Master Drilling: Cylinders starting to fire

Logically, as shallow, easily mined minerals are exploited, the world’s remaining minerals are getting deeper underground. While these tailwinds are fantastic for those well-positioned businesses that offer solutions to underground miners, the multi-year commodity and mining hiatus has been a tough period for all involved.

This is clearly noticeable when looking at the Fochville-based, global market leader in raise bore drilling, Master Drilling Group (JSE code: MDI) and its historical operating metrics.

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The group’s raise bore drilling service is often used for drilling ventilation shafts into underground mines as production advances but there are also capital and exploration uses for its fleet. Furthermore, the group has been active in developing a mobile tunnel borer (MTB) while it is also inching closer to a main shaft boring solution (shaft boring system or ‘SBS’).

All this while partaking in a multi-year investment into expanding the group’s fleet (nearly tripling its size over the last decade), automating and upgrading this fleet and expanding into a range of new geographies around the world (69% of the group’s H1:21 revenue came from outside of Africa).

I have written before on our view that the commodity cycle still has plenty of runway as miners have not yet invested in new major mines that will open up a floodgate of supply into tight physical markets.

Unfortunately for Master Drilling, this lack of capex spend is apparent in its fleet’s utilisation numbers, which peaked seven years ago and then steadily declined to a trough during hard lockdowns around the world in H1:20.

What is exciting is that — while there are still no new major mines coming onstream any time soon — existing miners are beginning to sweat their mines, push production as hard as they can, open new sections of their resources and, importantly for Master Drilling, spend capex on doing this.

In H1:21, not just has Master Drilling’s utilisation rate across its fleet began to rally (and, indeed, according to management it has continued to rally in H2:21 so far), but the group’s order book and pipeline have shot up to a whopping $232 million and $602 million versus H1:20’s $144 million and $281 million order book and pipeline.

Given that the pipeline converts into order book (before the order book converts into revenues and then cash flows), the fact that the pipeline has tripled in the last twelve months is material.

Not just will this drive utilisations higher but it should also help with the average revenue per operating rig (ARPOR) metric (think of as “price” in this equation) and, with Master Drilling’s large operating leverage, should logically drive large bottom-line growth for shareholders.

Listen to Fifi Peters’s interview with Master Drilling CEO Danie Pretorius:

For brevity’s sake, I have not touched on the group’s true ‘blue sky’ potential, which is the MTB’s commercialisation starting to occur (Master Drilling got its first MTB order during the period) while the SBS development moves forward. Both world-firsts! Each of these exponentially grows the group’s total addressable market (TAM) while solidifying nearly bulletproof competitive advantages.

Yes, for brevity’s sake, I’ll stop writing there and finish with a conclusion:

I have long written about Master Drilling and, honestly, my opinion has only gotten more convicted over time: this is a deeply underappreciated small-cap gem on our market. Management could not have controlled what happened in the global mining sector over the last half-decade or so, but it has executed on its capex, technology, and diversification strategies and has done so superbly.

While anything may still happen, all the indications are that the mining sector is starting to open the capex taps again and, with Master Drilling superbly positioned to catch this upside, all the cylinders are beginning to fire at this hidden gem of a stock.

Keith McLachlan is investment officer at Integral Asset Management

*McLachlan holds Master Drilling shares, as do some Integral Asset Management portfolios.