This week, we turn to precious metals to review a Canadian based mid-tier gold producer who has done a fantastic job decreasing its production costs while significantly increasing its production levels. B2Gold, based in Vancouver British Columbia, recently brought its Otjikoto mine to full production in early 2015, with total cash costs per ounce registering an excellent $393 per ounce in Q3, 18% below budget. B2Gold’s all-in-sustaining-cost for gold production has also fallen, registering a 22% year-over-year decrease in its most recent reported quarterly figures. The company is also on track to record production in 2015, targeting production of roughly 500,000 ounces, a 30% increase from 2014 levels. In addition, the company’s new Fekola mine will help boost production from 2015 levels (year-end estimate) of 500,000 ounces to an estimated 940,000 ounces once the mine begins full production in early 2018. These October 2018 bonds also have a feature that allows the bondholder to convert to shares of B2Gold common stock at a strike price of US $3.93 per share. However, with the current yield of over 10% on these bonds that are indicating a discounted price of about 84, it provides excellent yields and additional diversification into the precious metals sector. In light of these factors, we have marked these bonds for addition to our global high yield income portfolios, FX1 and FX2.
About the Issuer
B2Gold is a Vancouver Canada based, mid-tier gold producer with four operating mines – two in Nicaragua, one in Namibia and one in the Philippines. In addition, the company has advanced development and exploration projects in Mali, Columbia, Burkina Faso and Nicaragua. The company currently operates the La Libertad Mine and the Limon Mine in Nicaragua, the Masbate Mine in the Philippines and the Otjikoto Mine in Namibia, which began commercial production earlier this year in February 2015, one month ahead of schedule. As of December 2015, the company had total probable mineral reserves (of its four operating mines) of 4,840,000 ounces.
Increasing Production, Decreasing Costs
In February 2015, B2Gold’s newest mine, the Otjikoto Mine in Namibia, began full commercial production. This signaled a turning point for the company as the mine has now become the company’s lowest cost gold producing mine, with total cash costs of $444 per ounce since the mine came online in February. In Q3, that figure was even more impressive, with cash costs coming in at $393 per ounce, 18% below budget. This was achieved due to higher gold production, lower fuel prices and a weaker than expected Namibian dollar / US dollar exchange rate.
The Otjikoto mine has also yielded excellent production numbers for B2Gold, producing 106,349 ounces of gold since February, 5% above budget. Otjikoto helped B2Gold register record quarterly gold production in Q3, with the company producing 124,371 ounces, a 38% increase over the same period in 2014. In addition, the company recently reiterated it 2015 production guidance of between 500,000 and 540,000 ounces, up from 2014 production of 384,000 ounces, a 30% increase at the lower guidance. The company appears to be on track to achieve its target. At the end of Q3 (ending 9/30/2015), B2Gold had recorded record year-to-date consolidated gold production of 361,796 ounces, an increase of 33% over 2014.
The low cost production of the Otjikoto Mine has helped drive down overall gold production costs for B2Gold. For Q3, all-in-sustaining costs (AISC) fell to $875 per ounce, a 22% drop from Q3 2014. Additionally, for the nine months ended 9/30/2015, the company registered AISC of $1,001 per ounce, a 15% reduction from the same period last year.
New Mines, New Production
While all gold miners will continue to be challenged by lower gold prices, B2Gold remains a solid player in the gold sector. In 2016, annual gold production should increase slightly to roughly 600,000 ounces. However, by 2018, that figure is expected to catapult to 940,000 ounces, an increase of 147% over 2014 production of 380,000 ounces. A big reason for this massive increase is B2Gold’s upcoming Fekola Mine in Mali. B2Gold’s recent feasibility study of the Fekola Mine indicates a 12.5 year mine life, with estimates for an annual production of 350,000 ounces per year in the first seven years at a production cost of $418 per ounce. The remaining production is estimated to cost $552 per ounce. Mine construction began in Q4 2015, with the mine slated to begin full production in late 2017 or early 2018.
While the Fekola Mine is lining up to be the jewel in B2Gold’s crown, the company also has another lucrative project on the horizon. The company’s Otjikoto Mine has an adjacent area, the Wolfshag Zone that is currently under development. Most of the production from Otjikoto in 2015-16 will come from the existing open pit. Beyond that, the company intends to enhance Otjikoto’s production with the Wolfshag Zone, where a recently updated inferred mineral resource report indicated 675,000 ounces of gold grading 8.14 grams per ton (g/t), significantly higher than previous resource grades of 3.2 g/t.
The Global Gold Market
Gold prices have shown a near-steady decline over the past three years. With the recent rate increase from the Fed and the corresponding strength of the US dollar, gold prices continue to struggle to find equilibrium. With recent prices hovering between $1,050 and $1,075 per ounce, many are wondering where prices will head to next. Although there is much speculation that gold prices will continue to hover at their current levels (or some even say decline slightly to the $1,000 per ounce level), a few trends have emerged from the multi-year lows in gold prices.
Exploration budgets have been slashed. A study earlier this year by Market Oracle looked at eight of the largest gold producers and found that exploration budgets had been cut by 14% to 56% from 2011 levels. This makes sense since exploration is extremely expensive and yields little immediate value.
Production is also in decline, with only two of the largest ten gold producers expecting their minimum output to materially increase this year as compared to 2014.
Reserves are also in decline. For the seven producers in the report that reported lower reserve levels, the number of decreased gold ounces was 47.1 million. This represents more than half of the annual global mine output.
If gold demand remains at current levels, these developments should translate to increased prices as supply will continue to diminish. It takes years to locate and develop new sustainable mines so even when prices do begin to recover, the industry will be slow to respond with additional gold to market.
B2Gold recently posted excellent results in its Q3 and nine month YTD reporting. The company registered record YTD (as of 9/30/2015) consolidated gold revenue of $437.7 million. In addition, B2Gold had cash flow from operating activities of $126.9 million for the first nine months of 2015, an increase of $50.7 million, or 67% over the prior year period.
For the nine months ending 9/30/2015, B2Gold had operating income of $9.1 million. During the third quarter, the company had a write-off of mineral property interests in the amount of $8.1 million (non-cash item). Adding back this write-off gives an operating income of $17.22 million. With a nine-month interest and financing expense of $13.03 million, this calculates to an interest coverage of 1.32x. As the company continues to increase its production and bring down costs, this coverage ratio should improve.
From a liquidity and debt perspective, at the end of Q3, B2Gold had $86.8 million in cash with an additional $175 million available on a revolving credit facility, for total available liquidity of $261.8 million. Total long-term debt was $405.5 million. It also recently filed for a $300 million shelf offering consisting of additional debt securities, warrants, subscription receipts, units or common shares, or any combination thereof. This will assist the company in maintaining its financial strength and flexibility going forward.
The default risk is B2Gold’s ability to perform. The company is making outstanding progress on increasing its annual production in tandem with decreasing its AISC per ounce of gold. With the company’s newest Fekola mine coming online in late 2017 – early 2018, the company will significantly increase its production levels which should translate to increased revenues and profitability.
B2Gold’s revenues are tied to the prevailing market price of gold. With the price of gold declining over the past three years, many are wary of investing in this commodity or in companies that produce it. Gold demand is not likely to decrease and in fact, one would argue that it will increase due to the financial uncertainties in today’s global economies. This demand, coupled with decreasing supply (as discussed earlier) should eventually drive gold prices higher.
With B2Gold operating mines in different countries across the globe, there is some level of geopolitical risk as well. While B2Gold has encountered challenges in doing business in developing economies, the company has managed to keep production fairly steady even in the midst of these challenges.
These relatively short 34-month bonds, currently yielding over 10%, have similar duration and yields to other bonds reviewed on Bond-Yields.com, such as the 14% Kemet bonds, the 9% TerraVest Convertible bonds, and the 9.18% Parker Drilling bonds.
Summary and Conclusion
Although technically a mid-tier producer, B2Gold has done a fantastic job in bringing down its AISC to rival that of some of the larger, more well-known gold producers. Over the next few years, the company will see its production nearly double that of its 2015 levels. While some investors may currently want to shy away from gold given the recent interest rate increases, savvy investors know the value of diversifying with this precious metal. These 34-month Yankee bonds are currently yielding an outstanding 10% and will make excellent additions to both our Fixed-Income1.com and Fixed-Income2.com global high yield income portfolios.
Ticker: BTO / BTG (TSX / NYSE)
Conversion Price: $3.93 / share (US)
Yield to Maturity: ~10.1%
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Disclosure: Durig Capital and certain clients may have positions in B2Gold 2018 bonds.
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