Caledonia Mining — Update 15 August 2016

Caledonia Mining — Update 15 August 2016

Caledonia Mining

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

Caledonia Mining

Production up, costs down, cash building

Interim results

Metals & mining

15 August 2016

Price

97.50p

Market cap

£51m

US$/£:1.30

Net cash (US$m) at 30 June 2016

10.6

Shares in issue

52.2m

Free float

N/A

Code

CMCL

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.8

41.6

133.7

Rel (local)

8.3

26.3

123.0

52-week high/low

97.50p

38.00p

Business description

Caledonia Mining mines gold at, and maintains management control over, 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 event

Q3 results

October 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 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.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

53.5

11.0

10.4

6.9

12.2

5.4

12/15

49.0

5.1

8.1

4.8

15.6

3.8

12/16e

60.4

16.0

23.5

5.5

5.4

4.3

12/17e

87.2

36.7

46.8

5.5

2.7

4.3

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

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.

Exhibit 1: Financial summary

US$'000s

2014

2015

2016e

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

53,513

48,977

60,350

87,208

93,082

Cost of Sales

(34,970)

(35,796)

(38,530)

(44,415)

(47,734)

Gross Profit

18,543

13,181

21,820

42,793

45,349

EBITDA

 

 

14,721

8,967

19,541

40,291

42,613

Operating Profit (before amort. and except.)

11,181

5,645

15,730

36,480

38,802

Intangible Amortisation

0

0

0

0

0

Exceptionals

887

2,850

2,340

0

0

Operating Profit

12,068

8,495

18,070

36,480

38,802

Net Interest

(140)

(535)

251

248

514

Profit Before Tax (norm)

 

 

11,041

5,110

15,982

36,728

39,316

Profit Before Tax (FRS 3)

 

 

11,928

7,960

18,322

36,728

39,316

Tax

(5,982)

(2,370)

(1,366)

(7,531)

(10,516)

Profit After Tax (norm)

5,059

2,740

14,615

29,196

28,799

Profit After Tax (FRS 3)

5,946

5,590

16,955

29,196

28,799

Minority interests

(1,511)

(811)

(2,367)

(4,814)

(5,204)

Net income (norm)

 

 

5,420

4,220

12,248

24,383

23,596

Net income (FRS3)

 

 

4,435

4,779

14,588

24,383

23,596

Average Number of Shares Outstanding (m)

52.1

52.1

52.1

52.1

52.1

EPS - normalised (c)

 

 

10.4

8.1

23.5

46.8

45.3

EPS - normalised and fully diluted (c)

 

10.4

8.1

23.5

46.8

45.3

EPS - (IFRS) (c)

 

 

8.4

8.9

28.0

46.8

45.3

Dividend per share (c)

6.9

4.8

5.5

5.5

0.0

Gross Margin (%)

34.7

26.9

36.2

49.1

48.7

EBITDA Margin (%)

27.5

18.3

32.4

46.2

45.8

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

20.9

11.5

26.1

41.8

41.7

BALANCE SHEET

Fixed Assets

 

 

34,736

49,276

59,265

69,953

74,342

Intangible Assets

0

0

0

0

0

Tangible Assets

34,736

49,276

59,265

69,953

74,342

Investments

0

0

0

0

0

Indigenisation receivable

0

0

0

0

0

Current Assets

 

 

31,743

23,562

21,887

37,837

62,455

Stocks

6,512

6,091

3,853

4,316

4,627

Debtors

1,850

4,236

4,960

7,168

7,651

Cash

23,082

12,568

12,406

25,686

49,510

Other

299

667

667

667

667

Current Liabilities

 

 

(4,972)

(8,397)

(2,622)

(5,383)

(9,448)

Creditors

(4,972)

(6,709)

(2,622)

(5,383)

(9,448)

Short term borrowings

`

0

(1,688)

0

0

0

Long Term Liabilities

 

 

(11,164)

(14,080)

(14,080)

(14,080)

(14,080)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(11,164)

(14,080)

(14,080)

(14,080)

(14,080)

Net Assets

 

 

50,343

50,361

64,450

88,327

113,269

Minority interests

 

 

(693)

(1,504)

(3,407)

(7,756)

(12,960)

Shareholder equity

 

 

49,650

48,857

61,043

80,571

100,309

CASH FLOW

Operating Cash Flow

 

 

15,477

8,331

19,308

37,929

42,027

Net Interest

0

0

251

248

514

Tax

(4,526)

(1,462)

(1,366)

(7,531)

(10,516)

Capex

(6,150)

(16,567)

(13,800)

(14,500)

(8,200)

Acquisitions/disposals

0

0

0

0

0

Management Fees

0

0

0

0

0

Dividends

(3,620)

(2,504)

(2,866)

(2,866)

0

Net Cash Flow

1,181

(12,202)

1,526

13,280

23,824

Opening net debt/(cash)

 

 

(21,892)

(23,082)

(10,880)

(12,406)

(25,686)

HP finance leases initiated

0

0

0

0

0

Other

9

0

0

0

0

Closing net debt/(cash)

 

 

(23,082)

(10,880)

(12,406)

(25,686)

(49,510)

Source: Company accounts and Edison Investment Research

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DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Caledonia Mining and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Caledonia Mining and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

4SC — Update 15 August 2016

4SC

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