Capital (LSE:CAPD) — Interim Results

0:01 Good morning, ladies and gentlemen, welcome to the CAPITAL LIMITED Interim Results Investor Presentation. Simply type in your question at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company review all questions submitted today, and we'll publish those responses where it's appropriate to do so. Before we begin, we would like to submit the following poll, and I'm sure the company would be most grateful for your participation.

0:33 And I'd now like to hand over to Chairman, Jamie Boy. Good morning, sir. Good morning. Thank you, and welcome, everyone, to the CAPITAL LIMITED first half results call. With me, I have Giles Everest, a group c group CFO, and Connor Rally, the head of investor relations and corporate development, both of whom are sitting in London at the moment. Same format as last time. We will be fairly quick as we go through the slides and devote most of today's time to the q and a session. So I shall kick off. Obviously, we reported the first half results last Thursday, and it was a record for the company for the half year period, and that follows hot in the heels of record results in the second half of last year.

1:28 Very strong, performance across the board, revenue growth of 40% on the first half of last year, and that flowed through the operating leverage flow flowed through the business. So EBITDA, was up 46%, operating NPAT or adjusted NPAT up 57%, and a very, very strong surge in operating cash flow. I should note that that was cycling of the first half of twenty twenty one, which was the mobilization of that large earthmoving contract at Sukari just for context. The most pleasing part of the result for the management and and board of capital has been the return on capital generated. A little later in the slide deck, we will run through the capital spending profile, but it has been a very heavy period of capital investment in both 2020 and 2021.

2:22 And to have had, that level of capital investment, over a $120,000,000, feed through into strong returns so rapidly was a very pleasing result. And it goes speaks volumes to to our business model. Most of the capital that we have deployed in in the past two years has gone into existing sites, and existing infrastructure, adding services. And that has enabled us to leverage that existing infrastructure into into a very rapid returns. So very pleasing to see that number in particular. I should note, sorry, before moving off, we did, as part of last Thursday's update increase our revenue guidance.

3:07 We had previously been at $2.70 to $280,000,000. We increased that guidance for 2022 to $2.80 to $290,000,000.

3:20 A bit of a few background slides. I will spend I'll be pretty quick on these. We again, we're an integrated service provider operating predominantly in African markets providing services to mining and exploration customers. Three main service business, specifically drilling, mining, and laboratories. The drilling business which represents approximately 70% of our total group revenue is very well established. In fact, the largest drilling contractor in the African Continent. The mining and laboratory businesses are a lot newer businesses and both performing very well. The fourth part of our business is we run an investment portfolio, an opportunistic investment portfolio which complements our our business development activities and group performance.

4:15 Move we are a premium provider of services to to our customers, World leading safety standards, premium equipment deal deal with the top OEMs, take a lead in technology, heavy environmental focus, heavy in local community focus, about 90% of our 2,300 employees are are nationals. So very much a premium provider and we but and and and the rationale behind that is we are targeting tier one customers with tier one assets. And to establish yourself at those customers, you need to be bringing a tier one service and that is that is our model. The next slide looks at our global footprint.

5:04 The the mining and drilling businesses are are in Africa and Saudi Arabia, the dark gray being the current countries of operation, the light gray being countries where we have carried out contracts in the past. When you move out of Africa, Middle East, you're looking at the footprint for our laboratory business. It's in The Americas, Europe, and in Africa as well. Top left, gives a a snapshot of some of our top customers and, again, the the the top tier names from the industry. And then looking across the the the map, we have the major projects on which we're operating. And, again, a number of these are tier one assets. And and particularly, many of them, we've got a very long history on those assets. So in the case of Sukari dating back to 2005, in the case of Gator dating back to 2006.

6:03 So again, just reiterating the business model is to introduce services, establish a footprint, on our tier one asset, and then expand those services as as the the project develops.

6:18 The financial performance, it has been very strong, over the past few years in particular. I think one of the things that's probably not really, being recognized in our valuation is where we've come from with a a revenue number of 115,000,000 in 2019, and now we're guiding to 280 to 290,000,000 just a few years later. So we're certainly going through a very rapid growth phase at the moment. And as the other charts indicate, also getting very strong operating leverage through the business. A couple of slides on the macro environment. These are slides that we have talked through in in previous slide decks. The messages remain much the same that there has been a systematic structural underinvestment in the mining sector for the better part of a decade.

7:14 We bring that out in the chart in the top left where we show annual indexed metal prices trading at all time highs while exploration is trading exploration spend is about 40% below the levels it was a decade ago. The next slide overlays this into capital spending and it's the same thematic 2012 was with two thousand twelve, thirteen, the peak. We've we're off to the lows, but we're still well below levels of a decade ago. And we obviously now are entering, in our view, a very strong reinvestment, cycle. The bottom left talks this through in the terms of the asset bases. These are the gold reserves of the top world's top gold producers. And again, as you can see, they've been running their asset bases down from 2,012 to 19.

8:03 We're now starting to see reinvestment in those assets. In fact, quite a few of our customers where we work have just started new open pit operations. So in terms of the macro environment, one of the most frequently asked questions is where are we in the cycle? We are firmly of the opinion we are in the early stages of a new investment cycle. The narrative from our customers has shifted back to a growth narrative and we're seeing that demand flow through our business. Running through the individual operating businesses, drilling, the header says it all. It's the strongest demand environment in our history. We are running at 8285% utilization of our rig fleet in q q's one and two, which really is full capacity.

8:51 We are adding capacity to our drill rig fleet, which is in the top right. We are in a market now where there is excess demand, pricing is improving, productivity is improving, and the opportunity set is improving. So the depth and the quality of the opportunities in front of our drilling business as the header says are as as strong as we have seen it. We are however taking the opportunity to with this strong demand to continue or even accelerate our focus on the tier one assets. And one thing that's very pleasing over the course of the first eight months this year is we have either increased our presence, at some existing operations such as North Mara, Sukari, and and most significantly, Gator, which was recently released to the market, a new three year contract, which was an expanded contract and the second largest contract the company has been awarded in its history.

9:52 But we have also added operations at some other tier one global assets. So we've started at Gulamina Lithium, which is a lithium project owned by LIA Lithium in Mali. We've started at Kibanga Nickel, a nickel project in Tanzania that is being burnt into by BHP, the world's biggest mining company. And then the most, again, most recent announcements have been an award, for a laboratory business at Kibali, which is Africa's biggest gold mine, and a drilling contract at Fekola, for two rigs, is Africa's third largest gold mine. So we are increasingly gaining exposure to these top tier assets and consistent with our strategy, establish ourselves, with the service, get a footprint established, and then expand those services and grow with the customer.

10:45 The mining business is predominantly always dominated by this Sukari contract. The Sukari contract continues to perform exceptionally well We've actually record material movement in in coming through in the last few days. It's performing above contract specifications and above our expectations. The the team have done an outstanding job That and that contract continues to to perform well. The tendering market for mining is it is also looking very firm. A longer sales cycle, obviously, the discussions around mining contracts are nine to twelve months discussions. But there are a number of attractive opportunities that present growth opportunities for us in the future.

11:31 Our laboratory business going from strength to strength. The top left is a, is is sample volume growth through our laboratories, which has really jumped, in recent times. And most recently, we announced an extension of our arrangement with CRISSOS on their photon assay technology where we are now rolling out 21 committed to rolling out 21 units into 2025. And due through that release, we released some revenue guidance for the laboratories business. We're now guiding to $80,000,000 plus in 2025. Some significant wins for our laboratory business in the first half, the most, significant of which was Kibali that I mentioned earlier, but we also received a multi year extension at the Tasiat Gold Mine.

12:21 The investment portfolio, we released these numbers back on the eighteenth of, June with or July, pardon me, with our, revenue, results. The investment portfolio has been concentrated over the last eighteen months. It is now dominated by Allied, LEO, and Predictive. The latter of, those three names, LEO and Predictive have recently competed completed significant capital raisings which are taking which will fund the growth there significant growth in their projects. As a business development tool being highly effective, the blue dark blue is the annualized revenue coming from our investee companies through, I should point out, however, an arm's length commercial tendering process, but the relationships and the strength of working with our partners is is very much on the floor with these numbers. So continued growth and portfolio concentration.

13:17 We were a net seller of the portfolio in the second in in the first half, pardon me. We were impacted by the market volatility, obviously, particularly in May and June. However, since inception of this strategy, the invested capital which is now 11,500,000 is is on is is valued at 47,000,000 at the end of the first half, which is about a 50% compound return. On that, I'll hand over to Giles for the results, please. Great. Thanks, Jamie. So starting with the the financial side. So Jamie's gone through the headline numbers, the very solid headline numbers. So I'll focus on this slide in terms of margin.

14:05 EBITDA margin for the half, 30% EBIT, bit over 20%. Very strong reflection of the high level of activity and asset utilization. The if I look if we look at the graph on the bottom right, you can see that in the second half of twenty twenty one, the EBITDA margin was bit stronger because of some anomalies, things like lower lower r and m, repairs and maintenance and lower movements of assets, which we flagged. And we flagged also that the range would be somewhat lower than that in that 25 to 30% range. We have put this in a graph to ensure that analysts, in particular, don't get ahead of themselves.

15:03 And so just in terms of that 25 to 30% EBITDA range, we do feel that that is sustainable throughout the cycle. So while we have tailwinds in current conditions, one would expect it to be at the top end of that range. And conversely, when we've got headwinds, then it would be more at the bottom of that range. Moving on to the cash flow, the cash waterfall. The main takeaway from this slide is that we had strong EBITDA to cash conversion. This was despite a buildup in inventory. Inventory built, one, due to revenue and two due to the constrained supply chain. This was a deliberate move to increase our inventory to ensure that operations were not adversely affected by any constraints.

16:06 And our results show that, and we would expect that that might reverse that impact that build off of inventory might reverse a little bit in the second half. The other takeaway is the CapEx for the first half is SEK 22,600,000. And I'll then segue on to the next slide, CapEx. So 22.6 for the half. Back in March, we were guiding to $45,000,000 of CapEx. We are now guiding to 50,000,000 to $55,000,000 for this financial year. Two main aspects, two main impacts. One is that with the increase in some of the contracts, in particular places like Gator.

16:57 We have taken the opportunity to actually replace some of our older kit with new kit, and we've also found that with our utilization being higher than expected, so at that 85% mark, we're eventually incurring higher sustaining CapEx. In the bottom there, under sustaining CapEx rule of thumb, so we've given some guidance in terms of how to think about CapEx. Sustaining CAPEX is, if you like, stay in business CAPEX or CAPEX x growth, and we have pulled out sustaining CAPEX of, on average, of $275,000 per active rig per annum and then some sustaining CapEx for mining and head office.

17:47 If you like, I think at the end of the the year with our CapEx program, we would be ending up with around about 120 rigs, which may indicate that sustaining CapEx would be in the order of $30,000,000 to $35,000,000 ex growth into 2023.

18:10 Moving on then to the balance sheet. So net debt at the end of the half was $36,400,000. If you were to include the value of the investment portfolio of 47,000,000, then we'd be in a cash a net cash position of nearly $11,000,000. But just thinking about that net debt of 36 to start off with, that is a fairly modest gearing ratio of 16% and also works out at a leverage ratio, so EBITDA to net debt of about well, less than 0.5. So one would say that that's fairly modest gearing and certainly gives us headroom to particularly when combined with free cash flow, which gives us plenty of headroom to finance future growth, whether it be drilling contracts or indeed another mining contract.

19:16 The final slide on the financials is a is is really about capital allocation. We believe that we are in a still in a strong growth phase. So we're using our balance sheet to our strong balance sheet to to fund our opportunity pipeline, but still returning a reasonable but modest return to shareholders. So our dividend payout policy remains at 20% of net operating profit after tax, and we declared an interim dividend of 1.3. If you were to annualize that and add on the share buyback, the $2,500,000 share buyback that we did in the first quarter, then on current share price you'd be looking at a yield of around about 4.5%.

20:16 So with that, I'll, hand back to yourself, Jamie.

20:24 So just to round out, outlook and guidance, reiterating that we increased our revenue guidance last week, 280 to $290,000,000 and increased our CAPITAL guidance as well. We're seeing strong demand and strong growth across all of our businesses year on year. And I think really re reiterating the point, the quality of the opportunity set is is the strongest that we have had since inception. And I'm we're firmly of the opinion, and certainly everything we're seeing from our customer basis is that the reinvestment cycle is is back on and is in its early stages. And seeing a lot of positive announcements from

21:08 companies like BHP coming into Africa. There was an announcement this week about one of the largest iron ore companies in the in the world, FMG, going into Gabon. So there is money coming into the continent and with our customers, a lot of reinvestment activity after quite a long hiatus from '12 through to 1819. So we're in very good shape at the moment, getting a toehold or a foothold in some very high quality assets. And we see strong demand for the next few years ahead. And with that, I'll hand over to the questions. Thank you. That's great. Jamie, Giles, thank you very much indeed for updating investors this morning. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab just situated on the right hand corner of your screen. But just while the team take a few moments to review the questions submitted already, I'd like to remind you that a recording of this presentation, along with a copy of slides and the published Q and A, can be accessed via

22:07 your Investor Meet company dashboard. Connor, if I may, you can see that you've had a number of questions submitted through today's meeting along with a number that were pre submitted. If I may just hand back to you to read out the questions and give a response where it's appropriate to do so, and I'll pick up from you at the end. Sure. Thank you, and thanks, everyone, for submitting questions. I think we'll start with just one on the broader strategy. So you've mentioned that we've been looking at new opportunities in terms of commodities, but also regions. Has the view on being an Africa specialist changed? I'd say evolved. Look, we've got an exceptional footprint within Africa, but what we have is a laboratory business that has a very high quality reputation that's operating in The Americas that is leading to cross selling inquiries back to our, particularly, our drilling business.

23:04 And what we also have is,

23:07 a roster of customers that are obviously global in nature asking us to look beyond Africa. So, you know, our our biggest focus remains tier one assets and tier one customers. But we're certainly evolving that. We are looking at opportunities outside Africa. Short answer, yes. Okay. Thanks. The next one is on buybacks, and a number of you have have put in questions on buybacks. I think we'll just address it once. Jamie and Giles, in the context of what we think about the valuation of the shares, etcetera, and opportunities, what is your view on buybacks going forward?

23:47 We we discuss all aspects of capital allocation as any good management teams and boards do, and it's always the getting the right mix between them. One thing that is very clear is that we're in a very strong growth path at the moment. And I know one of the questions has been asked in terms of, you know, the cheap valuation and the returns metrics of buying back our own stock, and we took that view and did a small buyback early in the in the quarter. But we'll keep options open, but at the moment, we are executing on our strategy. And I think the most exciting thing at the moment for us is we are adding more tier one assets.

24:33 So, you know, we're generating a a very strong return of our operating businesses, but what we are looking to do is replicate the Sukaris since 2005, the Gators since 2006, the North Maras since 2010. These are all top tier gold mines in Africa, and now we're at Fekola. We're at Kibali. So we've got a lot of growth options ahead of us. So it's always a a question of, as I said at the start, managing your capital. However, I would stress that we are in a we're in a strong growth phase with high quality growth. Thanks, Jamie. Just on the the capital markets staying with that, we've seen some increase in M and A activity in Australia.

25:19 What are your thoughts on that? And also, how at risk do we think we are in terms of approach? There is absolutely more corporate activity starting to take place, particularly on the ASX. In fact, there was a takeover announced just last week for some earthmoving companies. So I think, you know, whilst the capital markets aren't or haven't in the last few years, been valuing contractors, whether they'd be drilling contractors or mining contractors particularly well, the corporate sector is starting to to show that the valuation is there. And as this cycle gathers its early stage momentum, the access to quality people and quality equipment is becoming increasingly difficult, and that's leading to corporate activity.

26:12 So, yes, we agree there is corporate activity. How vulnerable are we? Look, we are cheap. There's no doubt about that. We also have a very concentrated register of some very high quality institutions. So I don't feel that someone could just come in and raid the company. You've got a lot of scale holders that would be very, you know, resistant to just being taken over cheaply, so to speak. Given that, we are seeing differences in valuations across Canada and Australia, have we ever considered a dual listing? Look. It's been discussed. I wouldn't say it's been considered. I mean, the valuation differential certainly does exist at the moment. A dual listing is not really ideal when you're in a liquid stock, which we tend to be, and spreading your liquidity across two markets doesn't tend to doesn't tend to help too much. But, yeah. Discuss, but wouldn't say actively considering we aren't, we aren't we're we're certainly aware of the valuation differential.

27:24 So, you know, it's a possibility, but not a probability. Hope that answers. Thanks, Jamie. Maybe one for Giles. Giles, you you spoken about one times net debt to EBITDA being a reasonable cap in terms of leverage. Obviously, if the market was to turn against us, EBITDA can fall. What can you talk about the levers we have within the business to reduce leverage if the market were to head that way? Sure. Okay. So, look, first of all, I would say that we would only leverage up if it was a project that ticked all of the boxes. So tier one client, long life mine, low cost, high return on capital employed. So we are very, you know, very diligent in in that respect.

28:14 The other part is so so really, we'd leverage up to spend CapEx on a growth project. If if if if things turn south, then our main lever is not to spend CAPITEX. We just have sustaining CAPITEX, and we actually end up creating, you know, pretty reasonable amounts of cash, which can reduce debt very quickly. In terms of I would actually emphasize that in terms of our covenants, the leverage ratio is not not a covenant. It's an internal one. Thanks, Charles. Maybe stick with you.

28:59 Number of questions come through on inventory. So inventory has risen a lot in the past year. Can you talk about what is in that and really what is driving that increase? In terms of inventory, that is all of the consumables that are required to run the business. This is not CAPEX. It's not components for which might get capitalized. So in terms of volume of of business, I mean, clearly, the revenue has risen considerably. There was probably a little bit of of lag in terms of going for from '21 into '22. And then so that has been part of it. And then as I said, with the constrained supply chains, what that means is that, one, you increase your min max levels in terms of your inventories on-site, but it also means that lead times have have potentially spun out. Therefore, you know, stock is on the water for longer.

30:08 So those combined factors have gone to increasing that inventory by, what, about $15,000,000. As I said, I would expect in the second half for that to fall back a little. So and we do manage our inventory extremely closely, all 36,000 line items. Thanks, Charles. Maybe move back to Jamie, a couple on the investment portfolio. What led to the decision to focus the investments towards three key holdings? That was, when we initiated the strategy in 2019, the it was a lack of capital markets access to what were predominantly companies at the junior end of the market exploration companies.

31:01 The exception to that is obviously our financing or assistance in the financing of allied buying and operating gold mine. But the balance of them were early stage investment opportunities. So as the last few years have pan played out, what we've gravitated toward are the ones that have had exploration success that are going to turn into mines and moved out of the ones that haven't had exploration success. It's a it's very it's a high exploration investing in exploration is one of those things that you have to clearly the the winners, can be very material and predictive. The most noticeable, we invested our initial investment at a cent. It's now 20, but we've done follow on investments.

31:47 So that concentration is a result of going with the ones that have been successful while rationalizing the ones that haven't been. Okay. Thanks. Sticking with investments, and I'll ask this how I think the question is phrased. Well, the investment fund has been a useful sales tool. Is there what what is the, essentially, the end goal of these investments? The the end goal is to realize the value from them, really, simplistically. You know, we're not a a natural holder per se of a mature producing asset. That's that's not our business. But while we what we are in on the investment side is we we find early stage opportunities. We work with those companies through its development phase.

32:33 As their as their projects mature, we would be on the sell side. So, you know, the end goal is to is to grow as we do with our service business, grow with the with the project. Same thing with our investments. However, services will keep going once they reach that production stake, whereas investments would come off. Thanks, Jamie. Maybe shooting back to Giles. You've spoken in slides about a debt refinancing in the second half. What is the goal of this? And are you expecting a cash flow saving? Yeah. Thanks. So we are indeed going through a debt refi at the moment just to explain or give a bit more color in terms of our current debt book as on slide 19 or 20, is it?

33:25 There we go. Thanks. So on the bottom left, they all the blue is asset backed financing, and the other is a revolver, basically working capital facility. So we are looking at debt debt restructure to give us capacity to move quickly for the opportunities that arise. In terms of cash flow saving, yes, we do believe that there should be price competition, which should mean that the cost of debt interest comes down a little. Thanks. A question here on MSA Labs. I think it's will we break out the segmental profits when we get to larger in size? Think maybe the right answer is, regardless of whether we do that or not, can you talk to the difference of the margins between MSA Labs and the Drilling mining business?

34:27 Are you? You asking me that one? Whichever you like. You both know the answer. Yeah. Yeah. I'm gonna let Giles field it. Sure. Okay. No no problem. Okay. In terms of margins, you know, I think in terms of mature businesses, the labs business would have the the higher margin than the drilling business next, and then the the the the mining business would would be lower. In terms of the MSA labs, look, it's still relatively small in term so, you know, we're obviously looking towards the margins which would be more prevalent in terms of the the labs labs businesses. I'm I'm thinking about a particular Australian listed company, which, you know, its labs business in the mining sector would have, you know, EBIT margins of more around about the 25% mark.

35:43 So that is where we're aiming for. In terms of segmenting those those profits, we'll to do that when it becomes a material size. Thanks, Joss. I think I'll ask the last two questions sort of together. Jamie, you know, what's your general view on on the commodity prices and direction of travel here? And and in that medium to longer term, where do you see rig rig the rig count of the group going? Where are you comfortable in terms of a limit? I'll answer the second part first. I mean, we don't really have a a magic number in terms of comfort with respect to our asset base, whether it be rigs or mining equipments or laboratories. That will entirely be driven by the projects and the contracts and the clients that we're working with.

36:35 Certainly, we see that there is a lot of growth opportunities, but it's not about chasing asset. It's not about chasing rig growth, for example. It's about turning the next developing the next Sukari where we have 25 odd rigs or the next gator. That that drives the asset side. In terms of commodity prices, I I'm always cautious being a commodity forecaster, so let me answer the question this way. We are we're bulls on this cycle, and the primary driver of that is due to it's the cap it's the classic capital investment cycle where where there has been a structural underinvestment from our customer base in their asset bases.

37:22 So what might happen in short term volatility with commodity prices, there is a structural requirement for reinvestment because there is looming structural shortages in many of the commodities. That obviously is a highly supportive environment for prices, but even more so an incredibly supportive environment for service providers because their their investment drives demand for our services. Thanks. We've actually had one very last question that's come in. In relation to exploration, what are your expectations for the Arabian Nubian Shield geological area? What how do you see the mining future in that area? We've been vocal proponents and supporters of that geological region for many years now.

38:14 Obviously, Sukari and Egypt being the first, but we've worked, in, Ethiopia. We've worked in, Eritrea. We're working in, in Saudi Arabia. So, look, we we we're very bullish on that belt, and we think it's incredibly underdeveloped. So it's a big opportunity. That's great. Jamie, Giles, Connor, thank you very much indeed. And I think you've taken all the questions from investors today. So thank you once again for everybody for your engagement this morning. Jamie, I know that investor feedback is important to you and to the company and to the Board, and I'll surely redirect investors to provide you with their thoughts and expectations. I But wonder if I may, before doing so, just ask you for a few closing comments, and then I'll redirect investors to give you their feedback.

39:02 Well, closing comments are just really to to reiterate that you know, there is there is a very strong demand for us for for services at the moment. The business is very well positioned. I mean, the results we've been consistently delivering. So I hope investors pleased with the numbers, I would like to thank everyone for, taking the time to to dial in and particularly ask questions today. So thank you very much. That's great. Jamie, Giles, Connor, thank you once again for your time this morning and for updating investors. Companies ask investors not to close this session as we now automatically redirect you for the opportunity to provide your feedback in order the management team can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of CAPITAL LIMITED, we'd like to thank you for attending today's presentation. That now concludes today's session. I wish you all a very pleasant morning.