IMDEX LIMITED — Interim / Quarterly Report 2010

Feb 23, 2010

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Imdex News

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Issue 22 - Imdex Group Newsletter - Februar y 2010
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Dear Shareholders

As this is the first edition of Imdex News for the 2010 calendar year, I would like to take this opportunity to thank you for your ongoing support throughout 2009 and wish you a happy and rewarding year ahead.

Calendar 2009 was a tough year for the Imdex Group and our performance over the first half of the 2010 financial year (being the second half of the 2009 calendar year) needs to be put in the context of the preceding 12 months, which was a tale of two halves. The first half of the 2009 financial year represented an historic high in the markets in which Imdex operates, whilst the second half of the 2009 financial year represented a cyclical low given the impact of the global financial crisis.

Summary

• The 1H10 saw an improved operating performance on the second half of FY09, which was the low point in the current cycle (1H09 was the high point)

• Revenue (excluding interest income) of $58.4 million (2H09: $56.7 million, 1H09: $80.3 million)

• EBITA from operations of $7.5 million (2H09: $4.5 million, 1H09: $20.0 million)

• Net profit after tax (excluding non-operational items) of $2.9 million (2H09: $1.3 million, 1H09: $10.1 million)

• $23.5 million non-cash impairment of goodwill and intangible assets due to the lower performance and longer tool development times

• $4.9 million non-cash mark-to-market impairment of the investment in Sino Gas & Energy Holdings

• Cash flow from operations of $4.6 million (2H09: $9.6 million, 1H09: $6.6 million)

• Continued growth in oil & gas revenues accounting for 20% of 1H10 operational revenue

• Increased drilling activity emerging in Africa, Latin America and Canada in late 1H10, evidencing early stages of recovery

• Improved utilisation of DHI mining rental fleet, with fleet numbers up 90% (31 January 2010) on the low in April 2009

• Established platform for growth and well positioned for the upturn; and

• Operating margins improving going into 2H10.

Operationally, we have commercialised new generation solids control equipment and new units are in the process of being placed with companies such as BHP and Rio Tinto. Demand is robust and we are focused on increasing production capacity with our manufacturers.

We continued to invest in engineering and product development through the decline in the cycle and introduced new improved tools for mining and oil & gas even though the DHI market for oil and gas has been more difficult and is taking longer to recover.

Significant increases in the mining tool rental fleet were experienced towards the end of the 2009 calendar year and early in 2010. As a result, at the end of January 2010 our fleet was only down 20% from the peak experienced in July 2008.

Overall, Imdex is exiting the downturn a much stronger company and experiencing the early stages of a recovery. A number of commodities are now trading above their long term averages and many mining and exploration companies have taken advantage of receptive equity markets. Both large and small companies have returned to drilling exploration. The Asia Pacific region has rebounded pretty well, and the other major mining regions of Africa, Latin America and Canada are showing signs of increased activity.

We remain focused on growing shareholder value and are well positioned to generate attractive returns for shareholders over the medium to longer term.

Drilling Fluids & Chemicals (DFC) Division

Revenue for 1H10 was $41.0 million (2H09 – $41.2 million; 1H09 – $50.5 million), and operational EBITA was $2.7 million (2H09 – $2.4 million; 1H09 – $7.9 million).

The DFC Division experienced peak revenues of $50.5 million in 1H09 which were followed by a sharp decline due to the global financial crisis and related reduction in exploration spending. Revenues have now stabilised, with increased drilling activity in all major mining regions and oil & gas opportunities in Australia and South East Asia expected to drive revenue growth in 2H10.

Imdex continued to grow its oil & gas revenue to the extent that it represented 25% of DFC revenue in 1H10.

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Dear Shareholders (continued)

Performance has been impacted in 1H10 due to Imdex protecting its specialist skill set and fixed cost structures in all major mining regions despite the lag experienced in drilling activity in Africa, Canada and Latin America. As these markets recover, Imdex expects margins to improve reflecting the investment that has been made in the business.

Key operational highlights for the DFC Division included

• Successful commercialisation of new generation solids control units (SCUs) in Australia

• Continued investment in product development saw Imdex’s state-of-the-art drilling fluids research laboratory at Osborne Park, Western Australia open in 1H10

• Progressive recovery in the global drilling market - major, intermediate and junior companies have recommenced spending and exploration programs. The drilling contractors are also reporting a greater level of tender activity

• Continued to build relationships and support global alliances with Boart Longyear, Major Drilling, Layne Christensen and other leading drilling contractors; and

• Decision to move to a single drilling fluids brand globally, being “AMC Drilling Fluids”.

Down Hole Instrumentation (DHI) Division

Revenue for 1H10 was $17.4 million (2H09 – $15.5 million; 1H09 – $29.8 million), and operational EBITA was $5.1 million (2H09 – $2.7 million; 1H09 – $12.5 million).

Similar to the DFC Division, revenues were at peak levels in 1H09 and dropped significantly following that to $15.5 million in 2H09. A recovery of 12% from the 2H09 low to $17.4 million has been experienced in 1H10.

Compared to 1H09, revenues were adversely affected by the reduction in the mining DHI rental fleet and the lack of available capital expenditure budgets by customers to enable them to buy tools. However, the rental tool fleet reached a low in April 2009 and has since increased slowly each month, gathering pace late in 1H10.

The mining tool rental fleet is recovering and at 31 December 2009 was 33% up on the low point. The recovery has continued into January 2010, with the fleet up 90% on the low experienced in April 2009 and only 20% off the peak experienced in July 2008.

The continued investment in engineering and product development and building expertise for the oil and gas market expansion has impacted margins. However, it is expected that these initiatives will yield additional revenue from 2H10.

Key operational highlights for the DHI Division included:

• Ongoing investment in engineering and product development with continued research into new and improved products for both the mining and oil & gas industries

• Successful global launch of a new generation Core Orientation Tool with strong customer uptake in global mining markets

• Continued development of brand awareness to differentiate Flexit as the oil & gas brand and Reflex as the leading global mining and mineral exploration brand

• Successful establishment of manufacturing of DHI for the mining industry at Osborne Park in Western Australia, previously undertaken in the United Kingdom. This facility will eventually manufacture all new mining and oil & gas tools for the Imdex Group. By concentrating manufacture in this way, cost savings and efficiencies are expected to be gained from 2H10; and

• Continue to build relationships and support global alliances with Boart Longyear, Major Drilling, Layne Christensen and other leading drilling contractors.

New Board Member Profile: Betsy Donaghey

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In the Chairman’s statement in the annual report, Ian Burston mentioned that Imdex expected to make a new appointment to the Board with the goal of increasing the oil and gas expertise on the Board to align with Imdex expanding its business within that sector. To meet that goal, Betsy Donaghey was appointed to the Board in October 2009.

Betsy grew up in the United States of America. She received a Bachelor’s degree in civil engineering from Texas A & M and a Master’s degree in operations research from the University of Houston.

She has spent her entire career in the oil and gas industry, working first with Energy Reserves Group, a small independent oil and gas company, as a business analyst.

BHP bought that company in 1984, and moved Betsy to Australia in 1986. Betsy worked with BHP until 2000, in roles including business analysis, strategic planning, reservoir engineering and gas marketing.

In 2000, Betsy moved to Woodside Energy. Her roles there included gas marketing and strategic planning. She ran the Australia Business Unit in 2006 and 2007 as the Enfield, Vincent and Otway projects were brought on line. Her most recent role was running the Browse Business Unit, focused on delivering a Greenfield LNG development. She retired from Woodside in 2009. Betsy lives in Melbourne with her husband Tony, who is an oil and gas drilling engineer.

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PRODUCT UPDATE

Flexit HTGS Tool Product Achievement

In early December 2009, a Flexit client, MS Energy Services (Houston, USA) survey division set out to run the High Temperature GyroSmart Surveying System in deeper and more challenging wellbores after having good success surveying shallow and medium depth wellbores using the HTGS tool.

The Flexit HTGS tool’s performance and capabilities in surveying these deeper wellbores were realised upon completion of the surveys. The most noteworthy accomplishment is the successful survey of a 16,000 ft. deep directionally drilled and producing well in Robertson County, Texas.

MS Survey was recently commissioned by a major oil and gas producer to perform a gyroscopic survey inside a 16,000 feet deep, directionally drilled production well. A high temperature capable surveying system was requested. In order to provide the most accurate survey data with minimal down hole time, the Flexit HTGS system was deemed as the best choice for doing the job, said Kim Carrier of MS Energy Services.

The Flexit HTGS is based on unique MEMS solid state gyro technology utilising digital microgyros which consist of silicon sensor chips and advanced integrated circuits assembled together in a ceramic package. This digital micro-gyro has world class performance, is compact and light weight and thereby very rugged and shock tolerant. The Flexit HTGS is the simplest to use, yet the most technically advanced, miniature memory digital gyro system available.

The Flexit HTGS tool

Solids Control Units Ongoing Progress

New

Product: ACT II Rapid Decent

During 1H10, Imdex successfully commercialised the new generation Solids Control Units (SCU’s) in Australia. SCUs’ eliminate the need to dig conventional mud pits and limit the environmental impact and footprint disturbance on site. Demand for the units is robust, particularly with major mining companies who generally lead the way in protecting the environment during operations.

Imdex has released tender packages to selected manufacturers to increase capacity and increase our ability to meet demand which is robust for the large surface units and the trial units for underground operations.

Imdex launched the new ACT II Rapid Decent tool at the Mining Indaba 2010 expo in South Africa which was held early in February 2010. Early feedback from clients is that it is likely to enjoy greater success than its forerunner the ACT I.

Once the roll out of the SCUs’ gathers pace in Australia, we will introduce them into the other major mining regions of Africa, Canada and Latin America.

The Reflex ACT II RD retains the quality and consistency of the ACT which has become the preferred system for many drillers and geologists worldwide. This upgraded version provides the additional benefits of rapid decent, time stamping and infra-red technologies, making the tool even faster, more robust and accurate.

Single Brand for Drilling Fluids in Mining and Oil & Gas

In recent years Imdex acquired a number of small drilling fluids businesses in key mining regions to increase geographic reach. The major mining regions of Africa, Canada and Latin America were hit hard by the global financial crisis and have been slow to recover. Consequently, these businesses performed poorly in the current half year. Imdex is taking the opportunity to restructure these businesses along regional lines and re-branding all these entities into the AMC brand.

We are in the early stages of moving to a single drilling fluids brand globally for the mining and oil and gas industries. The individual geographic brands of Samchem, Polydrill, Southernland and Suay will disappear in the process and the product list further rationalised leading to increased efficiencies and a simplified business model.

The ACT I had become the market leader in core orientation due to the clever use of digital technology that reduces the time the orientation process takes while improving the quantity and quality of data. Although this leading edge technology has directly resulted in the success of the ACT I further improvements were undertaken to increase our competitive advantage.

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Outlook

Successful relocation of Manufacturing Facilities

Imdex’s strategy is to provide drilling fluids and down hole instrumentation to two main markets, those being mining and oil & gas. This strategy remains unchanged and Imdex has emerged from the downturn, a stronger business with a robust balance sheet. The key elements of this strategy are:

The relocation of manufacturing for down hole tools in the mining industry from the United Kingdom to Perth has successfully been completed. All of the tools for the global mining industry are now manufactured in Perth which increases efficiencies and provides greater control over manufacturing.

• Imdex’s global rental business model

• Expansion of relationships with global and local customers

• Investment in targeted engineering and product development; and

PDAC Convention 2010

• The expansion of Imdex’s share of the oil and gas market

Reflex will be showcasing its new core orientation and survey instrument developments at this year’s Prospectors & Developers Association of Canada’s (PDAC) Convention to be held in Toronto in early March.

The third quarter of FY09 represented the trough in the current cycle. The recovery, albeit slow, has continued into the first half of the 2010 financial year with improved commodity prices across the board and increased funding by equity markets driving a general increase in drilling activity globally. The medium to long term market fundamentals remain attractive due to long term supply and demand imbalances driving exploration and production spending within both the mineral and oil & gas markets.

The PDAC Convention is one of the most significant events for companies within the exploration and mining industries and has played an important role in launching new products for Reflex in previous years.

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Contact Details

Imdex Limited Level 1, 15 Rheola Street West Perth 6005 Western Australia PO Box 1325 West Perth 6872 Western Australia Telephone: +61 8 9481 5777 Fax: +61 8 9481 6527 Email: imdex@imdexlimited.com Website: www.imdexlimited.com

Imdex’s strategy remains unchanged. We expect that 2H10 will see a further recovery in revenue levels and profitability as we execute our global growth strategy and expand our oil & gas market share.

Yours Faithfully,

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Bernie Ridgeway Managing Director

Imdex Limited

Imdex is a Western Australian ASX listed company which provides drilling fluids and leading down hole instrumentation to the mining, oil and gas, water well and civil industries worldwide. The company has streamlined its business into two clearly defined and distinct operational divisions, the Drilling Fluids and Chemicals (DFC) Division, and the Down Hole Instrumentation (DHI) Division. The Group has a presence in all significant mining and exploration regions and has the global profile and resources to position itself for long term growth.

Imdex News is published quarterly to keep the Company’s valued shareholders up to date with Imdex’s performance and principal operational activities. Your feedback is always welcome. Please send any comments or suggestions to Tina Smitherman – Group Marketing & Communications Manager at: tina.smitherman@imdexlimited.com