Despite achieving an increase of 6.4 per cent on gold production in the first quarter of 2019, Caledonia’s Blanket Mine which is also reckoned as one of the biggest gold producers in Zimbabwe has experienced a sharp decline in its full-year production target of 56 000 ounces to 50 00 ounces due to unstable power supply.
Rudairo Mapuranga
According to a statement released by the company last month, the company has revised its target from 56 000 to 50 000 ounces in the year 2019 due to the continued low grades and the difficulties with electricity supply in July and early August.
“Due to the continued low grades and difficulties with electricity supply in July and early August, management has reduced full-year production guidance from the previous range of 53,000 to 56,000 ounces to a revised guidance range of 50,000 to 53,000 ounces. Whilst it is disappointing to reduce production guidance, earnings guidance for 2019 remains unchanged at 86 to 117 cents per share due to a higher than anticipated gold price and lower than expected costs”, reads the report in part.
Blanket Mine’s performance in the first quarter of 2019 was excellent due to different measures taken by the Zimbabwean government in trying to give minerals their full value. The Mine is also confident that they will reach a yearly production target of 80 000 ounces per year by 2022.
“Our cost performance for the Quarter was excellent, as a result of stringent cost control aided by the devaluation of the Zimbabwe currency, the South African rand and sterling which reduced the dollar value of expenses incurred in such currencies. On-mine costs of $534 per ounce for the Quarter were over 25 per cent lower than the corresponding quarter of 2018 and the all-in sustaining cost of $656 per ounce was 23 per cent lower than the second quarter of 2018. We are pleased to see this level of cost control in the business and remain confident in our longer-term all-in sustaining cost guidance target of $700 – $800 per ounce as the business grows towards 80,000 ounces per year by 2022”, reads the report.
“Caledonia also remains highly immersed in cash deficits due to the continued low grade and difficulties with electricity supply in July and early August. The management has reduced full-year production guidance from the previous range of 53,000 to 56,000 ounces to a revised guidance range of 50,000 to 53,000 ounces. Whilst it is disappointing to reduce production guidance, earnings guidance for 2019 remain unchanged at 86 to 117 cents per share due to a higher than anticipated gold price and lower than expected costs.
“Our cost performance for the Quarter was excellent as a result of stringent cost control, aided by the devaluation of the Zimbabwe currency, the South African rand and sterling which reduced the dollar value of expenses incurred in such currencies. On-mine costs of $534 per ounce for the Quarter were over 25 per cent lower than the corresponding quarter of 2018 and the all-in sustaining cost of $656 per ounce was 23 per cent lower than the second quarter of 2018. We are pleased to see this level of cost control in the business and remain confident in our longer-term all-in sustaining cost guidance target of $700 – $800 per ounce as the business grows towards 80,000 ounces per year by 2022.
“Caledonia also remains highly cash generative with operating cash generated in the first half of 2019 of approximately $8.4 million, this cash contributed to a healthy balance sheet with cash on hand of approximately $8 million at the end of the Quarter.
“Other macroeconomic events during the quarter were the continued devaluation of the Zimbabwean currency, which experienced an almost 10-fold devaluation since late February 2019. This contributed towards a significant increase in inflation which has made life difficult for our staff in the country. We note that the exchange rate appears to have stabilized in recent weeks and it is important to note that government fiscal discipline remains robust. The current currency devaluation and inflationary conditions appear for the most part to be a legacy of past fiscal indiscipline rather than as a result of current policy: indeed, the government continues to run a primary budget surplus, a level of fiscal discipline that bodes well for future stability. Moreover, the Finance Minister announced in the recent interim budget statement that the royalty payable to the government will be deductible for the purposes of calculating income tax. He also revised the royalty rate which is reduced from five per cent to three per cent of revenues when the gold price is below $1,200 per ounce. We welcome the government of Zimbabwe’s continued efforts to promote investment in the sector.
“The devaluation of the Zimbabwe currency resulted in very substantial foreign exchange gains as the value of liabilities such as bank loans and deferred tax were eroded in US-dollar terms. Earnings per share reported under IFRS for the Quarter was 211 cents per share – almost a nine-fold increase on the second quarter of 2018. Adjusted earnings per share which is a measure of the underlying performance of the business and excludes items such as unrealised foreign exchange gains were 26.8 cents per share, unchanged from the previous quarter and in-line with guidance for 2019.
“Capital investment for the quarter was in-line with our Capex plan for 2019 at $4.2 million, most of which was incurred at Central Shaft. We expect capex to decline substantially after we commission the Central Shaft as planned in 2020. Thereafter we expect free cash flow to increase significantly driven by rising production, an expected decline in operating costs and importantly, reduced capital investment. We are also pleased to see the recent strength in the gold price which, if sustained will be a welcome boost for patient gold investors.
According to Caledonia, the continued devaluation of the Zimbabwean dollar has led a very difficult life for the mineworkers who have since lived a very difficult life.
“Other macroeconomic events during the quarter were the continued devaluation of the Zimbabwean currency which experienced an almost 10-fold devaluation since late February 2019. This contributed towards a significant increase in inflation which has made life difficult for our staff in the country”, reads the report.
The exchange rates appear to have stabilised in recent weeks according to the mine‘s report and it is important to note that government’s fiscal discipline remains robust. The prevalent currency devaluation and inflationary conditions appear to be a legacy of the past fiscal indiscipline rather than the flaws of the current policy: indeed, the government continues to run a primary budget surplus, a level of fiscal discipline that bodes well for future stability. The Minister of Finance also revised the royalty rate which was reduced from five per cent to three per cent of revenues when the gold price is below $1,200 per ounce. We welcome the government of Zimbabwe’s continued efforts to promote investment in the sector.
The devaluation of the Zimbabwean currency resulted in substantial foreign exchange gains as the value of liabilities such as bank loans and deferred tax were eroded in US-dollar terms. Earnings per share reported under IFRS for the Quarter was 211 cents per share – almost a nine-fold increase on the second quarter of 2018. Adjusted earnings per share which is a measure of the underlying performance of the business, excluding items such as unrealised foreign exchange gains were 26.8 cents per share, unchanged from the previous quarter and in-line with guidance for 2019.
The company’s report stated that capital investment for the quarter was in-line with its capex plan for 2019 at $4.2 million, most of which was incurred at Central Shaft. The company expects capex to decline substantially after we commission the Central Shaft as planned in 2020. Thereafter, the company expects free cash flow to increase significantly driven by rising production, an expected decline in operating costs and importantly, reduced capital investment. The company is also pleased to see the recent strength in the gold price which, if sustained will be a welcome boost for patient gold investors.