Caledonia Mining Corporation PLC (LON: CMCL)

Caledonia Mining Corporation PLC (LON: CMCL) is an FTSE AIM All-Share index listed Gold producer, which has a profitable and cash-generative business with a strong growth profile. CMCL operates through the Blanket Mine in Zimbabwe. Furthermore, the Blanket Mine 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 14 US cents per share on 28 January 2022, an increase of around 27.27% from the last quarterly dividend of 11 US cents per share paid during January 2021.

(Source: LSE; Analysis done by Kalkine Group

Growth Prospects (also encapsulates details of a production update released on 18 January 2022)

• Production Boost: 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.
• Oversubscribed Placing: The Company’s shares got oversubscribed on Victoria Falls Stock Exchange ("VFEX") listing driven by extremely positive Zimbabwe investor response. The proceeds of the offer will be used for general corporate purposes in Zimbabwe.
• Record Gold Production: CMCL had achieved record gold production of around 67,476 ounces in 2021, an increase of around 17% from 2020 levels.

Key Risks

• CEO Stepped Down: On 21 December 2021, CMCL announced that Steve Curtis intended to resign from his position as Chief Executive Officer from 30 June 2022.
• 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.
  

Gold Industry Dynamics

• Robust Demand Outlook: Several factors such as rising inflation worldwide, the spread of Omicron variant of the Covid-19 pandemic and increasing industrial demand for Gold may support gold price over the medium term.
• Gold ETF: Meanwhile, Gold ETF had witnessed a year-on-year drop of around 5% to 3.57 kilo tonnes during 2021. Adjacently, the Asset under management declined year-on-year by almost 9% to USD 209 billion at the end of 2021. The losses of 2021 were dominated by North American funds.
• Growth Drivers: The recent Federal Reserve meeting indicating a sooner-than-expected interest rate hike and the US inflation touching 40-years high during December 2021 had weakened the US Dollar Index. Thus, it had benefitted the gold price.

(Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,790.90) is sustaining between the middle Bollinger band and the lower Bollinger band, indicating an upside direction for the commodity. At the same time, the 14-days RSI of ~43.47 indicates a bullish price momentum. 

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 December 2021.     

Q3 FY21 Financial Highlights (for the quarter ended 30 September 2021, as on 11 November 2021)

(Source: Company Filings)

• Production: During Q3 FY21, CMCL reported a record quarterly production of 18,965 ounces (oz) of gold.
• Annual Guidance: The Group reiterated its production target of 80,000 ounces in FY22.
• Liquidity: At the end of Q3 FY21, the Group had net cash and cash equivalents of USD 13.0 million (Q3 FY20: USD 21.6 million).
  

Financial Ratios (Q3 FY21)

Share Price Performance Analysis

(Source: Refinitiv; Analysis done by Kalkine Group)

On 31 January 2022, at 08:48 AM GMT, CMCL’s shares were trading at GBX 904.00, down by around 0.66% from the previous day closing price. Stock 52-week High and Low were GBX 1,210.00 and GBX 850.00, respectively.

From a technical perspective, a 14-day RSI of ~39.13 is inching towards the oversold zone, indicating an upside potential in the stock price.

Valuation Methodology: Price/Earnings Approach (FY21E) (Illustrative)

Business Outlook

CMCL reported excellent production in FY21, without compromising on safety. The commissioning of the Central Shaft in March 2021 boosted the production capacity and drove the new record production in Q4 FY21. Following the seventh increase in the quarterly dividend since October 2019, CMCL appeared confident about sustaining a higher level of dividend with good cost control, firm gold prices, and ramped up production. Also, it had expected annual gold production ranging from 73,000 to 80,000 ounces during FY22. 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.

Considering the solid revenue growth during Q3 FY21, strong balance sheet, record FY21 gold production, 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 904.00 (as on 31 January 2022 at 08:48 AM GMT), with lower-double digit upside potential based on 6.78x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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