Master Drilling Group Limited (MDI) Earnings Call Transcript & Summary

Welcome to our 2019 results presentation. We're going to do it a bit differently today, unlike the past. Today, I will only do the intro, give a business overview of what we've seen, experienced in 2019. And then we'd ask Koos and Roelof, Koos being the -- albeit, looks after the mobile miner and the shaft boring system and -- which was commissioned last year. I'm sure Koos would like to share with you the progress made in that space. And then Roelof Swanepoel is overseeing the South American business operation. He is going to give a run down on the operations for the period under review 2019. And as usual, Andre van Deventer will give us a run down on the numbers for 2019. I'm sure he's looking forward to share with you some of the highlights of 2019. And then unlike the rest of the past, we will do the Q&A and only then do the wrap-up at the end of the presentation. So first things first, safety. So the safety performance of the group 2019 all-time record. And I think I'm pleased to announce that no fatality for the period under review. And remember, we'll be coming from -- any sustainable business must have a specific focus on safety. And I think the numbers and the indicators Roelof will share with you later on will probably vouch for that. So overall, excellent, best-ever safety performance of the group, 2019, and we hope to continue with the performance in 2020. Then the business overview. The business, 2019, what we've seen from where we're sitting on a macro level, I think a couple of things important that we've seen. We saw the volatility in the markets, the China and the trade war between the U.S. We've seen Brexit, eventually the elections to follow. We've seen commodity prices took off some slower, especially on the copper side. We've seen the emerging markets, currencies fluctuating. And today, we're facing the corona, which is probably talk of the town today as we speak. So overall, if we look from 50,000 feet down from where we're sitting, certainly volatility and uncertainty, the 2 key words that we should take from 2019, and I can't see that will be different going forward. So very important for our business and ourselves is to make sure that we deal with these uncertainties and volatility going forward, and I'll touch on that later. If you look at the business, just on a lower level down, what happened in South America, certainly, the disappointment of the group in 2019. Remember, the Chilean business has been the darling of the group for many, many years, for the past 20 years, and last year, the wheels just came off. We had -- for the first time, the social unrest in Chile. For the first time, we saw buildings being burned down in Santiago. We had issues with the Peruvian business, labor issues, presidential elections have been moved forward. So generally, the South American business for 2019 not great. And again, Roelof will touch on the detail of it later on, the impact of business, the retentions and the re-base of, especially the Peruvian business, and where we are today with the Peruvian business. Then maybe another step back, if we look at the rest of the business, I think the African business, overall, not doing bad. I think we've ticked all those boxes, and Andre will give you a rundown on the numbers and the earnings that came from this division and the same with Scandinavia. I think Scandinavia, I think, we acquired that company 3 years ago, and it came through very nicely with returns well north of 20%. Then if I look at the business today and maybe another step back, where we are with the business and where we're going to, I think a couple of things important if we talk about the strategy of the business and where we're going to. And again, I'll leave the operational detail for Koos and Roelof to share with you guys. But if you look at the strategy of the business and maybe just do and put them in 3 boxes, the growth of the business, we've also said last year and even the prior year that the growth of the business would come from the MTB, Koos' mobile miner and the shaft boring system. A lot of progress was made in that space the last year with mobile miner at Eland and the shaft bore, the first phase of the machine being tested in Fochville in the last year. Again, Koos can deal with the detail and give you a rundown on where we're going to with that project. I think the second one is probably the geographic expansion, and I'm sure the investors would like to know more about our current asset base. How we're going to optimize and utilize and get the utilization north of the 70%, what we believe it should be. Now again, I think geographic expansion, I think the single KPI for that is to make sure that we optimize the current assets. Our assets -- total assets today well north of $200 million. If you look at the revenue and the asset turn, which is certainly way down from where we were when we listed the business in 2012, certainly is a concern for us, but there's no reason why the asset turn shouldn't be better today. And there's a lot of focus today to expand the business into Australia, and I think, Roelof will touch on that a bit later on as well. So maybe just high level in Australia where we are today. So we -- on a short form, we adjudicated a contract for 18 months, 2 years, for 2 machines, x machines. It's going to probably go there in the next month, we hope. And then the Detra JV that was signed end of last year for the stunts in Russia, which is going to help us to set up office in that part of the world. So I think if we talk about the geographic expansion, the box was ticked last year for Canada and for the U.S. I think the West Africa business was set up, and I think they're doing well. But I think the 2 kids on the block today is going to be Australia, and most certainly, the stunts in Russia, I do believe there's a lot of opportunity and no reason why we can't in a short, medium term, get the utilizations back up into the mid-70s. So this is high level on that business. If we look at the business today and where we're going to. The last box, if we talk about the 3 boxes, of the strategy is the M&As. And again, Andre will give you some feedback on the returns of the M&As, the last 3. And I'd like to think there's some good news coming from the M&As that we've done in the last couple of years. So that's, at this point in time, my part of the presentation. Koos, if you can maybe come forward and deal with the shaft borer. Again, Koos is going to deal with the mobile miner and shaft bore and just give you an update on where we are, and then I'll be back to do the wrap-up at the end of the presentation. Thank you, Koos.

Thank you. Good, Danie. Morning to everybody. Master Drilling would like to provide you with the following technology update. It's all in regards to a value proposition that Danie touched on around safety, it's around productivity, it's around cost, it's around quality and around risk. So that being said, I'd like to move to Slide 9 and give you an update on the Mobile Tunnel Borer. This resource was contracted in the first quarter of 2019 to a project at Eland mine with Northam Platinum. In the second half of 2019, the contract for Phase 1 was concluded. Subsequent to that, we've been awarded a Phase 2. And the scope of Phase 2 contract is a 1.5 kilometer decline at Eland. It will take us about 18 months to construct this decline. And we have initiated production or started production in the first quarter of 2020. We've had some delays on the startup. But recently, we've obtained and realized a steady build-up, which is very positive for us. Apart from this project, there is a lot of interest out of the industry. There is 2 projects that we're working on upfront engineering estimation for proposal to these projects, and we believe that will create a lot of value on these projects, if that would be considered. There is also a lot of other interest out of industry from around the world, and it's important for us to prove the initial work that we're doing that it's successful and build the business from there. If you can remember, we launched and we manufactured the Mobile Tunnel Borer in 2018. We kept it in storage in Europe before we moved it -- 2019, we moved it to South Africa. There's also another initiative from us to consider alternative contractual business model, how we can contract this resource. And most of it has to do with the capital nature of these projects. We are -- we have it in review at the moment, and we think that could also be and make a big difference on the way we provide the service to the industry. I'd like to move on to Slide 10, give you an update on the Shaft Boring System in Master Sinkers, a JV between Master Drilling and the IDC. We also agreed to follow a phased approach, and it's to mitigate the business risk for establishing this capacity. So in 2019 -- in the second half of 2019, we did an experimental project just outside Fochville, as Danie said, where we cut a 10-meter test shaft, 4 meters diameter in 300 MPa rock in norite rock. So maybe for people that can't relate to 300 MPa rock, it's about the same strength as mild steel. So with this experimental testing that we've done, we were able to get up to just short of a meter per hour instantaneous penetration. And this is of considerable value, if you consider the current complexities, safety-related issues, cost and productivity of the sinking industry. There haven't been many changes. It's pretty much conventional still. There are 2 soft rock projects that's mechanized, that's being done in Europe at the moment. But as to date, there is no real solution for hard rock cutting technology or sinking technology. So where to from Phase 1? So we have -- Phase 5 would be the first contract that we would execute. So we've grouped Phase 2 to 4 together. That's basically the assembly, the manufacturing and the commissioning of a machine and proving it to be ready for operations. So we currently have a funding for Phase 2 to 4 -- to Phase 4 in review, and we hope we will have a positive outcome. And that we could, in the second quarter of 2020, proceed with this project. I've mentioned that it is unique. There is quite a bit of IP that's related to this technology that we have patented worldwide. I'd like to move on then to Slide #11, automation, remote operation and digitization. It's important for us to demonstrate to you our ability to implement. In 2019, we were able to operate a raise boring machine 3.5 kilometers underground from surface. We did it to the extent that we completed just over 20% of the production that was done by remote control. And that helped us -- it helps you a lot if you have operations where you have reentry time, it's basically a dead time during the day. And this capability enabled us to provide production during that time. From this project that we've done, we see a lot of value where it could be used, where you don't have much face time. You don't have -- or you have limited personnel resources or very expensive personnel resources. So we're rolling that out to a project in South America. There is another machine in North America that we're preparing, one in Scandinavia and then also having a resource ready for a project in India. From remote operation, it's -- there's much value that we generate by quality -- that we -- quality and benefit that we realized from standard rising processes. So we have got the capacity now of about 42 rigs in our fleet, where we have semi-autonomous control, the semi-autonomous control if to put in on practical terms, it basically optimizes your cutting cycle without the interference of an operator, and it limits your risk if something would go wrong during operation. We have seen about a 20% to 30% benefit in productivity on the sites where we have implemented this functionality. We've also developed full autonomous control, the engineering side of it, and we're waiting for the ideal project where we could apply it and introduce it to the industry. Another point is the digitization. We have ran operational reporting since about 2017 from Master Drilling exploration. And that enables you to have operational data just about real-time. You can run a whole lot of analytics around that. And that enables you to make better management decisions and operational management. This capability has been rolled out to the majority of our other operations globally. So we're currently seeing the benefit of that in the group. There's additional modules that's being developed around this hardware and system, of which, I would say, the Czech module is probably one that we're getting a lot of value out from at the moment for managing Czech-related issues. This automation, remote operation, digitization capability, is something that we didn't have 5 years ago. We have invested in this capability over the last 3 years. And with electronic engineers, with programmers and we have seen an extremely valuable benefit from this initiative. And it helps us to modernize our fleet, our thinking in an ever-changing world. With that, I hope we can convey our interest to actually implement all of these new technologies, not just to talk around it. Hopefully, you can see that it's being realized and that it could mean a sustainable and a bright future for us. And with that being said, I'd like to hand over to Roelof, who will take us through the operational update. Thank you.

Thank you, Koos, for that introduction. Koos, now we need to move to the engine room of the business to pay for these capital projects, which you're planning for the years ahead. Morning, everyone. I want to start the operational review on Slide #12, and I want to focus on 3 important areas that I want to discuss with you today. Number one being safety, safety being our most valuable value and most important value of the business. This has been something, which is extremely important for us over the past few years, and we made tremendous efforts in the past few years to improve that. And as Danie mentioned, 2019 has been our best safety performance to date. Secondly, I want to have a look at the regions, share with you some of the insights into South America, the subpar performance. And then also have a chat about North America and Central America and regarding the margins there. Then there's also some good news coming from Europe, India and some of the other regions, which we will share with you. Lastly, we need to stand still at the order book. At the end of 2019, we had a very steady order book, which we're proud of. But with the current market uncertainty, volatility and also the outbreak of the coronavirus, there are some interesting discussions to have around the order book. Then if we move on to Slide #13, which is our safety results for the past few years. As I've mentioned, this has been our -- 2019 has been our best safety performance to date. And this is really something to be proud of. First of all, we would like to thank all of our operational teams across the world that contributed to the safety performance. When we talk about safety, we have a saying that talk is easy, but living these principles on a daily basis, that is what really matters. And these are the leadership principles we implemented over the years in our operations and this is the principles we live by today. Just to bring the safety perspective to you -- into performance, although the performance is down -- is up to about 2.02, I must put this into perspective. It's important to note that in 11 of the countries we operated globally, we had accident-free performance for the year 2019, which is quite remarkable. Then maybe to touch base on the initiatives that is actually driving the safety performance. As Koos mentioned, our machine automization program and semi-automization program is what really helps us operationally to improve the safety performance, projects around man and machine interaction. This is really under working sites, where we need to make sure that we limit the interaction between our machines and our people operating these machines. And then lastly, we have a lot of programs running in terms of safety behavior. And these are all local programs all around the world, specialized for the different cultures where we operate. Then maybe just something to mention to you about safety awards. 2019, we've seen a number of safety awards being awarded to Master Drilling across the group. And maybe 1 or 2, which are very notable. Eddie and his team in Kolomela, Kumba, received quite a number of these safety awards during 2019. Then let's move on to Slide #14 to talk about the revenue diversification across the group. So first of all, I'd like to mention that our revenue is up by about 6.9% in dollar terms. Having said that, you must note that the -- that we had an impact of about $6.4 million due to the strengthening of the dollar in the latter part of 2019. So considering that and a 6.9% increase, it was quite a strong performance we had on the top line of the business. But the disappointing part is really South America, and we need to stand still there for one moment. As you can see from the information, the contribution of South America dropped from 42% to 34%. Last year, we reported to you that the Peruvian business was under a lot of pressure due to certain market conditions. And during 2019, that persisted. Just to give you some context about what we've done in 2019 to improve this performance. First of all, we said to ourselves, we need to terminate or renegotiate some of these long-term contracts that were not that profitable anymore and that we've executed on. Secondly, we had a look at the structure of the business. We had a look at our workforce and said what workforce do we need, which is fit-for-purpose for the future. And unfortunately, we needed to do some restructuring. And as you can see in the information that we presented -- we picked up in South America and Central America a cost of about $1.5 million of retrenchments. And then lastly, we had the change in leadership in the area, in the region, and also change in the management structures, and we believe this was necessary to drive the business going forward. Let's talk a little bit about the good news. Up in North America, Gary and his team set off last year to gain some market share up in North America. And they did an excellent job up there to secure the voices by contract. That's a contract, which is running for about 3 years. If you have a look at the margin contribution or the operating profit margin for North America, that has been quite low. But that's typically of regions where you start up some of these big new contracts. We expect that margin to increase as the contract is ramping up during 2020. Then touching on the other countries, specifically India. It's now 18 months since our acquisition of the Atlantis business within the region. And this is just a great example. If you get the commercial conditions right in a contract, and if you get the business fundamentals right within a region, the performance will follow. A very strong increase in revenue from that region and also a very, very stable contribution to our operating margin, operating margins around 28.5% from those regions. Then just Africa. Africa has been very good to us for 2019, fairly stable, the performance. Going forward, we will see a lot more activity coming from West Africa. And we will talk a little bit about that in our order book to come. Africa, strong margin of around 39%, and we expect that to persist in the future. Let's move on to our revenue diversification per mining activity, and that is on Slide #15. This has been fairly stable compared to 2018. And this is really as expected. Maybe just to make a note on this, which is quite important. As you can see, the majority of our revenue is exposed to the production cycle. And this is quite beneficial in times where there's a lot of uncertainty in the market. And we clearly see that diversification playing into our favor during 2019. If we talk about the commodity diversification in terms of our revenue, that is quite stable compared to 2018, not much of a movement. What is just important to note here is going forward as part of the order book, you might see a little bit more exposure in terms of nickel and PGMs, but we will get to that later on. Let's just move on to Slide #17, which talks to our utilization in ARPOR. Our utilization is slightly up in 2019 compared to 2018. It's important to consider here, we did an impairment, Andre and his team, of about 6 smaller machines. Having considered that as well, the utilization is not at the level that we want it to be. As we communicated in the past, our expectation, our target is around 75%. But with the strong headwinds we received in 2019, the trimming down of the South American business, that is the best performance we could get out of 2019. What was interesting is the utilization mix that changed a bit throughout the year. We've seen in South America, a drop-off of the medium and smaller-sized machines. And then the bigger machines, our XXL and XXXL machines, we've seen an increase in that utilization, specifically in areas like Africa and Canada. And with this increase in utilization of the bigger machines, you can clearly see uptick in ARPOR up to about $111,000 ARPOR, which is a stable performance. One note, again, the currency impact on this ARPOR was quite significant for 2019, with the dollar strengthening in the last part of 2019. Regarding the slim rigs, utilization fairly stable compared to last year, and not much to comment on that. Then if we move on to the pipeline. We have a very strong pipeline of almost $300 million. This is significant. Important to note that for 2020, the pipeline is $169 million, of which $115,000 is committed. And the reason why this is important is that 77% of our revenue for 2019 is already committed in 2020. And that's quite a positive and a good position to be in. If we turn the page to Page #19. I just want to talk about the commodity diversification. So first of all, as you can clearly see, there's been a bit of a shift in our commodity diversification in terms of the order book. You will see an increased exposure in nickel and that is on the back of the voices by contract up with Gary and his team in Canada. Secondly, PGMs, that's up. That's based on the work that Koos and his team is doing with Northam. And then also the 1,400 meter shaft, which we are drilling here in South Africa in Northam. And just maybe 1 or 2 comments on this 1,400 meter shaft, which is very important is, shafts of this size and depth haven't been done around the world. And this is the first time in the mining industry that we will do a shaft of this depth and size. And what actually makes this project more groundbreaking is the fact that we need to drill the shaft within specific accuracy tolerances, which has never been done in the industry before. So this is something to look out for 2020. And hopefully, we can achieve this successfully over the coming few months. Maybe just important, why is this important for you to know? Once we're able to open up shafts with that depth and size and that accuracy, that opens up a completely new market for us with deep shafts into the future. Then that's it from my side on operational level, but maybe just to conclude 1 or 2 things. And there's a lot of uncertainty today in the market. What is happening today with the COVID-19 outbreak and the media today, everybody is worried about what will happen in the future. But from an operational perspective, we've always believed in diversification. If you have a look at our business, we've been extremely well diversified in terms of regions, commodities, currencies, and we believe that strategy will serve us very important in the times ahead. Having said that, I'll hand over to Andre, our CFO, to talk us through the number. Thank you, Andre.

Thank you, Roelof. Good day, everybody. This has been made much easier today with all the previous guys touching on everything I had to do before. So thanks for that, Koos and Roelof, looking forward to Danie's summary at the end. Just on the highlight side. Yes, it's been a tough year so has been 2018. So we went through a tough cycle and looking at the news coming out the last week or so, obviously, 2020, the challenging times as well. But looking at the highlights for 2019, I think the good thing is we managed in this time to increase revenue by nearly $10 million, which is quite substantial, also considering that the dollar was quite strong during the year. So I think to improve by 7% revenue for the year was actually a very good achievement. Then the expansion -- our strategy expanding into different countries. We ticked the box again with new projects up in Canadas and continuing in the U.S.A. So we're quite happy with that, then what Koos touched on the tunnel borer to do that first phase at Eland, which is very significant for us and important for the future for the business. And then the cash, I think still a very healthy cash position. And especially in times like this, now where we need to preserve cash, a good position to be in to have sufficient cash for the future. If we move to Slide 22. Just on the HEPS in dollar terms and rand terms. In rand terms, been quite stable the last 3 years around the ZAR 1.50 per share. So assisted by weaker local currency, and obviously, where the rand is today, 2020, on that side is looking positive. On dollar terms, a bit disappointing, not being able to grow the headline earnings per share, but the benefit of being a rand-hedged share being quite stable in rand terms. If we move to Slide 23, on the EBITDA. The EBITDA margin down to 20% from 22% previous year. But there's been some ones-off (sic) [ one-off ] costs in 2019, if we can just quickly go through them. Roelof touched on that on the restructuring of some of the businesses that we did in 2019, there's been about $1.5 million of costs that we put through the income statement for retrenchment cost. So it's actually been a good thing. We did that in 2019, given where we are today, that we cut that cost at that stage. So $1.5 million basically on labor cost. And then on the IFRS 15 on the ECL, there was additional $1 million due to the IFRS that we had to put through the income statement. So additional provision for bad debts. And then there's been the impairments that we referred to. It's about $400,000-something on the machines itself and then about another $300,000 on stock that we made additional provision for. So that in total was about $3.2 million, which is roughly 2%. So if you look at that, then it's basically in line with the previous year, although we've been benefited about $1 million on foreign exchange, so the benefit we had from that side. If you look at the -- so that's quite stable. If we move on to Slide 24, I that's just a profit after tax. That's pretty much aligned with what happened to the EBITDA, which just have flown through to down to profit after tax in dollar terms, quite considerable down from the previous year. If we then move to Slide 25, looking at the balance sheet or statement of financial position as it's called these days. We -- if we look at that property, plant and equipment, there's been about $14 million of investment in the year 2019. And as we've mentioned before, the capital we spend now is for future growth. So a lot of this is in the new technology, the tunnel borer currently in production, the shaft borer that's Phase 1, that's complete. That's obviously, as we mentioned before as well, that's a much longer-term investment and might -- potential benefit in 2022 -- '21, '22 on that. So a lot of capital spend -- spent on that, not much on raise bore, on the maintenance capital that we've spent. If we look at the working capital ratio, again, disappointing on year-end. Although from half year, it increased -- improved a bit by 135 days to 127, but obviously, far away from where we want to be. The only benefit of that is, obviously, with potential shutdown -- well, a shutdown of business definitely in South Africa for 21 days -- in some of the other countries [Audio Gap] working capital, debtors that hasn't paid us for a long time, we're insisting now that they're paying us in this time that we need the cash. So a positive way of looking at that. On the gearing side, we're up to 22% from the 16%, and that's due to the capital that we spent, less cash on the balance sheet than what we had in 2018, but still quite well within our range of 30% target that we put. We're also looking at in the next -- given the market conditions at the moment to try and decrease our gearing and try and get to a position where potentially we can be debt-free in a number of years. So that will be a focus of our business. On the current ratio, quite healthy at 2.25, so no problems on the current ratio. If we turn the page to Page 26, if we look at the income statement movement, we discussed the $10 million increase in revenue. We see a drop in the gross profit margin to about 30% from 31%, but that's mostly impacted by the factors that I mentioned before on the EBITDA. We also had on the taxes, quite consistent with previous year, roughly 20%. That was basically it. We mentioned the move due to the ECL provisions before. So that's all on the income statement, I would like to mention. If we turn the page to Page 27. Normally, an interesting slide. This is the impact of the currency and the diversification in the different currencies that we trade in. But interesting enough, the revenue is exactly the same as it was in 2018 on the currency side, 51% of the revenue was dollar terms and 49% in local currencies. And the cost -- the dollar price moved a bit downwards from 33% to 31%. So a lot more cost -- or not a lot, a bit more cost in local currencies. And that gave us the benefit of about $1 million impact on the profit in the mismatch between emerging currencies and dollars, always been our strategy to try and get as much revenue in hard currency and cost in emerging currencies. And given where we are today with all the emerging currencies weakening for 2020, that will also benefit the business. If we turn the page to Page 28, just on the cash flow statement. If we see the movement in cash from operating activities, substantially down from 2018. And again, that's due to the movement in working capital. A lot of investment is actually in debtors' inventory, and we actually paid our supplies a bit quicker this year too and -- which had a negative effect on our cash from operating activities. The investment activities, we talked about it is the investment in the technology mostly. The outflow due to financing activities. We've done all the drawdowns up to 2018 from Absa. So we spent some of that cash now on investments in the PPE, so $11 million downwards on that. So still with about $20 million of cash at the end of the year is still a strong position. If we then turn the page to 29, it's just a revenue waterfall. I think Roelof mostly [Audio Gap] the stronger dollar. I mean, if we talk stable currency, then the revenue would have been up another $6 million. But obviously, the cost would have been more. So I think this has been a very good performance to grow the revenue in this tough environment. If we turn to Page 30. On the working capital, I think I mentioned it. The movement in inventory, trade receivables and payables, all contributing to the negative movement in working capital, although it's -- it doesn't look like it, but a lot of effort is being put in this to try and recover that receivables on time. We have a lot of ways for different reasons in all the different areas. If we looked at trade receivable aging, less than half of our trade receivables are within normal payment terms with about 30% being 1 month overdue and the balance 2 months and 3 months overdue. So part of the reason why we had to make a bigger provision for ECL as well is the aging of trade receivables. But saying that, after year-end, we've made good progress with recovering of some of these overdue debtors. The one thing we still need to sort out is the retentions. It's about $5 million of retentions on the balance sheet, and a lot of that comes from the South American area. So we're busy, and that was part of the process last year to renegotiate some of the contracts is to get the retentions released, but it's quite a process, but we believe that it will be within [Audio Gap] all those repayments [Audio Gap] If we turn the page to Page 31, just on the ratios that we're achieving way below what our targets are on the return on capital employed on EBIT and EBITDA. Our target on the EBITDA line is about 17%. So we're 4% down on where we would like to be. And that obviously goes with the utilization percentage, that's not where we'd suppose to be. So if we can get it up to the 70%, 72%, 75%, then we'll be able to achieve that. So a lot of hard work needs to be done to get the machines in the field and get the revenue going. Working capital, we talked about the gearing, we talked about -- if we turn the page to Page 32, it's just the cash flow waterfall. I think we discussed most of these. Just touching on, Danie mentioned the M&As that we did in the last couple of years. So if we look at the Bergteamet and the Atlantis acquisition, on average, we achieved about a 20% return on capital on those 2 combined. So actually very good acquisitions that we did. Also gave us the footprint in different areas. And so very successful on the TunnelPro 1, obviously, that one is for a different reason. That was for the technology side, and we see that investment that we're doing in TunnelPro and the benefit we get at the tunnel borer project at Eland and now going into the 1.5 kilometer that we're going to drill, we see the benefit of that investment. If we turn the page then to Page 33. It's just the -- how we spend the capital. So basically, 82% of the capital spend, we see that as expansion and mostly of that is in the new technology, although it's not giving the returns at the moment. As we mentioned on the tunnel bore, previously, the first phase was at risk share with Northam. So not a lot of margin being made there. Obviously, in this year, when we achieve our targets on meters drilled per month, then there'll be a return that we can generate there, but this is investment for the future. So that is basically that on the finance side. So you guys are welcome, feel free if you get any questions that we can answer, and then Danie will do the wrap.

Danie, do you want to do the wrap before you do the Q&A? No problem.

The first questions or set of questions come from [ Keith McLaughlin ]. First one being, what amount of capital is sitting on your balance sheet relating to the Mobile Tunnel Borer and the shaft borer? And then if you exclude this blue sky growth capital, what would the return on capital or return on equity be on your core operations?

Keith, thank you for that easy question. The first part is quite easy on the CapEx for the tunnel borer and the shaft borer, it's about in the region of $13 million sitting there at the moment. So if we exclude that from -- on the equity, it's about 9% that the equity. So it will have about 10% effect on your return. So if we're making a 12% now, it will take it up to 13%, 13.5% on the current fleet, if my sums [Technical Difficulty] that affects about a 10% on the returns with the capital in the new technology.

Then following on to that, it's what debt covenants exist in the group? Is that at the center or subsidiary level in each country? What recourse back to group balance sheet exist? How worried are you regarding solvency and liquidity risk given COVID-19-driven economic shutdowns across the globe?

Okay. Thanks again, Keith. So on the group, the only -- all the debt are basically on group level. We've got the one overdraw facility in Sweden. That was when we acquired the business. So there's no recourse to the group on that. If you look at the Absa covenants, we've got 3 different ones. Within all the covenants at year-end, there was still a bit of headroom in each of them. I think part of the reason why we kept quite busy with the auditors last night was obviously the effect on COVID, which we need to have a look at on the ongoing concern. And we need to -- needed to do a lot of exercises on impact on different drop in revenues, different months not being productive. And what we got to was calculations that we're able to be solvent and liquid, at least for the next 12, 15 months. We're still within our covenants, so no risk on our assumptions that we used to do the calculations on -- given the conditions. So obviously, it's something we're looking at consistently now, and we're looking at the different scenarios. So we've got the baseline that we now use for what we call COVID-19-adjusted budget for the year. And if that needs to be adjusted as things change, then obviously, we need to pull the different levers that's available to us to stay within those ratios.

The next question is from [ Conrad Lutz ]. I want to compliment you on your results. 2 questions. What are your biggest challenges at this point in time? And what does the competitive landscape look like?

Well, thanks for the easy question, maybe the last one first. I think prior to the COVID-19, I think the commodities are moving upward in last year, even January, and we really set up for a good run for the rest of 2020. Obviously, things have changed. So again, I think we're probably not too bad position given the diversification of the business. The African business units are -- except South Africa, all normal operations. The Sweden, Scandinavia has a total different view on COVID-19. It's business as usual. And so today -- things might change tomorrow and next week, but I think today, we're probably okay, if we look at the landscape. What will happen to commodities in 2 or 3 months' time, your guess is as good as mine. Really, I can't judge for that. So unfortunately, I hate to look in the crystal ball and make a guess or take a shot at that.

Thank you, Danie. There are no more questions, if you want to close.

No more questions?

No more questions.

Maybe then just a high level as a wrap-up of where we are, and at the -- in focal, what do we see in the business going forward and what's likely to change in the business going forward. Maybe a step back, just to reemphasize what I said earlier on and just talking to the uncertainty and what we see today in terms of volatility in the market. I think the way we run our business will probably change going forward. And let me share with you, Andre didn't say too much about it. I think getting the business, we were repeating on that up to 30% was okay, and if you look at the business today, and we look at what I've mentioned earlier, I think we need to revisit the so-called 30% ceiling we set for ourselves. And maybe the discussion we should have as a management team is maybe debt-free 3, 4 years and probably 2 years, probably too much of a push. But I really think that we need as a management team need to agree on the time frame and the runway when to get to that point. I think the second one, certainly, on the cost today is the way we spend capital and the way we're going to deal with capital and the discipline going forward. That said, though, I think the CapEx spend for 2019 was quite disciplined. I think the CapEx was all spent 90%, 87% in the environment where Koos is operating, which is ultimately going to be the future of the business. Although there's a lack of CapEx spend, conversion to earnings, I really think '19, the CapEx discipline was probably better than the prior years. So I think that's the second one that we need to look at. I think the third one probably that we need to change in terms of the business going forward is the way we've set up our business units, the structure, and that starts from overage write-down to the operational levels. I think if you ask me today and if we look at the Scandinavian business and what we've learned from the Canadians and the U.S. and some of the First World countries, probably too many people in the business, might sound a bit harsh, but I think we need to look at the way we set up our contracts and our business units and even the overage of the business going forward. That's going to be work in progress. It's certainly something we need to focus on, and as a management team, need to reconsider. I think just on the dividends, I was waiting for the dividend question to come. And just on dividends, I can't see us paying dividends, if we see what we see out there today. We're right in the middle of something that we're not sure, how it's going -- when it's going to last. So on the dividends, I'm still one of the largest shareholders, and as management, we still, I think, 60-odd percent of the total company. So dividends is a no go. If you look at the uncertainties and where we are today, to try and to preserve cash. So that is ultimately in the business, if you look at the business from high level down. I think I've touched on most of the closing remarks on that last slide. But again, the focus ultimately is going to be the dream, the ideal of the business is going to ultimately make a difference in where the mining industry is going to, and I'm not saying Koos and his team has got the silver bullet, but I really think what Koos and the guys are doing in this space is probably where the industry is heading to. I really believe mining in 5, 10, 15, 20 years today will be very, very different of what we see today. And I think as long as we focus on those indicators and trends where the industry is going to, we probably should be okay. So that's my closing remarks. Any other questions, [ Fred ]? Is that the last questions we had.

No further questions.

Thank you for attending the presentation.