LATAM Stocks Investment Analysis #7 - Calibre Mining
This is an analysis of Calibre Mining, the leading gold mining company in Nicaragua
Dear LATAM Stock Readers,
Thanks for reading another edition! This edition will cover Calibre Mining, the largest gold mining company in Nicaragua. Calibre owns 2 of the 3 modern mines currently producing gold in Nicaragua. They also own a large package of exploration stage properties.
Due to the countries tumultuous political past that includes the nationalization of the mining industry in 1979, Nicaragua has been underinvested and under-explored for decades. But that may be changing and there is a reasonable argument that the market is overpricing the country risk for mining companies in Nicaragua.
Both short and long term investors can consider a position in Calibre stock. Global money printing continues unabated. In the short term, Calibre’s clean balance sheet and diversified production profile provide an attractive vehicle for investors to gain exposure to the gold price. Longer term, the company’s large and under-explored land package could hold significant upside potential.
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Common Stock: Calibre Mining (TSX:CXB) (OTC:CXBMF)
Current Market Price: $1.65 USD
Market Capitalization: $546 Million USD
*The bulk of the information in this analysis is based on the company’s most recent (2020) audited financials.
** All values in this analysis are expressed in United States Dollars (USD) unless otherwise noted.
***Disclosure: I own shares of Calibre Mining stock
Summary of the Company
Calibre Mining is a gold mining and exploration company focused on the acquisition, exploration, development, and operation of gold properties in Nicaragua. In October 2019 the company purchased their two key assets from B2Gold for aggregate considerations totaling $100 million. The assets purchased were as follows:
The El Limon Complex (100% ownership) – an underground and open pit gold mining operation located in northwestern Nicaragua. Historic mining in the region dates back to 1850, and modern mining and exploration dates back to 1918. The mine has been in continuous production since 1941. In 1979 the Sandinistas nationalized the mine. It was privatized in 1994.
The El Limon complex has all the necessary infrastructure required for a mining complex, including:
3 underground mines and 1 surface (open pit) mine.
A processing plant with cyanide leeching that has annual capacity of 500,000 tons.
Mill infrastructure
The La Libertad Complex (100% ownership) - an underground and open pit gold mining operation. The La Libertad complex consists of two operating areas; La Libertad and Pavón. The existing infrastructure is adequate for its current operations and includes a mill with annual capacity of 2.25 million tons per year.
The company continues to actively explore both of its operating mining complexes. In addition to these two complexes, Calibre owns a significant land package of exploration stage properties in Nicaragua, including their 100% owned Borsi property. In 2020 Calibre entered into an option earn-in agreement with Rio Tinto Exploration whereby Rio Tinto can earn up to a 75% interest in The Borsi property if they meet certain expenditure milestones.
Hub and Spoke Strategy
In 2021 the company plans to continue implementing its hub and spoke production strategy, which entails trucking ore from various satellite deposits to one of the company’s two operating mills.
Calibre Mining was founded in 2007 and is headquartered in Vancouver, Canada. At the end of 2020 the company had over 1,100 employees and over 1,600 contractors.
The Nicaraguan Economy
Nicaragua is one of the poorest countries The Americas. The world bank estimated the country’s 2017 GDP to be $13.8 billion. With a population of 6.3 million people, this implies a GDP per capita of around $2,100. Nicaragua is an agriculture based economy, with agricultural products accounting for 60% of exports. Major crops include coffee, tobacco, and sugarcane.
According to The Heritage Foundation, Nicaragua ranks poorly in economic freedom. Their score on the economic freedom index is on par with other LATAM countries like Brazil and Argentina. Nicaragua scores very badly in terms of property rights and regulatory efficiency. However they do score well in terms of fiscal health and tax burden. The country has a low debt to GDP ratio and reasonable tax rates.
Gold Mining in Nicaragua
Due to the nationalization of the mining industry in the 1979, mining in Nicaragua has received very little investment over the past decades. But many believe that may be changing and some are even expecting a gold rush in the country. High historic production, little modern exploration, and a mining friendly government are the main reasons cited for the optimism surrounding mining in the country.
There are currently three modern gold mines in production in Nicaragua: The Bonanza mine, El Limon, and La Libertad. Total annual production is around 300,000 ounces per year.
A relevant fact to note is that in Nicaragua there is a long history of small-scale miner activity throughout the country. Nicaraguan law provides that 1% of a mining concession be available for artisanal (non-mechanized) activity. Companies will have to manage relations with these small scale miners operating on and around their properties.
Financial Analysis
Revenue and Cost Analysis
The company’s principal product is gold doré, with some silver produced and sold as a byproduct. In 2020 Calibre sold 135,357 ounces of gold at an average price of $1,793 per ounce. The Limon complex produced 64,558 ounces in 2020 and The Libertad complex produced 71,451 ounces. Their all-in sustaining cost (AISC) was $1,043 per ounce.
Total revenue in 2020 was $242.7 million, a significant increase from $57.7 million in 2019. Their total production costs in 2020 were $133.1 million, representing a gross margin of 45%, also a significant increase compared to 23% the previous year.
The company was profitable in each of the last two years. In 2020, Calibre had net income of $63.4 million, representing a profit margin of 26%, a huge increase compared to 1.5% in 2019.
Calibre expects to produce between 170,000 to 180,000 ounces of gold in 2021 at an all-in sustaining cost of between $1,040 -$1,140 per ounce.
Royalty and Streaming Agreements
• International Royalty Corporation holds a 3% net smelter return (“NSR”) royalty on gold production from Limon and certain other concessions.
• Centerra Gold Inc. holds a 2% NSR royalty on any future production from the La Luz Project in Eastern Borosi. Calibre has the right to purchase 1.0% of the NSR Royalty for CAD $2 million and has a right of first refusal on the remaining 1.0% NSR Royalty.
• Inversiones Mineras holds a 2% NSR royalty on gold and silver production from Libertad and Buenaventura Mining Concession.
• B2Gold retains a 1.5% NSR on production from certain concessions within the 100% Calibre-owned Borosi project.
• IAMGOLD holds a 2% NSR royalty on future production related to certain concessions in the eastern Borosi Project. Calibre has the right to purchase 1.0% of the NSR Royalty for $2.0 million and a right of first refusal on the remaining 1.0% NSR Royalty.
Mineral Resources
As of December 2020 Calibre has probable reserves totaling 864,000 ounces of gold. Indicated resources (including probable reserves) total 1.5 million ounces, however a significant portion of these resources are speculative and may prove to be uneconomic.
Balance Sheet Analysis
Calibre has a strong balance sheet. They have sufficient short term liquidity and a solid base of long term assets, mainly mineral interests, as well as plant and equipment. Liability levels are reasonable and in 2020 the company paid off all outstanding obligations to B2Gold related to the acquisition of its Nicaraguan properties.
I do not see any red flags related to the company’s accounts payable, receivable, or inventory management.
It is worth noting that the company does not have a hedging policy for gold prices and management has stated that they have no intention of implementing any such policies.
Debt Analysis
As of year-end 2020 Calibre does not have any debt outstanding.
Share Dynamics and Capital Structure
As of March 2021 the company has 330.9 million common shares outstanding. In addition they have 32 million options, 11.4 million warrants, and 8.3 million restricted share units outstanding. Fully diluted shares outstanding is around 382.6 million shares.
B2Gold owns a 34% interest in Calibre Mining. Institutional ownership is around 37%.
Dividends
The company has never, and does not currently pay a divided. Management has stated that they plan to retain any earnings for the foreseeable future.
Management – Skin in the game
Insiders at Calibre Mining have been net sellers of the company’s stock in the recent past. However the amounts are too small to be considered significant. Insider ownership of Calibre stock is relatively high at 5%.
In February 2021 Calibre’s CEO resigned, effective immediately, for personal reasons. No further detail was provided.
4 Metrics to Consider
Debt to Equity Ratio
Total Liabilities/Total Share Holder Equity
$121 million / $230.1 million = .53
A debt to equity ratio of .53 indicates that Calibre uses both debt and equity in its capital structure. The company is not leveraged or overly reliant on any one form of financing.
Working Capital Ratio
Current Assets/Current Liabilities
$105.4 million / $35.5 million = 3
A working capital ratio of 3 indicates a strong liquidity position. Calibre should not have a problem meeting its obligations in the near term.
Price to Book Ratio
Current Share Price/Book Value per Share.
$1.65 / $0.60 = 2.7
Based on fully diluted shares outstanding Calibre Mining has a book value per share of $0.60. At the current market price this implies a price to book ratio of 2.7, meaning Calibre’s stock currently trades at a premium to the book value of the company.
Price to Cash Flow
Current Share price / Operating Cash Flow per Share
$1.65 / $0.25 = 6.7
In 2020 Calibre has total cash flows from operations of $81.3 million. Operating cash flows per share were $0.25. At the current price this implies a price to cash flow ratio of 6.7, meaning investors are currently willing to pay $6.70 per $1 of operating cash flow generated by the company.
Summary and Conclusions
Positives
Multiple producing mines with a long history of production. These mines and the company’s large exploration stage land package have significant upside potential.
Reasonable valuation with high leverage to rising gold prices.
The company is sound financially. They have a clean balance sheet, a strong liquidity position, and are profitable. All obligations to B2Gold have been paid off and they have no debt.
Insider ownership is high and the company is backed by a major gold producer, B2Gold, as well as significant institutional ownership.
The largest player in a potentially large and emerging mining jurisdiction. Calibre stock is by far the best way to gain exposure to the Nicaraguan mining industry.
Negatives
Operating in Nicaragua exposes the company to significant political risk, for example, sanctions from the US government related to human rights violations.
Property rights and their enforcement are unreliable in Nicaragua. The mining industry was nationalized in the 1970’s and only privatized in the 1990’s
Currency risk – The Nicaraguan Córdoba is by no means a strong currency. Calibre’s exposure to the currency presents risks to the company and its investors that need to be considered.
A significant portion of the company’s estimated mineral reserves are speculative and may prove to be uneconomic.
Conclusion
Calibre Mining owns two of the three modern operating mines in Nicaragua, making the company by far the best way for investors to gain exposure to the Nicaraguan mining industry. In addition to their producing mines they own several large and high potential exploration stage properties. Both of their producing mines and their other properties are being actively explored.
The company is financially healthy. They have no debt outstanding, a strong liquidity position, and are profitable.
Investors should be concerned with the amount of dilutive instruments outstanding. However given the company’s strong financial position, I don’t expect they will need to raise any additional capital in the short to medium term beyond the existing options and warrants outstanding.
I find Calibre Mining an attractive investment in both the short and long term, and I personally hold a long position in the stock. In the short term the company provides an efficient vehicle leveraged to rising gold prices. In the long term the company’s large and under-explored land package, located in a potentially emerging mining jurisdiction, provides long term upside potential. Their current valuation appears reasonable and may even be underpriced due to overstated country risk.
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Disclaimer
This is not investment advice. Nothing in this analysis should be construed as a recommendation to buy, sell, or otherwise take action related to the security discussed. If I own a position in the security discussed, I will clearly state it.
This is not intended to be a comprehensive analysis and you should not make an investment decision based solely on the information in this analysis. I hope this serves as a useful starting point for a more comprehensive analysis, and hopefully draws attention to aspects of the company that were overlooked or merit further investigation. This is by no means intended to be a complete analysis. Again, this is not investment advice, do your own research.