Caledonia Mining offers significant growth potential
Caledonia Mining Corporation PLC offers significant growth potential in an under-explored African greenstone belt, Cenkos Securities believes.
The broker reiterated its ‘buy’ recommendation on the Zimbabwe-focused miner, saying Caledonia delivers high yield exposure to the gold sector with increasing production from the 64% owned Blanket Gold Mine in Zimbabwe.
“With an improving political situation, Caledonia offers the in-country experience to capitalise on production-backed exploration in a significant under-explored African greenstone belt. We value Caledonia on a base case in the region of US$233mln or £14.80/share, on a long-term US$1,750/oz gold price and assuming a 12% discount rate. With a focus on developing a second project in the near-term while maintaining the dividend, Caledonia offers significant growth potential,” Cenkos said.
The gold miner is set to churn out 80,000 ounces (oz) a year from 2022, which will lead to increased cash flows just as capital expenditure requirements ease off, offering scope for the money to keep returning cash to shareholders.
Cenkos estimates the company will return more than C$15mln a year if it just holds its current dividend of 14 cents a quarter. Increased production and lower costs could support continued increases in dividends, the broker argues, observing in passing that the divi has more than doubled since 2019.
The stock has a yield of 4.7% against a sector average of 1.6% which implies to Cenkos that the stock should trade at C$36 a share based on the sector average.
“In fact, on any metric Caledonia looks like it is trading at a discount against its gold mining peers, and while this may be accounted for by its position as a single asset producer in Zimbabwe, we believe this is probably weighing too heavily on the stock at present as the Zimbabwean economy normalises,” the broker said.
The company has suffered from unstable electricity supplies but still maintains a healthy margin despite the current ramp-up of production from the Central shaft.
Increased volumes, economies of scale and better mine efficiencies could go some way to offset any inflationary pressures in the sector” the broker speculated.
Shares in Caledonia trade at 948p in London, down 2.5% on the day.