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Master Drilling sees interim earnings rise slightly

Company sees more activity from uptick in commodity prices.

WARREN THOMPSON: Master Drilling reported interim results for the six months ending June 30 2017 that saw revenue increase by 12.5% to US$60.5 million and operating profit decrease by 9.6% to US$12.1 million. US dollar earnings were also up 4.8% to 6.6¢ but because of the currency translation, rand earnings decreased by 10.7% to 87c. Joining me now on the line is the CEO of Master Drilling, Danie Pretorius. Good to have you with us, Danie.

DANIE PRETORIUS: Warren, thanks for the opportunity.

WARREN THOMPSON: So I guess one of the things with having a very global business like you do is that you constantly have to reconcile your earnings and your performance to the fluctuations of foreign currency.

DANIE PRETORIUS: Frankly, we didn’t expect the rand to go down below the 13 level. At the beginning of 2016 we were close to 15 but that being said, I think the game plan is still going to be the same. We would like to keep our costs as far as possible emerging currencies and income in hard currency. The problem is today with the business 40% of the total cost of the business is rand cost and only 20% of the total group revenue is in rand, so the mismatch certainly didn’t help.

WARREN THOMPSON: I think the question is, though, your business is aligned to the commodity market, it’s still fairly strongly correlated to the commodity markets but I know you’ve been developing your infrastructure and your capability, perhaps you can just take us through a jet-set tour of the globe and tell us how the businesses have been performing in each of the major geographies that you operate in.

DANIE PRETORIUS: I think if we can start off with the US, we are busy with a blind drilling project in the US, we are a bit behind, we face some serious ground condition problems but we’re progressing. It’s a four metre blind hole drilling through an aquifer and this typically is what one could probably use for Cape Town, so that I think is progressing but, again, we are behind. The Mexican business is going to be flat but I think the outlook for silver doesn’t look that bad, so I think we are quite happy with the Mexican exposure. Going south to Peru it’s one of the larger companies in the group, so I think Peru polymetallic seem to be okay, I think the zinc price in the last couple of months is just north of 3000 so that seems to be doing okay. Copper down in Chile seems to be okay, a major part of that business is exposed to Codelco, which is a major player in world copper production. So I think although that company is going to be down on last year it’s still a good business and the copper outlook is not bad. Brazil is the gold exposure in Latin America, the bulk of the work with Ashanti, we’ve just renewed another five-year contract with those guys, so they seem to be okay. Africa is what it is, we are pretty busy but the working hours, Zambia and South Africa are the only two countries where we work only a 20-day month, unlike the other countries. So in terms of the return on the investment in South Africa and Zambia it’s not as we would like it to be. More north the DRC is doing well, although the five-year contract with Kibali is partly coming to an end at the end of 2017, three machines will remain on site. North into Mali it’s progressing well. We’re established in Sierra Leone, it’s okay, it’s not too big. Then more north to Scandinavia we bought 40% of the Bergteamet business and probably by the end of the year we’ll pull the trigger for the remainder of the 60% stock in that business That company, by the way, this year was pretty flat but the outlook for next year for Scandinavia seems to be quite lucrative.

WARREN THOMPSON: Okay, great, I guess the contractual nature of the business means that there is a bit of visibility with respect to earnings, you noted in your results today that you have a pipeline of $226.1 million and a committed order book of $115.3 million. The committed order book, just define that for us, that’s stuff that’s been contractually agreed to, you are in contract with some of those and you will run off that $115.3 million over the course of the next year to two years, is that right?

DANIE PRETORIUS: Absolutely, that’s committed, sealed and signed, there’s no way back, no way out.

WARREN THOMPSON: So if we look back at the same time last year what was your pipeline because that’s really the number where we can see if there’s going to be any growth in earnings, how did that compare with this time last year?

DANIE PRETORIUS: We are down this year compared to the same period last year but remember, this was as of the end of June, I think with the uptick in commodity prices if you just take the last two months in terms of enquiries and tenders submitted we think today that come the next couple of months it should be very different.

WARREN THOMPSON: I noted that when we talked about that infrastructure you said that the hydroelectric energy project to the value of roughly $2 million was awarded in Colombia, expected to be completed towards the end of 2017. Is this the first step now in being able to monetise your skills in that particular field?

DANIE PRETORIUS: Last year we just completed $7 million hydro project in Colombia and this was the extension of a similar project and hydro scheme work was part of the business outside the mineral space. That being said, with the oil price down and the decline with hydro stations the plan was to diversify the business out of minerals in the order 30%, which I think is going to be very difficult in the next year or two. But we’re still committed to roll out the drilling technology to hydro projects and civil construction and, again, within the next couple of years to the extent of 30%, so that’s still part of the strategy of the business.

WARREN THOMPSON: What I think is really exciting about the business is the proprietary technology that you guys are developing. You note here that the concept phase of the mobile tunnel borer is expected to commence in September 2017. Tell us about what that actually does and then also I think you can tie into that the blind shaft boring system that you’ve developed is now getting funding from the IDC, so just give us a roundup in terms of what’s happening with the tech that you are continuing to develop.

DANIE PRETORIUS: One of the ideals of this company was to partake in the development of a totally mechanised mine, so maybe by the end of the next five or ten years, whereby we can construct a mine without drilling and blasting, having a continuous operation, which is totally mechanised and the business part thereof. So if we eventually could commission blind shaft drilling technology and tick that box that means a shaft in the ground, a hole in the ground without blasting. The horizontal part is probably as challenging and, remember, about 60% to 80%, depending on the mining method, is horizontal in nature and, hence, the reason why we are really pursuing and there’s a lot of emphasis on the horizontal miner and on this we are about to conclude on the design and will probably have the machine delivered in the second quarter before June next year, do the commissioning third quarter and probably then order additional machines to service the industry. So in short, we probably see this business in the next five years not to be a raise boring business but probably a company with a totally different nature.

WARREN THOMPSON: Just on that blind shaft boring system, the IDC is coming in here, they’ve confirmed partial funding for the first phase of that development and this particular one is going to allow cost effective access to ore bodies at great depths. Just put that into context for us, is this something that a platinum miner or a gold miner is going to use?

DANIE PRETORIUS: Absolutely, from the onset the idea is to deal with the so-called projects that are not feasible due to timing and the key word, buzz word was NPV and to develop a system whereby you have quicker access to the ore body and maybe drill three, four or five metres a day, as opposed to one or two metres that’s conventionally blasted. The slurry system we still hope to commission in early 2018 and then probably once successful with that pull the trigger for the remainder of the machine and probably have a system in the next 24 months, which is available for the market.

WARREN THOMPSON: Okay, great, Danie, we wish you all the best for the second half of the year, hopefully those commodity prices will continue to tick up and we can see some more handsome growth in earnings like you’ve delivered over the rest past.

DANIE PRETORIUS: Thank you.

WARREN THOMPSON: That was Danie Pretorius, the CEO of Master Drilling.

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What a great company this is operating in the tough mining sector!

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