Capital Limited (CAPD) Earnings Call Transcript & Summary

Okay. Welcome, everyone, to the Capital Limited H1 2022 Trading update. My name is Jamie Boyton, the CEO and Chairman of Capital. On the line with me I have Giles Everist, our CFO based in London and Conor Rowley, our Head of IR and Corporate Development based also in London. I'm going to talk today to the presentation as opposed to the release itself I believe the presentation has been made available to everyone. And I'm kicking off on page on Slide 3, which has the head of H1 2022 Trading Update. I'll run through the presentation, and then we'll hand over for a Q&A session. I would, however, just like to point out that this is a revenue update. We've taken the opportunity today to build an expanded briefing given an update on the investments and critically, Stuart Thomson, who is the Head of MSALABS is going to present today at the back of the recent announcement about the alliance with Chrysos but these are revenue announcements, our results are due for release on the 18th of August. So I could ask you to please keep that in mind when it comes to any Q&A at the end because obviously, we are in blackout when it comes to results themselves. Just focusing on the revenue, a record quarter and half-year period for the Capital Limited. Our Q2 revenues were up 30% on the corresponding quarter Q2 2021 and up 6.4% on the first quarter of this year. And our first half revenues up 40% on the first half of last year and 7.8% on the second half of last year. So very strong headline numbers. When we look through those numbers, few points to bring out the drilling. We're seeing strong demand across all aspects of our business. On the drilling side, which is 72% of our first half revenue, we saw an expansion in our fleet size up to 116 rigs, which is up from 109 at the start of the year. And critically, the utilization has been trading at levels -- well, the strongest levels that we've had since the inception of the company back in 2005. So our fleet utilization in the first half was 83% and for the second quarter, it was 85%, very strong demand in our drilling business. Going into a little more detail with Stuart on the laboratory business. But as I said, broad-based demand, strong demand across all 3 of the operating businesses. So drilling performing very well. And the contribution to our non-drilling activities is at the highest level, it has been since we diversified our service offering a few years back. Then move on to the next slide had our strongest demand in Capital's history, which is a fairly powerful message obviously. Look, I'm cognizant of the fact that clearly, there has been a lot of volatility at rate in capital markets, commodity markets. So we've included some of the top-down thematic slides that I think are worth discussing. And the fact is that the -- we have for some time in the bottom right, you see exploration budgets versus the annualized index metal prices. And there has been a disconnect. We have talked about this for some time, and we've seen a search in demand that has been for about 15 months now as exploration and general drilling activity and laboratory activity has started to increase to bridge this gap where exploration is still 40% below the levels it was at the previous peak cycle. Now that thematic also brings true across into the global CapEx, which, again, is well off-peak levels back in 2011 and '12. And interestingly, there was a report issued by Bank of America in early June pointing to the requirement for global CapEx to be running at $160 billion per annum to prevent raw material shortages as the world transitions to a net zero. So certainly, we believe that the fundamental demand drivers for continued strong growth for our services are in place, notwithstanding the current volatility that's been shown in both capital markets and commodity markets. And obviously, what we're seeing top right, drill rig fleet utilization as an indicator, brings that to bear in terms of demand on the ground, extremely strong -- strongest, we have seen tendering pipeline extremely robust despite the recent volatility. Moving on to Slide 5. The investments, obviously, a headline number that was weak in today's numbers. However, we'll just give a little bit of color on that. The bottom left goes the value of the investment portfolio since the strategy was formalized and implemented at the start of 2019 so we've had a very strong performance since inception. The 3 major holdings of the portfolio: Allied; Leo Lithium; and Predictive Discovery. Those 3 holdings represent roughly 80% of the portfolio's value. Allied itself is a producer going through an expansion of their core asset in Sadiola in Mali, whilst both Predictive and Leo Lithium have just completed capital raisings, which gives them a lot of runway with respect to project development. So those 3 positions are, as I said, 80% of the portfolio and what we have disclosed in this pyramid is the major holdings where the -- more than 5% of our portfolio will turn with more than 5% of the investee company. Moving on to the next slide, investments contributed to earnings. We've just given a little bit more color here. We were a net seller in the first half, which is the bottom right, we sold $2.6 million worth in those proceeds were allocated towards group capital expenditure. As you can see on the top -- in the text on the left, the 300, just a little over a 300% return, our 50% return compounded inception. But I should also note that the invested capital in this strategy is about $11.5 million against the total asset base of over $300 million, just to put some context around this. We continue to get good, very strong contract revenue in the first half, generating just around $25 million, $26 million of contract revenue from our investee companies. Moving on to the next slide, MSALABS business overview. So I'll hand over here to Stuart, please.

Thank you, Jamie. So just want to start with the first slide with a bit of an overview of the business and look at our 4 operating models. First operating model really relates to exploration of the mining industry, and this is our clients looking for new ore body and our operating model really affect both the broad range of locations that they're doing this and also the diversity of the elements we're looking for. A lot of our clients are looking for when they're talking example, 60-or-so sort of element and we need quite sophisticated equipment, some very knowledgeable people to actually operate it. And really lends itself to having centralized -- what is the capital laboratory and then a whole series of collector facilities that are out there in the field in the various locations to collect these lab sample -- sample prep and then send them to hub laboratories. So [indiscernible] MSA has got 2 hub laboratories. The first one has been banked in Langley in Canada, and the second one is the Yamoussoukro in Northern Coast. And then fairly 10 hub laboratories that are feeding sample with these hubs. Second model is actually on the mine site themselves. They wanted orebodies in terms of running laboratory for mine site, and this is for both great controllers again [indiscernible] plant. That's not really witnessed for most [ manners ]. So in this case, what MSA will do is we will do the engineering studies, project management, construction and laboratory and then the actual operations on-site. It'd be less sophisticated in terms of the number of elements, but the longer-term contracts as well. So setting that thing for the next slide. Slide #8 shows the 6 contracts that we have for Mining Plus right now. So you get an idea of the range of locations, of which most recent one, we have actually commissioned and taken over is Barrick in Kibali, the largest gold mine in Africa. And we will be putting a Chrysos unit currently along with the [indiscernible] and we'll be putting that Chrysos unit in there arriving from September. And then on the right-hand side, we've got just a bit of a sample of the various exploration projects that we do around the world. So this gives an indication of not only the geographical spread, where we are bringing samples in from the range of clients we have, but also different elements, you can see within the LKAB iron ore and then a series of gold and copper operations. So well on the right, that showed some pretty serious growth in 2019, and that's really due to the addition of the 10 laboratory. So we now have a total of 18 laboratories up and running and the construction since 2019 to -- 10 additional laboratories in 2019, and that's really driven that growth, the very rod-end prod bar, you can see got a step-up and that reflects Kibali coming on stream in May, along with increased samples coming from [ Victoria Gold ] in British Columbia. So looking forward in the future of it, and [ at the end of February ], we installed our first Chrysos unit. This is Slide 9. This unit is [indiscernible]. It's new technology, essentially a replacement for Fire assets. It's quite a very good [indiscernible], very different technology, a much bigger sample, much faster turnaround time and this great benefits to both those streams that we've been talking through in terms of online sites and for exploration. On the mine site, the ability to get the data so much faster allows our clients to make decisions much quicker and much more accurate in terms of where they want to be doing and what the ones to be doing, materials they're handling. And this reflects both the milling operations and the Lake and Salt. And similarly, for exploration, where turnaround times in the 6 weeks right now, that can create delays in efficiencies and exploration program as well as geologists are wondering where to go and put a drill hole next. The sort of changes in the magnitude of the changes, to give you an idea, whereby current priority would be programs will be lucky to do it and within a day. Our most recent precise unit, which will be installed in Val d’Or, geologists could come and do a trial like it's really popular then. [indiscernible] the machine as a profit and the time they finish the profit, they're actually getting the results. So this is a genuine game changer. The other areas that provide you a benefit or as utilized as last temperatures wanting at 900 degree Celsius. Obviously, as hydrocarbon footprint and along generating that way as well, both of those get removed in this process. [indiscernible] that's coming through as well is that in some of these locations, getting good quality labor, the labor pool is pretty small. And the ability to have a system that is simpler, requires a few people, requires few stats means that [indiscernible] more equipment to more technical roles within the mining operations as well. [ Lithium ] a real game changer, we're seeing a solid performance through the full unit and the available unit. It's performing well. And from this, the evidence we've seen, we're very pleased to this technology further. And hence, we some contracts noted a total 21 unit. -- versus if you look at the other on Slide 8, this is really going to provide the coloring of the business growing for going to -- in summary, MSA now has a really solid platform for growth for that in a really good half way but a really important industry. We've got long-term mine site contracts. And we now have some differentiating technology that's going to enable us to really work well with a very solid plant base. We put over 200 plants of the continued growing business through the 2025. And I will hand back to Conor.

Thanks. We had -- some questions are coming through the webcast. So given you just run while we start with you. Question in terms of the rollout of 150 units and how you think about where they go? Do you want customers to commit to utilization will you place and strategically based on anticipated remarks?

So we're placing them strategically. So first of all, we've got existing clients that we have that are already having discussions with around this locations. Logically, there are some major hubs around the world where it makes sense to put these limiting. Our preference is to have a combination of mine site baseload the grade control coming through this as well as the capability to draw exploration samples in our location around those areas. So we've already announced our door. We're going to put a unit across intent because the Abitibi belt is a major area. Within Africa, West Africa is a logical the amount of growth going to the number of the new mines that are coming on board. So we're already tendering and putting within those tenders the opportunity to recessing those facilities. And then elsewhere within Africa and potentially Latin America, there are some pretty large gold part here as well.

And maybe just to pass back into you and, Jamie, given MSA allows is more global scope, how have you found the potential cross-selling benefits between the drilling and the mining and the last business?

Who's going to answer Stuart, you or me? Okay. When we initially acquired MSA a few years ago, really what we bought was the accreditation, there wasn't really much of a business there. There was the hub lab in Langley, which has expanded significantly and obviously all the QA/QC. The cross-selling has been significant, such that Africa is now the biggest -- the bigger revenue stream for MSALABS. And the simple analogy that I always use is the best lead indicator for a sample going through a lab is a drill rig drilling the hole first. So the cross-selling is enormous. But what as MSALAB matures further, what it's actually presenting for the drilling activities now in particular, is presenting opportunities as the leader of those opportunities, whereas beforehand, MSA would really coming off the introduction of capital drilling, now MSA is driving opportunities both in existing geographies and some further field. So certainly, while they're not a bundling service per se, the cross-selling opportunity is significant.

I think now back to some more of the Q2 trading update itself. We've had a number of questions on the ARPOR in Q2, but also in general, just sort of the backdrop of pricing increases across the industry. Can you talk to capital Q2 ARPOR and also generally where we can see prices going and in that context, there's the recent data announcement and what we've announced there?

ARPOR broadly been in a range of I think about 170,000 to 190,000 for quite some time now. I think I need to get the teams to explain that ARPOR is not just rate driven. It's a lot to do with activity driven in fact more. So if you -- for example, if you are double shifting versus single shifting, that will have a more significant impact on our farther rates. So the things that feed into ARPOR productivity, obviously, if you start a real for a month, you only collect half of the ARPOR rates themselves. So just to give a bit of top-down overlay to ARPOR. Our ARPOR is at 171 are in a range that we're very comfortable with. It is a little bit lower, but I should stress that now that 20% of the drill rigs that are turning at the moment are underground, underground rigs, more footprint, lower ARPOR, same sort of margin profile. So that contributes to some degree of it. Obviously, also, as you are expanding your fleet, you're not starting all the rigs on the first of the month, you might be starting one on the 20th of the month, and that will also have an impact. So I hope that answers the question, Conor.

Yes. And is that a number of questions we've had in the utilization you talked before that a mid-18% is running as fast as we can. Can you talk to the outlook from here? And also on top of that, just the seasonality in the second half?

Sure. The previous statement stand, I mean, this is running pretty much as full [indiscernible] as you can run with respect to utilization. In terms of this analogy, we obviously have about 1/3 of our revenue coming out of West Africa and the wet season is upon us. And each wet season, it brings different conditions. But typically, you'll see an easing in activity in West Africa in the current quarter. But in terms of utilization, yes, this is very strong conditions. We obviously have further rigs arriving over the course of the year. And this type of utilization is the levels in which will drive pricing, which I didn't actually cover on that last question properly, but new contracts are being priced 15% above levels they were 12 months ago. So we're certainly seeing pricing increases come through, which is commensurate with utilization rates picking up significantly across the industry.

Thanks, Jamie. One more. We've had a number here on margins. As a reminder from [ as Jamie said ] the revenue uptake will come back in to margins at our interim results on the -- so one more just on data specifically. Congratulations on sort of the strong update. What triggers that update this year having renegotiated those contracts across 2 sectors announced since last year? And is there a scope to be similar upgrade and extension cost portfolio?

The trigger for that was that we previously announced it in 2 subcontracts. And they came back to us and expanded the stroke, which includes more meters and extended by the time the contract -- the new contract was settled, it led to an extension. And therefore, the new profile actually put it into the second largest contract win in the company's history and therefore, triggered what we believe is a materiality threshold for reporting. So that was the trigger behind -- sorry, Conor, the other part of the question?

Just whether we can see -- expects any sort of renegotiations and extensions across the contracts.

Yes, what we're seeing broadly with our customer base is increased activity at established sites. And that, for us, actually has been a thematic since 2020 actually, where we grew our revenue in 2020 at existing mine sites, and we're seeing that increased demand around existing mine sites. And that's the type of growth we obviously like to see because that enables us to leverage the infrastructure that we've already got in place. So really a focus for us as well is just increasing our exposure to Q1 assets. And one thing I didn't mention in the introduction is that recent win which we combined with the GEITA contract announcement about Fekola, which is the third largest gold mine in Africa, a very low-cost operation. So we're very pleased to have now got a footprint not only at Fekola, but as Stuart mentioned, recently at Kibali, which is the largest gold mine in Africa, so that very much is a focus for us as well to continue to increase our exposure to Tier 1 assets.

Okay. One more has actually come in just on it is on margins, but it's a long-term margin. How do you see the margins of MSA long term after the rollout of these units to [indiscernible]?

Could I feel that -- I'll feel that. I mean we -- it's very difficult to get looked through sectorially because most of the commodity analysis testing companies are interclined with much larger diversified testing businesses. The best look through, we always referred to as ALS, which operated 20% to 25% EBIT margins, which is a very strong margin profile. Obviously, a significantly larger business, but that gives you a sense of what can be achieved in these businesses when you get scale. Yes, I hope that answers the question.

Yes. I think that is it for the questions other than the ones that we will address at the interim report [indiscernible] So with that, Jamie, I'll let you to wrap up.

Okay. Well, thank you again, everyone, for dialing in. As I say, a good opportunity for Stuart to explain a bit more about MSALABS given the recent announcement. And as Conor said, we'll release H1 results on the 18th of August, and thanks again for your time.