Thanks for today. My name is Allen Chan for Bridge Street Capital, and today we are here to host Mitchell Services' half-year result for 2025. I have with us today Nathan Mitchell, who is Executive Chair, Andrew Elf, CEO, and Greg Switala, CFO. If you could please put any questions in the Q&A, and I'll address them at the end. Over to you, Andrew, and Nathan and Greg to start. Thank you.
Thanks very much, Allen and team, and thanks for the introduction. Welcome, everyone, and appreciate the interest. Obviously, we recently had an update call with our quarterly, so there's certainly the half-year is out, but no real surprises from what's already been put out there. We'll do a quick run-through and then open it up for questions, and certainly welcome any questions at the end of the presentation. I'll just move straight to slide four, market profile, and take the disclaimer as being read. Slight movement in holding for Mitchell Group there, obviously, Nathan and his group, just on the basis of a little bit of market buyback in recent times and also some direct purchases on market as well. As everybody would know, that buyback's on foot, and I think financial year to date we're probably up around the AUD 500,000 mark.
Just on slide five, as I said, no surprises here in regards to anything we have not already said. Again, even though the half is not as good as we would want it to be for various reasons, still some good operating cash flow coming through, gross debt down that Greg will talk to, and obviously we have invested into the right places in the business. As I said, that buyback is on foot, and it is at about that AUD 500,000 mark. Importantly too, from a safety perspective, no material safety incidents for the half, and our safety performance across the business remains very strong. Just from an overview perspective, following on from the high level of safety, high level of customer service, all of our major contracts that were expiring have been rewon, either through a tender process or direct renegotiation.
I think the annual customer survey we complete every year has come in and shows some wonderful results. I think certainly we're doing the right things day to day for our clients, which is important. From a market perspective, obviously there's a lot of commentary out there from others such as IMDEX that have already come out and etc. about the market, but certainly existing producers is stronger than exploration, which remains relatively soft, but we can talk to the market in question time. From a revenue stream perspective, again, no major changes sort of from when we sort of spoke to everybody last time.
The majority of that revenue coming from the global mining majors split half-half surface underground, a good exposure to gold of about 40% with gold at record levels, and 80% of our revenue is generally from production development and resource definition or from work that we conduct on mine sites. Importantly, the balance sheet, can't stress this enough, the good work that has been done, that's certainly held us in good stead through a half like this where we've had to invest in the business. We can certainly talk to that more as we go through Greg's slides and then again in question time, but that really has given us some good optionality from a business perspective. Operationally, again, we've spoken previously about a reduction in utilisation, and again, the Grosvenor Mine fire event that occurred on the 1st of July.
We have got those three rigs still stuck underground there. No issues with insurance if it does come to that. That is a disappointing one, but really out of our control. The mining industry corporate activity, obviously, Anglo, Peabody pending. We will wait and see what happens there. Activity levels at Anglo are probably a little bit different to what they have been given the pending transaction. Of course, the rain events which occurred sort of in that first half, but we just sort of had a bit more rain come through end of January, start of February as well in the second half. Importantly, down the bottom there, we talk about what we have invested into, and I think this is starting to look pretty good. PNG, the global mining major, those rigs are on site, crews are on site.
GM of People and Risk is there this week conducting some cultural training sessions, and we're hoping to drill in the next couple of weeks. That is a really good one for us. Secondly, the Surface to In-Seam organic entry into that market has been completed, which is a bit of a milestone for us. It is the first project we've undertaken in that space since Mitchell Services came into the market back in sort of 2013 or thereabouts. It is a type of drilling that Nathan invented back in the day. Highly specialist with good margin, but obviously a cost to get going and get into it. Lastly, the decarbonisation opportunity. Really what we saw there is that developed faster than we anticipated. We incurred the cost to ramp up in the back end of the half and then moving to site as we speak to start drilling.
We expected those expenses to be all in H2 along with the revenue, but it has sort of gone a bit quicker than what we thought, which is a positive thing. Just moving on to the next slide and updating everybody on that Loop business. It is obviously a 50/50 JV between Mitchell Services and Talisman, which is a technical services provider. The Loop business will provide initial feasibility and engineering work right through to drilling, gas drainage, and well management, etc. Our first customer, contract signed, sealed, delivered, and the rig is moving to site as we speak. Just delayed a little bit by some wet weather. Our second customer, again, signed up, and we are in that initial feasibility stage with a potential to drill towards the end of this calendar year.
I think, if you said to me, "Where do I think that business is versus where I thought it would be?" We're definitely ahead, and there's a lot of customers lining up behind these initial two. I certainly think that rig operating in a positive way when it gets there and gets going will be transformational for this Loop business and certainly going to be a big part of our growth story as we move forwards. I won't go through the next two slides just talking about what Loop is in detail, but it's a decarbonisation business managing the fugitive emissions legislation that's been released by the government where people will be taxed if they don't reduce their emissions. We're effectively helping surface coal miners, open pit coal miners, reduce their emissions. We're happy to take questions on that at the end of the presentation.
I'll hand over to Greg to go through the financial slides.
Thanks, Andrew, and good morning, everybody. I think from a profit and loss perspective, there's not a lot that hasn't already been extensively covered by Andrew in his commentary, but really just to summarize, temporary reduction in utilization levels driven by those key factors, namely Grosvenor, wet weather, and corporate activity at a client level have driven a temporary reduction in utilization combined with accelerated levels of ramp-up positively in relation to new contracts and new service offerings, most notably PNG and the Decarb. Those are really the main drivers for the period-on-period reduction in EBITDA and earnings. That is very much a similar story from a return on invested capital perspective, just the lower EBIT numbers driving the lower return on invested capital numbers.
Probably worth noting though, just in terms of the denominator in that calculation, the capital base, the PPE reducing from AUD 73 million to AUD 67 million, that's a positive in terms of the return on invested capital and to the extent that EBITDA and EBIT does increase in the second half of 2025 as well as 2026, that lower capital base is favorable from a return on invested capital perspective, and we'd hope to see a corresponding increase there. From a balance sheet perspective, just worth noting that the overall net asset position, that reduction of circa AUD 7 million, really a result of the final FY2024 dividend that was paid in the period, as well as payments in relation to the ongoing share buyback. From a networking capital perspective, no real increase or change in position in terms of that overall networking capital number.
You can sort of see their receivables and payables decreasing really as a result of the lower utilisation and revenue, and then offset to an extent by the increase in inventories of approximately AUD 4 million. That increase is really purchases for inventories in anticipation of that new work starting, so new work in PNG, the Decarb, and other new service offerings as well. As we have said many times before, no intention to raise equity for any reason. As Andrew mentioned earlier, the significantly improved balance sheet, a strong balance sheet, provides optionality, whether that be to take advantage of potential future opportunities or even just to navigate these lower levels of utilisation currently very comfortably. Just looking at the cash flow performance over the last six months, obviously the lower earnings, as we spoke to earlier, the main driver for the lower cash generated from operations.
Worth noting that the EBITDA to cash conversion ratio is still relatively strong at 85%. It is important to note there, the cash interest has essentially halved from AUD 700,000 to AUD 300,000 period versus period, and that is really a function of the significant debt reduction over the same period. As we have said before, still no obligation over the last six months to pay any level of cash income tax, and that is really a function of having benefited from the instant asset write-off program that was in place sort of post-COVID and the associated tax losses from that program. Worth noting that those tax losses have now, based on the final FY2024 tax return, essentially been fully utilized. As we said before, sort of back end of 2025 will be the point that that turns around and the business does become cash tax payable again.
Looking at slide 16, just a summary of the debt profile and the debt position, very much in line with expectations, net debt has increased slightly from circa AUD 2 million in June to AUD 6 million in December, and that's really, again, just a function of the final dividend payment as well as the ongoing share buyback payments. Very importantly, gross debt is now at lowest level since June 2019, having decreased from AUD 18 million to AUD 12 million June to December. That gross debt is entirely equipment finance facilities in relation to finance leases over equipment, all taken out at fixed interest rates, and that blended at cost of interest in terms of that fixed interest currently sort of 6.5%. The last two points there really just elaborate on our earlier comments around the strong balance sheet and the optionality it provides.
The business has got access to a further AUD 15 million worth of working capital currently undrawn, as well as an additional circa AUD 20 million headroom in that equipment finance facility. Combined with the drawn level of AUD 12 million, there is circa AUD 50 million capacity there to take advantage of some of these opportunities that may arise. Finally, from my perspective, just having a look at the capital expenditure, capital expenditure for the first half was circa AUD 10 million, very much in line with first half 2024 and largely a result of the continued capital management strategy to continue to apply sensible limits to capital expenditure where it makes sense. I think to the extent that CapEx in the second half is limited to maintenance CapEx, we can expect to see full year 2025 CapEx largely in line with 2024.
The caveat to that statement, I suppose, would be to the extent that some of these growth opportunities continue to have success, pointing to probably Decarb would be the obvious one there. To the extent that there is growth CapEx required for some of those opportunities, that may cause that to change. Again, to the extent that it's maintenance CapEx, it should very much be in line with what we've seen in the past. I'll hand back to Andrew now.
Thanks, Greg. From a strategic perspective, there's nothing that's really changed here. We've sort of got those three key points there that we've spoken to people about. We want to maintain our profitability and improve it, and that's certainly what we're trying to do by investing into specialist work like it is in PNG or with SIS or something new like it is with Decarb. Again, identifying new growth opportunities, domestic mining and energy sectors to provide new services. As Greg said, with the balance sheet, we've got the options to do that. Nathan's spoken about this extensively too. We'll allocate the funds available to us across four pillars as it's best in the long-term interest of the shareholders. Nathan, I don't know if you've got any comments on those allocations across the pillars or on the strategy and just the business itself maybe.
Yeah, I think so. The buybacks have obviously been on for a while. I think we all agree that share price is quite soft at the moment. We're pivoted into decarbonisation business. We essentially generated, invented that business, started it from nothing. Hopefully that we believe that will turn into something. Obviously, the softer market of last year or last half was evident. I think that's evident, which is why we saw that, I think, coming out of COVID. That is why we're sort of going hard into decarbonisation, generated a new industry, which hopefully will be fairly profitable for us and will only continue to grow. I think that's been a good strategy. I think that's the growth opportunity for us. We continue to look at other opportunities that align with drilling, but also outside of drilling. That's still on our radar at the moment.
I think it's been a soft half, but I think the factors around that, most of those have been out of our control. Like Andrew said, I think the SIS was an expensive exercise to get back into that game. Obviously, starting a whole new drilling industry with decarbonisation is not a cheap exercise, but I think one that will pivot the business in a different direction from the day-to-day minerals exploration type business. Not to say that we'll leave that. I think it's been a very good business, a good cash flow business, but you certainly need more strings to your bow than just continuing mineral exploration. We're pretty confident about where it's going from a point of view of copper. Certainly, AI is changing the world. At a board meeting yesterday, talking about where we're going.
I think commodities will be pretty strong as long as the Australian government does not blow it up. We need them to play their part, how, and ensure that big business and our customers want to invest in Australia. That is probably the one big caveat for everyone at the moment. Other than that, we think there is going to be a very strong forward for commodities globally. Yeah, I think overall, certainly could have been better. It is not our best half by any stretch of the imagination. I think we have got to spend a bit of money to make money on the go forward.
Thanks, Nathan. Just in summary, before we open up to questions, we've certainly flagged it in previous presentations. To Nathan's point, we expect the second half to be better than the first half as some of these jobs get up and running and we see the gross margin getting generated from them. Again, looking at things holistically, it's a quality brand with a very long history in the industry and high-quality revenue streams. We've spoken about the market, and Nathan just touched on that as well. It is a bit of a transition period for us with ramp-up and investment into some of these things. Again, significant progress and certainly some exciting times ahead with that decarbonisation set to drill any day.
I certainly think that all of those things combined with the buyback ongoing, which shows we've got some confidence in the business, in the stock with limited earnings. We're very well positioned with that gross debt still coming down, as Greg said. We're well set with a strong balance sheet to move forward in a positive manner and keep growing and developing the business. Allen, I'll hand back to you for any questions.
Thanks, Andrew. Thanks, Nathan. Thanks, Greg. First question, two parts from Doug. Are there any new contracts that you are targeting for the rest of the full year that would have a material impact on the bottom line? Obviously, do you foresee a return to dividends in the second half?
Look, I think just on the new contract side of things, business development is a key aspect of what we do. There's always a number of jobs in the pipeline from small ones to big ones, multi-rig, multi-year, either surface, underground contracts through to a couple of thousand meters here and there. There's ones that you bid more aggressively than others. There's ones that you put rates up more and you sort of look, always looking at what you've got available from a people or equipment perspective and things like that. There's always the opportunity that one of those could land and you get a win and you need to ramp up and get it. I think that's what's really happened to us. If you think about what's happened, we've won a couple of rig underground jobs in underground coal. We've won the work in PNG.
We've won the work with the decarb. We've won the work with the SIS. There's a lot of money we've spent and effort we've put into getting those jobs going. Could more come? Yes. It just depends on what we win or what we don't win. The second part of the question, again, Sorry, that was just in regards to.
Dividends coming back in the second half?
I think it really depends on what Andrew just said then. Let's see how our second half goes. Obviously, the first half wasn't great. We're hoping for certainly a better second half. It doesn't help us. We've all seen what's happening up in Townsville and in the Bowen Basin, whether last month or this month, the floods happening up there. It doesn't help us. Overall, I still think we'll be sort of getting going post that. I think it's too early to say at this stage. It still looks pretty good for the rest of the year.
Yeah. I think previously, the board's flagged that they happened to look at shareholder returns up to that 75% of NPAT level. Obviously, no NPAT in H1, but still a level of buyback on the positive side of things. Again, it comes back to the performance in the second half. What are the NPAT earnings? There are papers out there from Q Value and Morgans that are worth looking at. As Nathan says, it just depends how we go and what opportunities come up in the business as well. Yeah.
Thank you. Question from Glenn. Please explain in more detail of the SIS workstream. What does this actually do? What type of client, type of rigs, crew size, profitability, etc.?
Yeah, I think that's really just about the rig type. It's a gas drainage or coal seam gas rig. It's a fairly large rig. Drills 1,800 m-2,000 m lateral horizontal wells in the coal seam. It's the same drilling that you would do in CSG as you would do in the coal mines. Same sort of systems, oil and gas controls. You're talking about oil and gas type equipment, quite extensive crews, larger gear, a lot more equipment on site, essentially a true oil and gas rig. It costs a lot more money to get that rig out. It's the only real way to pre-drain the coal mines in front of mining operations, which is why it's pretty much identical to the oil and gas industry.
Yeah. I think, again, it's difficult work. It's expensive work. It's highly technical work. Along with the risk and the expense can come good returns too. There's really only a handful of companies that can do it. Nathan obviously founded that technique some time ago. It's taken us being back in Australia for well over 10 years to actually get a win in that space, even though Nathan was the one that invented it. It's hard to get into, but we've been given the opportunity with a good client. Now, it's up to us over the next however many years to make the most of it.
Thank you. Another question from Glenn and back to PNG. Given the large setup cost required for PNG over a period of time, how quickly are these pre-costs recovered?
Yeah, look, I think there's two aspects to that. Obviously, given the fact that it did involve entry into a new country, that contract was negotiated on the basis that there'd be a mobilisation charge. So a decent portion of those costs have actually already been covered in sort of January and February 2025. And then to the extent that those mobilisation charges didn't quite cover some of the original mobilisation costs, we'd be hopeful based on the bid margins that certainly by the end of second half 2025, they'd be well and truly covered.
Good. Question from Daniel. As you noted, inventory was up during the period related to the new contracts scheduled to start in a new term. Should inventory revert to a low level in the second half back towards the historical norm of approximately AUD 10 million?
Look, I think it'll come, it should reduce, but I don't think it'll reduce back to the norms of AUD 10 million. The reason I say that is taking into account which jobs they relate to. You think from an inventory management perspective in a new PNG, by definition, your inventory holdings on a day-to-day operating basis are going to have to be higher. Similarly, with something like decarb, which is a new service offering, it's critical that we're able to respond in terms of whether it's critical spare parts or other inventory items, being able to respond very quickly. I think certainly in the early stages of that contract, we'd like to probably hold a decent level of inventory there.
Just given the types of jobs involved and the location of the jobs, I think it will mean a higher normalised inventory number going forward.
That's great. Just referring back to cash tax, you mentioned it'll start in the end of 2025. Is that full year or calendar year?
It's really going to depend on what the ATO decides, to be honest. We're not quite clear yet. Will they take a view of noting the FY24 position and start requiring PAYG installments, in which case that probably means FY25? Does it mean we simply prepare the FY25 return, which that payable number will be due in December 2025, in which case it's calendar year 2025? A little bit up in the air, to be honest, at the moment.
That's great. Another question from Glenn. If there is a major shift in government policies about decarbonisation, does that leave Mitchells exposed?
Yeah, look, I think there'd be some coal companies that may not do the work that they're potentially looking at doing. I think if you're going to get hit with the tax and the tax disappears, are you still going to do the work? Maybe not. I certainly think regardless of what happens with government policy, there's going to be a number of companies, and you're probably fair to assume it would be the larger ones that regardless of what the government says, are committed to reducing their emissions. I think it may affect the size of the opportunity, but I think the opportunity will remain nonetheless if something like that happens.
Thanks, Andrew. Back to Daniel. Employee cost per shift for the half-year down, which is a notable reversal of trends over recent years. How has this been achieved, and what should we expect over the near term?
Yeah, look, it's a tough one because it's not linear. What I mean by that is this business is very specialised. It does various types of drilling with different revenue profiles, cost profiles. It's similar to if you have a look at the revenue per shift, you'll probably find that the revenue per shift for this half was down. It's really just a function of the change in the mix of work. I think what's probably happened is your more technical specialist type work, and we've sort of called out Grosvenor as an example given the fire there. Some of that stuff has come off, which has really resulted in two things. One, your revenue per shift's down given the highly technical nature. By definition, the crews for those jobs are either larger in size or paid more.
That then, as a result, has driven the employee cost per shift down. There is nothing, there is no underlying cost decrease, to be honest, that we have been able to filter through. It is really just a function of that mix of work.
Good. Another question from Daniel. Gold prices continue to push high and are nearing $3,000 ounce. Any signs of demand for drilling services coming through in the gold sector that may benefit you guys?
Maybe you've got any comments on the gold market, Nathan?
Yeah. Look, I think the juniors are still struggling. You would think that they would be getting out there and drilling the hell out of it. Certainly, probably every second tender that comes through is about gold, that's for sure. That hasn't changed, I don't think. Juniors are still struggling, I think, to raise capital, which is surprising. I do think it'll start to pick up now that there's been election change in the U.S., things will change. I think people, again, put in their hands in their pocket towards the second half of last year, waiting to see what would happen. I think gold still keeps going. It's really coming back to whether those guys can raise capital in the market. I would say that the gold price is going to stay or continue to climb.
I think overall, the real money's probably chasing copper, rare earths, and the minerals that are going towards that revolutionary change in energy and power and AI. I think that's where we think it's going to be. Gold, certainly, as a hedge, I think that's going to—we think it's going to stay. We're still seeing a lot of people ring up and looking for meters. With all those sort of gold ones, they're not multi-year type contracts. They're not multi-rig, multi-year, 100,000 metre contracts. Those guys are quite small in size, and they're chasing three-month contracts or four-month contracts. It's good, though. Don't get me wrong, but it's just more movements doing that type of drilling.
Nathan? Question from Mark. Is there scope for further rationalisation in the drilling space? Obviously, how'd that help and what's your role as such?
I think so. I think there's always scope for rationalisation. Yeah, I think it's pretty tight now as it is. I don't see any new companies coming into the market, that's for sure. Certainly, there's been less M&A action, I think, in this space. Over the last sort of six months, there was probably a fair bit of it earlier last year, not so much at the moment. There's always room for it, I think.
Thank you. If there's any other questions, please pop them in now and we'll address them. Otherwise, we'll come to a close. Thank you. Nathan and Andrew, any final remarks just for the investors online still?
No, look, thanks for the interest. Thanks for dialing in. We are looking forward to a better second half and hopefully reporting some positive outcomes in that decarbonisation business as it gets going.
Thank you. Again, this is recorded, so I'll make it available after the call. Any questions, feel free to come through to myself, and I can sort of relay it back to the Mitchell Services team. Thank you for joining.
Thanks, guys.
Thank you, guys.