Capital Limited (CAPD) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Capital Limited H1 trading update. I will now hand over to the speakers. Please go ahead.

Hello, everyone, and welcome to our conference call following our Q2 trading update released today. My name is Conor Rowley, recently joined Capital as the Investor Relations Manager. On the call today, we have Jamie Boyton, our Chairman and CEO; Giles Everist, our CFO; Rick Robson -- and Rick Robson, our Head of Corporate Development. I'll pass over to Jamie to run through our announcement, and then we'll go to Q&A. So we'll pass to the operator after Jamie's run-through. Jamie, over to you. Thanks.

Thanks, Conor, and thank you, everyone, for dialing in. So first, today, obviously, just to go through the first half trading update, which is obviously a revenue update, trading update, noting that our first half results will be released to the market on the 19th of August. In terms of the first half, looking at the revenue results, really the [ workforce is ] outstanding. We followed up our best ever Q1 revenue number with an even better second quarter. So if you look -- I won't go through all the numbers, but just to give some of the highlights. The second quarter revenues were $54.7 million, which is an increase on the first quarter of this year of 24%, an increase on last year's second quarter of 68%, which is just an incredibly strong number. And then extrapolating that to the first half results, revenue for the first half of $98.7 million. That is an increase from the second half of last year of 41% and an increase from the same period last year in the first half of 51.7%. So incredibly strong results for the first half. The main driver of this has been the activity levels in our drilling business. But before I actually just go into some of the detail there, what I will do is just briefly comment on the activities in both our mining business and the laboratory business. On the mining, within the mining business, we -- obviously, there's 2 main contracts there, the Bonikro contract and the Sukari contract, which kicked off this year. Sukari has been -- we set a pretty high bar in terms of expectations, and the team have beaten those expectations. We've managed to mobilize $65-odd million worth of equipment to site in rapid time. All of the major equipment has now been commissioned and slightly ahead of schedule. And at the time of [ pre ] the earth moving activities are, again, slightly ahead of schedule. So given we set the bar really high there, it's very pleasing that the team has achieved -- safely achieved and beating our expectations. The laboratory business has continued to perform well also. It's performing in line with our expectations, but it is actually seeing a very robust pipeline that is encouraging into the second half. And we obviously are in the process of commissioning a laboratory in Bulyanhulu for Barrick in Tanzania, with the revolutionary Chrysos technology arriving in the second half of this year and another one of those units has now been scheduled to be sent across to Canada. So both of those businesses are performing, as I said, in line with our expectations. And what's pleasing is that the nondrilling revenue contribution has grown now from 9% in the first half of last year is now 17%. So that momentum has continued. But this set of results, as I suggested in the opening, is all about the performance of -- or the outperformance that has driven the revenue upgrade today has been [indiscernible] drilling business. And we have commented for some time that there was somewhat of a disconnect going on in the marketplace, specifically commodities trading at decade-high-levels and/or record levels, and that has continued into 2021. Last year, we saw a huge resurgence in the capital markets. And again, capital raising activities, which is a very strong indicator for drilling activity again trading at decade highs. Yet, last year, exploration and delineation activity globally was 50% of what it was a decade ago. So that is something that we had flagged before, and we have flagged the fact that we -- the conditions felt like there was a -- we actually use the term wave of demand coming and it really did in the first half. The demand spike is as strong as we've ever experienced, and I'm really pleased to say that the activities of the business over the last 2 to 3 years positioning assets in, particularly in West Africa, which is now 38% of our revenue, building the infrastructure and getting ourselves ready has really paid dividends. Most of the increase in drilling activity, we've had a slight firming in the ARPORs, that 5% increase, which is encouraging. The fleet has increased in the first half. It increased just over 20% from the second half of last year. We had a closing fleet of 106 rigs at the end of the first half, but there are another 6-odd due to arrive in the second half. So the fleet size has contributed, but really it's all about the fleet utilization, which has exceeded our expectations when we started the year. The fleet utilization in the second quarter was 79%. For the first half, it averaged at 73%. Previous peak cycle in 2012 for the business is about 78%. So [ I think, ] clearly strong conditions, and as a result, that has driven an outperformance in revenue and an increase in our revenue guidance. So just to update where we are on revenue, we had originally guided at the time of the FY '20 results to revenue of between $185 million and $195 million, after the current calendar year. And we have today upgraded that revenue guidance to $200 million to $210 million. Look, a few highlights operationally. A few more contract wins. Another 2-year contract extension with Resolute at Syama, Mali. We've been working there since 2016. New contracts out in Kenya with Shanta. It's actually an asset that we've drilled out before when it was in the hands of Acacia. Another exploration contract with Arrow. And part of the key strategy for the company is obviously increasing capacity in existing mine sites. And we saw that at Geita in Tanzania, North Mara in Tanzania, Morila in Mali and in the Sanankoro Project with Cora in Mali as well. Safety. Again, some outstanding numbers there. Look, I'll just focus on 2 of them because they're large operations, particularly Geita. But we achieved 5 years LTI incident free at North Mara in Tanzania in March, and we achieved 4 years LTI incident free at the Geita Gold Mine in Tanzania in March as well. So again, just outstanding results there. So look, I'll just move into the outlook. As we said, we've raised the revenue guidance to $210 million for this calendar year, predominantly drilling-driven. It's worth noting, of course, that Sukari continues to ramp up on the earth moving [ stuff ] front, and that will be at full capacity in the fourth quarter of this year. The capital market is extremely buoyant and supportive of continued robust demand. Gold trading in decade highs. Other commodities are obviously seeing a surge in activity. So the general conditions are very buoyant. Demand market is as strong as we've seen it for, what, in the company's history. Business is performing well. Tendering activity, very robust. So it's a nice call with a nice release to have to make today because we're certainly working in a very supportive market at the moment. I won't dwell too much further on it as it's -- I'll turn it over to Conor and the moderator for Q&A.

[Operator Instructions] The first question is from Richard Hatch from Berenberg.

Congrats on a good trading statement. And I've got three questions. First one is just on seasonality. Can you just give us a bit of sort of context as we move into the third quarter, whether you would expect to see seasonality play a part? And just perhaps drifting either utilization rate down or ARPOR down and/or are you fairly comfortable? And second question is just -- I had a question this morning just with regards to the pipeline. Are you seeing any form of slowdown of activity at the moment? It doesn't appear so, but just to clarify that. And then thirdly, just on the investments. Well, I don't believe they're included in net debt, but just to clarify that. And obviously, it would appear that some of your portfolio companies have done quite well in the second quarter. So should we expect to see some form of mark-to-market upside with the results when they come out on the 19th through your investments?

Okay. Seasonality, absolutely, West Africa. You don't experience it in Tanzania or Egypt. Reminder, West Africa is 38% of our revenue. We're now moving into the wet season in West Africa. We have proven more resilient than most of our peers that operate there during the wet season for the simple reason that we targeted our activities to mine site activities. So the bigger contracts there are the likes of the Resolutes and Hummingbirds and [indiscernible] and more recently, Morila. We are operating around a mine site with graded roads and so on. So we're less affected to the seasonality at those operations. But certainly, on the exploration front, the wet season will make it prohibitively difficult. So I would expect a little bit of dampening in demand in West Africa, but converse to that is that we are -- we have increased activity recently in Tanzania, adding capacity, as we mentioned earlier, in both North Mara and Geita. And obviously, we've got Shanta kicking off as well. And then obviously, Sukari, the ramp-up continues. And Q3 is going to be bigger than Q2, and Q4 is going to be bigger than Q3. So certainly, we're [ phasing ] it in West Africa, but other parts of the business will get back. In terms of the pipeline, the only slowdown I can reference is back to point one, is that a number of the exploration programs in West Africa are coming to a conclusion. They'll go away and assess results during the wet before coming back to work. But we're expecting very robust demand at the back end of the wet season. The market conditions are incredibly supportive. So really, other than the seasonality, no slowdown in the pipeline. Your final question, investments. Correct, not included in the net debt figure. Correct, the portfolio has continued to perform well in the first half and particularly, the second quarter, and we'll update the market with the investment portfolio performance in conjunction with the results on the 19th.

Can I just ask one more? Just on cost inflation. It seems to be creeping into some companies and some commentary around just the broader market. Are you seeing any of that at the moment? Or are you feeling fairly kind of optimistic on being defensive against that?

We're not seeing it yet, but I'd be disingenuous to say that it's coming. You can't have this level of demand increase and not have cost inflation coming with it. And to now, the one I'd like to reference really is Western Australia. There's been quite a few companies down there that have noted the labor shortage. Now -- and I referenced that because, I mean, it's my hometown, but they've been in a 5- or 6-year bull market because of the [ weak Australian market ]. And that has contributed to labor shortages and wage inflation. We are yet to see any meaningful cost inflation in our business, but we are taking proactive measures to make sure that we are retaining key staff because the demand environment is that strong that we will see poaching. So we've been very proactive about it. And at this stage, well, frankly, it's always the perfect storm, H1. But the demand environment has taken off very rapidly, yet to see cost inflation. The flip side of that obviously is the rate environment. We've had some rate rises in H1. You would expect the rate environment to be favorable in H2 to offset the cost inflation.

And the next question is from Bobby Morse from Buchanan.

Just a quick one. If you could give us a little bit of background on the Chrysos PhotonAssay technology. Just -- is that -- is this a widely used technology? Or is this something which is seeing rapid adoption across labs businesses generally?

Bobby, I hate to use the word because I think it's overused, but I'm going to use it anyway, disruptive, and I've read the news. This was developed -- there's a scientific group out of Australia called the CSIRO. This is where this was originally developed. I think at the moment, there's about 7 units out there. They've rolled out 3 or 4 into -- or 2 into Kalgoorlie, which is the goldfields of Western Australia. There's 1 in the eastern state of Australia. I believe Intertek had just purchased 1 in Western Australia. And then we've now got an agreement. We've already got 1 on the way and there's another 1 on the way to Canada and agreement for number 4. So it's early stage, but it is widely gaining acceptance, is a lower cost, more environmentally friendly, but critically lower turnaround time, and that's the critical thing with assays. So a typical assay at the moment, we're doing assay turnaround times stretching out in some cases to 6 weeks. With Chrysos, you're getting a turnaround time within 24, 48 hours. So it's a reasonably new technology, but the adoption is starting to take off and are starting to attract a lot of interest within the sector, within the industry.

[Operator Instructions] And the next question is from [indiscernible]

Congratulations on a brilliant quarter, and I think it's really impressive that you've managed the risk with still kind of COVID challenges going on. Four questions from me. And the first one is about gross margins on the drilling side. And can we expect these to be in line with the sort of levels we've seen in the past? And the second one, yes, just following up on those PhotonAssay units. I think they're going to add -- because of the turnaround time, they're going to add significant lab capacity. And I'm wondering, is there sort of a typical payback period from investing in these machines? What does that sort of look like? And then on the finance fees, third question is are we likely to see the net debt sort of peak at the current levels? Or will that increase further going forward? And finally, a more technical question on the level 3 assets. [indiscernible] where capital holds an equity stake and/or is there other licensees or [indiscernible] unlisted companies in there, too?

Okay. I'm going to answer in disparate order. The level 3 assets, predominantly the unlisted assets, we disclosed some time ago that we've invested -- the biggest one is an investment in a company called Allied Gold. That was -- we announced that, I think, late 2019, when they purchased the Bonikro Gold Mine. So it's predominantly an unlisted private equity play, if you like, and it's been backed by [ Orion ] Mining Partners out of London. That's the main one. There are some other small direct equity stakes as well. So for asset turnaround time payback period, there is no payback period because we don't own the asset. Why is it Chrysos are bringing the technology to market is that they are the owner of the asset. We are the operator of the asset. There is a monthly rental fee for that asset. It's arranged under a long-term contract -- long-term license back to back with the customers. So it's actually -- it's effectively a lab management contract, the actual CapEx, which is a great model for us, the CapEx is borne by Chrysos themselves to get these rolled out into the marketplace. For the comment about -- the question about gross margins and the net debt, I'm going to hand that across to Giles.

Okay. Thanks, Jamie. In terms of the gross margins, we'll be providing more update on that in August when we announce the half year results. So I'd like to reserve any comments on that for then.

Sort of rough guidance, would they be similar to the past? Or give some commentary on where you see gross margins going in general rather than -- I don't want the specific figures, obviously.

No. I mean, look, I think this -- as Jamie has already said, this announcement and the results are very much about the increase in utilization, but there is obviously some increase in rates. So quid pro quo, one might say that the margins are looking to more increase rather than decrease.

Okay. That's brilliant.

Okay. And in terms of net debt, look, as flagged in the announcement, we have more or less finished the Sukari mining CapEx spend in the first half and so -- the second half. And again, this is -- we haven't been specific about CapEx. So I'll reserve that again for the announcement in August. But certainly, one would expect that there was a heavy weighting of CapEx for the first half. And therefore, there would be lower CapEx in the second half and cash generation in the second half, which would reduce net debt.

There are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead.

Okay. Well, thank you, everyone, for the questions. Thank you for dialing in. We look forward to catching up again on the 19th of August. Yes, thanks for your time.

And this concludes the conference call. Thank you all for attending. You may now disconnect your lines.