Allen Chan: Good afternoon, everyone. Thank you for joining us today. My name is Allen Chan, Bridge Street Capital. Today we have Mitchell Services, ASX code MSV, and they are here to talk about their Q1 FY 2027 quarterly update. We have with us today, Nathan Mitchell, Executive Chair, Andrew Elf, CEO, and Bruce Tarver, CFO. This is being recorded, and we are happy to take questions after the presentation. Andrew, over to you. Thank you.
Andrew Elf: Thanks very much, Allen, and thanks everyone for joining us and for the interest. As Al said, we will follow the usual format. We do not rabbit on too long at the start, just touch on a few key points, and then open it up for some questions. Obviously, we are happy to answer those as Allen puts them to us. Look, very pleasing quarter. Obviously, a lot of hard work over many years leads to a quarter like this, so credit to all of our teams that have done the hard work and delivered those results. A very strong quarter, a record quarter in many respects, and very proud of those numbers. I think important to note that it does look like it is going to get better.
Andrew Elf: We make the point about the rigs that are going to go out and where we think the operating rig count can potentially go. Certainly, there is a lot of leverage left in the business if that rig count increases throughout the course of this year. Then going into 2028 with a higher rig count again at the start of the year. So it is looking pretty good. We obviously talk about the market. I know Imdex released an announcement late last week where they spoke about the market as well, so it all sort of hangs together with that. Certainly, very strong in gold and copper, which is fantastic to see, particularly in the underground space. In more recent times, even though that coal price has increased, we have not yet seen an increase in demand for coal rigs.
Andrew Elf: But that certainly is an upside opportunity for the business if that coal market does improve. I won't go through the financials. Please feel free to ask any questions to Greg in that regard. But there's some movements in cash and things there that he can talk about in more detail. At the end of the announcement there, very pleasing that BHP did give us approval to talk about the project that we're completing with them at the moment, and the world's first that we completed in regards to decarbonization drilling. Then referencing the BHP presentation. So to date, as we've said previously to people, we think this business is going to take some time to get traction. But I think this proves again that the concept and what we're doing works.
Andrew Elf: We just need that market to come to us and need a little bit of time as it develops. So all in all, great work from the team with a world first. You certainly don't see many world firsts in drilling company presentations, so that's absolutely fantastic, and certainly builds on a lot of the experience that this business has in that gas space over many years. So all in all, a great start to the year. We're well set and hopefully looking forward to a very good year ahead for the business. Al, I'll let you open it up for some questions.
Allen Chan: Thanks, Andrew. Okay. The first one. For the additional 10 rigs you signed contracts for, are the pricing and expected margins the same as the rest of the contract book?
Andrew Elf: Yes. Yeah.
Allen Chan: Thank you. Next one. Aside from rig wins, do you see any rigs coming off contract for the balance of FY27 and FY28?
Andrew Elf: No, but I'll give more than a one-word answer to this one. I think, look, you've always got an element of your book that needs to be re-won, and we do have a couple of contracts that we need to re-win in the H2. Nothing in the H1. But we do hope to win those contracts. There's no reason that we shouldn't. We're performing well. We're being reasonable with our price expectations. Unless someone lobs in a stupid price, which you wouldn't think would happen in this market, we'd be confident of retaining those. I don't see a great number of rigs coming off at all. Maybe with clients that have got one rig that are smaller job stop and start, but there's enough demand to then go and have that rig somewhere else. I think no, I don't see rigs coming off.
Allen Chan: Would it be fair to annualize Q1 underlying results and add the incremental revenue and gross margin to arrive at a run rate end of FY27 earnings number?
Greg Switala: I think it's certainly fair to include the incremental revenue and gross margin in your assumptions going forward around the extra 10 rigs. Off the back of that, can you also simply annualize Q1 results for the rest of the business? Probably not. The reason for that is really twofold. One, the business is seasonal, particularly when you get to the back end of Q2, beginning of Q3, just with that sort of Christmas shutdown, et cetera, perhaps allowing for a bit of a wet season in early January as well. I would just probably point shareholders to previous reports to form their own views around what that seasonality can look like. Then with any new job, not that these 10 rigs, the ramp-up is going to be particularly significant, but there always will be.
Greg Switala: There will be an element of time before those 10 rigs are up and running and delivering the full margin that Andrew referred to earlier.
Andrew Elf: Yeah. I think what is good with those 10 rigs that are going out is they are going to existing sites. So the sites are set up, the workshops are set up, the supervision is in place. A lot of the bigger money that you would spend to go to a new project that is remote has been spent. You are literally sending rigs out there, crews out there, and that sort of thing. And obviously, with the business having more rigs running and a higher top line, the impact of that mobilization is reduced. So I think, to Greg's point, that can absolutely be managed.
Andrew Elf: From a rig count perspective, look, the best way to think of it is just pick an average operating rig count that you feel comfortable with, and pick an average revenue per rig and an EBITDA percentage and let the rest flow out from there. Obviously, we finished the year at a rig count. You can see what it was for the first quarter. You can make some assumptions on an average operating rig count for this year. And then as I touched on earlier, if the exit run rate from this year, 2027 to 2028, is much higher, then you can make some assumptions on how good 2028 could potentially look as well.
Allen Chan: Thanks, Andrew. A question from Royce: Can you explain the CapEx increase, please, and what full-year CapEx at FY27 and 28 might be?
Greg Switala: I think we've said previously that looking at FY27 CapEx is certainly going to be front-half loaded, and this quarter certainly demonstrates that. What that is, it's really in response to the increased demand. So there's an element of rigs that are parked up that need to get ready, a bit of a capital overhaul to be ready for those jobs. That's in line with expectations. That's what's unfolded. I think in addition to that, just what we're also seeing is the strength of that demand has meant, in some instances, that rigs that were otherwise scheduled for a rebuild have had to stay at client sites to service that demand. You may have noticed just in the commentary in the quarterly as well, rig count is now 93, and I think from memory, that was 90 at 30 June.
Greg Switala: Given that increased demand and the fact that we haven't been able to bring those rigs out for that rebuild, we've had to pivot and purchase three new underground drill rigs there, which is also part of the reason and why the count's gone from 90 to 93.
Andrew Elf: Yeah. I think what that means in dollars, Greg, is roughly maybe a 10% increase on last year. We've said to people CapEx is probably going to be flat year on year. With that increase in demand underground, it's probably 10% up now.
Greg Switala: Yeah. Off FY26 levels of about AUD 22 million or thereabout. So yeah, I'd agree with that, maybe increase by about 10%.
Allen Chan: Thank you. Next one from Asama. The timing of the new rig deployment through the rest of the year, so 2 rigs additional in Q1, obviously, which is not impacting EBITDA margins. Is the expected rig deployment through the rest of the year expected to impact EBITDA margins?
Andrew Elf: No. We are hoping that we can achieve a 20% EBITDA number for this year. We have said to people, literally our goal is 30% gross margin, 10% overhead, and 20% EBITDA. If we can achieve that with wet season and Christmas shutdowns and getting some rigs out, that is a great result. We would like to think that we can achieve that.
Allen Chan: Thank you.
Andrew Elf: As far as the rig count goes, we are hoping to get a majority of those rigs out before Christmas. It is just going to depend on the clients and whether that can happen. Certainly, we are very, very confident of getting 6 out before Christmas of those 10 that I talk about. Potentially the other 4, if we get them out before Christmas, great. If not, early in the new year.
Allen Chan: Well, thanks. From Anonymous here, with the increased cash expected, what does this mean for dividends?
Nathan Mitchell: Look, I think at the moment, it's our Q1, so that's yet to be decided on what we'll do on dividends. I think we'll leave that to the H2 of the year. As I say, it's been a great start from the team. But I think it's early days yet to talk about dividends and what we'll do. I think we're focusing right now on rig deployments. Get them out. As I say, it's a busy time for us, a good growth time. Super excited with what's happening. But that will come. That decision will come in time.
Andrew Elf: Yeah, and I think Nathan's spoken previously. We'll put the money where it needs to go to support the business, whether it's shareholder returns or other. But I think, look at last year, it was a four-cent divvy in H1, and I think two in the H2. And if you think about this year, maybe it looks like it flips around. Like last year, it was sort of the cash came in the H1 and a bit heavier usage in the H2. And then this year it's probably the opposite. It's heavier in H1, to Greg's point with the CapEx and rigs going out. And then it probably is a bit more stable with a lot of cash going to come back in in the H2. So the intention is still there to do something. But as Nathan says, early days, let's see how we go.
Allen Chan: Thank you. Question from Royce. Are market and rental prices increasing, stable, or decreasing? Any comments on the outlook?
Andrew Elf: I think everything looks pretty flat. There is obviously inflation out there of whatever it is. That just gets managed in the ordinary course of business, managing your suppliers and your employees and your clients with contract renewals and CPI increases, et cetera. But the rates that are out there are pretty good. For drilling, I think they have all been reset, and as our returns have demonstrated, the margins are okay. A lot of our workers with the global mining majors, probably 80% plus, they certainly do not allow you to make a super normal profit. So if you are making a good return, that is great, and you can maintain that. That is how we look at things. But when the market is tougher, they also let you make a return, which is important.
Andrew Elf: Outside of those major clients, the junior market, the smaller end of town, the demand for rigs is still strong. That is where your pricing probably moves a little bit more. But again, I think the pricing at the moment, Nathan, I do not know what your thoughts on the market. Is sort of just solid, but.
Nathan Mitchell: No, I think it is solid.
Andrew Elf: Yeah.
Nathan Mitchell: We're not expecting huge price rises, I think. I think looking at the numbers, we don't need to continue to push the price up.
Andrew Elf: Yeah.
Allen Chan: Next question from Chris. It is three parts, but you answered the latter two. Revenue per shift increased significantly against Q1 2026 and also Q4 2026. Is this just from doing higher value work, or is there something else that has driven the increased revenue per shift?
Greg Switala: Well, it's probably a factor of a few things. Just underlying productivity from a business perspective. The operational teams drilled very well and very successfully. We made the point in the quarterly just in terms of some of those previous quarters and the adverse factors that were outside of our control. You're certainly an absence of those this quarter. As Andrew alluded to earlier in answering the previous question around price, a lot of those contracts have just recently been repriced as well. So there's that element to it as well. So I'd say, yeah, lack of adverse impacts pricing to an extent and very good underlying productivity.
Nathan Mitchell: Yeah. I would agree with Greg. The productivity side of it has certainly picked up, that is for sure. The guys are doing an exceptionally good job in the field, not just a bunch of rigs, but most of the rigs are now doing exceptionally good productivity job. That really goes to the bottom line. Price helps, but productivity is a much better driver.
Andrew Elf: The rig timing we have spoken about and you have spoken about too.
Allen Chan: I guess the question is whether you can still deliver margins of over 20%, probably part 3.
Andrew Elf: We touched on that as well, that that is what we are hoping to try and do, yeah.
Allen Chan: A question from Daniel. Are you contemplating any investments into the expansion over the next 1 to 2 years?
Andrew Elf: Look, we've said to people on the investor roadshow and in these calls that it's not our intention to increase the fleet unless we have to, unless it makes sense to do so. But if it makes sense to do so, we will. We've got the balance sheet. We've got fantastic clients. We're going to look after them first and foremost. If we need more rigs to look after those clients, we'll get them. Do we have intention to go out and buy 15, 20 rigs and throw them into the eastern states market? No. No. You've just got to look after your good clients, and we'll get what we need to do that.
Allen Chan: I think we covered that one from Isam. Next one on rig count. Next one from anonymous. That's a good result. Well done. What share of FY27 CapEx is growth versus stay in business? Q1 revenue per shift up 17%, how much is price? Finally, what leading indicators are you watching in relation to your own book? Competitive landscape, how are those indicators tracking?
Andrew Elf: Well, I think, the CapEx question, Greg, just rely those few rigs.
Greg Switala: Yeah, so everything to touch on the CapEx question, all CapEx will be stay in business, sustaining CapEx with the exception of those 3 rigs. The Q1 revenue per shift, I think we've sort of touched on that one as well in terms of what's driven that 17%.
Andrew Elf: Yeah, and I think to be honest with people on the call, we don't sit here and do a forensic analysis accounting of 6.2% is price and 3% is productivity and 1% is this. We just don't have the resources to be forensically accounting like that. But we know what's happening, obviously. But look, what do we look at? We're always looking at what's happening in the market, commodity prices, competitors, projects moving from one phase to another. People look at different drilling results. There's a gazillion different things that we're looking at and reading about and staying close to the market that we're in. The competitive landscape, we've spoken about this over many years too. There's been a significant amount of consolidation in the sector. When you look at Eastern Australia and Mitchell Services, there's a number of companies in Mitchell Services that we've acquired over the years.
Andrew Elf: Tom Browne, Nitro, Radco, Deepcore, amongst others. And then similarly in the WA with Perenti, Strike, Swick, Ranger, DDH1, et cetera. So there's been a lot of consolidation in the drilling sector in Australia. It still remains a competitive industry. There's always someone else there. But I think importantly, when you look at the clients we've got, and I say 80% global major tier 1s, there's really a good handful of drilling companies that can service those more sophisticated clients that want excellent gear, excellent crews, and everything else. And those companies at that end bid fairly and reasonably, and so do we.
Allen Chan: Good. I think we spoke CapEx from Adrian. The next question, I guess beyond the 10 rigs, is there still an active tender pipeline or have you captured most of the opportunities in the market?
Andrew Elf: No, the pipeline is good. It just depends on what we're looking at. Really, what we're looking at is multi-rig, multi-year opportunities with global tier 1 major clients. Do we want to go and buy more rigs and put them out to drill two holes for a junior? No. Are those leads out there? Yes. But are there still material size leads with what makes sense for us to target and get a good return? Yeah, there is.
Allen Chan: Thank you. I think we spoke about that one on capital management, so buzz on Nathan. This one from Royce. How has Q2 for 2027 tracked so far as weather remains favorable?
Andrew Elf: Good until today. It just started raining and 50 mil expected through the coal fields, if not more.
Allen Chan: Well, I'll keep you posted. Thanks. From Isam. If you get to 85% utilization in FY28, is that effectively full utilization and you would have to go into growth phase with increased rig count and CapEx?
Andrew Elf: We've always said to people that 90% is full utilization. There'd probably be another 5% there that we could go to 90. Once you get to 90, it's always going to be rigs stopping, starting, moving. You might go up a bit, down a bit, but 90 is a good number to work on. At 85, you've got a little bit of fuel left in the tank.
Allen Chan: Yeah. This is from Jeff. How much will you have to spend on new underground drill rigs? This question from Jeff.
Andrew Elf: Yep. Thanks, Jeff. Look, those underground drill rigs, they're probably about AUD 1 million a throw. By the time you buy the rig and put a few bits and pieces with them, about AUD 1 million a throw.
Allen Chan: Okay. Anonymous here. Is the AUD 22 million FY26 base cash paid or additions including work progress? Just to be clear on cash total CapEx and the breakdown there.
Greg Switala: Probably struggling to interpret that one.
Allen Chan: I will come back.
Andrew Elf: Yeah, I will go back to that investor.
Allen Chan: This one from Royce. Is labor availability a challenge in a tight market? Sorry, Greg.
Greg Switala: I was just going to say, my interpretation is the AUD 22 million of FY26 CapEx that we called out earlier sort of base case sustaining or is there growth embedded in there? No, that is pretty much sustaining maintenance type CapEx only if that is the interpretation.
Allen Chan: Yeah.
Greg Switala: Yeah.
Allen Chan: Thank you. Yeah, I will repeat one from Royce. Labor availability a challenge in a tight market. Do your contracts protect against labor inflation there?
Andrew Elf: Best we can. The contracts have got clauses in there that are generally a rise and fall clause on the anniversary of the contract that is calculated off various indices, be it labor indices, material goods indices, et cetera. Just a straight CPI may not necessarily be reflective of the cost base, et cetera. Yeah, look, it is all about people. It is a service business. It is great to have rigs and things like that, but you need good people on them to make them turn and go down. We have got some great teams in the business, as I said, and it is a great brand. It has been around for over 50 years. The equipment is good, the clients are good, camps are good, the food is good, the training is good.
Andrew Elf: We have got a lot to offer people, so I think we are as good as you could hope to be positioned to deliver and we will, versus other businesses that may not offer some of those things to their employees, whether they are in the drilling industry or not. It is tough. It is all about people. But we are protected commercially best we can be and we certainly have a lot to offer and have good people.
Allen Chan: Thank you. Okay, next question. Last year, Q2 your clients had a shorter Christmas shutdown period. Given gold prices have pulled back, does this mean they are less likely to stretch production and revert back to a normal shutdown period?
Andrew Elf: No, I think we're just going through our shutdown planning at the moment. Obviously, it's still early days. We're only sort of getting towards the back end of November. Those conversations sort of started getting a bit more serious November, December. But I think just given the demand for rigs and how busy people are and budgets increasing, it is looking like people will be a little bit more aggressive with shutdowns than they have been previously, too. Obviously people don't shut down their mines, they just shut down their drilling and different aspects of operations at the mine over Christmas. Go back to sort of a skeleton crew, but keep things rolling. We always like to see our people get home for Christmas and spend time with family and friends and have a bit of a reset and then get back out there and get into it.
Andrew Elf: I think what we're seeing so far is that the planning suggests that the breaks will be shorter than has been traditional, which is a good thing for us. I think the other thing to consider is that the coal fields typically have quite a big break over the wet season. Obviously, the way the business looks at the moment, coal is only 20% of revenue, so less surface rigs in coal, less rigs stopping for an extended time over the wet period. I think, yes, it is absolutely seasonal to Greg's point before. But hopefully, some upside for us through shorter shutdowns is a good thing.
Allen Chan: Thank you. Yeah, question from Jeremy. How much additional work can you guys take on with the existing fleet before significant CapEx is required? What would earnings per share margins get to at full utilization?
Andrew Elf: Yeah, I mean, the answer is really 93 rigs at 90% utilization is tops. Pick an average revenue per rig and an EBITDA percent, and that's as good as it gets. We've been pretty open that that's a good way to have a think about it.
Allen Chan: Okay, and last question here that is from Royce. Have you seen market supply of rigs increase to meet demand given the high returns?
Nathan Mitchell: Yeah, I think people are looking for rigs for sure. Secondhand market's still pretty strong. Again, trying to find the right rigs though is difficult. If you're selling rigs now, you're probably selling rigs you don't want. As most people know on the call, we cycled out a bunch of our rigs a few years ago in the top of the market, and so that still remains pretty strong on the price. There's no more rigs that we have that we're cycling out anymore. The ones we have we're happy with. I think that the rig price. I think that also the timeline to build a rig now is probably 12 months delivery. That's not helping the situation if you wanted to get new rigs. Certainly underground drill rigs are a lot less than that, but the surface rigs have changed a bit.
Allen Chan: One more. Do you depreciate the rigs at the same rate whether they are utilized or not? Just thinking about the 2025, 2026 D&A number, whether this increases as rig utilization increases.
Greg Switala: Yeah, it's a very good question and thanks for that. We are fairly conservative in our approach, and there are components within the rigs that sort of need to be replaced irrespective of whether they are utilized or not. To answer the question, we simply do it over a period of time. That's generally sort of somewhere in the order of 7 years for a surface rig, 5 years for an underground rig. Then to answer the question around D&A, it should be very similar to 2025, 2026 levels given that. Maybe up a tick, just given the H1 sort of focus of that CapEx number, there will be depreciation associated with that. But shouldn't drive the D&A in any sort of material effect given the policy and the approach.
Andrew Elf: Yes. Straight line, whether the assets are running or not. So it's a good conservative way to do it.
Allen Chan: Just one more there, Andrew, from Michael Beasley here, Beasley. Can you please give me some more details about your experience so far with Loop Decarbonisation business and where this is heading?
Andrew Elf: Look, it's effectively a carbon tax by stealth, to the biggest emitters in Australia. Some of those are the coal mines. Obviously, there's gas in the coal. As they mine it freely vents up into the atmosphere. That business was created to work with those miners and take that gas out before they mine it and reduce their tax. I think we've proven that it works. What needs to happen now is, we need that market to just mature a little bit more, and then take advantage of it. We're well set with what we've done. What I mean by that is there's a crossover point between the tax. The tax gets to a point where it justifies acting and doing something.
Andrew Elf: There's always going to be clients out there, like BHP that was in the preso, and credit to them, regardless of the monetary side, they're committed to reducing their emissions. But there's other clients where they take a more financial approach, and that's their decision, of course. As the obligation in the legislation says, you need to reduce your emissions on a compounding basis year on year. If you don't, your taxation liability increases exponentially year on year as a result. Over time, the cost of drilling and managing that gas makes more and more sense. I think what we're seeing is that miners are doing everything they possibly can to avoid spending any more money, and good on them, so they should. Trying to maximize their profits.
Andrew Elf: But it's going to get to a point where they really need to do something to manage their financials the best they can, and that means get a company like Loop in to do some work for them. I think that is at least a year away, if not more. It really is a game of patience. I don't know, Nathan, if you've got any thoughts on that?
Nathan Mitchell: No, I think you're right, Andrew. I think that the whole idea there was to use our drilling technology that we developed many years ago, and thread that into this highwall degasification for these guys, and it clearly works. Credit to the guys and the team. Done a fantastic job. BHP is happy. It's great that we're able to tell people in the quarterly that we're doing the work for them. So I think technically, it's a great result. As Andrew said, I think the market will change. I think, we're probably the only one playing in this space at the moment. It is a long game. We play the long game in this business. So at some point, there will be a crossover, and we'll have the equipment, the technology, and the skills to be able to help them.
Allen Chan: Fantastic. Thank you. Okay, that's all the questions today. Again, this is recorded, so it will be available by the end of the day. Nathan, Andrew, Greg, thank you very much. If there's any further questions, please come through to myself and I'll arrange management to respond. Thank you. Thanks, guys.
Nathan Mitchell: Thanks very much.
Andrew Elf: Thank you.
