The rumour has it that when Danie Pretorius bought his first second hand raise bore rig in 1986, he was fixing it up at his home, but, as it was too large for his yard, it was protruding out onto the street of his Fochville suburb. 30 years later, Danie owns 53% of a R2.5bn company and Masterdrilling (MDI) is set to continue growing for years to come.
The company now owns 105 raiseboring rigs and is expanding into conventional exploration drilling as well as blind boring. Their fleet of raiseboring rigs is the largest in the world and their expertise and innovation in this niche industry is second to none.
In their recently announced results for the year 2016, MDI declared profits of R2.10/share and a maiden dividend of 30c. This puts the share on a Price Earnings multiple of 8.5 and a dividend yield of 1.7%. Most importantly though, earnings grew by 20%, after growing 30% in the September 2016 half yearly results and 31% in the 2015 financial year. As is often the case for these rapidly growing companies, we analysts can apply a PEG ratio, by dividing the PE multiple by the company’s growth. Generally, anything under 1 is considered excellent. For instance a company that is growing at 20% should trade at a PE of 20 (like Google parent Alphabet). MDI’s PEG of 0.43 is ridiculously cheap.
A more careful inspection of earnings, however, reveals that all of last year’s growth was derived from exchange rate benefits, against the backdrop of a difficult mining industry environment, the company actually stagnated in dollar terms. I work in the mining industry and the market is definitely showing signs of turning. MDI are brilliantly positioned for this increase in mining capex with their truly global presence. They have just established footprints in DRC, Tanzania and Sierra Leone to supplement their African platform in established mining jurisdiction such as Zambia and South Africa. When this is coupled with a strong presence in South America in the mining hubs of Brazil, Chile and Bolivia, an ongoing contract in the USA and a shareholding in Swedish Bergteamet Raiseboring Europe AB, it becomes clear just how well this company is positioned for the next upturn in the market.
With a cost base that is mostly in Rand, they should remain globally competitive and continue growing for years to come.
The use and application of the raiseboring and blindboring technologies is growing strongly. They are non-explosive excavation methods that are safer and cheaper than conventional drill & blast mining. Increasingly, their use is also growing outside of mining into infrastructure projects, such hydropower plants, tunnelling and storage.
Due to MDI’s unique global position in this growing niche market, it is difficult to compare it to a peer group. Redpath, is the world’s largest shaft sinking company. It is privately held by a German family holding company, ATM Holding, the same company that recently took a 25% stake in South Africa’s other shaft sinking champion, Murray & Roberts. Redpath is rumoured to be valued at $1.1bn, while M&R carries a valuation of R7.5bn, approximately 3 times the value of MDI.
Given MDI’s competitive advantages and growth profile, it may not be too far-fetched, to consider that this company could one day be the size of Murray & Roberts. They are managed by a driven individual, who has a large vested interest in the future performance of the business and continue to operate in a growing niche. If the mining industry turns upwards in the next few years, and the MDI multiple expands as the company continues to deliver, I am convinced that this company can easily increase in price by 2-3 times from the current level. MDI remains incredibly cheap.