Mitchell Services Limited (MSV) Earnings Call Transcript

Good afternoon, everyone. Thank you for joining today. My name is Allen Chan from Bridge Street Capital Partners. And today, we have Mitchell Services for their fourth quarter quarterly. Today, we have Nathan, Executive Chair; Andrew Elf, CEO; and Greg Switala as the CFO to talk about the update. Over you, Andrew.

Thanks, Allen. Thank you very much for having us, and thanks, everyone, for your interest. Look, as per the usual format, just be a handful of remarks at the start, nothing too long. And really, it's the purpose of today is to open up to questions and give everyone the opportunity to direct some questions. And obviously, we're lucky enough to have Nathan Mitchell, our Chairman as well. So look, just a few points. Obviously, a strong Q4 and importantly, a really strong financial year for us. Obviously, EBITDA percent is strong, and that's flowing through down to the final NPAT figure, which is expected to be about $15.2 million subject to tax being finalized in the release of the results. Obviously, the balance sheet has continued to strengthen, and we were in a net cash position as at 30 June. That certainly gives us the ability to have some optionality in the business, and I'm sure Nathan will talk to that in the questions. But obviously, some very strong operating cash flow during the year. Commodity-wise, gold representing circa 60% of revenue versus coal 30% for the year, steelmaking coal. And obviously, we sort of made the point as well that we believe rig count has bottomed out, and we exited the year at 65, which certainly gives us the ability to grow further, given the fleet that's available to us. Capital management, obviously, Nathan's here. We had a very strong dividend at the end of the first half, and Nathan can talk about some of those thoughts on the Board or what he may have. The loop business is currently drilling for its second client and that project is going well. It's still early days with that business, and it will take more time. And as we've said to people, but it certainly does give us an option for growth. And then on some of the metrics without touching on them too much. Very pleased to see return on capital sort of 25% plus. I think that's an excellent number and really a great effort from all of the team to deliver that. Last week -- just to finish up, last week, we were all up at the Noosa Mining Conference, which is a fantastic conference that we attend every year. There was actually a good paper from one of the analysts out there. I think the title was Drill, Baby, Drill, and that was really the theme. It was -- people are well funded. They've raised money. They're putting the money into the ground. We're starting to see that come through. Rig count is increasing. Certainly, I think the bookings for the rigs moving forward look fairly healthy, and we can see that rig count continue to increase throughout the first half. So the business is in great shape. The team is doing a great job. We're very, very thankful for all the work our clients give us and we're doing our best to provide good service to them. Balance sheet is strong and options available to us. So really, really pleased with where we are and importantly where we're going. So Nathan, I'm not sure if you want to add anything or just go to the questions?

No. Certainly reiterate what Andrew said, I think the team has done an excellent job, another amazing year. Again, as we've said, we've come through the coal downturn and accelerated into the mining boom. And I think the team is on the up and up. The numbers speak for themselves with regards to last year versus this year. As Andrew said before, we've had a great dividend first half. We'll pay another dividend second half. And so that's that number yet, I'm not sure whether we released that number as a sense-wise, but there will be a second dividend for the year based on the numbers we're looking at. And I think from an opportunity point of view, we've sort of wound down the coal or the coal has wound down not us winding down. But essentially, both those mines are now being bought by new owners up in the Bowen Basin. So a number of mines have traded hands over the last sort of, I don't know, 2 months in the coal sector. So that's an interesting space. We're certainly not reliant on it. We've sort of moved our business model into the minerals and that's been great for us. You're seeing that that growth in the minerals, and we're expecting that to continue to grow into this half and the next half. So minerals as Andrew said before, is strong. People have raised a lot of money at $5,000 an ounce. And exploration is strong on the East Coast. So -- and I saw it strong in the West Coast, not that we do a lot on the West Coast. But overall, we're, I think, again, in a very good position from a debt point of view and from a rig allocation point of view. We're now sort of well and truly even down across the Eastern Seaboard about 30/30/30 between Victoria, New South Wales and Queensland and N.T. So yes, I think that's -- and we continue to look at opportunities all the time. I think our balance sheet is very good. Our share price is low, but our balance sheet is strong. And so we continue to look at new opportunities going into the new year.

No. Beauty. Thanks, Nathan. Might open it up for questions. Allen?

So the first question has been answered by Nathan in regards to capital allocation. I think just to reiterate, there will be a second dividend, just a matter of the number. Second question. Any issues you are seeing with fuel supply, either clients or Mitchell's itself?

Just before we move on to that one, that on the capital management side, I think Nathan is pretty clear with everybody on these calls and correct me if I'm wrong, Nathan, but it remains the same, you'll decide to allocate the capital to growth or dividends. I just want to maybe touch on that?

Yes. No. that's true. So we're still seeing growth in the sector. So we are looking at opportunities around growth. So it's not just a pure dividend play. We still believe that the shareholders deserve a dividend when things are looking very good. But certainly, we are also looking at growth and growth opportunities. So again, the allocation is, obviously, we don't have any debt at the moment. So there's no allocation to debt. And the other levers we've always talked about is obviously share buybacks, dividends or growth. And I think what we're looking at the moment is growth and dividend.

Yes. No, that's really good, Nathan. Thank you. So obviously, as Nathan said, it's the intention of the Board to pay a dividend. It'll be fully franked and the quantum of the dividend we announced when the full year results are released in August. As far as fuel goes, no issues. We've got a little bit of our own contingency supply in some of the yards that we have. It's generally client provided. Our clients are obviously a lot bigger than us and better access as well. But no issues to date. A majority of our contracts are client provided fuel. In very few instances, do we provide the fuel and where we do it's generally on a charge-back basis. So if the -- not just supply, but if the price increases due to unforeseen circumstances, then from a profit perspective, our exposure will be really limited to lubricants and things like that, more so hydraulic oil and things like that. So the fuel is okay.

Next question. Can you make some comments on new business pipeline and whether you would expect rig counts to continue to rise over the course of FY '27?

Yes. I think we've -- Nathan touched on that just then. I think we do increase -- we do expect the rig count to increase through the first half, and then we'll reassess what we're seeing in the second half. We're never going to sit here and say it's going to go from this to that. And there's this many here and that many there because you're never going to be right and it's going to change. But certainly, I think, as Nathan said, with those companies that have raised the money, they've raised it already. They've gone through the approval processes. We're seeing tenders come out. We're seeing tenders get awarded, commitments are being made. Rig count will increase through the first half, and we're certainly very busy.

A question from Peter. Obviously well done on the great year. As you previously forecast, CapEx was a fair bit higher at second half versus first half, although similar year-on-year. Is that $21 million basically maintenance CapEx? Or does it include any growth CapEx? Do you expect that to be relatively consistent in future years?

Thanks, Allen. So the $21 million for the year obviously was very similar to last year and primarily maintenance CapEx. I think that the first half, second half split was really just a function of timing in terms of when that work needed to be done. That said, there was 1 new rig to service the new contract that's included in that number. So a very small element of that was growth in the form of that new rig. Probably a little bit difficult sitting here in July to be putting firm forecast on a CapEx number for this year. I think you broadly work on a similar number. There is obviously a very strong tender pipeline and subject to the success of that, we may need to sort of bring some of the maintenance CapEx forward a little bit, but probably too early to sort of give a firm number at this stage.

Thank you, Greg. Our next question is from Karim. There's a few parts here, gentlemen. Can you provide an update on Moranbah North and Grosvenor? His understanding is Moranbah North has been reopened with Mitchell's rigs working during Q4 '26. How of an impact could be the restart of the Moranbah North? Has the company any terms or rigs in earnings? First part.

Yes. So Anglo since they've had those challenges on those 2 respective sites have kept pretty close to their chest where things are at. I mean they really haven't released anything publicly that gives anyone any great guidance on what's happening. As Nathan said, there's a sale process that is being undertaken, obviously. What we can say is that the intentional of the new owners and Anglo was obviously to restart those mines and get going again. But at the moment, we've got 1 rig operating at Moranbah underground, and we've got no rigs operating at Grosvenor. So that's probably about as much as we can probably say, Nathan. But you go back in time, we had 3 rigs at Grosvenor. We have 4 rigs at Moranbah North. So it's 1 rig across the 2 sites instead of 7. Will it return to 7? We don't know. We have no idea.

Part 2. How many unused non-coal rigs do you guys have left? And what are the prospects to put these to work?

Look, we never sit here and talk about individual rig counts. If we sat here and said how many underground mineral rigs are here and how many service rigs are here and how many of this are there. You'd just sit here and picking it apart for hours on end. The best way to think of it is there's this many in the fleet, there's this many running at 30 June, count's going to increase. We're very open in the quarterly that average revenue per year per rig. You can make an assumption on operating rigs and times by the number. Obviously, you can do the math. We had 7 running across 2 sites. We're now down to 1. There's 6 rigs and 3 of them were damaged, obviously with the Grosvenor event. So there's some basic numbers there. But if opportunities come up, we'll be disciplined with the bidding and take advantage of them if they come up.

Can you also provide an update on what is viewed as an optimal balance sheet to be at year-end? The company had entered a net cash position. Does the company aim to be debt-free going forward?

I think the answer to this is very similar to the comments by the other gentlemen in terms of the overall capital management structure and strategy. Obviously, on a long-term basis, the business would look to keep it as low debt as possible, but it is going to depend on growth opportunities that may present themselves as well. And we've certainly done that in the past, leveraged up, not to -- leveraged it up to a fairly conservative level, but then demonstrated that we've got the ability to pay that down. So to the extent that those opportunities present themselves, we'd certainly look to use debt to fund them. Fair to say the company is probably in a bit of a harvest phase now, and we've seen that with the dividend at the half year and the likely dividend at the full year, and debt is going to remain low to 0 in the very short term. But again, that can obviously change based on growth opportunities that present themselves.

Thanks, Greg. I think we're talking about capacity, so I'll move on to the next one. And this also maybe add to the coal view, Andrew, guys. We said the revenue from some of the large coal clients a half with what they have been historically. Do you see getting back to those previous levels in FY '27? And maybe add to that, just your view on the coal sector, I guess, and how you're seeing it.

I don't think so. There's definitely transactions occurring, but that will take time to wash out through the industry. We have about a number of coal mines that have gone into receivership. That transaction is occurring, but that takes time to wind through. So there may be -- there's start-ups in 2027, but we are not budgeting for suddenly in rush of work in the coal sector in this year. It certainly could happen in 2028. But -- so a lot of them were going obviously, bad, gone bad, but now being picked up. So there will be additional work coming on at some point. But again, we're not budgeting that work.

No, I agree with Nathan, I think the best way to think of this, the miners that are out there are doing the bare minimum. There's nothing they're doing that they don't need to do. It was just a bare minimum. And -- do we see it bouncing back? As Nathan said, no, not this year. But when it does, it is an opportunity for us. If that bounces back and more rigs are operating in that sector, it's obviously an opportunity for us when it does bounce back. But I certainly think we got a very good year ahead of us with the business where it is at the moment.

If they're buying the mine, they're going to keep it going at some point. So -- and there's gas in those mines so they have to be drained. They have to be safe in order to continue to operate. So they will require ongoing drilling that they had. Greenfield, new exploration, I doubt very much, maybe 1 or 2 mines here and there. But as long as the coal royalties stay where they are, then I can't see new mines starting up any time soon. And so it will be more around the restart of existing mines and their ongoing production maintenance drilling, which will have to be done.

A question from [ Nisar ]. Are lower margins during the quarter due to mobilization and demobilization costs?