Master Drilling recaptures feel good factor but Pretorius remains cagey on prospects

BUSINESS continued to boom for Master Drilling in the six months to end-June with headline earnings up 55.5%, but CEO Danie Pretorius remains as cagey as ever over medium and long-term prospects.

Pretorius says he is hedging his bets through diversification and by focussing Master Drilling’s business on low-cost mining companies which should be able to cope if there is a  pull-back in commodity prices.

The latest example of diversification is the decision announced on August 29 to exercise the call option Master Drilling took in July last year to increase its stake in South African firm A&R from 25% to a controlling 51%.

A&R supplies management and safety systems for underground rail bound and trackless mining equipment. The digitalisation of this equipment has a range of spin-offs including productivity measurement and missing person location along with pedestrian and vehicle tracking.

Pretorius says A&R is a “capital-light” business with “minimal working capital requirements” needed to deploy projects and it is also meets Master Drilling’s aim of getting into business areas requiring technological innovation. He believes the use of A&R’s systems can be widely broadened into South America in particular.

He adds Master Drilling intends targeting the mining sector’s low cost operators for its business to ensure that Master Drilling allocates its own capital to companies that will be able to keep going under adverse conditions. He singled out Ivanhoe Mines’ Kamoa-Kakula  copper operation in the Democratic Republic of  Congo (DRC) as one example.

In March, when he reported on Master Drilling’s results for the year to end-December,  Pretorius held off on declaring the annual dividend citing the economic uncertainties around the war in Ukraine.

The company eventually paid a 32.5 South African cents a share dividend for financial 2021 in June by which time Pretorius must have had a good handle on the company’s first half performance.

This included a 34% increase in revenues to $96.5m (previous comparable period – $72m) along with a 19% rise in net cash from operating activities to $13.4m ($11.2m) and a 55.5% jump in headline earnings per share to R1.37 (87.2c).

Despite this Pretorius remains cautious admitting that, “I may be over-conservative but the only certainty we know is the uncertainty. Battery minerals are the talk of the town and I agree with that but you need to be very careful if you are going to build plant and add capital expenditure.”

Pretorius cited a number of headwinds mainly concerning China where growth in the Chinese economy had dropped from an annual rate of around 7% to around 2.5% which he felt had to impact on commodities “at some stage”.

In addition there was the on-going general conflict between China and the United States as well as the recent escalation of the China/Taiwan situation.

Said Pretorius: “I think capital allocation and gearing in our little business are going to be key going forward. There are too many moving parts to judge what commodities will be like in the next three to five years”.

That said, it seems investors like what they are seeing. The Master Drilling share price has recovered from around 515c in August 2020 to current levels around R14.25. The share sat as high as R18 in 2017.