A sustainable advantage

Written by ProfitGuide Staff

Case Study
Energold Drilling Corp.
Five year revenue growth: 919%

Many growing companies have to contend with stiff industry competition, cash-flow troubles and difficulties opening new sales channels. Not many have to dodge landmines, operate in isolated Third World locations and train foreign workers who seriously distrust outsiders— all while introducing untested technology to industry skeptics.

Welcome to Frederick Davidson’s everyday reality. The president and CEO of Vancouver- based contract mineral drilling company Energold Drilling Corp. (No. 62 on this year’s PROFIT 200) has overcome all of those hurdles, transforming the company from a $500,000 weakling 10 years ago into a mining industry player with 2010 revenue of $55 million. Today, the company boasts a fl uctuating contingent of about 1,100 employees. It operates in 22 countries, most of them developing nations chosen for their high mineral-drilling potential and dearth of direct competition. Davidson predicts Energold will hit $100 million in revenue this year, as it further diversifies its drilling operations and expands into new markets. So, what has spurred such dramatic growth?

As Davidson explains, Energold’s success came when it found a solution to a common drilling industry problem— the massive environmental damage left behind by rigs and crews. In 2001, five years after the company’s launch, it shifted its focus from mineral exploration to contract drilling. While less risky, contract drilling was—and remains—highly competitive. Demand shifts constantly, rigs are difficult to relocate and firms essentially rely on their own research to predict the next big market opportunity. To succeed, Energold would have to stand out. How? As is so often the case, inspiration came from an unexpected place: a remote mining site in the Dominican Republic.

To reach a proposed drilling location situated above a small town on the Caribbean island, Energold would have to drag a 10-ton drill across a river and farmers’ fields, destroying the landscape in the process. Typical industry practice was for drilling companies simply to compensate farmers for the damaged land. Davidson felt there had to be a better way. “I thought, ‘Exploration is a high-risk business, and the likelihood of finding something is very nominal, so why desecrate the landscape?’” he recalls. Besides, sustainability was becoming a key plank in corporate social responsibility mandates being adopted by most major mining companies.

Davidson and his team started researching options for less cumbersome drilling technologies and processes that would do less damage to surrounding ecosystems. That’s when one of Energold’s geologists came forward and explained that he’d once used a smaller, lighter underground drilling rig that could be disassembled and carried to a drilling site on foot. Intrigued, Davidson investigated and learned that no other firms in his field were using the equipment to green their drilling practices. He approached the manufacturer of the component drills, Delta, B.C.-based Hydracore Drills Ltd., and in short order was able to strike a supply deal, albeit a nonexclusive one.

Energold tested the new rigs in the Dominican Republic job, paying locals to transport the components to the drill site on foot. “We paid salaries to people working for us, locals still had their farms and you couldn’t tell where we’d been,” Davidson recalls. “That struck us as the way the industry should go.”

With that, Energold had a clear competitive advantage. By incorporating component drilling rigs into its business model, the firm could move into frontier locations that its rivals had long ignored to drill for minerals—everything from iron ore to limestone to uranium—safely, cheaply and without damaging the often fragile social and environmental fabrics. And by training locals and paying them competitively, Energold provided income to poor communities. All this gave its customers, including mining giant Rio Tinto PLC, a valuable chance to win the public relations battle on the corporate social responsibility front.

As interested as clients were in Energold’s sustainability proposition, however, it took some effort to sell them on the relatively new and untested modular drill technology. “If somebody’s running a $2-million drill program, it’s a big risk for them to take on a new technology,” Davidson explains. “It took a little while for them to become comfortable that this rig could do what we said it could do.” To encourage clients to try the drill, Energold cut its rates in half, to about $45 per metre at the time. It was a big gamble, as the firm could barely cover its costs at that price. Within two years, however, most customers were convinced, and the firm inched its rates up to those of its competitors. To win over customers further, Energold started to drill in increasingly remote locations. Davidson’s mantra: we’ll work where no one else will. That focus has proven highly beneficial, says Peter Prattas, a Toronto-based research analyst with investment advisory firm Fraser Mackenzie. “Energold has expertise in places in which the market hasn’t yet been big enough for a larger drilling company to operate,” he says.

Energold’s focus on frontier markets has meant contending with many challenges, one of the largest being oppressive or corrupt regulatory regimes in Third World nations. Never once, Davidson stresses, has Energold bribed an official to circumvent often obtuse local rules. “We don’t pay people off,” he says. “We’ve had occasions in which we’ve shipped a rig in and it has sat in customs for a year until [bribe-seeking officials] finally gave up and released it.” Energold typically budgets about $200,000 per year to cover delays or equipment losses, yet Davidson is quick to point out that his firm has yet to lose a rig on-site or in transit. Energold also enlists on-the-ground expertise. In Mexico, for instance, the firm recruited skilled, multilingual locals to its on-site management teams to help overcome regulatory hurdles. Davidson says Energold’s ethical stance appeals to sophisticated customers, even when they are very anxious to start drilling.

Another challenge is training locals and navigating complex webs of cultural norms in the almost two dozen countries in which Energold operates. While the firm’s labour costs are about one-tenth of those of companies that drill in Canada, labour efficiency in the developing world can be low because workers want to stretch out the job for as long as possible. “A lot of the people we’re dealing with in Africa are so poor they live day to day,” Davidson explains. “It’s a cultural leap for them to understand that there will be more work in the future.”

To increase employees’ confidence in Energold’s long-term plans to employ them, Davidson spends about a third of his time travelling to the firm’s drill sites and offices, speaking with locals and building trust. He encourages front-line managers to do the same. “I insist on personal contact,” he says. “You have to be able to look them in the eye, tell them they’re part of the team and that if they’re loyal to us, we’ll be loyal to them.”

To bolster goodwill, Energold often will take on community-improvement projects; for instance, the company recently used its drills to bore water wells for a town in Mexico’s Sierra Madre mountains. Davidson estimates the company spends 1% to 2% of its gross revenue each year on community skills training and sustainability work in its various markets—a point that goes over well in sales pitches to new clients. By drilling down into previously untapped markets and working to introduce clean technology in its industry, Energold has enjoyed breakout success. As for its future plans, Davidson says, the firm is expanding its product offering with an increased focus on water-well drilling, while growing its African and Asian operations. He credits the firm’s ongoing sustainability focus as the key competitive advantage that will continue to fuel Energold’s growth. “In mining especially, you can’t drill, take your toys and go home, because you’ll alienate the locals,” says Davidson. “You have to establish your credibility with the community. I think the industry is increasingly recognizing that.”


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