B2Gold: Minor Margin Compression In Q1
Summary
- B2Gold released its Q1 results on Tuesday, reporting gold production of ~220,600 ounces, translating to a 17% drop year-over-year.
- The higher costs in the period of $932/oz led to a minor decrease in all-in sustaining cost margins year-over-year to $859/oz.
- The good news is that the company remains on track to meet production and cost guidance, and has a much stronger H2 planned due to higher grades.
- Given B2Gold's industry-leading costs among million-ounce producers and organic growth potential from Gramalote and potentially Kiaka, I would view any pullbacks below $4.60 as low-risk buying opportunities.
The Q1 Earnings Season for the Gold Miners Index (GDX) is finally underway, and one of the first companies to release its results is B2Gold (NYSE:BTG). Overall, the company had a decent Q1, with results coming in above budget for this softer period of the year from a grade standpoint. While all-in sustaining cost [AISC] margins dipped vs. Q1 2020, we should see a return to margin expansion in H2 2021 with AISC more in line with guidance. Given B2Gold's industry-leading costs among million-ounce producers and organic growth potential from Gramalote and potentially Kiaka, I would view any pullbacks below $4.60 as low-risk buying opportunities.
(Source: Company Presentation)
B2Gold released its Q1 results this week and reported quarterly gold production of ~220,600 ounces at AISC of $932/oz. This translated to a 17% decrease in gold production year-over-year, reflected by increased waste stripping, as well as a 29% increase in costs from $721/oz in Q1 2020. While the headline numbers might look disappointing, the company put up a solid performance given that H1 was expected to be softer due to significantly lower grades mined at Otjikoto and Fekola. We also got an update on the company's two development projects and some negative news related to the Menankoto Permit. Let's take a closer look at the quarter below:
(Source: Company Filings, Author's Chart)
As shown in the chart above, B2Gold had a much softer start to the year in 2021, with the main catalyst for lower production being Fekola. During Q1, Fekola produced just ~125,100 ounces, down 25% year-over-year. The lower production resulted from a significant decrease in grades to 1.99 grams per tonne gold, related to lower mined grades while the company focuses on waste stripping to develop Phase 5 and 6 of the Fekola Pit. The good news was that throughput continues to exceed nameplate capacity. The company believes it should can run the mill at closer to ~8 million tonnes per annum vs. a capacity of 7.50 million tonnes per annum currently.
(Source: Company Presentation)
In the quarter, throughput hit a record of ~2.07 million tonnes, suggesting that an 8.0 million tonnes per annum throughput rate is achievable. Despite the lower production, Fekola's AISC came in at an industry-leading figure of $770/oz, and recovery rates were higher year-over-year (94.4% vs. 93.8%) despite lower grades. The one negative piece of news is that the company was informed that not only was the renewal of its Menankoto Permit for exploration not granted but it was granted to a third party instead.
The Menankoto Permit lies 20 kilometers north of the Fekola Mine license area. It covers a portion of the Anaconda resource area, which could have been an additional ore source for Fekola to extend the mine life. B2Gold believes that the grant of the exploration permit covering the perimeter of the Menankoto Permit to another party is contrary to Menankoto's legal rights under the Malian Mining Code. This is not a huge deal for B2Gold as it does not rely on Anaconda ore for its mine plan, but the resistance to granting the permit is surprising.
(Source: Company Filings, Author's Chart)
As shown above, B2Gold's Otjikoto Mine also had a much softer quarter (grey bars), with production down 27% year-over-year to ~48,100 ounces. This was driven by much lower grades due to processing low-grade stockpiles, while B2Gold works towards waste stripping at the Wolfshag and Otjikoto pits. The company noted that production should increase materially in H2 2021 once mining reaches the higher-grade zone at the base of the Wolfshag Pit. Given the much lower gold sales, AISC rose to $1,475/oz, up from $850/oz in the year-ago period. However, these costs should not be extrapolated to the rest of the year, with FY2021 AISC guidance of $850/oz for Otjikoto.
(Source: Company Presentation)
Fortunately, Masbate outperformed in Q1 with gold production up 28% year-over-year, and attributable production from Calibre Mining (OTCQX:CXBMF) also increased, partially offsetting lower output from Fekola and Otjikoto. As B2Gold heads into the back half of the year, we should see much stronger production with higher grades from Fekola and Otjikoto and lower costs resulting from much higher gold sales. While B2Gold reported a much higher average realized gold price of $1,791/oz in Q1, revenue was down by 5% to $362.4 million due to lower gold sales in the period.
Outside of its main operations, B2Gold announced results from its 50% owned Gramalote Project in Colombia that highlighted a project with the potential to produce ~2.97 million ounces of gold over 10.6 years. Annual gold production is expected to average 281,000 ounces over the mine life at a projected AISC of $744/oz, with production much higher at 347,000 in the first five years. Based on 50% ownership, this would translate to more than 170,000 ounces of added gold output to B2Gold's production by FY2025 if the company goes ahead with the project. The goal is to complete the final Feasibility Study by the end of Q1 2022, with hopes of optimizing the current project economics.
B2Gold also noted that it is working towards updating the existing Pre-Feasibility Study for its 81% owned Kiaka Project in Burkina Faso and is focused on optimizing project economics. The company is looking at the potential for a 12-million tonne per annum processing plant and a liquid natural gas hybrid power plant combined with solar to drive lower costs. In addition, B2Gold is exploring using dual-fuel haul trucks that utilize a mix of diesel and LNG. We should get an idea of what this project looks like by Q3 of this year. Let's take a look at the financial results:
(Source: Company Filings, Author's Chart)
As shown above, B2Gold saw a slight dip in AISC margins year-over-year, with the higher gold price being offset by higher costs in Q1. During Q1, AISC margins came in at $859/oz down from $867/oz, with the second consecutive sequential decline given the weakness in the gold price. While margin compression might be disappointing, it's important to note that margins should return to year-over-year increases in H2 2021 as costs come in closer to guidance ($890/oz), assuming gold prices stay above $1,725/oz.
(Source: YCharts.com, Author's Chart)Moving over to B2Gold's earnings trend, we've seen incredible growth the past few years, but B2Gold is now staring down minimal growth until FY2024, meaning that B2Gold will rely mostly on the gold price or share buybacks to drive annual EPS growth. As it stands, FY2021 estimates are sitting at $0.52, translating to single-digit growth year-over-year (FY2020: $0.50). The good news is that B2Gold should be able to easily fund the development of new projects, given that it's sitting on more than ~$500 million in cash. Still, the growth story here has taken a rest, with Gramalote unlikely to head into commercial production before Q3 2024. This is not a huge deal, but this was previously B2Gold's differentiator: massive organic growth from Fekola, which offset its less attractive jurisdictional profile.
So, is the stock a Buy?
Based on an earnings multiple of 12 and FY2021 annual EPS estimates of $0.52, I see a conservative fair value for B2Gold of $6.24. However, I prefer to buy at a minimum 25% discount to fair value to bake in a margin of safety, which lines up with a buy-zone closer to $4.68. Therefore, at current prices, I do not see a low-risk buy opportunity here. This doesn't mean that the stock can't go higher; it simply means that there are more attractive opportunities elsewhere currently with a higher upside to their conservative fair value.
B2Gold had a slow start to FY2021, but this was largely expected due to elevated waste stripping in the period. Looking ahead to the back half of the year, we should see very different results, with Fekola benefiting from a higher throughput rate and improved grades and Otjikoto also processing higher grades. Given B2Gold's industry-leading costs and organic growth potential (FY2024 or later) from either Gramalote or Kiaka, I see the stock as a solid buy-the-dip candidate. So, if the stock were to dip below $4.60, I would view this as a low-risk buying opportunity.
This article was written by
Analyst’s Disclosure: I am/we are long GLD. 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.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (23)
BTG is operating out of Africa, my pick for the continent is Perseus.
Like Africa better than Central/South America since a lot of countries are trying to up mining tax and that does not seem to be the case as much in Africa.
All in all I would say it is best to stay within Canada, parts of the US and of course Australia.