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  • Caledonia Mining (CALVF); A High Risk Potential High Return Gold Mining Company 30 comments
    Jul 8, 2012 12:19 PM | about stocks: CALVF

    Caledonia Mining (OTCQX:CALVF) was my stock of the year pick for 2011. Unfortunately the stock did not meet the goal of appreciating 100% in a twelve month period. In fact the stock has dropped approximately 50% since I recommended it. Interestingly the company fundamentals have, in my view, continued to improve as the stock price has declined.

    From the company website; "Caledonia is an African focused mining and exploration company with an operating gold mine in Zimbabwe, a copper-cobalt exploration project in Zambia and two platinum-nickel exploration projects in South Africa." The company's primary asset is the Blanket gold mine located in Zimbabwe. The mine should produce 40,000 oz. of gold in 2012 at a cash cost slightly above $600 per ounce. This is one of the lowest cash costs in Africa.

    The company produced slightly less than 40k ounces last year and that production yielded a gross profit of $29.1 million and cashflow of $17.4 million. The current market cap of the company is around $33 million so the company is trading at 2x cashflow and has a current P/E ratio of around 2.5. This is a profitable gold mining company.

    So why has the price dropped if the mine performance and financials are performing well. Several reasons:

    1. General weakness in gold equities, especially gold juniors and companies with single mines and production lower than 100k ounces per year.
    2. The company's main asset is located in Zimbabwe which is not viewed positively by foreign investors.
    3. Political uncertainty around elections, and Black Indigenisation policy.

    However there are mitigating circumstances to each of the above in my view. Changes in any of the above could lead to revaluation:

    1. The world economic situation which is one of slow growth and over indebted countries, especially in the west, may lead to governments pursuing monetary policies that are conducive to a higher gold price i.e. continued currency debasement. We are seeing continuing signs of this with the ECB cutting rates last week, the Bank of England engaging in another round of QE (money printing, the Peoples Bank of China cutting rates, and the central bank in Denmark adopting a negative rate policy due to Euro deposits pouring into the country seeking a safe haven. I expect these type of policy responses to continue which should be long term bullish for the gold price.
    2. The political situation in Zimbabwe is more complicated than what is generally reported outside the country. Robert Mugabe is 88 years old and is currently in Singapore, it is speculated to receive treatment for prostate cancer. His party Zanu-PF has in the last few years come under considerable pressure from competing parties in Zimbabwe and from pressure by outside entities like its neighbor South Africa and the UK to sit down with the opposition and write a new constitution and to hold elections. In fact there have been many reports of inter-party fracturing inside Zanu-PF and even party members splitting from Mugabe as politicians position for a post Mugabe Zimbabwe. The trend is clear in that we and I am sure Zanu-PF have seen the Arab Spring revolutions in North Africa and the movement in Africa away from autocratic rule to more participatory types of government. Suffice to say that when old Bob sheds this mortal coil there could be a signifcant revaluation of Zimbabwe and company's that have operations there.
    3. As stated above the country is moving towards elections although Zanu-PF has done much to delay them in order to give itself time to position itself for an outcome that does not significantly diminish its power and control of cronyism that has benefited its members. Nevertheless the pressure is on and it is my view that if free and fair elections are held that the MDC (Movement for Democratic Change) would have a greatly increased role in government. It is important to remember that Zanu-PF and MDC have a tenuous power sharing agreement currently in place. The prime minister of Zimbabwe is Morgan Tsvangirai and that several cabinet members and the central bank president are MDC officials. This is the prime reason that inflation was quashed in the last few years and the economy is growing at 6-8%. I suspect if elections were held today MDC would be the majority.
    4. On the subject of Black Indigenisation; this is a policy to transfer 51% ownership of large enterprises to control by black Zimbabweans. I think many outside the country have construed this as resource nationalization. However, if for example, we look at the deal Caledonia struck the company made a good deal. The deal is structured as such: "Signing an agreement with the National Indigenisation and Economic Empowerment Fund to sell a 16 per cent stake in its Blanket Mine for US$11.7 million. This is part of a wider accord to transfer 51 per cent of gold mine to indigenous Zimbabweans for a total of US$30.1 million. Caledonia has agreed to sell 15 per cent to a local consortium and 10 per cent to the Blanket Mine Employee Trust. Meanwhile, a 10 per cent share of the mine will be donated to the Gwanda Community Share Ownership Trust. The company has agreed to finance the deals at a rate of 10 per cent above the 12-month London interbank offered rate, with the loans being repaid from future dividends." Basically the company has transferred 51% to various Zimbabwean entities for around $30 million which the company will finance by carrying a note on at a rate of 10%+ to be paid out of the profits of the Blanket mine. The company management retains day to day operating control of the mine. Although not the optimum from a shareholder perspective that is a long way from nationalization.
    5. One last catalyst is that the company has a large opportunity to increase production and to find additional mineralization at the Blanket mine and the surrounding properties. Lets face it, due to the political situation in Zimbabwe the country and the mining industry has been starved for capital and the country is severely underexplored.

    The Caledonia story is a bit complicated for many speculators so they would rather not even bother. However, I think the story is compelling and the company is so cheap it could literally buy itself with two years of cashflow. That means it is so cheap it is almost risk free. There are several issues, any one of which if resolved positively could lead to a significant revaluation of the shares. I have been and continue to accumulate shares on any drops to $.07 cents or below.

    Disclosure: I am long OTCQX:CALVF.

    Themes: Zimbabwe Stocks: CALVF
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Comments (30)
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  • NuclearDickie
    , contributor
    Comments (234) | Send Message
     
    I agree John. I think $CALVF is a terribly undervalued gold miner. Payment of dividends would boost share price. Earning $0.03-$0.04 per share they could easily pay $0.02. That's a 29% yield at $0.07/share!
    16 Jul 2012, 08:53 PM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » A dividend and or share buyback would certainly be a good idea considering I have a ton of shares. I think as cash continues to accumulate on the balance sheet it could be a distinct possibility. I continue to put stink bids in at $.065 and they get filled occasionally.
    17 Jul 2012, 10:29 PM Reply Like
  • NuclearDickie
    , contributor
    Comments (234) | Send Message
     
    By the way, I own a mere 50,000 shares. Thinking of boosting that to 500,000.
    16 Jul 2012, 08:54 PM Reply Like
  • Jon Springer
    , contributor
    Comments (4160) | Send Message
     
    Best place for information and agitation about CALVF is the message board on Raging Bull http://bit.ly/Nv8oiN

     

    This message board is over a decade old. There are few people who have been there since at least 2003 (i.e. long suffering shareholders) - I have managed to check that far back.

     

    I agree with John Polomny that this stock will someday be a winner... but its been a long hard wait for many.
    17 Jul 2012, 09:08 AM Reply Like
  • FIFOkid
    , contributor
    Comments (171) | Send Message
     
    Thanks for the pick I actually like it but I am trying to discern the timing here which could expose you to some gold cycle risk. No arguments with you on the value here admittedly it is the cheapest producer on many accounting metrics and I see the mill is underutilized but unlocking this value may take time unless they decide to merge or pay a dividend.

     

    Assuming no merger or dividend any growth catalyst will have to happen internally around the Blanket mine but it is probable exploratory drilling related to any potential internal growth will be limited while the indigenous corporation is paying back the note which will take 2-3 years.
    20 Jul 2012, 02:03 PM Reply Like
  • crozz
    , contributor
    Comments (298) | Send Message
     
    Hi John. Great article. I got here doing research on Mwana Africa.
    What I like about Mwana is the recent cash infusion (at a price significantly above the current share price) as well as the involvement of the Chinese, which might deter the govt to strike a tough deal with Mwana.

     

    Did you do a benchmarking across the 4 Zimbabwe Gold companies? Caledonia. New Dawn. Mwana.
    African Consolidated

     

    How do they compare in your opinion? Is Zimbabwe especially attractive for miners, or are there similar possibilities for other metals and in other countries of Africa?
    5 Aug 2012, 08:22 PM Reply Like
  • crozz
    , contributor
    Comments (298) | Send Message
     
    I just checked. The other company with significant Zimb. share is Aquarius Platinum.
    5 Aug 2012, 08:24 PM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » Zimbabwe is certainly attractive for miners as it is significantly underexplored. However the political situation is acting as a deterrent to more investment. This is also a major reason share prices have been suppressed for Caledonia and New Dawn. Nevertheless for speculators willing to take on the risk I think betting on a favorable reconciliation of the political situation will lead to a re-rating higher of the country. I have not really compared the miners, however I will be interviewing Ian Saunders, the CEO of New Dawn, in the next few weeks and will write up my findings. As far as other countries in Africa I like Banro (BAA) in the DRC. I also am looking a t a small compnay that is rehabilitiating a palm oil plantation that used to belong to Unilever.
    6 Aug 2012, 07:43 AM Reply Like
  • Schumpeter_1
    , contributor
    Comments (211) | Send Message
     
    John

     

    Please keep us up-to-date. I think I know which palm oil company you are referring to and I am very curious about your insights. Agriculture always has been one of my major interests.
    11 Aug 2012, 02:50 PM Reply Like
  • crozz
    , contributor
    Comments (298) | Send Message
     
    Thanks for the Banro tip.
    6 Aug 2012, 10:18 AM Reply Like
  • crozz
    , contributor
    Comments (298) | Send Message
     
    Hi John, any news on the interview with CEO of New Dawn?
    I would be really interested.
    28 Aug 2012, 03:46 PM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » I talked with him, I just need to write it up. Been busy.
    28 Aug 2012, 05:40 PM Reply Like
  • crozz
    , contributor
    Comments (298) | Send Message
     
    Great. I am very curious. :)
    28 Aug 2012, 06:24 PM Reply Like
  • vonpaananen
    , contributor
    Comments (3) | Send Message
     
    Hi, thanks for your thorough analysis on this and many other stocks. I have a stupid question: is there some difference in buying stocks from American market than grin Canadian market. For instance this stock is traded in OTC and TSE. For me it's pretty much the same, because I live in Finland, but is there some reason why Ishould buy from States rather than Canada.
    Thanks.

     

    Mikko
    30 Aug 2012, 05:18 PM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » The primary exchange for this stock is in Canada therefore you will have better liquidity and the spreads between the bid and ask will be tighter.
    31 Aug 2012, 07:52 AM Reply Like
  • FIFOkid
    , contributor
    Comments (171) | Send Message
     
    John why han't there been a consortium of individual investors pressuring the company to pay a dividend like there was with Mart Resources in 2011? I sent Mart a letter last year and raised awareness last year on the Investor Village message board. Personally, I find the money spent on the Nama project a total waste of money. The project is greenfield, still needs to be proven up and it is so obvious it would be too big for them and is low grade.

     

    I know Orosur made the exact same mistakes with exploration and NOW finally realizing a dividend is the only logical way to unlock value.

     

    IMO CALVF has a much better operating mine than Orosur and can pay a higher dividend rate.
    7 Oct 2012, 06:07 AM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » I agree with your sentiment. I am more than happy to work together to write a letter and begin the process of identifying large shareholders and getting their support to bring the issue to managements attention. This is something similar to what a writer on SA did regarding Equal Energy. These efforts resulted in the company undertaking a strategic review to unlock shareholder value. I am quite familiar with how the dividend affected the mart shareprice. lets collaborate on this if you want.
    18 Oct 2012, 12:17 PM Reply Like
  • FIFOkid
    , contributor
    Comments (171) | Send Message
     
    John- I am very happy you replied. There certainly wasn't a consensus on the raging bull message board (unlike Mart) and I was virtually scorned off of the board upon the dividend suggestion by quite a few people. This sentiment was discouraging.

     

    I believe the power of a high safe dividend in this zero rate environment especially for something PM related will create the only opportunity to receive a very high rate of income on something gold related where holding physical pays you nothing and the industry pays you next the nothing.

     

    I would like to collaborate and get the ball rolling even though I will admit I don't have a large position here thanks to the imbeciles on the RB board. I think we need as much help as we can get because I don't think CAL has a large institutionaI ownership/following and I have strong feeling management will be much less receptive to the idea than Mart's management implying we need a majority backing.
    19 Oct 2012, 09:49 AM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » Yes I do not think the management will be very receptive at all in fact. They are content to exercise warrants as the shares outstanding balloons above 500 million. I only own 100,000 shares but I am willing to acquire more if the company begins returning cash to shareholders. Let me write something up this weekend and I will post it here. I do know that Pinetree Capital owns 50 million shares which is 10%. I need to identify other institutions so if we can make a persuasive argument and then get one or more of these institutions on board it may be the way to go to persuade management. I am surprised the momo's on the board think a dividend is a bad idea. Even if CAL paid a one cent dividend the share price would probably go up 50%. Why do they own the stock if not for a return? The company can afford it unless it chooses to throw it away on Nama.
    19 Oct 2012, 04:32 PM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » 20 October 2012

     

    Dear Sirs,
    I am a long time shareholder in Caledonia Mining. Although not a significant holder of shares I do believe in the company’s prospects and have consistently been adding to my share count on pullbacks in the share price. I have been very impressed with management’s performance at the Blanket mine especially considering the various challenges of operating in Zimbabwe. It is my view that Caledonia management has managed the indigenization process in a way that enabled compliance with government policy while still maintaining other stakeholders interests and allowing for a continued investment case to be made for the company. I also believe in the long term prospects of Zimbabwe and it is my personal view that although slow and sometimes uneven the country is moving towards a more prosperous future post Mugabe. It is also my contention that the country and its internal politics are not clearly understood in the investment community.
    I have been most impressed by the financial performance at the operating Blanket mine. The most recent financials available show the company enjoying healthy increases in revenue, earnings, and cashflow. This has been the trend for several quarters. Management has stated that, “Once indigenization has been fully implemented, Blanket, as a profitable and cash-generative gold producer, will be well-positioned to take advantage of opportunities that exist for furthergrowth.” (1) Now that the indigenization process is complete and mine operations are consistent I and other shareholders are curious about where shareholder value creation begins to come into play. The shareprice is not currently reflecting the current operational success much less the future prospects of the company. It is my view that the company’s shareprice is subject to a discount due to the perception that outside investors have towards Zimbabawe and does not reflect the true reality or potential of Caledonia Mining. It is my view, along with other Caledonia shareholders, that a dividend would go a long way in changing perceptions of the company among the investment community.
    In fact a similar situation existed at another African based resource company. Mart Resources (MMT.V) is an oil company that operates in Nigeria and faces similar issues that Caledonia is encountering. A decision was made by Mart management to institute a dividend and as you can see by the enclosed chart the company was substantially revalued upward by the market. This created both income and capital gains for the shareholder and put the company on the radar screen of analysts.

     

    Insert chart of Mart Resources

     

    I would like to request that management develop a plan for shareholder value creation that will accurately reflect the current operational success of Caledonia along with its long term prospects. I am hopeful that this plan can be explained to shareholders and that it will in fact lead to unlocking the value in Caledonia mining.

     

    Sincerely,

     

    John W. Polomny

     

    References:
    1. http://bit.ly/PhJN7q
    20 Oct 2012, 01:40 PM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » Here is the response from the company:

     

    Dear Mr Polomny

     

    Thank you for your constructive comments, which are noted.

     

    It was only after the indigenisation process at Blanket had been completed (a few weeks ago) that Caledonia was able to finalise a strategic plan for Blanket (and, by implication for Caledonia as Blanket is our major asset). Such a plan must be submitted to the board of Blanket (which includes our new Indigenous partners) for its approval and then be submitted to the Caledonia board. The plan includes a medium term investment programme for Blanket which will in turn determine the future free cash generation by Blanket and hence the availability of cash at the Caledonia level to fund investments in other jurisdictions and any dividends that Caledonia may decide to pay.

     

    Please rest assured that the matters you have raised have been and remain, under consideration by the Caledonia board.

     

    Kind regards

     

    Mark Learmonth
    Vice President, Investor Relations and Corporate Development
    Caledonia Mining Corporation

     

    It would seem prudent to wait a couple of quarters and see what happens.
    22 Oct 2012, 07:47 AM Reply Like
  • Jon Springer
    , contributor
    Comments (4160) | Send Message
     
    Good effort John. Investor relations at Caledonia is always responsive.
    22 Oct 2012, 09:32 AM Reply Like
  • FIFOkid
    , contributor
    Comments (171) | Send Message
     
    John thank you for the hard work and very well written letter. I would have been more critical but with my small stake in the company I don't really have any leverage. This information will give me time to build a meaningful position.

     

    I had a little more leverage with Mart (much bigger position) and I felt comfortable with the stock even without the dividend because I knew UMU-9 was going to be successful given the long history of production showing no depletion in the main field.

     

    On to the guts of the letter: I find it very odd that the company has to receive approval from the indigenous company especially since they are the ones financing them.

     

    I didn't save the response from Mart last year about the dividend but the letter didn't indicate they had to get approval from their partners but I knew there was pressure on them (quite a few influential people in contact with the company about this issue).

     

    Keep in touch.
    22 Oct 2012, 09:02 AM Reply Like
  • FIFOkid
    , contributor
    Comments (171) | Send Message
     
    Sorry for the comment about the approval by the indigenous company. I wrote this just waking up at home and my comprehension was clouded.
    22 Oct 2012, 09:51 AM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » We now have them on the record and can refer back to this correspondence as we move forward. My concern is that the company has a cash hoard that is growing and I hope they do not feel the need to be company builders i.e. Nama. This bull market in gold will not last forever so I would like to see some value creation for shareholders. When you are on other message boards for Caledonia please refer them to this string so I can get a gauge of what other shareholders are thinking.
    22 Oct 2012, 10:35 AM Reply Like
  • FIFOkid
    , contributor
    Comments (171) | Send Message
     
    In my original response to you my issue with the company is it is just too small and under capitalized to grow externally by a greenfield project or acquisition of an acceptable producing or proven project unless they wait for about 100 million in accumulated cash or choose the unthinkable dilution at this unacceptable share price. The mining cycle could be very well over by the time they accumulate enough cash for expansion. Really a dividend is their only near term option to unlock value.

     

    I will refer the board posters to this verbal exchange and reply by the company.
    22 Oct 2012, 11:39 AM Reply Like
  • FIFOkid
    , contributor
    Comments (171) | Send Message
     
    It looks like your correspondence was convincing and the company has initiated the dividend at 1/2 cent. A guess the payout will be semi- annual given its LSE listing. Thanks again for your hard work.
    19 Nov 2012, 09:48 AM Reply Like
  • John Polomny
    , contributor
    Comments (495) | Send Message
     
    Author’s reply » I am sure they had this under consideration for some time. However nice to see and it should result in more coverage and hopefully a re-rating of the shares. I do have mixed feelings about the reverse split.
    19 Nov 2012, 11:12 AM Reply Like
  • NuclearDickie
    , contributor
    Comments (234) | Send Message
     
    John & FIFO, I hold a fair amount of CALVF and was tickled to see they are going to begin paying a dividend. R/S's are notoriously bad on penny stocks, but not always. CALVF has such a low market cap already with a P/E under 2.5. It is hard for me to believe a R/S would do any damage to Caledonia. I like this company and its management. They truly seem shareholder friendly.
    19 Nov 2012, 04:46 PM Reply Like
  • FIFOkid
    , contributor
    Comments (171) | Send Message
     
    The company needs to concurrently graduate to a better exchange in addition to the reverse split.

     

    Ideally, the company should merge with Orosur Mining (another lemon) that trades at approximately 1 times EBITDA and isintending to pay a dividend and pay at a rate of 15% or higher per annum. They should drop all exploration on ancillary prospects with exception to activity for satellite mine potential and give it a year or two to see how the market rewards the move.

     

    If not the companies still will generate plenty of excess cash flow for internal expansion of a project more appropriate for a junior (with a very high IRR).

     

    If it is successful strategy they can use equity to acquire the relatively cheaper producing peer.
    29 Nov 2012, 10:20 AM Reply Like
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