By Alastair Ford
Zimbabwe has been a complicated place to do business over the past few decades.
No doubt about that.
But if there’s one company that’s worked out how to make a success of it, and consistently so, it’s Caledonia Mining.
Caledonia has been producing gold in considerable quantities from its Blanket mine near Bulawayo consistently for many years.
It’s just completed a major expansion programme there, and is now looking towards the next big thing.
What will that be?
Well, with plenty of cash now flowing in, capital commitments drying up and a long-stated desire to expand, perhaps it’s no surprise that Caledonia has set its sights on Zimbabwe’s largest undeveloped gold asset.
Caledonia recently offered around US$53 million in shares to acquire the multi-million-ounce Bilboes gold project.
As it stands, Caledonia is producing roughly of the order of 80,000 ounces of gold a year.
If Bilboes can be brought into production as planned, it ought to add a further 160,000 ounces to the annual production tally.
If successful, such a move would cement Caledonia’s move into the ranks of the world’s mid-tier gold miners.
And that in turn ought to have a corresponding effect on the Caledonia share price. It’s that thought that has helped motivated certain members of the consortium that is selling Bilboes, in particular the well-known UK mining investment fund Baker Steel.
Baker Steel has publicly stated that it’s willing to sell Bilboes at a price somewhat lower than its carrying value 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 have seemed significant, but there’s more than one way to read a market.
In times of uncertainty, good news is often met with a wave of selling. The fact that this transaction didn’t bring the ‘liquidity event’ sellers out into the market was a good sign. But it was understandable too. After all, the deal makes sense from all sides.
Baker Steel gets a sizeable stake in Caledonia as well as a one percent net smelter royalty on Bilboes that could deliver it more than US$2.5 million in revenues per year.
Caledonia: The next step
Caledonia gets to take the next natural step in its growth trajectory, and – what’s most crucial of all, following its recent production expansion – it has the cash to support those plans.
Lots of it.
In the quarter to end June, the last quarter for which financials are available, Caledonia generated more than US$36 million in revenues from Blanket, up by more than US$7 million from the corresponding period a year earlier. Its cash balance stood at around US$10 million.
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.
It’s also been able to keep the dividend payouts steady for a good long time now, and although cash from Blanket will now be earmarked for Bilboes, investors need not fret about getting their quarterly share.
But it’s the in-country expertise that’s perhaps the most significant reason why the Bilboes transaction is likely to be a win-win. If anyone can make a gold project in Zimbabwe work, Caledonia can.
So the sellers of Bilboes have found their perfect buyer. And Caledonia has found the ideal project to take it on to the next stage of what’s been a steady and consistent story of growth. In a way, this transaction looks like nothing more than one big exercise in de-risking.