Calidus Resources - Removing Balance Sheet Stress with Additional Production

• Calidus Resources is operating the Warrawoona gold mine in Western Australia and will soon start production at the Nullagine project, aiming to exceed 100,000 ounces of gold production annually.
• The company acquired the Nullagine project for A$250,000 with deferred consideration, viewing it as a bargain given its existing infrastructure and resources.
• Calidus plans to restart two old mines at Nullagine - Beatons Creek and Bartons - targeting initial production of 30-40,000 ounces per year to take advantage of high gold prices.
• The company is working to reduce its hedge book and debt, which have been challenging in the face of cost inflation, but sees itself as having "broken the back" of these issues.
• Calidus aims to complete a full feasibility study for Nullagine in the next quarter, which will allow for discussions on restructuring debt and potentially accelerating growth plans.

Positioning for Growth in Western Australia's Gold Sector

Calidus Resources (ASX:CAI) is an emerging gold producer in Western Australia that is positioning itself for significant growth in the coming years. With its flagship Warrawoona gold mine already in production and the recent acquisition of the Nullagine project, the company is on track to become a mid-tier gold producer.

Warrawoona Gold Mine: The Foundation

Calidus Resources' primary asset is the Warrawoona gold mine, located in the Pilbara region of Western Australia. The mine has been performing well, with Managing Director Dave Reeves noting that it is "operating fantastically at Warrawoona, above nameplate, good recoveries, and the infrastructure is all working well."

This established production base provides Calidus with steady cash flow and operational experience, which is crucial for funding and executing its growth plans.

Interview with Managing Director David Reeves

Nullagine Acquisition: A Strategic Move

In a significant step towards expanding its production profile, Calidus acquired the Nullagine gold project in December 2023. This acquisition was made at a remarkably low cost, with Reeves explaining:

"Up-front consideration [was] AUD$250,000, deferred consideration on 100,000 ounces produced of about $5 million. Considering what it had been purchased for previously, that's a heck of a bargain."

The Nullagine project comes with substantial existing infrastructure, including a 1.8 million tonne per annum processing plant that was operational until just 18-24 months ago. This infrastructure significantly reduces the capital expenditure required to bring the project back into production. Reeves estimates that only "two to three million" Australian dollars will be needed to refurbish the mill.

Nullagine Production Plans

Calidus has outlined a phased approach to restarting production at Nullagine:

1. Initial Focus: The company plans to restart two historical mines within the project area - Beatons Creek and Bartons.
2. Production Target: Calidus aims for an initial production of 30-40,000 ounces per year from Nullagine.
3. Operational Strategy: The company intends to initially operate the mill on a two-weeks-on, two-weeks-off basis, allowing for a gradual ramp-up and optimization of operations.
4. Unhedged Production: Crucially, all production from Nullagine will be unhedged, allowing Calidus to benefit from current high gold prices fully.

Resource Potential and Exploration Upside

While the initial production plan focuses on known deposits, Calidus sees significant potential for resource growth at Nullagine:

1. Beatons Creek: Beyond the initial 50,000 ounces targeted, there's potential for an additional 200,000 ounces with further permitting.
2. Bartons: The deposit is open at depth, with evidence of a high-grade shoot that has yet to be fully explored.
3. Golden Eagle: A partially completed cut-back near the mill could yield another 120,000 ounces.
4. Additional Targets: The project area contains 16 other deposits yet to be fully evaluated.
5. Felix Prospect: North of Nullagine, Calidus has identified what it describes as "the largest soil anomaly in the whole region" with promising initial intercepts.

This exploration potential provides Calidus with numerous opportunities to extend the mine life at Nullagine and potentially increase production rates in the future.

Addressing Financial Challenges

Calidus has faced challenges related to its debt and hedging positions, which were established during the project financing phase for Warrawoona. Reeves candidly discussed these issues:

"We've got a situation with our hedge and debt over the next 18 months that we need to sort. We are paying off our debt and hedge book as quickly as possible to get rid of them."

The company has made significant progress in reducing its hedge book, which now stands at 73,000 ounces, down from over double that amount previously. By the end of the year, Calidus expects this to decrease further to around 50,000 ounces. The addition of unhedged production from Nullagine is expected to substantially boost cash flow, which will be instrumental in addressing these financial obligations.

Reeves expressed optimism about the company's trajectory:

"We certainly feel that we're in a lot better position now, especially when we turn this plant on, than we have been in for a very long time."

Operational Improvements & Cost Management

Calidus has faced operational challenges, particularly in mining operations at Warrawoona. Reeves acknowledged these issues, noting difficulties with contractor performance and labour shortages during and after the COVID-19 pandemic. However, the company has proactively addressed these challenges and improved operational efficiency.

For the Nullagine restart, Calidus is leveraging existing knowledge and expertise:

"We're re-employing the previous underground manager, we're re-employing the previous management superintendent, you know, people with a lot of knowledge of those deposits. So we are just switching back on mine; it's not a new deposit."

This approach should help mitigate operational risks and allow for a smoother ramp-up at Nullagine.

Market Context & Gold Price Environment

Calidus is poised to benefit from the current strong gold price environment, with prices around A$3,500 per ounce. This favourable pricing, combined with the company's increasing production profile and reduced hedged ounces, sets the stage for potentially significant margin expansion in the coming years.

Reeves highlighted the company's potential in this environment:

"We are increasing production compared to the last 24 months, and we've got a lot better gold price for the unhedged portion."

Future Growth Potential

While Calidus is currently focused on executing its near-term growth plans and addressing its financial obligations, the company sees potential for further expansion. Reeves outlined a measured approach to future growth:

"We've got our hands full with the East Pilbara now and all the options there, and we need to stick to our knitting, get rid of that debt and hedge, build the balance sheet. With that balance sheet and our operating experience, we can build mines if the developers still haven't moved from their valuations."

This suggests that once Calidus has strengthened its financial position, it may be well-placed to consider acquisitions or larger development projects, leveraging its operational experience and improved balance sheet.

The Investment Thesis for Calidus Resources

• Production Growth: Calidus is set to increase gold production significantly by adding Nullagine, potentially doubling current output.
• Margin Expansion: Unhedged production from Nullagine allows full exposure to high gold prices, potentially driving substantial margin growth.
• Balance Sheet Improvement: Increasing cash flow should accelerate debt reduction and hedge book unwinding, strengthening the financial position.
• Exploration Upside: Numerous targets across the Nullagine project area offer the potential for resource growth and extended mine life.
• Low-Cost Acquisition: The bargain purchase price of Nullagine provides a low-risk entry into a potentially high-reward project.
• Operational Synergies: Existing infrastructure and rehiring of experienced personnel should facilitate a smooth restart at Nullagine.
• Leverage to Gold Price: Increasing unhedged production provides greater exposure to potential further increases in gold prices.
• Management Experience: The team has demonstrated the ability to build and operate mines, which is crucial for executing growth plans.
• Potential for Further M&A: Once the balance sheet is strengthened, Calidus may be well-positioned for further value-accretive acquisitions.

Calidus Resources is at a pivotal point in its development, transitioning from a single-mine producer to a multi-asset gold company with significant growth potential. The acquisition and planned restart of the Nullagine project represent a transformative opportunity, potentially doubling the company's gold production at a time of strong gold prices. While financial challenges remain, Calidus has a clear strategy to address these issues, leveraging increased cash flow from expanded, unhedged production.

The company's focus on cost-effective expansion, exploration upside, and operational synergies positions it well for future growth. As Calidus executes its plans and strengthens its balance sheet, it may emerge as an attractive mid-tier gold producer in the Western Australian mining landscape. For investors, Calidus offers exposure to a growth story in the gold sector, with the potential for significant value creation as production expands and financial constraints are resolved.

Macro Thematic Analysis

The gold mining sector operates in a favorable macroeconomic environment characterized by high gold prices, inflationary pressures, and global economic uncertainty. These factors drive increased investor interest in gold as a safe-haven asset and inflation hedge.

This environment presents both opportunities and challenges for companies like Calidus Resources. On the positive side, high gold prices provide strong margins for unhedged production, incentivizing increased output and exploration activities. Acquiring assets like Nullagine at relatively low costs during market downturns can be highly accretive in a rising price environment.

However, the industry also faces headwinds, particularly in cost inflation.

As Reeves noted, "Mining industry costs are up 50-60%, if not a bit more, in that period." This cost pressure underscores the importance of operational efficiency and scale in maintaining profitability.

The current market also highlights the divergence between producing miners and developers. While producers like Calidus can benefit from strong cash flows, many development-stage companies are struggling to raise capital, potentially creating future acquisition opportunities for well-funded producers.

Reeves succinctly summarized the opportunity:

"There is a point where that debt and hedge is gone, and wow, it's a different company then."

This encapsulates the potential transformation that Calidus and companies in similar positions could undergo in the current gold market environment.  In this context, companies that can increase production and reduce costs are well-positioned to deliver strong returns to investors. This context enhances the attractiveness of Calidus' expansion strategy as the broader macroeconomic environment for gold remains supportive, with ongoing geopolitical tensions and economic uncertainties potentially sustaining high gold prices.