Is there really such a thing as a win-win deal?
We could be about to find out.
Caledonia Mining Corporation PLC (AIM:CMCL, NYSE-A:CMCL) has just offered around US$53mln in shares to acquire the multi-million ounce Bilboes gold project in Zimbabwe.
Bilboes has long been billed as the largest undeveloped gold project in Zimbabwe and, as such, its acquisition represents a natural next step for Caledonia, which has just completed a multi-year expansion programme that has upgraded its annual gold output to 80,000 ounces per year.
The idea, though, is to get Bilboes into production at a rate of more than double that again, and if successful such a move would cement Caledonia’s position in the ranks of the world’s mid-tier gold miners.
One of the members of the consortium that is selling Bilboes, the well-known UK mining investment fund Baker Steel Resources Trust Ltd (LSE:BSRT), pointed out in its own commentary on the deal that should Bilboes take Caledonia’s production up towards 250,000 ounces of gold per year, then a significant re-rating of shares would be likely.
It was partly on that basis, said Baker Steel, that it had been willing to sell at a price somewhat lower than the carrying value of Bilboes on its balance sheet as at the end of June 2022.
The market, which has been marking most mining companies down in recent months – including Caledonia – took a fairly sanguine view too. By mid-morning on the day of the announcement, Baker Steel’s shares had risen by an unremarkable one percent or so.
Caledonia’s shares were up by just over half a percent.
These share price moves may not look like much, but there may be more to them than meets the eye.
After all, in markets like these, good news is often met with a wave of selling. The fact that this transaction hasn’t, could in itself be a good sign.
After all, the deal makes sense on many levels. Baker Steel gets a sizeable stake in Caledonia as well as a 1% net smelter royalty on Bilboes that could deliver the investment group more than US$2.5mln in revenues per year.
Caledonia gets to take the next natural step in its growth trajectory and, what’s most crucial of all, it has the cash to back up those plans. Cash is now pouring in from the Blanket mine, now that the upgrade has been completed, and record production numbers are being booked.
In the quarter to March, the last quarter for which financials are currently available, Caledonia generated more than US$11mln in revenues from Blanket. Its cash balance stood at more than US$17mln.
Now that the gold price is under pressure, we might expect these quarterly numbers to weaken a bit. But not by much. Caledonia has a long track record of making things work for it in Zimbabwe – it knows how to keep a lid on costs at Blanket whilst at the same time ensuring its workers get a square deal.
That in-country expertise is perhaps the final reason why the Bilboes transaction is a win-win. If anyone can make a gold project in Zimbabwe work, Caledonia can. In a way, this transaction looks like nothing more than one big exercising in de-risking.