Reko Diq And Nevada Labs Will Transform Mining Despite Challenges

Key Takeaways

• Anticipated increased mining revenue and profitability from the Reko Diq project and Nevada Gold Mines laboratory ramp-ups.
  
• Operational efficiencies and strategic asset redeployment expected to stabilize and increase earnings, improving net margins.
  
• Key contract terminations, project delays, and operational inefficiencies may reduce mining revenue and profitability, amid rising geopolitical risks and tax burdens.

Catalysts

Provides various drilling solutions to customers in the minerals industry.

• The letter of intent for the major miner contract at Reko Diq, expected to become one of the top 10 copper projects globally, is anticipated to ramp up mining revenue significantly, returning to the business in the second quarter of 2025 and reaching full run rate in 2026. This is likely to impact revenue positively.
  
• The ramp-up of the Nevada Gold Mines laboratory, with Phase 1 already in motion and Phase 2 expected in Q2 next year, is projected to improve contributions from MSALABS significantly by 2025. This will enhance revenue and profitability with expected accelerated growth.
  
• Management changes and improved operational focus in the Nevada drilling operations are expected to optimize productivity and reduce turnover, enhancing net margins as operational efficiencies improve.
  
• The strategic redeployment and efficient utilization of fleet assets from concluded contracts to new projects, such as Reko Diq, and optimized ramp-up schedules for these redeployed assets are expected to stabilize and increase earnings.
  
• Expanded business development capabilities and the enhanced focus on driving utilization through the aggressively established network of MSALABS are likely to improve both revenue and net margins as these labs reach higher commercial utilization rates.

Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Capital's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.0% today to 3.8% in 3 years time.
• Analysts expect earnings to reach $14.0 million (and earnings per share of $0.07) by about May 2028, down from $17.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $15.9 million in earnings, and the most bearish expecting $12 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, up from 10.3x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 8.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.1%, as per the Simply Wall St company report.

Capital Future Earnings Per Share Growth

Risks

• Early termination and conclusion of key contracts such as the Sukari Gold Mine and the Gabon contract with Fortescue could result in a significant and temporary reduction in mining revenue, impacting overall profitability and cash flow.
  
• Delayed ramp-up and utilization of new projects, such as Nevada Gold Mines, have affected expected revenues and margins, potentially indicating operational inefficiencies that could hamper earnings.
  
• Higher staff turnover and ramp-up challenges in the U.S. drilling operations could result in increased costs and lower operational efficiency, impacting net margins and profitability.
  
• Elevated geopolitical risks and provisions related to Mali VAT receivables indicate potential future financial burdens that could affect net profit if similar issues persist in other regions.
  
• A higher effective tax rate due to the mix of jurisdictions and tax losses in new start-ups could continue to suppress net earnings, impacting the financial viability and shareholder returns.

Valuation

• The analysts have a consensus price target of £0.976 for Capital based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.61, and the most bearish reporting a price target of just £0.58.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $371.7 million, earnings will come to $14.0 million, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 10.1%.
• Given the current share price of £0.68, the analyst price target of £0.98 is 30.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.