Edison Research: Caledonia Mining Interim results Production up, costs down, cash building
Caledonia’s interim results demonstrate improved financials due not only to the higher gold price, but also the effects of successfully implementing its Revised Investment Plan (RIP), including a higher gold grade from below the 750m level. Cash is starting to build again after a period of reduction due to RIP implementation and a weak H116 gold price.
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Production: Ore below 750m yielding higher grade Probably the most significant outcome from H116 was the first indication of higher gold grades below the 750m level – a watermark for the company’s future growth prospects.
The average gold grade improved 9.8% q-o-q (Q116: 3.16g/t Au vs Q216: 3.47g/t Au) and while the average grade is within range for the past two years of quarterly grade data, 19.5% of Q216 production came from Eroica (between 750m and 630m RL), where the trammed grade was 5.32g/t Au; a result of completing the 22 haulage level to this orebody. Furthermore, production occurred below the 750m level at the AR South ore body which resulted in a trammed grade of 4.76g/t Au.
This confirms current expectations of higher than mine-average (historically 3.84g/t Au) gold grades below 750m RL. Further, as more ore comes from below the 750m level, so the mined grade is expected to increase to a sustainable long-term average of c 4.0g/t Au by 2018.
Cash and AISC unit costs down due mainly to grade On-mine cash costs were down 8.7% q-o-q (Q116: US$689/oz vs Q216: US$629/oz), while all-in sustaining costs reduced 1.5% (Q116: US$950/oz vs Q216: US$936/oz).
Reduced costs resulted from Blanket’s high fixed cost base spread across more ounces produced – a result of the higher grades and tonnages mined.
Valuation: Sterling weakness has greatest effect We have adjusted our valuation for the H116 results, including one-off items such as the sale of US$3.2m in Blanket Mine Treasury Bills held by Caledonia in lieu of historical production in 2008 when the prevailing economic situation limited cash payments between the government and industry.
All other major cost items (production and capital items) remain in line with our full-year forecasts. The main effect on our previous £1.59 valuation is the US$/£ forex rate, which post Brexit has weakened by 8% to 1.30 vs 1.41 in our last note.
This improves our valuation by 10% to £1.74p. Cash at end Q116 was $8.8m and has increased 20% to US$10.6m; we forecast that after all cash outflows, this rises to US$12.4m by end 2016. H116 adjusted EPS was 8.6c. With gold production weighted to H216, we retain our FY16e adj. EPS of 23.5c.
