Governance questions gush from drilling bill spat
Liam WalshReporter
Mar 15, 2021 – 12.00am
Disaster can strike in many ways when drilling hundreds of metres down for minerals and metals such as gold or coal.
A man can suffer serious spinal injuries when a 270-kilogram drill rod falls on him, oil can spray over hot exhaust when a rig hydraulic line ruptures, a worker can lose his arm when his jacket entangles in rotating rods.
Nathan Mitchell with a rig during the boom times in 2009. Glenn Hunt
There is even a 68-page code of practice published by Western Australia’s Department of Mines and Petroleum outlining ways to prevent such historical horrors.
These are pitfalls that big players in the drilling sector watch out for, such as ASX-listed Mitchell Services, which has won awards for its safety measures.
But now the Brisbane-based company, and its chairman Nathan Mitchell, are navigating a financial calamity that has investors raising corporate governance questions.
It’s a dispute involving a West Australian gold mine and logistics industry legend Mark Rowsthorn.
Mitchell Services comes from a venerated drilling background. Its roots, according to the company history, stretch back to 1962 when Peter Mitchell was a “jug hustler” – a crew member who lugs around geophones, nicknamed jugs – for seismic work in outback Queensland.
He spent the family’s life savings on a second-hand rig in 1969 and drilled for water, and later minerals. By 2000, with almost 16 rigs under the Mitchell Drilling brand, Mr Mitchell’s son Nathan took over as boss, crafting the savvy sale of Australian operations to drilling outfit AJ Lucas for $150 million in 2008 as the mining and energy boom was in full swing.
The remaining Mitchell Group operations kept to a five-year local non-compete clause, working everywhere from Mozambique to Russia before the family returned to Australian markets, relaunching locally on the ASX as Mitchell Services. The new outfit boldly acquired rigs as the mining boom deflated, including picking up equipment in receiver sales.
Mitchell Services now has 99 rigs and last year recorded a 46 per cent jump in revenue, while earnings before interest, tax, depreciation and amortisation (EBITDA) lifted 45 per cent to $35 million. Its EBIT, however, fell 9 per cent to $12.6 million, with it wearing large depreciation and amortisation charges after acquisitions.
The WA bill shock came last month. A contractor on a gold mine had allegedly stiffed Mitchell Services for $6.2 million in drilling and blast subcontracting work. A statutory demand was served.
All in, Mitchell Services’ latest accounts show total unpaid invoices were almost $9.3 million.
What made this dispute unusual was the mine in question. It was the Kirkalocka gold mine, 590 kilometres north-north-east of Perth, which was acquired by Adaman Resources in 2018.
Mark Rowsthorn. Cole Bennetts
A related-party issue arose here because Adaman’s shareholders include Nathan’s private company Mitchell Group Holdings, with an 18 per cent stake in the mine. Nathan, a tall 50-year-old with close-cropped beard, was also a director on Adaman until February, along with Mr Rowsthorn and Daniel Sweeney, another mining veteran.
But the dispute gets messier. Mr Sweeney and Mr Rowsthorn are also directors on the head contractor hired to dig for the mine’s gold and which allegedly owes Mitchell Services the $9 million.
So you had contractors fighting each other over payments, all linked to the main backers of a mine they were working on.
It is not the first time related-party deals have emerged at Mitchell Services. The last accounts showed Mitchell Services engaged in almost $8.1 million in related-party deals, such as hiring equipment from an entity partly owned by Nathan. The company said then that proper corporate governance procedures were followed in such transactions and Mitchell Services received a great deal.
Mr Sweeney, Nathan Mitchell and Mitchell Services have not returned calls. Mr Rowsthorn would only say: “It’s a commercial issue.”
But
The Australian Financial Review can reveal questions were raised about how mine contracts were filled in Victorian Supreme Court documents.
The affidavit
An affidavit from the chief financial officer of the head contractor, SMS Mining Innovation, said his company was first hired in December 2018. Mitchell Services had initially declined to take up a contract in late 2018 after “Mr Mitchell informed the other directors of Adaman Resources that Mitchell [Services] could not compete on price compared with other tenderers,” the affidavit said.
Yet, according to the affidavit, Mitchell Services later changed its mind and Nathan and Adaman Resources chief executive Craig Bradshaw allegedly had a discussion in June that year “that resulted in an agreement” for Mitchell Services to be hired as subcontractor.
Mr Bradshaw informed SMS that month that SMS “would be required to engage Mitchell [Services],” the affidavit said.
The affidavit then alleged a strange bombshell: “Mr Mitchell further stated that SMS would be required to remain the head contractor … on a ‘no margin’ basis as the financing arrangements for the [gold mine] provided for SMS as the contractor.”
SMS “had to go along with what had been decided” since “Mr Mitchell was representing a major shareholder in Adaman Resources and now was insisting on Mitchell [Services] to be appointed the … subcontractor”, it said.
The affidavit claimed SMS disputed owing money because of a claim against Mitchell Services, such as for lost drilling time because rigs were not adequately maintained or parts insufficiently supplied.
At one stage, the affidavit alleged, blasts were fired at wrong heights causing a “shock tidal wave in the pit water reserve, resulting in loss of operation pumps and reducing productivity for an extended period”.
Another time, a “worker was removing a blocked drill bit from a hammer when a pulse of high-pressure trapped air … released spraying mud and fine particles of rock onto the [driller’s] uncovered hands”.
The nasty dispute contrasts with Mitchell Services’ optimism when investors were told in July 2019 about a five-year deal worth almost $33 million and expansion into WA. That announcement had a footnote about Nathan’s shareholding interest in the project, although not mentioning his directorship role in the project’s ultimate holding company.
Similar information was published in last month’s investment presentation.
It was among issues raised by concerned shareholders on an investor conference call last month. It was “just not right to say that you’re solely a minority shareholder in the project, that’s just not an accurate description”, one told Nathan.
He countered: “Well it’s the facts.”
Mitchell Services were quizzed about the bill’s accumulation, although the company argued factors were at play such as subcontractors generally not being able to simply walk away from a contract abruptly.
Sell-off ‘overdone’
The company’s share price has taken a bath since announcing the impairment, but Morgans analyst Tom Sartor wrote that the sell-off seemed “overdone”.
The underlying earnings performance of Mitchell Services was solid, he said. The company, whose black, gold and white logo says “50 years and spinning”, argued its underlying half-year EBITDA was up 40 per cent to $19.8 million, although the statutory loss, which includes the impairment, was $3.1 million.
“It will likely take time for Mitchell Services to repair investor confidence as the chunky SMS impairment blots its otherwise strong operating record,” Mr Sartor wrote in a client note.
“The SMS dispute rightfully raises questions on Mitchell Services’ client risk management, but equally highlights the inherent challenges of contracting.”
Nathan, who owns with family interests 18.3 per cent of Mitchell Services, seemed to back the idea of a long-term positive outlook. Even while navigating these issues, he bought another $193,000 in shares this month.
(20min delay)