Are Australia’s drillers ready for a battery metals frenzy? Without a healthy drilling industry, the dream of a robust energy metals sector in Australia will remain just that: a dream.
Australia is relatively blessed in having a minerals sector that is well-supplied through decades of mineral exploration which, so far, has served the battery minerals sector well. From a plethora of global services companies to small-time operators without so much as a website, Australia has an experienced drilling industry used to inhospitable conditions.
It’s why every year, particularly in the north of the country, there’s a mad scramble to secure rigs.
But if rigs are already relatively booked out, what happens should an increase in orders come through from the battery minerals sector? What if Australia moved, rapidly, to develop the minerals needed to turbo-charge a battery industry in Australia?
After all, according to Geoscience Australia¹, Australia has: the third-largest reserve of lithium; second-largest resource of copper; largest reserve of nickel; second-largest reserve of cobalt; and seventh-largest reserve of graphite.
Are Australia’s massed band of drillers in a good space to cope with extra demand? Answering that question means figuring out what their order books currently look like.
For that, there are no better people to ask than the drillers themselves.
What’s Keeping Drillers up at Night?
The current state of play
The Australian Drilling Industry Association is the peak body for Australia’s drillers, running the full gamut from drilling contractors to suppliers and runs about 800 members deep.
Peter Hall, the organisation’s CEO, told New Energy Resources that the outlook for drilling, grand geopolitical shocks notwithstanding, was pretty good.
“What our members are saying is that they're expecting [this] year to be pretty similar to where we are now,” he said. “The bigger contractors especially have got really full order books, so they're comfortable with what they've got.
“It looks like it's going to be fairly stable [this] year, definitely.”
The stats back him up.
The latest release of figures from the Australian Bureau of Statistics² indicate that the level of investment in exploration has been steadily increasing since 2015.
Even in the last quarter, seasonally adjusted expenditure rose by $31.1 million to $673.7 million -- while metres drilled was largely unchanged in the latest quarter, but that too has been steadily increasing since 2016.
It all equates to an environment which has been fairly rosy for drillers over the past couple of years.
“Rig utilisation is currently running at about 75 percent, which is reasonable,” Hall said.
For comparison’s sake, full utilisation is something around the 90 percent mark while during the doldrums in 2015 utilisation was running at about 35 percent -- a period which has left the industry with a few scars.
The junior exploration sector, being one of them.
“What we’re seeing is that junior exploration sector is still struggling to get funding. That end of town is struggling, and that's because investors are very risk averse with anything to do with mining,” Hall said.
“So drillers who work in that sector are still suffering a fair bit. Drillers working for the big mining companies are doing well because they're [the bigger miners] funding their own exploration.”
Hall also said beefing up various exploration incentive schemes would help stimulate the smaller end of the market -- but there are some things which need to be solved by the industry itself.
Margins and Relationships
Maintaining a drilling outfit can be an expensive gamble
Even if the market is relatively strong and there’s work in the order book, as there is now, it’s no guarantee that the business will become sustainable and allow for re-investment into new equipment.
That’s exactly the situation the drilling industry finds itself in now.
While the demand side has been picking up in recent years, there’s been no fundamental shifts in margin since the dark days of the GFC - and it’s looming as a crunch point for the industry.
The average drilling rig can cost up to $3 million depending on the fitout, but the cost of repairing an aging fleet can be even higher in terms of lost time and repairs.
Meanwhile, a flagging AUD/USD exchange rate has taken its toll on the industry, as many of the parts needed as replacements in an aging fleet need to be ordered from overseas. Explaining the complexities of the economic picture for drillers to bigger mining companies may earn some sympathy, but not a change in policy, drillers say.
They observe that what was once a conversation between driller and geologist now involves the accounting department.
“[It’s now run by] procurement teams who don’t want a relationship with the contractors on site,” Hall said.
“They say it’s not about price, but most of the time it is. You’ve got to have all the requirements and the compliance in place before you can actually be selected to bid on a job to start with, but after that it comes down to price.”
While Hall says there’s no cut and dry solution to what is a broader change in approach to business practice, he said if rig utilisation were to get back to 85 or 90 percent, then the supply-demand picture would swing around back into the drillers’ favour.
“I won’t say that there aren’t miners out there who don’t compensate well, because there are -- but it’s still fairly cutthroat out there and margins are nowhere near what they were during the boom,” Hall said.
“We’re lucky in that a lot of drilling companies are able to make money, but they’re having to cut back in order to re-invest, and that’s where the real danger is.
“If there’s not enough revenue left over, there’s not enough margin to put back into new equipment, maintain the equipment adequately, and train people -- and that’s the sort of thing the big companies want.”
Given talent is one of the drilling industry’s main pain points, it’s a discussion they’re hoping to put on the table with miners sooner rather than later.
Where Have all the Good People Gone?
When people leave the drilling industry, they tend not to come back. That’s not a reflection on the drilling industry per se, but rather a fact of life.
They find new work in new industries, and when an opportunity arises to come back to the drilling industry, they find the skills picked up in drilling are appreciated by their new employers.
“People leave the industry when there’s a downturn and rig utilisation falls to about 30 percent -- but they’re not coming back when we’re reaching 70 percent again,” Hall said.
It’s not a phenomenon affecting the drilling industry alone. For example, back in the May quarter of 2012 the mining industry as a whole (with drillers a sub-section) employed 274,200 people according to the ABS³, while it reached a low ebb of 212,500 towards the back end of November 2015.
As mining activity has picked back up, the mining industry is employing more than 250,000 people.
What’s more, the Australian Resources and Energy Group has forecast that the industry will need another 20,000 workers over the next five years for $41 billion in new projects⁴.
There is a risk that a lot of these workers will be cannibalised from the drilling industry, as miners look favourably upon candidates with mining nous and experience in tough conditions.
Hall says while drillers have tried to upskill more offsiders into bona fide drillers, that can be a challenge.
“You've just got to go back to the basics and train people up and get the young, next generation of drillers in, but you can't just come in and be a driller,” Hall said.
He said the training of a new driller can take anywhere between two to five years, depending on the complexity of work expected -- which doesn’t help when you’re trying to bid for work within the next year.
Once upon a time the industry may have solved the issue by contracting overseas talent, but a change in policy in 2017 means drillers are no longer covered by temporary skilled work visas.
“Drilling companies would go to the Philippines, or Mongolia or Indonesia or even Africa, North America and bring drillers in on the scheme and keep them here for a year or two, a couple of years, while they were needed,” Hall explained.
“But since then [change of policy] we haven't been able to bring drillers in from overseas either. It's affecting anybody who needs drillers.”
While Hall and the ADIA are well-placed to take the temperature of the industry as a whole, the issues which affect drillers on the ground can be very different indeed.
Meet the Drillers
Murray Pollock, who is a co-founder of deep drilling specialists DDH1 Drilling, told New-Energy Resources that the quest for talent was something that kept him up at night.
“We’ve really needed that (457 scheme) to be in place for the last two years to help the driller shortage - we’re damaging ourselves not having access to experience from overseas when there’s not enough to go around here,” Pollock said.
“In a way, it helps encourage us to train our local offsiders up into drillers, and training intensity has picked up a lot.”
But, he said, attracting new entry-level drillers into the game was an increasing challenge as the demands of Australia’s workforce changes.
“The Australian lifestyle today is a coastal, big-city lifestyle - there’s nobody in the country to recruit,” Pollock said.
“Life in the drilling industry is an ever-widening divergence to Australian city life. It’s physical, it’s remote...attracting people into the industry is difficult.”
Even when drillers are able to attract entry-level talent into the industry, they faced a challenge not necessarily faced by previous generations of drilling companies.
“Drugs are still a problem with entry-level candidates,” Pollock said, with a sigh.
“We explain that if you use drugs over a period of time it’s going to show up [on a drug test] -- don’t think you can just stop for a couple of days and hope for the best.
“All we can do is keep on repeating the message and hope it gets through - because we want to employ young people.
“The best feeling in my job is seeing somebody come through that really embraces the industry and gets enthusiastic about drilling.”
Talent questions aside, he also said the relationship (and perhaps more importantly the margins) between driller and miner had remained stagnant for years - and there could be a crunch coming.
It’s something he’s seen before.
He estimates that the industry has had 13 quarters in a row of drilling growth, and prolonged periods of drilling growth means rigs become strained (because they’re constantly drilling) and need to be replaced.
“There’s a real question about whether the drilling rates [monetary] can support the capital costs of new equipment,” Pollock said.
“It’s a supply and demand business, and things don’t move until service delivery starts to fail. Either you can’t get someone to suit your timing, or the quality drops away.
“I think the service delivery needs to fail before you reach that nexus of increased margins that will support the service that companies expect.”
But DDH1 is a top-tier player in the Australian drilling space, and has even gone so far as to test the IPO waters, but what about the smaller end of town?
The Rising Star
Tim Topham, Managing Director of Topdrill Mineral and Water Exploration, is a rising star in WA business.
He, alongside his brother, has managed to grow the business from one rig in 2005 to 17 rigs today - and that growth has been recognised by being named one of the top 40 business leaders in the state under 40 by WA Business News⁵.
He says talking to other business leaders has given him fresh perspective on the issues faced by his company and the industry.
“We don’t see attracting staff as a major issue - we believe it’s retention which is the challenge. It’s easier to get people in, but it’s very hard to keep them in,” Topham told New-Energy Resources.
“We’re changing the way we do business and the way that we operate - we’re trying to meet the needs of our employees to be able to get that outcome.”
For Topdrill, that takes the form of altering rosters to make them shorter, investing in new equipment so drilling is less of a manual slog - and providing mental health services for both drillers and their families.
It’s also given to community causes in its home base of Kalgoorlie.
Topdrill’s investment in HR and further investments in new equipment come at a time when margins have remained stagnant, but talking to business leaders has given Topham perspective on those challenges.
“We’ve been operating now for 11 years post-GFC, and the current rates and margins have not changed since that period,” Topham said.
“But we have a view that it means we have to be more efficient with what we do. The only way we’ve been able to grow the business is through investment in people and our community.”
To drive efficiency in a business, you have two options: invest, or cut back.
Topham has chosen the former, but for it to come off he acknowledges that (particularly with stagnant margins) the workbook needs to remain full.
For this, he’s relying on the upper end of the market rather than the plethora of smaller explorers - because those players are proving unreliable.
“One of our biggest challenges is in consistency of client delivery,” Topham said. “By that I mean the difference between what they ask initially and what ends up happening. We need to know that when they [clients] say they’re going to drill, they’re actually going to drill.
“It’s why we’ve made the conscious decision to try and move more towards the majors than the juniors.”
He described a recent order from a junior explorer which started out as four rigs for a campaign in January.
“Well, we were starting to gear up for that campaign and as of mid-December it changed to just one rig.”
“Drilling is a challenging industry anyway - it’s hard to drill a bloody hole. Having the right equipment in the right place at the right time is a challenge, but when that happens so close to the start date it’s almost impossible.”
The Recipe for a Robust Drilling Sector
One key theme emerges from talking to several players in the drilling industry: while times are good now, they don’t necessarily have the capability to deal with any boom in exploration.
While lithium has fallen into the doldrums for the time being, the longer-term outlook remains rosy for battery minerals in Australia.
As you’ve read about in New-Energy Resources, the scale of opportunity is huge - so it could be reasonably expected that an increase in drilling for battery minerals will be needed in the near future.
With capacity already at 75-odd percent and the likelihood this may increase in the future, it may become tougher and tougher to secure rigs to do the work - and that capacity is already being squeezed at both ends.
Existing rigs could be held up in the shop if drillers can’t invest in upgrading and maintaining equipment.
Capacity can’t be expanded without investment in new rigs, and crucially, new talent to operate those rigs.
Should miners and drillers be able to come together to solve those issues, Australia would be well-placed to take advantage of any increase in demand.
If they can’t, then the industry may find that securing rigs may be a bit more challenging than anticipated.
1. Australia’s Identified Mineral Resources 2018, Geoscience Australia
2. 8412.0 - Mineral and Petroleum Exploration, Australia, Sep 2019, Australian Bureau of Statistics
3. 6291.0.55.003 - Labour Force, Australia, Detailed, Quarterly, Nov 2019
4. More than 20,000 extra mining workers needed by 2024: report, Sydney Morning Herald, September 17, 2019.
5. WA Business News 40 under 40 Awards, 2019