Calibre Mining Corporation (OTCQX:CXBMF) Q3 2022 Earnings Conference Call November 2, 2022 9:00 AM ET
Company Participants
Ryan King – SVP, Corporate Development & IR
Darren Hall – President, CEO & Director
David Splett – SVP & CFO
Conference Call Participants
Michael Fairbairn – Canaccord Genuity
Farooq Hamed – Raymond James
Justin Stevens – PI Financial
Anthony Lebiedzinski – Sidoti & Company
Operator
Good day, and thank you for standing by. Welcome to the Calibre Mining Q3 and Year-to-Date 2022 Financial Earnings Results Conference Call. [Operator Instructions]. Please be advised that this call is being recorded. I will now turn it over to Ryan King, Senior Vice President of Corporate Development and Investor Relations. Please go ahead.
Ryan King
Thank you, operator. Good morning, everyone. Thank you for taking the time to join the call this morning. Before we get started, I’d like to direct everyone to the forward-looking statements on Slide 2. Our remarks and answers to your questions today may contain forward-looking information about the company’s future performance. Although management believes that our forward-looking statements are based on fair and reasonable assumptions, actual results may turn out to be different from these forward-looking statements.
For a complete discussion of the risks, uncertainties and factors, which may lead to actual operating and financial results being different from the estimates contained in our forward-looking statements, please refer to our 2021 annual MD&A and AIF available on our website as well as on SEDAR. And finally, all figures are in U.S. dollars unless otherwise stated.
Present today with me on the call are Darren Hall, President and Chief Executive Officer; and David Splett, Senior Vice President, and Chief Financial Officer. We will be providing comments on our third quarter and year-to-date results and our outlook for the remainder of 2022, after which we’ll be happy to take questions.
The slide deck we’ll be referencing is available on our website at calibremining.com, under the Events section. You can also click on the webcast to join the live presentation. And with that, I’ll turn the call over to Darren.
Darren Hall
Thanks, Ryan. Moving to Slide 3. Good morning, and thank you for taking the time to join us today. I’d like to start by thanking all of our employees and business partners for their continued commitment during the quarter. The team delivered 49,000 ounces of gold in the quarter, the year-to-date gold sales of just over 161,000 ounces. Despite industry-wide inflationary pressures, delayed sales due to the Libertad equipment earlier, and the Nevada heap leach inventory adjustment, which David will discuss shortly, our year-to-date consolidated total operating cost is $1,141 per ounce, which is favorable to budget.
We continue to expand the high-grade gold discovery along strike at Panteon North with 5 rigs currently drilling, demonstrating our confidence in the expansion potential. In addition, we announced drill results from the Pan mine, which continue to confirm our resource expansion potential. Exploration guidance has been revised to reflect our continued exploration success.
Growth capital has been increased, reflecting being ahead of schedule at Eastern Borosi and the solid progress made by the team at Pavon Central. I expect a strong fourth quarter and reaffirms the company’s commitment to deliver on our full year production and cost guidance. I will now turn it over to David to discuss our third quarter financial results.
David Splett
Thanks, Darren. Turning to Slide 4. As Darren mentioned, we’re on track to meet our full year production and cost guidance. Looking at the graph on the right-hand side, our September 30 cash position of $66.5 million, reflects the advancement of several key growth projects which includes $13 million of spending at Eastern Borosi and $12 million spent at Limon tied to the La Tigra pit and the Panteon and Atravesada underground mines.
In relation to Limon mine, Panteon is expected to reach commercial production levels during Q4, while La Tigra achieved the same at the end of the quarter. In relation to Eastern Borosi, the project has advanced faster than original planned and Calibre has now received all required operating permits with site development work going well.
Calibre was presented an attractive opportunity during the quarter to purchase the EBP mining equipment, resulting in a $10.5 million expenditure during the quarter. And as part of the agreement, Calibre has the benefit of Komatsu on-site management. Alongside of the equipment purchase, Calibre established a loan facility with LaFise Bank to borrow up to $19 million over a 3-year period at U.S. Prime plus 2.25%, resulting in an initial interest rate of 7%. The financing crystallized our strategy to develop a local banking arrangement at a lower cost of capital than what our contract miner could offer, and it helps to maximize corporate liquidity during the period of depressed gold prices.
As part of the agreement, Calibre may repay in part or completely the loan without penalty. Working capital during the quarter increased by almost $12 million due to the growth of the Libertad in-circuit inventory tied to the ADR shutdown and partially due to higher consumable inventories. It’s expected that working capital will be drawn down over the course of Q4 with an associated release of cash.
During the quarter, the value of the ounces contained in the Pan heap leach. Now looking at the graph on the left-hand side of the chart. During the quarter, the value of the ounces contained in the Pan leach pad was revalued to reflect an updated inventory model calculation. This resulted in an adjustment of $3.3 million for the quarter, which equates to $290 AISC per ounce in Nevada or $60 per ounce consolidated.
Calibre and third-party consultants are reviewing the inventory at Pan heap leach to determine the historic recovery models understate full cycle recoveries. An increase to recoverable ounces will positively impact the average cost of inventory. Regardless, year-to-date AISC for Nevada are $1,503 per ounce, which continue to be in line with guidance. I would like to note that operating expenditures have been stable at Pan mine with the cost per ton mine decreasing 5.5% quarter-over-quarter.
As pertaining to year-over-year inflation, elevated diesel and cyanide prices have increased consolidated cash cost by approximately $45 per ounce. However, during Q3, we’ve seen some softening of inflation with diesel prices being approximately 10% lower than that of Q2. Despite all of these impacts, Calibre’s year-to-date consolidated cash costs and all-in sustaining cost per ounce of $1,141 and $1,268 are favorable to budget, and we remain on track to meet cost guidance.
Looking towards Q4, we remain firmly on track to generate strong operating cash flows through the remainder of the year and into 2023. This cash will continue to be deployed back into the business, which in turn will facilitate the increase in gold production that we had previously discussed, and we will maintain strong liquidity should accretive investment opportunities present. With that, I’ll hand the call back over to Darren to conclude this presentation.
Anthony Lebiedzinski
Thanks, David. Moving to Slide 5. Now that we have discussed the Q3 results, I’ll take a few minutes to provide an update on the recent U.S. sanctions. On October 24, the U.S. announced an amendment to Executive Order 13851, that expanded sanctions authorities, including specific trade-related measures for Nicaragua in which the gold mining industry was mentioned.
In conjunction with the amended executive order, OFAC, a U.S. Treasury Department, announced 2 additional sanctions. The first thing against an individual who was unrelated to Calibre’s business. The second was against the General Director of Mines, which is under the direct control of the Ministry of Energy and Mines and which I will refer to as the DGM going forward. Before discussing the sanctions against the DGM, it is important to provide clarity on what constitutes a sanction violation.
To violate the sanction, there would need to be dealing in the sanction person’s property interest in some way, like payments, agreements to transfer of property or exchange of services. There would also need to be some connection with the United States, which means the involvement of either U.S. person, U.S. dollars or U.S. assets. So now let’s consider Calibre’s relationship with DGM. We do not make direct payments to the DGM.
We do not have contract agreements or joint ventures of any kind with the DGM. We do not exchange services or property interest with DGM. However, like all mining jurisdictions, we have requirements to report routine business information to the regulatory authorities, which in Calibre’s case is the Ministry of Energy and Mines which the DGM is a representative office. Therefore, after consultation with our advisers, we are confident Calibre is not in violation of existing sanctions.
Several U.S. news outlets incorrectly suggested that all persons and entities involved in the Nicaragua gold mining sector are now sanctioned under the executive order. While the executive order allows OFAC to target some of these versions of sanctions, that has not happened aside from the DGM. I believe this reporting has created a significant level of confusion. It is important to reiterate that it is the DGM which was sanctioned on October 24 and not all persons operating in the gold mining industry.
We understand that the focus is on the DGM because they have an active role in managing the artisanal and small-scale mining component of the Nicaragua gold mining sector and generating gold derived revenue for the Nicaragua government. Given the nature of this informal sector, it is likely that the same fiduciary controls do not exist as with the industrial scale businesses like Calibre, which is also subject to additional foreign government controls.
For example, the Extractive Sector Transparency Measures Act ESTMA in Canada, which requires the reporting of all payments to all foreign governments and related bodies. It is generally understood that the intent of the imposed sanctions is not to adversely impact the Nicaragua people will disrupt the normal functions of government that society needs, but rather to target the top leadership in the Nicaragua government.
It’s important to highlight that Calibre has explored in Nicaragua since 2009. And since we began operating in October 2019, the United States has imposed sanctions against 55 different individuals and entities in Nicaragua. We have successfully executed and delivered on our commitments throughout this period. I would like to reiterate that the company’s commitment to its assets in Nicaragua and in particular, to its employees, contractors and host communities.
The company will continue to strive to deliver sustainable value for all stakeholders through responsible operations and a disciplined approach to growth, while ensuring that we comply with all relevant laws and regulations as well as international standards and best practices. Despite recent events and industry-wide inflationary pressures, Calibre continues to deliver on expectations and reaffirms its commitment to deliver on our full year production and cost gains.
Calibre presents a compelling investment opportunity as we continue to execute quarter-over-quarter and maintain the ability to self-fund our growth strategy throughout the Americas, delivering positive and sustainable benefits to all stakeholders.
With that, we’re happy to take some questions, and I’ll pass it back to you, operator.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from Michael Fairbairn.
Michael Fairbairn
Just a few for me. I want to start on the sanctions in Nicaragua. Just wondering, in light of the additional sanctions that have been placed on certain individuals and entities in the country, does that increase the importance of your Nevada assets in your eyes?
Darren Hall
Michael, good question. And thanks for joining the call this morning. I don’t think it further increases or reduces our focus on either of the assets. Both sets of assets bring different aspects to our business, and we remain committed to our activities in Nicaragua. And as we’ve foreshadowed, we’re looking forward to specific and grade-driven production growth that are coming out of Nicaragua in the next couple of years. So no, I don’t think our focus really changes.
I see there’s more of a distraction in the short term, and we’ll manage through these and we’ll manage through upcoming sanctions as well because in all likelihood, given we’ve seen 55, we’ll see some more. And given what the sanctions are intended to do, right, they’re not intended to hurt our business. But as a consequence of them existing, yes, we will work our way through. So no, I don’t think there’s a change in focus on what we do.
Michael Fairbairn
Okay. Perfect. And on the topic of that grade-driven production growth with Pavon and Eastern Borosi tracking ahead of schedule. Just wondering if you have any plans to update your longer-term production guidance to reflect this?
Darren Hall
No, Michael, where we stand today, I think what we provided in — I think it was June when we provided the multiyear outlook is that I think that’s still a good place for us to hang our hat. Again, we remain committed and focused to deliver on that. And advancing these projects derisks the normal sort of delivery exposures you can see in the mining space.
So I think it provides us some optionality, and we’ll see how 2023 rolls out. And as we feel more comfortable, we’ll — I’m confident, we’ll then reflect that in the updated guidance, but at this point, standing behind and solid width what we presented for 2023 report.
Michael Fairbairn
Okay. Perfect. And last one for me here. Just on the debt that you took on to finance the equipment for Eastern Borosi. I know you touched on it during the formal presentation, but wondering if you can provide any more color around the strategic decision to take on the debt rather than pay for the equipment and cash.
Darren Hall
Yes. No, what I’ll do is maybe pass it over here to David to provide a little color. But one aspect that I will highlight is that who we took the debt with is a U.S. domicile bank, which has Nicaragua interest in banks as well and developing that relationship with a local bank is strategic — as developing a strategic partner is a critical part of our business going forward as well. So David, if you’d like to talk a little bit more about the strategy and elaborate if you can.
David Splett
Yes. Thanks, Darren. Michael, it’s a good point that you highlight why would we take on the debt? And for us, it was a cheap call option in a period where you’re seeing compression just — or depression of the gold prices. So we thought the economics of it were relatively attractive. And there was an interesting aspect associated with the economics of the loan, that being with us being the concession owner and the equipment owner in this instance, that allows us bring in all the equipment and get exonerated from VAT and exonerated means being exempt.
So what that does is that saves us USD 4 million over a 4-year period. while at the same time, we could repay the loan at any point which we wanted. So we get liquidity out of it. We get a bit of a call option. We get installation in terms of liquidity. And the economics are clearly better than allowing our service provider to buy the equipment. So it became a very highly attractive opportunity when this presented itself in Q3.
Operator
Our next question comes from Farooq Hamed with Raymond James.
Farooq Hamed
One. Darren and group, I just have a few clarification questions related, Darren, to your comments regarding the sanctions and the executive order. Maybe just the first one, just to clarify, maybe what you said there, in terms of Calibre’s dealings or any connection that there is to the DGM. It’s yours and your legal team’s view that you do not violate any of the sanctions in any of the dealings you may have with DGM. Is that correct?
Darren Hall
Yes, Farooq. That is correct.
David Splett
And Darren, can you maybe just give us some concept of like what — how do you deal with the DGM or what — how do you kind of cross their paths in general, like what involvement do you have with them?
Darren Hall
Yes. No, Farooq. I mean it’s pretty clear is that the governing body in Nicaragua is the Ministry of Energy and Mines. The DGM is a subordinate office to that, which basically represents the mining space from the MEM perspective. Our involvement with the DGM is that it’s kind of the repository, if you will, where we pass information to.
So all mining industries, regardless of jurisdiction, have an obligation to be able to report regular and sometimes irregular activities to the government body. The repository we tended to was the DGM. So that’s filing a monthly production report. So how much of a widget do you use. Or how much money have you spent on the concession to ensure that you maintain compliance. So it’s truly that’s the nature of the body. From an industrial scale perspective.
So it’s much more active in the informal space as I think that’s part — and the reason why that group has been focused because of the potential that exists in the less regulated space of the business from a fiduciary controls perspective. So, yes, it’s really, I think, sort of, a one-way street. We’re obviously in dialogue, because it’s not the exchange of services that — it’s provision of information to the DGM, which allows the DGM and the Ministry of Mines and Energy to be able to report within their government and also manage the sector as a whole.
Farooq Hamed
And is there any exposure in the sense — when you talked about the DGM maybe representing the informal part of the sector or the private part of the sector. When you toll or from private miners, is there any exposure to the DGM there in the DGM kind of representing the private or artisanal miners when — in your tolling agreements?
Darren Hall
No, Farooq. Again, a good question. And first, I’ll contextualize it by the contributions from artisanal mining coming from our property represents 1% of our total production. So it’s a very insignificant portion but whether it’s a little bit or a lot, the same fiduciary report — controls are required to ensure that we’re doing it responsibly. So with that, the relationship for any of those ore purchases is directly with us and the artisanal miners.
So the DGM are not involved in brokering, coordinating or any otherwise influencing that relationship and the controls that need to exist in order for us to be able to purchase ores from an artisanal miner are no different than what we’d be dealing with the local Caterpillar dealer, right? In terms of establishing what they call a PIK process, but it’s establishing the legal entities. There’s no tight sanctions. They’ve got tax file numbers, they’ve got bank accounts, right, there’s no transfer of cash.
So everything is auditable, traceable right, as part of it. And again, additionally, we have the traceability component in terms of measuring ores from another requirement. But from a business perspective, the artisanal space is treated — in our company is treated exactly the same way as any other business.
And in part, that’s probably why we have such small deliveries from the artisanal space because the controls and we put on the artisanals are significantly higher than what other groups do, which is where some of the opportunity comes from in terms of what the U.S. department targeting. And the real issue here is that it comes back to payments to individuals rather than the government. I think that’s where the control is going to be.
Farooq Hamed
Right. Okay. No, that’s — listen, that clarification is very helpful and gives us a better picture of kind of Calibre’s position. So that’s very helpful. Maybe just pivot a little bit to the export of your dore. So my understanding is that you — that the Japanese entity that buys your dore through a U.S. subsidiary. Has there been any issue there? Or do you have any concerns about them not being able to use that subsidiary going forward? And I guess, first of all, is that understanding correct?
Darren Hall
Yes. No, absolutely. Your general understanding is correct. And no there aren’t any issues, Asahi the vendor and they’ve been through and done the appropriate checks and balances as well in due diligence to ensure that they are compliant with as we have done with all of our vendors to ensure that there is no issues. And there are no controls limitations in order for companies to be able to import product into the United States.
There was — now if that was to change, then there are alternatives available as well, but we don’t anticipate that to be an issue. Keeping in mind that the focus here is not on the industrial scale of the business. It’s about any parts of the business that have informal payments to persons rather than legitimate government entities. So no, no issues from security of revenue perspective therefore.
David Splett
I’ll jump in. Sorry, Farooq, it’s Dave Splett. Sorry, I jumped in late on this one. Darren is correct. We’ve gone through all of our key suppliers. Everyone has been doing their own checks, both on the client side and the supplier side in terms of the impact of the — these 2 additional sanctions. We are convinced as is Asahi and others that there is no impact. There’s no material interaction with these sanctions in our business. So we have had verbal confirmation from everyone we’ve been in contact. They are fine. And in fact, we’re bringing in parts over the course of this week from the United States directly. So there’s been no problems associated with that either. So we’re convinced we’re in good shape.
Farooq Hamed
Okay. No, that’s really helpful and great color, guys. And like I said, I promise this is going to be the last question for me. Just on Eastern Borosi, you’ve accelerated the development or accelerated the purchase of the equipment. I’m assuming that, that happened prior to the executive order and the sanction — the additional sanctions being announced. Darren, you said that, obviously, you’re still Calibre is still committed to Nicaragua as it should be.
I’m just wondering, as you now look towards continuing to develop in Nicaragua and specifically the Eastern Borosi project, as you go through your budgeting process here, do you take a step back and consider the political risk and consider how quickly you want to deploy capital on the build? Or does — or has nothing changed on that front for you?
Darren Hall
So holistically nothing has changed for us. I mean again, if we talk about the investment piece, again, it’s not a high-end capital load, relatively speaking, for the development of Eastern Borosi. If it happens over the next few months. we’re moving ground now in terms of site preparations access. We’ll be breaking ground late Q1, right? We’ll see ore deliveries probably early in Q2. So we’re pretty quickly into a revenue theme.
And more holistically stepping back is that recent actions do not change how we manage investment into the country. We’ve always been looking for high return, high-yield projects that deliver, they’re very accretive for the business and our shareholders. So that doesn’t change. I mean, the majority of our projects they’re not significant investments with the 20-year payback, right?
They are things that we can pay back in very short order. So no, I don’t see any material change, and we’ll continue to be fiscally responsible. In light of gold prices, it was prudent to look at opportunities and ensure that we’re using our capital wisely, and we continue to do that. And that was part of the reason we saw this opportunity with this recent loan as well. It all kind of fits together, we’ve been ensuring that we can maintain that liquidity such that we see a further softening in the gold price that doesn’t impact our ability to continue to invest in the business and develop.
David Splett
And I think it’s worth highlighting the IRR even with the updated economics is well north of 20%. So we’re convinced it’s still worth while moving forward on.
Operator
Our final question comes from Justin Stevens with PI Financial.
Justin Stevens
Most of what I wanted to know has been answered. A couple of last lingering ones here. I was wondering if you could give a quick update on the Libertad plant, shipping tank placement. When do you expect to have that replacement installed and commissioned?
Darren Hall
Yes, Justin, everything we — again, as we’ve kind of talked about, we had 2 tanks, one of the tanks failed. We’ve actually been operating business as usual with the second tank. It came up a couple of weeks after the first tank failed. So right now, there is no impact to our business as a consequence of only running with 1 take.
The second take lands into Nicaragua today, actually. And it’s been air freighted down. And we’ll — we’ve got that set, and over the next couple of weeks, we’ll install it, and it will be up and running by the end of the year.
And what it’s doing is basically providing us with a workable spare. For all intents and purposes, it’s been a good opportunity this process to work through some optimization within the plant and work at how we can use 1 tank rather than a second tank, which is a good situation.
Justin Stevens
Yes, for sure, especially the — I suspect the grades come up next year, hopefully, having that backup will be helpful for sure.
Darren Hall
Absolutely. It’s that — again, we never let a crisis go to waste and this presented with an opportunity to test how we could manage existing production with that 1 circuit as we go forth in growth, there’ll be more install capacity. And in particular, as we start to see significantly higher levels of silver as well, and that will positively impact things as well. So…
Justin Stevens
Yes. Great. And last one from me. Just wondering, in terms of the trucking fleet that you’re going to be looking at for Eastern Borosi and Pavon, is there any overlap there? Or I guess put differently, is there going to be any impact potentially on one with the other? Or will the constraint mostly be on the production of the satellites and the milling side of things?
Darren Hall
So in terms of adding the additional spoke, if you will, it is a separate fleet, and we’re working through a an existing business provider that’s working in our freight business to actually develop that opportunity. Contracts are in place. We’re working through their sourcing capital to purchase equipment. So very comfortable with how that rolls out.
In terms of interaction, we’re looking at basically a different path. So we’re not going to see a lot of interaction with the fleet until you get to the point in and around the Libertad mill. So I don’t see congestion issues presenting an issue there. If we look at what we’ve envisaged in terms of ramp-up, the ramp-up is a much more slower than what we have actually delivered at both Limon and Pavon. So I think we have some opportunity there to potentially increase. So ore haulage is not the right determining step.
The current, call it, constraint that we’ve placed in ourselves from a planning perspective is the mining rates. And again, I think there’s plenty of opportunity to look at optimizing that as we go forward as well. But again, we’ve taken a relatively conservative approach given that it’s a new development in a new area. So that’s going to kind of creep up on this during the course of 2023.
Justin Stevens
Yes. No, that makes a lot of sense. And I think that’s — like I said, that’s a good constraint to have because it’s probably the one that’s most easily addressed in the future if you need to.
Darren Hall
Yes, absolutely. But yes, haulage — moving material between properties is not the constraint.
Operator
At this time, I would now like to turn it back to Darren Hall for closing remarks.
Darren Hall
Thanks, operator. I’d like to thank all of our shareholders for their continued support, your participation this morning and the questions as well. As always, Ryan, I and the leadership team are available if you have any further questions. So with that, I’d like to wish everyone all the very best, and have a great day. Thank you, operator.
Operator
Thank you for your participation in today’s conference. This does now conclude the program. You may now disconnect.
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