Earnings call transcript: Mitchell Services sees solid Q4 amid challenges

Mitchell Services Ltd (ASX:MSD) reported a "solid quarter" for Q4, despite some operational challenges. The company’s stock dropped 6.67% following the earnings call, closing at $0.28. According to InvestingPro analysis, the company appears undervalued based on its Fair Value estimate. The company highlighted a strong cash conversion rate and reduced net debt, while also focusing on future growth opportunities in the gold and minerals sectors. With a market capitalization of $38.9 million, Mitchell Services maintains a notably low EV/EBITDA ratio of 2.37x, suggesting potential value opportunity.

Key Takeaways

• Mitchell Services achieved over 100% cash conversion rate.
• Net debt was reduced quarter-on-quarter.
• The company launched its LOOP decarbonization solution for coal mines.
• Challenges were noted in the coal sector, with a stronger outlook in gold.

Company Performance

Mitchell Services reported a solid performance for Q4, emphasizing its robust cash conversion and reduced net debt. The company’s financial health score is rated as GREAT by InvestingPro, with particularly strong metrics in profitability and cash flow management. The company faced challenges in the coal sector but identified growth opportunities in the gold mining sector. With annual revenue of $133.03 million and an impressive dividend yield of 13.33%, the company maintains a strong shareholder return profile. The introduction of the LOOP business marks a strategic move towards decarbonization solutions, potentially expanding into gas management for surface coal operations.

Financial Highlights

• Inventory level at June 30 was 13.6 million.
• The company anticipates inventory reduction in FY26.
• Over 80% of revenue is generated from global mining majors.

Outlook & Guidance

Mitchell Services is optimistic about its performance in FY26, targeting better results than the previous year. The company plans to expand its LOOP business and continue its focus on gold and minerals drilling. Potential mergers and acquisitions are also being evaluated as part of its growth strategy. For detailed analysis and additional insights, investors can access the comprehensive Pro Research Report available on InvestingPro, which includes expert analysis of the company’s growth prospects and valuation metrics among over 1,400+ stocks covered.

Executive Commentary

Andrew Elf, CEO, stated, "We’re certainly not forecasting anything to run away or any critical shortages," highlighting the company’s stable outlook. He also noted, "If you’re dropping your rates, you’re not making enough money or margin to have a sustainable CapEx program," emphasizing the importance of maintaining pricing discipline. Nathan Mitchell, Executive Chair, added, "We’re always on the lookout, and people are always approaching us," indicating openness to potential M&A opportunities.

Risks and Challenges

• The coal sector faces challenging market conditions.
• Wage inflation is expected to be modest, around 3–3.5%.
• Maintaining rig utilization and safety performance, especially in PNG operations, remains crucial.

Mitchell Services is navigating a complex market landscape by leveraging its strengths in cash management and strategic innovation, while also addressing sector-specific challenges and exploring new growth avenues.

Full transcript - Mitchell Services Ltd (MSV) Q4 2025:

Alan, Conference Call Moderator, Bridge Street Capital: Good afternoon, everyone, and thank you for joining the Mitchell Services fourth quarter quarterly update. My name is Alan Chair for Bridge Street Capital, and today we have Nathan Mitchell, executive chair Andrew Elf, CEO and CFO Greg Sotawa to talk about the update. This is being recorded. If we let Andrew go through the update, and then we’ll have q and a at the end. Over to you, Andrew.

Thank you.

Andrew Elf, CEO, Mitchell Services: Thanks very much, Alan, and thanks everybody for jumping onto the call. We appreciate the interest. So I will just run through a few key points. I won’t take more than a minute or so, and then we’ll open up to questions as we usually do. Certainly, Nathan, Greg, myself are welcome to take any questions you may have.

So just on the quarter, look, a solid quarter, but really the theme was the shine was taken off the numbers by the client incidents that occurred in that quarter. But importantly, both of those projects are both now up and running again, which is good. The previous jobs that we’ve spoken about or projects we’ve spoken about that ramped up throughout the year did start delivering strong results for us in the fourth quarter, which will then flow on into this financial year, which is positive. The team did a good job managing the working capital in the last quarter. Obviously, that cash conversion rate well over 100% and associated net debt level down quarter on quarter materially.

The loop business up there update up the top on the last page there, a significant growth opportunity for the business and pleasing to say that the first program completed went really well, and we’ve now got a second contract that we’re working through the relevant engineering with the client with the view to drill later this calendar year. So it’s always going to take time for that business to come on and develop, and we do make the point there it’s in its early stages. But again, nonetheless, it is an exciting opportunity for us. At the end of the quarterly there, we talk about the outlook. It’s pretty straightforward.

Gold prices are strong, quite high. The outlook’s positive in that perspective. But from a coal perspective, probably fair to say it is a challenging market, certainly we’re happy to take people’s questions on that regard. So there’s also a table there of the yearly results and how it sort of wound up in the year a little bit. But, Al, we’ll probably hand back over to yourself and and open up for any questions people might have.

Alan, Conference Call Moderator, Bridge Street Capital: Perfect. Thanks, Andrew. First question, here from Daniel. Can you provide an indication of what June EBITDA would have been without the impact of events at Okie Creek and Moranbah North during the quarter?

Greg Sotawa, CFO, Mitchell Services: I might I might take that one. Look. I I don’t I don’t think we want to pull individual contracts apart and sort of disclose individual gross margins and EBITDA margins by job. Think Fed I think the best way possibly to look at it is is Moranbah North was a two rig operation down for about two months and Anokey Creek down for a full month. You know, that that, by definition, is is sort of, you know, 60 shifts and 120 shifts.

And you could possibly make your own assumptions around previously disclosed revenue shifts revenue per shift and normalized sort of EBITDA margins. But yes, from my perspective, I don’t think we’ll we’ll pull the individual contracts apart and to disclose that. I don’t know if anyone’s got any different views.

Nathan Mitchell, Executive Chair, Mitchell Services: No. No. No. Great.

Alan, Conference Call Moderator, Bridge Street Capital: Thanks, Rick. Looking ahead to FY twenty six, do you anticipate any further material investment in working capital over the year? Is the level of inventory on ahead at thirty June, thirteen point six mil reflective of ongoing requirements for the current book of contracts?

Andrew Elf, CEO, Mitchell Services: Yeah. Look. I I think, Greg, you might wanna say a few words too, but I think the inventory should be equal to or less than in the year ahead. I think we’ve got you know, we’ve ramped up new contracts. Some of them are remote.

We’ve made that point in previous communications. As those jobs sort of get going and we understand how it’s going and some of the supply chain aspects, you know, we hope that we can manage that inventory level, you know, and at minimum, keep it where it is, but hopefully reduce it if we can.

Alan, Conference Call Moderator, Bridge Street Capital: Thanks, Andrew. Just with the loop of business, do you think loop related earnings will be higher in FY ’26 versus FY ’25?

Andrew Elf, CEO, Mitchell Services: Yeah. Only on the basis that the initial trial that we completed was a fairly small one, and the net, the trial that we’re currently working on is a little bit larger. And just therefore, if you go, that contract stand alone last year, this contract stand alone this year, the results should be better just on the basis that it’s a larger trial project, notwithstanding the fact that there’s other opportunities that exist as well.

Alan, Conference Call Moderator, Bridge Street Capital: Thanks, Andrew. Now I guess the next question relates to sort of capital management. Maybe high level element of thoughts are dividend, buyback. What your thoughts are?

Nathan Mitchell, Executive Chair, Mitchell Services: Look. I think, you know, you can see the numbers there, 2025, 2024 difference. Well, it’s hard to say, but I don’t think dividends is not is the it’s probably gonna be off the table till we can, you know well, we’d like to be able to say that this dividend’s coming. I think we’ll look at it, but based on the current numbers, I think you’ve got to say that there’s significant cash flow to be able to pay, you know, high dividends.

Andrew Elf, CEO, Mitchell Services: Yep. That’s right. And look, on the last page of that quarterly, again, we make the point that we have renewed the share buyback. And we also make the point that if the share price stays down at current levels, which is very low in our opinion, you know, it may may represent better value for shareholders to buy back stock rather than than pay dividends and also on the basis of the current time where we’ve used our our franking credits too. So, you know, again, as Nathan says, it’s a it’s a board decision, but we just gotta make some good numbers and some good cash to give the board the opportunity to make those decisions.

Nathan Mitchell, Executive Chair, Mitchell Services: I think it’s too early in the year right now to be saying we’re paying dividends. I would say at the end of this year, 2025, not a lot left in that to do it this year. But it’s early in this year. I think this year’s got a long way to go. So I think let’s see how the the how it pans out over the next couple of quarters.

Alan, Conference Call Moderator, Bridge Street Capital: Thank you. Thanks, Nathan. A question from Nick. Obviously, on on the loop business. Everybody’s explaining again more detail about the loop business.

Are you a new entrant, I guess, to the listing segment, or has the segment not been operated in a way before? I guess, what what’s the main features any attractiveness, margins, etcetera, that you can achieve?

Andrew Elf, CEO, Mitchell Services: Yep. So it is it is a new segment. It is a new market, and and therein therein lies the opportunity. Obviously, Nathan was was at the forefront, you of the emerging coal seam gas industry back in the day, and there’s some similarities with that here. It takes time for a new market to be developed.

It will be choppy, it will be stop start, there will be trials before there’s longer term contracts, and that’s the stage that we’re currently at. But what this business does is provide, as it says in the quarterly, an end to end decarbonization solution to clients to reduce their fugitive emissions under that safeguard mechanism legislation in Australia. So the long and short of it is we do a lot of work in underground coal mines. We drain the gas so those mines can be operated safely. The gas that exists within a coal seam still exists in a coal seam for surface operations.

And the aim here is to drill that coal in advance of mining to drain the gas so that it doesn’t emit up into the atmosphere when the mining is undertaken. The fugitive emissions is the output of gas on that coal into the atmosphere, and there’s a requirement under that legislation for coal mines to reduce their emissions year on year. And if they don’t, they pay a tax. So the whole premise of this business is there’s an opportunity to reduce your emissions and hopefully pay less than the tax. And for others, there’s an imperative from a social perspective to reduce your emissions, and it’s also feeding into potentially government approvals for pit extensions, environmental approvals, things like that.

Rather than just buying carbon credits. You’re actually seen to be managing your gas in a more active manner. And then there’s obviously potential to use that gas downstream for benefits for the economy, power, trucks, the list goes on. So effectively, a new market. It hasn’t been around before.

The opportunity has come about because of that government legislation. Certainly with the federal government, Labor winning in a pretty strong manner and looking like they’re going be around for a while. I don’t think that legislation is going to change in any way, so I think the opportunity is there. It would just take time for it to come on. Obviously, we’re working with Talisman, who are a fiftyfifty owner in that business.

And really what it does is, from the very start of engaging with a client, understanding what is your gas content, how much gas have you got, what does your coal look like? What does the drilling plan look like? How do we engage with people to work in a pit through to the drilling, through to managing the drainage of the gas, gathering gas, and then potentially partnering with downstream providers. You know, it is a full solution from start to finish. Some of these surface coal miners have never had to manage or deal with gas before.

It’s a very limited niche skill set. It’s highly technical work, and it’s a great opportunity for us, but it’ll take time. Nathan, don’t if you’ve got Yeah.

Nathan Mitchell, Executive Chair, Mitchell Services: No. I totally agree. I think it’s a really good opportunity for us. Think it’s you know, as Andrew just said, I don’t think the government’s gonna change their requirements anytime soon. So and I think there’s a there’s a very big opportunity downstream to do something with the gas.

So there’s I think it’s early days at this stage, definitely. Obviously, we’re the only the only player in the market, and I think it’s it’s gonna be interesting to see, you know, what happens with this first project and the second project, and I think that will also dictate to other mines what they how how they go about it. So and we’ll learn along the ways as well. It’s not just the drilling. It’s also all of the other infrastructure that goes with it, the management of the gas, and whatnot.

So, yeah, so I think it’s I think it’s a it’s a really good opportunity for us.

Alan, Conference Call Moderator, Bridge Street Capital: Thanks, guys. Just more on the loop again. Obviously, you mentioned there’s a second client coming on board. When do you think you’ll need or begin kind of planning acquiring new rigs for this segment?

Andrew Elf, CEO, Mitchell Services: I think the plan at this stage is to use the rig we’ve got for this second client toward the end of the year and then to reassess any future rig purchases in the second half.

Nathan Mitchell, Executive Chair, Mitchell Services: I think we just wanna use what we have rather than spending more CapEx. And the equipment we’ve got is very good, so, you know, at this stage, I think we’ll try and squeeze as much out of the equipment we have at the moment. Yeah.

Andrew Elf, CEO, Mitchell Services: You know, people are just in that trial phase where they’re gonna be drilling for, you know, a number of months. You sort of try and stack them up together. So, you know, if Greg wants to a trial for a few months and then Nathan for a few months, yeah, you’re not going to go and buy a rig for each. You’ll try and line them up so you can keep that one rig busy. And then when it gets a bit more momentum or if someone commits to a longer term project, you then consider additional assets.

But certainly, I’ll try and, as Lanthan says, get the most out of the rig we’ve got.

Alan, Conference Call Moderator, Bridge Street Capital: Thank you. Okay. A bit on PNG. If you give an update on on the current status of PNG from a from a drilling perspective and operations? Is there an update there?

How are you going?

Andrew Elf, CEO, Mitchell Services: Yep. It’s been a a slow start as you would expect in PNG, but I couldn’t be happier with where it’s at. Both of those rigs started double shifting in mid late June, hitting a new financial year, double shifting. Production is very good. Safety is very good.

Client’s happy, and it is making a return.

Alan, Conference Call Moderator, Bridge Street Capital: Thanks, Andrew. I guess with the balance sheet in a very strong position and capital management in focus, how are you thinking about potential m and a by ’26?

Nathan Mitchell, Executive Chair, Mitchell Services: I think we’re we’re always on the lookout, and people are always approaching us, and so that hasn’t changed. I do you know, so we’re we’re actively always looking, and as I said, actively people are coming to us. We’re just prudent about which ones we look at, and and we do the right amount of DD. So I think that’s that’s just we always are looking at opportunities outside of or that aligns with, you know, the skill set that we have.

Andrew Elf, CEO, Mitchell Services: Thank you.

Alan, Conference Call Moderator, Bridge Street Capital: Just on the gold sector, obviously, with the size of gold sector strengthening, converting to new customer inquiries, how is labor supply for skilled drillers at present? Are you expecting another year of modest wage price escalation FY ’26?

Andrew Elf, CEO, Mitchell Services: Yeah. I think probably fair to say the worst of the inflationary pressure that we’ve seen is behind us. But certainly, the gold sector is busy. I think modest increases is probably a good word, Greg. I think we will see increases, but I think that will be modest.

We’re certainly not forecasting anything to run away or any critical shortages or anything like that.

Greg Sotawa, CFO, Mitchell Services: Yeah. I think in immediate short term, fair work have come out recently with a wage increase of 3.5%. So that three and a half percent will apply to a a a portion of the workforce, you know, sort of at the at the lower end or, yeah, at ward rates. And and to Andrew’s point, the the the section of the of the workforce that that ends above that rate, you know, probably probably less than than that three and a half. So for for for a blended rate of sort of three sub three thereabouts based on what we’re seeing so far.

Alan, Conference Call Moderator, Bridge Street Capital: Thanks. Thanks, guys. I I guess on the topic of gold, obviously, where the price is, can you comment on new client opportunities in the gold sector, or are any coming from existing gold clients?

Andrew Elf, CEO, Mitchell Services: Sorry. I was just reading the screen there. Yes. So look, the pipeline is is is stronger in gold than it is in coal. Needless to say, that just hangs together with the commentary in the quarterly.

We’ve obviously got a very good presence in that Victorian gold market through New South Wales, and sort of a couple of rigs in WA and NT as well. Again, there’s existing clients that have opportunities where they increase their budgets and their spending and want to increase rig count. And then similarly, there’s new clients that are either smaller exploration style clients that get funding, and then new mines, people drilling out of deposit, things like that. So there’s a bit of a bit of a mix of everything in that in that gold space, but certainly positive positive outlook versus versus the coal at this current point in time.

Alan, Conference Call Moderator, Bridge Street Capital: Got it. So I guess that probably walks into a part two of that same question. Obviously, with the commodity being and coal, do rig opportunities in gold in the coming year offset any rig reductions in coal? So the group rig utilization will stay largely flat.

Andrew Elf, CEO, Mitchell Services: Yeah. It’s the million dollar question. I mean, it’s never that linear. You know, it’s not like you sort of something stops here and it starts here straight away. You know, it’s always a bit of a a mix, but, you know, that’s the challenge we face, is the rig utilization.

You know, we’ve said in previous meetings, you know, we were hoping that it was heading up in the right direction. I think the coal side of things has made that a little bit more difficult in more recent times. But certainly, the opportunity remains within the gold space. Certainly, we’ve got rigs that can move between both sectors, which is important. So we can service both sectors with the equipment we’ve got, and that’s exactly what we’ll do.

So, you know, will it offset exactly? You know, you don’t know. You hope so. And we’re certainly going to be disciplined with our bidding, disciplined with our pricing, you know, and put rigs out where it makes sense to do so to get a a good return.

Greg Sotawa, CFO, Mitchell Services: Thanks,

Alan, Conference Call Moderator, Bridge Street Capital: Andrew. Next question from Jason. Bear with me here while I I read this a bit longer. But as of the end of the quarter, the number of active drill rigs appears to be around 67, 68 compared to an average of 72 active rigs throughout FY 24. This is despite the company having fleet of positive 90 rigs.

It is evident that the company’s probability is closely tied to sustaining a utilization rate of 65 to 68 rigs. Such small fluctuations of drill rig impacts bottom line financials exponentially. Beyond a potential recovery in the coal market, what strategies does the company have in place to increase the number of drill rigs under contract?

Greg Sotawa, CFO, Mitchell Services: Thanks, Alan. I might deal with the with the first part of the question. And then in terms of strategic direction, the last part, hand back to Andrew. But I think whilst whilst I can acknowledge why that would seem to be the case at face value, there’s a little bit more to it than that. It wasn’t simply a case of going from 72 and dropping four rigs to 68.

In reality, as we’ve outlined in previous quarters, there’s been a decent reduction in certain areas. And then the company’s pivoted pretty significantly to win a number of new contracts. So although on face value, it looks like it’s just a simple four week decrease, there’s been a lot of moving parts with a lot of ramp up mobilization in in new service offering areas as well as new jurisdictions. So don’t don’t think it’s can the can the business be profitable at that sort of 65 to 68 rigs? Absolutely.

Just needs a little bit of stability and absence of that mobilizationdemobilization. The flip side to that and the positive with all that is you can sort of see that can see that the leverage that is in the business as well when it does get back to sort of early 70s and a big portion of that revenue dropping back down to profit. I think, yeah, in simple terms, the company can absolutely be profitable at those lower levels, and there’s more to what’s happened in the last twelve months than a simple four rig drop, if that makes sense. Yeah.

Andrew Elf, CEO, Mitchell Services: From a BD perspective, it’s really a case of we’ve got some fantastic business development people in the business, and we’re well aware of what’s coming up where with who in our respective markets. And we’re certainly we’ve done a great job re winning existing contracts and winning new ones. As Greg said, we certainly enter this year with a very high percentage of work contracted, I think higher than we ever have, to be honest, which is a real positive. So I think there’s some great work that’s been done. Think our business development is strong.

But, again, to a degree, the market’s the market, and, you know, it’s it’s it’s not always not always easy. But please rest assured we are absolutely, you know, hungry and do everything we we can in the BD space. That’s for sure.

Alan, Conference Call Moderator, Bridge Street Capital: Alright. Thanks, guys. K. Next question. Basically, every indicator of the last year has trended down.

Appreciate there are things beyond management’s control. What are your expectations for the year or or this year going forward?

Andrew Elf, CEO, Mitchell Services: Yeah. Well, I mean, if we don’t have three or four underground coal mines have incidents and there’s less rain, we’re better straight off the bat. The rigs that we have won and have put out to work have had the money spent, to Greg’s point. They’re up, they’re running, they’re profitable. We’re better straight off the bat.

So, you know, again, what do I expect? Better than this year. You know, we really want to do better than the year we just had. And certainly, there are things out of our control, is always disappointing, but that’s business. But again, I think we’ve got a good team.

We do a great job. You know, we control what we can control really well. And if we do that, keep doing that, and focus on the right things, I think

Nathan Mitchell, Executive Chair, Mitchell Services: we can, you know, we

Andrew Elf, CEO, Mitchell Services: can do better, we should do better.

Alan, Conference Call Moderator, Bridge Street Capital: Thank you. Last question for now, I guess, from Glenn, from a margin perspective, are the competition drillers cutting prices to win work? For example, and hence, forcing you guys to trim margins. Any pressures, I guess, is the question?

Nathan Mitchell, Executive Chair, Mitchell Services: I think that’s just that’s just course of this business. You know, when market goes up and market goes down, you know, obviously, the coal industry is flattening. You know, the coal guys are obviously, you know, the royalties haven’t helped them. We all know that. I think as investors, we look at the coal industry and see that they are doing a bit tough with regards to prices and royalties.

So certainly, that is a softer market. Obviously, we’ve moved out of that market considerably. The guys have done an excellent job to move sideways into the gold market, into the minerals market. Obviously, it costs time and money. We said that sort of at the last quarter.

But, yeah, but, certainly, prices are are not gonna be at the high. But but luckily, we are not dropping our prices. You know, we’re just not that sort of business. We don’t need to drop our prices, and it hasn’t really moved that much. In essence, you know, the gold guys in Western Australia are keeping the prices up, and so there’s still a demand in Western Australia.

So so, yeah, they’re they’re they’re moving, but not, you know, not to the point where, you know, where we we see real risk for the business. Yeah.

Andrew Elf, CEO, Mitchell Services: And if you’re if you’re dropping your rates, you know, you’re you’re not making enough money or margin to then have a a sustainable CapEx program to rebuild and keep your rigs in good shape, you’re effectively going cheap and eating yourself. So that’s not something that we’re prepared to do. We’d bid things right, be disciplined, and then right size the back office and support functions accordingly. It’s worth noting, over 80% of our revenue was from global mining majors across coal and minerals. We’re operating on very good mine sites, lowest on the cost curve, drilling is required, ongoing through the cycle.

So there’s some excellent clients we’ve got. We certainly do a lot of specialist drilling, and that is very technical, less competition, good margins, and that includes some of the geotech work we’ve done where we’ve worked on Melbourne Metro, Sydney Metro, Snowy Hydro, and the list goes on. So certainly, there’s all sorts of things we’re trying to do to improve our margins all the time, know, loop technical drilling, geotech technical drilling, some of the mine services work. Again, it’s a good brand. It’s been around a long time.

Works for the right clients. It does a very good job. So just be disciplined and take the right opportunities when they present themselves.

Alan, Conference Call Moderator, Bridge Street Capital: Fantastic. Andrew and Nate, thank you. That was the last question. If anyone else would like to ask one more question, we can answer that. Alright, Andrew.

Again, thank you, Nathan, Greg, guys. I appreciate it. Just note that all calls is recorded, and I will reach out

Andrew Elf, CEO, Mitchell Services: to you

Alan, Conference Call Moderator, Bridge Street Capital: guys individually for any further questions. As Andrew noted, obviously, yeah, Q value covers stock as well as as Morgan. So, yeah, any further questions, happy to answer them. Guys, thank you.

Andrew Elf, CEO, Mitchell Services: Thank you, everyone. Thanks. Thanks, Alan, for having us. Thanks for your interest, everyone. And Nathan and I will be up at the the Moose At Mining Conference in a couple of hours for the next couple of days.

So if you if you’re at that Moosa Mining Conference, come and come and say hello.

Alan, Conference Call Moderator, Bridge Street Capital: Thanks, guys.

Nathan Mitchell, Executive Chair, Mitchell Services: Alright. Thank you. Thank you. Bye.

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