Earnings Call Transcript - CMCL Q1 2024

Camilla Horsfall, Vice President of Group Communications

Good morning, welcome to our Q1 2024 results call for shareholders. On the call from Caledonia, you have Mark Learmonth, our CEO; Chester Goodburn, our CFO; Victor Gapare, our Executive Director; and then myself, Camilla Horsfall, I'm the Vice President of Group Communications. As always, we're going to run through the presentation, and we will have questions at the end. If you do have a question, we just ask you to raise your hand. We find that's a better format than the written Q&A. I'm now going to pass you over to Mark, who will start the presentation.

Mark Learmonth, CEO

Thank you, Camilla. Can we proceed? That's the disclaimer. Moving on to the next page. So just a quick overview before I pass it over to Chester, who will handle most of this presentation related to the financials. Overall, it was a much improved quarter compared to the first quarter of 2023, which was quite challenging. Before discussing production and costs, it's encouraging to note the improvements in safety, which is a key focus for us, and we aim to enhance it further. We had a strong start to 2024 with increased production, supported by a favorable gold price. We produced just under 17,500 ounces in the quarter, compared to just over 16,000 ounces in the first quarter of 2023. Normally, we wouldn't delve into this level of detail, but this quarter is significant. In the first quarter of 2024, we only had 78 production days due to an early production cutoff caused by logistical challenges in transporting large amounts of gold between the mine, Harare, and Dubai. Hence, we had to cease operations relatively early, resulting in 78 working days compared to 86 in the first quarter of last year. In this context, it makes the first quarter look even better. We remain committed to our production guidance for the year of between 74,000 and 78,000 ounces. As you all know, Dana Roets, the previous Chief Operating Officer, left the company at the end of February. We’re pleased to announce that James Mufara has joined us effective May 1st. He comes from Harmony, one of South Africa’s substantial gold miners, where he oversaw five mining operations, employing 16,000 people and producing approximately half a million ounces of gold per year. His expertise includes both underground and open-pit mining. He would have joined us on the call today, but he is currently at the mine, likely 3,500 feet underground. James is originally from Zimbabwe and will initially be based in Johannesburg before relocating to Bulawayo, which will allow him closer oversight of operations at Blanket and later, Bilboes. Earlier in the year, we also announced some very encouraging exploration results from Blanket. We restarted the deep-level exploration program in early 2023 and have published two sets of drilling results, one last August and another in January this year. Approximately two-thirds of the drilled holes returned better results in terms of both width and grade. This will be incorporated into a revised mineral resource statement to be published shortly, along with an increased life of mine. So, please look out for that soon. We maintained a quarterly dividend of $0.14 per share, paid at the end of January and again at the end of April. We are making significant progress in analyzing ways to commercialize the large-scale sulfide project at Bilboes, aiming to enhance value for Caledonia shareholders. I expect we will have an announcement on that in about two weeks, certainly by the end of May. Yes, we noted a reduction in safety incidents and an increase in production from 16,000 to 17,500 ounces, aided by a higher average gold price that rose from $1,860 to $2,040 during the quarter. Since the quarter ended, we have been consistently running around $2,300 to $2,350. Our revenue increased from just under $30 million to $38.5 million, with gross profit rising from less than $6 million to nearly $14 million, and net profit to shareholders flipped from a loss of $5 million in the first quarter of last year to a profit of $2 million this year. The only drawback in the first quarter was a notable foreign exchange loss of about $4 million, which Chester will discuss later. I don't want to downplay the foreign exchange loss; it makes things challenging for everyone if we continue to face such losses. However, if we set that aside, we have seen a turnaround from a $0.30 loss per share in the first quarter of last year to a $0.27 profit this quarter, indicating significant operational improvement. Okay, there's a lot of information on this graph. It essentially illustrates quarterly trends dating back to 2012, with the top graph depicting the grade in tonnes and the bottom graph showing quarterly production at Blanket and the recovery rates. Notably, in the top graph, the grade has steadily decreased from about 4.5 grams per tonne in 2012 to around 3 to 3.1 grams per tonne. The revised resource statement coming soon will indicate an improvement in that grade as we move forward, which is crucial for achieving more gold at a higher grade, positively impacting costs per ounce and recovery rates. If you look at the bottom graph, it shows a clear pattern throughout the quarter, with Q1 typically starting low and improving as the year progresses. Based on what we have experienced at the mine in April and May, we are quite confident that this trend will continue into 2024. I will now turn it over to Chester to go through the financials. Chester, it's yours.

Chester Goodburn, CFO

Thank you. It's great to see that we produced nearly 19,000 ounces for the quarter, which includes 3,000 ounces that were produced in Q4 and sold in Q1. Additionally, we accounted for 1,600 ounces produced in Q1 and sold in Q2. Our sales occur at a time when we are experiencing record gold prices, with an average price of $2,040 for the quarter and an online cost of $993 per ounce, remaining relatively stable quarter-on-quarter, and we anticipate a decrease in the latter half of the year. At Blanket Mine, we have a significant fixed cost base, meaning that if we have more days in one quarter compared to quarter 2 or quarter 4, it should help reduce our online cost per ounce moving forward. Therefore, we continue to maintain our operational expense guidance between $870 and $970 per ounce on an online cost basis. Mark Learmonth asked Chester to clarify the increase in the old mine cost per ounce from approximately $700 in 2022 to close to $1,000 currently, so that everyone understands the situation. That's right. Yes. Mostly that's due to inflation increases that we've seen from 2022 to 2024 and about $2 million of increased electricity costs based on additional consumption since we started the Central Shaft in 2023. So we are working on quite a few initiatives to look at our electricity usage; so far, we've come up with our factor correction that we will implement in Q3 of 2024, and we should see some reductions in our costs. Other than that, we're also looking at other initiatives, and we'll come back to the markets with some of that information on how we plan to transition to using most of our shafts at Blanket to just using the Central Shaft and reducing our consumption overall at Blanket. So there are methods in place and ideas currently being discussed to reduce that electricity consumption. On an all-in sustaining cost basis, our costs were $1,267. That's lower than what we've given guidance on of between $1,370 and $1,470 for the year. You can see our gross profit increasing to $13.8 million. That includes an additional depreciation charge of about $2 million that we've incurred due to our assessment of the useful life of our shafts that we plan to stop mining predominantly under 750 meters at the mine. That should also have a result in cost benefits on electricity as explained. Our earnings per share was positive $0.106 for the quarter; that turnaround from 2023 egos that we had. It's good to see that Blanket is producing a lot of cash and it's profitable; they had a good quarter so far. So with adjusted earnings per share, this is where we count back the foreign exchange losses that Mark alluded to earlier, but we'll get to the FX losses in the following slides. Our cash used in investing activities, the CapEx, amounted to $4.1 million. We plan to spend more in Q2 to Q4, but we've maintained our guidance of $30 million at Blanket. It's all within plan; it's just the timing of the spend that will increase in future quarters. Operating cash flows before working capital movements amounted to $10.5 million; that includes the realized foreign exchange loss of $3.6 million and factors to be countered back. If we didn't have these massive devaluations of the ZAR dollar, we would have produced more cash than we did in our 2022 quarter 1.

Mark Learmonth, CEO

But before we move on, before working capital movements from time to time, we do think quite substantial variations in working capital, and that can be towards the end of this quarter. Part of that was due to us prepaying for equipment and goods that we're buying in country so that we weren't holding to minimize the extent to which we are holding local currency, which was devaluing very rapidly. We also have quite large foreign exchange movements arising from delays in transmission of funds from Dubai through the U.S. into Zimbabwe, and that comes down to sometimes intermediary banks sending the money back to Dubai because they get confused about KYC. So the working capital has been quite large, and that's also one of the things that contributed to the relatively low cash balance at the end of Q1; that has changed markedly since then. Sorry to interrupt, you move on, Chester.

Chester Goodburn, CFO

Thanks. It's encouraging to see our revenues reach $38.5 million, driven by a 20% increase in ounces compared to the same quarter last year and a 9% rise attributed to the higher gold prices we received. We had 78 production days, as mentioned earlier, with an average of 87 production days, indicating a 12% increase in production days from the second quarter to the fourth quarter. With our fixed cost structure, this allows us to derive more value from our production days in future quarters. Overall, it has been a very positive quarter with production costs well managed. Our online cost per ounce at Blanket has remained relatively stable, which is where our current focus lies since the Bilboes oxides have been under care and maintenance. Speaking of Bilboes, it is currently breaking even, with revenues from heap leaching activities exceeding our incurred costs. It's reassuring to see Bilboes at breakeven, avoiding the losses we experienced in previous quarters. We have significantly reduced our costs at the Bilboes site. Regarding depreciation, I've mentioned that we used four ounces that we've shortened for shafts. Under the gross profit line, the foreign exchange losses stand at $4.1 million, with $3.6 million of that being realized, which had a cash impact. This situation arose from the devaluation of the Zim dollar, and following the quarter end, the Zimbabwean government introduced the Zimbabwe gold currency on April 5. We have started transacting in that currency. Initially, the first two weeks were slow, but we are now effectively using the Zig. It's encouraging to see the Zig strengthen since April 5. This currency is supported by gold and foreign exchange reserves. We believe that with proper measures in place, if the Zig continues to strengthen, these foreign exchange losses should not recur in the future.

Mark Learmonth, CEO

So can I just provide a bit more context as to where these foreign exchange losses come from? We sell 25% of our gold in country for local currency. Normally, it takes about 2 weeks or so before we get paid for that gold. Actually, in this quarter just finished, the payment was slightly short, I think it was about 9 days. But whilst we're holding that 9-day receivable, the rate of devaluation of the Zimbabwe dollar accelerated exponentially towards the end of the quarter, which meant that by the time we got paid the RTGS in that local currency, in dollar terms, it was worth substantially less than the rate at which we booked it. So that's one component of the loss. The other component was on our VAT receivable, and a third component would be the relatively small amounts of local currency that we're holding in cash. As Chester says, the new currency was introduced shortly after the end of the quarter, and so far, we've seen much more stability.

Chester Goodburn, CFO

Looking at our production costs on a balance sold basis, it was encouraging to see that our costs at Blanket remained under control this quarter. Our consumables have actually decreased by 4%, which contrasts with the inflation increases we are observing globally with high inflation and high prices. This is a result of some initiatives we've implemented in our procurement department to lower inventory costs while upholding the quality of the consumables we are purchasing. It's very positive to see our costs reducing. We have a sophisticated procurement operation based in Johannesburg that takes advantage of the competitive supply landscape there. When we need something for the mine, there are usually multiple suppliers, allowing us to secure favorable pricing. We efficiently handle the logistics in our Johannesburg warehouse and are skilled at quickly shipping supplies to the mine. Without our Johannesburg operation, it would be challenging to engage with South African suppliers directly for Blanket Mine in Zimbabwe. I am very pleased to see the 4% reduction, and I am also happy to report that wages and salaries on a per ounce basis are decreasing. However, as mentioned, electricity costs have risen for reasons that Chester has outlined. Other than that, it's also good to see costs coming down. Bilboes, we've spoken about that. We believe we've maintained our guidance of $870 to $970 per ounce on an online cost basis. On an all-in sustaining cost basis, we've found that this will increase due to the timing of all the CapEx and the scheduling of our CapEx spend mostly towards an asset. So that's also maintaining a $1,370 to $1,470 for the full year. Also, I was quite pleased to see administrative expenses coming down. They came down by about $3.3 million overall. That came down on several fronts. For investor relations, it was lower than the comparable quarter. Advisory service fees were $3.1 million lower as we did not incur the Bilboes acquisition costs. That was a once-off cost to obtain an ounce of Bilboes and it's good to see that coming down. Wages and salaries from a group perspective saw a reversal of the 2023 management bonus accrual and the 2024 year, reducing our wages and salaries; also, our travel costs came down quarter-on-quarter.

Mark Learmonth, CEO

So overall, it's very good to see that the quarter 4 G&A costs that we incurred had quite a few one-off costs. These costs, although those one-off costs are not recurring into Q1, we have really focused on reducing our costs. So it's really good to see that in these numbers. This slide shows the cash generated from operations before working capital changes. As I said earlier, cash generation throughout the quarters was 2023 numbers looking very bleak. But from Q1, with our cost controls in place, our production is up, and we're really benefiting from the gold price. If you count back the $3.6 million realized foreign exchange loss that was outside of our control, we would've generated over $14 million. That is higher than our 2022 amounts when we ramped up to 80,000 ounces per annum. It's really good to see Blanket's cash generation abilities remain strong. Over to you, Mark. Yes. So just in terms of the outlook, as much here that's new. We're looking at 74,000 to 78,000 ounces for this year and then thereafter producing at a similar level. We're well advanced in reviewing a range of development options at Bilboes with the view exclusively to optimize the uplift in value for Caledonia shareholders. I'm hopeful that we'll get something out to investors before the end of the month. Exploration results at Blanket have been very encouraging, and that will be translated into a revised mineral resource statement and an increased life of mine, which will be announced shortly, which will go straight to value. We're just about to start a first phase of drilling activity at Motapa. I'm delighted that we seem to have drawn a line under what was a very, very difficult 2023. 2024, we got off to a reasonable start. First half of the second quarter is going very well indeed, and I think we're at a very exciting juncture as we begin to take this business forward materially. So that's the end of the formal presentation; we can now hold it open to questions.

Camilla Horsfall, Vice President of Group Communications

There are a couple of written questions.

Mark Learmonth, CEO

The first question is about the Zim-dollar. To clarify, the new currency is called ZIG. It was introduced and affects only 25% of our revenues. The remaining 75% of our revenues come from U.S. dollars, which remain unchanged. The ZIG is reportedly backed by assets. However, I have not seen these assets myself, but we are informed that the total value of ZIGs in circulation is supported by assets like gold and presumably other currencies, mainly U.S. dollars. Since the ZIG was introduced on April 5th, the exchange rate has improved slightly from about 13.8%. It seems to have stabilized and strengthened a bit. That covers the question about the ZIG. The next inquiry is regarding when we can expect Blanket’s grade to return to 4 grams per tonne. Well, can we just wait a few days until you get the revised mineral resource statement out in the next few days, and we can have a more sensible conversation about that then. The resource statement is quite complex, with a lot of information. That will be published sometime in the next few days. We will have a further call to give shareholders and investors an opportunity to ask questions specifically on that. So at this stage, I don't particularly want to answer that question right now. We'll get back to it in a few days' time.

Camilla Horsfall, Vice President of Group Communications

The lines are open. If people want to raise their hand, they can, yes.

Mark Learmonth, CEO

Not seeing any questions. There's another question popped up. How many shares are out?

Chester Goodburn, CFO

Right. Correct.

Mark Learmonth, CEO

Any further questions? Thank you. Okay. Thank you. I think on that basis, we’ll draw stumps there. Thank you very much. There is going to be quite a lot of news flow coming over the next few weeks. So keep your eyes open for it. Okay. Thank you all for your attendance.