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Capital Drilling

Flash Update: Q1 Trading Update Release

Capital reported it is on track to achieve full year revenue guidance and we are confident that the company will be able to deliver the US$29.3 million quarterly average revenue for the remainder of 2019 to hit the mid-point of guidance (US$110-120 million). The quarterly result is slightly below our forecast at the revenue level due to seasonal effects in Q1. Encouragingly, the company reported increased profitability from key contracts over the period – reinforcing our investment thesis from the FY/2018 results that Capital continues to outperform at blue-chip contracts with top tier mining companies including Kinross, Anglogold Ashanti, Resolute, Acacia, and Centamin. The West African hub continues to grow, highlighted by an exploration contract win with Golden Rim Resources (ASX: GMR) in Burkina Faso. The company is seeing robust tendering activity – any further contract wins will be incremental to the published guidance. Metals prices remain strong, and Capital is best placed to take advantage of any increased exploration spending by the majors and mid-tiers to replace depleting ounces or tonnes. We value Capital Drilling at 91p/share, representing 5x forecast 2019 EV/EBITDA of US$29.3 million and a 1.8x multiple on the current share price. Our forecast 2019 free cash flow is US$13.9 million, implying a 15.7% yield which easily covers the current dividend yield of 3.2%. At the current share price, Capital feels materially undervalued – trading at 2.7x 2019 EV/EBITDA, a strong balance sheet, covered dividend and further growth opportunities in the pipeline.

  • 18 Apr 19
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Exposure to Iron Ore bodes well

Petropavlovsk PLC (LSE: POG) has announced that the main span of the Amur River Bridge has been connected and that it is on track to complete in July 2019 and go operational later in the year. IRC (HKG: 1029, 31.1% held by POG) estimate that it will reduce the operational cost of transporting its 65% iron ore across the bridge by US$5/t and reduce potential shipment time from 7 to 10 days to 3 to 5 days. Petropavlovsk is the only company we know that has exposure to iron ore (now that Crusader sold its Posse iron ore mine) which we see as providing pulsing catalysts for the shares. The completion of the refinancing of the IRC loan two weeks ago has meant the company recoups the $57m bridge loan easing any near term cashflow issues. The US$5/t reduction should see IRC’s cash costs fall below US$50/t, and whilst they will receive a material discount to the benchmark price of US$95/t for the 65% concentrate, there is still plenty of margin to be had. The news that they are finally getting to grips with the drying unit at K&S and achieving 86% capacity (see announcement on 8th March 2019) is very positive and should result in production of c.2.5Mt this year. Pavel Maslovskiy has been quoted as saying he would like to sell the 31.1% stake in IRC. The series of positive announcements coming through should see some upside to the current market value of US$36 million (equivalent to 10% of POG market cap) that Petropavlovsk might receive in such a transaction. Our Price Target for Petrovalovsk remains at 14p for the moment.

  • 27 Mar 19
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