Capital Drilling – this could really be a rigged market winner
Mark Twain was right!
He said “During the gold rush it is a good time to be in the pick and shovel business”.
That, as an investment strategy, has paid handsomely for many a successful investor – it is a way to invest in an industry without having to endure the risks of the market for the final product.
That is exactly why I like Capital Drilling (LON:CAPD) because it supplies special drilling services to mining companies and mineral explorers operating mainly in African countries.
It provides complete drilling solutions to its global clients, ranging from grade control, underground drilling, blast hole, exploration, delineation and directional – as well as such ancillary services as shot loading and firing, mineral analytic services, on-site safety monitoring systems, directional software and surveying and geophysical logging.
Importantly though, it owns and operates some 92 drilling rigs. Those rigs are amongst the newest in the whole global rig sector – taking in 41 diamond core rigs, 27 blast hole rigs, 13 reverse circulation/grade control rigs, 7 underground rigs and 4 air core rigs.
From its base in Mauritius, the Company, whose first rig was used in 2005 in Tanzania, has subsequently built up its experience base from operating in so many different environments, such as Eastern Europe, Latin America, Asia and Africa.
The geography of where its rigs are in use stretches across the globe from its Mauritius base to Armenia, Chile, Botswana, Zambia, Burkino Faso, Tanzania, Nigeria, Cote d’Ivoire, Mali, Mauritania, and Egypt.
Capital Drilling has developed long-term relationships with some of the world’s largest mining companies.
Its major clients include: Acacia, Algold Resources, Anglo Ashanti, Antofagasta Minerals, Ascom Precious Metals, Aton Resources, Barrick, BHP Billiton, Centamin, Dundee Precious Metals, First Quantum Minerals, Glencore, Golden Rim Resources, Hummingbird Resources, IMX Resources, Khoemacau Copper Mining, Kinross, Liontown, Magnis Resources, MMG, OreCorp, Resolute Mining, Rex, Rio Tinto, Sama Resources, Strandline Resources, Tanga Resources, and finally, Tiger Resources.
Now that is quite a list to admire – so perhaps Capital Drilling really is more about its overall services offer than just owning the ‘picks and shovels’.
With the price of gold now on the rise again, and with exploration activity picking up, the number of quality tenders that the Company has been offered to bid for has been on the increase. The Company has recently been awarded a new exploration contract in Burkino Faso.
Some 35% of its rigs are currently in West Africa, with more being planned to switch there in due course. It is that area that now accounts for 45% of all the African continent’s gold exploration expenditure.
There are 136.3m shares in issue, valuing the Company at £66m.
The largest holder is Jamie Boyton, the 46 year-old Executive Chairman, with 15.5% of the equity, whilst the Company’s Chief Operating Officer, David Payne, owns 2.35%.
Of the institutional holders Ruffer owns 7.30%, Sustainable Capital 5.63%, Aberforth Partners 5.57%, BlackRock Investment Management 4.51%, Allianz Global Investors 4.19%, FIL Investment Advisers 2.52%, River & Mercantile Asset Management 0.92% and Webb Capital Asset Management 0.09%.
For the year to end December 2018 the Company’s international revenue was $116m, from which it generated pre-tax profits of $12.6m, earnings of 6 cents and a dividend of 3 cents a share.
The current year could show sales much the same but with pre-tax profits improving to $15m and earnings lifting to 7 cents and a maintained dividend.
However, brokers are looking for revenue next year of $122m, with profits of $17.4m and 8 cents in earnings.
For the 2021 year some $128m is estimated, 9 cents of earnings and 4 cents of dividend per share.
The Group’s first half results are due to be announced on Thursday 22nd August. The Company’s shares, now at 48p, look to me as though they are heading higher during the rest of this year.
Brokers Peel Hunt rate the shares as a Buy with a Target Price of 76p – which certainly looks good enough for me.