Capital Limited (CAPD) Earnings Call Transcript & Summary

Hello, and welcome to the Capital Limited First Half Results for the period 1st of January 30 through 30th of June 2021. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present Jamie Boyton, the Chairman; Giles Everist, the CFO; Rick Robson, Business Development; and Conor Rowley, Investor Relations. Please go ahead with your meeting.

Good morning, everyone, and welcome to Capital's interim results presentation. I'm Conor Rowley, the Investor Relations and Corporate Development Manager here at Capital. As I said today on the call, we have Jamie Boyton, our Chairman and CEO; Giles Everist, our CFO; and Rick Robson, Head of our Corporate Development. [Operator Instructions] With that, Jamie, I'll hand over to you to run through our results and presentation. Thanks.

Great. Thank you, Conor, and thank you, everyone, for dialing in. Obviously, as mentioned, our first half results presentation, which obviously follows on from our first half revenue trading update that we provided to the market on the 15th of July. And today is the results flowing that. I'll reference, obviously, slides in the presentation deck. I'll run through them fairly quickly and then we'll open it up to Q&A. Starting on Slide 3, just again, by way of introduction to Capital Limited, a full-service mining, drilling, maintenance and geochemical solutions provider to customers within the minerals industry, and we focus on the African markets. We've been in Africa since inception for 15 years, operate across 11 African countries as well as 1 in the Middle East, specifically Saudi Arabia. We have an asset fleet of 106 rigs, and more recently, we've moved into the earthmoving business. We have 35 pieces of heavy mining equipment, employing just a tad under 1,900 employees at the end of June, of which about 1,800 are African nationals. We have a very strong concentration of revenue to some very significant mining companies, the likes of AngloGold Ashanti, Barrick and Penrose. Moving on to Slide 4. As I said at the -- revenue on the 15th of July, we reported first half revenue of $98.7 million, an incredibly strong increase on the first half of last year's, 51.6% increase. Today, as we released the results, you can see an outstanding performance. Our EBITDA increased 84% to $28.4 million. Our adjusted net profit, essentially our operating net profit, increased 239% to $12.7 million, and we continue to perform very well with our equity investment portfolio, which had gains of a further $5.7 million. The return profile for the business, a slight drop on the first half of 2020. Return on capital employed of 17.9%, but it's important to note that we expanded the company's capital base in December of 2020 to facilitate the capital raising for the equipment for the Sukari earthmoving contract. And that contract commenced in 2021, but doesn't reach full run rate until Q4. So still outstanding returns when you consider that large capital base. Shareholder equity increased strongly by 65%. We have taken some debt on the balance sheet as previously flagged for the Sukari CapEx. And very pleasingly, as a result of the strong performance, we have, today, announced an increase in our interim dividend. We've declared a first half dividend of $0.012 per it's a 33% increase on the same period last year. And just to round off, we -- on the 15th of July, we actually increased our revenue guidance at that time. Previously, we've been guiding the market to revenue for this year between $185 million and $195 million. At that stage, we increased the revenue guidance to between $200 million and $210 million. Moving on to Slide 5. I'll keep it brief because we're going to deep dive a little bit deeper on 2 parts, drilling business, which is 83% of the revenue stream was incredibly strong in the first half, driven primarily by a rapid increase in our drill rig fleet utilization that rose from 57% in the first half 2020 to 73%. And the business has really performed very well. I'll digress as we move to that slide. But then our other services also grew. So our nondrilling revenue last year was 9%. That expanded to 17% in the first half, with growth across all the subdivisions. The waste mining or the earthmoving business grew but not only with existing operations, but with the commissioning of the Sukari contract. Our laboratory business continued to expand, and our [indiscernible] and maintenance business won a 2-year hose services contract with the Resolute at Syama mine in Mali. Moving on to Slide 6. What is particularly pleasing is, we've had a significant growth in revenue, significant growth in man hours worked, yet we've managed to maintain absolutely outstanding safety performance, and I draw your attention on Slide 6 to the table at the bottom left, which just shows Capital and our industry-leading safety performance that we're very proud of. Slide 7, just a quick overview of the macro. We have, in previous calls, flagged what we saw as a disconnect taking place in the market, specifically top left gold prices and metal prices in general, very buoyant, while exploration activity a disconnect, as you can see on Slide 7, the two arrows with the green arrow. And [ estimated ] has also been bearing out in finances, which is the top right, where capital raising activity has really accelerated, particularly in 2019, 2020, and into this year, yet again, exploration activity still at the levels -- half of what it was at the previous peak cycle. So overall, the macro, the tailwinds are very supportive. We have capital raisings, metal prices. We have very strong operating performance of our customer base, and we're starting to see a lean investment in our -- by our clients in their asset bases, which were depleted during what was a prolonged downturn. And that increased investment is driving increasing drilling activity, increasing mining activity and increasing [ assign ] activity. Slide 8. It's a little more granular on the drilling business. I've already quoted utilization statistics. We did add 12 weeks to our rig count in the first half, but I should note that the average rig count for the first half this year was actually flat on last year, i.e., because most of those rigs arrived very late in the first half. So that bodes well for the second half performance of the drilling business. We increased rig capacity at a number of the long-term contracts Sukari Gold and North Mara and Morila among a few of them. And that is a key part of the company's strategy is to increase capacity at existing operations. Multiple new contract awards, and what is particularly encouraging is the drilling cycle has really come back in favor of the contractors. Reutilization increasing, productivity is increasing, pricing is beginning to show signs of improvement and contract terms as well. So certainly a very pleasing market for drilling. And frankly, the big driver of the outperformance in the first half has been the drilling business, which has surprised us pleasantly on the upside. On Slide 9, we give an update of the waste mine earthmoving contract at Sukari. We announced this contract to the market in December of last year. And I'm going to actually go right to the bottom bullet point just to make a point that we had to hire 400 people. We had to move in 17 truck, 3 excavators and the mobilization and operations is actually commenced. We started moving earth within 2 months of the contract announcement, which is an absolutely outstanding achievement by our mining team. So as we talk now, the workforce recruitment is largely complete, infrastructure build is well advanced, all of the equipment has been fully commissioned and the job is on track to be achieving full production run rate in Q4 this year. So we expected to outperform the contract. We have done so, but a really, really pleasing achievement for the team on what is our first significant earthmoving contract. Moving on to Slide 10. We give a bit of profile to our laboratory business. This is a business we invested in 2017. We've moved to the majority ownership of that business, with initially a Canadian business, facing business now or Canadian, the Americas and we've now expanded that the Capital's network into Africa. Revenue growth was 97% year-on-year. A number of significant long-term contracts that have been announced with Barrick, Firefinch, Kinross and four, we were running the clients labs. And very pleasingly, we have managed to secure a number of the revolutionary Chrysos PhotonAssay Technology , which we're rolling out in our key markets of operation, which provides a real strategic differentiating advantage for our laboratory business. And then the final pillar of our activities on Slide 11, our direct investments, we provide a little more detail in this presentation deck. Obviously, a very active strategy. In 2019, we put our balance sheet to work partnering with our customers. And we do like to look at our customers as partners. We've invested in some of our customers to support capital raisings. We had, in some instances, acquired exploration companies development and embedded them into listed companies. We have provided financing for customers buying operating assets. And along with that, we've had partnership agreements, long-term preferred contractor status, and that model has worked particularly well and actually generated $20 million worth of contract revenue on our first half revenue of $98 million. So again, working very well for us. Slide 12. We've included these in the long-term contracts, and this goes to the heart of the company strategy, secure long-term contracts and then deliver multiple services into those contracts to provide leverage on the infrastructure that we have in place. And as you can see, some of these contracts, Geita Gold Mine, second to the left, we've been operating there for 15 continuous years; North Mara, 13 years; Sukari 16 years, again, testament to the quality of the operational team to have established such a long-term relationship. I'll now move into the financial results, Slide 14. I won't talk through all the numbers as we have covered a lot of them already. I think the critical point to raise here is that the model of increasing capacity at existing sites has really driven operating leverage through the P&L. And as I said earlier, revenue growth of 51% has driven operating or adjusted net profit of 238%. And I do apologize that construction within the background, but I'll continue. Slide 15, profile the company's margins. As you can see, we have been gradually improving our margins from 2017 onwards and was really pleased with margins in the first half. And again, this just brings to the full strategy of operating leverage on the existing platform. The margin growth improved asset utilization at existing sites is certainly a key driver, but also improved maintenance practices improved supply chain efficiencies. And as you can see in the bottom left on Slide 15, our EBITDA margins over time, outperforming both the drilling contractors and the mining contractors. Slide 16, cash flow tells a little different story as we continue to ramp up the Sukari contract. The waterfall chart at - on the top just shows the waterfall for the first half result. Obviously, very solid EBITDA, but working capital outflows associated with revenue growth for Capital to associated and obviously inventory growth as well, particularly with Sukari as that was a new type of inventory that we've been purchasing, substantial CapEx investments. So at closing, we've moved into a net debt position as at June 30, as previously flagged to the market. I have, however, included in the bottom left of Slide 16 the operating cash flow, which is the blue bar. And as you can see, consistently, since 2018, we have generally where we have experienced stronger operating cash flows in H2 versus H1. Now moving on to Slide 17. CapEx. It's really -- well, a couple of points to bring out here. The company listed in 2010. We operated through the 2020 self-funding cash generative. We entered the market in 2020 as we moved into the earthmoving business. And as you can see, there's been a substantial capital outlay on earthmoving equipment and actually the largest year-on-year rig fleet growth as well concurrently. So we're in a heavy capital spend, but the capital spend for the Sukari earthmoving is now largely complete. And a lot of the repurchases, as I said earlier, we've had 12 rigs arrived in H1. There's another 8 arriving in H2. So we're getting towards the tail end of this heavy CapEx period. Slide 18, a bit more detail on the balance sheet. Post the equity raise in December, we have backfilled some of our debt facilities, as you can see in the pie chart, bottom right. Standard Bank have been our banker for some time. We now have increased facilities with some OEM Sandvik and Epiroc; and Macquarie is coming with an asset-backed facility. So pleasingly broadening our fleet of debt facilities available to the company. Slide 19, the investments. The cash flows from this, as you can see bottom left. In 2019, we were quite proactive and aggressive in terms of identifying opportunities in what was a very depressive market. Since that period, the cash flow has been broadly neutral with the investment portfolio here, as you can see on the bottom right, we continue to go from strength to strength, and we posted, again, investment gains in the first half of USD 5.7 million. And then, finally, Slide 20, the dividend. Pleased again, just to reiterate, we have increased the interim dividend from $0.09 to $0.12 per share. The dividend timetable is on Slide 20 bottom right, the ex-date September 2 and payments on the 1st of October. So in summary, if I can go to Slide 22 to wrap up and then turn over to Q&A. Increased revenue guidance, and I might note that, that revenue guidance from midpoint represents 52% growth on 2020, and that follows the 20% growth in 2020 on '19. So we're certainly in a very strong growth period. Macro gold price very strong, and it's about 90% of our revenue exposure. Equity capital markets, very strong. Industry fundamentals, very strong. And I think, to bring that out even further, as I mentioned earlier, there is also a case of reinvestment into assets that have been depleted for protracted downturn and obviously, demand coming from the emerging metals and emerging battery metals. Demand is accelerating across all business units this year and continuing to be very strong and drilling demand at the previous peak cycle levels. Obviously, as I alluded to earlier, elevated capital spend across 2020 and '21, as we expand our rig fleet and build our heavy mining equipment fleet for the long-term contract awards. We continue to maintain a strong balance sheet. Gearing ratio of 20%. And I might add that when you balance out the investments, the gearing in investments pretty much balance out. So we continue to be a very conservatively geared company, looking to improving the cash flows in the second half. We continue to add flexibility in our balance sheet for future growth opportunities. That brings the presentation to a conclusion. I'll hand back to the moderator. Thank you very much.

[Operator Instructions] And our first question comes from the line of Richard Hatch at Berenberg.

Just a few questions, Jamie. First one, just on revenue concentration risk. I know, on Slide 12, you talked to the multiple revenue streams in your long-term contracts. But how do you sort of feel about kind of that revenue concentration risk across core contracts? Are you comfortable with that? Are you comfortable with the contract duration and the ability to extend those contracts just as we look out into sort of 2023 and beyond?

Yes. So Slide 12, a couple of points there. Revenue concentration risk, we've always been very focused at capital on contract selection and client counterpart. And as a result, we probably had a narrower client base than some of our peers, but I feel confident that we've been indicated in choosing the right people to partner with. Our goal has been to grow the long-term contracts from what was a couple of years ago 4 up to 15 to 20. We're at 10 now. So we're heading in the right direction. So I'm actually really pleased with that. And secondary to that thematic is, we chose the first cap off the rate outlined on Page 12. We're doing delineation grade control blast hole, ancillary mining services and laboratory services. So as time progresses, we're delivering more and more services to these customers and building on that relationship further. In terms of rollover risk, shall we say, I mean, some good examples here are Sukari. I mean we started there in 2005 with a couple of exploration rigs. We have had that contract or those contracts, both expanded and rolled over on multiple occasions. And the current one runs until the end of 2023 -- 2024. That is going to take us out for 20 years of consecutive service. So I'm very comfortable with the services we deliver, and we have a demonstrable track record of getting renewals and expansions, and we're well on track with our strategy to expand the portfolio. Now as I said, we've gone from 4 to 10, and we're working on expanding that further.

Okay. And second one is just on the margin. I mean margin was very strong, and you pointed in the presentation to the EBITDA margin being shown good margin good improvement. How do you expect that to evolve over the next couple of years? Do you think you can hang on to that? We talked a month ago a bit about inflation. You suggested that you're seeing a bit of it come through, but not too much. Is that still the case? Do you still feel that margins have stayed to be fairly defensive at this point?

At this stage, it feels like it, Richard. I mean, if I said to you over the last 4 or 5 years, I mean, if we're hitting 25% to 26% EBITDA margin, we're in a good spot. And we have been doing that in those couple of years. But as this demand has really taken off so has the margin. And in the last conference call, I said I'd be disingenuous to not acknowledge the fact that if this cycle matures, cost inflation comes. It absolutely does. But I'd also caveat that the long-term contracts have risen for mechanisms to provide protection against cost inflation. I won't crystal ball exactly about or guide where those margins will be, I'll leave that with my team in their direct dialogue. But if we're sitting between 25% to 30%, I think it's sustainable, we're in a very good band.

Yes. Okay, understood. And then just on 2022 visibility. I mean where are you with your kind of negotiations with your customers? As we look into 2022, I appreciate that a lot of the revenue comes from the long-term contracts so you know where they stand. But just in terms of some of the swing stuff like the exploration, where is your -- what are you seeing, or are you able to give any color on what you're setting into 2022 at this point just in terms of how we should think about utilization and potentially ARPOR?

Well, when we look across the -- in the first half, we generated 88% of revenue from contracts at mine sites. And most of those mine sites, I'm just thinking as I speak to you, all of those mine sites were long-term contracts. Some of them are due to roll off in the short term. But to the point I mentioned earlier, we have a demonstrable track record of rolling those over and in most cases, expanding them. So to use those numbers, 88% and assume most of those are rolling into next year, that gives you a pretty good starting point. Look, exploration is shorter term, as you know. Contracts there range from 3 to 6 months. But again, in that case, look at where the cycle is. And I think we are in the early stages of this cycle. We have only seen this demand both really come through this year, very late last year and this year. So I think we're quite early in that part of the cycle. Again, I'm not going to specifically guide on utilization and ARPOR on this call, but we have, I would say, probably the best visibility going into the next year, we would have had at this stage because we have, obviously, the major contracts, notably Sukari, has re-signed at the start of this year for 4 years for both the drilling and the earthmoving. We announced earlier in the year Geita have re-signed. That's one of our other big ones. So the bigger contracts are all locked in. So I'm feeling fairly good about the visibility into 2022.

Okay. And then just on business development. Can you just give us a bit more color on what's going on in the contract mining business development sphere? And just with that in mind, I mean, the investment portfolio has been very strong, and you've got a lot of value held there. I appreciate it's a partnership between your -- the companies you invest in and work with. But also, do you think that there's scope potentially to lighten that up if you win another contract and just need to add some extra fleet to the roster?

Let me answer the latter first. I mean, yes, there's always scope to lighten and there's obviously liquidity within that portfolio. And I don't think any of that will jeopardize the partnership we have with the customers, the customers, pardon me, for putting it this way, adult CEOs. And they know that buying sell shares at any portfolio manager in this portfolio for us. So I think that liquidity is available. But, as always, it will be a question of where can we get -- where do we think we can get now considered analysis of the best return on investments for our shareholders. So it's available absolutely. And as you can see from our cash flows, we actually -- we had net inflows from the investment portfolio in H1. In terms of the BD part contract mining, specifically, is building. I think for any resource analysts, you'd see the number of projects that are going through PFS, DFS and into development phase is growing exponentially. So there's a lot of activity, a lot of pricing to budgets for the development. So a bit longer dated, but frankly, we're comfortable with that. We have had some opportunities that have come across our desk that require rapid movement that we have not moved forward on. Our #1 priority was getting Sukari firing on all cylinders, and we feel very comfortable that's heading in the right direction. So some medium data, other opportunities works perfectly for us. And that pipeline is developing nicely.

[Operator Instructions] And we will go back to our next question from Richard Hatch at Berenberg.

I'll take the opportunity while it's there, right. I've got two more. The first one is just on the labs business, which, I think, continue to be underappreciated. Can you just talk a bit more about this Morila contract. You talked previously about the potential for this business moving to a $50 million revenue run rate. Is that still the expectation? And what should we -- have you got any kind of thoughts on potentially where that revenue could get to in, say, 2022? Or is it a bit too early to put a number on it?

It's running at this year somewhere in the vicinity of -- we think it's going to be about $14 million, $15 million that sort of number. Underappreciated potentially that last year was its first year of EBITDA positive and this year it's now become profitable. So it's been a bit of an investment here for quite a few years, structuring the business the way we feel it needs to be structured, winning some [ bedrock ] customers for long-term contracts. In terms of where it can go, yes, that 50% still seems like a totally achievable number. And these are, as we've said before in our conversations, very high CapEx light, modular CapEx, high-return businesses. So look, we're very pleased with the growth trajectory. And we said in the preamble that this was a -- when we acquired our initial state, this was a business focused on the Americas. Now more than half of revenue -- half of the revenue comes out of Africa. So look, I'm very pleased with the growth trajectory next year, conceivably, if we do hit the $15 million these growth rates continue with the $30 million next year. It's on a path now, building a market reputation. The Morila contract is subject to final Ts and Cs, but it's similar to what we're doing at Bulyanhulu, with Barrick and Tanzania, specifically, taking over, refurbing, running their traditional fire assay lab, then bringing in a Chrysos PhotonAssay machine to work concurrently with that it follows the same thematic.

Okay. And then just lastly on rig availability, just in terms of getting fleet yourself. How much of a challenge is that? Is there scope to, perhaps, put some more capital on the balance sheet? Or you utilize your finance leases more in H2. Should you want to get secure fleet. I mean -- and also just a follow-up on that. What's the state of the fleet at the moment? Is it, in your view, fairly good shape? I mean, I appreciate you recycled it and it clearly comes in and it goes out. But just in terms of your kind of general broad view on where the fleet sort of is at this point in time in the cycle? Is there a large kind of recycling element going to come soon? Or are you comfortable with the longevity of the fleet at this point?

We decommissioned quite a few rigs late last year, which is why you saw the rig count drop quite a dip. That was I think its 5 or 6 rigs. In general, we maintain one of the youngest fleets in the industry, and I think there are some rigs, a few that have actually just gone back into the yards, and [ Morila ], for example, that are going under a bit of a rebirth. So that's ordinary business practice. But generally, this is a young fleet in good working condition. And you won't -- don't expect to see any sort of major CapEx builds or spend on the existing fleet. It's in good nick. We have an ongoing maintenance program. We stick with that. So we don't get those sorts of surprises. In terms of the look forward, we've still got another 8-odd rigs to arrive over the course of this year, and this is the biggest year of rig growth the company has ever had. And that's comfortably for the long-term contracts, 7 have gone to Sukari, 3 have went to Geita, 2 have gone to Bulyanhulu and some others have gone to other long-term contracts. One have gone to Resolute, for example. In terms of the forward pipeline for rigs, look, it's getting tighter. All equipment is getting tighter. So we have actually started to place deposits for another 7 rigs. We're basically getting the slots for 2022. So we're having to be more forward-looking than we've needed to be in the last 4 or 5 years as the market is demanding that.

[Operator Instructions] And there are no further telephone questions at this time. So I'll hand over to James to see if there are any questions via the web.