B2Gold’s (NYSE:BTG) share price was catching up with peers in the losing ground after second-quarter earnings, and we were curious to see how the company would fare when releasing Third quarter results on November 8. And so we we sat down and studied the latest data points contained in company filings, updated our charts and listened to the earnings call.
The market shrugged, judging by the chart below, and continued to take a wait-and-see attitude regarding this mid-tier gold miner with operating mines in Mali, the Philippines and Namibia. We have a different perspective here and see opportunities in the cautious approach to the market, although not without risks.
of Faeces mine in Mali underperformed (again) in the third quarter, and we posit that this underperformance was most likely the reason for the decline in B2Gold’s share price following the earnings release. Quarterly production was reported a 13,000 ounce budget shortfall thanks to the effects of a downpour that made high-grade ore at the bottom of the Fekola pit inaccessible for some time during the quarter. Stockpiled ore was replenished and the lower grade of this material has led to the disappointing third quarter data points in the chart below. And if that wasn’t enough, the company also announced a delay in permitting the so-called Fekola regional ore resource as Mali transitions to a new mining code. Uncertainties surrounding this new permitting regime are likely to add to market concerns about this key asset.
of Masbate mine in the Philippines turned in a strong third-quarter showing, picking up some of the slack by cutting gold production roughly 5,000 ounces ahead of budget. All-in holding costs appear to have stabilized at around $1,100/oz, which we find quite remarkable for a low-rate, low-recovery operation. B2Gold has managed political risk better than other gold miners in the country, and the company looks poised to double its presence in the Philippines after establishing a new dedicated exploration company in the country.
of Otjikoto the mine delivered another strong quarter, thanks to continued contributions from the Wolfshag underground mine. This underground mineral grades 5.5 g/t and represents a welcome boost to the much lower grades from the open pit. Operations at the pit are effectively being shut down and will end in 2025, followed by seven years of processing lower grade stockpile ore. Wolfshag underground will remain operational until 2026, or longer if exploration efforts bear fruit. The next two years will see additional costs from these transitions on the one hand, partially offset by the lower cost of handling stock processing. We look forward to future guidance for some transparency on the future cost structure of this asset.
Consolidated gold production from the mine is shown in the chart below, including attributable production derived from B2Gold’s 24% equity interest in Caliber Mining (OTCQX: CXBMF). The dominant importance of the Fekola mine within this portfolio is evident, and market concerns after a below-average quarter for the Mali asset are understandable. B2Gold appears optimistic about achieving its production guidance for the year, which points to a very strong final quarter for the year.
The strong gold price provided a strong top line result in the third quarter.
However, cost increases, particularly at Fekola as discussed above, have continued to put pressure on margins for B2Gold (green bars in the chart below).
And shrinking margins, combined with rising capital expenditures (sustainable capital as well as growth capital) have hurt free cash flow generation. In the third quarter, free cash flow turned negative, and free cash flow maintenance (net of growth capital) remained only in the black. The bars in the chart below illustrate capital expenditures and the lines show free cash flow generation (with and without consideration of growth capital).
Fekola will see continued capital spending in the coming quarters (provided regional ore resource permitting can expire), and spending at the Back River project in Nunavut will ramp up in 2024, so we don’t expect much generation. free cash flow in 2024 B2Gold will use its strong balance sheet to fund these growth initiatives. This balance carries a negligible debt at the end of the third quarter; however, a first withdrawal of $50 million after the quarter on the revolving facility was mentioned in the earnings call. That leaves $650 million available in the company’s debt facility—enough firepower to see B2Gold’s capital projects through, barring unforeseen events.
Back River Project
B2Gold is betting big on its newly acquired Back River project in Nunavut. The logistics of mine construction and the transportation of materials to the site were discussed at length and in detail during the earnings call. This is a high-risk bet, and TMAC Resources’ failure to bring the Hope Bay mine to sustainable production is still fresh in investors’ minds. So far, only Agnico Eagle (Azem) has managed to build and operate gold mines in the harsh and remote environment of Nunavut, and it also came with a long learning curve.
The B2Gold team has the advantage of experience with similar conditions from mines built in Arctic Russia by its predecessor company. However, construction of the Goose mine at the Back River project remains a daunting task. And when we mentioned a market stuck in a wait-and-see approach in our presentation, we were primarily referring to the capital project at the Back River project. Operations and cash flow are still important, but the company’s valuation will be driven by success or failure in Nunavut for the foreseeable future.
Valuation and Theory of Investments
Consider the purple line in the chart below, illustrating net asset value per share. The increase from the first quarter to the second quarter of this year is caused by the addition of the Back River project, a very accretive acquisition according to this chart.
The market on the other hand seems to have focused on the risks associated with Back River and the share price has underperformed over the past 12 months.
And here we see long-term opportunities, although as mentioned, not without risks. B2Gold used to consistently trade at NAV multiples of 1.3 or higher; but this multiple has shrunk to less than 0.9 as shown in the chart below. The market is clearly concerned about risks growing in B2Gold’s portfolio: development risks related to the construction of the Back River mine, but also permitting risks at Fekola and political risks in the Philippines. If these risks can be managed, and if the Back River mine can be brought into production by early 2025 as planned, then multiples should expand again. A return to the historical low of 1.3 already offers a 50% upside from the current share price; and there are additional improvements if we consider the benefits of increased production from the Back River project. A high risk/high reward opportunity in our opinion.
B2Gold has been exceptional in managing the type of risks that are currently on the rise in the past. This is a management team that has successfully built several mines, is experienced in arctic conditions and has a strong track record in handling site risk. Investors willing to trust B2Gold’s continued ability to manage these types of risks should view the current situation as a buying opportunity; and investors with a low risk tolerance should probably look elsewhere.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. stock exchange. Please be aware of the risks associated with these stocks.