MASTER Drilling is a tidy little business. Since listing in Johannesburg in 2013, the company has lifted dollar-denominated pre-tax earnings from its debut $35m (R496m) to in excess of $40m (R567m) last year whilst it is on course for a similar, if not better, performance in the current year.
It’s worth remembering that Master Drilling went public just as the world’s mining sector went into a two-year tailspin. This was a period of drastic restructuring as nearly every major mining company sought to rid itself of over-indebtedness – itself a function of the spending splurge as producers clamoured to supply China’s double-digit growth rates.
The firm’s business is essentially drilling services with a specialisation on raise bore drilling. Raise boring is efficient, removes the need for underground blasting, and was developed uniquely from the firm’s Fochville headquarters, west of Johannesburg.
Since its technology is largely bespoke, the company believes it can offer mining companies individual solutions; after all, no single orebody or mine is exactly alike.
In essence, the business approach is to provide a client relationship rather than just a service which is why the company likes to stick with low-cost, high quality customers such as Randgold Resources, AngloGold Ashanti and Sibanye Gold. (In fact, between 30% to 35% of its business is in gold mining).
One doesn’t want to speak too soon, but it looks like the metals and minerals market is starting to recover. Set against that background, and with geographic diversification heavy on the minds of Master Drilling’s executives, the short-term outlook is looking pretty good for the firm.
Danie Pretorius, CEO of Master Drilling, thinks that in the medium-term – by around 2018/19 – the company could be capitalised somewhere around R4.5bn, trading at price: earnings ratio of 8 or 10. It is currently capitalised on the JSE at about R2bn.
What’s needed is for Pretorius’ expansion plans into the US, Canada and even China to succeed. The push into North America is being done from a manufacturing base in Mexico which mirrors the relationship South Africa has to Africa: a weak currency, low cost base from which to expand into a much larger continent.
In addition to the US, Master Drilling has recently turned up new contracts in Tanzania and Sierra Leone – an area where it wants to establish a regional footprint.
Master Drilling has also been on the acquisition trail. It has a 40% stake in Bergteamet Raise Boring Europe, a Swedish company that will allow it access into the European market. It has also bought the assets and team at Bergteamet’s Latin American business where it derives about 59% of its revenue. Some 21% of revenue is from South Africa with 20% from Africa.
“We will not do acquisition for sake of pleasing a potential investor or the market,” said Pretorius at the firm’s interim results announcement in which rand-denomianted earnings increased 30% year-on-year. “We prefer the organic story,” he said.
“But if we bump into company like Bergteamet and it is competing in territories where we have established business, we will consider it. If can’t get into an area such as Canada or the China market we will do a small- or medium-sized acquisition provided if ticks the boxes. It means we would buy market share,” he said.
Perhaps the only problem for investors is that it’s hard to invest directly in Master Drilling.
Pretorius describes himself as “the main culprit” in this regard as he owns 53% of the company and doesn’t want to release shares. Including other management and institutional shareholders such as Coronation Fund Management, Kagiso Asset Management and Investec Asset Management, there’s only 12.5% in the free-float.
