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

Okay. Good morning or good afternoon, everybody, depending on where you are. I just like to welcome you to the Q2 2023 results presentation for Caledonia Mining. Can we just move on to the presentation team, Mic? Okay. On the call today, there's me, Learmonth, Caledonia's Chief Executive. There's Victor Gapare, who is, as you all know, one of the vendors of the Bilboes assets. He's an Executive Director. We've got Chester Goodburn, the CFO based in Johannesburg, Dana Roets, also this Chief Operating Officer based in Johannesburg, Maurice Mason, Vice President, Corporate Development; and Camilla, VP Group Communications, they're both based in the U.K.. Should we get going -- so without beating about the bush was another very challenging very challenging quarter. As I go through these, my comments will be focused on Q2 compared to Q2 previous years. We do, for reference show 6-month numbers there, but I'd prefer to focus just on the quarter. So production was 18,000 -- 18,500 ounces. That includes a very disappointing 1,000 ounces from Bilboes. It's about sort of 17,400 from Blanket, I'll ask Dana and Victor, respectively, to discuss the operational issues facing Blanket and Bilboes, respectively. Pretty much saved by the higher gold price. The higher gold price meant that revenues were broadly level at about $37 million. The gross profit was substantially reduced. Down from $18 million in the second quarter of 2022, to just under $11 million for the second quarter of 2023. And that was a combination of higher -- very high costs at Bilboes with no commensurate revenue. And then on Blanket, the difficulty Blanket was largely related to higher-than-expected use of electricity. Which gave rise to about a couple of million dollars of extra expense there. That flows through into the net profit attributable to shareholders instead of being $11 million profit was $0.5 million loss. And that also flows through in terms of the earnings per share. And critically, the net cash flow from operating activities instead of an inflow of $16.7 million was an outflow of $2.2 million. Chester will give us some more information on that in a moment. Can we move on, Maurice? Again, so by way of summary, production Blanket was below target due to operational issues, which Dana will talk about, I'll just draw your attention to the fact that July, after a fairly intensive management interventions, July did show a substantial improvement, so 7,800 ounces produced in July, which has given us the confidence to reiterate our production guidance for 2023 between 75,000 and 80,000 ounces of gold. Similarly, costs for the quarter were very high. On-mine cost was over $1,000 an ounce. The bulk of that increase from just under $700 an ounce in the comparable quarter, much of that increase -- 81% of that increase was due to the high cost incurred at Bilboes. And again, I'll draw your attention to a very strong performance in July. Where our on-mine cost came in at $715 an ounce, which again gives us comfort that we can stand behind the full year guidance of between $770 and $850 an ounce. Having seen the poor performance at Bilboes, it will be returned to care and maintenance with effect from the first of October. So we got a 3-month notice period with a contractor and it made financial sense to run that contract down rather than terminate immediately. And it's likely we'll expect -- we expect to see a modest cash contribution coming from Bilboes in the third quarter as the stripping ratio falls away. And we continue to harvest gold that's been deposited on the leach pad. Safety has been very disappointing in the quarter and compounded by an unfortunate fatality which we announced next week. And so management is taking urgent measures to improve our performance there. On a more positive note, we've seen some good drilling results from Eroica, which we can talk about in a moment. We raised some money by placings in March and April. And we've also started the direct export of gold from Zimbabwe to a refiner in Dubai, which means that we've cut the Reserve Bank out of our U.S. dollar revenue stream. Which is sort of optically very good. And there's been some changes at the Board, whereas Leigh Wilson step down as our Non-Executive Chairman. And has been replaced by John Kelly. So in terms of safety, I mean, the critical thing here is the what sort of brings it home is the disability of injury frequency rate or the total injury frequency rate, you can see towards the bottom of that table, it has increased from the TIFR has increased from sort of from 1 about up to 1.35, 1.36, now clearly, we are going to have to take measures to address that. A lot of it comes down to trying to reengineer the way people behave in the work environment. We've got a clearly set out a series of rules and procedures for doing pretty much everything, and people just need to adhere to that. And stop doing silly things. And Caledonia and the rest of the team that Blanket are putting a lot of effort into trying to make people behave in the way they have to behave so they can operate safely. So we're not -- we don't expect -- we don't want to see those safety statistics stay at that level. Bilboes has included just for completeness, but there's been no significant issues at Bilboes. So let's move on from that. Okay. Can I ask Chester -- I'm afraid is suffering from a bit of a cold, but no doubt he'll manage. Can I ask Chester to take us through the financials.

Yes. Thank you, Mark. Our revenues are somewhat down from the previous half, comparing that to the previous quarter as well. That's due to lower ounces produced at Blanket. And the additional ounces that we produced at a Blanket did not increase above those levels. Royalty remained at 5%, full charge at the same rate as the comparable period. Our production cost has gone up, but we'll get to the detail of the production cost in a few slides. Depreciation has increased, but due to a reassessment of useful lives that increased the quarterly depreciation side by $600,000. That's due to reassessment of the useful lives of some generators, the Jethro shaft, which we do not plan to use now that we put the Central Shaft available. And some LHDs generated has been deteriorated due to the power fluctuation and the bad bow been experiencing at Blanket negatively affected by other costs to the extent of $14.3 million for the half year, -- there is about a $7 million swing on the foreign exchange losses. That's a $2.1 million loss for half year, came down from a gain of approximately $5 million the previous half. As deeply the Zimbabwean dollar that devaluated in the month of June, while outstanding from Fidelity of 25% as devalued down and that caused foreign exchange losses. It's good that we do explore 75% of our gold. That 75% is not subject to any foreign exchange losses -- also included here is write-down of Bilboes oxides. We've based on care and maintenance, as Mark said, and that was about the additional $850,000 of impairment expenses on -- on cash. Tax expense the effect of tax rate is quite high. That's due to the Bilboes losses we've encountered that are intense, it's not deductible against taxable profits. Or Blanket and that shows a very high tax charge for the year to date. We move to the next slide.

Okay. Could I suggest, Dana, could you just quickly give an overview as to what happened production-wise in the quarter?

Right. First of all, if you get the top graph, you can see the grade is -- went up last year and a bit in quarter 4 and quarter 3, and then it came down a bit, continued coming down in quarter 1 and quarter 2. We knew that was the case. And that was 1 of the reasons why we installed the extra Maligreen plant -- and that mill be operational at the end of last year. And that was the problem this year. If you look at the start, if you look at quarter 1 there in quarter 2 compared to last year is more or less the same tonnes that we did. But we had a higher grade last year, it helped us so we had to do more tonnes. Now when you're in a buildup phase, and we were building up 80,000 ounces last year, we pushed very, very hard to get to that -- and with that, we changed the GM last September, or it was removed. And then we signed on a new GM in January this year that started on-mine. And with that, we had also some underground managers that was replaced -- so during this put to get to 80,000 ounces, the safety culture also went for a loop and some people left the job because of being negligent as far as safety is concerned. Now they rolled over into this year. And when you build up, you don't have flexibility, the flexibility will come now with our development, especially on 33 and 34 level. Opening up those areas and then going down to 38 level. And when we started the year, we were slightly behind especially getting into our higher-grade places. By the end of the quarter, we -- we hope to be in those places. And with that, during quarter 2, we -- as we systematically sorted out the issues and got into the right places, again, doing some other issues like track work, there's normal operational issues that went for a loop, wishing very hard to get to 80,000 ounces. So again, systematically, we had to close issues -- and which put us in good stead for the third quarter, and we're in the right places, and we're getting the tonnages we need to get to now. And so far, the third quarter is on track. And the big driver is now, as Mark said, when you put people very hard and they're not achieving. They're of course taking shortcuts. They ignore safety standards and the kind of take chances and -- and unfortunately, that caught up to us from a safety point of view as well. And we were pulling out the teams every team in the mine, and we started pulling them out and taking them through a behavioral initiative again just to make sure that they understand because we signed on quite a couple of new people as well. Remember, we stopped with our previous behavior intervention -- we had to stop, talk with them and start it. So we stopped it for 2020 and 2021 and basically '22, and we're starting again. And unfortunately, the effect of that is showing -- so a lot of hard work to get to a place where we can trust the people when they go on a ground, where the supervisors are not around that they do the right thing. So from that point of view, to forward is more ounces at a lower rate and maintaining annual production of 80,000 ounces. And our prediction for this year is still 75,000 to 80,000 ounces.

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 costs of wages Blanket that most reflects inflationary increase of wages, consumables. Last year, we experienced by inflationary pressures on our consumable costs. This year, we haven't seen that. We've seen at the Plato and we haven't seen the same increase as last year. What's important to note here is that about 75% to 80% of costs are fixed in the short term on an on-mine cost per ounce basis. These production numbers do not look so great with lower production. But as we move forward and as our production increases like it has in July and August, -- you can see a great reduction in our on-mine costs. Electricity costs, that's 6.4% to Blanket level. That does not reflect the $1.4 million of solar savings due to the solar plant, that was commissioned earlier this year. Solar plant is working well and the same as money from a group perspective. And then we've also initiated a new agreement with the IEUG, the consortium that will tie into them and allows us to get power the lower kilowatt per hour rates and what we get from the utility. Our kilowatt -- our usage, we're looking at that, looking to use that for going forward, our power should reflect the lower rates than what you see here, and we should see some more benefits from solar. Bilboes oxides that's now been placed on general maintenance. We [ achieved ] the high costs of $7.5 million for the year as cost per ounce in waste stripping that we had to perform to get to the oxide. And we plan to mine the oxides now and the sulfide and the costs can be motivated with [Indiscernible] ounces. On that production cost on-mine per ounce basis on the next slide. You can see our on-mine cost was negatively affected mostly by oxide production, $17 per ounce. Our power does not reflect the solar savings, and it doesn't show the full effect of the IEUG rate. So going forward, we plan to stop leakage from Bilboes, reduce that cost, reduce the power cost on the on-mine cost balance basis and improve this on-mine price number significantly -- from all in standard cost point of view, there's not much more to add. That was mostly negatively affected by the Bilboes price that we do not expect to continue going forward. On the next slide, An extensive are very much comparable to the previous comparable quarter. For the full year, that includes a cost of $3.1 million due to the successful completion of Bilboes, where we had to pay some of our advisory on the successful completion of that. On the next slide, please? Our holding tax, as said, all is our total tax charge very high from an effective tax charge point of view, our effective taxation rate at a Blanket level are ever has remained very much stable from the previous quarters. And going forward, if we do not incur the loss of Bilboes, effective tax rate going forward should be, again, between a 30% and 37% range as we've seen in prior years and prior quarters. If you look at the next slide, here you can see our cash flow -- we generated $4.9 million across the group for the quarter, $8 million was from Blanket that shows Blanket's ability to generate cash flows. And that $8 million for the quarter compared to $7.7 million that we generated in July. That shows that Blanket is still a very good asset, cash generating and -- and when it produces, its running at full speed, produces a very good sum of cash. Our working capital outflows for the quarter, $4 million of that was due to legacy creditor payments, our net investing in capital activities. That's pretty much way to the latter part of the year, we'll catch up on some of the capital spend. And our financing activities increased $15.6 million net of expenses and equity raises, $7 million in bonds that we issued on the solar plant and some dividend payments for Q1and Q2. Looking at the next slide. Cash balances, that has come down on a quarterly basis. That's also due to the solar plant. We spent the money on holding solar plant. We purchased a power purchase Bilboes and Maligreen, and we expect in the next 6 to 12 months cash position to improve as we've paid for all assets that we acquired. Our cash transferred from Zimbabwe continued normally, and we are not holding up any surplus RTGS in Zim. If you look at the next slide. Our balance sheet doesn't do any new -- new story here that has changed mostly due to the acquisition for Bilboes. I said our cash balances should improve now bear all the assets that we required. And going forward, we foresee better ratios in our balance sheet.

Thank you. Thank you, Chester. -- as I've mentioned, July was a strong month. So here's the information relating to July that was in the MD&A. The grade is 3.6 gold recovery 93.6%, producing just over 7,800 ounces of gold a day an annualized rate of just about 93,000 ounces a year. With a very competitive on mine cost per ounce of $715, which equates is comparable to approximately $700 an ounce last year. So hopefully, we turn the corner and July shows that we should hopefully be looking for a much better second half of the year than the first half of the year. Could we move on. Early on, a few weeks ago, we restarted deep-level drilling in January. We'd have to suspend deep level exploration several years ago because we just didn't have the logistical capacity underground to do exploration at the same time as doing all the development and the production. So having got central shaft commissioned, we've now got the capacity to excavate to mine out the drilling copies. And then -- which then gives the platform for deep drilling. It's fair to say that of the -- we currently got, we've got sort of 2 exploration targets. The first target on which we reported, which is summarized here is at Eroica. We've just started also now in a second area on the other side of the mine at Blanket. But it's fair to say that the results that we got at Eroica pretty much a very substantial majority of the whole supplies on the upside in terms of grade and width. And that means that hopefully, towards the end of the year, we will reflect the better-than-expected results in terms of a new resource statement. Which will mean that we're going to be extending the life of the mine and increasing the amount of material we can access from the existing infrastructure of Blanket. Motapa, we've submitted an environmental impact assessment, and we will be able to commence what we call invasive drilling activity at Motapa later on in the year. So we've -- ESG is becoming an area of increasing focus by regulators and investors. It's fair to say that the -- the regulatory environment keeps on evolving. The SEC apparently is going to get involved. We are now that's going to be sort of accounting standards dealing with ESG. So our objective is to put in place sustainable business practices that are aligned with our corporate strategy. So we'll do what we have to do to the best of our ability, but we're not sort of blazing a trial. We'll do what we have to do. We -- we just published our most recent ESG report, which sets out a lot of information about the specific projects that we're involved with in the social level. But just in terms of a summary from an environmental perspective, we've put in place a solar plant, which provides about 24% of Blankets average daily power. I think it works first, slightly better than we'd expected, which is good. We're currently constructing a new compliant tailings facility. The existing tailings facility is now pretty much exhausted. So we're going to spend about $25 million over the next few years, putting in a new facility. Which is -- and the expense of that is because it has to be double lined with clay and plastic. And that will support us for the next sort of 12 to 14 years. At a production rate of about 800,000 tonnes a year. So upfront expenditure, but then once we are through that, the is built and we've got it. In terms of social, we've got 34% local ownership, including the employees and the community. The community paid off its outstanding sort of loans to us. And the picture there shows the -- our VP in Zimbabwe, Caxton Mangezi, handing over a substantial check to the local people. And in terms of governance, we comply with all the requirements, the relevant jurisdictions. I think we're very sort of -- we're where we need to be in terms of compliance. If this area or interest to you, there's a lot of information in the ESG report. Could we move on Okay. So in terms of outlook, the focus really is on maintain getting Blanket running sweetly again and achieving a targeted range -- production range of 75,000 to 80,000 ounces. We'll continue to do our deep-level drilling Blanket with the objective of initially of upgrading inferred mineral resource to a higher confidence level and then thereafter then looking for extensions to the existing ore bodies at depth. Which we can then make it a resource to if we find something, how do we commercialize it. We've commenced work on the feasibility studies at Bilboes -- and we're looking -- as I've said before, we're looking at how we can sort of balance growth with minimizing dilution and therefore, optimizing the net present value uplift for Caledonia share. And so we hopefully -- and we also expect to start exploring Motapa in the year. So I think that the full presentation finished. So maybe we can open this to -- to questions, Camilla?

[Operator Instructions]

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

Well, the -- that's one question. The other question is what do we do with the dividend in terms of the very substantial investment requirements for Bilboes -- and we've always said that the -- our policy is to pay a dividend. But we've also again said that whether we maintain the dividend, depends on a view about sort of capital allocation -- and it's not just affordability. Is it -- will it be the right thing to do as we go forward to continue to pay a dividend given the fact that the money we pay out in dividends is money we'd have to raise to fund the Bilboes project. So that's all part and parcel of the work that we're doing at the moment, relating to how to commercialize Bilboes. So if the idea was the way you started from, the idea always was that we would -- our dividend policy wasn't or our dividends weren't formerly pegged to performance. As you're probably aware, we never said Q2 well in a quarter's production, quarter's profit was this. Therefore, the dividend is that. We never did that. So there was no clear correlation between the 2. And frankly, given the fact that we can see a substantial improvement in the operating performance right now that itself would not be a reason for canceling dividend. The bigger issue really comes to how we're going to fund Bilboes.

Great. I just have a few more questions. Can I get to those?

Yes. Yes.

Okay, cool. So in part some of the electricity cost at Blanket rose because of extended use of Jethro and #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. And can you maybe add some color to that?

Dana, would you like to pick that up?

It's actually twofold. When we equipped central shaft in the beginning, first year last year, we only did waste through central shaft. And then at the end of the year, we started doing [ reef ] as well at Central Shaft. And [ Matt ] this year is by the end of the year, that 50% of our reef, will go through Central Shaft and 50% will go through 4 shaft -- and as you migrate towards Central Shaft, and that will happen over the next 2 to 3 years, then you will put a standby shaft, almost some good on maintenance, the same with Jethro. But at the same time, -- there's a lot of white areas still above 750 meters, that because during the sinking of Central Shaft having limited working capacity, we had to target our development, waste development. Where we knew we're going to fund a return on our investment. And as we've got more working capacity now, our deal certainly is above 750 meters we're targeting and opening up and that sort of bonuses. So we might get to a point where we above 750 meters, which will extend a lot, for example, of 4 Shaft because there are certain areas that you can only raise the resistance through 4 shaft other areas like on the Eroica side. [ Matt ], you can take above 750 meters, we can take Central Shaft. So that's why it's not clear cut when we go to -- when we're going to stop 4 shaft, we're going to stop Jethro all dependent on what we find. And as we explore more, -- and then also this year, when we started with solar, it was a lot of rain this year and even last we drain a tanker. So it's playing a bit of havoc with our solar is interesting that we generate as well. And using it for the first year, hopefully next year, we can budget better and get a better feel for what we will get from solar.

But in general, solar is performing in plan. I mean, what Dana is saying is that when you have rainy days and cloudy days, the solar doesn't work quite well in most days now. Blanket is fortuitously located in an area of good sunshine. But raining in Blanket in August is pretty much on I'm afraid that's what happened earlier on this week.

As we're going forward, I mean when you get over cost conditions, then you've got run generator supplement the solar? And going forward, the answer to that is we call a couple of metric to add that. When the cloud come over and your solar plant generation drops, that is kept stable. .

So do you have some further questions?

Yes, I did. Let me just get to them here. Okay. So it seems -- I just wanted to ask about some of the underground technical expertise. It seems like a lot of the infrastructure issues have been addressed. But it seemed like there were also some like human capital issues that needed like job skills training, some things like this. Can you just add some clarity to if that is a growing issue or is it okay?

Dana?

We were lucky that -- if you look at the workforce at Blanket, very stable, it was very stable and a lot of experience. And having started growing and building up, we had to sign on new skills. Now that's always a danger when you sign on new people. Not every new person you sign is do great fit. So you've got to get a correct fit some people fit in some don't. And with that also, you've got to be very strong on the culture you want to [ path ] and what you will allow and will not allow. And with that, we also actually saw that the people we lost during -- especially last year increased because of what I explained now. And we've got to get to a point where we grew our people by about 500 people and essentially started building up on more than 1,000 people. You've got to get that people putting into the culture and the way we do what we allow -- and that takes 2 years about to get that culture right, and then we've got stabilizing and we get a well experienced workforce. But I don't think we've got a very good mix of very, very experienced people. And the benefit of building up was we actually managed to get some younger people in because our workforce was actually getting quite old. So that's -- there's positives and negatives -- but you see it everywhere where you sign on new people and you've got a train and coach them to get into the right culture and the way you want to do things.

Right? Okay. I just have, I think, 2 more questions. 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, I mean -- so when you say we're going to go hunting for oxides that Motapa, is that what you're saying?

Right.

We may actually decide knocking out hunting for oxides given the core experience, we may actually just focus on the sulfides. Which is the -- which is the reason for actually acquiring Motapa in the first place.

Right. Okay.

I said we still don't want a repetition of what we've experienced at Bilboes oxide project.

Great. Okay. And then my last one is just maybe something that I'm unclear on is -- so in the MD&A, there was cited that part of the FX losses were due to a 3-week delay in the settlement of TSG receivables -- like previously, it was said that within 2 weeks, like it was okay and you were receivable settlement from SGR. So is that change only due to the devaluation of the rapid..

Only Chester can answer that, it would be good. But I'll just point out to you, there is a suspicious coincidence between the really very, very rapid devaluation of the RTGS over a 3-week period. And at the same time, the pushing out of the receivable period. Which has since normalized. I would just leave that out there. There does appear to be some suspicious coincidence that Chester. Do you want to talk about that?

Yes, sure. This -- the rate is devalued by about 3 -- well, devalued about 3x over that period of 3 weeks. Normally, we see our cash from Fidelity within 2 weeks. They've been paying us regularly over the 2 weeks. 75% of our gold now goes to outside of Fidelity to a company called Al Etihad, and you see just all out of our cash in 2 to 3 days of delivering the cash to them. . So we haven't seen those long delays again of June and so far that the Fidelity has been paying within 2 periods. So very far going well. It was only that level one that cost us a lot in FX losses.

Okay. Good. Thank you. Okay, any further questions from anybody?

I don't think there are any more questions. So I think that's it.

Okay. Should we just give it a few minutes just in case anybody has any second thoughts. Okay, well, on that, well, 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 and more cheerful presentation. Thank you. Thank you very much for attending.