CA - B2Gold Delivers; The Market Is Already Looking To The Future

Summary

• B2Gold posted a record quarter to close out the year 2022. The market expected as much.
• Fekola shines, and Back River beckons.
• This will be a very attractive portfolio in a couple of years. If execution risks in Nunavut are managed well, that is.

The market kept its cool when B2Gold ( BTG ) posted somewhat underwhelming Q3 results last November. At the time, management was adamant that Q4 would make up for the shortfall and the annual guidance would be met after all. Shares continued to trade in parallel with peers ( GDX ), underpinned by expectations of a blow-out fourth quarter to round off another successful year for the gold miner. The moment of truth arrived on February 22, the date of B2Gold's Q4 and Full Year 2022 Results release, and deliver the company did.

Again, the market kept its cool and shrugged off the record quarter. After all, it had been expected, especially after operational data released in January already foreshadowed the record results. The share price barely budged, and seems poised to track other gold miners for the foreseeable future.

Fekola Shines, Masbate Less So

The chart below illustrates quarterly gold production across B2Gold's portfolio of three producing gold mines. Record production in Q4 was clearly driven by the Fekola mine located in Mali which delivered 244Koz of gold production, by far the best quarter for this operation. Record throughput in combination with an average gold grade of 3.3g/t worked wonders to lift output to a record high, and push costs back to pre-pandemic levels.

Outstanding results at Fekola were accompanied by a solid quarter at Otjikoto where high grades from the Wolfshag underground mine is finally hitting the mill, and a slightly below-average quarter at Masbate. Cost inflation hasn't spared B2Gold, but was masked by high grades at Fekola and Otjikoto in Q4. However, a steady trend to higher costs is certainly on display at Masbate as illustrated in the chart below. And staying with Masbate, we also observe near-constant head grades, but a seemingly steady decline in metallurgical recoveries as B2Gold digs deeper into the ore body. All this to point to the fly in the ointment of an otherwise outstanding quarter from an operational perspective.

Unsurprisingly, margins remained strong as record production and the associated economies of scale worked their magic on cash costs. B2Gold made $870 on every ounce it produced in Q4 when measured against the consolidated all-in sustaining costs. Few, if any, peers will be able to match B2Gold's Q4 margins and we will be keeping an eye out as the earnings season evolves.

Financial Performance

Record production and a compliant gold price ensured a record top-line result of just under $600M in revenues for the quarter and $1.7B for the year. These revenues translated in solid free cash flows as shown in the chart below, where the blue line indicates free cash flow before growth capex.

B2Gold paid a total of $170M in dividends in 2022, reduced its modest debt position, tended to various exploration and development efforts, and has otherwise accumulated $600M in net cash. This is a very strong balance sheet, and it will be put to work in the not-too-distant future to grow the company's producing portfolio.

Growth

B2Gold has outlined plans to expand the Fekola complex in Mali. A feasibility study for a second mill to serve a number of oxide deposits on the vast land holdings, the so-called Anaconda study, is due out in Q2. This growth project has the potential to push Fekola even closer to tier-1 status, and one wonders how closely Barrick Gold ( GOLD ) is watching the company's progress as the major develops its Loulo-Gounkoto gold complex not far to the North along the same greenstone belt.

The recently announced acquisition of Sabina Gold & Silver ( OTCQX:SGSVF ) will add the Back River gold district in Nunavut to B2Gold's portfolio. This asset represents another potential tier-1 opportunity, although one that comes with plenty of execution risks. Sabina has already started early construction works on the so-called Goose project, and during the earnings call , B2Gold has already confirmed the goal to bring this mine online in early 2025. This is a high-risk project, with any number of challenges posed by the remote location and the harsh climate. TMAC's unfortunate attempt to build the Doris project will still be fresh on investors' mind; but so will be B2Gold's stellar reputation as a mine builder. Nevertheless, it's worth remembering that Agnico Eagle ( AEM ) is the only company that has mastered Nunavut as a gold mining destination so far, and it has taken the major close to a decade to figure out the nuts and bolts.

Summary & Investment Thesis

B2Gold has concluded 2022 with a record quarter, meeting expectations along with the upper end of its production and cost guidance. The company has delivered on prior promises, and the market expected no less.

The market valuation for B2Gold lags some of its peers as political risks across the operating portfolio is priced in. The addition of the Back River project might change this market view in the longer term, but not before execution risks due to mine development in Nunavut is navigated successfully.

B2Gold has always pointed to its predecessor company BEMA Gold as a role model for the company's corporate trajectory. BEMA Gold was taken out by Kinross Gold ( KGC ) in a $3.1B transaction after completing a number of high-stakes mine developments. B2Gold's move into Nunavut and the addition of another potential tier-1 asset to its portfolio follows a highly similar script. We don't see a buyout as an imminent scenario, but M&A probabilities will most likely increase as mine development at the Goose project progresses.

For the near term we view B2Gold as a fairly priced mid-tier gold miner on a risk-adjusted basis. The present risk profile is certainly not suitable for every investor, but for those who are willing to put their money to work in Mali, or the Philippines, B2Gold is certainly a viable investment option in the gold mining space. The Nunavut addition has added a tangible runway to margin expansion as the market might become amenable to re-think its country risk concerns as the Goose project comes online in a couple of years, provided the company navigates execution risks. And in the meantime, it's worth remembering that B2Gold pays a small dividend to sweeten the wait for an eventual take-out.

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