Caledonia Mining Stock: Potential Strong Upside From A Low Stock Price (NYSE:CMCL)

Another Buy rating for Caledonia Mining Corporation Plc

This analysis confirms a “Buy” rating issued in the previous analysis for the shares of Caledonia Mining Corporation Plc (NYSE:CMCL) – a miner and explorer based in Saint Helier, Jersey, which produces gold from its 60% interest in the Blanket Mine, 14 km northwest of Gwanda, Zimbabwe.

The buy rating was supported by an improving gold price outlook, coupled with Caledonia Mining’s cost-cutting initiatives, as this combination supports profitability, the health of which typically influences the market when valuing US-listed stocks.

The Prospects for Caledonia Mining

This stock is expected to have profitability benefits due to the expected increase in gold prices and greater ability to contain costs. Overall, stronger investment demand, including strong buying interest from central banks, will be the main driver of gold’s safe-haven price in an uncertain macroeconomic environment, while the decline in commodity inflation combined with the care and maintenance of some inefficient manufacturing activities will tend to impact costs through their calming effect.

Since profitability is the main catalyst for rising share prices in the stock market, the market value of Caledonia Mining Corporation Plc shares should get an upward boost from the combination just presented. Currently, the share price is not expensive relative to its 12-month trends, the shares are in the lower part of the price cycle, and this increases the potential to generate good returns.

As of writing, shares were trading at $10.15 per unit, for a market cap of $194.63 million and a 52-week range of $9.48 to $17.58. Shares are well below the 20-, 50-, 100- and 200-day simple moving averages.

The 14-day relative strength indicator at 32.84 suggests that shares have almost reached the end of the downtrend. It is unlikely that the stock will be able to achieve significantly cheaper prices than current ones, as there is little room between current levels and oversold levels, and there is also no strong downward pressure at the moment.

However, this does not rule out further buying opportunities until the trigger for the increase in the gold price pulls out, namely the expected economic recession. The stock price performance before the upside catalyst could be influenced by the following two market sentiments: This analysis predicts the emergence of an initially neutral mood due to the uncertainty in the markets about the start of the Fed’s rate-cutting policy. This phase of quite flat CMCL shares may last until something moves the markets: Maybe the Fed will surprise everyone and cut interest rates in March. Or tensions in the Middle East would trigger a rush for safe-haven gold amid fears of a rebound in inflation. The likelihood of these scenarios occurring becomes lower and lower as time goes on. Consider the probability of a rate cut initially expected from the Fed’s March 2024 decision: it fell sharply and gradually from 62.6% a month ago to 18% currently (at the time of writing).

Thus, the share price may remain neutral for quite a while before the first drop of 25 bps in rates expected in May (likelihood 52.7% as of this writing) leads to some recovery in the share price. The Fed’s first cut in the cost of money is seen as the beginning of the U.S. central bank’s actions to prevent the worst effects of the economic downturn, but also as confirmation that a dramatic slowdown in the economic cycle is underway.

Without being able to distinguish between safe-haven gold-producing stocks and other stocks in the US market, the panic triggered by the dramatic slowdown will initially spell trouble for CMCL shares as well. This in turn should result in downward pressure on the CMCL share price (in line with the market as indicated by a CMCL 24-month beta of 0.72), potentially creating a better opportunity to capitalize on the strong performance that this stock can deliver in the medium to long-term.

The Price Target for CMCL Stock

The previous analysis provided a price target for Caledonia Mining, resulting from a comparison with most direct competitors selected based on certain fundamental criteria: The valuation targeted a share price of around $9, which would result in EV/EBITDA (TTM) more in line with the peer average of around 6.1x. Meanwhile, CMCL EV/EBITDA ratio became lower and now is standing at 6.87, which is much closer to the target than the previous analysis’s 7.97x, and below the safety level of 6.97 set by Prof. Aswath Damodaran of New York University for 2023 for fairly valued gold stocks. As this analysis shows, it cannot be ruled out that EV/Ebitda will approach the target of 6 in the coming weeks, however, from these levels retail investors can already start thinking about buying shares.

The Fallout of Being Long on CMCL

The chart shows that if the stock had been purchased five years ago and the holdings had remained unchanged, Caledonia Mining Corporation shares would have increased 78.36% over the past five years.

SPDR S&P 500 ETF Trust (SPY) increased 84.16%, Materials Select Sector SPDR Fund ETF (XLB) increased 57.63%, and VanEck Gold Miners ETF (GDX) increased 22.92%. SPY is the benchmark for the stock market, XLB is the benchmark for the basic materials sector, and GDX is the benchmark for the sector of gold mining companies.

Additionally, thanks to its strong financial position and profitable operations, the stock has been paying dividends since 2014, but only for the most recent four-year period on a rolling basis, which is below the 9.7-year average for the materials sector.

The company has not increased its dividend in the past 12 months but CMCL has increased dividends at CAGRs of 14.81%, 10.25%, and 5.81% over the past 3, 5, and 10 years, respectively, compared to sector medians of 9.41%, 6.49%, and 5.56%. Currently, shareholders benefit from a CMCL quarterly dividend of $0.14/share, resulting in a CMCL dividend yield (FWD) of 5.52%, compared to the S&P 500’s dividend yield of 1.41% as of this writing.

Currently, shareholders can be very pleased with the dividend paid and consensus estimates for the future of the payout, as analysts expect CMCL‘s annual dividend to remain at last year’s levels for 2024 and 2025 as well.

This further potential catalyst for robust CMCL stock prices is seen as quite possible given the prospect of gold amid economic and geopolitical turmoil and profitability following some cost-cutting mineral project decisions.

A Growing Share Value

The balance sheet reflects a value growth (increased value of fixed assets) following several years of significant investment at Blanket, which resulted in a 2-fold increase in gold production and an extension of mine life (from 2027 to 2034) through the completion of the central shaft, while laying the foundations for further growth as underground exploration could finally resume last year.

The infrastructure allows mining activities well below 750 meters to a maximum depth of 1,200 meters, as well as more efficient management of the first 450 meters of the mine.

Exploration activities in underground deposits are aimed at discovering a mineral continuation of the “Eroica” ore body and feedback continues to support CMCL’s growth plan at extending Blanket’s operational life and increasing gold production for a multi-year active complex project. Eroica is one of several underground deposits totaling approximately 383,967 ounces of proven and probable reserves grading 3.07 grams of gold per tonne of ore.

The investment is also focused on the Bilboes metal project, also located in Zimbabwe, and the adjacent Motapa gold claim, spanning over 2,200 hectares, with the former asset undergoing a feasibility study for a gold ore sulfide production project, the implementation of which, however, requires phased operations for more efficient use of capital. The results of this investigation will be available sometime in 2024. It is not certain when the suspended oxide activities will be replaced by activities on the gold ore sulfide deposit, but until then Bilboes now expects a significant cost reduction of 80% per month.

Higher production costs were largely the cause of lower profits (adjusted earnings per share fell 45.6% to $0.33 in the third quarter of 2023 compared to the same period last year), but the Bilboes hiatus should be giving a big boost to cost savings. A cause for concern could be the rise in electricity prices in Zimbabwe, which, together with staff costs, is responsible for increasing inflationary pressures on the mine site in Blanket. However, this is likely to be counteracted by lower fuel costs in Zimbabwe, which although slightly up MoM in January, based on the last 5-6 months, seem on their way to be significantly cheaper than in 2023.

In addition, there is the appreciation of the US dollar against the local currency that also needs to be taken into account. This situation between the two currencies seems to ballast the electricity costs for Blanket, but at the same time should also result in lower US$–denominated costs on the balance sheet due to the conversion of figures from one currency to the stronger currency, mitigating the negative impact of energy bills and increased labor force to support expected higher mining.

Currently, AISC/oz is not among the cheapest in the industry at $1,268, but still compares favorably with the recent surge that saw the value rise globally to $1,358 AISC/oz in early 2023, according to Metals Focus Gold Mine Cost Service.

The company has stabilized liquidity as a result of strong operating cash flows profiting from higher gold prices (+6% YoY to $1,906/oz. average realized price in 9M-2023) and robust gold production (57,576 ounces in 9M-2023 vs CMCL production record of 59,726 ounces in 9M-2022) despite suspension of Bilboes’ oxide mining activities (75 km north of Bulawayo) for care and maintenance since October 2023.

The company used the issuance of new equity capital to finance the acquisition of Bilboes and financed the investments by issuing certain bonds and obtaining additional lines of credit in Zimbabwe.

Overall, the situation looks good with an interest coverage ratio of 8.28x (CMCL’s 12-month operating income of $20.7 million on a 12-month interest expense of $2.5 million), indicating that CMCL can afford the financial costs incurred on the loan, while CMCL Altman Z Score of 2.83 signals that safe zones are approaching, meaning zero solvency problems.

Looking ahead, the company says it is on track to produce between 74,000 to 78,000 ounces of gold in 2024 at an AISC of $1,370 to $1,470/oz after meeting full-year 2023 production guidance of 75,416 gold ounces. CapEx is expected to be around $34.4 million in 2024 for exploration at the Motapa and Bilboes feasibility studies.

The higher AISC may reflect the company’s intention to invest more in its exploration and development feasibility studies, which is good as management has demonstrated its ability to increase shareholder value.

The Upward Catalyst: the Economic Recession

The economic recession is likely to significantly increase demand for gold, as investments in the yellow metal act as a hedge against the headwinds that will emerge if the economic outlook worsens. As for the precious metal supply, it is expected to continue rising in 2024 after a 1% increase year-on-year in 2023, but this is projected to be another small step forward, which again will not be enough to surpass 2018’s record-high level.

Analysts at Trading Economics predict upward pressure as they estimate a price of $2,131.46/ounce in 12 months, versus the current value of around $2,033/ounce.

These economists predict an economic recession, as a consequence of the Fed’s hawkish stance to combat elevated inflation:

Michael Pearce, Chief US Economist at Oxford Economics, Chryssa Halley, Chief Financial Officer of the US Federal National Mortgage Association (Fannie Mae), and David Rosenberg, Economist at Rosenberg Research. Also, former US Treasury Secretary Larry Summers predicted that the next economic cycle would be a recession as early as 2024, and Luke Tilley, Chief Economist at Wilmington Trust, says that the US economy is not recovering but weakening, which will soon be clear to everyone, implicitly indicating an economic recession. Plus, Economists at Oxford Economics‘ forecast for a recession in the coming months suggests a significant slowdown in the US economy is expected sometime in 2024. The negative cycle in the US economy could occur sometime in the first half of 2024, according to economists at Deutsche Bank Aktiengesellschaft (DB).

These 3 indicators predict a recession:

a) The economic recession is predicted by Duke professor and Canadian economist Campbell Harvey’s inverted yield curve for the spread between 10-year and 3-month US government bonds. Currently the spread is determined by the following: a 10-year yield of 4.135% versus a 3-month yield of 5.39%. Under normal conditions, shorter terms mean lower returns than longer-term loans because there is less risk of the borrower defaulting. In an unusual situation, the shorter returns exceed the longer returns because the short-term future is seen as riskier and extremely uncertain than in quiet times. Then the switch warns of difficult times for the economy.

b) The following indicator also signals a recession: Postponing the Fed’s first interest rate cut causes the Fed’s real interest rate to rise, reaching high levels that have often been associated in the past with a subsequent economic downturn or recession.

c) The labor market still appears resilient to most market participants, but the decline in average hours worked leads economists to suggest that this trend may foreshadow a recession based on similar comparisons in the past. Lakshman Achuthan, co-founder of the Economic Cycle Research Institute says hours worked have declined in a manner typical of a recession.

Due to positive spillover to profitability, the rise in gold prices will have a favorable impact on CMCL’s stock price. This dynamic has been consolidated over the years, mainly reflected in two indices: The positive correlation between the CMCL stock price and gold futures prices is the first, and the beta gold coefficient is the second. The first index says that when the commodity market was bullish (bearish) for gold, the stock market was also bullish (bearish) for CMCL shares. The positive correlation is represented by the yellow area, which, except for very rare cases, is always in the positive area in the lower part of the diagram.

The Beta Gold coefficient causes the CMCL stock price to change depending on the price change. A linear model in which the past 52-week returns of gold futures are the input and the 52-week returns of CMCL shares are the output produced the following results: On average, a change in the price of gold is reflected in a twofold variation in the CMCL share price. Therefore, this dynamic bodes very well for CMCL’s holding given the expected rise in gold prices. The coefficient of determination is 30%, which means that the change in gold price determines 30% of the change in CMCL’s stock price. The coefficient of determination could be higher, but is acceptable.

Conclusion

Caledonia Mining Corporation Plc is a gold miner in Zimbabwe and is targeting annual production of 74,000 to 78,000 ounces of gold with a focus on reducing operating costs because recently these have resulted in lower profits. Gold prices will remain very supportive as global uncertainty enhances its safe-haven properties and protects the portfolio from headwinds. The combination of robust gold prices and cost control measures will bode well for the stock price, increasing expectations for a strong recovery from current levels, which are close to the oversold level at the bottom of the stock price cycle. The stock tends to outperform most of its peers over the long term and the premise is on the table because it can continue to achieve this in the future. There is now an opportunity to increase participation, although it cannot be ruled out that further opportunities will arise before the expected recession in 2024.