the g spot
Master Drilling: Rock star in waiting
Master Drilling has long been a frustrating disappointment for its fans on the JSE. Despite its unique drilling technology, and the fact that it is one of the largest rock-boring operators in the world, the small-cap company seems unable to convincingly ride any upswing in the commodities cycle. That’s evident in its shares, which have delivered a negative total return of 25% over five years against the resource index’s gain of 116%. Annual results out this week — despite a cracker market for platinum, gold and iron ore mines in 2020, in particular — showed a 17% slip in revenue to $123m and a 78% collapse in earnings, to 2.2 US cents a share. The FM spoke to CEO Danie Pretorius and CFO André van Deventer.
How can it be that your earnings have plunged amid a commodity price boom?
DP: There are three answers. First, remember when the commodity spot price changes, along with the exchange rate, then the very same day a miner would see the upside (or the opposite). Second, miners sometimes are sitting on stockpiles so these guys can really push the stock through and benefit in the short term. And third, remember, the miner will typically wait for a period of time before they actually start to spend capital. It’s not a switch you flick on and off. Is a mine ramping up production, or are they just benefiting from the high spot price?
We’ve been in a downwards cycle since our IPO and it’s only recently that we’ve seen prices moving.
Are you still not seeing much spend on exploration, which is where you would come in?
DP: Yes and no. If you look at the last results from Impala, it’s only now that they’ve gone public and said they’ll add battery minerals to their portfolio, and spend, say, R10bn in that space. So we only now see commitments from these miners after a long drought. If commodities stay where they are, and we speak this time next year, it will be a very different discussion. Remember, if you look at our order book of last year and you compare that to our order book ($212.8m) and pipeline ($539.9m) now, that tells a story.
Is that pipeline committed work?
DP: No, the orders are, but you could say a fair amount of that should convert.
You have been lauded for a huge turnaround in cash generation. What happened that cash from operating activities was up 73%?
AvD: Obviously, a cutback in capital spend shows that we can make a lot of cash, so that’s the one thing that changed. And a lot of work has been done on improving the working capital cycle. The investment that we’ve done into our capital equipment over the past five years puts us now in a position that with an uptick in commodities, we’ve got sufficient equipment to put into the market and make the returns.
You recently bought into a data business called AVA — what does it actually do?
DP: Imagine a normal tracking system that you have in your car and a satellite tracks where you are … At AVA it’s all about the system that they use to understand what is happening with the movement of all the plant [like vehicles on a mine]. It’s very difficult for [miners] to understand where the bottlenecks are, so this helps optimise that total value chain, for lack of a better word.
How’s this complementary to Master Drilling?
DP: We don’t really operate in this space and digitalisation is where the world is going to, whether it’s underground or surface. Miners don’t know what they don’t know, so if we can try and help them better understand where the potential yields are, they can sweat their assets better.
Given that there’s so little exploration work in SA, is that just going to fall away as a business for you?
DP: There’s about R20bn of applications sitting with the department of mineral resources for approval that’s been delayed for the past three years. So there’s huge opportunity, but the department needs to come to the party. It’s delaying exploration programmes in SA. The two hotspots for exploration are Canada and Australia. I would think in South America, with the copper price, that’s also on the up.
But South America was deeply problematic for you last year?
DP: Remember copper went down to just about an all-time low and then came Covid, but just on the order book and committed work, we should see South America back in business come the end of this year.
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