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Presentation

Mark Learmonth: Okay. On the call today with me, Mark Learmonth, Caledonia’s Chief Executive, there is Victor Gapare, who is, as you all know, one of the vendors of the Bilboes asset; he’s an Executive Director. We’ve got Chester Goodburn, CFO, based in Johannesburg. Dana Roets, also, Chief Operating Officer, based in Johannesburg. Maurice Mason, Vice President, Corporate Development; and Camilla, VP, Group Communications; they’re both based in the UK. Should we get going? So without beating about the bush, it was another very challenging quarter. As I’m going to go through these, my comments will be focused on Q2 compared to Q2 previous years. We do, for reference, show six-month numbers there, but I prefer to focus just on the quarter.

So production was 18,500 ounces. That includes a very disappointing 1,000 ounces from Bilboes, so it’s about 17,400 from Blanket. I’ll ask Dana and Victor, respectively, to discuss the operational issues facing Blanket and Bilboes, respectively. Pretty much saved by the high gold price. A high gold price meant that revenues were broadly level, at about $37 million. The gross profit was substantially reduced, down from $18 million in the second quarter of 2022 to just under $11 million for the second quarter of 2023. And that was a combination of higher, very high costs at Bilboes with no commensurate revenue. And then at Blanket, the difficulty at Blanket largely relates to higher-than-expected use of electricity, which gave rise to about a couple of million dollars of extra expense there.

That flows through into the net profit attributable to shareholders: instead of being $11 million profit, it was $1.5 million loss. And that also flows through in terms of the earnings per share. And critically, the net cash flow from operating activities — instead of an inflow of $16.7 million, it was an outflow of $2.2 million. Chester will give us more information on that in a moment. Can we move on, Maurice? Again, so that why — summary production at Blanket was below target due to operational issues, which Dana will talk about. And I’ll just draw your attention to the fact that July, after fairly intensive management interventions, July did show substantial improvement. So 7,800 ounces produced in July, which has given us the confidence to reiterate our production guidance for 2023 of between 75,000 to 80,000 ounces of gold.

Similarly, costs for the quarter were very high. On-mine cost was over $1,000 an ounce. The bulk of that increase, from just under $700 an ounce in the comparable quarter, the — much of that increase, 81% of that increase, was due to the higher cost incurred at Bilboes. And again, I’ll draw your attention to a very strong performance in July, where on-mine costs came in at $715 an ounce, which again, gives us comfort that we can stand behind the full-year guidance of between $770 and $850 an ounce. Having seen the poor performance at Bilboes, it will be returned to care and maintenance, with effect from October 1. So we got a three-month notice period with the contractor. And it made financial sense to run that contract down, rather than terminate immediately.

And it’s likely we expect to see a modest cash contribution coming from Bilboes in the third quarter, as the stripping ratio falls away and we continue to harvest gold that’s been deposited on the leach pad. Safety has been very disappointing in the quarter, and compounded by an unfortunate fatality, which we announced next week. And so management is taking urgent measures to improve our performance there. On a more positive note, we’ve seen some good drilling results from Eroica, which we’re going to talk about in a moment. We raised some money by way of placings in March and April. And we’ve also started the direct export of gold from Zimbabwe to a refiner in Dubai, which means that we’ve cut the Reserve Bank out of our US dollar revenue stream, which is, sort of optically, very good.

And there’s been some changes at the Board, where Leigh Wilson stepped down as our Non-Executive Chairman, and has been replaced by John Kelly. So in terms of safety, I mean, I think the critical thing here is the — what sort of brings it home is the disability or injury frequency rate, or the total injury frequency rate. You can see, towards the bottom of that table, it has increased from — the TIFR has increased from sort of about 1, up to 1.35, 1.36. Now clearly, we are going to have to take measures to address that a lot of it comes down to trying to re-engineer the way people behave in the work environment. We’ve got to clearly set out a series of rules and procedures for doing pretty much everything, and people just need to adhere to that and stop doing silly things.

And so Dana and the rest of the team at Blanket are putting a lot of effort into trying to make people behave in the way they have to behave, so they can operate safely. So we don’t want to see those safety statistics stay at that level. Bilboes isn’t included just for completeness, but there’s been no significant issues at Bilboes. So let’s move on from that. Okay, can I ask Chester — who I’m afraid is suffering from a bit of a cold, but no doubt he’ll manage, can I ask Chester to take us through the financials?

Chester Goodburn: Yes. Thank you, Mark. Our revenues are somewhat a bit down from the previous half, comparing at the previous quarter as well. That’s due to lower ounces produced at Blanket, and the additional ounces that we produced at Blanket did not increase above those levels. Royalty remained at 5%, still charged at the same rate as the favorable period. Our production cost has gone up, but we’ll get to the detail of the production costs in a few slides. Depreciation has increased, but due to a reassessment of useful lives, that increased the quarterly depreciation by $600,000. And that’s due to reassessment of the useful lives of some generators, whichever were shot, which we do not plan to use, now that we put the scan control available.

And some LHDs and generators has been deteriorated due to the [bow batration] and the [bad bow] we’ve been experiencing at Blanket. It’s being negatively affected by other costs, to the extent of $14.3 million for the half year. There’s about a $7 million swing on the foreign exchange losses. That’s a $2.1 million loss for the bar up here. It came down from a gain of approximately $5 million in the previous half. As did the Zimbabwean dollar, that devaluated in the month of June, while outstanding [Technical Difficulty] liability is between 5% as devalued, and that caused foreign exchange losses. It’s good that we do export 75% of our gold. That 75% is not subject to any foreign exchange losses. Also included here, it’s right down the Bilboes oxides, we’ve placed down here on maintenance, as Mark said, that part about the additional $850,000 of impairment expenses, all non-cash.

Tax expense, the effective tax rate is quite high. That’s due to the bulk of those losses we’ve encountered, kind of a — the things that’s not redactable, that means taxable profits of Blanket, and that shows a very high tax charge for the year to date. Can we move to the next slide?

Mark Learmonth: Okay, can I suggest — Dana, could you just quickly give an overview as to what happened production-wise in the quarter?

Dana Roets: [Indiscernible] If we look at the top graph, you can see the grade is went up last year, and peaked in quarter four, or in period three, and then it came down a bit, and it continued kind of coming down in quarter one and quarter two. We knew that that was the case, and that was one of the reasons why we installed the extra money in the plant and that model became operational end of last year. And that was the problem this year. If you’re going to start — if you look at quarter one there and quarter two and compare it to the last year, it’s more or less the same tonnes that we did. But we had the higher grade last year, it helped us, so we had to do more tonnes. When you’re in a buildup phase, and we were building up 80,000 ounces last year, we pushed very, very hard to get to that.

And with that, we changed the GM last September, or it was removed. And then we signed on a new GM in January this year, to tore up on the mine. And with that, we had also some underground managers that were suppliers. So during this goal to get to 80,000 ounces, the safety culture, also, will anchored up. And some people lost their job because of being negligent, as far as safety is concerned. Now that rolled over into this year, and when you build up, you run on flexibility, the flexibility will come now with our development, especially on 33 and 34 level, opening up those areas, and then going down to 38 level. And when we started the year, we were slightly behind, especially getting into higher-grade places. But end of the quarter, we hope to be in those places.

And with that, during quarter two, as we systematically sorted out the issues and got into the right places again, then some other issues like trackwork, it was normal operational issues that went for pushing very hard to get to 80,000 ounces. So again, systematically, we reacted to those issues, which put us in good stead for the third quarter. And we’re in the right places and we’re getting the tonnages we need to get to now. And so for the third quarter, it’s on track. And the big driver is now, as Mark said, when you push people very hard and they’re not achieving, they start taking shortcuts, they ignore safety standards, and they take chances. And unfortunately, that caught up to us from a safety point of view, very, as well. And we’re pulling out the teams, every team in the mine, we started pulling them out and taking them through a behavioral initiative.

Again, just to make sure that they understand, because we signed on quite a couple of new people as well. Remember, we stopped with the previous behavior intervention. We had to talk with them and start it. So we stopped it for 2020 and 2021, and basically ’22 and we’re starting again. And unfortunately, the effect of that is showing. So a lot of hard work to get to a place where we can trust the people when they’re go into ground, and where the supervisors are not around, and they do the right thing. So from that point of view, to forward, it’s more tonnes at a lower grade, and maintaining annual production of 80,000 ounces, which for this year is still 75,000 to 80,000 ounces.

Mark Learmonth: Good. Okay. Thank you, Dana. Can we move on to the next slide? So Chester, back to you to talk about production costs.

Chester Goodburn: Looking at our costs of wages, Blanket mostly reflects inflationary increase of [indiscernible]. Consumables, last year, we experienced the inflationary pressures on our consumable costs. This year, we haven’t seen that, we’ve seen that plateau, and no, we haven’t seen the same increase as last year. What’s important to note here that about 75% to 80% of our costs are fixed and on short term, so on our on-mine cost, there aren’t spaces. These production numbers look so great with lower production, but as we move forward, and as our production increases, like it has in July, and so far in August, you can see a great reduction on our on-mine cost now. Electricity costs, that’s $6.4 million at the Blanket level, that does not reflect the $1.4 million in solar savings, due to the solar plant, it was commissioned earlier this year.

The solar plant’s working well and saving us money from a group perspective. And then we’ve also initiated a new agreement with the IEUG, the consortium, that we’ll start into soon, and allows us to get power, the lower kilowatt per hour rate, and what we get from utility. Our kilowatt hour usage, we’re looking at that, looking to reuse that. So going forward, power should reflect a lower rate than what you see here. And we should see some more benefit from solar. Bilboes oxides, that’s now been placed on care and maintenance, and continue to have a high cost of $7.5 million for the year, that’s costs for the mine waste-stripping that we had to fund, to get to the oxide. And we plan to mine the oxides, now that the sulfides beneath us can be motivated with [ions].

On that production cost, on the on-mine cost per ounce basis in the next slide, you can see our on-mine cost was negatively affected, mostly by Bilboes oxide production, of $317 per ounce. Our power does not reflect the solar savings and it doesn’t show the full effect the IEUG rate. So taking forward, we plan to stop the leakage from Bilboes, reduce that cost, produce the on-mine cost balance basis, and improve the on-mine cost number significantly. From an all-in sustaining cost point of view, there’s not much more to add, just modestly, negatively affected by the Bilboes cost that we do not expect to continue trending forward. And the next slide. Our admin expenses are very much comparable to the previous comparable quarter. For the full year, it increased a cost of $3.1 million due to the successful completion of Bilboes, we had to pay some of our advisors on the successful completion of that.

And the next slide, please. Our withholding taxes sit — or at least our total tax charge appear high, from a effective tax charge point of view. Effective taxation rate at a blanket level, however, has remained very much stable from the previous quarters. And going forward, we do not incur the loss of Bilboes. Our effective tax rate, going forward, should be only in between a 30% and 37% range as we’ve seen in prior years and prior quarters. Look at the next slide. Here, you can see our cash flows. We generated $4.9 million across the group for the quarter. $8 million is from Blanket, so it shows Blanket’s ability to generate cash flows. And that $8 million for the quarter compares to $7.7 million that we generated in July. That shows that Blanket is still a very good asset, cash-generating.

And when it does and it’s running at full steam, produces a very good funnel of cash. Our working capital outflows for the quarter, $4 million of that was due to legacy creditor payments. Our net investing and capital activities, that’s pretty much related to the latter part of the year. We’ll catch up and settle the capital spend. And our financing activities includes $15.6 million net of expenses in equity raises, $7 million in bond that we issued for the solar bonds, and some dividend payments for Q1 and Q2. Looking at the next slide. Our cash balances, that has come down on a quarterly basis. That’s also due to the solar bond. We had to spend the money on holding the solar bond. We purchased Bilboes and Maligreen, and we expect, in the next 6 to 12 months, cash position to improve, as we’ve paid for all the assets that we acquired.

Our cash balances from Zimbabwe continued normally, and we are not building up any surplus RTGS [indiscernible]. Look at next slide. Our balance sheet doesn’t — there aren’t any new story there. It has changed mostly due to the acquisition of Bilboes. I’ve said our cash balances should improve now that we’ve paid for all the assets that we acquired. And going forward, we foresee big ratio to be now on our balance sheet.

Mark Learmonth: Good. Unless — Thank you, thank you, Chester. So as I’ve mentioned, July was a strong month. So here’s the information relating to July that was in the MD&A: the grade is 3.6g/t; gold recovery, 93.6%; producing just over 7,800 ounces of gold at an annualized rate of just about 93,000 ounces a year; with a very competitive on-mine cost per ounce of $715, which equates — is comparable to approximately $700 an ounce last year. So hopefully, we turn a corner, and July shows that we should hopefully be looking for much better second half the year, the first half of the year. Could we move on? Early on, a few weeks ago, we restarted deep-level drilling in January. We’d had to suspend deep-level exploration several years ago because we just didn’t have the logistical capacity underground to do exploration at the same time as doing all the development and the production.

So having got Central Shaft commissioned, we’ve now got the capacity to excavate, mine out the drilling cubbies, which then create just the platform for deep drilling. It’s fair to say that of the — currently, we’ve got two exploration targets. The first target on which we reported, and which is summarized here, is at Eroica. We’ve just started also, now, in a second area on the other side of the mine at Blanket. But it’s fair to say that the results that we got at Eroica — pretty much a very substantial majority of the holes supplies on the upside, in terms of grade and width. And that means that in due course, hopefully towards the end of the year, we will reflect the better of the expect the results, in terms of a new resource statement, which will mean that we’re going to be extending the life of the mine, and increasing the amount of material that we can access from the existing infrastructure at Blanket.

At Motapa, we’ve submitted an environmental impact assessment, and we will be able to commence what we call invasive drilling activity at Motapa later on in the year. ESG is becoming an area of increasing focus by regulators and investors. It’s fair to say that the regulatory environment keeps on evolving. The SEC apparently is going to get involved; we hear now that there’s going to be accounting standards dealing with ESG. So our objective is to put in place sustainable business practices that are aligned with our corporate strategy. So we’ll do what we have to do, to the best of our ability, but we’re not sort of blazing a trail. We’ll do what we have to do. We just published our most recent ESG report, which sets out a lot of information about the specific projects that we’re involved with at the social level.

But just in terms of a summary, from an environmental perspective, we’ve put in place a solar plant, which provides about 24% of Blanket’s average daily power. I think it works very slightly better than we’d expected, which is good. We’re currently constructing a new compliant tailings facility; the existing tailings facility is now pretty much exhausted. So we’re going to spend about $25 million over the next few years, putting in a new facility, which is — and the expense of that is because it has to be double-lined with clay and plastic. And that will support us for the next sort of 12 to 14 years. That’s a production rate of about 800,000 tonnes a year. So upfront in expenditure, but then once we’re through that, the — it’s built and we’ve got it.

In terms of social, we got 34% local ownership, including the employees and the community. The community paid off its outstanding loans to us. Now, the picture there shows our VP in Zimbabwe, Caxton Mangezi, handing over a substantial check to the local people. And in terms of governance, we comply with all the requirements, the relevant jurisdictions. And I think we’re very, sort of — we’re where we need to be in terms of compliance. If this area interests you, there’s loads of information in the ESG report. Should I move on? Okay, so in terms of outlook, the focus, really, is on maintaining — getting Blanket running sweetly again and achieving a targeted production range of 75,000 to 80,000 ounces. We’ll continue to do our deep-level drilling at Blanket with the objective, initially, of upgrading inferred mineral resource to a higher confidence level, and then thereafter, then looking for extensions to the existing ore bodies at depth, which we can then make a decision in due course as to if we find something, how do we commercialize it.

We’ve commenced work on the feasibility studies at Bilboes, and as I’ve said before, we’re looking at how we can balance growth with minimizing dilution, and therefore optimizing the net present value uplift for a Caledonia share. And I’m saying we hopefully, we also expect to start exploring Motapa later in the year. So I think that’s the formal presentation finished. So maybe we can open this to questions. Camilla?

A – Camilla Horsfall: Yes. If anyone has a question, can I ask you just to raise your hand? And we can unmute you. [Indiscernible]

Unidentified Analyst: Hi. Can you hear me?

Mark Learmonth: Yes.

Unidentified Analyst: So I just had a question regarding the dividend policy. In a scenario where the production and cash that continue to disappoint, what is the likelihood that that would be maintained at $0.14 per share?

Mark Learmonth: Well, the — that’s one question, the other question is, what do we do to the dividend in terms of the very substantial investment requirements for Bilboes?

Unidentified Analyst: Right.

Mark Learmonth: And we’ve always said that our policy is to pay a dividend, but we’ve also, again, said that whether we maintain the dividend depends on our view about capital allocation. And it’s not just affordability, is it really the right thing to do as you go forward, to continue to pay dividend, given the fact that the money we pay out in dividends is money we have to raise to fund the Bilboes project. So that’s all part and parcel of the work that we’re doing at the moment, relating to how to commercialize Bilboes. Where you started from, the idea always was that we would — our dividends weren’t formally pegged to performance. As you’d probably be aware, we never said, Q2, well, eight in a quarter, a quarter’s production, quarter’s profit was this, therefore the dividend is that.

Now, we never did that. So there was no clear correlation between the two. And frankly, given the fact we can see a substantial improvement in the operating performance right now, that itself would not be a reason for canceling dividend. The bigger issue, really, comes to how we’re going to fund Bilboes.

Unidentified Analyst: Great. I just have a few more questions, can I get through those or?

Mark Learmonth: Yes, yes, yes.

Unidentified Analyst: Oh, okay, cool. So in part, some of the electricity costs at Blanket rose because of extended use of Jethro and No. 4. Can I ask what is stalling the transition to Central Shaft? I saw, like, in the MD&A, there was, like, commissioning problems with the old power systems. Can you maybe add some color to that?

Mark Learmonth: Yes, Dana, would you like to pick that up?

Dana Roets: It’s actually twofold. When we equip a Central Shaft in the beginning, compared to last year, we only did waste through Central Shaft. I mean, at the end of the year, we started doing reefs as well at Central Shaft. And man, this year is — by the end of the year, the 50% of our reef will go through Central Shaft, and 50% will go through 4 Shaft. And as you migrate towards Central Shaft — that will happen over the next two to three years, then you will put, basically, 4 Shaft as a standby shaft, almost won’t be a mine there, the same with Jethro. But at the same time, there’s a lot of white areas still above 750 meters. That’s because during the sinking of Central Shaft, and having the method, the working capacity, we had to target our late development.

We knew we were going to find return on our investment. And as we got more work invested now, there are certain areas above 750 meters that we’re targeting and opening up, and that’s sort of bonus areas. So we might get to a point where we actually find extra stuff and we have already trialed extra stuff a bit above 750 meters, which will extend the life, for example, of the 4 Shaft, because there are certain areas that you can only work the resistance worse than through 4 Shaft. Other areas, like on the Eroica side, reefs you can go take, about 750 meters, we can take through Central Shaft. So that’s why it’s not clear-cut when we’re going to stop 4 Shaft, when we’re going to stop Jethro. We’ll pull the pin on what we find as we explore more.

And also, this year, when we started with the solar, it was a lot of rain this year, and even last week, we had to drain a tanker. So it’s playing a bit of havoc with our solar electricity that we generate as well. And using it for the third year, hopefully, initially, we can budget better and get a better feel for what we will get from solar.

Mark Learmonth: But in general, solar is performing in plan. What Dana’s saying is that when you have rainy days and cloudy days, solar doesn’t work quite well on those days. Now, Blanket is fortuitously located in an area of good sunshine, but raining in Blanket in August is pretty [indiscernible], I’m afraid. Now that’s what happened early on this week.

Dana Roets: And as we’re going forward, I mean, when you get overcast conditions, then you’ve got to run generators to supplement the solar. And value afforded, the long answer to that is to throw a couple of battery to have that — when the clouds come over and your solar power generation drops, then that it keeps stable.

Mark Learmonth: So if you had some further questions? We’ll turn —

Unidentified Analyst: No, yeah, I did. Let me just get to them here. So it seems — I just wanted to ask about some of the underground technical expertise. It seems like a lot of the infrastructure issues have been addressed, but it seems like there were some of, like, human capital issues that needed, like, job skills, training, somethings like this. Can you just add some clarity to if that is growing issue or, is it okay?

Mark Learmonth: Yes. Dana?

Dana Roets: We were lucky that — if you look at the workforce at Blanket, very stable, it was very stable, and a lot of experience. And as we started growing and building up, we had to sign on new skills. Now, that’s always a danger when you sign on new people. Not every new person you sign is a great fit. So you’ve got to vet a correct fit: some people fit in, some don’t. And with that, also, you’ve got to be very strong on the culture that you want to [proclive], and what you will allow and will not allow. And with that, we also actually saw that the people we lost during the stage last year includes — because of what I explained now. And it got to get to a point where we grew our people by about 500 people. And since we started building up on more than 1,000 people, you’ve got to get that people fitting into the culture and the way we do things and what we allow.

And that takes two years, about, to get that culture right, and then work out stabilizing and kind of get a well-experienced workforce. But currently, we have got a very good mix of very, very experienced people. And the benefit of building up was we actually managed to get some younger people in because our workforce was actually getting quite old. So there’s positives and negatives, but you see it everywhere when you sign on new people and you’ve got to train and coach them to get into the right culture and the way you want to do things.

Unidentified Analyst: Right. Okay. I just have, I think, two more questions. Okay, so Motapa, with the first phase, it sounds a little bit similar to the Bilboes first phase. Would that be an accurate characterization, or? And what gives you confidence, if it is, that it will work better this time around?

Mark Learmonth: Well, so when you say, we’re going to go hunting for oxides at Motapa, is that what you’re saying?

Unidentified Analyst: Right.

Mark Learmonth: Yes, we may actually decide not to go hunting for oxides, given the core experience. We may actually just focus on the sulfides, which is the reason for actually acquiring Motapa in the first place.

Unidentified Analyst: Right. Okay.

Mark Learmonth: Certainly, we don’t want a repetition of what we’ve experienced at the Bilboes oxide project, thank you very much.

Unidentified Analyst: Right, right. Okay, and then my last one is just maybe something that I’m unclear on. So in the MD&A, it was cited that part of the FX losses were due to a three-week delay in the settlement of RTGS receivables. Like, previously, it was said that within two weeks, like, it was okay, then your receivable settlement from SGR. So is that change only due to the devaluation of the rapid…

Mark Learmonth: I’ll leave Chester to — if Chester has the answer, that might be good. But I’ll just point out to you, there is some suspicious coincidence between the really, very, very rapid devaluation of the RTGS over a three-week period, and at the same time, the pushing out of the receivable period, which has since normalized. I would just leave that out there; there does appear to be some suspicious coincidence there. But Chester, do you want to talk about that?

Chester Goodburn: Yes, sure. [Indiscernible] the rate has devalued by about three times over that period of three weeks. Normally, we receive our cash from Fidelity within two weeks; they have been paying us regularly over the two weeks. 75% of our gold now goes to — outside of Fidelity, to a company called Al Etihad. And when you see, I just got all of our cash come in two to three days of delivering the cash to them. So we haven’t seen those long delays again after June. And so far, they’ve been — Fidelity’s been found putting maturing periods. So, so far, it’s been going well, it was only about level one that cost us a lot in FX losses.

Unidentified Analyst: Okay, cool. That covers me.

Mark Learmonth: Good. Anything else?

Unidentified Analyst: I don’t know, thanks. Thank you.

Mark Learmonth: Okay. Good. Thank you. Okay, any further questions from anybody?

Camilla Horsfall: I don’t think there are any more questions. There was another hand up, but it’s come back down. So, I think that’s it.

Mark Learmonth: Okay, shall we just give it a few minutes, just in case anybody has any second thoughts? No. Okay, well, on that, well, thank you. Thank you for attending. Difficult quarter, as I said. Signs of improvement in July, and hopefully, we’ll do this again at the end of Q3 and there’ll be a more cheerful presentation. Okay. Thank you very much for attending.