10MA Y 200804020885 INDUSTR Y O VER VIEW Certain information in this Industry Overview including estimates forecasts and other historical and forwardlooking information is based upon the 2007 Corporate Exploration Strategies report prepared by Metals Economics Group Halifax Nova Scotia MEG and the 2007 Overview of T rends in Canadian Minerals Exploration report prepared by a working group of Natural R esources Canada NR C Although management believes these reports are reliable the accuracy and completeness of such information has not been independently verified See also Cautionary Statements R egarding F orwardL ooking Information and Risk F actors Overview The contract drilling industry provides drilling services for the mining industry through all stages of mine development from exploration through to and including production In the exploration stage drilling is performed on prospective mineral properties to obtain rock chips or core samples in order to determine the existence and quality of a mineral deposit A t the development stage drilling is undertaken for reserve and resource definition and to aid in the planning design and construction of new mine sites Drilling for minerals primarily involves the extraction of solid rock core or chip samples for technical analysis The extracted samples provide the mining companies with critical information over the life of a mining project While in production mine operators undertake drilling to provide for ongoing geotechnical work and rock mechanics information reserve and resource estimation and grade control on producing orebodies Mining Industry P roduction P rocess Diagram K e y Industry Dri v er s Commodities Suppl yDemand K e y Customer s Major mining companies Inter mediate mining companies Junior mining companies K e y Needs Production Exploration Drilling Ser v ices Production Drilling De v elopment Drilling Exploration Drilling Other Consider ations Drill T ype Countr y Specif i c Dynamics The market for drilling services is largely driven by the underlying dynamics of the mining industry Mining companies typically outsource their drilling requirements because the logistics of attracting and maintaining a specialized work force with the flexibility required to staff the variable needs throughout the mining process is simplified by subcontracting to a larger operator with a sufficient labour force to service a number of mining operations Contract drillers have a diversity of clients ranging from major mining companies with production to junior mining companies that have no production Major mining companies typically have a more stable exploration budget due to cash flow from existing mining operations whereas junior mining companies are typically reliant on external financing to undertake exploration activity The drilling activity of major mining companies is typically related to the development and production stages of the mining process Many major and intermediate mining companies have focused on nearmine exploration in an effort to replace and increase reserves depleted by mining and to bring new reserves into production more economically by using existing infrastructure The added pressure to increase production in the current price environment coupled with increased competition for a diminishing number of acquisition opportunities and the perceived decline in significant new discoveries makes brownfields exploration exploration at or near an existing mining operation which requires a significant diamond drilling component a high priority for most producers Margins on drilling contracts are typically determined by a number of factors including project location size of the drill program and stage of drilling A large contract for example more than five drills on site for development stage drilling over a period of more than one year in length would typically be priced with a lower 19