Zimbabwe country risk exaggerated, study reveals

ZIMBABWE'S perceived country risk for foreign investors is exaggerated after success of junior miner, Caledonia Mining, which has operated in the country for the past decade and paying dividends to foreign investors in that time, according to a research on the firm.

Caledonia has operated Blanket Mine in Gwanda, south of the country since 2006. It became the first mining house to comply with country's foreign ownership laws after selling off 51 percent of the mine to locals in 2012.

Zimbabwe is seen as having high country risk, which levies an additional premium on the cost of funds, making the country more expensive. The country's low foreign direct investment flows have been blamed on the land reform and indigenisation programmes. Under the latter programme foreign-owned businesses in the extractive sector are compelled to sell 51 percent shareholding to local blacks.

Caledonia does not face any such challenges after it became the first and so far only miner to meet the indigenisation criteria.

It owns 49 percent, with the remaining 51 percent divided among Gwanda Community Trust (10 percent), Blanket Employee Trust (10 percent) the NIEEF (National Indigenisation and Economic Empowerment Fund (16 percent) and Fremiro (15 percent).

In a research paper on the company released by Caledonia, WH Ireland said the miner is undervalued because of Zimbabwe's risk, which is overstated.

"We believe that the Zimbabwe risk has been overplayed considering the operating history demonstrated by Caledonia and the company is valued at only half the level of its African gold mining peers on most financial multiples," said WH Ireland.

The mine is currently undertaking a major expansion project, which will see annual production capacity double from the current 40,000 ounces by year end.

"By the end of the year we expect Caledonia's cash position to improve measurably and see strong (and increasing) cash generation as the new Central Shaft is completed and the expansion concluded," WH Ireland said.

Blanket Mine has operated in Zimbabwe for over 100 years and in the 10 years under Caledonia, has operated without hindrance.

"During this time there have been no production halts as a result of operating in Zimbabwe – barring a period of non-production in 2008 as the country went from using Zimbabwean dollars to US dollars and the whole country stopped working for a while.

"Since early 2009 when production re-started following dollarisation of the country there have been no production stoppages out of the control of Caledonia, outside of the normal course of mining," said WH Ireland.

Caledonia owns 49 percent of Blanket but receives nearly 80 percent of the dividend flow from the mine until the vendor financing loans have been repaid. In addition, Caledonia receives a management fee, currently $4m per annum and also makes a margin outside Zimbabwe on the procurement activities in Johannesburg.

Current resources are only sufficient for another seven years of operation but the current reinvestment programme will prolong its lifespan. Caledonia also hold the bulk of the mineral licences in Gwanda and has two advanced exploration projects in the area which are seen as key to pushing production above the 100,000 ounces mark annually.

The miner successfully moved its registration from Canada to tax haven Jersey, Channel Islands, on March 19 this year to avoid charges on dividends.