Caledonia Mining Corporation Plc (CMCL) Earnings Call Transcript & Summary

Hello, and welcome to the Caledonia Mining results call. My name is Dan, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to Steve Curtis to begin today's conference. Thank you.

Thank you, Dan, and welcome, everybody, who's joined this call. And you are aware that this is the 2020 results presentation for Caledonia Mining. The presentation in graphic format is on our website. And also, there is a recorded presentation by Mark and myself that you can also view on the website if you want to get more detail. So we'll go briefly through the key points, and then we'll open this up to Q&A. I'm joined on the call today by Dana Roets, COO; Mark Learmonth, CFO; Maurice Mason, who is in charge of Business Development; and Camilla Horsfall, who is in charge of our Investor Relations. So the whole team will be available to take your questions, and we look forward to a constructive call. So just starting off to drawing your attention to the usual disclaimer, and you're all aware of its need and content. I'll just quickly briefly talk about the highlights. And then I'm going to hand over to Mark to go through the financial side of the presentation. And as I said, Dana is available to answer any operational questions that you may have that will take us through the Q&A. So really, the 2020 highlights, which we are very proud, is that from a health and safety perspective, we went through the year with COVID. It had very little effect on the operation at Blanket Mine. Management did an extremely good job in protecting our workers, and we had virtually no effect on the overall production levels. And as we have announced before, we actually came out with a record annual production of nearly 58,000 ounces for Blanket, which under the circumstances, is just fantastic considering the lockdowns that had to take place. The operation was also run at a very well-controlled measure from a cost perspective, although there were some additional and incidental costs associated with COVID, and Mark will go into that in a little bit more detail. But the 4 really key highlights that you're probably familiar with already because it is in the press announcement that we made. We hit $100 million turnover as we are in a higher gold price environment. That was a 32% increase. Gross profit came up to $46 million, and that was a 50% increase on the previous year. And adjusted EPS came in at $2.04, just over $2, a 41% increase. And all in all, because of the strength of the business, the strength of the gold price and our confidence in what the future looks like, we have been able to increase the quarterly dividend 4x during the year of 2020, which has given us a cumulative increase of 60% from late 2019 through to late 2020. So from a shareholder perspective, we have generated value, we've shared some of that value, and we are demonstrating our confidence going forward. The outlook, which is critically important to that ability to increase the dividend. The Central Shaft, our confidence is high because Central Shaft is -- was fully equipped during 2020, and commissioning will take place during this quarter, and that will be completed during the period of the first quarter of 2021. Our target production this year is going to be 61,000 to 67,000 ounces, as we've mentioned before. And then, we will get into the ramp-up of 80,000 ounces from 2022 onwards, which has been our guidance for the last few years. So COVID -- despite COVID, we have managed to stick to that goal. We've managed to deliver the shaft. And for that, we are very, very proud of our teams that we've had down at the Blanket Mine. And most importantly, we have also put into action -- I'll talk about wanting to expand our portfolio of assets. And we announced late in 2020 that we had acquired the options over 2 new exploration properties, brownfield properties. And we are starting to mobilize on those properties. One of them has got drill rigs on it. The other one is still in the planning stage. But we're very excited that we are now embarking on the next phase of Caledonia's development. So those are the highlights. We're very proud of them. And I think now what we should do is hand over to Mark and ask him to go into the financials in some detail, and then we'll take your other questions on the -- on matters of interest to you, where the team will be available to you at the end of the call. So Mark, if you take it from there, please.

Thank you, Steve. So the financial review actually starts from the -- Page 12 of the presentation that's loaded onto our website. So Page 13 gives the results highlights. So as Steve mentioned, revenue was up to $100 million leading to -- due to a 5% increase in production and a 27% increase in the average gold price. Steve's already mentioned gross profit up by 50%, adjusted attributable profit up by 55%. Adjusted attributable profit, all we do there is we strip out things like foreign exchange gains, in particular, also losses and profits and losses arising on the disposal of noncore assets. So we're really trying to get to the core performance of the business. So we generally do believe that, that 55% reflects the performance of the business. Just looking at the profit and loss accounts on Page 14. Revenue, I've dealt with. The royalty stays at 5% of revenue. Production costs appear to go up quite significantly, they've gone up by 20%. That does include a substantial component of what I call noncontrolled costs, and I'll come back to that in a moment. Similarly, G&A increased by 43% from $5.6 million to $8 million, and I've got some more context on that shortly. The net foreign exchange comes down. Last year, in 2019, it was nearly $30 million. This year, it's $4.3 million. And that doesn't reflect any diminution in the rate or devaluation of the Zimbabwe dollar. It just reflects the fact that in 2019, we devalued some very large liabilities down to not very much. And then simply, there's not much further for them to go. So that's the reason why the foreign exchange gain was smaller. And other, other in 2019 was a gain of $3.9 million. This year, it's on the -- a loss of $2 million. In 2019, that $3.9 million, most of that, [ $ 5 million ] of that was a profit on the disposal of the Eersteling Gold Mine in South Africa. In 2020, that reversed. We incurred a $2 million impairment on a small exploration asset, which we decided to get rid of. And that 2020 also includes $1.4 million of equity-settled share-based payment expense that's a long-term incentive award to management and employees. The bulk of that is driven by -- the bulk of that value is driven by the higher share price. I'll come on to tax in a minute, but the tax rate of $15 million -- the tax of $15.2 million, the first blush seems to be quite a high effective rate. And then I've got some further context on that in a moment. So turning to Page 15, production costs. Wages and salaries up by 16%. That reflects a 12% increase in manhours worked, and the balance would be higher per capita payments. It's fair to say in the year, we put in a much more aggressive bonus structure. And as Steve's already mentioned, in the year, performance was a record. And so it's not surprising that the workers are rewarded for that success. Consumables also goes up 15%. That's largely due to the increased cost of maintaining the fleets of trackless equipment on the ground, which mainly work in the declines. We have had difficulties with maintaining that equipment. The stuff we bought initially was recommissioned secondhand, and it did have a high maintenance cost. We've done 2 things. We've replaced much of that equipment with new equipment. And also, we've taken on a specialist contractor to help us improve the maintenance scheduling of that equipment. So we believe we've got our arms around that. Then offsetting that increase was a reduction in the cyanide usage as a result of the commissioning of the oxygen plant in March. Nearly $800,000 of COVID expenses. That's PPE and stuff like that, which is unavoidable. The ZESA electricity cost, ZESA being the grid provider, that went up from $5.9 million to $6.5 million. And that reflects a 12% increase in power usage, and that also is due to a 7% increase in tonnes milled. We also saw a substantial increase in the cost of electricity -- of diesel to run the gensets, that went up from $0.5 million to $1.8 million. So that effectively means the hours used increased from 3,800 hours in 2019 to 8,500 in 2020. And that increase informed the decision we took in the middle of 2020 to press ahead with a solar project because, frankly, we can't see the electricity situation in Zimbabwe or Southern Africa generally improving. And it's probably more likely to get even worse before it gets better. So as a defensive maneuver, we decided to press ahead with solar. And at the mine, in addition to the $1.4 million of share-based payment expense I'd referred to at the group level, the mine has a smaller amount, $0.6 million of share-based payment expense in respect to those employees at the mine who participate in that scheme. And as I said, that charge is largely driven by the movement in our share price. So that's -- total IFRS production costs increased by 20% from $36.4 million to $43.7 million. But within those costs, we required substantial costs of what I'd call noncontrolled costs. So in 2020, it's about $3.3 million of such costs being the cost of the COVID consumables, the cost of running the gensets. When the -- if -- when the electricity goes down, we have the choice of either running the gensets or not producing. And clearly, we'd prefer to run the gensets. And also the share-based expense. So if you strip those out in 2020 and 2019, the increase is 16% from $34.9 million to $40.5 million. And if you express those values in terms of cost per tonne, the cost per tonne increased by 8% from just less than $63 an ounce to $67.60. And frankly, with anything much less than $70, we're very pleased with. Anything much less than $70 an ounce -- $70 a tonne, we're quite pleased with. So whilst the headline number seems to have increased, we actually believe that the core costs have been quite well controlled. Looking at G&A, certain costs went down, so in particular, the Investor Relations costs went down and the travel costs went down. And that's largely due to COVID restrictions on the travel and the IR events in which we participated. Advisory service fees increased by $0.5 million from $400,000 to just over $900,000, and that reflects quite a lot of work that we had to do in the course of 2020, which -- on things which we might have got value from. So we incurred legal fees in respect of the TSX delisting, but we're very confident the TSX delisting actually increased our overall liquidity in North America. So if you compare liquidity on the Toronto Exchange, the New York Exchange for the 6 months before we delisted with the liquidity on the New York Exchange after we delisted, I think it doubled. And one of the difficulties we faced in recent years is low liquidity. So we're very pleased it increased the liquidity. We also incurred fees on an SEC F-3 filing, which we then subsequently used for the purposes of the ATM issue. And then we also incurred legal fees on the solar project for the period of time before we got Board approval. And so we had to expense those rather than capitalize them. So those things have gone up, and they do reflect a very high level of activity last year, but I hope you agree that those expenses flow through to things on which we derive tangible benefit. Wages and salaries, up about $1 million. Part of that was due to an increased headcount. So we took on a senior geologist to help us improve our resource management and also begin to look at the new projects, which we acquired. We took on our rock mechanics. As the mine is going deeper, we now need to begin to pay more attention to rock mechanics. And we took on Camilla to do IR for us. It's also fair to say that as a result of the strong performance in the year, management did receive higher bonuses. A number that really sticks out is the increased liability insurance, which went up by nearly $1 million. That's the insurance premium for directors and officers cover. That hurt to have to pay that amount, but it does reflect a general risk of a sharp tightening in the market for that sort of cover as the insurance companies are becoming increasingly concerned about recent problems in the mining industry, particularly relating to things like tailings dam wall failures and that sort of stuff. And today, that is worse because our primary listing in terms of volume is now in New York. The insurers are more worried about class actions, which typically come from the New York market, and not other markets. So I would like to see that come down in the future, but I think it will be substantially higher, the $86 million that we enjoyed in previous years. On-mine cost per ounce, don't forget these costs per ounce, they do include the noncontrolled costs that I've referred to previously. Turning to Page 18. The overall tax charge of 15 point -- nearly $15.2 million. That reflects a rate of -- an effective rate of 37% of IFRS profit, but that doesn't tell you the entire story. So the core of the tax is income tax and deferred tax in Zimbabwe. And if you add together the income tax and deferred tax in Zimbabwe and express that as a percentage of IFRS gross profit, which approximates very closely to online profit, that gives you an effective tax rate of 27%, which is very close to the headline rate of tax in Zimbabwe of 25.75%. But then in addition to that sort of, what I'd call, core tax, we also incur income tax in South Africa on intercompany profits. And then we also incur withholding tax as we move money around the groups, as we move money from Zimbabwe to South Africa and as we move money from Zimbabwe to the U.K. and Jersey. And clearly, those money movements don't reflect profitability. So inevitably, we will, as we go forward, continue to incur those taxes in South Africa around the withholding tax. Cash flow, not much to say about that on Page 19, extremely strong. Cash flow before working capital was over $42 million. We continue to see an absorption of cash into working capital, $4.5 million in 2020, $4.2 million in 2019. Part of that is just due to the erosion of supply credit in Zimbabwe due to the very high rate of inflation. But it's also fair to say that part of it was also due to an increase in the stock levels of inventories. And frankly, whilst for many years, we've been trying to get the stock levels down, that did save us in the course of 2020 because we had to rely on high levels of stocks of key consumables, cyanide, explosives, drill steel and what have you, to keep the mine going when the supply chain up from South Africa to Zimbabwe was interrupted. Fair to say last year, we invested a lot, $28 million of capital investment in the year. That includes about $2.6 million that we spent on getting our homes on the 2 new investment properties. As we move into 2021, we'll be spending even more because once again, we'll also be spending about $13 million on the solar project. And then I'd expect CapEx to fall away very quickly from 2022 onwards. The net financing income of $7.3 million, clearly, that gives us the net of $12.5 million of net equity raise that we did in the summer and $4.5 million of dividend payments. Balance sheet, very strong. Again, I wouldn't say much about that. All I would point out is we -- because there's now much more cash moving, we need more cash held in South Africa to act as a buffer because of very high level of procurement spend in South Africa. That does mean from time to time, we do hold surplus cash in South Africa. We're not allowed to hold that cash in U.S. dollars. We must hold it in rands. And it takes a long time to get the money out and to get the money back in again. So rather than leave that cash exposed to rand devaluation, we're holding it as a gold ETF to -- so it means we can, if need be, access that cash in South Africa with short notice rather than have to wait several weeks to get it back into the country if we need it. Steve's already mentioned the dividend. We started increasing in January. 2020, we increased it from $0.06875 to $0.075. We'd probably have increased it again in April last year had it not been for the coronavirus thing. So as you recall, when -- instead of declaring the dividend in early April last year, we decided to wait for 4 weeks to see how it played out. At the end of those 4 weeks, we were comfortable to maintain the dividend at $0.075. We didn't think it appropriate to increase it further. And then we increased it to $0.085 in July, $0.10 in October, and then further increased it to $0.11 in January this year. And the next dividend announcement is due very, very early in April. So that's all from the financials. Steve, I'll hand back to you.

Thank you, Mark. I'll just summarize how we see the outlook. And then we'll go into the Q&A. So just to reiterate, 2022, our target of 80,000 ounces is now very, very close, and it remains the absolute focal point of our business, and we really do look forward to ramping up production to achieve that target. The solar farm is very important to us. And that project is full steam ahead. Final designs have been signed off. The instruction to proceed has been issued. COVID has abated a bit in Zimbabwe. So the contractors will be able to get on the sites. So we're very excited about the solar project. It will take roughly 12 months. This time next year, we will have a 12-megawatt solar farm, providing nearly 27% of Blanket's power for its base load during the daylight hours. The exploration projects, as we spoke about, become a more focused part of our business as we hope -- as we ramp up the gold production. It just -- as I say, it just puts into action the words we've been saying for a while now that we want to increase the portfolio of our pipeline. We want to move away from being a single asset producer that shareholders [indiscernible] the exploration. They will take their time, and we will conduct in a responsible and professional manner. But we look forward to reporting back as and when we have something to talk to the market about. The other focus of Caledonia has -- in Zimbabwe, and it's a growing focus that we really are formalizing is our commitment to ESG. We are -- we have got a solid CSR program on the ground, where we work with our local communities to ensure that we make a difference in people's lives. We work very hard to adhere to the highest standards in terms of environmental behavior, our tailings dam management, the solar farm coming into that. So the ESG is something that we have done quietly in the background. Now it's -- we're bringing it to the form, and you will see more and more about our efforts there. We have recently just added a new non-executive director to our Board, who is going to have a focus on the ESG side of our business because he brings many years -- many decades of experience for other businesses in mining -- in the mining space across a number of jurisdictions, and we look forward to being able to wave that flag quite a lot higher. Our outcome of the 80,000 ounces is obviously going to be increased cash flows. There will be lower unit costs coming out of Blanket because of the economies of scale. And as we get past 2022, there will be a very slow reduction in the overall CapEx because the project for the South [indiscernible] is completed. There will be some money spent on the plants just to increase our capacity there. But it's minor, and that's probably going to take place during 2021 and 2022. So that is an exciting time that the cash flows floating up to Caledonia are going to start improving. As we get deeper into the mine, the new shaft allows us to get down to 1,200 meters. We will be able to do further deep level exploration, and that could enable our geological people to enhance our reserve and resource -- replace ounces that we deplete. And at the moment, we have a life of mine that's out to 2034, and that may be extended or refusal will be protected as we explore its 80,000 ounces of net. Dividends. There's going to be an announcement in the next couple of weeks about our next quarterly dividend. So shareholders should look out for that. But as we've said, we are confident. We have shown you our confidence by increasing the dividend 4x recently. And we have got to the end of a long and difficult and expensive program. So we look forward to talking to shareholders about dividends as we go forward. We will continue to evaluate other investment opportunities. So Glen Hume and Connemara North are not going to be via any projects that we hope to put into the Caledonia portfolio. We will continue to look at other opportunities. We will have some surplus cash flow that we can deploy towards these assets. And we -- as I say, we want to build Caledonia into virtually a gold producer with a portfolio of assets that diversify risk, and potentially, even diversify jurisdiction. So that for us is a very exciting part of the future of Caledonia. Blanket is secure. We've got a good business to build a sort of platform on. And with that, I think I should close off and open up the session to Q&A, and you can have access to the rest of the team. So thank you very much for listening, and I'll hand back to Dan, and he can open up call for the Q&A session.

[Operator Instructions] But the first question will come from Howard Flinker.

I have 3 minor questions. In the managerial commentary, does ECI refer to the now terminated governmental price support program for gold? Or is it something by the way of grant?

Yes, it keeps on changing its name. But that was one of its iterations, yes.

Yes. Okay. Second, I've read that -- I guess I can put quotations around this, "inflation in Zimbabwe is decelerating." What is the most recent guess at what annual inflation is?

It's several hundred percent, but -- it's still several hundred percent, but -- however, that doesn't affect us because we -- most of the stuff the mine uses we import anyway. So drill steel, cyanide, all that stuff is imported. We pay for our electricity largely in U.S. dollars. And we pay our workforce in either U.S. dollars or local currency, because the local currency component we pay them an adjusted amount every month, which reflects the devaluation of the exchange rate. So we try to keep our workers' level in U.S. dollar terms. So really -- the inflation really doesn't affect us at all, Howard.

Yes. And in fact, it affects the currency. But from what you've read or what you've heard, is it still above say 200%?

Yes. It's closer to 500%. But it is moderating slightly, but it's a bit -- it's a wild booster, it just doesn't affect us.

Okay. No, I was just curious. And finally, next year, will there be any extra solar power? And what may be off hours that you could sell to the national grid? Or will you use the full capacity?

No, the whole point of Phase 1 is that we will use the whole capacity on a use or leave it basis. Phase 2 would be -- we would need to have an arrangement where we could deal with surplus power from time to time. I'm not for a minute saying that we can't negotiate that, but that will take some time. And so the thinking was to get Phase 1 up and running, and then show -- prove the concept, frankly, and then we'll deal with phase 2 later.

Yes. And then you'd have to negotiate a price satisfactory to Caledonia parent before you proceed it. Otherwise, it wouldn't be worth your while.

Yes.

[Operator Instructions] The next question will come from [ Michael Trilli ].

Your gold output is bought by the authorities. What proportion of that is paid for in U.S. dollars? And what proportion of your costs are in U.S. dollars?

So currently, we're paid 60% in U.S. dollars and 40% in local currency. We -- the 40% in local currency, we are -- we use to -- for local purchases. So at the moment, we're paying for our electricity on a 60-40 basis, although there are ongoing negotiations about that. We pay our workers on a 60-40 basis. Just but every -- most of the consumables are imported. And so we pay for those in -- effectively in South African rand, so not local currency. So what we do is we -- to the extent we would have surplus local currency, we participate in a weekly auction whereby we sell that local currency in return to U.S. dollars. And so -- and we are not seeing a buildup at this stage of unwanted local currency. So I'm going to say the regime, the 60-40 regime has increased the administrative burden on the finance team enormously. But we make it work. So they're not making life easy for us, but it is workable.

I have one further question. You obviously externalize your profits so you can pay dividend. How are you actually doing that? How is it done technically? It sounds like a very difficult process to do.

No, it isn't. So Blanket, obviously, receives its revenues in a combination of U.S. dollars and local currency, yes. It spends some of that money than it has to spend on the local currency for local stuff and in U.S. dollars for imported stuff. It then has a profit of -- it has surplus U.S. dollars. Those U.S. dollars are externalized via the payments of a monthly management fee to our business in South Africa for services provided. Blanket buys pretty much all the consumables it uses from our business in South Africa. So there is a modest procurement margin on that. And then there's still money left over. And so that money is then distributed from Blanket up to our 100% subsidiary in Zimbabwe called Caledonia Holdings Zimbabwe. So that goes up as a dividend payment. And then CHZ Zimbabwe makes payments out from CHZ to the U.K. either by loan repayments or dividends. I mean that's what we do. It is complex. It is complex. And so the treasury management dealing with the RBZ is probably within all the operating difficulties of the business. That is probably the biggest single operating headache, but we make it work, and we've made it work for many years, and then that's how we can pay the dividend.

Just one final question. You talked about treasury management. Are there any foreseeable problems with that? As you said, it's worked well, thus far, but do you see any problems with that on the horizon?

No, I don't. But having said that, we must all recognize that Zimbabwe is very unpredictable, right? So all I can say is that we've made this work for many years now. And we are probably one of the biggest single foreign exchanger, at least, for the country. And the government understands that they need Blanket to continue producing gold and selling gold to get that foreign exchange. So it's a symbiotic relationship, which we don't need to explain to the authorities.

And I don't currently have any callers in the question queue, but I'll give another reminder and one more chance for questions to come in. [Operator Instructions] And it appears that, that's all the audience questions we'll have for today. So Steve, I'll pass it back to you.

Thank you, Dan. Yes, and thank you, everyone, for participating. I hope you enjoyed the presentation. As I've said before, the graphic presentation is on the website. And there's also a video presentation where Mark and I go into more detail. And that's also on the website. So please, if you've got an interest, go and have a look at those. But thank you once again for joining, and good afternoon, good night, good morning, and -- until next time. Thank you. Bye-bye.

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