Through the Cycle

The past year was a tale of two halves for the Company. The first half was characterised by strong demand for drilling services, which underpinned record earnings for the Company. In the second half, however, we encountered strong headwinds in the form of a sharp downturn in the mining cycle.

Cyclicality is a feature of the mining services industry, and the challenges that such a downturn present to financial performance will come as no surprise to experienced observers of our industry. However, the downturn in the December half was notable for its suddenness and far-reaching impact on the mining services sector. Our performance in this period was affected by circumstances, many of them out of our immediate control, ranging from a collapse in commodity prices and tightening credit markets to a freezing of mining company exploration budgets and a lack of financing for mining juniors. While these dampened revenue, the bigger impact was on margins and EBITDA, which deteriorated significantly during the second half.

Sovereign, compliance and security risks in developing countries also affected our 2012 financial performance, at different times requiring us to suspend or reduce activity in key developing markets or cease pursuing entry into these markets. When operating in such geographies, Boart Longyear has shown it will not compromise on the investment necessary to operate compliantly and safely and maintain contingency arrangements for crisis situations. This commitment does make operations in some developing markets unviable in certain circumstances, and that is the situation we faced in 2012.

Despite the Company’s close monitoring of the many external and internal indicators of our business, precise forecasting remains a key challenge to our ability to manage effectively through the mining cycle. Nevertheless, our response to the second-half market contraction and associated impact on operating margins was aggressive. From August we moved quickly to align the cost base with the mining cycle and sustain our overall competitive advantage, making very difficult decisions around executive leadership, reductions to headcount, rationalising manufacturing and realigning our overheads.

To date, more than US$70 million in costs has been taken out of the business following this work, and the Company continues to look for additional cost reduction opportunities. Specifically, we have commenced working with external advisers to identify structural changes to our operating model and cost base. This exercise will result in a simpler, more efficient and more flexible operating base that will allow Boart Longyear to respond more nimbly and effectively to future cyclical downturns.

Boart Longyear’s Board and management team recognise the fundamental importance of prudent capital management through the cycle. To this end, improving the Company’s debt profile and extracting better returns from more strategic capital expenditures are key are as of focus that will support improved shareholder returns in the future.

Notwithstanding the challenges of the past six months, the Board is very optimistic about the Company’s future and prospects. We are a stronger and wiser Company for the recent downturn, and the changes underway will position us to manage more profitably through all stages of our industry cycles in the future. Our goal now is to better leverage the synergies of our integrated products and services business model to deliver operating margins that exceed those of our peers. Our strategy is to be the “One Source” of drilling services, drilling equipment and performance tooling for mining and drilling companies globally.

Boart Longyear remains the best and most recognisable brand in our industry. The strength of our brand, our global footprint and the significant investments made over the years in a diverse and modernised fleet and pipeline of state-of-the-art products, position us uniquely to deliver on the One Source strategy. Meanwhile, Boart Longyear’s high standards of safety and compliance continue to be a source of competitive advantage and remain at the core of our culture. Our 2012 safety performance reflected significant improvements in all major metrics, with the Total Case Incident Rate improving by 27% (a Company record) and the Lost-Time Injury Rate improving by 23%.

At this point, I also would like to welcome our new CEO, Mr Richard O’Brien, and recognise our new Board Chair, Ms Barbara Jeremiah. Their combined leadership and experience, and Richard’s deep knowledge of mining industry operations in particular, will ensure that the Company stays focused on supporting its customers and delivering returns and value to shareholders.

In summary, 2013’s priorities will be to redouble our attention on the following key initiatives:

Focus: On delivering shareholder value through margin and cost improvements, a healthy balance sheet, and more frequent market communication.

Defend: Safety performance, compliance, global market share and technology.

Grow: In new product segments and technologies, by increasing market share with the “Majors”, and expanding aftermarket services.

Given the competitive strengths of our business, the depth of our leadership and the dedication of our motivated global workforce, I know we can deliver on these commitments.