Try this ‘pick-and-shovel’ play as the price of gold goes through the roof

Capital generates some 90% plus of its revenues from supplying the gold mining companies and looks set to capitalise on the gold boom, writes Mark Watson-Mitchell. 

A ‘pick-and-shovel’ play is an investment strategy that invests in the underlying technology needed to produce a good or service instead of in the final output. It is a way to invest in an industry without having to endure the risks of the market for the final product.

An example was Levi Strauss, who made his money in the California Gold Rush, not by digging away but instead by supplying very wearable and hardy trousers for the miners to wear as they toiled away.

Hardware suppliers in the Gold Rush made fortunes by providing picks and shovels and other basic equipment for those seeking out their fortunes.

An excellent way of playing the gold market

And this ‘play’ is one of my old favourites. Capital (LON:CAPD) generates some 90% plus of its revenues from supplying the gold mining companies, especially in Africa, with their drilling services.

It really is an excellent way of playing the gold market as the yellow metal drives even higher in price.

With forecasters across the globe pronouncing an even greater rise in the gold price in the near future, it is becoming evident that more mining companies are now looking to prospect previously neglected properties.

Interim results due in a fortnight

Capital will be announcing its interim results on Thursday 20 August and its shares could then become a more active counter. One broking house late last week upped its price objective for the stock.

From initial first stage exploration drilling to ‘load and haul’ of the ore to the mill, this group’s services extend across the mining cycle providing a fully integrated mining services solution.

It operates one of the youngest rig fleets in the industry, with its most recently recorded average fleet size numbering 99 rigs. It includes diamond core rigs, air core rigs, reverse circulation and grade control rigs, blast hole rigs, as well as underground rigs.

Not just drilling rigs but more

In addition, its heavy mining equipment fleet is growing rapidly with the recent acquisition of bulldozers, dump trucks and mining shovels.

It operates an extremely efficient maintenance team, helping to ensure optimisation of its working assets.

In addition to its exploration and underground drilling services, the group offers geochemical analysis laboratory services, together with software and tool rental.

Wide geographical experience

The Mauritius-based group has established infrastructure in Botswana, Burkina Faso, Cote d’Ivoire, Egypt, Mali, Mauritania, Namibia, Nigeria and Tanzania.

As it is now transitioning its operations into that of a full-service mining house its client list is building up.

It now has a portfolio of long-term mine-site based contracts with some of the world’s leading mining companies.

Now focussing on West Africa

Focussing on the African markets the group’s customer list includes Barrick, BHP, Hummingbird Resources, Kinross, Glencore, Antofagasta Minerals, AngloGold Ashanti, Perseus Mining, Altus Strategies, Centamin, Resolute Mining, First Quantum Minerals, Allied Gold Corp, and Rio Tinto amongst others.

Some 96% of the group’s revenues are derived primarily from Tier 1 and Mid-Tier clients. Around 77% of its revenue is through production and underground mining, which is less exposed to fluctuation in the mining cycle.

Mining juniors are raising more finance now that the price is so much higher

Current gold prices have been providing a highly supportive environment for increased activity levels in exploration and delineation drilling. Furthermore, junior and intermediate explorers have been more active in seeking additional financing for expanding their activities as the gold price rises and makes it even more attractive to do so.

It is believed that this should help to create more business in the second half of this trading year, especially following the easing of travel restrictions together with the end of the wet season in West Africa, which is where Capital is intensifying its operations.

Trading update was bullish

In the middle of July, the group issued a trading update for the six months to end-June. They suggested that revenue was up 18.8% at $65.1m.

For the full year estimates imply that $135m is possible and then up to $150m next year.

Pre-tax profits are likely to be around $15m this year and $17m next year.

More business contracts soon?

An increase in contracts awarded in the coming months will be beneficial for next year’s results. They could also get another boost from a rise in the values of the group’s listed and unlisted equity portfolio of companies with whom it is in business.

Brokers upping price objectives

Last week broker Peel Hunt increased its price objective to 85p a share.

Mining finance boutique Tamesis Partners is even more bullish about Capital’s prospects and has set its cap at 100p a share.

On Friday night they closed at 77.5p, just 1.5p below its year’s high.

Regular readers of my profiles will already know how keen I am on the company, its service offer, its markets and its massive prospects. I have had a 100p target price on the shares since late last October.

A great way to join in the golden fun

As the price of gold, waivers around the $1,980 market, it is attracting so much more of a following and so too the companies that participate in its mining activities.

I really do consider that Capital is an excellent way of joining in the fun.

It is an exciting ‘pick and shovel gold play’ not to be missed, especially with its interims due in just over a fortnight’s time.

Its financials are strong, its potential is significant, and it is an easy task for its shares to move ahead and break through the higher price targets.

(Profile 23.07.19 @ 48p set an end-2020 Target Price of 76p*.)

(Profile 22.10.19 @ 61p set an end-2020 Target Price of 100p.)

(* denotes that a Target Price has already been achieved.)