates
these days? Or is everyone looking to get a deal?
F.D: Well there are a lot of people looking for deals out there.
We traditionally try to balance our drilling between frontier-
style drilling where virtually nobody else can drill and drilling
at mine sites where conventional rigs drill.
The frontier drilling always has a premium because of where it is and how it is. In fact, there is a lack of competition.
We are not seeing a lot of pressure on frontier drilling at all. People are just happy to be able to get into the site.
Whereas at the mine site drilling, where 90% of all the drills work, the pressure is there. We are seeing pricing pushed
back by traditional clients and quotes are quite aggressive by competitors. The advantage from a Canadian point of
view is that most of our pricing is in U.S. dollars. So where we’ve seen pressure on pricing coming back at us, we are
also seeing a gain in the U.S. dollar which is probably up 10% over last year. Overall, I think our margins aren’t going
to be substantially impacted by the pressure.
D.P: I understand offsetting of this is that suddenly you can get all the pros’ you want at decent hourly rates?
F.D: On a daily basis, they are calling us looking for work. What we are doing as a result of this is that we are able to
upgrade the overall quality of our team. Last year we were certainly getting diluted with the pressure from people just
bidding anything to get a driller on site. This year we are able to select and make sure we have the most professional
drillers you can get. Middle management is still a group which is always hard to get. In prior years, down hole sup-
plies, where suppliers couldn’t get the equipment to us or the prices were rising, was the issue– that is no longer so.
Now it is just up to us to get out and market the product.
D.P: This is a tough question to answer as everyone’s crystal ball is quite different, but how do you see the world
economy recovering and what do you see for gold, base metals and other prices down the road?
F.D: We get a fair degree of opinion, as you can imagine because we are dealing in about five continents with about
20 clients at any one time. One guy who did the analogy the other day says it’s like a pilot that’s just pulling out of a
steep dive and now he is ducking the tree-tops trying to get control. What we are seeing at this point in time, is a de-
mand out there for commodities in a couple of places. One – we still haven’t replaced the depleted reserves that the
majors have and they do have depleted reserves. Two – we are seeing demand in areas like iron ore, where people
are not looking to current prices, but are looking ten years out because that’s how long it takes to put an iron ore pro-
ject into production. Three – we are seeing an interesting trend and I’m not sure most people are aware of it. The Chi-
nese are taking what they think is an overly strong U.S. dollar, and converting it into hard assets in terms of commodi-
ties. We’ve seen that in Africa and we are seeing that in South America where they are actually buying up properties
and companies with U.S. dollars and securing their access to commodities ten and twenty years out. If that trend con-
tinues, it certainly is going to provide a market for juniors to once again to get back in the field and start looking for
discoveries. So we are fairly positive. We don’t think this is going to be as steep a recovery like the Crash was. We
are sort of looking at stabilization at this point. We are going to see highs and lows over the next months, but by fall,
we are anticipating that we are going to be looking at a recovery of the industry on a graduated basis over the next
two years.
D.P: Does the company have any debt?
F.D: In terms of our balance sheet, we have been very cautious about that. We probably ended the year with a work-
ing capital of around $50 million – almost half of that is cash and we run a very careful balance sheet. We have abso-
lutely no long-term debt. Our determination is that this is not a business that can afford financial risk. There is
enough risk in the industry as it is but going forward, we see positive cash flows for the balance of the year.
D.P: You’ve got a lot of clients in the mining business and we don’t want you to get into their bad books, but if you
had to pick an exploration play and also a mining situation out there that you would recommend as a stock buy, which
ones would they be?
F.D: That’s hard because we have a lot of good, quality clients out there. Off the top of my head…as you know we’ve
taken a position in one right now – Tirex Resources which I think has a talented management team and an excellent pro-
ject. There are quite a few mid-tier coming on that have good management, good solid mines operating who aren’t in
the top tier yet, but certainly have the potential and I would say Eldorado Gold would be the other one in terms of the
mining side.
D.P: Thank you very much Fred!