Caledonia Mining Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2023

There are 5 speakers on the call.

Operator

Good morning or good afternoon, everybody, depending on where you are. Just like to welcome you to the Q2 2023 results presentation for Caledonia Mining. Can we just move on to the presentation team, Lars? Okay.

Operator

On the call today, there's me, Martin Leibond, Caledonia's Chief Executive. There's Victor Karpari, who is, as you'll know, one of the vendors of the Buildbase asset. He's an Executive Director. We've got Chester Goodburn, CFO based in Johannesburg. Dana Roets, also this Chief Operating Officer based in Johannesburg, Morris Mason, Vice President, Corporate Development and Camilla, VP, Group Communications.

Operator

They're both based in the U. K. Shall we get going? So without beating about the bush, it was another very challenging another very challenging quarter. I'll as I go through these, my comments will be focused on Q2 compared to Q2 previous years.

Operator

We do, for reference, show 6 month numbers there, but I prefer to focus just on the quarter. So production was 18,000, 18,500 ounces. That includes a very disappointing 1,000 ounces from Bilbo's. So it's about sort of 17,400 from Blanket. I'll ask Donna and Victor, respectively, to discuss the operational issues facing Blanket and Bilbo's respectively.

Operator

Pretty much saved by the high gold price. The high gold price meant that revenues were broadly level at about $37,000,000 The gross profit was substantially reduced down from $18,000,000 in the Q2 of 2022 to just under $11,000,000 for the Q2 of 2023. And that was a combination of higher very high costs at billbose with no commensurate revenue. And then at Blanket, the difficulty of Blanket was largely largely relates to higher than expected use of electricity, which gave rise to about a couple of $1,000,000 of extra expense there. That flows through into a the net profit attributable to shareholders.

Operator

Instead of being $11,000,000 profit, it was $500,000 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 £16,700,000 was an outflow of £2,200,000 Chester will give us some more information on that in a moment. Can we move on, Moise? Again, so by way of summary, production of Blanket was below target due to operational issues, which Diana will talk about. I just draw your attention to the fact that July, after fairly intensive management interventions, July did show a substantial improvement, so 7,800 ounces produced in July, which had given us the confidence to reiterate our production guidance for 2023 between 75,000 80,000 ounces of gold.

Operator

Similarly, costs for the quarter were very high. Online 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 costs incurred at Bilbo's. And again, I draw your attention to a very strong performance in July, where our online cost came in at $7.15 an ounce, which again gives us comfort that we can stand behind the full year guidance of between $7.70 $8.50 an ounce. Having seen the poor performance at Buildbase, it will be returned to care and maintenance with effect from the 1st October.

Operator

So we got a 3 month notice period with the 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 build bows in the Q3 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.

Operator

We raised some money about where placings in March 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 Leadley Wilson stepped down as a nonexecutive Chairman and has been replaced by John Kelly.

Operator

So in terms of safety, I mean, the critical thing here is the what sort of brings it home is the disability 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 about 1 up to 1.35, 1.36. 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 series of rules and procedures for doing pretty much everything, and people just need to adhere to that and stop doing silly things.

Operator

And Sadana and the rest of the team at 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. Bill buys is included just for completeness, but there's been no significant issues at Bill buys. So let's move on from that. Okay.

Operator

Can I ask Chester, who 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?

Speaker 1

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 the blanket and, the additional ounces that we produced that blanket did not increase above those levels. Royalty remained at 5%, still charged at the same rate as the comparable period.

Speaker 1

And 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 life that increased the quarterly depreciation charge by by $600,000 That's due to reassessment of the useful lives of some generators, the jet tow shaft that we do not plan to use now that we've got the central chart available and some LHDs generated that's being deteriorated due to the power fluctuations and the bad power we've been experiencing a blanket. We've been negatively affected by other costs to extend to 14,300,000 for the half year. There's about a $7,000,000 swing on the foreign exchange losses. That's a 2,100,000 loss for for the for the half year.

Speaker 1

It came down from a gain of approximately 5,000,000 in the previous half as due to the Zimbabwean dollar that devaluated in the month of June. While outstanding from Fidelity, you know, 25% as, as devalued and that caused foreign exchange losses. It's good that we we do export 75% of our gold. That 75% is not subject to any foreign exchange losses. Also including here is write down of all those oxides.

Speaker 1

We've placed that on care and maintenance, as Mark said, and that was about the additional 850 $1,000 of impairment expenses, all non cash. Tax expense, the effective tax rate is quite high. That's due to the the bulbous losses we've encountered that are ring fence that's not productive against taxable profits, a blanket and that shows a very high tax charge for the year to date. You move to the next slide.

Operator

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

Speaker 2

Right. First of all, if you look at the top graph, you can see the grade is went up last year and it picked in quarter 4 or in quarter 3 and then it came down a bit and it continued coming down in quarter 1 and quarter 2. We knew that was the case and that was one of the reasons why we installed the extra mile in the plant and that model became 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 and quarter 2, compared to last year, it's more or less the same tonnes that we did. But we had to hire great last year at Delta.

Speaker 2

So we had to do more tons. Now when you're in a build up phase and we were building up to 80,000 ounces last year, we pushed very, very hard to get to that. And with that, we changed the GM largest timber or it was removed. And then we signed on a new GM in January this year that started on a mine. And with that, we had also some underground managers that was replaced.

Speaker 2

So during this split to get to 80,000 ounces, the safety culture also went for a loop. And some people lost their jobs because of being negligent as far as safety is concerned. Now that rolled over into this year. And when you build up your own 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 prices.

Speaker 2

By the end of the quarter, we hope to be in those places. And with that during quarter 2, as we systematically sorted out the issues and got into the right places again. Then some other issues like bad track work, there's normal operational issues that went for a loop pushing very hard to get to 80,000 ounces. So again, systematically, we had to fix those issues and which put us in good state for the Q3. And we're in the right places and we're getting the tonnages we need to get to now.

Speaker 2

And so far the Q3 is on track. And the big drive is now, as Mark said, when you push people very hard and they're not achieving, they've got taking shortcuts, they ignore safety standards and they take chances. And unfortunately, that caught up to us from a safety point of view as well. And we are putting out the teams every team in the mind, 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.

Speaker 2

We had to stop when Darwin started. So we stopped it for 2020 2021 and basically 2022 and restarting now 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 underground and where the supervisors are not around that they do the right thing. So from that point of view, to forward is more at a low rate and keep them on planning annual production of 80,000 ounces. And our prediction for this year is still 75,000 to 80,000 ounces.

Operator

Okay. Thank you, Don. Can we move on to the next slide? So Chester, back to you to talk about production costs.

Speaker 1

Looking at our costs of wages planted, that mostly reflects inflationary increase of wages and consumables. Last year, we experienced high inflationary pressures on our consumable costs. This year, we haven't seen that. We've seen that plateau and we haven't seen the same increases last year. What's important to note here is that about 75% to 80% of the costs are fixed in short term.

Speaker 1

So on on a on mine cost, the 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 so far in August, you can see a great reduction in online cost down. Electricity costs, that's 6.4 to blanket level that does not affect the 1,400,000 of solar savings due to solar plant that was commissioned earlier this year. Solar plants working well and the same as money from a, from a group perspective. And then we've also initiated a, a new agreement with the IUG, the consortium that wheels power into them and allows us to get power at a lower kilowatt per hour rate, rate than what we get from the utility.

Speaker 1

Our kilowatt hour usage, we're looking at that, looking to renew stats. So going forward, our power should reflect lower rates than what you see here. And we should see some more benefits from solar. Volvo's upside that's now been placed on care and maintenance to the high cost of $7,500,000 for the year. It's cost for the, by waste stripping that we, we had to form to get to, to the oxides.

Speaker 1

And we plan to mine the oxides now with the sulfide, the need cost can be motivated with, with high ounces on that production cost, on a online cost, but on spaces in the next slide, you can see our online cost was negatively affected mostly by, the oxide production of $217 per ounce. Our power does not reflect the solar savings and it doesn't show the full effect of the IEG rates. So going forward, we plan to stop the leakage from all those reduce that cost, reduce the power cost on mine cost balance basis and improve this online cost number significantly. From all in standing cost point of view, there's not much more to add. That was modestly negatively affected by the Volvo's costs that we do not expect to continue going forward.

Speaker 1

On the next slide. Adam expenses are very much comparable to the previous comparable quarter. For the full year, it includes a cost of 3,100,000 due to the successful completion of all those where we had to pay some of our advisors on the successful completion of that. Next slide, please. Our holding tax has said, well, it's our total tax charge is very high from an effective tax charge point of view.

Speaker 1

Our effective taxation rate at a blanket level, however, has remained very much, stable from the previous quarters. And, going forward, if we do not incur the loss of bolbos, our effective tax rate going forward should be again between the 30 37% range as we've seen in prior years and prior quarters. Look at next slide. Here you can see our cash flows. We generated 4,900,000 across the group for the quarter 8,000,000 is on Blanket.

Speaker 1

So it shows Blanket's ability to generate cash flows. And that $8,000,000 for the quarter compares to $7,700,000 that we generated in July. That shows that Blanket is still a very good asset cash generating. And and, and when it produces running at 14, produces a very good sum of cash. Our working capital outflows for the quarter, £4,000,000 of that was due to legacy credit performance.

Speaker 1

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 includes 15,600,000 net of expenses and equity raises, 10,000,000 in bonds that we've issued from the solar farms and some dividend payments for Q1 and Q2. Looking at the next slide. Our cash balances, that has come down on a quarterly basis.

Speaker 1

That's also due to the solar plant. We had to spend some money on building the solar plant. We purchased power purchase and mining green, and we expect in the next 6 to 12 months cash position to improve as we pay for all the assets that we acquired. Our cash transfers from Zimbabwe continued normally, and we are not building up any surplus RGS in ZIM. If you look at the next slide, our balance sheet doesn't tell any new storage here that has changed mostly due to, the acquisition of portfolios.

Speaker 1

I said our cash balances should improve now to be paid for all the assets that we acquired. And, and going forward, we foresee better ratios in our balance sheet.

Operator

Thank you, Chester. So as I've mentioned, July was a strong month. So here's the information relating to July that was in the MD and A. The grade is 3.6%, gold recovery, 93.6%, producing just over 7,800 ounces of gold at an annualized rate of just about 93,000 ounces a year with a very competitive online cost per ounce of $7.15 which equates is comparable to approximately $700 an ounce last year. So hopefully, return 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.

Operator

Can we move on? Early on a few weeks ago, we restarted deep level drilling in January. We'd had 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, mine out the drilling cubbies and then which then gives the platform for deep drilling. It's fair to say that of the currently we've got sort of 2 exploration targets.

Operator

The first target on which we reported and 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 holes supplies on the upside in terms of grade and width. And that means that in Q4, 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 that we can access from the existing infrastructure blanket. At Matapa, we've submitted an environmental impact assessment, and we will be able to commence what we call invasive drilling activity at Metapa later on in the year.

Operator

So we've ESG is becoming an area of increasing focus by regulators and investors. It's fair to say that the regulatory environment keeps on evolving. The SEC apparently is going to get involved. We hear now that 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.

Operator

So we'll do what we have to do to the best of our ability, but we're not sort of blazing a trail. We'll do what we have to do. 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 Blanket's average daily power. I think it works very slightly better than we'd expected, which is good.

Operator

We're currently constructing a new compliance tailings facility. The existing tailings facility is now pretty much exhausted. So we're going to spend about $25,000,000 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're through that, the is built and we've got it.

Operator

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 VP in Zimbabwe, Cox Damanghese, 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.

Operator

If this area interests you, there's a load of information in the ESG report. Should 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 at 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 a decision in due quarters to if we find something how do we commercialize it.

Operator

We've commenced work on the feasibility studies at Bilbo's. 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 Matapa later in the year. So I think that's the formal presentation finished. So maybe we can open this to questions, Camilla?

Speaker 3

Yes. If anyone has a question, can I ask you just to raise your hand and we can unmute you?

Speaker 4

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

Operator

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 Bilbo's? 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.

Operator

It's will it be the right thing to do as we go forward to continue to pay dividend, given the fact that the money we pay out in dividends is money we'd have to raise to fund the Bilbo's project. So that's all part and parcel of the work that we're doing at the moment relating to how to commercialize Bilbo's. 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 formally pegged to performance. As you'll probably be aware, we never said Q2 or in a quarter, a quarter's production, quarter's profit was this. Therefore, the dividend is that.

Operator

No, 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 bill based.

Speaker 4

Right. I just have a few more questions. Can I get through those or Yes? Okay, cool. So in part some of the electricity costs at Blanket rose because of extended use of Jethro and Number 4, can I ask what is stalling the transition to central shaft?

Speaker 4

I saw like in the MD and A there was like commissioning problems with the OPOS systems. And can you maybe add some color to that?

Operator

Yes. Dana, would you like to pick that up?

Speaker 2

It's actually twofold. When we equipped the Centrosoft at the beginning, 1st year last year, we only did waste since the shop. And then at the end of the year, we started doing reef as well at Central Shaft. And then this year is by the end of the year, the 50% of our reef will go through Central Shaft and 50% will go through Fore Shaft. And as you migrate towards Central Shaft and that will happen over the next 2 to 3 years, then you will put eventually Fore Shaft as a standby shaft almost on Quirra Mainten, that's the same with Jaffra.

Speaker 2

But at the same time, there's a lot of white areas still above 750,000,000 that because during the sinking of Central Shaft and having limited to a working capacity, we had to target our development waste development where we knew we're going to find return on our investment. And as we got more working capacity now, there are certain areas above $750,000,000 that we're targeting and opening up and that's sort of bonus areas. So we might get to a point where we actually find extra stuff and we already found extra stuff above $750,000,000 which will extend the life. For example, of the foreshaft, because there are certain areas that you can only waste the waste tons through foreshafts. Other areas like on the Roca side, MAPFRE can go take above $750,000,000 we can take through Central Shaft.

Speaker 2

So that's why it's not clear cut when we're going to stop foreshore, when we're going to stop Jethro. It's all dependent on what we find as we explore more. And then also this year when we started with the solar, it was a lot of rain this year and even last week we had rain and tanker. So it's playing a bit of havoc with our solar, electricity that we generate as well. And losing it for the 1st year, hopefully next year we can budget better and get a better feel for what we will get from solar.

Operator

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

Speaker 2

And as we're going forward, I mean, when you get over cost conditions, then you've got to run generators, supplement the solar. And going forward, the answer to that is to pull a couple of battery to have that when you get on the cloud come over and your solar pond generation drops that is kept stable.

Operator

So do you have some further questions?

Speaker 4

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, something like this.

Speaker 4

Can you just add some clarity to if that is a growing issue or is it okay?

Operator

Yes. Donna?

Speaker 2

Yes. We were lucky that if you look at the workforce at Blanket, very stable, it was very stable and a lot of experience. And as we 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 on is to create fit.

Speaker 2

So you've got to get a correct fit. Some people are fit in, some don't. And with that also, you've got to be very strong on the culture you want to have and what you will allow and will not allow. And with that, we also actually saw that the people we lost during the stage of last year increased because of what I explained now. And we've got to get to a point where we grow our people by about 500 people.

Speaker 2

And since we started building up more than 1,000 people, you've got to get that people to fit in into the culture and the way we do things and what we allow. And that takes 2 years about to get that culture right and then we'll start stabilizing and get a well experienced workforce. But currently, 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 there's positives and negatives, but you see it everywhere when you sign on new people and you've got to train and coach them to get into the right culture and the way you want to do things.

Speaker 4

Right. Okay. I just have, I think, 2 more questions. Okay. So Mutapa, with the first phase, it sounds a little bit similar to the Bobo's first phase.

Speaker 4

Would that be an accurate characterization? And what gives you confidence if it is that it will work better this time around?

Operator

Well, I mean, so when you say we're going to go hunting for oxides at Metapras, is that what you're saying?

Speaker 4

Right.

Operator

Yes. We may actually decide not to go hunting for oxides given the poor experience. So we may actually just focus on the sulfides, which is the main reason for actually acquiring Watapa in the 1st place.

Speaker 4

Right. Okay.

Operator

I certainly don't want a repetition of what we've experienced in the Bilbo's Oxide project. Thank you very much.

Speaker 4

That's great. Okay. And then my last one is just maybe something that on here on is, so in the MD and A, there was it was cited that part of the FX losses were due to a 3 week delay in the settlement of RTSG receivables. Like previously, it was said that within 2 weeks, like it was okay and you would receive all settlement from SGR. So is that change only due to the devaluation of

Operator

the rapid I'll leave Chester to if Chester could answer, that 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. That does appear to be a suspicious coincidence there. But Chester, do you want to talk about that?

Speaker 1

Yes, sure. Yes, this is suspicious. The rate is devalued by about 3 or devalued about 3 times over that period of 3 weeks. Normally, we receive our cash from Fidelity within 2 weeks. They've been paying us regularly over the 2 weeks.

Speaker 1

75% of our gold now goes outside of Fidelity to a company called L80 and we receive just about all of our cash within 2 to 3 days of delivering the cash to them. So, we haven't seen those long delays again after June and so far they've been 5 80s been paying within that 2 year period. So, so far, it's been going well. It's only that little bump across this lot on ethics losses.

Speaker 4

Okay. Cool. That covers me.

Operator

Anything else?

Speaker 4

No, thanks. Thank you. Okay.

Operator

Any further questions from anybody?

Speaker 3

I don't think there are any more questions. There was another hand up, but it's gone back down. So I think that's it.

Operator

Okay. Shall we just give it a few minutes just in case anybody has any second thoughts? No? Okay. Well, on that, well, thank you for attending.

Operator

Digital quarter, as I said, signs of improvement in July. And hopefully, we'll do this again at the end of Q3, and it will be a more cheerful presentation. Okay. Thank you very much for

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Key Takeaways

  • Caledonia produced 18,500 oz in Q2 2023 (including ~17,400 oz at Blanket and ~1,000 oz at Bilbo’s), yielding flat $37 m revenue but reduced gross profit of $11 m and a £0.5 m net loss alongside a £2.2 m operating cash outflow.
  • Unit production costs spiked to over $1,000/oz (vs ~$700/oz in Q2 2022), with 81% of the increase at Bilbo’s, though July’s performance—7,800 oz at $715/oz—supports full-year guidance of 75–80 k oz at $770–850/oz.
  • Bilbo’s oxide operation will be placed on care and maintenance from October 1, with modest Q3 cash contributions expected as the stripping ratio declines and leach-pad recovery continues.
  • Safety metrics deteriorated in Q2, including a fatality and a rise in total injury frequency rate to 1.36, prompting urgent behavior-based safety interventions across the operation.
  • Deep-level drilling at Blanket has resumed, with Eroica results exceeding grade and width expectations—setting up a year-end resource update to extend mine life—while feasibility studies at Bilbo’s and later-year exploration at Mutapa are underway.
AI Generated. May Contain Errors.
Earnings Conference Call
Caledonia Mining Q2 2023
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