On March 20, the U.S. Federal Reserve decided to keep the federal funds rate unchanged at 2.25% to 2.5%. This will drive the price of gold higher as unvaried interest rates for an extended period of time usually promote a low-yield environment, making the precious metal a more compelling investment than bonds.
Further, the yield on three-month Treasury bills topped 10-year Treasury notes for the first time since 2007 on Friday, indicating a recession could be coming. Investors consider gold to be a safe haven asset for their wealth besides buying long-term securities that analysts have chalked up to their concerns about global growth.
The yellow metal was up 2.9% to $1,319.55 per troy ounce at close on Monday. The closing price brought the cumulative average to $1,303.76 per troy ounce so far this year, which, compared to the cumulative average of $1,268.49 per ounce for 2018, reflects an upside of 2.8%.
Investors who want to take advantage of the rising metal prices through its producers should buy shares of stocks that have outperformed the VanEck Vectors Gold Miners exchange-traded fund (GDX, Financial) over the same period. These stocks are expected to continue doing well over the coming weeks as well. The gold-backed ETF is a benchmark for the gold mining industry.
Caledonia Mining Corp. PLC (CMCL, Financial) is well positioned to benefit from high gold prices. As the chart illustrates, the stock has risen 15%, topping the benchmark by 5% so far this year, when gold rose nearly 3%.
The Canadian company focuses on mining, exploration, and development of mineral assets located in Southern Africa.
The company's main asset is represented by a 49% interest in the Blanket Mine, which is located in Zimbabwe. It produced approximately 54,511 ounces of gold at all-in sustaining costs of $802 per ounce of metal in 2018. Blanket had 805,000 ounces of gold hosted in total measured and indicated mineral resources last July.
The company closed the year reporting a 2% year-over-year decline in revenue to $68.4 million, a 3.9% increase in operating profit to $21.4 million and a 14.7% growth in net profit to $10.8 million.
The company had a good earnings before interest, taxes, depreciation and amortization margin of total revenue of 32.1%, topping the industry median of 24.5%.
Caledonia also beats the average peer in terms of higher operating margin of 31.68%, compared to an industry median of 4.77%, and higher net margin of 15.74% versus the industry median of 2.31%. Usually, higher margins drive the share price up.
GuruFocus rated the company's profitability and growth 7 out of 10.Â
Since it has no long-term debt, Caledonia's financial strength also scored a 7 out of 10 rating. As of Dec. 31, the balance sheet had $11.5 million in cash on hand and assets held for sale and $78.81 million in total equity.
Caledonia hopes to accomplish significant production growth and reduce operating costs from the successful completion of the central shaft at Blanket. The company already extended the central shaft's planned depth to 3,950.13 feet, adding 406.8 feet. Currently, development activities are at 3,772.9 feet, which means the company expects to complete shaft sinking in June or July and commissioning to begin in 2020. Following the completion of the mine's development, it will produce 75,000 ounces of gold in 2021 and 80,000 ounces of gold in 2022.
Shares closed at $6.03 on Monday following a 15% decline over the past year through March 25. The stock is trading substantially below the 200-day simple moving average line and slightly above the 50 and 100-day lines.
The 52-week range is $5.01 to $9.94. The price-book ratio is 0.92 versus an industry median of 1.62 and the enterprise value-to-EBITDA ratio is 2.77 compared to an industry median of 8.71. Thus, the stock is not expensive.
In addition, Caledonia Mining is paying a quarterly dividend of 6.875 cents per share, leading to a forward dividend yield of 4.56% versus an industry median of 3.14% and the S&P 500 Index’s dividend yield of 1.92% as of Monday. The next dividend will be paid at the end of April.
Disclosure: I have no positions in any securities mentioned.
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