Financial Mail - Investors Monthly - - Contents - Shaun Har­ris

Master Drilling, City Lodge, CSG Hold­ings, Rex True­form, TeleMasters

Be­hind strong in­terim re­sults (to end-June) are a num­ber of fea­tures that show why Master Drilling (MastDrill) is quickly emerg­ing as a force in the min­ing industry. Cash gen­er­a­tion is re­mark­ably strong, a qual­ity the com­pany nur­tures and puts to good use. And MastDrill is about more than min­ing, an industry that is go­ing through more downs than ups. Di­ver­si­fi­ca­tion into non-com­mod­ity sec­tors al­lows MastDrill to com­fort­ably get through the hard times in min­ing and re­duces per­for­mance risk. Ad­di­tion­ally the com­pany de­signs and de­vel­ops its own ma­chin­ery, sig­nif­i­cantly low­er­ing costs.

MastDrill is about raise­bore drilling tech­nol­ogy. Its ma­chines can safely drill holes to great depth through au­to­mated tech­nol­ogy. This al­lows them to be op­er­ated by far fewer peo­ple than con­ven­tional meth­ods.

“When fully mech­a­nised a ma­chine can be op­er­ated re­motely by two peo­ple. Con­ven­tional raise­bor­ing meth­ods need more than 12 peo­ple,” says ex­ec­u­tive di­rec­tor Koos Jor­daan.

This could prove con­tro­ver­sial as it makes MastDrill and its ma­chines ideal strike break­ers. Many mines, af­ter years of strikes, are mov­ing to­wards in­creased mech­a­ni­sa­tion. Sadly, that costs jobs in an al­ready vul­ner­a­ble industry. Yet it’s a global trend which works in MastDrill’s favour as it ex­pands its tech­nol­ogy abroad.

To gain an idea of how much money is earned over­seas, the re­cent in­terim re­sults show 48% of rev­enue, worth US$29,0m, com­ing from Latin Amer­ica. SA ac­counts for 29% of rev­enue ($17,4m) and the rest of Africa 23% ($13,7m). That gives MastDrill a large over­seas earn­ings plat­form, some­thing that’s likely to in­crease.

It must also make ac­count­ing for re­sults some­thing of a night­mare as money is earned in sev­eral dif­fer­ent coun­tries. As CE and founder Danie Pre­to­rius says, MastDrill is go­ing into coun­tries that are only in­ter­ested in hard cur­rency. That’s why it re­ports re­sults in US dol­lars. There is some dan­ger from the rand if it con­tin­ues to weaken, but that’s a prob­lem many com­pa­nies with a pres­ence abroad face.

Look­ing at cash gen­er­a­tion, of­ten the hall­mark of a suc­cess­ful com­pany, MastDrill re­ported an in­crease in cash from op­er­a­tions of 175% to $24,6m in in­terim re­sults. Yet the com­pany, awash in cash, does not pay a div­i­dend. This should irk share­hold­ers. IM will sel­dom rec­om­mend a share as a buy from a com­pany that does not pay a div­i­dend. But MastDrill’s rea­son goes back to its list­ing on the JSE.

“The board’s ear­lier de­ci­sion not to de­clare an or­di­nary share div­i­dend for 2014 was in line with the ex­pec­ta­tion re­ferred to in our list­ing prospec­tus that, dur­ing our ini­tial steep growth phase, cash resources would be used pri­mar­ily for in­vest­ments in as­sets de­vel­op­ment,” says Pre­to­rius. He says MastDrill is still in this growth phase, and there­fore there will be no div­i­dend “for the time be­ing”.

That sug­gests MastDrill will start pay­ing div­i­dends once it has in­vested suf­fi­ciently in de­vel­op­ing as­sets, which is es­sen­tially the R&D and de­vel­op­ment of its ma­chines and tech­nol­ogy. That could be fairly soon as the first ma­chines in its fleet of more than 150 rigs, the largest in the world, have been de­vel­oped. When div­i­dend pay­ments start they should be fairly gen­er­ous.

On di­ver­si­fi­ca­tion Pre­to­rius has this to say: “The ex­pan­sion of our ser­vice of­fer­ing is be­ing ac­com­plished in the en­ergy sec­tor, achiev­ing or­ganic growth tar­gets with op­er­a­tions that com­menced in Ecuador and Colom­bia.”

Stor­ing cash also puts MastDrill in po­si­tion to take ad­van­tage of any ac­qui­si­tion op­por­tu­ni­ties.

The com­pany has the sup­port of some strong in­sti­tu­tional in­vestors, such as In­vestec and Corona­tion Fund Man­agers. It’s also an op­por­tu­nity for re­tail in­vestors, on a mod­est PE ra­tio of 9,5.

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