Caledonia Mining Corporation PLC (LON: CMCL) – Targeting 80,000 ounces of Gold production from 2022

Caledonia Mining Corporation PLC (LON: CMCL) is an FTSE AIM All-Share listed Gold producer, which has a profitable and cash-generative business with a strong growth profile. CMCL operates through the Blanket Mine in Zimbabwe. The Blanket Gold Mine operates at a depth of approximately 750 meters below the surface and produced nearly 55,000 ounces of gold in FY19. Furthermore, the Blanket Mine also encapsulates brownfield exploration and development projects, which are within trucking distance of the Blanket metallurgical recovery plant.

Recent trend of dividend payments

CMCL had paid a quarterly dividend of 12 US cents per share on 30 April 2021, an increase of around 9% from the last quarterly dividend of 11 US cents per share paid during January 2021. Moreover, it also represented a modest 75% cumulative increase from 6.875 US cents per share of quarterly dividend paid in October 2019. Furthermore, it remained a fifth increase in quarterly dividend since October 2019.

Growth Prospects

• Upgradation of Blanket Mine in Zimbabwe – On 26 May 2021, the Company had reported an increase of 1% in the total Proven and Probable Mineral Reserves to 528,000 ounces and a growth of around 12% in total Measured and Indicated Mineral Resources as it reached 902,000 ounces.
• Commissioning of Central Shaft – CMCL had commissioned the Central shaft at the end of Q1 FY21. Moreover, the successful commissioning had ensured that the Company would achieve its medium-term production targets. Mainly, the strategic focus of the commissioning would be higher production, lower costs, and increased cash generation.
• Reduced Injury frequency rate – The total injury frequency rate remained 0.79 during Q1 FY21 as compared to 0.97 for FY20. Moreover, the Blanket Mine had delivered around 1,857,844 fatality-free shifts at the end of Q1 FY21.
• Construction of 12 MW Solar plant – The Company had begun the construction of a 12MW solar plant at the Blanket Mine. Moreover, the project had reached the procurement phase, and it would become operational within the next 12 months.

Key Risks

• Dependence on Gold Price – The gold market is cyclical and sensitive to economic changes and numerous factors, which are beyond the Company’s control.
• Financial Risk – several financial risks associated with fluctuation in the foreign exchange & interest rates, availability of adequate working capital, and credit defaults.
• Disruptions in Operations – Extreme weather conditions may cause several operational challenges, while various exploration risks may hamper certain drilling activities.
• Increase in US Dollar – The strengthening of the US dollar may cause a decline in the Gold price. Thus, it may negatively influence the top-line revenue of the Company.

Gold Industry Dynamics

• Global gold ETFs had demonstrated a net inflow of 61.3 tonnes during May 2021. However, it had shown substantial outflow for the last three months. Nevertheless, it had managed to reverse the trend during May 2021.
• The larger funds across the US, UK and Germany remained as the primary driver of strong inflows. The North American funds had witnessed inflows of 34.5 tonnes, while European funds had demonstrated the inflows worth 31.2 tonnes during May 2021.
• The Gold price had witnessed an upside movement of around 7.5% in May 2021. Effectively, it had witnessed a 13% rally in the last two months.
• The recent strength in the gold price can be illustrated by higher inflation expectations, weakness in the US dollar and positive industry sentiments.
• Some additional factors which might have contributed towards growth would be strong holiday demand in China and increased central bank demand.

Furthermore, the performance of gold is dependent on four sets of drivers – Economic expansion, Risk & Uncertainty, Opportunity Cost and Momentum. The Gold prices have rebounded recently. Furthermore, the stagnation in US Treasury yield may open the door for an increase in the gold price in the coming months.

(Analysis done by Kalkine Group)

On a weekly chart, COMEX Gold Futures' price is sustaining above an upward sloping trend line breakout for the past three weeks, indicating an upside direction for the commodity. The trend-following indicators, 50-period SMA and 21-period SMA trading below the current market price and supporting a positive stance. The momentum indicator RSI (14-period) is trading in positive territory at ~55.37 levels. The MACD line is also trading above the centerline and formed a positive crossover with the signal line.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Caledonia Mining Corporation PLC.  

Orbis Investment Management Ltd. is the most significant shareholder as it holds nearly 1.96 million shares as of 31 March 2021.

Q1 FY21 Financial & Operational Highlights (for the three months ended 31 March 2021, as on 13 May 2021)

(Source: Company result)

• CMCL had shown a jump in revenues from USD 23.6 million during Q1 FY20 to USD 25.7 million for Q1 FY21, illustrating a higher realised gold price partially offset by lower production.
• Moreover, the Company had generated USD 2.0 million from operating activities during Q1 FY21, while it was USD 10.1 million during Q1 FY20.
• The net cash & cash equivalents remained USD 13 million as of 31 March 2021.
• The gold production remained 13,197 ounces during Q1 FY21, while it was 14,233 ounces during Q1 FY20.

Financial Ratios (FY20) 

Share Price Performance Analysis

(Analysis done by Kalkine Group)

On 14 June 2021, at 07:21 AM GMT, CMCL’s shares were trading at GBX 1,020.00, down by around 3.77% from the previous day closing price. Stock 52-week High and Low were GBX 1,900.00 and GBX 992.00, respectively.

From a technical perspective, a 14-day RSI of ~35.84 is inching towards the oversold zone, indicating an upside potential in the stock price.

Over the last two years, CMCL’s stock price had delivered a positive return of 152.00%, while the FTSE AIM All-Share index (benchmark index) had produced a return of about 33.33%, and FTSE Gold Mines (benchmark sector) had generated a return of around 59.01%. 

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

Business Outlook Scenario

After gaining positive revenue momentum during Q1 FY21, the Company had achieved approximately 5,470 ounces of gold production during April 2021, which remained about 24% higher than the average monthly production during Q1 FY21. Furthermore, CMCL had managed to increase the cash balance as it stood at USD 16.3 million as of 30 April 2021. Moreover, the Company had provided encouraging production guidance as it forecasted FY21 total gold production to be ranging from 61,000 ounces to 67,000 ounces, higher than the levels of 57,899 ounces achieved during 2020. Also, it had expected annual gold production to reach 80,000 ounces from 2022 and beyond. Overall, the Company would sustain the high level of dividend boosted by the factors such as scheduled ramp-up of production, favourable gold price and efficient cost management.

The next important support level on the technical chart is at GBX 992.00.

Considering the successful commissioning of the Central Shaft, decent revenue growth during Q1 FY21, strong balance sheet, robust liquidity profile, consistent dividend growth, impressive production guidance, robust cash generation, 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 1,020.00 (as on 14 June 2021 at 07:21 AM GMT), with lower-double digit upside potential based on 6.79x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

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

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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