Earnings call transcript: Mitchell Services Q3 2025 shows strong performance

Mitchell Services Ltd reported robust financial results for the third quarter of 2025, showcasing a strong performance with expectations for continued improvement into the fourth quarter. The company, which operates in the drilling sector, highlighted a diverse revenue stream and significant operational advancements. According to InvestingPro analysis, Mitchell Services is currently undervalued and offers an impressive 15.4% dividend yield. Despite the challenging market conditions, Mitchell Services continues to navigate effectively, supported by strategic innovations and a diversified business model.

Key Takeaways

• Mitchell Services reported strong Q3 2025 performance, with expectations for continued improvement.
• The company introduced new drilling technology and a Loop decarbonization business.
• Diversified revenue streams include significant contributions from gold and coal sectors.
• The company anticipates achieving a 20%+ EBITDA margin in the upcoming quarters.

Company Performance

Mitchell Services demonstrated resilience in Q3 2025, overcoming early-year challenges and capitalizing on its diversified business model. The company reported a strong financial performance, driven by its ability to pivot between commodities and its strategic investments in innovative technologies such as horizontal drilling and environmental risk management. The gold sector, contributing 45% of the revenue, benefitted from record prices, while the coal sector faced challenges due to suppressed prices.

Financial Highlights

• Revenue for Q3 2025: $46.8 million
• Temporary working capital requirement: $28 million
• Inventory: $14 million
• Trade payables: $18 million
• Depreciation and Amortization (D&A) expected: $25 million for FY 2025

Outlook & Guidance

Mitchell Services is optimistic about its future performance, anticipating an improvement in Q4 2025. Analysts maintain a Strong Buy consensus, with a price target suggesting significant upside potential. The company aims for a 20%+ EBITDA margin, with a high-teens EBITDA margin expected at a 70-rig operating run rate. Additionally, FY 2025 is projected to be the first tax-paying year, with potential depreciation add-backs of approximately $12 million for tax purposes. For detailed financial analysis and more insights, investors can access the comprehensive Pro Research Report available on InvestingPro.

Executive Commentary

CEO Andrew Elf expressed confidence in the company’s trajectory, stating, "We’re starting to see us come out of that now," in reference to overcoming early-year challenges. He highlighted the company’s revenue diversification, noting, "Gold’s about 45% of our revenue." Elf also emphasized the company’s profitability goals, stating, "We would like to be 20% plus EBITDA."

Risks and Challenges

• Market volatility in commodity prices, particularly in the coal sector, could affect revenue.
• Global drilling market conditions remain challenging, potentially impacting demand.
• Weather-related disruptions and mobilization costs could affect operational efficiency.
• The company’s ability to maintain its competitive position amid evolving market dynamics.
• Regulatory changes in environmental policies could influence operational strategies.

Mitchell Services’ Q3 2025 results reflect its strategic resilience and adaptability in a challenging market environment. With a focus on innovation and diversified revenue streams, the company is well-positioned for future growth, although it must remain vigilant to navigate potential risks effectively.

Full transcript - Mitchell Services Ltd (MSV) Q3 2025:

Alan, Moderator: Good morning, everyone. Thank you this morning for joining the mutual services q three quarterly update. Today, we have Andrew Elf, CEO, Greg Svatala, CFO, and joining us as

Greg Svatala, CFO, Mutual Services: well

Alan, Moderator: is Nathan Mitchell, the tech chair. We’ll have a q and a at the end, so post Andrew, range for the update, I can ask questions,

Andrew Elf, CEO, Mutual Services: at

Alan, Moderator: the end. Andrew, over to you. Thank you.

Andrew Elf, CEO, Mutual Services: Thanks very much for the introduction, Alan, and welcome, everyone, and thanks for joining us today. We’ll just do, again, similar to previous months, a little bit of a quick update on the quarter, and then open it up to questions and make it more of an interactive session for everyone. So I think just starting at the top of the quarterly there, I think, again, the heading there, strong financial performance at the end of Q3 and expected to continue into Q4 and beyond, which is a positive and something we certainly flagged previously with shareholders and potential investors. And then on the quarter itself, again, we’ve in the half year, we really spoke about some of those factors in detail that impacted the first half, you know, things we’ve invested in and won and things that impacted the business. But pleasingly, as we say there, you know, the investment into replacement projects and service offerings has been made, and we’re starting to see us come out of that now, Still impacted in Q3 with mobilization costs and weather and delays, obviously, the traditional Christmas New Year period, but pleasingly, towards the end of the quarter, as we expected, starting to perform better from a financial perspective and some of those mobilization costs are dropping away, which is a real positive thing.

On the second page, we put a little bit more detail in than ordinarily. We would, given the disparity between cash and EBITDA, just in the interest of transparency to really show people why that’s moving. Effectively, given that better performance towards the end of the quarter, you’ve sort of got a temporary working capital requirement within the business, and Greg’s certainly happy to take some questions in regards to that at the end of the presentation here. But we really couldn’t be much more transparent than that, and obviously we expect that sort of normalize more so at a future point in time. So we’ve included there as well the year to date results.

There’s obviously coverage out there on us from Q value and Morgans, and I’d certainly refer people to that if they’re looking at, you know, what do they think that the year for this year may look like or the next year ahead. On the last page of the quarterly document, we’ve got a small update there on the loop decarbonisation business. Very pleasing to say that that business is performing in line and above expectations, both from the drilling performance perspective, but also a business perspective with a couple of clients signed up and the second client now going through the engineering phase. So I certainly think that that part of the business is a genuine growth opportunity for us. It’s early days, as we say, but, you know, we’ll keep chipping away and and it’s looking pretty good at this stage.

And then lastly, on the outlook side of things, again, we flagged that we’ve had some challenges we faced. We’ve responded. We’ve managed them. We’re starting to come out the other side. The numbers were better towards the end of the quarter as we say.

They’re looking like it’s going be a better quarter again in the last quarter and a good run rate heading into next year. And again, important to note in this paper here we say, based on current contracted projects, we expect the rig count to be on or around 70. So we don’t necessarily need to win more to get to that point. Think that’s a really important point to make. And then how could I go through this without touching on gold?

Obviously, you know, gold’s about 45% of our revenue, so you know, we do surface drilling work, underground drilling work in that gold space, And given the record prices in that area, we are starting to see increased inquiries come through. I wouldn’t say it’s translating into meters yet, but certainly the leveling of inquiry is increasing, which is a positive. So that’s just a little bit of a summary and a wrap up of the quarter. Nathan, I’m not sure if you got anything anything you’d like to add or just happy to open to questions.

Nathan Mitchell, Tech Chair, Mutual Services: No. Think we should open to questions. Yep.

Andrew Elf, CEO, Mutual Services: Thanks, Alan. We’ll open up for questions.

Alan, Moderator: Perfect. Thanks, Andrew. Okay. First one is from Daniel. How much additional working capital investment may be required in the fourth quarter of FY ’twenty five?

Greg Svatala, CFO, Mutual Services: I’m happy to take that one, and thanks, Daniel. I think if you sort of compare that $28,000,000 to legacy levels, that’s certainly up there. And when I say legacy levels, sort of over the last eighteen months to two years. And so I sort of believe that that’s about the level it’ll maintain at least for the next quarter. So to answer the question, don’t expect an addition to that.

That inventory of $14,000,000 now represents fully stocked sites at the likes of Lahir and Decarb and all those sites that we’ve spoken to previously in terms of the need for that additional inventory. I think $18,000,000 in trade payables is probably about right as well. And then subject to clients continuing to pay on time, that sort of low to mid-30s thereabouts. Pending revenue, of course, is probably a reasonable number as well. So we make the point in the quarterly that we expect it to normalize, and I think normalize from the next quarter as in no additional dollars from the $28,000,000

Nathan Mitchell, Tech Chair, Mutual Services: Thank you.

Alan, Moderator: Another question from Daniel. Are there any potential legislative changes proposed by either the government or opposition ahead of the forthcoming election? If we do get a change of government, do you think this presents any potential risks to the safe government use of legislation as it stands?

Andrew Elf, CEO, Mutual Services: I haven’t seen anything in the media that suggests there’s gonna be changes from either party. That’s not to say that I haven’t missed something, but nothing I haven’t

Greg Svatala, CFO, Mutual Services: seen anything.

Nathan Mitchell, Tech Chair, Mutual Services: I haven’t seen anything today. And then there’s been no feedback yet from our clients.

Andrew Elf, CEO, Mutual Services: No. So I think I I’d say probably the best way to look at it at this stage would be same same in all honesty.

Alan, Moderator: Thank you, Andrew. Can you provide some more color on what you’re seeing in the goal sector in terms of commentary around improving demand for the drill line?

Andrew Elf, CEO, Mutual Services: Pretty straightforward, pretty simple. They’re absolutely killing it if they’re producing, and well, they should be. If they’re not, they’re in the wrong game. But I think they’re just making that much money that they’re starting to reassess their drilling budgets. This is from a producer perspective, and those discussions are sort of just starting.

A lot of people running Australian financial year are well and truly into their budgeting and planning process, so we’re sort of hearing that, you know, there may be some increasing budgets into next financial year, which is a good thing given how the producers are performing and sort of the smaller end of town, the juniors. I think equity markets have been a little bit better, but it’s still taking time for the meters to come. You know, they’re not well and truly up and running, firing, you know, with active tenders out yet. So so I think, you know, best way to look at it, producers are talking about more meters. Equity markets have improved slightly for juniors, and both of those things leading to increased inquiries, but not meters yet.

Alan, Moderator: Thank In regards to, I guess, coal sector clients, the conditions there, is is their demand proving resilience despite relatively weak prices at current?

Andrew Elf, CEO, Mutual Services: It’s certainly challenging in the coal. Obviously, prices are down and, you know, obviously, you got royalties in Queensland, which make it a bit harder too, but it’s probably flat. You know, there’s nothing too exciting happening in that space in the coal. It’s good, steady, ongoing work that represents probably 30 to 40% of our revenue, and it’s very closely linked to the operation of those mines or very much near mine work. So, yeah, we got some good clients in that space, and they’re and they’re still active, and they’re still going well.

But probably fair to say, Nathan, they’re not doing anything they don’t have to

Greg Svatala, CFO, Mutual Services: do.

Nathan Mitchell, Tech Chair, Mutual Services: I think the thermal guys are, you know, either at par or underwater, which we don’t do a lot of work at the thermal industry. Coke and Kyle companies are still doing okay, but I think all of them are, you know, are certainly not as active as they were previously. Obviously, Anglo and the Peabody deal is yet to be resolved, but we haven’t heard anything either way about what’s happening with that. So, you know, obviously, that was a large chunk of our business, but we’ve we’ve had to pivot away from that over you know, we talked about that over the last twelve months, six months. So that’s that’s obviously we’re coming through that now.

As you can see, as Andrew said, in this quarter, so it’s taken a bit to sort of swallow and and and push through. So there’s two, obviously, active. One mine shut down, one’s still going. So we’re not sure what’s gonna happen with Anglo and what’s gonna happen with Moranbah North. But, obviously, you know, coal prices being suppressed doesn’t help that.

But as Andrew just said there, we’re still active in that sector, and and and it’s it’s still going well, still represents a good part of our business. I think Coke and coal is still here for a while. So no doubt, you know, things will hopefully increase, you know, in the future. Yeah.

Andrew Elf, CEO, Mutual Services: But I certainly think that diversity that exists within the business has held us in good stead over over many years now. You know, gold gold’s up, coal’s a bit flat, and we’ve seen it the other way as well. Yep. So so that’s that’s good, the rigs can move in many instances between the two commodities as well.

Alan, Moderator: Thank you. Question, Daniel. Can you remind us what D and A should be in FY ’25 and why this has been relatively stable as CapEx has tracked below D and A?

Greg Svatala, CFO, Mutual Services: In terms of the first part of that question, sort of somewhere around the $25,000,000 or thereabouts, D and A in FY ’25. In terms of the second part, it the DNA on on a sort of monthly basis is certainly decreasing. It does it does take a little bit of time to sort of fully unwind. So in other you know, I suppose if if CapEx from year one to year two decreases, you you don’t automatically see a corresponding decrease just given the nature of what was purchased in the previous years and and the and the length of time it it takes to depreciate, but we are seeing a a reduction. The the other the other part of that equation is just, you know, with with the with the LF one sixties previously purchased, I suppose CapEx in in recent years comprises a lot of sort of ancillary gear, drill pipe as an example, as opposed to to drill rigs in previous years.

And and that sort of that sort of equipment depreciates at a at a quicker rate than than the rig. So you got a bit of a there’s bit of a mix element there too in terms of depreciation periods. But it will at forecast levels, it’s it’s due to decrease, maybe just for those reasons, not at at the same sort of dollar value rate as the as the CapEx goes down by, I suppose.

Alan, Moderator: Thank you. A question for Neil. Can you explain how the loop activities differ from your standard underground degas drilling?

Nathan Mitchell, Tech Chair, Mutual Services: Yeah. I think they’re very different. Yep. It’s it’s essentially different drilling rigs, different drill pipe, different bottom hole assemblies, different directional control equipment. I think the fundamental concept of drilling a hole horizontally is the same, but apart from that, they are very different technologies.

The equipment we’ve got here now is the first of its kind doing what it’s doing. So, yep, it’s a it’s a very different offering to to underground coal degasification.

Andrew Elf, CEO, Mutual Services: Yep. And that loop business, you know, it’s important to to remember it’s not just a drilling business. So we’re actually offering a full service to the clients, integrating, you know, health, safety management, operational environmental risk. We’re actually dynamic gas modelling, engineering work. We’re looking at, you know, what is their potential safeguard liability is going to be, helping them with those submissions, as well as actually doing the drilling in the field, potentially gathering gas, amongst other things.

So it is a genuine full service offering to those clients to assist them with their safeguard, you know, missions reporting and management. And as Nathan says, a very technical and different type of drilling, which so far has gone fantastically well.

Alan, Moderator: Thank you. Next question, this one’s for you, Nathan. With with the transition year in FY ’25, can you provide any commentary on how you’re thinking about the with only one quarter to go?

Nathan Mitchell, Tech Chair, Mutual Services: Obviously, I think we’ve,

Alan, Moderator: you

Nathan Mitchell, Tech Chair, Mutual Services: know, we’ve got we’ve had a fairly you can see the numbers. They’re they’re not great number coming out of Christmas, and then and looking at the the last two, the January, February is not great. March was a much better month for us, as I said before, swallowing all those issues that we had and then having the extended rain, which sounds like a broken record. But but, you know, it’s you look at the numbers, they’re not great. So we we would hope and we expect the next quarter to be much better.

So I think we’ll just have to see how good it is based at the end of the end of the year. I think it’s a moving target at the moment just based on where where things have been in the last three months. So I can’t say at this stage until we till we look at the next month and the month after that.

Alan, Moderator: Thanks, Nathan. A question from Tom. Can you comment on what you think a steady state EBITDA margin for the business should look like at the plus 70 rig operating run rate given the expanded service mix?

Andrew Elf, CEO, Mutual Services: Think the best way to answer that is just to go back in time and look at the previous financial year where it was around that level. And I think from memory, Greg, it was probably high teens. Yep. So, again, we’ve always spoken to everyone and said from an aspirational perspective, we would like to be 20% plus EBITDA. Obviously, in specialist drilling like the decarbonization drilling can help you achieve those numbers.

Some of the specialist geotech work that we do on various projects, you know, like Snowy Hydro scheme or other specialist geotech projects like Sydney Metro, those things, you know, they come and go, but again, it’s highly specialist work with good returns. So we’re always trying to get that percentage up. It can make a big difference to us. You know, obviously, when that number of rigs is running, there’s good leverage in the business, and those additional rigs are dropping down to your EBITDA because you’ve got your overheads covered. So, yeah, I would say that, you know, realistically, teens is a good number to work to, but would we like to do better?

Of course, we would. Have we done better? In some quarters, we have. But, yeah, from a from a modeling perspective and and looking out, high high teens.

Alan, Moderator: Thanks, Andrew. A question for Brad. Can you speak to the competitive environment for drilling?

Nathan Mitchell, Tech Chair, Mutual Services: Can we talk to that? You know, I think it’s it’s probably been a tough six months for most drilling contractors. I think we were in a very good position with our debt piece and buying equipment when we did and paying it off, and and think others are struggling just with where the world is at the moment between, you know, China, US, Russia, all the other things. If we think about what’s happened in the last six months, the world’s turned over probably three times in such a short period of time, and we forget about that. You know, the the excess coal has has been flowing from Russia to China, submit you know, subduing prices.

You know, in a perfect world, I think we we would yes. We’d be in a normal run rate, but it’s not we’re far from perfect at the moment. But overall, I think we’re seeing our competitors are probably not as good a position as we are in order to sort of weather this, and we’ve been able to move pretty quickly from from coal to minerals as we’ve seen. And, obviously, there’s a we’ve got to go through a dip to come back out. So, fundamentally, I think we’re better

We’re certainly in a better position for our competitors. And I think it’s you know, for that, you know, it’ll be a better you know, short term will be better for us than others, I think.

Alan, Moderator: Thank you, Nathan. Another question from Daniel. I’m sorry for you, Greg. Can you clarify when cash tax payments will recommence with the utilization of COVID era instead of asset write offs?

Greg Svatala, CFO, Mutual Services: Yeah. So so just in in summary and and just taking a look back during the COVID period, you know, all those F160s as well as other CapEx was purchased in those years, whereby we were allowed to write it off instantly from a tax perspective, and we did that and, hence, haven’t paid tax over the past number of years. As is highlighted in the in the annual report, you know, it’s it’s it’s essentially a temporary difference, not a permanent difference. And so with the losses associated with those write offs having been fully utilized at the June 2024, We now we’ll now be in a scenario where there’ll effectively be a depreciation add back from a from a tax perspective. So the FY twenty five tax return will be the first will be the first sort of tax paying year, I suppose.

And the easiest way to think about how that works at least for the next couple of years is there’ll be approximately $12,000,000 of of depreciation accounting depreciation that will not be allowed as a as a as a tax expense because it previously has been under the under the instant asset write off. So make your own assumptions around accounting profit before tax, and then add back the $12,000,000 in depreciation will give you the taxable income upon which tax will be paid.

Alan, Moderator: Thanks, Greg. A question for Roger. What are the like for like rates on contracts being one down versus a year ago?

Andrew Elf, CEO, Mutual Services: So I think probably first off, worth pointing out that all legacy contracts with old rates, you know, pretty sort of inflation spike have been reset. You know, there’s no old legacy contracts out there now. But to be honest, rates are probably flat. You know, I think typical contract length, you know, on the mine sites that we work at are sort of three years plus minus. Most of those contracts have rise and fall clauses contained within them on the anniversary of the contract, so you may get an inflation increase.

Shorter contracts one year, two year, maybe fixed rates for one or two years. So really, to answer the question, I’d say, you know, the rates are probably flat, but you’re getting inflation. And the primary increase in costs, you know, that we foresee in the year ahead is probably labor more than anything, to be honest.

Alan, Moderator: Thanks, Andrew. Another question for Brad back on on Blue. Can you provide some more color around how the current Blue contracts has exceeded expectations?

Andrew Elf, CEO, Mutual Services: I certainly think that the, you know, there were question marks about the ability of because obviously the rig is sitting in the pit of the coal mine, and there were question marks about the ability of the rig to drill through the face, you know, in broken ground and bad ground, and then get out and drill a good well without any issues. We overcame that. Question marks on some of the techniques and methodology, which have been proven before, got across those, but drilled quicker than we thought as well. And then the quality of the data that we’re getting and providing to the client, excellent, And the overall service of the team with some of that reporting engineering and other things has been very good too. So, you know, all in all, very, very happy.

The performance of the rig, given it’s a new type of rig that we’ve got, has been excellent. You know, sometimes you get a new type of rig and you’re a bit nervous that it may not perform, but this one has had negligible issues. So sort of all those little things that make a difference to provide a good service to the client have been positives. And that, you know, it’s a small industry. Everyone’s pretty close, and the the word has spread, which is a really positive thing that it’s that it’s been really good.

So that sort of bodes well for the the future.

Alan, Moderator: Perfect. Thank you. One question on the on the chat here. Any update on on the buyback?

Nathan Mitchell, Tech Chair, Mutual Services: No. Nothing at the moment. No. No. It’s the price is fairly low as we all know, but not at this stage.

Think based on our numbers, I think we sit tight and and focus on on being a better drilling business going into the last quarter.

Andrew Elf, CEO, Mutual Services: Yeah. I think it’s worth adding that, you know, there’s there’s been, think, Greg, probably four odd million dollars of shareholder returns so far this financial year from the from the the final dividend from previous year plus buybacks.

Greg Svatala, CFO, Mutual Services: Yeah. About that if you if you include the final from the from the previous year. So, you

Andrew Elf, CEO, Mutual Services: know, that that has that has been made this this financial year as such. And then, you know, to Nathan’s point, we we gotta see some the business to to to delivering some impact, and then we’ll we’ll have some some more money to just to decide what to do with it. And and then it’s up to Nathan and the rest of the board to to decide what they do. But gotta gotta just keep delivering some decent numbers into the last quarter, and then, you know, hopefully give the board a good problem to think about.

Alan, Moderator: Thanks, Andrew. That’s the last of the questions now. If you have any further questions, please, yeah, top me down. I’ll quickly address them with the team. I think that concludes today’s webinar.

Andrew, Nathan, Greg, thank you very much. As Andy said, research is covered by qValue and and Morgan’s. If there are any questions, feel free to reach out to myself, and I can sort of revert it back to management. This is also being recorded, so I’ll I’ll come back to you individually for the recording. Again, thank you, guys.

Thanks.

Andrew Elf, CEO, Mutual Services: Thanks, everyone. Appreciate it. Hurry up.

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