Capital Drilling: an excellent ‘gold play’

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Capital Drilling: an excellent ‘gold play’
Master Investor Magazine

Master Investor Magazine 60

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The ongoing demand for gold just has to be a major driver for Capital Drilling and I remain convinced of the upside prospects for the company.

Just in case you had not noticed it is, perhaps, well worth telling you that the price of gold has risen significantly in the last year – moving from $1,270 an ounce to around $1,500 currently.

As a global benchmark of value, the metal cannot be beaten, it is in demand across the world, and especially so in virus times like these.

As countries and investors alike continue to build up their financial safety by acquiring more gold, it can be expected that demand will increase significantly. With Russia and China now amassing strong physical hoarding to back, perhaps, their own new global currency, the upward price movement will not rest.

Why am I telling you this? Because I really like a little £44m company called Capital Drilling (LON:CAPD). Some 90% plus of its business last year was gold sector based.

It provides a complete range of drilling and mine services to mineral exploration and mining companies, covering exploration, development, drill and blast and grade control drilling for surface and underground projects, together with load and haul services.

This Mauritius based company is fast becoming a leading mining services business, with a focus on the African markets. It operates in Botswana, Burkina Faso, the Cote d’Ivoire, Egypt, Mali, Mauritania, Namibia, Nigeria and Tanzania.

It already has a strong presence in East Africa and since early 2018 it has been building up its operations in West Africa. It is this latter area that today represents about 45% of the total exploration spend across the whole of Africa. Some 44 of its then fleet of 91 drilling rigs operate there.

At the end of 2019 it was up to 95 rigs and the group today is up to 99 rigs, supporting the growth potential in its long-term contracts.

With the gold price nearing a ten-year high, operators are securing higher margins and in turn are increasing their levels of mining and drilling activity. In addition to its well-established drilling and mineral analytical and maintenance services, it can now also offer operators specific load and haul services.

As the group can now offer a pan-African service to its customers its business is set to get a real boost. It is winning even more contracts, which are getting underway during 2020. And it is increasing its larger client base.

Clients include Kinross, Barrick, Resolute, AngloGold Ashanti, Centamin and Allied amongst many others.

Today’s results, which are in US$, for the year to end-December 2019 showed revenue at $114.8m and an impressive 34% increase to $10.4m. Despite heavy capital expenditure last year, at $19.8m ($11.9m), it still ended up with a good net cash balance of $4.4m. Earnings rose 35% to 7.7 cents per share.

The average rig utilisation rose from 51% to 54%, with the average revenue per rig coming in at $176,000 a month.

The group is expecting to see a big uplift in the second half of this current year, as its recently secured long-term contracts start to show up in its revenue.

Obviously, just how well it, and its customers, can escape the effects of Covid-19 is anyone’s guess. However, its shares are off 3p this morning, at just 29p reflecting, perhaps, a combination of the market melee and an investor ignorance of the potential of this little group.

The ongoing demand for gold just has to be a major driver for Capital Drilling and I remain convinced of the upside prospects for the company.

Brokers Peel Hunt have today issued a ‘buy’ note on the company, with a target price of 84p.

While Tamesis Partners are more bullish: “We value Capital Drilling at 99p/share, and maintain our target price of 100p. This represents 5x forecast 2020 EV/EBITDA of US$28.9 million and a 3.0x multiple on the current share price.

That is good enough for me!

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