Mitchell announces share buy-back and dividends as demand for drilling services boom
Mining
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Trade figures released recently showed that Australia’s resource exports topped $400 billion in 2021, the first time it’s reached that mark.
Earnings from coal and natgas – the nation’s second and third-largest exports behind iron ore – have both more than doubled in the past 12 months.
The boom has been underpinned by rising commodity prices, which is caused, at least in the short term, by turbulence in the Ukraine-Russia conflict.
As a result, Tier-1 miners and junior explorers alike are now exerting all efforts on near-mine extensions and new mineral developments at a pace not seen since the crisis of 2008.
These activities are in turn driving huge demand for drilling services, benefiting companies like Mitchell Services (ASX:MSV)
Mitchell is now in a position to focus on shareholder returns, launching a share buy-back program and a new dividend policy that will commence this financial year.
Although rising commodity prices has a lot to do with the company’s recent success, the trajectory had already been put in motion through its timely investment in new drill rigs, well before the conflict in Ukraine.
As part of its organic growth strategy announced in August 2021, Mitchell has taken delivery of 12 new, state of the art LF160 drill rigs with all of these rigs now contracted to long term contracts with Tier-1, major miners.
“We foresaw the current resources upcycle and invested to expand our rig fleet before it impacted supply costs and lead times,” Andrew Elf, CEO of Mitchell Services told Stockhead.
“Commodity prices are high and demand for drilling services is strong. We are certainly seeing budgets increase across the board for many of our major clients.”
Mitchell Services has a world class fleet of circa 100 drill rigs and services miners and explorers in QLD, NSW, VIC, SA and WA – making it one of the leading contractors in Australia.
Around 90% of its revenue comes from global Tier-1 companies that include names like Newcrest, Newmont, Anglo American and South32.
Revenue is a 50/50 split between surface and underground drilling operations with a focus on brownfields or operating mine sites. Gold mining makes up around 60% revenue, 30% is from metallurgical coal, and the balance is from various other commodities demonstrating the diversity and quality of Mitchell Services revenue.
Strong Outlook
The company’s confidence in returning cash to shareholders is built on its positive outlook for the industry, particularly the demand for drilling services across a range of commodities.
“The Tier-1 miners we work for have got world class assets and high-quality sites, and they’re also performing well financially which is seeing their drilling budgets increasing” said Mr Elf.
“If you look through the cycle, we’re operating on some excellent sites that are low on the cost curve and regardless of commodity prices, there’s always going to be a solid level of activity across a lot of those sites,” Mr Elf added.
For the mid-tier miners and the junior sector, the demand is equally strong and the outlook also looks positive.
“There have been strong capital raisings and some good drilling results that have been recognised,” Mr Elf said.
Capital Management Policy
The share buyback and dividend the company just announced are part of the Capital Management Policy that is following on from its successful organic growth strategy.
“This disciplined approach to Capital Management will see us significantly reduce the company’s debt profile over the next two years, whilst paying strong dividends and buying back shares.” Mr Elf said.
Mitchell says it will pay up to 75% of its reported post tax profits to shareholders in dividends.
Under the new dividend policy, an interim dividend will be declared with the company’s half year results (expected February 2023), with a final dividend to be declared at the company’s full year results (expected August 2023).
Meanwhile, the share buy-back program commenced on 15 July, where the company will purchase not more than 10% of its fully paid ordinary shares (approximately 22.5 million shares) as stated under existing ASX rules.
The price of the buyback will be no more than 5% above the volume weighted average price of its shares over the five days of trading prior to the purchase.
Competitive Market Profile
The competitive profile of the drilling services sector has improved, and the company is in a very strong position to generate material returns for shareholders.
Mr Elf says the company is in the best position its ever been in and the high barriers of entry for competitors planning on entering the industry bodes well for existing drilling services companies.
“There are lots of barriers like requirements to comply with the labour laws, cost of capital in buying rigs, access to capital to buy rigs and most importantly accessing the skills and knowledge of the right people to start this business,” Mr Elf said.
He’s also very positive about what investors should expect from Mitchell looking forward.
“We’ve invested heavily in our fleet over the last couple of years, and the fleet is world class. It’s now time to use that fleet and generate a material increase in revenue and earnings.
“The heavy lifting is done, and we will reduce capex where it makes sense to do. It’s now time to reward our shareholders who have been very supportive.” Mr Elf added.
This article was developed in collaboration with Mitchell Services, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.
