Nicaragua the key to B2Gold’s success

While many companies aspire to build themselves into the next mid-tier gold producer few are successful at actually doing it.

There’s the small matter of finding a deposit that will yield wide profit margins, and then there’s financing issues, political risk and operational issues to contend with.

Such factors make the road from being a junior company with early stage assets to a producer with a profitable mine a long haul — which is why there is no shortage of companies proclaiming to be the next mid tier producer, but so few that actually become one.

B2Gold (BTO-T) is one of the few that has followed through.

Born out of the ashes of Bema Gold — which was taken out by Kinross Gold (K-T)  in 2007 for $3.5 billion — the company has managed to grow its market cap by a multiple of 12 times since its shares began trading in at the end of 2007.

The growth in the value of the company’s equity has coincided with its acquisition of two producing gold mines that turned out nearly 150,000 oz. of gold last year, and also reflects the markets optimism that the firm may well reach its goal of producing 450,000 oz. of production by 2016.

While there are a myriad of factors that go into any company’s market success, there is no denying that geography has played a crucial role in B2Gold’s climb.

With its recent socialist past and crippling poverty, many mining investors have shied away from Nicaragua over the last few decades.

Such a lack of enthusiasm for the country, combined with the astute timing of doing an acquisition just before equity markets began to rebound in the spring of 2009, opened the door for B2 to acquire two operating gold mines in the country on the cheap.

B2 acquired the assets as part of its takeover of Central Sun Mining in all share deal that valued the target company at roughly $66 million at the time of the acquisition. Considering that the B2 now has a market cap of roughly $1.42 billion, and much of that wealth has been built on the back of the assets acquired from Central Sun, it’s safe to call the merger a shrewd move by B2’s management.

But the company didn’t start out with a Nicaraguan focus. After having such success in Russia with the Kupol mine — which was sold to Kinross as part of the Bema deal — B2’s management team, headed by its president and chief executive Clive Johnson, began to look for their next big find in Colombia.

And while the company still has assets in the country — chief amongst them is its joint venture with AngloGold Ashanti on the Gramalote project — the Nicaraguan assets of La Libertad and Limon have been the company makers to date.

As for the country itself, Nicaragua is perhaps most known to North American investors as the home of the Sandinista revolution and the ensuing contra war which reached peak media coverage thanks to the Iran-contra affair of 1986.

Since that time the country witnessed the defeat of the socialist Sandinistas in a 1990 election, and then the return of the party’s leader, Daniel Ortega, who won the presidential election in 2007. And while the latest version of Ortega still offers kind words to the heads of such investing no-go countries like Venezuela and Iran, he has at the same time been consistent in his promotion of an investor friendly environment.

Ortega has reasoned that foreign direct investment has its role to play in if the country is to lift itself out of poverty. That new vision is evidenced in a lack of operational difficulties experienced by B2 to date and by a fair tax regime which is made up of a 3% net smelter return and a 30% tax on net profits. Hardly company breaking numbers.

B2 has done its part to build a solid reputation for itself in a country that is sensitive to what many there would call the ills of American imperialist policy cloaked in a veil of capitalist rhetoric. The company is one of the country’s biggest employers with some 2,000 employees and contractors and is also the largest exporter of gold and the largest individual exporting company in the country.

Beyond that, B2 is partnered with the unionized mine workers at its Limon mine. The union holds 5% of the mine, while B2 holds the remaining 95%.

Not that everything has been smooth sailing, however. Back in 2009 operations were halted due to a workers strike. But both the company’s ability to negotiate with the workers, and the governments support for B2 (it labeled the strike illegal) showed it could handle the sort of difficulties that can arise at any mine in the developing world.

Since the resolution of the dispute in November of 2009 the company has not reported any stoppages at the mine due to worker angst — the mine was, however, closed in the summer of last year due to heavy rains, which resulted in one underground miner losing his life.

But while Limon may exemplify how B2 has made strides to integrate itself into Nicaraguan culture, it is La Libertad, an open pit mine that sits 178-km east of the capital of Managua, exemplifies the company’s economic success in the country.

Indeed La Libertad, which was then known as the Orosi mine, was the key driver behind the Central Sun acquisition.

The mine had been operating as a heap leach mine back since 1996 but operations were halted in 2007 after studies showed that gold recovery could be boosted to 90% from just 40% by making a switch from the heap leach pad to a conventional milling operation.

At the time of the acquisition Central Sun was in the midst of converting the mine to a milling operation — a transition that required US$70 million for a new SAG and ball mill grinding circuit, carbon-in-pulp recovery tanks, and a tailings storage facility.

 Gold and silver production at the re-vamped mine began in January 2010. With an initial seven-year mine life, La Libertad Mine was initially slated to produce 80,000 to 90,000 ounces per year, but 2011 saw the company beating that guidance. As of the third quarter of 2011 (it’s most recent reporting period) B2 said it was on track to beat its production guidance by 5,000 oz. and that for the year total production would come in between 93,000 and 99,000 oz at operating cash cost of US$40 to US$460 per oz.

 With metrics like that it is little wonder that La Libertad generated the of the lion’s share of the company’s sales, as the mine accounted for 67% of its $158.4 million in gold revenue for the first nine months of last year.

 And the economics at the mine could be set to improve in the neat future.

 That is because the company has outlined a new deposit roughly 9 km east of the mine. The deposit is known as the Jabali and is an east-west trending, low sulphidation, epithermal quartz vein system which was mined for its high grade ore from 1862 to 1956 and has been traced over a distance of 6.2 km.

 B2 recently released a resource estimate of 3.55 million tonnes grading 4.58 grams gold for 522,000 oz. of gold. The company says the deposit will increase Libertad’s seven year mine life and the higher grade ore delivered to the mill from Jabali should boost production while lowering operating costs.