Join our community of smart investors

Caledonia cash machine

Investor concerns around Zimbabwe's economy may explain Caledonia Mining's super-low valuation, but the company's cash generation is doing the talking.
September 8, 2016

It's been a great year for gold bugs and the 24 per cent year-to-date rise in the metal's price to just over $1,300 (£978) an ounce has resulted in heavy demand for gold stocks, particularly those with profitable, long-term mines. This has left shares in many companies trading at valuations that leave little room for error. However, one miner that looks extremely cheap in the current climate is Aim minnow Caledonia Mining (CMCL), whose Blanket mine in Zimbabwe is expanding both production and margins. Given the political and economic unrest in the country, not to mention the volatility of small gold miners' shares, it's understandable that institutional investors have largely steered clear of Caledonia. But if the company delivers on its aims - as it has done in recent years - then its high-yielding shares look hugely undervalued on just six times 2016s forecast earnings dropping to three times 2017 expectations.

IC TIP: Buy at 100p
Tip style
Value
Risk rating
High
Timescale
Long Term
Bull points
  • Big discount to peers
  • Strong yield
  • Improving ore grades
  • Growing cash pile
Bear points
  • Political situation & ownership
  • Gold volatility

That sort of rating might be warranted if the gold miner had run up huge debts or its mine was nearing the end of its life, but neither is the case. At the end of June, Caledonia had net cash of $10.6m and first-half net operating cash of $9m came close to covering a 42 per cent investment hike to $8.2m along with $1.2m paid out in dividends. The resource base was recently upgraded to 661,000 measured and indicated ounces at an average grade of 4.23g per tonne and is expected to grow further.

 

 

Indeed, Caledonia has found the Blanket mine's grade only improves the deeper it digs. This bodes very well for cash generation as by mid-2018 the company should have sunk the central shaft down to 1,080m from the current level of 170m. At that point all-in costs should fall to just $750 compared with an already competitive $936 per ounce in the three months to June.

The policy in Zimbabwe of handing assets to indigenous groups saw Caledonia cede control of 51 per cent of Blanket in 2012. While the fact that Caledonia does not have a majority claim is a negative, it will be the de facto owner until the indigenous groups' facilitation loans are fully repaid, which is expected some time in 2023. Caledonia is also reliant on payments from the Reserve Bank of Zimbabwe, to which it must sell all of its gold at a 1.25 per cent discount. However, investors can take encouragement from the fact the government is no longer pursuing hyperinflationary policies and is supportive of companies that provide a regular source of dollars.

CALEDONIA MINING (CMCL)

ORD PRICE:100pMARKET VALUE:£52.2m
TOUCH:98-102p12-MONTH HIGH:111pLOW: 38p
FORWARD DIVIDEND YIELD:4.2%FORWARD PE RATIO:3
NET ASSET VALUE:99¢NET CASH:$10.6m

Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
201363.220.726.66.0**
201453.511.210.46.0**
201549.05.79.24.5
2016*62.016.823.35.0
2017*84.330.543.35.5
% change+36+82+86+10

Normal market size: 1,500

Market makers: 6

Beta: 0.44

£1 = $1.32.

* WH Ireland forecasts, adjusted PTP and EPS figures

** Dividends in $CAD.