Good day, ladies and gentlemen, and welcome to Capital Limited H1 2022 Results. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session through the phone lines, and instructions will follow at that time. Alternatively, participants can submit written questions using the Ask a Question button on the webcast page. I would like to remind everyone that this call is being recorded. I will now hand over to Jamie Boyton, Executive Chairman of Capital Limited. Please go ahead.
Thank you very much. Thank you everyone for dialing in today to the Capital Limited first half 2020 results. I've got with me today, Giles Everist, our Group CFO, and Conor Rowley, Group Investor Relations and Corporate Development, both of whom are based in London. I'll run through the slide deck. I'll skip over some of the background detail, focus in on the results. Obviously, that's the context of today's presentation. Obviously at the end we'll have the Q&A. Moving on to the highlights slide to kick things off. Look, it's an incredibly pleasing performance for the first half. A record performance for the company.
We obviously did a lot of work, setting the company up over the preceding few years, positioning ourselves in West Africa, putting the foundations in place for the laboratory business and entering full scale earthmoving business. Those moves and that positioning have really benefited the company's results, particularly in the second half of last year and continuing on into the first half of this year. The numbers, they're there on the page in front of us, so I won't repeat too much, but we're at 40% revenue growth, translating into 46% EBITDA growth. 57% adjusted net profit growth. Then the operating cash flows from the business up very strongly on the first half of last year, over 500%.
Noting, of course, the first half of last year is when we were establishing ourselves at the Sukari mine contract. Look, again, strongest results in the company's history. Returns very strong. We generated an adjusted return on capital employed of 24.6% in the first half. We maintain quite modest net debt position of $36.4 million. And that does not obviously account for the fact that we have an investment portfolio of $47.3 million. A key thing to come out of today's results is that we had previously guided the market to revenue for this current year of $270 million-$280 million.
Today we have, along with the results, increased our guidance up to $280 million-$290 million. Just flicking through the background. The business are fully integrated multi-discipline service provider to exploration and mining companies across Africa. In the case of the laboratory business, in the Americas. This map obviously profiles the major projects that we're currently working on. A heavy reliance on contracts at mine sites and the largest fleet of rigs in the African continent, and a growing presence in both heavy mining equipment and our laboratory businesses. The slide deck today was the full slide deck we'll be using in the investor marketing. I'll just point out a couple of the key thematics.
We certainly had one thing that was, I suppose different in the first half of this year to the second half of last year, is we saw some increased volatility, particularly in Q2. However, as you saw, the numbers still reflect an incredibly strong performance. Despite the volatility, we're still operating in a market and demand environment that's highly supportive. Continuing to see metal prices trading at decade highs, and exploration spend below or 40% below previous peak cycle levels. The same thing holds for the CapEx cycle as well. Again, whilst there has been some volatility, particularly in Q2, the demand environment has continued to be very strong across all of our services. Going into each of the individual business unit performances.
The drilling business has just continued to go from strength to strength. In fact, you know, we did pre-release the revenue results in mid-July. Our Q2 fleet utilization 85%, that's the strongest utilization that we've had in our drilling business since the IPO back in 2010. We're seeing demand across the board, an improving pricing environment, rate environment. You know, we're using that demand as an opportunity at the moment to actually reposition and consolidate our operations. I think this is an important point to bring out. We announced contract wins in H1 with Kibali for our laboratory business and more recently for our drilling business at Rapola.
As you can see in the visual there on the left, we're now operating on five of the top 10 gold mines in the African continent. Noting that we don't actually do business in Burkina Faso and Ghana. In the territories where we do business, we're on five of the top six. Further to that, we have started drilling at Goulamina Lithium Project, which is gonna be one of the world's top five spodumene producers globally. That's in Mali. We started drilling at the Kabanga Nickel Project, one of the largest undeveloped nickel sulfide deposits in the world. We're also working at the Bankan Project, which we're also a shareholder of, which is an emerging major gold discovery. Last reported number about 4.3 million ounces.
The message that we're really delivering to investors today is that while the demand is extremely strong, we are using this now as an opportunity to review contracts, decrease our exposure to smaller scale contracts, single asset contracts, consolidating to larger contracts and continuing to target the top-tier customer base to expand our business. The mining business, two contracts were operated across the first half, one in Ivory Coast at the Ity mine and the other at Sukari, the big one being the Sukari contract. The contract continues to perform exceptionally well, meeting all our expectations, performing above contracted volumes. The performance has really now we've been running that contract for about 15 months.
We reached full run rate in late Q3 last year, and it continues to go from strength to strength. The tendering market for the mining opportunities is longer dated cycle, obviously. However, still, many opportunities presenting themselves. We're very selective about the ones we're gonna go for. Continue to see a lot of opportunity for our mining business. Laboratory business going from strength to strength. We have actually started to increase our level of disclosure as the business gets a bit more critical mass within Capital. Obviously in the first half we announced an extension of our existing arrangement with Chrysos, where we'd already announced an arrangement to roll out six units, which are gonna be rolled out over the course of 2022.
We recently announced an extension to that agreement to roll out a further 15 units, taking the total to 21 units over the next few years out to 2025. We've also given some revenue guidance on this business, longer dated revenue guidance. The business is again going from strength to strength. Secured major contracts in the recent period with Kibali that I mentioned earlier. A contract renewal with Tasiast, which just sits outside of that. The top ten, I think it's number 11 in Africa for the significant gold mines. The business again performing very well. Investments, we released a fair bit around our investment portfolio in the July revenue release.
Obviously we had some volatility in the portfolio, particularly in May and June. However, significantly outperformed the broader market. We're continuing to develop some solid relationships with customers and generate some very good revenue, off what is a highly effective business development tool. In fact, you know, for the half year annualized, $53 million of our revenue base is coming from investee companies. Again, we disclosed a lot of this with the revenue results, but we were a net seller of investments in the first half of $2.6 million, and the portfolio at June 30, $47.3 million. Since we initiated this strategy, formalized this strategy at the start of 2019, we generated a 300% return.
The invested capital sits just a little bit over $11 million, and that's a compound return about 50% since inception. Moving on to the results themselves. Again, very strong performance across the board. Obviously adjusted net profit represents the operating business as opposed to the net profit encapsulating the investment portfolio. We're still operating at very strong margins, EBITDA of 30%, EBIT of 20%. We have previously guided that 25%-30% EBITDA margins is our target range, so we're still trading at the top end of that range.
We had a bit of an anomaly which we previously communicated in the second half of last year, which corrected itself in H1, but still operating at the upper end of our target margin band. The net cash waterfall, I won't run through this in too granular detail. As you can see, strong EBITDA. CapEx was $22.6 million in the first half. We finished with first half investments of $47.3 million. With our investments, we finished the period in a net cash position, obviously net debt without the investments. More critically on the CapEx slide, we had previously guided the market to CapEx of $45 million. The market was sitting about $48 million.
We've today upgraded our CapEx guidance. We've moved the guidance range to $50 million-$55 million. We've actually shared a little more detail about the sustaining CapEx of the business because we'll just give analysts a better sense of our sustaining run rate. You are now talking about with a significantly larger business. In 2019, we turned over, I think, about $115 million. We're now looking at $280 million-$290 million this year. Our sustaining CapEx has moved into the 30-odd million range.
The increase in CapEx in this year's guidance is essentially around higher rig utilization than we previously guided, which obviously leads to higher sustaining CapEx for the operating fleet and the addition of a further few rigs, which are coming in for fleet replenishment, as we lock in further long-term contracts, the most significant of which was the Geita contract that we announced recently. As mentioned earlier, balance sheet still maintaining a pretty modest gearing level. Net debt to equity is 16.4% at the end of the first half, and net cash, when you incorporate the investment portfolio. In the bottom left, we've broken down the gross debt composition, noting that the majority is amortizing debt, specifically Epiroc, Sandvik and Macquarie.
26% of the debt is a revolver. We've also declared today an interim dividend for the first half of $0.013 per share. It's an 8% increase on the first, on the corresponding period last year. Dividend policy remains consistent with prior reported policies. The dates for the dividend timetable are in the bottom right-hand side of this slide 20. Outlook and guidance critical obviously. What we continue to say is that this continues to be a highly supportive commodity price and commodity demand environment, notwithstanding the volatility that has entered the market in recent months. Generally, balance sheets of the majors in particular, our target customer lists are in extremely healthy condition.
We're still seeing gold, in particular, the majority of our exposure trading at around the $1,800 ounce level, which is highly supportive for increased exploration and capital spending. The demand from strategic demand or structural demand from transitioning into battery metals is something that is a new revenue driver for the company. We've now got exposure to nickel projects, lithium projects, copper projects, and we're seeing increased demand for those types of commodities. A very strong demand environment led to an increase in our revenue guidance. The other numbers I've really covered already. CapEx guidance as well of $50 million-$55 million. With that, I'll hand back for Q&A. Thank you.
Thank you. We will shortly begin the question and answer session. As a reminder, participants can submit written questions using the Ask a Question button on the webcast page. To ask a question on the phone line, please press star and one on your device. We will pause for a moment to assemble the queue. We will take our first question from Richard Hatch of Berenberg. Please go ahead.
Yeah, thanks very much. Yeah, morning, Jamie and team, and congrats on a nice set of numbers. Got three questions. The first one is, Jamie, can you perhaps just give us a bit more sort of color and flavor on what's going on in the business development angle, particularly in Capital Mining? Just be interested to know what the opportunities you're seeing there and any hopes to for any new sort of contract announcements in addition to the Sukari contract. That's the first one. The second one is just on the numbers. Just noting the increase in inventory, which I guess is part of what's going on with COVID and part of a growing business. But any kind of targets there to try and drag back some of that working capital build, particularly in inventory.
The third one is, I just note this morning that a couple of your competitors are engaging in M&A, although it's not been successful at this point. I just wonder what your view is on any sort of M&A opportunities that you're seeing in the space to kind of, you know, provide additional scale in a step change for the company through M&A. Thanks.
There's an interesting connection between your first question and your last question. The connection is the M&A activity, which I would imagine is predominantly around Australian earthmoving contractors. What that is, I'm gonna tackle the third first. What that is telling you, there's two very clear thematics coming out of Australia in particular, where the majority of our peers are listed. One is an increasing prevalence of buybacks. We've seen probably up somewhere close to a half a dozen companies announce buybacks. The second is M&A starting to happen. That M&A, in my opinion and our opinion, reflects a tight market for both people and equipment and depressed valuations. You're starting to see valuations improve.
You're starting to see buybacks enacted, and you're starting to see corporate activity due to a lack of or longer lead times on equipment and a lack of access to deeply skilled operators. All of which are highly positive signs reflective of the valuation and demand within the services sector. When I reflect that back to your first question, the BD around the mining business, it's. Look, it is something we get asked. There's two main points I'd like to get across is. The first is mining. The mining business development sales cycle is a lot longer than drilling, stating the obvious.
What the opportunities that we have seen in the last 18 months since commencing or being awarded Sukari have not been of a compelling enough nature or what we saw as within our wheelhouse with respect to our returns targets for us to chase particularly hard. Now, as contracts are awarded, and they are small, most predominantly small scale in nature, that is taking excess equipment out of the market, which is leading to an improving rate environment on the next round of tenders, making them more attractive. I would say that we are engaged on a number of opportunities, but unlike our peers, we don't have to win just drilling. We don't have to win labs. We don't have to win mining. We will win the contracts that satisfy all the criteria, returns, risk profile, customer profile, country profile, et cetera.
We're afforded the luxury, so to speak, with of being able to choose between multiple services and which contracts tick all the boxes. It's still a very strong demand market, as it is across all of the business units. With respect to your question about inventory, there was inventory build in the first half. We actually had a call last night, Giles and I, with the team. We are internally expecting a little bit of that to get released over the second half. I won't quantify a number. Hats off, I think, to our operating team.
While the inventory build was pretty robust, was a decent sized number in the first half, that was 100% the result of the war in Ukraine, supply chains getting constrained, making sure we got ahead of that early, inventory hit the ships, you know, to make sure we didn't have any supply disruptions. Those results tell you that they achieved those goals very well.
Thank you. We'll take the next question from Andrew Breichmanas of Stifel. Please go ahead.
Thanks. Good morning. Two questions from me. First, you talk about the buoyant tender pipeline. I was wondering if we could just get a bit more granularity on what you're seeing, particularly on the drilling side, because the aggregate data for the sector seems to suggest a weakening of activity in June and July. Is the demand you're seeing more reflective of the locations you're operating in and your client relationships? Does that commentary suggest that you're starting to get some visibility past the rainy season and into 2023? That's the first question. The second question just relates to your approach to shareholder returns. I think you mentioned that your dividend policy continues to target returning up to 20% of NPAT. There's some discretion in that policy.
I was hoping to understand some of the considerations that go into setting the path. Secondly, you just mentioned buybacks by some of your peers. You've completed a program at the start of the year, but I just wanted to see how further buybacks could contribute to your shareholder returns policy going forward.
Demand, let me tackle that first. We're very positive about demand. I know you're quite right when you look at the number of lead indicators that we always look at. Metal prices obviously being very significant. Capital markets activity being another one. Capital markets activity has been impacted with the recent volatility. As I sit here today, I am very aware and we are cognizant of that. I think in the junior end of the market, it will show up. It's getting more difficult, whether that's a sustained difficulty. However, it has been more difficult in recent times for the juniors to raise money. In answering your question, that's not our market. We have exposure to mid-tiers, blue chips, mine sites. We have the exposure to exploration sites.
Therefore the demand we're continuing to see is from those larger clients that are still operating in a very strong environment. Now having really established ourselves as a larger scale player, what is particularly pleasing is that the opportunity sets in front of us are very often five, six, up to 10 rig opportunities. We're not talking about one or two rig opportunities. Again, as the ability to be more meaningful to the group. I hope that sort of answers the question. You know, there is volatility impacting the juniors, but we're not seeing that particularly in the top tier assets, thus the strategy. Within our policy framework, yes, it is broad. It's a subjective process. It's high level of discourse between the board.
Will it require buybacks? We'll look at dividends, we'll look at the capital demands from the business itself, we'll look at our gearing levels. All those things come into play, as you would fully expect. It's a bit of a bland answer, but you know, there's a lot of things to consider. Clearly, we're in a period of capital intensity. We have been for the last few years as revenue has really taken off, particularly over the last two years. You know, all options remain on the table. Conor or Giles, you might just wanna answer what the, you know, the aggregate payout based on the buyback and dividend yield, if you could.
Yeah. Sure, Jamie. I mean, if you combine the buyback and the divvy, you're around about 4.5% yield, currently. Pretty strong re-yield.
So there's-- we don't-
Okay, thank you.
Good. Good.
Thank you.
Thank you. The next question is from Alex Bedwany of Canaccord Genuity. Please go ahead.
Hi, Jamie, can you hear me?
Yes, I can. Hi.
Great. Look, two questions from me this morning. First is just how you guys are thinking about your efficient debt level and repayments going forward. I note that on a net debt to EBITDA basis, the multiple, you guys are less indebted than your peers. How much further do you think you'll sort of go with debt repayments, and where do you think the efficient level sort of sits, whether it's into the short, medium, or long term? That's the first question. The second question is just around cost inflation. Obviously you've got some significant rise and fall mechanisms in your contract. I just wanted to get a sense, a broad sort of ballpark sense of how much of your cost base is actually protected by that.
If the industry is sort of seeing 20% cost inflation, then, you know, how much that will actually impact your EBITDA margin. Thanks.
Cost inflation. The major contracts have rise and fall mechanisms embedded within them. You're probably talking in the vicinity of 60%-70% of our contracts have embedded rise and fall. The balance of the contracts, you have mechanisms that allow for renegotiation. Look, there is absolutely cost inflation in the system. We've been quite open about that. Wage inflation, shipping inflation, freight, those sorts of costs. We've largely been able to mitigate those cost pressures and pass those cost pressures off. In fact, to the point, you know, we said at the time, the H2 margin last year was an outlier, sort of a perfect storm of events. We've been quite consistent saying 25%-30% is our target range.
We're right at the top of that band. That in itself, I think, should indicate that largely we're managing to pass on cost inflation. We are also using that cost inflation, and it's a real cost inflation. Obviously if some clients are not willing to look at that, you know, obviously we've got to look at where we're gonna generate returns for our shareholders, and that is part of our consolidation phase and reposition that we're going through currently. Giles, I'm gonna let you handle the debt question if I could, please.
Yeah, sure. You're absolutely right. I mean, at the moment our gearing levels are relatively modest. You know, debt to equity 16% and leverage ratio below 0.5 x. I think most of our peers are around about the 1 times leverage or higher. I think in terms of comfort, we would perhaps look to go to about 1 times on a leverage ratio. Based on you know current EBITDA for the half, that might suggest that there's around about a sort of $40 million of additional debt that we would potentially use to fund further growth.
Great. Thank you, guys. Very clear.
Thank you. We have no further questions through the audio lines. I will now hand over to Conor Rowley, Capital's Investor Relations and Corporate Development Manager, to run through the Q&A submitted through the webcast page. Thank you.
Thank you, and thanks everyone for sending in questions. There's been a number through. I'm not gonna repeat any that have already been addressed, like a number of you have asked about a buyback. I think one question that I'll start with, a bit more general, Jamie, is just on, we talked a lot about wanting to move to larger scale drilling projects. Can you talk about the advantages of those, of going larger scale and also any disadvantages that come with it?
Well, the advantages is entirely consistent with the group strategy and the model, and that is that, the very simple premise of the economies of scale. I mean, larger scale and longer duration allows you to build your infrastructure, train your people, and hone your efficiencies. That's where you get your margin from. The larger scale as well, obviously stating the obvious, but you become increasingly embedded and critical to the ongoing operations of your customer. So it is. It's been a strategy of ours since inception, successful strategy, and we'll continue to pursue it. Certainly, in our business, you don't make money moving, you make money sitting still, and honing your efficiencies. You know, that's why we're focused on that model.
Conor, sorry, the other part of the question, or have I covered it?
Just any disadvantages that may come with it.
Disadvantages. I suppose, you know, we have in the past been critiqued for client concentration. I think that's probably the only one that I could really genuinely say has been a critique of it. Frankly, again, strategically, I'd rather have a portfolio that is more concentrated on tier one assets than have a wide range of contracts because, you know, it's much more efficient both at that site and in management's discipline running that type of business.
Thanks, Jamie. Another couple of you asked for an update in your view, Jamie, on the current situation in Mali.
Um-
Politically and the operating environment.
Yeah. Okay. Well, I mean, politically, obviously the ECOWAS sanctions were recently lifted. You know, this is a broad region that is not without its challenges and certainly not without its history of challenges. For some of the diehards, they're not, you know, the rest of diehards I speak to, what they're seeing is what they've seen for the last 20 or 30 years. The flip side of that is that I think you then need to be very cognizant of the you know increasing security risks. We have been. Without getting too granular on our strategy here, but, you know, we have been for quite some time focusing again on secure mine site operations, as opposed to exposed single asset or double asset exploration opportunities.
You know, again, it comes with its challenges. The challenges can be managed. It's obviously a higher cost embedded in your operations to ensure that you have adequate safety procedures in place and not only with the security environment, but also dealing with sanctions that have led to border closures, et cetera. Look, we have managed all our way through. We'll continue to do so. We know this part of the world. We successfully operate. You know, that's part of why people hire us, is we know how to navigate these environments. We're not specialists for the gold fields of Australia. We're specialists of the mining industry in Africa.
Thanks, Jamie. Just to finish with a couple of, I guess, more specific questions. One was on MSALABS. Maybe one for Giles, just on what current operating margins we're seeing, and I think people might be linking to the non-controlling interest here, and what margins we think that business can go to.
Okay. Sure, Conor. Look, I think I'll just cover off on the non-controlling interest aspect, first of all. While MSA is included in that is not just solely MSA. We do also. It includes local content, ownership across the group, so you can't extrapolate that for MSA. More broadly, in terms of the margins, for MSA, look, they are in line, broadly in line with group margins, across the board.
Thanks, Giles. Just one last one to finish. Jamie, just on the investments. Our unlisted investment portion, Level 3, has gone up slightly. Can you talk to what's driving that?
That's just a nuance in the valuation methodology that has been entirely consistent for the last few years, which rolls from a backward-looking to current year earnings. Therefore, as it moved from backward-looking to current year, that led to an increase in the valuation. However, still using market-based multiples on the earnings and a discount to allow for a liquidity discount, but it's effectively moving from numbers that looked to 2021 to numbers that look to 2022.
Brilliant. I think that covers off everything from the Q&A. I'll hand back to the operator, see if there's anything on the lines. Otherwise, I'll hand to Jamie to round off.
Thank you. There are no further questions at this moment through the audio lines. That concludes the Q&A session. I will now hand back to Jamie for closing remarks.
Well, I won't overdo the closing remarks. I'd just like to thank everyone again for for dialing in today. Obviously there's a few of the broker analysts on the line. Thanks for the questions, and obviously we'll be doing about four or five days worth of investor marketing. With I think at the end, Conor, we're doing an investor company session as well, if I'm not mistaken.
Yeah, that'll be 9:00 A.M. Wednesday next week.
Wednesday. Very good. Okay. Well, that brings it to a close. Thank you again, everyone. Thank you.
Thanks.
Thank you. Everyone, that concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day. Thank you.