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Caledonia Mining still on track to lift production amid earnings alert

Caledonia Mining is now well into an expansion plan that could boost gold production
Caledonia Mining still on track to lift production amid earnings alert
Caledonia's current investment programme will boost gold production

Caledonia Mining Corporation PLC's (LON:CMCL, TSE:CAL) Blanket gold mine has been in operation for many years now, and has managed to ride out the complexities of the Zimbabwean political situation relatively unscathed.

In large part that’s due to the indigenisation deal that Caledonia struck some years ago with local businessmen, with its own workers, and with other community groups. Under the terms of that deal, Caledonia retains operational control of Blanket and ownership of 49% of it.

The terms of sale of the 51% stake stipulated that the company would be paid back out of cash flow from the mine itself, and on very commercial terms.

Accordingly, as with all the best deals, all parties felt that they came out of it well, and the company’s ability to operate in Zimbabwe has never been seriously in jeopardy.

In recent years the concerns have been more about how to operate Blanket to maximum efficiency.

To that end the company has embarked on a heavy investment programme, the benefits of which are just beginning to show through.

Thus, a new tramming loop has been installed at the 750 metre level, allowing for the more efficient distribution of ore around the underground network of tunnels before it is brought to the surface for processing.

In addition, the company is also working on new shafts to increase the amount of ore it can haul to surface at any one time.

All told, the plan is to boost output in the longer term to more than 80,000 ounces per year by 2021.

In the meantime, the company has become recognised as one of the steadiest dividend payers on London’s junior market, having rewarded shareholders with regular consistency since the beginning of 2012.

From the bosses

“In the middle of March 2016, production from below 750 metres commenced, as planned, via the Number 6 Winze,” says chief executive Steve Curtis.

“Production from below 750 metres is expected to increase progressively in the remainder of 2016 and 2017 and will contribute to the higher targeted production of approximately 50,000 ounces of gold in 2016 and approximately 65,000 ounces of gold in 2017.”

A resource upgrade

Following a drilling programme, 343,000 tonnes were upgraded from the inferred to the higher-confidence indicated resource category in July.

At the same time an additional 1.3mln tonnes of new inventory was added to the inferred resource base.

This latest upgrade combined with the results from a similar exercise last December boosted the reserves and indicated resources that can be used in the life of mine plan by 67% to just under 4.9mln tonnes.

Restates output guidance but warns on profits

On November 2 this year, the group said it expected to meet market expectations for revenue but that it would miss earnings per share (EPS) guidance for full year 2016.

The average grade mined in October was below expectations, but Blanket was still on track to produce 50,000 ounces of gold this year, it said.

The earnings warning was due to various factors, including the strong South African Rand against the US dollar and the increased share price since the start of 2016 meaning share-based expenses are now higher, the group told investors.

Blanket remained on track to increase production from 42,800 ounces of gold a year in 2015 to around 80,000 ounces of gold per annum in 2021, it added.

What the broker said

Panmure Gordon analyst Kieron Hodgson said: "We downgraded Caledonia at the start of September and whilst we see longer term value, short term optimism was too bullish."

He repeated a recommendation for investors to 'hold' the shares but said he was preparing to reappraise his forecasts.

The broker reckons the investment programme to increase production, the low-cost nature of the operation, an unrivalled yield and significant cash resources offer enough incentives for investors to ensure the Caledonia story remains interesting.

"... however, following the latest update we retain our view that taking profits from the exceptional performance in 2016 is preferable," it said.

It said it remained "cautious" on the outcome for full year 2016 given the optimism in recent months.

The broker has a target of 81p on the shares compared to a current price of 120p.

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