B2Gold Q2 Earnings: Solid Results Overshadowed By Mining Law Changes (NYSE:BTG)

The Q2 Earnings Season has been a mixed one thus far for the Gold Miners Index (GDX), but B2Gold Corp. (NYSE:BTG) is one name that delivered solid results yet still suffered a negative reaction following its report. This poor reaction likely stems from the increased uncertainty related to the new 2023 Mali Mining code, which suggests the potential for state interest to increase to 35% from 20% previously.

However, while this is undoubtedly a negative for B2Gold, it’s much less negative if this applies to new projects (not existing mines like Fekola), and this news has already shaved nearly $1.0 billion in market cap off the stock, a far greater figure than the value of a 15% participating interest in Fekola Regional. So, while B2Gold is reporting lower margins and free cash flow in a higher-cost year with elevated sustaining capital, I see this pullback in the stock being overdone and I see B2Gold Corp. stock as a Buy on weakness.

All figures are in United States Dollars unless otherwise noted.

Q2 Production & Sales

B2Gold released its Q2 results this week, reporting quarterly production of ~262,700 ounces of gold (including ~16,700 ounces from its Calibre interest), an improvement from the year-ago period. The increased production was helped by higher mined grades at Fekola, despite production coming in slightly below budget at ~152,400 ounces, with lower grades than planned. This was a material improvement from average processed grades of 1.71 grams per tonne of gold, affected by stockpile usage and elevated waste stripping as it waited to gain access to high-grade Phase 6 ore.

And besides higher production at its flagship Fekola Mine in Mali, Otjikoto also benefited from higher grades from Wolfshag Underground, with mining rates of ~1,000 tonnes per day at 4.0+ gram per tonne gold grades supplementing feed from the Otjikoto Pit. Notably, Otjikoto’s production should be back-end weighted (40%/60%) in FY2023, so we should see a step up in production from the Namibian mine vs. its ~44,100 ounces produced in Q2.

Digging into Fekola’s production a little closer, the company processed ~2.32 million tonnes at an average grade of 2.24 grams per tonne of gold, up from 1.71 grams per tonne of gold in the year-ago period. However, this was lower than expected related to the delayed receipt of a mine production excavator, lower than planned mine production due to blast hole drilling inefficiencies, and lower than planned recoveries on the higher-grade feed. That said, the mine still remains on track to meet its annual guidance, and is tracking well against guidance with ~318,300 ounces produced in H1 2023.

As for costs, Fekola’s all-in sustaining costs came in at $1,165/oz which was a 23% increase from the year-ago period. However, it’s important to note that this was largely related to higher sustaining capital (including $21 million for mobile equipment and rebuilds), with sustaining capital more than quadrupling to ~$59.0 million year-over-year (Q2 2022: ~$14.1 million) and much fewer ounces sold than produced (~142,900 vs. ~~152,400).

As for B2Gold’s sales, the company reported revenue of $470.9 million (+24% year-over-year) on the sale of ~239,100 ounces at an average realized gold price of $1,969/oz. This was up sharply from the year-ago period due to the higher production levels and contributed to operating cash flow of ~$199 million, also up materially from the year-ago period. However, with significantly higher investment at Fekola (~$74 million) and the Goose Project (~$69 million), B2Gold reported a cash outflow of ~$10 million in the period on the back of $205 million in capex.

This was abnormal for this consistent free cash flow generator, but it’s important to note that this is a period of unusually high investment and the company will revert to being a free cash flow machine in FY2025 with spending at Goose winding down following first gold pour in Q1 2025 and reduced sustaining capital at Fekola.

Costs & Margins

Moving over to costs and margins, B2Gold reported cash costs of $777/oz in Q2 and all-in sustaining costs [AISC] of $1,214/oz. While cash costs were down year-over-year from easy comps of $888/ooz in Q2 2022, AISC increased over 9%, denting B2Gold’s AISC margins on a sequential basis ($759/oz in Q2 2023 vs. $841/oz in Q1 2023). This was despite the benefit of a higher average realized gold price ($1,969/oz), and this margin compression in a robust period for the gold price may have alarmed some investors.

However, it’s important to note that this is due to the elevated sustaining capital spend this year and while year-to-date AISC has come in much higher than investors have been accustomed to, 2023 is an unusual year from a cost standpoint due to the elevated sustaining capital, with elevated capital stripping expenses expected to drop considerably in 2024.

Looking at the below chart of margins, B2Gold’s AISC margins have slipped to $759/oz, but they still came in above the industry average in the period, and year-to-date AISC is sitting at $1,128/oz, below the guidance range of $1,195/oz to $1,255/oz, implying a higher-cost H2 but signaling a likely beat vs. the guidance midpoint of $1,225/oz, in line with B2Gold’s strong track record of over-delivering on promises. The lower costs benefited from lower than budgeted diesel prices and heavy fuel oil costs, in line with what we have heard from commentary on other conference calls sector-wide. So, while AISC margins could continue to decline on a sequential basis into the back half of the year, I don’t see any reason to be discouraged by this, with all-in sustaining costs expected to improve materially in 2024.

In fact, as the chart below highlights, all-in sustaining costs could come in above $1,200/oz this year (lower end of guidance), but are likely to improve to $1,125/oz or better in 2024 with more normalized sustaining capital spend. And if we look ahead to 2025, B2Gold will benefit from at least two quarters of commercial production from the high-margin Goose Mine (sub $800/oz costs in first five years), which should contribute to sub $1,050/oz AISC in 2025.

This will make B2Gold one of the lowest-cost producers sector-wide, and place its costs over 20% below the estimated FY2025 industry average of ~$1,350/oz. And even more importantly, the combination of lower sustaining and growth capital plus a similar production profile (Goose more than offsetting Otjikoto which is winding down post-2024) and higher margins will lead to a significant increase in free cash flow generation from 2025 going forward.

Recent Developments

As for recent developments, the negative one that has weighed on B2Gold is that the Mali Mining code could boost state and local interest to 35%, up from 20% currently (10% with the option to acquire another 10% stake). If this applied to the Fekola Mine which is a ~600,000 ounce producer, this would certainly be a very negative development. However, B2Gold noted the following in its Q2 Conference Call:

“Any new mining code is not expected to impact the existing Fekola Mine operations, which will continue to be governed by the existing mining convention entered into under the 2012 Mining Code and the impact of the new 2023 mining code on Fekola Regional license — sorry, I’ll end it there. So the bottom line is what we’re saying is that the — any proposed 2023 mining code that was not — in my understanding and recent consultation with the government as last week, the government’s confirming that they are not — this code is not going to look back to previous existing code. That would be unlawful. The 2012 code and the mining convention that comes — that came out of that dictates the terms; the ownership, 80/20, with ourselves and the government of Mali; and also dictate your taxes and all the details of that. That is in the code.”

– B2Gold CEO, Clive Johnson, Q2 2023 Conference Call.

This is positive news if correct, suggesting that the higher ownership only applies to tenements outside of the existing mining license for Fekola from the 2012 Mining Code, and this cannot be increased to 35%. And while it’s certainly negative that the Anaconda area and surrounding tenements could be subject to a 15% increase in interest, this is a much smaller hit in my view and does not justify anywhere near the ~$1.0+ billion decline we’ve seen in B2Gold’s valuation over the past month.

Hence, while an increase to 35% interest is negative relative to what the picture looked like a month ago before news was released about the new 2023 Mali Mining code, I see this as only moderately negative as long as it doesn’t impact B2Gold’s interest in the Fekola Mine. For now, the receipt of the exploration license for the Bantako North permit is outstanding, given that it’s pending the finalization of the new 2023 Mining Code.

As required under the 2012 Mining Code, B2Gold contributed a 10% free carried non-dilutable interest in Fekola S.A. to the State of Mali. Under the 2012 Mining Code, the State of Mali also had the option to purchase an additional 10% participating interest in Fekola S.A., which it exercised. As a result, the State of Mali holds a 20% interest in Fekola S.A., and B2Gold holds the remaining 80% interest.

In other news, the Goose Project in Nunavut (recently acquired from Sabina) remains on track for Q1 2025 first gold production, and the production profile has been optimized with the potential for 300,000+ ounces in the first five years, which would make the mine one of the top-10 largest gold producers in Canada and one of the top-5 highest-margin assets in Canada. And while the increase in expected capex from ~$460 million under Sabina to ~$670 million is negative, this was largely to be expected given inflationary pressures we’ve seen sector-wide and scope changes (including accelerated underground development).

As it stands, cost to completion is sitting at ~$410 million which is easily covered by B2Gold’s ~$1.2 billion in liquidity. It’s also worth noting that B2Gold has approved a $20 million exploration budget on regional targets, which could be a major value add for this asset which has excess permitted processing capacity (6,000 tonnes per day vs. 4,000 tonnes per day planned processing rate).

Let’s dig into B2Gold’s valuation following its sharp correction:

Valuation

Based on ~1,330 billion fully diluted shares and a share price of US$3.05, B2Gold trades at a market cap of ~$4.06 billion and an enterprise value of ~$3.61 billion. This makes B2Gold one of the most attractively valued million-ounce gold producers, especially when we compare it to names like Evolution Mining (OTCPK:CAHPF) at a ~65% higher enterprise value and much more leveraged vs. B2Gold’s strong financial position (net cash: ~$450 million).

That said, B2Gold is in the unfavorable position of having significant concentration to non Tier-1 jurisdictions which have can weigh on its multiples, even if these issues haven’t caused the company any issues recently (outside of brief uncertainty surrounding its Menankoto exploration permit that’s since been resolved). However, the most recent development is more significant, as discussed above, with the possibility that the Malian government could boost interest in projects to 35%, potentially reducing B2Gold’s share of profits from its stand-alone Anaconda opportunity it’s actively looking at potentially developing.

The good news is that the company made a timely bid to acquire Sabina Gold & Silver at a very attractive price, adding a massive land package in Nunavut and a project that will head into production by early 2025. This has taken care of the upcoming production cliff at Otjikoto with this asset set to wind down by 2025, added a new high-margin asset in what’s regarded as a Tier-1 jurisdiction, and partially reduced its exposure to Tier-2/Tier-3 ranked jurisdictions. And given these developments and that Goose is now just 18 months from first gold pour with an optimized production profile (~300,000 ounces for the first five years), I believe a more reasonable multiple for the stock is 8.5x cash flow (a premium to its historical multiple), and more in line with the ranges for other million-ounce producer peers. If we apply this figure to B2Gold’s FY2024 cash flow per share estimates of $0.58, this points to a fair value of US$4.95 – 62% upside from current levels.

While this represents a significant upside to fair value, I am looking for a minimum 40% discount to fair value for mid-cap producers, pointing to an updated ideal buy zone of US$2.97 or lower for the stock. This is slightly below the stock’s current levels, but investors can take comfort because they are also pocketing one of the industry’s most attractive dividend yields by owning B2Gold, enjoying a ~5.2% annualized dividend yield.

So, on a total return basis to its 18-month target price (US$4.95), B2Gold’s return is closer to 67%, making it one of the better reward/risk setups in the sector today. And while the company will lag its peers from a free cash flow generation standpoint over the next 18 months while it builds Goose, its free cash flow will come roaring back in FY2025, with the potential to generate upwards of $600 million in FY2025 free cash flow (depending on the timing of a stand-alone Anaconda build) leaving the stock trading at less than 7x FY2025 EV/FCF.

Summary

B2Gold has slid considerably from its year-to-date highs, and while this might make sense if the Mali mining code was potentially clawing back an extra 15% interest from its existing Fekola Mine and all other tenements and the company had just come off a highly dilutive acquisition. However, neither of these appears to be the case. As highlighted by B2Gold’s CEO, Clive Johnson, in recent remarks, the potential for an extra 15% interest does not apply to its 80/20 ownership of Fekola, but Fekola Regional instead.

And on the second point, this was a minimally dilutive acquisition that could create enormous shareholder value, and potentially end up being one of the smartest deals done sector-wide in a while. This is because there’s the possibility of a second mine down the road on the company’s massive 80 kilometer belt with multiple gold deposits in iron formations and a 2.5x larger iron formation at George. And the latter didn’t get the attention it deserved, given that it was under the umbrella of a gold developer in a tough market, with Sabina choosing to preserve cash and not drill aggressively to minimize share dilution.

It’s also worth noting that the current mine plan at Goose does not include the newly drilled Hook Target (highlight hole of 8.50 meters at 10.05 grams per tonne of gold), nor does it include upside from the Llama Extension or Nuvuyak deposit, which host a combine ~1.0 million ounce inferred resource at 7.50 grams per tonne of gold.

So, with B2Gold trading at one of the highest FY2025 free cash flow yields sector-wide, having multiple impressive sleeper assets in its development portfolio excluding the Nunavut land package that it’s not getting credit for (JV in Finland, Gramalote JV that’s likely to be sold, added production from a stand-alone operation at Anaconda, and greenfield opportunities in Uzbekistan and Cote d’Ivoire, the stock seems unfairly punished near US$3.00 per share. This is especially true when it will be one of the lowest-cost gold producers post-2025 with the exceptional future Goose Mine in production, with all-in sustaining costs likely to be below $850/oz even adjusting for inflation.

In summary, with a more diversified portfolio that’s finally got some Tier-1 exposure and the share price back to the depressed levels it hasn’t visited since Q3 2022, I see this correction in B2Gold Corp. stock providing a relatively low-risk buying opportunity.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.