SMALL CAP SHARE IDEAS: Caledonia Mining sets stage for next decade with Blanket gold mine expansion
Caledonia Mining has been on the rise recently but there is a good case for arguing this is only the start for the gold group’s share price.
To begin with, the company is an established producer and dividend payer that has been operating successfully at its Blanket mine in southern Zimbabwe for several years. But Caledonia has been preparing for the future as well.
‘Our long-standing expansion is nearly finished,’ says Mark Learmonth, the company’s finance director.
‘In January 2015 we started construction at the new central shaft, and since that time we’ve been digging this 4,000-foot hole in the ground in Zimbabwe that’s four times deeper than the Shard is tall.’
Caledonia Mining is expanding its gold mine in southern Zimbabwe and plans to finish by January next year
It’s a huge and complex undertaking for a relatively small company like Caledonia to be undertaking.
Nevertheless, the whole process has been virtually glitch-free, thanks in large part to the technical expertise of chief operating officer Dana Roets.
‘We finished digging the hole in July of 2019,’ continues Learmonth, ‘and we are now busy filling it up with steel to make it a functioning shaft.’
The entire undertaking will be finished by January 2021, at which point Caledonia’s capital expenditure numbers will come down dramatically and free cash flow will increase exponentially.
That’s because the shaft will allow the company to boost production from the current 55,000 ounces a year to around 80,000 ounces going forward, a boost of around 40 per cent.
Operating costs, meanwhile, are expected to fall from the mid $800s per ounce to the low $700s, while fixed costs will be spread more widely.
What kind of re-rating will be generated as a consequence remains open to question, but given that the recent upward move was stimulated simply by a publicly stated improvement in the earnings outlook on the current 55,000 production level, one suspects that there may be plenty more interest in the market as earnings and margins go up next year, and costs come down.
All of which begs the obvious question: what will the company do with the extra cash it will be generating?
‘We’ve been paying a dividend since 2012 and we understand the importance of paying a dividend given the environment in which we’re operating,’ says Learmonth.
‘But if we paid out every single dollar we earned we’d become ex-growth, and that might not sit well with investors since we’re mining a depleting asset.
‘So, we want the flexibility to increase the dividend at a faster or a slower rate depending on what else we’re doing.’
Over the years Caledonia has developed a deep well of in-country expertise in Zimbabwe, and it’s also attracted some high calibre mining industry professionals onto its board, including John McGloin, the former head of Amara Mining and Nick Clarke, the man behind the almost unparalleled success of Central Asia Metals.
Learmonth himself has been on board for many a year, while chief executive Steve Curtis has extensive experience of the business environment in Southern Africa. All of which experience can be deployed into the search for new growth opportunities.
‘We can comfortably increase the dividend and invest in early-stage new projects,’ says Learmonth.
‘The new projects will be in Zimbabwe, which remains a very underexplored gold jurisdiction.
‘But we won’t be looking at buying any big existing gold operation. Most of those assets require significant recapitalisation.’
He adds: ‘Our approach is to get our hands on brownfields projects explored historically by the likes of Anglo American (or Falconbridge, and then over two years identify a resource base.
‘It will take at least two million ounces will get us excited, although some of the stuff we’re looking at is potentially bigger.’
That will be relatively slow work and won’t provide explosive growth. But then, Caledonia has time.
The mine life at Blanket goes out to 2034 and there may even be significant resource left after that.
Meanwhile, the outlook for gold remains distinctly positive.