Mitchell Services Ltd

ASX:MSV

Earnings Call Transcript

[Allen Chan]

Good morning, everybody, and thank you for joining us today. My name is Allen Chan from Bridge Street Capital. And today, we are hosting Mitchell Services for their quarterly update. We have Nate Mitchell, Executive Chair; Andrew Elf, CEO; and Greg Switala, CFO, joining us. We will have a Q&A at the end. So please feel free to put in your questions, and I'll address them after Andrew's presentation. Andrew, over to you. Thank you.

[Andrew Elf, executive]

Thanks very much, Allen. Good morning, everybody, and thanks for making the time to dial in. So look, I'll take the quarterly as being read, and I'll just make a few key points along the way. Greg will then do the same, and then we'll open up to some questions, and we'll go from there.

But look, first quarter of the year, and as we said through some of our full year investor roadshow year-end presentations, it is going to be a tougher year for us this year, and we make that point in this paper. That's also supported by the coverage that's out there for Mitchell Services by QValue and by Morgans. But that being said, it's still going to be a relatively good year for us. We've made some notes there in the quarterly as to why the rig count has been what it is. It's our view now that, that rig count or the operating rig count has bottomed out or have seen a trough. And certainly, with some of the contract wins that we talk about in this quarterly, that there's a positive way forward into the future.

We're certainly not going to sit here and give people numbers of rigs operating or any guidance or things like that. But certainly, we think that from here, things get a little bit better as we move forward. And it's going to take time and money to get those rigs up out and running, mobilization costs, but that is going well so far. And the contracts that we've won are good long-term contracts with global miners or very large miners.

So certainly, some great wins from the team. Some challenges in that first quarter with the weather and some other factors that are outside of our control. But all in all, safety was good. Clients are happy. The performance within the business is good. We've just got to get these recently won contracts up out running, and we'll be away.

Obviously, on the second page of the quarterly, a few of the key points there in regards to the business being in the best position it's ever been in. I strongly believe that. And I'm sure that when we get to questions and Nathan starts talking, he'll have his own thoughts to add as well.

But obviously, the net debt from 30 June, a tick up, obviously, based on the dividend payments and some of that investment into those new contracts as they ramp up and go out. But again, still in a very, very strong position. We've got a wonderful base to move forward from, and we'll certainly do that.

And then lastly, it's worth touching on Loop Decarbonisation Solutions, which has now got its first purchase order and is negotiating its first drilling contract, which will most likely start either late this calendar year or early next calendar year. So that's very positive as well. And certainly, we introduced that Loop business and concept in our full year investor presentation and certainly touched on a few key points. So if anyone's got any questions on that, we can certainly let them know a little bit more about it today.

So all in all, a busy first quarter, some challenges with weather and getting some rigs up and out and running with new contract wins, which have been good. And certainly, as I say, there's papers out there from QValue and Morgans. They've got some numbers in there for the year, and I'd point people to those and have a read of those questions. Greg, I might hand over to you to make a few other points.

[Gregory Switala, executive]

Yes. Thanks, Andrew, and good morning, everyone. I think from my perspective, really just touching on that strong balance sheet again, as Andrew mentioned earlier, the company now has a significantly strong balance sheet, has optionality, whether that's navigating these mobilizations in the short term or potentially taking advantage of opportunities such as the decarb, but it really has a strong balance sheet and has that optionality to do so.

That net debt figure of $4.8 million, obviously, a tick up versus the end of June of $1.9 million, with that difference primarily related to payments for shareholder returns of approximately $4.4 million in the form of dividends and buybacks. And maybe just then on the subject of shareholder returns, the Board has called out previously that the policy will be to pay shareholder returns of circa 75% of NPAT. I suppose, just given the fact, as everyone can see from these numbers, that the NPAT was essentially breakeven, coupled with the ongoing mobilizations, the Board's view and you would have seen it from the recent share buyback activity is just to temporarily pause the buyback, gauge the success of the mobilizations, get back to NPAT profitability, and then potentially keep going with that program. I just thought that's worth mentioning probably upfront. And that's probably the key thing for me, I suppose.

[Andrew Elf, executive]

So that's probably it from us, Allen, just touching on a few key points from the quarter. We're certainly happy to take any questions.

[Allen Chan]

Thank you, Andrew. Thank you, Greg. Yes, we'll start with questions. The first one there from Daniel. With gold prices continuing to rally now over AUD 4,000 an ounce in Aussie dollar terms, are there any signs of a step change in investment in drilling by key gold sector clients?

[Andrew Elf, executive]

It's a really interesting question and was certainly asked on the full year investor roadshow and quite a lot just in the ordinary course of business. But to be honest, no. I think if you look at our clients at the moment, some of those larger gold miners are making extraordinary returns based on what is costing them, but their budgets for drilling remain the same. They've got a corporate strategy or a corporate plan, and they're executing that.

There's certainly a strong demand for drilling from those clients that remains in place. But they haven't pinned their ears back and said, look, we need a whole lot more rigs because of where the gold price is at. And then similarly, we mentioned in the quarterly on that first page about the junior explorers still being tough. I think that's still the case. Nathan, you probably got some thoughts too in the market.

[Nathan Mitchell, executive]

Yes. It seems like the juniors are back to the old days of really not wanting to spend money at the moment on exploration, but it doesn't really affect us a lot in the market because we don't chase the juniors.

Certainly, I suppose, Deepcore in Victoria. There's a lot more juniors in Victoria. So there's probably some effect on Deepcore's rig count around there. But yes, there seems to be certainly a pullback over the last sort of 4 months on greenfield exploration. But -- so again, 90% of our work is essentially brownfield or production drilling.

But certainly, if you ask the question, is it affecting West Australia? Definitely. Is it affecting Queensland? Probably. So -- but having said that, just recently, we've seen a bit of a tick up in WA, and we've seen a little bit of a tick up here in Queensland. I'm talking only in the last couple of weeks, so it moves pretty quickly this sector. But again, ours are all long-term multiyear contracts, so it probably affects us less than others.

[Andrew Elf, executive]

No, that's right. And look, when does the switch flip? Don't know. But at these levels and maybe if it keeps going, who knows? You would think at some stage, activity would increase as it has in the past. Yes.

[Allen Chan]

Thank you, Andrew. And Nathan, just one of the things for you, Nathan, from Michael. So commentary 2 years back at the AGM in Brisbane, Mitchells is getting underground drilling work at the huge Fosterville mine. Question is, is Mitchell still at Fosterville? And are we getting other underground gold work in Victoria and elsewhere?

[Nathan Mitchell, executive]

Yes, we're still working for Fosterville, definitely. We certainly haven't got the same rig count, which is probably frustrating for us. Again, that comes back to we're not in control of their exploration budget. But I think when we first bought Deepcore, we had 14 rigs operating there. That's significantly come back, and that's Fosterville's decision.

I do think Victoria is a tougher place to work just with what's all -- what's happened over the last couple of years coming out of COVID, so they haven't helped themselves down there. But -- and that's probably somewhere where some of our rig count has gone, but we are still there. It's not like we've been -- we've lost that contract, though they've just pulled back on the number of rigs that they're doing, which doesn't really make a lot of sense to us on the basis that, as Andrew said before, the gold is at AUD 4,000 an ounce. But our understanding is they will start to ramp that back up again hopefully next year.

[Andrew Elf, executive]

Yes, that's right. And certainly, we've got a strong presence down there in Victoria. There's multiple other clients that we work for on the underground and in the surface in that region, that sort of Bendigo, Stawell, Ballarat Golden Triangle. The Deepcore head office is down that way. Their management team is down there, so we've got a significant presence in those Victorian gold fields.

But Nathan is spot on. When you look at the recent round of exploration, tenement decision-making down there in Victoria, Fosterville were awarded blocks in that round. I think it was nearly 3 years ago now. And they're probably some of the most prospective blocks in the country right next door to the mine they've got. And they'd love to be out there drilling, but it's -- they're not at a point yet where their program has been approved nearly 3 years later. So there are some of the things that make Victoria more difficult. But certainly, there's work to be done. As Nathan says, we hope to increase the rig count with that client again at a future point in time.

[Allen Chan]

Thank you. Another question from Daniel. With the first Loop rig potentially going into operation in the next 6 months, what is the strategic plan thereafter in buying and deploying additional rigs in decarb?

[Andrew Elf, executive]

Yes. I mean, really, it's obviously a start-up business in a new sector. And really, you're sort of trying to identify that total available market and target the key clients from a business development perspective. So certainly, from a BD perspective, the targets on a first-pass basis are your larger listed mining companies that have got more of an imperative to undertake that decarbonization work. And they're also the leaders in the market.

Other people will look at what they're doing. Other people will follow what they're doing. So certainly, we can sit here and talk about that in a lot more detail. But that's really the guts of what the focus is in the short term, get that first one away and then target the larger ones. And then obviously, we would go out and buy more to do that work. But Nathan, I don't know if you've got any other comments on that business and the strategy.

[Nathan Mitchell, executive]

I think so. I think the decarb business, as I said before, it's very similar to the old CSG game 20 years ago. I think people want to -- governments and companies know there's an issue. They need to resolve it. This should work. But I think at the moment, we've got to get it out there. We've got to prove to our customers and to the market and to the government that this technology does work, which we think it does.

But everyone is going to be wanting to see how it goes. So I think the first project is important for us. And then I think after that, we're hoping that it will start to accelerate fairly quickly after that. But it all depends on the impetus behind government and how much pressure they put on the customers and the coal mines.

[Allen Chan]

And just to add to that, Andrew and Nathan, in the event a second rig is needed, will that come from offshore? Or can you sort of rig up the closed one you have on site?

[Nathan Mitchell, executive]

It's to come from offshore, yes.

[Allen Chan]

Got it. Next question from anonymous. Could you please talk to the commodity split of your rigs? Is the mix changing with new wins?

[Andrew Elf, executive]

No, it's really quite similar, Greg, I think, to be honest. I mean, in the last probably couple of years, it's sort of been that 50% gold, 40% metallurgical coal, and 10% copper, lead, zinc, other. No lithium, no nickel. And I think given the swings and roundabouts and starting and finishings, it's going to be around about that similar percentages. So no material changes in that regard.

[Allen Chan]

Thank you, Andrew. Another question from Michael. Are we getting any work in New South Wales? The [ Fontana Resource ] is going great. [ Gun ] is exploring at [ Abbey ], which has tripled in price over the past 16 months.

[Andrew Elf, executive]

Yes, New South Wales is certainly a busy market for us. Obviously, we've got Mitchell Services based out of Brisbane and Deepcore based out of Bendigo, and both companies have got rigs in New South Wales. We've got a workshop in Newcastle as well that is a specialist in underground coal. We've got a little workshop out in Western New South Wales. And certainly, Aurelia would be our largest client in that region. We work across multiple sites, both surface and underground, as well as with Newmont, obviously, underground at Cadia. So certainly an important market for us in New South Wales. And I think, Greg, from memory, it's about 15% or thereabouts of our revenue that comes out of New South Wales.

[Allen Chan]

Right. Next question, anonymous. Can you talk about the level of new tender activities in the market, in general?

[Andrew Elf, executive]

Look, it's up and down, and it sort of varies over time. Different clients come out at different times and for different things. We've just had a bit of a spate of multi-rig, multiyear tenders come through. And obviously, we've won some of those, which is why we're putting rigs out, which has been positive.

There's still one multi-rig, multiyear tender in hand waiting a decision at the moment. That's quite a good one. We're seeing some good leads come through in the geotech space. Sort of -- we did some work on Snowy Hydro and Kidston and other things last year, and that represented about 6% of our revenue in FY '24. So a couple of tenders there, too.

But yes, certainly, I would say that the tender pipeline is good. I wouldn't say it's especially strong or on fire or anything like that. But it's good, it's there. There's still a strong demand from the larger producers, as I said. And as to Nathan's point, it's probably a little bit slower at the bottom end of the smaller clients.

[Allen Chan]

Thank you. A question from Tom. This one's for you, Greg. Can you provide some color on the dollar value size of the working cap build associated with the remobilization in new contracts?

[Gregory Switala, executive]

Thanks, Allen. I think the ultimate size is obviously going to depend on the success of those mobilizations, i.e., how quickly they can mobilize the site and sort of get up to full production. But I think the best way to answer that question, we've sort of -- companies called out that there's a pathway between the current utilization levels of low 60s back to the sort of mid 70s based on these contract wins.

So by definition, you can sort of -- that implies 12 rigs or there thereabouts. I'd probably work on $300,000 or there thereabouts per rig, which is somewhere in the order of $4 million working capital investment between now and the end of this calendar year is probably the best way to estimate it at this stage.

[Allen Chan]

Another question from Daniel. With greenfield exploration remaining weak, is this flowing through to good skilled labor availability at the moment? And should we expect skilled labor inflation to be pretty subdued for the time being?

[Andrew Elf, executive]

I think we can certainly say it's more subdued. It will be more subdued than it has been. But again, superannuation is going up another 0.5% from July next year. It depends what Fair Work do with their decision-making. Obviously, the people at the lower end of our business are closer to the award and are affected by any Fair Work decisions. But certainly, the higher-level, higher-skilled labor is more subdued than it has been. That's a fair point.

[Nathan Mitchell, executive]

It's definitely a big change as well. 3 or 4 years ago, it was the #1 topic at the Board table was skilled labor. Where are we going to get people from? How are we going to get people? How do we retain people? That's certainly not the #1 topic at the Board meetings anymore, so that certainly has changed. The pull from Western Australia, the COVID issues, they're well and truly behind.

[Allen Chan]

Thank you. Another question from Michael. Is Mitchell proactive in approaching junior explorers before they ask for tenders? We have a good team, and I'm wondering how well we market ourselves. Does the CEO in challengers visit small mine sites? A good example is the Mount Isa region.

[Andrew Elf, executive]

Yes. Look, I think we've got a saying here. BD never sleeps. And I think we're very, very good at BD. We're always actively marketing the company to all sorts of companies, big and small. So certainly, I think we're absolutely approaching people in advance of tenders coming out. We're meeting them. We're talking to them. We're letting them know who we are and what we stand for in advance of a tender coming out rather than just putting a submission in that basis.

And look, it's a -- I'd say it's a fairly small market. You really -- the tenders are sort of high value, low volume. And you really know who the major players are and you really get to know them. So I'd say, certainly, from Nathan and mine's perspective, any travel that we do to the field to see crew and clients is pretty strategic. It's generally going to be your larger clients, to be fair, or it may be a smaller client that's got a huge upside, but that's obviously a lot rarer.

The other way Nathan and I get in front of those sort of people is at conferences, where you've got a whole lot of people in one place, and we can meet them and see them and that sort of thing, too. But no, I think we're very active in that business development space. That's for sure.

[Allen Chan]

A question from Daniel. How is the JV with Talisman going so far? And I want to add to that, can you walk us through how it sort of plays out? Again, your BDs never sleep. Is there sort of low-hanging fruit with mines with the inbounds?

[Andrew Elf, executive]

Yes. I mean there's not too much to say on how is the JV going. It's a 50-50 JV with all the relevant documentation. Everything is in place. It's in a good rhythm now. It's got a plan. It's got a CEO. He's doing the right things. He's got that first purchase order. He's negotiating the first contract and chasing down leads after that.

And certainly, the team is doing a lot of work, both at Talisman and Mitchell, to get that first rig up and out. Bearing in mind, there's a huge amount of work that needs to be done in regards to the engineering, in regards to the workflow and everything else to be doing this work on a mine site. So how is it going? I think really well. I think if we're going to have a rig out there drilling late this year or early next year, I think that's amazing.

[Nathan Mitchell, executive]

Yes. No, I would agree with that. I think they're doing an excellent job. I think it's the CEO of that business who's pretty much got in front of everyone and everyone knows him. And I think everyone knows in that sector now who Loop is. So I think from a BD point of view, I think that's going really well.

[Allen Chan]

Thank you. A question from Joshua. With the reduction in operating cash flow for Q1, does the Board have a prediction for the full year free cash flow? As a shareholder, we have not been able to join in the rewards has led the company to current position, which is the strongest ever. Pausing buybacks does not help. Greg?

[Gregory Switala, executive]

Yes. So a couple of things there. I suppose on the free cash flow front, the free cash flow is very sensitive to 3 things: EBITDA, operating cash conversion ratio, and CapEx. The company is not going to give EBITDA guidance or formal CapEx guidance. However, the best -- I'd probably point shareholders to the papers from QValue and Morgans in terms of coverage. And obviously, those 3 metrics are key metrics in those papers as well.

In terms of not being able to join the rewards and the company's statement of being in the strongest position ever, I suppose we say we're in the strongest position ever not just with reference to recent shareholder returns, which have been circa $17.5 million in total, but also very importantly, in terms of its position to delever the balance sheet. And 2 years ago, our net debt was $40 million. And today, it's practically 0. So that's really where that statement comes from.

Apologies. I'm talking on behalf of Andrew there in the statement in the letter. But it's a combination of not just shareholder returns, but a significant deleveraging as well that has really been done over the past 2 years by an exceptional free cash flow performance over the last 2 years.

[Andrew Elf, executive]

And I think you just got to be mindful of where the business has come from 10 years ago to where it is today and the optionality that, that strong balance sheet does now give us. You can go and get 5, 10, 15 rigs for Loop and not raise equity and do it comfortably using the balance sheet and get that accretion straight to EPS.

So I certainly think from a personal perspective, I think it's really exciting from where we are right now. You can't judge this business on a quarter. You look at where we've come from, where we are now and where we can go. I think it's quite exciting, to be honest.

[Allen Chan]

Another question from Daniel. Can you remind us when you expect to start paying cash tax and, therefore, when dividends will begin to have attractive franking credits?

[Gregory Switala, executive]

Our position hasn't changed on that front, so it's sort of back end of FY '25, early '26 in terms of the cash tax payments. And then by definition then, dividends from FY '26 to begin to have attached franking credits.

[Allen Chan]

Thanks, Greg. Another question. Are there downstream opportunities with the decarb drilling?

[Nathan Mitchell, executive]

I think there's a lot of opportunities we're looking at decarb, and it shouldn't just be called decarb drilling. It's just decarbonization because essentially, from our point of view, that business can spread its wings a lot further than just drilling.

Decarbonization is a big word in our clients and in the mining sector, so we're looking at all different opportunities in that JV. So I think the first one, obviously, the easiest for us is the drilling part of it, and that's the low-hanging fruit for us. That's our technology. That's the smarts that we have. But obviously, it's a joint venture, so the Talisman guys and us bring a lot to the table, not just drilling.

[Allen Chan]

Thanks, Nathan. Another question from me. Just Andrew and the team, I guess, with the rare wins of the new contracts, can you elaborate where and maybe how many rigs outside of the new clients? Just a bit more color.

[Andrew Elf, executive]

Yes. Look, it's a tough one because some of them are still obviously in confidentiality and other things. But we've won our first contract where we're going to take a couple of rigs over to Papua New Guinea. Again, people don't need to freak out that we're going to be running overseas with 1 million rigs. It's with a large global miner. It's a good contract, paid in AUD, just less withholding tax. We've worked over there before. We've worked all over the world before.

So again, it's just following a really good client to a particular place to do a good job for them with some highly technical drilling. There's been another good multiyear, multi-win -- sorry, multi-rig, multiyear contract win underground with a larger client and then another multi-rig, multiyear win on the surface in the coal with another client. And those alone are sort of 10-odd rigs or thereabouts, so they're all in the process of going out. And the Australian opportunity is to be out up and running pre-Christmas and the one over there in PNG in sort of Q3, first 3 months of next year. But some good wins there.

[Allen Chan]

Thanks, Andrew. Got a question from anonymous also with regards to the buyback. I'll just read this one out, guys, for a second. Let's ramp the buyback a little. If I'm not mistaken, the enterprise value of the company is as low as it's been for 5 years, and the balance sheet is healthy. Great time to dilute stock while there is short-term weakness in trading. Maybe if you appreciate the financial side? Yes, your thoughts?

[Gregory Switala, executive]

What mine did you say? Sorry, Allen.

[Allen Chan]

No, I read one for you, Greg. I think you've got the 3 pillars that judge that.

[Gregory Switala, executive]

I can only answer that by reiterating what we sort of said in upfront. It's -- shareholder returns is designed to be a function of profitability. Right now, given this first quarter, there wasn't any. And just from a conservatism perspective with these opportunities that lie ahead, the mobilizations that lie ahead, the Board's view is just to pause it in the short term, acknowledging the comments from that particular shareholder around, yes, EVs and 5-year lows, et cetera. So...

[Andrew Elf, executive]

Yes. We can't disagree with that.

[Nathan Mitchell, executive]

It makes sense, what you're saying there. It does make sense. Unfortunately, I think Greg is right. Whilst we've always said about the 4 different pillars of shareholder returns and debt reduction buybacks, I do agree, it is the lowest, and it's frustratingly so that it is the lowest. But I think we've got a plan going forward with the decarbonization, the new mobilizations to potentially our first operation overseas internationally, which is multi-rig, multiyear contract.

I think we've got a lot on our plate that we can see over the horizon, so we just got to be aware. And I think we also made commitments to shareholders that we'd do 75%. So of course, we could always break that and say, well, at the moment, buyback is a better option than a dividend. And again, that'll -- we've got a long way to go between now and the end of the financial year, so all the things are on the table, so certainly.

[Allen Chan]

Thank you, Greg. Thank you, Nathan. So we have no more questions. Andrew or Nathan, just final remarks for investors before we close.

[Andrew Elf, executive]

And just for Michael there, I think just if he can send either Greg or myself an e-mail, we can send him the analysis from either QValue or Morgans if he just wants to reach out directly.

But no, look, thanks very much for everyone's time and interest. Appreciate the questions. Good questions. We hope these are informative for everybody. And again, if there's any further questions, reach out to Greg or myself. We appreciate the ongoing support and look forward to talking again once we get a few more of these rigs out and hopefully get more progress on the decarbonization business as well.

[Allen Chan]

Perfect. Thank you. Everyone on the call, I will also reach out to you guys personally and talk through any questions with you guys may have with the team as well. Again, Andrew, Nathan, Greg, thank you. This is recorded. So again, yes, I'll reach out again, this recording. Thanks, guys.

[Nathan Mitchell, executive]

Thank you, Allen. Thanks, everyone.

[Andrew Elf, executive]

Thanks, everyone.