Caledonia Mining Corporation Plc (AMEX:CMCL) Q4 2023 Earnings Call Transcript

Caledonia Mining Corporation Plc (AMEX:CMCL) Q4 2023 Earnings Call Transcript April 3, 2024

Caledonia Mining Corporation Plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Camilla Horsfall: We’re going to run through the presentation as always, and we will leave time for questions at the end. What we do ask though is if you do have a question, if you could just raise your hand and we will unmute you. We find that’s a better format than the written Q&A. I’m now just going to pass you over to Mark and Chester who can run through the presentation.

Mark Learmonth: Thanks very much, Camilla. I’m Mark Learmonth, Caledonia’s CEO. And I was going to give a few opening observations and comments before I hand over to Chester. It’s fair to say 2023 was a challenging year. Most of the difficulty was encountered in the first half of the year with a difficult situation at Blanket mine and also the Bilboes oxides problem. Both of those are resolved and Q3 was a good quarter. Q4 started off reasonably well. It was sort of sideswiped towards the end of the quarter by a couple of unexpected things. But pretty much the bad news relating to 2023 was dealt within the first half. Having said that let’s just run through this. So annual gold production at Blanket was just over 75,000 ounces, which was in line with guidance.

Gross profit for the year was $41.5 million, compared to nearly $62 million in the previous year. And that decrease was largely due to higher production costs, in particular at the Bilboes oxides mine in the early parts of the year. It should also be noted that 2023 performance, particularly the Q4 performance was adversely affected by a higher and work in progress. That was gold in a bar that hadn’t been sold at the end of the year, just over 3,000 ounces. So that represents about $6 million of revenue and about $3 million of gross profit and that was sold in the first week of January. So that was just purely a timing issue. In terms of operating costs, we had expected higher labor and power costs, but they were somewhat higher than we’d even expected.

We are looking at measures to reduce our electricity consumption and to reduce our labor — and to improve our labor efficiency. And that’s certainly on the labor side, that’s gone reasonably well since December 2023. On the electricity side, the issue is purely one of higher than expected usage. It’s got nothing to do with pricing. And in fact, actually, our average unit pricing for electricity has come down. On the good side with the drilling program, our Blanket has yielded very positive results. We put out two news releases, one in July, I think and then the other one in January. And buried deep in the financial statements, you’ll find a reference to the fact that on the back of that drilling, the life of minor Blanket has been extended from 2034 out to 2041, and that will be — that statement will be followed up in due course with a revised resort resource and reserve table.

We maintained our quarterly dividend payable in April this year, which reflects the good start to 2024 and our confidence that the remainder of 2024 will be strong. We’ve received some preliminary feedback from the various consultants who are working on the bill based feasibility study. Management and the board are evaluating those results so that we can make the capital allocation decision. And we’re pressing now quite very hard to get that work to a state of finality where it’s capable of being published. Then as previously announced, Dana Roets, the Chief Operating Officer stepped out with effect from the end of February and we’re now very, very close to announcing the appointment of his replacement. So just in terms of summary, I’ve already mentioned production.

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Q&A Session

That was something you can see here for the quarter. 21 — just under 21,000 ounces compared to just over 21,000 ounces in Q4 2022. We benefited from a higher gold price, which fed through into higher revenues. Gross profits for the quarter were within touching distance of what they were in Q4 2022 is as you can see for the full year, $41.5 million compared to $61.8 million. And unfortunately, there’s a lot of damage below the gross profit line, which meant that the attributable profit to shareholders was a loss in a quarter down the year. Chester will give you more information on that. So though that’s just some sort of headline numbers. Can we, could we move on? So just to give you a longer term view of what’s been happening at Blanket, these graphs go back to 2012.

The top graph that shows grade and tons. You can see that the tons, the tons has increased pretty much steadily from 2012 to 2023, but you will notice in the first two quarters of 2023, tons mined and milled did show a fairly sharp contraction for reasons we previously discussed, but pleasing to see that that recovered quite well, in Q3 and the Q4 of 2023. Grade has in general declined but one of the things that I think we’re optimistic about as we do more exploration is that the grade will stabilize and may somewhat slightly improve. Should we move on? Okay. It’s pretty best if I hand over now to Chester to run through the more detailed analysis of the of the financial results. Chester?

Chester Goodburn : Thank you, Mark. Yes. It’s good to see the revenue going up from quarter this comparable quarter, and asked you to increase ounces sold as well as the higher realized gold prices received. It’s not that number. It’s about 3,000 ounces of gold work in progress that was sold early in January, and that’s mostly just to get the cattle fishing. Royalty is very much been flat at 5%. The tax in Zimbabwe for several years has been fairly unchanged and consistent. Production price that’s gone up for the quarter versus the comparable quarter and it’s predominantly due to the higher electricity usage from when we added the central shaft in 2023 and really started wasting some damages, a little bit. As we go forward with our life and mine plan, we aim to move our production centralize our production to below 750 meters.

We’re currently moving on mine above and below. And that synchronization below 750 would allow us to shut some shaft down, like the four shaft and six ones that should reduce our kilowatt hours coming forward. Now the sequencing of that and exactly how that kilowatt hours we will save that decision is still under in the process, we’re making up or evaluating our various options on that. Over time, it’s been high in October and November. Our initiatives has paid dividends in December and now it’s going forward, so you won’t see an increase in the overtime that’s been sold. And we’ve incurred some unforeseen maintenance for us late in December of approximately $1.1 million and we don’t expect to incur that going forward. The depreciation number has gone up, and that’s where you see the short and useful lack of some of the shafts that we estimate.

And going forward with this significant increase in life of mine to 2041, we will probably see a depreciation number now coming down, but doesn’t prove that short of life of the shafts going forward. Under the gross profit line, we’ve seen a lot of once off price that we don’t expect to incur going forward. That would relate to well, let’s say, $1.7 million of that relate to the settlement payable to the former CRO. We had $1.5 million of non-cash impairments on that receivables and the oxides mine utility repair. For the year, we extended quarter one $3.1 million on acquisition fees of all those and that’s to acquire a few amounts of resources. Our last significant items would be $2.5 million of foreign exchange losses that are in that other cost.

So, overall, we shouldn’t see the overtime cost of computing. We don’t expect the unforeseen maintenance. That’s why it’s not seen and we should not see that going forward. Our production is looking good for Q3 and Q4 and that’s guaranteed to Q1. And we’re going to see these sponsored costs that I just mentioned. So I’m looking forward to sharing these results with you in Q1. All-in-all, you can also see the Blanket mine numbers remaining robust in a very tough year for us. And Blanket mine, which is the underlying business cash generated that remains strong. Our tax expense at Blanket mine, that’s approximately effective tax rate of approximately 37% to 42%. And why we have such a high tax rate, it’s effective tax rate for the group because of a lot of non-deductible expenditures within the group like the Bilboes oxides losses.

These Bilboes oxides losses, they were $2.3 million for the quarter. We expect that to come down to approximately $200,000 per month and you should see that additional cost of $13.1 million going forward. When we look at the detailed cost breakdown — operating cost breakdown, our wage and salaries has come down quarter-on-quarter and that seem to have reduced production bonus. Consumables is very much stable in check and that’s throughout the inflation environment that we’ve seen globally. Our procurement department has really done well to with our pricing and check with the modest increase in consumables. Electricity, we’ve seen the solar plant producing some of the high usage that we’ve experienced on our utility use. And solar plant has been very much been producing a lot better than what we expected initially.

We’re looking at some solutions to reduce our addressable going forward. Bilboes oxides that’s been placed on care and maintenance from October 2023. And I said that’s reduced to approximately $200,000 per month. Other expenses that shot up during 12 months, and that’s also due to a few one sell across, we mentioned the $3.1 million we spent to online advisers to obtain for those and our salaries and wages for us also include that $1.7 million on the settlement payable to the COO. Additional wages and salaries that we’ve incurred was mostly on [MRN] fees and that’s to do some of our feasibility studies and also evaluate our whole body. And we’ve seen some — we’ve seen that playing some of those but in the piece of life of mine. Taking out $3.1 million, $1.7 million of settlement and you will see that the general and administrative cost is pretty much stayed in line with inflation from 2022 cost per ounces.

Here you can see the effect of Bilboes in yellow. We’ve got some power increases. We’ll explain that. We don’t foreseeing that those oxide costs coming through again, and our labor might be reduced going forward with the overtime initiatives that is paid off. Looking at the outstanding costs, standing CapEx, shoots up and that’s mostly due to a different allocation. Now that we’re steady state most of our CapEx moves from a non-standing price to a standing capital classification that has pushed up our all in sustaining cost. And all our CapEx too much remains the same in total. That’s just how we pieces. Taxation, I’ve mentioned but some higher effective tax rate that’s just due to some of our losses being reinvested in things and without taxable income improving going forward with losses like the Bilboes upside project not being pre-incurred going forward, we should see that number improving.

Slight increase was made to an active tax rate 25% from 1 January 2024. Our balance sheet among current assets has increased as due to the acquisition of Bilboes and our solar plant that came online. If we look at our non-current liabilities that has increased due to our overall facilities that have increased, don’t be due to higher working capital needs at Blanket with Blanket growing to 75,000 to 80,000 ounce producer. That’s very much to find some strings roundabouts on our working capital and we’ve also issued some bonds located in Zimbabwe to improve the local financial markets and be more so relevant. Cash, currently, we’re sitting with a negative net cash balance of $11 million with a negative $13.8 million in country in Zimbabwe, and our cash balances — the positive cash balances remains outside as Zimbabwe.

Now going forward, should we hold our production, which you can see in our Indian vein, we did well for Q1. The high gold prices, we should see that net of numbers improving as 2024 progresses.

Mark Learmonth : Thank you, Chester. I just want to just leave you with this slide, which focuses on Blanket’s quarterly performance in 2022 and 2023. And I just want to make it very clear that the difficulties that we faced in the first two quarters of 2023, quarter one and quarter two, where you can see production dipped from about 21,000 ounces in the second half of 2022 to 16,000, 17,000 ounces in quarter one and quarter two respectively, which then floats through into a fairly sharp fall in gross profit from anything like $20 million a quarter down to $12 million and $17 million. I just want to just make it clear that in terms of the underlying profitability and cash generation, Blanket has improved in Q3. Q4, $17 million of gross profit that’s pretty much accounted for by the 3,000 ounces of gold work in progress that was realized in January.

So the core of the business is Blanket. It had a bit of a difficult time in the first half of 2023, but we’re now increasingly comfortable that it’s now through that. Should we move on? Next slide. So, look in terms of outlook, we’ve taken steps to address the higher than expected costs experienced in the second half of 2023. Although it’s fair to say that finding a full resolution to the elevated electricity usage may take us a little bit longer. Our expectation is to maintain production at Blanket mine in the range of 74,000 to 78,000 ounces. That’s somewhat lower than we’ve indicated previously, because we’ve taken a decision to scale back production in areas which are relatively low grade and relatively low volume and quite remote from the main infrastructure.

So all three of those together means that those areas, which might only be moving 7,500 tones a day, they’re relatively high cost. We’re very comfortable operating some areas of the mine which are low grade because they’re very high volume and therefore very efficient. So we’re trying to focus the mine onto producing cash generative ounces and not just chasing ounces at any cost. We’re in the short strokes of preparing a revised resource statement, which reflects the encouraging drilling results we’ve reported in 2023 and early 2024. The board management are now beginning to consider some of the initial feedback from the work that’s been done on the feasibility study with a view to identifying the most appropriate implementation strategy. Currently, we’re doing some low level exploration of Blanket, but we hope that will start to improve.

I guess fair to say that the start to 2024 at Blanket has been very encouraging and that creates very solid foundation for us to become as we’ve said we want to become, which is involved with multi asset gold producer. So I think that’s the end of the formal part of the presentation. Maybe I can hand this over for opening it up to questions. As Camilla said, if you raise your hand, we’ll unmute you. We’ll find it easier to deal with verbal questions rather than written questions. Well having said that, whilst people get their minds working, I did receive a very detailed email with some questions.

A – Mark Learmonth: The first question related to the reasons for Dana’s leaving the company. We entered into a termination agreement with Dana, which is subject to an NDA. But I think it’s fair to say that Dana made an enormous contribution to the business over the last 10 years, in particular, completing the central shaft. Central shaft is now complete. The tailings facility is complete and we have yet to start work on the new business of the Bilboes project. And therefore, in the context of that and some other matters, it was the appropriate time for both sides to part company. The recruitment process for his replacement is very well advanced. I mean, by very well advanced we expect to be able to provide some updates within the next week or so.

And we’ve had no difficulty attracting talent. We’ve been very favorably surprised actually by the strength and depth of the pool of candidates who’ve been very excited about pursuing the opportunity that’s reflected by Caledonia. And there’s a lot of detailed questions about the solar plant at Blanket. First of all, let me just clarify. The proposed sale of the solar plant is not a sale of leaseback. It is an outright sale. And actually, one of the issues that is currently somewhat holding up negotiations is the counterparties trying to transfer risk back to us. And we’re very clear that, this is an outright sale with a long-term take or pay contract. It’s not a sale or leaseback. And they said that at the moment, the solar farm is producing slightly better than we’d expected.

And there is scope in due course maybe to consider increasing the size of the solar farm. But the issue we face is that we’re the only logical off-taker for the product for the solar farm. So if the solar — if we expand the size of the solar farm so that it produces more power than Blanket can use at any one time, either that power gets wasted or we have to find some way of storing it which means batteries which are very expensive. And there’s no real alternative in terms of finding someone who can buy the surplus that we produce from time to time. So that puts a limit on the growth prospects for the solar project. But it is something that we — it is something that we will be considering in the context of trying to reduce our overall electricity cost.

As you know, we have hedged and given the fact that we’re in the late stages now of a capital expenditure program, which really focuses on the finishing off the final stages on the tailings facility and the finishing off the horizontal development relating to central shaft. For as long as we have those relatively high levels of capital expenditure, we will hedge from time to time. But if we didn’t have those high levels of capital expenditure, we wouldn’t see the need to hedge in hedging. Let me be clear is buying out the money put options. So it’s basically paying an insurance premium. We don’t engage in forward sales or hedging structures that give rise to potential margin cause. So those are the questions that I received by email, which I hope I’ve addressed.

If anybody else has — can we move back down to any further questions if people have them?

Chester Goodburn : Mark, we’ve got a question that’s been typed.

Camilla Horsfall: There’s one from [Howard Flinker]. Howard?

Unidentified Analyst : The two questions are, what do you plan to spend on CapEx this year?

Mark Learmonth: $30 million. Sorry, Chester. I’ll leave it to you. Chester? I’m sorry.

Camilla Horsfall: Just over $30 million.