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Cabo Drilling is unique
in that as a drilling services company Cabo provides exposure to the Mining Sector without
the commensurate risk. Additionally drilling companies are not tied to a single commodity
or project but have the ability to participate in the upside of the demand for numerous
commodities.
Resources
Mineral & Specialty Drilling
(CBE-TSX-V)
Cabo Drilling Corp.
3rd Floor, 120 Lonsdale Ave.
North Vancouver, BC Canada V7M 2E8
Phone: 604-984-8894
John A. Versfelt
Chairman, President & CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
May 18, 2006
BIO:
JOHN A. VERSFELT Chairman, President & Chief Executive Officer
John A. Versfelt has been a senior officer and a director of the Company since January
1992. He is also President of American Resource Management Consultants Inc., which has
provided management consulting, accounting, administration and paralegal/regulatory
services to private and public companies for the past 24 years. He is currently a director
and/or officer of several public companies.
Company Profile:
Cabo Drilling Corp. is a mineral and specialty drilling services provider headquartered in
North Vancouver, British Columbia.
In 2006, Cabo’s objective is to build stability
and reliability by concentrating on greater operational efficiencies, quality control and
cost controls, enhanced employee relations and development of their expertise, thereby
obtaining growth in revenues and net earnings that we hope will translate into a good
return for our shareholders.
Cabo’s drilling services are provided through
subsidiary companies; Advanced Drilling Ltd. of Surrey, British Columbia; Forages Cabo
Inc. of Montreal, Quebec; Heath & Sherwood Drilling Inc. of Kirkland Lake, Ontario;
and Petro Drilling Company Limited of Springdale, Newfoundland.
CEOCFO: Mr. Versfelt, you’ve recently changed your
company name to Cabo Drilling; what has happened?
Mr. Versfelt: “We’ve grown very fast, we were in
the mineral exploration business back in 2000, 2001 and even before that. At that time, I
felt very strongly that I needed to generate cash flow, so I evaluated the whole mining
sector. In 2002, I felt that the mining sector was going to come back in short-order and
thought the timing was right to move ahead. After evaluating all the different parts of
the mining industry, I decided that the best place for Cabo to generate cash flow was the
drilling services business. I knew people in the drilling business and I felt that if
anywhere, because approximately .50 cents of every exploration dollar is spent on
drilling, that the drilling business would be the best way to go. Furthermore, it has
definitely turned out that way. Cabo’s new name reflects the Company’s
plan for growth within the mineral and specialty drilling services sectors. Cabo provides
an opportunity for investors to participate in the metals bull market as a services
company taking advantage of cash flow opportunities generated by the robust mineral
exploration and mining sectors.”
CEOCFO: You have a
number of different drilling companies; tell us what Cabo Drilling is now?
Mr. Versfelt: “We acquired two drilling companies at
first; one in Ontario, which in Canada, Ontario along with Quebec is where the majority of
exploration dollars are spent, as a percentage over the whole country. Additionally, a
considerable amount of the financing happens in Toronto, or comes from Europe into Toronto
and gets focused in Canada, once again mostly in Ontario and Quebec, at least in the very
early stages. As the mining market expands, it then expands into the rest of Canada.
Therefore, we focused on making an acquisition of a significant company in Northern
Ontario. We also found another company in the Maritimes region. These are the two
companies that we started with. We then found another little company in Montreal that was
in the alternative drilling sector, called, GEO Environmental. Our next acquisition was
another alternative drilling service company in Quebec and we then merged those two
operations. In addition to that, we acquired another company here in British Columbia,
where the dollars have really started to grow in terms of the amount of exploration that
is taking place in this province. Today, we are a drilling company with regional offices
across Canada and have over 300 years combined diamond drilling experience.”
CEOCFO: Are you drilling companies run independently; how do
they fit under the umbrella of Cabo Drilling?
Mr. Versfelt: “It is a model that I wanted to put in
place for a long time; I believe that there is a variety of businesses out there that you
can run strictly as a centralized business, but there is a whole stack of them that
you would run decentralized. We have taken the middle of the road approach and that is to
have a smaller staff, yet a very specialized staff, such as your controller, CFO, senior
accountant and a senior operation person at the company’s head office. This group of
individuals carries out all of the parts of the business like cash-flow management,
insurance and health benefits plans. The divisions are then are operated by general
managers who report to me. Therefore, it is a decentralized centralized type of management
style.”
CEOCFO: What is different about your drilling companies and
why are people coming to you?
Mr. Versfelt: “There are a few things. First of all,
there are very few public drilling companies, Cabo is one and there is also a larger one
here in Canada. There is also a public drilling services company that is about our size
and is listed and traded here in Canada but whose operations are focused outside of Canada,
other than these companies, that is pretty well it. In the United States, you have a few,
but it is not like the oil and gas business where there are a fair number of service
companies that have become public companies. One of the advantages to being public is
access to capital and we took advantage of that in 2004. Secondly, from an employee point
of view, we can offer all of our employees stock options. Very few companies in the
drilling business can actually offer that to their employees. Those are just some of the
positive things that we can do. How we are different is that in Canada, the drilling
environment is pretty much a private arena and there is only one larger company and
ourselves that has a presence right across the country. There is also one other private
company that has a presence across the country, but the rest of our competition, only has
a presence in parts of Canada. Therefore, for our client base, which may have operations
across Canada, we can offer them a drilling company that can be in British Columbia
servicing their needs, as well as be in Ontario servicing their needs. It is a little
harder for the regional companies to provide that. We also have a situation where we can
work with our suppliers, on a national basis, which they find that quite appealing, so we
tend to get better pricing on our supplies. The other aspect to it is that with all of
these divisions, we can cross-pollinate them. Therefore, if we need drills on the ground
in the Maritimes, and that division does not have them, then we can send them over from
our division in Ontario or from our division in British Columbia. Further, we can also do
the same with people, so it provides us with a way to manage our equipment resources,
people resources, money resources and our customer resources across the country enabling
us to provide better customer service and expertise.”
CEOCFO: I see that your motto is ‘We are building
stability, reliability and growth’; how are you doing all three?
Mr. Versfelt: “The stability comes from being able to
acquire financing at levels that are customers are able to say ‘yes, they are going
to be around for awhile’. We have issued a news release stating that we have
appointed a new commercial bank and part of the reason for that is that the commercial
bank has approved us for a $4 million line of credit and demand loan facility at very good
rates. The bank is the HSBC Bank Canada and they are an aggressive bank, they have other
affiliated banks around the world, and as a matter of fact, are considered one of the
world largest banks. That to me demonstrates to our customer base and to our shareholders
that we are a company that is stable. We have also put in place the whole aspect of
pricing and being available to your customers when they need us. Our goal is to build
long-term relationships with our customers by providing excellent customer service and
working with them in any way we are able to assist them in meeting their goals. Through
this, we believe that we will build relationships that will sustain Cabo in the upturn of
the metals market as well as the downturn. We want our clients and our employees to know
that they are going to be respected, treated fairly and that we will be around for them
for the long-term. From this, we are providing our customers, employees and shareholders
with reliability. The third part is the growth; we grew from zero revenue, pre-June 30,
2004, to first year revenue of $23 million FY2005. Our 1st Quarter FY2006
revenue was just about $9 million. If you annualize that, it is a fairly significant
number. Therefore, we are providing growth to our customers, employees and shareholders.
We have not only grown in revenue but also in the number of drills that we own, and the
number of people that work for us. From this, I believe our motto is well suited to us as
we have achieved, and will continue to bring our customers, employees and shareholders,
stability, reliability and growth.”
CEOCFO: Why is the strategy to buy existing drilling
companies as opposed to growing organically?
Mr. Versfelt: “We are actually doing both. Initially in
the first year we needed to achieve a certain level of operation. Our goal was to become
the 3rd largest mineral drilling company in Canada, in terms of the number of
drills, people and revenues. I believe that we have attained that now; I do not know 100%,
because many of the drilling service companies are private and they are not about to
disclose what their revenue numbers are. However, from what we can see, in terms of the
number of drills we have in our fleet, we are now the 3rd largest in Canada.
Our goal was to get to a base level that we could operate from and then in our 2nd
year, which we are now in, we would back off acquisitions, for the time being, and focus
on the consolidation of our companies by getting our systems in place and fine-tuning the
overall operations. We are also, through our mineral drilling divisions, leveraging the
combined wealth of technology and drilling expertise, as well as sharing people and
equipment resources to meet the needs of larger global customers and increase our current
market share. Therefore we have had growth through acquisition which has provided us with
the expertise and know-how to achieve additional organic growth.”
CEOCFO: How do you plan for the cyclicality in the mining industry?
Mr. Versfelt: “Our cycles are very significant in the
mining sector, if you look at the cycles you will see that there is a variety of them.
First of all, you have some people looking at the cycles of gold, which seems to go in a 9
to 10 year cycle. You also have the financial markets, that finance the mineral sector,
and that seems to be in shorter cycles of 4 to 5 years. However, when it comes to the
metals themselves, they go in 20 to 22 year cycles and there are some good reasons for
that. One of the big reasons is developing a mine from the exploration stage, first you
must have positive drill hole results, indicating that you may be onto a deposit, this can
take 2 to 3 years to develop. Then you have to go into the development stage with a
preliminary feasibility study. If that turns out to be positive, then you have to go
forward with getting your financing in place and building your mine.
All of that takes a significant amount of time; usually somewhere between 5 and 8 years.
Therefore, you require a longer cycle as you do not have the ability to poke a hole in the
ground and come up with an economical deposit and within 6 months put a mine into
production. It is just not that kind of a situation, so you tend to have longer drawn-out
cycles, both on the supply side and on the demand side. For example, right now we are in
the first three or so years of what is the early part of the metal cycle, which was in a
down cycle for about 22 years. I think that we are in the beginning of it, but you will
have short cycles within the longer cycle. One of the ways that we can plan for this is by
developing a resource or information base, which takes a lot of doing in our business.
Secondly, I am aware of the cycles, so we are buying non-mineral drilling companies that
are in another type of drilling cycle, this will help us to off set deep bottoms and the
higher tops in the mineral sector. You kind of smooth them out a bit. Therefore, you have
a combination of businesses that are in the exploration drilling business or in the
alternative drilling sectors.”
CEOCFO: I would suspect that strategy will help you develop a
good national presence.
Mr. Versfelt: “We do have a strong national presence;
however we do need to fill in the holes. We also want to develop a presence in the Americas
and we have stated that as one of our goals. Cabo intends to become one of the larger
drilling companies in the Americas and that extends from North America through Central
America and down into South America.”
CEOCFO: In closing, address potential investors, why should
they be interested and what should they realize that tends to get overlooked?
Mr. Versfelt: “One of the big reasons that investors
should be interested in Cabo is because of the activity in the mining sector, unless you
are actually a mine, you are spending money and not making money, as far as Cabo Drilling
is concerned, we are making money. We are making money on the exploration side of things;
we are actually drilling the holes for the exploration/mining companies. Therefore, what
you have with Cabo is you have a company that is in the mining industry that is not a
mining production company, but is producing revenues from those who wish to find deposits
and put a mine into production. In addition, once the mines are in production Cabo can
continue to work for them, as we can provide them with the drilling for their ongoing
mining of the reserves that they need to develop. The best comparison that I can make is
in the ‘gold rush’ days in California; the question was who made the most money?
It was the people who were servicing the prospectors and the exploration. One of those
companies in California that is still in existence today is Levi Strauss & Co.; they
were selling jeans like crazy in those days. Therefore, that is where we want to be,
providing a service and ensuring that Cabo is around for the long term. Further to that,
we do have our properties on the mineral exploration side that we are vending out into
another exploration company. Cabo will receive stock from the exploration company, in
exchange for its properties, and our shareholders will receive 77% of those shares in a
redistribution with the balance being kept in Cabo. Out of that redistribution, you will
have an investment in a mineral exploration company as well as a drilling service company.
Our shareholders will receive a significant amount of stock in the exploration company and
will then have ownership in two companies, each participating in the mining sector in
different ways. In the mean time, we are going to be steady as you go, with strong revenue
and cashflow. Further, our strategy is working and I really believe that people should
judge us on our results and on where they see the future of the metals business. Cabo has
something very significant going on in the metals sector and investors should take
advantage of it.”
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