With a market cap of R1.9bn, Master Drilling Group flies below the radar of most investors. That’s a pity. It’s a quality operation that Anglo American pulled into South America with an outsourcing contract that provided a base from which half the company’s revenue is now generated. As you’ll hear from this interview with CEO Danie Pretorius, Master Drilling has the security of some long-term contracts and the flexibility to move into promising new areas like Africa’s natural gas boom. The shares are not expensive. Especially after the company today reported 29% growth in HEPS. The stock offers an interesting, relatively low risk option into the energy sector’s next big thing. – AH
ALEC HOGG: Welcome back to Power Lunch. Well, we’ve had an upgrade. Master Drilling has sent us their Chief Executive, Danie Pretorius instead of Andre van Deventer. My apologies, we have the CEO of the company. It’s R1.9bn company, financial results just out and that’s for the first half of the financial year. What I was very interested in (in your business, Danie) was the fact that you are getting about half of your revenue in this period, from Latin America. Just give us a little bit of your background. You’re professional drillers in the mining space, specifically with junior miners and exploration.
DANIE PRETORIUS: Thanks for the opportunity, but let me step back. We’re not quite in the exploration side of the business. Exploration is probably about 20 percent of the total business. We’re actually more on the production cycle of our total mine in the exploration style.
ALEC HOGG: What does that mean?
DANIE PRETORIUS: Just an explanation for the non-miners: the way a mine is set up, it obviously comes from a green field where exploration is being drilled and then, moving into a mine, which is the ultimate. Once the mine is established, the shaft is sunk with the development underground, and that’s where we come to play. That’s where the actual production starts – as the underground tunnels are developed – and is the service we provide. It’s a case of if there’s a mine and there’s underground development, the service is part of that, as opposed to exploration drilling. Exploration drilling is more in the beginning. Brown fields become green fields. That’s the exploration side of the drilling.
ALEC HOGG: So you deal operating mines primarily, digging those tunnels to get the minerals out.
DANIE PRETORIUS: Not necessarily the tunnels, but the vertical development and that is the space in which we play.
ALEC HOGG: According to these results, you have eight drill rigs around the world – half of them in Latin America.
DANIE PRETORIUS: That’s right.
ALEC HOGG: Why Latin America?
DANIE PRETORIUS: Of the 157 rigs…of the total amount, there are close to 92/94 machines – raiseable machines – and so the balance would be on the exploration side of the business. Latin America is actually a nice story. We were taken to Chile by the – then Anglo/Anglo Gold, which bought a company in Chile (PETROC). At the time, Anglo decided to establish a shaft sinker’s copy in Chile and they thought it would be good to have a company like ourselves, servicing that part of the shaft sinking business. That’s how we ended up in Chile and from then on, they took us to Brazil (on the back of Anglo, too), and from there, going into Latin America. Once it was established, it became an organic growth program, going forward.
ALEC HOGG: Your numbers are good. The revenues are up by one-fifth. You’re also exposed to iron ore and gold. Is the fact that iron ore and gold are under pressure, good for you? I ask this because when companies come under pressure, they look at their costs and sometimes they outsource. Presumably, you might be first in the queue there.
DANIE PRETORIUS: Well, let’s deal with the iron ore first. We were awarded a contract 18 months ago by Kolomela – the Kumba project at Kolomela. This is a five-year contract, just on R1bn. At the time, the iron ore price was certainly better than it is today. It’s a five-year contract and I believe that Kolomela is on the right side of the cost curve, so that contract’s going to run for the next three years.
ALEC HOGG: So it doesn’t matter to you. You just keep on going. You have the contract.
DANIE PRETORIUS: Within the boundaries of their capital expansion program, although we’re on the production side of that project, we should be okay with the Kumba iron ore exposure. It’s the only iron ore exposure that the group has. On the gold side, we’re obviously dealing with the Sibanyes and they’re more the GR guys/Randgold Resources guys up in Kibali and Mali.
ALEC HOGG: But those are both very differently managed organisations. Sibanye watch their costs very closely. With Randgold Resources, it’s the same kind of thing. My question really is this: is a decline in the prices of those commodities and those minerals good for you, or not?
DANIE PRETORIUS: There’s really no impact on the business. Remember, we’re on the production side so the mines we’re dealing with – the Sibanyes and Randgold Resources – are on the right side of the cost curve, so impact on the business is nothing major. You could probably see it in the figures.
ALEC HOGG: So where does your new business come from?
DANIE PRETORIUS: Africa, primarily. Going forward this year, the motto/building block of this company has always been ‘diversification’, both into new geo areas and obviously, the other one – the expanding drilling services. On the drilling services side, there are some opportunities inside South Africa. We’ve just added another drilling service up at Kibali. We added the pylon drilling, which is more on the civils side of the business, so that’s typically, the model of the company. We try to add at least one new country to our portfolio to use as an organic growth basis, going forward.
ALEC HOGG: So you’re moving a little bit out of mining.
DANIE PRETORIUS: I like to think there may be opportunities in the on-shore gas drilling – maybe on the civils side. There’s an appetite for that. So far, we’ve been seen, purely, as a commodity company or a servicing company. I believe we can add a flavour of perhaps the gas and oil, and maybe the civils side of the business, just to diversify the company a bit more.
ALEC HOGG: Just one, final point: the shale gas finds in the Karoo, given what you’ve just said now, would be very exciting to a business like yours.
DANIE PRETORIUS: Yes and no. I think the South African case is different. If you asked me today, I think we’d probably take a back seat. It might change in a year’s time, but certainly, up in Africa, we would like to be part of that.
ALEC HOGG: Fascinating. That’s Danie Pretorius, the Chief Executive of Master Drilling – a late inclusion in our program. It’s good to have him here as well, to give us some insights into exactly what’s going on in the mining field.
