Capital Ltd – yesterday’s trading update shows the way

Mark Watson Mitchell is convinced that Capital Limited really is a winner in the making following its trading update.

I am convinced that this company really is a winner in the making.

And furthermore, the latest deal, that Chairman Jamie Boyton and his management team pulled off, will prove to be a mega game-changer for the group’s fortunes.

Regular readers will know by now how much I like the feel of this company and its potential. 

So, what is Capital?

For new readers it is probably best to mention what the company does and where it operates.

Capital Limited (LON:CAPD) has evolved from just supplying and operating drilling rigs to resource mining groups, especially in Africa. It has well-established operations across East Africa and a substantial presence in the high-growth West African region.

During 2019, the group expanded its services to include ‘load and haul’ for mining clients, enabling it to offer a fully integrated mining service. 

The group provides full-service mining, drilling, maintenance and geochemical analysis solutions to customers within the global minerals industry. Its services span the mining cycle, from initial exploration drilling to mine site services across drilling and earthmoving, providing customers with a fully integrated mining services solution. 

Change of name

As a result of this shift towards becoming a full-service provider, the group rebranded from Capital Drilling to Capital Limited in the middle of last year. 

The grouping also includes its mineral analytic business, MSA; its well-established downhole survey business, Well Force; and its newly established maintenance services business, Mine Site Maintenance. 

The company also holds investments in a portfolio of both publicly traded and private companies. The value of the investments at end-June 2020 was $23.2m. 

Several multi-year contracts

The group currently has several multi-year contracts including eight drilling contracts with clients with established mine sites and one ancillary mining services contract. In addition, the group has a number of shorter-term drilling contracts with exploration companies.

The recent expansion of the Capital’s service offering to include earth moving or ‘load and haul’ services, in addition to drilling services, has required and will continue to require new equipment to be purchased by the group. Even more so if the group is awarded further contracts.

The group is currently participating in a number of tender processes for new contracts. The majority of the group’s revenue is derived from contracts held with a limited number of key customers, including Sukari Gold Mines.

Transformational contract

The ‘pivotal’ turn was when the company was awarded an open pit waste mining services contract with Centamin (LON:CTM) owned Sukari Gold Mines in Egypt.

The Sukari Contract is a full-service open pit waste mining services contract incorporating ‘load and haul’ services over a four-year period. It has also extended the term of its existing drilling services agreement at the Sukari gold mine. 

To handle the added work, it is planning to invest in further equipment, to be financed through a combination of OEM finance facilities, asset backed loan facilities and a portion of the net proceeds from Capital’s ‘Project Charlie’ £27.9m net placing last month. 

An interesting fact is that ‘insiders’ own about 21% of the group’s equity, while the Chairman Jamie Boyton dished out £750,000 of his own money last month buying even more stock for himself in the 51.8m share placing at 58p each.

Sukari is a turning point

The company considers the Sukari Contract to be an important and positive element in the expansion of its services to include earthmoving and thereby providing fully integrated mining services for its clients, which will have a positive effect on both the group’s revenue and profits.

Its portfolio of ten long-term mine-site based contracts continue to deliver solid performances, including Tasiast (Kinross Gold) in Mauritania, Syama (Resolute Mining), Morila (Firefinch Ltd) and Yanfolila (Hummingbird Resources) in Mali, Bonikro (Allied Gold) in Côte d’Ivoire, Sukari (Centamin) in Egypt, North Mara (Barrick Gold), Bulyanhulu (Barrick Gold) and Geita (AngloGold Ashanti) in Tanzania, and Jabal Sayid (Barrick Gold) in Saudi Arabia.

Q4 trading update

Yesterday, the company announced its Q4 trading update, which predicted an 18% rise in revenue to end-December from $114.8m to $135m. 

It currently has a fleet of some 94 rigs, of which the utilisation rate is around 59%.

We will get a full picture of its business when the group announces its finals on 18 March.

What the brokers say

However, in the meantime it is well worth noting what brokers are saying about its prospects.

Berenberg reported a ‘stable end to a strong year’ rating the shares as a ‘buy’ at 62p with a price target of 101p. They look for 2021 sales of $189m then $230m next year, with net profit of $20m last year, $18m this year, then up to $24m next year. The shares offer ‘a 63% upside’.

Peel Hunt also rate the shares as a ‘buy’, but with a lower 87p price target. It goes for $137.2m sales last year, then $186.6m this year and just $223.6m next year. Their estimates are for pre-tax profits in 2020 of $32.7m($14.6m), falling to $20.3m this year and rising to $24.0m next year. They rate Sukari as a ‘springboard for a further push into load and haul contracts’.

Tamesis Partners looks for $135m, then $186.7m and $215.2m in respective sales, while pre-tax profits for 2020 they suggest could be $24.4m, for 2021 $25.8m, accelerating to $37.1m next year. Their estimates are for underlying earnings of 6.7c, 10.2c and 15.7c per share respectively. That backs up their increased price target of 127p for Capital’s shares. They reckoned that the group’s management had posted ‘an extremely positive trading outlook generally as the effects of a rising gold price take hold on the industry.’

My opinion

As I stated earlier in this article, I do feel that Capital is a real winner in the making. It has impressive strength in its client spread. 

This year could, hopefully, see more large contracts being awarded to the now ‘mining services’ group.

Its shares at just 62p seem to be in limbo after the recent 58p a share placing, but that will not last too long as others begin to realise its prospects.

I have profiled this company several times previously and I stand by my Target Price of 100p for its shares.