Thursday, August 4, 2016

B2 Gold Is Shining

I am impressed by B2 Gold 2Q 2016 results. The company owns four mines, of which one is excellent (Masbate), two are O.K (Limon and Libertad) and the fourth is going to be excellent (Otjikoto). 

A few weeks ago I posted the B2 Gold 2Q 2016 margin forecast. According to my estimates, in 2Q 2016 the company was supposed to delivered a gross margin of $110 million. I missed a little bit - in fact, it was $99 million. Anyway, B2 Gold is heading for the right direction.

For example, it is steadily increasing cash flows from operations (for comparison reasons, I have calculated these cash flows on a per quarter basis):

On the other hand, B2 Gold is a shark company - it wants to produce more and more gold. Now it is building its fifth mine, Fekola in Mali. The mine should cost around $395 million (plus $66.7 million in mine fleet, which will be lease financed). Production is expected to commence in late 2017; during life of mine Fekola should be delivering 276 thousand ounces of gold in annual production.

Due to heavy investments, since 2012 the company has been reporting negative free cash flows:

Fortunately, higher prices of gold should support the company during the construction phase at Fekola. In 2Q 2016 B2 Gold generated $72 million in cash flow from operations - it makes around $290 million in annual cash flow at today's prices of gold. After deducting $80 million on sustaining capital needs, the company should have around $200 million per year to finance the Fekola construction. I think it should be enough to complete Fekola so there should be no need to increase the company's debt load (which is quite high today).

The table below summarizes 1H 2016 results:

Now, let mu list the main pros and cons for B2 Gold:

  • B2 Gold is quickly adding new mines to its mineral portfolio
  • Production is going up
  • Costs of production are going down
  • Despite the implementation of heavy investment program, the company keeps its debt at safe levels (at the end of 2Q 2016, debt was 2 times higher than the annual EBITDA - banks consider this figure as a safe ratio)
  • the company is lucky (I realize it sounds funny but good luck really matters) - rising prices of gold should make the Fekola construction easier
  • there are no prepaid, streaming agreements (the company economics is not spoiled by these expensive instruments)
  • each operating mine presents decent economics (Masbate and Otjikoto are the leaders)
And the management is not greedy:

Despite excellent financial results, in 2Q 2016 they cut their salaries by 60%, compared to 2Q 2015 (on the other hand share-based payments went up by 24% but the total compensation was down, compared to 2Q 2015).

Summarizing - in my opinion, B2 Gold is one of the best world's miners. The company's development is really impressive and in the not too distant future B2 Gold should add another big, low-cost mine to its portfolio.

As my readers know, B2 Gold is included in my precious metals portfolio. 2Q 2016 results are the best evidence that my choice was rational.

Finally, B2 Gold share prices action looks also impressive:


During the current bull market in gold B2 Gold shares are much stronger than the broad precious metals stock market, represented by GDX (upper panel of the chart).

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