Description

Quick Take. Two years ago I pitched this same security to the VIC community (posted 10/17/2019). Since then, the stock price increased from $0.60/sh to $1.38/sh, which is a 130% increase.  

But whyyy you say? Sipping CBD flavored 5.0% ABV seltzer, why would anyone have needed to invest in a micro-cap gold-miner in Nicaragua when they could have purchased a diversified basket of FAANG stocks and achieved the same result? 

I can’t argue with that.

The reason to buy it now is what happens next. After similar stock performance to the FAANGs, CXB now trades at the nose-bleed valuation of 2.8x ’21 EBITDA / 2.1x ’22 EBITDA. Should you ditch Amazon and buy Calibre? No. Should you own both? Probably. 

Calibre adds a few unique features to a portfolio:

1. Calibre still has the chance to 4x between a combination of organic growth, multiple re-rating.

2. Calibre provides exposure to gold which is handy in an inflationary environment (particularly one with hyper-inflation risk)

3. 1 and 2 can compound on each other. And you could get a portfolio- er…corn.  

I just reread those three points and it sounds vaguely pornographic. But there is added justification that the prior three sentences are not complete bullsh*t, which is that the same management team turned a similar situation in Australia into what is now called Kirkland Lake Gold (TSX:KL), which I wrote up for VIC a few years back and is up over 4x since then.

Company Overview. In October 2019, Calibre purchased a number of operational open-pit and underground mines, two milling facilities (the El Limon and La Libertad mills), and a portfolio of exploration and development opportunities in Nicaragua, Central America from B2Gold. In addition to its mining operations, Calibre continues to explore and develop several concessions at its 100%-owned Eastern Borosi Gold-Silver Project (“EBP”) in northeastern Nicaragua and also work with joint venture partner, Rio Tinto Exploration (“Rio Tinto”), to explore, identify, and acquire exploration assets throughout Nicaragua with a focus on copper-gold-porphyry, skarn and epithermal precious metal systems. 

Financial results:

Since purchasing the assets, Calibre management team have delivered, as they did in every quarter in their previous roles at Kirkland Lake. 

In 2020, they guided to 150-160k oz at $1,100/oz AISC. They had to shut down operations for Covid in q2 ’20. Adjusting for that (I never like starting a sentence with those 3 words, but this one seems justified), they would have produced 173k oz at $1,017 AISC for 2020.

In 2021, they guided to 170-180k oz at $1,040-$1,140/oz AISC. Based on the recent press release on ounces produced in 3q, they are on track to hit the high end of production guidance and will likely exceed as they added that 4q “is anticipated to be the strongest of 2021.”

Hitting the high end of the targets has resulted in strong profitability and cash flow profile.

Assuming Calibre can produce $80m of free cash flow today (and still growing) what valuation would you put?

Using a simple DDM, as a gut check, would result in the following: 

Reserves

When the current management team took over, there were no reliable publicly available reserve numbers. In 2020, the management team released the updated estimates and they were impressive, despite only a year of infill drilling, and step-outs.

Reserves: 864,000 oz

Resources: 1,532,000 oz

Resources plus inferred: 2,846,000 oz

Using a bank-of-the-envelope valuation, if all Calibre ever does is produce their reserves, the FCF easily covers the current market cap. This means the downside is entirely protected by what exists today and you are getting the upside “for free.”  

Hub and Spoke Strategy

Calibre is using a hub and spoke strategy. The Libertad mill has nameplate capacity of 2.2m tons per year (two ball mills and one sag mill). At the time Calibre purchased it, B2Gold was getting ready to close it.

Calibre management realized that there were significant attractive mines at various stages of development within easy trucking distance of the Libertad mill. 

Today, the Libertad mill is processing 1m tons which leaves a further 1.2m tons of spare capacity. Once fully utilized, and they are well on their way as I will describe below, operating leverage will increase free cash flow per ounce even further. At 100% mill utilization, the company will produce over 300 oz of gold per year or roughly $180mm in free cash flow.

• Limon – process 500k tons at its own mill, and trucks 350k tons to Libertad per year

• Libertad mine – produces 350k tons per year

• Pavon – trucking 1k tons per day to Libertad, as of September start-up, which will increase materially as Pavon North is added

• Eastern Borosi – open pit mine representing 515k ozs of the inferred resource, technical drilling has been high grade average 8.15 g/t. Could add 350-500k tons per year to production (all will be trucked to Libertad)

• Four new concessions staked in promising areas within trucking distance of the Libertad mill including Buena Vista, a claim block the size of Limon

Comparables

CXB trades at 2.1x ’22 EBITDA compared to its junior peer set at 4.9x, despite a proven management team, extremely good performance in 2020 and YTD 2021, and identified, under writable growth pathways. A multiple re-rate alone to median levels would equate to >100% upside. 

Valuation

• Re-rating to median peer level would equal to a $3/share stock price.

• Organic growth could double the EBITDA in the next five years (without needing to expand mill capacity)

• Company actively exploring promising nearby deposits, increase inferred reserves and terminal value of the business

• Compound those three and there is over 400% of upside to $6/share.

Appendix - Financials

Key Risks:

Country political situation (mitigated by the fact that these mines/mills are significant employers and contributors to the local economy)

Execution risk: significant amount of logistics involved

Macro risk: price of gold

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author and/or his employer may have a position in this stock and may trade this stock. This analysis is intended only for VIC members and must not be distributed further.

Catalyst

Earnings beat and raises