Capital Limited

Good morning, ladies and gentlemen. Welcome to the Capital Limited Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged. They can be submitted at any time using the Q&A tab situated on the right-hand corner of your screen. Just please simply type in your question at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and will publish those responses where it's appropriate to do so. Before we begin, we would like to submit the following poll, and I'm sure the company would be most grateful for your participation. And I'd now like to hand over to Chairman Jamie Boyd. Good morning, sir.

Good morning. Thank you, and welcome, everyone, to the Capital Limited first half results call. With me, I have Giles Everest, a group CFO, and Conor Rowley, the head of investor relations and Corporate Development, both of whom are sitting in London at the moment. Same format as last time, we will be fairly quick as we go through the slides and devote most of today's time to the Q&A session. So I shall kick off. Obviously, we reported the first half results last Thursday, and it was a record for the company for the half-year period, and that follows hot on the heels of record results in the second half of last year. Very strong performance across the board, revenue growth of 40% on the first half of last year, and that flowed through the operating leverage flowed through the business. So EBITDA was up 46%, operating NPAT or adjusted NPAT up 57%, and a very strong surge in operating cashflow. I should note that that was cycling off the first half of 2021, which was the mobilisation of that large earth moving contract at Sicari, just for context. The most pleasing part of the result for the management and board of capital has been the return on capital generated. A little later in the slide deck, we will run through the capital spending profile, but it has been a very heavy period of capital investment in both 2020 and 2021. And to have had that level of capital investment, over $120 million, feed through into strong returns so rapidly was a very pleasing result. And it speaks volumes to our business model. Most of the capital that we have deployed in the past two years has gone into existing sites and existing infrastructure adding services. And that has enabled us to leverage that existing infrastructure into very rapid returns. So very pleasing to see that number in particular. I should note, sorry, before moving off, we did, as part of last Thursday's update, increase our revenue guidance. We had previously been at 270 to 280 million. We increased that guidance for 2022 to 280 to $290 million. A few background slides I will spend, I'll be pretty quick on these. Again, we're an integrated service provider. operating predominantly in African markets, providing services to mining and exploration customers. Three main service business, specifically drilling, mining and laboratories. The drilling business, which represents approximately 70% of our total group revenue, is very well established. In fact, the largest drilling contractor in the African continent. The mining and laboratory businesses are a lot newer businesses and both performing very well. The fourth part of our business is we run an investment portfolio, an opportunistic investment portfolio, which complements our business development activities and group performance. We are a premium provider of services to our customers, world-leading safety standards, premium equipment, deal with the top OEMs, take a lead in technology, heavy environmental focus, heavy local community focus. About 90% of our 2,300 employees are nationals. So very much a premium provider and the rationale behind that is we are targeting tier one customers with tier one assets and to establish yourself at those customers, you need to be bringing a tier one service and that is our model. The next slide looks at our global footprint. The mining and drilling businesses are in Africa and Saudi Arabia, the dark gray being the current countries of operation, the light gray being countries where we have carried out contracts in the past. When you move out of Africa, Middle East, you're looking at the footprint for our laboratory business. It's in the Americas, Europe, and in Africa as well. Top left. gives a snapshot of some of our top customers, and again, the top tier names from the industry. And then looking across the map, we have the major projects on which we're operating. And again, a number of these are tier one assets. And particularly, many of them, we've got a very long history on those assets. So it's In the case of Sakari, dating back to 2005. In the case of Gator, dating back to 2006. So again, just reiterating the business model, it's to introduce services, establish a footprint on a tier one asset, and then expand those services as the project develops. The financial performance, it has been very strong over the past few years in particular. I think one of the things that's probably not really being recognised in our valuation is where we've come from with a revenue number of 115 million in 2019, and now we're going to 280 to 290 million just a few years later. So we're certainly going through a very rapid growth phase at the moment, and as the other charts indicate, also getting very strong operating leverage through the business. A couple of slides on the macro environment. These are slides that we have talked through in previous slide decks. The messages remain much the same, that there has been a systematic structural underinvestment in the mining sector for the better part of a decade. We bring that out in the chart in the top left where we show annual indexed metal prices trading at all-time highs while expiration spend is about 40% below the levels it was a decade ago. The next slide overlays this into capital spending, and it's the same thematic. 2012, 13, the peak. We're off the lows, but we're still well below levels of a decade ago. And we obviously now are entering, in our view, a very strong reinvestment. cycle. The bottom left talks this through in the terms of the asset bases. These are the gold reserves of the top world's top gold producers. And again, as you can see, they've been running their asset bases down from 2012 to 19. We're now starting to see reinvestment in those assets. In fact, quite a few of our customers where we work have just started new open pit operations. So in terms of the macro environment, one of the most frequently asked questions is where are we in the cycle? We are firmly of the opinion we are in the early stages of a new investment cycle. The narrative from our customers has shifted back to a growth narrative and we're seeing that demand flow through our business. Running through the individual operating businesses, drilling, the header says it all, it's the strongest demand environment in our history. We are running at 82% and 85% utilization of our rig fleet in queues one and two, which really is full capacity. We are adding capacity to our drill rig fleet, which is in the top right. We are in a market now where there is excess demand. Pricing is improving. Productivity is improving. and the opportunity set is improving. So the depth and the quality of the opportunities in front of our drilling business, as the header says, are as strong as we have seen it. We are, however, taking the opportunity to, with this strong demand, continue or even accelerate our focus on the tier one assets. And one thing that's very pleasing over the course of the first eight months this year is we have either increased our presence at some existing operations, such as North Mara, Sukari, and most significantly, Gator, which was recently released to the market, a new three-year contract, which was an expanded contract and the second largest contract the company has been awarded in its history. But we have also added operations at some other tier one global assets. So we've started at Gulamina Lithium, which is a lithium project owned by Leo Lithium in Mali. We've started at Kabanga Nickel, a nickel project in Tanzania that is being earned into by BHP, the world's biggest mining company. And then the most, again, most recent announcements have been an award for a laboratory business at Kabali, which is Africa's biggest gold mine. and a drilling contract for Kola for two rigs, which is Africa's third largest gold mine. So we are increasingly gaining exposure to these top tier assets and consistent with our strategy, establish ourselves with the service, get a footprint established and then expand those services and grow with the customer. The mining business is predominantly always dominated by the Sukari contract. The Sukari contract continues to perform exceptionally well with actually record material movement coming through in the last few days. It's performing above contract specifications and above our expectations. The team have done an outstanding job and that contract continues to perform well. The tendering market, For mining, it is also looking very firm, a longer sales cycle. Obviously, the discussions around mining contracts are nine to 12-month discussions, but there are a number of attractive opportunities that present growth opportunities for us in the future. Our laboratory business, going from strength to strength, the top left is sample volume growth through our laboratories, which is really jumped in recent times. And most recently, we announced an extension of our arrangement with Crisos on their photon assay technology, where we are now rolling out 21, committed to rolling out 21 units into 2025. And through that release, we released some revenue guidance for the laboratories business. We're now guiding to $80 million plus in 2025. Some significant wins for our laboratory business in the first half. the most significant of which was Kabali that I mentioned earlier, but we also received a multi-year extension at the Tassie at Goldmine. The investment portfolio, we released these numbers back on the 18th of June, July, pardon me, with our revenue results. The investment portfolio has been concentrated over the last 18 months. It is now dominated by Allied, Leo and Predictive. The latter of those three names, Leo and Predictive, have recently completed significant capital raisings, which will fund the significant growth in their projects. As a business development tool being highly effective, the dark blue is the annualised revenue coming from our investee companies. Through, I should point out, however, an arm's length commercial tendering process, but the relationships and the strength of working with our partners is very much on the floor with these numbers. So continued growth and portfolio concentration. We were a net seller of the portfolio in the first half, pardon me, and we were impacted by the market volatility, obviously, particularly in May and June. However, since inception of this strategy, the investor capital, which is now 11.5 million, is valued at 47 million at the end of the first half, which is about a 50% compound return. On that, I'll hand over to Giles for the results, please.

Great. Thanks, Jamie. So starting with the financial side. So Jamie's gone through the headline numbers, the very solid headline numbers. So I'll focus on this slide in terms of margin. EBITDA margin for the half 30%, EBIT over 20%, very strong reflection of the high level of activity and asset utilization. If we look at the graph on the bottom right, you can see that in the second half of 2021, The EBITDA margin was a bit stronger because of some anomalies, things like lower R&M repairs and maintenance and lower movements of assets, which we flagged. And we flagged also that the range would be somewhat lower than that in that 25% to 30% range. We have put this in a graph to ensure that analysts in particular don't get ahead of themselves. And so just in terms of that 25 to 30% EBITDA range, we do feel that that is sustainable throughout the cycle. So while we have tailwinds in current conditions, one would expect it to be at the top end of that range. And conversely, when we've got headwinds, then it would be more at the bottom of that range. Moving on to the cash flow, the cash waterfall. The main takeaway from this slide is that we had strong EBITDA to cash conversion. This was despite a buildup in inventory. Inventory built, one, due to revenue and two, due to the constrained supply chain. This was a deliberate move to increase our inventory to ensure that operations were not adversely affected by any constraints. And our results show that. And we would expect that that might reverse that impact, that buildup of inventory might reverse a little bit in the second half. The other takeaway is the capex for the first half is 22.6. And I'll then segue onto the next slide, capex. So 22.6 for the half. Back in March, we were guiding to $45 million of capex. We are now guiding to $50 to $55 million for this financial year. Two main aspects, two main impacts. One is that with the increase in some of the contracts, in particular places like Gator, we have taken the opportunity to actually replace some of our older kit with new kit. And we've also found that with our utilization being higher than expected, so at that 85% mark, we've actually incurring higher sustaining capex. In the bottom there, under sustaining capex rule of thumb, so we've given some guidance in terms of how to think about capex. Sustaining capex is, if you like, stay in business capex or capex X growth. And we have pulled out sustaining capex of on average of $275,000 per active rig per annum, and then some sustaining capex for mining and head office. If you like, I think at the end of the year with our CapEx program, we would be ending up with around about 120 rigs, which may indicate that sustaining CapEx would be in the order of $30 to $35 million X growth into 2023. Moving on then to the balance sheet. So net debt, the end of the half was $36.4 million. If you were to include the value of the investment portfolio, 47 million, then we'd be in a net cash position of nearly $11 million. But just thinking about that net debt of 36 to start off with, That is a fairly modest gearing ratio of 16% and also works out at a leverage ratio, so EBITDA to net debt of about, well, less than 0.5. So one would say that that's fairly modest gearing and certainly gives us headroom to, particularly when combined with free cash flow, which gives us plenty of headroom to finance future growth, whether it be in drilling contracts or indeed another mining contract. The final slide on the financials is really about capital allocation. We believe that we are still in a strong growth phase, so we're using our strong balance sheet to fund our opportunity pipeline, but still returning a reasonable but modest return to shareholders. So our dividend payout policy remains at 20% of net operating profit after tax, and we declared an interim dividend of 1.3. If you were to annualize that and add on the share buyback, the $2.5 million share buyback that we did in the first quarter, then on current share price, you'd be looking at a yield of around about 4.5%. So with that, I'll hand back to yourself, Jamie.

So just to round out outlook and guidance, reiterating that we increased our revenue guidance last week, $280 to $290 million and increased our CapEx guidance as well. We're seeing strong demand and strong growth across all of our businesses year on year. And I think really reiterating the point, the quality of the opportunity set is the strongest that we have had since inception. And we're firmly of the opinion and certainly everything we're seeing from our customer basis is that the reinvestment cycle is back on and is in its early stages. and seeing a lot of positive announcements from companies like BHP coming into Africa. There was an announcement this week about one of the largest iron ore companies in the world, FMG, going into Gabon. So there is money coming into the continent and with our customers, a lot of reinvestment activity after quite a long hiatus from 12 through to 18, 19. So we're in very good shape at the moment. getting a toehold or a foothold and some very high-quality assets, and we see strong demand for the next few years ahead. And with that, I'll hand over to the questions. Thank you.

That's great. Jamie Giles, thank you very much indeed for updating investors this morning. Ladies and gentlemen, please do continue to submit your questions using the Q&A tab just situated on the right-hand corner of your screen. But just while the team take a few moments to review the questions submitted already, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your InvestorMeet company dashboard. Connor, if I may, you can see that you've had a number of questions submitted through today's meeting, along with a number that were pre-submitted. If I may just hand back to you to read out the questions and give a response where it's appropriate to do so, and I'll pick up from you at the end.

Sure, thank you. And thanks, everyone, for submitting questions. I think we'll start with just one on the broader strategy. So you mentioned that we've been looking at new opportunities in terms of commodities, but also regions. Has the view on being an Africa specialist changed?

I'd say evolved. We've got an exceptional footprint within Africa, but what we have is a laboratory business that has a very high quality reputation that's operating in the Americas that is leading to cross-selling inquiries back to our, particularly our drilling business. And what we also have is a roster of customers that are obviously global in nature asking us to look beyond Africa. So, you know, our biggest focus remains tier one assets and tier one customers. But we're certainly evolving that we are looking at opportunities outside Africa. Short answer, yes.

Okay, thanks. The next one is on buybacks and a number of you have put in questions on buybacks. I think we'll just address it once. Jamie and Giles, in the context of what we think about the valuation of the shares, et cetera, and opportunities, what is your view on buybacks going forward?

We discuss all aspects of capital allocation as any good management teams and boards do. And it's always getting the right mix between them. One thing that is very clear is that we're in a very strong growth path at the moment. And I know one of the questions has been asked in terms of the cheap valuation and the returns metrics of buying back our own stock. And we took that view and did a small buyback early in the quarter. But we'll keep options open. But at the moment, we are executing on our strategy. And I think the most exciting thing at the moment for us is we are adding more tier one assets. So... You know, we're generating a very strong return off our operating businesses, but what we are looking to do is replicate the Sakaris since 2005, the Gators since 2006, the North Maras since 2010. These are all top-tier gold mines in Africa and now at Fakola. We're at Kabali. So we've got a lot of growth options ahead of us. So it's always a question of... as I said at the start, managing your capital. However, I would stress that we are in a strong growth phase with high quality growth.

Thanks, Jamie. Just on the capital markets, staying with that, we've seen some increase in M&A activity in Australia. What are your thoughts on that? And also, how at risk do we think we are in terms of an approach?

There is absolutely more corporate activity starting to take place, particularly on the ASX. In fact, there was a takeover announced just last week for some earth moving companies. So I think whilst the capital markets aren't or haven't in the last few years been valuing contractors, whether they be drilling contractors or mining contractors particularly well, the corporate sector is starting to show that the valuation is there. And as this cycle gathers its early stage momentum, the access to quality people and quality equipment is becoming increasingly difficult and that's leading to corporate activity. So yes, we agree there is corporate activity. How vulnerable are we? Look, we are cheap. There's no doubt about that. We also have a very concentrated register of some very high quality institutions. So I don't feel that someone could just come in and raid the company. You've got a lot of scale holders that would be very resistant to just being taken over cheaply, so to speak.

Given that we are seeing different valuations across Canada and Australia, have we ever considered a dual listing?

Look, it's been discussed. I wouldn't say it's been considered. I mean, the valuation differential certainly does exist at the moment. A dual listing is not really ideal when you're in a liquid stock, which we tend to be, and spreading your liquidity across two markets doesn't tend to help too much. But... um yeah discussed but wouldn't say actively considering we aren't uh we aren't we're certainly aware of the valuation differential um so you know it's a possibility but not a probability hope that answers it thanks jamie maybe one for charles charles you've spoken about one times net debt to ebitda being a reasonable cap in terms of leverage obviously if the market was to turn against us ebitda can fall

Can you talk about the levers we have within the business to reduce leverage if the market were to head that way?

Sure. Okay. So look, first of all, I would say that we would only leverage up if it was a project that ticked all of the boxes. So tier one client, long life mine, low cost, high return on capital employed. So we are very diligent in that respect. The other part is, so really we'd leverage up to spend CapEx on a growth project. If things turn south, then our main lever is not to spend CapEx. We just have sustaining CapEx and we actually end up creating pretty reasonable amounts of cash, which can reduce debt very quickly. I would actually emphasize that in terms of our covenants, the leverage ratio is not a covenant. It's an internal one.

Thanks, Giles. Maybe stick with you. A number of questions come through on inventory. So inventory has risen a lot in the past year. Can you talk about what is in that and really what is driving that increase?

In terms of inventory, that is all of the consumables that are required to run the business. This is not capex, it's not components for which might get capitalized. So in terms of volume of business, I mean, clearly the revenue has risen considerably. There was probably a little bit of lag in terms of going from 21 into 22. And then so that has been part of it. And then, as I said, with the constrained supply chains, what that means is that one, you increase your min max levels in terms of your inventories on site. but it also means that lead times have potentially spun out and therefore stock is on the water for longer. So those combined factors have gone to increasing the inventory by about $15 million. As I said, I would expect in the second half for that to fall back a little. So, and we do manage our inventory extremely closely, all 36,000 line items.

Thanks, Charles. Maybe move back to Jamie, a couple on the investment portfolio. What led to the decision to focus the investments towards three key holdings?

That was when we initiated the strategy in 2019, it was a lack of capital markets access to what were predominantly companies at the junior end of the market, exploration companies. The exception to that is obviously our financing or assistance in the financing of allied buying and operating gold mine. But the balance of them were early stage investment opportunities. So as the last few years have played out, What we've gravitated toward are the ones that have had exploration success that are going to turn into mines and moved out of the ones that haven't had exploration success. It's a high exploration. Investing in exploration is one of those things that You have to clearly, the winners can be very material and predictive, the most noticeable. We invested our initial investment at a cent, it's now at 20, but we've done follow-on investments. So that concentration as a result of going with the ones that have been successful, rationalising the ones that haven't been.

Okay, thanks. Sticking with investments, and I'll ask this how I think the question is phrased. Well, the investment fund has been a useful sales tool. What is essentially the end goal of these investments?

The end goal is to realise the value from them, really, simplistically. You know, we're not a natural holder, per se, of a mature producing asset. That's not our business. But while what we are on the investment side is we find early stage opportunities, we work with those companies through its development phase. As their projects mature, we would be on the sell side. So, you know, the end goal is to grow as we do with our services business, grow with the project. Same thing with our investments. However, services will keep going once they reach that production state, whereas investments would come off.

Thanks, Jamie. Maybe shooting back to Giles, you've spoken in slides about a debt refinancing in the second half. What is the goal of this and are you expecting a cash flow saving?

Yeah. Thanks. So we are indeed going through a debt refi at the moment. Just to explain or give a bit more color in terms of our current debt book, as on slide 19 or 20, is it? There we go. Thanks. So on the bottom left there, all the blue is asset backed financing. And the other is a revolver, basically working capital facility. So we are looking at debt restructure to give us capacity to move quickly for the opportunities that arise. In terms of cash flow saving, yes, we do believe that there should be price competition, which should mean that the cost of debt interest comes down a little.

Thanks. A question here on MSA Labs. I think it's, will we break out the segmental profits when we get to larger in size? I think maybe the right answer to that is no. Regardless of whether we do that or not, can you talk to the differences in margins between MSA Labs and the drilling and mining business?

Who are you? Are you asking me that one?

Whichever you like. You both know the answer.

Yeah, I'm going to let Giles field it.

Sure. Okay. No problem. Okay. In terms of margins, I think in terms of mature businesses, the labs business would have the higher margin. then the drilling business next, and then the mining business would be lower. In terms of the MSA labs, look, it's still relatively small. So, you know, we're obviously... looking towards the margins which would be more prevalent in terms of the labs. I'm thinking about a particular Australian listed company, which its labs business in the mining sector would have EBIT margins of more around about the 25% mark. So that is where we're aiming for. In terms of segmenting those profits, we'll look to do that when it becomes a material size.

Thanks, Jas. I think I'll ask the last two questions sort of together. Jamie, what's your general view on the commodity prices and direction of travel here? And in that medium to longer term, where do you see the rig count of the group going? Where are you comfortable in terms of a limit?

I'll answer the second part first. I mean, we don't really have a magic number in terms of comfort with respect to our asset base, whether it be rigs or mining equipment or laboratories. That will entirely be driven by the projects and the contracts and the clients that we're working with. Certainly we see that there is a lot of growth opportunities, but it's not about chasing asset. It's not about chasing rig growth, for example. It's about turning the next, developing the next Sakari where we have 25 odd rigs or the next gator. That drives the asset side. In terms of commodity prices, I'm always cautious being a commodity forecaster. So let me answer the question this way. We're bulls on this cycle and the primary driver of that is due to, it's the classic capital investment cycle where there has been a structural underinvestment from our customer base in their asset basis. So what might happen in short-term volatility with commodity prices There is a structural requirement for reinvestment because there is looming structural shortages in many of the commodities. That obviously is a highly supportive environment for prices, but even more so an incredibly supportive environment for service providers because that investment drives demand for our services.

Thanks. We've actually had one very last question that's come in. In relation to exploration, what are your expectations for the Arabian Nubian Shield geological area? How do you see the mining future in that area?

We've been vocal proponents and supporters of that geological region for many years now. Obviously, Sakari in Egypt being the first, but we've worked in Ethiopia. We've worked in Eritrea. We're working in Saudi Arabia. So we're very bullish on that belt and we think it's incredibly underdeveloped. So it's a big opportunity.

That's great. Jamie, Giles, Connor, thank you very much indeed. And I think you've taken all the questions from investors today. So thank you once again for everybody for your engagement this morning. Jamie, I know that investor feedback is important to you and to the company and to the board. And I'll shortly redirect investors to provide you with their thoughts and expectations. But I wonder if I may, before doing so, just ask you for a few closing comments and then I'll redirect investors to give you their feedback.

Well, closing comments are just really to reiterate that there is a very strong demand for us, for services at the moment. The business is very well positioned. I mean, the results we've been consistently delivering. So I hope investors are pleased with the numbers and I would like to thank everyone for taking the time to dial in and particularly ask questions today. So thank you very much.

That's great. Jamie, Giles, Connor, thank you once again for your time this morning and for updating investors. Can I please ask investors not to close this session as we're now automatically redirecting you for the opportunity to provide your feedback in order the management team can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Capital Limited, we'd like to thank you for attending today's presentation. That now concludes today's session. I wish you all a very pleasant day.