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Summary of Operations
Caledonia Mining Corporation PLC is a gold miner whose primary asset is the Blanket Mine in Southern Zimbabwe. A shaft mine, gold is carried to the surface and processed on site. Producing about 80,000 oz per year, this is sold to Fidelity, a company with a monopoly on gold purchases in Zimbabwe. With an operating margin of 33% in 2021, low operating costs compared to other gold miners, the company has been consistently profitable over the last decade as the mine has been improved for cost reduction. A central shaft was just completed last year, and a solar plant for electrical needs will be completed in the summer of 2022.
Headquartered on the Isle of Jersey, it operates in US dollars.
Strategy
The company typically finances improvements to the mine with its own cash. It has no debt and has usually sold its own shares when it wants to raise capital. Management compares all potential investments to the return shareholders would receive if they simple ran the mine for cash and distributed it. Capital investments are made if they are deemed superior to that return.
Caledonia is keen to secure its resources, developing its own solar plant, paying its workers completely in US dollars and above the market rate for unionized workers, while also maintaining a good relationship with the Zimbabwean government.
Growth and the Future
Caledonia’s growth will come from continued cost reduction on site and the acquisition of other sites in southern Zimbabwe. With a natural gold belt that has remained largely untapped since the 80s, modern technological improvements in mining create an opportunity in this country. Caledonia recently acquired Maligreen, an open pit mine, with gold sales likely to begin in 3-4 years. Management is hopeful to turn Caledonia into a multi-asset miner.
The company prefers to avoid debt, so this is no a danger, but marginal share dilution to finance acquisitions is a possibility.
Valuation
Let’s assume Caledonia can produce $30 million in FCF.
Growth Assumptions: 3% first 5 years; 8% second 5
Intrinsic Value Per Share: $23
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