An alternative investment opportunity in the mining sector
When investors are looking to gain exposure to the mining sector the path most travelled is typically to invest in an established miner. The business model of a miner is to extract ore or minerals from the earth and sell these at a profit. Companies that may come to mind include names like Anglo American Platinum, Impala Platinum, Sibanye Stillwater, Exxaro Resources and Thungela Resources to name a few. But what if I told you could gain exposure to the mining sector without investing in a company involved directly in the extraction of commodities? You may have heard of the business concept of selling shovels during a gold rush. Well, I think Master Drilling embodies this concept well by making their products and services indispensable to the mining industry.
Master Drilling provides miners with the equipment and expertise needed to get valuable commodities out of the ground. Founded in 1986 Master Drilling is the worlds largest raise boring business. You may be wondering what raise boring is? This is a drilling process used to create a circular vertical or horizontal excavation between two existing levels or tunnels in an underground mine. It is mostly used for ventilation shafts from the surface to underground. The business differentiates themselves in the mining industry though using new technology to aid miners in tunnelling and shaft sinking. They offer clients an end-to-end solution by using inhouse experts to design and manufacture equipment to meet the needs of the customer. While the customer profile is mainly blue-chip and mid-tier entities within the mining sector, Master Drilling also services customers in construction and hydro-energy.
Master Drilling Group Limited is domiciled in South Africa and holds investments in the subsidiaries and joint ventures through which the operations are run. Master Drilling Group Ltd is listed on the JSE and has a market cap of R2.15 billion, making it a midcap stock. The share is currently trading at price of R14.20.
Although listed on the JSE Mater Drilling has a globally diversified operation. The entitys specialised consumables and equipment are produced China, while the Groups engineering, manufacturing and support services are provided from South Africa. Revenue by geographical area is as follows:
- Central and North America: 11%
- South America: 32%
- Africa: 38%
- Other Countries: 19%
Given that the entity is globally diversified they are less sensitive to foreign exchange risks given that they earn revenue in multiple different currencies. The global diversification also reduces the risk of political instability in a country the entities operate in causing a material impact on the business. For example, if operations were only in South Africa load shedding would have a significant impact on the business.
Master Drilling has performed well in the most recent financial period and is currently trading at very attractive valuation multiples. Below for a summary:
Gross Profit: $49m
Net Profit: $20m
PE Ratio: 5.02
Price to FCF: 3.53
Current Ratio: 1.48
Debt to Equity: 21%