Can you provide a brief overview of Caledonia and the evolution of its operations in Africa?
ML: Caledonia is a Canadian company whose main interest is a 49% share in the Blanket gold mine in Zimbabwe. Becoming fully indigenized in late 2012 has afforded us tremendous growth opportunities. Blanket gold mine produced a record of just over 45,000 oz in 2012 and has very low cash cost of $570 per oz in 2012, down from $590 from the previous year. In January of 2013 we announced Blanket mine’s growth strategy to increase production by 90% to 76,000 oz by 2016. Blanket will be investing $37 million that will be internally generated at the mine over the next five years. Caledonia paid its first dividend in February of 2013 and has just announced a further dividend in respect of profits generated in 2012. We are one of a very small number of gold mining companies that will be growing aggressively over the next few years whilst paying a dividend. We have surplus capacity and we can increase production substantially without having to invest heavily in the metallurgical plant. Further north, Caledonia also has a base metals exploration project that focuses mainly on copper in the North West province of Zambia.
From the interviews we have already conducted, it is clear that Zimbabwe faces significant challenges. The two main challenges are said to be security of tenure and an unstable power supply. How is Caledonia addressing these issues?
ML: In 2010 the entire Zimbabwe faced widespread power outages: at Blanket Mine electricity was running on average only 14 hours a day. This made it almost impossible to generate the cash we urgently needed at that time to invest in further development. It also had significant safety implications. We had to find a solution. Caledonia installed its first 2.5 MW generator in May of 2010 and now has four of these that produce enough produce energy to run the entire mine as well as the metallurgical plant completely from a standing start. The $4 million dollar investment in the generator sets may seem quite expensive, but Blanket would still make a profit if it ran completely using the diesel generator sets even if the gold price falls to $1,000 an ounce. The opportunity cost of not producing outweighs the cost of owning and operating the generator sets. We have also recently entered into an uninterrupted power supply agreement with the Zimbabwe Electricity Supply Authority. Under this agreement Blanket’s cost of electricity almost doubled from $0.07 per kWh to $0.13 cents per kWh, but it is still significantly cheaper than generating power ourselves. Since Blanket entered into this agreement, the incidences of outages have reduced to around half an hour per day on average. Companies who cannot enter into such an agreement or afford to generate their own power face serious problems.
Caledonia has largely dealt with the security of tenure challenge by becoming fully indigenized in September. Caledonia gave a 10% stake to the local community; sold another 10% to a workers’ trust, sold 16% to the National Indigenization and Economic Empowerment Fund and sold another 15% stake to a consortium of Zimbabweans. Caledonia has thus effectively acquired a social license to operate in Zimbabwe.
Another issue is the uncertainty surrounding escalating exploration fees. Caledonia’s fees to protect and maintain its exploration interests used to be $24,000 a year, but they are now scheduled to cost $3.2 million. Caledonia’s landholdings are not excessive and we have honed them down to only those areas that we will be working on in the short to medium term to minimize EPO costs. However, there are mining companies that have massive land holdings and for some of them, their EPO fees could be bigger than their turnover, which is not sustainable. Putting fees at such high levels is a shortsighted approach by the government because it will inhibit exploration and the development of the mining industry. That would be a great shame as Zimbabwe is such an underexplored mining destination with enormous potential mineral wealth.
What is the trend in investment flows into Zimbabwe?
ML: At the Mining Indaba in Cape Town there were some very senior players in the global mining industry making bold statements about investing into Zimbabwe claiming that it is now a more favorable place to invest than South Africa. Such sentiments, coupled with the performance of successful companies like Caledonia which is an example of the opportunity Zimbabwe presents, is changing the perspective of many who were reluctant to invest in the country. The risk appetite of Asian investors is slightly overstated, but we do see increasing interest coming from Singapore.
Caledonia appears to be in a very positive position. What is the medium-term outlook for the rest of the mining industry in Zimbabwe?
ML: The outlook is tough for most Zimbabwean miners over the medium-term. Many of the gold producers desperately need to increase production to realize economies of scale, but they have difficulty raising the capital they require. As costs go up and the gold price goes down, this will be a difficult time for them. Platinum has its own challenges, but it producers will do well to move some of their apples out of the South African basket into Zimbabwe. Despite the recent hype about coal it is unlikely that Zimbabwe will burst into enormous coal production due to logistical constraints on accessing the export market. High-value, low-volume commodities such as chrome and nickel should be doing well over the next few years if problems with electricity can be addressed. On a positive note, the overall skills and education level in Zimbabwe is very high compared to the rest of Africa, which makes operating here comparatively more attractive.