Earnings Call Transcript - CMCL Q2 2024

Mark Learmonth, CEO

Good afternoon or good morning, depending on your location. Thank you for participating in this presentation to review Caledonia's results for the second quarter of 2024. I'm Mark Learmonth, the Chief Executive of Caledonia. With me are Chester Goodburn, our CFO, and Victor Gapare, another Executive Director. James was supposed to join us but is currently traveling in Zimbabwe and is likely facing communication issues. We have a relatively brief presentation to cover, so Chester will lead it. Chester, please proceed with the overview. It was an excellent quarter with production and gold prices up, and costs down, leading to a strong financial performance. We produced just under 21,000 ounces of gold this quarter, a notable increase from the 17,500 ounces achieved in the second quarter of 2023. Additionally, although not the main focus of this presentation, we released a preliminary economic assessment of the Bilboes sulfide project, confirming its robust underlying economics. It is projected to produce 1.5 million ounces over a 10-year mine life at an all-in sustaining cost of below $1,000 an ounce, making it highly cash-generative. Furthermore, we published a revised mineral resource estimate for Blanket Mine, effectively doubling our reserves, which places the life of the mine beyond 10 years—a strong position for a mine of our kind. Based on our internal life of mine plan that includes some inferred resources, we now have a life of mine plan extending to 2041, which significantly supports the business moving forward. It’s important to note that the increase in gold ounces was due not only to higher tonnage but also to higher grades, which is positive. On an administrative note, you may notice in the MD&A and news release published this morning that we are rescheduling the declaration and payment of our quarterly dividends to align with the quarterly board processes for approving and reviewing the financials. This change is purely administrative with no other implications. Now, regarding the results summary, our safety metrics remain stable, although there is always room for improvement and this continues to be a management priority. As previously mentioned, production has risen significantly. With the current gold price up, we realized $2,300 an ounce, compared to $1,949 in the same quarter last year. This contributed to a substantial increase in revenue, surpassing $50 million for the quarter. Lower costs resulted in gross profit more than doubling, from about $11 million to nearly $23 million. Consequently, net profit attributable to shareholders reached nearly $8.4 million for the quarter, compared to a loss of $0.5 million in the same quarter last year, driving an increase in earnings per share. Let's proceed, and I would like to ask Chester to delve into the financial details. Chester, please take it from here.

Chester Goodburn, CFO

Yes. Thank you, Mark. Very good quarter and pleased to share these results with our shareholders. Our revenues were up 35.4%. That's on account of additional ounces as well as higher gold prices received. Royalties were up, that's due to the higher revenues. Royalties remained flat at 5% of revenues. Production costs in absolute terms were down on a consolidated basis, and our online cost at Blanket has reduced to $906 from $915 per ounce in the previous quarter. Depreciation has increased due to our exact cost base. It was good to see our gross profits increasing by 110%. That's $12 million up from the comparable quarter. Other costs are down by $1.6 million due to lower foreign exchange losses. It was good to see that the volatile RTGS was replaced on 5 April of this year by the ZiG which has so far been more stable. Should that continue, we should also see lower foreign exchange losses. Our net finance cost is lower, due to additional cash in the group which has reduced the interest charge. Our tax expense is normalized to between 30% to 33% of our effective tax rate due to higher profits and a lesser proportion of non-deductible expenditures. It was also good to see our EPS up to $0.43 and adjusted EPS of $0.51 for the quarter. That's all produced in the 3-month space. Looking at our production cost balance, that's come down significantly on an online cost basis due to the Bilboes Oxides cost coming down. Our online cost has reduced by 13.7%. Power and labor are up, mostly power due to consumption and higher maximum demand charges. We're seeing higher maximum demand charges due to exceeding some of our limits on electricity use during certain times of the day, and we are working on that. We've got some power factor correction equipment in the budget that should help with that. But we're also looking to create some efficiencies when it comes to labor overtime and power consumption. I was quite pleased to see the consumables coming down by 3%. This is a time when you see your consumables increasing amidst inflationary pressures across the globe. But at Blanket, we've managed to curb that and reduced our consumable costs due to good procurement practices. On an all-in sustaining cost basis, that's come down mostly due to the online costs decreasing. What you'll see in that other costs would be the royalties due to higher revenues that we've generated over the quarter. We maintained production guidance at $870 per ounce to $970 per ounce for online costs and we also maintain our all-in sustaining cost guidance between $1,370 and $1,470 per ounce. It's good to see our costs being in check while we are producing more ounces and also at these record gold prices. Administrative expenses are approximately $3 million down, due to $3 million of expenditures we incurred last year to complete the finalization and the acquisition of the Bilboes sulfide steel, which added 3 million ounces of resource and reserves to the group. It's good to see us moving toward becoming a multi-asset gold producer. Employee costs have also increased by about $500,000 that was previously accounted for as oxides' operating expenditures. We've moved those employees and resources over to the feasibility study and we've also reallocated some of those resources to the Motapa drilling. It's good to see spending some funds furthering our business and our strategy of becoming a multi-asset gold producer. Revenues being up, costs being down, and cash generation increasing, we've generated just over $20 million in the quarter. That's more than we've generated in any quarter over the last 2 years. Overall, on a net basis, we've added $12.8 million worth of cash during the last 3 months. I'm very pleased with these results and the cash generation that accompanies them. Over to you, Mark.

Mark Learmonth, CEO

Okay. Look, I mean this presentation focuses on the financial results for the quarter. We've discussed in separate calls the work of the PEA at Bilboes and also the upgrade in the reserves and resources. So really, these results are very clean, very good, quite easy to talk to. In terms of our immediate strategic focus, we are continuing to run Blanket to achieve our targeted production range of between 74,000 and 78,000 ounces for the year. Then thereafter, similar levels from 2025 onwards. We're also making good progress on completing the feasibility study in respect of the sulfide project. In parallel with that, we're refining our internal work that we've done on funding structures for that asset. Initially, we're focusing on refining our understanding of the debt capacity of the project. Given that it is high margin and has a quick payback, we are confident that a high proportion of the overall funding requirement will be capable of being funded by debt. In parallel, we're also continuing with our initial exploration of Motapa; that exploration work started at the beginning of the second quarter and will be finished towards the end of the third quarter. Subject to the capacity of the assay labs, we expect to get those results out before the end of the year. It's fair to say that the work to prove Motapa is about 5 years behind Bilboes in terms of exploration, so it will take a considerable period of time to do sufficient exploration at Motapa to prove up a significant resource. But so far, it's all looking very good. So, with that, it's a brief presentation but I think it's on point. We'll open it up to questions. Typically, we prefer questions spoken. If they're typed, the risk with a typed question is that we don't really understand the nuance and we may answer a slightly different question than what you actually wanted answered. So please, if you can, open the line and ask questions verbally.

Operator, Operator

I'm going to start unmuting people.

Unidentified Analyst, Analyst

All right. Thank you. Can you hear me?

Mark Learmonth, CEO

Yes.

Unidentified Analyst, Analyst

Okay. I've been noticing over the past few months an increase in the U.S. asset manager BlackRock's shareholding in the company. I wanted to find out if your company is going to continue selling a significant stake of the company to BlackRock and what their increased stake in Caledonia will mean in the long term?

Mark Learmonth, CEO

Just to clarify something, BlackRock's participation in Caledonia is as a manager of a passive fund. They're an index tracker investor. We're in something called the Russell 3000 Index in the United States. That means BlackRock runs a fund that tracks that index. To ensure that the fund mirrors the performance of the index, they have to buy shares in the underlying companies. Because there are very few gold companies in the Russell 3000, BlackRock has to buy and sell our shares from time to time depending on what our weighting is within the overall index. So that's the first thing. They're not active managers; they're purely passive managers. Typically, you'll see that as our market capitalization goes up, they'll have to buy more shares to increase the weighting of Caledonia in their overall portfolio. Conversely, when our market cap falls, they typically sell shares. They're only buying and selling shares in the market. There is no issuance of shares to them. So I hope that answers your question. Does that answer your question?

Unidentified Analyst, Analyst

Yes.

Mark Learmonth, CEO

Okay. Before I move on, I see a typed question. There is a modest increase in the planned capital expenditure for 2024. What caused the $700,000 increase in the planned capital expenditure for the Tailings facility Phase Ib compared to the projected $4.7 billion in Q1 2024? Chester, can you answer that?

Chester Goodburn, CFO

Yes, I am. It's comprehensive as we're planning to implement a Blanket just to improve the pneumatics underground.

Mark Learmonth, CEO

The second part of this question relates to water at Blanket. For those who are not aware, Zimbabwe is experiencing a severe drought. The rainy season usually occurs from November to February, and the last season was very poor, leading to a significant water shortage. The question concerns how this shortage affects Blanket. I’m pleased to report that one unexpected but positive outcome of the new Tailings facility is that it is aligned, meaning the water entering the facility does not seep underground, which allows us to recycle more water compared to the old unaligned facility. That's the first point. Secondly, we have implemented measures to reduce our water usage. Currently, we are receiving water into the Blanket dam from upstream, and at this moment, we are not seeing, nor do we expect to see before the next rainy season, any negative effects. Clearly, if the upcoming rainy season is as disappointing as the last, we could face challenges. However, we have rejuvenated boreholes and can explore other options, but we understand it is a risk. One further question, how is the production grade profile playing out at Blanket? The grade profile is lower than it has been in previous years but is improving. I don't see Blanket getting significantly above 80,000 ounces a year. I'm comfortable giving guidance for Blanket in the range of 75,000 to 80,000. The grade will improve moving forward, but I can't really provide guidance that Blanket will be producing substantially above 80,000 ounces a year. I can see someone has their hand up, Camilla?

Operator, Operator

There are a few people with their hands up. So Ian Joslin, you're unmuted.

Unidentified Analyst, Analyst

About foreign exchange which you briefly mentioned and its role in adjusted EPS. Obviously, adjusted EPS indicates the earnings you would normally expect and the difference between that and IAS earnings comes from one-off pluses or minuses not incurred normally. A comment you made in your presentation implied that because of currency volatility, you tend to systematically lose money on foreign exchange. I just wonder how you can relate that to stripping it out when you put out your reports?

Mark Learmonth, CEO

Okay. That's a very fair question. Historically, we have incurred, let's be clear, substantial foreign exchange gains with the Zimbabwe currency, formerly the RTGS and now the ZiG, being very volatile. There was one quarter when we had tens of millions in gains. Initially, we thought it was misleading to keep that in the adjusted EPS calculation, so we tried to remove things outside management's control. You are correct that in the last 2 quarters, we have reversed substantial foreign exchange losses. For the first quarter, the foreign exchange loss was $4 million and in this quarter, it was $2 million. That $2 million loss in the second quarter was incurred in the first 5 trading days of the year because the RTGS was discontinued on 5 April. But since then, with the ZiG's introduction, the official exchange rate has stabilized. If it continues this way, the frequency of foreign exchange gains and losses should become not such a noticeable factor. It is clearly disclosed every quarter, with full reconciliation in note 10.2. I hope that answers your question.

Unidentified Analyst, Analyst

I mean, it sounds like you have different elements on your balance sheet affected in various ways, as you pointed out with your deferred tax. This is just my opinion, but do you think the government in Zimbabwe is less likely to devalue the currency as it has in the past, or have they turned over a new leaf with the ZiG?

Mark Learmonth, CEO

Let me come to that. The elements of the balance sheet that lead to foreign exchange losses are the RTGS receivables, a relatively small portion of our revenues sold in local currency, and where we receive cash a week or so after the transaction date. Another component is the VAT refund. All I can say is based on conversations with the Deputy Minister of Finance and the Governor of the Reserve Bank, there's confidence that the Zimbabwe government has clear determination not to repeat the mistakes of the past with the new currency. That's all I can repeat. I can't predict whether they'll uphold that or not.

Unidentified Analyst, Analyst

No, I understand. Just seeking your view.

Mark Learmonth, CEO

Don't forget, the collapsing of the currency doesn't help anyone, including us. It also keeps the government chasing its tail. So it's in everyone's interest to maintain a stable currency, and that commitment seems evident from the government and the Reserve Bank.

Unidentified Analyst, Analyst

Do you think the timing of those VAT refunds coincided with the currency's collapse?

Mark Learmonth, CEO

I don't think so. No, we haven't seen any unusual delays or untoward lengthening of credit.

Chester Goodburn, CFO

Our VAT receivables timing is between 60 and 120 days, and that's been consistent over the last couple of years.

Mark Learmonth, CEO

The larger component, the one that brings in more volume, is the payment of the RTGS for our revenues, which is more frequent. I would hate for people to think that’s 120 days; that's much shorter.

Chester Goodburn, CFO

Yes. For the bullion receivable, it typically hovers between 7 to 14 days.

Unidentified Analyst, Analyst

And that portion you have to sell, that's a standard requirement?

Mark Learmonth, CEO

Yes, we must sell 25% to the government. The remaining 75% is exported and sold offshore for dollars. This ability to export our gold is only something we started doing in April 2023 and that works very well. I see a question from Nathira. Hand up.

Operator, Operator

There's Nic, I'm just unmuting.

Unidentified Analyst, Analyst

Okay. Just a follow-up question to Ian's earlier inquiry. It's not quite a question but an observation that your suppliers seem skeptical about the future of the ZiG. Black market ZiGs are now trading between 20 and 22. Is this an indicator of a robust parallel market starting to develop?

Mark Learmonth, CEO

Victor, do you want to address that? I would say that our visibility of an illegal foreign exchange market is, by definition, non-existent. But Victor, can you provide insights?

Victor Gapare, Executive Director

Yes. Thank you, Mark. Let's focus on what Caledonia does. Number one, we receive ZiGs from the Zimbabwe government for 25% of our sales. We primarily use the ZiG for payments to the government because the government has set into place payments required to be made in ZiGs. We don’t really feel much impact from the parallel market at this stage except when discussing exchange losses when the ZiG officially devalues.

Mark Learmonth, CEO

Victor, could you talk about the government measures taken to pump liquidity into the market recently?

Victor Gapare, Executive Director

Two weeks ago, the government released about USD 50 million into the market due to some pressure. The ZiG is backed by gold and foreign currency. They converted some gold into those dollars to release into the market when necessary. The currency rate has been showing improvement.

Mark Learmonth, CEO

So, Nic, while I'm not an economist, if a currency is backed by assets like gold or U.S. dollars, in theory, when people want to sell that currency, the backing should support maintaining its value. However, until the supply of ZiGs becomes so restricted, it should strengthen. That said, the government did release dollars recently in response to the parallel market movement, suggesting they are committed to managing this currency as an asset-backed currency.

Unidentified Analyst, Analyst

Excellent. One or two other little questions if I may. You had a rock fall in Eroica. Is there a read-through into a broader picture of what's happening on the mine? Or is this an isolated incident?

Mark Learmonth, CEO

It's an isolated incident. It adversely affected production in July as you'll have seen from the MD&A, where production was about 6,000 ounces. We've since redeployed crews to other productive areas, and the affected area will be recovered. So it's not symptomatic of any broader issue.

Unidentified Analyst, Analyst

You've got quite a bit of CapEx lined up for H2; still going to amount to $31 million to $32 million by year-end?

Mark Learmonth, CEO

Yes. To be clear, we previously scaled back CapEx after disappointing production at the end of last year and a slow start to this year. As our cash generation has improved, we'll release the planned CapEx in the second half of the year.

Unidentified Analyst, Analyst

There was commentary about additional studies to enhance the solar power panel project, while simultaneously you're discussing selling it. Is this adjunct to or will the study disappear once you sell?

Mark Learmonth, CEO

Yes, it's part and parcel of the same thing. We're effectively selling the solar plant while retaining a long-term power purchase agreement on the same terms. The new owner will construct a second phase. We're selling it to someone whose core business is solar plant development and operation; it's not our core business, and we don't need to own this.

Operator, Operator

There is another question from Albright. I'm just trying to unmute.

Mark Learmonth, CEO

Is someone asking me a question because I can't understand or hear properly?

Unidentified Analyst, Analyst

I can't understand or hear properly.

Mark Learmonth, CEO

Sorry, I really can't understand.

Unidentified Analyst, Analyst

I can't understand the production you have.

Mark Learmonth, CEO

Sorry, Victor, can you assist me on this because I really can't hear it properly.

Victor Gapare, Executive Director

I think they're having a background conversation among themselves.

Mark Learmonth, CEO

Yes. Okay. Well, when they've decided the question, we'll try to deal with it but I couldn't hear that properly. Any further questions coming, I can see some.

Operator, Operator

There are some written questions.

Mark Learmonth, CEO

Let me see.

Chester Goodburn, CFO

There is a question here from Albert.

Mark Learmonth, CEO

Just a minute, I'm working through them.

Operator, Operator

From Justin bearing, that's the next one.

Mark Learmonth, CEO

Can you comment on the proposed changes in the FX regime? I think I've dealt with that. The expectation is that Bilboes will operate on a 100% U.S. dollar basis anyway. I hope Justin, we dealt with that question. I think we've addressed another question about the July production issue. Again, that was due to a fall of ground affecting Eroica, a high-grade area of the mine. Production was impacted but has been resolved, so there's no long-term effect. A question regarding inflation. I'm not sure about the monthly inflation rate recently. Victor, do you know?

Victor Gapare, Executive Director

In the last few months, when the Reserve Bank has released any numbers, it has been minor; the ZiG has been stable since its introduction. I think it was around 2% for the annualized period.

Mark Learmonth, CEO

2% a month?

Victor Gapare, Executive Director

Much less than that, Mark, annualized.

Mark Learmonth, CEO

That's better than in many other places. Any further questions? Could you see anything there, Camilla? Do you see any others?

Operator, Operator

I don't see any more.

Mark Learmonth, CEO

Okay. Well, look, that's relatively brief, but I think the numbers speak for themselves. Thank you for your attendance. We'll do the same thing again in mid-November after we've released the third quarter results. Thank you all very much for your participation.