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UPDATE: Caledonia Mining plans to increase gold production by 90%

Broker SP Angel said the strategy update announced by Caledonia Mining this morning underscores the significant potential at the Blanket mine.
UPDATE: Caledonia Mining plans to increase gold production by 90%

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Caledonia Mining Corporation (LON:CMCL, CVE:CALVF) has set out plans to increase gold production by 90% by 2016.

This would take output to 76,000 ounces of the precious metal compared with 40,000 this year.

It will be achieved in stages, with work to unearth an additional 12,000 ounces starting in the first quarter of next year.

This will come from the company’s already-producing Blanket operation in Zimbabwe, where it will be mined from above the 750 metre level.

A further 24,000 ounces of gold will come from the Number Six Winze Project, below the 750 metre level.

Not included in the figures is the planned production from the first three of Blanket's portfolio of 18 satellite properties expected to begin production in the fourth quarter.

Their eventual output “will be determined by the success of on-going exploration and mining development work”, the company said.

The plans require an additional US$4.7mln of capital expenditure taking the investment budget for the period 2013-17 to US$37mln. This will be funded internally.

The upgrade builds on a year of significant progress during which Caledonia became the first foreign owned gold mine in Zimbabwe to comply with local indigenisation legislation.

Operationally, output has exceeded the company’s guidance, while costs have been below those forecast by the market.

Marking its transition to becoming cash generating business, the company has said it will pay a maiden dividend – marking it out as a rarity in the junior mining sector.

Broker SP Angel said the strategy update underscores the significant potential at the Blanket mine.

“Now that the company has an approved indigenisation plan in place it can now maximise the potential at the mine,” said the broker, which has a ‘buy’ rating for Caledonia.

“The company is well positioned to execute this strategy with US$25m of cash in hand last reported in November last year. Cash flow in Q3 was US$12.3m from 12,918 oz of production with cash costs at $508/oz. With the projected increase in production the company should remain cash flow positive even with the budgeted capex spend,” SP Angel calculates.

“Assuming they achieve 50,000 oz of production (based on an annualised run rate of Q3 2012 production) – they will be generating operating cash flow of US$55m – assuming 50% is paid away to indigenisation partners that still leaves them with US$27.5m,” the broker added.

Canaccord Genuity sings a similar tune to SP Angel. “Importantly, a 90% production growth will require only a minor investment in the plant expansion of c.US$1m to extend the crushing and milling capacity towards 3ktpd [3,000 tonnes per day). Both hoisting and carbon-in-leach capacity is already at 3.0ktpd and 3.5ktpd respectively,” the broker notes.

A 76,000 ounces per annum production is expected to be achieved with the throughput of 1.9ktpd, meaning that the plant will have sufficient capacity to treat ore from the satellite projects and/or higher volumes from the Blanket mine, Canaccord said.

“Given that the plant is currently running at 1ktpd, well below its capacity, an increase in throughput should allow to spread fix cost component over a larger production base, helping to mitigate some of the input cost pressures,” the broker added.

Canaccord has a ‘buy’ recommendation and a 16p target price. The stock is almost hallway towards that target price after a 16% increase to 7.25p following the strategy update.

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