Caledonia Mining — Update 23 November 2015

Caledonia Mining — Update 23 November 2015

Caledonia Mining

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Caledonia Mining

Development gathers pace

Q315 results

Metals & mining

24 November 2015

Price

41.50p

Market cap

£22m

C$2.01/£,C$1.30/US$

Net cash (C$m) at 30 September 2015

19.7

Shares in issue

52.1m

Free float

N/A

Code

CMCL

Primary exchange

TSE

Secondary exchange

AIM

Share price performance

%

1m

3m

12m

Abs

(1.2)

0.0

2.5

Rel (local)

0.7

(1.7)

6.6

52-week high/low

53.00p

35.50p

Business description

Caledonia Mining mines gold at its main operating asset, the 49%-owned Blanket gold mine in southern Zimbabwe. It is also progressing its understanding of a number of promising satellite projects close to Blanket.

Next events

2015 production update and 2016 outlook

January 2016

Annual results

March 2016

Analysts

Tom Hayes

+44 (0)20 3077 5725

Charles Gibson

+44 (0)20 3077 5724

Caledonia Mining is a research client of Edison Investment Research Limited

Caledonia’s Q315 results indicate continuing steady progress in implementing its revised investment plan (RIP), with year-to-date gold production of 31.3koz making its FY15 guidance of 42koz of gold look eminently achievable. In US dollar terms, on-mine costs remained stable q o-q. Increased capex in Q3 reflects adherence to the RIP as well as normal run-of-mine equipment purchases. Accounting for the lower gold price environment, Caledonia will inject US$5m of its own treasury in FY16 to support implementation of the RIP, as well as to continue quarterly dividend payments.

Year end

Revenue (C$m)

PBT*
(C$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/13

65.1

21.9

18.2

11.4

4.6

13.7

12/14

59.1

12.2

7.5

7.6

11.1

9.1

12/15e

64.5

8.5

11.1

6.0

7.5

7.2

12/16e

78.8

20.6

30.2

6.0

2.8

7.2

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Cash cost stable, all-in increased y-o-y on RIP capex

Blanket produced 10,927oz gold from 117kt of ore milled (in total 120kt was hauled to surface, with the remaining amount stockpiled), at an all-in sustaining cost of production of US$1,011/oz. This is a slight q-o-q decrease of 1.8% (Q215: US$1,030/oz), and on a y-o-y basis increased 6.1%, due to higher sustaining capital. Q315 sustaining capital was US$1.5m (Q314: US$0.5m), which reflects investment in two machine drills, employee housing and a rope for the No. 4 Shaft.

C$ accounts distorted by currency movements

Depreciation of the C$ vs US$ has on a l-f-l basis, heavily distorted Caledonia’s C$-denominated accounts, with revenue and costs up 17% and 41% respectively (cf stable US$ costs shown above). Caledonia operates in a dollarized-Zimbabwe economy and its present reporting currency does not accurately reflect underlying performance. Caledonia is looking to transfer to US$ accounting during H116.

Valuation: Forecasts essentially unchanged

We adjust our valuation for Q315 results and our 2015e average gold price from US$1,164/oz down to US$1,151/oz. We also adjust our C$/£ exchange rate from 2.04 to 2.01. Gold production and capex ytd are in line with guidance. We also adjust for Q315 G&A costs totalling C$2.2m and a ytd forex gain of C$2.6m. On this basis, our previous £1.36 valuation becomes £1.38. At a flat gold price of US$1,100/oz over life-of-mine, our valuation becomes £0.68 per share. All valuations use a 10% discount rate to reflect general equity risk. Our end-FY15 cash position is now C$18.3m (cf C$16.9m previously). We also factor into our FY16 forecasts Caledonia’s intention to inject US$5m of its own cash into the Blanket mine to support implementation of the RIP. This is a direct result of a decrease in the gold price from US$1,200/oz; the price used when the RIP was finalised in 2014. FY16e end year cash is now C$9.5m cf C$11.8m previously.

First effects of investment come through

Added production flexibility has allowed Caledonia to haul 117kt of ore to surface in a single quarter, 20% more than has ever been achieved before at Blanket. This is due to the first element of its RIP, the Tramming Loop, being completed in June. Increased tonnes hauled to surface have offset the still weak gold grade, currently 3.14g/t, which is expected to rise steadily to 4.0g/t by 2020 via mining identified higher grade pods. This increasing grade progression is factored into our production model. With 31.3koz of gold produced ytd in FY15, production guidance remains intact at 42koz. With better haulage flexibility now available, increased underground capital development has started to occur with all other elements of the RIP progressing as planned. Providing a further incentive to invest, Caledonia will pay a similar (to FY15) quarterly dividend through FY16.

Lower gold price causes Caledonia to aid RIP funding in FY16

As a result of the persistently low gold price Caledonia has advised that it will inject US$5m into the Blanket mine from its own treasury. It states that its cash reserves have been maintained at a high level for just this reason. We have therefore included this cash injection as a capex item bringing FY16 cash down from C$11.8m to C$9.5m.

Foreign exchange movements distort accounts

The following sections explain Caledonia operating cost performance in US dollar terms only. In summary, on-mine costs in US dollar terms remained stable, however translated into Canadian dollar terms, they rose by a misleading 41%.

Cash costs stable on a l-f-l basis, down 8.4% q-o-q

Q315 on-mine cash costs were US$668/oz, level with Q314 (US$669/oz) and an 8.4% decrease q o q. The q-o-q decrease in on-mine unit costs reflects a decrease in the cost of mining due mainly to lower consumable costs.

All-in sustaining cost of production steady

Blankets Q315 gold production was achieved at an all-in sustaining cost of production of US$1,011/oz. This is a slight q-o-q decrease of 1.8% (Q215: US$1,030/oz), and on a y-o-y basis, increased by 6.1% due to higher sustaining capital. Q315 sustaining capital was US$1.5m (Q314: US$0.5m), which reflects purchases of two machine drills and a rope for the No. 4 Shaft. Additional housing for the increased employee headcount to implement the RIP was also required.

All-in costs up, reflects RIP investment

Q315 all-in cost of production was US$1,412/oz. All-in costs include those not related to current production; effectively this cost measure is driven by the significant capital investment associated with implementing the RIP. The drain on cash resources caused by the RIP and the lower realised gold price achieved for ounces sold has led Caledonia to invest US$5m of its own treasury into the Blanket mine. We factor this into our FY16 forecasts.

Capital projects summary

The following sections provide a brief update on the progress of implementing specific aspects of the RIP, namely the No. 6 Winze development, Central Shaft sinking and extension of the 22 Level haulage drive.

No. 6 Winze, production due to start Q116

Due to a slight delay equipping this shaft, ore production will now start mid Q116, compared with January 2016 previously. The equipping of shafts is a relatively straightforward exercise. In our view this slight revision to the start-up date, which will see ore production occurring for the first time below the 750m level, should not affect the production of 50,000ozs in FY16.

Central Shaft sinking

The successful completion of the RIP is intimately linked to the sinking of a new 1,080m Central Shaft, which will allow a significant increase in underground haulage capacity. Work on the Central Shaft commenced with a pre-sink phase down to an eventual pre-sink depth of 90m. The depth of development is 24m below surface. Once the pre-sink is completed, expected by year end, a continual phase of shaft sinking will take place. This main phase of the Central Shafts development will take until 2018, at which point the end depth of 1,080m should have been achieved. First production out of the Central Shaft is planned to occur mid-2018.

22 Level haulage extension

The 22 Level haulage extension will link up all Blankets’ orebodies over a distance of 2.5km on the 750m level. With the Tramming Loop now completed, Blanket’s workforce will complete the remaining 300m of development. For illustrative purposes only, based on a 2m advance per blast, and two blasts achieved per day implies completion of this development project in mid-Q116.

Financials

Revenue and profit forecasts maintained

Blanket’s Q316 revenue was C$15.8m, from the sale of 10,927ozs gold at an average realised gold price of US$1,106/oz (C$1,437/oz at a US$/C$ forex rate of 1.30). Production costs of C$10.2m, royalty payments of C$0.8m and depreciation of C$1.2m resulted in gross profit for the quarter of C$3.6m. Administrative costs were C$2.2m and a large 141% increase q-o-q in foreign exchange gains (C$1.8m) resulted in a Q315 operating profit of C$3.4m. We estimate a FY15 tax charge of C$1.0m compared with C$0.3m previously. Third quarter profit after tax was C$2.0m. At the nine-month stage, Caledonia’s revenue of C$46.8m, operating profit of C$8.5m and PAT of C$4.6m, are sufficiently in line to maintain our end FY15 revenue forecast of C$64.5m (other than for a slight reduction in our Q415 gold price assumption – see below), and operating profit of C$8.3m. However, largely due to the moderate increase in tax paid, this drives down our PAT from C$8.7m previously to C$7.4m. Stability at the operating profit line is mainly driven by the Blanket mines consistent operational performance, coupled with slightly reduced revenue due to our modest downward revision in the average FY15e gold price from US$1,164/oz to US$1,151/oz.

Quarterly dividend assumption maintained through 2016

We record a 6c quarterly dividend totalling C$3.1m in our model for FY16e. At Caledonia’s current share price equivalent to C$0.83, the 6c dividend indicates a yield of 7.19% compared with the FTSE Mining Index average of 7.96% as of 24 November 2015. Caledonia’s management states that it currently envisages the FY16 dividend will be paid, however it remains “attentive to further changes in market conditions”.

Exhibit 1: Financial summary

C$000s

2013

2014

2015e

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

65,113

59,082

64,475

78,785

113,848

Cost of Sales

(35,232)

(38,609)

(48,457)

(50,300)

(58,104)

Gross Profit

29,881

20,473

16,018

28,485

55,743

EBITDA

 

 

25,317

16,252

13,324

25,511

52,476

Operating Profit (before amort. and except.)

22,041

12,344

8,349

20,535

47,501

Intangible Amortisation

0

0

0

0

0

Exceptionals

(12,526)

980

1,888

0

0

Operating Profit

9,515

13,324

10,237

20,535

47,501

Net Interest

(108)

(155)

134

91

47

Profit Before Tax (norm)

 

 

21,933

12,189

8,483

20,627

47,548

Profit Before Tax (FRS 3)

 

 

9,407

13,169

10,371

20,627

47,548

Tax

(9,897)

(6,604)

(1,044)

(1,783)

(9,832)

Profit After Tax (norm)

12,036

5,585

7,438

18,843

37,716

Profit After Tax (FRS 3)

(490)

6,565

9,327

18,843

37,716

Minority interests

(2,565)

(1,668)

(1,677)

(3,090)

(6,284)

Net income (norm)

 

 

9,471

3,917

5,762

15,753

31,432

Net income (FRS3)

 

 

(3,055)

4,897

7,650

15,753

31,432

Average Number of Shares Outstanding (m)

52.0

52.1

52.1

52.1

52.1

EPS - normalised (c)

 

 

18.2

7.5

11.1

30.2

60.3

EPS - normalised and fully diluted (c)

 

18.2

7.5

11.1

30.2

60.3

EPS - (IFRS) (c)

 

 

(5.9)

9.3

14.7

30.2

60.3

Dividend per share (c)

11.4

7.6

6.0

6.0

0.0

Gross Margin (%)

45.9

34.7

24.8

36.2

49.0

EBITDA Margin (%)

38.9

27.5

20.7

32.4

46.1

Operating Margin (before GW and except.) (%)

33.9

20.9

12.9

26.1

41.7

BALANCE SHEET

Fixed Assets

 

 

33,448

40,388

54,157

77,466

92,540

Intangible Assets

0

0

0

0

0

Tangible Assets

33,448

40,388

54,157

77,466

92,540

Investments

0

0

0

0

0

Indigenisation receivable

0

0

0

0

0

Current Assets

 

 

36,154

36,908

28,755

21,308

44,353

Stocks

6,866

7,571

4,810

5,030

5,634

Debtors

3,889

2,151

5,299

6,476

9,357

Cash

25,222

26,838

18,298

9,454

29,014

Other

177

348

348

348

348

Current Liabilities

 

 

(7,534)

(5,781)

(5,197)

(6,264)

(11,451)

Creditors

(5,738)

(5,781)

(5,197)

(6,264)

(11,451)

Short term borrowings

`

(1,796)

0

0

0

0

Long Term Liabilities

 

 

(10,094)

(12,980)

(12,980)

(12,980)

(12,980)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(10,094)

(12,980)

(12,980)

(12,980)

(12,980)

Net Assets

 

 

51,974

58,535

64,735

79,531

112,462

Minority interests

 

 

(51)

(804)

(2,481)

(5,064)

(11,348)

Shareholder equity

 

 

51,923

57,731

62,254

74,466

101,113

CASH FLOW

Operating Cash Flow

 

 

22,768

18,859

14,241

24,261

49,393

Net Interest

(108)

(155)

134

91

47

Tax

(7,974)

(4,999)

(1,044)

(1,783)

(9,832)

Capex

(11,738)

(6,786)

(18,744)

(28,285)

(20,049)

Acquisitions/disposals

0

0

0

0

0

Management Fees

470

0

0

0

0

Dividends

(7,934)

(3,974)

(3,127)

(3,127)

0

Net Cash Flow

(4,516)

2,945

(8,540)

(8,843)

19,559

Opening net debt/(cash)

 

 

(27,942)

(23,426)

(26,838)

(18,298)

(9,454)

HP finance leases initiated

0

0

0

0

0

Other

0

467

0

0

0

Closing net debt/(cash)

 

 

(23,426)

(26,838)

(18,298)

(9,454)

(29,014)

Source: Company accounts and Edison Investment Research

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GFT Group — Update 22 November 2015

GFT Group

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