Earnings Call Transcript - CMCL Q1 2022

Camilla Horsfall, Vice President of Investor Relations

Welcome to our Q1 results for Caledonia. You've got Steve Curtis, our CEO, Mark Learmonth, our CFO, Dana Roets, our COO, Maurice Mason, our Vice President of Corporate Development, and then myself, Camilla Horsfall. If you have any questions, please can you either write them in the Q&A or raise your hand, and we will unmute you at the end of the presentation. So I'm now going to pass you over to Steve and Mark, and they're going to talk through the results.

Steve Curtis, CEO

Thanks, Camilla. Good afternoon, everybody. We are going to go through a presentation that has been prepared for the Q1 results, and Camilla will share the screen as the presentation is obviously available on our website. If we go through it quickly, you've always got an opportunity to go back and have a look later. Thank you once again for joining us. Obviously, the disclaimer as usual, and you'll be very familiar with that. We have a mixture here of a summary of financial results. I'm going to ask Mark to discuss the financial results. You will have seen these results before because we announced production numbers at a particular time and put out the MD&A and the Q1 results. All of this should be familiar to you, but just to reemphasize the quality of the quarter, production ounces were up 40% on the previous quarter and on the comparable quarter in 2021. My apologies, average gold price, nothing in our control there, but we will be beneficiaries of a higher gold price, which resulted in revenues being up 37%. Pleasingly, gross profit was up 63%, and EBITDA was 49% up on the comparable quarter. Also, Blanket is well known for its all-in sustaining costs, showing a reduction of 7%. Management continues to do a very good job in controlling costs even as we ramp up production. Profit attributable to shareholders was up 30%, and adjusted earnings per share, and Mark will talk a little bit more about the adjustments to arrive at that number, 62.5 cents for the quarter, remembering we pay $0.14 a quarter in terms of dividends. Therefore, you can see that the business is very cash-generative, very profitable, and we are returning some of that to shareholders. Moving onto the next slide, our safety performance. We have had an excellent track record of safety, but as we reported previously, we unfortunately had a fatality in February, and as ever, we send our condolences to the family and the colleagues of the deceased. This was a very unfortunate accident, and all the necessary follow-up procedures have taken place. But the statistics on lost-time injury frequency rates are nicely down, and we continue to be 100% focused on safety, especially as we get more workers on the mine. The higher level of activity means more blocks, more open areas, and more timing going on. Safety gets the requisite amounts of time and attention. Now that COVID has subsided, we are able to be in customer proximity to each other; the Nyanzvi training and education program that Dana runs at the mine is back and operational. This is very important to reinforce the disciplines and culture of safety. But importantly, the higher production is due to the increased tons, and that is critical for us to achieve 80,000 ounces, along with an improved grade that was over and above the average mine grade. We are very happy that we are sticking to the mining plan and, as expected, getting some pleasant surprises while navigating through the business. Currently, we are benefiting from a higher grade, which we are very happy about. The same-store trough continues to contribute, although hoisting waste mainly arises from the development and connecting work between the various levels to the Central Shaft. The efficiency of moving waste seems to help us achieve the tonnages needed to get to 80,000 ounces. At the moment, we have a significant stockpile because we're actually mining more than we are milling and crushing. This is due to our preparation for bringing a new operation into the production process. So we are not relaxing on the mining side, and we're building up the stockpile to ensure that if we encounter bad days in some aspects, we have capacity on the surface. We continue to reiterate our guidance for 2022, which is between 73,000 and 80,000 ounces. The run rates we have reported in the MD&A for April were 86,800 ounces. If you extrapolate that out, that brings us close to 81,000 ounces. We are very proud of a good first quarter and are seeing momentum as we enter the second quarter. Hats off to our production team; they are really delivering and making the asset work that they have spent four to five years putting into operation.

Mark Learmonth, CFO

Thank you, Steve. So, very briefly, revenue was up 36%, driven largely by a 28% increase in gold sales. Steve already mentioned a 6% higher gold price. Royalties stayed fixed at 5% of revenues. Production costs will provide a little more detail in the next slide. Although the dollar value went up, there was actually a 17% reduction in online costs per ounce and depreciation terms do stand out because we’ve commissioned the Central Shaft, which has increased our depreciation costs. Hence, gross profit is up by 63% from $10.5 million to just under $17 million. G&A is up by $1.6 million to $2.4 million, driven by a considerably increased quarterly charge for insurance. I have some more information on how the G&A is made up. Our net foreign exchange gain was just under a million dollars, which reflects a considerable step-up in the rates of the devaluation of the RTGS against the U.S. dollar in the quarter. Other expenses totaled $3 million, including $1.7 million of the mark-to-market costs on the various hedges, half a million dollars in exploration and evaluation, asset impairment mainly relating to the decision to walk away from the Connemara North asset, and about $4,000 of LTIP costs. Looking directly at the production costs, they mainly comprise wages and salaries, consumables, and electricity. Wages and salaries increased quite substantially from $4.4 million to $5.9 million, but don't forget we had nearly a 24% increase in headcount at the mine, which now employs about 2,000 people as we increased personnel levels to cater for increased rates of production. Additionally, the comparative quarter, Q1 of 2021, was a very poor quarter with only 13,000 ounces produced, resulting in no production bonuses for that quarter. However, in the first quarter of 2022, since it was a good quarter, there was a 12% production bonus. Late last year, we took the decision to pay our online workers entirely in U.S. dollars, which has been an effective measure against inflationary pressures stemming from the local currency rates. This means we are now seeing no significant inflation arise from these wages. Consumables were up from $4.2 million to $5.1 million, reflecting a 21% increase, partly due to price increases on major imports such as explosives, drill steels, and cyanide. Following the end of the quarter, we’ve seen further price rises in those areas. We expect to prepare for a higher input price environment alongside other producers. Although, as we noted in this discussion, we are seeing inflation in consumables, that constitutes a relatively small component of our overall cost base. We also believe we've got the electricity cost under control for now. Electricity costs increased from $2.1 million to $2.3 million due to late last year’s investments to install additional auto tap changes at Number 4 Shaft, which led us to significantly reduce diesel usage this quarter. While diesel usage increased last year, we've reduced our diesel usage this quarter by 83,000 liters due to the improvements we've made. Lastly, all-in sustaining costs fall from just over $1,000 an ounce to $968 an ounce. Taxation, the ability for external viewers to see through the tax charge for the group in terms of underlying profitability can be difficult because the main elements of tax involve income tax and deferred tax calculations based on local currency-denominated accounts. It’s safe to say the main components of tax comprise income tax in Zimbabwe, about $2.9 million, and deferred tax, just under $1.5 million. If you express that, income plus deferred tax comes out at about 32% of Zimbabwean profit before tax, showing underlying stability in terms of tax charges regarding underlying profitability. Cash flow is very strong, with cash flow before working capital increasing from $9.7 million to $13.5 million. Working capital continued to increase somewhat in the quarter, but less dramatically than in the first quarter of 2021. We are working hard to minimize the overall level of working capital, focusing on inventory levels, which will continue to be an area of management's focus. Net cash from operating activities was $10 million compared to a very low $2 million in the first quarter of 2021. Net investing remains high, as we spent $10 million in the quarter on the Central Shaft and solar projects, and we expect a high rate of net investment in Q2 and Q3 before it tapers off. The cash position remains strong, with non-current assets increasing due to high rates of capital investments. Current assets total $35 million, with cash equivalents of $15.3 million. The non-controlling interest of $21 million reflects the 36% minority interest in Blanket Mine, while the non-current liabilities of $11.6 million primarily comprise deferred tax and closure provisions, with current liabilities mainly being trade payables and tax payables, which includes $4 million of derivative liabilities.

Steve Curtis, CEO

I’ll now hand over to Dana to discuss the solar project.

Dana Roets, COO

The solar farm is progressing quite well, and we expect to begin commissioning and making connections to the mine by July, aiming to be fully operational by the end of July or early August. As shown in the video, the preparation for the solar panels began, and we have targets for almost completing the solar panel installation.

Mark Learmonth, CFO

That's the video from a few weeks ago, but the dollar has moved on quite a bit since then. I want to remind you all that these solar panels will be adjustable to follow the sun to improve their efficiency. On the topic of dividends, we paid a dividend of $0.14, and we’ve increased the dividend quite substantially over the last few years. However, we have decided to maintain it at $0.14 a share, given the high level of capital expenditures this year and as we begin to position the company to invest in new projects, with Maligreen likely being the front runner. The company is transitioning from relying solely on Blanket to exploring new investment opportunities.

Steve Curtis, CEO

Thank you, Mark. There are a couple of questions that have been typed into the Q&A session. I’ll ask the team just to review those. If anybody else wants to ask a question, please raise your hand, and Camilla will manage that accordingly.

Mark Learmonth, CFO

Regarding cash and increased dividends, it’s fair to say that over the last seven years, we've probably not done justice to exploration expenditures for Blanket, which had been primarily focused on going deeper in the mine. However, in the last few years, we have not had the flexibility underground to pursue that strategy. We intend to resume deep-level exploration to improve the confidence level in existing inferred resources at depth while looking for more material. This year, we propose to execute 15,000 meters of drilling, and next year, 25,000 meters of drilling. Furthermore, we believe there are unexplored potential areas immediately outside the existing mining area, warranting further attention. Additionally, we are reevaluating all drill cores for Maligreen to enhance the confidence level of the existing resource base, which is about 940,000 ounces at 1.9 grams per ton. We do intend to spend more on exploration, balancing between retaining funds in the business to support those projects and distributing returns to shareholders.

Steve Curtis, CEO

Thank you, Mark. The increase in D&O costs is not just something particular to us. It reflects a broader industry trend since the beginning of the COVID pandemic. It is a huge cost; a few years ago, we were paying around $80,000 annually for premiums. We're now exceeding a million dollars, making it very expensive.

Mark Learmonth, CFO

It's important to note that while our workers benefit from being paid fully in U.S. dollars, the situation remains complex given the swiftly changing informal exchange rate environment in Zimbabwe compared to the official exchange rate. They are in a better position than last year, and while inflation persists, their actual buying power in local currency remains high.

Dana Roets, COO

I can add that there’s currently no complaint from our workforce. The fact that we are now paying 100% in U.S. dollars, compared to only 60% previously, reflects a significant improvement. They’re not unhappy; in fact, they’re satisfied even amid price increases. Regarding Maligreen, we have identified a resource, and we believe we have enough information from re-logging and analyzing core samples available to upgrade this resource into an indicated resource. We're currently about 80% of the way through the process, and we anticipate compiling a new report for the market soon.

Mark Learmonth, CFO

Our plan is then to proceed quickly with a feasibility study to ensure profitability from the mine. Additionally, it's possible that more attractive assets could see Maligreen take a lower priority for investment.

Steve Curtis, CEO

We've answered the next question regarding new mining projects. Our new projects are brownfields; they are not mining operations at present.

Mark Learmonth, CFO

For exploring further capacity, if exploration reveals increased resources, our plant can increase capacity relatively easily. Blanket has some spare capacity currently in both hoisting and CIL operations, which we will manage carefully as we ramp up tons to about 2,300 tons a day.

Steve Curtis, CEO

Thank you, Mark. The consensus regarding supply channels indicates we need to be cautious about potential delays. We're monitoring input price inflations closely, particularly in diesel, which is essential in our operations. Our procurement teams are working diligently to manage working capital effectively.

Mark Learmonth, CFO

In relation to supply chains, we are particularly concerned about maintaining our supply lines from South Africa. However, we've been pleasantly surprised; almost all of our solar project supplies came from the east, through Mozambique, which has worked very well. We're also exploring ways to diversify supply routes from the west through Walvis Bay.

Steve Curtis, CEO

Mark, would you like to address cash flows and new project assets?

Mark Learmonth, CFO

Regarding the potential acquisition of Maligreen, which has been discussed, it is feasible to support a mine of about 50,000 ounces a year with an estimated cost of around $60 million to $70 million. However, we could not fund that through our internal cash resources alone, even if we ceased dividends. We consider various funding elements in our decision to invest in new projects, and we will account for the shares we might need to issue in relation to project capital programs. We also need to be confident that future cash distributions will exceed existing per share values.

Dana Roets, COO

On the new projects, if we go into production, I estimate we could begin building a new mine within the next two years. Breaking even would take about 1.5 years, so I anticipate we would start realizing returns in about 3.5 to four years.

Mark Learmonth, CFO

It's important to note that we will not need to raise all new project funds via equity issuance. We expect to raise some debt alongside our retained cash during development. Moreover, our ability to export gold means each new project can potentially secure debt funding in several forms. If equity markets are not favorable at any point, we can proceed with slower timelines similar to what we did with Central Shaft, phasing reinvestment of our generated cash.

Steve Curtis, CEO

Thank you to the team. I’d like to acknowledge that this is my final reporting quarter as Chief Executive, as I will be stepping down at the end of June. On behalf of my colleagues, I’d like to express gratitude for your support in rehabilitating the company since 2014. We’ve made significant progress, and I’m pleased to hand over to new leadership in reasonable shape.

Mark Learmonth, CFO

Thank you, Steve. The succession work we’ve done ensures the team is ready to move forward with success. The faces will be familiar, so you are in good hands. I wish the team the very best to continue this journey.

Camilla Horsfall, Vice President of Investor Relations

Great. Thank you.