B2gold Corp Q2 FY2021 Earnings Call

Good afternoon, my name is Collin, and I will be your conference operator today. At this time, I'd like to welcome everyone to the B2Gold Second Quarter 2021 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mr. Johnson, you may begin your conference.

Thanks, operator. Thanks everyone for joining us. As the operator said, we are here today to talk about our financial results from a strong Q2 of 2021, and continued strong gold production performance above budget, and we are on track to meet or exceed the upper end of our annual production guidance range, which is 970,000 ounces of gold to 1.030 million ounces of gold. I’m just going to give a couple of remarks and then Mike will walk us through the key financial results. We put on a pretty extensive news release talking about the results of the quarter, and also where we sit on our financial overall growth, and updating you on a few other issues. The three mines continue to produce well. I think as we've signaled very early and very often, that the second quarter of this year versus the first half of the year was going to be lower production, with production weighted to the second half of the year. The second quarter of this year, we knew, was going to be the weaker quarter on a financial results basis, which hopefully we signaled that very well to the market. So we're seeing the reality of that. We're also seeing a positive start to the second half of the year. In terms of overview, we'll hear the three mines continue to operate very well. We've worked very hard and diligently through the COVID experience with our communities, our employees, and the governments in the areas we work with. They're proud of the contributions from everyone. And I think that we will shore off the amount of social license and trust we have in the places that we work in that we're able to collaborate very early on a mutual trust relationship to ensure that we can continue to mine. This is critical in the countries around for the economy, but continuing to mine, but only if we can do it safely. So I'm proud of the contribution from all of our employees and people. In terms of looking forward a little bit, I will touch on some of the catalysts going forward. I'll touch on that now for those who don't make it through the whole call. But at the end of the day, as I said, we're on guidance. That does not include a couple of upside potentials. We have the cardinal zone, which is adjacent to Fekola deposit. We've already done a mock test and we're looking to start moving on from cardinal to good grade material from Cardinal through the Fekola mill, which is not included in any of our projections. So that could bump up production there. Looking a little bit further out, we are looking at the Anaconda area which consists of Menankoto and Bantako. We are currently in dispute with the government over the ownership of the Menankoto license. We continue to discuss with the government looking for solutions. We believe we have a legal right to an extension of an exploration license where we've spent $27 million and identified a significant resource that has potential to get larger and can be tracked down potentially too difficult to Fekola mill. But importantly, the Anaconda area, where these two licenses in the Bantako North and just North of Menankoto has a significant amount of satellite weather material at the surface worth good grades. That's actually where we would start mining the Anaconda area, which is the license that is not disputed. We're looking to start shipping a lot of potentially the upper down to the Fekola mill, as early as the second half of next year. The Fekola mill we've talked about had spectacular performance from when we first constructed it and through the two expansions of the mill and we're getting some very good tonnage throughput. So that's another upside given the projections we made for tonnage throughput, and if that continues for the year, that's another potential positive upside. And the saprolite really, because of its weathered nature material can run through the mill on top of the normal capacity for the mill. The overall picture of the Anaconda area, we think there's tremendous exploration upside in Menankoto and Bantako and continue to explore Bantako while we resolve hopefully positive results and get on with business on Menankoto. In terms of that scenario, I just want to comment that Mali has been a very good place to do business and the Fekola mine can attest to another company, including ourselves. So we expect to resolve this current situation and get back to exploring Menankoto on behalf of our part of the government and the people of Mali, creating jobs in the short-term. But in the meantime, we'll tackle where we will have started there anyway. We think Mali is a good place to be in the gold mining business. We still believe that. We believe that the government will continue to honor the laws as it has for decades, making it an attractive place for foreign investment in gold mining. Other than that, we’ve got a lot of projects. Everyone knows we decided to delay the feasibility study there to do some additional work on engineering to meet some different concepts there to lower capital costs. It looks like we're getting some traction from some of the early indications from the engineers. We're doing additional drilling on the Gramalote itself, on two other areas Trinidad and Monjas West, getting some interesting early results from Trinidad, which was a low-grade zone that might have extended mine life now, which seems to show some potentially higher grades there. We'll see how that pans out. Because of COVID-related delays, we are looking at hopefully early in the second quarter now for the release of the new feasibility study. We’re optimistic about Gramalote and we can improve the project through some of the initiatives we have going on and we'll be able to talk about that, as I said earlier, in the second quarter. Other than that, we've got a very active exploration program going on around many targets around the world, things we've been working on, in some cases for years to get opportunities like Uzbekistan, where we're drilling, and targets in Finland, and of course, all of our various brownfield exploration programs around the mines. We've had great success over the years, continuing to add ounces and therefore our mine life to our operating mines. Exploration will continue to be an important part of our growth profile. The Kiaka Project in Burkina Faso, we're updating the feasibility study there, and we're considering various alternatives to unlock that value for our shareholders. M&A, we're always looking at opportunities. We don't see a ton of things that we really love out there that we think are fair value. But we'll continue to look for opportunities, but primarily, we won't start overpaying for assets. We never have before. So with that, I’ll pass it over to Mike, and he'll tell you about the financial position we find ourselves in, continuing to pay a very robust dividend, one of the highest dividend yields in the gold sector, and talk about our strong cash position and our lack of debts and continued financial strength looking into the future. So with that, I'll pass it over to Mike Cinnamond to give us an update view.

Thanks, Clive, and good morning, everyone. I want to quickly cover the quarterly results, provide some comments on our year-to-date performance, and discuss our cash flow and balance sheet status. In the second quarter, we generated $363 million in revenue from selling 200,000 ounces at an average price of $1,814 per ounce. Gold prices remain stable, hovering around the $1,800 mark. Initially, we based our cash flow guidance for the year on a $1,800 gold price, and we exceeded our sales forecast by 12,000 ounces this quarter due to overproduction at our sites. For production in the quarter, including Calibre, we reached 212,000 ounces, which is 10,000 ounces above budget thanks to strong performance across all our operations. At Fekola, we continue to see mill throughput perform better than expected. We planned for an annualized throughput of 7.75 million tons for the newly expanded Fekola mill, and in the first quarter, we achieved 2.29 million tons, significantly exceeding forecasts. This success is attributed to favorable ore conditions and optimizing the grinding process. Masbate produced 57,000 ounces, 4,000 more than budgeted, with mill recoveries surpassing our targets and grades performing better than expected. We also conducted metallurgical tests to improve future recoveries as we move to harder rock later in the mine’s life. Otjikoto produced 27,000 ounces, 2,000 ounces above budget. Much of Otjikoto’s production is from stockpiles in the first half, but we anticipate improvements as we extract higher-grade ore in the second half of the year. Even during Q3, our grades from stockpiles were better than anticipated. In terms of cash costs, our overall production costs were on budget at $664 per ounce compared to the budget of $662. Fekola's cost was $617 per ounce, slightly above budget due to lower-grade material processed and higher fuel costs. Conversely, Cola's costs came in lower at $616 per ounce, thanks to higher-than-expected production. Otjikoto's costs were $854 per ounce, lower than budgeted as well. Overall, our consolidated cash costs were $30 lower than anticipated, aided by lower sustaining CapEx primarily due to delays in fleet rebuilds and stripping, which we expect to catch up in the second half. Year-to-date, we are ahead of budget by 29,000 ounces, reflecting our strong performance in the first and second quarters. We believe there is potential to exceed the upper end of our production guidance as we consider Cardinal's contributions. On other operational fronts, the Fekola solar plant is now fully operational, expected to reduce HFO consumption by over 13 million liters annually. We have successfully implemented solar energy solutions previously, and we are pleased to expand this at Fekola. We anticipate operational cash flow for the year to be around $630 million, based on our $1,800 gold assumption, and we are optimistic about a significant increase in cash flows in the upcoming quarters. The dividend was maintained at $0.04 per share, and our confidence remains strong, given the robust cash flows from our operations. Overall, the quarter was solid for us, and we remain cautiously optimistic about the remainder of the year.

Thanks, Mike. I guess we’ll open up for any questions now.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Okay, your first question comes from Tyler Langton from JPMorgan. Tyler, please go ahead.

Hey, good afternoon. Thanks for taking my questions. Maybe just start with Cardinal, I think you'd previously talked about it maybe being able to contribute around 20,000 to 25,000 ounces this year. Is that still the case? And then, I guess, start production? Are there any sort of permits or approvals that you need from the government?

Sure, yes. That's actually a question, Tyler. I'll pass it over to Bill to answer that.

Yeah, thanks. So the answer is yes. Kind of for the whole year, that 20,000, 25,000 is certainly within the range that we talked about. Remember, that it is still an inferred resource. So we're still working through that. But with that being said, certainly, the initial bulk sample that we completed in Q2 did represent quite well what we thought was going to be there. So that number still holds true. We have already gone through a full update to our environmental impact assessment. That was approved and now we’re just adding it to the mining plans. We actually have this next week the ministry coming out to have a look at it. We see within Q3, we'll be ready to mine it fully.

Thanks. And then just – sorry…

Go ahead, Tyler.

Okay, yes, the second question, just, I think we've certainly seen some inflationary pressures, I guess, can you just and you mentioned in the release some of the new pressures from fuel and other items, but could you just provide a little bit more detail on what you're seeing, whether it's materials, consumables, fuel, and if you've started any supply contracts, or fuel hedges that kind of mitigate the impact this year?

I think Mike can speak to – in fact, he touched on in his remarks about the fuel hedging. I don’t know Bill, do you want to talk other views on inflation and what we're doing to mitigate the impact?

Yes, we are seeing some inflationary pressures for sure. In particular, on the shipping side, there is – as everybody comes out of COVID, the shipping costs are up. What we're doing as far as trying to mitigate it, as you know, in the last couple of years, we've become a major producer as opposed to a junior. That's allowed us to get global pricing everywhere. So when we go out for prices on reagents, we're able to get the best price as possible. Certainly, there is pressure on inflation, but we're managing it as best we can. In fuel, Mike was going to talk about…

On the fuel side, I don't have a lot to add than I already talked about. We have kept our fuel hedging program up-to-date. We are basically 50% hedge for diesel and HFO needs for the next 12 months and then 25% for the subsequent 12 months. Right now, that's on the book. It has a mark-to-market value of about $80 million. The other hedge that we've put in place is through the solar plants.

Okay, great. Thanks so much. That's it for me.

Thanks, Tyler.

Your next question comes from Josh Wolfson from RBC Capital Markets. Josh, please go ahead.

Thanks. Just a quick question maybe on capital allocation. Obviously, this quarter was not necessarily representative of what the go forward cash expectations are going to be, but with the second half of the year being positioned much better and even beyond that, with Gramalote, what's the current thinking in terms of dividend policy and what the excess cash is going to be allocated towards?

So on that front, Josh, I think we’re pretty comfortable with our current dividend rate. We have one of the highest yields out there, and we feel pretty comfortable maintaining those rates, certainly for the long term, even given significant fluctuations in gold price. We are trying to balance cash flow generation with returning capital to shareholders while also being a growth company. So we plan to evaluate it towards the end of the year. Right now, we feel the balance we have is appropriate.

Great. Thank you. And then maybe if I can tuck in one more just for Otjikoto with the sequencing in the second half of the year, is there any sort of key difference between the third and fourth quarter?

Bill, you want to tackle that one?

Yes, I'm just looking at what grade we're feeding into the mill here in the second half. The answer is, it's going to be pretty evenly broke out. The first half, obviously, we had a very low output, but in the second half, we're going to see it come up in Q3 and Q4.

Okay. That's it for me. Thank you very much.

Your next question comes from Ovais Habib from Scotiabank. Please go ahead.

Thanks, Operator. Hi, Clive and B2 team. Many of my questions have been addressed, but I have a follow-up regarding Cardinal. Bill, you mentioned that you have submitted the environmental and social impact assessment.

Yes, they're proceeding very well. Like I said, we submitted the bulk sample. Now they’re just coming out to see where it's all at and just make sure that we've implemented it correctly within our mine plan. We see mining errors imminent.

Perfect. And in terms of mining on Cardinal side as well. Once you get the official, I guess, permit or whatever, can you start on Cardinal right away, or is there any pre-strip required?

We can start right away. As part of our bulk sample, we had to move some material out to get some representative material. So it’s been kind of a twofer. We got good metallurgical testing and we got some of the pre-stripping done.

Okay, perfect. That's it from you guys. Thanks so much.

Thanks, Ovais.

Your next question comes from Don DeMarco from National Bank Financial. Don, please go ahead.

Okay. Thank you, Operator. And thank you, Clive and team. My first question is for Bill. So, Bill, there's a lot of moving parts at Fekola. We've got low-grade stockpile just on Q2. What should we be thinking about in terms of grade for Q3?

Your question is, what is the grade for Q3 at Fekola? Yes, in the budget, our grade, kind of in Q3, is up around 2.8, 2.83. In Q4, we’re between 2.5 and 2.6.

Okay, great. Bill, just continuing on, you confirm Cardinal is going to be still in that range of 20K to 25K for 2021. But how much might we expect in 2022? Cardinal is included in the five-year guidance?

Yes, Cardinal is part of the original guidance we released, but the Menankoto developments are not included. What’s particularly intriguing is that we will have some flexibility regarding these matters. All of this will be factored into our planning. That's why I can't specifically predict what will happen in the first and second quarters of next year.

That’s an important point. We believe we have the legal right to an extension to allow us to get going on and file for an exploitation license. That’s a big step. But we didn't do that lightly, because we believe we have significant rights here.

Okay. Great. And on that note, is there any concern that the mining license in that area north of Mexico could be retracted?

We see that as really low probability. Reality is that is still sitting under a very early exploration license. We see business as usual everywhere else.

That’s a very different situation compared to Menankoto. Again, we're discussing with the government. That’s an important point. The indications are they're very keen to see us get going in that area with production.

Okay, guys. Good luck with the rebound in starting in Q3. Thank you.

Thanks.

Your next question comes from Carey MacRury from Canaccord Genuity. Please go ahead.

Hi. Good morning, everyone. Maybe a question for Mike on the operating cash flow guidance. 500 million in the second quarter. Is that line up with the midpoint of your production and cost guidance i.e. if you pressure guidance now, but if you do better in costs, could we see upside to that number?

On the operating cash flow side? Yeah, obviously, the more production you have depends on costs. We have seen some cost inflation. Our view overall is I think we can meet our cost guidance, but what the cost per ounce could still benefit from lower cost production.

Okay, great. And then maybe a question for Bill. I notice in the MD&A, you guys talked about the solar plant being completed and looks like it's going better than planned. Just wondering if you can add a little color on, potentially that could translate into progress.

We’re definitely seeing designs plus. We certainly anticipate we’re going to be above where we thought the design capacity was going to be. The solar provided 16.8% of total power production showing its effectiveness.

So high level, you mentioned the savings 30 million liters of HFO, which we can do the math on, but what is it like I assume the operating costs of that qualify now that again, is pretty, pretty minimal?

Yes, it's minimal. It's going to contribute to roughly $0.025 per kilowatt hour savings. We may have potentially even exceeded that.

Carey, just a reminder, overall, we think solar will reduce cash costs by about 3%.

And your next question comes from Anita Soni from CIBC World Market. Anita, please go ahead.

Hi, thanks for taking my call. Good morning, or afternoon Clive and team. Most questions have been answered. Can you just clarify again, the components of how we're getting to the higher production in the second half of the year? I thought you said that Cardinals not part of the guidance, and that could be an additional upside. But I thought Mike, that you had said that just now that Cardinal was factored in.

About Cardinal was factored in, it's not factored into the budgeted numbers. We haven't changed our guidance range. When we see what Cardinal looks like in Q3 then we will can consider updates.

Yes, a lot of different ways that could happen for sure. Our budgets for this year, were run at 7.75 million tons. We’re currently running much closer to 9. So that’s what we are shooting for. We could also see ounces from stockpile.

Excellent.

There are no further questions at this time. I'll turn it back to Clive Johnson for closing remarks.

Thanks for your participation and your good questions. We look forward to a very strong second half of the year and continue to perform well in the mines. We’re excited about pursuing development projects, exploration, and we look forward to talking with you again soon. Thanks, everybody.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.