May 2021


2021: May

Capital Limited (Ticker: CAPD) is a mining services company based in Africa that provides a range of drilling, mining, maintenance and geochemical laboratory solutions to customers within the minerals industry. 

They are listed on the LSE as part of the FTSE Fledgling Index (as their market cap is too small to be listed on the FTSE All-share Index).

Capital Ltd was founded in 2004 and is headquartered in Ebene, Mauritius.

 RATIONALE

A key part of our stock analysis in recent months has been looking for UK companies who have thrived in a post-Brexit environment, and those who have been largely unaffected by COVID-19. 

After what was a record year for Capital Limited in 2020 in terms of revenue, EBITDA (earnings before interest, taxes, depreciation, and amortization) and cash flow, the company has now released the strongest quarterly revenue performance in Capital’s history.

Images courtesy of Capital Limited.

So how do Capital Ltd make their money?

1. Exploration Drilling 
The majority of their revenue comes from supplying ready-made, agile drilling teams to work with mining companies. Their operations include exploration, core sampling and providing information on changing ground conditions. Their value also lies in working with the local communities to provide in-country expertise and operational knowledge in order to improve efficiencies and reduce costs. 

2. Underground Drilling
The underground drilling services provide a similar service to their exploratory team, incorporating techniques with a focus on high safety, such as diamond and reverse circulation drilling for exploration and grade control projects. 

3. Geochemical Analysis Laboratory Services
Their laboratory services company 'MSALABS' provides tailored geochemical laboratory services for the exploration and mining industries. 

4. Software & Tool Rental
They support exploration drilling projects with a range of survey and mining tool rental solutions, on-site surveying and geophysical data services. They also have their own software, called HiTT, which is an innovative program for borehole management.

Why have they been making so much more revenue recently? 

Most of the growth comes down to a whole raft of new drilling and mining contracts: their Fleet Utilisation % (the percentage of their drilling and mining resources being used) has increased by 17.5%. This now totals 67% in 2021, driven by these new contracts.
  • 2-year complete hydraulic hose services contract in Mali
  • 6-month delineation drilling contract in Mali
  • Exploration drilling contract for a new client in Mali 
  • Exploration drilling contract with in Côte d’Ivoire
  • Initial six-month delineation drilling contract in Mauritania
  • Six-month exploration drilling contract in Burkina Faso
CAPD were also awarded a huge waste mining contract with Sukari in 2020, this project is continuing to progress well, with highlights including:
  • Q1 asset commissioning completed ahead of schedule with the second phase of equipment commissioning on track for completion early Q2
  • Substantial progress on recruitment with approximately 70% of planned workforce hired during the quarter
Another core asset for Capital is their excellent safety record, in the mining industry this is measured by 'LTI' or lost time injury: an injury sustained by an employee that leads to a loss of productive work time. 

Several key safety milestones were reached for Capital mining projects in 2021, improving trust with their key clients:
  • Mwanza facility (Tanzania) achieved thirteen years LTI free in January
  • Yanfolila Gold Mine (Mali) achieved three years LTI free in January
  • Bamako facility (Mali) achieved three years LTI free in January
  • Bulyanhulu Gold Mine (Tanzania) achieved one year LTI free in January
  • Bonikro Gold Mine (Côte d'Ivoire) achieved one year LTI free in January
  • North Mara Gold Mine (Tanzania) achieved five years LTI free in March
  • Geita Gold Mine (Tanzania) achieved four years LTI free in March
Lastly, Capital's ten long-term mining contracts continued to perform well, with the number of equipment teams increasing from 94 to 98. They have also acquired three new teams to support projects in Egypt and Mali.

  • You can read the company's latest interim report here: https://www.capdrill.com/media/home/CAPD-2021-04-15-Q1-2021-Trading-Update-RNS_Final_Website_20200415.pdf
  • The Executive Chairman summarised the positive outlook for the company in his statement:
"The first quarter of 2021 has been the strongest revenue performance in Capital’s history, underpinned by significant demand for drilling services in particular, and supported by growth in the company’s non-drilling services. Capital’s strategy of diversifying its revenue streams through significant expansion into the fast growth West African drilling services market, as well as the generating of significant momentum in its contract mining, MSLABS and maintenance operations, continues to deliver strong returns for our stakeholders. Of particular note is our continued excellence in safety, particularly during a period which has seen unprecedented mobilisation and start-up operations in a number of mine sites across our blue-chip client mine sites. Looking ahead and having been awarded a number of new contracts with both new and existing customers in West Africa, our rig utilisation is expected to remain strong. The execution of the early stages of the Sukari contracts for the waste stripping and additional drilling contracts is progressing well with revenue growth contribution set to accelerate through 2021, reaching full run rate in Q4."

Conclusion

CAPD has had an excellent 18 months, both in terms of new business growth and revenue. According to our metrics, the earnings reported and potential for future growth are not fully reflected in the company's share price. Furthermore, Capital are paying shareholders a healthy dividend of around 2.3% which, with a payout ratio of less than 10%, is easily covered by earnings.

We see no reason why the company cannot continue to build on these excellent results in the coming months and years, and we will be adding it to the CC portfolio on the 4th of May. 

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