Caledonia Mining Corp Plc Q2 FY2023 Earnings Call

Okay. On the call today, I’m Mark Learmonth, Caledonia's Chief Executive. Joining me is Victor Gapare, one of the vendors of the Bilboes asset and an Executive Director. We also have Chester Goodburn, CFO, based in Johannesburg, Dana Roets, our Chief Operating Officer also in Johannesburg, Maurice Mason, Vice President of Corporate Development, and Camilla, VP of Group Communications, both based in the UK. Let’s get started. It was another very challenging quarter. My comments will focus on Q2 compared to the same quarter in previous years, although we do present six-month numbers for reference. Production was 18,500 ounces, including a disappointing 1,000 ounces from Bilboes, leaving about 17,400 from Blanket. I'll let Dana and Victor discuss the operational issues facing respectively. The high gold price helped maintain revenues at around $37 million. However, gross profit dropped significantly from $18 million in Q2 2022 to just under $11 million in Q2 2023 due to extremely high costs at Bilboes with no corresponding revenue. At Blanket, higher-than-expected electricity usage led to additional expenses of about a couple of million dollars. This resulted in a net profit attributable to shareholders shifting from $11 million in profit to a $1.5 million loss, impacting earnings per share as well. Importantly, net cash flow from operating activities went from an inflow of $16.7 million to an outflow of $2.2 million. Chester will elaborate on this shortly. Summary production at Blanket fell short of targets due to operational issues that Dana will address. However, after focused management efforts, July saw substantial improvement with 7,800 ounces produced, allowing us to affirm our production guidance for 2023 of 75,000 to 80,000 ounces of gold. Costs for the quarter were very high, with on-mine costs exceeding $1,000 an ounce, which increased from just under $700 an ounce in the same quarter last year. Much of this rise, 81%, was associated with higher costs at Bilboes. Notably, July’s on-mine costs were $715 an ounce, giving us confidence in maintaining our full-year guidance of $770 to $850 an ounce. Due to the poor performance at Bilboes, it will be returned to care and maintenance effective October 1, with a three-month notice period for the contractor. It makes financial sense to reduce the contract rather than terminate it immediately, and we expect a modest cash contribution from Bilboes in Q3 as we continue to extract gold from the leach pad. Safety performance was disappointing this quarter, marked by an unfortunate fatality, prompting management to take immediate actions for improvement. On a positive note, we've obtained good drilling results from Eroica, raised funds through placings in March and April, and initiated direct gold exports from Zimbabwe to a Dubai refiner, which effectively bypasses the Reserve Bank for our US dollar revenue. Additionally, there have been changes to the Board, with Leigh Wilson stepping down as Non-Executive Chairman and John Kelly stepping in as his replacement. Regarding safety, the total injury frequency rate has increased from roughly 1 to 1.35 or 1.36. We need to implement measures to address this, focusing on reshaping work behaviors. Clear rules and procedures are essential, and everyone must follow them to ensure safety. Dana and the Blanket team are working diligently to improve behaviors for safe operations. Let’s move on from Bilboes, where there have been no significant issues. Now, can I ask Chester to walk us through the financials?

Yes, thank you, Mark. Our revenues are slightly down compared to the previous half and the last quarter. This is mainly due to lower ounces produced at Blanket, and the extra ounces we produced at Blanket did not exceed those levels. The royalty remains at 5%, the same rate as during the favorable period. Our production costs have increased, but we will provide more details on that in a few slides. Depreciation has also risen due to a reassessment of useful lives, which increased quarterly depreciation by $600,000. This is related to a reassessment of some generators that are no longer in use since we have implemented scan control. Additionally, some LHDs and generators have been deteriorating because of the challenging conditions at Blanket, resulting in other costs totaling $14.3 million for the half year. There has also been about a $7 million swing in foreign exchange losses, with a $2.1 million loss noted for the bar up here, down from a gain of approximately $5 million in the previous half. The Zimbabwean dollar devaluated in June, causing foreign exchange losses, although it is beneficial that we export 75% of our gold, which is not subject to foreign exchange losses. Included in this is the impairment expense of $850,000 for the Bilboes oxides maintenance, all of which is non-cash. The effective tax rate is quite high due to the bulk of the losses we have faced and the taxable profits of Blanket, resulting in a significant tax charge for the year to date. Can we move to the next slide?

Could you provide a brief overview of what occurred in terms of production during the quarter?

In the top graph, we can observe that the grade increased last year, peaked in the fourth quarter, and then decreased slightly, continuing to decline in the first and second quarters. We anticipated this decline, which is why we invested additional funds in the plant, and that system became operational at the end of last year. This year, the challenge has been that, when we look at the first and second quarters and compare them to last year, the tonnage produced is about the same. However, due to the higher grade last year, we needed to produce more tonnage. During our buildup, we aimed to reach 80,000 ounces last year and worked very hard to achieve this. We made changes to our general management last September and brought in a new general manager in January to oversee operations. We also had some underground managers who were suppliers. During the push for 80,000 ounces, we focused on enhancing safety culture, which unfortunately led to some job losses due to safety negligence. This challenge carried over into this year. As we continue our buildup, flexibility has become essential, especially with our development on levels 33 and 34 and moving down to level 38. At the start of the year, we were somewhat behind schedule, particularly in accessing higher-grade areas, but we hope to be in those areas by the end of the quarter. In the second quarter, we systematically addressed these issues and got back on track, though we did face some typical operational issues due to our intense push for 80,000 ounces. As we systematically dealt with these challenges, we positioned ourselves well for the third quarter, where we are now in the right locations and achieving our required tonnages. We're on track for the third quarter. A major concern is that when pressure mounts and targets are missed, some individuals may take shortcuts, compromising safety standards. This has caused safety issues for us. We have begun to disband teams and initiate a behavioral program to reinforce safety awareness, especially since we've brought in new personnel. We had paused previous behavioral interventions in 2020, 2021, and 2022, and are now restarting that effort. Unfortunately, the absence of this initiative has had noticeable effects. We need to work hard to establish trust in the teams working underground, ensuring they make the right decisions even when supervisors aren't present. Moving forward, we expect to produce more tonnage at a lower grade while maintaining an annual production target of 75,000 to 80,000 ounces.

Good. Okay. Thank you, Dana. Can we move on to the next slide? So Chester, back to you to talk about production costs.

Looking at our wage costs, Blanket primarily reflects inflationary increases. Last year, we faced inflationary pressures on our consumable costs, but this year we've seen those costs stabilize without the same increases as last year. It's important to note that about 75% to 80% of our costs are fixed and short term, so there aren't fluctuations in our on-mine costs. Although the production numbers appear strong with lower production, as we move forward and our production increases, as we saw in July and August, we can expect a significant reduction in our on-mine costs. Electricity costs at the Blanket level total $6.4 million, which excludes the $1.4 million in savings from the solar plant that was commissioned earlier this year. The solar plant is functioning well and providing us with savings. We have also established a new agreement with the IEUG consortium that will soon allow us to source power at a lower kilowatt per hour rate than we currently receive from utilities. We are analyzing our kilowatt hour usage and looking to optimize it, which should lead to lower power costs in the future alongside increased benefits from solar. Bilboes oxides have been put on care and maintenance and incurred a high cost of $7.5 million this year due to the funding needed for mine waste stripping to access the oxide. We plan to extract the oxides now that we can utilize ions to motivate the sulfides beneath. In the next slide, you will see that our on-mine cost per ounce was negatively impacted primarily by Bilboes oxide production, which cost $317 per ounce. Our power expenses do not account for solar savings or the impact of the IEUG rate, but moving forward, we intend to address the issues with Bilboes to reduce costs and improve our on-mine cost significantly. From an all-in sustaining cost perspective, it has been slightly negatively impacted by Bilboes costs, which we do not expect to continue. Our admin expenses are comparable to the previous quarter, with a total year increase of $3.1 million primarily due to payments to advisors for the successful completion of Bilboes. Our withholding taxes appear high from an effective tax charge standpoint, but the effective tax rate at the Blanket level has remained stable compared to previous quarters. Going forward, with the absence of Bilboes losses, our effective tax rate should be between 30% and 37%, consistent with past years and quarters. In the next slide, you can see our cash flows. We generated $4.9 million across the group for the quarter, with $8 million coming from Blanket, indicating its capacity to generate cash. This amount compares favorably to the $7.7 million generated in July, showcasing Blanket as a strong, cash-generating asset. Our working capital outflows for the quarter included $4 million for legacy creditor payments. Our net investing and capital activities relate to the latter part of the year, and we plan to catch up on our capital expenditure. Our financing activities included $15.6 million in equity raises after expenses, $7 million in bonds issued for solar investments, and some dividend payments for Q1 and Q2. In the next slide, our cash balances have decreased on a quarterly basis due to our expenditures related to the solar bond. We invested in Bilboes and Maligreen and expect our cash position to improve in the next 6 to 12 months since we have completed payments for all acquired assets. Our cash flows from Zimbabwe are stable, and we are not accumulating any surplus RTGS.

Thank you, Chester. As I mentioned earlier, July was a strong month. Here are some key details from July: the grade was 3.6 grams per ton, gold recovery was 93.6%, and we produced just over 7,800 ounces of gold, on an annualized rate of about 93,000 ounces per year. Our on-mine cost per ounce is $715, which is comparable to roughly $700 an ounce last year. We hope that this marks a turning point, and that the strong performance in July indicates an improved second half of the year compared to the first half. A few weeks ago, we restarted deep-level drilling after having halted deep-level exploration several years ago due to insufficient logistical capacity underground to support both exploration and ongoing development and production. With the Central Shaft now commissioned, we have the capacity to excavate and create drilling platforms for deep drilling. Currently, we have two exploration targets. The first target we reported on is at Eroica, and we have recently begun work in a second area at Blanket. The results from Eroica have mostly exceeded expectations in terms of grade and width. We anticipate that this will lead to an updated resource estimate by the end of the year, which should extend the life of the mine and increase the amount of material we can access from our existing infrastructure at Blanket. At Motapa, we have submitted an environmental impact assessment, and we expect to start invasive drilling there later in the year. Environmental, social, and governance (ESG) issues are increasingly important to regulators and investors, and the regulatory landscape is evolving. For example, the SEC is reportedly working on accounting standards related to ESG. Our goal is to implement sustainable practices that align with our corporate strategy; we will comply with all requirements but are not looking to lead the way in this area. We have just released our latest ESG report detailing our social initiatives, and from an environmental perspective, we have established a solar plant providing about 24% of Blanket's average daily power, which has exceeded our expectations. We are also constructing a new compliant tailings facility, as the existing one is nearly exhausted. We plan to invest about $25 million over the next few years into this new facility, which requires double-lining with clay and plastic, and it will support our operations for the next 12 to 14 years at a production rate of about 800,000 tonnes per year. While this is a significant initial expenditure, it will provide long-term benefits once completed. In terms of social contributions, we have achieved 34% local ownership, including from employees and the community. The community has also paid off its outstanding loans to us. Our VP in Zimbabwe, Caxton Mangezi, recently presented a substantial check to local representatives. In terms of governance, we comply with all relevant regulatory requirements and feel confident in our compliance status. For more details, please refer to our ESG report. Looking ahead, our primary focus is on optimizing operations at Blanket to achieve a production range of 75,000 to 80,000 ounces. We will continue deep-level drilling at Blanket with the aim of upgrading inferred mineral resources to a higher confidence level and exploring for extensions of existing ore bodies at depth, to determine future commercialization options. We have started feasibility studies at Bilboes and, as previously mentioned, we aim to balance growth while minimizing dilution to optimize net present value for Caledonia shareholders. We also expect to begin exploring Motapa later this year. That concludes my formal presentation, and I would like to open the floor to questions.

Yes. If anyone has a question, can I ask you just to raise your hand? And we can unmute you.

Hi. Can you hear me?

Yes.

So I just had a question regarding the dividend policy. In a scenario where the production and cash that continue to disappoint, what is the likelihood that that would be maintained at $0.14 per share?

That's one question. The other question is about how we approach the dividend in light of the significant investment needs for Bilboes. We have always maintained that our policy is to pay a dividend, but we've also indicated that maintaining it depends on our perspective on capital allocation. It's not just a matter of affordability; we need to consider if it makes sense to continue paying a dividend given that the funds for dividends are the same funds required to finance the Bilboes project. This is all part of our current work on how to commercialize Bilboes. Initially, our dividends were not formally tied to performance. We never stated that, based on performance or profit from a specific quarter, the dividend would be adjusted accordingly. There was no clear correlation between the two. Furthermore, given the substantial improvement in our operating performance, that alone would not justify canceling the dividend. The major concern is really how we will fund Bilboes.

Great. I just have a few more questions, can I get through those or?

Yes, yes, yes.

Oh, okay, cool. So in part, some of the electricity costs at Blanket rose because of extended use of Jethro and No. 4. Can I ask what is stalling the transition to Central Shaft? I saw, like, in the MD&A, there was, like, commissioning problems with the old power systems. Can you maybe add some color to that?

Yes, Dana, would you like to pick that up?

It's actually twofold. When we equipped the Central Shaft at the beginning of the year, we only processed waste through it compared to last year. By the end of the year, we began processing reefs as well at Central Shaft. This year, by the end, 50% of our reef production will go through Central Shaft and 50% through 4 Shaft. As we transition to Central Shaft over the next two to three years, we will effectively put 4 Shaft on standby, and it will be less of an active mine, similar to what will happen with Jethro. However, there are still many unexplored areas above 750 meters due to the Central Shaft sinking and method used, which limited our late development targeting. We anticipated a return on our investment, and with more work invested now, we're targeting and opening up certain areas above 750 meters. These could be additional resources for us. We've had some success in trialing extra resources above 750 meters, which may prolong the life of 4 Shaft because there are areas that can only be effectively worked through 4 Shaft. On the Eroica side, we can extract reefs at around 750 meters through Central Shaft. Therefore, it's not straightforward to determine when we will cease operations at 4 Shaft or Jethro. We'll make decisions based on our findings as we continue to explore. Additionally, this year, we faced challenges with solar power due to substantial rainfall, including the past week when we had to drain a tanker. This has disrupted the solar electricity generation. In our third year of using solar, we hope to budget more effectively and gain a better understanding of what we can expect from it.

But in general, solar is performing in plan. What Dana's saying is that when you have rainy days and cloudy days, solar doesn't work quite well on those days. Now, Blanket is fortuitously located in an area of good sunshine, but raining in Blanket in August is pretty rare, I'm afraid. Now that's what happened early on this week.

As we move forward, during overcast conditions, we need to use generators to support the solar power. The longer explanation is that adding a few batteries helps maintain stability when cloud cover reduces solar generation.

So if you have any further questions, we'll turn to them.

I wanted to inquire about the underground technical expertise. It appears that many of the infrastructure issues have been resolved, but there seem to be some human capital challenges regarding job skills and training. Can you clarify whether this is an ongoing concern or if it's under control?

Yes. Dana?

We were fortunate to have a very stable workforce at Blanket, with a lot of experience. As we started to grow and expand, we needed to bring in new skills. However, hiring new people can be risky, as not everyone will be a great fit. It's essential to ensure a good match, as some individuals will integrate well while others will not. Additionally, it's important to maintain a strong company culture and set clear boundaries regarding what is acceptable. We experienced some turnover during last year’s growth phase, partly due to these challenges. We expanded our team by about 500 people, and as our workforce exceeded 1,000, it became crucial for everyone to align with our culture and operational standards. Establishing the right culture can take around two years, during which we aim to stabilize and develop a well-experienced workforce. Currently, we have a healthy blend of highly experienced individuals and some younger employees, which is beneficial since our workforce was aging. While there are both advantages and disadvantages to hiring new people, it’s essential to train and mentor them to align with the company's culture and practices.

Right. Okay. I just have, I think, two more questions. Okay, so Motapa, with the first phase, it sounds a little bit similar to the Bilboes first phase. Would that be an accurate characterization, or? And what gives you confidence, if it is, that it will work better this time around?

Well, so when you say, we're going to go hunting for oxides at Motapa, is that what you're saying?

Right.

Yes, we may actually decide not to go hunting for oxides, given the core experience. We may actually just focus on the sulfides, which is the reason for actually acquiring Motapa in the first place.

Right, okay.

Certainly, we don't want a repetition of what we've experienced at the Bilboes oxide project, thank you very much.

Right, right. Okay, and then my last one is just maybe something that I'm unclear on. So in the MD&A, it was cited that part of the FX losses were due to a three-week delay in the settlement of RTGS receivables. Like, previously, it was said that within two weeks, like, it was okay, then your receivable settlement from SGR. So is that change only due to the devaluation of the rapid…

I'll let Chester address that if he has the answer, which could be helpful. However, I want to highlight that there seems to be a notable coincidence between the very rapid devaluation of the RTGS over a three-week period and the simultaneous extension of the receivable period, which has since returned to normal. I’d just like to mention that; there does appear to be a concerning correlation there. Chester, would you like to discuss that?

Yes, the rate has devalued by about three times over the past three weeks. Normally, we receive our cash from Fidelity within two weeks, and they have been paying us regularly during that time. Currently, 75% of our gold is sent to a company called Al Etihad instead of Fidelity. I've noticed that we receive our cash within two to three days after delivering it to them, so we haven't experienced those long delays since June. Overall, things have been going well, and the only significant cost we've incurred was related to level one, which resulted in considerable foreign exchange losses.

Okay, cool. That covers me.

Good. Anything else?

I don't think there are any more questions. There was another hand up, but it's come back down. So, I think that's it.

Okay, shall we just give it a few minutes, just in case anybody has any second thoughts? No. Okay, well, on that, well, thank you. Thank you for attending. Difficult quarter, as I said. Signs of improvement in July, and hopefully, we'll do this again at the end of Q3 and there'll be a more cheerful presentation. Okay. Thank you very much for attending.