- Caledonia Mining reported Q2 earnings of $1.8 million on lower ore grades and a lower realized gold price.
- However the shares fell sharply in early trade as the company overstated its Q1 earnings due to an accounting error.
- While the results are still fine (the company remains inexpensive and highly profitable) and in line with my expectations, accounting irregularities raise a red flag.
- I am avoiding the stock for the time being.
Caledonia Mining (OTCQX:CALVF) just announced its second quarter earnings results. The results were fine. Earnings came in at $1.8 million, down from $3.1 million in the second quarter of 2013. Gold production fell slightly from 11,600 to 11,200 from the second quarter a year ago. Both declines are attributable to the fact that the company realized lower ore grades. Also the company's average realized gold price fell from $1,373/oz. to $1,271/oz. However these issues were offset by lower all-in costs, which fell from $959/oz. to $881/oz.
These results aren't spectacular, but they are not terrible. The company remains highly profitable while being priced for disaster. They are largely in line with my March investment thesis that the company is inexpensive with just a $53 million valuation as investors do not want to invest in Zimbabwe. The company has a large, $25 million cash position and it trades at less than 4 times earnings with the cash backed out.
There was, however a troubling issue, namely the company's accounting irregularities. Management reported that it had overstated its Q1 profits by $1 million: it reported $4.1 million when the figure should have been $3.1 million. Now $1 million isn't a big deal, but accounting irregularities are. The market punished the company on the open for this misstep, although the stock quickly recovered reflecting the stock's valuation. However I do not like accounting irregularities and so I do not want to be in the stock for the time being. Investors who followed my advice and bought shares can exit with a 30% profit (not including dividends), which represents a 35% out-performance relative to the Market Vectors Junior Gold Miner ETF (NYSEARCA:GDXJ) and a similar out-performance relative to gold.
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