Caledonia Mining Corp Plc Q2 FY2022 Earnings Call

Run through the results for the second quarter of 2022 for Caledonia Mining. I'm Mark Learmonth, Caledonia Mining's CEO, and I'm joined today by Dana Roets, Caledonia’s Chief Operating Officer, and by Chester Goodburn, Caledonia’s CFO. Also in attendance, we have Camilla. So let's just move on to the disclaimer. Just a very brief summary. Production was excellent. The gold price was sort of a modest following wind; it wasn't particularly beneficial. The real improvement in revenue was driven by the higher production, and then the improvement in gross profit and profitability was a combination of higher production and excellent cost control. But I think Dana can provide more information on that from operations, and Chester can discuss it financially. So let's move on. Okay, I'll ask Dana, if you could just give us some highlights for the production for the second quarter. Dana?

Good afternoon. We had an exceptional quarter—truly a record quarter. We are building up towards being in a steady state next year. The higher production was due to increased tonnes milled and improved grade and recovery. Currently, the Central shaft is hoisting waste only; we are teaching infrastructure around the shaft. We basically equipped on all points, and we should start hoisting reef by the end of the third quarter going forward, which will put us in a good position. At the end of the quarter, we had 12,700 tonnes of ore on the stockpile estimated to contain about 1,500 ounces of recoverable gold, which is not currently in production. Unfortunately, we couldn't repair a broken part of the ore and it had to be sent in to be recast. It's made of cast iron, but that should be operational by the end of August. We did limit our mining, which obviously then went through to August and our stockpile has just kept on growing. The good news is that we are commissioning the new Girona, Bolon, and by the end of the period, we will be fully operational with the repaired equipment and the new regrind fluor plant operational. That will give us the capacity that we need for total milling at that banked, and then we will start getting into the stockpile.

Thank you, Dana. So let's just move on? Okay. I'll ask Chester to run through the financial slides. So Chester, over to you.

Thank you, Mark, and hello, everybody. On the back of production numbers, we can see that coming through on our gross profit. The sub-quarter is up 29%, while for the half year it's up 44%. Our online costs are down by 2.9% quarter-on-quarter and down 10% on a half-year basis. Administrative expenses have increased quarter-on-quarter, mostly due to advisory services fees incurred on the Bilboes transaction, which we will come to shortly. Net foreign exchange gains amounted to $5.1 million for the half year, with $1.7 million as realized gains, which reduces our deferred tax expense and effectively lowers our effective tax rate. Further, our adjusted earnings per share show quarterly numbers that are down by 10% compared to the previous quarter, but our adjusted earnings per share is up by 4%. Cash wages and services have increased quarter-on-quarter, reflecting our remuneration for increased production. Consumables have also gone up, driven by exposure to steel and inflationary pressures from China. You can see that the economy is down by $500,000 quarter-on-quarter, largely due to the capital initiatives we implemented. Overall, we've managed to keep all of our production costs under control.

Yes. These slides or the following slides will repeat the slides that we presented several weeks ago when we reached out to shareholders on the Bilboes transaction. So I'll go through them quite quickly as a refresher. Bilboes is a large-scale, low-cost, long-life gold project located north of Bulawayo. The Blanket Mine is located south of Bulawayo, so there's no significant scope for synergies since they are not close enough to run on a combined basis. We signed a sale and purchase agreement to acquire this asset for a consideration of just over 5 million shares and a 1% net smelter royalty, equating to about 28.5% of our fully diluted equity. Bilboes has a large resource base with just under 2 million ounces at 2.3 grams per tonne, and an additional inferred resource of over 0.5 million ounces with significant exploration potential remaining on the property. The existing owners have completed a feasibility study that indicates a very large open-pit operation capable of producing about 168,000 ounces of gold annually, peaking at just under 200,000 ounces a year. It has a very attractive internal rate of return of 33% with an all-in cost of approximately $826 per ounce.

In terms of the CapEx to build that project identified in the feasibility study, it is about $250 million. Initially, I expect that number may have increased in the current environment. I want to be clear that our approach to commercializing this property will take into account the cost of raising the necessary funding, which will come from three sources: first, debt to the extent that's available on attractive terms; second, from internal cash flows from both Bilboes and Blanket; and thirdly, from equity. I want to be very clear that we will not put ourselves at the mercy of the markets to raise equity at depressed prices. So frankly, if the equity price isn't productive, we will fall back on a smaller-scale first-phase project funded from internal cash plus debt and then progress to the second phase using cash flows from the first phase.

That's the approach we took on the Central Shaft project, which we built completely using our own internal resources. However, it's somewhat unusual for a transaction with this structure. Even before completion, we will commence investing money in Caledonia. We plan to manage and start a relatively small oxide operation capable of producing quite quickly—within a few months—and we expect to recover our initial costs within about 6 months, followed by a modest cash flow of between $1 million and $2 million a month for a period of about 30 months. This cumulatively adds quite a nice increment to our cash generation. The current shareholders of Bilboes include Toziyana, a vehicle controlled by Mr. Victor Gapare, a prominent Zimbabwean mining entrepreneur, Baker Steel Resources Trust Limited, and a Chinese investor group called Infinite Treasure. You can see on the slide the extraction from the feasibility study that indicates the monthly production, which peaks at about 168,000 ounces annually. On the right side, you can see the amalgamated production from Blanket and Bilboes mined under Canadian regulations. We can only show production from measured and indicated resources; therefore, we cannot combine production from inferred resources.

Several conditions precede the transaction that are crucial. We will insist on the right to export the gold produced from Bilboes directly, rather than selling to Fidelity, the government-owned refiner. We will sell under our own auspices to an offshore Zimbabwean precious metals refinery accredited by LBMA. This condition cuts through one of the significant concerns that investors and lenders have regarding gold mining operations in Zimbabwe, specifically the current requirement to sell gold to Fidelity. Another important condition is getting clarity on the electricity supply to the project. Fortunately, the changes in the electricity supply landscape in Zimbabwe are moving in a very positive direction, which appears to allow larger users like Caledonia access to power produced in the region.

Having said that, Bilboes is much better placed in terms of access to a well-maintained grid, while the Blanket mine suffers from being at the end of a poorly maintained line, which is not the case for Bilboes. To provide context, several other African gold development projects currently underway show Bilboes leading in recovered grade, just below 2 grams per tonne, which is outstandingly good compared to the average for most open-pit gold operations that are now below 1 gram per tonne. We paid about $27 per M&I ounce for Bilboes, which is competitive, and we are very pleased with that. All these factors combined—the size, the grade, and the competitive price—bode well for our future.

To give additional context, the Bilboes already has an on-site oxide operation which has been producing for several years, but due to delays in the sale process, they've now exhausted the readily accessible oxide material and need capital for a pre-strip to uncover material down to a depth of about 40 meters.

The initial capital costs for restarting the oxide project are estimated at about $5 million. After about 10 to 12 weeks, it should become cash-generative quite quickly.

That's a significant aspect of our strategy moving forward. Let's open the lines for questions. If anyone is shy and doesn't want to speak, feel free to type your questions, but I prefer addressing questions aloud as they often lack sufficient context otherwise. So, Camilla, would you mind opening the lines?

No questions at the moment.

Can you run through your CapEx? It has gone up a little bit. Is that due to the end of the period?

The CapEx has been going up chiefly due to a combination of more expensive development work related to the central shaft. We're spending quite a lot on improving the electricity supply, including replacing some generators that have failed due to overuse. We're also investing more in auto tap changers that help reduce diesel consumption. This capital expenditure reflects those necessary enhancements.

I can add that during the past quarter, we had a half crew finishing the shaft for about 6 months. Additionally, electricity delays affected our development timelines, which necessitated pushing declines further down, leading to increased costs. We've also had to increase our mining capacity, which is a good step for the future.

Despite these challenges, it has also led to some improvements in our production profile, which is encouraging.

What will your milling capacity be once everything is fixed and operational?

Our milling capacity will increase to 2,400 tonnes a day. Currently, we are operating at 2,000 tonnes a day, but once everything is up and running smoothly, we expect to reach the higher capacity.

Will you have excess capacity until you catch up?

Yes, the stockpile continues to grow, hopefully allowing us to reduce stock in the near future.

Do you expect any more payments? Is it dependent on repairs being completed?

There's quite a bit of activity regarding our solar project between us and the current contractor. I'd prefer not to unpack that right now, but we're working as diligently as we can to get everything commissioned so we can begin utilizing that electricity in our plant.

We have another question here.

My first question relates to the growth the company is experiencing. Is the company considering acquiring more assets? Will this be limited to Zimbabwe, or are there opportunities elsewhere?

We do have other assets we would like to add to our portfolio, but they are not as pressing as Bilboes, which is ready to go. Maligreen is further down the track. Any other assets we consider will likely follow behind Maligreen, although I can confirm they would still be in Zimbabwe.

We have a few more questions.

We recognize there is great exploration potential at depth. This includes following existing ore bodies deeper and areas between existing ones believed to still hold mineralization. We are also interested in exploring a formation about 800 meters east of the current mining area.

We are looking to add team members who can assist with identifying these opportunities. As we add more drillers, we want them focused on high-potential areas to avoid wasting resources.

For the past seven years, we have primarily concentrated on deep-level development and now we are in a position to prioritize exploration more seriously.

Inventory levels for the past quarter are about $20.2 million, down from about $21.5 million. Critical items are on hand for about 5 to 7 weeks, allowing for operational continuity in case of potential disruptions.

It's worth noting that our view shifted from 'just in time' to 'just in case' in recent years, ensuring we don't run the mine on a bare-bones basis while balancing stock levels.

Many critical supplies are sourced locally, though we also procure items from South Africa based on price and availability.

In terms of CapEx, we heavily rely on South Africa, but we utilize local sources too, particularly for day-to-day operations.

Could you explain the difference between reported earnings and adjusted earnings, particularly with regard to taxes related to depreciation?

That's a great question, and Chester can provide specific details.

Regarding adjusted EPS, we eliminated non-cash items such as unrealized foreign exchange gains, which significantly influenced our earnings this quarter.

We started reporting adjusted earnings per share some years ago to simplify the presentation for users; however, it has, at times, created challenges in explanation and consistency.

Is your solar plant now operational? I believed it should be operational by now.

It's not yet operational as we need to connect to the grid, which requires authorization from our energy provider.

Unfortunately, we are facing some communication delays between the contractor and our energy provider, but it is a top priority, and we have contractual protections for delays.

Can you manage both Maligreen and Bilboes development simultaneously?

It's possible, but realistically, we may find it challenging to manage two projects at once in Zimbabwe.

Ideally, we would develop one project at a time, ensuring that each project has the resources and attention needed to succeed.

Overall, the deal seems attractive given the potential returns from Bilboes during the startup phase.

Indeed, while we do not currently have a feasibility study for the oxide project, our decision was based on the evaluation that we attributed no value to these oxides initially, making this situation feel like a bit of a windfall. Thank you for joining us today. We will keep you updated with further news as appropriate. Thank you very much.