TORONTO (miningweekly.com) – Zimbabwe-focused gold producer Caledonia Mines raised its annualised dividend by 22% to $0.055 a share on Monday, underpinned by increased output as a result of the company’s turnaround strategy at the flagship Blanket mine.

“We have increased the dividend not based on improved gold prices, but based on our revised investment plan at Blanket coming to fruition,” CFO Mark Learmonth told Mining Weekly Online in an interview.

The board had declared an increased quarterly dividend of $0.01375 a share. The previous annualised dividend was $0.045 a share.

The Aim- and TSX-listed miner’s strategic focus on implementing the revised plan was starting to deliver more gold ounces, with output expected to rise incrementally from about 50 000 oz of gold this year (42 806 oz in 2015), to 65 000 oz in 2017, and more than 80 000 oz in 2021.

All-in sustaining costs were expected to hit about $760/oz in 2019, down from $1 038/oz reported in 2015.

“The planned increases in production in 2016 and 2017 are expected to result in a lower average cost of production as fixed costs are spread across an increased number of gold ounces. These factors allowed the board to bring forward its decision to raise dividends by several quarters,” Learmonth stated.

IMPLEMENTATION SUCCESS
Learmonth commented that the three-pillared revised investment plan would result in increased production, reduced operating costs and greater flexibility to undertake further exploration and development, thereby safeguarding and enhancing Blanket’s long-term future.

The revised plan focused on improving logistics to allow for increased production volumes; accessing deeper, higher-grade ores; and constructing a new Central shaft that would provide efficiency improvements and de-risk the mine’s current single-shaft status.

According to Learmonth, the benefits of the revised plan were now being seen. The completion of a tramming loop that increased tramming capacity from 400 t/d to 1 000 t/d in June last year had resulted in a 10% improvement in tonnes milled. The completion of the No 6 Winze project in March, comprising a deepening of the shaft from the 750 m level to the 930 m level, had also already resulted in higher-grade ores being delivered for processing.

Production in the higher-grade zone started during the first quarter and the shaft was expected to ramp up to 500 t/d by mid-2017. However, work on deepening the Winze project had been paused at 870 m, while sinking of the Central shaft progressed.

Started in August 2015, the 3 000 t/d Central shaft was expected to be complete and equipped by June 2018. Shaft construction was reported to be on schedule, with about 90 m of pre-sinking activities completed, with the shaft now reaching 120 m below surface.

Critically, Learmonth pointed out that the revised plan had lowered the total planned investment between 2015 and 2021 from $68-million to $65-million, with no changes to the scope of the investment programme.

He explained that the capital expenditure (capex) reduction reflected a lower cost of capital equipment; higher capex in 2015 compared with the original plan owing to the front-loading of capital purchases while specific items were available at attractive prices; a resulting $5-million cumulative reduction in projected capex from 2016 to 2020; and providing for all further capex to be funded by Blanket’s internal cash generation following a $5-million recapitalisation earlier this year, all while maintaining its own dividend.

CORPORATE REVISION
The company had been busy streamlining its corporate structure this year, adopting in March financial reporting in US dollars. This was owing to a 40% devaluation of the Canadian dollar against greenback distorting Canadian-dollar-denominated financial reporting.

Further, effective from March, Caledonia had also re-domiciled from Canada to Jersey, in the Channel Islands. Learmonth explained this move simplified the group structure, reduced travel and compliance costs and removing Canadian withholding tax on Caledonia’s dividends for non-Canadians.

For the past six months, the company had maintained a ‘zero-cost, cap and collar’ hedge position on 15 000 oz of gold. However, the hedge expired on Friday, allowing the company to return to unhedged status based on the expected increased Blanket output and reduced costs.

INVESTMENT CLIMATE
Learmonth pointed out that Caledonia was currently the largest active investor in the impoverished Southern African State.

The country had long suffered under the 36-year rule of 92-year-old authoritarian President Robert Mugabe, seeing the economy collapse and triggering years of hyperinflation and food shortages that created a nation of impoverished billionaires before the local currency was suspended in April 2009, in favour of the greenback.

Learmonth conceded that Zimbabwean policies were difficult, but having dealt with the country’s controversial indigenisation laws in 2012, that demanded 51% of all businesses be owned by Zimbabweans, it paved the way for the company to stably implement its growth strategy.

Since 2012 up to the first quarter this year, the Blanket operation had contributed a total of $65.3-million in community and social investment, as well as to the Gwanda Community Share Ownership Trust and in payments to the Zimbawean government.

Caledonia currently owned 49% of the Blanket mine, having donated 10% of the mine to the local community and sold 41% of Blanket to three parties for $30.09-million. The off-balance-sheet transaction was vendor-financed, with the purchasers repaying their loans from 80% of their Blanket dividends.

The company characterised political rule by Zanu-PF since 1980 as providing political continuity, describing government as “pragmatic and pro-business”.

Learmonth noted that Blanket received an uninterrupted electricity supply, while enjoying access to functioning roads and airports. The company also sourced refurbished equipment from neighbouring South Africa, which provided capital savings. He described Zimbabwe as having effective ‘soft’ infrastructure in place such as education, labour and administration.

Despite the country currently experiencing a cash crunch with low availability of US dollars, he affirmed that the Zimbabwe government was prioritising Blanket’s liquidity needs and confirmed that all foreign accounts payable were continually being met.

EXPLORATION UPSIDE
Meanwhile, Learmonth noted that thanks to a Caledonia management shake-up late in 2014, the company had been spending more funds on resource development at Blanket, with resources in the inferred and indicated mineral categories rising since then.

He said resource conversion was proceeding at a frustrating pace as a result of the hard-rock nature of the deposit, which conversely provided the company other benefits such as negating the need for shaft lining.

Blanket currently held a measured and indicated resource of 638 000 oz gold grading 4.18 g/t, which was held in 4.74-million tonnes of ore. The inferred resources comprised 419 000 oz gold grading 5.03 g/t held in 2.59-million tonnes of ore.

Learmonth advised that the company was looking forward to accessing and evaluating satellite exploration properties in the near future, which held resource upside for Blanket.

Following the news release on Monday, Caledonia’s Aim-listed stock rose 11.71% to a new 52-week high of £0.85 a share. The stock had gained 121% since the start of the year.