DIGGING FOR RETURNS WITH CAPD - 30/12/20

Over recent months I have been fortunate enough to see some very solid gains on a number of stocks I hold, including Calnex, Fonix, G4M and SDI along with the highly speculative NAKAMA, all of which I have covered here.

There wasn’t much in the way of new buys for me running up to Christmas, save for my taking a position at 62p in Capital Group (CAPD), a company focused on providing an increasing array of services and solutions to global gold mining operators.

Although it isn’t an area that I frequent very often, this company looks well placed in its markets and at current levels the shares look decent value and arguably should be trading at circa 35/40% higher than at present, given the numbers in the market, which provides for decent upside potential.

Although CAPD has delivered some very positive news flow, the shares appear to have been frustratingly shackled by a former Director who has been selling into the market, and on a frequent basis.

There has however been signs of an imminent move northwards more recently, which could result in a fast and welcome rerating for the stock, which seems well overdue.

CAPD’s services which are extensively focused on gold mining operations across Africa sees the company providing a growing range of services from drilling to ongoing support and maintenance and which sees the company working with some of the biggest and well known names operating across the sector.

These include Ashanti, Anglo Gold, Barrick Gold and Centamin Mining where it provides substantial support from drilling to laboratory services along with an increasing portfolio of offerings.

Clearly the company’s fortunes are very much aligned to the gold price and expenditure from major operators across mining, which from an investment perspective can make for a decent spot in a diversified portfolio providing a differing exposure to the area.

The most recent news from CAPD came just last month and has the potential to not only drive the business further forward, but create additional opportunities in both the medium to longer term.

This news saw the company announce an extensive services contract with Centamin focused on its Sukari Gold Mine in Egypt which is worth a significant $235m-$260m over a four year period commencing next month from January 1st 2021.

The details of the deal where CAPD already has a firm relationship sees it entering into a conditional open pit waste mining services contract along with also expanding and extending its existing drilling contract with Sukari, one of the largest gold mines in Africa and the Principal asset of Centamin.

The existing drilling contract will be expanded by nine additional rigs, bringing the total amount of rigs operating at Sukari to 24.

In conjunction with the announced win CAPD also revealed a sizeable placing to support the deal which provides for working capital and also positions it well for further contract awards and it has subsequently raised $40m at 58p per share.

Although this represented a small discount to the then price of 63p, the shares subsequently eased, closing that range and providing for an entry point for others similar to that seen by the Institutional holders taking part.

Prior to cementing the large Centamin deal there had also been news on operations at Barrick Gold’s Bulyanhulu mine in Tanzania which saw the award of two new contracts that included a five-year laboratory services deal for MSALABS along with a two year underground grade control drilling contract.

Additionally, there was also news of another new win in Mali relating to four rigs being supplied to Firefinch’s Morila Gold Mine which was previously jointly owned by Barrick and Anglo.

The companies most recent trading update came back in October relating to the third quarter performance to 30th September 2020 which saw revenue of $35m being achieved, representing a 20% uplift on the corresponding period in 2019.

Despite the global pandemic, CAPD appears to have traded positively throughout with the company stating that it had seen a substantial increase in pipeline activity across all business units which puts it on track to achieve full year revenues of circa $130m-$140m.

Adjusted pre-tax profits are forecast to hit $27.8m which sees the shares trading on not only a single digit PER, but one that appears to be in deeply discounted territory at circa 8.

It is however worth noting that within the bigger picture, CAPD as part of its model allocates certain funds to actually invest in mining and exploration operators, which is arguably something of a double edged sword.

If the gold price is strong and its investments achieve, then that will reflect positively for CAPD, the reverse could of course prove to be a drag.

That said, the numbers out in the market do appear to largely strip out these investments which implies the shares do indeed look undervalued, particularly in light of the recent and significant Centamin win which has been described as something of a potential game changer.

Having expanded its services beyond that of pure drilling the company looks very well placed to further expand and is already seasoned regarding operating across Africa where it enjoys a widespread number of long-term contracts throughout the region.

There is also a dividend in place to add further to the story and it is reasonable to expect this to continue on a progressive path given the recent contract wins and positive tone coming out of the company.

Obviously not without some downside risk related to the gold price and activities, but that appears to be factored into the price at current levels and the shares appeal to me on a risk/reward basis, hence my buying in.