Caledonia Mining Corporation PLC (LON: CMCL) is a Gold producer, which has a profitable and cash generative business with a strong growth profile. The Blanket Mine in Zimbabwe is its primary asset, which is all set to hit the production guidance of 55,000 – 58,000 ounces (oz) in FY20. The Blanket Gold Mine operates at a depth of approximately 750 meters below surface and produced nearly 55,000 ounces of gold in FY19. The Banket Mine also holds brownfield exploration and development projects, which are within trucking distance of the Blanket metallurgical recovery plant.

The Company has an experienced management team and board of directors with diverse expertise in gold production, mine development, exploration, finance and marketing. Caledonia’s shares are listed on the NYSE American LLC, and depositary interests in the shares are traded on the FTSE AIM All-Share index of the London Stock Exchange.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

By FY22, the Company plans to increase its annual production by 45%, up to 80,000 ounces. CMCL has one of the highest yields in the gold industry and pays a quarterly dividend, which has increased thrice in FY20. It is also investing in the Company’s future growth by evaluating new investments opportunities in Zimbabwe. The Company targets to achieve All-in Sustaining Cost Guidance (AISC) of $810/oz – $850/oz in the short-term. Moreover, the operating cost is expected to move down further with new shaft ramps up due to increased production volume, better mine efficiencies, and economies of scale. The Company has a diversified, well established, and indigenous mine management team which differentiates from other African producers.

However, the Company is also exposed to various risk and uncertainties. It is exposed to financial risk with fluctuations in Gold price and exchange rates. Furthermore, the unavailability of adequate working capital can impact regular revenue and cash flow. The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs.

Industry Outlook Dynamics

Recent Trend: The Gold prices lingered below US$1,900 per oz since lack of additional US fiscal stimulus kept the US dollar firm. The world mines are expected to produce 3,368 tonnes of gold in 2020, which is 4.6% lesser than 2019 and the lowest in the past five years. However, the Covid-19 pandemic has led to unparalleled money printing and low-interest rates globally, which shall put gold on track for registering its best year in a decade as it appeals investors as a hedge against currency debasement and inflation.

Market Overview: The Gold investment is an efficient way of preserving the purchasing power as the one ounce of gold cost has risen from US$20.67 in 1993 to US$2,000 in 2020. However, in present times, Gold has also been outperforming the major asset classes, in terms of return. Therefore, it is provoking a fundamental shift in asset allocation. The bull market in gold started around two years prior to the Covid-19 pandemic with the trade war between US and China and sudden downtrend in real interest rates. The Covid-19 pandemic further exacerbated these concerns by dragging real interest rates into negative territory. Moreover, the dollar depreciation should support the surge of gold prices for the foreseeable future.

In 2020, the onset of the Covid-19 pandemic has made Gold’s relevance as a hedging tool even more prominent, which accelerated the price performance. The Gold ETFs surpassed 1,000 tonnes of new demand. The Gold ETF recorded its tenth consecutive month of net inflows in September 2020.

In Q3 FY20, global Gold demand dipped by 19% year-on-year to 892 tonnes, as consumer sentiments remained depressed. This represented the lowest quarterly demand since Q3 2009. The YTD demand was 2,972 tonnes, which was 10% lower against the same period in 2019. The Gold prices increased by ~17% during the H1 2020 and soared by an additional ~10% in July. The Covid-19 pandemic may bring structural shifts to asset allocation, and there are strong fundamentals to support the Gold investment in the longer term. According to the global demand trends report from WGC (World Gold Council), the gold demand fell in H1 FY20 vs H1 FY19. However, the increased investment by Central banks and robust inflows into gold ETFs amid the pandemic zoomed the Gold prices.

The chart below shows the performance of LBMA Gold Price over the past 3 years, which was trading at US$ 1,892.20/oz on 16 November 2020, reflecting around 39.19% growth over the last 3 years.

(Source: Refinitiv, chart created by Kalkine Group)

Growth Catalysts

• Record inflows into Gold-back ETFs should continue to offset the demand weakness in other sectors.
• Reduced opportunity cost of holding Gold with persistently low-interest rates would bolster the demand for Gold being a source for long-term returns.
• Central banks have been adding to the gold reserves since the financial crisis. Presently, the official reserves are more than 5,000 tonnes higher than they were in 2009. The central banks own nearly 35,000 tonnes of Gold, equivalent to ~17% of worldwide above-ground stocks.
• Uncertainties arising from US-China trade tension and Brexit, followed by dented economic indicators after Covid-19 outbreak, has further encouraged investors to reconsider Gold as a traditional hedging tool in times of turmoil.
• Moreover, the economic downturn has devalued the Forex market, which is compelling investors to switch to more tangible metal resources.

Key Risks

• The long-term price performance is dependent heavily on retail purchases, which makes demand a critical factor for long-term growth. According to the global demand trends report from WGC, the Gold demand in H1 2020 declined by 6% against the last year comparatives. The jewellery demand plunged 46% (year on year) in H1 2020 as consumers were deterred by the high price and with a reduction in the disposable income. Similarly, the bar and coin investment declined sharply in Q2 2020 due to Covid-19 led lockdown.
• The gradual resumption of economic activities and receding apprehensions of Eurozone disintegration could dent demand for gold to hedge related risks.
• The scale and continually evolving nature of coronavirus pandemic are causing unprecedented disruption to the supply chain. It can lead to reduced gold production as small-scale refineries and fabricators also halted their operations during H1 2020.
• With travel restrictions, logistical and supply concerns can deplete the dealer inventories for coins and small bars.
• Supply from gold producers can decline as only US$4.4 billion was spent on exploration in 2019 against US$11.8 billion in 2012. Consequently, there were only three gold discoveries in 2019 as compared to 42 major gold discoveries in 2000. In short, there would be less gold, if a lesser amount is invested on exploration.
• The allocation to gold could go down if real interest rates rise dramatically.

Gold Outlook

Gold can act as a genuine diversifier tool in an investment portfolio for a long-term due to the attributes pertinent to scarcity, highly liquid and uncorrelated asset nature. Moreover, it has been proven over time that beyond merely a safe-haven asset during the high-risk time, it can also be an asset to outperform and generate positive returns too. Such dynamics are likely to persist amidst high political and economic uncertainty, battered stock and bond markets, and historically low interest-rates scenario.

Overall, the Gold industry landscape is going through an unparalleled wave of change, which is arising from various aspects, such as demand patterns, regulatory changes, innovation, and the entrance of new participants. Furthermore, the resurgence of coronavirus cases denting equity market sentiments with speculations regarding another round of lockdown, which would eventually attract investors towards the Gold, as a safe-haven investment.

However, as the gold prices and uncertainty have the inverse correlation, there is a risk that lower uncertainty with lockdown easing might cause gold prices to consolidate around US$ 1,800 to US$ 2,000/oz.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Caledonia Mining Corporation Plc.

Recent Developments

7 October 2020: Caledonia announced that it is raising the required funds to invest in the construction of a solar power plant to supply the electricity in Zimbabwe, Caledonia. Therefore, it issued 597,963 shares.

6 October 2020: The Company signed an agreement with the Government of the Republic of Zimbabwe, to evaluate mining rights or projects in the gold sector that are controlled by the Government.

Production Update for the quarter ended 30 September 2020 (as on 5 October 2020) 

(Source: Presentation, Company Website)

• Nearly 15,164 ounces of gold were produced in Q3 FY20, reflecting 11.1% increase from 13,646 ounces produced in Q3 FY19.
• As a result, production guidance for FY20 increased to between 55,000 and 58,000 ounces.
• In 9M FY20, gold produced to 30 September 2020 was 42,896 ounces, 12% more than the 38,306 ounces produced in the 9M FY19.
• Overall, Caledonia remained on track to achieve its production target of 80,000 ounces by 2022.

Financial highlights for the three months ended 30 September 2020 (as on 12 November 2020)

(Source: Interim Report, Company Website)

• During Q3 FY20, gross revenues surged 27% year-on-year to US$25.4 million.
• Similarly, gross profit increased by 47% year-on-year to US$12.5 million against US$8.5 million in Q3 FY19.
• EBITDA (excluding net foreign exchange gains and share based payments) registered a 34% increase on the $8.3 million in Q3 FY19.
• The on-mine cost per ounce surged to US$$758 in Q3 FY20 from US$686 in Q3 FY19.
• Adjacently, AISC cost increased from US$872 in Q3 FY19 to US$1,119 in Q3 FY20, primarily due to a higher insurance premium.
• Adjusted EPS stood at 34.1% (Q3 FY19: 15.8%).
• The net cash from operating activities was US$5.3 million (Q3 FY19, $4.9 million).
• As of 30 September 2020, net cash and cash equivalents stood at US$21.6 million (as of December 31, 2019: US$8.9 million).
• In Q3 FY20, the Company paid a quarterly dividend per share of 8.5 cents.
• Operationally, the Company produced 15,155 ounces of gold in Q3 FY20 and produced 42,887 ounces produced in the first nine months of FY20.
• Meanwhile, total mined and milled increased by 10% year-on-year in Q3 FY20; recoveries were also slightly improved.
• As of 30 September 2020, total assets increased to US$172.12 million from US$143.55 at the end of Q3 FY19.

Financial Ratios – Reflecting Strong Fundamentals

Share Price Performance Analysis

 (Source: Refinitiv, Kalkine Group)

On 16 November 2020 (before the market close, at 12:54 PM GMT), Caledonia Mining Corporation PLC shares were trading at GBX 1,220.00, down by 4.69% against the previous day closing price. Stock 52-week High was GBX 1,900.00 and Low of GBX 582.00, respectively. 14-day RSI (32.43) is currently supporting an upside move, which means the stock price could increase in the short term.

 (Source: Refinitiv, Kalkine Group)

In the last one year, Caledonia Mining Corporation PLC’s stock return has outperformed the benchmark index and the sector as it has delivered ~ 100.32% return as compared to ~12.03% return of FTSE AIM All-Share index and ~2.92% return of FTSE All Share Mining.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook

Clearly, Covid-19 pandemic had no effect on production, and therefore, the production was above target in the 9M FY20. Subsequently, the production guidance for FY20 increased to 55,000 to 58,000 ounces from 53,000 to 56,000 ounces. Adjacently, the progress on the Central Shaft returned to the planned rate post lifting of the travel and transport restrictions. The Central Shaft is likely to be fully equipped by the end of FY20 and to be commissioned in the Q1 FY21, approximately three months delays due to Covid-19. The production guidance for FY21 is 61,000 to 67,000 ounces. Further, the Company expects to produce 80,000 ounces of gold in FY22.

Meanwhile, Voltalia (a renewable energy provider), has been appointed as the contractor for the 12MW solar project, which is expected to supply 27%of Blanket's average daily electricity requirements. The solar projects is anticipated to be commissioned before the end of FY21.

However, as Gold has moved sharply higher in the past few months, the price may experience some consolidation in the near term. Nevertheless, if quantitative easing and other factors encourage investors to treat Gold as money, the potential for Gold price outperformance is extremely high over the next five to ten years. Therefore, we believe that the fundamentals of the Gold bull market are still intact from a long-term perspective though short-term consolidation can be expected with demand downturn and supply chain disruption.

(Source: Presentation, Company Website)

Based on the fundamental and technical factors as discussed above, we have given a “Speculative Buy” recommendation on Caledonia Mining Corporation PLC at the current market price of GBX 1,220.00 (as on 16 November 2020, before the market close at 12.54 PM GMT) with lower double-digit upside potential based on 8.92x Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.). 

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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