Capital (CAPD)

I see a few tweets on this (including Martin Flitton). Looks interesting based on valuation, net cash, improving profits. I mention it here because I know Mincon is in your portfolio Maynard. Any thoughts on it from anybody? I know it’s history is mixed and is not obviously a “moat” long term hold short of company. Cheers, Steve

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Hi Steve,

Martin has written about CAPD on his blog here and here.

A comprehensive write-up is also available through the Small Caps Life newsletter here:

I have not looked at CAPD before, and after skim-reading the Small Caps Life review I note a dependence on one particular customer:

“With the latest mining services contract, Capital has 35% of their rigs and more than half their mining services revenue coming from the Sukari mine owned by Centamin. While Centamin is a profitable cash-rich listed company that has operated in Egypt for over a decade, this is still a significant customer concentration.”

I see that customer has a contract until 2024:

“As part of the deal, Capital gets to increase their mining fleet by nine blast hole rigs on a long-term contract through to the end of 2024. So about $75m of the incremental revenues are rig revenues on likely 40% gross margins.”

I would want to know what is expected to happen beyond 2024. If the contract ends because all the gold has been mined then the low share-price rating may be justified.

I note this line:

“Centamin required Capital to raise at least $20m of equity to fund the project’s capex.”

I get the impression large contracts may require upfront capital investment by CAPD, which is not ideal and perhaps may limit the ‘fair’ valuation of the business.

I also note this:

“They recently changed the useful life of some assets, extending the time over which rigs are depreciated and increasing earnings. However, due to solid maintenance & rebuild schedules, they were still using some assets that had been fully depreciated, so this seems a reasonable change.”

All this needs to be checked to determine exactly what is going on and whether the change is indeed “reasonable”.

Maynard

Thanks for looking into it and providing all the background information and links Maynard. It looks a bit too speculative - now I know more about it. Centamin itself seems a more contrarian play since that seems to have lagged the gold rally, perhaps for company specific reasons eg problems in Egypt. But it goes against my general policy of avoiding all mining stocks on the basis its outside my area of competence and because they rarely compound well over time.