My last article on Banro Corp. (NYSEMKT:BAA) has triggered a number of critical comments. My opponents have accused me of having being biased against the company. Well, I have not changed my mind - I still think that Banro is not worth investing in. However, to defend my thesis, in this article, I will use Banro's management's arguments. I hope that this way of reasoning should settle the dispute over my attitude towards the company once and for all.
Banro is a mid-tier gold producer, operating two mines in the Democratic Republic of Congo. The first mine, Twangiza, should deliver around 120 thousand ounces of gold in 2016. The second mine, Namoya, commenced its commercial operations in January this year. Banro expects that Namoya should produce 100-110 thousand ounces of gold in 2016.
During the construction phase of Namoya, the company had encountered a number of technical problems. These problems were magnified by low gold prices. As a result, the company entered a few unorthodox business deals to finance Namoya's construction. I agree with my opponents that at that hard time Banro did not have too many alternatives to find cash to finish Namoya's construction. However, I think that the decisions taken by the management will have a negative impact on the company's performance in the years to come (for example, due to gold forward agreements, Banro is set to sell its gold at lower prices than those offered by the market). The results delivered in 1Q 2016 confirm this thesis.
1Q 2016 Results
The table below provides a few basic operating and financial measures delivered in 1Q 2016:
In thousands of US$
source: Simple Digressions
The most striking issue is the gold price realized. In 1Q 2016, gold prices went up from $1,062 to $1,233 per ounce. Many miners were selling their gold for around $1,200 per ounce, on average (for example, another African gold miner, SEMAFO (OTCPK:SEMFF), was selling its gold at $1,187 per ounce, on average). Banro, due to a few gold forward selling agreements (discussed in my first article on Banro), was selling its gold for just $1,109 per ounce.
As a result, despite much higher production than before, in 1Q 2016, Banro reported revenue of $46.5 million, only 13.5% higher than in 1Q 2015.
Further, despite higher production and higher revenue, the company showed only marginal earnings from mining operations (I am touching this issue below). These poor earnings had a negative impact on the company's bottom line.
Another thing - Banro is a heavily indebted company. Let me list all of its debt issues ($388,285 thousand, in total) as of the end of 1Q 2016:
- Bank loans - $9,281 thousand
- Debt offering - $169,508 thousand (it is a mixed financial instrument, comprising both debt and common shares issues)
- Term loan - $20,981 thousand
- Preference shares - $74,896 thousand
- Deferred revenue - $113,619 thousand
In my opinion, this heavy debt is putting severe constraints on the company's future performance. For example, in March 2017, Banro will have to pay off the expiring debt offering of around $170 million. It looks like the company, to cover this liability, should have to find new financing sources very quickly.
Next thing - despite commencing commercial operations at Namoya, in 1Q 2016, Banro was not able to report positive cash flow from operations. Apart from the decreased revenue (due to gold forward selling agreements), the company reported the increased production costs at both operations. Let me discuss this problem now.
Twangiza is a flagship property. It started its commercial operations in 2013. In just two years, it increased its gold production from 82,591 ounces in 2013 to 135,532 ounces in 2015. What is more, in the same period, Twangiza's cash costs of production went down from $836 to $553 per ounce of gold.
Unfortunately, in 1Q 2016, Twangiza delivered much worse results. It produced less gold than in 1Q 2015 (26,638 ounces in 1Q 2016 versus 35,943 ounces in 1Q 2015). In addition, this gold was produced at a higher cost. Reason? Lower throughput, lower grades and lower recovery rates. The company explains (page 9):
"The decrease in ore tons mined in Q1 was consistent with the annual mine plan, which allows for higher waste movement in the main pit and the new central pit throughout the first half of 2016. Recoveries at Twangiza during the first quarter of 2016 were impacted by the processing of lower head grades than in recent quarters. The focus of waste removal in the first half of 2016 was planned to provide better access to higher grade ore in the second half of 2016 in step with the expansion of the fine crushing circuit. This is expected to increase the plant throughput and create a finer grind (i.e. producing a smaller average particle size) which is more amenable for improved leach dissolution. The additional crushing equipment has been procured and is expected to be commissioned in the beginning of the third quarter of 2016"
It looks like the situation is going to improve in the second half of 2016. We will see.
Although this mine started commercial operations in January, I understand that it takes some time to achieve full efficiency at any new mine. It means that the operating results delivered by Namoya in 1Q 2016 are, by no means, representative in the long term. Anyway, in 1Q 2016, Namoya was ramping up its production, delivering 17,554 ounces of gold (15,901 ounces in 4Q 2015 and 9,254 ounces in 1Q 2015).
Despite higher production, Namoya reported loss from mining operations of $3.5 million. As I have written above, it is an initial stage of Namoya's operations, therefore, the mine does not perform in the way it should perform in the future. For example, the company's management is currently focused on stacking the ore to build the significant inventory for future production.
Now, let me go to the main point.
In my forecast, I will use the management's assumptions delivered in the 1Q 2016 Earnings Call Transcript and 2016 Outlook:
- Over the year, the company will be selling its gold at 1Q 2016 prices ($1,109 per ounce) - keep in mind that a price of $1,109 per ounce of gold, obtained by Banro, means a market price of gold of around $1,200 per ounce.
- Projected gold production: 230 thousand ounces, of which 120 thousand is attributable to Twangiza and 110 thousand to Namoya (I am assuming the highest production estimate).
- The gold sold is equal to the gold produced.
- Banro will produce 40% of its annual production in the first half of 2016; the rest, 60%, will be produced in the second half of 2016 (management's assumption).
- In 1H 2016, cash cost of production will stand at $800 per ounce of gold; in 2H 2015, it will go down to $700 per ounce (management's assumption).
- Depreciation and depletion are calculated on a per ounce of gold basis ($291 per ounce, as reported in 1Q 2016).
Using these assumptions, I have prepared my forecast for 2016:
source: Simple Digressions
As the table shows, despite higher production and higher market prices of gold, in 2016, Banro should earn only $17.8 million in earnings from mine operations. I remind my readers that in 2015, with only one operating mine and lower gold market prices, the company reported earnings from mining operations of $56.0 million.
The company's fans will surely argue that the margin (revenue less production costs) reported in 2016 should be higher than that delivered in 2015 ($84.7 million versus $81.8 million). Yes, it should be but understand that to get a big picture, I have to take into account the economic cost of putting Namoya in operation (depreciation and depletion). Putting it differently, although in 2016 Banro operates two mines, cash flow from operations should be comparable to that delivered in 2015 by only one mine. Quite a shocking observation…
Summarizing - although now Banro has two operating mines, no recovery in the company's financial standing is expected. Quite contrary - this year, this African miner is going to show much worse results than in 2015. What is more, the company is heavily indebted and some large liabilities will become due within one year. Therefore, in my opinion, Banro, despite its low market valuation (the company's shares are currently trading at a relatively low multiple enterprise value/EBITDA of 8.2), is too risky to put your hard earned dollars into.
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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.
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