Global Report: Energold Drilling Breaks Through in China

With the Dow Jones Industrial average dropping at historical rates in late August due to fears about China’s economic growth, the standard assumption would be that now is not the ideal time to forge business ties with the nation.

But while Wall Street investors were wringing their hands, Energold Drilling Corp.’s director of corporate development and investor relations, Jerry Huang, was praising China as a place where Energold is focusing its energy.

Specifically, Energold—a provider of specialty drilling services to many sectors including mining and energy—has two joint ventures in Beijing: one with a local equipment distributor and the other with a service company.

Digging in with Energold Jerry Huang:

Why is China attractive to Energold?

“Its sheer size: 1.4 billion people and a booming market that is transitioning from labour market to value-added manufacturing and a middle-class consumer-driven market means the additional need for commodities. If it’s not grown it has to be mined, and we are there to provide the drills.”

What are the benefits of doing business in China now?

“The foreign exchange rate is helpful to Canadian-China trade. Other positive factors include: it is a growing market compared to many international markets that are saturated; skilled labour is available at a respectable rate; there is an increasing willingness to pay a premium for international service firms with recognizable service and capabilities.”

What does Energold see in China in terms of future growth?

“We see a five to seven per cent growth on a much bigger population base compared to other countries. That means a much higher need for commodities, whether it is metals or water—and therefore a higher need for the equipment and services we provide.”

These ventures are part of Energold’s goal of becoming a global drilling solutions provider. In order to do so, the company spent over $35 million to complete three strategic acquisitions: Envirodrill Ltd. (U.K.), Dando International Ltd. (U.K.) and Bertram International Corp. (AB). It has also grown from a fleet of six drilling rigs in 2006 to over 240 rigs drilling in 25 countries, including South America, Africa, Asia and the Middle East.

Huang says that despite China’s current economic strife, “It’s still a growing market for us, and amongst its many attractions is the fact that while the amount of work that is going to local equipment suppliers is between 80 and 90 per cent, there’s a notable swing in preference to foreign brands as labour, reliability and China’s currency continues to get stronger.”

Publicly traded, Energold’s interest in China dates back to the 1990s when it developed a range of compact drill units that leave a small environmental footprint. These units have many advantages over larger products, particularly in developing nations where infrastructure is poor but labour is readily available (the rigs can be easily disassembled, carried to a site in pieces and reassembled). The small size of the rigs also means they can be shipped worldwide in a 20-foot container, along with all the supplies, for a reasonable cost.

Beyond its innovative and environmentally friendly products, Energold has also made its mark through strategic investments. For example, by acquiring Dando—a UK-based drilling rig manufacturer known for building the earliest water rigs in 1843—Energold was able to expand its portfolio of light and compact rigs designed for use in water borehole, geotechnical investigation and geothermal (GSHP) drilling projects as well as mineral exploration (the multipurpose Dando Multitec 9000 being a prime case in point).

In terms of penetrating the Asian market, Energold achieved a breakthrough in 2003 when its former partner, Kluane International Drilling Inc., signed a letter of agreement with China’s Yunnan Geology and Minerals Co. Ltd. whereby two drill rigs and technical direction would be provided under a joint venture. The agreement also stipulated that Kluane and YG&M would deal with each other exclusively in China for contract drilling.

The agreement solved one of the main hurdles facing Energold in its bid to expand globally: how exactly could it penetrate the Chinese market? “Joint ventures have proven to be a good approach,” says Huang. “In our joint venture with the equipment distributor, we provide equipment, consumables and some marketing capital, and this is far more preferable logistically than, for example, physically opening an office in Beijing.”

With the second joint venture, Huang notes, “We bid on projects, supply equipment and jointly provide funding.” He declined to elaborate further on the business arrangement other than to say, “Drill rig operators in China are plagued with quality control issues, product inconsistencies and after-sales support issues. These are all things that start adding up as labour rates increase in Asia, so our presence is welcome.”

As for drilling contracts, Huang says the economic woes of China notwithstanding, “Rates are very good compared to those of other countries: competitive even compared to half of the $200 per metre rate we charged back in 2011. China may be experiencing a slowdown, but its infrastructure development is still enormous due to the emergence and growing influence of its middle class.”

Not surprisingly, Huang and his colleagues are optimistic about future opportunities. “Despite China’s slowdown from double-digit to single-digit GDP the last few years, a growing population of 1.4 billion and a five-time growth of GDP in a decade to over $9 trillion USD is still an extremely large figure.”

“Overall, our view of Asia is a long-term proposition, one in which we intend to build trust and prove reliability. So far, our efforts are paying off.”