B2Gold to acquire Papillon Resources

Over the last six years, B2Gold (TSX: BTO; NYSE-MKT: BTG) has looked at scores of properties that it considered adding to its portfolio of assets, which includes two mines in Nicaragua, one mine in the Philippines, another under construction in Namibia, and a number of exploration projects.

“We’ve looked at literally hundreds of projects . . . and it’s surprising how few meet our requirements,” Clive Johnson, B2Gold’s president and CEO, said on a conference call.

But the most recent search has brought the gold producer to the doors of Papillon Resources and its advanced Fekola gold deposit in Mali, and on June 3 B2Gold offered to buy the Australia-based developer in a deal that Johnson says is accretive on all metrics.

“This one definitely does [meet our requirements],” Johnson says of the Fekola project, 400 km from Mali’s capital of Bamako. “It’s one of the best things we’ve seen out there.”

Fekola is described as a high-grade, low-cost conventional open-pit gold project. It is expected to produce more than 306,000 oz. gold a year over a nine-year mine life, according to a prefeasibility study completed last year. Cash operating costs are estimated at US$580 per oz. over the mine life, with all-in sustaining costs of US$725 per oz. Capital costs are likely to fall in the range of US$292 million, with US$173 million for infrastructure and other costs, and US$119 million for a plant.

At a US$1,100 per oz. gold price, Fekola is expected to produce average revenues net of royalties of US$320 million a year and average operating cash flow (pre-tax, post royalties) of US$130 million. The deposit is open at depth and along strike.

Fekola will add attributable measured and indicated resources of 4.18 million oz. gold grading 2.40 grams gold per tonne, and inferred resources of 459,000 oz. grading 1.91 grams gold per tonne. The proposed merger would increase B2Gold’s measured and indicated resources by 25%, the company says.

The deposit has an environmental permit that’s valid for 30 years (granted in May 2013) and a 30-year mining permit (granted in February 2014), and is situated in southwestern Mali on the Senegal–Mali fault in a district with eight operating mines.

Mali — Africa’s third-largest gold producer, churning out 1.3 million oz. gold a year—has a mining friendly government that does not impose restrictions on foreign investment or capital flows in or out of the country, Mark Connelly, Papillon’s managing director and CEO, noted on the conference call.

The Papillon acquisition builds on B2Gold’s West African presence, enhances the company’s growth and production pipeline at below industry average cash costs, and brings with it an experienced management and technical team, Johnson said. He added that “in this day and age when talent is still an issue out there, we are pleased to combine with Mark’s team and continue the rapid advancement of Fekola.”

Johnson noted that while many companies have fallen into trouble acquiring projects they shouldn’t have, and endured major writedowns as a result, B2Gold has prided itself on its acquisitions, all of which he claims have been accretive.  “One of the problems [in the industry] has been the lack of quality due diligence,” he says. “We have an in-house team that has been working together for many, many years, and we have accountability.”

Conversations between B2Gold and Papillon got underway earlier this year, followed by the first due diligence field trip to Fekola in March 2014.

“Having completed over US$1.3 billion in acquisitions since 2009, the company has augmented production capacity and output at all acquired three mines, and is expected to develop its fourth gold mine in late 2014, after buying the gold deposit as a pre-development stage asset in late 2011,” Geordie Mark of Haywood Securities wrote in a June 4 research note. “These actions demonstrate a clear history of performance, not only in delivering output growth, but also in managing costs and are a clear reflection of management performance goals and strong ideals on social engagement, interaction and awareness.”

Mark also noted that with “multiple irons in the fire, both on the exploration and development fronts,” he believes that the near-term opportunity for investors in B2Gold is “the company’s production growth and positioning as a contending mid-tier producer,” and added that there is “potential for B2Gold to further consolidate a gold market fractured by depressed metal prices and equity valuations.”

Under the offer, B2Gold would acquire all of Papillon’s outstanding shares in a deal worth US$570 million. Papillon shareholders would receive 0.661 B2Gold share for each Papillon share held. That represents a A$1.72-per-share purchase price and a 42.4% premium to the 20-day, volume-weighted average price of each B2Gold and Papillon share as of June 2. Upon completion, B2Gold shareholders and former Papillon shareholders would own 74% and 26% of the shares of the enlarged company.

Papillon shareholders would also benefit from exposure to B2Gold’s enhanced liquidity, cash flow, strong balance sheet and growth portfolio, B2Gold argues.

Johnson says that if everything works smoothly, Fekola could start production in late 2016, followed by full production in 2017. Johnson calls the plan “aggressive,” but says that “it’s what we’ve done before, and what Mark has done before.”

This year B2Gold expects to produce up to 400,000 oz. gold from its three operating mines, and forecasts that number will grow to more than 900,000 oz. gold by 2017 from five operating mines, based on its current assumptions.

“At the end of the day, there are few people doing acquisitions right now,” Johnson says. “We believe this is the time to do them . . . especially with great projects. So we’re not going to apologize for our strategy of acquisitions. Stick with us and watch what we do, because I hope our track record gives investors comfort. We feel we’re uniquely positioned, and the fastest growing profitable gold producer in the world.”

In response to a question during the conference call from Robert Cohen of 1832 Asset Management in Toronto about the timing of insider selling before the transaction, Johnson said some of the selling included restricted stock units (RSUs) in April and May, and related to tax expenses. RSUs are a bonus paid on performance and when they vest, tax is due immediately, so management sometimes sells shares so that they can pay the taxes related to their RSU obligations.

“You are kind of an idiot if you don’t sell your RSUs, because if the gold price goes down and the stock goes down, you’re actually losing money,” he said, adding that B2Gold is the only publicly listed company that he is aware of where the president, chief financial officer and other senior vice presidents don’t take any stock options. “We started off with founder shares and we said: ‘We don’t need to be greedy and use options . . . we don’t need to double-dip,” he said. “If we had options I’d keep all my founder’s shares and sell my options. But we don’t take options because we respect our shareholders to the point where we want to use options for the other people that we want to have skin in the game.”

In another telephone interview, Johnson said that the founde
rs also sold a small part of their founder shares — a total of 3 million shares — on May 20, before there was a material event in regards to the proposed Papillon merger. The timing of the share sales (both RSUs and founder shares) was coincidental. He pointed out that sometimes they can sell their stock during black-out periods, and added that members of management remain sizable shareholders in the company.

Shares of B2Gold closed down 9¢ — or 3.4% — to $2.53 on the news, with 38 million shares changing hands. Over the last year the company has traded in a range of $1.87 to $3.69. At press time B2Gold traded at $2.85 per share.