Good morning, everybody. Thank you for joining us today. My name is Alan Chan from Bridge Street Capital, and today we are hosting Mitchell Services for their quarterly update. We have Nathan Mitchell, Executive Chair, Andrew Elf, CEO, and Greg Switala, CFO, joining us. We will have a Q&A at the end, so please feel free to bring your questions, and I'll address them after Andrew's presentation. Andrew, over to you. Thank you.
Thanks very much, Alan. Good morning, everybody, and thanks for making the time to dial in. So look, I'll take the quarterly as being read, and I'll just make a few key points along the way. Greg will then do the same, and then we'll open up to some questions, and we'll go from there. But look, first quarter of the year, and as we said, through some of our full year investor roadshow, year-end presentations, you know, it is gonna be a tougher year for us this year, and we make that point in this paper. That's also supported by the coverage that's out there for Mitchell Services by Q Value and by Morgans. But that being said, you know, it's still gonna be a relatively good year for us.
You know, we've made some notes there in the quarterly as to why the rig count has been what it is. You know, it's our view now that the rig count or the operating rig count has bottomed out or seen a trough, and certainly with some of the contract wins that we talk about in this quarterly, that there's a positive way forward into the future. We're certainly not gonna sit here and give people numbers of rigs operating or any guidance or things like that, but certainly we think that from here, things get a little bit better as we move forward, and it's gonna take time and money to get those rigs up, out, and running, mobilization costs.
But that is going well so far, and the contracts that we've won are good long-term contracts with global miners or very large miners. So certainly some great wins from the team. You know, some challenges in that first quarter with the weather and some other factors that are outside of our control. But all in all, safety was good. Clients are happy. You know, the performance within the business is good. We've just got to get these recently won contracts up, out, running, and we'll be away. Obviously on the second page of the quarterly, a few of the key points there in regards to the business being in the best position it's ever been in.
I strongly believe that, and I'm sure that when we get to questions and Nathan starts talking, he'll have his own thoughts to add as well. But obviously, the net debt from 30 June, a tick up, obviously based on the dividend payments and some of that investment into those new contracts as they ramp up and go out. But again, still in a very, very strong position. We've got a wonderful base to move forward from, and then we'll certainly do that. And then lastly, it's worth touching on Loop Decarbonization Solutions, which has now got its first purchase order, and is negotiating its first drilling contract, which will most likely start, either late this calendar year or early next calendar year. So that's very positive as well.
Certainly, we introduced that Loop business and concept in our full year investor presentation, and certainly touched on a few key points, so if anyone's got any questions on that, we can certainly let them know a little bit more about it today, so all in all, a busy first quarter. You know, some challenges with weather and getting some rigs up, out, and running with new contract wins, which have been good, and certainly, as I say, there's that reports out there from Q-Value and Morgans that they've got some numbers in there for the year, and I'd point people to those and have a read of those reports. Greg, I might hand over to you to make a few other points.
Yeah. Thanks, Andrew, and good morning, everyone. I think from my perspective, really just touching on that strong balance sheet again, as Andrew mentioned earlier. You know, the company now has a significantly strong balance sheet. Has optionality, whether that's navigating these mobilizations in the short term, or potentially taking advantage of opportunities, such as the decarb. But it really has a strong balance sheet and has that optionality to do so. That net debt figure of AUD 4.8 million, obviously a tick up versus the end of June of AUD 1.9. With that difference primarily related to payments for shareholder returns of approximately AUD 4.4 million in the form of dividends and buybacks.
And maybe just then on the subject of shareholder returns, the board has called out previously that the policy will be to pay shareholder returns of circa 75% of NPAT. I suppose, just given the fact as everyone can see from these numbers, that the NPAT was essentially break even, coupled with the ongoing mobilizations, the board's view, and you would have seen it from the recent share buyback activity, is just to temporarily pause the buyback, gauge the success of the mobilizations, get back to NPAT profitability, and then potentially keep going with that program. But just thought that's worth mentioning, probably upfront.
That's probably the key thing from me, I suppose. Yeah.
So that's probably it from us, Alan, just touching on a few key points from the quarterly. We're certainly happy to take any questions.
No, thank you, Andrew. Thank you, Greg. Yeah, and we'll start with the questions. The first one there from Daniel: with gold prices continuing to rally now over, you know, AUD 4,000 an ounce in Aussie dollar terms, are there any signs of a step change in investment in drilling by, you know, key gold sector clients?
... It's a really interesting question, and was certainly asked on the full year investor roadshow, and quite a lot just in the ordinary course of business. But to be honest, no. I think if you look at our clients at the moment, some of those larger gold miners are making extraordinary returns based on what it's costing them. But their budgets for drilling remain the same. You know, they've got a corporate strategy or a corporate plan, and they're executing that.
There's certainly a strong demand for drilling from those clients that remains in place, but they haven't pinned their ears back and said, "Look, we need a whole lot more rigs because of where the gold price is at." And then similarly, we mentioned in the quarterly on that first page about the junior explorers still being tough. I think that's still the case. Nathan-
Yeah.
You've probably got some thoughts, too, in the market.
Yeah, it seems like the juniors are, you know, back to the old days of really not wanting to spend money at the moment on exploration. But it doesn't really affect us a lot in the market, 'cause we don't chase the juniors. Certainly, I suppose, Deepcore in Victoria, there's a lot more juniors in Victoria. So there's probably some effect on Deepcore's rig count around there. But yeah, there seems to be certainly a pullback over the last sort of, you know, four months on greenfield exploration. But, you know, so again, 90% of our work is essentially brownfield or production drilling. But certainly, if you ask the question, is it affecting Western Australia? Definitely. Is it affecting Queensland? Probably. So...
You know, but having said that, just recently we've seen a bit of a tick up in WA, and we've seen a little bit of a tick up here in Queensland. I'm talking only in the last couple of weeks. So it moves pretty quickly, this sector, this sector. But again, ours are, you know, all long-term, multi-year contracts, so it probably affects us less than others. Yeah.
No, that's right. And look, you know, when does the switch flick? Don't know. You know, but at these levels, and maybe if it keeps going, who knows? You would think at some stage, you know, activity would increase as it has in the past. Yeah.
Thank you, Andrew and Nathan. This one, I think is for you, Nathan, from Michael so commentary two years back at the AGM in Brisbane, Mitchell's is getting underground drilling work at the huge Fosterville mine. The question is: Is Mitchell still at Fosterville, and are we getting other underground gold work in Victoria and elsewhere?
Yeah, we're still working for Fosterville, definitely. We certainly haven't got the same rig count, which is probably frustrating for us. Again, that comes back to, you know, we're not in control of their exploration budget. But I think when we first bought Deepcore, we had 14 rigs operating there. That's significantly come back, and that's Fosterville's decision. I do think, you know, Victoria is a tougher place to work, just with what's happened over the last couple of years coming out of COVID. You know, so they haven't helped themselves down there. But, you know, and that's probably somewhere where some of our rig count has gone, but we are still there. You know, it's not like we've lost that contract.
They've just pulled back on the number of rigs that they're doing, which doesn't really make a lot of sense to us on the basis that, you know, as Andrew said before, the gold's at AUD 4,000 an ounce, but our understanding is they will start to ramp that back up again, hopefully next year.
Yeah, that's right. And certainly, you know, we've got a strong presence down there in Victoria. You know, there's multiple other clients that we work for on the underground and in the surface in that region, that sort of Bendigo, Stawell, Ballarat, golden triangle. You know, the Deepcore head office is down that way. Their management team is down there. So we've got a significant presence in those Victorian gold fields. But Nathan's spot on. You know, when you look at the recent round of exploration tenement decision-making down there in Victoria, Fosterville were awarded blocks in that round. I think it was nearly three years ago now.
They're probably some of the most prospective blocks in the country, you know, right next door to the mine they've got, and they'd love to be out there drilling, but it's, you know, they're not at a point yet where their program's been approved nearly three years later. You know, they're some of the things that make Victoria more difficult. But certainly there's work to be done, as Nathan says, we hope to increase the rig count with that client again at a future point in time.
Okay, thank you. Another question from Daniel: With the first Loop rig potentially going into operation in the next six months, what is the strategic plan thereafter in buying and deploying additional rigs in decarb?
Yeah, I mean, really, it's a, you know, it's obviously a start-up business in a new sector. And, you know, really, you're sort of trying to identify that total available market, and target the key clients from a business development perspective. So certainly from a BD perspective, the targets on a first pass basis are your larger listed mining companies that have got more of an imperative to undertake that decarbonization work. And they're also the leaders in the market. Other people will look at what they're doing. Other people will follow what they're doing. So certainly, you know, we could sit here and, you know, talk about that in a lot more detail, but that's really the guts of what the focus is in the short term. Get that first one away, and then target the larger ones.
... and then obviously we would go out and buy more to do that work.
Yeah.
But, Nathan, I don't know if you've any other comments?
Yeah
on, on that business and the strategy?
I think so. I think the decarb business is, much as I've said before, it's very similar to the old CSG game, you know, twenty years ago. I think people want to governments and companies know there's an issue, and they need to resolve it. This should work, but I think at the moment, we've got to get it out there. We've got to prove to our customers, and to the market, and to the government, that this technology does work, which we think it does. But obviously, everyone's gonna be wanting to see how it goes. So I think the first project's important for us, and then I think after that, we're hoping that it'll start to accelerate fairly quickly after that.
But it all depends on, you know, the impetus behind government and how much pressure they put on the customers and the coal mines.
And then just to add to that, Andrew, Nathan, in the event a second rig is needed, will that come from offshore, or can you sort of rig up with the close one you have on site, or?
Yeah. We'd have to come from offshore.
Yeah.
Yeah.
Okay, got it. Thank you. Next question from Anonymous. Could you please talk to the commodity split of your rigs? Is the mix changing with new wins?
No, it's really quite similar, Greg, I think, to be honest. I mean, the last probably couple of years, it's sort of been that 50% gold, 40% metallurgical coal, and 10%, you know, copper, lead, zinc, other, you know, no lithium, no nickel, and I think, you know, given the swings and roundabouts and starting and finishings, it's gonna be around about that, similar percentages, so no, no material changes in that regard.
Thanks, Andrew. Another question from Michael: Are we getting any work in New South Wales? Larvotto Resources going great guns, exploring at Ataby, which has tripled in price over the past 16 months.
Yeah, New South Wales is certainly a busy market for us. Obviously, we've got Mitchell Services based out of Brisbane and Deepcore based out of Bendigo, and both companies have got rigs in New South Wales. You know, we've got a workshop in Newcastle as well, that is a specialist in underground coal. We've got a little workshop out in western New South Wales, and certainly Aurelia would be our largest client in that region. We work across multiple sites, both surface and underground, as well as with Newmont, obviously underground at Cadia. So, certainly an important market for us in New South Wales, and I think, Greg, from memory, it's about 15% or thereabouts of our revenue-
Yeah.
comes out of New South Wales.
Great. Thanks, Andrew. Next question, Anonymous. Can you talk about the level of new tender activities in the market in general?
Look, it's up and down, and, you know, it sort of varies over time. You know, different clients come out at different times for different things. We've just had a bit of a spate of multi-rig, multi-year tenders come through, and obviously we've won some of those, which is why we're putting rigs out, which has been positive. There's still one multi-rig, multi-year tender in hand waiting a decision at the moment, that's quite a good one. We're seeing some good leads come through in the geotech space. You know, the sort of we did some work on Snowy Hydro, and Kidston, and other things last year, and that represented about 6% of our revenue in FY 2024. There's a couple of tenders there, too.
But yeah, certainly I would say, you know, that the tender pipeline is good. I wouldn't say it's, you know, especially strong, or on fire, or anything like that, but it's good, it's there. There's still a strong demand from the larger producers, as I said, and as to Nathan's point, it's probably a little bit slower at the bottom end with the smaller clients.
Thank you. Question from Tom. This one's for you, Greg. Can you provide some color on the dollar value size of the working cap build associated with the remote mobilization in new contracts?
Thanks, Alan. I think the ultimate size is obviously gonna depend on the success of those mobilizations, i.e., how quickly they can mobilize the site and sort of get up to full production. But I think the best way to answer that question, which sort of company's called out, that there's a pathway between the current utilization levels of low sixties back to the sort of mid-seventies, based on these contract wins. So by definition, you can sort of you know that that implies 12 rigs or thereabouts.
I'd probably work on AUD 300,000 or thereabouts, per rig, which is somewhere in the order of AUD 4 million working capital investment between now and the end of this calendar year. This is probably the best way to estimate it at this stage.
Thank you, Greg. Another question from Daniel: With the greenfield exploration remaining weak, is this flowing through to good skilled labor availability at the moment? And, should we expect skilled labor inflation to be pretty subdued for the time being?
I think we can certainly say it's more subdued. It will be more subdued than it has been. But you've got, you know, again, superannuation's going up another 0.5% from July next year. Depends what Fair Work do with their decision making. Obviously, the people at the lower end of our business are closer to the award, and are affected by any Fair Work decisions. But certainly, the higher level, higher skilled labor, you know, is more subdued than it has been. That's a fair point.
It's certainly, I think, changed as well. Three or four years ago, you know, was the number one topic, the board table, was skilled labor. You know, where are we going to get people from? How are we going to get people? How do we retain people? That's certainly not the number one topic at the board meetings anymore. So that certainly has changed. The pull from Western Australia, you know, the COVID issues, they're well and truly behind.
Thank you. Another question from Michael. "Is Mitchell proactive in approaching junior explorers before they ask for tenders? We have a good team, and I'm wondering how well we market ourselves. Does the CEO and chairman just visit small mine sites? A good example is the Mount Isa region.
Yeah, look, I think, you know, we've got a saying here, BD, I mean, BD never sleeps. And, I think we're very, very good at BD. We're always actively marketing, the company, you know, to all sorts of, of companies, big and small. So certainly, I think we're absolutely approaching people in advance, of tenders coming out. You know, we're meeting them, we're talking to them. We're letting them know who we are and what we stand for, in advance of a tender coming out, rather than just putting a submission in, on that basis. And look, it's a I'd say it's a fairly small market. You know, you're really the tenders are sort of, high value, low volume, and you really know who the major players are, and you really get to know them.
So I'd say, certainly from Nathan and mine's perspective, any travel that we do to the field to see crew and clients is pretty strategic. It's generally gonna be your larger clients, to be fair, or it may be a smaller client that's got a huge upside. But that's obviously a lot rarer. The other way Nathan and I get in front of those sort of people is at conferences, where you've got a whole lot of people in one place, and we can meet them and see them and that sort of thing, too. But no, I think we're very active in that business development space, that's for sure.
Okay, thank you. A question from Daniel. "How is the JV with Talisman going so far? And I might as well add to that, maybe can you walk me through how it sort of plays out? Again, your BDs never sleep. Is there sort of a, you know, low-hanging fruit with mines that... You know, whether it's inbounds?
Yeah, I mean, it's not, not too much to say on how's the JV going. It's a, it's a fifty-fifty JV. You know, all the relevant documentation, everything's in place. It's in a good rhythm now. It's got a plan, it's got a CEO. He's doing the right things. You know, he's got that first purchase order. He's negotiating the first contract, and chasing down leads after that. And certainly, the team is doing a lot of work, both at Talisman and Mitchell, to get that first rig up and out. Bearing in mind, there's a huge amount of work that needs to be done in regards to the engineering, in regards to the workflow, and everything else, to be doing this work, on a mine site. So, how's it going? I think really well.
I think, if we're gonna have a rig out there drilling late this year or early next year, I think that's amazing.
Yeah. No, I would agree with that. I think they're doing an excellent job. Luke, who's the CEO of that business, has pretty much got in front of everyone, and everyone knows him, and I think everyone knows in that sector now who Luke is. So I think from a BD point of view, I think that's going really well.
Yeah.
Fantastic. Thank you. Question from Joshua: "With the reduction in operating cash flow for Q1, does the board have a prediction for the full year free cash flow? As a shareholder, we have not been able to join in the rewards that has led the company to current position, which is the strongest ever. Pausing buybacks does not help. Greg?
Yeah, so a couple of things there. I suppose on a free cash flow front, the free cash flow is very sensitive to three things: EBITDA, operating cash conversion ratio, and CapEx. The company is not gonna give EBITDA guidance or formal CapEx guidance. However, the best... I'd probably, you know, point shareholders to the papers from Q-Value and Morgans in terms of coverage. And obviously those three metrics are key metrics in those papers as well.
In terms of not being able to join the rewards, and the company's statement of being in the strongest position ever, I suppose we say we're in the strongest position ever, not just with reference to recent shareholder returns, which have, you know, been circa AUD 17.5 million in total. But also very importantly, in terms of its position to delever the balance sheet. And, you know, two years ago, net debt was AUD 40 million, and today it's practically zero. So, that's really where that statement comes from. Apologies, I'm talking on behalf of Andrew there in the statement in the letter.
But it's a combination of not just shareholder returns, but a significant deleveraging as well, that has really been done over the past two years by an exceptional free cash flow performance over the last two years.
I think you've just got to be mindful of where the business has come from ten years ago to where it is today, and the optionality that that strong balance sheet does now give us. You know, you can go and get, you know, five, 10, 15 rigs for Loop and not raise equity, and do it comfortably using the balance sheet. And get that accretion straight to EPS. So I certainly think, you know, from my personal perspective, I think it's really exciting from where we are right now. You know, yeah, you can't judge this business on a quarter. You look at where we've come from, where we are now, and where we can go. I think, you know, it's quite exciting, to be honest.
Thank you. That was from Daniel. Can you remind us when you expect to start paying cash tax, and therefore, when dividends will begin to have attracted franking credits?
Our position hasn't changed on that front, so it's sort of, you know, back end of FY 2025, early 2026, in terms of cash tax payments, and then, you know, by definition, then dividends from FY 2026 to begin to have attached franking credits.
Thanks, Greg. Another question from Anonymous. Are there downstream opportunities with the decarb drilling?
I think there's a lot of opportunities we're looking at decarb, and it shouldn't just be called decarb drilling, it's just decarbonization. You know, because essentially, from our point of view, that business can spread its wings a lot further than just drilling. Decarbonization is a big word, same for in our clients and in the mining sector. So we're looking at all different opportunities in that, in that JV. So, I think the first one, obviously easiest for us, is the drilling part of it, and that's the low-hanging fruit for us. That's our technology, that's the smarts that we have. But obviously, you know, it's a joint venture. So, the Talisman guys and us bring a lot to the table, not just drilling.
Sure. Thanks, Nathan. Another question from me. Just, Andrew and the team, I guess, with the re-wins and the new contracts, can you elaborate where, and maybe how many rigs outside of named clients? Just be more clear.
Yeah, look, it's a tough one, 'cause some of them are still obviously, you know, confidentiality and other things. But, you know, we've won our first contract where we're gonna take a couple of rigs over to Papua New Guinea. Again, people don't need to freak out that we're gonna be running overseas with a million rigs. It's with a large global miner. You know, it's a good contract, paid in AUD, just less withholding tax. You know, we've worked over there before. We've worked all over the world before. So, you know, again, it's just following a really good client to a particular place to do a good job for them with some highly technical drilling.
There's been a, you know, another good multi-year, multi-rig, multi-year contract win underground with a larger client. And then another multi-rig, multi-year win on the surface in the coal with another client. You know, and those alone are sort of, you know, 10 odd rigs or thereabout. So, you know, they're all in the process of going out, and the Australian opportunities will be out up and running pre-Christmas, and the, you know, the one over there in PNG, sort of Q3, first three months of next year. But some good wins there.
Thanks, Andrew. Okay. Gosh, anonymous, obviously with regard to the buyback. I'll just read this one out, guys, have to, you see. Let's ramp the buyback a little. If I'm not mistaken, the enterprise value of the company is as low as it's been for five years, and the balance sheet is healthy. Great time to buy the stock while there is short-term weakness in trading. Maybe if you appreciate, not financial side, but, yeah, your thoughts?
Mine, did you say? Sorry, Alan.
Oh, I'm not maybe with you, Greg. I think you've got the three pillars that judge that.
I can only answer that by reiterating what we sort of said in you know, upfront. It's shareholder returns is designed to be a function of profitability. Right now, given this first quarter, there wasn't any. And just from a conservatism perspective with these opportunities that lie ahead, the mobilizations that lie ahead, the board's view is just to pause it in the short term, acknowledging the comments from that particular shareholder around yeah, EVs and five-year lows, et cetera. So, yeah.
Yeah. Yeah, we can't disagree with that.
It makes sense what he's saying there. It does make sense. Unfortunately, I think Greg is right. You know, whilst we've always said about the four different pillars of shareholder returns and debt reduction, you know, buybacks, I do agree. It is the lowest, and it's frustratingly so that it is the lowest. But I think we've got a plan going forward with the decarbonization, you know, the new mobilizations to potentially our first operation overseas, internationally, which is multi-rig, multi-year contract. I think we've got a lot on our plate that we can see over the horizon, so we've just got to be aware, and I think we also made commitments to shareholders that we'd do 75%.
So, of course, you know, we could always break that and say, "Well, at the moment, buyback's a better option than a dividend." And again, that'll. We've got a long way to go between now and the end of the financial year, so all the things are on the table, so certainly.
Thank you, Greg and Nathan. We have no more questions. Andrew, maybe or Nathan, just final remarks for our investors before we close?
Just for Michael there, I think just if he can send either Greg or myself an email, we can send him the analysis from either Q Value or Morgan's, if he just wants to reach out directly. But no, look, thanks very much for everyone's time and interest. Appreciate the questions, good questions. You know, we hope these are informative for everybody, and again, if there's any further questions, reach out to Greg or myself. But you know, we appreciate the ongoing support and, you know, look forward to talking again, once we get a few more of these rigs out, and hopefully a bit more progress on the decarbonization business as well.
Okay. Thank you. Everyone, I will also reach out to you guys personally and filter any questions you guys may have for the team as well. Again, Andrew, Nathan, Greg, thank you. This is recorded, so again, yeah, I'll reach out again. This is recording. Thanks, guys.
Thank you, Alan. Thanks, everyone.