Qoria Ltd

Good morning, everyone, and thank you for joining us this morning. My name is Alan Chan from Ridge Street Capital Partners, and today I'm here to host Mitchell Services for their four-year results for FY25. The webinar has been recorded, and we'll have time at the end of the presentation for Q&A, so we'll put the questions in there and I guess at the end. Today we have CEO Andrew Elf and CFO Rex Tyler to present their results. Andrew, over you, thank you.

Thanks very much for the introduction, Alan, and thanks very much everyone for joining us. I'll take the disclaimer as being read and just move straight to the market profile slide. Sadly, Nathan can't be with us today. He's just travelling. So it's just Greg and I, but certainly happy to obviously take questions as Alan said at the end of the presentation. And Nathan, our major holder there, 19.9% Mitchell Group and Scott Tunbridge, the founder of Deepcore that was acquired in 2019 at 7.6%. And then obviously still a good percentage of instos and then obviously retail investors after that. On the summary page for 25, obviously a tougher year financially for many reasons that we'll discuss as we go through the presentation. But importantly, I think the business is doing a very good job controlling what it can control. And certainly, you know, our focus moving into the current year is improving that net profit after tax number. So in overview, look, it was a transitional year. We had a quarterly call in recent times. So there's not a huge amount of surprises in what's been released today. But it was a transitional year as we replaced, you know, utilisation with projects that we want. And importantly, you know, we re-won all the major contracts that were expiring in FY25. certainly talks to the good job that the teams are doing. And 26, pleasingly, we enter the year in 26 with mobilisations and ramp up and a lot of that investment and spending behind us and those jobs that we have won are starting to deliver some returns to the business. Importantly, there is significant leverage that exists within the business when utilisation normalises and we'll talk to that more as we go through this presentation. But again, just the quality of the business and who we work for, you know, majority of that revenue from the global mining majors. Our revenue is split 50-50 surface underground. You know, gold is sort of 45% of revenue and looking positive given its price in the year ahead. And a majority of our revenue is generated from mine sites, you know, near mine type work. And importantly, the very good work that's been done over the last few years to strengthen our balance sheet certainly gives us optionality and held us in good stead throughout the last year. Operationally, the utilisation that was down was due to a number of factors, some of which are very much out of the business's control, including some client incidents and mining corporate activity, predominantly mining. Anglo Peabody and Newmont Newcrest. The rain has been quite amazing over the last year or so. And again, some challenges in that coal sector just with lower prices and corporate activity. But the new projects are a real positive and I think the team has done a wonderful job to win them and then to execute on them accordingly. The P&G work is going really well and the client is extremely happy that project is performing really well. As we would expect, the Loop business, which I'll talk about in a minute, has completed its first project and proven the concept. And we've got a second client underway now, which is fantastic. And then a couple of multi-rig, multi-year contracts, underground surface with large miners as well that have been mobilised and are performing well. We've put a slide in here just talking to operational history, obviously the leverage, the upside that does exist in this business when utilisation normalises. We really did demonstrate that in 23, 24, and you can see the number of shifts there. Obviously with some of those mines having challenges and rain and other things, that shift count dropped, as did the earnings in the current year. But obviously, if we can increase that shift count, get more rigs out, we've shown we can do it. And certainly the business does generate some very good cash when that utilisation and that leverage plays out. You know, that net debt has decreased significantly over recent years. We have returned significant funds to shareholders. And again, the fleet's in great shape. We've got a good team, good clients. And, you know, gold is strong. The coal price is bouncing back a little bit, you know, and the Peabody have said they're not going to progress with Anglo. So, again, the balance sheet gives us optionality. We've done it before, you know, and this is an important slide to show that, you know, we're focused and we're going to do everything we can to try and improve those earnings in the current year ahead of us. So just touching on the Luke business a little bit more, as it says there, it's a 50-50 JV between Mitchell and Talisman. And it was established in 2004. And that business offers end-to-end decarbonisation solutions to companies in a variety of sectors. And really it's about decarbonisation strategy, emission reduction pathways, including financial and carbon modelling. So a lot of that front end type work, a lot of operational readiness and engineering work, health and safety work, systems and program approvals. So there's a lot more to this business than just drilling. Obviously there's a lot of liaising with government bodies for funding, assisting people with regulatory submissions and peer review of other EOS submissions that the companies have put together that Luke would review too. Certainly, it's got quite a lot of things it does. Obviously, since it started, its primary focus has been on mining operations and predominantly linked to the reducing fugitive greenhouse gas emissions under the federal government's safeguard mechanism legislation. And really the focus has been on the coal sector in that regard. So a lot of gas reservoir characterisation and gas production modelling, in-field gas operations, including but not limited to gas and gas drainage and gathering and other sort of proprietary technical solutions that we've proven on the first project. and potentially in the longer term, beneficial use and offtake opportunities for gas on some of those client sites with business partners that may be specialists in some of those areas. So it's obviously completed a successful trial program with its first client. The second client has been secured and we're going through some of those front end phases with them at the moment. and hopefully out in the field towards the end of this calendar year or early next year. So this business does represent a very strong growth opportunity for the business. It's ahead of where we thought it would be. We're excited about it. The first project went really well, but it is a new sector. It will take time and it's not going to happen overnight. So, you know, we've got to keep chipping away and then hopefully over time, you start playing out more for the company. So I'll hand over to Greg to sort of run through some of the financials and then we'll get on to some of the other slides at the back end.

Thanks, Andrew. And morning, everyone. From a profit and loss perspective, there's not much that hasn't already been covered by Andrew, to be honest, with that decrease in profitability attributable to the lower utilization, as well as those investments into replacement projects. Importantly, all ramp up and mobilization associated with those projects is complete and the business enters FY26 with clear air and on a ex-mobilizations basis. From a return on invested capital perspective, obviously that lower number is driven by the lower EBIT. But it is worth noting there just the lower asset base as well, FY25 compared to FY24, which then should translate into stronger return on capital numbers upon normalization of earnings. Looking at slide 14, the balance sheet, the overall net assets number decreased. You can see there largely a result of the modest FY25 impact number, as well as the $4.3 million dividend payment, which related to final dividend for FY24. Also as flagged in the most recent quarterly update, working capital has increased mainly as a result of increased inventories. to service new projects, but that now should begin to normalize as those projects commence and with mobilizations behind them. There's a later slide in the pack that outlines the company's debt position, which I'll run through in more detail. But fair to say the balance sheet is in good shape with optionality to capitalize on opportunities as they present. And we make the point there that there's no intention to raise equity for any reason. From a cash flow perspective, the lower earnings and increased working capital requirements obviously drove the lower operating cash flows and conversion rates for the year. Noting the earlier comments around the normalization of that working capital, we do expect conversion rates to improve. into FY26. The significant reduction in interest payments there was a result of the decrease in gross debt and there were no income tax payments just given the legacy tax loss position largely as a result of the instant asset write-off. Worth noting, however, that those legacy tax losses have now been fully utilised and the company will commence income tax payments in FY26. So slide 16 really talks to the earlier comments around the balance sheet being an excellent position. That gross debt now is the lowest level that it has been since June 2015 and comprises entirely of equipment finance facilities with a blended average cost of debt of sub 7%. And importantly, and these sort of comments just tie into what we say earlier about the flexibility and the balance sheet to provide optionality, we've got access to $15 million worth of working capital facility, as well as an additional $20 million in headroom in the equipment finance lines there as well. Finally, from a capital perspective, the business remains committed to applying sensible limits on growth capex where it makes sense to do so. And you can see there that the majority of the FY25 capex really related to the maintenance capex. which is required to support the high level of equipment availability. We make the point there as well, we'll continue to monitor the size and composition of the fleet. And if and when it makes sense to do so, have a look at opportunistic asset sales, which has served the business well in previous years.

Thanks, Greg. And really just a few slides now to wrap up before we start taking some questions. But really what we want to do is optimise long-term growth of the business and focus on those returns for shareholders. And again, there we talk about improving the profitability of the business, which is a focus for us given the previous year. Keep identifying opportunities that exist within the sector and And then looking at opportunities with clients offshore where it makes sense to do so. Obviously, the balance sheet is strong, as Greg has said. And if we can make some good earnings, then shareholder returns can come back accordingly. And we make the point here that would most likely be by buyback given where the share price currently sits. Importantly, again, that operational leverage that exists within the business is significant upon normalisation of utilisation. So, look, in summary, it's a quality brand. It's got a long history. It's got quality revenue streams, good clients, good teams, good rigs. uh it is well set um as a business you know f25 tough year in many respects but i think the team managed it well uh and did well to win those jobs and get those other jobs out um and now we've got to make the most of that in the in the current year ahead of us uh we've spoken about those those projects in the year and and now that they're performing uh obviously that gross debt significantly down as greg said to the lowest level in a long, long time. And that balance sheet will really give us the ability to move forward in a sustainable manner and take opportunities as they come and the leverage I've touched on already. So Al, we might hand back to yourself and open it up for some questions.

Fantastic. Thanks, Andrew. And thank you, Greg. The first question comes from Daniel. Can you provide some colour into the capex spend in FY25 of 20.5 mil, which is up from the 17.6 spend in FY24? What should we expect for FY26?

Thanks, Daniel. I think in terms of the colour on the FY25 capex, really a function of all those factors that tie back to the EBITDA number, namely the significant number of mobilizations and demobilizations and the amount of rigs involved. So you had rigs coming back from projects that had ceased. You had rigs that needed a bit of capex spend in advance of going out to some of those new projects. And, you know, when you have movements to that extent involving as many rigs as that, you know, that's part of the reason for the CapEx spend, which from a maintenance CapEx perspective, you know, was sort of up year on year. For all, and again, sort of tying back to the EBITDA comments, we enter FY26, we're with that clear air, with all of the mobilizations and sort of ramp-ups behind us. So what you should see is a decent enough decrease there. Can't call out an exact number, but certainly if it plays out, you know, in terms of the stability of those jobs now that CapEx spend increases, should start coming down from a maintenance perspective. And then the normal sort of outlier or caveat on growth CapEx is really going to be a function of some of those growth opportunities and probably point to Loop as being the primary driver there if we do get the second and third contract potentially and to the extent that that then needs new CapEx that'll drive the growth. Great.

Daniel, can you also provide some indication of what DNA should be in FY26?

I think we're starting to see a level of normalization. I say level of normalization. In the past, the DNA number, for reasons well explained in the past, was higher than the maintenance capex number. I think you're starting to see that those two could converge and become a lot similar. And in the same way, I think the year-on-year DNA number is going to start stabilizing as well. So I don't see... It's certainly not going to go up, but I don't see any significant decreases either. I think roughly the same, 26 compared to 25.

Thanks Craig. Question from Nick. Can you clarify what the $2.7 million on decarbonisation review is, given the loop? Is equity accounted? I take it's not loop. So can you clarify what this is and how it fits in?

It's a good question. Happy to take that one. Yes, Loop is equity accounted, and so therefore you wouldn't expect to see revenue and costs, et cetera, to the extent that it relates to Loop. Just to clarify the structure of that arrangement, though, it's a 50-50 joint venture between ourselves and Talisman. But the service offering that Loop provides is essentially outsourced back to the shareholder partners. And so what I mean by that is the consulting work that Loop provides is essentially done through Talisman and the drilling that it provides is done through Mitchell. So that 2.7 million revenue that you see there is genuine Mitchell services revenue. but obviously the client there is the LoopJV who then contracted to the client in this instance, Coronado. I hope that makes sense.

It's great. Just follow on, given the successful completion of the first pilot LoopJV project client one, is there a reason that client has not continued on the additional loop services?

Look, Nathan's spoken about it previously, that he sees some similarities between this opportunity developing and what he saw in the early days of the unconventional energy sector. You know, people start with a pilot, they drill a few holes, they do some testing, they go back and write reports, and then it sort of goes, you know, the wheels turn and you go back and you do a bigger one, someone else does one, you know, and then it sort of... starts gaining some momentum, some acceptance, and then sort of larger, more ongoing type opportunities come up. So I think to answer the question, it's early days. It was the first client, first holes completed, you know, the first lot of engineering work, et cetera. You know, no one's really going to grab it and keep it running on the first pass. So as I said, it will take time. went really well importantly, which is good.

Thanks, Andrew. Another question from Nick. Any update on the status of Grosvenor? It was ported Anglo and close to reopening.

Look, I certainly can't sit here and provide detailed updates on client sites. I think a lot of the information that we get is secondary and they've kept their cards pretty close to their chest with with Moorumbar North and Grosvenor just on the basis of the potential sale and there's obviously other factors at play for them but we are back in underground at Moorumbar North which is great with one rig and obviously it's Anglo's intention to get that mine up and running and with Grosvenor I don't have any updates I can provide I'm sorry but again it's Anglo's intention to get back in there and get going again but as to how long that could take or when that may be. I couldn't say, sorry.

Thank you. Just a question on Luke. Maybe you can add to it, Greg, but can you talk to the current impact of Luke's JV on profitability?

So I think... talking about this year just gone and FY25, you'll really see the impacts come through in two areas. And it sort of relates to the previous question as well. Number one, you'll see the equity accounting portion, which would be a share of Loop's profit, or in this case, small loss, given Loop was in startup mode, but you're sort of talking tens of thousands of dollars as opposed to anything more meaningful there. And then as well as the profit for Mitchell's to the extent that it relates to the drilling services provided. So we called out the $2.7 million of revenue that was obviously earned, but don't think it's appropriate to sort of call out the margin associated with that on this call, but that margin would obviously form part of the FY25 number. And then it's really too early days to be calling out how that might extend into FY26.

But just to add to that, you know, without talking in detail to Greg's comment, it's a new service. It's a specialised service. It's highly technical. No one else is offering it. you know, it can potentially save those mines a fortune in tax that they would have to pay under that scheme. So, you know, when you've got that sort of service you're providing and then wrapping it up with a full service of infield management and engineering and everything else, you know, it can make a good return versus a very simple 300 metre hole that anyone can drill and everyone is competing for. So again, we're trying to, know do something that um that plays into the skill and expertise that exists in specialist work within both the talisman and mutual organizations thank you just on rigs what is happening to the rig prices in the market with the running gold prices do you have an update Yeah, I think, look, it's always a difficult one. But, you know, again, we've sort of said to people, you know, to replace the fleet on a brand new basis would be in the hundreds of millions of dollars. The assets that we've got market value north of $100 million. You know, you just look at fleet count, roughly $90 million. and all the associated assets that go with it, including, you know, pumps, compressors, trucks, vehicles, lighting plants, pipe, this goes on forever, well north of $100 million. But rig prices, I think, are probably flat. You know, there's still capacity out there in the market and in Western Australia as well. So you're certainly not seeing rig prices or the value of those particular assets themselves go through the roof. You know, things like trucks and cars and everything is a pretty well-worn path and a pretty transparent market.

Next question. Are you able to talk to the current regularization that is trending for Q1FI26 versus prior year?

Yeah, it's probably flat to a tick up, to be honest. I think, again, we've won those jobs and put put rigs out you know we had rigs come off you know we've hit the new financial year as Greg said sort of post ramp up and now it's really okay you've got a bit of a steady state going you know there's a couple of rigs that are going to come off there's probably a few more that are going to go out so you know net net from here you're probably a tick up and that's probably how it's looking at the current time yeah

On the question from Nick, what sort of return might a client get from engaging them directly with DCAR?

Yeah, it's going to depend. Every site is so different. So you could have a site that it's a huge site, it's a small site, the gas content could be high, the gas content could be lower. So it's really going to depend on the particular site. But The level of tax that clients or sites may have to pay, depending on their particular circumstances, could be material for their earnings of those sites. And the cost of the services from Loop, insignificant versus the level of taxes they may have to pay. So certainly from a return on investment perspective, it makes sense. It makes sense from a... know uh social perspective doing the right thing by managing your gas it makes sense when applying for applications to government for approvals or amendments of approvals showing that you're doing the right thing by trying to manage the gas so uh yeah it certainly um you know will make a difference for clients and that's and that's why we're doing it you know if it was marginal um you know, it's a tough sell, but it's certainly an easier sell because of the material difference it can make to those clients.

Perfect. Just one for me, guys. Just on the loop pipeline, how do you see that demand? And obviously you've got one rig out there. How easy is it to get a rig deployed for the next client? Did you have to sort of wait for that one to finish and move on?

Yeah, so we sort of finished the first project, you know, took the rig back to the yard, sort of wound all that up. And then we've sort of gone straight into the engineering side of things and operational readiness side of things with the second client. And obviously the rig's in the yard with all the things it needs ready to go. We'll go through the engineering process. Then hopefully that rig gets out sort of towards the end of the year or early next year and then obviously complete the program. But So to answer the question, Alex, you know, credit to that first client, they had a go. The second client was an easier sell because someone else had a go. And I think it just gets easier and easier as the. you know, as the business strategy and as the operational, you know, the work we do on the ground is proven. So I certainly think, you know, this second client is, you know, is well known and well regarded within industry. And again, it just will add further weight to the value of the offering. So it's certainly, you know, it's just gonna take a little bit of time, but I think that momentum will start hopefully building a little bit quicker into the next calendar year once this next project is done. But everyone that is impacted by that legislation knows Luke, has met the CEO of Luke, Vikesh, who's the CEO of that business, and he's out there talking to them and they're being presented to and they understand the offering and everyone's watching and learning. So I certainly think that, you know, there's a lot of interest. But again, it's that whole... thing of adoption and how quick people want to jump on board. And, you know, again, as Nathan said, with unconventional energy, it took time, it was choppy, and that's exactly what we're seeing. But hopefully next year, that momentum starts building a bit more again.

Thank you. Just on rig count, can you remind me again, obviously you said 90, but any older rigs possibly up for sale or It's all relatively new.

Yeah, it's always a balance. You sort of think, okay, well, you know, what's idle that we can use for potential opportunities? If we did sell it, what could we sell it for? You know, there's always an argument that you don't want to be selling rigs into your home market and have them come back and compete against you as well. So you've got to be mindful of where you sell them. So there's always a whole lot of factors. Obviously, the question from before rig prices is, Yeah, no point selling them if you're not happy with the price that you're going to get. So I think we've been very good at that over time where we've been opportunistic and if the prices are right and the opportunity's there and not necessarily selling it to a direct competitor, we'll take the opportunity, you know, and then other times we'll sit and hold them. I mean, certainly I think it's fair to say a large portion of the fleet is very, very good in good condition and there's really only a handful of rigs that are, you know, not that fantastic, but could always still go back to work if needed.

Thank you. That was the last questions, Andrew and Greg. If you guys could, again, yeah, if you have any questions, yeah, type them in and I can address them now. Otherwise, I'll leave it to Andrew for final remarks. I think we're clear, Andrew. Any final comments?

No, thanks very much, Alan, and thanks, Greg, and thanks, everyone, for the interest and dialling in. We're looking forward to a better year ahead. Obviously, last year was a transition year, but, again, great team, a lot of history, good brand, good equipment, and we're looking forward to a good year ahead.

Thanks, Andrew. Thanks, Greg. This is being recorded, so I will reach out to everyone in New Chile and give them a copy. But any questions, feel free to come through to me and I can get back to you with what you need. Thank you, everyone. Thanks, Andrew. Thanks, Greg.

Thanks, guys. See you. Thanks, Alan.