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B2Gold Realizes Big Impairment Charges; Exciting Growth Prospects Ahead
Nov. 28, 2014 4:52 AM ET
B2Gold missed third quarter earnings as the company realized big impairment charges on the bottom line. B2Gold has an exciting gold mine in Namibia that should produce approx. 140,000 ounces annually.
We project B2Gold to produce record gold production in the fourth quarter, and in turn, beat analysts' revenue estimates.
B2Gold is an intermediate fast-growing gold producer, with gold operations and development/exploration projects in four continents (see Figure 1). Big impairment charges, largely because of lower gold prices, drove third quarter earnings downward. B2Gold expects another record year in gold production, with production growth to continue into 2015 and beyond as new gold mines reach first production.
Lower gold prices prompt asset write-downs
B2Gold reported a third quarter net loss of $274.1 million, or $(0.39) per share, compared to a net loss of $7.9 million, or $(0.01) per share in the prior-year quarter. The loss derives from $298.4 million in non-cash impairment charges related to the decline in gold prices.
The impairment charges accrue from a) $202.1 million goodwill impairment at the Masbate gold mine in the Philippines, and b) $96.3 million impairment on B2Gold's investment in the Gramalote gold joint venture (49% interest) project in Columbia.
"The sustained decline in the long-term gold price was deemed to be an indicator of possible impairment," the press release reads.
As previously discussed in our latest articles, the weak gold environment has induced billions in asset write-downs over the past year. If gold prices continue to plunge on the back of better U.S. economic and labour market data, further asset write-downs should come as no surprise in the gold industry next year.
On an adjusted earnings basis, B2Gold logged a loss of $4.2 million, or $(0.01) per share, better than a year ago, but still short of the Street's target of $0.01 per share.
B2Gold registered $114.9 million on gold sales of 91,282 gold ounces at an average realized gold price of $1,259/oz (vs. $1,378.oz YOY). Revenues could have come much higher, but weak gold prices have trimmed millions from potential top and bottom line growth over the past year.
Given the lower realized gold price of $1,259/oz, and an all-in sustaining costs ("AISC") of $1,117/oz, B2Gold earned $142/oz in operating margin in the quarter. That is a low, and uncompetitive margin compared to senior and intermediate gold peers (see Figure 2).
Fourth quarter and full year estimates
B2Gold estimates 2014 gold production from its Masbate, La Libertad, and Limon Mines to range between 380Koz to 385Koz.
The production guidance excludes the estimated gold output from the Otjikoto development project in Namibia. B2Gold plans to use the revenues earned from Otjikoto's pre-commercial production (starting in mid-December) toward mineral property development costs. We expect Otjikoto to recognize full-scale gold production in the first quarter of next year.
We can use the company's production guidance to project fourth quarter revenues and production. We take a conservative approach and use the low-end of the production guidance for our calculations.
Given year-to-date production of 272,199 ounces, we forecast B2Gold to produce 107,801 (subtract 380,000 from 272,199) gold ounces in the fourth quarter. We forecast fourth quarter revenues of $131.5 million based on an estimates averaged realized gold price of $1,220/oz. The Street is modeling sales of $125.8 million, and $0.01 earnings per share.
By comparison, B2Gold reported revenues of $138.1 million, and record gold production of 105,577 ounces in the fourth quarter last year.
B2Gold projects to reach the high-end of its AISC guidance range of $1,025/oz to $1,125/oz. If we assume a realized year-end gold price of $1,250/oz, we arrive at an operating margin of $125/oz, which is still uncompetitive among industry peers.
We expect the all-in cost figure to move lower next year as the low-cost Otjikoto gold mine reaches full production.
Liquidity positioning to improve with new gold mines
B2Gold has a good balance sheet, with $179 million in cash, and cash equivalents, and a working capital position of $215.6 million. The total liquidity position adds to $254 million if we include the $75 million in available credit.
In terms of debt, the company has $8.3 million in short-term debt, and $390.1 million in long-term debt, or $219 million in total net debt. The company has a reasonable debt to equity ratio (0.21) that is in-line with the mining sector as a whole.
Looking ahead, B2Gold expects 2015 gold production to range between 500Koz to 540Koz based on the high recovery rates at the Otjikoto gold mine.
In addition, B2Gold anticipates cash flows to increase "significantly" next year, and beyond as the company generates low-cost gold at new gold mines.
( Full disclosure - I do not currently have a position in B2Gold )
