Calibre Mining (CXBMF): Has Strong Growth Prospects, But Wait For The Dip

A Hold Rating for Calibre Mining Corp.

This analysis recommends a Hold rating for shares of Calibre Mining Corp. (OTCQX:CXBMF) (TSX:CXB:CA), a Vancouver, Canada-based gold producer in Nicaragua and Nevada with exploration and development activities for gold deposits in Nicaragua and North America.

The Reason for the Hold Rating

This stock is well positioned to benefit from its evolution into a mid-tier gold producer, while gold prices are expected to rise as demand for the precious metal remains robust as a safe haven in a scenario fraught with rising threats and uncertainties for investors’ portfolios. However, despite the robust outlook, investors should not rush to buy Calibre shares, but wait for a significantly lower share price to form. This analysis sees the chances of a dip in the coming period, which if conveniently exploited, the holding would be much better positioned for a robust return. Due to the cyclicality, it is possible for investment strategies with a long-term perspective to increase holdings by buying the dips.

Calibre Mining: Good for the Long-Term Horizon

In principle, investors should remain exposed to gold through a long-term position in Calibre shares because, while future performance is not guaranteed, with a company that is growing while gold remains supportive, it is reasonable to be confident in what has happened so far. As a benchmark for long-term performance, in the wake of bullish gold prices, as illustrated by a 64.64% price increase in Gold Spot Price (XAUUSD:CUR), Calibre shares rose 317.50%, outperforming VanEck Junior Gold Miners ETF (GDXJ) +11.99% and SPDR® S&P 500® ETF Trust (SPY) +92.74% over the past 5 years. GDXJ is the benchmark for competitors of Calibre, and the SPY is the benchmark for the US stock market.

The Upside for Long-Term Investors of Calibre

As interest rate traders assign a 69% probability of a 25-bps cut from the current target rate of 5.25-5.50 to 5.00-5.25 rate, as of this writing, the Federal Reserve will most likely change its monetary policy at the September 18 meeting and probably continue to gradually reduce interest rates thereafter, pushing up the price of gold. This is because as the yield environment cools, investors find non-income-paying gold more attractive compared to US Treasuries, which instead pay an income based on fixed interest rates.

According to Carl Surran, news editor at Seeking Alpha, the consensus among analysts is that dovish signals from Federal Reserve Chairman Jerome Powell, with the latest from his speech at the Jackson Hole Symposium on Friday, August 23, combined with safe-haven interest “stemming at least in part from geopolitical risks in the Middle East” give gold a boost. For analysts at Citigroup Inc. (C), the Fed’s looser monetary policy, which is boosting demand for ETF gold, is a factor alone that would cause the price of gold to reach the $3,000 mark by mid-2025. This is undoubtedly very positive news for Calibre shareholders, who can be confident that their growth expectations will continue to be met, as the forecast gold price environment will provide fertile ground as additional assets come into production in line with Calibre’s strategy to become a mid-tier producer.

Calibre Mining’s Gold Deposits, Mine Development Projects and Explorations

Calibre currently operates the following gold-producing assets:

• The 100% owned “El Limon” complex located 38 km northeast of Leon, western Nicaragua, consisting of three underground mines, three open pits, a conventional processing plant and 5 drills for exploration activities, has 1.26 million ounces of indicated gold mineral resources incl. 639,000 ounces of Probable Gold Mineral Reserves and additional growth potential represented by 224,000 ounces of Inferred Mineral Resources.

• The 100% owned “La Libertad” complex located 4 km northwest of La Libertad, central Nicaragua, which consists of the La Libertad mine, the Pavón mine, and the Eastern Borosi project now mining the waste at the Guapinol site. The complex also consists of the processing plant “La Libertad” and the Volcano’s high-grade open pit gold mineralization deposit (within 5 km of the La Libertad mill) recently approved for construction and production already supporting Calibre production in H2-2024 with 2 g/t (grams of gold per ton of mineral) resources. Volcano should reach commercial production sometime this quarter of 2024. The “La Libertad” complex has 602,000 ounces of indicated gold mineral resources incl. 487,000 ounces of Probable Gold Mineral Reserves and additional growth potential represented by 520,000 ounces of Inferred Mineral Resources.

• The 100% owned “Pan Gold Mine” complex is instead located 74 km west of Ely in east-central Nevada, USA. This complex of assets consists of a fully operational mine equipped with heap-leaching technologies, a single-stage ore-crushing system and mineral processing facilities. The Pan Gold Mine complex has 340,000 ounces of Indicated Gold Mineral Resources incl. 299,000 ounces of Probable Gold Mineral Reserves and an additional 18,000 ounces of Inferred Mineral Resources.

Leveraging successful exploration and development projects and total mineral resources, including five or more years of production from available reserves, consistent with the current production rate, the Calibre mining operation overall has a long life and without the potential Valentine Gold Mine project in Canada.

• Plus, the 100% owned and fully funded Valentine Gold Mine project, located 86 km southeast of Corner Brook, Newfoundland and Labrador, Canada, which Calibre acquired in January 2024. Following the green light from federal and provincial environmental authorities in 2022, construction commenced in October 2022 and was 64% complete by May 2024. A 130,000-metre exploration program aims to increase production through resource expansion and the discovery of new mineral opportunities, as there are strong indications of “vast upside potential”. The project envisages two distinct phases: initially 2.5 Mt/a and thereafter an expansion to 4 Mt/a of mineral material being processed. The company says the Valentine Gold Mine is the “largest undeveloped gold resource in Atlantic Canada”, and hosts 3.96 million ounces of measured and indicated resources and an additional growth potential of 1.1 million ounces of gold in inferred resources. With the Valentine gold mine expected to produce 195,000 ounces of gold per year over the first 12 years from 2.7 million ounces of mineral reserves based on a conservative gold price assumption of $1,700 per ounce, this gold production project looks financially sound with an internal rate of return (“IRR”) hovering at 22%. Due to our previous analyses, we have come across many gold mining projects so far and the IRR of these projects has been between 15% and 35%. So the Valentine Gold Mine is a profitable project with a 14.3-year mine life, and with the gold price on track to trade higher than the assumed $1,700/oz, Valentine has a much higher IRR realistically.

Rising Gold Prices and Production Prospects Strengthen Calibre’s Balance Sheet

To maintain current gold-producing assets and support development and exploration projects, Calibre can count on a robust financial position excluding the cash flow that will be infused into the business from operations facilitated by bullish gold price sentiment and many years of gold production ahead. As of June 30-2024, “cash and restricted cash were $127.6 million and $125 million” indicated the company, while total debt was $353.4 million, of which $316.7 million was the long-term portion. Current production and costs combined with gold prices enabled the company to achieve a trailing 12-month operating income of $114.9 million while the outstanding debt involved the payment of a trailing 12-month interest expense of $4 million as of Q2-2024.

The operating profit for the last 12 months divided by the interest expense for the last 12 months (= the Interest Coverage Ratio for the last 12 months) is 28.725 times, which is well above the generally accepted minimum of 1.5 to 2 and indicates that the company is financially able to carry its debt.

The bullish sentiment will support Calibre’s balance sheet, especially due to the presence of $101.1 million stored in inventory as of June 30, 2024, already starting in the short term: analysts of Citigroup Inc. are forecasting a price of $2,600 for the fourth quarter of this year, which is 4 percent above the current Gold Spot Price (XAUUSD:CUR) level of $2,499.65/ounce. According to analysts at Trading Economics, the yellow metal is expected to trade at $2,532.66/ounce at the end of this quarter and $2,623.27 in 12 months.

This gold price scenario bodes well with the ongoing improvement of Calibre’s operations: the company is on track to meet its 2024 gold production of 275,000 – 300,000 ounces, meaning more ounces will be mined compared to 120,521 ounces in H1-2024 at an AISC of $1,275 – $1,375/oz, which implies lower costs compared to $1,545/oz in H1-2024. If the mix between ounces, gold prices and costs has had the effect of an increase in the share price, where positive income and cash flows have attracted market demand for shares of Calibre, investors would now not be unreasonable if they expect the same positive fallout for the stock price of Calibre in the coming months.

The Upside Momentum for Calibre Shares in the First Half of 2024: Catalysts

In the first part of 2024, Calibre produced 120,521 ounces of gold and sold 120,122 ounces of gold, down 10.4% and 10.9% respectively to accommodate project development and exploration activities, actually increasing AISC at $1,545/oz for H1-2024 from $1,239/oz. in H1-2023.

The sharp rise in the “average realized gold price” of $2,194/oz in H1-2024, up 13.5% from the same period last year ($1,933/oz in H1-2023), was supported by the market price of the yellow metal, which was pushed to its “fifth straight weekly increase on April 19” and secured “a spot on the Metal Olympics podium on May 21” in a game between commodities. The market price of the precious metal was driven by geopolitical risks and strong demand for safe-haven assets, particularly in China, amid macroeconomic headwinds and fears of a resurgence in inflation. Rising hopes for a Fed rate cut at the September meeting and a weaker US dollar also helped gold prices to reach higher levels.

The increase in the gold price on the market was crucial as it fully offset the negative impact of a decline in ounces of gold produced and sold as well as higher operating costs. For the first half of 2024, Calibre reported adjusted earnings per share of $0.03 on revenue growth of 1.12% year over year to $269.2 million, putting the stock up more than 70% so far this year, outperforming most of its peers (GDXJ+23.51%) and the U.S. stock market (SPY+19.26%).

In addition, robust operating cash flow was generated, increasing to $106.6 million for H1-2024, an improvement from $86.6 million for H1-2023. This was well appreciated by the market: it helped cover a significant portion of capital investment, which increased 2.7 times year-on-year to $193.3 million in H1-2024 for investment in mine development, purchase of fixed assets and exploration, providing an impressive boost to the growth strategy.

With much of the production set to move toward the second half of 2024, operations to be cheaper than the first half of 2024, and gold prices remaining supportively high, Calibre will have no problem finding growth capital of $45 – $55 million and updated exploration capital of $40 – 45 million as guided for the full year 2024, and the consequences are expected to be positive for share prices going forward.

Stock Price: Another Dip Targeted

The stock has a bright future, but since it is not trading at the bottom of the price cycle, investors should refrain from buying shares and remain with a Hold rating for the time being. At the time of writing, Calibre shares under the symbol CXBMF are trading at $1.67 apiece on the US OTCQX over-the-counter market, giving it a market cap of $1.34 billion.

Shares are trading above the MA Ribbon and are currently well above the midpoint of the 52-week range of $0.81-1.76/share. Also looking at the 14-day Relative Strength Indicator trend which signals 57.50, there is downward momentum building as the share price has more room to reach lower levels than to continue higher from these levels. It therefore needs to pull back to healthier levels and then resume the rise, and only then will it have more steam to continue more profitably in its uptrend.

There is a possibility of a price drop:

Let’s see what the past suggests. Shares already saw significantly lower levels around the end of June 2024 and in early August 2024: The first drop came after gold prices cooled somewhat as the market deferred its optimism for a Fed rate pivot to the September meeting from the July meeting, as signalled by analysts at ING Groep N.V. (ING).

The decline in Calibre’s share price in early August 2024 was the result of chaotic and large sell-offs around the world of equity markets, triggered by panicked investors fearing a recession in the US after the unemployment rate had previously risen from 4.1% to 4.3%. Over time, these worries subsided and bullish sentiment around Calibre stock resumed.

This means that the reasons for another solid decline in Calibre’s share price could lie in the disillusionment of the market participants if the Fed decides to cut interest rates by 25 basis points instead of 50 bps at its meeting on September 18. In addition, it could lie in a possible new wave of recession fears, as signalled by two reliable indicators.

• After dovish signals from Federal Reserve Chairman Jerome Powell’s Jackson Hole speech on Friday, August 23, markets were more confident that interest rate cuts would begin in September, giving “further impetus to the hypothesis of a 50-basis point cut,” senior market analyst from XS.com, Samer Hasn told Dow Jones as reported by Carl Surran, Seeking Alpha News Editor on August 26. But as also suggested by interest rate traders who have massively downgraded their expectations for a 50bps rate cut in recent weeks, amid improved expectations for the future that drove the Conference Board’s consumer confidence index up to 103.9 in August combined with second estimate US GDP-growth at an annual rate of +3% from +1.4% recorded in Q1 driven by an upward adjustment in consumer spending, while inflation continues to cool, the Fed is unlikely to cut by 50 bps at the September meeting. Some argue that a 50-basis point cut is still firmly on the table because the deterioration in the labour market – the Fed’s preferred yardstick for setting interest rates along with core inflation – has revealed that 818,000 fewer jobs were created between April 2023 and March 2024 than originally expected. However, with US Services (the largest component of the US GDP) showing signs of expansion, while consumption grits its teeth and allows GDP to move forward, it cannot be ruled out that unemployment will not worsen further, or that further declines will just be negligible. In February 2025, “the annual adjustment report on payrolls will be published,” quite a long way from here, and with many analysts still believing that a soft landing is more likely than an economic downturn, the Fed will ease its interest rate policy, but with great caution, as the environment is still too uncertain for a bold decision.
• However, contrary to the “soft-landing” scenario predicted by analysts, the following two indices continue to signal an impending recession in the US, which could trigger depression among market participants as it happened between late July and early August causing Calibre shares to fall to an attractive buying level: Economist Claudia Sahm, the designer of the Sahm Rule, believes that the US recession is likely to be three to six months from now. The Sahm Rule is an indicator that, performed on the last nine US recessions since 1970, has convinced most in the market about its intent to predict a subsequent one. The inverted yield curve indicator (three-month US Treasury yields are currently higher than ten-year US Treasury yields: 5.105% versus 3.909%), developed by Duke University professor and Canadian economist Campbell Harvey, also signals that a recession may be around the corner for the US economy. Since World War II, this index has reliably predicted a recession 8 out of 8 times.

Conclusion

Calibre Mining Corp. or CXBMF shares in the US OTC market is a good alternative to gain exposure to the rise in the gold price driven by the likely Fed rate cut starting on September 18, and the safe haven properties of the metal amid risk and uncertain scenario globally.

Shares of Calibre Mining are positively correlated with the price of gold and are also an affordable and practical way to anchor portfolio returns to the metal, as investing directly in the physical metal is usually possible for large investors or banks and less so for others.

Calibre Mining shares are tied to the bullish momentum in gold, as the company is well on track with its growth strategy to become a mid-tier gold producer with many years of production ahead.

However, investors want to hold shares for the time being as these are set to post another dip.

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.