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Services group prepares to capitalise on recovery in mining sector
Thursday 23 Mar 2017 Author: Daniel Coatsworth

Capital Drilling (CAPD) 54.7p

Gain to date: 43.9% 

Original entry point: Buy at 38p, 14 July 2016

Don’t be put off by Capital Drilling’s (CAPD) latest full year results. Resurgence in activity across the mining sector might have suggested its results would show booming profit. That wasn’t the case.

Not only did the company remain loss making, it also saw average revenue per operational drill rig fall 5.9% to $177,000.

Closer analysis of the numbers shows that Capital Drilling is making good progress and the market backdrop continues to be more favourable.

CAPD - Comparison Line Chart (Rebased to first)

A lot of the new business in the year came from a revival in exploration drilling for gold miners which is currently less profitable for the group.

‘Pricing for exploration drilling is still low relative to historical levels,’ explains executive chairman Jamie Boyton. ‘We’ve started work on two-to-three month jobs. They’ve been single shifts not double shifts we see with production drilling. As the mining cycle improves, we will see double shifts and higher rates with exploration.’

Boyton says most of the contract opportunities for exploration drilling lie in gold, although he believes there could soon be more work in base metals in light of recent commodity price gains.

Importantly, Capital Drilling saw a return to revenue growth in 2016 when looking at all its drilling work. Its rig utilisation rate increased from 34% at the start of the year to 58% at the end of the year.

The company is now making plans to offer a broader range of services than drilling. It will invest up to $3.8m in a private laboratory testing business called A2 in a bid to get more money from its existing clients.

‘If you look at historical mining cycles, the best margins among mining service companies are found with lab businesses,’ says Boyton. ‘One of the biggest complaints from miners is the slow pace at which they get lab results back. It holds up their decision making.’ He hopes A2 will be able to provide a more efficient service.

FinnCap has a 95p price target and forecasts a return to profit in 2017. We remain big fans of the stock, which is also one of our top picks of the year. Keep buying at 54.7p. (DC)

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