Case analysis: Bremner decided to prepare a proposal, he needed to take into account the actions of his competitors. Should he bid aggressively and give Mond a discount, or should he rely on Northern’s reputation and bid at a level consistent with the traditional 30 per cent target gross margin?

Read the case and use the following general outline:
1. Executive summary (written last but appearing first);
2. Statement of problem, opportunity, and objectives;
3. Analysis of the situation; (quantitative and qualitative)
4. Identification and evaluation of alternatives; and
5. Decision, course of action, and implementation.
I will provide a sample of previous work so you can know what I exactly want. The analysis must be 1500 words excluding the appendix

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NORTHERN DRILLING INC.: THE MOND NICKEL CONTRACT DECISION – A TACTICAL DILEMMA IN A GROWTH STRATEGY Robert Bremner wrote this case under the supervision of Professor Michael Taylor solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail Copyright © 2012, Richard Ivey School of Business Foundation Version: 2012-11-08
It was October 2011, and Peter Bremner, general manager of Northern Drilling Inc. (Northern), sat at his desk poring over a request for proposal (RFP) he had just received from Mond Nickel Company (Mond), one of the largest players in the Canadian mining industry. In the exploration phase of mine development, mining companies contracted out work to exploration diamond-drilling companies such as Northern. Mond’s latest exploration contract, if won by Northern, would be Northern’s largest contract to date. Developing a relationship with Mond, a new client, was very important to Northern’s growth plans. However, the contract could compromise Northern’s long-standing relationship with another of its customers, Noranda Nickel (Noranda). Bremner had been responsible for the start-up of Northern in 2006. Since Northern’s inception, he had worked tirelessly to develop positive relationships with the biggest players in the mining industry. As a result, when making the decision to tender a bid for this latest contract, Bremner had to bear in mind the potential consequences this business would have on Northern’s reputation with its other clients. Also, because Mond was requesting that Northern deploy more drills over the life of the contract than it currently had available, Bremner needed to assess whether Northern was capable of handling the job. In addition to these considerations, Bremner also needed to determine a reasonable price. If he bid too high, he could lose the contract to one of the four competitors vying for the same work, but bidding too low would leave money on the table. If Bremner decided to send a proposal, he had only three weeks before the proposal deadline. He needed answers quickly. EXPLORATION DIAMOND DRILLING Exploration diamond drilling was used in the mining industry to confirm the existence of ore deposits, usually in remote locations, and to assess the viability of developing the mine to extract the ore (see Exhibit 1). Although called exploration diamond drilling, the exploration could involve any kind mineral — from industrial minerals (e.g., salt and limestone) to rare earth elements. The process involved the use.

Page 2 9B12A038 of a hollow drill bit embedded with synthetic diamonds to remove a cylindrical piece of solid rock (i.e., a core sample) from deep in the ground. A geologist then assessed the core sample for mineral content. Exploration diamond-drilling contractors, such as Northern, were hired by mining companies to carry out the drilling activities. Core sample assessment was performed by the mining company itself. Holes varied by depth, but were typically between 100 and 3,000 metres deep (with an average of 600 metres). The deeper the hole, the greater the expertise required. This was partially due to the complexity of drilling deeper holes, but also because of the severe consequences incurred if a mistake was made. Bremner explained:
If our guys make a mistake — if the drill rods1 break, for example — they have to “fish” for the rods to get them out of the hole to keep drilling. As you can imagine, this becomes difficult when the hole gets deep, and retrieving the rods isn’t always possible. When it isn’t possible, the crew has to re-drill the hole. This could set us back days,2 depending on the depth, because remember: we have a target depth. Drilling to 1,900 metres leaves us with nothing if the client needs to get to 2,000 metres.
Geological conditions were considered to be ideal when the rock beneath the surface was homogenous, but it was often necessary to drill through sand, voids or broken earth to reach the target depth. If the driller was not well equipped to deal with poor geological conditions, mistakes could occur (e.g., the breaking drill rods or the burning the drill bit into the rock). Thus, part of what differentiated drilling contractors was their ability to finish the job on time under less than ideal conditions, while providing high-quality, intact core samples for examination by the geologist. Accordingly, drilling contractors needed to staff each job with highly capable and experienced employees. THE MINING INDUSTRY The mining industry was highly cyclical and highly dependent on commodity prices. Whether a given commodity was profitable to extract depended on its current and expected market price. As a result, mining companies set their exploration budgets for the year according to these prices. When commodity prices were expected to be high, mining companies could afford to spend more on exploration (see Exhibit 2). In 2010, the exploration market was US$10.68 billion, and was expected to be even higher in 2011.3 Exploration in Canada represented 19 per cent of global expenditure on exploration, making it the largest market in the world by country (see Exhibit 3). THE EXPLORATION DIAMOND DRILLING INDUSTRY Exploration diamond drilling represented, on average, 70 per cent of the budgets that mining companies allocated to exploration. Thus, the exploration market in Canada was approximately US$1.4 billion in 2010.4 The health of the drilling services market depended heavily on the health of the mining industry. Although the short-term outlook for the Canadian mining sector was positive, nothing was certain. Some
1 Drill rods are threaded steel tubes three metres long. The diamond drill bit is attached to the end of the rods, which run for entire depth of the hole. 2 A competent driller could average 20 metres per shift when drilling an 1,800-metre hole, or 14 metres per shift when drilling a 3,000-metre hole. Drill rigs operated two 12-hour shifts per day. 3 Metal Economics Group, “World Exploration Trends 2011“, exploration-trends-2011 (accessed March 18, 2012). 4 Ibid.
Page 3 9B12A038 issues had been plaguing the industry. For example, since 2009, the industry had been experiencing a shortage of experienced drillers, which had affected most of the major contractors. The industry was highly competitive and very fragmented. The Canadian industry comprised about 80 drilling contractors, including many smaller owner-operators who offered services around existing mine sites. With almost no overhead cost, these owner-operators drove down industry prices by operating on relatively thin gross margins. Despite clients being generally very price-sensitive, other factors could differentiate drilling contractors, depending on whether the work was complex or routine. For more complex jobs, a mining company’s primary concern when sending RFPs to various contractors was the reputation of the drilling service provider. When assessing the bids, a mining company’s primary concern was the efficacy of the crew that would staff the work tendered. It was important that the drilling company prioritized the role of the mining company by staffing the job with experienced drillers, both to minimize delays and to ensure the work was performed properly. For more routine jobs, a mining company’s primary concern when selecting a contractor was cost. Owner-operators were often hired for smaller contracts, but larger drilling service providers were usually contracted for large jobs that ran for extended durations. Both kinds of jobs were profitable for Northern, but Northern was able to secure higher margins for more complex jobs. Selling in the industry was typically done through conventions or cold calls to potential clients. Very little print advertising was used in the industry. Most work, however, was attained through referrals. Mining companies would contact their competitors to determine which contractors they had hired to do exploration work. Competing mining companies had no issues sharing information about their experiences with various contractors. NORTHERN DRILLING Northern Drilling was a subsidiary of InterDrilling Corporation, the world’s third largest exploration drilling contractor, headquartered in Europe. Northern began in 2006, when Peter Bremner was hired to build the division from the ground up. Since then, the company had acquired several other drilling companies across Canada, such as Cass Drilling Ltd., based in Kamloops, British Columbia. Northern was considered to be a full-spectrum services company, with superior technical capability and high safety standards. Of Northern’s 34 drill rigs, 12 were deep diamond drills, the type of drills required in the Mond Nickel RFP. Northern’s year-to-date revenue was Cdn$43 million with 26 per cent earnings before interest and taxes (EBIT) (see Exhibit 4). Current utilization rates were approximately 75 per cent across all drill types. Deep diamond drills were fully utilized. Northern prided itself in its treatment of employees: “We treat our drillers like people, not numbers;” explained Peter. “We pay attention to their needs and give them a level of job security far above our competitors.” Although the company had several jobs that were running smoothly, Northern was struggling to be competitive in the market. Management believed these difficulties were the result of being too expensive relative to some of the commodity-type drillers5 and owner-operators. 5 Commodity-type drillers were drilling contractors who did routine work that, as a result, was evaluated based almost solely on price.
Page 4 9B12A038 The company’s growth strategy was to secure long-term specialized work. Because of the cyclical nature of the mining industry, long-term work mitigated some of the risk associated with investing in drilling equipment.6 Specialized work allowed Northern to differentiate itself in the highly competitive Canadian industry, helping Northern to secure contracts with higher margins.7 Generally, management preferred to avoid investing in new equipment unless absolutely necessary. However, when investments were assessed, they were benchmarked against a 20 per cent hurdle rate. Peter Bremner Peter Bremner had worked in the exploration drilling industry for more than 30 years. After graduating from Queen’s University with a degree in mining engineering in 1981, Bremner began working for Boart Longyear, the world’s largest exploration drilling contractor. He had held several senior management positions, including Regional General Manager (Asian Pacific) and Vice President of Drilling Services. As a result, he had personally developed excellent relationships with many of the world’s largest mining companies and was in an excellent position to begin InterDrilling Corp’s Canadian operations in 2006. The Mond Nickel Contract The proposed Mond contract involved drilling over a span of three years for poly-metallic deposits near Sudbury, Ontario. The RFP was divided into two individual jobs: a deep job with 3,000-metre holes, and an intermediate job with 1,800-metre holes. The work was to be charged as a fixed cost per metre, regardless of speed, unless the contractor entered poor geological conditions (which would be compensated on an hourly basis). If any costs and delays occurred due to the negligence of a Northern employee, Northern was to bear the cost. The proposed contract was for a total of 231,500 metres (see Exhibit 5). Direct costs per shift would be roughly $2,450 for the intermediate job and $2,800 for the deep job. Because the contract required that Northern invest in new drills and drilling equipment, Bremner needed to consider the cost of securing the equipment and the potential return on investment. The number of drills required for each job varied depending on the year (see Exhibit 6). Each drill cost Northern $550,000. A bulldozer or skidder per drill was also required to move the rigs, costing $150,000 each. Additional support equipment of $200,000 per drill was also necessary. Overhead costs amounted to 8 per cent of sales, but synergies equal to 2 per cent would be realized if Northern won both jobs. The deep job involved drilling deeper than Northern was used to, and the work was complex. Geological conditions were expected to be poor in some areas, and these issues were compounded by the fact that the holes were so deep. As a result, Mond had made it clear that the contract was to be prioritized by the winning bidder. All bidders were required to include a detailed profile of each employee that would be working on either job. Bremner wondered whether he would be able to put together a team capable of doing the work. He would need to find 24 additional drillers8 to staff both jobs, but he knew that drillers found long-term contracts to be appealing. 6 Contract durations could range from a few months to a few years. However, the industry standard was for contracts to be tendered on an annual basis. 7 Management preferred to bid at a level that provided Northern with a 30 per cent gross margin on each job (24 per cent EBITDA, or earnings before interest, taxes, depreciation and amortization. 8 Drilling companies often opted to train their own drillers rather than hire experienced personnel. Becoming a driller required 18 to 30 months of training as a driller’s assistant.

Page 5 9B12A038 Bremner also considered Northern’s existing client base. Although he wanted to grow the company, he wanted to do so without affecting Northern’s other clients. In particular, Noranda Nickel, the world’s fourth largest nickel producer, had been a loyal Northern client for several years and had historically represented 60 per cent of Northern’s revenue. Bremner wanted to maintain their excellent relationship. Northern was running seven drills for Noranda Nickel in Sudbury, next to Mond’s property. The contract with Noranda, however, was up for renewal at year’s end. Bremner was unsure whether Noranda wanted to maintain the current contract or scale down the number of drills, given that he had heard the geological results had been less than favourable. However, Noranda had only one mine left in Sudbury with only eight years of production life remaining. Noranda had the infrastructure to support three more mines. On average, it took seven years from discovery for a new mine to go into production. Competition for the Contract Bremner was concerned about three drilling contractors that would be bidding for the Mond contract: Boart Longyear (Boart), Major Drilling Group International Inc. (Major) and Orbit Garant Drilling Inc. (Orbit). Boart, the incumbent contractor, was the world’s oldest and largest drilling exploration service provider. Boart had an excellent reputation, but had been struggling in recent years in Northern Ontario. Service had been on the decline a result of management issues and, because of the industry shortage, personnel issues. Boart had lost the Mond contract due to underperformance. Major was the world’s second largest drilling contractor. It was more experienced and more technically capable than Northern. With global training camps in place for new drillers, it was likely that they were well equipped to handle the Mond job. However, the company was constrained by capacity and had performed little work for Mond in the past. Bremner suspected that the Mond contract would not be a strategic job for Major, and, as a result, it would bid high. Orbit was a major drilling contractor based out of Val-d’Or, Quebec. Orbit was typically known as a discount contractor. Bremner expected it would bid for the contract aggressively. However, Bremner didn’t think Orbit performed such deep work, and it did not perform technical work on a regular basis. DECISION Bremner wondered what steps he should take before sending a proposal, or whether he should send one at all. Although Northern was only at 75 per cent utilization, it had no diamond drill rigs available for the upcoming year. However, Bremner anticipated that up to four drills would be made available through the renegotiation of the Noranda contract. Utilizing these drills on the Mond job could save on capital costs and allow Northern to potentially outbid competitors. On the other hand, Bremner knew that Noranda was likely to eventually ramp up its exploration efforts given the urgency of its situation — he just didn’t know when. He had worked hard to develop a good relationship with Noranda in particular, so he wondered whether to approach someone at Noranda and explain his situation with Mond, Noranda’s direct competitor. Bremner considered the alternative: investing in new diamond drill rigs. Would such an investment be too risky given current industry conditions? Could Northern meet its target hurdle rate and make a satisfactory return on investment (ROI)? Could Northern afford to invest in eight new drills, or would it make more sense to bid on only one of the two jobs?

Page 6 9B12A038 If Bremner decided to prepare a proposal, he needed to take into account the actions of his competitors. Should he bid aggressively and give Mond a discount, or should he rely on Northern’s reputation and bid at a level consistent with the traditional 30 per cent target gross margin? Bremner knew that even if Northern was successful in winning the bid, he would need to ensure that the company was capable of performing the job. If the company underperformed, Northern would compromise its relationship with Mond and could lose any chance of repeat service. However, if the deep job was won and executed properly, Northern would be established as one of Canada’s most technically competent drilling contractors. With only three weeks before the proposal deadline, Bremner needed answers quickly.

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Source: Company files.
Source: Data for Chart: Metal Economics Group, “World Exploration Trends 2011,” center/world-exploration-trends-2011, accessed March 18, 2012.
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Source: Data for Chart: Metal Economics Group, “World Exploration Trends 2011,” center/world-exploration-trends-2011, accessed March 18, 2012.
Source: Company files.
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Exhibit 5
2012 2013 2014 Total Intermediate Job 46,500 52,000 33,000 131,500 Deep Job 28,000 28,000 44,000 100,000 Total 74,500 80,000 77,000 231,500
Source: Company files.
Exhibit 6
2012 2013 2014 Intermediate Job 4 4 3 Deep Job 4 4 5 Total 8 8 8
Note: Drill rigs were interchangeable between the intermediate and deep jobs. In 2014, if both jobs were won, one of the drills on the intermediate job could be shifted to the deep job. Source: Company files.
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