Caledonia Mining cuts production guidance on grades and power crisis, but backs Zimbabwe’s new tax, currency measures

Caledonia Zimbabwe

Caledonia Mining has downgraded its guidance on annual production at Blanket Mine to account for lower-than-expected grade and unreliable power supply. 

Production guidance for 2019 has been cut to between 50,000 and 53,000 ounces, down from previous forecasts of 53,000 to 56,000 ounces, the company said in a statement. 

“The electricity situation worsened considerably in July and early August and Blanket experienced frequent and long interruptions to its power supply,” the company added. 

To deal with the power crisis, Caledonia has concluded a new power supply deal and is evaluating a solar generating facility to reduce Blanket’s dependence on the grid. 

While the production guidance has been lowered, the company still expects this to be offset by better-than-expected gold prices and the benefits of the recent currency devaluation.  Earnings guidance for 2019 remains unchanged at 86 to 117 US cents per share. 

For the second quarter of 2019, operating profit, before foreign exchange gains, was just over US$6m, 21% higher than the comparable quarter. 

Gold output for the quarter was 12,712 ounces, up 6.4% on the output in the first quarter of 2019 of 11,948 ounces. This took production for the first six months of 2019 to 24,660 ounces. 

Output has been held back by lower-than-expected grade, as mining dilution issues affected grade. 

In July, Caledonia announced completion of the US$45 million shaft sinking at central shaft, which should ultimately lead to output rising to 80,000 ounces per annum from the year 2022.

Steve Curtis, Caledonia’s CEO, said the power crisis had worsened in July and early August, and the company has taken steps to deal with the outages.

“We have had constructive engagement with the state electricity utility and the Chamber of Mines as a result of which Blanket has signed a new electricity supply agreement in terms of which it will receive un-interrupted imported power at a lower cost than it previously paid,” Curtis said.

“Caledonia is at an advanced stage of evaluating a solar PV generating facility which would reduce Blanket’s dependence on grid power.  Although the electricity situation has improved in recent days, we feel it prudent to continue to implement plans to protect Blanket from any recurrence of this problem.”

Devaluation: bad and good

On the currency reforms, Curtis says the devaluation has had a double-edged impact; it has made life harder for workers, but helped the company contain costs.

“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 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.”

For Caledonia, the devaluation has handed the company “very substantial foreign exchange gains” as the value of liabilities such as bank loans and deferred tax were eroded in real terms. 

While critics blame Finance Minister Mthuli Ncube’s policies – especially his controversial move to end the multicurrency system – for stoking inflation, Caledonia is taking a different view. The current turmoil is a legacy of the past, Curtis says.

“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, government continues to run a primary budget surplus, a level of fiscal discipline that bodes well for future stability.”

Caledonia also backs Ncube’s move to make the mining royalty deductible for the purposes of calculating income tax. Ncube, as part of his tax measures on mining, also the royalty rate from 5% to 3% of revenues when the gold price is below US$1,200 per ounce.

“We welcome the government of Zimbabwe’s continued efforts to promote investment in the sector,” Curtis says.