Capital Drilling – so much more than just picks and shovels

Since I profiled Capital Drilling (LON:CAPD) in late July it appears that events have been moving at quite a pace, writes Mark Watson-Mitchell. 

Two weeks ago, the company announced a major contract win, together with a strategic investment in what could well turn out to be an exciting mining company.

Then, last Tuesday, it released its third-quarter trading update, covering a period when the company was investing to build a stronger, broader revenue base.

The next day, a founder and former director of the group sold down 4.65m of his shares, some 3.4% of the equity, at 60p each, by way of a placing through Peel Hunt and Tamesis Partners. Those shares were rapidly picked up, leaving the vendor being locked-in to his balance 6.15% holding for at least the next six months.

The company itself was not involved in the placing and took no financial benefit from it. However, a couple of the non-executive directors each picked up £50,000 worth of those shares as initial holdings in the company.

So, let us go back to the basis of what and where the company does its business.

It is now a leading mining services business providing complete drilling solutions for surface and underground projects ranging from grade control drilling, underground drilling, blast hole, exploration, delineation and directional, shot loading and firing, on-site safety monitoring systems, directional software and surveying, and geophysical logging, and mineral analytic services.

Although it has operated globally, today it supplies its special drilling services to mining companies and mineral explorers operating mainly in African countries.

It owns and operates 92 drilling rigs, including 27 blast hole rigs, 7 underground rigs, 41 diamond core rigs, 13 reverse circulation/grade control rigs, and 4 air core rigs.

Before the recent announcements, some 35% of its rigs were operating in West Africa. It was that area that accounted for 45% of all the African continent’s gold exploration expenditure.

The company, which has its corporate headquarters in Mauritius, has built up its experience over the years since its first rig went into service in 2005. It has operated in so many different global environments, such as Eastern Europe, Latin America, Africa and Asia.


Today it has established operations in Botswana, Burkina Faso, Côte d’Ivoire, Egypt, Mali, Mauritania, Namibia, Nigeria and Tanzania.

Over the years, the company has developed long-term relationships with some of the world’s largest mining companies.

A couple of years ago it invested in A2, a private laboratory testing business, giving it entry into a higher margin service for its clients. Miners, it seems, always complain about how long it takes to get results back from the lab, which in turn holds up decision making. So that was a sensible service move.

Two weeks ago, the company announced a big mining services contract with Allied Gold Corp, together with a $3m investment into that company. This contract sees the company stepping up to really expand its offer and in so doing create added revenue streams.

Allied is a private gold mining and development company, which has recently been given a $75m institutional financing package through industry experts Orion Mine Finance. That will help it fund Allied’s existing projects and also its acquisition programme.

For that company Capital Drilling will provide a full range of comprehensive mining services to its Bonikro Gold Mine in Cote d’Ivoire, taking in load and haul services as well as its world-class drilling, maintenance and mineral analytic capabilities.

This five-year contract, initially, will kick in some $25m-$30m added revenue for 2020. So that $3m early stage investment into Allied looks to be a very cheap way in to secure the business.

It also is seen to be a low capex entry into the load and haul market, with the company taking on Bonikro’s existing mining fleet.

This step up in its services makes its total offer that much more attractive to other mining companies in Africa. It is a natural extension of its activities.

It also adds significantly to the company’s current portfolio of large, long-term contracts in the fast-growing West African market.

The third-quarter results for the period to end September saw the company increase its revenue by 6.1% to $29.4m, while its actual average monthly revenue per operating rig was down 4.1% at $174,000, but that was due to a suspension of the use of the tailings facility by the Tanzanian Government, which has now been resumed to previous levels.

Fleet utilisation of the 92 rigs was a constant 52% over the second quarter figure. More rigs are now being put into West Africa, from 35 up to 40 to support new contracts. Additional rigs are being purchased as well.

There is a strong contract pipeline starting in this fourth quarter.

Expectations are for 2019 revenue of between $110m to $120m, before a big jump up next year. That compares with $116m last year. For 2020, Tamesis Partners are going for $144.5m in revenue and pre-tax profits rising from their estimated $14.9m for this year up to $17.5m. That compares with $12.6m in 2018.

At the current 61p, that puts the shares out on 13 times historic, 10 times current year and just over 8 times prospective earnings.

It was no wonder Craig Brown’s shares were snapped up so quickly.

My end-July profile put out a 76p target price by the end of next year. Now, with these latest announcements, I see them easily trading up through the 100p level.