Capital Limited (CAPD) Earnings Call Transcript & Summary

Just to remind you, this conference call is being recorded. Today, I'm pleased to present Jamie Boyton, Chairman; Giles Everist, CFO; and Conor Rowley, IR. Jamie, please begin your meeting.

Thank you very much, and welcome, everyone, to the FY 2021 and the Q4 trading update. Obviously, this is an update on trading conditions and revenue, so just worth flagging that we will announce or advise the market shortly on our reporting date for the full year results. Last year, we released on the 18th of March, just as a guide. So we'll update the market with that date shortly, and that will include guidance for the 2022 financial year. Today, I'm going to be focusing in on the 2021 trading conditions and revenue statement for Q4. Look, it was an absolutely outstanding year for Capital. We recorded revenue for the full year of $226.8 million, which is a 68% increase on 2020. And for Q4, we recorded our third consecutive record quarterly revenue of $66.5 million. That was an 8% increase on Q3 but an incredible 92% increase on the previous corresponding Q4 in 2020, so looking absolutely outstanding set of numbers. The -- just to also point out, we ended up at $226.8 million, which is just beyond the upper end of our most recent guidance. but we did start the year guiding the market to revenue of $185 million to $195 million. That was upgraded twice during the year. So even after those two upgrades, we ended the year just marginally above the [ outcome ] -- twice upgraded guidance. So again, really pleased with the numbers. When we look back on the year, we -- so obviously, three operating businesses, and two of them performed exceptionally well, but I have to say broadly in line with our expectations. Specifically, our mining business, predominantly driven by the Sukari load and haul contract. That contract ramped up in line with our expectations but ahead of our contractual terms and has had an outstanding result for the year and places us very well for 2022 and beyond. In our lab business, which is quite a young business and is really experiencing quite strong growth, exponential growth really at the moment, also performed very well and -- but in line with management expectations. So the key driver over the course of 2021 for the sequential revenue upgrade has been the drilling business, which has surprised us positively on the upside over the course of the year. And there has been a lot of presentations from the company over the last couple of years where we've highlighted the disconnect that we've seen in the market between the level of commodity prices and capital markets activities, both of which a strong lead indicators for service providers and both of which have been trading at decade highs. Yet conversely, global exploration activity is actually trading about half of where it was a decade ago, and it even dropped in 2020, albeit due to the impact of COVID. So we've seen this disconnect in the market. And 2021 is -- really even Q4 2020 and 2021 has all been about a reversal or a narrowing of that disconnect. But as I said earlier, [ Chambers ] a -- even is surprised to us just how strong the demand has come through. On the drilling side, Q4 utilization was 79%. For the full year across our fleet of 109 rigs is 75%. And again, just to give some context, I mean, the earlier 2020 utilization was 59%, and the fleet is 94. So it's a huge increase in utilization, which is just really indicative of the demand that we're seeing in the market. So we closed the year with 109 rigs, but we also have another three that have arrived in country. These rigs have gone to West Africa, and they're in the process of being commissioned as I speak. Other highlights just within the mining and laboratories business. Just worth pointing out that we've been engaged a diversification -- revenue diversification strategy in terms of our service offering over the last number of years. And in 2021, the nondrilling revenue contributed to 22% of our total revenue. It was only 9% back in 2020. So again, just an incredibly strong increase. It was actually 26% of revenue in the fourth quarter. I think it would be -- it's worth mentioning our safety record yet again. Another outstanding result on all our safety metrics and LTI-free across 11 of our sites through the year, and six have remained LTI-free in excess of 3 years and, again, against any of our peers -- well above our peers in terms of our safety performance. But I think it's particularly relevant this year because not only did we enter large-scale, new stream of business with our load and haul contract with Sukari, where we employed over 400 people. Across the broader business, we added about 1,000 people at the headcount. So it's an incredible result that we actually improved our safety performance, bringing on -- and essentially doubling our headcount. So obviously, the cultural -- safety culture in this company, we're very pleased and very proud of what we've achieved there. We've had -- in this release, we have highlighted a few recent contract announcements. There are a couple of things I'd just like to point out, that we recently announced a new 3-year service production drilling contract with AngloGold Ashanti and Geita Gold Mine in Tanzania, reported that the revenue -- anticipated revenue over the next 3 years is $33 million. Significant in that the two longest-term contracts that Capital has is the Sukari gold mine we've been operating since 2005 and at the Geita Gold Mine, where we've been operating since 2006. And both of those sites have recently, in the last 12 months, also had contract renewals and taking us out to 2023, 2024, which meant -- at which stage we will have been operating at these sites for 20 consecutive years. So very proud of the continued renewals, which is obviously a very strong sign of Capital's performance. And we've had this across multiple other contracts at Tanzania, which we announced. We've had the grade control contract extended there. We've been there since 2010. We've had another contract extension for our underground grade control drilling with Resolute at the Syama Mine. So again, very pleased to see further renewals and further extensions. But also, we've just reached -- in today's release, we've announced new contracts, one with Firefinch, which is a customer of ours in Mali, the Morila Gold Mine. We're now drilling at the Goulamina Lithium mine, which is -- it's a joint venture project between Firefinch and Ganfeng, China's -- or the world's largest lithium producer. It's one of the top undeveloped lithium deposits globally. And we've also announced today a contract with Tembo at the Kabanga Nickel mine in Tanzania, which is just in this past week, seeing an investment from the world's biggest mining company, BHP. And this is nickel in Tanzania and is actually the first large-scale job of Capital way back in 2005. So again, very encouraging that we're seeing some commodity diversification into nickel and lithium to supplement existing operations where we have exposure to copper in Saudi Arabia and, obviously, many of the projects exposed or the gold exposure. MSALABS, some significant milestones in the fourth quarter. And I think the most important one to note is that we formed a solid partnership with Chrysos, who's got a PhotonAssay unit that's really been quite disruptive to the traditional fire assay market. And we commissioned in the fourth quarter the first PhotonAssay unit ever commissioned globally and outside of Australia, where the technology was developed. And that was with Barrick in the Bulyanhulu Gold Mine. And we have 30 units, one arriving in Canada this month in Val d'Or and another unit arriving in March this year at the Morila Gold Mine, as I mentioned earlier, owned by Firefinch. So MSALABS is going from strength to strength. Another highlight of the results is our direct investment portfolio. Look at an outstanding result in the second half. We had solid gains in the first half. Second half, we reported -- we're reporting today the listed portfolio that increased by 135% over the period. So the total value of the listed investments at the end of December was $51.9 million versus $21.6 million at the end of the first half. So the investment portfolio, again, it was a strategy that we put in place in 2019 in particular. We saw, again, a disconnect in the market in terms of improving commodity markets, yet capital markets haven't responded improving valuations. And so we put Capital to work, and that has really paid dividends, not only in terms of the investment portfolio but generates a lot of business for Capital over the last couple of years and a lot of long-term contracts and some very solid relationships. So as we look to the outlook, as we said in the intro, strongest quarterly revenues in the group's history, and we really are seeing a shortage in supply, in [indiscernible] assets, particularly in drilling and laboratories. So demand is very strong. And commodity prices, as we've ended 2022, have continued their upward trend. Nickel is now at decade highs, tin prices higher, lithium prices higher, gold prices starting to move up. So the macro environment is incredibly supportive, and financings for 2021 was up about 80% on 2020. So continue to have a very supportive macro environment. On the mining side, the development pipeline is maturing quite nicely. Obviously, longer lead times on mining, but there is multiple companies now going through final DFSs, which obviously then lead to financing and then into earth moving. So we're optimistic about that pipeline as it develops through this cycle. So look, strength across all of our business units and which continues to give us confidence to invest in the business. The -- as I said earlier, revenue guidance will be announced alongside our full year results along with any dividend declaration. So look, on that, I'll hand over to the moderator for Q&A. Thanks very much.

[Operator Instructions] Our first question comes from the line of Richard Hatch from Berenberg.

Jamie, thanks a lot for the call and congrats on a cracking end to the year. Lovely to see it. Got just three questions, please. The first one is just on the drilling business and the current sort of conditions and run rate. I mean, ARPOR, $184,000 and year rates sitting at 79%. I mean that's really strong, especially if you comp it versus the Q4 2020, which you talked to. I mean, what kind of outlook can you provide for us on that ARPOR and that utilization rate, please? Are we getting to that point as a cycle where now the pricing pressure starts to really kick in and you can grow in those prices higher?

Look, I mean, we both utilized and we've put up some slides in earlier presentations. I think previous peak cycle utilization is around these numbers, 79%, 80%. We have pushed the business when you have the right asset mix. We've been as high as 85%, even high 80s utilization. But I think in this band of 75% to 80% and I think ARPOR around the $180,000 mark, they're numbers we continue to be pretty comfortable with. But I won't get drawn too much more just obviously for guidance reasons. But what I would say to your question is that the market, the pricing power is certainly more so in the hands of the contractors. Demand is extremely strong. We need to balance that, Richard, against -- obviously, you're starting to see a little bit of cost inflation. We certainly want to be retaining key staff in this type of market. But certainly, we're in a very positive environment for pricing, and we have seen pricing improve across the majority of the exploration and delineation contracts when they are rewarded.

Okay. And then I mean just on that inflation point, can you perhaps just expand a bit on that, where you're seeing it, kind of what levers you've got to keep sort of some kind of defense on your margin?

Look, I mean, the defense on the margin really will be -- I think you probably get pricing gains offset a little bit by inflation cost, right? So again, I won't get drawn too granularly on the margins guidance-wise, but I'd expect it to move pretty much in sync. And a good example is a lot of these long-term contracts we have, have risen for mechanisms built into them for cost inflation. So prices get adjusted to reflect cost inflation. So there is a large degree of protection across all the major long-term contracts. Look, most of the inflation is -- obviously, it's stating the obvious with global supply chain. There's inflation across the supply chain. But I have to say, we've managed that exceptionally well. There's inflation across wages, as you would expect as the cycle matures. But again, none of this is -- it's manageable is what I would say, Hatch.

Yes. Got it. Okay, cool. And the other two would just -- I mean the investment portfolio. Clearly, that's been a real winner this year in terms of performance. How do you think about how you crystallize value from that, some companies on the Street that have a similar -- well, not as good but an investment portfolio where the value isn't really attributed by the market and likely you don't get value for it either? So how do you think about crystallizing value from some of those investments?

Well, I think it's a really good question, and I'd argue pretty strongly that the value of the investment portfolio has not really been reflected in the value of Capital's equity. So I think probably testament to that is that the Board has recently approved to buy back and cover our head stock because we identified the fact that we think there's a lot of latent value in Capital head stock. In terms of the portfolio itself, look, it was a more aggressive strategy back a couple of years ago, but we do continue to look for new opportunities. But what we have done over the past 12 to 18 months is consolidate those positions. So the portfolio is more concentrated than it was. And what we're really trying to target is assets that we think -- we focus on projects that have got the ability to go through the development phase. A good example, one of our headline holdings is predictive, and maiden resource delineated to 3.6 million ounces, and we think this is unequivocally got potential to be a very large gold mine. So look, I hope it's one of those things, Richard, that, over time, the market will attribute some value having seen the gains that have been registered. But obviously, we have an investment committee process around it, and when we think the time is right, we may crystallize some of those gains, and we had crystallized some of those gains over the course of the last 2 years.

Okay. Last one, just on BD. Obviously, the Sukari contract has done very well. Congrats. Can you just talk about the -- what you're seeing in the load and haul business development space? Should we be expecting to see the company look to try and put another contract win on the table at some point this year? Or can you just sort of give us a bit of how competitive is the environment? Can you just give us a bit of sort of color on what's going on there?

It moves in a longer cycle than drilling. So your labs business and your drilling business move a lot quicker. And actually, we didn't exercise recently looking across the awards that have happened in the last, let's call it, 14 months or so. And there's only been around seven -- six or so actually as significant, and one of them was Sukari. So when you look at the market share basis in the markets in which we operate, we've got a reasonably good hit rate. Look, I'm not going to guide as to when we think one -- the next one will come, and we have actually declined on a few [indiscernible] quite worked for us in terms of the right profile. But what I would say is that, I think, we're seeing, at the moment, a [ rare ] number of companies that are reaching next [indiscernible], as I said in the preamble, going through the final DFSs. I could list 10 off my head now that are going to move into financing and then move into construction. So back to where I started the answer, it's a longer lead time, but the pipeline ahead of us is quite broad.

[Operator Instructions] Our next question comes from the line of [ Mark Simpson ] from Exelon Investing.

Jamie, congratulations on another brilliant quarter. And first up from me, and on the last conference call, we spoke about net debt, and you certainly thought it was likely to peak around '21 H1 and reduce in H2. Obviously, you can't share actual details. But can you give some guidance on that? Did it reduce in H2?

Giles, can I let you field that?

Yes, certainly. Look, as you say, we can't guide you to that. But look, we -- what we said at the end of the first half is that we've got good strong cash flows, that our CapEx profile was heavily lent towards the H1. And so our expectation at that time was to be good EBITDA to cash conversion with a lower CapEx profile. So [indiscernible], yes, one would expect the debt profile to come down.

And then in this update, you mentioned sort of three rigs undergoing commissioning at the moment. And in the previous update, you said that, I think it was sort of seven rigs [ from order ] for 2022 at the time. Can you give some guidance on these additional, to those three? I think some were on long-term contracts and some were going on the spec.

The three that I'm referencing, we expected it to finish the year at 112. We finished the year at 109 in the delta for the three rigs that are 2021 CapEx and have actually arrived in country but just haven't been turned on yet. So one of the way I put it. In terms of the regrowth for 2022, the previous comments, we have preordered rigs. There are other rigs on the way. Again, sorry to keep putting this line out. We don't want to be specific about numbers because it can feed through to guidance a little too easily. But to answer your question, the three is separate to the previous comment.

Okay. And then on -- obviously, the share buyback is very kind of welcome, but the company still sort of trades at quite a material discount to both listed peers and both targets. Would you look to extend that buyback if that discount remains? Obviously the current 2 million sort of isn't particularly material in terms of the reducing the fair count and adding to EPS.

Would we look to, without being definitive about it? Yes, we would look to.

And as there are no further questions, I'll hand it back to the speakers.

All right. Well, very good. Well, thanks, everyone, for the questions. And well, as I said at the introduction, we will update the market shortly with respect to the date of the release of the full year results, in fact, and which will include the guidance moving forward. And thanks again, everyone, for dialing in. Thank you.

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