Detailed narrative
Operational Recovery and Optimization at Blanket Mine
Caledonia's Blanket mine experienced a significant operational recovery in Q2 FY26, with the head grade improving from 2.5 grams per tonne in Q1 to 2.88 grams per tonne, and a target of 3.1 grams per tonne for the remainder of the year.
This improvement is attributed to enhanced access to higher-grade mining areas, following previous fall of ground incidents. The mine also implemented a 7-day working week in June, increasing blasting days by 18%, which is expected to boost run-of-mine production. Incremental production will initially be processed through the re-purposed Lima plant from September, with a planned upgrade to the main metallurgical plant in 2027 to handle all run-of-mine material at a target rate of 990,000 tonnes per year.
Bilboes Project Advancement and Funding Strategy
The Bilboes project continues to advance on schedule, remaining central to Caledonia's long-term growth strategy. Geotechnical investigations for the process plant site and tailings storage facility are complete, and process plant optimization studies are nearing completion. Procurement for long-lead items is substantially done.
The company's funding strategy for Bilboes, based on four pillars (hedge program, convertible note, interim funding, project finance), is progressing well. The successful $145 million convertible note offering has been completed, and credit approval for the $150 million interim funding facility is secured from co-lead arrangers, with closure expected by early September.
Project finance discussions are also well underway, with closure anticipated by year-end 2026 or early 2027.
Exploration Successes at K-Pits and Motapa
Caledonia reported exciting exploration results from both K-Pits and Motapa. At K-Pits, located within the Blanket mining lease, over 2,000 meters of surface trenching and 7,000 meters of shallow reverse circulation drilling revealed oxide grades of 1.5-2.5 g/t and sulfide grades of 6 g/t, all within 40 meters of surface.
A resource statement and metallurgical testing are underway, with encouraging heap leach trial results. At Motapa, the mineral resource estimate is complete and expected to be published in the coming weeks, based on 2024-2025 drilling. The 2026 exploration program is ongoing, focusing on new areas in the Central and Southern shear zones, reinforcing Motapa's potential contribution to the Bilboes project.
Cost Drivers and Capital Expenditure Adjustments
The company's on-mine cash costs and all-in sustaining costs have seen increases for FY26. A significant driver is the reclassification of the Blanket Employee Trust distribution, which resulted in a $3.2 million charge now categorized as employee costs within production costs.
Additionally, electricity costs increased by 25% due to higher wheeling charges, despite reduced consumption. Total CapEx guidance for FY26 has been revised from $162 million down to $103 million. This reduction is primarily due to a timing shift of over $80 million of Bilboes spend into early 2027, facilitated by better financing terms, rather than a project delay or funding constraint.
New CapEx initiatives include an $8.1 million spend in 2026 for a 133 kV power line and a $3.5 million Blanket mine plant upgrade.
Financial Accounting for Convertible Notes and Derivatives
The company highlighted significant movements in its P&L related to the accounting for convertible notes and capped call options. These are treated as derivative financial instruments under IFRS, leading to fair value accounting that can cause considerable volatility in the P&L.
While these movements are fully disclosed and independently valued, management emphasized that they are complex accounting items and should be treated separately when analyzing the underlying operational performance. The convertible notes contributed $145 million in proceeds, while the capped call options had an acquisition cost of $14.4 million, with a net balance sheet position of $4.4 million at period end.