GCM.TO - Gran Colombia Gold Corp

[SafetyinNumbers]

Gran Colombia Gold is a producing gold company based in Colombia (but you could probably guess all of that from the name!). Gold stocks have been on an amazing run this year but I think this one has been a bit under the radar because of a debt restructuring and an odd capital structure. It also may have lagged a bit because they are in Colombia and they have interference from gangs at times but they are on the right side of the law so while it may cause disruptions at times (that could hurt the stock), I do not think it's an impairment.

 

They have a good website that details the capital structure and they provide annual guidance which they just raised the past quarter so I don't want to spend too much time rehashing information.

 

Basically in addition to about 250m shares outstanding, there are two sets of convertibles outstanding GCM.DB.U and GCM.DB.V, with face value of about US$53m and US$100m outstanding. Both sets of converts trade on the TSX in USD and are convertible at US$0.13 vs the last trade of the equity at C$0.125.

 

Based on the high end of their cash cost guidance of US$750 and using the spot gold price of $1350 and assuming 145k oz of production next year ( I think this is low based on their production growth so far this year and discussions with management), their potential EBITDA for 2017 is about US$87m or about C$110m.

 

To calculate EV/EBITDA you have some choices for EV. You can use the fully diluted share count as the valuation seems to cheap for the stock to trade at US$0.13 or below even with 1.46bn shares outstanding or you can fix the debt at face value and add the equity value. Either way projected EV/EBITDA is less than 2x.

 

I own some of the GCM.DB.U and mostly the GCM.DB.V. The latter has a 6% coupon paid monthly, is senior secured and trades at 86 on the dollar so not too far from conversion value. The former only has a 1% coupon and trades at 77 and often trades below conversion value.

 

This has created an arb at times and hedge funds are rightly buying the debs and converting to stock and selling in the market. In fact the share count has more than doubled this year so far and the amount of GCM.DB.U outstanding has dropped by a decent amount. This overhang is also constraining valuation.

 

The final thing I want to add is that there is a cash sweep for the debentures on any "excess cash flow" and the company must use it to buy back debentures and they have started that program. This could offset some of the dilution but they have said they will not pay above par for the debs (not a problem yet).

 

The multibagger potential comes from getting to say 6x EV/EBITDA which would be more in line with tier 3 producers. Even if it gets to 4x and the gold price lifts or they continue to grow it could be a multi-bagger.

 

Any feedback welcome.

[SafetyinNumbers]

One of the biggest holders buying more of the GCM.DB.V.

 

Now owns US$18.9m worth.

 

http://www.marketwired.com/press-release/lloyd-i-miller-iii-acquires-2020-senior-secured-convertible-debentures-gran-colombia-2153509.htm

[influx]

I am curious, how did you find this debenture?

[SafetyinNumbers]

I think from some of the press releases around the time of the restructuring in January. There were so many iterations in the restructuring that I actually read the wrong circular and bought common and then the GCM.DB.U before figuring out the GCM.DB.V were the best way to get exposure. That being said, at that time the GCM.DB.V and GCM.DB.U were trading at the same price but now with the gap, the GCM.DB.U is pretty compelling too.

[bskptkl]

Gran Colombia Gold is a producing gold company based in Colombia (but you could probably guess all of that from the name!). Gold stocks have been on an amazing run this year but I think this one has been a bit under the radar because of a debt restructuring and an odd capital structure. It also may have lagged a bit because they are in Colombia and they have interference from gangs at times but they are on the right side of the law so while it may cause disruptions at times (that could hurt the stock), I do not think it's an impairment.

 

They have a good website that details the capital structure and they provide annual guidance which they just raised the past quarter so I don't want to spend too much time rehashing information.

 

Basically in addition to about 250m shares outstanding, there are two sets of convertibles outstanding GCM.DB.U and GCM.DB.V, with face value of about US$53m and US$100m outstanding. Both sets of converts trade on the TSX in USD and are convertible at US$0.13 vs the last trade of the equity at C$0.125.

 

Based on the high end of their cash cost guidance of US$750 and using the spot gold price of $1350 and assuming 145k oz of production next year ( I think this is low based on their production growth so far this year and discussions with management), their potential EBITDA for 2017 is about US$87m or about C$110m.

 

To calculate EV/EBITDA you have some choices for EV. You can use the fully diluted share count as the valuation seems to cheap for the stock to trade at US$0.13 or below even with 1.46bn shares outstanding or you can fix the debt at face value and add the equity value. Either way projected EV/EBITDA is less than 2x.

 

I own some of the GCM.DB.U and mostly the GCM.DB.V. The latter has a 6% coupon paid monthly, is senior secured and trades at 86 on the dollar so not too far from conversion value. The former only has a 1% coupon and trades at 77 and often trades below conversion value.

 

This has created an arb at times and hedge funds are rightly buying the debs and converting to stock and selling in the market. In fact the share count has more than doubled this year so far and the amount of GCM.DB.U outstanding has dropped by a decent amount. This overhang is also constraining valuation.

 

The final thing I want to add is that there is a cash sweep for the debentures on any "excess cash flow" and the company must use it to buy back debentures and they have started that program. This could offset some of the dilution but they have said they will not pay above par for the debs (not a problem yet).

 

The multibagger potential comes from getting to say 6x EV/EBITDA which would be more in line with tier 3 producers. Even if it gets to 4x and the gold price lifts or they continue to grow it could be a multi-bagger.

 

Any feedback welcome.

So you asked for feedback:

 

I have a stake in another Columbian gold company and I asked around about GCM. I was told it was headed towards bankruptcy but bailed out by gold price. Was told most of their production comes from buying ore from small miners and they are trying to sell Marmato. Mine is old and capital starved. Relations with union are poor.

 

So I guess the arb could still make sense, but I wouldn't want to bet on it becoming an efficient mine.

[SafetyinNumbers]

Much appreciated!

 

I can't disagree with a lot of this. They were bailed out by gold price and by the peso devaluation. You can see the decline in their cash costs and AISC. The last few quarters are very different than what your source is providing because there has been a significant change in performance.

 

The first two quarters of 2016 a lot of the cash flow was held back from excess cash flow so they could spend money on capex as the operations were capital starved because of the issues they see having with two much debt with coupons that were too high. They are planning on spending a lot on capex in the second half too.

 

They do use contract miners but a higher gold price helps make relations better quickly. I'm not sure if they are trying to sell Marmato. That may have been one of the plans considered to deal with the debt issue before it was restructured.

 

At the end of the day though, they have been putting up strong EBITDA. US$18m last quarter on a much lower gold price and production and gold price are up this quarter. They are also active on the buyback of the debentures.

 

This investment is not about the arb but about the valuation of this cash flow stream once it gets analyst coverage and the market cap gets big enough to show up on the radar of gold and generalist investors.

[SafetyinNumbers]

The FD share count is down about 6m since the last update on August 11, I believe.

 

It looks like they did a big purchase on Aug 31 of some of the debs but it won't settle until after Sept 1 so not sure if that's in the numbers.

 

Anyway, 6m shares on 1.459bn (now 1.453bn) isn't much but that's over 3 weeks and the buybacks should continue.

[SafetyinNumbers]

Positive update tonight on August production and highlighting the debenture repurchases and conversions. This update actually lowered my pro forma share count by another 4m shares as it confirmed what I had expected that the last debenture purchase on August 31 was not reflected in the month end share count on the website.

 

The production update was interesting as it was almost identical to last month with a little more production from Marmato and a little less from Segovia. This trend should continue to the end of the year if they are to meet there year end guidance. If Segovia production can remain this high and they can meet their Marmato guidance, however, they have a good chance of beating the high end of their production guidance.

 

One risk, is that higher Marmato production and lower Segovia production in the back half might mean higher costs but that is somewhat reflected in their AISC guidance.

 

I still see it less than 2x EV/EBITDA and think it moves higher as the debenture overhang continues to dissipate.

 

http://www.marketwired.com/press-release/gran-colombia-gold-provides-positive-updates-on-senior-debt-reduction-gold-production-tsx-gcm-2155951.htm

[SafetyinNumbers]

Looks like the board is frustrated with the valuation too as they have launched a strategic review.

 

http://www.grancolombiagold.com/news-and-investors/press-releases/press-release-details/2016/Gran-Colombia-Gold-Announces-Strategic-Review-Process/default.aspx

[SafetyinNumbers]

With the recent dip in the gold price down to $1310, I just reran my run rate EBITDA estimates.

 

Assumptions:

Gold = US$1310

Production = 145k oz (high end of 2016 guidance but management discussions indicate up next year)

Cash costs = US$725 (guidance for 2016E is US$700-750 while under $700 for H116)

FD share count = 1.45bn (all debt is convertible at US$0.13).

On that basis, I get US$76m in annual run rate EBITDA. They did US$18.3m in Q2 EBITDA so this estimate shouldn't be controversial!

 

EV/EBITDA Sensitivity table:

 

Multiple C$ share price

    2               0.14

    3               0.21

    4               0.28

    5               0.35

    6               0.42

 

 

[influx]

http://www.elcolombiano.com/antioquia/paro-por-cierre-de-minas-en-segovia-y-remedios-GG4998686

http://www.elcolombiano.com/antioquia/mineros-de-segovia-y-remedios-preparan-paro-civico-GB4982888

 

You may want to dig more though...

I dont know what is going on

[SafetyinNumbers]

Thanks.

 

Labour relations are definitely a risk. GCM relies on contract miners but they are also trying to convert illegal miners into legitimate miners and they have had some success so far.

 

In every company, I have ever owned that has had a strike, it has always ended. This could have a short term impact but it's not an impairment, in my view.

 

 

[influx]

Probably :)

 

I hear good news generally from Colombia lately..so I guess it will be well for you

 

What kind of capital gain are you happy with, in gross numbers with this?

[SafetyinNumbers]

I'm usually just happy making money versus losing it!

 

In this case, I own all the different parts of the capital structure and have made some decent gains already on the debentures but I still think 100% upside from here is not unreasonable.

[SafetyinNumbers]

Despite some labour issues during the quarter, GCM continues to impress on the production front.

 

YTD production is now 108k oz and full year guidance maintains at 135-145k oz.

 

http://www.grancolombiagold.com/news-and-investors/press-releases/press-release-details/2016/Gran-Colombia-Gold-Provides-Production-Update-and-Details-for-the-Third-Quarter-2016-Results-Webcast/default.aspx

 

The most recent presentation highlights the valuation discrepancy between GCM and its peers.

 

http://www.grancolombiagold.com/news-and-investors/events-and-presentations/presentations/default.aspx

 

 

 

 

[SafetyinNumbers]

Another good quarter reported this week with production guidance raised and cost guidance narrowed.

 

http://www.grancolombiagold.com/news-and-investors/press-releases/press-release-details/2016/Gran-Colombia-Gold-Announces-Third-Quarter-and-First-Nine-Months-2016-Results-Expecting-Over-144000-Ounces-of-Annual-Gold-Production-for-2016-at-an-AISC-Below-850-per-Ounce/default.aspx

 

Still trading well below 3x EBITDA even at these lower gold prices.

 

I now own some common as well as the senior debt.

[SafetyinNumbers]

Spectacular monthly production number in a December and a very large beat of full year guidance. With gold starting to lift again, it's possible some value investors might look at gold stocks and at less than 2.5x EV/EBITDA, GCM might get some attention.

 

http://www.grancolombiagold.com/news-and-investors/press-releases/press-release-details/2017/Gran-Colombia-Gold-Surpasses-Guidance-and-Sets-Record-in-2016-With-149687-Ounces-of-Gold-Produced/default.aspx

[rukawa]

I don't really understand why the GCM.DB.U aren't considered the most attractive security here.  They have the highest yield to maturity, same conversion price as the .V and highest yield to maturity. Plus the maturity date is earlier and they have a smaller principal so easier to payoff.

[SafetyinNumbers]

The Us are 81% mandatory convertible so the effective "par value" of the bonds at current stock price is about 69. Still much better than the stock because the downside is less with the 19% payable in cash while still the same upside as the stock.

[SafetyinNumbers]

Decent sized insider buying of GCM.DB.V by one of the executive chairmen.

 

The equivalent of 7.6m shares.

 

https://www.canadianinsider.com/company?menu_tickersearch=GCM%20%7C%20Gran%20Colombia%20Gold

[SafetyinNumbers]

Interesting press release today.  http://www.marketwired.com/press-release/gran-colombia-gold-announces-2017-outlook-and-proposals-to-improve-capital-structure-tsx-gcm-2200586.htm

 

Guidance seems fine. The proposal to extend the 2020 debt is interesting. Those bonds are my primary holding and an increase in the interest rate and enhancement of option value seem like good things at first glance since I do think the equity is undervalued.

[SafetyinNumbers]

New agreement w/ IAMGOLD for a exploration property that is likely valued for zero by anyone analyzing GCM!

 

http://web.tmxmoney.com/article.php?newsid=5245081097633691&qm_symbol=GCM

 

Seems like a good idea as it allows for some exploration dollars in a property they probably would not have a chance to spend money on for many years.

 

This is a bit of a stretch but it also potentially lets IMG warm up to Colombia for an eventual takeover of GCM. IMG is already in some "high risk" countries and have a relatively low valuation so they could make a very accretive deal by paying say 15% of their market cap to increase their production/EBITDA by 20%.

 

15% of IMG's market cap works out to about 25 cents CAD/share (vs the 10 cent close today) on a fully diluted basis for GCM. Of course that could be a lot more if GCM can buy back a bunch of debentures in the mean time.

[SafetyinNumbers]

The company announced last week they will do a 15-1 consolidation instead of a 10-1 based on feedback from investors.

 

I ran through my estimates based on this higher gold price ($1255) and I get run-rate EBITDA on forward twelve months around US$67m.

 

Given they have guided to about US$15m in free cash flow to buy back debt this year with gold around $1225, I figure they can buy back around US$25m in debt by August 2018 when the GCM.DB.U convert to stock (they are 81% mandatory convertible).

 

At that point debt/ebitda will be around 1.25x TTM EBITDA and at the current share price EV/EBITDA would be around 1.9x TTM EBITDA. At that point, every multiple point increase would be worth about CAD 15 cents per share vs the CAD 9.5 cents share price.

 

Of course, once the stock trades above US$0.13, the debentures are all in the money so they will also convert to stock which will dilute shareholders but even fully diluted valuation is still extremely compelling especially for a company with no debt at that point!

 

The safer play is the GCM.DB.V, the senior secured convertible debt, which is likely going to be extended to 2024 and have an 8% coupon while being convertible at US$0.13. It is currently offered at 83.

[Cardboard]

I have not done any DD but, what is the reserve life at current run rate?

 

Cardboard

[SafetyinNumbers]

It's currently 2022 on the main money producer, Segovia, but they haven't spent any money for a long time on drilling until this past year as cash flow started to rebound. We should see reserves increase as they update estimates after incorporating the drilling. The smaller producing mine has 14m oz of reserves but they don't have the capital or political flexibility to develop that right now. They spent ~$500m for that asset back in 2011.