Even After The Last Rally In Gold Prices B2Gold Shares Offer An Upside Potential Of 36%, At Least

| About: B2Gold Corp. (BTG)

Summary

In my opinion, B2 Gold is one of the best gold miners in the entire precious metals industry.

The company is well run by an established team of resource managers, under the leadership of Clive T. Johnson.

Since 2009 B2 Gold has opened four mines; in late 2017 the fifth mine, Fekola, should start its operations.

In my opinion, B2 Gold shares are currently undervalued against its peers.

B2 Gold (NYSEMKT:BTG) is a primary gold producer, operating four mines around the world. In my opinion, this company is one of the most prospective gold miners. Managed by a group of highly experienced mining executives it has a proven record of implementing new projects, which increase value for the company's shareholders. Nevertheless, B2 Gold is, in my opinion, underestimated by a majority of investors and the world investment media.

This underestimation creates a great buying opportunity. In this article I am trying to prove that B2 Gold, even after the last impressive rally in gold prices, demonstrates excellent value. What is more, in the medium-term the company is going to put in operation another gold project, which should strengthen the B2 Gold position.

Introduction

B2 Gold is a relatively young company - it was incorporated in November 2006. Then, very quickly the company was putting in operation its mines:

  • 1Q 2009 - El Limon Mine, located in Nicaragua
  • 4Q 2009 - La Libertad Mine, located in Nicaragua
  • 1Q 2013 - Masbate Mine, located in Philippines
  • 1Q 2015 - Otjikoto Mine, located in Namibia
  • Late 2017 - the company plans to open another mine, Fekola, located in Mali

B2 Gold is managed by a group of mining professionals. The big part of the management team, led by Clive T. Johnson, was formerly running Bema Gold. Let me dig a little bit into Bema's story.

In the beginning Bema was a small mining contractor providing its services to exploration companies. Then Johnson and his partners transformed Bema into an exploration company. The company was exploring in remote regions like Chile (yes, in the eighties Chile was a large copper producer but its precious metals deposits were still to be discovered), building the Refugio mine and discovering the Cerro Casale deposit. Then, in the beginning of this century, the company started doing business in Russia, which was another bold move. What is more, it was Russia where Bema made its best deal. The deal was called Kupol, a gold / silver deposit located in a remote setting in the Chukotka region of Far Eastern Russia. In 2006 Kupol was a low-cost, high-grade, gold / silver project holding gold reserves of around 3.9 million ounces. In that year (2006) Bema was acquired by Kinross Gold (NYSE:KGC) for a total consideration of $3.1 billion. More or less at the same time B2 Gold was incorporated.

Summing up, Mr. Johnson is sort of a one-man band. He has a background in geological prospecting, mineral exploration, successful mining construction and big project management. In my opinion, together with such big names as Mark Bristow of Randgold, Neal Froneman of Sibanye Gold or Eric Fier of SilverCrest Metals, he is one of the best mining top managers.

B2 Gold operating history.

As I have noted above, B2 Gold built its business very quickly. The charts below show production and resources growth, starting from 2009:

Click to enlarge

Click to enlarge

Source: Simple Digressions

Notes

  • mineral resources are reported inclusive of mineral reserves
  • mineral reserves are reported at a long-term gold price of $1,300 per ounce
  • mineral resources are reported at a long-term gold price of $1,500 per ounce (with the exception of Fekola and Kiaka, where the prices of $1,550 and $1,400 have been used, respectively)

What is more, the company has been able to cut its production costs to one of the lowest levels in the entire industry. The chart below documents this phenomenon:

Click to enlarge

Source: Simple Digressions

Assessing the value

Below, using the company's 2016 Outlook, I present, step by step, the methodology for assessing the value of B2 Gold shares.

Production

To calculate the amount of gold, produced by each mine, I have used the company's 2016 Outlook figures. Let me take the Otjikoto mine as an example:

  • B2 Gold assumes that in 2016 this mine will process 3.3 million tons of ore
  • The average ore grade should be 1.59 grams of gold per ton of ore processed
  • 97% of gold, contained in the ore, should be recovered at the processing plant (recovery ratio of 97%)

It means that in 2016 Otjikoto should deliver 163,634 ounces of gold (3.3 million tons x 1.59 grams of gold per ton x recovery ratio x 0.03215 ounces per gram).

Doing the same math, the other mines should deliver the following amounts of gold:

Source: Simple Digressions

Gross margins

To show the way I calculate gross margin delivered by each mine, let me take the Otjikoto mine as an example, once again:

Otjikoto

Taking into consideration the above described Otjikoto operating measures (section: "Production") it means that the company is going to extract 1.542 grams of gold per ton of ore (1.59 g/t x 97%).

Then, assuming that in 2016 the company will be selling its gold at $1,280 per ounce (the current price of gold), one ton of ore processed at Otjikoto should be worth $63.5 ($1,280 x 1.542 x 0.03215 ounces per gram).

Now, the tricky part of the equation - costs of production. Because the company delivered no data at what cost its gold would be extracted at each mine, I had to prepare my own assumptions. In 2015 Otjikoto was processing the ore grading 1.63 grams per ton; recovery ratio was 98.4%. It means that in 2016 the company will be processing the ore of lower quality than in 2015:

  • Grade of 1.59 g/t vs. 1.63 g/t in 2015
  • Recovery ratio of 97% vs. 98.4% in 2015

Generally, lower quality means higher cost but in the case of Otjikoto, which is a new mine, this rule does not apply. For example, in 1Q 2016 the ore processed was of even lower quality than in 2015 (grade of 1.39 grams per ton and recovery ratio of 98.5%) but cash cost of production was $17.48 per ton of ore (lower that $19.23 per ton in 2015). Simply put - the company's management has to learn the way Otjikoto works and such a lesson takes time. Therefore I have assumed that in 2016 the ore at Otjikoto would be processed at cash cost of production reported in 1Q 2016 ($17.48 per ton of ore).

Further, with such assumptions (revenue of $63.5 and cash cost of $17.48 per ton of ore processed) the Otjikoto mine should deliver a margin of $46.0 per ton of ore.

Finally, with 3.3 million tons of ore processed, in 2016 Otjikoto should deliver a gross margin of $151,780 thousand.

Other mines

Based on the above described methodology, I have calculated gross margins for all operating mines. The results are presented in the tables below:

Click to enlarge

Source: Simple Digressions

Note: I have assumed that in 2016 all mines, except Otjikoto, would incur the same cash costs of production as in 2015

After summing up all margins delivered by the four operating mines, the total 2016 margin should stand at $377.1 million. The main drivers standing behind this high margin (48.3% higher than in 2015) are two mines: Otjikoto (accounting for 40.3% of total margin) and Masbate (29.6%):

Source: Simple Digressions

Operating results

Now, let me calculate the other operating expenses: depreciation and depletion, royalties, administrative expenses and share-based payments.

Depreciation and depletion

Depreciation and depletion are calculated in US dollars per ounce of gold produced. In 2014 and 2015 the company's depreciation and depletion was around $293 per ounce of gold produced. Assuming that in 2016 B2 Gold is going to produce 530,160 ounces of gold, the company should write $155,087 thousand as depreciation and depletion expense ($293 times 530,160 ounces).

Royalties, administrative expenses and share-based payments

To calculate these costs, I have multiplied the expenses paid in 1Q 2016 by four.

Now, let me present final results:

Source: Simple Digressions

Valuation

Valuation multiple

To assess the value of B2 Gold shares, I am using a multiple of EV / EBITDA (enterprise value / earnings before interest, taxes, depreciation and amortization). In my opinion, this multiple is one of the best valuation measures used in capital - intensive sectors (and the precious metals sector is very capital - intensive).

Below I have plotted a chart showing the current EV / EBITDA multiples of a few big miners (data as of June 13, 2016):

Click to enlarge

Source: Simple Digressions

As the chart shows, the median ratio stands at 13.0.

On the other hand, most recently the gold / silver related share prices went strongly up so, in the short-term, current valuations may be in some way overshot. Therefore, for comparison, I have introduced another EV / EBITDA multiple, which conveys the long-term share value. This multiple is calculated taking the average long-term EV / EBITDA ratios at which:

  • two established (having the long-term trading record), big gold miners, Newmont (NYSE:NEM) and Barrick (NYSE:ABX), were trading between 2008 and 1Q 2016 (6.2 and 7.3, respectively)
  • B2 Gold was trading between 2011 and 1Q 2016 (11.0)

Using the above described assumptions, I find that the long-term EV / EBITDA multiple is 8.2.

Now, in my opinion, the most reliable ratio should be situated at some point between its long-term and short-term multiples. To make things simple, I assume that this ratio is the average of both multiples (the long-term multiple of 8.2 and its short-term equivalent of 13.0), which is equal to 10.6.

Assessing the value

Using the EV / EBITDA multiple of 10.6, the estimated enterprise value of B2 Gold is $3,202.8 million (10.6 times the 2016 projected EBITDA of $302,152 thousand).

Further, at the end of the first quarter of 2016 B2 Gold was holding cash of $109.1 million and debt was standing at $539.8 million. It means that the company's equity, defined as the enterprise value less debt plus cash, should be valued at $2,772.1 million ($3,202.8 million less $539.8 million plus $109.1 million).

Taking into account that at the end of 1Q 2016 the company had 928,728,630 common shares outstanding, one share of B2 Gold is worth $2.98.

As of June 14, 2016 the closing price of B2 Gold shares was $2.19. It means these shares offer an upside potential of 36%.

Risks

Gold Prepaid Sales Financing Agreements

In March 2016 the company entered into the so-called Gold Prepaid Sales Financing Agreements of up to $120 million. In exchange for an up-front cash prepayment, B2 Gold will be delivering pre-determined volumes of gold, starting from 2017. The company is obliged to deliver the gold at the price of $1,160 per ounce. It means that, in 2017 and 2018, around 6% of B2 Gold's total production is going to be sold under the current market prices. However, in 2016 the company will not be affected by these gold prepaid agreements. On the other hand, the liability, assigned to these contracts, is included in the debt calculation ("Prepared sales") so this risk factor is partly taken into consideration.

Fekola

Currently the company builds its fifth mine, called Fekola. The mine is located in Mali. In my opinion, the construction phase is very risky for any mine. If something is wrong, for example the company encounters cost overruns or shortage of funds, it may negatively affect current operations.

Catalysts

In my opinion, the only short-term catalyst, which may have a huge positive impact on the company's performance, is the price of gold.

However, in the medium-term, in late 2017 B2 Gold should be producing additional gold from its Fekola mine in Mali (276 thousand ounces of the annual gold production, on average). This fully financed project should deliver the pre-tax net present value of $583 million (using the price of gold of $1,280 per ounce and a discount rate of 10%).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.