Wednesday, March 30, 2016

In 2016 Banro Corp May Deliver Weaker Results Than In 2015

My first (and last) article on Banro Corp, published on Seeking Alpha, triggered quite a violent discussion. Some people accused me of a biased attitude against the company. Of course these people were totally wrong - when presenting any opinion on anything I am trying to be as much objective as possible. No company, website, person etc. pays me for my opinions - I am an independent analyst. Period.

In this article I am discussing the 2015 results delivered by Banro Corp. The article is structured around two main topics: positives and negatives. I encourage my readers to assess on their own, which features overweight.



In January 2016 Banro declared commercial production at Namoya, the second operating mine. Therefore, starting from the beginning of 2016, the company will be reporting Namoya's results in its statements of operations; until the end of 2015 all costs and revenues, delivered through selling gold produced at Namoya, were capitalized into the company's balance sheet in the line called "Mine Under Construction". Let me discuss this issue a little bit deeper.

At the end of 2014 the line "Mine Under Construction" was showing the cost of $414,258 thousand - see the picture below (page 27 of the Annual Report):

At the end of 2015, $388,012 thousand was disclosed as the cost - please, note that "Pre-commercial production revenue" of $53,318 thousand was accounted for as an item decreasing the total cost. Since the beginning of 2016 all revenues generated by Namoya will be accounted for as revenue in the statement of operations but until the end of 2015 the company could not book this revenue, due to accounting rules, as operating revenue. Consistently, all costs attributable to Namoya in 2015 were shown in the same way (i.e. in the line "Mine Under Construction". 
In other words, in 2015 all revenues and costs, visible in the statement of operations, were attributable to the Twangiza mine, only. In 2016 both mines, Twangiza and Namoya, will be shown in this statement. Why am I writing that? Because, due to these rules, the investors have been not able to find out what costs of production the company has to incur to extract gold at Namoya.


This is a negative. If I do not know these costs  I am not able to asses whether Namoya is going to be profitable in the future or it is not. Simply put - there is no data on that issue. 

However, I may try to do it indirectly. 

First of all, in 2015 the company processed (milled) 1,416,179 tons of ore at Namoya. The average head grade was 1.88 grams of gold per ton of ore and the company was recovering gold at the rate of 84%. Therefore one ton of ore processed was containing gold of market value of  $58.7 (1.88 gram x 84% x gold price realized ($1,157 per ounce in 2015) x 0.03215 (grams to troy ounces)). 

Now, production costs. The table below shows production costs reported in the Namoya Technical Report, published in 2013 (page 127):

Summarizing these items:

  • Mining costs: $8.32 / ton
  • Processing costs: $15.01 / ton
  • General and Administrative: $14.05 / ton
  • Selling costs: $32.53 / ton
  • Minus Government Royalty (which is included in the net gold price realized)
  • Total: $58.28 / ton

Well, it seems that, using the 2015 gold prices, Namoya is going to be slightly profitable because the difference between revenue and costs is standing at $0.42 per ton of ore milled and sold. 

Assuming the price of gold at today's level of $1,233 per ounce, the difference would be a little bit higher ($4.32 per ton). 

I realize that production costs presented above should be updated, but 3 years after the publication of the last Technical Report these costs might be even higher. 

On the other hand, the company assumes that in the fourth year of operations the total cost of production should stand at $54.73 per ton. If such is a case (i.e. due to the learning curve effect, costs should go down), Namoya could be profitable even at the price of gold of $1,157 per ounce. 

Summarizing - it seems that the results reported in the first quarter of 2016 may surprise many investors quite negatively. If gold prices are standing at today's level of $1,233 per ounce, in the first quarter of 2016 Namoya should deliver the margin of around $3,500 thousand (margin is defined as revenue less operating expenses without depreciation and depletion), which is a rather meaningless figure (for example, the quarterly margin, delivered by Twangiza, was $15,790 thousand in 4Q 2015).  



Twangiza is, in my opinion, a much better operation than Namoya. Let me discuss the mine's economics. The table below presents the Twangiza basic operating and economic measures, actual for 2014, 2015 and forecasted for 2016: 

As the table shows, Twangiza is a highly profitable operation. In 2015 this mine delivered gross margin of $81,306 thousand or, using other metric, it delivered percentage margin of 52%. Assuming the price of gold of $1,230 per ounce in 2016, Twangiza should deliver gross margin of $80,667 thousand (a little bit less than in 2015 because of lower throughput). 

2016 Forecast

Let me summarize the above calculations and present my 2016 forecast for Banro (Twangiza production: 120,000 ounces; Namoya production: 110 thousand ounces of gold). The table below shows all figures:

"Corrections" of $20,618 thousand comprise the effects of many gold forward agreements signed by Banro in 2015. According to these agreements, the company is obliged to deliver specific amounts of gold, produced at Namoya and Twangiza, sold at strictly defined gold prices. In other words, through these agreements the company is selling part of its gold production below market prices - that is why the corrections negatively impact the company's results.

The last line depicts the adjusted EBITDA, calculated for 2014, 2015 and 2016. Due to issues described in this article, in my opinion, despite putting into operation a new mine, in 2016 Banro should report worse results than in 2015. 

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