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Caledonia Mining: risk off?

Caledonia has many of the things you'd look for in a gold miner. Might we now add an improving political backdrop to the list?
Caledonia Mining: risk off?

Caledonia Mining (CMCL) is, in the eyes of broker WH Ireland, “the premier Zimbabwe recovery story in London”. The competition here isn’t stiff. Of the other candidates, Vast Resources (VAST) appears increasingly focused on Romania, the market does not know what asset the currently suspended Contango Holdings (CGO) is buying, and Premier African Minerals (PREM) is still appraising its lithium and tantalum project. Neither is it clear that last year’s peaceful political transition spells ‘recovery’, for a gold miner in an isolated part of the African nation. The new president, Emmerson Mnangagwa, may be making the sort of noises international capital likes to hear, but he has still inherited from Robert Mugabe an economy with big challenges. Still, if sentiment does pick up, Caledonia has a lot of the things you’d want in a gold miner: low cost, high margin, cash-generative and rapidly growing production. Oh, and a dividend.

IC TIP: Buy at 538p
Tip style
Value
Risk rating
High
Timescale
Medium Term
Bull points

Low-cost expansion

Zimbabwe recovery

Good dividend record

Big discount to net assets

Bear points

Stock liquidity is poor

Single-asset company

Indeed, the situation has only really improved since our original buy call in September 2016. Not that you’d tell from the shares. They changed hands for £1 each at the time – or £5 once adjusted for last year’s share consolidation. Perhaps that shouldn’t be a great surprise given the dollar-denominated gold price has only returned to (and consistently stayed above) $1,300 (£914) an ounce since the beginning of 2018. And the London market for Caledonia shares remains illiquid, a fact management has tried to alleviate through last year’s tertiary listing on the NYSE American.

But there are several reasons to look past the wide bid-offer spread, starting with 2017's figures. Higher gold grades and an increase in tonnes milled at the group’s Blanket mine resulted in an 11.5 per cent year-on-year jump in production to 56,133 ounces. By 2021, Caledonia expects annual output to be 43 per cent higher, underpinned by 0.71m ounces (oz) of measured and indicated resources and 0.89m oz of inferred resources. Extending capacity involves sinking a new shaft in the middle of the mine, an investment the group expects to complete for just $18m.

This could be self-funded. On a flat gold price, Caledonia generated $24.5m of operating cash flow in 2017, and has plenty of cash on hand. A $4m rights issue is also planned for the mine, to which Caledonia will subscribe. Significantly, this may allow it to take its holding in the Blanket mine to above 50 per cent, which has been made possible following recent changes to company and indigenisation law – one of the first passed under Mr Mnangagwa’s administration. Caledonia wants to keep employees and the local community on the shareholder register, but has signalled its intention to buy holdings from other indigenous owners of the mine.

There are likely to be limits to these purchases, although a controlling stake in the cash flows can only help the prospects for a re-rating. Regardless, a greater holding is a sensible option because Caledonia’s cash generation is primed for growth.

CALEDONIA MINING (CMCL)  
ORD PRICE:538pMARKET VALUE:£57.0m
TOUCH:525-550p12-MONTH HIGH:588pLOW: 288p
FORWARD DIVIDEND YIELD:3.6%FORWARD PE RATIO:5
NET ASSET VALUE:597¢NET CASH:$11.3m
Year to 31 DecTurnover ($m)Pre-tax profit ($m)*Earnings per share (¢)*Dividend per share (¢)
201549.08.046.022.5
201662.016.457.927.5
201769.822.888.927.5
2018*74.928.013327.5
2019*78.330.516727.5
% change+63+9+26-
Normalmarket size:300   
Market makers6   
Beta:0.72   
£1=$1.42. *WH Ireland forecasts, adjusted PTP and EPS figures