Clive’s Tribe: Why B2Gold’s prospects are up in an era of writedowns

His latest, B2Gold Corp. (TSX:BTO), is one of the few gold producers to have delivered for investors over the past five years.

Johnson’s contrarian instincts have served him well in a career that’s taken him from the harsh Yukon bush as a contractor in the early 1980s to the penthouse suite at Vancouver’s Bentall Tower 3, where he hosted me for an interview recently.

We’re at the world headquarters of Johnson’s B2Gold Corp., which produced 82,000 ounces of gold in the second quarter from two mines in Nicaragua and one in the Philippines, with plans to produce between 360,000 and 380,000 ounces in 2013 and to double production by 2017, to 750,000 gold equivalent ounces annually.

“We’re looking for countries in economic and political transition, and we get in there early,” says Johnson of his mining methodology.

Johnson certainly got in on the ground floor in Chile in 1988. His Bema Gold ventured into the South American country while military dictator Augusto Pinochet was still running it and at a time when sentiment toward America was very negative. Bema developed the 50%-owned Refugio mine and the promising Cerro Casale gold-copper project in a country where foreign-owned copper assets had been nationalized less than two decades before.

“If you’re doing something bold, expect to have some critics. Bold initiatives are done by the few, not the many,” he says. “But never change the path you’re on for critics.”

Geopolitical risk didn’t keep Johnson away from Russia while gold was bumping along below $300/oz. Russia had defaulted on its debt in 1998 and was a no-go zone for many wary investors. But where others were scared away, Johnson and his team evaluated the risk and envisioned long-term reward. Bema developed the high-grade 79%-owned Julietta gold mine in the far reaches of remote Russia and built it 2 months ahead of schedule.

Success at the mine site didn’t immediately translate to a share price surge, however. In 2000, a year the gold price averaged about $280, Bema Gold’s market capitalization touched just $50 million.

While the mining capital markets were “just dead,” Johnson hatched a plan to finance his company. Bema issued “shares for debt” which were then sold into the open market, eventually raising $15 million.

Johnson doubled down in 2003 when Bema acquired the rich Kupol gold project, and carved out an underground mine in the permafrost of eastern Russia.

“This is a double contrarian play, you have to do it,” Johnson recalls telling investors reluctant to invest in both gold and Russia at the time.

Johnson’s backers were richly rewarded in 2006 when Kinross paid $3.5 billion to snap up Bema Gold and its mines and development projects in Russia and Chile. The perseverance payoff was also lucrative for Johnson and his close-knit team, who had been together for 25 years and continue to work together at B2Gold today.

The latter detail is a point of pride for Johnson, who used to play rugby at a high level and carried a strong belief in teamwork over to the mining game. Johnson credits the sport with helping to shape his outlook and work ethic.

“You’ve got to walk the talk when you talk team,” Johnson says. “I am a big supporter of rugby, that was a huge part of my culture. Teamwork. Leadership. Respect for other people, even your opponents.”

“Nobody here has changed the way they treat people.”

Neither has Johnson changed his focus on building value for shareholders. Of the 2,000 projects that his team has looked at in the past five years, he says, the company has done 200 confidentiality agreements and only three deals. His preference is to invest in B2Gold’s own exploration projects – “The cheapest ounces are always the ones you find.”

But that doesn’t mean he’ll pass up a deal that would add immediate value for B2Gold shareholders. And B2Gold has plenty of dry powder after raising $259 million last month from institutional buyers through a notes offering. The offering of 3.25% convertible senior subordinated notes – which included the full over-allotment of $34 million – closed on Aug. 23.

The lack of good mining projects out there is scary, Johnson says. “I’m not scared to do a deal, but we’ll only do a deal if we can make it a success.”

B2Gold’s latest transaction was paying $1.1 billion last year to acquire Australian-based CGA Mining and its producing Masbate gold mine, the largest in the Philippines. An updated mineral reserve estimate for Masbate announced Aug. 6 increased both the reserve and grade.

“We have no need to write down anything.”

In Nicaragua, a country whose socialist president, Daniel Ortega, had previously embarked on a campaign of nationalization and land redistribution, B2Gold mines the yellow metal at its La Libertad and Limon mines. B2Gold is a major player in Nicaragua’s nascent mining industry – underlining the importance of genuine social and environmental engagement, something Johnson says his companies have been doing since “before it became a buzzword.”

“When you hear about political risk or companies getting screwed by governments or local partners, the dirty little secret is the fact that a lot of times when government or local people take actions against the companies, it’s because they didn’t live up to their promises.”

In an investment environment where skepticism has replaced optimism, delivering on promises – both to shareholders and to stakeholders – is crucial to success, Johnson has discovered.

“The key thing is about delivering,” he says. “There’s no shortage of good promoters out there, but there’s a massive shortage of delivery on the promote.”

“If you don’t have cash flow and credibility, you are not going to build a mine right now.”

Johnson is critical of some of the majors whose management teams chased ounces rather than profits as the price of gold rose. The big guys overpaid with little regard for capital cost control, and are now paying the price with massive writedowns and mediocre share values.

“Now is a fascinating time,” Johnson says. “Now is when they should be buyers, and they’re sellers.”

The attrition that will result from a lower gold price is good for the industry, which has spit out too many companies, he contends. But a barrier to M&A among junior miners is entrenched management teams fighting to keep their jobs and salaries at the expense of shareholders.

“I’d rather that gold was $1,600 and my stock $5, but there’s a cleansing aspect of this,” he says. “Now you separate the men from the boys.”

B2Gold stock has bounced nicely off its 52-week low of $1.87 and recently traded in the $2.60 range, valuing the company at about $1.7 billion.

Johnson is in an enviable position in mining today. In an era when momentum matters, his company has the respect of the marketplace.

“I have never hesitated to tell the story. And as you can tell, I tell it well.”

B2Gold trades on the TSX under the symbol BTO, and on the NYSE under the symbol BTG. Learn more at B2Gold.com.