Vancouver – With only hours to go before a 5:00 p.m. deadline on Jan. 30 Linear Gold (LRR-T) dropped its bid for Central Sun Mining (CSM-T) instead of topping B2Gold’s (BTO-T) counteroffer made four days earlier.
The move paves the way for B2Gold’s acquisition of Central Sun, fulfilling the former’s desire to become a gold producer.
Central Sun has been under the gun to find a cash-source ever since this fall when a US$22 million loan it had arranged fell through amidst the unfolding credit crisis.
“That sent us into a bit of a tailspin,” says Central Sun chief financial officer Denis Arsenault. “It was not a very pleasant situation.”
The loan was integral to Central Sun’s plan to upgrade its Orosi heap-leach mine with a conventional mill aimed at improving gold recovery. The mine is about 110-km east of Managua, Nicaragua.
Arsenault says that as Central Sun’s management scrambled to arrange another loan, find a partner or a potential buyer, “they were not leaving any stone unturned.”
Potential terms offered by banks on new loans, however, were too steep he says. “Our distressful situation” – the Oct. 16 implosion of Central Sun’s loan – did not help matters there.
It was under these circumstances that Central Sun got its first of two pitches from aspirational gold-producers.
The prize: In addition to the Orosi project, which Central Sun expects will initially produce 45,000 oz. per year, the company also operates the 1,000-tonne-per-day Limon underground gold mine, also in Nicaragua, where it has pegged proven and probable reserves at 1.2 million tonnes grading 5.3 grams gold per tonne.
In the third quarter of 2008 output at Limon was about 10,000 oz. gold at a cash cost of about $610 per oz.
On Dec. 24 Linear Gold offered Central Sun 0.4 Linear shares for every Central Sun share. Based on Dec. 23 share prices the offer valued Central Sun at $18.4 million.
As Arsenault puts it, “They had the money. We had the assets.” And in anticipation of closing the deal, Linear even announced a $15 million private placement.
But Linear was not the only junior with a healthy kitty and an eye to becoming a gold producer.
Just over a month after Linear made its intentions known, B2Gold announced a counteroffer. For every Central Sun share B2Gold would give it 1.28 B2Gold shares and B2Gold would also extend $10 million through a convertible debenture. Linear had offered a $2.5 million debenture.
Based on Jan. 26 share-prices B2Gold valued Central Sun at about $41 million versus Linear’s offer which at this point had Central Sun at about $28 million.
Arsenault says Central Sun management put together an independent committee to assess the offers and also consulted Maquarie Capital Markets. When both said B2Gold’s was superior Central Sun advised Linear it had the right to match it until Jan. 30, 5:00 p.m.
With about four hours to go that day Linear president and CEO Wade Dawe finally announced, “We are disappointed that Central Sun’s board of directors is recommending an alternative bid. Nevertheless, Linear has demonstrated its financial discipline over the years and will not be drawn into a bidding war.”
Instead B2Gold and Linear have agreed to sign a definitive agreement by Feb. 6. It will give Central Sun shareholders about 33% of the combined company’s 245 million outstanding shares.
If all goes according to plan, the deal not only means that Linear will have found its source of cash in B2Gold’s $55 million in cash and cash equivalents but also that B2Gold will have taken its first step towards its stated goal of becoming an intermediate gold producer.
B2Gold’s management isn’t new to the strategy. Much of the B2Gold team, including president and CEO Clive Johnson, built their former company, Bema, up from a junior explorer and into an intermediate gold producer that Kinross Gold (K-T, KGC-N) bought in 2007 for $3.5 billion.
Along with its cash B2Gold brings to the combined company exploration properties in Colombia and Russia. In Colombia it is mostly exploring for copper, molybdenum and gold on four properties: Gramalote (a 51-49 B2Gold-AngloGold Ashanti joint venture), 80-km northeast of Medellin, Quebredona, 60-km southwest of Medellin, Miraflores, 55-km north of Pereira, and Mocoa, 67-km east of Pasto.
In Russia it is exploring the Kupol East and West properties where it has the right to earn a 37.5% interest from Kinross.
Since B2Gold announced its counteroffer Central Sun’s share price has nearly doubled gaining 41¢ to close at 85¢ Jan. 30. It has about 62 million shares outstanding.
B2Gold gained about the same amount, jumping from 44¢ to 85¢. It has about 163 million shares outstanding.
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