Commodities, Features

Paying dividends: Mitchell Services is at the top of its game

Mitchell Services

Mitchell Services has announced several financial initiatives to capitalise on recent successes and reward shareholders who have been there over the journey. So what’s in store?

As Australia’s leading provider of drilling services across a variety of commodities and drilling types, Mitchell Services’ client base is brimming with big names.

With 90 per cent of its revenue derived from Tier 1 miners, Mitchell Services has supported the likes of Anglo American, Agnico Eagle, Newmont, Newcrest, Glencore, South32 and Evolution Mining, among many others, on their drilling journeys – a testament to the company’s consistent, high-quality service over the years.

Demand for Mitchell Services’ drilling services has risen even further in the wake of high commodity prices, and as the company continues to evolve it has announced several financial initiatives as it embarks on the 2022–23 financial year (FY23).

The ASX-listed company has a buyback underway and has announced a dividend policy in FY23 to reward shareholders.

Mitchell Services plans to declare an interim dividend with its half-year results (expected February 2023) and a final dividend alongside its full-year results (expected August 2023), with the 75 per cent dividend aligning with each six-month period.

With a current fleet of at least 100 drill rigs, Mitchell Services chief executive officer Andrew Elf said the “heavy lifting” had been done regarding the company’s capital investments and now was the time to shift the focus.

“We don’t need or want to keep spending on capital equipment, and we can certainly pull back that capital spending in the next couple of years,” he told Australian Resources & Investment. 

“We’ve invested heavily to have the world-class fleet that we do and it’s now time to put that fleet to work – use it, generate cash, reduce debt, and reward the shareholders. 

“Our shareholders have been very supportive in our growth from a handful of rigs and staff back in early 2014 to 100 rigs and over 700 staff today. And it’s time to give something back to them.”

Ninety per cent of Mitchell Services’ revenue stems from Tier 1 mining companies.

As part of Mitchell Services’ ongoing fleet management, it has sold two older surface rigs to support an on-market buyback, which it said were purchased at the bottom of the market for a combined $400,000 in 2014. The combined selling price for the two rigs in the current climate after many years of operation was $2.5 million. 

Shares purchased as part of Mitchell Services’ buyback will cost no more than five per cent above the volume-weighted average price (VWAP) of the company’s shares from five days prior to the purchase, while the number of shares will not exceed 10 per cent of the company’s fully paid ordinary shares at the time.

Proceeds from any future rig sales (if any) will go towards buybacks, with earnings to drive dividends for its shareholders.

Mr Elf said that while Mitchell Services’ balance sheet was strong, the company aims to solidify it further, with aspirations to reduce its debt profile from $40 million to $15 million by the end of the 2023–24 financial year (FY24).

Capitalising on the surge in demand is one way to slash debt, and because Mitchell Services pre-ordered new drill rigs before the latest commodity boom, the company has avoided the supply-chain constraints and long lead times currently plaguing much of the Australian mining sector.

At the time of writing (mid-July), Mitchell Services had booked all 12 new LF160 drill rigs since announcing its organic growth strategy in August 2021, which Mr Elf said had been a well-timed investment by the company.

“The investment we made with our organic growth strategy – pre-ordering drill rigs and upgrading technology ahead of supply constraints and interest rate increases – has positioned us well,” he said.

“(This has been driven by) a few wise heads on the board. (Executive chair) Nathan Mitchell is a major shareholder and has been in the drilling industry since he could walk. 

“Scott Tumbridge (executive director) was the founder of Deepcore Drilling and Peter Miller (non-executive director) was the founder of Drill Torque. Between those three, there is over a hundred years of experience and a very strong knowledge of the industry.”

Mitchell Services’ key focus in the near-term is to attract greater investment and support shareholders.

While rising commodity prices are driving increased demand, utilisation and opportunity for growth in the mining sector, this is coinciding with decreasing grades and reserves worldwide, creating a perfect storm for Mitchell Services. 

Mr Elf said three commodities were driving increased drilling demand.

“Gold is always gold … and the precious metal represents circa 60 per cent of our revenue,” he said. 

“The demand for copper is high, and there’s decreasing grades and reserves in the transition to a new economy while metallurgical coal for steelmaking is driving demand for drilling as well.” 

“We operate all across Australia. Fifty per cent of the business is surface drilling and 50 per cent is underground drilling so Mitchell Services can support a diverse range of drilling programs.”

While Mitchell Services will continue to expand its client base, which not only supports Tier 1 companies but also mid-tier miners and juniors, its key focus in the near-term is to attract greater investment and support shareholders who support it.

“It’s a good time to invest in the company,” Mr Elf said. “We’ve got a world-class fleet, a strong client base and revenue earnings will continue to grow into 2023. 

“We’re going to be focused on capital returns the next couple of years. The equity price is low versus our net tangible assets and the equity price is low versus traditional models. 

“It is a compelling investment opportunity for those who may be interested.”  

This feature appeared in the August issue of Australian Resources & Investment.

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