Drill-o-nomics

Want a real-world read on the commodity markets? Try selling a drill rig
By Paul Brent

It’s blue, big as a CEO’s office and can be helicoptered or dragged through the woods to its next job. It’s also proving to be very, very hard to get rid of.

The “it” in question is a $300,000 drilling rig, and it’s become a bit of a corporate albatross for miner Purepoint Uranium Group Inc. (TSX-V:PTU). The Toronto-based company purchased the drill a few years ago amidst the commodity boom, at a time when it made sense for smaller players like it to buy a rig and hire a competent mining team to run it for them. The arrangement had a natural exit plan for the company, as the crew would over time earn ownership of the drill.

Purepoint's rig is in storage, but it's like this one in Mexico

It’s a drill-to-own scheme that worked flawlessly once before for Purepoint. The second time, unfortunately, was not a charm. The crew selected to work their way to ownership of the rig turned out to be less than world class and the company soon found itself stuck with the rig and the commodity super-cycle all but dead.

“The drill has turned into a new barometer for activity” in the mining industry, says Purepoint president and CEO Chris Frostad. The uranium miner has attracted a number of serious bids from would-be operators, only to see its buyers undercut by the very mining companies that they planned on running the drill for. “We have had numerous offers that were accepted, that all fell through because their client didn’t get the financing that they needed to proceed with their programs,” says Frostad.

He expects to eventually unload the drilling rig as the commodity cycle has to turn. Or, seen in reverse, when Purepoint sells its drill, it’s a sign commodities are back.

Whether that happens in 2013, Frostad can take comfort in the fact that the rig isn’t losing value like a rusting Kia on a used car lot. “The funny thing about a drill is it’s a big diesel engine and they never break down,” he says. “They last forever, drills don’t depreciate and have to be replaced in five years.”

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