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. 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 Blanket 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: Company Website)

Growth Prospects and Risk Assessment

Caledonia has delivered well on its strategy of organic growth and has increased the quarterly dividend for the fourth time since October 2019, creating substantial value for its shareholders. 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, there are certain risk and uncertainties to business growth. The financial performance is highly dependent on the Gold price, and the Gold market is cyclical and sensitive to the economic changes and numerous factors, which are beyond the Company’s control. The Global Covid-19 pandemic could result in the suspension of operations and increase the labour absenteeism, and thus, the operation costs. Moreover, there are several financial risks associated with fluctuation in the foreign exchange & interest rates, availability of adequate working capital, and credit defaults.

Industry Outlook Dynamics

In February 2020, Gold ETFs shed 84.7 tonnes, representing 2% decline in AuM, marking third outflow in the past four months. The continuous ETF outflow is putting pressure over the precious metal. The weighing on gold is a repercussion of vaccination progress that has improved global growth outlook. In global markets, gold rates fell following a rebound in the dollar index and the US Treasury Yield. However, expert says that a drop below US$1,660 could trigger further liquidation pressure to support the price.

In terms of growth catalysts, the 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. Furthermore, central banks have been adding to the gold reserves since the financial crisis.

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$1,700 to US$2,000/oz.

The chart below shows the performance of Gold Future Prices over the past 3 years, which was trading at US$1,728.30/oz on 15 March 2021, reflecting around 31.54% growth over the last 3 years.

 (Source: Kalkine Research, Investing.com)

However, 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. With travel restrictions, logistical and supply concerns can deplete the dealer inventories for coins and small bars. Moreover, the 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. Also, the allocation to gold could go down if real interest rates rise dramatically.

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

Recent Developments

On 23 February 2021: The Company announced that Mrs Geralda Wildschutt had joined the Board of the Company as an Independent Non-Executive Director with an immediate effect.

On 4 January 2021: CMCL has declared a 10% increase in the quarterly dividend. This was the fourth increase in the past 15 months, representing a cumulative 60% surge in the dividend since the first increase in October 2019.

Q4 FY20 Production Update (for the quarter ended 31 December 2020, as on 18 January 2021)

• The Company expects gold production to be approximately 15,012 ounces in Q4 FY20.
• During the year, the Company delivered a record gold production of 57,899 ounces, which was at the top end of the Company's revised increased guidance.
• Further, the 2021 gold production is expected to be in the range of 61,000-67,000 ounces.
• In Q4 FY20, the Company stated that Blanket Mine's delivered a strong operating performance.
• Based on the improved production in the financial year 2020, the Company has revised its annual production guidance and expects to deliver the higher end of revised production.
• CMCL remained on track for commissioning of Central Shaft and will be completed in Q1 FY2021.
• The Company also entered into option agreements on Zimbabwe-based properties as a part of a strategy to deliver organic growth.

Q3 FY20 Update (for the quarter ended 30 September 2020, as on 12 November 2020)

(Source: Company Website)

• In Q3 FY20, the revenues increased by 27% year-on-year to USD 25.4 million, and gross profit surged by 47% year-on-year to USD 12.5 million, with a gross margin of 49%.
• Led by a higher insurance premium and an increased share-based payment expense, the all-in sustaining cost per ounce surged to USD 1,119 in Q3 FY20 from USD 872 in Q3 FY19.
• Basic IFRS earnings per share decreased to 36.6 cents as compared with the corresponding period of the last year (Q3 FY19: 63.4 cents), adversely affected by higher taxation and lower foreign exchange gain.
• During the quarter, the Company delivered a strong operating performance, with 15,155 ounces of gold produced and an increase of 10% year-on-year in tonnes mined and milled.
• The July dividend per share increased by 13.3% to 8.5 cents. Further, the October dividend per share increased to 10 cents.
• It has also shown a strong cash generation, with net cash flow from operating activities of USD 7.4 million and net cash and cash equivalents of USD 21.6 million.

Financial Ratios

Share Price Performance Analysis

On 15 March 2021 (before the market close, at 9:07 AM GMT), Caledonia Mining Corporation’s shares were trading at GBX 1,145.88, down by 2.06% against the previous day closing price. Stock 52-week High was GBX 1,900.00 and Low of GBX 582.00, respectively.

From a technical standpoint, 14-day RSI (47.95), 20-day SMA (1,110.30), and 20-day EMA (1,109.96) is supporting the upside potential.

In the last two years, CMCL’s share price has delivered a positive return of around +166.48% return as compared to +29.78% return of FTSE-AIM All-Share index and nearly +1.77% return of FTSE All Share Industrial Metals index, which shows that the stock has outperformed the benchmark index and the sector.

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

Business Outlook Scenario

Clearly, Covid-19 pandemic had no effect on production, and therefore, the production was above target in the FY20. Moreover, the production guidance for FY21 and beyond has been significantly improved to 61,000 to 67,000 ounces of gold. For Q4 FY20, Caledonia also delivered an 10% jump in dividend per share from previous quarter that was paid in October 2020. In a nutshell, the Company is in a great position to pursue significant growth opportunities. 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 are 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: Company Website)

Considering an improvement in gold production in Q4 2020, decent FY21 production guidance, operational conditions improving towards normal levels, robust financial & liquidity position, higher profitability margins, minimal leverage ratio, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Caledonia Mining Corporation at the current price of GBX 1,145.88 (as on 15 March 2021, before the market close at 9:07 AM GMT), with lower-double digit upside potential based on 4.63x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

 

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

* The dividend yield is subject to change as per the stock price movement.

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