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      Major Drilling Reports Strong Growth in its Second Quarter Results


      News provided by

      MAJOR DRILLING GROUP INTERNATIONAL INC.

      Dec 07, 2010, 19:25 ET

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      MONCTON, NB, Dec. 7 /CNW/ - Major Drilling Group International Inc. (TSX: MDI) today reported results for its second quarter of fiscal year 2011 ended October 31, 2010.

      Highlights

               
      In millions of Canadian dollars (except earnings per share) Q2-11    Q2-10    YTD-11    YTD-10
      Revenue $127.8 $75.5 $237.3 $138.0
      Gross profit 35.1 22.8 61.6 40.0
        As percentage of sales 27.5% 30.2% 26.0% 29.0%
      Net earnings 11.4 4.1 16.5 0.8
      Earnings per share 0.48 0.17 0.69 0.03
      Cash flow from operations (before changes in non-cash working capital items) 18.6 12.3 30.7 19.9
      • Major Drilling posted quarterly revenue of $127.8 million, up nearly 70 percent from the $75.5 million recorded for the same quarter last year.

      • Gross margin percentage for the quarter was 27.5 percent, compared to 30.2 percent for the corresponding period last year, an increase from the 24.2 percent in the first quarter of 2011.

      • Net earnings were $11.4 million or $0.48 per share for the quarter, compared to net earnings of $4.1 million or $0.17 per share for the prior year quarter.

      • The Board of Directors is recommending to shareholders a three for one stock split in order to help enhance liquidity.

      "We continued to see a strong recovery during the quarter in all of our operating regions although pricing remained relatively stable. The actual number of rigs working in the field increased by 18 in the quarter and revenue grew by nearly 70 percent year-over-year to $127.8 million.  The utilization rate of our fleet was relatively flat compared to the first quarter as a significant part of our revenue growth came from increased activity at existing projects translating into more shifts worked per drill.  Our utilization rates are expected to rise as we respond to what is shaping up to be a much busier 2011 calendar year," said Francis McGuire, President and CEO of Major Drilling.

      "Margins improved significantly from the first quarter but were still impacted by training costs and additional consumable purchases to support increased activity.  Going forward, increased pricing should help margins improve, although the shortage of experienced drill crews will put some pressure on labour costs and productivity, especially in our most active markets."

      "Recent announcements of significant increases in exploration budgets from senior mining companies, combined with a recent increase in financing for junior mining companies, indicate that activity levels in calendar 2011 should be robust.  To meet the labour availability challenge coming from this pick-up in activity, we have stepped up our training efforts around the world, and have re-instated many of the initiatives that were successful in the last industry upturn.  Many of our senior drillers are returning to their function of trainers, extra trainees are being assigned to rigs and retention programs are being re-instated.  With a truly global workforce, we see opportunities to shift employees between regions to mitigate inter-regional seasonal fluctuations.  Wage increases will be required in certain areas to retain and attract the most experienced drillers, which are key to high quality customer service, particularly in specialized circumstances," observed Mr. McGuire.

      "Net capital expenditures for the quarter were $13.3 million as we purchased 22 rigs, 7 of which are for our environmental division.  We also retired 8 rigs through our modernization program.  During the quarter, we added a significant amount of support vehicles and other support equipment to meet changing patterns of demand and our new safety standards.  Through these additions, we hope to further improve rig utilization and reliability."

      "It is important to note that we are now in our third quarter, seasonally the weakest quarter of our fiscal year, as mining and exploration companies shut down, often for extended periods over the holiday season.  At this time, most senior and intermediate companies are still working through their budget process and have yet to decide on post-holiday start up dates, which impacts third quarter revenue."

      "The Company is pleased to announce it has appointed Catherine McLeod-Seltzer to its Board of Directors.  Ms. McLeod-Seltzer has enjoyed a broad and successful career in the mining industry, including co-founding and/or directing numerous successful mining ventures."

      "Finally, in a separate release issued today, the Board of Directors is recommending to shareholders a three for one stock split in order to help enhance liquidity," said Mr. McGuire.

      Second quarter ended October 31, 2010

      Total revenue for the quarter was $127.8 million up 69.3 percent from the $75.5 million recorded in the same quarter last year. Most of the Company's branches exhibited strong growth, mainly coming from an increased number of shifts per drill and increased utilization.

      Revenue for the quarter from Canada-U.S. drilling operations increased by 110 percent to $50.6 million compared to $24.1 million for the same period last year.  Both countries contributed to this increase.

      South and Central American revenue was at $42.0 million for the quarter, up 74 percent from the $24.2 million posted for the prior year quarter. Argentina, Mexico and Chile continued to be the main drivers in that region.

      Australian, Asian and African operations reported revenue of $35.2 million, up 29 percent from the $27.3 million reported in the same period last year. Mongolia accounted for a large part of the region's growth while we saw increased activity in Australia and Indonesia.  The Company also started operations in Kazakhstan.

      The overall gross margin percentage for the quarter was 27.5 percent, down from 30.2 percent for the same period last year, but up from the 24.2 percent margins in the first quarter of fiscal 2011.  Although still a factor, the impact of training costs and consumable purchases was reduced this quarter. 

      General and administrative costs were $9.9 million or 7.7 percent of revenue for the quarter, compared to $8.1 million or 10.7 percent of revenue in the same period last year.  The increase was due to the addition of the new environmental division and also increased costs to support the strong growth in activity levels.

      Other expenses for the quarter were $1.4 million, up from $1.1 million in the prior year quarter, due primarily to higher incentive compensation expenses given the Company's increased profitability in the current year.

      Foreign exchange gain in the quarter was $1.3 million compared to $0.1 million in the prior year quarter.

      Short-term interest expense was $0.1 million this quarter compared to nil for the same quarter last year, while interest expense on long-term debt was down to $0.2 million compared to $0.3 million for the same quarter last year due to lower debt levels.

      Amortization expense was $7.8 million for the quarter compared to $7.7 million for the same quarter last year.

      Income tax expense was $5.6 million in the quarter compared to $1.7 million for the prior year quarter as a result of increased earnings. 

      Net earnings were $11.4 million or $0.48 per share ($0.48 per share diluted) compared to $4.1 million or $0.17 per share ($0.17 per share diluted) for the same period last year.

      Year to date ended October 31, 2010

      Revenue for the six months ended October 31, 2010 increased 72 percent to $237.3 million from $138.0 million for the corresponding period last year.

      Canada-U.S. revenue increased by 105 percent or $46.7 million to $91.0 million compared to $44.3 million last year with both countries contributing to this growth.

      Revenue in South and Central America increased by 94 percent to $82.1 million, compared to $42.4 million in the prior year period.  Most of the growth in the region came from Mexico, Chile and Argentina.

      Revenue in Australia, Asia and Africa increased 25 percent to $64.2 million from $51.3 million in the prior year period. Mongolia and Indonesia were the main drivers of growth in the region while Australia was flat as compared to the same period last year.

      Gross margins for the year to date were 26.0 percent compared to 29.0 percent last year, due to significant training, mobilizing and consumable costs to accommodate present growth.

      General and administrative costs were $19.5 million or 8.2 percent of revenue compared to $17.0 million or 12.3 percent of revenue in the same period last year.  The increase was due to the addition of our U.S. based environmental division and also increased costs to support the strong growth in activity levels.

      Other expenses were $3.3 million for the year compared to $2.0 million for the same period last year due primarily to higher incentive compensation expenses given the Company's increased profitability in the current year.

      Foreign exchange gain was $1.2 million compared to $0.8 million in the prior year period.

      Short-term interest expense was $0.2 million for the year compared to a revenue of $0.1 million last year, while interest expense on long-term debt was $0.4 million compared to $0.6 million last year due to lower debt levels.

      Amortization expense decreased to $15.1 million compared to $15.4 million in the previous period.

      The provision for income tax for the year was $7.9 million compared to $1.9 million for the prior year, reflecting the increased profitability of the operations. 

      Last year, the Company recorded a restructuring charge of $1.2 million to account for retrenchment and closedown costs, primarily in Australia.  The Company also recorded a net non-cash goodwill impairment charge of $2.0 million relating to the Paragon del Ecuador S.A. acquisition.

      Net earnings were $16.5 million or $0.69 per share ($0.69 per share diluted) compared to $0.8 million or $0.03 per share ($0.03 per share diluted) last year.

      Some of the statements contained in this press release may be forward-looking statements, such as, but not limited to, those relating to worldwide demand for gold and base metals and overall commodity prices, the level of activity in the minerals and metals industry and the demand for the Company's services, the Canadian and international economic environments, the Company's ability to attract and retain customers and to manage its assets and operating costs, sources of funding for its clients, particularly for junior mining companies, competitive pressures, currency movements, which can affect the Company's revenue in Canadian dollars,  the geographic distribution of the Company's operations, the impact of operational changes, changes in jurisdictions in which the Company operates (including changes in regulation), failure by counterparties to fulfill contractual obligations, and other factors as may be set forth, as well as objectives or goals, and including words to the effect that the Company or management expects a stated condition to exist or occur. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties. Actual results in each case could differ materially from those currently anticipated in such statements by reason of factors such as, but not limited to, the factors set out in the discussion starting on pages 15 to 17 of the 2010 Annual Report entitled "General Risks and Uncertainties", and such other documents as available on SEDAR at www.sedar.com. All such factors should be considered carefully when making decisions with respect to the Company. The Company does not undertake to update any forward-looking statements, including those statements that are incorporated by reference herein, whether written or oral, that may be made from time to time by or on its behalf, except in accordance with applicable securities laws.

      Based in Moncton, New Brunswick, Major Drilling Group International Inc. is one of the world's largest metals and minerals contract drilling service companies. To support its customers' mining operations, mineral exploration and environmental activities, Major Drilling maintains operations in Canada, the United States, South and Central America, Australia, Asia, and Africa.

      Financial statements are attached.

      Major Drilling will provide a simultaneous webcast of its quarterly conference call on Wednesday, December 8, 2010 at 8:30 AM (EST).  To access the webcast please go to the webcast section of Major Drilling's website at www.majordrilling.com and click the attached link, or go directly to the CNW Group website at www.newswire.ca for directions.  Participants will require Windows MediaPlayer, which can be downloaded prior to accessing the call.  Please note that this is listen only mode.


      Major Drilling Group International Inc.
      Consolidated Statements of Operations
      (in thousands of Canadian dollars, except per share information)
      (unaudited)
                     
        Six months ended   Three months ended
        October 31   October 31
                     
        2010   2009   2010   2009
                     
                     
      TOTAL REVENUE $ 237,298   $ 138,017   $ 127,818   $ 75,528
                     
      DIRECT COSTS 175,665   97,995   92,717   52,736
                     
      GROSS PROFIT 61,633   40,022   35,101   22,792
                     
      OPERATING EXPENSES              
        General and administrative 19,502   16,998   9,946   8,126
        Other expenses   3,310   2,032   1,419   1,147
        Foreign exchange gain  (1,248)    (829)   (1,340)   (149)
        Interest expense (revenue) 231   (95)   145   (26)
        Interest expense on long-term debt 380   574   180   271
        Amortization 15,114   15,440   7,759   7,713
        Restructuring charge -   1,220   -   -
        Goodwill impairment  -   2,032   -   -
        37,289   37,372   18,109   17,082
                     
      EARNINGS BEFORE INCOME TAX  24,344   2,650   16,992   5,710
                     
      INCOME TAX - PROVISION (RECOVERY)              
        Current 8,850   1,302   5,907   1,587
        Future (979)   584   (335)   63
        7,871   1,886   5,572   1,650
                     
      NET EARNINGS $ 16,473   $ 764   $ 11,420   $ 4,060
                     
                     
      EARNINGS PER SHARE              
      Basic  * $ 0.69   $ 0.03   $ 0.48   $ 0.17
      Diluted  ** $ 0.69   $ 0.03   $ 0.48   $ 0.17

      * Based on 23,795,973 and 23,717,467 daily weighted average shares outstanding for the fiscal year to date 2011 and 2010, respectively, and on 23,807,033 and 23,718,861 daily weighted average shares outstanding for the quarter ended October 31, 2010 and 2009, respectively.  The total number of shares outstanding on October 31, 2010 was 23,854,042.
         
      ** Based on 23,955,179 and 24,025,755 daily weighted average shares outstanding for the fiscal year to date 2011 and 2010, respectively, and on 24,019,713 and 23,894,788 daily weighted average shares outstanding for the second quarter ended October 31, 2010 and 2009, respectively.

      Major Drilling Group International Inc.
      Consolidated Statements of Comprehensive Earnings (Loss)
      (in thousands of Canadian dollars)
      (unaudited)
                     
        Six months ended   Three months ended
        October 31   October 31
                     
        2010   2009   2010   2009
                     
      NET EARNINGS $ 16,473   $ 764   $ 11,420   $ 4,060
                     
      OTHER COMPREHENSIVE EARNINGS (LOSS)              
        Unrealized gain (loss) on translating financial statements of self-sustaining foreign operations 8,595   (24,016)   2,958   412
                     
      COMPREHENSIVE EARNINGS (LOSS) $ 25,068   $ (23,252)   $ 14,378   $ 4,472
                     
                       
                     
      Consolidated Statements of Retained Earnings        
      (in thousands of Canadian dollars)        
      (unaudited)        
                     
        Six months ended        
        October 31        
                     
        2010   2009        
                     
      RETAINED EARNINGS, BEGINNING OF THE PERIOD $ 209,025   $ 218,983        
                     
        Net earnings  16,473   764        
        Dividend (5,243)   (4,745)        
                     
      RETAINED EARNINGS, END OF THE PERIOD $ 220,255   $ 215,002        
                     
                       
                     
      Consolidated Statements of Accumulated Other        
      Comprehensive Loss        
      (in thousands of Canadian dollars)        
      (unaudited)        
                     
        Six months ended        
        October 31        
                     
        2010   2009        
                     
      ACCUMULATED OTHER COMPREHENSIVE LOSS, BEGINNING OF THE PERIOD $ (44,333)   $ (5,079)        
                     
        Unrealized gains (losses) on translating financial statements of self-sustaining foreign operations 8,595   (24,016)        
                     
      ACCUMULATED OTHER COMPREHENSIVE LOSS, END OF THE PERIOD $ (35,738)   $ (29,095)




      Major Drilling Group International Inc.
      Consolidated Statements of Cash Flows
      (in thousands of Canadian dollars)
      (unaudited)
                     
        Six months ended   Three months ended
        October 31   October 31
                     
        2010   2009   2010   2009
                     
      OPERATING ACTIVITIES              
      Net earnings $ 16,473   $ 764   $ 11,420   $ 4,060
      Operating items not involving cash              
         Amortization 15,114   15,440   7,759   7,713
         (Gain) loss on disposal of property, plant and equipment (817)   1   (705)   (66)
         Future income tax (recovery) (979)   584   (335)   63
         Stock-based compensation 907   1,044   460   539
         Goodwill impairment -   2,032   -   -
        30,698   19,865   18,599   12,309
      Changes in non-cash operating working capital items (4,178)   (325)   (3,961)   213
      Cash flow from operating activities 26,520   19,540   14,638   12,522
                     
      FINANCING ACTIVITIES              
      Repayment of long-term debt (5,234)   (6,469)   (2,953)   (3,393)
      Acquisition of short-term debt (note 8) 10,400   -   -   -
      Issuance of common shares 1,280   28   1,146   28
      Dividend paid (4,750)   (4,743)   -   -
      Cash flow from (used in) financing activities 1,696   (11,184)   (1,807)   (3,365)
                     
      INVESTING ACTIVITIES              
      Business acquisition (note 5) (2,537)   -   (185)   -
      Acquisition of property, plant and equipment (22,208)   (7,208)   (13,289)   (3,904)
      Proceeds from disposal of property, plant and equipment 3,357   1,497   2,817   602
      Cash flow used in investing activities (21,388)   (5,711)   (10,657)   (3,302)
                     
      OTHER ACTIVITIES              
      Foreign exchange translation adjustment (1,213)   (3,157)   (1,545)   (484)
                     
      INCREASE (DECREASE) IN CASH 5,615   (512)   629   5,371
                     
      CASH POSITION, BEGINNING OF THE PERIOD 30,232   58,035   35,218   52,152
                     
      CASH POSITION, END OF THE PERIOD $ 35,847   $ 57,523   $ 35,847   $ 57,523




      Major Drilling Group International Inc.
      Consolidated Balance Sheets
      As at October 31, 2010 and April 30, 2010
      (in thousands of Canadian dollars)
      (unaudited)
             
      ASSETS October   April
        2010   2010
             
      CURRENT ASSETS      
        Cash $ 35,847   $ 30,232
        Accounts receivable 85,563   62,128
        Income tax receivable 6,575   10,053
        Inventories 64,447   63,170
        Prepaid expenses 6,689   4,813
        Future income tax assets  233   793
        199,354   171,189
             
      PROPERTY, PLANT AND EQUIPMENT 223,646   210,812
             
      FUTURE INCOME TAX ASSETS  9,450   8,117
             
      GOODWILL AND INTANGIBLE ASSETS (note 7) 27,373   25,538
             
        $ 459,823   $ 415,656
             
      LIABILITIES      
             
      CURRENT LIABILITIES      
        Accounts payable and accrued charges $ 65,956   $ 54,027
        Income tax payable 6,486   2,830
        Short-term debt (note 8) 11,148   -
        Current portion of long-term debt   7,048   8,887
        Future income tax liabilities 374   819
        91,012   66,563
             
      LONG-TERM DEBT  11,741   15,041
             
      FUTURE INCOME TAX LIABILITIES  16,789   15,783
        119,542   97,387
             
      SHAREHOLDERS' EQUITY      
        Share capital  143,715   142,435
        Contributed surplus 12,049   11,142
        Retained earnings 220,255   209,025
        Accumulated other comprehensive loss (35,738)   (44,333)
        340,281   318,269
             
        $ 459,823   $ 415,656




      MAJOR DRILLING GROUP INTERNATIONAL INC.
      NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
      FOR THE PERIODS ENDED OCTOBER 31, 2010 AND 2009
      (in thousands of Canadian dollars)

      1. BASIS OF PRESENTATION

      These interim consolidated financial statements were prepared using accounting policies and methods consistent with those used in the preparation of the Company's audited consolidated financial statements for the year ended April 30, 2010.  These interim consolidated financial statements conform in all respects to the requirements of Canadian generally accepted accounting principles for annual financial statements, with the exception of certain note disclosures. As a result, these interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes for the year ended April 30, 2010 contained in the Company's 2010 annual report.

      2. FUTURE ACCOUNTING CHANGES

      International Financial Reporting Standards ("IFRS")
      In February 2008, the Accounting Standards Board ("AcSB") confirmed that the use of IFRS will be required in 2011 for publicly accountable enterprises in Canada. In April 2008, the AcSB issued an IFRS Omnibus Exposure draft proposing that publicly accountable enterprises be required to apply IFRS, in full and without modification, on January 1, 2011 for companies with a calendar year end, therefore the transition date for the Company is May 1, 2011. This will require the restatement, for comparative purposes, of amounts reported by the Company for its year ended April 30, 2011, and of the opening balance sheet as at May 1, 2010. The Company is currently in the process of developing a conversion and implementation plan and assessing the impacts of the conversion on the consolidated financial statements and disclosures of the Company.

      3. SEASONALITY OF OPERATIONS

      The Company's operations tended to exhibit a seasonal pattern whereby its fourth quarter (February to April) was its strongest.  With the exception of the third quarter, the Company has, over the past several years, exhibited comparatively less seasonality in quarterly revenue.  The third quarter (November to January) is normally the Company's weakest quarter due to the shutdown of mining and exploration activities, often for extended periods over the holiday season, particularly in South and Central America.  Coming out of the recent economic and industry downturn, it is not yet clear whether or not the Company's revenue will return to more historical seasonal patterns, or whether a recent lack of seasonality will continue.

      4. FUNCTIONAL CURRENCY

      Effective May 1, 2010, the Company's operation in Chile changed its functional currency from the U.S. dollar to the Chilean peso. Factors considered when changing the functional currency included contract revenue being determined in local currency, the currency of operating costs and local regulations requiring invoicing and settlement of these being performed in the local currency.  This change has been done in accordance with CICA Handbook Section 1651, Foreign Currency Translation, and consequently applied prospectively.  All items were translated to the new functional currency using the exchange rate at the date of the change. 

      5. BUSINESS ACQUISITIONS

      North Star Drilling
      Effective June 30, 2010, the Company acquired the assets of North Star Drilling, which provides contract drilling services to the fresh water and geothermal markets in certain mid-western states in the USA, and operates from its head office in Little Falls, Minnesota, as well as from satellite offices in Brainerd and Bemidji, Minnesota.  The acquired business includes drilling equipment, contracts and employees.  The purchase price for the transaction was USD $2,428 (CAD $2,537), including customary working capital adjustments, financed with cash.  There is also a contingent consideration of USD $750 to the purchase price, based on future earnings.

      The Company is in the process of finalizing the valuation of assets. As at October 31, 2010, $1,475 of the purchase price was allocated to net tangible assets and $1,062 was allocated to goodwill. These values are preliminary and are subject to adjustments as additional information is obtained.

      The estimated net assets acquired at fair market value at acquisition are as follows:

      Assets acquired and liabilities assumed  
      Accounts receivable $ 774
      Inventories 385
      Prepaid expenses 18
      Property, plant and equipment 1,075
      Goodwill 1,062
      Accounts payable (777)
      Net assets $ 2,537
         
      Consideration  
      Cash $ 2,537

      SMD Services
      Effective February 26, 2010, the Company acquired SMD Services based in Huntsville, Alabama. Through this purchase, Major Drilling entered the environmental drilling sector and acquired a small fleet of sonic, probe and auger drill rigs, as well as a skilled management team and personnel. The purchase price for the transaction was USD $1,953 (CAD $2,064), including customary working capital adjustments, financed with cash.  There is also a contingent consideration of USD $2,000 to the purchase price, based on future earnings.

      The net assets acquired at fair market value at acquisition are as follows:

      Assets acquired and liabilities assumed  
      Cash $ 90
      Accounts receivable 234
      Prepaid expenses 46
      Property, plant and equipment 1,605
      Intangible assets 249
      Accounts payable (160)
      Net assets $ 2,064
         
      Consideration  
      Cash $ 2,064

      6. INVENTORY

      The cost of inventory recognized as an expense and included in direct costs for the six and three months ended October 31, 2010 was $42,164 and $23,446 respectively.  During the period, there were no significant write-downs of inventory as a result of net realizable value being lower than cost and no inventory write-downs recognized in previous years were reversed.

      7. GOODWILL AND INTANGIBLE ASSETS

        October 2010   April 2010
             
      Goodwill $ 26,321   $ 24,464
      Intangible assets 1,052   1,074
        $ 27,373   $ 25,538

      Intangible assets include the carrying value of customer relationships and a non-compete agreement, which are amortized on a straight-line basis between a three and five year period.

      Changes in the goodwill and intangible assets balance were as follows for the six and three months ending October 31, 2010 and 2009:

        2011 YTD
        2010 YTD
        2011 Q2
        2010 Q2
                   
      Balance at beginning of the period
      $ 25,538
        $ 32,072
        $ 26,434
        $ 26,692
      Goodwill and intangible assets acquired
      1,062
        -
        374
        -
      Amortization of intangible assets
      (297)
        (264)
        (165)
        (132)
      Goodwill adjustment
      -
        (1,690)
        -
        -
      Goodwill impairment
      -
        (2,032)
        -
        -
      Effect of foreign currency exchange rate changes
      1,070
        (1,789)
        730
        (263)
        $ 27,373
        $ 26,297
        $ 27,373
        $ 26,297

      8. SHORT-TERM DEBT

      In the first quarter of the current fiscal year, the Company borrowed 5,375 million Chilean pesos (CAD $10.4 million), secured by a USD $10 million stand-by letter of credit drawn from the Company's demand credit facility, carrying interest at an annual rate of 5.18% and maturing in May 2011.

      9. CAPITAL MANAGEMENT

      The Company includes shareholders' equity (excluding accumulated other comprehensive loss), short and long-term borrowings and demand credit facility net of cash in the definition of capital.

      Total managed capital was as follows:

        October 2010   April 2010
             
      Short-term debt $ 11,148   $ -
      Long-term debt 18,789   23,928
      Share capital 143,715   142,435
      Contributed surplus 12,049   11,142
      Retained earnings 220,255   209,025
      Cash (35,847)   (30,232)
        $ 370,109   $ 356,298

      The Company's objective when managing its capital structure is to maintain financial flexibility in order to: i) preserve access to capital markets; ii) meet financial obligations; and iii) finance internally generated growth and potential new acquisitions. To manage its capital structure, the Company may adjust spending, issue new shares, issue new debt or repay existing debt.

      Under the terms of certain of the Company's debt agreements, the Company must satisfy certain financial covenants. Such agreements also limit, among other things, the Company's ability to incur additional indebtedness, create liens, engage in mergers or acquisitions and make dividend and other payments. During the period, the Company was, and continues to be, in compliance with all covenants and other conditions imposed by its debt agreements.

      In order to facilitate the management of its capital requirements, the Company prepares annual budgets that are updated as necessary, dependent on various factors.

      The Company's objectives with regards to capital management remain unchanged from fiscal 2010.

      10. FINANCIAL INSTRUMENTS

      Fair value
      The carrying values of cash, accounts receivable and accounts payable and accrued charges approximate their fair value due to the relatively short period to maturity of the instruments. Long-term debt has a carrying value of $18,789 as at October 31, 2010 (April 30, 2010 - $23,928) which also approximates its fair value.

      Risk management
      The Company is exposed to various risks related to its financial assets and liabilities.  There have been no substantive changes in the Company's exposure to financial instrument risks, its objectives, policies and processes for managing those risks, or the methods used to measure them, from previous periods, unless otherwise stated in this note.

      Credit risk
      The Company is exposed to credit risk from its accounts receivable. The Company has adopted a policy of dealing only with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. It carries out, on a continuing basis, credit checks on its customers and maintains provisions for contingent credit losses. The Company also diversifies its credit risk by dealing with a large number of customers in various countries. Demand for the Company's drilling services depends upon the level of mineral exploration and development activities conducted by mining companies, particularly with respect to gold, nickel and copper. The Company's five largest customers account for 24 percent (25 percent in 2010) of total quarterly revenue, with no one customer representing more than 10 percent of its revenue for 2011 or 2010.

      The carrying amounts for accounts receivable are net of allowances for doubtful accounts, which are estimated based on aged analyses of receivables, past experience, specific risks associated with the customer and other relevant information. The maximum exposure to credit risk is the carrying value of the financial assets.

      As at October 31, 2010, 70 percent of the Company's trade receivables were aged as current (less than 30 days) and 2.2 percent of the trade receivables were impaired.

      Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. This risk is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

      Interest rate risk
      The demand loan and long-term debt of the Company bear a floating rate of interest, which exposes the Company to interest rate fluctuations.

      As at October 31, 2010, the Company has estimated that a one percentage point increase in interest rates would have caused a quarterly decrease in net income of approximately $46 and a one percentage decrease in interest rates would have caused a quarterly increase in net income of $46.

      Foreign currency risk
      Foreign currency risk arises as the Company has operations located internationally where local operational currency is not the same as the functional currency of the Company.

      A significant portion of the Company's operations are located outside of Canada. The accounting impact of foreign currency exposure is minimized since the operations are classified as self-sustaining operations. In certain developing countries, the Company mitigates its risk of large exchange rate fluctuations by conducting business primarily in U.S. dollars. U.S. dollar revenue exposure is partially mitigated by offsetting U.S. dollar labour and material expenses. Monetary assets denominated in foreign currencies are exposed to foreign currency fluctuations. 

      Based on the Company's foreign currency net monetary exposures and net assets as at October 31, 2010, and assuming that all other variables remain constant, a 10 percent rise or fall in the Canadian dollar against the other foreign currencies would have resulted in increases (decreases) in the net earnings and comprehensive earnings as follows:


        Increase (decrease) in net earnings
        Canadian dollar
      appreciates 10%
        Canadian dollar
      depreciates 10%
      U.S. Dollar $ (1,478)   $ 1,478
             
        Increase (decrease) in comprehensive earnings
        Canadian dollar
      appreciates 10%
        Canadian dollar
      depreciates 10%
      U.S. Dollar $ (22,661)   $ 22,661
      Chilean Peso (3,602)   3,602
      Australian Dollar (1,003)   1,003

      Liquidity risk
      Liquidity risk, the risk that the Company would not be able to meet its financial obligations as they become due, arises from the Company's management of working capital, finance charges and principal repayments on its debt instruments.

      The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

      Total financial liabilities, by due date, as at October 31, 2010 are as follows:

        Total   1 year   2-3 years   4-5 years
                     
      Accounts payable & accrued charges $ 65,956   $ 65,956   $ -   $ -
      Short-term debt 11,148   11,148   -   -
      Long-term debt       18,789         7,048       10,855           886
        $ 95,893   $ 84,152   $ 10,855   $ 886

      11. SEGMENTED INFORMATION

        2011 YTD   2010 YTD   2011 Q2   2010 Q2
                     
      Revenue              
        Canada - U.S. $ 91,020   $ 44,279   $ 50,569   $ 24,091
        South and Central America 82,060   42,403   42,043   24,160
        Australia, Asia and Africa 64,218   51,335   35,206   27,277
        $ 237,298   $ 138,017   $ 127,818   $ 75,528
                     
      Earnings from operations              
        Canada - U.S. $ 15,077   $ 5,381   $ 9,506   $ 3,768
        South and Central America 9,158   5,268   4,626   3,362
        Australia, Asia and Africa 7,272   566   6,278   1,270
        31,507   11,215   20,410   8,400
      Eliminations (465)   (657)   (234)   (333)
        31,042   10,558   20,176   8,067
      Interest expense, net 611   479   325   245
      General corporate expenses 6,087   4,177   2,859   2,112
      Restructuring charge -   1,220   -   -
      Goodwill impairment -   2,032   -   -
      Income tax 7,871   1,886   5,572   1,650
      Net earnings $ 16,473   $ 764   $ 11,420   $ 4,060

      Goodwill impairment relates to the South and Central American segment for the fiscal year 2010.

      For further information:

      Denis Larocque, Chief Financial Officer  
      Tel: (506) 857-8636     
      Fax: (506) 857-9211     
      [email protected]

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      Organization Profile

      MAJOR DRILLING GROUP INTERNATIONAL INC.

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