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Master Drilling Group 26 January 2023

New tech, new growth

Nic Dinham

Master Drilling (MDH) is the world’s largest provider of raise boring services to the underground mining industry. Raise boring is a niche but indispensable technology that allows the construction of ventilation shafts as well as connections between surface and underground workings to facilitate waste, access and ore transfers. 

Global reach: MDH operates in 23 countries through over 50 subsidiaries and associates and JVs. It has been successful in the less developed mining jurisdictions and over the past five years has expanded into the more demanding developed markets with a broader suite of services. 

Competition: MDH’s Raise Boring business is not obviously affected by new or alternative technologies but its larger clients are aligning themselves to high ESG scores. As a result, MDH has been continuously investing in leading-edge technical upgrades of its equipment to ensure safety and to bring underground mining closer to a zero employee, zero harm environment.

Earnings high: The company has recovered from its Covid lows and is experiencing strong demand for its machines with fleet utilisation close to 76%. Despite pressure on GP margins from rapid cost increases in some contracts, we expect earnings in FY2022E to reach a record USD 19cps.

MTB: MDH has invested heavily in generating new areas of growth outside its core businesses. The most important of these is a hard rock tunnelling machine called the MTB. This is in commercial operation at Mogalakwena and generated $13m of revenue in the 12 months ending in June 2022.

MTB growth: We think it’s likely that the MTB will complete its project with an advance rate sufficient to generate further contracts and encourage MDH to invest in another machine. If so, MDH’s real earnings could increase by another 20% by 2025E (base case).

MTB growth extra: If the MTB completes its project with an advance rate of 150m/mth, the fleet would then be able to increase real earnings by 30% by 2025E, assuming MDH provides all the funding (optimistic case).

SBS: The second new technology that is being developed is the narrow-diameter SBS, which is hoped to be in operation by mid-2023. A successful campaign should prove the technical feasibility of a large-diameter shaft project, which has the potential to be a game changer for shaft sinking. It could also generate significant earnings benefit from 2027E, beyond our forecast period.

Valuation: We value MDH based on DCF using a 15% real discount rate based on the discretionary cash flows we expect it to be able to access both for the Base and Optimistic cases. Our valuations are supported by using current PE multiple of 5x, equivalent to a top-of-the-cycle resource valuation. Our derived valuation range for MDH is R15.35ps to R16.05ps, assuming R17.5/USD.

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