Caledonia Mining Corporation (LON:CMCL) Chief Financial Officer Mark Learmonth caught up with DirectorsTalk for an exclusive interview to discuss their revised preliminary economic assessment
Q1: You recently announced the refiling of an updated technical report which contained a summary of a revised preliminary economic assessment (PEA), could you tell us a bit more about that?
A1: We had to refile the technical report at the request of the Ontario Securities Commission (OSC), really it’s just a very technical issue and it’s just a different way of looking at the same project, nothing’s changed on the project, just a different way of looking at it. What the Ontario Securities Commission required us to do was to disaggregate the future production that will come from measured and indicated resources and the future production that will come from inferred resources. So what we’ve done is we’ve now put forward a revised technical study which only looks at the production coming from inferred resource, so it completely disregards any production that we’re going to get from higher levels of competence reserves and resources, and also critically requires us to make the assumption that all of the $70 million that we’re going to spend to deliver that production from inferred resource, we’ll have to raise from third parties. Clearly both of those assumptions don’t reflect reality because we are currently producing from inferred resource, come from measured and indicated resource and actually 50% of our production in any one day comes from outside resource, so that’s just disregarding completely the current level of production which doesn’t reflect commercial reality. The second thing is preparing a revised technical report on the assumption that we have to go out and raise all the funding doesn’t reflect the reality which is that we actually don’t need to raise any external funds at all. So the OSC kind of admitted to us that their own rules don’t really cater for relatively mature organisations such as ourselves to prepare PEA’s in respect of new projects, they accept that and maybe that in due course their own rules are revised to cater for this eventuality. We accommodated their request, we revised and filed the new technical report and even on the somewhat uncommercial assumptions that we now forced to make, the project still has an attractive internal rate of return, all be it one which we don’t think actually reflects the underlying commercial reality.
Q2: What impact does the revised report have on Caledonia?
A2: None, not at all. There’s absolutely no change on the amount of money we’re expecting to spend on the project, there’s absolutely no change on the quantum of the anticipated production or the timing of the anticipated production and there’s no change in the expected operating costs arising that we’ll need to spend to give to create that production so absolutely no change to the underlying operation whatsoever.
Q3: So how is Caledonia actually funding the plan?
A3: We’re funding the plan through the internal cash flow generated at the operating subsidiary in Zimbabwe so the Blanket mine; that’s the subsidiary in Zimbabwe, generate a heap of cash, historically it’s paid out most of that cash after its capex programme, it’s paid up all of that cash to shareholders, some of who are local investors. This year, 2015, Blanket suspended its dividend payment so it could reinvest all of the cash it generates into this development project, in addition it had $2.5 million of undrawn debt facilities in Zimbabwe, we’ve just increased that to $5 million so Blanket itself has its own internal cash generation plus available sources of finance to allow it to fund this project in 2015. Actually right now, Blanket’s cash position is probably rather better than we’d expected. We expect next year, 2016 onwards, Blanket should be able to continue to fund the capex it needs to continue to implement this project but because it’s cash generation will have improved, it will then be able to start paying modest dividends in 2016 and then increasing dividends in 2017 onwards. So all of the expenditure for this project will be funded internally at the Blanket level, we don’t need to go out and raise external funds other than the very modest existing overdraft facility which actually is used more for working capital purposes.
Q4: The revised investment plan, what progress has been made there?
A4: I’ve actually been up at Blanket Mine in this last week and it’s really gratifying every time we go there, I go every sort of month or so, the operational guys go more often, to see what progress has been made. So where we were when I was there on Monday, Tuesday, Wednesday last week, the shaft column has been excavated and the steel support structures have been put in around where the shaft will continue to go down to about a kilometre below surface. We’ve now started the process of filling that shaft column with concrete, once that’s been filled with concrete, we can then get about the process of putting in place the semi-permanent crane facilities and actually then get down to the business of sinking the shaft in earnest from where it is at the moment which is at about 70 metres below surface down to a kilometre so we’re making good progress, we are exactly on schedule, perhaps even slightly ahead but we’re absolutely where we expected to be. The thing that you do pick up when you go to the site is just the scale of the operation, it’s enormous. This shaft is going to be significantly bigger than our existing shafts and just the size of the area that we’re developing is absolutely enormous and it’s all going to plan so we’re very pleased with that.
Q5: So what are the next steps for the project?
A5: Once you start sinking a shaft of that size, frankly you just keep digging and digging and digging and you go down to the surface just below a kilometre so at that point, once all the surface infrastructures in place, actually it’s going to be quite boring, it’s just going to be a hole getting deeper and deeper. What we’ll do is we will provide regular updates to the market in terms of the rate of decent of the shafts so we’ll say ‘the shafts reached 200 metres below surface’, if that is ahead or behind schedule and 6 months later we’ll say ‘the shafts now reached X metres below surface’ and again, ahead or behind schedule. Once you start the process of the actual sinking which will be, I’d have thought, towards the end of this year, frankly then for 2016 and 2017 there won’t be much more to see other than the hole’s getting deeper. I think more significant are probably developments on some of the other projects such as no 6 Winze.
Q6: WH Ireland actually said this morning that they anticipate Caledonia to de-risk further by beginning its reserve definition drilling at the no 6 Winze, they’ve set a target price of £1 so that’s an upside of around 100%. How close are we?
A6: The no 6 Winze project, the shaft that we’ll be using for production has been completed, that was finished about 4 weeks. We’re now equipping that shaft with the steel work and the infrastructure, that’ll probably be done by the end of August and September through to December, we’ll do horizontal development into the existing ore bodies that we’ll be attacking with the expectation of commencing commercial production from no 6 Winze in January next year. I think the point that WH Ireland are making is at the same time, we continue to do exploration drilling into those ore bodies that we’re expecting to exploit in 2016 onwards, with a view to increasing the competence level of the resource from inferred to measured and indicated. We made some progress on that, we put out a press release a couple of months ago which showed a significant upgrade of the resource at Blanket from inferred to measured and indicated. The drilling work has already started and the rate of drilling has increased, we’ve got some new drilling machines, we’ve got a much bigger compressor installed and operational which means that we’re now providing much more compressed air to the drilling machines so they can work much more effectively. So the meterage that we’re doing on a monthly basis is now increasing significantly and we do expect, over the course of the coming year, to announce further upgrades in the inferred resource at Blanket and hopefully, potentially also just increases in the inferred resource as well. So that process has already started and I think where WH Ireland are coming from is as the results from that drilling work are fed into the market, that will decrease peoples risk perception of the no 6 Winze project.
