Calibre Mining: Strong Reserve Growth Caps Off An Impressive FY2020

Summary

• Calibre Mining released its FY2020 Reserve & Resource update last week, reporting reserves of 864,000 ounces, with a sharp increase in reserves at both the Libertad Complex and Limon.
• This increased reserve life has provided added visibility and confidence regarding future production, with roughly five years of production based on Calibre's reserves alone, assuming a 175,000-ounce production profile.
• While Calibre looks a little expensive on a reserve basis, it's worth noting that the company is sitting on a very large resource base of more than 2.80 million ounces.
• Given the company's significant installed capacity at La Libertad which provides a foundation for significant organic growth, I believe Calibre is a name worth keeping a close eye on.

Photo by svedoliver/iStock via Getty Images

We've finally reached the end of the Q4 Earnings Season for the Gold Miners Index (GDX), which means that companies are busy reporting their year-end reserve statements. One of the most recent companies to release its results is Calibre Mining (OTCQX:CXBMF), a mid-tier gold producer focused in Nicaragua. While most miners struggled to add reserves due to smaller exploration programs related to COVID-19, Calibre had an incredible year for reserve growth, enjoying a 202% increase in its mineral reserves. Given the company's significant installed capacity at La Libertad, which provides a foundation for significant organic growth, I believe Calibre is a name worth keeping a close eye on.

(Source: Company Presentation)

Calibre Mining released its FY2020 Reserve & Resource statement last week and reported a 202% increase in its total mineral reserves, with reserves ending the year at 864,000 ounces. This material growth in the company's reserve base was driven by a 137% increase in open-pit mineral reserves at Limon after depletion and a Pre-Feasibility Study [PFS] for the company's Pavon Mine, with Pavon home to 200,000 ounces of probable reserves at a grade of 4.86 grams per tonne gold. The company has already begun trucking ore from Pavon to its Libertad Mill as of January, both ahead of schedule and budget. Let's take a closer look at the reserve report below:

(Source: Company News Release)

As shown above, the Limon and Libertad mines had a dearth of reserves when they acquired them from B2Gold (BTG) in Q4 2019, which was likely one of the reasons that Calibre got such a great deal for the asset. For those unfamiliar, Calibre paid ~$50 million in cash and 88 million shares, valued at roughly ~$50 million, for a total consideration of roughly ~$100 million for the Nicaraguan assets. At the time, the Nicaraguan assets were non-core for B2Gold, and we had not seen any real reserve replacement since 2010, with total mineral reserves down 80% from ~900,000 ounces to below 200,000 ounces. However, with Calibre's fresh set of eyes and hub & spoke model, we've seen exceptional growth since they took over the asset.

(Source: Company Presentation)

Previously, there would have been little hope in building a mine at Pavon, given that the asset was not big enough to justify a stand-alone mill with less than 300,000 ounces of total resources. However, a higher gold (GLD) price and creativity on Calibre's part has made the asset work, with the company trucking ore roughly 300 kilometers from the high-grade Pavon Mine to the Libertad Mill. This has allowed the company to monetize these resources and turn them into reserves with a mine plan, and the recent PFS at Pavon outlined a 4-year mine life with an average annual production profile of 47,000 ounces per year.

(Source: Company Filings, Author's Chart)

Typically, ore would be ignored if it had to be trucked these distances, but Pavon benefits from very high-grade ore with an average reserve grade of 4.86 grams per tonne gold, which easily offsets the ~$32.00/tonne trucking costs. If this were a 1.0 gram per tonne deposit and Calibre was a low-grade story, then this hub & spoke model would be much harder to justify. However, given that Calibre is a very high-grade story (shown above under symbol CXB) with a reserve base that comes in at 4.71 grams per tonne gold and 13.08 grams per tonne silver (SLV) across its operations, the company is in a great position to employ this model, regardless of the significant distances from its main hub, Libertad.

(Source: Company News Release)

As noted previously, the recently released Pavon PFS has outlined a 4-year mine life based on trucking just over 300,000 tonnes of ore per year from Pavon to Libertad. The all-in sustaining costs for the operation are estimated at an industry-leading level of $711/oz, with grades expected to increase materially in FY2023 and FY2024 to just shy of 6 grams per tonne gold. However, this reserve base represents less than 70% of the total resource at Pavon, with the total resource coming in at 294,000 ounces of gold, with an additional 437,000 ounces of silver. Therefore, it's certainly possible that Calibre could extend the mine life by another year based solely on the current modeled resource through additional resource conversion.

(Source: Company News Release)

Elsewhere at Libertad, Calibre added 60,000 ounces of underground mineral reserves at Jabali and an additional 19,000 ounces of high-grade open pit reserves at Jabali at a grade of 4.25 grams per tonne gold. Combined with high-grade stockpiles, Libertad's total mineral reserve sits at 296,000 ounces at 4.71 grams per tonne gold, with an additional ~80,000 ounces of indicated resources not included in reserves.

(Source: Company News Release)

Moving over to Limon, we saw significant reserve growth here as well, with the mine finishing the year with 568,000 ounces of gold at an average gold grade of 4.38 grams per tonne. This translated to 137% growth in mineral reserves year-over-year, which is exceptional considering that this was after the depletion of more than 60,000 ounces last year from production. The company noted that two additional mineralized shoots at Panteon contributed to the increase in reserves, with the Limon Central Pit being the largest contributor. Limon's total reserves of 568,000 ounces make up just 41% of the ~1.38 million-ounce resource base, suggesting upside here as well through resource conversion.

(Source: Company Presentation)

Elsewhere in Calibre's project portfolio, there is regional upside from Eastern Borosi, which is a low-sulphidation epithermal target in northeast Nicaragua. Calibre recently increased its interest from 30% to 100% on the project by buying out Iamgold's (IAG) stake, and the project is home to 701,000 ounces of inferred resources at an average grade of 4.93 grams per tonne gold. Within this resource, there is an extremely high-grade resource at Guapinol, with 612,000 tonnes at 12.74 grams per tonne gold, translating to just over 250,000 ounces. Eastern Borosi lies even further than Pavon from Calibre's Libertad Mill, which runs at nowhere near full capacity. The high grades here could easily justify trucking the ore the extra 100 kilometers, or 400 kilometers in total.

(Source: Company Presentation)

Typically, I avoid Tier-3 jurisdiction stories given their added risk, but in Calibre Mining's case, there is a compelling story here due to the organic growth potential. This is because the Libertad Mill has 2.2 million tonnes of annual processing capacity, and the mill is nowhere near full, even with an additional 300,000 tonnes per year being trucked from Pavon. So, assuming Calibre can make new discoveries, the company has the ability to grow production to more than 200,000 ounces per year and as high as 300,000 ounces per year at minimal additional cost. This is because the only real added costs are trucking costs and development costs, with the sunk costs already in place at Libertad. Given that Calibre is expected to be a ~170,000-ounce producer in FY2021, this is undoubtedly an exciting growth story, with Calibre having enviable organic growth potential.

So, how does the valuation look?

(Source: Company Filings, Author's Chart)

On a reserve basis alone, Calibre is not cheap, with an enterprise value of ~$396 million and just 846,000 ounces of reserves, giving it a valuation per reserve ounce of roughly $458.33/oz. However, from a free cash flow yield standpoint, the stock is one of the cheapest names in the sector at a 17% projected free cash flow yield, and Calibre is also cheap from a revenue multiple standpoint. This is because it's trading at less than 1.4x sales if we assume revenue of ~$289 million in FY2021 and a current enterprise value of $396 million at $1.35 per share. If there was no organic growth potential here and Calibre was running at full capacity, I would argue that it was fairly valued. However, with a competent management team [ex-COO of Kirkland Lake Gold (KL)], and significant upside if Calibre can fill the mill, the stock looks very reasonably valued at current levels, even if it looks a little expensive on an enterprise value to reserve ounce basis.

(Source: Company Presentation)

While I don't see a low-risk buying opportunity for Calibre here just yet, the stock looks reasonably valued even after its recent rally. Assuming Calibre can execute on its plans, I would not be shocked to see the company increase production to above 220,000 ounces by FY2024, translating to 62% growth from FY2020 levels (136,000 ounces). This would likely lead to a re-rating for the stock because there is a dearth of growth in this sector. Names that can consistently grow production often receive higher multiples, even if they operate out of less favorable jurisdictions, as we've seen with K92 Mining (OTCQX:KNTNF). In summary, I see Calibre as a name to keep a close eye on going forward, and I may look to start a position if we see further weakness below the US$1.20 level.

Analyst’s Disclosure: I am/we are long GLD, KL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.