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Capital Drilling Ltd: THE INVESTMENT CASE

Capital Drilling caps a year of progress with a savvy investment

Revenues are up, as are underlying earnings, while the company is also splashing the cash
Capital Drilling caps a year of progress with a savvy investment
The company owns 94 rigs

Capital Drilling Limited (LON:CAPD) is making a phased strategic investment of up to US$3.8mln in a business that provides laboratory testing services to the mining and exploration industries.

It has advanced US$950,000 to private company A2 Global Ventures – the first of three tranches to be paid over the course of this year.

Trading as MS Analytical, A2 currently has around 50 blue-chip and mid-tier customers in more than 15 countries.

The investment by Capital Drilling will fund the business’ expansion plans, including the creation of new labs in AIM company’s core African market.

“Capital Drilling and A2 see significant opportunities to realise synergies and support customers through the cross selling of services and the sharing of infrastructure,” a statement from Capital said.

It added the investment was part its strategy to glean greater exposure to the “improving outlook for mineral exploration markets”.

Capital’s chairman Boyton and non-executive director, Brian Rudd, will join the board of A2.

Resutls in line

In a separate announcement, the company revealed its 2016 results.

Underlying earnings (EBITDA) rose to US$13.1mln from US$10.1mln on the back of an increase in revenue to US$93.3mln from US$78.7mln.

The average fleet size in 2016 fell to 94 drill rigs from 97 in 2015, but they were kept busier, with the fleet usage rate improving to 45% from 34%.

Bang on forecast

House broker finnCap said the results were in line with the recent trading update.

“Market conditions continue to improve, with a strong improvement in exploration activity,” the broker said, as it left its recently updated current year estimates unchanged.

Capital Drilling recapped a number of exploration contracts it had won during the year, the benefits of which are expected to feed through this year.

“After a strong run, the shares have recently seen some profit taking and now offer an excellent buying opportunity,” the broker said.

Up 88% in the last year, shares in Capital Drilling succumbed to mild profit-taking as the fell 5% to 50p after the results.

The company at a glance

The name gives it away a little: Capital Drilling is an expert in drilling, be that exploration drilling for minerals, grade control or for blast holes.

Its first drilling operation was 12 years ago in Tanzania and, in the same year, it worked on the expansion of the world-class Sukari Gold Mine in Egypt, owned by Centamin.

Today it boasts a fleet of 20 blast-hole rigs, 42 diamond rigs, 12 reverse circulation rigs, nine multi-purpose rigs, six deep-hole diamond rigs and nine underground rigs.

More than half its revenues come from mid-tier operators, although it does work with a significant number of majors too.

Its core areas are eastern and southern Africa, although Capital Drilling is currently working in Chile, Papua New Guinea, Armenia and Pakistan.

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