Cabo Drilling Corp. (TSXV:CBE) is a drilling services company that focuses on core drilling, tree falling, and clearing. The company has 93M shares issued and the same number fully diluted. The current market cap is around $2M. As of December 31, 2016, the company had $265K cash, with $12.3M total current assets and $11.6M of current liabilities. You can find more information on the company’s website here.
Read on for the full transcript of my interview with Mr. John Versfelt, CEO of Cabo Drilling, to learn about the history of the company, where they are today, and where they are headed in the future.
PB: Hello, John. Thanks for joining me to talk about Cabo Drilling.
JV: My pleasure, Peter.
PB: The first time I encountered Cabo was at the VRIC, a few months ago. I was impressed by your booth with the drill rig. You were the only group that had such large equipment on the conference room floor and I hadn’t seen much of that before.
JV: If you go to the PDAC in Toronto, then you would see much more of it there. The Cambridge House event is typically not a venue for service companies or suppliers. However, they asked us about 5 or 6 years ago to consider bringing a drill rig in to be part of our booth because we are specifically focused on the mining sector. We have done so ever since.
PB: I had a chance to go to Roundup for the first time this year and saw some drilling equipment there. Very cool stuff. I think the ice roads were the favourite thing I found while I was there. Do you go to PDAC?
JV: Yes, we've been going there as long as I can remember.
PB: I imagine it would be pretty important for you to have a presence there.
JV: We get to meet existing clients, clients we've had in the past, and new potential clients. The conference is really split into two parts: the service companies and the suppliers in one sector, and the public companies in the investment sector. That is different from Roundup, which is primarily meant for service providers and suppliers. There are a certain number of juniors who are displaying their core at the core shack at Roundup, but it is meant to be something different from Cambridge House.
PB: I talked to some of the prospectors down by the student poster area of Roundup and that was great.
JV: They will have something similar to that at PDAC, as well.
PB: I will admit that these public drilling companies are something new to me. I was under the impression that most of the drilling is done by private companies.
JV: You're right. The majority of drilling companies in Canada are private.
PB: Any comment on the story behind when you went public and why?
JV: Actually, I was the only one employed by Cabo at the time. We were called CABO Explorations, although we went through a few different names prior to that. Essentially, we were an exploration company from 1992 to 2004 and then became a drilling company. The impetus to become a drilling company was the need for cash flow. My background has been to provide CFO, COO, and other administration services to public companies. I have been doing that since 1982. As a result of that, I have experienced five or six different cycles -- downturns and upturns. To continue to exist in this environment, through the downturns, is near to impossible if you don’t have either cash flow or a very significant treasury that can allow you to last for four, five, or six years in a downturn.
JV: After evaluating the different possibilities in the mining sector, I observed that the highest percentage of dollars spent in mining sector are spent on drilling. Well over 50% of all the dollars spent at the exploration and development stages are spent on drilling. Having observed that, I decided I would focus my energy on acquiring drilling companies, instead of acquiring a mine. I didn’t have the capability of raising forty or fifty million dollars in the downturns of the market to by a mine, so I decided that I would focus on buying drilling companies. I interviewed or met with drilling company owners across Canada for about two years.
JV: There were, eventually, two drilling companies that agreed to be acquired, provided that I could convince the appropriate people in the financial community to finance the prospect of buying drilling companies. One of these drilling companies was located in the Atlantic provinces and the other was in Ontario. These two companies offered a good presence in their respective areas. After that, I spent a ton of time trying to raise money. Fortunately for me, a newsletter writer, Jason Hommel, was attracted to the story and ultimately helped me raise about $4.5M. In addition to that, there was a corporate finance person with Research Capital in Toronto who helped me raise another $3M to close the transaction and on July 1, 2004, we became a drilling company.
JV: Initially, we had only two Cabo employees. When we acquired the drilling companies, we acquired the employees, as well. Ultimately, we grew the business from about $20M in revenue to about $58M in revenue over a period of 4 years. Then, we were hit in 2008 by the bank meltdown. It has been a very difficult time since then. We had a bit of a rebound in 2011, but then everything crashed in mid-2012 and we are only now beginning to see a return of the dollars into the exploration and development sector, to the point where we believe that our revenues can start growing again. Our revenues dropped to around $15M, so we lost 75% of our revenue. Now we are starting to rebuild.
PB: Good for you. What an amazing story.
JV: I appreciate that. It's been very difficult.
PB: So many questions come up for me around your experience. People from the early days, whether the financing or operation side -- any comment on how many people have stayed with the company?
JV: We have had a very significant loss of people, by design. Our primary operations are now in Latin America, in Panama and Colombia, which is where the majority of our people are employed today. Of the original group from 2004/2005, there are maybe 10 or so people left with the company.
PB: I wonder about that newsletter writer -- I don’t recognize that name.
JV: Yes, he is still around. I would say that he doesn’t have any stock whatsoever in the company, but I believe he made some good money on it. Jason focuses on silver, which is actually the reason why he initially showed an interest in Cabo. When we started in the drilling business, we owned a significant land package near the town of Cobalt, Ontario. After the transaction was done, we sold that property to a sister company about two years later. We did a bit more work on the property but, in the end, we decided that we couldn’t find the silver deposits we were looking for, terminated our exploration program, and gave the properties back to their respective owners.
JV: Jason Hommel was initially interested in the company because of the silver property. Then, when I told him the story of what we were attempting to do, he thought it was a pretty interesting story. We were only the third minerals/metals drilling company to become a public company at that time. Since then, there have been several others. At that time, Major Drilling and Energold were the only other public drilling companies in the minerals sector.
PB: I seem to recall some stories of Major Drilling, but don’t know much about it. The name seems to live on in legend.
JV: Major Drilling is a very well-run company and they are very large. They have a significant capital base. Their IPO was $40M or $50M. They did very well. They are either the second or third largest core drilling company in the world. Boart Longyear is the largest. They were a private company, but they went public in 2007 or 2008, I believe.
PB: I see almost 4,000 employees for Major Drilling there. Wow. To what degree did they do acquisitions?
JV: One of their most significant acquisitions was a company that was based in Manitoba in the late 1990s. It was a very significant Canadian acquisition. They initially acquired several drilling companies in the 1980s in the Atlantic provinces when they were private. The company started in the Atlantic provinces. An accountant had them as a client as a private company, then they made big acquisition of Midwest Drilling somewhere around 1998.
PB: Yes, that sounds familiar.
JV: They also acquired a significant drilling company in the Northwest Territories, which provided their major lift in the North when it was bolted on to the Midwest Drilling Acquisition. They did very well with that.
PB: And were they using equity financing to do those deals?
JV: Yes.
PB: Well, that comes back to the question of surviving. When you combine these drilling companies, you get a larger capital base that may provide sufficient treasury to survive for several years, but that is not guaranteed. A question for you: Do you think the companies that Cabo acquired would be having a hard time surviving if they had not been acquired?
JV: I am afraid to say that it probably would have been worse for them. The three companies we acquired were Petro Drilling, which has nothing to do with oil and gas, Heath and Sherwood, and Advanced Drilling. The mining markets were hit in 2008, but then really started going downhill after 2011. It literally shook up the entire mining sector -- not only in Canada and the USA, but globally. It hit every commodity, including diamonds, industrial minerals, etc. Canada has a very significant number of drilling companies and they have all suffered. To give you some idea about the numbers here, there are around 800 odd drills represented by 60 or 70 companies in Canada from Red Lake to the West Coast. Less than 10% of those drills, say 80 odd drills, were drilling in 2015. That includes underground and surface drill rigs.
JV: There was a similar decline in the East, but with a bit of a twist. The twist is that the majority of the drilling companies that exist in the East are in Quebec and the French-Canadian drilling cut their rates very severely. We just can't compete against them. The result is that the majority of drilling companies had a very difficult time surviving.
JV: To answer your question: if those other companies had continued to exist in that period of time, then their operations would have been significantly curtailed. To give you a bit of context here, our revenue in the last quarter was around $3.3M but only $200,000 of that was in Canada.
PB: That is quite telling. I wonder if the other Canadian drilling companies have picked up on that opportunity that exists globally?
JV: Yes. Major Drilling, Energold, Boart Longyear, Foraco, and Orbit Garant all operate internationally.
PB: At the start, you mentioned how the lion’s share of exploration spending is spent on drilling. I wonder if there is another analogy that the lions share will be spent globally, rather than in Canada.
JV: To a certain extent, that is the case. However, the markets are coming back now with increased financings for mining and exploration and there are some very good projects in Canada that are being financed. This will lead to some increases in business for drilling companies, but those projects already have drilling companies. They will probably increase the number of rigs on each project, but it is unlikely that they would change drilling companies.
JV: There are other projects that are getting financings that were not able to get financings from 2014-2016. Their projects warranted financing, but the financial community was not interested. Now they are interested and you are starting to see more money coming into the system, but it is not enough to say that the demand outstrips the supply at this time. Right now, there is still more supply than there is demand in regards to the Canadian drilling scene.
JV: The two major areas that supply drilling people, equipment, and everything that is needed to support the drilling industry internationally are primarily Canada and Australia. Most drilling companies are either Canadian or Australian.
PB: Any comment on China, broadly?
JV: For one thing, we would never go into China. We have no interest.
PB: Are there other places in the world that you purposefully avoid?
JV: Yes, everything in Asia.
PB: Are you exclusively focused on Latin America?
JV: No, we also look to Europe and Africa. We don’t have anything in Africa at this time, but we would consider it. Our markets are Canada, USA, Latin America, and Europe. We would not consider doing business in Brazil or Venezuela because of corruption, or Argentina because it is too far away for us to manage. Chile and Peru also have very significant competition, which precludes Cabo from working in these countries. Our focus is mainly Colombia, Ecuador, and Central America.
JV: We have an operation in Eastern Europe in Albania. We have drilled in Spain, Portugal, Greece, Italy, Turkey, Albania, and are now going to start drilling in Kosovo. We have an interest in the European market. At some point, we will take a closer look at Africa.
PB: Sometimes I feel like there is a chicken and egg problem. If you can't get the teams into the places, then you can't build up some interest in exploration for these areas.
JV: That's correct. It's not just the drill teams -- you need the drill suppliers, as well. If those suppliers are not available, then it makes the life of a drilling company very difficult.
PB: There have been stories of carnage in the global shipping industry. Are things still functioning well for you guys?
JV: There are always ways of getting things done. We are able to function properly in places like Panama, Colombia, and Europe.
PB: Well, I imagine that there are some great lessons hidden in your business there.
JV: Without drilling, you're not going to know about a deposit that cannot be supported by revenues. Drilling companies are at the forefront. We feel the pain earlier and we don’t necessarily see the gain as fast as some of the mining companies. We can get pinched from several directions. Clients are very demanding in a downturn, as well as upturns. We can lay people off and decrease rates during downturns, but a company does not do that immediately, which creates timing difficulties and extra costs. Then, when the upturn happens, the people employed can demand a higher wage, but the mining companies are reluctant to pay a higher price and that causes difficulties, as well. The suppliers tend not to decrease their prices because their costs continue to stay the same or go up, so you don’t get much relief from the supply side, either.
PB: I can see how people in equity markets could kick you around or take the drilling companies for granted, which is problematic because the whole mining industry runs on your back to some degree.
JV: It is a large responsibility and it doesn’t necessarily pay well enough to overcome many of the challenges. At the same time, the industry needs drilling people. There is a role there, but it is a difficult one. This is one of the reasons why I am working on diversifying the company. I don’t want to be held to the demands of the mining companies, strictly as a core drilling company.
JV: We are working on a variety of areas. We continue to talk with potential candidates who could work with us to expand our tree cutting and clearing business, which we operate in Panama now. Also, we are interested in expanding into the drill and blast business, particularly the blasting side of the business. The whole area of water management intrigues us, which has all kinds of spin-offs in terms of infrastructure services.
PB: Good to hear that you are moving forward on those things, that is important for surviving over the long-term. I notice that the balance sheet does not have long-term debt.
JV: No, but it does have significant debt that we have to deal with. We are continuing to keep all parties onside, but we need to find the avenues that will enable us to raise some money to clean up the business and make acquisitions.
PB: Well, I expect your experience will prove helpful with all of that. Some people involved in exploration seem to like stories that flirt with danger, or stupidity, but I noticed Cabo has a good safety record. Any broad comments on that?
JV: We have a very good safety record. We don’t take significant risk. One of the reasons why we have the clients that we do is because of our safety record. I spend a significant amount of my time in Panama and Colombia, where I run the operations down there. In Panama, for example, we have well over 3.5-million man hours on that site and have 8 lost-time accidents in the 9 years that we have been there. None of the accidents are serious -- there were 2 concussions, 1 broken collarbone, a couple of broken ankles, and several minor muscle issues. The total lost time is less than six months over a period of 9 years.
JV: We are working in an area that has significant challenges, it is a dense jungle with thick canopy and high volumes of rain. We are working in areas with much saprolite, which gets very slippery when it is wet. We have set in place a whole series of procedures that enable us to work safely. We are dealing with many variables and our people are all well-trained to be productive and safe. We do not function as a bunch of cowboys. We are very concerned about safety. We have zero tolerance for alcohol and zero tolerance for drugs. We have a very good track record in that respect.
PB: I wonder about running a global business and keeping those standards with an international workforce.
JV: Each country has its own rules around hiring practices for local people and expatriates. Typically, a company like ours goes into a new country with people who have certain skillsets that can be taught to the local people. When a drilling company starts working in a new company, the percentage of expats is higher, but the goal is always to hire as many local people as possible who can be trained the Cabo way. Once they have the skillsets we require for drilling or tree cutting, we can decrease the number of expats.
JV: In Panama, we have approximately 110 people working for us and there are about 9 who are expats. The idea is always to train and hire locally, as much as possible. Eventually, only the senior supervisors and management will be expats. We don’t plan to have 100% of the people from the country -- we will always retain a certain amount of people that are expats. The other important point is to understand the culture and the labour laws of the country that we would be working in. This is imperative for success.
PB: And you are really quite committed to that location, in some sense.
JV: We are not as committed as the mining company because the mining company actually develops the ground and stays for the long-term, as a result. Eventually, our services are no longer required and we focus on other projects.
PB: Do you generally locate for a particular client, or are you picking locations based on some strategic planning? That ties into a broader question about the pipeline of customers, too.
JV: Typically, we will go into a country because we are looking at a client that is already in that country and trying to convince them that we are a good alternative for them. We worked with a Canadian client in Spain and have expanded in Europe since then. In Panama, we started working for a Panamanian company, who I knew well, and then progressed to securing another large Canadian client and have worked for other clients in the country. In Colombia, we started with a Canadian client and now have developed the business with a variety of clients. Each circumstance varies, but we typically have a customer lined up already because it is expensive to go to a new country to develop business without at least one client.
PB: That comes back to the idea of surviving the lean times: you want to be there to provide the services to the companies when they need them, but you also don’t want to get over-extended. Well, thank you very much for taking the time to introduce the company to me, John.
JV: You’re welcome, Peter.
