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A few months ago, I wrote an initiating article on B2Gold Corp. (NYSE:BTG), rating a speculative buy for those with a strong stomach for mine development risks. B2Gold is developing the large Goose mining project (I had formerly called it ‘Back River’ to be consistent with historical geography) which is expected to produce over 300,000 oz of gold per annum once it is complete. As with all mine developments, the major risks are cost overruns and time delays.
So far, my buy recommendation is not panning out (pardon the pun), as B2Gold has only rallied a meager 7.5% compared to its peers, as measured by the VanEck Gold Miners ETF, which has soared 31% with the rising gold price (Figure 1).
Figure 1 – BTG continues to lag peers (Seeking Alpha)
Long-time industry observers know that the mining industry is notoriously leaky (projects routinely employ hundreds of construction workers and miners who talk with their wives and family, etc.), so B2’s price action was telling me the company was having additional issues with the Goose project. Sure enough, when B2Gold recently released its Q1/24 results, the company also announced a delay to first gold production at Goose.
While a 3-month delay is disappointing, investors need to keep in mind that a 3-month delay on a 10-year-plus mine life is a small rounding error. Given the large upside potential with Goose once the golden egg (another pun!) hatches, I am maintaining my speculative buy recommendation.
Brief Company Overview
B2Gold Corp. is a senior gold producer with approximately 1 million oz. of annual gold production from three producing mines (Fekola, Masbate, and Otjikoto) and its ownership interest in Calibre Gold (CXB:CA) (Figure 2).
Figure 2 – BTG asset overview (BTG investor presentation)
In addition to three operating mines, B2Gold is also developing the Goose / Back River project in Nunavut, Canada.
Q1 Results Was Inline
As mentioned above, B2Gold recently reported its first-quarter results for fiscal 2024. Revenues and earnings beat estimates, although that is mostly a function of the company’s realized gold price compared to the figures used by sell-side analysts.
Q1 production was 226k oz of gold, which is in line with the company’s previously lowered guidance of 860,000 to 940,000 oz of production for 2024 compared to 2023’s 1.06 million oz (Figure 3). Q1 all-in-sustaining-costs (“AISC”) of $1,346 was a touch better than the company’s guidance of $1,360 to $1,420.
Figure 3 – Q1 financial summary (BTG Q1 press release)
The YoY decrease in production is primarily the result of a delay in obtaining an exploitation license for Fekola regional development from the Government of Mali. However, this production is simply delayed and not lost. Once the license is obtained, B2Gold expects Fekola regional production to recommence in 2025, bringing production at the Fekola complex back to its run-rate of ~600,000 oz.
Goose Project Update
In my opinion, the day-to-day production figures are but a sideshow, since B2Gold is an experienced miner with multiple assets that can be flexed to meet expectations. Instead, the focus in Q1 was mostly on the Goose project’s progress.
On the positive side, a 162 km winter ice road (“WIR”) was completed on April 30, 2024. B2Gold has also successfully delivered all the necessary materials to complete the construction of the Goose project, including 19 million litres of diesel and more than 4,500 cubic metres of cement.
Construction of the processing facility is also on schedule, with the installation of the ball mill progressing ahead of schedule and the installation of all shell sections, feed/discharge heads, trunnion, pinion and bearings having been completed.
However, on the negative side, the development of the open pit and underground is behind schedule due to equipment availability and adverse weather. This delay is expected to add 3 months to the pre-production timeline. Instead of first production in Q1/2025, B2Gold now expects first production of Goose to commence in Q2/2025 with ramp-up to full production by Q3/2025.
B2Gold will update the total cost estimate for the project in June 2024 taking into account the delayed schedule. For now, the company estimates that the total spend before first gold production will not be significantly higher than previous estimates of $1.05 billion for construction plus $200 million for accelerated underground and open pit development (Figure 4).
Figure 4 – Prior Goose construction cost estimates (BTG investor presentation)
Keep An Eye On The Prize
As I like to remind readers new to the mining business, mine building is a highly complex engineering problem. For an asset with a useful mine life measured in decades, a few months of delay is but a rounding error. The important question investors should ask is what is the ‘prize’ at the end of the day?
For B2Gold, the prize is a ‘golden egg’ that will boost annual corporate production of to ~1.2 million oz spread out over 4 assets (Figure 5).
Figure 5 – BTG 2025 production estimates (BTG investor presentation)
At the current corporate all-in sustaining cost (“AISC”) estimate of ~$1,400/oz for 2024, this 1.2 million oz in production could translate into over $1 billion in mine-level ‘free cash flows’ (“FCF”), assuming spot gold prices of over $2,300 (Figure 6).
Figure 6 – 2024 production cost estimates (BTG investor presentation)
While there are uncertainties concerning realized gold prices, production, and costs, a gold company that can generate over $1 billion in mine-level FCF is likely worth more than B2Gold’s current enterprise value of $3.3 billion (Figure 7).
Figure 7 – BTG enterprise value (Seeking Alpha)
Using Price-to-operating-cash-flow as a proxy for valuation (P/CF is likely understating valuation multiples since operating cash flows do not include sustaining capital expenditures), B2Gold’s senior mining peers like Barrick (GOLD), Newmont (NEM), and Agnico Eagle (AEM) are trading at P/CF multiples ranging from 7.9x to 15.6x respectively (Figure 8).
Figure 8 – BTG vs. peers (Seeking Alpha)
Once Goose is completed, I expect B2Gold’s valuation will converge with its peers. For reference, B2Gold generated $714 million in operating cash flows ($0.55 / share) in 2023 with average realized gold prices of $1,946, production of 1.03 million oz, and total cash costs of $788 / oz (Figure 9).
Figure 9 – BTG 2023 financial summary (BTG company reports)
Assuming B2Gold’s run-rate production increases to 1.2 million oz with cash costs rising to ~$850 (2024 guidance is $835 to $895) and realized gold prices of ~$2,300, I estimate B2Gold’s operating cash flows to be ~$1.07 billion or $0.82 / share. At an 8x multiple, BTG shares could be worth upwards of $6.50 / share or more than 150% upside.
Risks To B2Gold
The key risks to B2Gold remain construction delays and/or cost overruns at Goose. If the upcoming cost update in June does not show a materially higher price tag, I expect the market to breathe a sigh of relief and BTG shares to rally.
Another risk with B2Gold is its leverage to gold prices. As I have highlighted recently, spot gold prices are overbought and may need to consolidate. This volatility could negatively impact gold miners.
Conclusion
B2Gold is a senior gold miner developing the large-scale Goose project in Nunavut, Canada. B2Gold has not been participating along with other gold miners in the recent gold bull run, as investors are still fearful about the development updates at Goose. The concern was validated in the recent first quarter earnings report, as B2Gold announced a 3-month delay to the pre-production schedule. Until there is more certainty with Goose, I expect B2Gold to continue to lag peers.
However, given the upside with B2Gold once Goose is in production in mid-2025, I continue to rate B2Gold a speculative buy for investors with a long investment horizon.
