Earnings Call Transcript - BTG Q2 2020

Operator, Operator

Good morning or afternoon, ladies and gentlemen. Welcome to B2Gold's Second Quarter and First Half 2020 Financial Results Conference Call. I would now like to turn the call over to Mr. Clive Johnson, President and CEO. You may proceed, Mr. Johnson.

Clive Johnson, President and CEO

Thank you for joining us today. The B2Gold executive team is either present in Vancouver or on the phone to discuss our financial results for the second quarter and first half of 2020. It has been another very strong quarter for us, with records in both revenue and operating cash flow. We also have kept a strong lead on our operating cash costs per ounce and all-in sustaining costs per ounce, and we are pleased to announce that we are doubling our dividend from $0.02 to $0.04 a share, reflecting our strong financial position. The current gold prices have contributed to this success. We plan to fully repay our revolving corporate facility in the third quarter, and we currently have a positive cash position. Given our impressive total cash operations this year, it is fitting to increase our dividend to $0.04 per share. Now, I will hand it over to Mike Cinnamond to go through the financial results, followed by a brief update on the Fekola expansion, and then we will open the floor for questions. I'd like to comment on how we've managed through COVID. Our financial and operational success over the past couple of quarters, despite the pandemic, can be attributed to several factors. Our team's extensive experience in the industry has been invaluable. We have faced numerous challenges over the years, and we took COVID-19 seriously from the outset. Our team's ability to adapt and manage through this crisis has been a key factor in our success. Moreover, our company’s culture emphasizes treating people with fairness, respect, and transparency. This has fostered mutual trust among our employees, unions, and governments in the regions where we operate. During times of crisis, this trust has proven crucial as we all shared a common goal of ensuring safety in mining operations. We collaborated early with governments and employees to maintain operations safely amidst varying challenges in each country. We’ve also made significant donations to support COVID relief efforts in the regions where we are active. In terms of political risk, while we operate in countries that some may view as risky, we prefer to be in countries that welcome us. The regions we work in often lack strong safety nets, making our continued gold revenue and the jobs we provide vital. Governments have been receptive to working with us to ensure safe operations. In the future, I believe there will be a recognition of which industries proved beneficial during the COVID pandemic, and mining is likely to be seen favorably, potentially leading to increased openness towards the mining sector. I welcome any specific questions regarding our response to COVID, and I will now turn it over to Mike Cinnamond for a review of our financial results, followed by Bill who will update us on the Fekola expansion before we take questions. Over to you, Mike.

Mike Cinnamond, CFO

Thank you, Clive. I'll begin with the earnings report. Our revenue for the quarter reached $442 million, setting a new record for B2, with sales of 257,000 ounces at an average realized price of $1,719 per ounce. I'm pleased to share that we sold some gold above $2,015 per ounce during this period, which is quite remarkable. Additionally, we sold nearly 17,000 ounces more than we produced, largely due to the drawdown of Fekola's closing inventory at the end of Q1. As you may recall, by the end of Q1, we began feeling the impacts of the pandemic at various sites, significantly affecting flight schedules. This situation resulted in a slight buildup of gold inventory, which we successfully sold down in the current quarter amid rising gold prices. Now, focusing on production, our ongoing operations produced 240,000 ounces, exceeding our budget by 8,000 ounces, primarily driven by Fekola. Fekola's performance was in line with expectations, and our share of equity investments brought in an additional 2,000 ounces, leading to a total production of 242,000 ounces for the quarter. Fekola was the standout contributor, producing 147,000 ounces—6,000 ounces above budget—continuing its strong operational performance. Process throughput and recoveries exceeded expectations, while head grade matched our budget. In Masbate, we reported 49,000 ounces, aligning closely with our budget despite reductions in workforce due to COVID-19. We experienced a reduced workforce for half of the second quarter, but by mid-May, operations were back to nearly full strength, staying on track with our budget. During this period, processing met budget expectations, with mill feed grade slightly lower at 0.94 grams per tonne. However, recoveries improved due to mining a higher ratio of oxide. Grades dipped slightly mainly due to prior artisanal mining activity at Montana’s surface level. We anticipate this issue will resolve as we transition to deeper mining within Montana. At Otjikoto, we recorded 43,000 ounces, which is 1,000 ounces ahead of budget, reflecting consistent output. Both processed tonnes and recoveries were in line with expectations. It’s worth noting that this performance is up from last year due to mining higher-grade ore from the Wolfshag Pit. Now turning to costs, our cash costs for the quarter were $390 per ounce, which is $42 per ounce less than our budget. This achievement was supported by solid operational performance across all sites. Fekola had cash costs of $300 per ounce, just $6 above budget, reflective of increased production and in-line with total production costs, albeit with slightly higher-than-expected COVID-related expenses at about $4 million. This includes primarily payroll and some transportation costs, averaging approximately $30 per ounce. At Masbate, cash costs were $610 per ounce, which is $91 under budget due to various factors, including lower than anticipated mining and processing costs. Mine tonnage fell short of budget, and we also had reduced waste stripping. Fuel prices for the fleet were significantly lower, leading to decreased processing costs as well. Otjikoto’s cash costs came in at $421 per ounce, which is $64 below budget, driven by higher production, lower fuel costs, and a stronger Namibian dollar, positively impacting operational costs. Overall, we saw notable declines in fuel costs at both Masbate and Otjikoto. In contrast, at Fekola, diesel costs were slightly below budget, while HFO remained around budget levels. When factoring in our very minor production from Caliber during the quarter, total cash costs across all operations stood at $390 per ounce, again $42 less than budget. Our all-in sustaining costs for operations were $714 per ounce, a reduction of $93 from budget, largely driven by Otjikoto’s performance, which resulted in lower cash costs and capital expenditures. Year-to-date, our budgeted figures for cash costs and all-in sustaining costs reflect consistency across the first two quarters, a testament to our robust operations even amidst COVID-19 disruptions. On the income statement side, G&A costs were down by about $3 million from last year, primarily due to less travel and lower consulting fees resulting from decreased activity. The income statement also reflects a $3.7 million share in the income from our associates, specifically Caliber. In terms of tax, we are now fully taxable at all sites, having utilized any accelerated capital deductions available, leading to a corporate income tax expense of $82 million for the period. Additionally, we anticipate cash taxes nearing $180 million based on current gold prices, with this figure expected to rise above $200 million if gold prices remain strong. Now, on to net income, we reported $138 million for the period, with shareholders' attributable income standing at $124 million, or $0.12 per share GAAP EPS. After adjusting for significant non-cash items, our adjusted EPS for the period was $0.11 per share. Moving to cash flow, we reached a record $238 million for the quarter, which translates to $0.23 per share, accumulating a total of $454 million in operating cash flow year-to-date. With gold prices around $1,900, we project operating cash flows could exceed $900 million. In financing matters, we drew $250 million from our revolving credit facility as a precautionary measure, with plans to repay this amount and the remaining drawn balance in the upcoming third quarter. Despite COVID-19 impacts on all sites, operations are running well, and we’re on solid ground financially. We also do not expect to incur any dividends this quarter; however, our dividend has increased from $0.01 per share in Q4 of 2019 to $0.04 per share now, translating to an annualized amount of $0.16 or around $170 million per year in cash flow. In terms of capital expenditures, we've spent $70 million this quarter and $182 million year-to-date, falling short of our budget by $38 million, much of which we believe will not be spent in the second half. Notable savings include $4 million from Otjikoto's stripping operations, permanent savings are anticipated, and there are also reductions in costs for the Wolfshag underground development. In summary, we ended the period with $628 million in cash, which puts us in a net cash position of just below $160 million, well-positioned to manage our debt while expecting a strong cash position by year-end. As for project updates, Fekola is advancing, and we remain on track with various initiatives, including the Gramalote feasibility study expected by early next year.

Clive Johnson, President and CEO

Thank you, Mike. Before I hand it over to Bill, I want to discuss our strategy, who we are, and where we're headed. Over the last 12 years, we have felt confident in our long-term strategy, which focuses on growing production through accretive acquisitions and exploration, regardless of current market conditions, gold prices, or market sentiment. Looking back, we’re pleased that we adhered to this strategy, even when it was contrary to prevailing opinions. We constructed mines during periods when growth was not favored, and that persistence has positioned us well today. We take pride in being one of the few companies to build gold mines in recent years, which contributes to our fortunate standing. This position allows us the flexibility to take a measured approach to mergers and acquisitions, as we do not see many appealing projects at this time or at acceptable price points. Our primary focus remains on developing our pipeline. The Gramalote feasibility study is set for the first quarter of next year. I believe many do not yet fully understand the potential of Gramalote. It is a robust project with numerous beneficial attributes, and we have a strong partnership with the AGA team, which is critical as we move forward with feasibility. We feel confident the project will be viable and economically feasible in today's gold market, particularly at a gold price of $1,350. We expect to make progress towards a development decision on Gramalote by the second quarter of next year. To clarify, neither party can hinder the project’s advancement under our 50:50 joint venture agreement. If we receive a favorable feasibility study next year and AGA opts not to invest their share of the estimated $900 million capital, we have the option to buy their interest at fair market value based on the study's findings. The same applies vice versa. AGA could reduce their stake to 30% if needed. Unless unforeseen circumstances arise, we anticipate that Gramalote will proceed to become a mine. Currently, the main risk involves infill drilling, which is progressing well with promising results. The ore body is fairly uniform, and we are near the completion of drilling. Following this, we will develop a true resource and integrate all the extensive engineering and metallurgical work completed over the years. Gramalote has the potential to produce over 400,000 ounces annually, with all-in sustaining costs projected around $650 per ounce based on preliminary economic assessments. This is an attractive project, with few comparable opportunities globally today. We are optimistic about advancing to the next stages of development. Our Kiaka project in Burkina Faso is becoming more appealing with current gold prices. We are exploring various power sources and have gained valuable insights into solar power from our experiences in Namibia and Mali. We are also considering natural gas and other alternatives, which could enhance the project. We will be reassessing Kiaka over the coming months, working on a new geological model and digital mine planning, ultimately producing a new feasibility study. Regardless of our approach, whether independently or in collaboration with others, we are determined to unlock value from the 4 million ounces at the Kiaka deposit. Additionally, our exploration team, one of the leading gold exploration teams worldwide, will continue its efforts. We are getting promising results from Cardinal, which is west of Fekola, and we have also identified encouraging results in the Anaconda region to the north, about 20 kilometers from Fekola. We are eager to resume drilling as resources become available, and we will actively seek world-class deposits. Regarding M&A activity, while we remain on the lookout, we find ourselves in a strong position and do not feel pressured to pursue any major acquisitions. We anticipate increased M&A activity in the market and hope to avoid the issues seen a decade ago, with inflated asset prices amidst rising gold prices. We intend to maintain our prudent approach. Before I pass it to Bill, I want to acknowledge our 4,200 employees for their incredible work during the challenges posed by COVID. Their dedication, hard work, and positive morale are commendable and reflect our company culture. In the coming months, you can expect more drill results and exploration updates from Cardinal and other locations, including the Anaconda region. We officially launched the Rhino Gold Bar initiative through Kitco, allowing the purchase of gold bars to support black rhino conservation in Namibia. This initiative has been positively received and highlights our commitment to philanthropy and conservation efforts, especially as the African tourism industry faces challenges due to COVID. Our contribution will aid local communities in protecting rhinos from poaching. We are proud to be involved in this creative initiative, which presents new opportunities for responsible giving in the future. Now, I'll hand it over to Bill for an update on the Fekola expansion.

Bill Lytle, CFO

Yes, thank you, Clive. I won't go into much detail about production since Clive has already covered that well. However, I do want to highlight something that hasn't been asked. We've had an outstanding record on safety, especially considering the challenges posed by COVID-19 and long shifts. We achieved a quarter with no lost time accidents at any of our operations, which is an impressive feat for the entire year across all three sites. This reflects the strong culture and dedication of our employees and reinforces our position as an industry leader in safety practices. Now, turning to the Fekola expansion, as we discussed after last quarter, there are four phases to this expansion which I will quickly outline. On the mining side, as Mike mentioned, we are ahead of our development schedule. We aimed to double our mining production rate, and we received the first two batches of equipment earlier than expected. A fantastic job was done in commissioning these under COVID-19 conditions, and they are currently in operation and performing exceptionally. Another batch of equipment is expected before the end of the year, and we do not anticipate any issues, so everything is on track. On the milling side, we previously stated that we would be ready to transition to full-scale production by the end of Q3. It now appears we will meet or exceed that timeline. We're in the final stages of preparing our commissioning team, with over 80% of our tie-ins complete. The commissioning team has now arrived on-site after going through mandatory quarantine and is getting ready to begin work. We plan to fully operationalize this by mid-August, aiming for a successful commissioning and implementation of the expansion by the end of August. We consider the end of Q3 to be a very achievable target, possibly even sooner with a bit of luck. The third part concerns the tailings facility. We completed a double lift, which was primarily aimed at ensuring we could accommodate the increased volumes from the expansion. After reviewing historical mill activities, we decided additional capacity was necessary in case the mill exceeds expected performance. This setup will carry us into 2023, and we completed this work ahead of schedule and before the rainy season, so it's now fully operational. Lastly, regarding the solar plant, we've continued to make progress. Remember that we transitioned to an island-type configuration at Fekola to protect our employees and the local community from COVID-19. To facilitate this, we needed to create extra accommodation space, which led to the solar team stepping off-site. Despite those challenges, the project has been making steady progress. We've received materials, installed batteries, and are finalizing the design. Once the mill commissioning team completes their work, we have the solar team ready to move in. We anticipate that by mid to late September, we can begin their work, and within about six months, the solar plant could potentially be up and running. It's important to note that the solar plant is not a requirement for the expansion but serves as a cost-saving measure throughout the mine's operational life. We expect no issues with its completion in Q1 2021. Regarding the Otjikoto underground project, as Mike mentioned, it is on schedule. The contract was awarded as planned, and the contractor has entered the country and completed quarantine. They are currently preparing their team. We are confident that this project will progress according to the existing timeline. With that, Clive, I will turn it back to you.

Clive Johnson, President and CEO

Okay. Thanks, Bill. I think with that, we will open it up for any questions.

Operator, Operator

Your first question comes from Ovais Habib of Scotiabank.

Ovais Habib, Analyst

Congratulations on a successful quarter. Mike, my first question is regarding B2’s net cash position and the plan to pay off the RCF by the end of Q3. Additionally, I see that you've increased your dividend. How are you planning to allocate the strong free cash flow going into 2021, especially if gold prices remain high? Will it be more dividends, investment in the construction of Gramalote and Anaconda, or exploration? Could you provide some details on your capital allocation plans?

Mike Cinnamond, CFO

Yes, I can share some insights on the aspects we'll be considering. We can't go into much detail until we reach a decision point. Regarding the dividend, when you increase it significantly, it raises questions about its sustainability, which can be inferred from our actions this quarter. On the capital side, the first major decision pending is Gramalote, as we expect to have feasibility results by the end of March. We'll assess our needs for Gramalote and determine whether to proceed, and the indicators to move forward, as Clive mentioned, look promising. We're also revisiting Kiaka to evaluate its potential and what actions we may take there. Additionally, with ongoing drill programs in Fekola for the Snakes and Cardinal zones, we're starting to focus on the positive results and consider future capital allocations. These are the main priorities moving forward.

Clive Johnson, President and CEO

And just to add to that, many companies base their dividends on a percentage of free cash flow. We haven't reached that point yet, and currently, as Mike mentioned, we're focused on understanding our capital needs moving forward. When looking at Gramalote, we don’t necessarily have to rely solely on free cash flow. It's clear that we can generate over a couple of billion dollars in cash from operations during the next 2.5 years while we are developing Gramalote, assuming gold prices remain stable. Therefore, cash flow can cover our needs. However, we are beginning to see a bit of project debt take shape along the way since it is available and very inexpensive. This is why we haven't established a dividend based on free cash flow just yet; we're still in the process of determining our cash requirements concerning capital and other factors. For exploration, we can likely continue to invest around $50 million annually. We can provide further details regarding the sustaining capital going forward if you're interested in discussing that in a separate call.

Ovais Habib, Analyst

Sounds good. And just changing gears a little bit then, and my next question is for Bill in regards to the Fekola expansion. So the expansion was supposed to increase throughput by approximately 1.5 million tonnes per annum. In 2019, the mill was already running at over 7 million tonnes per annum without the expansion. So, I mean, could you see Fekola achieving approximately 8 to 8.5 million tonnes per annum instead of 7.5? And then if that's the case, is this rate sustainable? And how do you see the mill ramping up once it's completed at the end of Q3?

Bill Lytle, CFO

And so I'll answer it and then, John, can you help me afterwards. So if you remember, we always said it was going to be $1.5 million-plus what we think it could do when it became kind of fully production-wise. John and I had a lot of discussion on this, hard ore, soft ore. But the other thing which is of really interest but he keeps bringing up is that when you're running these things so hard, if you're running up at the top end, then you really risk the additional maintenance cost and everything else that goes with that. So what we can say is that we're very comfortable with the 7.5, and it's probably above that a little bit. But I don't think, until we get it commissioned and really see what this thing can do, that we're comfortable saying that we're above 8 or 8.5. I think the 1.5 million-plus, what it was originally designed at, is what we're comfortable saying and maybe a little conservative. I don't know, John, if you want to add that.

John Rajala, Senior VP

I agree with everything said there, Bill. Yes, it was designed for 7.5 million tonnes a year on hard ore. With softer ore, we will be able to achieve a higher production rate, but that'll depend on the mill feed blend coming from the mine. So after we run it for a while, we'll have a much better idea of what the ultimate throughput can be on softer feed blends. There are some...

Clive Johnson, President and CEO

We're drilling extensively at Cardinal now because it has the potential to contribute additional ore, and it's located about 500 meters from Fekola. Some of this ore may be softer, which, if successful, could positively impact production and throughput. Would you agree with that, Bill?

Bill Lytle, CFO

Yes, Clive, that's an interesting point you raise. We're not just considering Cardinal, but we're also exploring whether we can assess the Anaconda area as saprolite and process it. We are investigating if there are hard sources that we can bring in for processing. Those studies are currently underway, Ovais. However, we all recognize that the mill has exceeded its design expectations, and if everything proceeds as planned, we believe there is potential for that continued success in the future.

Ovais Habib, Analyst

And in terms of the ramp-up, I mean, do you see that taking a quarter? Or is that a longer ramp-up?

Bill Lytle, CFO

No. Certainly, in our budget, by the end of September, we're going to be up and operational. John, I mean, am I out of line saying that? Certainly by the end of September, is it at full...

John Rajala, Senior VP

Yes, I agree with that, Bill. We'll be ramped up to design throughput by the end of September. Additionally, if we blend in saprolite in the mill feed, we will be able to achieve a throughput higher than 7.5 million tonnes per annum.

Joshua Wolfson, Analyst

Continuing the theme on the Fekola questions. For the third quarter, should we expect a steady-state production over the duration of the quarter? Or is there going to be any sort of commissioning-related downtime we should expect?

Bill Lytle, CFO

We have 10 days for all final tie-ins, but we are expecting full production for the quarter. That's all included in the budget and how we are currently operating. It's kind of evenly spread out over four quarters. I think it might actually be slightly less, but it's really within the margin of error of what we've been doing.

Joshua Wolfson, Analyst

Got it. Okay. And then for the Fekola Mine license, I guess, which is slightly adjusted for the solar project, and also looking at where gold prices are today, when do you expect capital to have been repaid and the dividend start to be paid from that asset on a steady-state ongoing basis?

Mike Cinnamond, CFO

You're asking when the initial investment, the loans that we put in to build the mine will have been paid up?

Joshua Wolfson, Analyst

Yes.

Mike Cinnamond, CFO

I think now at these gold prices, you're looking in the next two years, the initial investment will be recouped.

Joshua Wolfson, Analyst

Okay. And then last question on the commentary for Gramalote and looking at, I guess, what looks to be an optimistic outlook for that project. Is there anything else within the portfolio today which could potentially sort of come up as a higher-priority opportunity? Or is it safe to say that, that would be the #1 project? I asked just because the commentary on Kiaka was, I guess, more constructive in the current environment. And then potentially, if there's been more work done for Anaconda, could that be the case? Or is that not sort of the case for maybe a mid-2021 timeline for Gramalote's decision?

Clive Johnson, President and CEO

Yes, I find it difficult to envision any project taking precedence over Gramalote at this stage. It is progressing through the permitting process, and we are nearing the final feasibility assessment. We are optimistic about its potential, especially at a gold price of $1,350. Therefore, I do not foresee anything displacing it in our priority list. While Kiaka is not as strong a project currently, it has the potential to improve with our ongoing efforts, particularly regarding power costs. However, I don't believe Kiaka will surpass Gramalote in terms of priority. We are committed to maintaining focus and accountability, and we will not be rushing to develop multiple significant gold mines simultaneously. If Kiaka proves viable after the upcoming evaluations, we may consider partnering with a responsible industry player to advance it, or alternatively, we could sell it as an asset. The government of Burkina Faso expects such a project to be developed, and if it is economically viable, I believe it should be built. In terms of timing and quality, I don’t anticipate Gramalote being pushed out of the agenda. We are quite interested in the potential of the Fekola project and its sulfide resources, and we'll be actively engaged in drilling there. It’s also possible that some material from the Anaconda area might be transported to the mill, especially the saprolite material. However, should we successfully identify another major deposit in the Anaconda area, I expect that project to follow Gramalote in development, possibly leading us to construct another significant mill and perhaps share a solar power facility.

Carey MacRury, Analyst

Maybe a bit early for this question, but just looking back to the feasibility on Fekola into 2021 and given what you've learned there this year in terms of grade and how the plant is performing, and obviously, you've got the expansion coming around the corner, but I think production was expected to dip into 2021 in that feasibility study, so I'm just wondering what's the opportunity for flat production or even higher production in 2021.

Bill Lytle, CFO

The question is versus 2020, what's the production in Fekola?

Clive Johnson, President and CEO

Yes, comparing 2021 to 2020, we're expecting the original feasibility study to come into play.

Bill Lytle, CFO

Yes, I believe we will have slightly less production in 2021. However, it's important to note that we have a stable production target of 550,000 ounces over five years, and we are consistently working towards that goal. The actual timing of production within that timeframe will depend on our pay positions throughout the year. We are always exploring the best strategies to advance our production. So, the target remains at 550,000 ounces over the five years.

Clive Johnson, President and CEO

That does include any potential from Cardinal or from Anaconda.

Bill Lytle, CFO

Yes, that's a valid point. We are currently exploring how the mill may perform. We are taking some significant risks to evaluate if there is additional capacity and how we could utilize it, whether that comes from Cardinal, Anaconda, or potentially from the northern zones, which haven't been extensively discussed yet.

Operator, Operator

There are no further questions at this time. I turn the call back over to Mr. Clive Johnson.

Clive Johnson, President and CEO

Okay. Thanks, everyone, for your time. And thank you, operator. We look forward to talking to you again soon. Thanks, everyone.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.