The lack of skills is both a driving factor and a major limitation for specialist drilling service provider Master Drilling, CEO Danie Pretorius said at the presentation of the company’s full year results on Monday.
Pretorius said although the group’s raise bore drilling technology offers a unique opportunity to the mining industry – as it uses less manpower than traditional shaft-sinking methods – the pool of people with the necessary skills to operate the machinery is extremely small. This limits the group’s growth strategy to be less aggressive.
“There aren’t many raise-boring companies in the world. There’s Murray & Roberts who has a division (that can do what we do), but otherwise it’s just a few junior companies….The mechanisation drive from the mining companies also puts us in a good position moving forward,” said Pretorius, adding that they are able to fast-track miners’ automation programmes.
Master Drilling also builds and maintains its own machinery, giving it a comparative advantage. Geographical, commodity and cross-sector diversification also remains an on-going strategy as it partly shields the group from the commodity cycle downturn.
This is why the company has been able to achieve headline earnings per share growth 32.4% to 131.5 cents, and a 24% year-on-year improvement in revenue to R1.431 billion for the year ended December 31 2014. Profit attributable to shareholders was up by 11.8% to R205 million and, although total cash flow fell by 32.5% to R151.4 million, cash generated from operating activities increased by 52.9% to R289.3 million.
Master Driling’s operating profit margin rose to 20.1% from 8.8% the previous year, while the profit-after-tax figure increased by 16.8% to R223.9 million.
Group CFO André van Deventer said the only major negative was currency volatility, without which would have seen group revenue at around R2.9 billion.
However, from a sustainability point of view Master Drilling is in cruise control, boasting an order book of approximately R2.6 billion. By year-end, the group actively operated 139 drilling rigs across Southern Africa, Latin America and West Africa.
Growth not a forgone conclusion
Cadiz Corporate Solutions mining specialist Peter Major, says Master Drilling is the future of the mining industry, and that it should be able to demand better margins from mining companies because its drilling methods are the safest and most efficient.
“They should be getting much better margins because these guys are very unique and they save mining companies a lot of money. They can drill shafts two-to-three times faster, and at a third of the cost. And this is with no fatalities, which is the best part. I really think they should be able to become a higher margin business than the average mining contractor going forward. And we have reason to believe there are more exciting things to come,” said Major.
Despite the fact that Master Drilling has very little competition and is in a strong competitive position, the group focuses on organic growth. Van Deventer said the specialised nature of its equipment meant growth-by-acquisition would not assist in maintaining the quality of its assets, while according to Pretorius, the primary problem is the shortage of skills.
“It’s not the machines. We can build the machines, but we need the people to operate them,” he said, adding that one of the most important aspects of the Master Drilling business model is having a utilisation rate of 75% of the raise-bore rigs, of which it now has 94.
“I don’t think the government is doing us any favours with the quality of matriculant that is leaving school…And the unions are also a great concern, especially now with these talks of a minimum wage. They need to understand that it is not wise to have all these rules attached to the process of hiring and firing in a country with 25% unemployment,” said Pretorius.
Master Drilling shares fell by 0.75% to close at R13.25 on Monday. This suggest a PE ratio of around 10 times.