We’ve finally begun the Q3 Earnings Season for the Gold Miners Index (GDX), and the senior gold producers are busy pre-announcing their production results after what might be a volatile fourth quarter with the Presidential Election on tap. The most recent name to report its preliminary Q3 results is B2Gold (BTG), and the company has outdone itself as usual with another blow-out quarter in Q3. The company reported gold production just shy of record levels on a consolidated and attributable basis, and revenue spiked to a new all-time high of ~$487.0 million, given the higher gold (GLD) price. While B2Gold’s earnings growth should decelerate going forward, the higher dividend is now paying investors to wait for the next growth lever to be pulled. For now, I see the stock as a Hold, but I would view any pullbacks below $6.25 as buying opportunities.
(Source: Company Presentation)
B2Gold released its preliminary Q3 results on Thursday and reported quarterly gold production of 248,700 ounces, up 17% year over year after adjusting for the El Limon and La Libertad mines sold to Calibre Mining (OTCQX:CXBMF) last year. On a consolidated and attributable basis, gold production came in just shy of record levels at 263,800 ounces, which has pushed year-to-date consolidated and attributable gold production to ~770,300 ounces. These are incredible results, given that the company has had to navigate through unprecedented challenges related to COVID-19, though B2Gold is fortunate that Africa has been one of the less-affected continents, while other continents have struggled to contain the virus. Let’s take a closer look at the results below:
Beginning with B2Gold’s Fekola Mine, it was another exceptional quarter with the mill expansion to 7.5 million tonnes per annum completed ahead of schedule and production of 152,300 ounces of gold. This was the second-best quarter for the mine since it began commercial production, and it would have been closer to a record quarter if not for additional downtime for mill expansion tie-ins and a full relining of the SAG mill. Mill throughput for the quarter came in at 1.56 million tonnes for the quarter with exceptional grades of 3.22 grams per tonne gold, a 10% increase vs. last year’s grades (2.93 grams per tonne gold). Overall, the mine saw production increase 36% year over year, and Fekola is on track to produce over 600,000 ounces year to date, which should beat the guidance mid-point of 605,000 ounces.
(Source: Company Presentation)
As investors may remember, the Fekola Solar Plant was delayed due to the timing of shipments, and construction was suspended in early Q2 to prioritize mining and camp space. The expectation is that the Solar Plant will be complete by Q1 2021 after construction restarted in September, and this project should significantly reduce operating costs and emissions at the mine. With all-in sustaining costs of $641/oz last year, it’s incredible that B2Gold can push costs down even further going forward. Fekola is already one of the lowest-cost mines in the world based on FY2019 figures. A further cost reduction should benefit the company’s consolidated costs even further, helping the company cement its position as one of the two lowest-cost million-ounce gold producers. As of H2 2020, the company’s all-in sustaining costs were the lowest in the sector for million-ounce producers at $705/oz.
If we move over to the company’s Otjikoto Mine in Namibia, it was a solid quarter here as well, with ~42,600 ounces of gold production. While this figure was down 14% year over year, this was not much of a surprise as the company was not benefiting from the same amount of high-grade tonnes it did last year from the Wolfshag Phase 2 Pit. B2Gold continues to advance the Wolfshag Underground Mine development, with stope production expected to begin in early 2022. Despite the weaker Q3 results on a year-over-year basis, Otjikoto remains on track to hit its FY2020 guidance midpoint of 170,000 ounces, with ~127,800 ounces produced year-to-date and just 42,200 ounces needed to hit its target. The year-to-date quarterly average is 43,700 ounces per quarter, so this is certainly achievable.
(Source: Company Presentation)
Finally, at B2Gold’s Masbate Mine, we saw quarterly gold production of 63,600 ounces, which was 4% higher than last year. This beat vs. last year’s results was even though mining and processing were halted for six days to assess any potential damage after a 6.6 magnitude earthquake hit 90 kilometers from the mine site in mid-August. To date, Masbate has produced 147,100 ounces of gold and is the only mine that might come up shy of its production guidance, with the mid-point set at 205,000 ounces. This is more than excusable, given the headwinds COVID-19 has created for the industry and an earthquake that shaved almost a week off the mine’s total operating days this year.
Based on near-record gold production and a new all-time high for gold (GLD) in the quarter, it’s no surprise that we saw another massive quarter from a quarterly revenue standpoint. As we can see below, quarterly revenue hit a new all-time high of ~$487.0 million, up an incredible 57% year over year (Q3 2019: $310.8 million). If we look at the chart below, we can see that revenue has been in a steady uptrend for two years now, with the production growth at Fekola and higher gold prices more than offsetting the loss of revenue at La Libertad and El Limon following the divestment to Calibre Mining. Based on Q4 2020 revenue estimates, B2Gold is on track for its first half-billion quarter for revenues, with forecasts sitting at $511.9 million currently.
Given the exponential revenue growth, it’s not surprising that B2Gold is on track for a massive year with margins providing extra fuel for earnings growth, bolstered by lower costs and the higher gold price. If we look at the chart below, we can see that B2Gold is on track for a year of triple-digit earnings growth, with FY2020 estimates sitting at $0.50, up significantly from the $0.22 reported last year. Generally, the best prospects for investment are those growing annual earnings per share at 20% or higher each year with double-digit revenue growth, so it should be encouraging for B2Gold investors that the company passes these criteria with flying colors.
The only real negative to the B2Gold story is that growth is so impressive it can’t be maintained, with FY2021 and FY2022 annual EPS estimates sitting at $0.52 and $0.56, respectively. While these translate to new all-time highs in annual EPS, the earnings growth rate is expected to slip to single-digit levels, a significant deceleration from what investors are used to from FY2017 to FY2020, with annual EPS growing from $0.05 to estimates of $0.50. It’s worth noting that deceleration is inevitable with a company growing this fast, and we could certainly see annual EPS estimates climb if the gold price heads over $2,100/oz. However, assuming a flat to slower ascent in the gold price from current levels, B2Gold has lost some of its luster from a growth standpoint temporarily. I have noted that this is temporary because Gramalote is a possible driver of future growth, as is increased attributable production from Calibre Mining with excess milling capacity at La Libertad.
Fortunately, while most of the growth in the B2Gold story is accounted for with Fekola realizing nearly its full potential, B2Gold has pulled the value lever to pay shareholders to wait for the next growth lever to be pulled. As announced recently, the company has raised its dividend to $0.16 annually, translating to a 2.30%~ yield at current prices. Not only is this a massive boost from the previous dividend of $0.08, but it places the company well ahead of the sector average in terms of dividend yields. This is a smart move by the company because it gives investors a reason to hang onto their shares as they’re being paid to wait for either increased production from current operations or news from Gramalote, which is still several months from a potential construction decision. As we can see above, B2Gold is a world of its own when it comes to its current yield among million-ounce gold producers.
Given B2Gold’s continued operational excellence, the expectation for a slight decrease in costs at Fekola with the Solar Plant online in Q1 2021, and the company’s industry-leading yield, I see the stock as a Hold at current levels. My only hesitation in paying up at current prices is that the stock will become more of a value stock than a growth stock after another record year in FY2020 and tough year-over-year comps going forward. For now, I see better value in safer jurisdictions, and the growth thesis is no longer as strong here. However, if we were to see the stock pull back below the $6.25 level, I believe this would be a low-risk opportunity to add exposure to the stock.
Disclosure: I am/we are long GLD, CXBMF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.