Caledonia Mining Corporation Plc (CMCL) Q4 2020 Earnings Report, Transcript and Summary

Well, good morning, ladies and gentlemen, and thank you for joining the 2020 Results Presentation of Caledonia Mining. It's a pleasure to actually present these results, and you'll understand why as we run through the very successful financial results, operational results and just a general update for Caledonia. So let's proceed without any further ado. The disclaimer, most of you will be familiar with, and we have to put it up there. So there it is for you. Now moving on to the 2020 highlights. It really is encouraging and pleasing to be able to talk to highlights in a year that most of us look back and wish had never happened. 2020 was a tough year from a COVID perspective, affected every single one of us. Luckily, the -- COVID had a minimal effect on Blanket Mine. We had 1 case at the mine during 2020, but the structures that have been put in place, the discipline that is demonstrated by the staff saw us through the COVID pandemic, and it did not affect our overall operating results at Blanket Mine to the actual extent that we recorded a record production of 58,000 ounces. And Blanket, as it always does, had very well controlled costs. Obviously, there were some exceptional costs because of COVID, and Mark will talk about those just a little bit later when we get into the financial review. A very, very good strong set of financial results, high production, a higher gold price arena. I'm not going to elaborate too much on the financial results because Mark is going to talk about them, but there are 4 very, very important points. Turnover hit the $100 million level, 32% increase above previous years. Gross profit hit $46 million, 50% increase. And adjusted earnings per share hit just over $2.00 a share, $2.04 a share, which was a 41% increase. So all in all, that says the business is running well, and we demonstrated that during the year by increasing dividends 4x. And that gave shareholders a cumulative increase of 60% on the return that they got via the dividends. We are confident about the outlook for the future for Caledonia and Blanket Mine. The Central Shaft, which has been this 5-year long project, will be commissioned during Q1 of this year, 2021. And that will then draw a line underneath the project. And Dana and his teams will be able to then bring into operation the Central Shaft into the structures of Blanket Mine, and that will enable us to ramp up production this year to 61,000 to 67,000 ounces. And looking forward into 2022 and onwards, that's when we'll hit our anticipated run rate of 80,000 ounces, which is the target we've been putting out there for the last 5 years, and we're very excited that it is now just around the quarter. And also, equally as important is we've spoken about Caledonia's ambition to become a multi-asset operation, and we demonstrated that at the end of last year when we announced the signature of 2 exclusive exploration rights on 2 properties. We will be exploring there for the next 15 to 18 months. And we will then be able to make a decision as to whether we exercise those options and purchase the properties and decide what the next steps are. Our brownfield operations, the Glen Hume operation, is -- actually has drilling operation taking place there at the moment. And the Connemara North is in late-stage planning with the use of consultants to give us their wisdom about where best to site the drill holes. So the highlights are very pleasing, and we'll go into more detail for you when we go into the financial results. But if I look at the health and safety performance of the mine, critically important to us, top of most agendas, the Nyanzvi initiative really set the mine up to deliver another really excellent set of results. We continued with training where we could, but at a very, very reduced level during 2020 because of COVID and social distancing. But the benefits of Nyanzvi flowed through, and that enabled us to have a hard lock down, disciplined staff members, resulting in record production. Just shows if you lay the foundations well, you will reap the benefits later on. The increased awareness has resulted in a continuing reduction in total accidents, and that continues to be our objective. Our people are paramount to us from an importance point of view. Their safety is critically important, and we will continue to strive to improve here all the time. Training never stops. And we didn't have a large staff turnover in the year, but we will discontinue to do the training as and when necessary. I think I've spoken enough about COVID. We did assist the Chamber of Mines in Zimbabwe with some donations, and they distributed that more broadly into the Zimbabwe environment. We did -- we were able to do some of our own projects, and we'll talk about those a little bit later. But overall, the shaft was a little bit delayed, but as I've said, commissioning will happen this quarter. It must be remembered, though, that some of the underground development work was delayed to a greater extent, and that needs to be caught up this year, and that's why we have a slightly lower target for ourselves of 61,000 to 67,000 ounces. But we can still, with the work that's been done previously and the work that will be done this year, we will still be able to hit that 80,000 ounces in 2022. One of the CSR projects that we delivered, this is a very exciting one because it was conceptualized, it was planned, it was executed and it was delivered during the height of the pandemic. And this was an isolation center at the Phakama clinic, which is in the local community areas where we operate, and this enabled us to build 2 isolation wards for the local communities, a very decent ablution facility and kitchen facility. We equipped these isolation wards. And pandemic having passed, hopefully, these will be great assets for the area to be able to look after the community. Very respectable and decent surroundings for the local community at large, so we're very, very proud of what the team managed to do on this project. From an operating point of view, we've already said that we produced 58,000 ounces. The graph that you can see shows you that there was this gradual ramp-up of tonnage, which was as per the plan. We had a great start. And we continue to progress to the 58,000 ounces grade. We continue to work hard to deliver a good grade to the mill, so the planning is essential. And the grade, obviously, has an effect on the overall recoveries and the number of ounces produced, and it affects how your costs pan out at the end of the day. So we -- this is not a particularly high-grade mine, but you can see that we can still generate a decent blended grade across the various ore bodies. We can get the tonnes that we need, and this gives us the confidence that we will be able to deliver the 80,000 ounces because we will have more infrastructure available to us when the Central Shaft is commissioned, so that we could move more tonnes, we will have more underground development done so that there will be more access to stopes for the mining teams. Planning can be more flexible. And we can, therefore, get the tonnes out to the plant at the required grade and therefore, deliver the ounces that is required. And you can just see that Blanket just continues to deliver and slowly ramps up, and through 5 years of when we had to look after the mine, generate sufficient and significant cash flows. I think this is a slide that just tells a very, very good story about the capabilities of this operation, and we should be very, very proud of a slide like this and the overall results. Electricity continues to be a challenge in the southern part of Africa, where we are. Blanket runs off the national grid. The grid in Zimbabwe is constrained, like many of its neighbors, but it does buy power from its neighbors, South Africa and Mozambique. It went through a very difficult cycle when there was a severe drought, and there was less power coming out of the hydroelectric scheme at Kariba. I'm pleased to say that, that has turned around this season. So electricity continues to be a problem. We do have the diesel gen sets, 18 megawatts of diesel capacity, but that's expensive, and it's not particularly environmentally-friendly. And therefore, we made the decision last year to build a solar farm, and we will ultimately be operating with grid power, diesel gen sets as and when necessary and then solar power. The important thing for us is that during daylight hours, the solar farm is going to give us clean and consistent power, which is one of the problems that grid has. The power generally tends to be of a lower quality and a variable quality, and that is not good for sophisticated pieces of machinery. So the solar farm is a very good strategic piece of insurance for us, and we look forward to that coming to fruition. It's going to provide -- the solar farm is going to provide 12 megawatts of power, which will be about 27% of the requirement that Blanket has on a daily basis. It is fully-funded, as we sit here today, we did the funding last year. Mark anticipated a great opportunity, and we exercised an ATM fundraise in New York, and we raised $13 million gross, so we're in the enviable position that we can fully fund this project. The go button has been pushed. The ground has been cleared. Voltalia is in full delivery mode, and we should be looking forward to solar power sometime 12 months from now. So this time next year, we will be a generator of solar power, and we are very, very excited about that. We're now going to go into the financial review, and I'm going to hand over to Mark so that he can deliver what are really a very, very good set of results. So Mark, over to you.

Thank you, Steve. So just looking at some of the highlights. Steve discussed the production level, nearly 58,000 ounces, that was a record. So production was 5% up. The gold price was obviously higher, so that's a 27% increase in the gold price. So both of those contributed to revenue of bang on $100 million, a 32% increase. Gross profit was up by 50% to $46.7 million. And the adjusted profit attributable to shareholders was also up by about 55% to $23.8 million. And adjusted profit, we strip out from the foreign exchange gains and losses. And in the previous year, we also incurred -- had a substantial profit arising on the disposal of a subsidiary. So we strip out that background noise and gives you a very pleasing increase in attributable profit. Earnings per share, as Steve mentioned, was just over $2 a share, so that puts us a current [ PE ] of about 7. And as Steve has already mentioned, we have progressively increased the dividend pretty much quarter-on-quarter, which means the overall dividend paid in 2020 was $0.335, which was about 22% higher than the $0.275 that we paid in the previous year. Looking at the profit and loss. I've already mentioned revenue, the royalty stays the same, it stays at 5% of revenues. Production costs appear to go up quite a bit by about 20%, so from $36 million to $43.7 million. That does include a fairly sizable component of what I call noncontrolled costs, and I'll come back to that in a bit more detail later on. So clearly, you see gross profit up from $31 million to $46 million. G&A also appears to step up from about $5.6 million to $8 million. That's largely driven by higher insurance and higher wages and salaries, but again, I'll discuss that in a little bit more detail later on. Last year, in 2019, we did have an enormous foreign exchange gain of nearly $30 million. This year, it was much smaller at $4 million. And the reason why the foreign exchange gain is reducing is simply once you've written liability down, there's not much further you can take them. So that's why notwithstanding the continued devaluation of local currency, that's why the foreign exchange movement was much, much lower. So profit before tax, $60 million last year, down by about $40 million this year. But don't forget that $60 million does include those large foreign exchange gains. The tax, I will talk about in a bit more detail. The overall tax rate of about 37% does look high, but again, I can put that into some more context. So I think there's nothing really more to say on the profit loss account, very strong performance. But I said I'd talk a little bit more about production costs. So what you see here is production costs broken down into the main components. Wages and salaries increased from just less than $14 million to just over $16 million, so that's a 16% increase. The bulk of that was largely driven by a 12% increase in manhours worked and also the effect of a new slightly more aggressive bonus structure. So just to be clear, we pay our workers in a combination of local currency and effect of the U.S. dollars, so we don't -- we're not affected by the high inflation rate in Zimbabwe because the amount we pay in local currency, we determine each month based on the prevailing U.S. dollar RTGS exchange rate. Consumables also stepped up. A large proportion of that increase relates to the increased cost of maintaining the underground fleet to trackless equipment. That will be with us for a few years yet. We think we've got our arms around this now. We've improved the maintenance schedules and also, we've upgraded the fleet with near equipment. Previously, we bought secondhand equipment because we were capital constrained. But we've now upgraded that fleet. And you can see, about $1 million, $800,000 of COVID consumable costs, which clearly weren't incurred in the previous year. Electricity. We split the electricity down between the cost of that setup, the grid power and the cost of diesel. The [ lesser ] cost appears to go up, there was an increase in power usage. But also it's fair to say that in 2019, for part of 2019, we were paying in local currency for our grid power, which at some -- at one point we're paying effective about USD 0.01 per kilowatt hour which was -- which is ridiculously low. That has corrected this year, so that contributes partly to the increase in the investor cost. And then a significant increase in the cost of diesel for the gen sets, and that's because I'm afraid we're having to run the gen sets longer, so $1.8 million of diesel cost. And that increase played into the decision that we took in the middle of last year to press ahead with introducing the first phase of the solar project because actually, we can't see this electricity situation getting any better and arguing it could get much worse, so we need to protect the business and press ahead with solar. Online administration comes down very slightly because that is actually one of the very few areas where our local -- our costs are denominated in local currency, and we do benefit from further local currency devaluation. The LTIP. LTIP expense of $600,000, that -- the LTIP is -- its long-term incentive awards for certain members of the online staff. That is determined largely by the share price. And so as the share price goes up, that means the size of that award increases. So again, that's not a cost that we can control. So the overall IFRS production cost, you can see went from about $36.4 million to $43.7 million. But within that, in 2020, there's about $3.3 million of what I would call noncontrolled costs, being the cost of COVID, the cost of the diesel for the generators and the share-based expense. So removing those on a like-for-like basis, controlled costs went from about $34.9 million, [ digital ] to $40 million, $40.5 million, which is a 16% increase. And if you express that in terms of cost per tonne, the actual increase there was about 8%, so the cost per tonne went from $62.78 per tonne to $67.61 per tonne. Frankly, anything much less than $70 is a number that we're very pleased with. A little bit more detail on G&A, broken down into the main components. Investor relations, the investor relation, even though we were trying last year to -- because we knew that we had a good story to talk to last year as we approach the end of the Central Shaft project. But most of the events that we attended were converted to virtual events, so they were cheaper, but that also flows through into a reduction into the travel because simply, we just weren't traveling as much as we had been previously. Advisory service fees increased from $400,000 to $900,000. That reflects really the amount of activity that took place in 2020. So for example, we incurred legal costs associated with the delisting from Toronto, we incurred legal costs relating to the filing of the FV registration document, the SEC, which we subsequently used for the purposes of the ATM. And in the period before we got Board approval to proceed with the solar project, we incurred legal expenses on the solar project which we expensed rather than capitalizing. So I wouldn't expect that level of fees to continue going forward, but frankly, those fees reflect things that we've done with for the benefit of the business. Increase in wages and salaries from $3 million to just over $4 million. There was an increase in headcount at the office in Johannesburg, primarily driven by senior appointments in the areas of geology and rock mechanics, and we also took on a new investor relations person based in London. And reflecting the strong performance in the year, there was also an increase in management bonuses. The significant increases was in the management liability insurance, that's called DNO insurance, which went from less than $100,000 to over $1 million. That reflects a general -- a very sharp tightening in the market for this sort of cover. So we are, by no means, the only smaller mining company to have experienced this increase. And that was also exacerbated for us because the primary market for our trading is now in the United States, and insurers are more concerned about the potential class actions coming out of the U.S. market. So that explains -- what puts in more context why the G&A cost increased from about $5.6 million to about just under $8 million. Looking at cost per ounce. It's fair to say that in 2019, the online cost per ounce of $651, that did benefit, to some extent, from a lower electricity charge, certainly in the first half of 2019, which we just didn't have in 2020, so that's part of it. There's also the $744 an ounce in 2020. That does include, as I mentioned, about $3 million, $3.2 million of what we call noncontrolled costs, which is equivalent to about $56 an ounce. So again, I think that puts that increase in some sort of context. Similarly, the all-in sustaining costs increasing from $856 to just over $1,000 an ounce. Again, that also includes about $3.2 million of the noncontrolled costs, so that's about $56 an ounce and that $1.4 million of share-based expense. So again, that puts into some context the increase from $856 to just over $1,000 an ounce. And we take the business forward as we grow production and as our CapEx falls, we still believe that the all-in sustaining costs move forward. We're looking at something between $700 and $800 an ounce from 2022 onwards, probably towards the top end of that range, largely because of the higher gold price. The gold price is significantly higher now than when we did the technical report on which those forecasts are based, that gives rise to a higher royalty charge. And then finally, just a word on taxation. The overall tax charge of $15.1 million is an effective rate of about 37% from our IFRS profit before tax, which looks high. But the main components of the tax: Zimbabwe income tax of $8.1 million, Zimbabwe deferred tax of $5.7 million. If you express those 2 elements of tax as a percentage of gross profit, and gross profit is very close to the online profit before tax, that's an effective rate of about 27% which is very close to the headline rate of income tax in Zimbabwe of 25.75%. So the underlying tax charge, Zimbabwe income taxes and Zimbabwe deferred tax, is reasonable. But then on top of that, we also incur income tax in South Africa of about $760,000 of tax in South Africa, which arises on intercompany profit. Clearly, that profit disappears on consolidation, but the tax liability to South African revenue doesn't disappear, so it's about $760,000 there. And then in addition, there's also withholding tax arising on money that we move around the group, so our management fees and on dividend distributions intra-group because all of that contributes to the total taxation charge of about $15 million. Looking at the cash flow. The number that I most like here is the cash flow before working capital increased from $28 million in 2019 to $42.5 million in 2020. So there's no doubt that this business even producing at a rate of 58,000 ounces is highly cash generative, and we'd expect that rate of cash generation to increase as production increases and as our costs come down and as our CapEx begins to fall away. We continue to see working capital absorption. That is a deliberate increase in stock levels which protected the business during the lockdowns when we're having to rely on our stocks of cyanide and explosives and drill steels at a time when we couldn't readily import them into Zimbabwe. And you can see continued high levels of investing, $28 million spent last year, and that includes $2.6 million, which we spent to get our hands on the new exploration properties, Glen Hume and Connemara. We'll continue to invest heavily this year. Both at the mine, a small amount on the new properties and also clearly on the solar project as well. And then we'd expect the CapEx to begin to fall away from 2022 onwards. And the financing and net, the net finance income of $7.3 million. The big elements of that were $12.5 million net equity raise by the ATM in the middle of last year, offset by a $4.5 million dividend payment. So the cash position is very strong, and nobody should be in any doubt in the extent towards this business is highly cash generative. Nothing really to talk about on the balance sheet. The balance sheet continues to grow as we continue to invest in business and retain profits. The dividend is worth -- is -- just to reinforce what we've done here, we've been paying a dividend for many, many years now, and it was at about $0.06875 a share, so we increased it from $0.06875 to $0.075. And then when -- in April last year, when the coronavirus came upon us, we decided just to hold fire for about 4 weeks just to see what the effect was. But by that -- so by the end of April, we could see that coronavirus hasn't had an appreciable effect on the business, but we didn't feel it appropriate to continue to increase the dividend further at that point, so we kept it at $0.075, and then we started to increase it again from July onwards when it became clear that the business was performing well and coronavirus wasn't having any effect. So the last dividend we paid was in January 2021, and that was $0.11 a share. The next dividend announcement will be in early April. And we've always been very clear with the market that as we continue -- as the cash generation from the business increases, we have every intention of sharing that higher cash with shareholders, but also retaining some of the increased cash generation so that we have money to invest in new projects. And I think that brings the finance section to an end, so I'll leave it to Steve to talk about the outlook.

Thank you, Mark, and excellent being able to talk to numbers that look like that. And as I said before, very, very proud of the team at Blanket and the Caledonia team to have held the ship together and to really produce fantastic results for the shareholders. So yes, so the outlook we've spoken about before, 80,000 ounces in 2022, the infrastructure that our operational people have got is greatly advanced on where we come from. We've got a new 6-meter diameter 4-compartment shaft going down to 1,200 meters, giving us access to deeper ore for longer. So the future of this mine is guaranteed for the next 14-odd years to 2034, and that just shows that there is value in this business. It doesn't matter that it's been operating for over 110 years. It is a great ore body or a collection of ore bodies. And we're very excited about the future. We've invested heavily. Mark's already spoken about how cash-generative this business really is. But if you put it in context, the Central Shaft alone has consumed $67 million worth of investments since January 2015, and all of that is being generated by the mine in Zimbabwe during some lower gold times, some production periods that were lower than what we've seen. It just shows a good operation will always be there to deliver and give you the flexibility that you look for as a management team. The opportunities in Zim, we've looked at many over a long period of time, and we were very happy to announce 2 last year. The Connemara North property, now this is the one that is in sort of late-stage of planning. There are no drills operating there right now, but we've got 18-odd months to do an exclusive exploration project there. And if we find what we hope to find, then we will exercise the option and we can purchase this property for just over $5 million. There would be a 1% net smelter royalty. But if you're producing gold and you're making profit, then a 1% net smelter royalty, considering that we've capped the intro price, is very good. The slide is clear. It says this is a brownfield operation previously owned by First Quantum, and they decided not to carry on with it during some very difficult times in Zimbabwe. We've been there. We've weathered those difficult times in Zimbabwe. We're confident we can operate, and we are now very excited to be looking at growing additional assets in the Zimbabwe area. The other project is called Glen Hume. And geographically, it's in the same sort of area as Connemara North, right in the middle of the country, near Gweru, and these are within 30 kilometers of each other. So they are useful if we could find something on both properties, but they are exploration. Let's remember that. And we will conduct appropriate exploration exercises there, and we will tell the market what we find when we find it. The option agreement here is slightly shorter, and we've got 15-odd months. We've paid $2.5 million already to have the exclusive rights. And if we find, again, what we hope is there, that will give us the opportunity to consider an expanded project. We'll pay the balance of the price which will give us an overall entry price of $5 million and again, with a 1% net smelter royalty. Drilling has commenced here. There was a drill contractor on-site when we finalized this deal. They have continued, and we will continue to utilize these services as long as it's appropriate. And certainly for this Phase 1, we've established some RC drilling and we're doing some diamond drilling. And we've got the respective laboratories teed up to do the assay work for us. So yes, we will talk to the market when we got -- when we've got something to talk about on these properties, but we're very pleased that we have added something to our portfolio. From a sustainability point of view, we take our responsibility as an operator in a country -- in a poor country very, very seriously. And we have a high regard for the governance that we must measure ourselves against. High levels of FX, it doesn't matter that we're a small company operating in a relatively distant and difficult environment, that doesn't change the matter we're miners, we're there to extract minerals and we want to do it to the best effect for the benefit of the country and for the shareholders. Health and safety is of critically important to us -- importance. And we spoke about this earlier. It never gets forgotten, it's on the top of every agenda, and we continue to train and train and train and remind our workers of the importance of health and safety. Our people have weathered the storm of COVID. They've come through it with great praise, and they deserve to be proud, 10% owners of this Blanket Mine. They will continue to be 10% owners even though that the ownership rules in Zimbabwe have been changed, and Caledonia could own 100% of this property. But we will continue to always have local partners, and the staff will be one of them at a 10% level. So will the community. We believe it's important that you work with your local community, and we've done that. They are a 10% owner. We have a defined CSR project that we'll talk in a little bit more detail about later. But I've already spoken about the Phakama clinic and some of the work that we've done in some of the schools and areas to help the local community. So we take this side of our business seriously. And the environment, yes, we have tailings dams. We operate to the highest international standards. We are embarking on the solar projects, as we've spoken about already. So again, we measure ourselves against the best standards, and we do what we believe is appropriate for a business of our size in the region where we are, but we are very responsible operators in the environment that we reside in. Corporate social responsibility. Again, we don't just pay lip service to this, this is part of our culture. It's growing in importance all the time, and we look at it in 5 sort of pillars: we look at it from an education point of view, for the locals in the area; from a health perspective; from an agricultural perspective, because we are in a rural area; the overall effect and footprint we leave on the environment; and what we can do for women and youth empowerment in the area. It's the legacy we want to leave behind, and it's important that we have something structured. We allocate -- we dedicate funds to this on a yearly basis, and the Board has recognized the importance of this. And we've just appointed a new nonexecutive director to head up and provide leadership and guidance from her experience in this area, which she has been doing for the last 20, 25 years. And we -- as I say, we're not paying lip service to this. The community needs us, we need the community. And our staff, we've got 1,600-odd staff on the property. They've got their families there. So we've got a large community that is dependent on the mine, and we are dependent on them to make the mine successful. So we work in harmony together, but it takes effort, it takes money, it takes discipline, and we are committed to this part of our business completely. From a strategic perspective and an outlook, just really in summary, get that production up to 80,000 ounces from 2022 onwards. That will deliver increased cash flows which will enable us to look at other opportunities that will give us choices. With the increased production, the -- one of the overall benefits is going to be a declining average all-in sustaining cost because there is a large proportion of blankets costs that are fixed, so we will start seeing economies of scale, and that's excellent. As we go deeper, we'll be able to continue with deep level exploration, and that will enable us to extend the life of mine even beyond the 2034 that we know about today. We will continue to generate high levels of cash which will flow through to the Caledonia level as CapEx at blanket tapers off from the end of this year onwards, which will mean that returns to shareholders can be considered at a growing and/or increasing level, and we can emulate what we've done in the past. As I've said, we've increased 60% over the last sort of 12 to 14 months, and we're very, very proud of that. We can use the cash that's going to be generated to look for other opportunities, either in-country or out of country, if we can't find things that deliver the right sort of value level for shareholders. All that we find, we've exhausted the opportunities that we believe are appropriate. We're not going to stand still, we're not going to sit on our laurels, and we are going to continue to work very, very hard to look for new opportunities, deploy cash, generate good returns for shareholders and add value wherever we can and grow Caledonia from a single asset, small company to a larger gold producer, mid-tier gold producer, multi-assets and maybe even multi-jurisdiction. So the future for us is exciting. We know we can do it. We've got the team, and we really do look forward to the way forward. So that completes the presentation from my perspective. Mark, I don't know if I've missed anything and if you want to add or just we'll say goodbye at the end?

I think that's everything, Steve, so I think we're finished. Thank you.

Very good. So thank you once again for your time, and look forward to talking to you as this year rolls out and we have the opportunity to release further quarterly results. So thank you for your time, and cheerio.