Caledonia Mining Corporation Plc (Zimbabwe) – Q4 2022 Earnings Conference Call Transcript

By Published On: April 27th, 2023Categories: Transcripts

Company Participants

Camilla Horsfall – Vice President of Investor Relations
Mark Learmonth – Chief Executive Officer
Victor Gapare – Executive Director
Dana Roets – Chief Operating Officer
Chester Goodburn – Chief Financial Officer
Maurice Mason – Vice President of Corporate Development

Conference Call Participants

Mark Learmonth

By way of introduction, I’m Mark Learmonth, Caledonia’s Chief Executive, prior to that as the CFO as you may well know. I’d also like to take some time to introduce Victor Gapare, who’s an Executive Director, joined the group in January following the acquisition of Bilboes. I’d just like to give Victor an opportunity to introduce himself. Please, Victor.

Victor Gapare

Thank you, Mark. My name is Victor Gapare. I worked for Anglo American Corporation Zimbabwe for 16 years. And my last job in Anglo was Director for the Gold and Pyrites Mining Division. I left Anglo American at the beginning of 2003, after I had completed the management buyout of the gold and pyrites businesses, which I was managing at that time.

From 1 January, 2003, I became the Chief Executive officer of Bilboes. So I have been Chief Executive of Bilboes until we completed the transaction with Caledonia in January 2023. Between 2009 and 2011, I was also President of the Chamber of Mines of Zimbabwe. Basically the Chamber of Mines is the organization which represents organized mining in Zimbabwe, and it includes suppliers and service providers to the mining industry as well as professionals in the mining industry.

During the time – over the last few years from – really from 2010, I led the Bilboes team, which raised the first $6 million from Baker Steel Resources Trust, which is listed on the London Stock Exchange. So we used that money to carry out exploration – to begin exploration at the Bilboes properties. In 2018, we raised the [Fed] by $10 million, which helped us progress the feasibility study. Also in 2018, we also raised another $7 million debt from the Industrial Development Corporation of South Africa, which enabled us to restart our operations after we had closed them during the hyperinflation period. So basically that’s little bit about me. Thank you, Mark.

Mark Learmonth

Thank you, Victor. And then also, Chester Goodburn, who replaced me as CFO last year, and we’ve got Dana Roets, who is the Chief Operating Officer, been with us for about 10 years now; Maurice Mason, Vice President of Corporate Development; Adam Chester, our General Counsel; and Camilla Horsfall, who is Vice President, Group Communications.

Okay, so let’s get into the meat of the presentation. Just in terms of results highlights, production – all disclosed previously increasing from about 58,000 ounces in 2020 to just over 80,000 ounces in 2022, which is good. We’ve not been held much by the gold price, so all the increase in revenue is largely driven by higher production. Gross profit up from $46 million to $54 million to nearly $62 million, but you will notice there has been a slight compression in the gross margin from about 46% in 2020 to 43% in 2022, and that reflects the general increase in our operating costs offset by economies of scale. And then I’d also draw your attention to the dividend, which has increased from $0.335 in 2020 to last year, we did $0.56, but again, more information about that later. Okay. All of this will come into more detail later.

Just a few words on safety, if I may. Very unfortunately we had the fatality in 2022 and a further fatality in 2023. Dana may want to talk about this more, but it is fair to say the fatalities resulted from non-adherence to prescribed safety procedures, and our response to that has to be to redouble our attempts to enforce adherence to safety procedures. And clearly, fatality is a very distressing event, but we just have to work harder, just try and make sure that people adopt the safe working practices that we set out. Other than that, our general safety performance compares quite well with other similar deep-level mines in the gold sector. Dana, would you like to add anything further to what I’ve said?

Dana Roets

Well, Mark, I think it’s just important to also know that we were in a place and increasing our labor numbers, which complicated things. And I think a good indication of – we actually improved our safety record from 2021 is the fact that there are disability in injury frequency rate, which takes the extra number of employees into account, year-on-year improved from 0.26 to 0.23.

Mark Learmonth

Yes. But I got to say it does compare. If you compare us to other gold producers, I’ve got to say not many of them produce information on this granularity, we actually perform quite well. So should we just move on and talk about the operations? Dana, can I ask you to just talk to the next couple of slides?

Dana Roets

Yes, Mark. Similar to what I said about safety. We started to build up process in – basically 2015 and you can see that on [indiscernible], and we completed that buildup last year. So it was a steady buildup over the last seven, eight years. And hopefully this year we can get into steady state. We [indiscernible] production because we are in build up. We achieved our targets of 80,000. We told the market the higher end of our forecast and now it’s time to settle down and optimize and try to improve economies of scale.

Mark Learmonth

Yes. It is fair to say if you look carefully at the quarterly production numbers in the lower graph, you would notice there is in general quarter one is lower than quarter two. And so production tends to progress as the year progresses and we’ll probably see the same pattern again this year with lower production in Q1 and then peaking in production in Q4.

Okay. So look, that’s all of operations. All I’d say is that the grades remain consistent and about 3.36 grams a ton. The recoveries remain consistent at 93.9 gram – 93.9%. The real driver of growth has been tons milled. And as Dana said, our objective now is to stabilize production at between 75,000 and 80,000 ounces a year. And then having done that, see what we can do to what we call optimize it. So look at ways where we can do what we do, but just do it more efficiently and therefore control our costs. Okay. Should we move on?

The solar projects was something that we started out in 2020 that was clearly delayed by COVID, by delays in the manufacturer of the panels in China and then the shipping of the panels. It was finally commissioned in November last year. All the way through that period, I’m afraid the grid deteriorated. And so particularly in the course of 2022, we found ourselves spending more money on capital equipment to protect our own equipment from voltage spikes and also we have spent more money on diesel than maintaining generators. That is worst in October and so immediately before we commissioned the solar plant, we were using about 720,000 liters of diesel a month, diesel cost of about $1.50 a liter that’s considerable.

But by January this year, as a result of the commissioning of the solar plant and also it’s going to be said as a result of improvements in the grid and grid supply. In January, we only used, I think about 18,000 liters of diesels, a very substantial reduction in our diesel consumption. Now I am comparing peak trough. But even so if you take the average consumption of the course of 2020 with a reasonable expectation of an average production of average diesel usage going forwards, we will expect to see a reduction in diesel consumption. And also the benefit of solar compared to just an average cost of electricity supply that works out at about $35 per ounces produced, so approximately 5% of the online cost.

It’s fair to say we funded the whole solar project, which cost about $14 million using equity, which we raised in 2020 in New York and then the excess we funded ourselves from cash. It’s inappropriate really for a business of that nature, a solar business, not to be ungeared. And so we are now completing an exercise to raise a bond in Zimbabwe by the vehicle that owns solar and we are looking to get about $7 million to $7.5 million by the end of March.

I think, Chester, correct me if I am wrong, I think we’ve got about 4.5 in at the moment and we’re probably expecting another couple million dollars towards the end of sometime this week. I don’t know, Chester is on the line, but is that correct?

Chester Goodburn

That’s right, Mark. [Indiscernible] that we expect should be in by the end of this week.

Mark Learmonth

Okay. There’s nothing, we don’t really specifically discuss politics, but it is interesting to compare the way that the Zimbabwean authorities have responded to the same electricity crisis that also exists in South Africa. And so whereas the South African government appears they done very little to help facilitate or encourage large industrial users to put in place their own IPPs and by contrast, the Zimbabwean authorities were very proactive in terms of encouraging and facilitating and fast tracking the approval process to things like our solar project and facilitating the movement of the equipment across the border. And then another development, which is current, is through an initiative called the Intensive Energy User Group, IEUG, which has been established under the auspices of the President himself. We now hopefully move into a situation where Blanket can enter into an agreement to import power directly from Zambia and Mozambique, which may have certain cost advantages, but will further reduce our reliance on the grid.

Again, that’s a development that you would be unconscionable in or unexpected in South Africa. So it’s just interesting to compare in practical terms, the way that the Zimbabwean authorities have tried to find – help people to find a solution to the same problem that exists in South Africa.

Okay. Should we move on and talk about some other bits? I think we’re going to talk about Bilboes now. So could I ask Victor to run us through a few slides on Bilboes, please?

Victor Gapare

Thank you, Mark. As I already said, Bilboes house is the gold mining assets, which is belong to Anglo American Corporation in Zimbabwe. Anglo mined oxides and treated the ore through the heap leach technology, pretty much recovering. In fact, between the time they opened the mines to the time we finished mining the oxides, they mined about – we’ve produced about nine tons of gold from the Bilboes assets. Anglo had also started exploration for the sulfides, which is what you find below the oxides, and then drilled about 17,000 meters and established in [indiscernible] just under 500,000 ounces. They stopped the exploration when they were getting out of the gold mining business all over the world, and that’s the time when we bought the assets in 2003. Between 2010 and 2018, we drilled the well by 80,000 meters, and established the resource of just under or just over 3 million ounces. We also contracted DRA to actually carry out a definitive feasibility study on that resource.

At the end of the feasibility study, please can you move to the next slide. At the end of the feasibility study, which was completed, DRA expect the mine with a life of mine of 10 years, with a planned average production rate of 2.4 million tons per year and the planned average mill feed of our 2.3 grams per ton. That kind of grid for an open pitch deposit is actually quite a good grid. We are expecting a life of mine gold production of just under 1.7 million ounces, and an average life of mine production of 167,000 ounces per year. Actually, a peak will produce 200,000 ounces per year. The peak funding requirement for this project is US$250 million.

This is at end of 2021 prices, the project economics basically at a gold price of $1,650 per ounce. The project has a post tax NPV of $323 million, a post tax IRR of 33.4%, and then all-in-sustaining cost of $826 per ounce. So if you just use the current gold prices, maybe if you upgraded that to about 1,800, you can naturally see the impact on the bottom line basically. In the meantime, when we were doing the exploration for the feasibility for the sulfides, we actually also established some remnant oxides, which we have started mining.

That picture on the right there is actually the current mining, which is taking place at Bilboes. We expect to produce about 12,000 to 17,000 ounces per year, from the current site operations. And that project is a life of about two to three years. So at that rate, we should be able to harvest over the three-year period, maybe somewhere between US$20 million and US$30 million as free cash from this operation.

Mark Learmonth

Okay. Talk about Bilboes – I’m sorry, Motapa.

Victor Gapare

Thank you, Mark. Again, Motapa, is a property which is contiguous to the Bilboes assets. Actually, in the 1990s, Anglo entered into a joint venture with the original owners of Motapa and actually mined the oxides from the Motapa claims. They also started drilling for sulfides because the idea was that with the sulfides, which were expected at Bilboes in the sulfides at Motapa, we should be able to establish a mine with reasonable scale by Zimbabwe standards. However, Anglo also – anywhere on this when they were getting out of gold at the end of the 90s. So the current Bilboes team actually went on the Motapa project because some of the mining, which was taking place there, the oxides, some of them were being transported to the Bilboes heap leach operations.

The current plan is actually to put in some money, start exploration, hopefully get some oxides because we do know where the targets, we have some targets for oxides. Maybe if we establish the oxides, complement the oxides which are being mined at Bilboes and actually hopefully improve the cash flow from that operation. But long-term, the idea is to actually carry out exploration for the sulfides because we believe if you combine the sulfides at Motapa and the sulfides at Bilboes, you can actually get a mine scale with economies of scale in this area.

Mark Learmonth

Okay. Sorry to interject. So just before we move on to the financials, by itself, Bilboes is a very attractive asset. It’s relatively large, it’s relatively high grade and we acquired it at a very, very competitive price. The work we are doing on our own feasibility study isn’t just to revalidate the feasibility study done by Victor and his team to reflect the current environment. We’re also looking to see whether it’s possible to do that on a phased – to do that project on a phased basis with the view to minimizing equity dilution. So it’s always going to be a balancing act between achieving growth and minimizing dilution. So we’re solving for the best net present value per share, not the potentially highest NPV of the project. So I think that’s quite important.

But Bilboes together with Motapa really is potentially a very, very attractive asset. And the nice thing is that we’ve got the same geological team at Bilboes who successfully identified the resource base at Bilboes, and they can transfer their skills and experience and using pretty much the same infrastructure that they’ve already got at Bilboes to go and start looking across the road at Motapa. And that’s one of the reasons why we wanted to accelerate that process by having the modest equity raise that we completed last week. But I’ll come onto that a bit later. So frankly, Bilboes and Motapa together is now standing asset package.

I think – should we just move on and talk about the financials? Chester, are you able to just give us a couple minutes on the new slide, please?


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Caledonia Mining Corporation Plc (Zimbabwe) – Q4 2022 Earnings Conference Call Transcript

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