B2Gold: Tracking In Line With FY2022 Guidance

Summary

• B2Gold released its preliminary Q1 results last month, reporting quarterly production of 196,500 ounces, or ~209,400 when including contribution from Calibre Mining.
• This translated to a 5% decline in production on a year-over-year basis, with this being attributed to the weakest quarter in years of the company's flagship Fekola Mine.
• However, this was expected due to the back-end weighted production due to waste stripping, and H2 should be much better, especially if we see some contribution from Anaconda.
• Given the combination of operational excellence and a solid development pipeline, I would expect pullbacks below US$3.85 to provide a low-risk buying opportunity.

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The Q1 Earnings Season for the Gold Miners Index (GDX) has finally begun, and one of the first companies to report its preliminary results was B2Gold (NYSE:BTG). While the headline numbers may have looked disappointing, the company had a solid quarter and is tracking well against its FY2022 production guidance mid-point of ~1.02 million ounces. Given B2Gold's combination of operational excellence and a solid development pipeline, I would expect pullbacks below US$3.85 to provide a low-risk buying opportunity.

Otjikoto Mine (Company Presentation)

Production

B2Gold released its preliminary Q1 results last month, reporting quarterly production of 196,500 ounces, or ~209,400, when including contribution from Calibre Mining. This translated to a 5% decline on a year-over-year basis, mostly related to Fekola having its weakest quarter in years, with gold production of just ~101,700 ounces. While this may be disappointing, this was expected due to a focus on waste stripping with fewer tonnes of ore mined in the period as the company develops Phase 6 of the Fekola pit. Besides, although Fekola had a soft start to the year, Masbate had a great quarter, helping to pick up some of the slack. Let's take a closer look below:

B2Gold - Quarterly Gold Production (excluding Calibre contribution) (Company Filings, Author's Chart)

Looking at the chart above, we see that B2Gold's gold production from its three operating assets was quite soft in Q1 2022, coming in at its lowest level in more than three years. As noted, this was related to a ~19% decline in production at Fekola on a year-over-year basis, partially offset by stronger quarters on a year-over-year basis at Masbate and Otjikoto. However, while Fekola's production was lower, there are two points worth noting that impacted Q1 production levels.

The first was that B2Gold was busy developing Phase 6 of the Fekola pit in Q1, which led to much lower feed grades (1.54 grams per tonne gold), with fewer tonnes of ore mined. The second was that B2Gold had to suspend the processing of saprolite ore at the Fekola mill to reduce reagent consumption. This was a precautionary measure in case difficulties persisted in importing reagents into Mali due to the economic border sanctions imposed on the country by the Economic Community of West African States [ECOWAS].

Fekola Operations (Company Website)

The good news is that despite the lower grades, Fekola's grades actually outperformed plans, and higher throughput also helped to pick up some of the slack (~2.2 million tonnes processed). Meanwhile, although saprolite contribution was lower in Q1, saprolite ore was reintroduced into the mill feed blend at the end of February, which should improve production in Q2. Finally, grades will climb in the second half of the year as higher-grade portions of the pit are reached and Cardinal operations ramp-up to full capacity. So, while Fekola's costs will be high in Q1 and Q2, I would ignore the weak H1 results.

B2Gold - Quarterly Production by Asset (Company Filings, Author's Chart)

Moving over to production from a mine-by-mine standpoint, we can see that while Fekola (red bar) was weak, Otjikoto and Masbate both saw higher production on a year-over-year basis. This was evidenced by the two operations combining for gold production of ~95,000 ounces in Q1, up from ~80,500 ounces in Q1 2021. It is worth noting that Otjikoto was up against very easy comps in Q1 2021 (~23,000 ounces); hence the year-over-year increase was not surprising at all.

Still, both assets saw higher than budgeted grades and pulled their weight in the period. At Masbate, we saw quarterly throughput of ~2.01 million tonnes at 1.19 grams per tonne gold, well above the ~1.95 million tonnes at 1.10 grams per tonne gold in Q1 2021. This was related to mining additional high-grade areas within planned mining areas and improved mine haulage. At Otjikoto, grades came in above budget (1.31 grams per tonne gold vs. 1.26 grams per tonne gold), and production will ramp up significantly in H2 as Wolfshag Underground contributes later in the year.

B2Gold - Annual Production Guidance (Company News Release)

To summarize, while production may be tracking at just ~20.5% of its annual guidance mid-point, this is actually in line with plans, given the significant production weighted in the back half of 2022. In fact, B2Gold's second-half weighting is more pronounced than its peers, with ~575,000 ounces expected in H2 2022, representing nearly 57% of its annual production guidance mid-point. Therefore, investors should expect relatively weak results in Q1 and Q2, followed by significant cash flow generation in the second half and close to $1.1 billion in H2 revenue.

Preliminary Financial Results

Moving over to sales, B2Gold reported preliminary revenue of ~$365.6 million, a 1% improvement from the year-ago period. This was helped by a higher average realized gold price of $1,874/oz, more than offsetting the ~4% decline in gold sales, given that just ~195,100 ounces were sold in the period. Assuming similar production and sales in Q2 and a slightly higher average realized gold price of $1,915/oz, B2Gold is set up for another year-over-year in sales, with revenue likely to come in above $370 million in Q2 2022 (Q2 2021: ~$363 million).

B2Gold - Quarterly Revenue (Company Filings, Author's Chart)

Unfortunately, while revenue should increase year-over-year, margins will contract a little in Q1 and Q2, assuming the gold price can't recover. This is because B2Gold reported Q1 2021 all-in sustaining cost margins [AISC] of $859/oz, and Q1 2022 AISC margins are likely to come in below $700/oz, based on all-in sustaining costs north of $1,200/oz, and an average realized gold price of $1,874/oz.

Gold Futures Price (TC2000.com)

On a full-year basis, B2Gold should also see slight margin contraction, with FY2022 AISC margins likely to come in at $870/oz or lower, down from $908/oz in FY2021. This is related to inflationary pressures, which have not been quite offset by the gold price, even if it has been stronger this year. So, while B2Gold will report higher revenue in FY2022, this should be on slightly lower AISC margins unless the gold price can spend the majority of the year above $1,950/oz. Let's look at the stock's valuation and see whether this correction has set up a buying opportunity.

Valuation

Based on ~1.06 billion shares outstanding and a share price of US$4.21, B2Gold trades at a market cap of ~$4.46 billion. This leaves B2Gold trading at a forward cash flow multiple of ~6.3, with B2Gold likely to generate operating cash flow of at least $710 million in 2022 (~$0.67 per share). This figure compares favorably to its historical cash flow multiple of ~7.7 over the past 10 years and ~10 since 2007. Based on what I believe to be a conservative multiple of 8.25, I see more than 25% upside in the stock from current levels to its conservative fair value.

From a P/NAV standpoint, B2Gold is also very reasonably valued, with an estimated net asset value of $5.08 billion. Even at a conservative P/NAV multiple of 1.05 to account for its less favorable jurisdictional profile, I see a fair value north of US$5.00. Obviously, if we continue to see steady resource growth at Anaconda that could support a stand-alone and use a higher gold price assumption ($1,850/oz), this fair value would increase materially. In summary, no matter how you slice it, B2Gold is very reasonably valued and pays one of the most attractive dividend yields sector-wide (~3.80%).

So, is the stock a Buy?

While B2Gold is attractive from a valuation standpoint, the stock has still not dropped into the lower portion of its trading range, with resistance at US$4.85 and no strong support until the US$3.40-3.60 range. This doesn't mean that the stock can't head higher, but I generally prefer to buy at a minimum reward/risk ratio of 4.0 to 1.0. Based on a current share price of US$4.20, BTG's reward/risk ratio comes in at 1.05 to 1.0, even if we use the upper end of its support zone. So, while I think the stock is worth keeping a close eye on, the stock would need to dip below US$3.85 to move into a low-risk buy zone.

BTG Daily Chart (TC2000.com)

B2Gold had a solid start to the year despite the headline numbers, and while margins will come in light in Q1, we should see much better margins in H2 as the second half benefits from higher grades at Fekola and possibly some minor contribution from Anaconda. If we look at the bigger picture, there's a lot to like. This is because investors are getting paid to wait for B2Gold's growth with an attractive yield, with the possibility of growth to 1.25+ million ounces by 2026 (20%+ growth).

One could argue that investors have to be patient for this growth to materialize, and this is certainly true. However, this is a team with a nearly unrivaled track record for growth (~150,000 ounces to 1.0 million ounces per annum in less than a decade) and consistently under-promises and over-delivers. Hence, investors can be confident that the team will find a way to continue growing while maintaining its industry-leading margins. Given the combination of operational excellence and a solid development pipeline, I would expect pullbacks below US$3.85 to provide a low-risk buying opportunity.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GLD either through stock ownership, options, or other derivatives. 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. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.