Despite the overall stock market correction, valuations remain historically elevated; value is beginning to appear, but we remain cautious, notes Ryan Irvine, CEO of KeyStone Financial and a contributing editor to Internet Wealth Builder.
One stock we do like at this time, however, is Caledonia Mining (CMCL) — a gold producer. Its primary asset is the Blanket Mine in Zimbabwe, and it continues to explore that country for potential mining opportunities.
The Blanket Mine has a 13-year life projection. The company’s strategy is to recommence deep level drilling with the objective of upgrading inferred mineral resources, thereby extending the life of the mine beyond the current horizon of 2034.
On April 6, 2021, Caledonia announced that its new central shaft at the Blanket Mine was fully operational. The new shaft was a six-year project. It will enable the company to hoist rock, men, and material daily, thereby solving its hoisting constraints. That will facilitate the planned expansion in mine capacity, with a target of 80,000 oz. of gold production per year.
Third quarter production update, released Oct. 31, indicated the company was on track to record quarterly production of 18,965 ounces of gold, an increase of 15,155 ounces produced in the corresponding quarter of 2020.
Adjusted EBITDA was $15.1 million during the quarter, an increase of 30% from $11.7 million generated in the same period of 2020. Net earnings were $6.9 million ($0.57 per share), an increase of 60% from $4.3 million ($0.37 per share) generated in the same quarter of 2020.
Caledonia Mining currently trades with an EV/EBITDA multiple of 3.8 times and a P/FFO multiple of 3.6 times. The company raised its dividend four times in 2021 and currently pays $0.14 per share ($0.56 a year), to yield 4.8%.
Caledonia is a profitable, cash-rich gold producer, operating in the relatively risky jurisdiction of Zimbabwe. The company pays a healthy, growing dividend and has funded expansion projects with internally generated cash flow, including its new central shaft at the Blanket Mine and further exploration activities across the region.
The company has shown decent long-term growth with a compound annual growth rate of 9.4% between fiscal year-end 2017 and fiscal year-end 2020.
There is a compelling case to be made that the new central shaft at the Blanket Mine will allow Caledonia to achieve its 2022 production target of 80,000 ounces of gold. If the price of gold remains stable in its current range of $1,800 per ounce, this growth in ounces of approximately 21% over 2021 will increase cash flow per share.
With the stock currently at just 3.8 times adjusted EBITDA and 3.6 times funds from operations (FFO), it trades at a discount to competitors, which trade in the range of 7-8 times EBITDA. While the company should trade with at a discount due to geopolitical risk, the solid dividend yield, cash generation, and cash rich balance sheet appear to make the discount too high.
Action now: For investors with a high degree of risk tolerance, Caledonia is a speculative Buy. The company will continue to be highly correlated with the price of gold and a flat to higher pricing environment for the metal in 2022 is key to significant positive returns.
