Investment plan implementation guides performance
Caledonia produced 12,521oz of gold in Q217, a slight increase over Q1’s 12,510oz. Second quarter cash costs were US$696/oz, 10% higher than Q117 (US$629/oz), resulting from the lower gold grades mined (3.08g/t vs a budgeted grade closer to 3.6g/t). All-in sustaining costs for Q217 were US$855/oz and 8% lower on a q-o-q basis. Q217 gold production resulted in a gross profit of US$5.0m, 16% lower than Q216 (US$5.9m). H117 gross profit was US$10.9m, up 11% from the same period a year ago, and net profit attributable to shareholders is US$3.0m, 27% lower on a l-f-l basis.
The second quarter of 2017 saw steady progress concerning implementation of the company’s investment plan. The Central Shaft is now completed to a depth of 870m, or 81% of its 1,080m initial design depth. During Q217, 202m was completed at the Central Shaft, 63% above the quarter’s budgeted development target of 124m. With Central Shaft development the most critical element of the company’s investment plan (started in late 2014), material, and importantly, ore, haulage capacity has been constrained on the 22 Level, 750m below surface (see below).
Exhibit 1: Long section of Blanket mine with ore bodies and main haulage development and shafts
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This constraint on material handling around the Central Shaft development led the company to initiate a number of work programmes in an attempt to raise tonnes and thereby maintain gold production targets. For 2017, 60koz of gold were to be produced. However, as mentioned above, constraints on the 22 Level forced the company to revise this gold production target down to a range of 52-57koz. We have revised our model to reflect production of 54koz of gold, with 14.2koz produced in each of Q317 and Q417.
Production performance by quarter has seen a slight reduction in gold grades mined at Blanket, and this has been the overriding factor in the company’s decision to downgrade its production guidance.
Exhibit 2: Quarterly gold production, tonnes milled, gold grade AND recovery data Q114-Q217
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Source: Edison Investment Research, Caledonia Mining
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Exhibit 2: Quarterly gold production, tonnes milled, gold grade AND recovery data Q114-Q217
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Source: Edison Investment Research, Caledonia Mining
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Since the implementation of Caledonia’s investment plan, gold grades have fluctuated between a high of 3.74g/t Au and a low reached Q217 of 3.08g/t Au, with an average of 3.35g/t Au. The major reason for this is the fact that the higher-grade Eroica and Lima ore bodies are unsympathetically located relative to the main No. 4 Shaft (used currently as the main haulage route to surface) relative to the Central Shaft development (see Exhibit 1). As a result, and to maintain the development schedule of the Central Shaft and associated lateral development below the 22 Level (horizontal red lines in Exhibit 1), the vast majority of gold ore had to be mined from the marginally lower-grade AR Main and AR South ore bodies.
As already stated by Caledonia, these production and gold grade issues are likely to persist until completion of the Central Shaft. We find it reassuring that this most critical of capital projects has seen above-budget development meterages achieved during the last quarter and that it is firmly on track to complete in mid-2018, with first production from the Central Shaft stated to come shortly before end 2018.
As can be seen from Exhibit 2 above (right-hand side), while the head grade at blanket has seen a gradual reduction over the past few quarters, tonnages trammed and hauled to surface (left-hand side) have seen a 300% increase since the tramming loop was completed.
Grade estimate revisions for H217 & H118 as Central Shaft completes
We have conservatively revised our gold grade forecasts downwards for the remainder of 2017 and the first half of 2018 to accommodate the haulage bottleneck on the 22 Level and the restricted access to higher-grade ore bodies while the Central Shaft development completes (due mid-2018).
Previously we had a grade of 3.66g/t mined during H217 and 3.71g/t Au mined during H118. We now anticipate that a gold grade reflecting the average of Blanket’s head grades since Q114 is mined through H217 to H118 – 3.35g/t Au. We maintain gold recovery at 94% efficiency. This revision results in 14.2koz produced in Q317 and Q417, and 15.1koz produced in Q118 and Q218.
The following points give an outline summary of the capital project works completed during Q217.
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AR South decline below 750m (22 Level): a conveyor belt was commissioned, the extraction haulage on 780m level was completed and work of the 785m extraction haulage level continues (these are represented as the two horizontal, red-shaded lines below 750m on Exhibit 1 above).
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Development on a second decline at the AR Main ore body is planned from 750m to 780m and will allow accelerated access to gold resources situated below the 22 Level.
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At the No. 6 Winze development, three haulages are being developed 870m below surface to link the Blanket section to the AR South and Blanket 2 and Blanket 4 ore bodies.
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On 22 Level an extraction haulage is being developed towards the Eroica orebody.
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Upgrade of electricity supply from the grid and the ring feed between the two standby generator farms at Central and four shafts. This is due to be completed by end 2017, with the purpose of stabilising the supply of Zimbabwean grid power.
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An upgrade of the metallurgical plant, including the installation of a third Knelson concentrator and vibrating Gemini table (ie gold processing equipment using gravity as the means of gold separation from crushed waste rock).
