Edison Research: Caledonia Mining positive

Edison Research: Caledonia Mining positive and higher target price

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Caledonia Mining (CMCL) beat its FY16 production target of 50kozpa by recording 50.4koz Au produced, with AISC costs down 12% y-o-y to US$912/oz, while C1 costs dropped 9% due to a commensurate annual increase of 18% in gold ounces produced. Investment continues at Blanket to raise production towards 80kozpa by 2021, with US$36m spent in the past two years alone, and another US$18m due in 2017 before capex drops off markedly.

The central shaft is on track and on budget for completion in mid-2018 and is two thirds-complete. While this investment takes place, CMCL carries a sound cash balance of US$14.3m at end December 2016. The dividend yield is a high 3.8% and the stock is trading on a very low P/E of c 4x vs the FTSE miners index at 2.1% and 40x respectively.

Costs driven down by ramp-up

Caledonia’s on-mine and all-in sustaining costs (AISC) continue to fall with 2016 recording a y-o-y decline in mine costs of 9.3% from US$701/oz to US$636/oz as production increased 18% in line with the Investment Plan (IP) roll-out. AISC decreased 12% from US$1,037/oz to US$912/oz. The AISC decrease in part reflects CMCL’s accounting of the Zimbabwean government’s 2016 launch of an export incentive credit rebate in H216 (see page 4).

Exploratory drilling replenishing gold stocks

Caledonia ramped up its underground drill programme in 2016, completing 22.2km of exploratory and resource definition drilling. This has resulted in a marked increase in resource confidence and the addition of new inferred material (page 3).

Valuation:

Adjusted for FY16 results, forecasts intact As a result of adjusting our model for FY16 results, royalty and rebate adjustments and using our gold price assumptions and maintaining our US$/£ forex rate at 1.25, our combined dividend discount flow (of Blanket’s free cash flow of production postIP implementation) and DCF of vendor facilitation loan repayments increases slightly from 146p to 149p share. We also expect a 124% increase in headline EPS to 35.6c in 2017 (cf 15.9c reported in 2016). Our valuation uses a 10% discount rate to reflect general equity risk. Forcing our model’s valuation of Caledonia’s shares to its current share price (113p as of 12 April 2017) requires using a discount rate of 15.6% (in our Q317 note this was 16.3%). In our view this relatively low, and decreasing, hurdle rate represents a marked reduction in the country risk factor applied by the market to Caledonia’s shares, and an increasingly positive view on CMCL’s ability to deliver its IP successfully.



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