Caledonia Mining Corp Plc Q4 FY2022 Earnings Call

By way of introduction, I'm Mark Learmonth, Caledonia's Chief Executive. Prior to that, I was the CFO, as you may well know. I'd also like to take some time to introduce Victor Gapare, who's an Executive Director. He joined the group in January following the acquisition of Bilboes. I'd just like to give Victor an opportunity to introduce himself. Please, Victor.

Thank you, Mark. My name is Victor Gapare. I worked for Anglo American Corporation Zimbabwe for 16 years, and my last job at Anglo was Director for the Gold and Pyrites Mining Division. I left Anglo American at the beginning of 2003 after completing the management buyout of the gold and pyrites businesses, which I was managing at that time. From January 1, 2003, I became the Chief Executive Officer of Bilboes. I have been Chief Executive of Bilboes until we completed the transaction with Caledonia in January 2023. Between 2009 and 2011, I was also President of the Chamber of Mines of Zimbabwe, which represents organized mining in Zimbabwe, including suppliers, service providers, and professionals in the industry. Over the last few years, particularly from 2010, I led the Bilboes team, which raised the first $6 million from Baker Steel Resources Trust, listed on the London Stock Exchange. We used that money to begin exploration at the Bilboes properties. In 2018, we raised the funds by $10 million to progress the feasibility study. We also raised another $7 million in debt from the Industrial Development Corporation of South Africa in 2018, which enabled us to restart operations after they had closed during the hyperinflation period. That's a little bit about me. Thank you, Mark.

Thank you, Victor. And also, Chester Goodburn, who replaced me as CFO last year, and we have Dana Roets, who is the Chief Operating Officer and has been with us for about 10 years now; Maurice Mason, our Vice President of Corporate Development; Adam Chester, our General Counsel; and Camilla Horsfall, Vice President of Group Communications. Okay, so let's get into the meat of the presentation. In terms of results highlights, production has increased from about 58,000 ounces in 2020 to just over 80,000 ounces in 2022, which is good. We haven't been held much by the gold price; so all the increase in revenue is largely driven by higher production. Gross profit increased from $46 million to $54 million to nearly $62 million, but you will notice there has been a slight compression in the gross margin from about 46% in 2020 to 43% in 2022, which reflects the general increase in our operating costs offset by economies of scale. I'd also draw your attention to the dividend, which has increased from $0.335 in 2020 to $0.56 last year, but more information about that will come later. On safety, unfortunately, we had a fatality in 2022 and a further fatality in 2023. Dana may want to talk about this more, but it is fair to say the fatalities resulted from non-adherence to prescribed safety procedures, and our response must be to redouble our attempts to enforce adherence to safety procedures. Clearly, a fatality is a very distressing event, but we must work harder to ensure that people adopt the safe working practices that we set out. Other than that, our general safety performance compares quite well with other similar deep-level mines in the gold sector. Dana, would you like to add anything further to what I've said?

Well, Mark, I think it's just important to also note that we were in a place of increasing our labor numbers, which complicated matters. A good indication of our improvement is the fact that the disability injury frequency rate, which accounts for the extra number of employees year-on-year, improved from 0.26 to 0.23.

Yes. It is fair to say, if you look carefully at the quarterly production numbers in the lower graph, you would notice there is a general pattern where quarter one is lower than quarter two. Production tends to progress as the year progresses, and we will likely see the same pattern again this year, with lower production in Q1 and peaking in production in Q4. That's all of operations. The grades remain consistent at about 3.36 grams per ton. The recoveries remain consistent at 93.9%. The real driver of growth has been tons milled. As Dana mentioned, our objective now is to stabilize production at between 75,000 and 80,000 ounces a year, and then explore ways to optimize what we do more efficiently, thereby controlling our costs. The solar projects were something we started in 2020, which were clearly delayed by COVID, delays in the manufacturing of panels in China, and the shipping of the panels. It was finally commissioned in November last year. Throughout that period, we found ourselves spending more on capital equipment to protect our equipment from voltage spikes and also more on diesel than maintaining generators. By January this year, as a result of the commissioning of the solar plant and improvements in the grid supply, we only used about 18,000 liters of diesel, a very significant reduction. We fully expect to see a reduction in diesel consumption going forward. We've funded the entire solar project, which cost about $14 million using equity raised in 2020, and the excess was funded from cash. We are now completing an exercise to raise a bond in Zimbabwe by the vehicle that owns solar, expecting to secure about $7 million to $7.5 million by the end of March. Chester, correct me if I'm wrong, but I believe we've got about $4.5 million in currently and are expecting another couple of million dollars this week. Is that correct?

That's right, Mark. We expect that to be in by the end of this week.

It's interesting to note how the Zimbabwean authorities have responded to the electricity crisis in comparison to South Africa. While the South African government has appeared to do very little to facilitate or encourage large industrial users to install their own Independent Power Producers (IPPs), the Zimbabwean authorities were very proactive in encouraging and fast-tracking the approval processes for projects like ours. Additionally, there is a current initiative called the Intensive Energy User Group (IEUG), established under the auspices of the President, which may allow Blanket to enter into an agreement to import power directly from Zambia and Mozambique, potentially providing cost advantages and further reducing our reliance on the grid. That development would be quite unexpected in the context of South Africa. Let's move on and talk about Bilboes. Victor, could you run us through a few slides on Bilboes, please?

Thank you, Mark. Bilboes houses the gold mining assets belonging to Anglo American Corporation in Zimbabwe. Anglo mined oxides and treated the ore through heap leach technology, recovering about nine tons of gold from the Bilboes assets. They initiated exploration for sulfides and drilled about 17,000 meters, establishing just under 500,000 ounces. They ceased exploration when exiting the gold mining business globally. We purchased those assets in 2003. Between 2010 and 2018, we drilled an additional 80,000 meters and established a resource of just over 3 million ounces. We contracted DRA to carry out a definitive feasibility study on that resource. The study estimated a mine life of 10 years, a planned average production rate of 2.4 million tons per year, and an average mill feed of approximately 2.3 grams per ton. The peak funding requirement for this project is US$250 million at 2021 prices, indicating a post-tax NPV of $323 million and a post-tax IRR of 33.4%. Using current gold prices of around $1,800, you can see the impact on the bottom line. We also established some remnant oxides while conducting feasibility studies, which we have started mining. We expect to produce about 12,000 to 17,000 ounces per year from the current site operations, yielding approximately $20 million to $30 million in free cash over a three-year period.

Discussing Bilboes – I'm sorry, Motapa.

Thank you, Mark. Motapa is a property contiguous to the Bilboes assets. In the 1990s, Anglo entered into a joint venture with the original owners of Motapa, mining the oxides from the Motapa claims and starting drilling for sulfides. Unfortunately, Anglo also stopped operations when exiting gold mining. The current Bilboes team pursued the Motapa project, as some of the oxide materials were transported to Bilboes heap leach operations. We plan to invest in exploration for additional oxides, complementing those mined at Bilboes to improve cash flow. The long-term goal is to explore sulfides, believing that combining the sulfides at Motapa and Bilboes could create a mine of reasonable scale by Zimbabwe standards.

Before we move on to the financials, I must say that Bilboes is an attractive asset due to its size and high grade, and we acquired it at a very competitive price. The work we are doing on our feasibility study isn't just to revalidate the previous study but also to see whether we can conduct the project on a phased basis to minimize equity dilution. This balancing act between growth and dilution is crucial; it is essential to solve for the best net present value per share, not necessarily the highest NPV of the project. Bilboes and Motapa together present a very attractive asset package. Chester, could you provide a couple of minutes on the new financial slide, please?

Thank you, Mark. The 2022 financial results reflect the success of our 80,000-ounce target set for Blanket Mine and lay the groundwork for our future growth phase of newly acquired assets as Victor explained earlier. I'm pleased to see an increase in revenues due to higher production, which is evident in our cash flow statement. Our G&A has risen for positive reasons, owing to increased advisory services costs for acquiring Motapa and Bilboes and an increase in salaries and wages for senior staff to prepare for this new growth phase at Caledonia. Our profit after tax includes non-cash items like $7 million of deferred tax expenditures and unrealized foreign exchange losses that are also non-cash. This might lead to questions about the disparity between the EPS of $2.20 and adjusted EPS of $1.36. Additionally, there are payment expenses of $8 million incurred from areas beyond the Caledonia life of mine plan that should be noted in our production costs. Our production costs decreased on a per-ounce basis due to the increase in ounces, dropping from $742 to $735, even with increases in our salary and wages bill due to bonuses tied to higher production levels. Inflationary pressures also applied to consumables while electricity expenses have decreased due to the solar plant's connection to the Blanket mine grid in November. Moving on to G&A, our administrative costs increased due to advisory service fees associated with acquiring Bilboes and Motapa, as mentioned earlier. Our salary expenses rose to help unlock value at both the Motapa and Bilboes mines. Regarding taxation, most of our tax is paid to the Zimbabwean government, which has a substantial non-cash component of about $7 million, making it challenging to reconcile with our U.S. dollar-based profits due to localized calculations. I'm pleased to see that net cash from operating activities increased by $12 million from heightened production outputs. We've balanced reinvesting in cash generation while distributing cash to our shareholders, confirming that cash returns from Zimbabwean assets can support initiatives like the solar plant and new mining acquisitions. Our non-current assets increased due to investments in Central Shaft, Bilboes, Motapa, and the solar plant, although our cash position diminished as a result.

Thank you, Chester. To briefly discuss the fundraise we carried out last week along with the announcement of the 2022 results, we raised about $10 million in London through an accelerated bookbuild, primarily to fast-track work on our newly acquired properties. Specifically, this includes kickstarting the feasibility study at Bilboes and initiating exploration at Motapa. We aim to set up a shared services center in Bulawayo to realize synergies in accounting, HR, technical services, and procurement due to the proximity of Blanket in the south and Motapa and Bilboes to the north. We're also pursuing exploration work at Maligreen. Our net cash position at year-end stood at about $1.5 million. While Blanket generates significant cash flow, our strategic activities necessitate funds that do not pertain to Blanket. We felt it prudent to raise around $10 million quickly in the U.K. given the urgency of our opportunities and to test the market demand from institutional investors in the U.K., which resulted in three new institutional investors entering the register. The Zimbabwean raised approximately $3 million and remains open to allow local institutions to arrange liquidity to participate. The investment landscape in Zimbabwe shows institutions have the appetite to invest but face timing challenges for availability. Now regarding the dividend, it's worth noting we've paid a dividend for about 10 years. It was initially denominated in Canadian dollars until 2016 when we started increasing the dividend rate as we became comfortable with our cash flows. Having acknowledged our transition into a growth company and subsequent capital requirements, our intention is to maintain the dividend at current levels of about $0.41 per share quarterly. Thus, barring any unforeseen circumstances, I do not expect to see a dividend reduction but also do not anticipate increases until new projects become cash generative. Gold production expectations for Bilboes from the oxides are approximately 15,000 ounces for the year, between 12,500 and 17,000, while production for Blanket is between 75,000 and 80,000 ounces. The split between online costs at Blanket, which are generally around $770 to $850 an ounce, must be noted. The production cost at Bilboes will be significantly higher due to its low-grade oxide production, while blending these two assets will result in a group online cost per ounce of about $900 to $1,000. The capital expenditure for this year is projected to be about $31 million at the group level, with $28 million allocated to Blanket. Of this amount, approximately $10 million will be directed to a new tailings facility and another $10 million for deep level capital development at Blanket mine necessary for continued production. This is an overview of the formal presentation. I now open the floor to questions.

Shall we deal with some of the written questions first, Mark? There are a few, and then if anybody else has questions, they can just raise their hand and we can address those.

The first two questions regarding earnings. Chester has answered part of that already concerning the difference between adjusted earnings and cash earnings around $2.20 or $1.36. Chester, do you want to add to this?

The sale of stock reflects the demand dynamics as we cannot control the rate of transactions. Ultimately, the internal rate of return on the main Bilboes project is substantially higher than the cost of equity, and while it is not a practice we intend to adopt regularly, we feel comfortable with it.

Thank you, Mark. There are other questions about costs. What percentage of costs are expected to increase this year?

Costs will increase due to the predominance of oxides impacting the cash flow statement. For Blanket, we're projecting a 4% to 10% increase, although we anticipate savings from solar efficiencies.

As Chester elaborated, the benefit of solar is not reflected in the online cost, only in the all-in-sustaining cost. Considering the relatively subdued inflation in labor and essential imports, we're targeting an increase in all-in-sustaining cost to approximately $1000 to account for state volatility.

Mark, would you like to address the question regarding the impact of tax?

Let me hand this over to Chester for further clarity.

Yes. As Mark mentioned, our tax in Zimbabwe varies due to discrepancies between local currency calculations and our U.S. dollar accounting. Several non-cash items contribute to this, including deferred taxes and unrealized foreign exchange losses.

There are also inefficiencies regarding withholding taxes and capital gains taxes in South Africa on intercompany transactions, further complicating our tax burden. However, the underlying tax regime in Zimbabwe remains stable and favorable. We have opted not to provide EPS guidance anymore due to the myriad of uncontrollable factors affecting our position that invite volatility in financial expressions.

The interest rate anticipated on the bond is 9% per annum, payable biannually, with a three-year tenure.

We seek to only attend mining conferences that align with our interests given recent increases in investor relations costs, especially in light of the transition back to in-person events. Some conferences deliver greater value than others.

In London and Europe, we plan to attend the London one-to-one in November and the Denver Gold Show, which we've found quite valuable.

The capital expenditure estimate for 2023 is just over $31 million, primarily for Blanket and its tailings facility. Additionally, developing new deep-level operations at Blanket will require significant investment.

Mark, as far as the measured and indicated resources are concerned, there is no significant downward trend to expect in the grades; they should remain stable going forward.

The guidance we have provided for Blanket's production is realistic, considering we do not foresee any significant production increases above 80,000 ounces annually.

We want some debt funding in our business and have utilized overdrafts short-term to meet our liquidity requirements. It allows us to manage our cash flow effectively as needs arise.

The complexities of cash flow and the requirements for dividends lead to volatile cash management strategies, but we are actively working on improving our liquidity in Zimbabwe. I don’t see any further questions. It’s the end of March, so look for Q1 results to be released in mid-May. We view 2023 as a year for stabilization and consolidation, which may sound dull but is valuable in our current economic environment. Thank you all for your attendance.