A few weeks ago, B2Gold (BTG 1.98%) announced a $570 million acquisition of Papillon Resources (NASDAQOTH: PAPQF). This merger seems to me a very bullish sign for emerging gold producers. Papillon was taken out at about $125/oz of gold. That's $125/oz of measured, indicated and inferred resource. Papillon's asset is located in Mali -- yes, that's Mali the country in western Africa. The project could be in production as soon as the second half of 2016. Again, I find this deal to be very bullish for the gold sector. Paying $125/oz for a project that's at least two years from initial production and that has significant geopolitical risks says a lot about the state of the gold market.
When I read the news, I figured that Papillon's project must be spectacular in some way, perhaps very high-grade or ultra-low cost -- but it's not. The ore grade is mediocre at 2.35g/tonne and the all-in sustaining cost at $725/oz is pretty good, but far from spectacular. These deal metrics for an asset in Mali really surprised me. Digging deeper, I spoke to some analysts who said that although Mali has overall Africa risk and infrastructure challenges, it's one of the better countries to do business in, for Africa at least. For some reason, that wasn't entirely comforting.
Reading between the lines, the real story here is that mid-tier and major gold producers are starting to look at their production profiles from 2016-17 on. There are going to be shortfalls as significant amounts of high-cost operations have been curtailed and development of projects with all-in costs north of $1,000-$1,100/oz are on indefinite hold. The one good thing about the Papillon project is that it's of meaningful size, forecasted to produce 300,000 ounces per year from 2017 on.
Takeaway?
I think this deal shows that the writing is on the wall: Companies need to acquire near-term production. If B2Gold was willing to pay $125/oz for a non-spectacular (my opinion only) asset in Mali, what does that say about the possible takeout value of assets in North America? More specifically, there are a number of highly promising, low-risk, near-production plays in Nevada that really stand out compared to B2Gold's acquisition of Papillon. Names that come to mind include Pershing Gold (PGLC) and Midway Gold (NYSEMKT: MDW), both of which will be in production next year, and Midway as soon as late 2014. Pershing already has fully built, 100% owned and paid-for processing facilities and heap leach pads. It should be in initial production in the second half of 2015 with a remaining capital cost of under $20 million, according to a recent research report by Cantor Fitzgerald.
Cantor forecasts all-in sustaining costs for Pershing of roughly $750/oz and 85,000 ounces of production for the full year of 2016, ramping up to 100,000 ounces in 2017. Call me crazy, but I will take Nevada production all day long over any production anywhere in Africa. Pershing's Relief Canyon project is a past-producing mine, it has three open pits, roads, and other infrastructure already in place. The overall risk of getting Relief Canyon into production compared to that of Papillon's project reaching production on time and on budget is like night and day.
Analysts and gold market pundits have noted the increase in suitors kicking the tires of assets in Nevada. It's merely a question of when, not if, a wave of M&A sweeps over the state. Some deals of distressed juniors may occur at cheap valuations, but companies with highly experienced management teams, strong projects, near-term production and tangible assets will not be sold at fire-sale prices. Companies like Pershing, which has zero debt and a solid balance sheet, and Midway, with ample cash after issuing shares and obtaining an attractive debt financing package, are gems that should be valued at a substantial premium to emerging producers in Africa.
