Global: Recovery from COVID impact

To conserve cash, most mining firms deferred capital expenditures and halted or slowed project activity in 2020 but have since reversed the trend. After rising by 20% in 2021, the capital expenditure of the world’s 20 leading miners is expected to increase even further in 2022, reaching US$70.4bn, a rise of 22% and the highest level since 2014.

The pandemic brought with it increase in shipping and container costs. International shipping costs enjoyed unprecedented gains with the cost of a 40ft container increasing from US$1,331 on average at the end of February 2020 to a peak of US$11,109 by mid-September 2021.

Renewed push for renewable energy in transport and power generation is expected to increase the global demand for minerals such as lithium, cobalt, copper, aluminium, graphite and nickel which all play a key role in manufacturing of electric vehicles batteries and electric grid stabilisation.

 

Zimbabwe: Renewed thrust to increase production

According to government estimates, mining sector production grew 3.4% in 2021 while receipts were up 25% y/y to US$5bn in 2021 supported by firm international prices and a raft of measures taken towards turning the sector into a US$12bn industry by 2023. Going into 2022, government has forecast annual growth in production of 8%.

Optimism for 2022 in the sector remains encouraged by ongoing developments to increase capacity, and outlook on commodity prices. Capital constraints and policy shifts remain the main downside risks for the sector. Beneficiation remains a key issue hindering earning growth.

Most investment has been centered around increase in production at the mine and plant level however, there is still much to be done in infrastructure that supports the industry.

Moving forward, we anticipate government will continue revising policies to create a conducive environment for both foreign and local investors.

From a stock market perspective, we are in favour of companies with strong financial positions that give room for investment in output growth during seasons of high commodity prices and also provide a cushion to ride out rockier periods for the underlying commodities. We’re attracted to companies with a culture of management execution, transparency and creation of value for the shareholder. Gold mining stocks are particularly appealing in the present environment given that the underlying mineral thrives in periods of global uncertainty. The possibility of a global recession and a weak U.S. dollar is expected to support gold prices in 2022.

Caledonia is trading at a PER (+1) of 5.3x compared to peers at 10.6x. We estimate a TP of US$15.05. We see the valuation as fair and place a HOLD rating on Caledonia. Padenga Caledonia is trading at a PER (+1) of 17.2x. We estimate a TP of US$0.27. We see the valuation as fair and place a HOLD rating on Padenga.