Technology vs mining – Master Drilling lead
MASTER Drilling commenced raise boring operations at Impala mine in the Rustenburg area in 1986 and listed on the JSE in December 2012. Today Master Drilling is recognised a world leader in the raise bore drilling services industry. They provide specialised drilling services in the mining, civil engineering and energy sector, across many commodities.
The South African operations are managed from Fochville, while the international raise bore operations are managed abroad and include entities in Latin America, Africa and Europe.
The Chilean, Peruvian, Brazilian, and Mexican entities maintain both operational and engineering facilities. The international footprint also includes operations in Guatemala, Ecuador, DRC and Ireland.
Since listing the company has achieved compound annual growth of 16.1 percent in profit after tax in US dollar terms and delivered on the key strategic objectives set out in its listing prospectus.
This, coupled with significant ongoing cash generation, enabled the company to declare a maiden dividend of 30c per share when they reported full year to December 2016 results.
They will maintain the balance between continued investment in capital projects to support the company’s further growth and to enhance returns to shareholders through the payment of appropriate dividends. Master Drilling is unique in the sense that it is the only listed company in the world that focus on drilling alone, and therefore there is no real peer to compare to.
The other companies that deliver drilling services usually do this from small subsidiaries that form part of a bigger industrial company. The closest comparison is Swedish Drillcon, listed on the Nasdaq and trading at a price/earnings ratio of 17. Compare this to the Master Drilling ratio of 7.
Master Drilling can be considered more of a technology company than a commodity company, and they integrate problem-solving solutions into their service delivery. They design, manufacture, operate and maintain their drilling rigs; and do not shy away from more difficult situations, where tailor-made solutions are required, sometimes in challenging circumstances. Master Drilling maintain higher margins than their competition, because they are prepared to tackle more challenging satellite projects, where they are sometimes the only company to quote on a tender. The company own and operate 122 raise boring and 22 slim drilling rigs.
Prospects
The competitive advantage is that they have developed their own intellectual property that is hard to replicate, and focus on innovation around new approaches to simplify drilling. Their service delivery is uniquely integrated to help mines identify a problem, find a solution and then implement a plan.
Up to now they only did vertical drilling, but they recently unveiled horizontal boring technology which can change the face of mining altogether and open new growth avenues for Master Drilling over the next decade.
Master Drilling’s financial reporting is done in dollars because most of their contracts are dollar-based, 50 percent of invoicing is done in US dollars. Only 30 percent of their business is South African based, and 25 percent of revenue comes from the rest of Africa. This is unique for a small cap company, as they are usually domestically focused.
One would think that they are also at the mercy of the commodity cycle, and mining companies’ cycling spending nature, but this is not the case since 80 percent of their work is related to the operational cost of mines and they do very little exploration work.
Their margins are healthy, much higher than their competitors and they have a solid balance sheet with little debt. Net gearing is less than 10 percent, and drills are paid off in 3 to 5 years, with the life of a drill at least 20 years. These are upgraded and refurbished continuously, and their oldest machine is now 40 years old.
The troubled South African mining landscape is not really a threat since their SA exposure continues to shrink. This company is healthy and inexpensive, trading at 1 470c per share, the price/earnings ratio is only 7.