Revisiting Caledonia Mining - No Developments On M&A And I Remain Bearish
Aug. 26, 2021 8:55 AM ETCaledonia Mining Corporation Plc (CMCL)1 Like
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Contributor Since 2015
- Disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.
Summary
The company is on track to boost production at Blanket to 80koz per year by 2022.
The mine life stretches to 2034, but this is based on inferred resources.
Reserves at Blanket were just 527koz of gold as of the start of 2020 and Zimbabwe is a terrible mining jurisdiction.
Also, the Glen Hume property was impaired and there have been no updates on the potential purchase of the Isabella-McCays-Bubi mines.
I continue to be bearish and the short borrow fee rate stands at 1.69% as of the time of writing.
Bear icon
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Investment thesis
In January, I wrote a bearish article on SA about Zimbabwe-focused gold miner Caledonia Mining (NYSE:CMCL). The company aimed to become a 500koz/year gold producer but the latest quarterly report looks unimpressive. Also, the Glen Hume property was impaired, and there have been no updates on the potential purchase of the Isabella-McCays-Bubi mines.
Caledonia's valuation has decreased significantly since my previous article but I remain bearish as the prospects for the company now look worse than before. Let's review.
Overview of the operations and the financials
In case you haven't read my previous articles on Caledonia, here is a quick overview of the operations. The company's main asset is a 64% interest in the Blanket gold mine, which is located on the northwest limb of the Gwanda Greenstone Belt in Zimbabwe. This is the largest gold mine in a belt which had 268 operating mines at its peak.
(Source: Caledonia Mining)
Blanket has so far produced over a million ounces of gold and its output stood at 16,710 ounces in Q2 2021. As you can see from the charts below, the grades have been decreasing over the past decade but the production has been improving as Caledonia keeps boosting the mined volume.
(Source: Caledonia Mining)
Caledonia's aim is to reach an annual production rate of 80,000 ounces of gold and is close to achieving this. Blanket is comprised of five significantly independent near vertical ore bodies and Caledonia the Central Shaft project last quarter. With this, July production reached almost 6,000 ounces. Overall, Caledonia has invested around $67 million into expanding its production rate since January 2015, which was fully funded from internal cash flows. This is impressive.
(Source: Caledonia Mining)
Blanket has a mine life stretching 13 years and is generating EBITDA of $14 million per quarter even before the expansion. Also, Caledonia has just around $0.2 million in debts and over $16 million in cash.
(Source: Caledonia Mining)
Why in the world would I be bearish on this one? Well, the main reasons are mining jurisdiction and reserves.
Zimbabwe is a terrible mining jurisdiction and this is why there are almost no mines left there today. The country has a history of nationalization plans for parts of its mining industry and is currently struggling with food and fuel shortages, electricity supply disruptions, soaring inflation, and an imploding currency.
Looking at the reserves, keep in mind that Blanket's 13-year mine life is based on resources. Sure, the mine has a very good track record of replacing reserves, but it's dangerous to base your mine life on inferred resources. As of January 2020, Blanket had proven and probable gold reserves of just 527koz.
(Source: Caledonia Mining, page 6 here)
If you take into account only measured and indicated resources, the mine life ends in 2026.
(Source: Caledonia Mining, page 131 here)
Oh and keep in mind that Caledonia owns less than two-thirds of Blanket, which means that the attributable reserves were just 337koz as of January 2020. With this in mind, Caledonia looks like a value trap.
Let's move onto why I think the prospects for the company now look worse than before. There are two main reasons. First, gold prices are lower today compared to January:
(Source: Gold Price)
Second, I'm unimpressed by the recent exploration and M&A developments. Caledonia disclosed in its Q2 financials that it impaired the Glen Hume property near Gweru following disappointing exploration results. That's $3.5 million down the drain.
(Source: Caledonia Mining, page 18 here)
In addition, there has been no development in regards to a rumor that Caledonia was planning to buy the mothballed Isabella-McCays-Bubi mines in northwest Zimbabwe. The latter is said to have the potential to produce over 200koz of gold per year. It seems that Caledonia Mining is back to focusing on Blanket and I just don't see a way the company can achieve its ambition of growing output to 500koz per year.
Caledonia has a market capitalization of $147.1 million as of the time of writing. Blanket had a net present value (NPV) of $191 million according to the May 2021 technical report.
(Source: Caledonia Mining, page 12 here)
Keep in mind that 64% of this sum is $122.2 million. In view of this, I think Caledonia looks overvalued and investors can take advantage of this by short-selling the shares. According to data from Fintel, the short borrow fee rate stands at 1.69% as of the time of writing.
Investor takeaway
I view Blanket as a relatively small gold mine that has pretty low all-in sustaining costs (AISC). The problem is that the mine is located in Zimbabwe and reserves are low. Caledonia has done a good job at Blanket over the past several years, but I just don't see a clear path to a production profile of 500koz per year anymore. The company is already valued at above its NPV and I think it deserves to be trading at a discount due to the jurisdiction. In light of this, I view the company as overvalued.
I see two major risks for the bear case at the moment. First, gold prices might increase in the future. Central banks across the world are currently injecting record amounts of liquidity into the financial system due to the Covid-19 pandemic and gold is seen by many investors as a safe haven against inflation and currency depreciation (personally, I prefer real estate). Second, Caledonia could have success on the exploration front over the next few years, thus significantly boosting reserves. This, in turn, would increase Blanket's NPV.
