B2Gold Stock: 5.1% Dividend Yield Driven By Strong Free Cash (NYSE:BTG)

Investment Thesis

B2Gold (NYSE:BTG) is a low-cost global producer of gold, with the highest dividend yield in the gold sector with some of the lowest all-in sustaining costs (AISC). BTG maintains a very strong free cash position, thanks to both record high production results and higher gold prices. However, at this time BTG does not expect to increase the dividend, but rather maintain it.

If inflation turns out to be more persistent than the market currently believes, gold stocks and gold should do well. From a valuation standpoint, gold stocks have never been cheaper on a price to earnings, price to cashflow, price to free cashflow or dividend yield basis.

B2Gold (BTG)	E2022	E2023	E2024
Price-to-Sales	1.9	1.8	2.0
Price-to-Earnings	9.0	7.8	6.9
EV/EBITDA	2.9	2.8	3.3

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Producing Assets

Mine	Location	AISC (per oz)	Estimated Mineral Reserves (thousands of oz, only includes confirmed amounts)	Expected Output in 2022 (thousands of oz)
Fekola	Mali	$860	2,960	580
Masbate	Philippines	$1,110	1,890	210
Otijkoto	Namibia	$1,160	560	180
25% attributable production share from Calibre		$1,200	N/A	45

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The primary producing asset for BTG is the Fekola mine located in Mali. The main location is fully developed; however, newer estimates have increased the probably mineral reserves, with exploration results returning similar quality minerals. These newer reserves are likely to add 60 Koz per year of production over the next 7 years.

A significant development asset called Anaconda is approximately 20km north of the Fekola mine area. Anaconda is expected to have 1.1 Moz of gold in confirmed reserve, but the total estimate is expected to be 2.2 Moz. $33 million will be budgeted to facilitate pre-bedrock exploratory mining operations, with phase 2 under current economic analysis. The primary economic concern is whether it is better to construct a new standalone mill or transport untreated rock to Fekola’s existing mill. BTG estimates that operations could begin as early as late 2H22, adding 100 Koz per year to Fekola’s production.

Exploration Assets

BTG allocated approximately $65 million for exploratory projects in 2022, with 43% going toward greenfield exploration, and the remaining going toward expanding existing mining operations.

$8 million in budgeted for a joint venture in Finland, next to an already economically feasible mine indicating favorable geology. $6 million is budgeted toward exploration of satellite locations around the Muruntau gold deposit in Uzbekistan. Muruntau is already the largest open pit mine in the world with an estimated 2 Moz/year output.

The remaining $14 million in the greenfield exploratory budget are still in very early development, with the most promising of which being in the Ivory Coast.

Previously, BTG was in a joint venture in Gramalote in Colombia, but this project was recently suspended following increases in projected long term costs, a reduction in the expected grade of resources, and a low first-five-year return.

Financial Health and Market Conditions

BTG maintains a solid below-sector-average P/E of 9.2. BTG has a weaker revenue growth than the sector, seeing only a 5.5% increase in revenue year over year. However, it excels at cash flow growth, which is partially put toward capex, with the capex budget growing 44.5% year over year in 2Q22. BTG has stated that its strong free cash position will not increase the dividend currently, instead focusing on development of assets.

Gold stocks have pulled back from their April highs, with markets assuming inflation has peaked, and a recession is coming. In the short term, we doubt this, and take the opinion that inflation is more persistent than the market is pricing in with quantitative tightening remaining a wildcard. Moreover, to a large extent gold has been left out of the Fed-sponsored gravy train that QE brought into equity markets which could make gold stocks a stable investment even in the case of a bear market.

Additionally, the global pricing of gold has seen an upward trend in the last few years. Countries under heavy sanctions like Russia – and those seeking to trade with it, are reducing USD holdings and increasing gold reserves which should support further price increases.

Risk

The largest and cheapest production asset BTG controls is the Fekola mine in Mali. In recent years, Mali has become a hotbed of Islamic terrorism and political instability following a military coup in 2020. In January 2022, ECOWAS sanctions against Mali severely restricted imports and banking locally, though BTG claims no production impact. Things could heat up once again in the country, as there is a constitutional referendum scheduled for October, after free elections were delayed until 2024.

In addition, it is always important to note the environmental impacts of mining operations, though the risk for severe consequences is likely to be already priced into the stock.