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Caledonia Mining Corp Plc 28 April 2022

Zimbabwean blue skies

Nic Dinham

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Caledonia Mining Corporation (CMC, Caledonia) owns 64% of the 120-year-old Blanket Gold Mine (BGM) in Southern Zimbabwe. Under CMC’s ownership, production has grown from 20,000oz/a to an expected 80,000oz/a in FY2022E. 

The BGM is a world-class deposit and has produced nearly 1.5moz to date.  CMC estimates that Blanket has at least another 10 years of mineable resources at current production rates. In the medium term, it appears possible that an additional 10 years of operating life will be delineated.  

At current gold prices, the BGM is likely to distribute significant dividends. These dividends will accelerate the repayment of facilitation loans made to non-controlling interests. This should allow CMC’s ‘share’ of the mine’s dividends to rise to $40m/a, which will in turn generate a cash ‘surplus’ available for reinvestment of around $25m/for the next two years. 

CMC intends to use these cash flows to acquire new resources in Zimbabwe. Zimbabwe has not seen significant modern exploration for decades and undeveloped or ‘blue sky’ assets generally seem reasonably priced. In addition, government and the labour force are now more supportive of the mining industry than their South African counterparts, according to management.

Zimbabwe is generally regarded as a risky investment destination. The risk is largely due to the policies of the Reserve Bank of Zimbabwe (RBZ), which restricts access to the USD generated by product sales as well as the ability to remit dividends.

CMC has a 15-year track record of navigating the country’s complexities and running a successful mining company. Its emphasis on good governance under current management has helped the company to secure itself an admirable reputation within Zimbabwe.

We value two scenarios for CMC based on 64% of the distributable cash flows of the BGM. The first scenario uses a 10-year mine life and the second, the more speculative 20-year life. Several other potential sources of value uplift are possible

One source of value uplift hinges on perceptions of Zimbabwe. There are some encouraging signs that the country’s new pro-mining policies are gaining credibility among frontier funds and several mining projects are being actively considered. If this trend gains traction, we think that CMC is likely to be significantly rerated.

Our analysis shows that CMC’s value is also sensitive to the benefits of the new Central Shaft, which will replace the complex pre-existing access and production infrastructure that the mine has used until now. Management’s expectations that AISC will fall from the current $980/oz to below $900/oz are not fully imbedded in our estimates but will add further value when they materialise.

In our view CMC’s value should also benefit from any resources it can acquire over the next two years. However, the attribution of the full value of these ‘blue skies’ should appear once management secures strong fiscal guarantees and USD access from the government.

Finally, our analysis shows that the value of CMC is closely linked to the gold price. A 10% increase in the gold price to $2,200/oz lifts our range of estimates by 20% and increases the company’s ‘surplus’ cash flows to ca $30/a over the next two years.

We value CMC between $14.5/s and $17.5/s using a DCF based on a discount rate of 20% real and a gold price of $2,000/oz. The lower value reflects a 10-year LOM and the high value a 20-year LOM. The key risks to this valuation are the gold price, geological variations and ZRB forex policies.

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