GDXJ - B2Gold: Is It Really Time To Sell?

2023-08-08 14:52:49 ET

Summary

• B2Gold Corp. released a Q2 earnings report with strong production numbers and solid financial performance.
• The stock sold off despite a positive report, possibly due to concerns about regulatory uncertainty and political risk in Mali.
• Company taking steps to diversify gold production and has a promising new mine set to commence production in 2025.

B2Gold Corp. ( BTG ), a prominent low-cost international senior gold producer, has recently released its Q2 2023 earnings , with a mixed market reaction.

Before getting into the earnings, here's some background on the company. For the current year, the company projects gold production to be in the range of 1 - 1.08 million ounces, at industry-leading all-in sustaining costs between $1,195 and $1,255 per ounce. This production comes from three active gold mines. In addition, B2Gold owns various development and exploration projects in countries including Canada, Mali, the Philippines, Namibia, Colombia, Finland, and Uzbekistan.

The stock sold off pretty hard following earnings, despite what I feel was a very positive report. What happened?

B2Gold's Q2 Earnings Analysis

B2Gold's stock selloff was quite surprising to me because its earnings appeared to be pretty strong. Here's a recap and my thoughts.

• Total gold production for Q2 2023 was 262,701 ounces, in line with quarterly expectations.

• Consolidated all-in sustaining costs were $1,214 per gold ounce sold, below the annual guidance's midpoint.

• Operating cash flow before working capital adjustments amounted to $199 million, another solid showing.

• Attributable net income was $0.06 per share, with adjusted attributable net income at $0.07 per share.

• Also, the balance sheet remains in great shape. As of June 30, 2023, it has cash and equivalents of $506 million and a working capital of $570 million.

• The full amount of the company's $600 million revolving credit facility ((RCF)) is also undrawn, positioning B2Gold well to advance the Goose Project (acquired from Sabina Gold & Silver) with mill completion and first gold production expected in Q1 2025.

As for individual mine performance: Fekola, considered a top "tier-1" gold mining asset, produced 152,427 ounces, slightly below expectations due to delayed excavator delivery and minor operational issues. However, investors should note that production is anticipated to recover in the latter half of 2023, and the company still expects to meet the annual guidance.

I also felt the Masbate mine in the Philippines turned in a solid showing. Gold production was 49,478 ounces, above expectations, as a result of higher mill feed grade and mill throughput. All-in sustaining costs for Q2 were $1,091 per ounce sold, lower than expected due to cost efficiencies and higher gold sales, according to the company.

Why Did B2Gold Shares Fall?

The stock is down 2.5% post-earnings, and now down 12.75% over the past year, trailing the performance of the VanEck Gold Miners index (GDX). So, what's going on?

My assumption is that investors may be concerned by recent reports from Mali, where the government is negotiating with gold miners about proposed changes to its mining law .

These changes could raise state and private Malian ownership in new projects from the current 20% to 35%. B2Gold, one of the largest miners in Mali and operator of the Fekola mine, could certainly be affected by these discussions.

Some may fear that the government intends to take a larger stake in Fekola. Perhaps there is also some fear of outright nationalization. However, this concern appears to be overblown, as the proposed changes to the mining law specifically target new projects and not mines that are already in operation, according to reports.

Nevertheless, the situation has undoubtedly created some regulatory uncertainty and a perception of political risk in Mali. Again, though, I want to stress that reports indicate that the gold miners, including B2Gold, are engaged in constructive discussions with the government. B2Gold's CEO, Clive Johnson, has even been quoted by Reuters expressing optimism about the ongoing talks, describing them as "encouraging."

B2Gold is also taking steps to diversify its gold production worldwide, which will reduce its exposure to Mali operations. The Sabina Gold takeover is a great example, giving it more exposure to Canada. It also has joint ventures on projects in Colombia and Finland. While Fekola makes up about half of its current total gold output, that percentage is likely to drop in the coming years as new assets come online.

Finally, the company has also confirmed that it is seeking more assets to fuel its growth, even after the Sabina deal.

B2Gold: Compelling Valuation, Risks Priced Into Stock

B2Gold stands out as a debt-free company, with over $500 million in net cash. It's also in a promising position with a new gold mine set to commence production in 2025, projected to enhance its gold production by more than 20% and add over 200,000 ounces of gold per year in a top-tier mining jurisdiction. So its production outlook (pictured above) could rise from 1 million to over 1.2 million ounces in just a few years' time.

B2Gold Corp.'s current valuation seems to be strongly influenced by political risks in Mali, and perhaps excessively so. B2Gold's shares trade at a P/E ratio of 11.8 , a figure that lags well behind the industry median of 15.59. Similarly, its EV/EBITDA of 3.61 is notably below the sector average of 9.10.

The stock's yield, astonishingly, is now more than 5%-over twice the average of its peers. With a payout ratio of 52%, the B2Gold Corp. dividend appears to be not only generous but also sustainable.

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