B2Gold well positioned for an acquisition, says BMO

VANCOUVER — Producer B2Gold (TSX: BTO) has been one of the better performing gold equities over the past couple of months, as shares have jumped 52%, or $1.05 per share on the back of consistent production and a strong balance sheet.

Despite being well-financed for its capital programs in 2013, B2Gold opted to raise US$259 million via a senior notes offering in late August, raising questions as to whether the company might be boosting its cash position to accommodate an acquisition.

On Aug. 23 B2Gold announced it had completed the offering, which was composed of 3.25% convertible senior subordinated notes due in 2018, and included a US$34-million over-allotment option that was fully exercised by institutional buyers. The initial conversion rate is 254.29 shares per US$1,000 principal amount, which is equivalent to an initial conversion price of US$3.93 per share.

B2Gold’s capital raise follows a strong second quarter for the company, which generated net earnings of US$33 million, or 5¢ per share, on the back of gold revenues totalling US$123 million. Over the first six months of 2013, B2Gold’s consolidated gold revenue clocked in at US$278 million, compared to US$121 million during the same period in 2012.

An acquisition would come just under a year after the company picked up Australian gold producer CGA Mining in a friendly, all-stock deal valued at US$1.1 billion. The CGA acquisition saw B2Gold issue 250 million shares, which resulted in a 62% equity dilution for the company. And it appears as though any future deal would likely be cash-driven, judging by B2Gold’s balance sheet.

B2Gold grabbed CGA’s Masbate gold mine in the Philippines, which now registers as the company’s largest producing asset. Over the first half of 2013 Masbate’s output totalled 82,000 oz. gold at cash costs of US$827 per oz.

B2Gold expects Masbate’s production to meet the upper end of its previously issued guidance range of 175,000 to 185,000 oz. gold. Cash costs have been better than expected at the mine, with the company budgeting production at US$842 per oz. over the past six months.

The company completed a reserve update at Masbate that could see the mine running at a higher  head grade. B2Gold tacked on 225,000 oz. gold to bring its reserves at the project to 104 million tonnes grading 0.97 gram gold per tonne for 3.23 million contained oz. Previous deposit models had Masbate’s grade at 0.82 gram gold. B2Gold calculated its reserves using current site-operating costs, revised metallurgical recoveries and a gold price of US$1,350 per oz.

B2Gold’s major capital burn for the year can be attributed to its US$244-million Otjikoto gold project, 300 km north of Namibia’s capital city of Windhoek. The company has budgeted US$134 million on construction and development at the site for 2013, and committed US$65.8 million in pre-production expenditures over the past six months.

The current mine plan incorporates reserves of 29.4 million tonnes at 1.42 grams gold for 1.34 million oz. gold, at a 5.59 stripping ratio. 

With mill commissioning expected in late 2014, Otjikoto is scheduled to produce 141,000 oz. gold annually over a 12-year mine life, at cash costs of US$524 per oz.

B2Gold had a cash position of US$95.7 million at the end of June, and maintains access to US$100 million of a US$150-million senior-secured revolving credit facility from mid-April. And though the company says its recent capital raise will be used for general corporate purposes, it notes that “management believes that there will be significant acquisition opportunities in [the current gold] environment for companies with proven technical teams and strong financial performance.”

BMO Capital Markets analyst Brian Quast maintains an “outperform” rating on B2Gold, along with a $3.75-per-share target price. He seems inclined to believe the company’s most recent raise is a sign of things to come on the acquisition front.

“B2Gold is already well financed for ongoing construction of the Otjikoto project, as BMO Research expected the company to maintain a healthy cash balance throughout the construction period from internally generated cash flow and a previously arranged credit line,” Quast says in an Aug. 23 research note.

“Consequently, this financing gives B2Gold the flexibility to pursue other opportunities while also maintaining a strong balance sheet during the construction and commissioning of Otjikoto,” he adds, citing the company’s remarks about opportunistic acquisitions.

B2Gold has traded within a 52-week window of $1.87 and $4.38 per share, and closed up 6¢ at $3.06 at press time. The company has 651 million shares outstanding for a $2-billion market capitalization.