Capital Limited (CAPD) Earnings Call Transcript & Summary

Thank you very much, James. Thank you to everyone for dialing in to the Capital first half results presentation. A part of the release, we have done today to the LSE. There is the RNS as well as a link with the presentation. As I present today, I'll be referencing slides in the presentation. I'll kick off on Slide 4, which gives an overview of Capital, quite briefly here because we did cover a lot of the boards in greater detail later. The Capital is a services provider in the mining and exploration industry in Africa, predominantly Africa, and predominantly to actually gold customers in Africa. We offer a range of services across our traditional business of drilling as well as more recently laboratory services and earth-moving. And to reflect the fact that the business is evolving its service offering, we actually just recently changed the name from Capital Drilling Limited to Capital Limited. We're going to the key metrics briefly is that we've had an outstanding first half results, particularly in light of the environment with COVID. Our revenue was $65.1 million, up 18.8% from the prior half -- first half 2019. Our EBITDA was $15.4 million, up 21.3%. Our net profit was $13.6 million, up 167%, driven, obviously, by the strong performance of the operating business as well as some very strong gains in our investment portfolio. A lot of the strategic priorities are going to cover later in the presentation. So I'll just bring your attention to the bottom-right bullet point, and that is that we are operating across 9 mine sites, 8 of which are in Africa and 1 of which is in Saudi Arabia, and those sites provided 94% of our revenue over the first half. And I make that point because that's part of the resilience of the model is by working on mine sites and offering multiple services to those customers, we're becoming [indiscernible] on many of these sites. And while we had to deal with the restrictions of activity because of COVID, the mine site kept operating. And as a result, we got an extremely positive half year. Moving on to Slide 5, just gives a bit of a snapshot of the offering. We began in exploration drilling, moved into development drilling and more recently have added production -- have added production drilling and more recently moved into earth-moving as well to supplement those mine site activities. We also undertake underground drilling and laboratory services. So the recent additions there have been laboratories, which we moved into in 2017. And in 2019, we moved into the earth-moving business, so a fully integrated offering, which is offering us more growth opportunities as we move into this cycle. Slide 6. The profile of the major sites in which we work across Africa and Saudi, as I mentioned earlier. As you can see, some of these sites dates back to 2005, so we have really established a long-term [ prudence ] of quite a few of these operations, and as I've said earlier, looking to continue to look to the ways to expand our services to those customers. I'll move now on to -- I mean move forward actually to...

Jamie?

Yes?

Sorry, Jamie, if I could just interrupt you for a moment. James, the moderator. Two people have informed me that they can see the slides moving, but they cannot get any audio. I'm not sure if you can do anything about that. They're saying they can see the slides moving, no audio.

It's André. Perhaps if they just reload the page, I think they'll be able to hear the audio. If not, there will be a recording of the webcast available after -- at the conclusion of it.

Okay. Jamie, apologies. Please continue.

Okay. Thank you. We'll move straight through to Slide 9, so we'll [ skip ] around a little bit. I just want to highlight the absolutely outstanding safety performance of Capital, which has been a feature of our business for many years now, but these are absolutely industry-leading safety standards. When you look at any of our peers, we are, for incidents, well below any of our peers. And I think it's important to say that because it represents such an important part of the company's culture, which is really focused on doing things properly, professionally. We invest in health and safety. We invest in the best-quality people, the best-quality assets and the best-quality infrastructure, and that really has come through with those outstanding safety stats. So moving back to Slide 7, if I could, which is the gold market. I won't dwell on this too much. I mean stating the obvious, the gold price is trading at all-time highs. It's therefore highly supportive for demand and is very much a lead indicator for demand. When you look at the gold price, it has actually been on the [ improved ] for quite a few years and obviously improved materially over the course of 2020. But if you look at the chart on the right, the financings by junior and intermediate companies, predominantly on the ASX, TSX and [indiscernible] and LSE, and that is really the lead indicator for increased demand. And you can see it only start to take off in Q2 2020. So while the market has been improving since late 2016 and there have been reasonably good profits being generated by the mining companies and quite a lot of M&A activity, particularly at the top [ end of town ] was absent from the market with funding sources for the intermediate and juniors and what was also absent was exploration spending. For example, in 2019 exploration spending globally was a tad under $10 billion versus $21 billion back in 2012. So this recent reopening of the capital markets is a very strong positive lead indicator that we're going to start to see increased demand coming through, not only for exploration activity, but we also -- and we've seen it in the tendering market, increased mine site activity for resource extensions and tendering for in the mining site, cutbacks as the mining companies themselves are starting to redo their pit models using higher gold prices, which means accessing previously less-economic volume. Then I'll step over -- I'll skip straight to Slide 11, if I could, which is the highlights of the results. I'll focus just on the strategic and operational because we'll go through the finance slides. A couple of points just to raise here is that we had a number of new contract wins, not only with existing customers, but also some new customers, including a new long-term mine site contract with Hummingbird. And we also had contract extensions on some of our long-term customers, such as Resolute and Barrick North Mara, so again, just embedding those with long-term contracts. For the drilling fleet, we saw fleet utilization increased to 57%. We added 1 rig in the half to 100 rigs. The ARPOR was stable, outstanding safety stats that I mentioned earlier. And what's particularly encouraging is that we are growing our non-drilling revenue, which has grown from 5% of revenue to 11% of revenue in the current half year period. That revenue is being sourced predominantly from MSALABS, our laboratory business, and also from our recently formed mining business. And they -- both those businesses provide a lot of opportunity for growth moving forward. For the financials, let's go to Slide 12, just really looking at the highlights here. As flagged earlier, revenue on the previous period -- previous half year, up 18.8%.; EBITDA, up 21%; net profit, up 167%. We also announced today we declared a dividend of 0.9 cents per share for the interim period, and that's up 28.6% on the first half 2019, so just a really solid result. Slide 13, I won't go into too much detail, just basically to point out that the margins in the business have been maintaining robust levels now for quite a few years. And we've managed to achieve that despite some challenges over the course of 2019 and into -- 2018/'19 into the tail of first half this year. We actually moved 1/3 of our fleet from -- effectively from East Africa to West Africa, and we managed to absorb the cost of doing so and obviously the lack of revenue while the rigs are moving and maintain the margins. And then in the first half of this year, we were obviously impacted by COVID, which means longer rotations on site and site loadings for those working longer meant more people on site. And it saves about 1% of our margin, the increased labor costs. But as you can see, we still managed to achieve GP margin up on the previous half year period, first half '19. And then moving cost to EBITDA, we had 23.7% EBITDA margin, which is again up on the previous half year of '19, and that is despite building capability with offices in Perth and London and making a number of key hires in business development, contracts, legal and finance, which is adding bandwidth to support our expansion plan. Moving on to Slide 14 with the cash flow slide. I just bring your attention to a couple of numbers in there. EBITDA, I've already flagged. The operating cash flows before working capital changes, also up strongly, 21%. The cash generated from operations was, however, down, and that reflects a number of factors that were represented in the slide. Some of it was asset prepayments. That will be reversed as the assets are capitalized in the second half, those prepayments on capital items. Some of it's receivables timing. So working capital outflows dampen the cash from operations but still an extremely strong result, particularly operating cash flows before working capital. Slide 15 covers CapEx. As you can see in the first half, CapEx was $7 million. The one rig that was acquired that I mentioned earlier, an underground rig. The balance has primarily been spent on support equipment for the existing fleet. As flagged early, $3 million in asset prepayments is not reflected here. That will be reflected in the H2 CapEx. We are adding some further rigs in the second half, predominantly reverse circulation rig, just to expand our fleet in West Africa because that is very much a reverse circulation market. And we've also started to build our mining fleet to get some core capability on board as we're tendering on a number of contracts. Slide 16, balance sheet. I won't spend too much time here. The numbers speak for themselves. A couple of points to make, obviously, a strong increase in shareholder equity. And just recently in the post -- or in July, we renewed and increased our group revolving credit facility from $12 million to $15 million. That's with Standard Bank who we have been banking with now for 12 to 13 years. But the balance sheet remains -- despite the investment and the working capital outflows, we still maintain it a net neutral -- net neutral debt-to-equity position, so strongly positioned balance sheet as to position us well for the growth period ahead. I'm sure I'll get a lot of focus on Slide 17, which is the investments slide. We had an outstanding half year with the investments. That's some background on these slides. And the investments basically have been a feature of Capital, and it's been a feature -- it's a feature for a lot of the drilling companies and also the mining contractor, particularly those in Australia. We took a view in 2019 to -- that there was increasing activity in the gold mining sector, in particular, M&A activity happening, gold price firming up if there was an absolute rapid funding available to the juniors, so there's a disconnect in the capital market. And that coincided with us moving, as I said earlier, 1/3 of our fleet to increase our fleet in West Africa to 42% of the total fleet. So we went out as a BD to -- as well as through the investment, seeing the opportunity and invested in a number of juniors and mid-tiers and one [ case ] producer and did that, obviously, in conjunction with securing preferred contractor status. That really trended before -- well, first point is those contracts that we secured from that activity generated $8 million worth of revenue in the first half. The investments in sales have generated a gain of $9.9 million in the first half. We were a small net seller of those investments in the first half, but they really started to perform late in the first half and have continued with the recent gold prices being supported into Q3. That's been a fantastic result for the company. Moving on to Slide 18, covered already. But just again, the dates around the dividend. We declared the dividend up 28%, $0.9 per share that will be paid on the 25th of September. So in the overall, fantastic results financially, both operationally and with investments. So I'll move up on to Slide 20, talk about the growth drivers moving forward. And this is back to the very initial slide. When we look at what is the strategy for the group, really 3 main things. One is expanding the capacity we have with existing customers, so we'll leverage the on-site infrastructure to deliver more services into those customers. The second is, obviously, to utilize our idle assets that are existing within our rig fleet. And the third is grow the ancillary services revenue. So moving through those sequentially in Slide 21, increasing assets with existing customers, successful in the first half. We added capacity at 4 sites. Which are in the slide deck: Bonikro, Geita, Syama and Yanfolila. We also added laboratory services, the Bonikro as well as Perseus in the Ivory Coast, so again the concept of delivering more services to existing customers. So very pleased with the results in terms of increasing assets with the existing customers, and that's really where the growth in the utilization came from in the first half, the business exploration -- the greenfield exploration activity was obviously somewhat curtailed due to the impact of COVID-19. The next growth driver is to increase -- Slide 22, I should say, to increase the exploration fleet utilization. Back to the point about investments, if we moved into West Africa last year in the second half of last year, we actually had a record number of contract wins for a 6-month period in the company's history. We have got a range of current exploration contracts, which are outlined in Slide 22. This is obviously a very good pipeline for us and has obviously been somewhat restricted again because of COVID-19, as I said earlier. But the encouraging thing with that exploration activity began to start -- we began to see that start up again in June. We've, in fact, had 3 jobs: started 1 in June, 1 in July and just 1 in August. In terms of the potential revenue upside from just getting to the other rigs back to work, on the bottom left of Slide 22, we've got approximately 40 idle rigs. When they're working full time for a year, it could generate revenue of $2 million per annum. So it just gives you the scenario -- the likely scenario and a very strong market. We've seen utilization in previous strong markets move up 75% to 80%. So obviously, there's very good incremental revenue gains to be had in the strong market from the existing assets. Moving on to Slide 23. This is the load and haul services, Capital Mining services. So this business was set up in H2 2019. We commenced our first contract for ancillary mining services at the Bonikro mine. And over the course of this year, we -- the first half, we had continued to build the core team. We've hired a Chief Development Officer, the Head of Contract Pricing, Legal, Head of Maintenance and Assets. We're now tendering on multiple tenders across a mix of existing and new customers. To use in context, our typical load and haul contracts started about $40 million in revenue per annum and typically a 4-, 5-year contract, so it's a quite substantial sized contract. And we've actually started investing in building our fleet to enable us to be better positioned in the tendering process, so starting to get some traction in that business, which is exciting for the growth of the company. Slide 24 looks at the other main ancillary businesses. The laboratory business, as I said earlier, Côte d’Ivoire. We increased our footprint in Africa. We acquired a lab in Ivory Coast called ELAM. We commissioned a new lab in Nouakchott in Mauritania. We added a number of new clients, some of which are existing Capital clients. The cross-selling opportunities work. And in fact, we have taken revenue for MSALABS, which is the name of the business I just realized I hadn't said. That business when we acquired it, half of the lab is in Canada. Now 2.5 years later, more than 50% of the revenue for that business is coming out of Africa, which just shows the cross-selling ability within the group. MSM, the maintenance business. That runs a maintenance contract in Mauritania as well as signing up multiple distribution agreements for various maintenance products. The management team has been put in place. This is a brand-new business. But again, we're pretty excited about the prospects for it moving full year. I'll take you through now to Slide 26, which is the outlook slide. A lot we've covered. But record gold price, clearly a positive indicator, and over 90% of our revenue comes from the gold sector. The surge in equity market activity is really the strong lead indicator for demand. The industry itself has got fantastic fundamentals at the moment with very strong operating cash flows, which they also under invested in the asset basis during the protracted downturn, so there's a fundamental need to replace the resources and reserves. We're now well positioned with a really good platform in West Africa, which is where the bulk of the activity is in the African continent. We've seen a substantial -- we have seen a substantial increase in tendering activity across all business units. We've managed to navigate the difficulties of COVID-19 successfully as these results show. And also within our health and safety track record, very pleasing that we managed business through those difficult times. And we've got a really robust balance sheet, much more the management team and established the infrastructure, which just puts us n a really strong position to capitalize on the increased demand as we move forward. So on that note, I will hand back to the moderator for any questions.

[Operator Instructions] Our first question is from Mark Simpson at Excellent Investing. The last time the gold capital cycle was strong in 2011, 2012, Capital achieved a utilization rate of over 75%. Do you see that level being achievable in the current cycle?

The short answer is yes. We did 57% in the first half. It's entirely conceivable to see us get back to the 75% level. I mean that would be very bullish levels. And I think 75% to 80% is probably the peak level, then you're always going to be doing some asset rebuilds or asset moves. But certainly to see it back at those levels, I think, is entirely achievable. I'd also point out, in 2012, which is the peak of the last bull market, the business did, I think, $38 million of EBITDA on revenue of $158 million. So we're currently tracking our guidance is $130 million to $135 million of the revenue line. And I say the business is also much smaller then, but we still managed to do those revenue and EBITDA numbers off of a smaller fleet. So sorry, the long answer. The short answer is yes, I think those numbers are achievable.

And a second question from Mark. Great results with close to record highs in both EBITDA and EBIT. However, PAT is negatively impacted by a very high tax charge, although tax paid is lower. Could you give some more color on this? And what sort of tax rate can we expect over the long term?

I'm going to defer the tax -- longer-term tax rate to André Koekemoer, who's on the call with me. But the tax charges in the first half will negatively impact our provision for tax in Mauritania, which is in most of the accounts. And secondly, which is a nice problem to have, we actually started to make more money in a couple of centers that had higher effective tax rates, so that skewed the number a little bit. André, what would you be your guidance, your estimate number for an effective tax rate moving forward?

And if we could taxify the business, as we start maturing in some of the areas where we've been paying higher taxes and getting into better tax regimes, we should be in the region of about 25%, certainly less than 30%.

Thank you.

One question from Chris, who is a private investor. How does the current coup in Mali affect operations?

It's very early to actually answer that question. As I'm sure you can appreciate, Chris, it's literally 28 hours old. Not long before this call, I checked with my COO, and the latest report is all the employees are safe and is just quiet on the streets and a bigger police presence than normal, but otherwise pretty quiet in the streets. In terms of our customers, in Mali, we work for Resolute and Hummingbird, which have made statements that the operations are unaffected, which is the fact there will be no impact on operations. So we'll have to see how it pans out. However, at the moment, there is curfews and border closures. But as I raised earlier with the journalist, that's not anything different than what we've been dealing with COVID for 6 months, restrictions of ability of people to move across borders and supply chain. So hopefully, it will be a situation that will calm down soon. But at the moment, no real impact.

We have a question here from [ Michael Shrees ] at Mirae Asset Management. How will working capital evolve in the H2? Will cash flow from ops improve?

The expectation is yes. We typically -- H1 is an outflow and H2 is an inflow. I mean that's variable with some. Typically, that's the [ right ] works. And typically, the best inflow quarter is Q4. And I also point out that there is asset prepayments within the first half outflow to the tune of $3 million. So when those assets are actually landed and capitalized, that reversal, so there's an inflow from that, just from the accounting movement. So we expect better working capital performance in the second half, absolutely.

We have 3 questions here from Richard Hatch at Berenberg. The first is would you be able to provide some clarity around the H2 CapEx on this? Also, how do you think around the funding of CapEx as the mining contract business develop? The second question is how quickly can utilization rates ramp up to peak levels? And the third and final, how do you think around the dividend, given elevated CapEx investment?

Okay. I'm just writing it down, so I won't forget. H2 CapEx will be up on H1. The core or the traditional drilling business has average CapEx on the operating fleet of around about $12 million per annum [ in next 3 ] prior years originally doing similar sort of revenues. On higher revenue and higher utilization, I can just run those numbers through. That pushes up just naturally to about $15 million in the same ratios. We're also acquiring some rigs in the second half, as I alluded to earlier, to help beef up the fleet mix in West Africa. So that core business, including the lab acquisition, will push the CapEx closer to $20 million. And any delta beyond that is really down to the growth in the mining fleet. So we have started the purchase in mining fleet, as I said earlier, helps us be better positioned as we're tendering. Where that -- we're assuming that sits somewhere -- pushing the CapEx number somewhere between $25 million and $30 million for the year. The -- how the CapEx is funded up until -- well, funded with existing debt facilities, we have done some small realizations on the investment portfolio. But I think the question, if my memory serves me correctly, is utilization of mining CapEx. The mining CapEx side of the business is a chunkier CapEx profile but easier to fund due to the great depth of availability of funding sources. So typically, the OEMs, by way of example, the Cats of the world, they fund 80% of the equipment at quite very competitive rates actually. So let me just say there's a lot more opportunities for asset-backed funding, should we grow the mining fleet. Next question is how quickly utilization rates can move up. I think pretty quickly, frankly. When the exploration market moves, it moves quickly. It's not inconceivable to see at the back end of this year a 65% utilization. It's not inconceivable to see a 75% utilization next year. It really can move quickly when it moves. And back to the point earlier that the magnitude of the capital raises at the moment and what we're seeing in the tendering, I mean, we face the market putting our tenders of 3,000 meter jobs only 4 months ago. Now those same tenders are 20,000 meter jobs. So it can move pretty quickly. And I'm sorry, the third question?

The third question was how do you think around the dividend given the elevated CapEx investment.

We have kept a deliberately flexible dividend policy. We firmly believe and the Board that we're a company that believes in dividends as we've came since 2014, so we expect to continue to pay dividends. We would just simply manage the many different facets of it. We believe in a strong balance sheet. With our capital requirements, we just have to find the right mix between them, but the dividend will remain moving forward. The policy is actually at the moment is to accommodate the different phases of the cycle moving.

We have a question now from David Butler of Tamesis. What sort of revenue contribution proportion do you think the mining service business will be making next year?

That's a really open question, that one. Let me just -- all I can do really there is just to go back to -- the drilling business at the moment is 90% of the revenue, so you're talking $115 million, roughly, drilling revenue. That could quite conceivably move to $135 million as utilization picks up. A decent mining contract, as I said in the earlier part of the presentation, is $40 million, $50 million per annum. So that really gives you some context of what it can do at the revenue line, and it's clearly very material, but it's also very lumpy in nature. You get exploration contracts awarded in the market daily at the moment and weekly at the moment. Mining contracts, by virtue of the fact they're 4-, 5-year contracts, don't get awarded as often. So look, we're confident on number of the tenders that we're working on, but that's about as much as I can say at this stage.

We have another question here from Mark Simpson at Excellent Investing. Mining Services contract at Bonikro was being held back by temporary mining plan. Has the full mining plan now been agreed and the contract performing as expected?

The full mining plan, we don't have [ version A ], which is what we're waiting for. We think the delivery in Q3, which is what we've previously guided to in the half through Q3, but we haven't received that yet. So -- and then once we do receive that, then we still have to have a look at it and obviously go into a tendering process. So not as much to reconcile on that at the moment because it's still coming down the pipeline. In terms of how the contract is performing well, the run rate that we stated in previous release, it's performing in line with that run rate. It is improving its performance month on month, which tends to happen as you get more embedded in the contracts. So the contracts that we have in place, which include the blast hole, the grade control equipment and full mining equipment, are all performing in line with our expectations.

[Operator Instructions] We have -- currently have 2 more questions. The first is from [ Lucien Meeus ] at [ Charter Capital ]. Can you say a bit about ROW operations as it seem to represent a significant drag on profits?

Good question. Good pickup, I have to say, but it's actually a segmental reporting that represents where assets are held and what entities as opposed to the actual operating activities themselves. The only rest of world or ex Africa revenue that we have at the moment is Saudi Arabia, but we have cost structures like offices in Perth and London, et cetera, management overhead assets that are owned by parent companies, so it's not truly representing the business performance.

And I have finally 2 more questions from [ Michael Shrees ] at Mirae Asset Management. The first is does your revenue guidance include winning any of these contracts in terms of load and haul? And the second question is are there any plans to do more work outside of Africa?

No. The revenue guidance does not incorporate new load and haul wins. The revenue guidance at the moment just encapsulates the existing mix of business and secured contracts that are starting up in H2. The second question again, please?

The second question is are there any plans to do more work outside of Africa?

Thank you. Yes, potentially, but not actively. We went to Saudi Arabia at the behest -- or request, I should say, of Barrick. And we work for -- on 2 sites in Tanzania, and we do have a history of execution with [ generic ] expecting countries such as Mauritania and obviously Haiti. Look, we will look beyond Africa for the right customers, but it will be customer-driven. The group strategy is to remain focused on Africa.

And we have one final question from Mark Simpson. Is the H1 ARPOR of $170,000 indicative of the levels you expect for H2?

Good question. It's similar, too. If you look back through the ARPOR cycle, it was higher a couple of years ago, which was really representative of the business being underpinned very heavily by these blast hole, grade control, underground, double shifting mine site contracts. As we started to add more exploration jobs, some of which [indiscernible] shift that low as the average revenue per operating week, as the cycle matures, we tend to see a single-shift operations turn into double-shift operations. We tend to see short-term programs become longer-term programs in both those dynamics. And of course, the third one, rate rises be through in the higher ARPOR. So I would expect the current quarter to be pretty consistent with that number, but the momentum is on the upside Q4 and beyond.

With no further questions, I will now hand back over to Jamie for his closing statement.

Thanks, James. Well, look, I won't hold it very much -- too much, but thank you very much for dialing in. I'm sure any further questions, we're happy to take them through Buchanan. But thank you very much for your time again. Bye.