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Audited annual report for the year ended 31 December 2019
MASTER DRILLING GROUP LIMITED
Incorporated in the Republic of South Africa
Registration number: 2011/008265/06
JSE share code: MDI
ISIN: ZAE000171948
AUDITED ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2019
SALIENT FEATURES FOR THE PERIOD
- USD Revenue increased by 6.9% to USD148.3 million
- USD Earnings per share decreased by 9.0% to 10.1 cents
- ZAR Earnings per share decreased by 0,8% to 145,9 cents
- USD Headline earnings per share decreased by 3.7% to 10.3 cents
- ZAR Headline earnings per share increased by 4,9% to 148,8 cents
- Stable order book of USD142.1 million
- Healthy pipeline of USD297.0 million
- Continued focus on working capital management
- Mobile Tunnel Borer pilot project initiated in South Africa
REGULATORY REQUIREMENTS
The contents of this short form announcement are the responsibility of the Board of directors
of Master Drilling Group Limited. 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/2020/JSE/ISSE/MDI/FYResults.pdf
The information in this announcement has been extracted from the audited
consolidated annual financial statements that are 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.
BDO South Africa Inc, the group's independent auditor, has audited the consolidated annual financial
statements of the group from which the abridged consolidated results contained in this report have been
derived, and has expressed an unmodified audit opinion on the consolidated annual financial statements.
The abridged consolidated financial results comprise the statements of financial position at 31 December 2019
and the statements of comprehensive income and cash flows for the year then ended. A copy of the auditor's
report is available for inspection at Master Drilling Group Limited's registered office and the Company’s website.
The auditor's report does not necessarily report on all of the information contained in the abridged consolidated annual results.
Shareholders are therefore advised to obtain a copy of the auditor's report and key audit matters together
with the accompanying financial information from Master Drilling Group Limited's registered office or the Company's website.
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.
CEO, Danie Pretorius provided an overview of the business for the past year, commenting as follows:
"I am pleased that Master Drilling was able to maintain stable performance in the face of increased
challenges in 2019. Looking back at the past year, good progress was made in delivering on the targets
that we set out to achieve, especially in advancing the testing and commissioning of new technology
and in deploying the largest machines in our fleet."
"We continued to explore opportunities for the expansion of our presence, services and exposure
through our foray into new markets and our search for business acquisitions that would integrate
well into our value chain and provide increased revenue and profits. As business
conditions become more difficult and exploration drilling budgets continue to dwindle, we believe it
is critical to not only manage existing operations optimally but also adapt to changing conditions and
plan for a different future. Master Drilling's future remains firmly driven by investments in
technology, people and processes that will generate consistent and long-term returns."
"In the short- to medium-term we have to continue to manage volatility and uncertainty as best we can,
the impact of which ultimately reflects on working capital, revenue and profit fluctuations. Some of
the factors that give rise to volatility and uncertainty are sudden changes in global trade, geopolitical
risk, exchange rate movements and unforeseen events such as weather disruptions and the outbreak of deadly
and infectious Corona Pandemic. The past financial year was unfortunately marked by some unforeseen events,
some of which have spilled over into 2020."
Financial Overview
Revenue increased 6.9% to USD148.3 million and operating profit decreased slightly to USD22.4 million.
This was a respectable result given the adverse global market conditions experienced. Costs increased
in line with the increase in revenue aligned with the new business operations.
Continuous investment in middle management human capital to support future growth and lower
utilisation rates due to adverse demand had a negative impact on the profit after tax. Profits In the
current year were negatively impacted by restructuring costs within business units within the Group.
USD earnings per share (EPS) decreased 9.0% to 10.1 cents, and ZAR EPS decreased 0,8% to 145,9
cents. USD headline earnings per share (HEPS) decreased 3.7% to 10.3 cents, and ZAR HEPS
increased 4,9% to 148,8 cents.
Net cash generation decreased to USD23.6 million. This is as a result of the worsening working
capital cycle which came on the back of slower payment from debtors due to challenging global
economic conditions. Cash resources continue to be managed stringently to cater for emerging
opportunities that require specific design, planning and investment.
Master Drilling's capital spend was 88.8% on expansion and 11.2% on sustaining the existing fleet.
Debt decreased from USD57.8 million to USD51.4 million and the gearing ratio, including cash,
changed from 16.2% to 22.5% in the 2019 financial year.
Operational Overview
The past year was characterised by volatility across markets, including equity, currency and
commodity markets. As a business that generates USD revenues off an emerging currency cost base,
we benefit from emerging currency weakness.
South America
Our South American operations, together with those in Africa, continue to generate the most significant
portion of our overall revenue. Operations in this region span across Chile, Peru, Ecuador and Brazil.
A number of challenges were encountered in this region in 2019, most notably in Peru and Chile.
Throughout the year, we continued with our review of the Peruvian business with a view to rightsizing
operations and increasing efficiency. As a result, and because of relatively stringent labour laws
governing retrenchments, higher than desired once-off costs were incurred. However, the business
had to be restructured to align with commercial activities in the country, which have declined in what
has become an aggressive pricing environment. However, we believe that in order to maintain
sustainable, long-term business activities, profit margins need to be adequate and that our compelling
offering will ultimately lead to renewed business opportunities in this market in future. In addition,
our Peruvian operations also continue to support activities in Columbia and Ecuador. In Columbia,
opportunities exist for copper and gold projects.
In Chile, where we have benefited from contracts with state-owned entity CODELCO in the copper
sector, although operations are stable and continue, for the first time in many years political
uncertainty and instability surfaced in 2019. A state of emergency was declared by Chile's president
when unrest erupted over an increase in subway fares. The level of inequality in Chile is very high and
might continue to pose social and political challenges. In addition, Chile's production of copper
declined in 2019 on the back of lower ore grades, strikes and weather-related disruptions. However,
Chile remains the top copper producer in the world and our revenue target for 2020 remains solid.
Finally, in Brazil, returns and performance remained on track and results were aligned to our expectations.
Central and North America
Our Mexican operations performed slightly under expectations in 2019 on the back of delays on
some contracts, which however gained momentum towards the end of the year. To supplement this
momentum, we are exploring additional diversification opportunities.
In Canada, where we recorded a significant number of enquiries in 2019, some of which successfully
converted into project work, the commencement of our activities was partly delayed by protracted
on-boarding processes. Although activity got underway during the second half of the year, and we
ultimately executed the projects and realised an increase in revenue, our performance was
disappointing and the margins we realised were sub-optimal.
The reverse circulation investment we undertook in the US a few years back has also not lived up to our
expectations but we firmly believe that it was strategically sound and that good opportunities will
materialise in future, especially on the back of the prevailing focus on increased mechanisation and
odernisation in the sector.
Africa
Although revenue from Africa has slowed as contracts in some countries, such as Zambia and Mali
have come to an end, performance was still pleasing in 2019, with the region accounting for 34% of
overall revenue. We continue to operate on the African continent in a number of countries such as
Sierra Leone and the DRC, with a total of 5 machines deployed across the projects underway.
Activity is further picking up, particularly in the western region, where Master Drilling has been
awarded a contract by AngloGold in Ghana; we are also involved in the Subika project in this
country. Elevated levels of global uncertainty spurred demand for gold as a safe-haven asset in 2019;
together with increased demand from central banks, the gold price moved higher. This might
continue to bode well for gold mines, at least in the short-term.
In South Africa, the unexpected termination of the Kolomela iron ore mine drilling contract,
notwithstanding our compliance with the requirements of the project, has impacted negatively on the
business. As a result, and with opportunities for new projects in South Africa remaining limited, we
have been exploring developments in neighbouring countries. Nonetheless, South Africa remains the
world's leading supplier of Platinum Group Metals (PGMs), catering for the significant demand for
these commodities from China. As such, our revenue exposure to platinum has increased significantly
over the past year, on the back of the work we are doing at Northam's Zondereinde mine, which
features a world-record deep shaft. In addition, we are accessing opportunities in Zimbabwe through
our work for Zimplats, located on the Hartley Geological complex that has 80% of the country's known
PGM resources.
While the domestic mining sector still provides isolated and marginal opportunities, in overall terms
it is shrinking, and new capital expenditure is not forthcoming. Increasingly, with cost pressures
rising, uncertainty persisting and labour policies remaining inflexible, an inevitable shift towards
increased mechanisation will occur over time and we will be well positioned to exploit resultant
opportunities.
Master Drilling will continue to support its loyal domestic clients although growth will likely remain subdued.
We remain committed to expansion into appropriate African countries.
Scandinavia
Our investment in Bergteamet, our gateway to Scandinavia and the rest of Europe is yielding the
expected returns. The order book looks promising with expansion into neighbouring European countries.
Our foray into this region continues. We are currently investigating opportunities to expand our
service offering both in Scandinavia and the rest of Europe.
India
In India, through the acquisition of the Atlantis Group operations in 2018, Master Drilling secured a
stable portfolio of contracts, which supplemented the work we separately secured from Vedanta
Limited, and which got underway in 2019. We are pleased with the performance of our operations in
this country, both in terms of efficiencies and revenues. The initial contract is coming to an end
towards the end of 2020 and negotiations are currently underway for additional work to be performed
under a new contract.
Other regions
Our drive to maintain geographical and commodity exposure diversification continued in 2019.
Master Drilling continues to explore opportunities in Russia and Australia, where there is a
significant amount of activity and appetite for modern and mechanised drilling solutions.
Technology
We believe technological innovation will continue to drive increased safety in the global mining
sector through the reduction of labour intensity, as well as result in overall efficiency and
performance gains, as is already evident. Master Drilling has always and continues to utilise
technological innovation to provide drilling solutions across a number of sectors, principally mining,
but also construction and civil works. We have committed significant investment towards this
technology drive over the years, ensuring a feasible capital mix relative to machine utilisation.
The focus on the development and testing of new machines continued in 2019; the commissioning
of the Mobile Tunnel Borer (MTB) got underway, as did the first phase of commissioning of the shaft
boring system. Master Drilling adopts a phased approach to the development of new technology in
order to mitigate conceptual risks. Inevitably, there is a lag between investment and the
flow-through to return on the capital employed which means that the benefit of developing these
innovative systems will only fully materialise in coming years.
Plant and equipment
The fleet consists of 149 raise bore and 30 slim drilling rigs. The total fleet's utilisation rate
was 64%.
The rate of new rigs coming on stream will settle with a focus on larger units, which typically
generate higher income. No new slim rigs are in the pipeline at this point.
Skills development
The delivery of innovative concepts and drilling solutions would not be possible without a highly
skilled and specialised team. We focus on the optimal use of all resources, including skills and
knowledge. Over the years, both through psychometric-based recruitment processes and the
acquisition of other established businesses that could be integrated into the vertical value chain of
our business, Master Drilling has ensured it has accessed highly skilled teams.
To ensure the continued development of skills, alongside the exponential development of technology,
Master Drilling has established a training centre which is a first of its kind in this specialised field.
SETA accreditation has already been obtained. Not only does this ensure that we continue to have the
necessary skills within our business, it also ensures that we contribute to skills development in
the country and meaningfully impact communities.
Dividend
In view of currently prevailing global volatility and uncertain economic conditions the Board deems it
advisable that cash resources should be protected, and thus resolved on 23 March 2020 not to declare a
dividend in respect of the 2019 financial year. The Board remains committed to consider the continuation
of the Company's dividend history in future financial periods, once circumstances permit.
Outlook and prospects
Diversification across regions, commodities, currencies and industries remains a key part of our
long-term strategy. We are experiencing good demand with increased enquiries across the various
regions and commodities and expect this to continue.
With volatility and uncertainty likely to prevail in global markets in the foreseeable future, we
remain cautiously optimistic that the resolution, or the minimisation of geopolitical factors as
well as a measured, rather than significant slowdown in the global economy will create a favourable
operating environment in time.
Various opportunities in first world countries such as Australia, Canada and USA are coming to
fruition and are expected to increase the Group's footprint across the world in the near future.
As outlined earlier, we believe that we have used the past year to solidify the foundations of our
business, which will not only help it withstand the anticipated environment but will also ensure that
Master Drilling remains at the helm of some of the rapid changes shaping our industry. We will
continue with our efforts to expand our footprint in countries where we do not yet have a presence
and to look for opportunities to expand our sector and service diversification. This, together with our
existing footprint, services and the depth of our engineering and innovation capabilities position us
well to remain a leader in the sector, bearing fruit for all our stakeholders.
Master Drilling's technology and experience put the company in a strong position to continue to
support its clients' drive to improve productivity and efficiencies whilst reducing operational risk.
Pipeline and committed orders
As at 31 December 2019 our pipeline totalled USD297 021 346 while the committed order book totalled
USD142 123 271 for 2020 and beyond.
ABRIDGED ANNUAL FINANCIAL RESULTS
Consolidated Statement of Financial Position
2019 2018 2017
USD USD USD
Audited Restated Restated
Assets
Non-current assets
Property, plant and equipment 158,014,917 145,044,336 119,075,667
Intangibles 3,487,216 4,346,359 3,083,427
Financial assets 5,320,645 4,345,662 4,709,897
Deferred tax asset 6,175,360 2,994,311 2,010,263
Investment in associate 3,710,575 2,605,117 6,022,115
176,708,713 159,335,785 134,901,369
Current assets
Inventories 27,855,901 25,787,869 23,894,609
Related-party loans 103,842 101,831 102,641
Trade and other receivables 50,734,496 48,179,847 38,191,737
Derivative financial instrument 296,323 53,958 -
Cash and cash equivalents 19,723,118 33,725,131 40,211,629
98,713,680 107,848,636 102,400,615
Non-current assets held for sale 808,928 808,928 1,255,128
99,522,608 108,657,564 103,655,744
Total assets 276,231,321 267,993,349 238,557,113
Equity and liabilities
Equity
Share capital 148,703,721 148,703,721 148,703,721
Reserves (97,974,826) (93,886,991) (82,244,142)
Retained income 114,437,446 101,837,302 88,221,320
165,166,341 156,654,032 154,680,899
Non-controlling interest 9,964,308 9,002,330 8,255,315
175,130,649 165,656,362 162,936,214
Liabilities
Non-current liabilities
Interest-bearing borrowings 39,113,277 50,458,654 36,263,625
Lease obligations 5,534,231 - -
Instalment lease obligation 618,716 1,203,072 1,682,765
Deferred tax liability 11,602,658 9,434,322 9,189,125
56,868,883 61,096,048 47,135,515
Current liabilities
Interest-bearing borrowings 12,334,035 7,306,843 4,659,387
Lease obligations 457,626 - -
Instalment lease obligations 898,059 1,273,282 1,444,820
Related party loans 481,067 174,720 195,483
Current tax payable 2,943,562 3,385,537 2,098,947
Trade and other payables 26,901,527 28,690,020 20,086,747
Cash and cash equivalents 215,913 410,537 -
44,231,789 41,240,939 28,485,384
Total liabilities 101,100,672 102,336,987 75,620,899
Total equity and liabilities 276,231,321 267,993,349 238,557,113
Consolidated Statement of Profit or loss and Other Comprehensive Income
2019 2018
USD USD
Revenue 148 327 852 138 721 765
Cost of sales (104 199 262) (95 155 229)
Gross profit 44 128 590 43 566 536
Other operating income 3 074 752 5 909 368
Other operating expenses (24 756 349) (25 827 367)
Operating profit 22 446 993 23 648 537
Investment revenue 1 139 831 736 169
Finance costs (4 601 505) (2 858 491)
Share of profit/(loss) from equity accounted investment 10 529 (26 948)
Profit before taxation 18 995 848 21 499 267
Taxation (3 614 278) (4 027 469)
Profit for the year 15 381 570 17 471 798
Other comprehensive income that will subsequently be
classified to profit and loss:
Exchange differences on translating foreign operations (3 947 546) (11 979 325)
Other comprehensive income for the year net of taxation (3 947 546) (11 979 325)
Total comprehensive income 11 434 023 5 492 473
Profit attributable to: 15 381 570 17 471 798
Owners of the parent 15 263 136 16 774 334
Non-controlling interest 118 434 697 464
Total comprehensive income attributable to: 11 434 024 5 492 473
Owners of the parent 11 315 590 4 795 009
Non-controlling interest 118 434 697 464
Earnings per share (USD)
Basic earnings per share (cents) 10.1 11.1
Diluted earnings per share (USD)
Diluted basic earnings per share (cents) 10.1 11.0
Earnings per share (ZAR)
Basic earnings per share (cents) 145,9 147,1
Diluted earnings per share (ZAR)
Diluted basic earnings per share (cents) 145,9 145,7
Consolidated Statement of Cash Flows
2019 2018
USD USD
Cash flows from operating activities
Cash generated from operations 23,607,299 25,801,932
Dividends received 947,439 444,540
Interest received 192,393 291,629
Finance costs (4,850,280) (2,858,491)
Tax paid (5,122,813) (4,854,787)
Net cash inflow from operating activities 14,774,038 18,824,823
Cash flows from investing activities
Purchase of property, plant and equipment (14,876,878) (16,920,012)
Sale of property, plant and equipment 948,278 1,595,764
Financial assets proceeds 631,553 362,937
Acquisition of associate (897,837) (2,605,117)
Additional investment in associate (3,048,673) -
Acquisition of subsidiaries - (14,689,135)
Net cash outflow from investing activities (17,243,557) (32,255,563)
Cash flows from financing activities
Advance from financial liabilities - 20,000,000
Repayment of financial liabilities (6,798,814) (6,604,694)
Advance from leases - 597,942
Repayment of leases (1,502,917) (1,249,171)
Related party loan advance/(repayment) 304,335 (19,953)
Dividends paid to shareholders (2,662,992) (3,078,131)
Dividends paid to BEE partners (525,953) (135,594)
Net cash inflow from financing activities (11,186,341) 9,510,399
Total cash outflow for the period (13,655,860) (3,920,341)
Cash at the beginning of the period 33,314,594 40,211,629
Effect of exchange rate movement on cash balances (151,529) (2,976,694)
Total cash at end of the period 19,507,205 33,314,594
Correction of prior year error
During 2019, the Group discovered that it erroneously omitted the reversal of an investment transaction in
financial assets since 2015. As a consequence, financial assets and reserves have been understated.
The errors have been corrected by restating each of the affected financial statement line items for prior periods.
Refer to the statement of changes in equity and note 5 to see the impact of the error.
2017 - as reported 2017 - restated Change
Financial assets 3,098,512 4,709,897 1,611,385
Reserves (83,855,527) (82,244,142) 1,611,385
2018 - as reported 2018 - restated Change
Financial assets 2,734,277 4,345,662 1,611,385
Reserves (95,498,376) (93,886,991) 1,611,385
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
Sandton
24 March 2020
Sponsor
Investec Bank Limited
REGISTERED AND CORPORATE OFFICE
4 Bosman Street
PO Box 902
Fochville, 2515
South Africa
Date: 24-03-2020 08:07:00
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