While most of the gold exploration and production companies, from Barrick Gold Corporation (USA) (NYSE:ABX) to the junior plays such as Valor Gold are increasing their focus on the Nevada’s gold rush, others such as B2Gold Corp Common shares (Canada) (NYSEMKT:BTG) and Continental Gold are eying some of the key areas in emerging markets. Both B2Gold and Continental are based in Canada and like their much bigger South African rival AngloGold Ashanti, the two smaller players are going to enjoy a labor cost advantage due to operations in Colombia, Namibia, Nicaragua and Philippines as long as they can navigate the inherent political uncertainty that comes with mining in these places. The question for western investors is whether that risk is greater than the banking system risk inherent in the U.S. and Europe.
B2Gold Corp Common shares (Canada) (NYSEMKT:BTG) is gearing up towards significantly increasing its production levels after the CGA acquisition while Continental Gold, which is in advanced stage of exploration and production, has reported some interesting results of metallurgical tests conducted on its massive mine located in Colombia. B2Gold has a market cap of $1.41 billion while Continental Gold’s cap is $475 million, which puts Continental in rarefied air for an exploration company, a lot of people are betting heavy on their ability to get into production profitably.
B2Gold.
B2Gold Corp Common shares (Canada) (NYSEMKT:BTG) has been one of the best performing gold stocks during this struggling commodities market. Gold’s dramatic drop in mid-April has started a physical gold frenzy around the world being led by India. B2Gold believes that this has created an ideal environment for some more valuable acquisitions. The AMEX Gold Bugs Index – The HUI – is trading at historically low valuations to the price of the underlying metals. So, B2Gold Corp Common shares (Canada) (NYSEMKT:BTG)’s assessment of the situation is accurate. Value investing is all about buying undervalued assets. Doing M&A when your stock is trading at a high multiple is simply good value investing.
In the second half of 2012, B2Gold Corp Common shares (Canada) (NYSEMKT:BTG) announced the acquisition of Australia based CGA Mining ltd and its properties in Phillipines in an all-stock deal valued at $1.1 billion. The company will now have production from three mines; Limon, La Libertad in Nicaragua and Masbate in Philippines.
The firm’s Gold revenues have increased from $127 million in 2010 to $225 million in 2011 to $259 million in 2012. In the last year, it had record gold production and sales of 157,885 ounces and 155,008 ounces respectively. However, net income, which increased from $20 million in 2010 to $56.3 million in 2011 has dropped to $51.9 million in 2012. The company’s gross profit increased by 14.4% to $127 million while its gross profit margin has remained constant since 2011 levels of 49%. The decrease in net profits came because of higher share based compensation of $16.6 million (up from $6.2 million), the CGA acquisition cost of $1.6 million and a $1.5 million write-off.
Following the acquisition of CGA, B2Gold is expecting to increase its production by 200,000 ounces per year for the next 15 years from CGA’s Masbate mine pushing expected 2013 production to 385,000 ounces of gold from its three mines. B2Gold Corp Common shares (Canada) (NYSEMKT:BTG) will continue to develop its Otjikoto mine in Namibia and higher grade ore is expected from La Libertad in the future. Both of these things are going to cause an increase in annual production to 550,000 ounces of gold by 2015.
Continental Gold
Continental Gold is an advanced-stage gold exploration and production company that is based in Canada and does most of its operations in Colombia under its gold project Buriticá located in the department of Antioquia. The project has a combined measured and indicated mineral resources of 3.74 million tonnes which includes 1.64 million ounces of gold grading 13.6 g/t gold, 4.6 million ounces of silver from an average grade of 38 g/t, as well as 55.8 million pounds of zinc grading 0.7%.
The company currently does not generate any operational revenues. Its common shares started trading about a year ago on the OTCQX. Earlier this month, it announced test results for its flagship mine. The tests were performed by McClelland Labs of Nevada under the supervision of M3 Engineering of Arizona. The test revealed metallurgical recoveries of gold and silver at the Buriticá Project of 95.4% (Gold) and 48.6% (Silver). Most of the gold can be extracted through gravity separation with an average recovery rate of 73.8%. This should give more confidence to its investors that the firm can produce gold at predictable cash costs.
In 2012, B2Gold and Continental gold went up by 22.2% and 24.1% while trading at the pink sheet. However, in 2013, following the steep decline in gold prices, both have dropped by 36.7% (B2Gold) and 52% (Continental) respectively. Both firms represent different ways for gold bulls to find value once the bull market resumes following the current shake-out. The physical demand for gold at current prices will continue as societal demand in Asia and the Middle East will more than likely outstrip current supply. The question overhanging both of these firms, of course, is the political climate in volatile places like Colombia and even the Phillipines. B2Gold’s diversifying into the Phillipines is a strong move given how strong the demand is regionally and how resilient the Phillipine economy is proving to be.
The Takeaway
One of the things that is important to remember when buying gold miners is first valuation risk and the second is political risk. In the case of the firms I mentioned at the top of the article Valor and Barrick Gold Corporation (USA) (NYSE:ABX) we have examples of each one carrying the first but not the second. Nevada is as politically friendly a place as there is for mining companies and the quality of the deposits that are begin discovered are some of the best the industry is producing at the moment.
For an explorer like Valor, they are trapped by the dearth of available investment capital plaguing the industry at the moment. But, Barrick Gold Corporation (USA) (NYSE:ABX), as a firm, has made a number of mistakes in terms of valuing properties and the recent ruling against them at Pascua Lama is a prime example of this. And I do not see that materially improving in the near future. Given how difficult the mining industry is at this point and that Barrick has apparently re-opened its hedge book, means that it will continue to yield up a poor return on investment.
So, in contrast to B2Gold Corp Common shares (Canada) (NYSEMKT:BTG) and Continental, they offer up a valuation problems versus the potential for political risks for doing business in South America and Southeast Asia. That said, the valuations in the gold mining sector, especially junior producers is so poor that valuation risk at this point is significantly low enough to warrant a look at companies like these in relatively unproven jurisdictions. This is especially true while gold continues to languish in price with investor sentiment as bearish as it has been since the bull market began back in 2001.
The article 2 Gold Stocks for Emerging Market Plays originally appeared on Fool.com and is written by Peter Pham.
Peter Pham has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Peter is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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