B2Gold aims for diversity, growth with CGA bid

VANCOUVER — Vancouver-based gold miner B2Gold (BTO-T) looks to be banking on its proven ability to operate successfully in difficult locales, as it moves forward with an US$1.1-billion, all-stock friendly bid for Australia’s CGA Mining (CGA-T, CGX-ASX) and its Masbate gold mine in the Philippines.

The two companies have struck a deal to exchange 0.74 of a B2Gold share for each CGA share held, equating to roughly $3.18 per CGA share. The offer represents a 22% premium for CGA shareholders based on a 20-day, volume-weighted average price for the respective companies, or a 26% premium over closing prices on Sept. 17.

“We believe that this transaction is typical of the types of deals we have done in the past, and will continue to do,” commented B2Gold president and CEO Clive Johnson during a conference call.

B2Gold would see equity dilution of roughly 62% or 250 million shares, in exchange for bumps in production of  around 162% in 2013, in reserves of 375%, and in resources by 150%. B2Gold and CGA shareholders would hold approximately 62% and 38% of the combined entity, which would have a market capitalization approaching US$2.9 billion.

Total post-merger production for 2013 is now pegged at 350,000 oz. gold from three operating mines — which include B2Gold’s La Libertad and Limon gold mines in Nicaragua — with aggregate reserves jumping to roughly 3.9 million oz. gold. B2Gold holds 13 million proven and probable tonnes grading 2.02 grams gold per tonne for 837,637 contained oz. at its two mines, and CGA holds 119 million probable tonnes averaging 0.83 gram gold for 3.2 million contained oz. at Masbate.

“These are win-win deals where we are partnering up with other companies that have very good management and very good assets. CGA is a great company with a very strong operational team in the Philippines that have had success,” Johnson concluded.

Both companies had been shopping in the mergers-and-acquisitions space on opposite sides of the ledger, with CGA hoping to pass the reins over to a more established mine operator, and B2Gold looking to expand its production portfolio and diversify its operating jurisdictions.

Johnson explained that CGA was brought to B2Gold’s attention by Haywood Securities, and that the merger process started up a “number of months ago.” The companies determined they had compatible interests and complementary expertise.

“We think the deal is outstanding from both shareholder perspectives,” explained CGA president and CEO Michael Carrick, who cited project diversity, political de-risking, and greater liquidity as the big benefits for CGA shareholders. “This merger is exactly consistent with our management’s original strategy, getting the asset to design capacity and moving it into some safe hands. We searched globally for the right management team to take control, and we’re absolutely confident we’ve found them.”

CGA’s wholly-owned Masbate is a carbon-in-leach, open-pit and underground mine located on the island of Masbate roughly 350 km south of Manila. The operation is the Philippines’ largest gold mine, and has produced roughly 500,000 oz., at average cash operating costs of US$654 per oz., since CGA poured its first gold in May 2009. The mine produced 50,800 oz. gold during the second quarter at an average cost of US$769 per oz., and remains on track to meet its guidance at roughly 200,000 oz. gold in 2012.

CGA has proven operationally consistent, achieving equivalent throughput levels of 7.6 million tonnes per annum in May, after having successfully expanded annual millage capacity to 6.5 million tonnes. The company has also started preliminary studies on the potential to further ramp-up mine capacity to the 10 million tonnes per year level over the long term.

“We’ve found the Philippines an extremely good and reliable place to operate a gold mine,” Carrick comments when asked about the jurisdiction. “It is true you require more permits than some other countries, but more importantly once you’ve geared up to work through the bureaucracy in a professional and diligent way permitting is very reliable and predictable.”

The Mabate property contains 16 km of mineralized strike that runs in a southeasterly direction, indicating the potential for further exploration success.

CGA’s 2012 exploration budget clocks in at US$20 million, with 60,000 metres or half of that aimed at scouting regional targets. Drilling at the company’s Montana North target has returned potential for additional mineralization over a 750-metre strike to the northwest, including 32 metres grading 1.54 grams gold.

“Our objective as a company is to grow as a serious player in the sector through acquisitions and exploration,” commented Johnson, who cited Mabate’s growth potential from both a production and exploration angle as what attracted B2Gold to the project. “Due diligence is a very important part of what we do, and we’ve sent our team down on site and done extensive legal, financial and geological diligence on the project. We’ve been impressed with the jurisdiction and what CGA has put together in terms of management and operations. Our level of confidence is extremely high.”

Markets were not enthusiastic about B2Gold’s acquisition, with company shares dropping 12% or 51¢ on above-average 21 million share volumes before closing the day at $3.79 per share. Analysts on the conference call seemed predominantly concerned with dilution, as well as political and social risks associated with operating in the Philippines, but Johnson again cited the company’s due diligence and CGA’s operational experience in the country as key de-risking factors.

B2Gold’s acquisition options were basically limited to equity dilution, with US$77 million in cash and equivalents outstanding at the end of the second quarter and a number of development and exploration costs already on the books. Johnson said the move would not hinder the company’s ability to meet its development schedule on other assets.