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MASTER DRILLING GROUP LIMITED - Unaudited interim report for the six months ended 30 June 2019

Release Date: 10/09/2019 07:05
Code(s): MDI     PDF:  
Wrap Text
Unaudited interim report for the six months ended 30 June 2019

MASTER DRILLING GROUP LIMITED
Registration number: 2011/008265/06
Incorporated in the Republic of South Africa
JSE share code: MDI
ISIN: ZAE000171948


REGISTERED AND CORPORATE OFFICE
4 Bosman Street
PO Box 902
Fochville, 2515
South Africa

UNAUDITED INTERIM REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2019

SALIENT FEATURES FOR THE PERIOD

* USD Revenue was up 3.8%

* USD Earnings per share decreased 14.3% to 5.4 cents

* ZAR Earnings per share decreased 1,0% to 76,7 cents

* USD Headline earnings per share decreased 8.5% to 5.4 cents

* ZAR Headline earnings per share increased 5,6% to 76,7 cents

* Committed order book of USD198.6 million

* Pipeline of USD297.1 million

* Following dividend for 2018, dividend will be considered at year-end.

REGULATORY REQUIREMENTS

The contents of the short form announcement are the responsibility of the Board of directors
of Master Drilling. The information in the short-form announcement is a summary of the full
announcement available on Master Drilling's website. Master Drilling posts information that
is important to investors on the main page of its website at www.masterdrilling.com and
under the "investors" tab on the main page. The information is updated regularly and
investors should visit the website to obtain important information about Master Drilling. 
The full announcement can also be accessed online at
https://senspdf.jse.co.za/documents/2019/JSE/ISSE/MDI/HYResults.pdf 

The information in this announcement has been extracted from the condensed unaudited
consolidated interim financial statements that as prepared by the corporate reporting staff of
Master Drilling, headed by Willem Ligthelm CA(SA), the Group's financial manager. This
process was supervised by Andre Jean van Deventer CA(SA), the Group's chief financial officer.

COMMENTARY 
 
About Master Drilling  

Master Drilling was established in 1986 and listed on the Johannesburg Stock Exchange in 2012. The 
company delivers innovative drilling technologies and has built trusted partner relationships with 
blue-chip major and mid-tier companies in the mining, hydro-electric energy, civil engineering and 
construction sectors across various commodities worldwide for over 30 years. The Master Drilling 
business model of providing drilling solutions to clients through tailor-made designs coupled with a 
flexible support and logistics chain, makes it the preferred drilling partner throughout the 
lifecycle of projects from exploration to production and capital stages.

Commenting on the results for the six months to end June 2019, Danie Pretorius, CEO of Master
Drilling, said:

"In the face of continued uncertainty and volatility, which has inevitably impacted on business 
performance, I am pleased that we have been able to remain committed to our strategic journey 
of diversifying our presence across geographies, commodities and sectors. In this regard, we have 
worked hard to bed down our existing businesses across regions, while stabilising new operations 
and seeking to grow our presence in new territories, such as Russia and Australia, where we 
believe new opportunities will arise.

Global trade is in turmoil, impacting negatively on commodity markets and creating uncertainty 
around the future demand for and consumption of commodities. It is heartening that in this 
uncertain environment our pipeline of new business remains strong, as does interest in our 
innovative technology. This positions us well, both during these uncertain times and beyond when 
the inevitable upturn comes, to continue on our growth path through delivering desirable, efficient 
and safe drilling solutions. 

Master Drilling will also continue to focus our efforts on technology that enhances operations
and, above all, improves safety." 
 
Financial Overview 

Revenue increased 3.8% to USD70.0 million and operating profit decreased 8.3% to USD11.8 million.
The increase in revenue was due to the acquisition of the Atlantis Group, compared to the same
period last year.

The impact of foreign exchange movements on revenue was less than the impact thereof on cost,
resulting in overall stable profitability and profit after tax decreasing 14.7% to USD8.3 million.

USD earnings per share (EPS) decreased 14.3% to 5.4 cents, and ZAR EPS decreased 1,0% to 76,7 cents 
due to the stronger ZAR compared to the same period last year. USD headline earnings per
share (HEPS) decreased 8.5% to 5.4 cents, and ZAR HEPS increased 5,6% to 76,7 cents compared
to the same period last year.

Net cash generation decreased to USD9.3 million, following the investments in working capital to
cater for higher volumes of work coming on stream involving new projects across the Group. Debtor
days increased due to longer payment cycles as a result of weak economic conditions. Master Drilling
will continue to manage debtors actively to ensure good conversion to cash. Cash resources continue
to be managed stringently to cater for emerging opportunities that require specific design, planning
and investment.

During the reporting period, 81.4% of the Master Drilling capital spend was on capacity expansion
with the remaining 18.6% allocated towards maintenance capital.

Debt increased slightly from USD60.2 million to USD61.3 million while net of cash, the gearing ratio
changed from 10.9% to 18.9% compared to the same reporting period in the prior year.  

Operational Overview 

The domestic macroeconomic environment remained mixed in first half of 2019, with market 
players, businesses and investors holding back decisions ahead of the national elections in May. 
Although the elections yielded the anticipated result, the new dispensation's work to place the 
economy on the recovery track is extensive. As a result, business and consumer confidence remains 
constrained. Globally, uncertainty has also prevailed as trade wars have escalated, placing the global 
economic growth outlook at risk. In this environment, the demand for commodities could be compromised.

While these factors continue to shape our operating environment, Master Drilling has continued to 
forge ahead with its technological development, the stabilisation of its global footprint and the 
exploration of new business opportunities, which most recently has included Russia and Australia. As 
a result, the business remains stable and well positioned to benefit from an improvement in the 
global economic climate.
  
South America

Operations in Brazil continue to perform well and in a stable and satisfactory manner, following a 
restructuring of the business two years ago. The short- to medium-term outlook for our business in 
this country is positive, with a pleasing build-up in the order book.

In Chile we continue to experience growth in the order book and expect to be awarded a substantial 
amount of contract work for underground vertical shaft development. In addition, Master Drilling is 
in the process of tendering for the drilling of ventilation shafts which, if successful, will get underway 
in mid-2020. Notwithstanding the volatility and decline in the copper price, state-owned entity 
CODELCO remains committed to the expenditure it has pledged towards projects, which continues 
to bode well for our activities in Chile.

The Peruvian business is undergoing restructuring to ensure that it remains efficient and well 
positioned to contribute positively to the Group. The restructuring will lead to reduced fixed costs, 
resizing of the workforce and, in the short-term, lower turnover. Restructuring processes are difficult 
and costly to implement but we are certain that these measures will ultimately yield positive outcomes.

Enquiries continue to be received across South America, particularly in Colombia. In Ecuador, work 
on a project at a large underground mine commenced recently with the potential of additional work 
materialising in future.

Central and North America

The business in Mexico is stabilising after a challenging first half of the year, during which we 
experienced some operational issues. However, Master Drilling has been awarded new contracts 
which will lead to increased activity during the second half of the year. These contracts are in the 
silver and copper mine sectors.

We are encouraged by the amount of inquiries that we receive and the extent of the activity and 
opportunities that are available in North America, which support our strategic decision to venture 
into this region. Although it has taken some time to stabilise new clients and contracts, Master 
Drilling is likely to record improved activity in the second half of 2019, once the on-boarding process 
for certain large projects, has been completed. We are also making progress in overcoming delays on 
other projects, with our focus firmly on stabilising operations in this region for the remainder of the year.

Africa

Although Africa's significance in terms of revenue has been in decline in recent years, we continue to 
be active on the continent, maintaining presence in seven countries, including South Africa.

There are projects underway in Mali and Sierra Leone that are progressing satisfactorily; two 
machines have been deployed to the site in Sierra Leone. There are also a number of projects under 
way in the Democratic Republic of Congo, among which Kibali (gold) and Kamoa (copper), where we 
might need to deploy an additional machine.

In Ghana, following some geological issues on the initial project, we expect work to get underway 
over the next few months on additional projects. In addition, we have been awarded a new two-
phase contract that includes deploying a big machine to drill a vent shaft and, in the second phase, 
work underground. We expect this contract to yield more scope going forward.

Meanwhile, operations in Zambia have scaled down significantly. Work at the Lubambe copper mine 
continues and is nearing completion. 

In South Africa, activity in the mining sector remains constrained, amid the uncertain economic 
climate and recent industrial action in the sectors we operate within. However, Master Drilling was 
recently awarded a contract for a 1.4 kilometer hoisting shaft, which is the first of a number that 
could be drilled.   

In neighbouring Botswana, new opportunities have presented themselves in gas and exploration drilling.

Scandinavia

After getting off to a slow start, the Bergteamet business has recorded an improvement over the 
past quarter, with the order book filling up for the remainder of the current financial year and well 
into 2020. Projects have been added across a number of locations, including Spain, Turkey, Finland, 
Norway and Sweden, proving that Bergteamet Raiseboring has become our gateway into the region.

India

The project we undertook in India in support of Vedanta Limited, a London Stock Exchange listed,
globally diversified natural resources major with interests in Zinc, Lead, Silver, Copper, Iron Ore,
Aluminium, Power and Oil & Gas, got off to a very good start in 2019. The project is achieving high
levels of operational efficiencies and we expect the contract to achieve the targets as initially planned. 

Technology

While technological innovation and development is resource-intensive, it remains a key pillar of 
Master Drilling's focus and a significant business differentiator. This keeps driving global demand for 
Master Drilling's fleet of machines, which could result in an improved utilisation rate across the 
large, X large and XX large machines. In addition, having completed the testing of our remote drilling 
technology in South Africa, Master Drilling recently successfully rolled out this technology in Mexico 
and Peru.

Because of Master Drilling's steadfast focus on innovation, we continue to receive enquiries 
worldwide for our new machines and have already recorded significant interest in the horizontal 
mobile tunnel borer (MTB) and the blind shaft borer.

Master Drilling will continue to focus on progressing machine development and testing during the 
remainder of 2019. The commissioning of the MTB is already underway and drilling underground has 
commenced. The first phase of the shaft boring system is in the process of being commissioned. 

The first phase of the shaft boring system is in the process of commissioning and will form part of a 
new shaft sinking system with the capability to sink shafts in hard rock conditions up to 11.5 meter 
diameter and 2 kilometer in depth. During the first phase, the pilot shaft excavation section of the 
complete system will be tested and the detailed concept design of the complete system completed. 
The phased approach is a result of reducing conceptual risk in the system.    

Skills development

Attracting and retaining expertise and skills development are key priorities for Master Drilling. We are
investing in skills development based on a skills gap analysis previously conducted and constantly
monitored. This investment will extend our capacity to support our growth strategy. The rest of 2019
will focus on targeted technical training in general.

Outlook and prospects 

The business remained stable and made good progress over the latest reporting period,
notwithstanding a number of headwinds, including currency fluctuations and political developments.
Having continued to focus on expanding the pipeline and optimising operations geographically, as
some of these headwinds subside, we are cautiously optimistic that we will record some
improvements in operational and financial performance during the remainder of the financial year. In
particular, the positive developments filtering through from any improvement in the commodity cycle,
coupled with weaker emerging market currencies could prove supportive of firmer revenue and lower
costs.

Pipeline and committed orders 

As at 30 June 2019 our pipeline totalled USD297 075 486 (2018: USD358 192 132) while the committed order 
book totalled USD198 617 931 (2018: USD114 449 011) for the remainder of 2019 and beyond. 
 
Any investment decision by investors and/or shareholders should be based on consideration
of the full announcement as available on www.masterdrilling.com. The full announcement is
also available at the Company's registered office (for inspection, at no charge, during office
hours on any business day). 


For and on behalf of the Board

DC Pretorius                         AJ van Deventer
Chief Executive Officer              Chief Financial Officer


Sponsor
Investec Bank Limited

Sandton
10 September 2019
Date: 10/09/2019 07:05:00
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