Caledonia Mining Corporation Plc (CMCL) Q2 2018 Earnings Report, Transcript and Summary

Hello and welcome to the Caledonia Mining Results for the Quarter Ended the June 30, 2018. My name is Bella and I’ll be your coordinator for today’s event. For the duration of this call, you will be on listen-only however at the end you will have the opportunity to ask questions. [Operator Instructions] I’m now handing over to your host, Steve Curtis to begin today’s conference. Thank you.

Thank you very much, and good afternoon, ladies and gentlemen. Welcome to this call. I’m joined by Mark Learmonth, the CFO; Dana Roets, COO; and Maurice Mason, our VP in charge of Investor Relations and Business Development. We’re going to talk specifically about the second quarter and we will assume that the presentation that we have produced on the website has been reviewed. We will run through some specifics and then we will take some question at the end. From an overall point of view, the financial results are pleasing in the fact that profitability was there, cash generation as an operational level was there and we managed to have – for the quarter a reasonable average gold price. This is in gold mining companies are very aware now that the gold prices is under threat and there are issues that we as operators will have to deal with. We’ll get into specifics around some of the issues that we raised in our MD&A around me of the more specific issues that are happening at the mine in terms of grades and tonnage. But I can’t ignore the fact that outside of the reporting period, but inside of the period that we’re talking about from an MD&A point of view, we did have another fatality unfortunately at Blanket mine. And I just wanted to show that our shareholders and investors and service providers all understand that we take the issues of safety, very, very seriously at Blanket. And we have initiated many, many programs at the mine to ensure that we take nothing for granted and that the staff an employee that we have a Blanket and we are now past the 1,400 level of number of employees at the mine. A number of those are more recently employed and ensuring everybody understands the standards that we demand in terms of safety, we have initiated safety programs. We’ve also initiated a behavioral change program to ensure that everybody understands the methodology and the focus around site production and effective production. So that is a program that is going to take a number of years to work all through the mine, because every single employee will be put on a one week’s training course and they will be introduced to the methodology that that Blanket is using. So we as ever and we’ve explained it and we’ve stated it in our MD&A. We send our sincere condolences to the family of the deceased and we just are working very, very hard to do whatever we have to do to improve the safety report at Blanket mine. Other incident statistics do indicate that there is an improvement. And therefore the teams in the program that we had in place, I do trust, are starting to reach some benefits, but a fatality is something which you just cannot ignore. I think one of the major issues that we have to acknowledge during this quarter is that we had a significant reduction in our cash. And that’s a function of slightly lower production than we would have liked. And then some rather significant working capital issues, which are a function of the jurisdiction in which we operate. And we are attacking those areas, because they are under our control. And we will do whatever is necessary in a very difficult environment to improve the working capital drain. Zimbabwe is still going through a very difficult liquidity period and we as operators who are spending a lot of money and needing to invest a lot of money, do whatever is necessary to ensure that we manage and protect the cash balances that we had in the business. Dana will talk some more about the project the Central Shaft project that is now significantly more than halfway through. And it is important to understand that Blanket has got multiple projects on the go at this point in time. We are continuing to produce gold to generate revenue to fund an expansion program to sink a new shaft. We are close to 1,100 meters now. And we are building a new mine underneath the existing mine. So Blanket is a very busy space. It requires a lot of close attention and the management is doing a good job in keeping all the balls in the air and we will continue to focus very, very closely. I'm going to ask Mark to get into a few more of the specific items, excuse me – that he feels are necessary to discuss. And then as I said, we’ll open up the discussion for general questions at the end. Thank you again for attending and look forward to a fruitful discussion.

Thanks, Steve. We have posted a very brief results presentation on the website a few days ago, shortly after the published results so that’s all based on publically disclosed information. I’m assuming that people are seeing method of access and then post to sensitive in areas to the pages on that. Steve already mentioned safety, so I don’t really think anymore to that. The income statement is reproduced and that just simply reflects what the profit and loss was. Revenue is quite simply the gold price, gold production. I’ll ask Dana in a few moments to comment on the tons and the grade. I think that’s a matter of relevance. And the other real issue, I propose to focus in the financial results will be the working capital issues, as Steve referred to. So if anybody has any specific questions we can come back to those and deal with those later. So I’m going to ask Dana to talk about the production and the effects on production of plants and particular grade in the quarter and half year.

Good afternoon. I just want to just give some background. When we announced last year that we are going to deepen the shop even more of those good expedition results. We mentioned that for the next two years since 2017, talking about 2018 and 2019 we are going to see more than what we achieved in 2017. And the guidance we gave out was 55,000 to 59,000 ounces. More relation to certain ounces that we – of tons that we did last year and helping for a slight increase in grade as we get into the bank theory and was slightly higher and improving the grade C slight improvement in the ounces. And during the quarter we had some problem with our tons move, we were was 3% less than the comparison six month last year and that was mainly due to first of all, we add some low grade periods in Lima and we had to redevelop or re-establish some in that period. And we had some logistical constraints at – especially at Eroica, where we had some local issues and we had to solve those issues because we had some saving and the parts of the open of such, which we have to get to the draw point which also gave us problems with dilution as well as pairing the tons to the shop. And in we are – issue in AR South as well low that area on the agents of AR South as we engage to the sale of AR South, which we will see especially in this state towards the end of this quarter and the last quarter will gradually improve again. So, after the particular loss, we decided that in the Blanket area where we used unhand serving metals that for site regions we get cash along those surfing, which will take the guy to draw, we don’t have to go down bench 2 meter by 2 meter and so it working in onsite conditions or late-site conditions. And with that we doubled our long-hole and we had some new people that we have to train some new guys that had to drill with long-hole machines. And the accuracy of the hole being drilled and understanding of controlling the dilution is or was issued during the quarter and we [indiscernible] and we put extra people in helping these guys learnings these guys and making sure that we drill accurate and that we reduce the dilution. We expect to drive to start pick up during the third and fourth quarter as we move into bigger areas and as we get interrupt with the dilution issues that are just explained. And because of the low grade as well that we will recovery – recoveries have also done and at this stage we still maintain our production growth for 2018 of 55,000 to 59,000 ounces as mentioned. And the long-term with Central Shaft that we put operational of the first drill in 2020 that we didn’t will be able to build up to achieve 80,000 ounces by the end of 2021. So that is still on target and the Central Shaft is now at 54,000 level, we believe, I think the station there and I think one more level to go down and the other station and the bottom of the Shaft and the Shaft will be compete, and then we will go into only those we talk about year to equip the Shaft. So as far as the long-term are concerned, we are still on track and we had a couple of issues in the first quarter, we would be like to able produce more tons and high grade and we believe that will net out.

So Dana, did you mention the recoveries in the Oxygen plant?

Yes, I did mentioned the recovery, but I didn’t mention the Oxygen plant. As far the recoveries is that our current Oxygen plant is currently inefficient, it’s been old, the factory, we stopped operating it. And we sign contracts and we really positioned in new oxygen plant and we hope that will be installed in operational by end of this year.

So yes, $3 million down for the $8 million project we raised funding for that – from Stanbic in Zimbabwe and so it really don’t comes down to making sure the foreign exchange is available from Zimbabwe to – from the purchase of that. But that should underpin a recovery in [indiscernible] In addition, the oxygen some remaining it no longer me to use liquid oxygen which we currently importing and this is significant, this side as well as sort of an improved recovery in a savings for that. So that’s production widely on Page 7 of the presentation, there is a limit bit of information about production costs. Labor was down on the quarter, compared to the comparable quarter. And that’s notwithstanding of 2.9% across the board pay rise, which back dated to the 1 of January this year and also we’re employing quite a few more people, 5% more people than we’re in quarter two compared to the previous the comparable quarter in 2017, but notwithstanding by the few factors, the overall labor charge has come down because given – the type of performance of the production is not quite well as expected to be. So in first half, there is no production bonus that explains why the labor is down. Consumables are up quite a bit. We had indicated that the increased use – increased production coming from the declines I think about 25% of overall production that comes in declines of others. Moves it we are making much greater use of a business equipment that we haven't previously – sorry, intensively of the market, but an increased maintenance and sort of consumable costs that are only temporary. So when the Central Shaft is completed, we go back to our traditional mining methodology, which won't include the use of these industry machines, that’s relevant, that again, as a short term phenomenon. What we have seen in the quarter is significant increase in explosives price and also in the quarter, there was about $280,000 of a consumable cost associated with the pilot plant, which was running in the quarter to tax fleet material from some other satellite properties that are currently no longer operational. So again on the whole, we're reasonably comfortable but on-mine cost remaining pretty well contained and increases, we understand why those increases are happening and its relatively short-term, as we increase production and revert back to our memorable mining methodology. We do expect there is on-mine costs and also the all-in sustaining cost for again quite significantly. I really want to get on to the working capital. But before I get there, I think other thing is notice is taxation. The few bit of information on Page 9. The effective tax charge in the quarter was quite a bit lower than the comparable quarter. It's come down from 52%, but when I really – when I’m look at the tax rate high, I’m going to amalgamate the income tax rate and deferred tax rate that's come down and also the total effective tax rate, which includes withholding tax that come down. Before you get to excited that the benefits from the reduction and withholding tax is only short-term. We do need to have some sort of mechanism, both Caledonia in South Africa to charge on the Blanket for the services that’s a very considerable services that we provide from South Africa to the mine. The difficulty we have is that the transfer pricing regulations that exist between Zimbabwe and South Africa are a very complex and be mutually compatible. And so the difficulty, we're going to have is about over and above commercial requirements to make sure the cash is growing from Blanket to Caledonia to cover costs that we incur here in South Africa. We are going to end up in a situation, where there will be some tax leakage arising in either South Africa and/or Zimbabwe and we just happened to find a way to minimizes that. And I have say that by failing to make any transfer pricing arrangements tool would cause a serious problem in one or other jurisdictions. So don't get too excited about the fact that withholding taxes, which much lower in the quarter. And I afraid it will come back later on in the year. But really significant from the effect of the cash in the quarter was working capital and if you look at Page 11 of the result presentation. On Page 11, it shows the quarterly cash flow going back quarter one 2017. We start with EBITDA and then hands on although which full intensive purposes will be export credit incentive, which we should get paid in cash and that gives you the operating cash flow before working capital. And you can see that on a quarterly basis, it was $5.7 million in the first quarter of 2017, just last a $5 million in the second quarter of 2017. Quarter three and four in 2017 with very good productive quarters and slow we’re generating $7.2 million and $8.9 million respectively. Just on the $7 million in quarter one, the quarter two – the quarter just finished in 2018 was $6.3 million. So I don’t want cutting – I don’t want people to look at the cash movement in the quarter and drove the conclusion that the underlying cash generating capacity of the business has been adversely effected that by naming the case. We’re still generating over $6 million on a relatively disappointing and falling on the gold price environment. What did cause the damage was working capital movement, which you can see in the quarter was a $5.5 million outflow and that's after four or five quarters of consistent inflow, some of which have quite consistent. One of the couple of was that, it was a few factors behind that working capital outflow. The first is that the stock has continued to increase and management needs to take some steps to stop the quarterly increase in stock levels. The second thing is that the amount the government owns ours – so government owns us primarily for VAT recoverables and so to a lesser extent to go deliveries and for the export incentive credit that’s gone up by $2.6 million. In part a good proportion that was good genuine timing issues, so the increase in the gold bullion sale receivable, and in export credit payment those reversed immediately after the end of the quarter, so I’m not at all concerned about that. What is the quarter rotation is the constant increasing VAT recoverable, and we’re taking – taking measures now to try and recoup some of that recoverable in the absence of Zimbabwe actually paying of the money, so offsetting the amount of Zimbabwe result, if the amount we pay Zimbabwe under other taxation had, so things like PAYE. But also in the quarter there was a $3 million outflow for ZESA. ZESA supply the electricity, over a year ZESA had been insisting that we pay them offshore outside Zimbabwe, surprise we couldn’t get the foreign exchange to pay them, and so therefore we effectively we’re not paying our electricity bill, which we – in the $6.5 million. In last quarter ZESA and the RBZ or the Reserve Bank in Zimbabwe intervened and ZESA is now accepting payment domestically, and so we’re now in a Phase 1 program to paid down of $6.5 million, but approximately $1 million a month. And so that will continue until the ZESA build forced to renewable at about $800,000. So that really explains what’s happening on the working capital front. The ZESA situation we’ll stabilize towards the end of quarter three, stock is in our hands and we have taken steps to deal with the government receivable. So I think really, unless anyone start anything about – anything, no I mean really that’s what we have to say on these results. So I think we’re ready to open questions now.

[Operator Instructions] We currently have no questions coming though – we have a question which comes the line of [indiscernible]. You are now unmuted. Please go ahead.

Hello, everybody.

Hello, Harry [ph].

Could you please explain what the tax payments will be when you charge administrative fees from South Africa to Zimbabwe, I didn’t follow that clearly?

Hi, it’s Steve. So South Africa provides services to Zimbabwe, and Zimbabwe perhaps to pay South Africa than a services, right?

Right.

The problem you have is many of this is usually characterized the management fee. The miners haven’t helped themselves over the past decades, mining companies no sales jurisdictions, management fee is very aggressive management fee district profit about African countries, and move gross profits to places like other than Jersey wherever, okay? So tax – African countries are quite widely somewhat skeptical of management fees, and all management fee has been quite high, but that’s because it represents a very substantial amount of work has been done by South Africa to for granted. So we’re absolutely comfortable that there’s no difficulty with the quantum that we charged, okay? The problem we have in Zimbabwe, the management we’ve been charging about $4 million a year, only 1% or 2% or 3% of that actually qualifies the tax deductions in Zimbabwe, okay? So it means that effectively you don’t get tax deductions in Zimbabwe for effectively the real cost if actually Blanket wasn’t particularly services in Caledonia, went out and particularly services from the third party, just a general engineering consultancy or whatever those costs would be allowable for tax in Zimbabwe, okay? That’s the first issue. The second problem we have is that all of that elements of the management seeing that is not deductible of income tax is deemed by the Zimbabwean authorities as a dividend. And so effectively then what happens is that you’ve got to pay 15% withholding tax on that deemed dividend payment, and that’s an addition to other withholding taxes. So it’s a very inefficient structure, if we simply and never frustrated, as long as the Blanket is in a healthy dividend paying position from Caledonia’s perspective, we actually don’t care whether you get money about management fees or money about dividend, it makes almost the dollar, makes it different at all, the difficult we have if we suddenly stop these management fees, the Zimbabwe tax authority will turn us, and say, hey you stop pay management fee, and all those management fees even charging since 2012 that clearly been fictitious, and therefore we’re going to know for them. Other side of the call, with the South African revenue, but now become accustomed to seeing management fees arriving in South Africa which does crystallize a modest tax liability here in South Africa, but again basically we’ve done with South African revenue service’s calling out that risk, now before we know where we are, we go Zimbabwean numbers and South Africans calling away for us and we were going to work them. So it is quite a naughty problem, and so our objective is try and over time reduce the level of management fees, sort of try and release the unnecessary tax leakage, but it can’t be done other night, because you can’t talk jump the system. So that’s quite a long answer to what is quite a complex situation.

Effectively to start a managerial fee is an after tax fee, because the Zimbabweans – that’s how you say it, are not permitting an expense deduction because of that, then they are charging a second fee, let’s say 15% on dividends or that’s the differed taxes.

Yes, yes.

For what? And then South Africa that wants to charge you tax also.

Yes. I think the dividend, the management fees we did lot in South Africa create taxable profit here in South Africa, obviously the cost in South Africa they get deduction from that, and that – so historically we have seen a modest tax liability in South Africa, which in this quarter worked and exist, so it isn't helpful. We have many submissions at the very highest level in Zimbabwe to draw our attention to the situation, which we think genuine answeris thesetdifferent senses to the companies like us to invest in Zimbabwe, because one of the reasons why we have to provide such a high level of support from South Africa into Zimbabwe, because the availabilityof skills in Zimbabwe is very limited, and so there is just the competitive skills locally, you got to get more offshore. We hope that we will get a positive reception, but the fact is it's very difficult for cash throughout African countries to walk away from a source of revenue when – because the competition and another…

Yes, it’s sounds on my mind, that’s addressable for cash. I understand that, you are almost being tax tripling.

Yes you are. That’s not a tax charge has been quite high and we over time, we need to try and it's not going to quick, but we're going to try and identify a tax structure which mitigates, just to leave it open to this particular tax burn, obviously other side of the corner I’m going to say, if the Zimbabwe taxes also looking very aggressive in terms of looking at our structures, not helped by some extremely unhelpful third-party country from well informed, well advised, script commentators based in UK we seem to have really to the width of a storm for thatcompanies – the coal mining companies not paying their share of taxes, they are very comfortable to pay tax on our operating profits, what we'reretreating is going to start paying tax on things really are certain target that you’ve seen – just fort the thing kind of spectacles, I think that’s in a context with that.

You have been tarred with the same brush as people do abuse the system, and how do you accrue – account for these taxes, now do you set up some accruals?

Yes, we accrued for tax, yes.

You do. So it shows up in a public statements, even though there is a transactions between two – associated entities.

Yes. Why, we break it down is, we actually show the tax, over the tax charges are arising in Zimbabwe, in South Africa, and elsewhere we have them, but it's not elsewhere anymore.

I know what happens, if you set up a different managerial company say in Mauritius or the British Virgin Islands which are far away?

The problem that how does the all of our technical people have to do look in the BVI, [indiscernible] convenience of having the technical staff clearly understood is very significant – practical even difficult.

You couldn’t even move to Mauritius, because that would relatively a large move.

No, I think that’s too difficult.

Yes. I think this is going to drag on for some time how you describe it?

We are just going to find away as soon as we develop the company over the next sort of few years to see if we can find a structure that the mitigate in, very much the same way when we moved the company out of Canada, because we could say relatively easy way it’s not complex basically, but we did not sort of section of avoid – not the tax avoidance, so which is an attempt to make it cleaner and simpler and just avoid unnecessary tax leakage, as I say…

[Indiscernible] in Canada, you are basically listing that’s all I had there.

Yes, we are still incurred in withholding taxes and there was another taxes rising on the realization of the value for the facilitation rules.

Other than new Prime Minister, would have been overstay whether ordered you every 15 months, even though you added, they are really add to commercial, good thing you moved out. Okay, that clarifies my puzzle. Thanks.

Okay. Thank you.

See you in Colorado.

Yes. Any other questions?

There are no further questions in the queue. [Operator Instructions]

Okay. I think there are no more questions. Thank you once again for attending this call. And we look forward to talking to you again in some future period. And yes, Caledonia will continue to do what you need to do, the project continues to advance and we will file the necessary reports as and when appropriate. So thank you once again, and good afternoon to you all.

Thank you for joining today’s conference. You may disconnect your handsets. Hosts please stay on the line.