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Master Drilling announces JV to unlock tunnelling projects

Joint venture to be mutually beneficial for both companies by opening access to new markets.

NOMPU SIZIBA: Master Drilling and Italian company Ghella have announced the creation of the TunnelPro joint venture. The two companies have joined forces to combine their expertise in unlocking key mining and civil tunnelling projects. The two have acquired a business called SELI Technologies and its trademarks. This business specialises in the design and manufacture of tunnel-boring machines.

To share his views with us on the tie-up, I’m joined on the line by Keith McLachlan, a small-cap analyst from AlphaWealth.

Keith, before we get into the joint venture, just outline the business of Master Drilling and Ghella as individual entities.

KEITH McLACHLAN: Ghella is an Italian construction company. I’m not overly familiar with them, so I’m not going to delve too deep into that. But best just to know that they are in construction. They’ve been in construction for a very, very long time and in fact have specialisation in terms of boring and tunnelling and the like.

Master Drilling was built out of Fochville in South Africa as a raise-bore drilling company. It has the biggest fleet of raise-bore drillers in the world, and this speaks all over the world. But it effectively specialises in raise-bore drilling, which goes into the production cycle in underground mining.

NOMPU SIZIBA: So they’ve joined forces and they’ve bought a company and its tunnel-boring technology. What opportunities would this open up for the two companies?

KEITH McLACHLAN: There is a natural drive to diversify from Master Drilling’s side – and, I can only assume, from Ghella’s side as well – and a need to diversify. They have not just obviously over the last couple of years done it geographically by moving their mobile drilling fleet all over the world into all sorts of countries, but also across commodities. This is the next step in the diversification drive. It’s to move into different industries.

Now there is an interesting thing where, although they are doing the raise-bore drilling within the mining industry, this is in fact a move into horizontal or near-horizontal drilling – effectively tunnel drilling. Now, about 80% of the drilling that happens or potentially could happen in an underground mine would in fact be horizontal. So this takes Master Drilling’s addressable market from 20% of the market up to 100%, boosting materially or diversifying the product offering.

And then what Ghella brings to the table is access to the construction industry, which diversifies it into … .

And now obviously Master Drilling will offer access to the mining companies in the resource sector, which Ghella is after, because this joint venture can effectively address both sides.

NOMPU SIZIBA: It sounds like this technology that they’ve bought from this company called SELI is quite incredible in terms of competition. Will they be leading in the industry, or will they have a lot of competition in this regard?

KEITH McLACHLAN: There is traditional competition already in the sense of, say, Murray & Roberts Cementation, where the tunnelling is done on a far more manual basis. This is my limited understanding of it, so a disclaimer right up front – if any of the listeners correct me, by all means do. But this is largely automated.

So yes, it is quite revolutionary in terms of what it potentially offers, and in terms of how it can operate. Understand, a key problem in an underground mine or in any underground construction, even in the construction industry, is if you start to involve blasting, it’s first of all very violent and very risky. And, particularly in an underground mine, you’d have to empty the entire mine to do blasting in any one section from a safety perspective, and that has a huge cost – not just from the capital cost of doing the blasting, but from the loss of production. The moment you shift to an automated drilling machine, that’s blast-free, explosive-free, much safer, [has] much lower cost in terms of all these measures. But it’s also much safer, which adds a lot to the appeal of the product.

So yes, in my limited understanding, I definitely view this as quite cutting edge, on the precipice of potentially fantastic uplift in terms of mining and construction automation.

NOMPU SIZIBA: Based on what you say, it means that the environment that they work in, the integrity of it, would be better maintained than the manual process that you are talking about, or the blasting process.

KEITH McLACHLAN: Absolutely. Don’t forget, these mobile tunnel-boring machines can potentially even be operated remotely, so you can operate in conditions that are too dangerous for people to go into.

There is a lot of optionality in the technology and the offering, and the effective different routes to market through the construction sector and through the mining sector.

NOMPU SIZIBA: Master Drilling is a JSE-listed company. What’s its market cap? And, based on today’s announcement, are you quite excited about their prospects to grow?

KEITH McLACHLAN: First a disclaimer, right up front in answering this question, is we hold it in the AlphaWealth Prime Small and Mid-Cap Fund. It’s one of our core investments. We think it’s a superb business that the market views as just another mining resource counter. We don’t think it’s that at all. We think it’s much closer to an industrial technology play, with optionality in this space, and this is a perfect example of that optionality. Its market cap is well over R1 billion. It’s unwinding and we think that at some point in the cycle, as all of this plays out, and as the tailwinds from increasingly deep mineral resources play in their favour as they increasingly automate their fleet, and as they drive this diversification shift into different commodities, different industries, unlocking these different technologies, you have the combination for what is potentially a multibagger in the making.

NOMPU SIZIBA: Let’s bring it to South Africa now. From what you have described, these guys have the potential to go completely global. But in the South African context–

KEITH McLACHLAN: They are completely global, just to jump in there. They currently earn close on three-quarters of their top line and bottom line from outside South Africa. So don’t view this as a South African company. This is very definitely a global company.

NOMPU SIZIBA:  Okay. So, in the South African context, we have low economic growth and there are a few initiatives at platy to try and invigorate the economy. We’ve got that R400 billion infrastructure fund that’s been launched by government. On top of that, some players in the mining industry have made significant announcements around investment in the short to medium term. Do you think there would be a role to play for TunnelPro, this umbrella company that covers both Ghella and Master drilling, in the future?

KEITH McLACHLAN: Definitely. Not just in South Africa – across the globe. But in the South African context it absolutely has a role to play in both, and this is the beauty of the optionality within this business, potentially in both the construction sector and in the mining [sector].

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