Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Mitchell Services Full Year Results for 2020, the analyst briefing. [Operator Instructions] And just please be advised that today's conference is being recorded. On today's call, we have Andrew Elf, Gregory Switala and Nathan Mitchell. But I will now hand the conference over to your first speaker, Andrew Elf. Thank you, and please go ahead.

Thanks very much for that, and good morning, and welcome, everybody, and thanks for joining us on the call today. With me, I've got Greg Switala, our Chief Financial Officer and Company Secretary; and Nathan Mitchell, our Executive Chairman, who'll be available for some questions at the end of the presentation. So we'll get cracking first off on Page 2, the disclaimer. We'll take that as being read and move on to Page 3, the market profile. As people can see there, major holders, Nathan Mitchell, obviously, name on the door, Executive Chairman and the Founder connection. Similarly with Scott Tumbridge with the Deepcore acquisition in November 2019, a major holder of 7.2% and on the Board, and then institutions holding approximately 21% of the stock amongst others. On Page 4, COVID. I think everyone's heard a lot about this. I won't read this slide other than to say, I think all of the team has done a wonderful job in regards to managing this the best they can. It's been very tough for us, but we've done a fantastic job and continue to do so. And a big thanks, as I've said previously, to people in our workforce that have made large sacrifices to keep the business running and moving. Obviously, Victoria is a challenge at the moment, but we're operating in regional Victoria and really haven't seen too many impacts on the business as we speak. On Page 5, people and community. We have set up Mitchell Services Foundation throughout the course of the previous year and really just looking to creating value for our shareholders by having more of a presence in that community space and looking forward to getting some good wins on the Board with the foundation in the future. On Page 6, looking at an overview of the business. Again, a fantastic year for the business all in all. Looking at those 3 top boxes there, revenue up, EBITDA up, 46% and 45%, respectively. And importantly, net debt, 28% down from December '19 post the acquisition of Deepcore. I think it's fair to say there in the bottom left-hand corner that we've spoken to people about the quality of the business and how we work. Mitchell has got 50 years in the industry. It really is a quality brand, and it is very much seen as a Qantas-style operations within the sector that we operate. And again, these results are fantastic given the pandemic that we've had upon us. Importantly, the business has had another special dividend in July as we did the previous year. So again, that's 2 years in a row now and during the pandemic as well. And importantly, with that reduction in debt and the business producing strong cash flow, the balance sheet is strong, and we're in a really good position to move forward and continue to take advantage of opportunities as they present themselves. On Page 7, we can see the impact there of the increased utilization in the business. So this is the -- the bar chart here shows the average operating rig count across the course of the year. For those that follow Mitchell Services, you'll see in our quarterly releases that we show the actual operating rig count on a sort of month-by-month rolling basis and the appropriate shift count. We make the point there that we expect the operating rig count to increase in FY '21, and again, that will just lead to increased top line revenue and EBITDA as we go throughout the course of the year. Obviously, that's subject to change based on seasonality and contract leases and other things like that. But all in all, certainly looking forward to another positive year for the company. Operational highlights on Slide 8. We achieved our EBITDA guidance during the pandemic, and again, I think it just talks to the quality of the business. We did have our utilization marginally impacted by COVID-19. That's increased again subsequent to that. And really, I think when that first happened, it was a case of clients really getting a little bit nervous and stopping a few rigs here and there. And it was more about not having people come to site to reduce their risk more so than the drilling not needing to be done. And certainly, what we're seeing now is a few of those clients getting rigs back out, but being behind on where they need to be and having to make some decisions to manage that accordingly from a program perspective as well. From a diversity perspective, we'll get to that in some further slides, but it's continuing to improve by commodity and geography and drilling type, and I think we're in a really good position to take advantage of gold and [ where gold ] that as well, and we'll talk to that more and, importantly, the quality of the revenue and where it comes from. We're working with the best clients on the best sites. They're on the lowest part of the cost curve on sites to continue to operate throughout the cycle. And if they do so, we need to keep drilling. So on Slide 9, the revenue diversity. We can see there in the top left box the revenue by commodity, coking coal 44.5%. I think moving forward into FY '21, that percentage of the coking coal will continue to reduce as the gold percentage increases. The coking coal dollars will stay the same. It's more just the case of the gold area of the business continuing to increase. Bear in mind that the Deepcore acquisition will transact for full 12 months rather than 7 in FY '21. We make a point there. We've got zero exposure to thermal coal. So that is 100% met coal. Obviously, this is something that management are very mindful of in regards to the mix of drilling and geography. When we look at geography, again, that Queensland percentage will probably decrease a little bit again in FY '21 as other areas that Deepcore operate in, from predominantly New South Wales and Victoria, trade for a full 12 months. And interestingly, in the revenue by drilling type, we've seen underground become greater than 50% of the business in the current year and, I think, that percentage will remain over 50% looking at '21 as well. So again, the business works surface and underground in met coal, surface and underground in minerals across various states, various commodities with an exposure to gold, which can be put into the gold space, and that gold percentage will increase in '21. On Slide 10, the quality of our revenue streams and, again, this is certainly the way we've wanted to set the business up and something we're focused on. It's very important to us. Again, those large multinational clients or Tier 1 clients and long-life, low-cost mine sites, they're operating, we're drilling, and that's approximately 90% of our revenue and has been now for quite some time. We are focused on the work that is on the mine site or close to the mine site, and that is related to production, and that's where the ongoing work will be. And you can see down the bottom there in the little graphic that those 3 darts or little circle that was highlighted equate to that 90% of revenue. We still do have rigs that can take advantage of an uptick in greenfield exploration and things like that. So as these equity markets get better and people raise money and rigs get soaked up, we can take advantage of that sector, particularly in gold.

Looking at the profit and loss statement on Slide 11. The company has once again recorded significant EBITDA growth in FY '20, and we expect EBITDA to continue to grow into FY '21. The significant revenue growth in FY '20 was essentially driven from increased utilization, increased production and, as Andrew mentioned earlier, 7 months' worth of contribution from Deepcore, whilst at the same time maintaining a strong EBITDA percentage of approximately 20%. Worth noting from a P&L perspective, just the lower EBIT and lower net profit after tax numbers in FY '20 compared to FY '19. The lower EBIT figure was essentially a function of the Deepcore acquisition accounting, particularly around the amortization of Deepcore's customer contracts, whilst from a tax perspective, FY '19 did benefit from a once-off income tax credit of approximately $4.5 million, whilst in FY '20, we've now had an income tax charge of $3.3 million. So that's approximately an $8 million turnaround just driven from that once-off tax credit in the prior year. Looking at the balance sheet on Slide 12. The company was able to utilize its strong balance sheet to take advantage of growth opportunities whilst maintaining flexibility around other capital management options as well. We utilized the strong balance sheet to essentially debt fund the entire cash component of the Deepcore acquisition whilst, at the same time, paying out $0.011 per share fully franked special dividend in July. That cash component of the Deepcore acquisition was funded through a new facility with National Australia Bank, a $16 million facility that expires in November 2022, with its annual -- or with its mandatory annual principal repayments of $3.2 million per year, and it comes at a cost of BBSY plus 2.7%. FY '20 also saw a marginal improvement in the group's current ratio from $1.1 million (sic) [ 1.1. ] in FY '19 to 1.2 in FY '20. Looking at the cash flow on Slide 13. The business has again converted its strong EBITDA performance into real operating cash flows with cash flows from operating activities representing 89% of FY '20 EBITDA, up 18% from prior years. From a net debt perspective, on Slide 14, it's pleasing to note, as Andrew mentioned earlier, that post the completion of the Deepcore acquisition in late calendar year '19, net debt has reduced by approximately 28% to a level that is now well under 1x EBITDA. If we look just at the existing debt facilities and the existing equipment finance facilities in hand and just have a look at the standard amortization profiles of those facilities, gross debt would reduce to $15 million by November 2022, which will represent a 63% reduction from current levels. Importantly as well, the company is well funded to take advantage of any future potential growth opportunities that do present themselves. We've got access to a $10 million working capital facility with NAB, which is currently undrawn and also approximately $6 million worth of headroom in a $15 million revolving equipment finance facility. Looking at capital expenditure in FY '20 on Page 15. Maintenance CapEx has once again trended in line with P&L depreciation multiplied by utilization rates. Maintenance CapEx in FY '20 was $11.1 million and represented approximately 66% of FY '20 P&L depreciation versus 80% in prior years. The increased growth CapEx in FY '20 was driven by a number of factors, most notably the material entry into the drill and blast market sector, further organic growth, particularly in the underground sector as well as delivery on our innovation and improvement pipeline. As Andrew mentioned earlier, the business development pipeline is strong, tender pipeline is strong, and we will continue to target a 2- to 3-year CapEx payback on any growth CapEx required to potentially service those opportunities.

So just moving on to Slide 16. In regard to the outlook, I think the business is in the best shape it's ever been in and pipeline is strong, gold is good. And again, we'll probably take some questions, again, on this at the end of the presentation, but the pipeline is strong, particularly from Tier 1 clients who are cash-producing and have operations in hand. Gold is very strong, obviously, especially in Australian dollar terms. And given the conditions, the prices and everything like that, we expect revenue and EBITDA to continue to grow in FY '21. And again, similar to previous years, again, this is a Board decision, but it's expected that we would give guidance when we release the H1 results in February depending on general market conditions, of course. And worth noting, if anyone is interested in looking at some of the analysis that's out there in a little bit more detail on the company, we are covered by Morgans and Wilsons. So on the capital management side, and Greg's touched on that briefly, we had some initiatives where we have reduced debt from December 31, and that's been really well done from the team and talks to a strong operating cash flow of the business. The special dividend, again, during a pandemic and a couple of years in a row now is good as well. There is the continuation of the share buyback as well. As Greg said, we'll continue to invest where our investment hurdles are met, and we have a strong balance sheet to do so. We understand that the drilling industry is capital-intensive, and having that strong balance sheet is critical, and that will hold us in good stead moving forward. And lastly, acquisitions, where they make sense and where they're at right price and where they're fit, we'll always have a look. In summary, on Page 18, the vision of the company to be Australia's leading provider of drilling services to the global exploration, mining and energy industries, and again, I think we're heading in the right direction in that regard. It is a diversified business, surface and underground in coal and in minerals and in different states and different commodities, the quality of the client base and the companies we work for and the mine sites that we operate on. We achieved our guidance in FY '20. We paid a special dividend. And lastly, and very importantly, we maintain a very strong balance sheet to take advantage of opportunities as they present themselves. So I might just hand back to the moderator and see if there's any questions for any of the team here today.

[Operator Instructions] Your first question today comes from the line of Tom Sartor from Morgans.

Strong result in the circumstances. I've got 3 quick ones, if I may. Firstly, on your Victorian exposure, it's an important part of the business now. Just curious about whether equilibrium has been reached down there around those government restrictions you've talked about and the behavior of the client and/or whether it's a week-on-week proposition given the health situation down there?

Yes. So our view on Victoria at the moment, again, it can change very quickly, but obviously, it's Stage 4 in Melbourne, Stage 3 in regional Victoria. We operate in regional Victoria. Stage 3 was what regional Victoria was in the first time around. So really, it's same for us. Clients have committed to their existing programs, and with regional Victoria now in Stage 3, we haven't seen any reduction in rig count like we did last time. In fact, we're seeing clients increase rig count down there still. So with cases reducing in Melbourne itself and that lockdown looking like it's having the right impact, hopefully, from a regional Victoria perspective and the operations we've got, we keep moving forward and increasing rig count. It's obviously a very prospective region, a lot of money being raised and the team down there is doing a great job.

Terrific. And that tender pipeline you spoke to, can you give us some more color or quantify where you expect to add extra rigs relative to last quarter heading into '21? I assume that the WA business development is bearing some fruit. Can you talk to the jurisdiction and commodity exposure on that growth pipeline?

Yes. I think it's fair to say that met coal is flat. I think, again, coal at sort of $110 a tonne or thereabouts, they're sort of just plodding along at the same sort of levels as they have been. So not really seeing a huge pipeline in that area. Probably it would be just more of the same for us. So really, it's going to come from gold, number one, and then other base metals, number two. And note that there's certainly opportunities across the board through Queensland. New South Wales, obviously, there's been a lot of success there with companies getting some good results, too, and then Victoria and into Western Australia, of course, too. So if you're going to sort of say where is it going to come from, it could be anywhere from a geographical perspective, but commodity wise, most likely gold.

And lastly, the outlook for the operating margin in '21, obviously, you'll have a positive contribution from the 12 months of Deepcore, but you've also got your workforce in some arrangements that might not be sustainable? Or if you can talk to whether you might need to bear some additional costs to sustain those arrangements. Net-net, what sort of outlook for the operating margin might we expect into '21?

Yes. We've always said to people that sort of 20% is a good number to work on from an EBITDA perspective, and I think that still remains the case. If you have a few things go your way, there's always the possibility of doing better and when the market is quite strong, there's previous history out there to support that drilling companies can do a little bit better than that. But at the same time, if you have a few of these other impacts come in, you could be a tick under that. But I think 20% is probably a percent for EBITDA, a good number to work on similar to previous years.

Your next question comes from Daniel Porter from Wilsons.

That was a very good result in -- all things being considered. I just had a few questions from my end, firstly for Greg. Just on your amortization of customer contracts, it looks like you lifted that a little bit this year just a bit ahead of where I was expecting. Is that going to be a normal policy for you guys going forward? Or was there sort of a one-off adjustment that was included in FY '20?

Thanks, Dan. Yes, definitely a once-off adjustment. We made the point in the December half year numbers that in relation to the Deepcore acquisition accounting, it was sort of done on a provisional basis, and it was done on a provisional basis, I suppose, just because of the -- one of the reasons is the short time frame between the acquisition dates of 29 November and coming out with those half year accounts. So I suppose -- and so under the accounting standards, you've got 12 months to effectively make any necessary alterations to the provisional allocations. So now finalized that in June. As a result, the customer contracts -- the value of the customer contracts that we ascribed, we've reduced slightly, to be honest, just on a conservative basis and, at the same time, reduced the amortization profile thereof. So you're right, the numbers are a little bit higher. But what it's going to mean is, it's going to drop off to a lower number a lot quicker.

Can I ask the quantum that should unwind into next year?

Approximately $8 million. So there was $6 million in this FY, and that was obviously not for a full year. But on that basis, $6 million should be approximately $8 million in FY '21.

Okay. That's great. Now can I also ask just in terms of your split on rigs by type and your revenues by commodity as well, just given your CapEx over the last sort of 2 years and given Deepcore as well, where would you expect that surface-underground split to sort of end up in FY '21? And then you mentioned before that the increasing amount of activity in gold, where do you think that can sort of hit in FY '21 as well?

So Dan, I think as far as the maintenance CapEx goes, I think so Greg sort of highlighted how it trends in line with utilization rates and depreciation, and again, that's just going to be based on operating rigs. Again, with the surface-underground split, we're 100% utilized in the underground space and the rigs that we have available to us are surface rigs. So that then will drive potential growth CapEx decision-making in regards to the wins that occurred. So similarly, we're 100% utilized in the drill and blast space, too. So if we win additional drill and blast, it'll be growth CapEx. If we win additional underground, likely some CapEx depending on what happens. Surface rigs, we've still got some capacity. So I think with that gold market getting better and a lot of that work being surface-related, I think there's a good opportunity for us to potentially put some of those rigs to work in the current year.

Yes. Okay. So that -- in terms of that exploration spend, you would expect more of that to go to sort of boost your surface utilization then? Is that fair to say?

Yes.

Yes. Okay. That makes sense. Now can we just talk a little bit about the market conditions as well. I just noticed that Swick last week put out an announcement surrounding the Olympic Dam contract. I thought you guys were bidding on that one as well. Could you just give us a little bit of color on how that sort of sits now for you guys? Is -- I guess, in that regard, is the market strong enough that you're able to sort of move rigs around at better prices just given what we've seen in the last 6 months?

Yes. So for those that may not be familiar with what occurred there, Swick released an announcement last week saying they won Olympic Dam, which means that they won all the work there, which means we'll be leaving the site sort of towards the end of October. And we had 5 rigs operating out there. We've certainly got opportunities to redeploy those rigs sort of around the end of the year or early into the next year. I think what's happened with Swick is that they've been under some pressure in Western Australia with certain competitors increasing their market share, namely AUD and Webdrill, both private companies that had some rigs idle, rigs in hand, and they've gone in and picked rates that are pretty sharp. We certainly put our best foot forward on a rate perspective to try and win all the work. We've done a fantastic job out there with safe, productive, all those things, but we just got beaten on price. So again, there's certain levels we'll go to. Other than that, we'll keep the rigs in the pocket and take advantage of things when they come. So that's probably how I see that one and why Swick made that decision. The market, more broadly, I think, going back to March when COVID first started, the drilling companies that were purely focused on greenfield exploration working pretty hard and a lot of work did stop regionally, and that's now sort of improved and starting to come back quite strongly as well. So I think from a rates perspective, clients are, particularly in the coal and some other areas, a little bit price sensitive still, and again, we're not seeing big increases in prices on renewals of contracts or anything like that. So again, I sort of think that 20% EBITDA is a reasonable number to work to moving forward.

Okay. So like 20% EBITDA, but on potentially more rigs and better utilization.

Correct.

Okay. Fantastic. Looks like a pretty good year ahead. Well done.

Thanks, Dan.

Your next question comes from the line of Mark Hancock from Precept.

Andrew, can you hear me okay?

Yes. Hello, Mark.

Just following up on that question. If I do the maths right, I think your average rig count in the fourth quarter was about 72, given some of those COVID issues versus about 81 in the third quarter. Actually, you managed to maintain revenue and EBITDA in the fourth versus third. So am I correct in that?

Yes, correct. That's right. Yes. So again, certainly, I think something that makes us quite different and quite strong is this diversity of the business. And there's always going to be swings and roundabouts in revenue per rig, revenue per shift based on the nature of the work that we're undertaking at the time, whether it's large diameter specialty work that's a high revenue per shift or underground work that is a lower revenue per shift, but still at a good margin. So I think for us, just lucky that the mix of work and some of the things we were undertaking were of a specialist nature. I remember we were talking to people last year saying that, that specialty, high-margin large diameter work was going to occur later in the year and it did. So that certainly held us in good stead through Q4 when some of those rigs came off due to COVID. So I think moving forward into Q1 now, we're seeing those rig counts increase back up again. Obviously, Olympic Dam will come off end of October, but the pipeline is there to redeploy those rigs elsewhere again.

And I mean other than Olympic Dam, do you see the average rig count getting back to that 80 level in the fourth quarter -- I mean the first quarter of FY '21, the quarter we are in at the moment?

Well, it might struggle in Q1, but I think throughout the course of the year, we'll absolutely hope that it will be back up there somewhere. And again, looking at that slide earlier on in the pack, the average rig count of 67 -- the average operating rig count for '21 will be above 67.

How many rigs exactly were involved in Olympic Dam? Is it 6 or 8 or so?

We had 5 operating.

Five?

Yes.

And are there specialists in there and whether they can be redeployed in most sort of base metal scenarios?

Correct. Any base metal job is easily redeployable. Correct.

Okay. And just maybe a question for Greg on the debt and the CapEx outlook. Where do you say you could put quite a significant debt -- dent in the net debt level of FY '21? And this -- can you give us a rough estimate how low you think you might be able to reduce it by over the year?

Yes. I think so, Mark. I think it's -- I think a lot of that answer will depend on to what extent some of the growth opportunities do present themselves in terms of the tender pipeline. But if we sort of ignore that for a second, just sort of have a look, gross debt is currently $38 million. We've always sort of said that maintenance CapEx will sort of trend roughly in line with P&L depreciation. So if you sort of just use a rough benchmark of somewhere around $15 million for maintenance CapEx, pick a number from an EBITDA perspective, I know we're not giving guidance, but we've done $35 million. We say we'll likely do more. So it's on the basis of, call it, $40 million EBITDA less $15 million maintenance CapEx, $25 million free cash flow is a big chunk of that net debt. But I suppose the disclaimer there will be, that logic hasn't assumed any growth CapEx. That's always going to be the outlier in terms of what we win. But certainly, just the underlying free cash flows within the business should be able to make a pretty material dent into that debt number.

Okay. And just maybe one final question on coal. Are there any concerns about coal on the Eastern Coast states, which could adversely affect your contract outlook longer-term there?

No. Not at the moment. I mean we're working with -- primarily with Anglo and Glencore in the coal and met coal, obviously, high-quality sites, long lives, long-term contracts. They have the lowest quartile of cost of production. And I think whilst it's not growing at the moment, I think it's a good, steady, ongoing work that will continue into the future. A lot of the work we do there is gas-drainage related and gas-management related. And as long as those lines are open and producing, it's been well-publicized in the meaning that, that gas drainage and gas management drilling is more important than ever, to be honest. So I think we've got a lot of work ahead of us in that space.

Congratulations on delivering an excellent result where you actually hit your guidance despite COVID, which is quite an unusual achievement in these unusual times. Well done.

Thanks very much, Mark.

Your next question comes from Nick Robison from Jarden.

Just 2 questions from me. Just firstly, just to touch back on this Olympic Dam. So if I'm interpreting it correctly, the issue is you seem fairly confident you'll be able to redeploy the rigs. It's just a question of how close you can get to the backing and that's probably how we should think of it?

Correct. That's right. I think from a ramp-up, ramp-down perspective, we've got some demobilization out of Olympic Dam, et cetera, that have pretty much covered the cost of redeployment. They're small and fairly easy to move around and inexpensive to move around. So from that perspective, you wouldn't expect any really large costs. It's probably more just the timing of when we can get them back out again.

Sure. And you're speaking to some potential places now. How fast you think, if you think, you can get them out fairly quickly?

Yes. We've got some opportunities in hand sort of around October, November and then into -- and then other opportunities in sort of January and February, too. So it just depends on can we land one of those and get them back out there.

Sure. And then we can move to the next question. So when you talk about the strong tender pipeline, what's the timing on the opportunities with that? And then I presume now, you're not going to be announcing individual contract. So would we get updates in the quarterlies if you're winning some of these bids there?

Yes. We've certainly made a -- obviously, there's prescription in the announcements and continuous disclosure that if something is material, we'll absolutely announce it. As the business gets larger and sort of heading upwards in the revenue and operating rig count, a typical size drilling contract generally isn't material anymore, so you're not going to see us announcing every 5 minutes on won this, lost that sort of thing. But certainly, that quarterly we put out gives people a really good visibility on what's actually happening with rigs and shifts and things like that. So what was the other part of the question there around?

Just the timing on the opportunities you're looking at [ at the moment, what were the due dates to them ] signing some of these opportunities if they come through?

Yes. That's a really good question. Obviously, there's a big pipeline of opportunities that we're aware of. You then start disseminating those into ones that require a tender to be submitted, ones that have got a tender submitted. Then once you win, you've got to get the contract sorted, and you've got to get the gear out. So anything that you win now will probably not be getting out until September. If you win in September, you would be getting out after that. But certainly, there's a good volume of work available to us that if we win it, it will transact revenue and EBITDA in FY '21.

Right. And then there's probably a portion that you are aware of that already would slip into fiscal '22 as well?

Yes, that's correct. I mean typical contract lengths are anywhere between 2 and 3 years. So the first one is how much of a win now would transact in '21? And then how long is the contract and how many future years would have been -- fall into as well?

You next question in line comes from Tim Evans from Morgans.

Andrew and Greg, well done on the result. Great you are hitting guidance given what's going on. And also, particularly, that I understand you were negatively impacted by the fire at Grosvenor. I'm just wondering what the outlook is for that contract. And you mentioned the gas work that's going on in coal. Just maybe some commentary on whether you see that sort of work increasing materially at that site and others.

Yes. Thanks for the question, Tim. So look, Grosvenor and Anglo, in particular, are fantastic clients, and we work very closely with them. They have paid a standby on those underground rigs that have been impacted by the Grosvenor event to retain the crews. That is highly specialized work that is undertaken in that intrinsically safe underground gas environment, and great to see Anglo come to the party and help us out through that time. The seal has now been completed at that site, and Anglo is seeking approval from the regulator to get back underground, and I believe if that's not already approved, it's imminent. And we expect to be back underground operating with those rigs potentially September, October. So standby in the meantime and then back operating. So that's great. The surface rigs we had out there have been redeployed at other Anglo sites in the short term. And again, that long haul is expected to start producing out there again early in the New Year, and then they'll redeploy those service rigs back to site. From a gas management perspective, we have seen clients increase the meters they're drilling to reduce the risk. Oaky Creek was sort of operating underground there at about 1.5 underground rigs and now operating in a solid 2. Anglo at Moranbah North have increased their meters for drainage, and I dare say, Grosvenor, given what's happened, will do the same. So certainly, that underground gas space will need a lot of work, and I think the cost of it for the clients is so miniscule in regard to their overall cost of production that they just -- the risk that, that presents to them, I think everybody is going to just say, look, just do a lot more drilling to reduce that risk. So this reduces the risk of something happening. So I certainly think that moving forward, we've got some really good work and good long-term future out there with those clients.

[Operator Instructions] Your next question comes from [ Jeffrey Thomas from Seagaloff Investment ].

Just the first one is on the contract that Swick has got at Olympic Dam. If these contracts just define by price -- I mean what I wanted to know is what's your competitive advantage if it's just going to be defined by price all the time. I understand that you may have walked away from the price being that -- if it was that low. But how do you define yourself from just being at price [ for that ]?

Yes. Look, good question again. I think I sort of mentioned it briefly before, but I'm going to expand on it now that Mitchell has been in the drilling industry for over 50 years. And we are seen as more of the Qantas in the quality of the work and service that we provide. And when you look at the business across the board, and I spoke about the diversification, the different commodities and types of drilling we do, there are various aspects of -- various types of work we do that are highly specialized in nature, and they come with very strong margins, and the people are highly skilled, and there's a very limited number of companies that can undertake that work. Similarly, there's also a proportion of work that we do that is not as specialized and maybe seen as more of a commodity. Generally, we try and -- where we're undertaking that particular type of work, how we try and differentiate ourselves is to work for the right clients that buy based on quality rather than just price. And unfortunately, for us, Swick went fairly sharp -- we believe they went fairly sharp on the prices there, and it just wasn't a position that we were prepared to go for. So I think to answer your question, the way we do it is, again, focus on those quality clients that buy on quality, where it's more of a commodity type of drilling per se, but ensuring that a percentage of that business is highly specialized work that not everybody can do that gives us good returns, and that may be deep haul directional work in Victoria or elsewhere. We've got some rigs working on the Snowy Hydro Scheme doing some very complex geotechnical hauls, underground gas drainage, large diameter hauls, underground block cave, frac stimulation, et cetera. So there's a number of things we do that are highly specialized.

Well, just on getting the staff, employees and that sort of thing incentive to maintain good people, have you got a program for that?

Yes, it's all about the people in this business. People, people, people. If we haven't got the people, we really haven't got anything at all. And I think the culture that we've got internally is excellent. We've got fantastic teams. And I certainly think that's something that makes us very different is, we may be a little bit of a large drilling company these days, but we operate very much like a small company, we're nimble, we're quick to move to clients. And we really do look after our people, extensive training in place, do everything by the book from an HR perspective and, importantly, from an HR industrial relations perspective, get all of our own employees, very, very limited use of labor hire, if at all. So that's important from a cultural perspective. No unions, no EBAs, and everybody is on individual contracts. So that gives us ultimate flexibility to manage on a contract-by-contract basis and match the skill and needs that are required to the top of drilling and client.

Good. That sounds a good approach. In the presentation, you mentioned about innovation, and I'm interested to know what's involved -- what you're able to do there in terms of automation as well as innovation looking to the future?

Yes, we don't want to tell you too much because it's kind of a secret. But look, it's pretty simple, really. I think we sort of look at the different types of drilling that we do in different sectors. And we're always looking at what can we do differently to be at the front of the game. I mean certainly it's something that's been really important to Nathan and rubs off on all of us is just find a better way. And again, focused on the client and focused on making our people's jobs easier and better and giving us an advantage that we -- competitive advantage in regards to efficiency or price and things like that. So certainly, there's all sorts of exciting things coming now, and it's a really great time to be in the industry.

I see the trick is they're doing something along those lines as well.

What did you say they would do?

They've got some sort of new technology or something they're working on?

That might be the Orexplore. That's a geological scanning device?

Yes. Okay. The next one was just on -- you mentioned about a 2- to 3-year payback for the drills. At the moment, we've got gold hyped up. Everybody -- it's off to the moon. And my concern is that if we had a 2- to 3-year payback, we're getting more gold drilling. What happens in full 3 years' time when the gold price may come back considerably, all the hype goes out of it. And we've seen within 6 months the industry fall in a heap. I just wondered, is that something that you're looking over the horizon because it's just something that would concern me in the long term?

Yes. Look, I think we have regular strategy sessions with the Board, and certainly something that the Board are very mindful of is what we call the stage of the cycle and where we're at in the market. And the Board then considers appropriate leverage within the business as a whole and, obviously, management then works to that and the various debt levels wherever they are. So I think as Greg sort of spoke to, debt is one -- is way less than 1x EBITDA. The balance sheet is strong. We just sort of maintain a view moving forward in conjunction with the Board on appropriate debt levels for the business accordingly.

I think from my perspective as well, in regards to the comments around gold, I think gold -- the counterparty would be important in that decision. So we wouldn't just go out and spend $1.5 million or $2 million on a rig necessarily for a smaller customer who's doing greenfield exploration because gold has been pretty strong at the time. That CapEx investment decision will generally be underpinned by the fact that it's a long-term Tier 1 gold producer that's been able to operate at the lower end of the cost curve through the cycles. And so it will be on that basis that we'd probably commit to a 3-year investment decision as opposed to potentially what you're seeing now with a lot of activity in gold and maybe at a more junior, short-term level.

I think from a rig perspective, too, it's worthwhile noting that there's been a long period of time where people really haven't bought too many rigs in the industry and a lot of the manufacturers that make rigs are downsized and things like that. So the lead time for rigs has significantly increased as well. So there's also a balance between buying rigs on spec or buying them when you have the contract in hand. But at the same time, given we've got rigs in hand, that then gives us the ability to deploy those when others can't get them to. So with where the market's at and a few rigs in our pocket, I think we're in a strong pipeline, I think we're in a very good position to take advantage of that.

And just finally, one for the Board. I appreciate the dividend, but what is the possibility with the DRP going?

Jeffrey, I think everything is on the cards. It's Nathan here. Everything is on the cards on those sort of opportunities. I think fundamentally, what we're looking at is just a 3-pronged approach, which is really trying to get the debt down; obviously, looking after the shareholders with regards to either a buyback or a dividend; and growing the company. And I think it really has to be an even key to all 3 of those prongs because, look, what we've talked about before, we're not just going to win contracts for the sake of winning contracts at a low price, and it is not at the right margins and we might do it -- we're not going to put the company in a huge amount of debt with regards to potentially what happens in coal in 3 years' time. And more importantly, we want to look after shareholders. We want to stick with shareholders who we're going to hang around. And so we've done the 10:1. I think we are seeing now as a genuine business. I think the last 4 or 5 years have shown that the business has really proved itself as a real business. And so our position is, we'll diversify into different sectors and so if gold goes one way, then we are still safe with regards to coal and vice versa. So I think, yes, from the Board's point of view, I think we couldn't be more happier with where the management team has gone and the direction. I think the pivot to gold has been excellent, but we're always aware of that issue with regards to what's on the horizon. And I think we're here really for the shareholders and try and grow this business and make sure that if things do go south, then we're in a very strong position with our balance sheet. And again, I just want to thank the team for another great year. I think it's been an excellent result. And I think the acquisition of Deepcore has really made a real benefit to the business as did Radco the years before. So I think it helps significantly.

Okay. I presume that you're not going to consider [ the IP ] at this stage, but just make a comment -- I like to align my interest alongside the likes of [ Souls and CVC ]. So you've got some good investors in there who are very supportive, I would imagine, and would like to be the same. So keep up the good work and just keep an eye on that debt because we don't -- I mean this industry has gone through too many hard times, as you know, Nathan, and if we can be prepared for the next difficult time with [ COVID ] that will be good for the company and all of us as well. So thank you very much to the team and the Board, and that's much appreciated.

Thanks, Jeffrey.

Thanks, Jeffrey.

[Operator Instructions] There appears to be no further questions at this stage. So I'll just hand back to management for any closing remarks.

Thanks very much, Ben. Thanks very much for participating today. Thanks for the questions. And certainly, feel free to reach out to either Greg or myself, if you'd like any one-on-one meetings or any further information. Thanks very much.

Ladies and gentlemen, that does conclude today's conference call. Thank you for all participating today, and you may all disconnect.