Caledonia Mining: Weak Production This Quarter (NYSE:CMCL)

Introduction

Saint Helier, Jersey-based Caledonia Mining Corporation Plc (NYSE:CMCL) released its second-quarter results on August 10, 2023.

Caledonia’s primary asset is Blanket Mine, a gold mine in Zimbabwe. However, it also produces gold in the Bilboes mine.

The company owns 64% of Blanket Mine and 100% of the Bilboes oxide mine.

Caledonia is a Zimbabwean focused exploration, development and mining corporation. Caledonia owns a 64% stake in the gold-producing Blanket Mine (“Blanket”), and 100% stakes in the Bilboes oxide mine, the Bilboes sulphide project, and the Motapa and Maligreen gold mining claims, all situated in Zimbabwe.

This article updates my preceding article, published on June 5, 2023.

A reminder: On January 6, 2022, the company completed the purchase of Bilboes for a total consideration of 5,123,044 shares, representing approximately 28.5% of Caledonia’s fully diluted equity.

The Bilboes oxide mine produced 1,076 Au Oz in 2Q23, an increase from the 105 ounces produced in 1Q23. Also, due to the uncertainty that the oxide project can operate profitably, the mine will be returned to care and maintenance at the end of 3Q23.

1 – 2Q23 Gold Production Results Snapshot

1.1 – Gold production and commentary

The company announced 2Q23 gold production of 18,512 Au ounces, including 1,076 Au Oz, produced at the Bilboes oxide mine. It was down 7.9% compared to 20,091 Au ounces in 2022. Although production at Blanket improved from the previous quarter, it was still below expectations.

Finally, the company has focused intensively on the problem areas, and production in late June and July has shown a marked improvement.

due to lower grade and lower than budget tonnes milled. Gold production from Blanket was below expectation due to several factors which adversely affected the implementation of the mine plan in certain mining areas. Management has focused intensively on the problem areas and production in late June and in July has shown a marked improvement. (Press release.)

Gold production guidance for Blanket in 2023 is maintained but excludes the production outlook for Bilboes, which will be placed on care & maintenance at the end of 3Q23.

Production is expected to be between 75K and 80K Au ounces of gold, with AISC excluding Bilboes oxides scheduled at $1,050 to $1,150 per ounce.

Production guidance of 12.5K – 17K ounces from the Bilboes oxide mine was withdrawn in April 2023.

1.2 – Historical gold price realized and AISC

The production costs increased by 42.9% in 2Q23 compared to 2Q22, and the on-mine cost per ounce rose by 56.6% in 2Q23 from 2Q22.

The AISC per ounce in the Quarter increased by 37.9% compared to the comparative quarter due to the higher on-mine cost per ounce. AISC deducts the benefit of the solar plant electricity saving ($46.84 per ounce) in 2Q23.

2 – Stock Performance

The stock performance has been quite exceptional on a one-year basis until April 2023, as shown below. However, the stock dropped quickly due to the FED uncertainty, and now CMCL is down 5% YoY.

3 – Investment Thesis

Caledonia Mining Corporation Plc is struggling with the Blanket mine due to lower grade and lower-than-budget tonnes milled. Knowing that Blanket Mine will be the only producing mine for the company after 3Q23 is not an encouraging sign, as Bilboes Mine will be placed on care and maintenance.

On the positive side, the company has a good balance sheet with little debt and pays dividends with a yield of 5.49%.

However, with a recurring negative free cash flow, I wonder how long the company will be able to pay such a high dividend.

Thus, the business model is weak and risky from a long-term investment perspective because all assets are located in Zimbabwe, and the Blanket Mine production is weakening even if the company indicated that production in late June and in July has shown a marked improvement.

The outlook for gold is slightly bearish, with the FED expected to raise interest rates again by 25 points before the end of 2023.

However, inflation is dropping, with the last CPI showing 3.2%. The gold price holds above $1,900 per ounce but may weaken in 4Q23. However, I expect the FED will pause raising interest in 2024 and potentially start cutting interest by H2 2024.

Thus, I recommend trading short-term LIFO with a minimum of 80% of your long-term position to alleviate potential risks and take advantage of the gold volatility, which will be very high in the next six months.

Caledonia Mining – Balance Sheet History Through 2Q23 – The Raw Numbers

Note that all currency references in this document are in thousands of US Dollars.

CMCL	2Q22	3Q22	4Q22	1Q23	2Q23
Total Revenues $ million	36.99	35.84	34.18	29.44	37.03
Quarterly Earnings (excl. non-controlling %) $ million	11.38	8.61	-8.03	-5.03	-0.51
EBITDA $ million	18.87	16.90	-2.49	2.26	2.59
EPS (diluted) $ per share	0.88	0.65	-0.63	-0.30	-0.01
Operating Cash Flow $ million	16.72	8.92	6.82	-0.88	-2.23
CapEx in $ million	13.42	11.15	9.56	4.74	6.15
Free Cash flow	3.29	-2.23	-2.74	-5.61	-8.37
Total Cash in $ million	10.86	8.26	6.74	17.06	10.82
Total LT Debt in $ million	0.00	2.09	12.34	22.46	23.36
Dividend $/ share	0.14	0.14	0.14	0.14	0.14
Shares Outstanding (diluted) in million	12.93	13.25	12.06	16.77	19.19*
Gold Production	2Q22	3Q22	4Q22	1Q23	2Q23
Quarterly Production K Oz	20,091	21,120	21,049	16,141	17,436
Gold Price in $	1,840	1,696	1,714	1,863	1,949
AISC in $	984	944	964	1,412	1,357

Click to enlarge

Data Source: Company release.

*Note: On March 30, 2023, the Company conducted equity raises of 781,749 shares, which were issued, and respect of 425,765 shares were issued on April 14, 2023. The placings raised $16.6 million before expenses.

Analysis: Revenues, Free Cash Flow, Net Debt, and Gold Production

1 – Quarterly revenue history

Revenues were $37.031 million in the second quarter of 2023. Net loss, excluding non-controlling interests, was $0.51 million or $0.01 per diluted share compared to an income of $11.38 million or $0.88 last year.

2 – The quarterly free cash flow history

Note: The generic free cash flow is the Cash from operations minus CapEx.

Trailing 12-month free cash flow is negative $18.95 million, with a negative of $8.37 million in 2Q23.

The company is paying a quarterly dividend of $0.14 per share or a dividend yield of 5.49%.

3 – Balance sheet history

The company has a long-term debt of $23.36 million, including current. The cash position dropped to $10.82 million at the end of June 2023. The increase in debt is due to the completion of the solar power plant.

As I said earlier, the company also did an equity raise this quarter, which is not something shareholders like to read. The total shares outstanding diluted is now 19.19 million, up 15.6% sequentially.

Technical Analysis and Commentary

Note: The chart is adjusted for the dividend.

CMCL forms a descending channel pattern with resistance at $11.25 and support at $10.10. The RSI is now 32, indicating potential support at below $10.

Descending channel patterns are short-term bearish in that a stock moves lower within a descending channel, but they often form within longer-term uptrends as continuation patterns. Higher prices usually follow the descending channel pattern but only after an upside penetration of the upper trend line.

I recommend using about 70% of your position for trading the current volatility. The trading strategy is to sell LIFO between $11.10 and $11.55 with a potential higher resistance at $12.15. Conversely, I suggest accumulating CMCL between $10.10 and $9.60, with a possible lower support at $9.25.

Watch the gold price like a hawk.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.