Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us this morning for the Mitchell Services fourth quarter quarterly update. My name is Allen Chan and my colleague Kurt Worden and we're both from Bridge Street Capital. Today, we have Executive Chair, Nathan Mitchell; CEO, Andrew Elf; and CFO, Greg Switala, joining us to talk about the results. Just for housekeeping, we will have a Q&A at the end of the session. If you could please just add your questions to the chat, and I'll address them at the end. Thank you, and Andrew, over to you.

Thanks very much, Allen, and thanks, everyone, for joining us. And as Allen said, we've got Nathan with us today, so certainly welcome any questions at the end. Look, my presentation won't be long-winded. I'll probably just touch on a few key points, and then we'll open it up to some questions. But look, firstly, just a very quick introduction for those that may not be familiar with the company. The Mitchell brand itself has got over 50 years of a very, very proud history and the company today has a large portion of its revenue coming from global major mining companies, predominantly copper, metallurgical coal and other base metals with no exposure to lithium and nickel. We're #1 in our respective market in Eastern Australia, and we work in different types of drilling surface, underground and specialty mine service drilling as well. So that's just a very quick introduction to the company. Firstly, just looking at quarter-on-quarter, '23 versus '24, probably not a good comparison. For those that haven't been following the company, we have flagged that previously, there was a large amount of specialty work completed in the quarter, the last quarter FY '23 for Peabody to reopen that North Goonyella Mine, and again, that specialty work was not sort of to the same level in '24 and therefore, quarter-on-quarter is a very tough comparison. So what I might do is just talk really to the year, given it's the end of the financial year, talk to that, but certainly welcome any questions on anything people may have at the end. So firstly, I think it's important to say that all in all, I think the company is in a magnificent position and the strategy that's been agreed upon with the Board with Nathan has been excellent over many years. And very importantly, I think, we've done what we said we're going to do as a Board, as a management team, and we've delivered for our shareholders. It's been a very solid year. Operating cash flow has been strong. We've paid down debt from over $40 million down to $1.9 million net debt and return a significant amount of funds to shareholders along the way by dividends and by buybacks. So we've got a very strong balance sheet from which we can position ourselves to take various options that may be available to us. So it's been a fantastic year. And importantly, we're now in a very good position where we've done what we said we're going to do. Looking at the year ahead, we've spoken to some people about the decarbonization business, look decarbonization solutions that we have started. That continues to gain some traction, and it's certainly an attractive growth opportunity for the business amongst other opportunities that are out there, too. Commodity prices are strong. Gold remains strong. Inflationary factors predominantly are behind us. Greg can probably talk to any questions on labor as they may come up. But all in all, we're in a very good position. And certainly, I think in a positive manner to move forward into the future. So they are probably some of the key points and Allen, I'll probably open it up to questions, if you want to ask us a few questions.

Sure thing. Thanks, Andrew. Nothing as yet, but I think you just on mobilizations. When will the new contract wins be completed, such that we should expect utilization to start trending upwards from the current levels?

Look, we flagged in probably the last couple of quarterlies and you can see it in the stats that rig count ship count slightly down. Again, the market is a bit choppy in places. We haven't lost any contracts. We have rewon all of the contracts that we've needed to rewin. It's really just a function of the market where there's a couple of clients that have traded down with rigs and things like that. But at the same time, we have had some good wins as well. So there are rigs that are going to be going back out between sort of now and November. There's probably 7 rigs out off the top of my head right now that I know we're going out between now and November. So it's probably going to take a little while to get them ready and get them out, but positive that there have been a couple of good wins there and moving forward in a right direction.

I think that question has been answered, but here we go. Another one. The impact of the Anglo asset sale process for loss of productivity needed to be drilled.

Look, I think, again, if someone just buys the assets and operates them on a same-same basis, you wouldn't expect anything different. Maybe the person that buys is more aggressive and wants to do more drilling for one reason or another. I couldn't, Nathan, imagine them doing significantly less drilling.

No, I don't think so. I think the issues they're having on-site at the moment, obviously, the gas issues, means it's going to have to be more drilling. But I think we're really in a holding pattern with Anglo at the moment with regards to the issue that's occurred, the fire. But overall, from a sales asset point of view -- sales process point of view, I would agree with Andrew, I think it will continue as normal. We're not going to buy to slow down, if anything we're going to buy to speed up. But we're really in the holding pattern with regards to what's happening, I think, with the rest of the market what Anglo is going to do.

And just to touch on that word, productivity in that question, certainly, where you have an asset owner lock at BHP or lock in Anglo and the asset owner changes, and they may be a bit smaller, a bit more nimble, you can certainly get more time on the rig, Nathan, more bit on bottom and be more productive as such. So it all depends on who that owner may be. And what happens in this process, we'll find out.

I guess just to add to that, is it right to say that there was 2 rigs on-site there? And what's happening with those once they are sort of in that holding pattern as you said? Is there sort of clarity on whether you get them back or..

So the site that we're talking about that had the issue that Nathan touched on is Grosvenor and it's the same site that had a similar issue in the past. Previously, that site was down for approximately 18 months, the last time it happened, and the decline paid as a standby rate throughout the course of that 18 months to remain operationally ready to then go back and resume operations. When we got down to the rigs last time around, we literally started the rig and started drilling -- rig started first shot, no impact on the rigs. But as Nathan said, we're in a holding pattern right now. The client is still assessing their options commercially. We haven't had access to get underground and assess the rigs. Obviously, the clients working on stabilizing things and then looking to move forward. So yes, we're in a holding pattern and really haven't got much more that we can add other than that at the current time. Everything is insured, of course. So there's no issues in that regard, and service rigs, obviously, they're on track or whatever and they can move around fairly easily. So it's really just a case of getting some guidance from the client as to where to from here. But as to this point in time, I think it's fair to say that they're still working through that.

Thanks, Andrew. Just on the latest two. Last quarter, you were talking about contract wins or pipeline what or not. Can you give us an update on how they're progressing based on status?

I think we have had a couple of good wins. I won't sit here and single out who the clients are or what the sites are. But as I sort of briefly mentioned at the start of the call, sort of 7 rigs, 4 on the surface and 3 underground, and those rigs will be mobilizing between now and the end of October. So certainly, a couple of good wins there that helps replace some of that work that's just downtraded a little bit. But again, the pipeline remains strong. I mean there's some fantastic tenders out there at the moment. multi-year, multi-rig tenders with large clients. We got a couple of those go our way. There will be more than 7 rigs going out, which is great for us. So again, as I said, copper good, gold good, big part of the business, met coal is still good and then certainly active in that market. So there's some positives there for sure.

Thank you. I hope that answered Leo's question. Maybe another from Lee. How much CapEx is budgeted for FY '25? Is this expected to be all maintenance spend? Or are there any fleet upgrades, replacements included in this?

I think from our perspective, based on what we know in terms of known contracts in hand, FY '25 CapEx should be at levels similar to FY '24. We've also got a couple of older rigs just on the schedule there in terms of potential asset sales. So I think on a net basis, certainly that $17 million that you're seeing in this update for CapEx is probably an appropriate number to use. That's obviously on the basis of known contracts, as I said, to the extent that any of these -- any of the tender pipeline opportunities are one, then that could potentially change, although noting that one of the positives in terms of those opportunities and that tender pipeline in this instance is that we -- it requires rigs that we do have. So there'd be -- a little bit of work on existing rigs may be required and obviously, the pipe and the ancillary sort of gear, but it doesn't require new rigs, which is a positive. But yes, in short, on known levels in terms of revenue sort of similar CapEx for '25.

That's great. I think we just covered that one. We can see the labor availability and expected wage increases across different employees in the group. Commentary on that?

I think in terms of labor increases and outlook, no real change here from our most recent updates. There's really two drivers or elements to labor rates, and that's the sort of legislated elements. Fair Work obviously came out and increased rates by 3.75% from 1 July, but that only applies to a very small portion of our workforce, which is effectively at award rates. So there'll be a 3.75% increase there. The balance of our labor force, the increase is really driven by market factors. And we just haven't seen anything in recent times to suggest any increase. It's pretty flat. I think what you're seeing out of nickel, particularly in the West is probably a large driver there where that labor market is just beginning to soften. So given that the vast majority of our labor force is at that upper end and the Fair Work increase doesn't apply, low to negligible overall wages increase is expected in '25.

Thanks, Greg. A question from Jason, probably a little bit more color there. Andrew, I guess, with regard safeguard mechanism and, obviously, U.S. wait in looking for rig. I guess, maybe some color in the sets that it's now landed down under, so to speak, or so much around that.

Just for the benefit of others on the call, obviously, a strategy we've employed is to go to the U.S. and buy a rig that was low hours with conditions secondhand and just have a look at the market there and see if there's more available should this opportunity develop further for us and need more rigs. And as you said, that rig has now landed in Australia. It's currently going through the quarantine process, and the leads continue to develop for that business, but it will be choppy. It's early days. It's going to be a heap of rigs. Nathan, would you like...

Yes, sure. Look, I think that's a strategy we've employed. Obviously, we've -- it's always a touchy one where we're trying to keep as much as possible cards to our chest. But obviously, in -- let shareholders know as much as possible because we believe there's a real opportunity for us in that market. We've taken the first step. We've obviously spent the CapEx. We've started the business, and we think there's opportunity there. Obviously, early days. I see it similar to the start of the CSG industry sort of 20 years ago. It's going to be very choppy initially. But fundamentally, we believe, first-mover position for the company. The safeguard mechanism is, obviously, an issue for the miners going forward, and it needs to be dealt with over the next few years and then ongoing. So I think that's exciting for us. I think it's exciting for shareholders. Let's see where it goes. As I say, really early stage. We've spent the money, not on a whim and a prayer, but certainly to get that first-mover position. We did that 20 years ago, worked for us then. We expect it will work again. But again, we're dealing with government incentives, government carbon tax, all those sort of wonderful things. So again, we'll have more to say probably in the next 6 months. Let's see if we've made the right decision or not, but I think we're pretty happy with making those decisions. Again, we've made those decisions along the way. As Andrew said, around the $45 million CapEx that we're now down to sort of $1 million to $2 million. We've got played out well. I think timing is everything in this business. And so I think, overall, we're pretty happy where we are at this stage.

I think we're hoping -- ideally in an ideal world, hoping to have the rig out running before Christmas, but that's the goal at this stage. And the intention is to put 1 or 2 slides into the full year investor pack and start introducing that growth opportunity a little bit more to the shareholders.

Great. Thanks, guys. One from Issan. Other than the issues you've brought up, why the clients have been so cautious on drilling given the fair bit [indiscernible] climate other than nickel?

I think the global, as we've all seen, we watch TV, what the mainstream media, it's pretty choppy out there, and I think people are just waiting to see what happens until next year. So I think the juniors are finding it hard to get to raise capital even when gold is at $2,400, but look, I think fundamentally -- fundamentals are that inflation is slowing. Mining is going to continue, we think, for the foreseeable future and growth in the mining sector, but I think it's just choppy waters at the moment. Again, it's one of the reasons why we paid down debt and got ourselves back into a good position. We're sitting on a significant amount of debt if we need it going forward, but we don't expect to use it. That's our firepower. So let's see, I think, what happens in 2025.

Thank you, Nathan. I guess the question from Daniel, I guess, we've spoken about just the trend. Any further talk about the update on open pit gas drainage? Is there any more commentary around that?

Probably, Nathan.

Not really. I think that gas drainage will slow, obviously, with the fire or the issue at Grosvenor. So that will slow down for us and our competitor up there initially. So that's -- but I mean, that happened with Peabody before. When Peabody -- obviously, we talked about this time last year, we were doing a lot of work for Peabody with their reopening. And that's the specialist work that we do and the direction of drilling that we do, they help them get back into the game, get that mine going. And we did the same thing for Anglo 4 years ago when they had an issue then. So again, we're in a holding pattern with regards to what's happened. The rigs are still on site. We're still working on some of the work, but let's see, over the next 3 or 4 months could be very busy or we could be still waiting to hear what Anglo are going to do.

Thank you, Nathan. Next two, probably a combination here, but I think you mentioned you've recommenced the buyback, but I guess something from capital management, how do you guys decide entirely buyback, dividend, debt repayment? What's the process or the thinking?

Just to remind everyone, thinking in our business, we look at it from a Board point of view as the four pillars. First pillar is growth, whether we spend more and more money on growth or ratchet that down. The second one is debt, whether we ratchet up or ratchet down, we've decided to ratchet debt write down. The last two pillars are dividends and buybacks, and we essentially just really move those pillars up and down depending on where we see the market. And things like the Anglo accident or future growth into these next 7 rigs that Andrew is talking about and the others that are in our pipeline really then dictates whether we push the CapEx up or the growth up or down. Ideally, we want to use all the rigs that we have in our fleet before buying any rigs, and obviously, the decarbonization rig is an outliner to that. And there's other contracts that may require specialist rigs. But fundamentally, we only -- we want to use the rigs we've got, and we've taken actions over the last 12 months and previous 2 years selling off old rigs that we believe that were top of the market prices, and we let them go. And I think, again, that's been very successful for us. So I think at least the last two pillars of buyback and dividends -- and look, I think it's worked for shareholders in both instances, both buybacks and both in dividends. So I think a meld, and it's really just a matter of how much of either. And I think we're early stage this year. So I think looking forward, it really will be -- let's see how things pan out for the rest of this year and next year. But overall, that's how we're playing it. I don't think huge amount of growth has been spending a lot of money on new gear is where we want to be. Debt is where it's at. And so it's really the last two that we'll look at.

Thank you, Nathan. I guess next question is from anonymous. M&A, options, thoughts in terms of I guess buying smaller businesses? Is that on the agenda?

Look, we're always being out to look at things, and we do. We never say no. We'll always look. I think we've been pretty prudent of what we're doing at the moment at businesses. We'll never say no. But I think at this stage, we'll just say there's nothing on our radar at this stage.

We've completed 4 acquisitions in the last 10 years since we've been back in Australia. Two, we bought them in the market for assets only, from assets out of receivership for administration and two earnings accretive acquisitions. So as Nathan says, we'll certainly keep our eyes open. And certainly, we've got the ability with our balance sheet to just swing the bat if we see something that we like.