Joining us today, one is Allen Chan, Bridge Street Capital. Today we have Mitchell Services, ASX code MSV, and they are here to talk about their first quarter FY 2027 quarterly update. We have with us today Nathan Mitchell, Executive Chair, Andrew Elf, CEO, and Greg Switala, CFO. This is being recorded, and we are happy to take questions after the presentation. Andrew, over to you. Thank you.
Thanks very much, Allen, and thanks everyone for joining us and for the interest. As Al said, we will follow the usual format. We do not rabbit on too long at the start, just touch on a few key points, and then open it up for some questions. Obviously, we are happy to answer those as Allen puts some to us.
Look, very pleasing quarter. Obviously, a lot of hard work over many years leads to a quarter like this, so credit to all of our teams that have done the hard work and delivered those results. But a very strong quarter, a record quarter in many respects, and very proud of those numbers. I think it is important to note that it does look like it is going to get better. We make the point about the rigs that are going to go out and where we think the operating rig count can potentially go. Certainly, there is a lot of leverage left in the business if that rig count increases throughout the course of this year, and then going into 2028 with a higher rig count again at the start of the year. So it is looking pretty good.
We obviously talk about the market. I know IMDEX released an announcement late last week where they spoke about the market as well, so it all sort of hangs together with that. Certainly very strong in gold and copper, which is fantastic to see, particularly in the underground space. In more recent times, even though that coal price has increased, we have not yet seen an increase in demand for coal rigs. That certainly is an upside opportunity for the business if that coal market does improve. I will not go through the financials. Please feel free to ask any questions to Greg in that regard. There are some movements in cash and things there that he can talk about in more detail.
At the end of the announcement there, very pleasing that BHP did give us approval to talk about the project that we are completing with them at the moment, and the world first that we completed in regards to decarbonization drilling, and then referencing the BHP presentation. To date, as we have said previously to people, we think this business is going to take some time to get traction. But I think this proves again that the concept and what we are doing works. We just need that market to come to us. You need a little bit of time as it develops.
All in all, great work from the team with a world first. You certainly don't see many world firsts in drilling company presentations, so that's absolutely fantastic and certainly builds on a lot of the experience that this business has in that gas space over many years. All in all, a great start to the year. We're well set and hopefully looking forward to a very good year ahead for the business. Al, I'll let you open it up for some questions.
Thanks, Andrew. Okay. The first one. For the additional 10 rigs you signed contracts for, are the pricing and expected margins the same as the rest of the contract book?
Yes.
Yeah.
Yes. Yes.
Yep. Thank you. Next one. Aside from rig wins, do you see any rigs coming off contract for the balance of FY 2027 and 2028?
No, but I'll give more than a one-word answer to this one. I think, look, you've always got an element of your book that needs to be re-won, and we do have a couple of contracts that we need to re-win in the second half. Nothing in the first half. We do hope to win those contracts. There's no reason that we shouldn't. We're performing well. We're being reasonable with our price expectations. So unless someone lobs in a stupid price, which you wouldn't think would happen in this market, we'd be confident of retaining those. I don't see a great number of rigs coming off at all. Maybe with clients that have got one rig that are sort of smaller jobs, stop and start, but there's enough demand to then go and put that rig somewhere else. I think no, I don't see rigs coming off.
Thank you. Would it be fair to annualize Q1 underlying results and add the incremental revenue and gross margin to arrive at a run rate end of FY 2027 earnings number?
I think it's certainly fair to include the incremental revenue and gross margin in your assumptions going forward around the extra 10 rigs. Off the back of that, can you also simply annualize Q1 results for the rest of the business? Probably not. The reason for that really twofold. One, the business is seasonal, particularly when you get to the back end of Q2, beginning of Q3, just with that sort of Christmas shutdown, et cetera, perhaps allowing for a bit of a wet season in sort of early January as well. I would just probably point shareholders to previous reports to sort of form their own views around what that seasonality can look like.
Then with any new job, not that these 10 rigs, the ramp-up is going to be particularly significant, but there always will be. There'll be an element of time before those 10 rigs are up and running and delivering the full margin that Andrew referred to earlier.
I think what's good with those 10 rigs that are going out is they're going to existing sites. So the sites are set up, the workshops are set up, the supervision's in place. A lot of the bigger money that you would spend to go to a new project that's remote has been spent. You're literally sending rigs out there, crews out there, and that sort of thing. Obviously with the business having more rigs running and a higher top line, the impact of that mobilization is reduced. So I think, to Greg's point, that can absolutely be managed.
From a rig count perspective, look, the best way to think of it is just pick an average operating rig count that you feel comfortable with, and pick an average revenue per rig and an EBITDA percentage and sort of let the rest flow out from there. Obviously, we sort of finished the year at a rig count. You can see what it was for the first quarter. You can make some assumptions on an average operating rig count for this year. Then sort of as I touched on earlier, if the exit run rate from this year, 2027- 2028, is much higher, then you can make some assumptions on how good 2028 could potentially look as well.
Thanks. Andrew. Question from Royce. Can you explain the CapEx increase, please, and what full year CapEx FY 2027 and 2028 might be?
I think we've said previously that looking at FY 2027 CapEx is certainly going to be front half loaded, and this quarter certainly demonstrates that. What that is, it's really in response to the increased demand. So, there's an element of rigs that are parked up that sort of need to get ready. A bit of a capital overhaul to be ready for those jobs and that's in line with expectations. That's sort of what's unfolded.
I think in addition to that, just what we're also seeing, the strength of that demand has meant, in some instances, that rigs that were otherwise scheduled for a rebuild have had to stay at client sites to service that demand. You may have noticed, just in the commentary, in the quarterly as well, rig count is now 93. I think from memory, that was 90 at 30 June. Given that increased demand and the fact that we haven't been able to bring those rigs out for that rebuild, we've had to sort of pivot and purchase three new underground drill rigs there, which is also part of the reason and why the count's gone from 90- 93.
Yeah, and I think what that means in Australian dollar, Greg, is roughly maybe a 10% increase on last year. We've said to people CapEx is probably going to be flat year-on-year. And with that increase in demand underground, it's probably 10% up now.
Yeah. Off FY 2026 levels of about AUD 22 million or thereabout. So yeah, I'd agree with that. Maybe increase by about 10%.
Thank you. Next one from Issam. The timing of the new rig deployment through the rest of the year. Circuit two rigs additional Q1, obviously which do not impact EBITDA margins. Is the expected rig deployment through the rest of the year expected to impact EBITDA margins?
No. We're hoping that we can achieve a 20% EBITDA number for this year. We've said to people repeatedly our goal is sort of 30% gross margin, 10% overhead and 20% EBITDA. If we can achieve that with wet seasons and Christmas shutdowns and getting some rigs out, that's a great result. We'd like to think that we can achieve that.
Thank you.
As far as the rig count goes, we're hoping to get a majority of those rigs out before Christmas. It's just going to depend on the clients and whether that can happen. Certainly, we're very, very confident of getting six out before Christmas of those 10 that I talk about. Potentially the other four, if we get them out before Christmas, great. If not, early in the new year.
Thanks. From Donald C. With the increased cash expected, what does this mean for the dividend?
Look, I think at the moment it's our first quarter, so that's yet to be decided on what we'll do on dividends. I think we'll leave that till the second half of the year. As I say, it's been a great start from the team. I think it's early days yet to talk about dividends and what we'll do. We're focusing right now on rig deployments. Get them out. As I say, it's a busy time for us. Good growth time. Super excited with what's happening. That will come. That decision will come in time.
Yeah, I think Nathan has spoken previously. We'll put the money where it needs to go to support the business, whether it's shareholder returns or other. I think, look at last year, it was a AUD 0.04 divvy in H1 and I think two in the second half. If you think about this year, maybe it looks like it flips around. Last year it was sort of the cash came in the first half and a bit heavier usage in the second half. This year it's probably the opposite. It's heavier in H1, to Greg's point, with the CapEx and rigs going out. Then it probably is a bit more stable with a lot of cash going to come back in in the second half. So the intention is still there to do something. As Nathan says, early days, let's see how we go.
Thank you. Question from Royce. Are market and rental prices increasing, stable or decreasing? Any comments on the outlook?
I think everything looks pretty flat. There's obviously inflation out there of whatever it is. That just gets managed in the ordinary course of business. Managing your suppliers and your employees and your clients with contract renewals and CPI increases, et cetera. The rates that are out there are pretty good for drilling. I think they've all been reset, and as our returns would demonstrate, the margins are okay. A lot of our workers with the global mining majors, probably 80%+ , they certainly don't allow you to make a super normal profit. So if you're making a good return, that's great, and you can maintain that. That's how we look at things. When the market is tougher, they also let you make a return, which is important.
Outside of those major clients, the junior market, the smaller end of town, the demand for rigs is still strong. That's where your pricing probably moves a little bit more. But again, I think the pricing at the moment, Nathan, I know your thoughts-
Yeah.
on the market is sort of just solid.
No, I think it's solid.
Yeah.
We're not expecting huge price rises, I think.
Yeah.
I think looking at the numbers, we don't need to continue to push the price up.
Yeah.
Next question from Chris. It is three parts, but I think we've answered the latter two. Revenue per shift increased significantly against first quarter 2026 and also fourth quarter 2026. Is this just from doing higher value work, or is there something else that has driven the increase in revenue per shift?
I think most-
It's probably a factor of a few things. Just underlying productivity from a business perspective. The operational team's drilled very well and very successfully. We made the point in the quarterly just in terms of some of those previous quarters and the adverse factors that were outside of our control. There was certainly an absence of those this quarter.
As Andrew alluded to earlier in answering the previous question around price, a lot of those contracts have just recently been repriced as well, so there's that element to it as well. I'd say, yeah, lack of adverse impacts pricing to an extent and very good underlying productivity.
Yeah. I would agree with Greg. The productivity side of it has certainly picked up, that's for sure. And the guys are doing an exceptionally good job in the field, not just a bunch of rigs, but most of the rigs are now doing exceptionally good productivity job. And that really goes to the bottom line. So price helps, but really productivity is a much better driver.
The rig timing we've spoken about our-
Yes.
you've spoken about, too.
I guess the question is whether you can still deliver margins north of 20%. It's probably part three.
We touched on that as well, that that's what we're hoping to try and do. Yeah.
A question from Daniel. Are you contemplating any investments in fleet expansion over the next one to two years?
Look, we've said to people on the investor roadshow and in these calls that it's not our intention to increase the fleet unless we have to, unless it makes sense to do so. But if it makes sense to do so, we will. We've got the balance sheet, we've got fantastic clients, and we're going to look after them first and foremost. If we need more rigs to look after those clients, we'll get them. But do we have intention to go out and buy 15, 20 rigs and throw them into the Eastern States market? No. You just got to look after your good clients, and we'll get what we need to do that.
I think we covered that one from Issam. Next one on rig count. This one from Anonymous. That's a good result. Well done. What share of FY 2027 CapEx is growth versus stay in business? Q1 revenue per shift up 17%, how much is priced? Finally, what leading indicators are you watching in relation to your own book and competitive landscape? How are those indicators tracking?
Well, I think the CapEx question, Greg, just reel off those few rigs.
Yeah. So everything, to touch on the CapEx question, all CapEx will be stay in business, sustaining CapEx, with the exception of those three rigs. The Q1 revenue per shift, I think we've sort of touched on that one as well in terms of what's driven that 17%.
Yeah. I think, to be honest with people on the call, we don't sit here and do a forensic analysis accounting of 6.2% is price and 3% is productivity and 1% is this. We just don't have the resources to be forensically accounting like that. But we know what's happening, obviously. But look, what do we look at? We're always looking at what's happening in the market, commodity prices, competitors, projects moving from one phase to another, people with different drilling results. There's a gazillion different things that we're looking at and reading about and staying close to the market that we're in.
The competitive landscape, we've spoken about this over many years too. There's been a significant amount of consolidation in the sector. When you look at Eastern Australia and Mitchell Services, there's a number of companies in Mitchell Services that we've acquired over the years. Tom Browne, Nitro, Radco, Deepcore, amongst others. Then similarly in the WA with Perenti, Strike, Swick, Ranger, DDH1, et cetera. So there's been a lot of consolidation in the drilling sector in Australia. It still remains a competitive industry. There's always someone else there. But I think importantly, when you look at the clients we've got, and I say 80% global major Tier 1s, there's really a good handful of growing companies that can service those more sophisticated clients that want excellent gear, excellent crews, and everything else. And those companies at that end bid fairly and reasonably, and so do we.
Yeah. I think we spoke CapEx from Andrew. The next question, I guess beyond the 10 rigs, is there still an active tender pipeline, or have you captured most opportunities in the market?
No, the pipeline is good. It just depends on what we're looking at. Really what we're looking at is multi-rig, multi-year opportunities with global Tier 1 major clients. Do we want to go and buy more rigs and put them out to drill two holes for a junior? No. Are those leads out there? Yes. Are there still material size leads with what makes sense for us to target and get a good return? Yeah, there is.
Thank you. I think we spoke about that one on capital management, so pass on to Nathan. There's one from Royce. How has the second quarter for 2027 tracked so far, has weather remained favorable?
Good until today. Just started raining and 50 mil expected through the coal fields, if not more. I will keep you posted.
Thanks. From Issam, if you get to 85% utilization in FY 2028, is that effectively full utilization and you would have to go into growth phase with increased rig count and CapEx?
We've always said to people that 90% is full utilization. So there'd probably be another 5% there that we could go to 90%. Once you get to 90%, it's always going to be rig stopping, starting, moving. You might go up a bit, down a bit, but 90% is a good number to work on. So at 85%, you've got a little bit of fuel left in the tank.
Yeah. Next one's from Geoff, Geoffrey. How much will you have to spend on new underground rigs? This question for Geoff.
Yep. Thanks, Geoff, and hello. Look, those rigs, those underground rigs, they're probably about AUD 1 million a throw. By the time you buy the rig and put a few bits and pieces with them, about AUD 1 million a throw.
Okay. Is the AUD 22 million FY 2026 base cash paid or additions including work in progress? Just to be clear on cash total CapEx and the breakdown there.
Probably struggling to interpret that one. Al, do you?
I will come back. Yeah, I will go back to that investor. There is one from Royce. Is labor availability a challenge in a tight market? Sorry, Greg.
I was just going to say, my interpretation is the AUD 22 million of FY 2026 CapEx that we called out earlier sort of base case sustaining or is there growth embedded in there? No, that is pretty much sustaining maintenance type CapEx only. If that is the purpose [audio distortion] on that question.
Yeah.
Yeah.
Thank you. I will repeat the one from Royce. Labor availability a challenge in a tight market? Do your contracts protect against labor inflation for you?
Yes, we can. The contracts have got clauses in there that are generally a rise and fall clause on the anniversary of the contract that is calculated off various indices. Be it labor indices, material goods indices, et cetera. Just a straight CPI may not necessarily be reflective of the cost base, et cetera. Look, it is all about people. It is a service business. It is great to have rigs and things like that, but you need good people on them to make them turn and go down.
We have got some great teams in the business, as I said, and it is a great brand. It has been around for over 50 years. The equipment is good. The clients are good. Camps are good. The food is good. The training is good. We have got a lot to offer people. I think we are as good as you could hope to be positioned to deliver, and we will. Versus other businesses that may not offer some of those things to their employees, whether they are in the drilling industry or not.
It is tough. It is all about people. But we are protected commercially best we can be. We certainly have a lot to offer our good people.
Thanks, Andrew. Next question. Last year in Q2, your clients had a shorter Christmas shutdown period. Given gold prices have pulled back, does this mean they are less likely to stretch production and revert back to a normal shutdown period?
No, I think we're just going through our shutdown planning at the moment. Obviously, it's still early days. We're only sort of getting towards the back end of November. Those conversations sort of started getting a bit more serious November, December. But I think just given the demand for rigs and how busy people are and budgets increasing, it is looking like people will be a little bit more aggressive with shutdowns than they have been previously, too.
Obviously, people don't shut down their mines, they just shut down their drilling and different aspects of operations at the mine over Christmas. Go back to sort of a skeleton crew but keep things rolling. We always like to see our people get home for Christmas and spend time with family and friends, and have a bit of a reset, and then get back out there and get into it. I think what we're seeing so far is that the planning suggests that the breaks will be shorter than has been traditional, which is a good thing for us.
I think the other thing to consider is that the coal fields typically have quite a big break over the wet season. Obviously, the way the business looks at the moment, coal is only 20% of revenue, so less surface rigs in coal, less rigs stopping for an extended time over the wet period. I think, yes, it is absolutely seasonal to Greg's point before. But hopefully, some upside for us through shorter shutdowns is a good thing.
Thank you. Yeah, a question from Jeremy. How much additional work can you guys take on with the existing fleet before significant CapEx is required? What would earnings/margins get to at full utilization?
Yeah, the answer is really 93 rigs at 90% utilization is tops. Pick an average revenue per rig and EBITDA percent, and that's as good as it gets. We've been pretty open that that's a good way to have a think about it.
Yeah. Last question here. That's from Royce. Have you seen market supply of rigs increase to meet demand, given the high returns?
Yeah, I think people are looking for rigs, for sure. Secondhand market's still pretty strong. Again, trying to find the right rigs, though, is difficult. If you're selling rigs now, you're probably selling rigs you don't want. As most people know on the call, we cycled out a bunch of our rigs a few years ago in the top of the market, and so that still remains pretty strong on the price. There's no more rigs that we have that we're cycling out anymore. The ones we have, we're happy with. I think that the rig price, I think that also the timeline to build a rig now is probably 12 months delivery. So that's not helping the situation if you wanted to get new rigs. Certainly, underground rigs are a lot less than that, but the surface rigs have changed a bit.
One more. Do you depreciate the rigs at the same rate whether they are utilized or not? Just thinking about the 2025, 2026 D&A number, whether this increases as rig utilize increases.
Yeah, it's a very good question. Thanks for that. We are fairly conservative in our approach, and there are components within the rigs that sort of need to be replaced irrespective of whether they are utilized or not. To answer the question, we simply do it over a period of time. That's generally sort of somewhere in the order of seven years for a surface rig, five years for an underground rig. Then to answer the question around the D&A, it should be very similar to 2025, 2026 levels. Given that, maybe up a tick, just given the first half sort of focus of that CapEx number. There'll be depreciation associated with that. But shouldn't drive the D&A in any sort of material effect, given the policy and the approach.
Yeah, it's a conservative straight line, whether the assets are running or not. So it's a good conservative way to do it.
Just have one more Andrew, from Walt Beasley here. Can you please give me some more details about your experience so far with Loop Decarbonisation business and where this is heading?
Look, it's effectively a carbon tax by stealth, to the biggest emitters in Australia. Some of those are the coal mines. Obviously, there's gas in the coal. As they mine it freaking vents up into the atmosphere. That business was created to work with those miners and take that gas out before they mine it and reduce their tax. I think we've proven that it works. What needs to happen now is we need that market to just mature a little bit more, and then take advantage of it. We're well set with what we've done.
What I mean by that is there's a crossover point between the tax. The tax gets to a point where it justifies acting and doing something. There's always going to be clients out there, like BHP that was in the preso, and credit to them, regardless of the monetary side, they're committed to reducing their emissions. There's other clients where they take a more financial approach, and that's their decision, of course. Really, as the obligation in the legislation says, you need to reduce your emissions on a compounding basis year- on- year. If you don't, your taxation liability increases exponentially year- on- year as a result. Over time, the cost of drilling and managing that gas makes more and more sense.
I think what we're seeing is that miners are doing everything they possibly can to avoid spending any more money. Good on them, so they should. Trying to maximize their profits. But it's going to get to a point where they really need to do something to manage their financials the best they can. That means get a company like Loop in to do some work for them. I think that is at least a year away, if not more. It really is a game of patience. I do not know, Nathan, if you've got any thoughts on that.
No, I think you're right, Andrew. I think that the whole idea there was to use our drilling technology that we developed many years ago, and thread that into this highwall degasification for these guys. It clearly works. Credit to the guys and the team. Done a fantastic job. BHP's happy. It's great that we're able to tell people in the quarterly that we're doing the work for them. So I think technically, it's a great result. As Andrew said, I think the market will change. I think we're probably the only one playing in this space at the moment. It is a long game. We play the long game in this business, so at some point there will be a crossover. We'll have the equipment, the technology, and the skills to be able to help them.
Fantastic. Thank you. Okay, that's all the questions today. Again, this is recorded, so it will be available by the end of the day. Nathan, Andrew, Greg, thank you very much. If there's any further questions, please come through to myself, and I'll arrange management to respond. Thank you. Thanks, guys.
Thanks.
Thank you very much.
Thank you.