Papillon Resources (B2 Gold)

Stock of the Day - Papillon Resources (B2GOLD ) - SELL

Today, we have our focus on Papillon Resources (PIR) - the gold-mining company, entire share capital of which has been recently acquired by Vancouver-based B2Gold Corp (BTO) of Canada (acquisition completed on October 3, 2014). This entailed a stock transaction valued at US$570 million. More interestingly, BTO offered 0.661 common share per PIR share held. Shareholders in PIR represent about one-quarter of the merged entity after being given 0.661 BTO’s shares for every PIR share. As of 03 October 2014, and including the 237,390,819 shares issued as consideration under the merger for the former share and option holders of PIR, BTO has 917,514,320 shares issued and outstanding. BTO had a net amount of cash used in investing activities of $32 million which is associated with the Papillon acquisition.

Benefits to Papillon Shareholders owing to the Merger (Source – Company Reports)

The deal received support from both companies’ shareholders. PIR has now been delisted from ASX post the merger with BTO, which is listed on Toronto Stock Exchange, the New York Stock Exchange and the Namibian Stock Exchange and is now considering an ASX listing as well.


Projects’ Map (Source – Company Reports)

BTO operates mines in Nicaragua (two mines) and the Philippines (one mine). The Company has a robust portfolio of development and exploration assets in Namibia, Nicaragua, Mali, Burkina Faso and Colombia. The development with regards to the Otjikoto gold project in Namibia is a highlight for BTO. The Company indicated an interest in PIR’s Fekola gold project in Mali. Thus, the merged entity will be emphasizing on the development of the Fekola project in Mali, optimizing BTO’s existing Masbate, Limon and La Libertad mines, and completing construction of the Otjikoto mine in Namibia. Mark Connelly, the former Managing Director and Chief Executive Officer of PIR, was appointed to the board of directors of BTO upon the implementation of the merger.

New B2Gold Projected Production (Source – Company Reports)

The operational report for BTO discloses that 2014 has been another record year for gold production. In totality, BTO expected to produce 395,000 - 420,000 ounces of gold in 2014 and approximately 540,000 ounces of gold in 2015. Production in 2014 from the Masbate, La Libertad and Limon Mines has been expected to be in the range of 380,000 to 385,000 ounces of gold.

The production forecast for 2014 excludes any estimated gold production from the Otjikoto development project in Namibia owing to the fact that revenue earned from the sale of pre-commercial production needs to be ascribed to mineral property development costs prior to commercial production. Nonetheless, the Company reported that Otjikoto project is on schedule and on budget to begin production in December 2014. The Company aims to have further development at the Fekola project in view of BTO’s strong funding capacity and a very skilled management team. BTO’s highly experienced exploration team is another asset to bring significant exploration potential at Fekola.

Otjikoto is expected to ramp up to full production capacity in 1Q 2015. Further, the Otjikoto Mine is expected to produce between 140,000 to 150,000 ounces of gold at a cash operating cost in the $500 to $525 per ounce range in 2015. With the completion of planned mill expansion in 3Q 2015, the annual gold production from the main Otjikoto pit is expected to increase to about 200,000 ounces in 2016 and 170,000 ounces in 2017. Development of Wolfshag zone adjacent to the main Otjikoto pit may also increase aforesaid gold production. An updated indicated resource study is expected to be complete in 1Q 2015 along with an updated mine plan by the end of 2015.


Otjikoto Project Map, Wolfshag Zone (Source – Company Reports)

As per BTO’s operations’ updates for 3Q ended 30 September 2014, gold production of 90,192 ounces at a cash operating cost of $732 per ounce; gold revenue of $114.9 million on sales of 91,282 ounces at an average price of $1,259 per ounce; cash flow from operating activities before changes in non-cash working capital of $27 million ($0.04 per share); and strong cash position of $179 million at quarter end have been reported.


Fekola Project, Mali (Source – Company Reports)

1Q 2015 will mark the beginning of the planned early construction activity at Fekola. Assessment of construction equipment needs and mobilization planning for personnel is in progress. BTO has stated that it is evaluating and enhancing the feasibility work completed by PIR. Activities under this include reviewing the optimal grind size and throughput rate, optimal size and configuration of the mills, assessing the mine plan and potential use of mine contractors, reviewing Health, Safety and Environmental controls, etc. BTO will release an updated mineral resource estimate and final feasibility study for the Fekola Project in 2Q of 2015 based on findings of its evaluation.


Mining in Mali (Source – Company Reports)

A key point of concern is BTO’s assessment of additional funding for the construction of Fekola. Then few operational setbacks at Masbate and Limon are noted to be other impediments for growth.


B2Gold Daily Chart (Source - Thomson Reuters)

In view of the above, we put a SELL recommendation for PIR stock at the current price of $1.368.