Capital Regulatory News (CAPD)

Capital Drilling Limited

("Capital Drilling", the "Group" or the "Company")

Full Year Results

for the year ended 31 December 2018

Capital Drilling Limited (CAPD:LN), a leading drilling solutions company focused on the African markets, today announces its full year results for the year ended 31 December 2018.

FULL YEAR FINANCIAL RESULTS (UNAUDITED) FOR THE YEAR ENDED 31 DECEMBER 2018*

Financial Overview

· Significant increase in profitability and net cash

· Full year 2018 revenue of $116.0 million, marginally above the top end of the 2018 guidance of $105 to $115 million (2017: $119.4 million)

· EBITDA up 16% to $28.3 million (2017: $24.3 million)

· EBIT up 26% to $14.8 million (2017: $11.7 million)

· Net Profit After Tax up 48% to $7.7 million (2017: $5.2 million)

· Net Operating Cash Flows up 9% to $22.5 million (2017: $20.7 million)

· Final Dividend of US1.5cps, up 25% (2017: US1.2cps) to be paid on 3 May 2019

· Net Cash up 122% to $10.9 million (2017: $4.9 million). 

· The Company anticipates full year 2019 revenues of between $110 and $120 million underpinned by existing contracts.

Operational and Strategic Review

· Maintained full year ARPOR at $194,000, a significant achievement given the rig mobilisation into West Africa in H1 2018

· Annual rig utilisation 51% in 2018 (2017: 53%) with rig utilisation of 56% in H2 2018 driven by the commencement of new contracts in West Africa

· Purchased two new blast hole rigs in H1 2018, while disposing of four rigs during the year (sale and decommissioning), with a fleet size of 91 rigs at end of 2018

· Continued strong performance on our long-term contracts:

- Acacia Mining's North Mara Gold Mine (Tanzania)

- AngloGold Ashanti's Geita Gold Mine (Tanzania)

- Centamin's Sukari Gold Mine (Egypt)

- Resolute Mining's Syama Gold Mine (Mali)

- Kinross Gold's Tasiast Mine (Mauritania)

· Awarded extension on three long terms contracts, including:

- Resolute Mining's Syama Gold Mine: Awarded a three-year extension on surface drilling and delineation drilling

- Centamin's Sukari Mine: Awarded a five-year extension, covering our existing blast hole and grade control drilling services

- AngloGold Ashanti's Geita Gold Mine: Awarded a one-year extension covering our underground grade control and underground exploration drilling services

· Awarded numerous exploration contracts over 2018, including:

- Aton Resources (Egypt)

- De Beers (Botswana)

- Graphex Mining (Tanzania)

- Hummingbird Resources (Mali)

- OreCorp Limited (Mauritania)

- Sama Resources (Côte d'Ivoire)

- Strandline Resources (Tanzania)

· Significant progress in the implementation of the West Africa strategy:

- Established infrastructure with offices, warehouses, workshops and accommodation in Bamako, Mali, and Yamoussoukro, Côte d'Ivoire, adding to the existing presence in Mauritania

- Doubled rig count in the region to 31 rigs during the period

- Broadened Business Development presence

· Successful contract awards in West Africa including:

- Resolute Mining (mentioned above)

- Kinross Gold (mentioned above)

- Hummingbird Resources

- Orecorp Limited

- Sama Resources: commenced a 6,000m diamond drilling contract

· Outstanding safety performance with a record achievement of zero LTI's and 0.45 AFIR (51% decline from 2017) for the year, reflecting our uncompromising commitment to safety

· Achievement of a number of world class safety milestones, including:

- Mali (Syama Project) achieved two years LTI free

- Tanzania (North Mara Project) achieved two years LTI free

- Tanzania (Geita Project) achieved one-year LTI free

Board and Management Update

The Company appointed Michael Rawlinson as Non-Executive Director in August 2018, who replaced Craig Burton. Michael was also appointed chair of the Remuneration Committee.

We are further pleased to announce today the appointment of Jodie North as Chief Operating Officer effective March 2019. Jodie was previously the Executive for Production and is bringing significant experience into this new role.

Commenting on the results, Jamie Boyton (Executive Chairman) said:

"Capital Drilling enjoyed a year of significant progress with record net cash generated from our assets, a further strengthening of the balance sheet, as well as key strategic growth into West Africa. The quality of our business mix further improved with extensions to a number of our long-term drilling contracts, ARPOR remaining consistently robust, whilst utilisation saw a further improvement in the second half of the year, particularly with our exploration rig fleet. All of these metrics were underpinned by an exceptional safety record with zero LTIs and a halving of our AIFR to an industry leading 0.45, which demonstrates the management's focus on our goal of a zero harm strategy.

The outlook for 2019 remains encouraging, albeit amidst mixed market drivers, specifically supportive commodity prices, in particular gold which represents circa 90% of Group revenue, offset by continued weak capital markets that impacted the funding for exploration activity. Our significantly increased presence in the key West African markets provides optimism for further contract wins over the year ahead. We believe that the careful investments we have made in 2018, both in terms of infrastructure as well as continually maintaining a high quality and young fleet, combined with our strong focus on cost discipline and return metrics on our asset base, will reap further benefits to all of our stakeholders over the course of the current financial year.

Our stated strategy of building our long-term business, coupled with a robust balance sheet and a focus on maximising the generation of free cash, is expected to see shareholders enjoy strong dividend growth, with a final payment for 2018 of 1.5c per share"

For further information, please visit Capital Drilling's website www.capdrill.com or contact:

Capital Drilling Limited +230 464 3250

Jamie Boyton, Executive Chairman investor@capdrill.com

André Koekemoer, Chief Financial Officer

Peel Hunt LLP +44 20 7418 8900

Ross Allister

James Bavister

Tamesis Partners LLP +44 20 3882 2868

Charlie Bendon

Richard Greenfield

Buchanan +44 20 7466 5000

Bobby Morse capitaldrilling@buchanan.uk.com

James Husband

About Capital Drilling

Capital Drilling provides specialised drilling services to mineral exploration and mining companies in emerging and developing markets, for exploration, development and production stage projects. The Company currently owns and operates a fleet of 91 drilling rigs with established operations in Botswana, Côte d'Ivoire, Egypt, Ghana, Kenya, Mali, Mauritania and Tanzania. The Group's corporate headquarters are in Mauritius.

CHAIRMAN'S STATEMENT

During 2018, Capital Drilling achieved a number of pleasing results, including: record safety achievement of zero Lost Time Injuries (LTI's); successful strategic expansion into West Africa; solid performance from the Group's core long-term contracts; and contract extensions with existing long-term clients. Financially, our full year results were the strongest reported for many years, with a significant increase in our profitability measures, including a net profit after tax of $7.7 million representing a 48% increase on 2017 ($5.2 million). The improved performance contributed to a solid increase in the Group's return on capital, in addition to strong cash generation, allowing continued investment, debt reduction and an increase in dividends.

The operating environment produced some mixed signals during 2018. Commodity prices were generally supportive, particularly gold which represents approximately 90% of our overall business by revenue and 50% of the drilling industry's revenue, by commodity. The strong gold price continued to drive solid operating margins for our mining customers, contributing to improved budgets across 2018. Conversely, capital markets activity levels remained weaker over the course of the year, particularly in Canada, restricting access to finance for junior explorers, a critical customer group in early stage exploration drilling. While these customers remained active during 2018, the projects were generally budget constrained which continues to be prevalent as we enter 2019. Most recently, an increase in M&A activity in the sector has driven increasing interest from generalist investors, which is a positive sign for new investment in the sector.

Revenue decreased 3% to $116.0 million following a 28% increase in 2017 ($119.4 million), reflecting lower utilisation in the first half as idle rigs were redeployed to West Africa. Second half revenue ($61.5 million) was 13% higher than H1 2018 ($54.5 million) as assets arrived in the region and new contracts commenced drilling. During H2 2018, the West African region contributed 24% of total revenue, up from 18% in H1 2018 and substantially increased from 2017 (13%). These results validate the Board's decision to expand its presence into this highly active market.

The Group reported a net profit after tax (NPAT) of $7.7 million (2017: $5.2 million), a very strong 48% increase on 2017, with Basic Earnings Per Share (EPS) increasing to 5.7 cps (2017: 3.9cps). This was particularly pleasing as it was achieved despite weaker revenue and increased costs associated with fleet mobilisation and the establishment of infrastructure in West Africa.

Improved working capital movements coupled with ongoing financial discipline and tight expenditure controls delivered an outstanding net cash improvement. Working capital was significantly stronger in the second half following first half outflows associated with establishing the West African presence. Net cash as at 31 December was $10.9 million, up from $4.9 million at December 31, 2017, after the payment of $2.4 million in dividends in 2018. The strong net cash position enabled the Group to reduce gross debt by 25% to $9 million from 2017 ($12 million).

In line with the Group's solid financial and operating position, the Board of Directors have declared a final dividend for the 2018 period of 1.5cps ($2.04 million), payable on 3 May 2019. This is up 25% on the 2017 final dividend and reflects the stronger profit and balance sheet result, while retaining ample capacity to execute on the Company's strategy into 2019 and beyond.

OPERATIONAL UPDATE

The improvement in global drilling activity continued into 2018. Capital Drilling's key markets of Egypt and Tanzania did not however experience the uplift in exploration activity seen in other mining regions. As a result, while the long-term blast hole and grade control contracts were performing well, the Company was not benefitting from the increase in exploration and management accelerated the Group's strategic expansion into the high-growth West African region over H1 2018 and into H2.

Throughout the year assets were redeployed into the region, while infrastructure was established in Bamako, Mali, and Yamoussoukro, Côte d'Ivoire, in addition to existing facilities in Mauritania. The rig count in the region was doubled over the course of the year to 31, over one third of the total fleet, and the Group increased its key operational personnel in the region while adding further Business Development resources.

Capital Drilling benefitted from this investment with a number of contract wins, including: delineation drilling for Hummingbird Resources at the Yanfolila Gold Mine, Mali; two-year maintenance contract at Kinross's Tasiast Gold Mine, Mauritania; three year surface drilling and delineation contract extension at Resolute Mining's operations in Mali; and delineation drilling contract with new client Sama Resources at its Yepleu property in Côte d'Ivoire. Contracts commenced in the second half, with stronger revenues reflected as a result.

The Company also saw stronger exploration activity in the second half with a number of contract wins, despite the softer equity markets. New contracts included: Aton Resources, Egypt; Graphex Mining Limited, Tanzania; De Beers Holdings, Botswana; Acacia Mining, Kenya; and Strandline Resources, Tanzania.

While fleet utilisation was subdued in the first half (H1 2018: 46%) due to rig mobilisation into West Africa, it increased substantially in H2 2018 to 56%, driven by the commencement of the new contracts outlined above. The annual average fleet remained flat at 93 rigs (2017: 93 rigs).

Average Revenue per Operating Rig (ARPOR) remained consistent with 2017 at $194,000 per month - an outstanding result from our operational teams given the lower utilisation in the first half.

The Group's long-term contracts, Geita Gold Mine (AngloGold Ashanti) and North Mara Gold Mine (Acacia) in Tanzania, Sukari Gold Mine (Centamin) in Egypt, Tasiast Gold Mine (Kinross) in Mauritania and Syama Mine (Resolute) in Mali, all continued to perform well during 2018.

Significantly, the Company was awarded contract extensions at Sukari Gold Mine for a further five years and Geita Gold Mine for underground drilling services for a further one year. These extensions reflect the Group's professional service delivery to its clients. Capital Drilling will continue to focus on securing long-term contracts with blue chip clients to provide revenue stability and greater visibility of future revenue and earnings.

Capital Drilling's production fleet of blast hole and grade control rigs continued to operate at near full capacity over the year. Throughout 2018, the Company acquired two new production rigs to support our operations. The Group continues to focus on maintaining a solid rig maintenance and rebuild program, in addition to retiring older assets, to maintain its industry leading reputation for asset quality. With an average fleet age of approximately five years, Capital Drilling continues to lead the market in equipment standards and reliability.

SAFETY

The Group has an uncompromising commitment to the safety of its employees and all other stakeholders. It expects visible safety leadership at all levels of the business, from the Executive Leadership Team to crews on site. The Company invests significantly in training programs to ensure its workforce is skilled, competent and can identify and mitigate hazards in the workplace.

As highlighted above, the Group delivered an outstanding safety achievement of zero LTI's during 2018 the year. This is an industry leading result and a record for Capital Drilling and makes us very proud of the level of professionalism in the Group's safety culture.

Additionally, the All Injury Frequency Rate (AIFR) more than halved to 0.45 (2017: 0.92), well below industry standards.

Capital Drilling achieved a number of site records and safety milestones during 2018 including:

· Mali, Syama Project: 1 year LTI free in June 2018

· Tanzania, North Mara Project: 2 years LTI free in March 2018

· Tanzania, Geita Project: 1 year LTI free in March 2018

OUTLOOK

As we enter 2019, we continue to face an external environment providing mixed signals for growth. As raised earlier, commodity prices are generally supportive and the recent strength in the gold price highly supportive for an increase in drilling activity. Capital markets activity levels do however remain challenging, particularly in Canada, which is continuing to restrict access to finance for junior explorers. Critically, our long-term contracts continue to underpin Group revenues, which combined with existing exploration contracts, provide baseline revenues similar to the result achieved in 2018. In addition, our increased presence in the high growth West African market positions us well for further contract wins throughout 2019. Against this backdrop, we anticipate a further improvement in profitability in 2019 with our ongoing discipline in managing the business.

Capital Drilling will continue to focus on improving the key metrics of the business, growing the portfolio of long-term mine-site based contracts, further expanding the business in the West African region and maintaining the growth of free cash flow to continue the delivery of returns to all our stakeholders.

I would like to take this opportunity to thank all of our employees, business partners, shareholders, our Board of Directors and other stakeholders for their continued support of our Company.

Jamie Boyton

Executive Chairman

14 March 2019

CHIEF FINANCIAL OFFICER'S REVIEW

Overview

2018 experienced a significant increase in both profitability and cash levels. Net cash increased to $10.9 million (2017: $4.9 million), the highest levels since listing in 2010, with $22.5m generated from operating activities. As a consequence, Net Profit After Tax increased 48% to $7.7 million (2017: $5.2 million), despite a 3% decrease in 2018 revenues to $116m (2017: $119m).

The increased cash generation has enabled the Group to fund the West Africa expansion strategy from operating cash, as well as to reduce the long-term debt by $3 million, down 25% (2017: no movement).

This increased profitability was driven by the continuation of the savings initiatives implemented in 2017. The Group's key long-term contracts continue to perform strongly, with stable revenues at Sukari Gold Mine (Egypt), Geita and North Mara (Tanzania) and increased revenues at Tasiast (Mauritania). In addition, contract extensions were awarded at Sukari (five year extension on grade control and blast hole), Geita Gold Mine (one year extension on underground grade control and exploration drilling) and Syama (three year extension on surface drilling and delineation).

Despite more subdued capital markets, Capital Drilling secured additional contracts in both its strategically important area of West Africa and elsewhere in Africa, winning contracts with Hummingbird Resources (Mali), Sama Resources (Côte d'Ivoire), Graphex Mining (Tanzania) and De Beers (Botswana).

Capital expenditure (Capex) of $11.9 million (2017: $10.8 million) continued to support the new and existing contracts and increased presence in West Africa, with $7 million spent on growth Capex (2017: $6.4 million) and additional spend on ancillary assets to support the fleet. During the year two new blast hole rigs were purchased and four diamond rigs decommissioned.

Statement of Comprehensive Income

Table 1: Statement of Comprehensive Income (Summary)

Rig utilisation for the year was 51% (2017: 53%) on an average fleet size of 93 (2017: 93). Average revenue per operating rig (ARPOR) was maintained at $194,000 (2017: $194,000) per month.

Most contract margin results improved due to greater operational focus and performance management, with a more hands-on approach by the Executive Leadership Team in involving and upskilling the project management teams to focus on profitability. The escalating margin improvement trend from Q4 2017 continued for FY 2018.

Earnings before interest, tax, depreciation and amortisation ("EBITDA"), amounted to $28.3 million delivering a margin of 24.4% (2017: $24.3 million, or 20.4%), a 20% increase in margin, year on year.

Profit Before Tax (PBT) was impacted by Net Interest of $0.65 million (2017: $1.0 million) and loss of $1.6 million on new business opportunities. These investments are expected to increase the Group's service offering to clients. The costs also include $0.1 million relating to an associate's IPO, which has since listed, with an unrealised gain of $0.6 million.

The Effective Tax Rate of 39% (2017: 46%) is partly due to final taxes on entities no longer contributing to Group revenues, the cost of cash repatriation and the impact of commencing operations in countries where we are yet to benefit from normalised tax margins, as Minimum Income Tax rates are applied. These tax levels are above the Group Tax targets and are expected to see a decline in 2019.

Profit after tax for the year was $7.7 million (2017: $5.2 million), up 48%.

The earnings per share for the year was 5.7 cents (2017: profit of 3.9 cents), up 46%. The weighted average number of ordinary shares used in the earnings per share calculation was 135,670,075 (2017: 135,162,396).

Statement of Financial Position

Table 2: Statement of Financial Position (Summary)

As at 31 December 2018, shareholders' equity increased by 8.1%. The Group distributed dividends of $2.4 million (2017: $2.0 million) to the shareholders and recorded a net profit after tax of $7.7 million (2017: $5.2 million). Net cash is $10.9 million (2017: $4.9 million). The net profit for the year has further strengthened the Statement of Financial Position.

The total rig fleet size at the end of 2018 was 91 drill rigs (2017: 93). The strategic capital expenditure in 2018 resulted in a marginally increased requirement in 2018 of $11.9 million (2017: $10.8 million). 

Overall property, plant and equipment reduced from $41.4 million in 2017 to $38.8 million in 2018, reflecting depreciation of $13.5 million (2017: $12.6 million), assets disposed of $1.0 million (2017: $1.9 million) and additional capital expenditure of $11.9 million (2017: 10.8 million).

Current assets increased to $66.2 million at 31 December 2018 (2017: $61.4 million). Inventory decreased by $1.9 million to $19.8 million (2017: $21.7 million) as part of an inventory rationalisation programme. Trade receivables decreased by $0.8 million due to improved collections. Cash and cash equivalents increased by $3.0 million to $19.9 million (2017: $16.9 million). 

Non-current liabilities were $9 million at end of year, as the $12 million revolving credit facility ("RCF") provided by Standard Bank (Mauritius) Limited was reduced by $3 million. The Group was fully compliant with all debt covenants throughout the year.

Current liabilities consisted of trade and other payables, $18.1 million (2017: $19.7 million), current portion of long-term liabilities $0.03 million (2017: $0.04 million) and tax liabilities of $3.7 million (2017: $3.7 million).

Table 3: Statement of changes in equity (Summary)

Statement of Cash Flows

Table 4: Statement of Cash Flows (Summary)

Table 5: Reconciliation of net cash (debt) position

Net cash generated from operating activities was $22.5 million (2017: $20.7 million) with the operating cash significantly higher than 2017 due to the improved EBITDA result of $28.3 million (2017: $24.3 million), offset by an increased spend on payables.

The capital expenditure increase of $1.1 million in 2018 followed on the $2.0 million decrease in 2017, driven by the Group's commitment to meeting existing client requirements and the strategy of maintaining fleet operational readiness for the expansion into West Africa, which is expected to deliver long-term growth benefits.

The increase in Financing activities related to a $3.0 million payment on the long-term liabilities (2017: No movement) and an increased dividend payment of $2.4 million (2017: $2.0 million).

The Group reported a net cash position of $10.9 million at 31 December 2018. The increased net cash is attributed to the improved profitability for the year.

Critical Accounting Policies

The Financial Statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The principal accounting standards are set out in the Group's financial statements.

The Financial Statements have been prepared on the historical cost basis and are presented in US dollars, given the Group's transactions are primarily denominated in US dollars.

Property, Plant and Equipment

The Group depreciates all fixed assets over their estimated useful lives, less any pre-agreed salvage value. The carrying value and estimated life of fixed assets are reviewed annually or more frequently if a triggering event occurs.

Principal Risks and Uncertainties

The Group operates in environments that pose various risks and uncertainties. Aside from the generic risks that face all businesses, the Group's business, financial condition or results of operations could be materially and adversely affected by any of the risks described below.

These risks should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties nor are they listed in order of magnitude or probability. Additional risks and uncertainties that are not presently known to the Directors, or which they currently deem immaterial, may also have an adverse effect on the Group's operating results, financial condition and prospects.

The principal risks associated with the business are:

Viability Statement

The activities of the Group, together with the factors likely to affect its future development, performance, the financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the pages 16 to 31. The Directors have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. These risks and the ways they are being managed and mitigated by a wide range of actions are summarised on pages 11 to 14.

Taking account of the Group's position and principal risks, the Directors assessed the prospects of the Group by reviewing and discussing the annual forecast, the three-year strategic plan and the Group risk framework. Throughout the year the Directors review and discuss the potential impact of each principal risk as well as the risk impact of any major events or transactions. A three-year period is considered appropriate for this assessment because:

• It is the period covered by the strategic plan; and

• It enables a high level of confidence, even in extreme adverse events, due to a number of factors such as:

- The Group has considerable financial resources together with established business relationships with major, mid-tier and junior mining houses and suppliers in countries throughout the world

- High cash generation by the Group's operations

- Low level of gearing and availability of unutilised facilities with the Group's bankers

- Flexibility of cash outflows including capital expenditure and dividend payments

- The Group's long-term contracts, equipment availability and diverse geographic operations

Based on the results of this analysis, the Directors believe that the Group is well placed to manage its business risks successfully as the market conditions continue to improve. The Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

Cautionary Statement

This Business Review, which comprises the Chairman's Statement and Chief Financial Officer's Review, has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed.

The Business Review contains certain forward-looking statements. These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

By order of the Board

André Koekemoer

Chief Financial Officer

14 March 2019