Caledonia Mining Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 12, 2024

There are 7 speakers on the call.

Operator

good afternoon or good morning, depending on where you are. Thank you for joining this presentation to review Cannadonia's results for the Q2 of 2024. I'm Mark Leamanth, Caledonia's Chief Executive. I'm joined by Chester Goodburn, our CFO and also Victor Gopari, who is another Executive Director. James should have joined us, but he's traveling somewhere in Zimbabwe and I suspect he's got communication difficulties.

Operator

Okay. We've got a relatively short presentation to run through. So Chester is driving it. Chester, could you move through the right overview. It was an excellent quarter.

Operator

Production up, gold price up, costs down and that all flowed through as you'll see into a very strong financial performance. In terms of production, we produced just under 21,000 ounces of gold in the quarter, comfortably up from the 17,500 that we achieved in the Q2 of 2023. So very substantial improvement there. Also during the quarter, although not a focus for this presentation because we've already discussed it at some length, we published a preliminary economic assessment of the Bilbo's Sulfide project which reiterated the fact that it's got a very strong underlying economics. It will produce 1,500,000 ounces over a 10 year mine life all in sustaining cost of below $1,000 an ounce so highly cash generative.

Operator

In addition, we also published a revised mineral and resource estimate for Blanket mine, which effectively doubled our resource base, our reserves by it doubled our reserves. It means that now we have a life of mine based on reserves of Blanket out beyond 10 years, which is a very healthy position for a mine of our nature. Based on our internal life of mine plan, which includes some inferred resource as well, we've got a life of mine plan now out to 2,041, which significantly underpins the business going forward. It's also worth noting that the increase in gold ounces was the result of not just more tonnes but also higher grade, which is very healthy. And just as a matter of administration, some of you may have, if you've seen it in the MD and A and the news release that we published this morning, For administrative purposes, we're rescheduling the declaration and hence the payment of our quarterly dividends to bring it in line with the quarterly board processes to approve and review the quarterly financials.

Operator

It's just purely administration. There's nothing else to it apart from that. Okay. So just turning to the results summary. Stable in terms of safety.

Operator

Clearly, there's always more that we can do and this continues to be an area of management focus, but it's pretty much the same as it has been in previous quarters. As I mentioned, production up quite significantly. Clearly, as we all know, the gold price is higher. So we realized exactly CAD2,300 an ounce, substantially higher than the CAD1949 in the comparative quarter. All of that flowed through to a significant increase in revenue, just over $50,000,000 for the quarter.

Operator

And as you'll see in a moment, lower online costs means that gross profit more than doubled, up from approximately CAD11 1,000,000 to nearly CAD23 1,000,000 in the quarter. And that flowed through to a significant increase in net profit attributable to shareholders, which was nearly CAD8.4 million for the quarter compared to a loss of CAD5 1,000,000 in the corresponding quarter. And obviously, that then flows through to an increase in earnings per share. I think we'll move forward now and I'll ask oh, sorry, Craig sorry, James was going to join us. Unfortunately, he has a communications issue.

Operator

This is a slide that we've used many times. It just shows the long term development in terms of tonnes milled, grade, ounces produced and recovery. And during the quarter, pretty much everything went as or slightly better than planned in terms of better tonnes, better grade. And the recovery remains very efficient at the sort of 93%, 93.5% and that then flows through into better ounces. So frankly, there's no there's nothing funny to explain here.

Operator

It was a good solid quarter. And hopefully, we can see a repetition of that in future quarters. Shall we move on? Okay. I'll ask Chester to run through some of the financials in a bit more detail.

Operator

Chester, if you could do that for us, please?

Speaker 1

Yes. Thank you, Mark. Very good quarter and I'm pleased to share these results with our shareholders. Revenues were up 35.4 percent. That's on account of additional ounces as well as higher gold prices that we've received.

Speaker 1

Royalty is up. That's due to the higher revenues. Royalties remained flat at 5% of revenues. Production costs, in absolute terms, that is down on a consolidated basis. And in our online cost, that blanket, it's reduced to $906 from $9.15 per ounce in the previous quarter.

Speaker 1

Depreciation has increased due to higher fixed asset cost base. It was good to see our gross profits increasing by 110%. That's $12,000,000 up from the comparable quarter. Other costs are down by $1,600,000 due to lower foreign exchange losses. It was good to see that the volatile RTGS was replaced on 5 April of this year by the ZIG that has so far been more stable.

Speaker 1

And should that continue, we should also see lower foreign exchange losses. Our net finance cost is lower. That's due to additional cash in the group that reduced the interest charge. And our tax expense is normalized to in between 30% to 33% of our effective tax rate. That's due to higher profits and less proportion of nondeductible expenditures.

Speaker 1

It was also good to see our EPS up to $0.43 and adjusted EPS of $0.51 for the quarter. That's all produced in the 3 month space. Looking at our production cost balance, that's come down significantly on an online cost basis due to the Bulbros Oxide cost has come down. That's reduced our online cost by 13.7%. Cowen labor is up, power mostly due to consumption and higher maximum demand charges.

Speaker 1

We're seeing higher maximum demand charges due to succeeding some of our limits on the electricity use in certain times of the day and we are working on that. We've got some power factor correction equipment that's in the budget that should help with that. And we're also looking to create some efficiencies when it comes to labor over time and the power consumption. I was quite pleased to see the consumables coming down by 3%. This is a time where you see your consumables increasing and you see a lot of inflationary pressures across the globe.

Speaker 1

But at Blanket, we've managed to curb that and actually reduced our consumable costs due to good procurement practices. On all in sustaining costs, that's come down mostly due to the online costs coming down. And what you'll see in that other costs would be the royalties and that's due to higher revenues that we've generated over the quarter. We maintain production guidance at GBP 8.70 to GBP 9.70 for online costs and we also maintain our all in sustaining cost guidance between $13.70 $14.70 per ounce. It's good to see our costs being in check while we are producing more ounces and also at these record gold prices.

Speaker 1

Administrative expenses are approximately $3,000,000 down. That's due to $3,000,000 of expenditures that we expanded last year to complete the finalization and acquisition of the Borbose sulfide steel. That added $3,000,000 3,000,000 ounces of resource reserves to our group. It was good to see us going on route to becoming a multi asset gold producer. Employee cost has also increased and that's by about $500,000 that previously was accounted for as Oxide's operating expenditures.

Speaker 1

We've moved those employees and those resources over to the feasibility study, and we've also reallocated some of those resources to the Metapa drilling. So good to see spending some costs on furthering our business and our strategy of becoming a multi asset coal producer. Now with our revenues being up, cost being down and in check, it's good to see our cash generation increasing. We've generated just over $20,000,000 in the quarter, and that's more than we've generated in any quarter over the last 2 years. So really good cash generation.

Speaker 1

And overall, on a net basis, we've added $12,800,000 worth of cash during the last 3 months. So I'm really pleased with these results and the cash generation that comes with that. Over to you, Mark.

Operator

Okay. Look, I mean, this presentation focuses on the financial results for the quarter. We've discussed in separate calls the work of a PEA at Bilbo's and also the upgrade in the reserves and resources. So really these results are very clean, very good, quite easy to talk to. In terms of our immediate strategic focus, we are continuing to run blanket to achieve our targeted production range of between 74,078,000 ounces for the year and then thereafter similar levels from 2025 onwards.

Operator

Also making good progress on completing the feasibility study in respect of the sulfide project and in parallel with that we're refining our own internal work that we've done on funding structures for that asset. Initially, we're focusing on refining our understanding of the debt capacity of the project. But given the fact that it is so high margin and has such a quick payback, we are confident that a high proportion of the overall funding requirement will be capable of being funded by debt. And then in parallel, we're also continuing with our initial exploration at Matapa. That exploration work started in the second quarter, right at the beginning of the second quarter.

Operator

We'll be finished towards the end of the third quarter and then subject to the capacity of the assay labs, we'd expect to get those results out before the end of the year. It is fair to say that the work to prove Metapra is about 5 years behind Bilbo's in terms of exploration. So it will take a considerable period of time to do sufficient exploration at Matapa to prove up a significant resource. But so far, it's all looking very good. So with that, it's a brief presentation, but I think it's on point.

Operator

We'll open it up to questions. Typically, we prefer questions spoken. If they're typed, the risk with a typed question is that we don't really understand the nuance and we may answer a slightly different question from that which you actually wanted answering. So please, if you are able, if you could just open the line and ask questions verbally. I do see one typed Q and A.

Operator

Let me just go to that one.

Speaker 2

I've been noticing over the past few months that there's been an increase in I think the U. S. Asset manager BlackRock's shareholding in the company. And I wanted to find out if the your company is going to continue with selling a significant stake of the company to BlackRock and what their increased stake in Caledonia will mean in the long term?

Operator

Okay. Just to clarify something a lot that we're not a BlackRock's participation in Caledonia is as a manager of a passive fund. So it's an index tracker investor. So we're in the something called the Russell 3,000 Index in the United States. And that means BlackRock run a fund which tracks that index.

Operator

Okay. And so to make sure that the fund mirrors the performance of the index, they have to buy shares in the underlying companies. And because there actually aren't that very many gold companies, if any, other than us in the Russell 3000, BlackRock have to buy and sell our shares from time to time depending on whether what our weighting is within the overall index. So that's the first thing. They're not active managers.

Operator

They're purely passive managers. And typically, you will see that as our market capitalization goes up, they'll have to buy more shares to increase the weighting of Caledonia in the overall portfolio. Conversely, when our market cap falls, they'll typically sell shares. They're only buying and selling shares in the market. There's no where they're not having shares issued to them.

Operator

So I hope that answers the question. Does that answer the question?

Speaker 2

Yes. Thank you.

Operator

Okay. So before we move on, I can see a typed question. Modest increase in planned CapEx spend for 2024. What led to the $700,000,000 upward vision in planned CapEx for the tailing facility Phase 1b against the expected $4,700,000 in Q1 2024? Chester, are you able to quite a detailed question.

Operator

Are you able to answer that?

Speaker 1

I hope so. Yes, I am. It's a corporation that we're planning to implement a blanket just to improve the pneumatics underground.

Operator

Okay. Now the second part of this question relates to water at Blanket. For those people who aren't in Zimbabwe Zimbabwe is suffering from a very poor, very bad drought situation. The rainy season normally is sort of November to February. And the last rainy season was extremely poor.

Operator

And so there is a big shortage of water. And the question relates to what the impact of that water shortage has been on Blanket. I'm happy to say that one of the unexpected but very welcome side effects of the new tailings facility is that because it's an aligned tailings facility, it means that the water that goes into the tailings facility doesn't escape underground, which means that we can now recycle much more water from the tailings facility than we could from the old one, which was unlined. And therefore, the water used to percolate into the ground. That's the first thing to say.

Operator

Second thing is that we are and we have taken measures to reduce our water consumption. But for the time being, water has been released into the Blanket Dam from upstream. And at the moment, we're not seeing and we don't expect to see over the course of the next before we get to the next rainy season any adverse consequences. Clearly, if the upcoming rainy season is as disappointing as the last rainy season, that may cause difficulties. We do have boreholes, which we've not renovated, but we've got them going again and we could look for other boreholes.

Operator

But it is a risk and it is one that we recognize. One further question, how's the production grade profile playing out of Blanket? The grade profile is lower than it has been in previous years. The grade of Blanket is lower than it has been in previous years but is improving I don't see blanket is getting significantly above 80,000 ounces a year I'm comfortable giving guidance for blanket in the range of 75 to 80 The range the grade will improve as we move forward. But I think to it, I can't really give guidance.

Operator

The blanket will be producing substantially above 80,000 ounces a year. Any I can see it sorry, someone got a hand up, Camilla.

Speaker 3

There are a few people with their hands up. So Ian, Jocelyn, you're unmuted.

Speaker 4

About foreign exchange, which you briefly mentioned, and the role it plays in adjusted EPS. Obviously, adjusted EPS is something that says, this is our these are the earnings you would normally expect and the difference between the adjusted earnings and the IAS earnings are one off pluses or minuses that won't reoccur. But a comment you made as part of your presentation implied that because of the volatility of the currency, you tend to systematically lose money on FX. And I just wondered how you can relate that to basically stripping it out when you put

Operator

your Okay. That's a very fair question. Historically, we have actually incurred let's be clear. The Zimbabwe currency, formerly the RTGS, now the ZIG, has been very volatile. Historically, we have actually incurred very substantial foreign exchange gains.

Operator

There was 1 year up the 1 quarter, I think, Chester, we did was it like tens of 1,000,000,000 of dollars when the deferred tax liability devalued. And so as the tax as the dollar tax liability in dollar terms became much smaller, we had a gain. And so initially, we started we thought that was whilst it would have been great fun to keep that in the adjusted EPS calculation, it was kind of misleading. So initially, we went into adjusted EPS to try and remove things like that, which were outside management's control. You're correct that in the last 2 quarters, particularly in the Q1 of this year and to a lesser extent, the Q2 of this year, we have reversed out substantial foreign exchange losses.

Operator

So in the Q1, the foreign exchange loss was $4,000,000 In this quarter, the foreign exchange loss was CAD2 1,000,000 Let's be clear that CAD2 1,000,000 loss in the second quarter was incurred in the 1st 5 trading days of the year because the RTGS was discontinued on the 5th April. So $2,000,000 was incurred in the 1st 5 days of the year. Since then, with the introduction of the ZIG, the official exchange rate has been very stable. And if it continues on this basis, the incidence of foreign exchange gains and losses will become, if I say immaterial, I don't mean like an accounting weight, it will become not such a it will become a much, much less noticeable factor. Okay.

Operator

But it is clearly disclosed every quarter and there is a full reconciliation in I think note 10.2. Is that correct, Chester, 10.2?

Speaker 1

Then Yes. In the end, you'll see

Operator

a full reconciliation between IFRS EPS and the adjusted EPS. So I hope that does that answer your question adequately? I was just I mean, it

Speaker 4

sounds I mean, clearly, you've got different elements in your balance sheet that will be affected in different ways, as you pointed out, deferred tax. I guess it's all about whether the government in Zimbabwe intends to try to run a firm money policy or whether it will go back to what it historically has done is obviously devalue the currency. And this is just an opinion I'm asking of you. Do you think the government in Zimbabwe is less likely to devalue the currency to nothing as it has done in the past? Is it has it turned over a new leaf at the ZIG or

Operator

Let me answer that. I mean, the elements of the balance sheet that crystal that give rise to foreign exchange losses are the RTGS receivables, which is the relatively small proportion of our revenues, which we sell in local currency and where we receive the cash sort of a week or so after the date of the transaction. Then the other component is the refund of VAT. So it's both of those two things that drive foreign exchange losses. All I can repeat to you is the conversations I had with the Deputy Minister of Finance, with the incoming governor of the Reserve Bank.

Operator

The governor of the Reserve Bank changed the end of March and with the permanent representative of the IMF in Harare, all three of whom were very confident that Zimbabwean having broken the RTGS, there is a clear determination not to make the same mistake with the new currency. That's all I can repeat. I can't give a view as to whether they're going to stand behind that or not. No, I understand.

Speaker 4

Just a view

Operator

of what you've been doing. Don't forget, nobody the collapsing of the currency doesn't help anybody, doesn't help us. And the government ends up chasing its tail as well. So it's in everybody's interests to maintain a stable currency and the government and the various and the government of the Reserve Bank seem absolutely determined to maintain that. That's all I can say.

Speaker 4

And do you think the timing of those VAT refunds was timed to coincide with the collapse of the currency?

Operator

I don't think so. No. No, we've not seen any blowout. We haven't seen any sort of untoward lengthening of credit. No, no, no, we haven't seen that.

Speaker 1

You don't see it in the timing either. Our timing of our VAT receivables are between 60 and 120 days and they vary during those days throughout and it's been doing so for the last couple of years. So it's been very constant in terms of how regularly we receive those VAT refunds.

Operator

The bigger one, the one that's got more volume would be the payments of the RTGS components of our revenues and that's a much shorter I would hate people to think it's 120 days for that Chester, that's much shorter, isn't it?

Speaker 1

Yes. For the bullion receivable, it always between 14 to 7 days that we receive it from delivery at Fidelity. And that's just for the 25% portion of our gold sales.

Speaker 4

Okay. And that portion you have to sell, that's a standard requirement for you to do, is it?

Operator

Yes. We have to sell 25% to government. The balance, the 75% of the remainder, we export ourselves and we sell that offshore for dollars. Got

Speaker 4

you. Okay. That's been very helpful.

Operator

That actually is a relatively recent development. The ability to export our gold is only something we started doing in April 2023. So we've been doing that for just every year now. And that works extremely well. We will deliver a bar of gold or several bars of gold into Dubai on a day, say, on Monday morning.

Operator

And we get sort of 90%, 95% of the revenues that day. And the balance, 2 days later, it works very nicely. Thank you.

Speaker 5

That's good.

Speaker 4

That's been very helpful. Thank you.

Operator

Okay. I see a question from Tatera. Nick

Speaker 3

Dillon. I'm just unmuting Nick.

Speaker 6

Nick. Hi, Mark. Hi, Nick. Okay. Just there was a follow-up question to that earlier question by Ian.

Speaker 6

It's not only a question, but it's an observation that obviously your suppliers are skeptical about the future of the ZIG. And I see that black market ZIGs are now trading between 202022. Does this is this an early indicator of a robust parallel market starting to develop?

Operator

Victor, do you want to talk about that? I mean, I would say that clearly, our visibility of an illegal foreign exchange market, Nick, is, by definition, 0. I would just say that. But Nick sorry, Victor, are you able to help with Nick's question?

Speaker 5

Yes. Thank you, Mark. Nick, I mean, basically, let's just focus on what we, as Caledonia, do. Number 1, we get, the ZIG from the Zimbabwe government for 25% of our gold production or our sales. So basically, what we do with that ZIG is we match the bulk of it with the payments we have to make to government because government has set in place payments to it which are paid in ZIG.

Speaker 5

So basically, that you are matching in terms of the exchange rate. The balance, which is a very small amount, we actually buy local products. So in terms of having visibility what's happening on the parallel market, we don't really feel it that much. We don't see it that much at this stage other than, maybe when we talk about the exchange losses, when the ZIG officially devalues or something like that. So I would say we don't have visibility on that.

Speaker 5

We couldn't comment on that.

Operator

Sorry, Victor, could you just talk about the measures the government took to put liquidity into the market recently?

Speaker 5

Yes. Okay. When there was a bit of pressure on the market about I think it's about 2 or so weeks ago, we actually did see the government releasing about USD 50,000,000 in the market, right, because what they've basically said is the ZIG is backed by gold and some, foreign currency. So all they did is they converted the gold which they are keeping, which is the gold and currency which they have. The gold, they get it out of 50 percent of the royalties we pay.

Speaker 5

We pay in physical gold. And also the other producers give them money so they can have reserves. So what they're doing is they're trying to manage it in the sense that if they think the ZIG is on the market is under pressure, they're actually releasing money through the reserve bank onto the market. So you see the currency, the rate coming down naturally.

Operator

So I mean, Nick, I'm not an economist by any means. But if you have a currency, which is backed by something, gold or U. S. Dollars, you should, in theory, when people want to sell your currency, you should, in theory, be able to take those zigs off those people who want to get rid of those zigs and give them the asset backing, give them whatever it is, the gold or the dollars behind it. Until you get to such a point that the money supply of the ZIG is so restricted that the ZIG exchange rate has to strengthen.

Operator

And that's the theory. Now I don't I'm not an economist, and I'm certainly not a central banker. So you kind of exhausted my understanding of how currencies work. But I think what we saw in the last couple of weeks where in recognition of the movement in the parallel market, government did release dollars. I think it kind of suggests that they really are running this currency as an asset backed currency.

Speaker 6

Okay. Excellent. I want to add a little questions, if I may. So you had a rockfall in Oroyke. Is there a read through into a broader picture of what's happening on the mine?

Speaker 6

Or is this an isolated incident? No.

Operator

It's an isolated incident. It did have an adverse effect on production in July, as you'll have seen from the MD and A. Production in July was about 6,000 ounces. We've now got all the crews back to other areas and they're now working in productive phases. And the area that has been affected by the fall of ground will be recovered.

Operator

So it's not symptomatic or systemic of any broader problem with the any broader problem, Nick.

Speaker 6

Okay. And then last question is that you've obviously got quite a bit of CapEx lined up for H2. That's still going to amount to $31,000,000 $32,000,000 by year end? Yes. Okay.

Speaker 6

Excellent. Great. Thank you.

Operator

So to be clear, what we did is we having seen disappointing production towards the end of last year and a slow start to the beginning of this year, the 1st 6 weeks of this year, we put the brakes on CapEx because we can't we've seen this movie before where production promises an increase that will get back on track in terms of production. And in the meantime, could we please carry on spending on the CapEx plans? And having been bitten by that before, this year, we said, well, hold on, the production is not there. The cash isn't flowing as it should be. Therefore, we will defer CapEx.

Operator

Now as clearly, our cash generation has improved, that planned CapEx will be released in the second half of the year.

Speaker 6

Sorry, one more question, Mark. There's a commentary about additional studies to enhance this solar power panel project, the capacity there at the same time you're talking of selling. Is this an adjunct tool or will the study disappear once you sell?

Operator

No, it's part and parcel of the same thing. So the idea is that we will well, not the idea, it's more than an idea, it's happening, is that we will sell the solar plant in terms and we'll have a long term power purchase agreement on the same terms as we currently enjoy. And in addition, the new owner will construct a second phase.

Speaker 6

Okay. Excellent.

Speaker 5

See, the

Operator

point is we're selling it to someone whose core business is building and developing and running solar plants. It's not our core business. We don't need to own this.

Speaker 6

Right. Excellent. Thanks very much, Norman. Okay.

Speaker 3

There is another question from Albright.

Operator

Is there another question?

Speaker 3

Yes, there is.

Operator

Sorry, Victor, can you help on this because I really can't hear this properly?

Speaker 3

All right, it's now muted. I think Yeah.

Speaker 5

But I don't think they're having a background conversation among themselves.

Operator

Yeah. Okay. Well, when they've decided when they saw the background conversation and they decided the question, we'll try and deal with it. But I couldn't hear that properly. Any further questions?

Operator

I can see some

Speaker 3

There are some written questions.

Speaker 1

Okay. Hold on. Let me see The next question here from Albert.

Operator

Just a minute,

Speaker 5

I'm working through them. Just a minute, I'm working through them. Just a minute, I'm

Operator

working through them.

Speaker 6

Just a minute,

Speaker 5

I'm just working through them.

Speaker 3

Justin Barings, that's the next one.

Operator

Can you comment on the proposed changes, the FX regime and how it went? I think I've dealt with that. The expectation is that for Bilbo's, Bilbo's will operate on 100% U. S. Dollar basis anyway.

Operator

So I think we've dealt with that. I hope, Justin, we've dealt with that question. I think we've dealt with another question about the July production issue. Again, I think we've dealt with that. It was a fall of ground affected Eroica, which is a high grade area of the mine.

Operator

It affected us in July. It's been sorted out. And the mine in the last week has been running within 1% or so of plan. So it doesn't it's not a long term impact. A question on inflation, I don't know what the monthly inflation rate has been recently.

Operator

Victor, do you know what the monthly inflation rate is?

Speaker 5

Yes. Actually, in the last few months, when the Reserve Bank has released something or rather the Zimbabwe statistical offices removed has released something, it was actually very minute because the ZIG has been very stable in the last few months since they introduced it. So I think it was almost like 2% or something like that.

Operator

2% or more? 2% above.

Speaker 5

Much less than that, Mark.

Operator

Okay. Okay.

Speaker 5

Annualized, yes.

Operator

Okay. Annualized, annualized. Okay. That's better than a lot of other places. Any further questions?

Operator

Bella, can you see anything?

Speaker 3

No. I didn't know anymore.

Operator

Okay. Well, look, that's relatively brief, but I think the numbers speak for themselves. So thank you for your attendance, and we'll do the same thing again in mid November after we've released the Q3 results. So thank you all very much for your participation.

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Earnings Conference Call
Caledonia Mining Q2 2024
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