Wrap Text
Unaudited interim report for the six months ended 30 June 2020
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 2020
SALIENT FEATURES FOR THE PERIOD
- Revenue in USD down 17.9% from USD70.0 million to USD57.4 million
- Profit in USD decreased 45.9% from USD8.3 million to USD4.6 million
- Headline earnings per share in USD down 40.7% from USD5.4 cents to USD3.2 cents
- Headline earnings per share in ZAR down 30,5% from ZAR76,7 cents to ZAR53,3 cents
- Basic earnings per share in USD down 40.7% from USD5.4 cents to USD3.2 cents
- Basic earnings per share in ZAR down 30,5% from ZAR76,7 cents to ZAR53,3 cents
- Cash from operating activities increased 100% from USD5.5 million to USD11.1 million
- Revenue pipeline of USD281.4 million
- Committed order book of USD144.6 million
- No dividend for the current period
- Decisive and effective action taken in response to Covid-19 pandemic
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/2020/JSE/ISSE/MDI/HY2020.pdf
The information in this announcement has been extracted from the condensed unaudited
consolidated interim financial statements 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 2020, Danie Pretorius, CEO of
Master Drilling, said:
"The COVID-19 pandemic has had an unprecedented negative effect on our business
with government-imposed lockdowns impacting our customers' operations across
most of the 23 countries in which we operate. Decisive actions taken by us from the
outset of the crisis which focused on cash generation, capital management and the
safety of our people, secured our Group's financial stability.
We have managed to make progress in pursuing our strategy and secured new work
in West Africa, Australia, Russia, Europe and North America, whilst also
increasing our exposure to commodities experiencing significant upswings and
driving mining activity.
Technology remains a key differentiator for Master Drilling and we continue to
support our customers with solutions that address changing conditions and future
trends. However, our short-term capex plans have been paused to preserve cash until
more certainty returns in the environment.
Whilst the full impact of the pandemic across our value chain remains unclear, we
continue to drive diversification across regions, commodities, currencies and
industries with an eye on the long term without compromising the management
of short-term risks and headwinds associated with the pandemic over the remainder
of the year."
Financial Overview
Revenue decreased 17.9% to USD57.4 million with operating profit down 37.7% to
USD7.3 million. The decrease in revenue was mainly due to the impact of the COVID-19 pandemic
globally.
The impact of foreign exchange movements on revenue was less than on costs, resulting
in an overall decrease in profit after tax of 45.9% to USD4.6 million.
USD basic earnings per share (EPS) decreased 40.7% to 3.2 cents, and ZAR EPS by 30,5%
to 53,3 cents compared to the same period last year. USD headline earnings per share (HEPS)
decreased 40.7% to 3.2 cents, and ZAR HEPS by 30,5% to 53,3 cents compared to the same period
last year.
Net cash generated increased to USD11.1 million, while debtor days remained fairly constant amid
the weak economic conditions. Master Drilling will continue to manage debtors actively to
ensure robust conversion to cash. Cash resources continue to be managed prudently to cater for
emerging opportunities that require specific design, planning and investment.
During the reporting period, 86.1% of the Master Drilling capital spend was on capacity expansion
with the remaining 13.9% allocated towards maintenance capital.
Until 30 June 2020, Master Drilling received USD0.5 million from the Temporary Employer/Employee
Relief Scheme in South Africa, within the African segment of the Group. Master Drilling has paid
over to its employees all amounts so received.
Operational Overview
The Group entered the year facing a challenging operating environment and deteriorating
economic fundamentals across most of its operations. Global volatility across capital and
commodity markets further impacted overall mining activity and capex spend, with only a
limited number of new mining projects expected to be commissioned in the short to medium
term.
In addition, the global COVID-19 pandemic is having a profound effect on the world
economy and various lockdowns disrupted mining operations globally. Whilst the full impact
of the crisis across the Group's value chain remains unclear, all indicators are pointing to a
negative trend for the remainder of the year.
Global economic growth is not expected to correct in the short term, resulting in a direct
impact on mining demand although some commodities are showing positive trends. An
increase in mergers and acquisitions in the mining industry may improve prospects and, as
experienced during previous cycles, mining tends to pre-empt an uptick in economic
growth. Master Drilling should be in a position to see the early benefits of an upturn.
As a business that generates USD revenues off an emerging currency cost base, the Group
benefits from emerging currency weakness.
Safety and response to COVID-19
Ensuring the safety of all staff, their families and the communities in which we operate to the
greatest practical extent remains our top priority. Master Drilling is fully committed to playing
its part in limiting the spread of COVID-19 across the 23 countries in which it operates,
including those that are most severely impacted by the pandemic.
The Group continues to support and comply with all requirements set by governments and
customers to contain the pandemic and stringent workplace measures have been
implemented to ensure that the Group continues to deliver services in a responsible
manner.
In addition, Master Drilling is evaluating the risk posed by the pandemic through an active
crisis committee focused on maintaining the long-term sustainability of the business. Various
stress tests have been conducted and the Board is satisfied that the Group's financial
position remains adequate to service its obligations and remain a going concern for the
foreseeable future.
Whilst the Company has adequate headroom in terms of liquidity, stringent, proactive measures have
been implemented across the business to manage costs, and optimise working capital and capital
expenditure, with a stronger focus on cash flow generation during these uncertain times. As at the
date of signing these interim financial results the implementation of strict controls measures
limited the impact and the business is operating as close to normal as possible. Management
is confident that business is able to continue to operate successfully in the current environment.
South America
Operations in South America, which include Brazil, Chile, Ecuador and Peru, were severely
impacted by the COVID-19 pandemic, with these countries suffering some of the worst
infection rates globally.
Whilst we remain the dominant player in the South American market, revenues were
weighed down by a combination of currency impact, government-imposed lockdowns as
well as increased competitor activity and market pressures already apparent at the
beginning of the year.
Peru continued to present difficult conditions following the restructuring in 2019 that aligned
our operations to local commercial activities and the aggressive pricing environment. More
recently, mining companies have been forced to keep operations suspended and halt new
ones as coronavirus cases surged through the country. Whilst our Peruvian operations
continue to support our activities in Columbia and Ecuador, we are proceeding with our plan
to establish a Columbia office in 2020 to take advantage of opportunities across copper and
gold projects.
Chile, the world's largest copper producer, offers an attractive growth opportunity although
mining operations and production levels have been severely affected by ongoing
disruptions stemming from the pandemic situation.
In Brazil, where we have established our position as the top contractor, we are expecting
returns and performance to improve and continue to look for diversification opportunities,
including in the civil construction industry.
Our continuous drive to improve profit margins will support sustainable, long-term business
activities across the region and we believe that our compelling offering will ultimately lead to
renewed business opportunities post COVID-19. In the short term, given the current
pressures from the pandemic as well as political and social issues, the Group will focus on
cash generation, cash security and optimisation.
Central and North America
Our operations in North America have been bedded down and we continue to establish
Master Drilling as a differentiated competitor compared to other players.
Canada has the largest exploration budget in the world offering many opportunities for
growth. In the USA, we continue to work hard to secure contractor's licenses across each
state to drive the new business pipeline, with a focus primarily on mining-rich Nevada.
The Mexican operations had a challenging first half with the government declaring mining a
non-essential activity and enforcing a lockdown. Although mining output is showing signs of
recovery, the effects of the lockdown and currency fluctuation impacted our performance
negatively.
We see good opportunities driven by increased mechanisation and modernisation and
remain focused on automation and remote controlling with three automation rigs in Canada
representing 75% of the raise boring fleet there whilst Mexico's operational fleet is targeting
a 50% automation rate.
Africa
Africa is currently the largest contributor in terms of revenues and profits and the region
delivered a commendable performance during the period. We currently have 20 rigs deployed
across key projects. Projects across most parts of Africa have continued to operate,
despite the challenging operating environment and pandemic.
As indicated last year, we continue to pursue aggressive expansion into West Africa with a
specific focus on gold producers. The global uncertainty spurred demand for gold as a safe-
haven asset in 2019 and this trend accelerated in 2020 as the pandemic took hold with the
metal reaching new highs. This trend is positive for gold producers in the short term.
Botswana offered opportunities and a long-term contract on the Khoemacau Copper-Silver
Project has been secured.
South Africa remains the world's leading supplier of platinum group metals (PGMs), catering
for the significant Chinese demand. The surge in PGM prices is expected to balance the
significant production losses associated with the national lockdown and phased restart of
mining activities. Our exposure to PGMs has steadily increased as a result of the work at
Northam's Zondereinde mine. In addition, we are accessing opportunities in Zimbabwe.
While the South African mining sector still provides isolated opportunities, it is shrinking in
overall terms and new capital expenditure by this sector is not forthcoming. With cost
pressures rising and uncertainty and inflexible labour policies persisting, Master Drilling is
positioning itself to benefit from opportunities arising from the inevitable shift towards
increased mechanisation over time.
Scandinavia
In Scandinavia, Bergteamet continues to perform in line with expectations and to support our
geographical expansion across Europe. A civil engineering project for the French-Italian
project developer Tunnel Euralpin Lyon Turin (TELT) in France has been secured. The
contract is set to begin mid-2021 with two machines commissioned for 18 months.
India
Our operations in India are performing well in terms of efficiencies and revenues supported
by a stable contract. The Vedanta Limited contract is expected to complete this
year and negotiations are currently underway for additional work to be performed for this
customer under a new contract.
Other Regions
At year end, we highlighted our interest in growing our presence in Australia, Russia and
central Asia, with a focus on raise boring.
Our Russian business partner agreement is in place and a project has been secured with
equipment currently being mobilised. Opportunities in Kazakhstan and neighbouring states
are also being actively worked on.
Operations in Australia have started on a contract and we are actively building a pipeline of
new projects.
Technology
Technological innovation and development remain pillars for Master Drilling's long-term
success. Artificial intelligence and big data are driving changes around mining activities to
enable cost reductions and improve safety. To be sustainable, we need to position ourselves
as an innovation partner with our customers to equip them for a future world of work that will
encourage further developments in autonomous mining methods. Merger and
acquisitions opportunities focused on technology value add for the mining sector are
currently being assessed.
A clear example of Master Drilling's technological advantage during the period was the
setting of a world record by successfully drilling a 1 382 metre raise-bore pilot hole at
Northam's Zondereinde mine by using our own ground-breaking directional drilling
technology and machinery.
Our Mobile Tunnel Borer (MTB) continues to receive keen interest and we are actively
looking to deploy the machine on a new project after the phase 2 capital project at Eland
Platinum mine was cancelled due to capital cutbacks on the project as a result of COVID-19.
During the period, the decision was made to exit the TunnelPro joint venture due to a lack of
contract opportunities, cost management requirements and general economic conditions.
However, the skills and intellectual property transfer was completed successfully and the
strategy for our MTB technology remains sound.
We anticipate that our markets will be uncertain for the foreseeable future and whilst we
remain committed to developing and delivering solutions such as the Shaft Boring System
(SBS) to assist clients in meeting their efficiency targets and economic goals, the decision
was made to halt all non-essential capex for the time being to preserve cash.
Skills development
One of our major challenges in achieving targeted top line growth is having the right people.
Therefore, our focus has been on running projects that are fit for purpose, ensuring that the
right number of people with the appropriate skills are working on a project at any given time.
We have analysed the business with a five to 10 years horizon and have established a
formal two-to-five-year programme that kicked off in January 2020.
This programme is focused on manpower management and also involves training to ensure
resources stay aligned to business requirements. Our aim is to keep good engineering skills
in-house and use a geographically diverse footprint to move resources between regions as
required.
Ensuring that we have the right skills in place does not only mean internal training and
external resourcing but also actively creating the skills required. As such, we are giving our
support to the South African government YES programme.
Outlook and prospects
Our quick response to the COVID-19 pandemic has ensured that the Group remained
financially sound and profitable during these unprecedented times.
Whilst it is still too early to assess the full impact of the pandemic on our business, we
believe that our diversified profile, combined with a continued focus on cash and capital
management as well as safety, will see Master Drilling emerge from this cycle ready to take
advantage of opportunities.
In the short term, the improvement in commodity prices including gold, PGMs, iron ore,
copper and polymetals, together with the weaker emerging market currencies, should
counter some of the headwinds still facing the Group for the remainder of the year.
In the longer term, our strategy to diversify across regions, commodities, currencies and
industries will stand us in good stead.
NATURE OF BUSINESS
Master Drilling Group Limited is an investment holding company, whose subsidiary companies provide specialised
drilling services to blue-chip major and mid-tier companies in the mining, civil engineering, infrastructure
and hydro-electric energy sectors, across a number of commodities and geographies. Master Drilling is the global
leader in the raise bore drilling services industry.
Pipeline and committed orders
As at 30 June 2020 our sales pipeline totalled USD281 408 522 (2019: USD297 075 486) while the committed order
book totalled USD144 598 586 (2019: USD198 617 931) for the remainder of 2020 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
25 August 2020
Date: 25-08-2020 07:05:00
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