On Friday, Caledonia Mining informed that it has filed of an updated technical report with a summary of its revised preliminary economic assessment (PEA) for the Blanket mine in Zimbabwe. The PEA comprises inferred mineral resources considered quite speculative geologically; hence assessment of economic considerations is needed to categorize them as mineral reserves. The PEA was initially commissioned last year to Minxcon Ltd to complete a scoping level study. The original study defined the project to a depth of 750 metres and included an extension below 750 m level to 1,080m level. On request of the Ontario Securities Commission, Minxcon has revised the PEA to consider the expansion project below 750 m as a separate project. Therefore, the revised PEA would conduct the economic analysis on a stand-alone basis assuming that Caledonia would need to raise further funds for expansion. However, Caledonia expects to fund these expenses from cash flows of its existing mines. The net present value (NPV) of the project was estimated to be US$65m at a real discount rate of 8.36% and the internal rate of return (IRR) for the project stood at 42%. The Company now awaits acceptance of the new PEA and technical report.
Beaufort Securities view on Caledonia Mining: Caledonia Mining expects an approval over its new PEA which is likely to improve its prospects. An approval on the separate project to extend below 750m is expected to increase its resources owing to the huge depth which will be accessible to the company. We expect the production to increase towards the second half of the year owing to the completion of the tramming loop on 22 Level in June that would increase the underground haulage capacity and development activity. In addition, the latest results showed that the company improved its cash reserves despite a challenging gold price environment in the previous year. The recent reduction in the Zimbabwe royalty rate to 5% from 7% continues to benefit Caledonia. In view of the above argument, we reiterate a Speculative Buy on the stock.
