Master Drilling Group Limited (JSE:MDI) News - Unaudited interim report for the six months ended 30 June 2021 MASTER DRILLING GROUP LIMITED Registration number: 2011/008265/06 Incorporated in the Republic of South Africa JSE share code: MDI ISIN: ZAE000171948 REGISTERED AND CORPORATE OFFICE 4 Bosman Street PO Box 902 Fochville, 2515 South Africa UNAUDITED INTERIM REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2021 SALIENT FEATURES FOR THE PERIOD - Revenue in USD up 25.4% from 57.4 million to 72.0 million - Profit in USD increased 97.8% from 4.6 million to 9.1 million - Headline earnings per share in USD up 87.5% from 3.2 cents to 6.0 cents - Headline earnings per share in ZAR up 63,6% from 53,3 cents to 87,2 cents - Basic earnings per share in USD up 87.5% from 3.2 cents to 6.0 cents - Basic earnings per share in ZAR up 63,6% from 53,3 cents to 87,2 cents - Net cash from operating activities increased 0.9% from USD11.1 million to USD11.2 million - Revenue pipeline of USD601.6 million - Committed order book of USD232.0 million - No dividend for the current period - Decisive and effective action taken in response to Covid-19 pandemic REGULATORY REQUIREMENTS The contents of the short form announcement are the responsibility of the Board of directors of Master Drilling. The information in the short-form announcement is a summary of the full announcement available on Master Drilling's website. Master Drilling posts information that is important to investors on the main page of its website at www.masterdrilling.com and under the "investors" tab on the main page. The information is updated regularly and investors should visit the website to obtain important information about Master Drilling. The full announcement can also be accessed online at https://senspdf.jse.co.za/documents/2021/JSE/ISSE/MDI/HY2021.pdf The information in this announcement has been extracted from the condensed unaudited consolidated interim financial statements as prepared by the corporate reporting staff of Master Drilling, headed by Willem Ligthelm CA(SA), the Group's financial manager. This process was supervised by Andre Jean van Deventer CA(SA), the Group's chief financial officer. COMMENTARY Master Drilling was established in 1986 and listed on the Johannesburg Stock Exchange in 2012. The company delivers innovative drilling technologies and has built trusted partner relationships with blue-chip major and mid-tier companies in the mining, hydro-electric energy, civil engineering and construction sectors across various commodities worldwide for over 30 years. The Master Drilling business model of providing drilling solutions to clients through tailor-made designs coupled with a flexible support and logistics chain, makes it the preferred drilling, mine safety and innovative, data-driven solutions partner throughout the lifecycle of projects from exploration to production and capital stages. Commenting on the results for the six months to end June 2021, Danie Pretorius, CEO of Master Drilling, said: "We have seen an increased demand for our services in 2021 as a result of the uptick in commodity prices and an increased capital spend by our clients. Master Drilling has seized the opportunity presented by this trend and continued on its growth strategy including the acquisition of interests in two businesses that complement our offering. We have made significant progress in expanding our geographical footprint by securing new contracts in West Africa, Australia, Russia, Europe, and North America. The expansion has also ensured that we continued to increase our exposure to commodities experiencing significant upswing thereby driving increased mining activity. Technology remains a key differentiator for Master Drilling, and we continue to support our customers with solutions that address changing conditions and constantly evolving trends. As we capitalise on themes such as the Internet of Things (IOT) and innovation, we have also acquired stakes in AVA Solutions and the A&R Group, companies that address the need for innovation in the mining industry. Both of these companies provide digital offerings that seek to enhance and improve mining safety while optimising operations. Whilst the full impact of the pandemic across our value chain remains unclear, we continue to drive diversification across regions, commodities, currencies and industries with an eye on the long term without compromising the management of short-term risks and headwinds associated with the pandemic over the remainder of the year." Financial Overview Revenue increased 25.4% to USD72.0 million with operating profit up 60.3% to USD11.8 million. The increase in revenue was mainly due to the impact of higher commodity prices following the global outbreak of Covid-19 during the previous financial year. During the current reporting period, the Group received approximately USD6.2 million as an advance payment on a contract to be executed over a number of years. Refer to the consolidated statement of financial position for the long-term portion and note 6 of the notes to the interim results for short-term position of the contract liability. USD basic earnings per share (EPS) increased 87.5% to 6.0 cents, and ZAR EPS by 63,6% to 87,2 cents compared to the same period last year. USD headline earnings per share (HEPS) increased 87.5% to 6.0 cents, and ZAR HEPS by 63,6% to 87,2 cents compared to the same period last year. Net cash generated remained flat with an increase of USD0.1 million to USD11.2 million, while debtor days remained constant amid weak economic conditions. Master Drilling will continue to manage debtors actively to ensure robust conversion to cash. Cash resources continue to be managed prudently to cater for emerging opportunities that require specific design, planning and investment. During the reporting period, 34% of the Master Drilling capital spend was on capacity expansion with the remaining 66% allocated towards maintenance capital. As at 30 June 2021, the Group owed USD36.6 million on the ABSA facility. Operational Overview Following a significant contraction last year caused by Covid-19, global economic output is expected to expand in 2021 and to moderate between 3 - 4%, due in part to the vaccine rollout and growing optimism. Growth is therefore driven by renewed focus on infrastructure spend, clean and alternative energy and population demand and optimism. China is forecast to grow by 8% in 2021, while other markets may see a 'W' recovery cycle with difficulties as a result of the knock-on impact of the various Covid-19 waves. As a business that generates USD revenues off an emerging currency cost base, the Group benefits from emerging currency weakness. Safety and response to Covid-19 We have seen an increase in Covid-19 infections in some countries where we operate especially in India. Although Master Drilling put measures in place to prepare for expected Covid-19 infection waves, this has had an impact on logistics. Master Drilling is fully committed to playing its part in limiting the spread of Covid-19 across the 23 countries in which we operate, including those that are most severely impacted by the pandemic. Master Drilling has adequate headroom in terms of liquidity with stringent, proactive measures implemented across the business to manage costs, as well as optimise working capital and capital expenditure, with a stronger focus on cash flow generation during these uncertain times. As at the date of finalising these results, these measures had limited the impact of lost productivity, and the business continues to operate at satisfactory levels. Management is confident that business can continue to operate successfully in the current environment. South America South America has seen increased market activity since the beginning of 2021. The uptick was primarily driven by the global increase in commodity prices. Though continuous risks around Covid-19 and geopolitical uncertainty remain, we expect a solid performance in South America over the next two years. Brazil saw a strong H1 2021, exceeding its target profitability levels. In addition, during June we were awarded the AngloGold Ashanti Raisebore contract for another three years. Research has indicated that there are several new mining projects that should come online in the medium-term that can potentially utilize our XXXL machines. Chile, the biggest copper producing country in the world, has capitalised on the strong copper price. The market dictates more of a turnkey solution approach and our Master Drilling Chile and Besalco Construction Joint Venture was awarded a contract with Chuquicamata (Codelco). Further increase in the value of the contract may occur in H2 2021. Appropriate right sizing in the region occurred in 2019 and 2020 and with the uptick in the market in 2021, we have started reaping the benefits of these changes. Peru has seen its strongest half year performance since 2018. These results are driven by additional work at Volcan. Also, strong cost control and reduction in people per operating rig assist the profitability of the business. Peru's mining sector could be its engine of economic recovery, but this will require collaboration between the State and the private sector. Central and North America Our operations in North America are established and we continue to position Master Drilling as a differentiated competitor. In Canada, we have finalised the contract negotiations and have received the purchase order and executed contract for Glencore's Raglan Mine. Drilling of the first three surface raises will commence in January 2022. In addition, Raglan Mine has reached out to us to provide pricing for an additional underground raise. In the United States we continue to work hard to secure contractor's licenses across each state to drive the new business pipeline, with the initial focus primarily on mining-rich Nevada. Mexico, like the other countries in the region, had a positive start to the year. Our machine utilisation has increased to 85% with several new projects expected to commence. Further, we have recently mobilised for a satellite contract in Nicaragua. We see opportunities driven by increased mechanisation and modernisation while remaining focused on automation and remote controlling with three automation rigs in Canada representing 75% of the raise boring fleet there whilst Mexico's operational fleet is targeting a 50% automation rate. Africa Africa is currently the largest contributor in terms of revenue and profits and the region delivered good performance during the period. We have several rigs deployed across key projects. As indicated last year, we continue to pursue aggressive expansion into West Africa with a specific focus on gold producers. Covid-19 had a moderate effect on operations compared with most other regions in 2021. The pandemic did, however, adversely affect the logistical side of the business with various delays experienced in mobilising equipment to site and clearing by the necessary authorities. It also affected the rotation of the expatriate crews which has now normalised. The operations in Ghana experienced some challenges with logistics and safety aspects. Operations in Mali for Barrick will see a marginal uptick in revenue due to a bigger machine being mobilised to the site. We moved work on the ventilation shafts to August 2021 with drilling set to begin in October 2021. Stable revenue is expected in this country. Kibali (Barrick), in the DRC, continued its satisfactory performance with our long-term project. Master Drilling is currently looking at growth areas in East Africa and we are confident that our marketing efforts should see return by the end of 2021. We have received requests from Burkina Faso and Sierra Leone and we are currently awaiting the outcome of bids submitted. With the platinum outlook expected to move back into surplus, we have seen that in Zimbabwe a PGM-rich market, particularly in the Great Dyke, has become attractive to us. We have secured a contract with Zimplats and have submitted further proposals and await feedback on work in H2 2021. Although Zambia's operations were put into care and maintenance, we submitted a tender that could see two machines utilised in H2 2021. Botswana offer opportunities and a long-term contract on the Khoemacau Copper-Silver Project has been secured. The South African mining sector still provides isolated opportunities; it is shrinking in overall terms and new capital expenditure in the sector is not forthcoming. With cost pressures rising and uncertainty and inflexible labour policies persisting, Master Drilling is positioning itself to benefit from opportunities arising from the inevitable shift towards increased mechanisation over time. Scandinavia After a slow start to the year, operations have started to gain momentum towards the second half of Q2 2021, with several delayed projects receiving the green light to proceed. Since the last report we established at the Lokjesvatnet Hydroelectric project in Norway and completed the pilot drilling. Boliden approved the start of the second ventilation at Ravlinden Mine, after suspending the project start date to H2 2021. We have commenced construction at the Haga project in Gothenburg, which will be our first major infrastructure project in this metropolitan area. India Our operations in India are performing well in terms of efficiencies and revenues supported by a stable contract. The Vedanta Limited contract was successfully renegotiated for a further three years. Other Regions At 2020 year end, we highlighted our interest in growing our presence in Australia, Russia, and central Asia, with a focus on raise boring. Our Russian business partner agreement is in place, and we have executed our first project and are now mobilising for a second project in Russia. Opportunities in Kazakhstan and neighbouring states are also being actively worked on. Operations in Australia have started on a contract, and we are actively building a pipeline of new projects. Our continuous drive to improve profit margins will support sustainable, long-term business activities across the region and we believe that our compelling offering will lead to renewed business opportunities post Covid-19. In the short term, given the current pressures from the pandemic as well as political and social issues, the Group will focus on cash generation, cash security and optimisation. Technology Technological innovation and development remain part of Master Drillinga's strategic pillars for the companya's long-term success. Artificial intelligence and big data are driving changes around mining activities to enable cost reductions and improve safety. To be sustainable, we need to position ourselves as an innovation partner with our clients to equip them for a future world of work that will encourage further developments in autonomous mining methods. An opportunity focused on technology value-add for the mining sector was executed with the acquisition of an interest in AVA Solutions. A clear example of Master Drilling's technological advantage during the period was the setting of a world record by successfully drilling a 1 382-metre raise-bore pilot hole at Northam's Zondereinde mine by using our own ground-breaking directional drilling technology and machinery. Our Mobile Tunnel Borer (MTB) continues to receive keen interest and we have been awarded a contract with Anglo American in South Africa that will come online in Q3 of 2021. We remain committed to developing and delivering solutions such as the Shaft Boring System (SBS) to assist clients in meeting their efficiency targets and economic goals. We are further involved in four development projects (all in different stages of development) to establish non-explosive mining methods, products and services for our contracted clients. Skills development One of our major challenges in achieving targeted top line growth is attracting the right people into the organisation. Therefore, our focus has been on running projects that are fit-for-purpose, ensuring that the right number of people with the appropriate skills are working on a project at any given time. We have analysed the business with a five-to-10-year horizon and have subsequently established a formal two-to-five-year programme that kicked off in January 2020. This programme is focused on workforce management and involves training to ensure resources stay aligned to business requirements. Our aim is to keep good engineering skills in-house and use a geographically diverse footprint to move resources between regions as required. Ensuring that we have the right skills in place does not only mean we invest in internal training and external resourcing but also actively create the skills required. As such, we are giving our support to the South African government's YES programme. Outlook and prospects Our quick response to the Covid-19 pandemic has ensured that the Group remained financially sound and profitable during these unprecedented times. Whilst it is still too early to assess the full impact of the pandemic on our business, we believe that our diversified profile, combined with a continued focus on cash and capital management as well as safety, has positioned Master Drilling to emerge from this cycle ready to take advantage of opportunities. In the short term, the improvement in commodity prices including gold, PGMs, iron ore, copper and polymetals, together with the weaker emerging market currencies, should further assist the Group for the remainder of the year. In the longer term, our strategy to diversify across regions, commodities, currencies, and industries will stand us in good stead. Pipeline and committed orders As at 30 June 2021 our sales pipeline totalled USD601.6 million (2020: USD281.4 million) while the committed order book totalled USD232.0 million (2020: USD144.6 million) for the remainder of 2021 and beyond. NATURE OF BUSINESS Master Drilling Group Limited through its operating subsidiary companies provide specialised drilling services to blue-chip major and mid-tier companies in the mining, civil engineering, infrastructure and hydro-electric energy sectors, across a number of commodities and geographies. Master Drilling is the global leader in the raise bore drilling services industry. Any investment decision by investors and/or shareholders should be based on consideration of the full announcement as available on www.masterdrilling.com. The full announcement is also available at the Company's registered office (for inspection, at no charge, during office hours on any business day). For and on behalf of the Board DC Pretorius AJ van Deventer Chief Executive Officer Chief Financial Officer Sponsor Investec Bank Limited Sandton 31 August 2021 Date: 31-08-2021 07:14:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct, indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on, information disseminated through SENS.