What am I thinking, looking at:
- A Mining company (hated sector)
- A Gold mining company (loathed commodity)
- A company with operations in Zambia and Zimbabwe (talk about geopolitical risk)??
I have looked at Caledonia Mining (LON:CMCL) before, as it ranks well on Stockopedia's StockRanks with a 90 Value rank and a 72 Quality rank (Figure 1), which is very high for a mining stock.
1. Caledonia Mining: StockRanks
Well, my interest was re-ignited in Caledonia on the back of this detailed Seekingalpha article on the stock.
Obvious Value
And yes, the valuations do look rather compelling at 3.4x P/E, 2.1x EV/EBITDA and 7.8% dividend yield...
Looking at deep value, the market cap. of £21m is only £3.6m more than the stated working capital of C$31.1m (at a £/C$ FX rate of 1.78), which itself is mostly cash. Put another way, you are paying no more than 10% of the book value of the net fixed assets after subtracting this working capital...
A Low-Cost Gold Producer
It has to be pointed out that with their 49%-owned Zimbabwean Blanket mine, Caledonia is a low-cost gold producer, with a claimed 267% internal rate of return (IRR) - see the CFO's Video discussing this here.
According to the Q3 results, for 9m 2014 production of 31,354 oz of gold was sold at a price of $1,266 per oz, versus an all-in cash cost of $938/oz. While both production and the average selling price were both down in Q3 2013, resulting in a lower profit, bear in mind that the company also managed to lower the all-in cost from $972/oz over the first 9m of 2013.
Moreover, according to the company,
Blanket remains on course to achieve its target production of approximately 40,000 ounces of gold in 2014
and
On-mine costs at Blanket remain low and are better than was expected
But Quality Too
Let's start with the balance sheet and cash flows, since these are primordial for high-cost industrials like miners. The good news is that Caledonia has net cash of C$27m (with an increase of C$1.1m over Q3 2014), representing around 70% of the market cap. Very strong balance sheet then.
The dividend cover is a prospective 1.7x for this year, rising to 4x for next year. Pretty solid.
Despite the crash in gold prices, both operating margins and…
