Caledonia Mining Corp Plc Q2 FY2021 Earnings Call

Hello, everybody. Welcome to our Q2 results call for shareholders. So, on the call from Caledonia, you've got Steven Curtis, our CEO; Mark Learmonth, our CFO; Dana Roets, our COO; Maurice Mason, our Vice President of Corporate Development; and then myself, Camilla Horsfall, Vice President of Investor Relations. If you have any questions, please raise your hand at the end of the presentation and I can unmute you, or you can write the question in the Q&A box. I'm now going to pass you over to Steve and Mark, who can talk you through the presentation.

Thanks, Camilla. And welcome everybody and thank you for joining us for this Q2 presentation. It's great to have my team with me and we're very pleased to present a very good set of results. We have a presentation, which we will quickly go through, and then we'll open it up to questions. Let me kick it off by starting initially and Mark will flick the slides and then I'll hand over to Mark. So, the disclaimer is what you're all familiar with so I'll just pass over that. The next slide just gives you the focus areas, which I'm sure you are also familiar with. Central Shaft project completed and operational — Dana can talk about that later if you'd like him to. We're ramping up production. You will have seen in our public announcements that July was a very good month of nearly 6,000 ounces and that indicates that the process of building up is working extremely well. We are committed to returning money to shareholders as we've demonstrated with our regular increases in the quarterly dividend. As you would have seen from the results, the free cash flow generated in this quarter is in line with our thinking of being able to afford and to return more money to shareholders. We do need some of that money, though, for new opportunities. We announced as well in the MD&A that one of our two exploration properties we have decided not to continue with and not to exercise the option. It's the nature of exploration. Later on in the presentation we'll talk about the Connemara North exploration opportunity and we'll give you some detail as to where that is. The results highlights — if you haven't studied yet the presentation will be on the website — production ounces for the quarter were 16,700 ounces, a record for any second quarter. Revenue of $30 million, a 31% increase. I must mention that to achieve those ounces we mined and milled 165,000 tons which is actually an all-time record and that just indicates how well our mining team under Dana has done in developing the mine and developing the opportunities to be able to ramp up to 80,000 ounces. Gross profit was nearly $14 million. Importantly, the EBITDA number we are quoting here is adjusted for the unusual non-operating items — the write-off of the exploration property and foreign exchange gains and losses — so this is a kind of normalized number and we are looking at a 100% increase from just under $7 million to $14 million. That is a very pleasing number for a quarter. That rolls into adjusted earnings per share of nearly $0.63 per quarter, 70% up on the comparable quarter. But importantly, against our dividend declaration of $0.13 a quarter, it shows that we've got a lot of headroom and at a point in time we'll be able to ramp up that dividend, Board permitting. Net cash from operating activities was nearly $13 million compared to a comparable $4 million. That's what the game's all about. We need to generate cash and allocate that cash sensibly, and I trust you will understand that we've done that well in sinking the Central Shaft and progressing the mine to an 80,000 ounce producer. I'm going to hand over to Mark to go through some of the intricacies of the dividend and maybe a number on the previous slide that Mark wants to give a little bit more explanation around.

So, I've got to confess I'm a bit naughty — I hurry Steve along and I keep on moving the slides before he's finished. To go back to the previous slide: Steve is quite right. If you look at the six months this year and the six months last year, there looks to be an anomaly. The dividend declared in the first six months of 2020 was $0.235, which is more than the dividend we declared in the first six months of this year, and that's because for very obscure and arcane regulatory reasons last year we declared three dividends. We declared one at the end of January. The one that we would ordinarily have declared in early April and paid in April we actually deferred to May just to get a better sense as to what was happening with coronavirus. The dividend that we would ordinarily have declared in July — i.e., after the end of the half year and after the quarter — for some reason last year we declared it on June 29. So in terms of dividend declaration, in 2020 we had three dividends whereas in 2021 we only had two dividends. I don't want any confusion that we've cut the dividend. To make that clear, here you see the graph showing our quarterly distributions and you can see we've pretty much increased it every quarter since late 2019 other than, as I mentioned, sort of April/May last year where we deferred the dividend for a month to see what was going on and then we held it at an increased level of $0.075 a share rather than increase it further. We were on a dividend yield of about 4.1%. That's probably gone up since our share price reacted to the adverse movement in the gold price a few days ago. There's nearly a 90% increase in the quarterly dividend since October 2019. Turning to production: what you see here is tons milled, grade, ounces produced and recovery. The driver for incremental production in the quarter was the tons milled — Steve's already mentioned that the ounces produced in quarter two is a record for any quarter two, but the tons milled in the quarter is a record for any quarter at all. That demonstrates the Central Shaft is now contributing. What it's doing at the moment is it's hoisting development waste so that the Central Shaft can get itself connected up to the ore bodies and that relieves pressure on number four shaft to focus on hoisting ore. We'd expect Central Shaft to start hoisting gold-bearing material by the end of the year, but it's already making a substantial contribution. As Steve mentioned, July's production was just 5 ounces less than 6,000 ounces — 5,995 ounces — which, if you extrapolate for the quarter, shows continued progress towards our target of 80,000 ounces a year. Looking at the profit and loss account: revenue was up to $30 million for the quarter, a combination of higher production and a higher gold price. The royalty remains at 5%. Production costs I'll discuss a bit more later, but in general production costs were as expected or perhaps slightly lower than expected other than in the area of electricity. Depreciation has increased by about $1 million for the quarter because having commissioned the Central Shaft we've now started to depreciate it. That increases the annual depreciation charge from about $4 million to about $8 million. So at the gross profit level everything is looking good — $9.2 million up to $13.9 million. G&A is up slightly and that primarily reflects increased wages and salaries due mainly to new hires. We've taken on an internal audit person to strengthen our controls, we've taken on Camilla to help with investor relations, and Dana has taken on two technical staff in Johannesburg to help with the increased complexity of the mine. Then below that line things kind of go wrong for this quarter. Last year we had a net foreign exchange gain of $1.5 million and we also had net other income of $1.5 million. That net income was a government grant to encourage us to produce more gold, so we had $3 million of non-operating income in 2020. But in the comparable quarter this year we had a net foreign exchange loss because the rate of devaluation of the Zimbabwe dollar has pretty much stopped. In addition, we impaired the Glen Hume asset. We bought an option for $2.5 million and we spent about $1 million over the intervening period. Because we decided to walk away from that project now because it doesn't meet our criteria, we impaired that. So that contribution is a $3.5 million impairment. Whereas in the second quarter 2020 we had $3 million of income, in this quarter we had about a $4.2 million charge and that's why profit before tax goes down from $9.9 million to $7.7 million. The tax expense — the aggregate effective tax rate for the quarter of $3.9 million was just over 50% and that's largely because the $3.5 million impairment reduced PBT but there was no corresponding effect on the tax charge — there's no tax to offset against that — so the tax expense remained unchanged. I'll come back to that in more detail later. Adjusted earnings per share, as Steve mentioned, were $0.626 for the quarter, which we feel is a fair reflection of the underlying performance of the business. Turning to production costs: everything was pretty much as expected. The only area where it wasn't as expected was electricity. For the quarter electricity increased from $2.1 million to $2.7 million; for the half year nearly $1 million extra. That's because we are having to use gensets more due to more outages and deterioration in the incoming grid supply, which means we're having to run gensets more to protect our equipment. First point: we can actually run the entire business using diesel gensets, so it's not an existential problem — it has a cost implication, but we could accommodate that if necessary. But we have a plan to install a solar project which should be operational by about April next year, which will provide about 27% of Blanket's average daily usage and will reduce our dependence on the grid. We are evaluating how to increase the scope of that solar project to further reduce grid dependence. On-line costs were very much as expected. Here you see a breakdown of G&A; the main increase comes from employee costs largely due to increased headcount. What does that mean in terms of cost per ounce? On-mine cost per ounce for the quarter was $715 an ounce, below our guidance for the year of $740 to $815. All-in sustaining cost per ounce for the quarter at $933 was also below our guidance range. Of our on-mine costs, about 90% of our on-mine on-site costs are fixed, and as we expect production to increase in the second half compared to the first half, those fixed costs will be spread over more ounces and we expect on-mine cost per ounce to fall further. We're confident our cost guidance will likely come in below target. On tax: the bulk of tax is in Zimbabwe — income tax on profits arising at Blanket Mine and deferred tax. The bulk of deferred tax recognizes the difference between accounting and tax treatment of capital expenditure. If you add $2.4 million of income tax and $1.2 million of deferred tax and express that as a percentage of IFRS gross profit — which is close to on-mine PBT — you end up with an effective tax rate of about 26%, very close to the income tax rate in Zimbabwe of just under 25%. That should give comfort that the tax charge isn't completely wrong. In addition, we incur tax in South Africa on intercompany profits and other taxes as we move money around the group. Cash flow was very strong. Cash flow before working capital for the quarter was nearly $14 million compared to $9.5 million for the comparable quarter. It's also pleasing to see working capital for once go down. Working capital can be volatile if we have large receivables due from customers or if electricity credit builds up then is paid down in a lump sum. It's nice to see working capital normalize. Net cash from operating activities was about $12 million, very strong. We continue to invest on development associated with Central Shaft, about $7.1 million there. We haven't started spending big on the solar project — we've made deposits for orders already placed — so spending on the solar project will really kick in from now until probably January/February next year. So cash flow is very strong. On the balance sheet there's nothing unusual to discuss. The derivative financial asset is explained by surplus cash we had sitting in South Africa at the end of last year, which we knew we would need for procurement liabilities. Because of exchange controls in South Africa we can't hold that in US dollars; we had to hold it in rand and the rand is volatile. Rather than put ourselves in a position where we strip money out and can't get it back quickly enough, we held a gold ETF. We liquidated that in this quarter and repatriated those funds back to Jersey. The only other item on the balance sheet is liabilities — non-current liabilities are mainly deferred tax and provisions. Current liabilities are mainly trade payables. We have less than $200,000 of debt and that is locally denominated working capital facilities.

Thank you, Mark. I'm sure you'll agree that's a very nice set of numbers. If you mine efficiently, the numbers will look after themselves as long as you've got a management team that is considerate about costs and Blanket has been consistent in that aspect. We're very proud of those results and very proud of the team who've produced them. The opportunity we're going to progress in Zimbabwe is the Connemara North exploration property. We signed up in December and we've got 18 months to explore the property and make a decision as to whether to exercise the option. Over the last six months we've been doing a desktop study producing a geological model from the information at hand. We don't have a lot of information, but our consultants and in-house people have put together their best evaluation and now we will put drill rigs on the ground. The next number of months will be busy in the field. It's important to understand the exercise price for this option is $5 million. We have paid $300,000 just to get the rights to explore and we will be very cognizant that there is a $5 million option price and the results of the drilling need to meet our internal criteria. As we've demonstrated, Glen Hume did not meet our criteria. There was gold there, we found resources, but they didn't meet the criteria that validated paying more money to exercise the option. There is historic information about this property. We signed up two properties; we've got one now going live, and we are still considering other options in Zimbabwe. We like brownfield opportunities and there are a couple of others we've been working on and we will continue to look at them to build our pipeline. We are aware we're a single-asset company and we want to change that. We have a successful producing mine which will give us the luxury of some money to spend on other opportunities, but we're very careful about allocating shareholder money and we think brownfield opportunities are a good option. Anything we do needs to be free cash flow enhancing and NPV enhancing so shareholders can see that we are spending their money well.

Sorry. I got sidetracked.

Usually you're ahead of me. Camilla, who you heard earlier on in the call, has been the author of a very good ESG report which was recently published. If you haven't had the opportunity to read it, I suggest you have a look. It really takes you under the covers regarding the thinking of the mine management and the ethos of Caledonia. We operate a mining company in a poor country in a poor geographical area. What we've learned through this report is many of the things we are reporting on have been carried out at Blanket for a long time and we are now formalizing the way we report them. The report has indicated a need to capture data more efficiently and measure some things more diligently than we used to. There are international standards against which companies are rated and scored and we stand next to anybody else when seeking shareholder money and therefore must put our best foot forward. We have identified gaps in our processes versus best practice, and you can look forward to an annual report coming out where you will see progress in this area. Our solar farm alone is a significant move in this direction. We look forward to reporting back in a year's time on the next ESG report.

I assumed you finished, Steve, so I moved on to COVID.

Yes, we finished. COVID has been with us since March of last year. It has been hugely disruptive for the world, for South Africa and Zimbabwe where we operate. It is due to the huge credits to our management teams in South Africa and Zimbabwe that they have managed to keep the operation running through our own lockdowns and country lockdowns. We source a lot of raw materials and capital items from South Africa which we need to bring into Zimbabwe, and Dana and his team managed to complete the Central Shaft project in COVID times. The third wave hurt us more than the first and second waves. I'm pleased to say we seem to have turned the corner in the third wave and active cases on the mine have declined to about 10 and we have managed our way through this very well. It has cost us money, anxiety and time, and it cost time on the shaft completion. But it's testament to the quality of the management that they have managed to keep the mine running every single day through this lockdown period and for that we're very grateful. I think that brings us to the end — Mark, yes, that's the who's who.

Yes, I can see some questions. Shall we try and counter through those?

There's a question later on Glen Hume about the charge seeming high and can we clarify what it was as well? Mark, why don't we roll those two into one?

I'll just go through the questions as they appear. If there's a second question, I'll deal with it when I get there. Someone's asking if it may be possible to finish the second half of the year with 36,000 ounces. We won't change our production guidance at this stage; we're well positioned to achieve our guidance but it's too early to talk about increasing it. Dana, someone is asking what our plans are to increase the resource estimate now that Central Shaft is complete. Dana should answer that question. Dana?

Can you all hear me? We ran our exploration from the platforms we had with the current infrastructure and we always said that as soon as Central Shaft is completed we would develop additional horizontal development to create new platforms and that will allow us to drill deeper. Also, above level 750, the current lowest point of the mine before we started Central Shaft, there are opportunities above 750 where we'll put exploration platforms. That exploration plan is currently being put together and after that is completed we can give a better indication of when we expect to have exploration data available. But yes, the plan is definitely to start drilling as soon as possible again after we create these platforms.

It's fair to say we've increased the strength and depth of the exploration team at the moment.

That's correct, yes.

Okay. So someone's asking about what were Q2 last year's extraordinary items. There weren't actually any formal extraordinary items. If you mean the non-operating items, that was primarily the export credit incentive, which was about $1.5 million or perhaps a bit higher. That export credit incentive was a government scheme intended to encourage production by paying us a premium for the gold price in local currency. We don't run the mine on that basis so we just took the money and that fell by the wayside. Someone's asking about the WA charges.

Mark, also foreign exchange gains and losses?

Yes. There were big foreign exchange gains last year and that's not been repeated this year, but that's fully set out in our financial statements. Someone's saying the note we put out this morning forecast $18 million of CapEx for 2022. Yes, it will be that high. That also includes CapEx on the solar project that I explained — the solar project will cost about $40 million in total, and we've spent only about $2 million so far so there's another roughly $12 million or so to go in our near-term plans. Some of that spending will take place next year. CapEx for next year also includes continuation of horizontal development and haulages to connect the Central Shaft to the producing areas; that will start to fall off after that. Someone's asking how much of our cash is held at Blanket — it's not $19 million. $19 million was the end of quarter one; it's about $16 million now. That is fully disclosed in the Management Discussion & Analysis which I can find and share with you. We do disclose where the cash is because it's relevant. Let me share the screen and see if I can. Maurice, can you deal with some other questions whilst I find the right document?

Yes, sure. There's a question on grade, Dana. Slide 6 shows our ore grade has gradually declined over the last decade; can we provide any color on our thoughts on grade in the coming years and whether it will flatten out or perhaps rise? Dana, perhaps you can answer that.

Looking at the available information, the grade will flatten out and in probably three to four years' time there might be a slight increase, but nothing significant to report now.

Also, for everyone's detail, there was a comprehensive independent technical report filed — it's on our website and available to download and view — and that details CapEx, grade, tons and recovery for the life of the mine.

To go back to the previous question: the Management Discussion & Analysis document we file every quarter contains a lot of information and I encourage you to look at it. Someone asked where our cash is. At the end of June we had $3.1 million sitting in Zimbabwe and that $3.1 million was presumably sitting at Blanket. We don't hold cash there longer than necessary — any money that goes out from Blanket to our holding company immediately goes up to the UK, so any cash there is only for a matter of days. We need that money in Zimbabwe to pay month-end payrolls and creditors. It's difficult to borrow dollars in Zimbabwe — they're not available — so given the size of the business and lumpy cash flows we need that level of local cash. We have about $3 million sitting in South Africa to fund procurement, where we often need to pay for stuff upfront, and $10 million sitting in Jersey. To be absolutely clear, we do not regard this as trapped cash in Zimbabwe. We work to get money out via loan repayments, management fees, procurement margins and dividends. It's hard work but we manage it effectively.

It is important to understand that we deliver gold on a weekly basis and get paid on a weekly basis. If timing coincides with a quarter-end, there may be a lumpy cash position in Zimbabwe.

Yes. I think we've dealt with the grade question. There are 12.1 million shares outstanding. Someone asked about difficulties getting people, machinery and materials across the border from South Africa. There were difficulties in the early stages of COVID, particularly getting specialised contractors across the border, which caused delays in completing Central Shaft. There were some issues at the border during the recent disruption in South Africa associated with the imprisonment of Jacob Zuma, but our operations managed to get our lorries through and we were quite good at getting things across. We would like to make more in-person visits to the mine but the difficulties of testing and isolation make that sticky, though we're managing effectively.

Currently it's quite good for getting material and equipment to the mine — no issues. We did lockdown the mine for two weeks because of increased COVID cases, but we have a vaccine drive on the mine and people going to the mine must be vaccinated. All contractors are vaccinated now as well as our staff except those younger than 35. I expect in about two to three weeks we'll return almost to normal mine operations, so the situation will have improved tremendously.

The cooperation we've had over the last year and a bit from the governments of Zimbabwe and South Africa to move people and machinery across the border during lockdowns indicates they are keen to keep mining companies like ourselves open and running.

There's a question about the internal rate of return we anticipate on the solar project. Our evaluation, like every project we consider, is that it must increase our NPV per share taking into account any equity issued to fund it. The NPV per share enhancement from the solar project was about 5% on our assessment. The internal rate of return would be in the low 20% range.

On an NPV per share enhancement basis, yes, that's correct.

So the IRR was in the low 20%s. We're doing it because it makes economic sense, but it's primarily a defensive move to protect us in the event the grid collapses. Someone's saying the $3.5 million cost for Glen Hume is excessive. We spent $2.5 million to buy the option and then about $1 million on work. Glen Hume is an operating mine and the owner is not a Zimbabwean national, so his negotiating position was stronger and he required a larger upfront payment. That compares with the Connemara asset where the owner is a Zimbabwean and paying him a large sum upfront could result in local currency confiscation under liquidation requirements. So those are two very different vendor situations which explains the difference in exposure.

Regarding expenditure and activity to extend reserves and resources at Blanket and when drill updates will be provided: this year there is no deep exploration because we exhausted our exploration platforms. You'll see a retraction in our resources and reserves — that will be reported and is C1-01 compliant — and that will start improving as soon as we have platforms in place again. With current resources and reserves we've got possible life until 2034, so there's enough time to proceed. We will give an update yearly around the end of the year.

Howie is asking what the export credit was in Q2 2020. Offhand I can't remember; it's disclosed in the financial statements. Maurice, could you find that and tell Howard the actual amount in 2020?

I'll send it to you, Howie.

The next question is about VAT receivables. Yes, VAT receivables have increased since December 2020. The receivables are detailed in both US dollars and RTGS. We're receiving the US dollar portion; the outstanding part is the RTGS component. The tax authorities in Zimbabwe have pretty much stopped working because of the recent COVID wave. The Zimbabwean idea of working from home hasn't been effective because of electricity and internet constraints. It's not a concern because we will offset the VAT due from Zimbabwe against our future income tax payments. We recover it that way, so it's irritating but not a material concern. Those were the written questions. Are there any others? Camilla, shall we open for verbal questions?

Yes. If anyone wants to ask verbally, please raise your hand. Howie, I see you raised your hand. I'm allowing you to talk although you already asked in the Q&A so perhaps everything's been answered.

Yes, it has been. Maurice is going to send me the export tax credit. The other usual item in last year's quarter showed $2.8 million and Mark mentioned $1.5 million so that was my confusion. Maurice will straighten that out. Thanks, everybody.

I think that's it. I don't think we have any more hands raised. We do have one more question from Daniel.

Hi, can you hear me? My name is Daniel. Thanks for the presentation. In the UK people sometimes lump all of Southern Africa into one thing and we'd like to know a bit more. Is the political situation now stable in Zimbabwe? Has it calmed down to where it was 10–15 years ago and that kind of thing?

Daniel, by your accent are you South African or Zimbabwean?

I'm actually South African but I live in London.

As it stands at the moment, I would say Zimbabwe is an infinitely more stable political environment than South Africa, unfortunately. Under the Mugabe regime it was completely unpredictable — he was capable of irrational actions. The current regime is more rational and open to constructive engagement. Our assessment is Zimbabwe is much more stable now than it has been for some time. We get regular detailed political updates so we stay informed. Steve, do you want to add anything?

If you consider inflation management and the foreign currency option system, the current approach has stabilized the official exchange rate. We're running with an inflation rate around 56% now versus 800% a year ago. The administration recognises the need for business to survive and has introduced incentives for the export industry so we can retain more of our dollar proceeds on incremental sales if we participate in schemes. These are things we've argued for a long time and now they're being implemented. You need to be flexible and able to react quickly. Considering Dana and his team's decision since 2015 to invest nearly $70 million into sinking a shaft and effectively building a new mine under an old mine in what some would call an uninvestable country, and now demonstrate ramping up production, shows you can manage the environment if you're in the right business. It takes very close attention to detail from the finance team, and our track record shows we know how to operate there.

There's been a question about a share split. We've had queries about that and the argument is a high share price discourages some buyers. The facetious answer is our full aim was a sophisticated stock exchange. More seriously, to avoid being classified as a penny stock in the United States we need a share price over $5 and the US is our largest market for liquidity. In terms of dividend yield and P/E ratio, it's unaffected by whether our share price is GBP10 or GBP5. If our share price moved substantially we might consider a split, but it's not something we plan to do. We are progressing with a listing on the Victoria Falls Exchange. The reason for that is to get access to more US dollars. The regulation announced in early June is that companies listed on the Vic Falls Exchange will receive 100% of incremental revenues from incremental gold production in US dollars. As we increase production from 58,000 ounces last year to 80,000, all revenue associated with that extra production will be received in US dollars, which will move our mix from about 60% dollars / 40% local currency to roughly 70% dollars / 30% local currency. The only reason for the Vic Falls listing is to get better access to dollars.

I think that's it.

That was just Howard responding. The issue about a high share price is primarily a UK issue; it's not been raised in the United States. A high share price might give a perception of respectability, but it's debatable.

I think that's it. I don't see any new questions.

I don't see any new questions, Camilla.

No, there are no questions that have come through.

Okay. Unless anyone wants to raise a hand at the last minute, I think we're done. Thank you. We had a very nice turnout tonight. I hope we've answered your questions and provided the detail you needed. You know where we are and you know where Camilla is — you can contact her if you have personal questions; whether we can answer them will depend on whether it's public information. Thank you for participating. We will make our normal quarterly announcements — production update after the end of September and then Q3 results and dividend announcements. Keep watching this space; this is an exciting second half of the year for us. Lots of work for Dana and his team, but so far so good. Thanks for running the course with us. All the best to you. Good night.