Caledonia Mining Corporation PLC (CMCL) 2020 Q4 法說會逐字稿

Hello, and welcome to the Caledonia Mining results call. My name is Dan, and I will be your coordinator for today's event. Please note this conference is being recorded. (Operator Instructions)

I will now hand you over to Steve Curtis to begin today's conference. Thank you.

Thank you, Dan. And welcome, everybody, who's joining this call. You are aware that this is the 2020 results presentation for Caledonia Mining. The presentation in graphic format is on our website. And also, there's a recorded presentation by Mark and myself that you can also view on the website if you want to get more detail. So we'll go briefly through the key points and then we'll open this up to Q&A.

I'm joined on the call today by Dana Roets, our COO; Mark Learmonth, CFO; Maurice Mason, who's in charge of business development; and Camilla Horsfall, who is in charge of our Investor Relations. So the whole team will be available to take your questions. And we look forward to a constructive call.

So just starting off, drawing your attention to the usual disclaimer. And you're all aware of its [reading] and content. I'll just quickly briefly talk about the highlights, then I'm going to hand over to Mark to go through the financial side of the presentation. And as I said, Dana Roets is available to answer any operational questions that you may have that will take us through the Q&A.

So really, the 2020 highlights, which we're very proud, is that from a health and safety perspective, we went through the year with COVID. It had very little effect on the operation at Blanket Mine. The management did an extremely good job in protecting our workers, and we had virtually no effect on the overall production levels.

And as we have announced before, we actually came out with a record annual production of nearly 58,000 ounces for Blanket, which, under the circumstances, is just fantastic, considering the lockdowns that had to take place. The operation was also run at a very well-controlled measure from a cost perspective, although there were some additional and incidental costs associated with COVID, and Mark will go into that in a little bit more detail.

But the four, really, key highlights that you're probably familiar with already because it's in the press announcement that we made. We hit a $100 million turnover as we are in a higher gold price environment. That was a 32% increase. Gross profit came up to $46 million, and that was a 50% increase over the previous year. And adjusted EPS came in at $2.04, just over $2, a 41% increase.

And all in all, because of the strength of the business, the strength of the gold price, and our confidence in what the future looks like, we have been able to increase the quarterly dividend four times during the year of 2020, which has given us a cumulative increase of 60% from late 2019 through to late 2020. So from a shareholder perspective, we have generated value. We've shared some of that value, and we are demonstrating our confidence going forward.

The outlook, which is critically important to that ability to increase the dividend. The Central shaft, our confidence is higher because Central shaft was fully equipped during 2020, and commissioning will take place during this quarter that will be completed during the period of the first quarter of 2021.

Our target production this year can be 61,000 to 67,000 ounces, as we've mentioned before. And then we will get into the ramp up of 80,000 ounces from 2022 onwards, which has been our guidance for the last few years. So COVID -- despite COVID, we have managed to stick to that goal. We've managed to deliver the shaft. And for that, we are very, very proud of our teams that we've had down at the Blanket Mine.

And most importantly, we have also put into action our talk about wanting to expand our portfolio of assets. And we announced late in 2020 that we had acquired the options over two new exploration properties, brownfield properties. And we are starting to mobilize our notice of those properties. One of them has got drill rigs on it; the other one is still in the planning stage. But we're very excited that we are now embarking on the next phase of Caledonia's development.

So those are the highlights. We're very proud of them. And I think now, what we should do is hand over to Mark and ask him to go into the financials in some detail. Again, we'll take your other questions on matters of interest to you, where the team will be available to you at the end of the call.

So Mark, if you will take it from there, please.

Thank you, Steve. So the financial review slides will start from page 12 of the presentation that's posted onto our website.

So page 13 is the results highlights. As Steve mentioned, revenue was up to $100 million. And as you can see, that was due to a 5% increase in production and a 27% increase in the average gold price. Steve has already mentioned gross profit up by 50%. Adjusted attributable profit up by 55%.

Adjusted attributable profit, all we do there is we strip out things like foreign exchange gains in particular, also losses, and profits and losses arising on the disposal of non-core assets. So we're really trying to get to the core performance of the business. So we genuinely do believe that that 55% reflects the performance of the business.

Just looking at the profit and loss accounts on page 14. Revenue are dealt with the royalty, stays at 5% of revenue. Production costs appear to go up quite significantly by 20%. That does include a substantial component of what I call non-controlled costs, and I'll come back to that in a moment. Similarly, G&A increases by 43% from $5.6 million to $8 million. And I've got some more context on that shortly.

The net foreign exchange comes down. Last year in 2019, it was nearly $30 million. This year, it's $4.3 million. And that doesn't reflect any diminution in the rate of devaluation of the Zimbabwe dollar. It just reflects the fact that in 2019, we devalued some very large liabilities down to not very much. And simply, there's not much further for them to go. So that's the reason why the foreign exchange gain was smaller.

And other in 2019 was a gain of $3.9 million; this year, it was a loss of $2 million. In 2019, that $3.9 million, most of that -- well, $5 million of that was a profit on the disposal of the Eersteling gold mine in South Africa. In 2020, that reversed. We incurred a $2 million impairment on a small exploration asset, which we decided to get rid of.

And that 2020 also includes $1.4 million of equity settled share-based payment expense. That's a long-term incentive award to management and employees. And the bulk of that is driven by -- the bulk of that value is driven by the higher share price.

I'll come on to tax in a minute, but the tax rate of 15% -- the tax of $15.2 million, at first [blush] seems to be quite a high effective rate. And I've got some further context on that in a moment.

So turning to page 15, production costs. Wages and salaries up by 16%. That reflects a 12% increase with man-hours worked and the balance would be higher per capita payments. So to say, in the year, we put in a much more aggressive bonus structure. And as Steve already mentioned, in the year, performance was a record. So it's not surprising that the workers are rewarded for that success.

Consumables also goes up 15%. That's largely due to the increased cost of maintaining the fleets of trackless equipment on the ground, which mainly work in the declines. We have had difficulties with maintaining that equipment. The stuff we bought initially was reconditioned secondhand and it did have a high maintenance cost.

So we've done two things. We've replaced much of that equipment with new equipment. And also, we've taken on a specialist contractor to help us improve the maintenance, the maintenance scheduling of that equipment. So we believe we've got our arms around that.

Then offsetting that increase was a reduction in the cyanide usage as a result of the commissioning of the oxygen plant in March. Nearly $800,000 of COVID expenses, that's PPE and stuff like that, which is unavoidable.

The ZESA electricity cost, ZESA being the grid provider, that went up from $5.9 million to $6.5 million. And that reflects a 12% increase in power usage and also due to a 7% increase in tonnes milled.

We also saw some substantial increase in the cost of electricity -- diesel to run the gensets. That went up from $0.5 million to $1.8 million. So that effectively means that the hours used increased from 3,800 hours in 2019 to 8,500 in 2020. And that increase informed the decision we took in the middle of 2020 to press ahead with a solar project because, frankly, we can't see the electricity situation in Zimbabwe or Southern Africa generally improving. And it's probably more likely to get worse before it gets better. So as a defensive maneuver, we decided to press ahead with solar.

And at the mine, in addition to the $1.4 million of the share-based payment expense I've referred to at the group level, the mine has a smaller amount, $0.6 million of share-based payment expense in respect to those employees at the mine who participate in that scheme. And as I say, that charge is largely driven by the movement in our share price.

So the total IFRS production costs increased by 20% from $36.4 million to $43.7 million. But within those costs, there were quite substantial costs that I would call non-controlled costs. So in 2020, there's about $3.3 million of such costs, being the cost of the COVID consumables; the cost of running the gensets if -- when the electricity goes down, we have the choice of either running the gensets or not producing it, clearly, we'd prefer to run the gensets; and also the share-based expense.

So if you strip those out to 2020 and 2019, the increase is 16% from $34.9 million to $40.5 million. And if you express those values in terms of cost per tonne, the cost per tonne will increase by 8% from just less than $63 an ounce to $67.60.

And frankly, anything much less than $70, we're very pleased with. Anything much less than $70 an ounce -- sorry, $70 a tonne, we're quite pleased with. So whilst the headline number seems to have increased, we actually believe that the core costs have been quite well controlled.

Looking at G&A, certain costs went down, and particularly, our Investor Relations cost went down, and the travel cost went down. And that's largely due to COVID restrictions on travel and the IR events in which we participated.

Advisory service fees increased over $0.5 million from $400,000 to just over $900,000. And that reflects quite a lot of work that we have to do in the course of 2020, which -- on things, which we later got value from. So we incurred legal fees in respect to the TSX delisting, but we're very confident the TSX delisting actually increased our overall liquidity in North America.

So if you compare liquidity on the Toronto Exchange, the New York Exchange for the six months before we delisted with the liquidity on the New York Exchange after we delisted, I think it doubled. And one of the difficulties we faced in recent years is low liquidity. So we're very pleased that includes the liquidity.

We also incurred fees on an SEC F-3 filing, which we then subsequently used for the purposes of the ATM issue. And then we also incurred legal fees on the solar projects for the period of time before we got Board approval. And so, we have to expense those rather than capitalize them. So those things have gone up and they do reflect a very high level of activity last year. But I hope you agree that those expenses flow through to things for which we derive a tangible benefit.

Wages and salaries, about $1 million. Part of that was due to an increased headcount. So we took on a senior geologist to help us improve our resource management and also begin to look at the new projects, which we acquired.

We took on a rock mechanics. So as the mine is going deeper, we now need to begin to pay more attention to rock mechanics. And we took on Camilla to do IR for us. It's also fair to say that as a result of the strong performance in the year, management did receive higher bonuses.

A number that really sticks out is the increased liability insurance, which went up by nearly $1 million. That's the insurance premiums for directors and officers cover. That hurt to have to pay that amount, but it does reflect a general risk of a sharp tightening in the market for that cover as the insurance companies are becoming increasingly concerned about recent problems in the mining industry, particularly related to things like slimes dam, wall failures, and that sort of stuff.

But it's very much worse because our primary listing in terms of volume is now in New York, the insurers are more worried about class actions, which typically come from the New York market and other markets. So I would like to see that come down in future, but I think it will be substantially higher than the $86 million that we enjoyed in previous years. Our on-mine cost per ounce. Don't forget these costs per ounce, they do include the non-controlled costs that I've referred to previously.

Turning to page 18, the overall tax. The charge of nearly $15.2 million, that reflects a rate -- an effective rate of 37% of IFRS profit. [But we haven't] tell you the entire story. So the core of the tax is income tax and deferred tax in Zimbabwe. And if you add together income tax and deferred tax in Zimbabwe and express that as a percentage of IFRS gross profit, which approximates very closely to on-mine profit, that gives you an effective tax rate of 27%, which is very close to the headline rate of taxes involved. We have 25.75%.

But then in addition to that what I call core tax, we also incur income tax in South Africa on intercompany profits. And then we also incur withholding tax as we move money around the groups, as we move money from Zimbabwe to South Africa, and as we move money from Zimbabwe to the UK and Jersey. [Including] those money movements don't reflect profitability. So inevitably, we will, as we go forward, continue to incur those taxes in South Africa and the withholding tax.

Cash flow, not much to say about that. On page 19, extremely strong. Cash flow before working capital was over $42 million. We continue to see an absorption of cash into working capital, $4.5 million in 2020; $4.2 million in 2019. Part of that is just due to the erosion of supply credit in Zimbabwe due to the very high rate of inflation.

But it's also fair to say that part of it was also due to an increase in the stock levels of inventories. And frankly, whilst -- for many years, I've been trying to get the stock levels down. That did save us in the course of 2020 because we have to rely on high levels of stocks of key consumables, cyanide, explosives, drill steels, what have you, to keep the mine going when the supply chain up from South Africa to Zimbabwe was interrupted.

Fair to say last year, we invested a lot, $28 million of capital investment in the year. That includes about $2.6 million that we spent on getting our hands on the two new investment properties. As we move into 2021, we'll be spending even more because, don't forget, we'll also be spending about $13 million on the solar project. And then I'd expect CapEx to fall away very quickly from 2022 onwards.

The net financing income of $7.3 million, clearly that's the net of $12.5 million of the net equity raise that we did in the summer and a $4.5 million of dividend payments.

Balance sheet, very strong. Again, I wouldn't say much about that. What I would point out is we -- because there's now much more cash moving, we need more cash held in South Africa to act as a buffer because of very high level of procurement spend in South Africa. That doesn't mean from time to time we do hold surplus cash in South Africa.

We're not allowed to hold that cash in US dollars. We must hold it in rands. And it takes a long time to get the money out and to get that money back in again. So rather than leave that cash exposed to rand devaluation, we're holding it as a gold ETF. And to some extent, it means we can, if need be, access that cash in South Africa with short notice rather than have to wait several weeks to get it back into the country if we need it.

Steve's already mentioned the dividend. We started increasing in January 2020, we increased it from [$0.0678 to $0.075]. We will probably have increased it again in April last year, had it not been for the coronavirus thing.

So as you recall, instead of declaring the dividend in early April last year, we decided to wait for four weeks to see how it played out. At the end of those four weeks, we were comfortable to maintain the dividend at $0.075. We didn't think it's appropriate to increase it further, but then we increased it to $0.085 in July, $0.10 in October, and then further increased it to $0.11 in January this year. And the next dividend announcement is due very, very early in April.

So that's all from the financials. Steve, I hand back to you.

Thank you, Mark. I'll just summarize how we see the outlook and then we'll go into Q&A.

So just to reiterate, 2022, our target of 80,000 ounces is now very, very close, and it remains the absolute focal points of our business. And we really do look forward to ramping up production to achieve that target. The solar farm is very important to us, and that project is full speed ahead. Final designs have been signed off. The instruction to proceed has been issued.

COVID has abated a bit in Zimbabwe. So the contractors will be able to get on site. So we're very excited about the solar project. It will take roughly 12 months. This time next year, we will have a 12-megawatt solar farm, providing nearly 27% of Blanket's power for its base load during daylight hours.

The exploration projects, as we spoke about, become a more focused part of our business. And as we ramp up the gold production, it just -- as I say, it just puts into action of the words we've been saying for a while now that we want to increase the portfolio of our pipeline, we want to move away from being a single-asset producer.

But shareholders [are assuming that these are] brownfield exploration. They will take their time and we will conduct them in a responsible and professional manner. But we look forward to reporting back as and when we have something to talk to the market about.

The other focus that Caledonia has in Zimbabwe, and it's a growing focus, what we really are formalizing is our commitment to ESG. We are -- we've got a solid CSR program on the ground, where we work with our local communities to ensure that we make a difference in people's lives. We work very hard to adhere to the highest standards in terms of environmental behavior. [Taking stand], management, the solar farm coming into that.

So the ESG is something that we have done quietly in the background. Now, it's -- we're bringing it to the fore, and you will see more and more about our efforts there. We have recently just added a new non-executive director to our Board, who is going to have a focus on the ESG side of our business because she brings many years, many decades of experience for other businesses in the mining space across a number of jurisdictions that we look forward to, to be able to wave that flag quite a lot higher.

Our outcome of the 80,000 ounces is obviously going to be increased cash flows. There will be no unit costs coming out of Blanket because of the economies of scale. And as we get past 2022, they will be a slow reduction in the overall CapEx because the project for the shaft syncing is completed.

There will be some money spent on the plants just to increase our capacity there, but it's minor and that's probably going to take place during 2021 and 2022. So that is an exciting time that the cash flows floating up to Caledonia are going to start improving.

As we get deeper into the mine, the new shaft allows us to get down to 1,200 meters, and we will be able to do further deep-level exploration. And that will enable our geological people to enhance our reserve and resource, replace ounces that we deplete. And at the moment, we have a life of mine that's out to 2034. And that may be extended, or at least it will be protected as we exploit 80,000 ounces a year.

Dividends, there's going to be an announcement in the next couple of weeks about our next quarterly dividend. So shareholders should look out for that. But as we've said, we are confident, we have shared we are confident by increasing the dividend four times recently, and that we have got to the end of a long and difficult and extensive program. So we look forward to talking to shareholders about the dividends as we go forward.

We will continue to evaluate other investment opportunities. So Glen Hume and Connemara North are not going to be the only projects that we hope to put into the Caledonia portfolio. We will continue to look at other opportunities. We will have some surplus cash flow that we can deploy towards each asset. And as I say, we want to build Caledonia, ensure a mid-tier gold producer, with a portfolio of assets that diversifies risk and potentially even diversify jurisdiction.

So that for us is a very exciting part of the future of Caledonia, like it is secure. We've got a good business to build a solid platform on.

And with that, I think I should close off and open up the session to Q&A, and you can have access to the rest of the team. So thank you very much for listening, and I'll hand back to Dan and he can open up for the Q&A session.

(Operator Instructions) Howard Flinker.

Hello, everybody. I have three minor questions. In the managerial commentary, does ECI refer to the now terminated governmental price support program for gold, or is it something else that I forgot?

Yeah, yeah. It keeps on changing its name, but that was one of its iterations, yes.

Yeah, okay. Second, I've read that, I guess I can put quotations around this, inflation in Zimbabwe is decelerating. What is the most recent guess at what annual inflation is?

It's several 100% percent, but it's still several 100%. How that doesn't affect us? Because we -- mostly, most of the stuff the mine uses we import anyway. So drill steel, cyanide, all our stuff's imported. We pay for our electricity largely in US dollars, and we pay our workforce in either US dollars or local currency. But the local currency component, we pay them an adjusted amount every month, which reflects the devaluation of the exchange rate. So we tried to keep our worker's level in US dollars terms. So it really -- inflation really doesn't affect us at all, Howard.

Yeah. It affects the currency. But from what you read or what you heard, is it still above, let's say, 200%?

Oh, yeah, I think closer to 500%. But it is moderating slightly, but it's a -- this is a wild goose chase. It just doesn't affect us.

Okay. No, I was just curious. And finally, next year, will there be any extra solar power? And what may be off hours that you can sell to the national grid? Or will you use the full capacity?

No. The whole point of Phase 1 is that we will use the whole capacity on a user diluted basis. Phase 2, we would need to have an arrangement where we could deal with surplus power from time to time. But I'm not for a minute saying that we can't negotiate that, but that will take some time. And so, the thinking was to get Phase 1 up and running and then prove the concept, frankly, and then we'll deal with Phase 2 later.

Sure. And then you'd have to negotiate a price satisfactory to Caledonia [parent] before you proceeded, otherwise it wouldn't be worth your while.

Yeah.

Okay, thanks. Stay healthy, guys.

Thank you, Howard. Thanks.

You're welcome.

(Operator Instructions) [Michael Trilling].

Hello there. Your gold output is bought by the authorities. What proportion of that is paid for in US dollars, and what proportion of your costs are in US dollars?

So currently, we paid 60% in US dollars and 40% in local currency. The 40% in local currency, we are -- we use for local purchases. So at the moment, we're paying for our electricity on a 60-40 basis, although there are ongoing negotiations about that. We pay our workers on a 60-40 basis, just about every -- then most of the consumables are imported. And so, we pay for those effectively in South African rands. So lot of local currency.

So what we do is we -- to the extent we would have surplus local currency, we participate in a weekly auction whereby we sell that local currency in return for US dollars. So we are not seeing a buildup at this stage of unwanted local currency. So I'm going to say that the regime, the 60-40 regime, has increased the administrative burden on the finance team enormously, but we make it work. So they're not making life easier for us, but it is workable.

I have one further question. You obviously externalize your profits so you can pay dividends. How are you actually doing that? How is it done technically? It sounds like a very difficult process to do.

No, it isn't. So Blanket obviously receives its revenues in a combination of US dollars and local currency, yeah. It spends that -- so some of that money then, it has to spend on the local currency for local stuff, or US dollars for imported stuff. It then has a profit, [a split], it has surplus US dollars. Those US dollars are externalized via the payments of a monthly management fee to our business in South Africa for services provided.

Blanket buys pretty much all the consumables it uses from our business in South Africa. So there's a modest procurement margin on that. Then there's still money left over. And so, that money is then distributed from Blanket up to our 100% subsidiary in Zimbabwe called Caledonia Holdings Zimbabwe. So that goes up as a dividend payment. And then [ZESA] makes payments out from ZESA to the UK by other -- by loan repayments or dividends. That's what we do.

It is complex, it is complex. And so, the treasury management and dealing with the [all] that is probably within all the operating difficulties of the business, that is probably the biggest single operating headache. But we make it work, and we made it work for many years. And that's how we compare the dividend.

Just one final question. You talked about treasury management. Are there any foreseeable problems with that? As you said, it worked well thus far, but do you see any problems with that on the horizon?

No, I don't. But having said that, we must all recognize that Zimbabwe is very unpredictable.

Yeah, yeah.

So all I can say is that we've made this work for many years now. And we are probably one of the biggest single foreign exchanges for the country. And their government understands that they need Blanket to continue producing gold and selling gold to get that foreign exchange. So it's a symbiotic relationship, which we don't need to explain to the authorities.

That's great. That's much appreciated.

Thank you.

Thank you.

(Operator Instructions) And it appears that that's all the audience questions we'll have for today. So Steve, I'll pass it back to you.

Thank you, Dan. Yes, and thank you to everyone for participating. I hope you enjoyed the presentation. And as I've said before, the graphic presentation is on the website. And there's also a video presentation where Mark and I go into more detail and that's also on the website. So please, if you've got an interest, go and have a look at those.

But thank you once again for joining, and good afternoon, good night, good morning, and until next time. Thank you. Bye-bye.

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