Rating Update: Stock Rating B-Positive (6/11/19)-Caledonia Mining Corp PLC (CMCL).

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BUSINESS

Caledonia Mining Corporation Plc primarily engages in the exploration and development of gold properties. The company also explores for precious metals. It primarily holds a 49% interest in the Blanket Mine, a gold mine located in Zimbabwe. The company was formerly known as Caledonia Mining Corporation and changed its name to Caledonia Mining Corporation Plc in March 2016. Caledonia Mining Corporation Plc was founded in 1992 and is headquartered in Saint Helier, Jersey.
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INVESTMENT RATING

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CMCL’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.

Caledonia Mining has a current Value Trend Rating of B (Positive).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Caledonia Mining has a very high Appreciation Score of 97 but a slightly negative Power Rating of 34, triggering the Positive Value Trend Rating.

Caledonia Mining’s stock is selling well below targeted value. The current stock price of $5.68 compares to targeted value 12 months forward of $28.
Caledonia Mining’s very high appreciation potential results in an appreciation score of 97 (only 3% of the universe has greater appreciation potential.)
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Caledonia Mining has a Power Rating of 34. (This slightly negative Power Rating indicates that CMCL’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: the trend in CMCL’s earnings estimates has been unfavorable in recent months; and recent price action has been neutral. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

CMCL’s financial strength is high. Financial strength rating is 90.
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Relative to the S&P 500 Composite, Caledonia Mining Corp PLC has slightly more Value than Growth characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that CMCL is lower risk. Relative weaknesses include: low forecasted profitability, low historical profitability, and low expected growth. CMCL’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. CMCL has unusually low market capitalization.

CURRENT SIGNALS

Caledonia Mining’s current operations are stable. Return on equity is falling, reflecting: and falling asset utilization.

Caledonia Mining’s current technical position is very weak. The stock price is in a 8.2 month down move. The stock has declined 30.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Positive development: significant quarterly earnings acceleration occurred. Negative development: significant quarterly sales deceleration occurred.
The stock is currently rated B.
Caledonia Mining Corp Plc (NYSEAMERICAN: CMCL) stock closed at $5.55 on 6/11/19 after a major increase of 24.4%. However, this advance was accompanied by exceptionally low trading volume at 17% of normal. The stock has risen 2.3% during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2018, Caledonia Mining experienced a significant decline in cash of -$1.88 million (-14%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$18.95 million. Non-operating sources contributed +$3.78 million (+20% of EBITDA). Cash taxes consumed -$3.74 million (-20% of EBITDA). Re-investment in the business amounted to -$21.12 million (-111% of EBITDA). On a net basis, debt investors supplied +$3.82 million (+20% of EBITDA) while equity investors received -$3.57 million (-19% of EBITDA).
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Caledonia Mining’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Caledonia Mining Corp Plc Peer Group. In most years, Caledonia Mining was in the second quartile and top quartile. Currently, Caledonia Mining is substantially above median at +20% of EBITDA (+$3.78 million).

Caledonia Mining’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Caledonia Mining Corp Plc Peer Group. In most years, Caledonia Mining was in the top quartile and lower quartile. Currently, Caledonia Mining is slightly above median at -20% of EBITDA (-$3.74 million).

Caledonia Mining’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Caledonia Mining Corp Plc Peer Group. (Since 2016 Business Re-investment, %EBITDA has decelerated very sharply.) In most years, Caledonia Mining was in the lower quartile and third quartile. Currently, Caledonia Mining is substantially below median at -111% of EBITDA (-$21.12 million).

Caledonia Mining’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Caledonia Mining Corp Plc Peer Group. In most years, Caledonia Mining was in the top quartile and second quartile. Currently, Caledonia Mining is upper quartile at +20% of EBITDA (+$3.82 million).

Caledonia Mining’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Caledonia Mining Corp Plc Peer Group. In most years, Caledonia Mining was in the top quartile and lower quartile. Currently, Caledonia Mining is slightly above median at -19% of EBITDA (-$3.57 million).

Caledonia Mining’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Caledonia Mining Corp Plc Peer Group. (Since 2016 Change in Cash, %EBITDA has decelerated very sharply.) In most years, Caledonia Mining was in the top quartile and lower quartile. Currently, Caledonia Mining is lower quartile at -10% of EBITDA (-$1.88 million).
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Caledonia Mining’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Caledonia Mining Corp Plc Peer Group. (Since 2014 Cash, %Revenue has experienced a very sharp decline.) In most years, Caledonia Mining was in the third quartile and top quartile. Currently, Caledonia Mining is substantially below median at +16%.

PROFITABILITY

Caledonia Mining’s return on equity has improved very significantly since 2010 accelerating very sharply after the 2013 level.
Caledonia Mining’s strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a major performance consideration.
The productivity of Caledonia Mining’s assets declined over the full period 2009-2018: asset turnover has suffered an downtrend that accelerated sharply after the 2011 level.
Partially offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend that sharply accelerated from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Caledonia Mining’s return on equity is below median (15.3%) for the four quarters ended December, 2018.
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Operating performance (pretax return on assets) is above median (16.9%) reflecting asset turnover that is above median (0.54X) and slightly below median pretax margin (31.0%).
Tax “keep” rate (income tax management) is at the lower quartile (50.8%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is above median (1.78X).

GROWTH RATES

Overall, Caledonia Mining’s growth rate has slowed very considerably in recent years.
Caledonia Mining’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 12.5% per year. (More recently it has been 7.5%.)

Total asset growth has been 16.8% per year. (More recently it has been 10.7%.)

Annual E.P.S. growth has been -0.3% per year.

Equity growth has been 12.8% per year. (More recently it has been 4.5%.)
No consensus growth rate forecast is available for Caledonia Mining.
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Relative to the Caledonia Mining Corp Plc Peer Group, Caledonia Mining’s historical growth measures are generally top quartile. Revenue growth (12.5%) has been upper quartile. Total asset growth (16.8%) has been upper quartile. Equity growth (12.8%) has been upper quartile. E.P.S. growth (-0.3%) has been below median.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Caledonia Mining’s stock price performance has been volatile and significantly below market. Between August, 2008 and June, 2019, Caledonia Mining’s stock price fell -21%; relative to the market, this was a -65% loss. Significant price moves during the period: 1) July, 2015 – September, 2016: +215%; 2) January, 2013 – January, 2014: -54%; 3) November, 2010 – September, 2011: -53%; and 4) August, 2009 – November, 2010: +184%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -33.9% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through May, 2019 of -33.9% is lower quartile relative to Caledonia Mining Corp Plc Peer Group.

Current 5-year total return performance of 12.0% is above median relative to the S&P 500 Composite.
Through May, 2019, with above median current 5-year total return of 12.0% relative to S&P 500 Composite, Caledonia Mining’s total return performance is substantially above median relative to Caledonia Mining Corp Plc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CMCL’s overall valuation is exceptionally low. All five factors are upper quartile. The highest factor is the ratio of enterprise value/assets, followed by the price/earnings ratio, then by the price/equity ratio, then by the ratio of enterprise value/revenue. The lowest factor is the ratio of enterprise value/earnings before interest and taxes.
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Caledonia Mining has a major value gap compared to the median. For CMCL to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.82X to 2.66X. If CMCL’s ratio of enterprise value/revenue were to rise to 2.66X, its stock price would be higher by $12 to $17.
For CMCL to achieve upper quartile valuation relative to the Caledonia Mining Corp Plc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.82X to 11.47X. If CMCL’s ratio of enterprise value/revenue were to rise to 11.47X, its stock price would increase by $68 from the current level of $5.68.

VALUE TARGETS

CMCL’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.
Caledonia Mining’s current Price Target of $32 represents a +460% change from the current price of $5.68.
This very high appreciation potential results in an appreciation score of 97 (only 3% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 97, the moderately low Power Rating of 34 results in an Value Trend Rating of B.
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Caledonia Mining’s current Price Target is $32 (+4% from the 2018 Target of $31 and +460% from the 06/11/19 price of $5.68). This plateau in the Target is the result of a +18% increase in the equity base and a -12% decrease in the price/equity multiple. The forecasted decline in cost of equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a very large positive impact as well. More than offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
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PTR’s return on equity forecast is 13.0% — below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly below the 2017 peak of 27%.

PTR’s growth forecast is 12.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2013 peak of 39%.

PTR’s cost of equity forecast is 6.9% — slightly below recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is below the 2013 peak of 11.1%.
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At Caledonia Mining’s current price of $5.68, investors are placing a negative value of $-1 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 22.3% versus a cost of equity of 9.1%.
PTR’s 2020 Price Target of $32 is based on these forecasts and reflects an estimated value of existing assets of $6 and a value of future investments of $26.

About John Lafferty 47332 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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