Traditionally a sector bonded to the mining cycle’s peaks and troughs, mining services firms have begun to emerge in stronger shape than ever before.

No clearer is this phenomenon on show than in the recent quarterly results of Mitchell Services (ASX:MSV).

The Brisbane-based driller now boasts 100 drill rigs with a near 50-50 split of underground and surface capacity, turning over more than $200 million in FY22.

Its October 20 quarterly update shows just how healthy the company, and the broader drilling sector, is now – even in the face of supply chain, labour and inflationary pressures affecting the entire Australian mining sector.

Mitchell Services generated record quarterly revenue of $61.1 million in the first quarter of FY23, up 16% on the same period in FY22.

EBITDA rose 24% year on year to $10.1m, while net debt fell 10.6% to $38.8m after peaking at $42.9m on June 30, opening the door to a new dividend policy which will see 75% of post-tax profits paid out to shareholders at the company’s half and full year results in February and August.

Chief executive Andrew Elf told Stockhead, both market forces and Mitchell Services’ own successes had placed the Nathan Mitchell-chaired driller in a position of strength.

“I think it’s obviously the strong demand for drilling services, no doubt about it, and that’s driven by strong commodity prices,” he said.

“I think there’s been a lot of change since the last downturn, there has been a lot of consolidation in the sector.

“People are very mindful of the past and when I say that, I mean, people that have just taken on too much debt and other things and come unstuck.

“If you have a look at the sector as a whole, and I’m not just talking about Mitchell Services, more broadly balance sheets are in better shape, I think people have been a bit more conservative recently.”

Rigs in the field

Photo Supplied: Mitchell Services drill rig onsite in Cannington

 The quarterly improvement came after Mitchell Services already engineered a big turnaround in FY22, increasing revenue 11% to $213.37m, EBITDA by 24% to $32.15m and swinging from a loss to a small after-tax profit.

A large part of Mitchell Service’s recent success has been its ability to increase utilisation rates.

On average 81 rigs were operational at any one time in the September quarter, up from 69.3 in the same period a year earlier, a reflection of new and expanding contracts.

The vast bulk of these are with Tier-1 global miners, with Mitchell Services counting some of the behemoths of the industry among its clientele, including Glencore, Anglo American, South32, Newmont, Newcrest Mining and Agnico Eagle.

This means the lion’s share of its business is conducted not at greenfields operations with juniors most vulnerable to mining’s boom and bust nature, but for global heavyweights with mines on the bottom end of the cost curve and decades of operating life.

“We’re one of the larger drillers in the country, certainly in the top ten in the world,” Mr Elf said.

“Our fleet is absolutely world class; we’ve got 90% of our revenue from a strong client base of global miners.

“Using what we’ve got, generating a return and getting prices up as we move forward, and resetting legacy contracts, will certainly enable us to grow revenue and earnings materially heading into this year and then obviously future years.

“A majority of that revenue, circa 80% plus is from mine sites.

“We do greenfield exploration drilling and service that market. But it’s not the majority of our business.

“To us it’s a very good sustainable business through the cycle, with major clients that have mining operations that are low on the cost curve and need drilling through the cycle regardless of the commodity prices.”

Major reinvestment

One of the reasons Mitchell Services is prospering now is its decision to reinvest in the business in the aftermath of the COVID pandemic – at a time when it could have tightened its belt.

Mitchell Services recently took delivery of 12 state of the art LF-160 drill rigs, both modernising and boosting the scale of its fleet.

Photo Supplied: Mitchell Services drill operator using hands-free technology.

“The timing of that investment was particularly important for a number of reasons and we managed to place the order just in advance of the current supply constraints” CFO Greg Switala said.

“From an interest rate perspective, we funded all 12 rigs with NAB for fixed interest at a rate of about 4% which is outstanding value versus what you’d be paying today.

“And then also from a tax perspective, we were able to benefit from the ATO’s instant asset write off program that it had in place (as a post-COVID stimulus).

“There’s good technology benefits on those rigs as well. You’re able to reduce the number of people operating the rigs because of some of the automatic handling and other advancements.

“We are beginning to see the benefits and they will certainly continue for the next few financial years.”

Dividends back on the agenda

After a couple of years of consolidation, returns to shareholders are back on the agenda.

That will come both in the form of the previously mentioned capital management policy, and an ongoing share buyback, which has already seen Mitchell Services return approximately $1.2 million to loyal shareholders.

“I think when the buyback initiated, the share price was a tick under 30 cents. If we look today, we just hit 40 cents,” Mr Switala said.

“In other words, it’s a material increase in a very short space of time off the back of a buyback.

“The Board has also put in place a formal dividend policy whereby 75% of reported post-tax profits will be paid via dividend.

“It’s a clear commitment from the company to start returning some of those free cash flows to our shareholders into the foreseeable future.”

Mitchell Services is targeting a net debt level of $15m by the end of FY24 even as it increases returns.

The company last paid dividends in FY18 and FY19, “those were both declared as special dividends given the strong returns in those particular years, despite the growth,” Mr Switala noted.

“The difference now is there’s a more targeted formal policy in place, whereby they won’t be special dividends.

“It’s worth noting that they were paid once a year previously, this is intended to be a more targeted, formal dividend policy of twice a year. One after interim results, and then after final results.

Very busy times indeed

Photo Supplied: Mitchell Services underground operations.

At a market cap of around $90m, Mitchell Services potentially offers an attractive entry point into both the mining services thematic and the ongoing strength of the resources sector as a whole.

For Andrew Elf, the outlook for mining and commodities is positive, especially among the Tier-1 clients Mitchell Services generates the bulk of its business for.

“For us 90% of our revenue comes from global mining majors and those clients are certainly spending a lot of money on their existing mines, they’ve got to try and expand the resource to extend the life of their operations here in Australia,” he said.

“Obviously greenfield exploration has been busy and is still busy, but as people know, it takes time and money to get a mine going, red tape, green tape, etc.

“The best place for people to add value very quickly and take advantage of existing infrastructure is on existing mine sites.

“So certainly, those global majors are very, very active on their existing mine sites, budgets are increasing, demand is increasing, and then more broadly across the whole sector, there are strong commodity prices and activity levels.

“Everyone’s pretty busy and the future looks bright.”

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.