Cabot Turnaround Letter Issue: July 31, 2024

Playing the Biggest Turnaround Catalyst of 2024

As I mentioned in my first installment of the Cabot Turnaround Letter, the most valuable lesson I have learned in my professional career as a price forecaster is that the rate of change – of just about any metric – tells us everything we need to know about the immediate future. When the rate of change accelerates, it tends to continue accelerating. When it decelerates, it tends to continue decelerating. And the resulting push and pull is a large part of what comprises the business cycle.

In his book Principles, Ray Dalio explains the business cycle as a series of predictable stages that economies go through. According to Dalio, the cycle starts with a period of economic expansion, where borrowing and spending increase, leading to growth and rising asset prices. This growth eventually leads to overheating, where demand outstrips supply, causing inflation.

To combat inflation, central banks raise interest rates, which makes borrowing more expensive and slows down economic activity. This period of tightening credit often leads to decreased spending and investment, resulting in an economic slowdown, or in more severe cases, a recession. During the slowdown or recession, asset prices fall, and economic activity decelerates.

Eventually, the slowdown reduces inflationary pressures, and central banks lower interest rates to stimulate borrowing and spending, leading to a recovery phase. This recovery sets the stage for the next cycle of expansion. To illustrate this, Dalio made the following three doodles:

Source: Principles

Productivity, he argues, tends to increase over time, and is represented by a line going up and to the right at a 45-degree angle. The long-term debt cycle represents the gradual accumulation of debt over several generations up to the point it becomes unsustainable, and then the gradual reduction via payoff, default or bankruptcy. Meanwhile, the short-term debt cycle is a pattern that repeats every five to eight years, driven by credit expansions and contractions – sort of a mini-cycle within the broader cycle.

Source: Principles

Now here’s the neat trick that I’ve learned over the years.

If we were to zoom in on that box that I highlighted in the above chart – one single short-term debt cycle – we would find another mini-cycle that in my experience is much more useful in short-term risk management.

Source: Principles

Whereas a five-to-eight-year short-term debt cycle is characterized by periodic booms and busts, an equivalent subdivision simply highlights the business cycle in any one given year. Within that timeframe, EVERY company must plan out how much product they can sell, the outside procurement necessary to meet those sales goals, and the logistics necessary to provide that product to customers.

And it’s that overall short-term movement of capital that we measure by calculating overall spending and the average price received. Or as you might better know them, Gross Domestic Product (GDP) and Consumer Price Index (CPI), or “inflation” in parlance.

If I were to rewrite Dalio’s description of the business cycle using those metrics, it might read something like this…

The cycle starts with an acceleration in GDP, which leads to an acceleration in CPI (inflation). To combat higher CPI levels, central banks raise interest rates, which eventually decelerates GDP, which eventually decelerates CPI. When that deceleration/slowdown in GDP growth finally slows down CPI, then central banks lower interest rates to set the stage for the next cycle of expansion.

Ladies and gentlemen, I’m happy to report that after four long years of dealing with elevated levels of inflation, we have reached that final stage in CPI where it is beginning to roll over.

Source: Bureau of Labor Statistics

Now sure, I recognize that some of you might not fully believe what the “Bureau of Liar Statistics” may have to say about inflation. But whether we like it or not, this is what the Federal Reserve uses to set interest rate policy. And Fed Chairman Jerome Powell has already telegraphed that cuts are coming, he just hasn’t said exactly when.

And that’s OK – we don’t really need to know.

Because there is one asset that has the strongest possible long-term correlation – or in this case an anticorrelation – to interest rates.

I’m talking about gold.

As a friend once told me – and as I described in Cabot Wealth Daily not long ago – “Gold in particular has an enormous anti-correlation to long-term interest rates. When rates go down, they tend to pump up gold prices, and when rates go up, a little air comes out of gold…but never all of it.”

The trend is incredibly obvious when we just look at the period since the dot com bubble in 2000. And with inflation numbers finally softening and rate cuts anticipated in September (or sooner), gold prices have already begun their moonbound excursion.

Source: Tradingview

In our Cabot Turnaround Letter holdings, we already have some exposure to gold via Agnico Eagle Mines (AEM) which we moved from BUY to HOLD not long ago following its enormous run-up close to our price target of 75/share.

But while large-cap companies like AEM and Lundin Gold (LUG) have moved up massively alongside the yellow metal, other small and mid-cap companies – even some of those with fantastic assets – have not.

Source: Tradingview

And that brings us to this month’s recommendation…

Purchase Recommendation

B2Gold (BTG)

Park Place
Suite 3400 – 666 Burrard Street
Vancouver, British Columbia
Canada V6C 2X8
https://www.b2gold.com/

Symbol: BTG
Market Cap: C$5.20 billion
Category: Mid Cap
Business: Basic Materials
Revenues (2024e): $471 Million
Earnings (2024e): $91.7 Million
7/29/24 Price: $2.89
52-Week Range: $2.34-3.52
Dividend Yield: N/A
Price target: $5

Background: Company History and Operations

B2Gold Corp., a Canadian gold mining company, has grown from a small exploration outfit to one of the world’s largest gold producers since its inception. The company’s journey is marked by strategic acquisitions, successful exploration, and efficient operations that have positioned it as a major player in the gold mining industry.

The company was founded in 2007 by a group of experienced mining executives, including Clive Johnson, who became the company’s President and CEO. The founding team brought with them a wealth of knowledge and experience from their previous success at Bema Gold Corporation, which was acquired by Kinross Gold Corporation in 2007 for $3.5 billion. The name “B2Gold” reflects the continuity and ambition of the team to build another successful gold mining company.

In its early years, B2Gold focused on identifying and acquiring high-quality gold assets. The company made its first significant move in 2009 by acquiring the El Limon and La Libertad mines in Nicaragua from Central Sun Mining. These acquisitions provided B2Gold with a solid production base and a platform for future growth.

B2Gold continued its expansion strategy by acquiring further exploration and development projects. In 2010, the company acquired Auryx Gold Corp., gaining control of the Otjikoto gold project in Namibia. The Otjikoto mine, which began production in 2014, has since become one of B2Gold’s flagship operations, contributing significantly to the company’s overall gold output.

B2Gold’s growth strategy has been marked by strategic acquisitions and exploration successes across different continents. In 2012, the company acquired the Masbate Gold Project in the Philippines through the acquisition of CGA Mining Limited. The Masbate mine is one of the largest gold mines in the Philippines and has been a steady producer for B2Gold.

The company’s expansion into West Africa began with the acquisition of Volta Resources Inc. in 2013, which included the Kiaka Gold Project in Burkina Faso. This move was followed by the purchase of Papillon Resources in 2014, giving B2Gold control of the high-grade Fekola Project in Mali. The Fekola Mine, which commenced production in 2017, has been a significant contributor to B2Gold’s production profile, with substantial reserves and a low-cost operation.

In recent years, B2Gold has continued to explore new opportunities and expand its resource base, including last year’s acquisition of Sabina Gold & Silver, whose Back River Gold District in Nunavut, Canada, is expected to come online in 2025. The company has also undertaken exploration activities in Finland and Uzbekistan, aiming to identify new projects that can contribute to its long-term growth.

Analysis: Managing Sovereign Risk

Now a quick word before I move on to our plan to get in and out.

There are areas of the world – like South Africa, for instance – that present risks to operators.

And there are areas of the world – like Mali – that define risk.

As of 2024, Mali is under the control of a military junta led by Colonel Assimi Goïta. The junta has repeatedly postponed promised elections, the most recent delay being the presidential elections originally scheduled for February 2024, which were indefinitely postponed in September 2023. This pattern of delay has been consistent since the junta seized power in a coup in August 2020 and then again in May 2021 when transitional leaders who were preparing for elections were overthrown.

The junta has significantly restricted democratic space and political freedoms. It has suspended all political party activities and associations, citing public order and security reasons. This has been accompanied by increased intimidation of political opponents, civil society actors, and journalists. Media outlets have faced suspensions, and there have been reports of threats and arrests of journalists critical of the junta.

Despite these setbacks, Mali’s transitional authorities have shown some commitment to a political transition by establishing a new independent electoral management body and drafting a preliminary constitution. However, significant challenges remain, including setting up local electoral offices and finalizing the constitutional review process. The security situation in Mali also remains complex, with ongoing violence and high levels of internal displacement due to extremist groups.

All this said, there is no indication that the military junta in Mali plans to take over B2Gold’s Fekola mine.

Although the political instability and the coup-led government have caused concern, B2Gold has maintained continuous operations at the Fekola mine without significant interruptions. And as of now the company’s flagship mine – which I should add is partially owned by the Malian state (20%) – continues to be a significant asset for both B2Gold and the Malian government.

Entry and Exit Strategies:

Prior to the coup, the stock got up to as high as ~7.55 during gold’s COVID-driven run in 2000. Since then, however, it has largely been moving in the other direction, and during gold’s December-February slowdown, share prices got as low as 2.34. Since then, it ran back up with gold prices to as high as 3.18 a couple weeks ago before turning around.

Source: Tradingview

With gold prices likely to accelerate as interest rates come down and production about to increase as the Goose project at the company’s Back River property pours first gold next year, honestly, current levels look fine to establish a position, as downside is likely around 20% relative to an upside of 70% or more. And it’s always a good idea to set limit orders at lower levels so you can average down – in particular, the June lows at 2.50 look like a reasonable spot to target.

For an exit strategy, though, I like the idea of setting a trailing stop just above your entry price when the stock reaches the Oct/Nov highs at 3.46, then moving that to a 20% trailing stop when the stock hits the April 2023 highs at 4.40.

Source: Tradingview

And although I’m frankly pretty optimistic about the overall outcome here, I’m going to set the overall price target at the April 2022 highs around 5. Both the company’s revenue and margins should accelerate over the coming quarters, and that should provide more than enough momentum to get share prices moving substantially.

We recommend the purchase of B2Gold (BTG) shares with a 5 price target.

The chief analyst of the Cabot Turnaround Letter does not yet personally hold shares of every company on the Current Recommendations List, but that will change over time subject to the following guidelines. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may currently hold and may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.

Performance

The following tables show the performance of all our currently active recommendations, plus recently closed out recommendations.

Large Cap¹ (over $10 billion) Current Recommendations

Mid Cap¹ ($1 billion - $10 billion) Current Recommendations

Small Cap¹ (under $1 billion) Current Recommendations

Most Recent Closed-Out Recommendations

Notes to ratings:

1. Based on market capitalization on the Recommendation date.
2. Total return includes price changes and dividends, with adjustments as necessary for stock splits and mergers.
* Indicates mid-month change in Recommendation rating. For Sells, price and returns are as-of the Sell date.
** BNRE return includes spin-off value of BAM shares.
*** GE total return includes spin-off value of GEHC shares at January 6, 2023 closing price to reflect our sale.

The next Cabot Turnaround Letter will be published on August 28, 2024.

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