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.