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Calibre Mining: A Transformational Year On Deck
Apr. 22, 2024 5:47 PM ETCalibre Mining Corp. (CXB:CA) Stock, CXBMF Stock
Taylor Dart
Investing Group Leader
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Summary
Calibre Mining made a transformative acquisition of the Valentine gold project, beating out other potential suitors and providing a meaningful upgrade to its investment thesis.
Meanwhile, the company continues to fire on all cylinders operationally, beating its guidance midpoint by an average of 4% the past three years and reporting record FY2023 earnings/cash flow.
In this update, we’ll dig into the company’s FY2023 results, Q1 production and where the stock’s updated low-risk buy zone lies.
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Falcor
It’s been a busy past year for M&A in the precious metals sector and while Alamos Gold (AGI) continues to be the king of counter-cyclical M&A to grow its per share metrics, Calibre Mining (OTCQX:CXBMF) is certainly throwing its hat in the ring to be a future contender. The company’s recent acquisition of Marathon Gold is to thank for this upgrade in its track record, with the company punching above its weight to beat out other suitors to acquire the 180,000+ ounce per annum gold project while Marathon’s share price sat near multi-year lows. And while Calibre didn’t model a higher gold price to make the acquisition work as it was already at an extremely low P/NAV multiple, the gold price has certainly improved the terms, with Valentine’s NPV (5%) using higher metals price assumptions now over triple that of the price paid by Calibre even assuming higher upfront capex than estimated.
Outside of this transformative acquisition, Calibre continues to fire on all cylinders operationally, reporting another year of record gold production and trouncing its FY2023 guidance midpoint. This marked ~27% production growth year-over-year, and the company has beaten its annual guidance midpoint by an average of ~4% over the past three years, a significantly better performance than the sector average. However, Calibre also deserves credit for its success with the drill bit, continuing to add high-grade quick-to-permit and put in production ounces in Nicaragua, helping to extend the life and grow the production profile of its Hub & Spoke Model at an extremely low discovery cost per ounce. In this update, we’ll dig into the company’s FY2023 results, Q1 production and what makes it a solid buy-the-dip candidate.
Valentine Gold Project Progress, March 2024 - Company Website
Q4 & FY2023 Results
Calibre Mining released its Q4 and FY2023 results in late February, reporting quarterly and annual production of ~75,500 ounces and ~283,500 ounces, respectively. This translated to records for both quarterly and annual production, with annual production growing 27% year-over-year and quarterly gold production easily beating its previous record of ~73,500 ounces. And while we saw a sharp sequential decline in Q1 2024 production (~61,800 ounces) and only 1% production growth year-over-year, this was largely to be expected with Calibre guiding for back-end weighted production this year. In fact, the company expects another year of record gold production and I would not be surprised to see FY2024 production of 290,000 to 295,000 ounces.
Calibre Mining Quarterly Gold Production - Company Filings, Author's Chart
Calibre Annual Gold Production vs. Initial Guidance Midpoint - Company Filings, Author's Chart
Digging into the Q4 results a little closer, the bulk of production came from its Libertad operations, which produced a record ~47,500 ounces. The incredible growth at this asset can be attributed to increased throughput to the hungry Libertad Mill, with ~3,100 tonnes per day of feed from "spokes" such as Pavon Central, Eastern Borosi, and mines at its Limon Complex, a 65% increase from ~1,900 tonnes per day in the year-ago period. More importantly, though, overall head grades at the Libertad Mill improved year-over-year to 3.33 grams per tonne of gold (Q4 2022: 3.11 grams per tonne of gold), providing a further boost in production on top of utilizing some of the excess capacity at the mill. And with the nearby Volcan deposit now coming into the picture (lower-grade feed, but just south of the mill, which means much lower haulage costs), Libertad is set for a very strong finish to 2024.
Libertad Tonnes Processed, Capacity & Head Grade - Company Filings, Author's Chart
As for Calibre's financial results, quarterly revenue hit a record of $151.6 million, benefiting from record gold production and a higher average realized gold price ($1,969/oz). Meanwhile, operating cash flow also surged to $59.2 million (Q4 2022: $28.1 million), pushing annual operating cash flow to ~$200 million, which is a very respectable figure for a company with Calibre's market cap. And not surprisingly, this robust finish to the year allowed for annual financial records as well, with adjusted net earnings of ~$97 million, annual revenue of ~$562 million, and a 600+ basis point increase in all-in sustaining cost [AISC] margins to $714/oz.
Calibre Quarterly Revenue - Company Filings, Author's Chart
Costs & Margins
Digging into Calibre's cost and margin performance, Calibre had a strong Q4, with all-in sustaining costs up year-over-year to $1,317/oz, but below the Q4 2023 industry average for the producer universe. Fortunately, this was more than offset by a higher gold price, with AISC margins climbing to $652/oz (Q4 2022: $506/oz).
Meanwhile, Calibre was one of the few producers to report lower AISC year-over-year ($1,228/oz vs. $1,259/oz) despite adding a relatively high cost asset with Fiore Gold (Pan Mine) which was a drag on its overall costs. And unlike Red 5, the lower costs weren't simply due to easy year-over-year comparisons. Plus, while Calibre's costs are expected to increase year-over-year based on its FY2024 guidance ($1,275/oz to $1,375/oz), the company has paved a path to pulling AISC back below $1,250/oz by adding the higher-margin Valentine Project. In fact, even assuming higher life-of-mine operating costs to factor in continued inflationary pressures, Valentine should produce at sub $1,075/oz AISC in its first few years.
Calibre Mining 2022/2023 AISC vs. Junior/Medium Scale Producer Peers - Company Filings, Author's Chart
Given the impressive margin performance ($714/oz AISC or 36.7% AISC margins) that complemented a record production profile in 2023, Calibre enjoyed another year of significant free cash flow generation despite elevated capital expenditures related to aggressive exploration, Limon Norte and Tigra development, pre-stripping at Dynamite & Palomino (Pan), and development of its new spoke, Eastern Borosi. And while Calibre has a very capital-intensive year ahead with Valentine 60% complete and major construction underway, the company will generate significant free cash flow (pre-Valentine construction costs) from its Nicaraguan operations, especially with the gold price on track to potentially average upwards of $2,200/oz this year.
Calibre Annual Operating Cash Flow, Capital Expenditures & Free Cash Flow - Company Filings, Author's Chart
Recent Developments
As for recent developments, 2024 will be a transformational year for Calibre as it works to complete most of the construction at Valentine. And in order to help with the significant capex bill, the company sold ~69 million shares in a recent bought deal at a share price of US$1.25 (~$86 million). In addition, the company completed a small prepay arrangement that works out to ~10% of 2024 gold production with Asahi Refining USA to raise $60 million. Normally, I would be less than enthused with the share dilution from a decent-sized producer, but the bought deal was done at a reasonable valuation, it helped to de-risk any cost overruns which certainly appear likely given the significant revision to capex estimates at Goose (also in Canada). Hence, even if this has pushed the share count to ~890 million on a fully diluted basis, Calibre now has significant liquidity to complete construction while also maintaining its aggressive exploration budget.
Leprechaun Deposit Drilling - Company Website
As for other recent developments, ore control drilling completed by Calibre at the smaller Leprechaun Pit has shown a 12% increase in gold ounces on ~2.2 million tonnes of material. This 12% increase ounces vs. predicted levels (~29,400 ounces vs. ~26,300 ounces) is on a small portion of the overall resource so should not be extrapolated over the full mine plan, but the 15% higher tonnes offset by 3% lower grades is encouraging for Leprechaun. Meanwhile, Calibre has seen exploration success at Leprechaun with a high-grade hit of 5.3 meters at 46.5 grams per tonne of gold along the southwest edge of the Leprechaun Pit. And while there are no guarantees this translates into new reserves, it's exciting to see these solid results from initial drilling post-acquisition on the southern end of the Valentine Lake Shear Zone.
Finally, an analysis of a gold producer that's set to enjoy ~60% gold production once Valentine moves into commercial production in H2 2025 would not be complete without mentioning the gold price. And while Calibre was already set to see its free cash flow generation soar beginning in H2 2025 once Valentine moves into commercial production, its free cash flow outlook has improved materially if we start modeling higher gold prices. In fact, even under relatively conservative gold price assumptions that are well spot levels, Calibre looks like it could generate upwards of $280 million in free cash flow in FY2026. Hence, while it may be carrying more debt than it's used to during this capital intensive build phase and after absorbing Marathon's debt, it will have no trouble cleaning up its balance sheet once its new and lower-cost Valentine Project pushes its consolidated production closer to 500,000 ounces per annum.
So, was there any negative news?
While it may simply be semantics, the language around the Valentine Project first gold pour has changed from "Q1 2025" at the time of the acquisition to "H1 2025" more recently. This could simply be a matter of adding the usual Calibre conservatism to the start date, and it doesn't hurt that Calibre has brought in a strong technical team in Reliable Controls Corporation ["RCC"] to help with pre-commissioning and commissioning of the project while also adding a VP Canadian Operations in Jason Cyr (former GM at Hemlo [Ontario], with additional experience at Seabee [Saskatchewan]). Still, while Valentine is capable of producing 200,000+ ounces in its peak years, it's probably better to be conservative when modeling 2025 production with what looks like a Q2 gold pour, a progressive ramp-up period and barely five months of commercial production.
Valuation
Based on ~890 million fully diluted shares and a share price of US$1.37, Calibre trades at a market cap of ~$1.22 billion. This is a significant increase in market capitalization given its recent outperformance when combined with the ~75% increase in the fully diluted share count (previously ~500 million shares) following its acquisition of Marathon Gold and its recent financing. And while this has pushed Calibre up to a high double-digit FY2024 free cash flow multiple which sits well above some of its mid-tier peers, this is largely due to it being in the heart of capital-intensive construction at its Valentine Gold Project, with its free cash flow multiple set to drop to mid single digits next year even using gold price assumptions below spot levels at $2,200/oz. As for its valuation from a P/NAV standpoint, Calibre still trades at a very reasonable multiple of 0.75x P/NAV vs. an estimated net asset value of ~$1.62 billion.
Calibre Mining vs. Peers Valuations (Forward EV/EBITDA Multiples) - Koyfin
The above estimated net asset value figure assumes an 8% discount rate on its Nicaraguan operations, a 5% discount rate at Valentine and Pan and a $2,000/oz long-term gold price assumption.
So, what's a fair value for the stock?
Using what I believe to be fair multiples of 5.5x FY2025 P/CF (given its large scale and improved jurisdictional profile) and 1.0x P/NAV and a 65/35 weighting to P/NAV vs. P/CF, I see an updated fair value for Calibre of US$1.98. This points to a 42% upside from current levels, suggesting Calibre still has significant upside if it were to trade up to fair value and it could make a run towards its all-time highs. However, with a minimum 40% discount required to ensure a margin of safety for small-cap producers, Calibre is now well outside its low-risk buy zone.
B2Gold Industry-Leading Production Growth - Company Website
Plus, while it's possible that Calibre continues to march higher as it benefits from gold price strength and what appears to be some appreciation (finally) for the gold sector, B2Gold is trading at a similar multiple to Calibre following its severe underperformance for the first time in years. However, B2Gold has higher-quality assets on balance with a monster ~550,000 ounce mine (Fekola) and one of the world's highest-grade open-pit gold projects with peak production north of 300,000 ounces in Nunavut, as well as two additional ~200,000 ounce per annum gold assets. So, with B2Gold offering a 6.0% dividend yield, a similar P/NAV multiple to Calibre despite 3.0x the scale (2025 production of ~1.20 million ounces vs. ~400,000 ounces) and trading at the lowest FY2025 free cash flow multiple among its senior producer peers, I think B2Gold is the more attractive bet if I were putting new capital to work in the sector today.
For those unfamiliar, Calibre initially got its start as a producer from acquiring B2Gold's non-core Nicaraguan assets.
Summary
In a sector where over-delivering on promises and chasing growth at any cost has been the norm over the past two decades, the Calibre Mining team has been one of a handful of names that’s created significant shareholder value. And while the sector seems to be smartening up on balance regarding per share growth and a focus on free cash flow generation (evidenced by even the world's largest gold producer actually looking to shed production to focus on margins), the most consistent long-term returns will come from backing those companies with a consistent track record of disciplined growth. Calibre Mining certainly fits this bill, which makes it a solid buy-the-dip candidate and for the first time it’s a much easier name to invest in with the bulk of its net asset now tied to Canada/USA. So, for investors looking for a gold producer offering growth at a reasonable price, I would view any sharp pullbacks in Calibre as buying opportunities.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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