GCM.TO - Gran Colombia Gold Corp

[Green King]

Man Columbia is a fun place. :D

 

http://www.mining.com/coalcorp-saga-a-lesson-for-miners-in-colombia/

[SafetyinNumbers]

Yeah for sure. When I find a stock/debenture as cheap as GCM, I need to know why this opportunity exists and there are plenty of reasons here like the company's previous struggles and the general environment. On the first point, they seemed to have overcome a lot operationally evidenced by the soaring production and they have been helped by the peso decline/gold rally and on the second point, the government seems to want to change the culture. Certainly other Colombian-based companies aren't painted with the same brush as GCM.

 

Perhaps if they make a deal with the illegal miners at Segovia which sounded from the call like it could be imminent, it might change how the market views the company and result in multiple expansion.

[SafetyinNumbers]

GCM is at the International Mining Writers conference today and tomorrow in Vancouver.

 

They are presenting on a panel tomorrow at noon. If anyone is going, any feedback would be appreciated.

 

https://metalwriters.com/e/international-metal-writers-conference-68/agenda#day-0

 

As an aside, I was talking to a pretty smart investor on Friday and he had dismissed GCM because the 2018 bonds trading in the 60s made him assume it was distressed. Of course he didn't realize the 2018 bonds are 81% mandatory convertible so they are actually trading effectively at par. It's an easy mistake to make, especially for equity investors who assume bond investors are smarter (they usually are).

[SafetyinNumbers]

Very constructive developments from the company today, especially for the 2020 debenture holders.

 

The company is effectively redeeming 5.7% of the 2020 bonds at par as of July 31, 2017. This may be an indication of how difficult the company is finding it to source bonds using the buy back (recall, they can only execute block purchases if they want to do any size and it cannot be on an uptick.

 

The production numbers for May were also very impressive and they are currently trending above their guidance range although they have not increased guidance yet.

 

Details are in the press release. The AGM is next week in Toronto if anyone is interested in attending.

 

http://www.grancolombiagold.com/news-and-investors/press-releases/press-release-details/2017/Gran-Colombia-Gold-to-Redeem-Approximately-57-of-2020-Debentures-on-July-31-2017-Sets-New-Monthly-Production-Record/default.aspx

[SafetyinNumbers]

The AGM is tomorrow morning in Toronto, if anyone wants to hear the story up close and personal.

 

The recent decision to start redeeming the V bonds at par is very interesting when paired with the decision of executive board members to convert all of their V bonds to X bonds. They have effectively kept their long term exposure while forcing the 2020 bond holders to sell at par. Acceleration of the YTM is a nice thing and the V bond holders might choose to take the cash they get to buy more V bonds or X bonds or common stock. The common stock could move quickly if those dollars flow back in that way as the market cap is so tiny in relation.

 

 

[SafetyinNumbers]

I went to the AGM yesterday and continued to hear very positive developments in the story.

 

The most important thing they are doing is buying back the convertible debt as it reduces the fully diluted share count and reduces leverage. At the current gold price they should be able to buy back all of the 2020 bonds before they are due. I'm hoping the stock price is up so much by then that bond holders end up converting some into equity anyway!

[SafetyinNumbers]

There was some insider buying by the CFO of the common shares on Friday after the meeting.

 

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

 

I think it's rare to see a company's long term debt trade from 60 to 90 in 12 months while the common equity does nothing. There seems to be very high confidence they will be able to pay off the US$105m in debt remaining (recall the 2018's are 81% mandatory convertible) but the equity market cap will stay at less than US$45m (assuming the 81% of 2018s become stock).

 

Even if the EV stayed constant, the market cap would more than double in the next few years as they use the FCF to pay off 19% of the 2018s and buyback the 2020s.

[SafetyinNumbers]

The company has put up a new summary page for anyone who wants to get up to speed quickly on the name.

 

http://s21.q4cdn.com/834539576/files/doc_presentations/GranColombia_05.pdf

 

It overstates debt a little as the 2018 debt is 81% mandatory convertible at US$1.95 vs the stock at C$1.45.

[SafetyinNumbers]

Another impressive month of production from GCM in June. They finished H1'17 at 85k oz vs the current guidance of 150-160k oz for the full year '17. I believe they will likely increase guidance in Q4 but we'll see how they continue to progress.

 

They put up about US$13.6m in EBITDA in Q1 on 39k oz of production and given they produced 46k oz in Q2 and the gold price increased, I'm modeling about US$20m in EBITDA in Q2. I'm being somewhat conservative on costs, keeping them at the high end of guidance but I'll be pleased if they beat my numbers.

 

http://www.marketwired.com/press-release/gran-colombia-steadily-improving-gold-production-with-22-increase-first-half-2017-total-tsx-gcm-2225934.htm

 

The 2020 debs TSX:GCM.DB.V are the most interesting if you are risk averse as they have begun redeeming bonds at par starting at the end of this month, while the bonds trade at 85 with a 6% coupon. I'm expecting redemptions every quarter to use up the sinking fund.

 

The common is the most interesting if someone notices that the 2017E EV/EBITDA at the current price of C$1.40 is 2.3x and because of the financial leverage at an EV/EBITDA of 3.3x, the stock more than doubles. I haven't factored in that the debt will be declining every quarter but I have factored in the redemption that has been announced for month end.

 

[SafetyinNumbers]

1. New blog post on the GCM common shares.

 

https://reminiscencesofastockblogger.com/2017/07/27/buying-gran-colombia-gold-a-levered-free-cash-flow-generating-gold-producer/

 

2. There is also a strike going on in the region with the illegal miners not wanting to accept the proposed terms of Gran Colombia to become formalized miners. I'm not clear how this impacts current production but the same thing happened last September but it really didn't impact production in the quarter.

 

If they can come to a resolution, it would be very positive as there would be more ore to process in the mill and it would likely come at a lower than current AISC. Ideally, we would see incremental cash flow and normalization of community relations in the region which might reverse investor concerns and allow the multiple to lift.

 

http://www.mining.com/artisanal-miners-strike-impacts-colombian-town/

 

3. The 2020 debs went "ex-redemption" on Tuesday for about 6% of holdings. Based on GMPs activity in the trading there, the company may have bought over $600k in bonds at 87 in addition to the $3m redeemed at par effective July 31. Every $1m in bonds they buy reduces the FD share count by ~500k shares so this month's actions may account for almost 2% reduction in the fully diluted share count (recall all debentures are convertible at US$1.95).

[SafetyinNumbers]

GCM reported solid numbers for Q2 w/ adjusted EBITDA coming in at US$21.3m which is just under what the market cap is at US$22.5m.

 

http://www.marketwired.com/press-release/gran-colombia-gold-reports-second-quarter-2017-results-announces-mine-life-extension-tsx-gcm-2230185.htm

 

They also extended the mine life at Segovia to 2026 with continued drilling and reversed a previous impairment as the long term gold price assumption was moved to US$1250. On that basis, basic EPS was actually US$1.77/share but excluding the reversal, adjusted EPS was US$0.20/share for the quarter vs the stock price of US$1.10.

 

Overshadowing all of this though is the continued labour disruptions at their Segovia property (which produces the bulk of the cash flow) which began in late July. They were able to produce ~15k oz in July, they have indicated the disruption is having an impact but it's not clear how much. Maybe we'll get some colour tomorrow on the call. They do say they are negotiating with two of the illegal mines on their site so perhaps a resolution there could lead to an end of the dispute (maybe just wishful thinking on my part).

 

 

[SafetyinNumbers]

If you are interested in this stock or the debentures, it's worth listening to the conference call.

 

It sounds like they expect a resolution on the labour disruption in the next few weeks and they are close in negotiations with some of the larger illegal mines on their property. Solving both of these problems would have a significant impact on cash flow and some of the reasons why this company trades at such a big discount to its peers on almost every metric.

 

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

[SafetyinNumbers]

Following from the conference call, it seems like a proposal is now in front of the miners:

 

https://www.larepublica.co/empresas/tras-33-dias-de-protestas-gran-colombia-gold-llego-a-un-acuerdo-con-la-gobernacion-de-antioquia-2539274

 

This looks really interesting as while it increases cash costs at Segovia, it should reduce AISC. Further, significantly more production should come online which would increase cash flow / EPS. Perhaps most importantly though is that we could see multiple expansion as they illegal mining problems fade to the background.

[SafetyinNumbers]

This article from today suggests decent progress on negotiations but still some hostility.

 

http://www.eltiempo.com/colombia/medellin/violencia-durante-negociaciones-en-paro-en-antioquia-124506

 

If they can come to a resolution, we could see EBITDA north of US$90m on a forward 12 month basis based on recent production rates and some additional production from illegal miners.

 

Current EV is US$148m.

[SafetyinNumbers]

Lots of articles in Colombia suggesting the strike is ending and an agreement has been reached. Impossible to tell what the terms of the deal will mean for costs I would expect cash costs to rise along with production.

 

http://www.rcnradio.com/locales/antioquia/gobierno-y-mineros-llegaron-a-acuerdo-para-levantar-el-paro-en-segovia-y-remedios/amp/

[SafetyinNumbers]

Normal operations at Segovia.

 

http://www.grancolombiagold.com/news-and-investors/press-releases/press-release-details/2017/Gran-Colombia-Gold-Announces-Resumption-of-Normal-Operations-at-Segovia/default.aspx

 

Unfortunately we didn't get an exact number on August production but that's probably because they don't have it yet. Likely in a few weeks we'll have an update.

 

It reads like any new mining collectives that agree to deals with GCM will be incremental to existing production but might come at a lower margin.

 

I wish there was more clarity in the press release but given the market cap, peace on the labour front should increase the value considerably.

[SafetyinNumbers]

The numbers get kind of crazy when you slap a normal mid-tier producer multiple on GCM of 6x EBITDA.

 

At the current gold price at a production rate of 170k oz (they produced 85k oz in H1 and production was accelerating before the strike), forward 12 month EBITDA could be over US$85m. Theoretically any illegal mining that is formalized through agreements will be accretive to that.

 

On a fully diluted basis there would be 93m shares outstanding so 6x EV/EBITDA gets you a share price of C$6.80 vs the current share of C$1.60.

 

If they are able to buy back debentures, which they should be able to do unless the stock starts to run very fast above US$1.95 (the conversion price), then the price of the shares at that multiple will be even higher as there will be less dilution.

 

Recall there are only 20.5m shares outstanding right now so there is lots of opportunity (but maybe not time) to reduce dilution through redemption/buybacks of debentures.

[SafetyinNumbers]

Anyone else still reading these rantings of a mad man?

 

It looks like there was some decent insider buying the last few days ahead of what may be some decent catalysts and after some very good news with the labour settlement.

 

The insider marker shows about 40k shares purchased in total over the past couple of days.

 

https://www.canadianinsider.com/company?ticker=GCM#ui-id-7

 

There has been no filing on SEDI yet, however.

 

In terms of catalysts, there is expected release of the Marmato drill results which I'm hoping come before the marketing beginning next week at two Colorado gold conferences and finally there is a chance that the company finally gets some analyst coverage.

[awindenberger]

Anyone else still reading these rantings of a mad man?

 

It looks like there was some decent insider buying the last few days ahead of what may be some decent catalysts and after some very good news with the labour settlement.

 

The insider marker shows about 40k shares purchased in total over the past couple of days.

 

https://www.canadianinsider.com/company?ticker=GCM#ui-id-7

 

There has been no filing on SEDI yet, however.

 

In terms of catalysts, there is expected release of the Marmato drill results which I'm hoping come before the marketing beginning next week at two Colorado gold conferences and finally there is a chance that the company finally gets some analyst coverage.

 

Haha, I for one am reading all your postings with interest. I still haven't committed any capital but am seriously considering it.

[valcont]

Anyone else still reading these rantings of a mad man?

 

It looks like there was some decent insider buying the last few days ahead of what may be some decent catalysts and after some very good news with the labour settlement.

 

The insider marker shows about 40k shares purchased in total over the past couple of days.

 

https://www.canadianinsider.com/company?ticker=GCM#ui-id-7

 

There has been no filing on SEDI yet, however.

 

In terms of catalysts, there is expected release of the Marmato drill results which I'm hoping come before the marketing beginning next week at two Colorado gold conferences and finally there is a chance that the company finally gets some analyst coverage.

 

Why do you think the stock is a better play here than buying '20 or '24(my preference) debentures? Basically you are buying leaps that pays 6%/8% with no mandatory conversion. Talking about conversion , I can't figure out why the '18 debs are mandatory. Who would ever buy that at 70 when the mandatory conversion is at CAD $2.37 , a 45% premium?

 

Just a day's work so please correct me if I have missed anything.

[SafetyinNumbers]

First, I got some messages that people are actually reading this stuff so I appreciate that. Thanks!

 

I actually own the entire capital structure with the biggest position being in the Vs.

 

I used to own only the Vs but my concern is with the strategy to redeem the Vs at par with sinking fund money. If the stock starts to move they will redeem the debs at par below conversion value. Definitely a high class problem. While you could convert the debs or sell them at conversion value at that point the return on the common would be significantly higher in that scenario. I sold some Vs and switched them into Xs but mostly I just bought common and the Us opportunistically.

 

"Who would ever buy that at 70 when the mandatory conversion is at CAD $2.37 , a 45% premium? "

 

The Us are only 81% convertible below US$1.95/share so the current value of the debs is actually about 74 with current share price and exchange rate. The stock value there is about 55 so with the recent trading price at 70, you are creating a less than one year piece of paper at 15 that is worth 19 in a year which is about 77 cents on the dollar while having a free option above US$1.95. I find that attractive. It's really sensitive to bid/ask spreads though!

 

[valcont]

First, I got some messages that people are actually reading this stuff so I appreciate that. Thanks!

 

I actually own the entire capital structure with the biggest position being in the Vs.

 

I used to own only the Vs but my concern is with the strategy to redeem the Vs at par with sinking fund money. If the stock starts to move they will redeem the debs at par below conversion value. Definitely a high class problem. While you could convert the debs or sell them at conversion value at that point the return on the common would be significantly higher in that scenario. I sold some Vs and switched them into Xs but mostly I just bought common and the Us opportunistically.

 

"Who would ever buy that at 70 when the mandatory conversion is at CAD $2.37 , a 45% premium? "

 

The Us are only 81% convertible below US$1.95/share so the current value of the debs is actually about 74 with current share price and exchange rate. The stock value there is about 55 so with the recent trading price at 70, you are creating a less than one year piece of paper at 15 that is worth 19 in a year which is about 77 cents on the dollar while having a free option above US$1.95. I find that attractive. It's really sensitive to bid/ask spreads though!

 

Ah I see. Didn't notice the 81% conversion part. BTW take a look at page 19 of this report for the excess cash flow.What is the other working capital?

 

http://s21.q4cdn.com/834539576/files/doc_presentations/GCM-Corporate-Presentation-MAY-2017-(Final).pdf

 

These guys haven't made any money until a year or two ago.Right around when peso is devalued and gold prices had started moving up. Perfect tail wind. I am not disputing your bull case. I am just trying to understand why there is a discount?  Is it because the management seems shitty having restructured once or there is more to those mining disputes? Don't think debentures are causing any confusion. The terms are pretty clear and price looks good post 2018 dilution.

 

 

[SafetyinNumbers]

 

Ah I see. Didn't notice the 81% conversion part. BTW take a look at page 19 of this report for the excess cash flow.What is the other working capital?

 

http://s21.q4cdn.com/834539576/files/doc_presentations/GCM-Corporate-Presentation-MAY-2017-(Final).pdf

 

These guys haven't made any money until a year or two ago.Right around when peso is devalued and gold prices had started moving up. Perfect tail wind. I am not disputing your bull case. I am just trying to understand why there is a discount?  Is it because the management seems shitty having restructured once or there is more to those mining disputes? Don't think debentures are causing any confusion. The terms are pretty clear and price looks good post 2018 dilution.

 

Eyeballing it the other working capital highlighted appears to be growth in accounts receivable and inventories but you can analyze the 2016 financial statements here: http://s21.q4cdn.com/834539576/files/doc_financials/2017/GCM-Financial-Statements-12-31-16-(FINAL).pdf

 

I disagree on the debentures. I have spoken to a few professional portfolio managers who see the 2018s trading at 70 and assume there is financial distress so they don't touch the equity. In fact, most of this year the 2018 debs traded above par on the partial conversion basis. I think the recent opportunity is just because the CAD rallied so quickly.

 

I think there are lots of reasons for the discount. I don't think all of them are fair which is why I own it but it explains the discount to me. A smart former colleague of mine once said "you can't buy a cheap stock unless you know why it's cheap!"

 

In this case:

 

1. Their costs were out of control under the old CEO, while the peso was really high and the gold price was falling. They have benefited on costs recently from the peso move but also the expansion in production at Segovia.

2. There was too much debt and they had to dilute equity shareholders in the past. With the way EBITDA and FCF has grown, the debt is at a very manageable level. Recall, the market cap with these very same assets was over $1 billion in the past. That's a lot of burned investors.

3. Labour relations have been awful and there is lots of illegal mining / gang activity. Hopefully the settlement in Segovia puts this in the rearview mirror but there will surely be flare ups like almost any mining company.

4. There is no analyst coverage. Hopefully resolved this fall as one would think with all of the fees GMP has received they will launch coverage soon!

5. Market cap is too small for many big investors to get involved. Ironic but true, I think. They will come rushing in when all of the debs are converted and the company is big enough to go in the GDXJ. 

 

I'm sure there are more reasons but those are the most glaring to me at least.

[valcont]

 

Eyeballing it the other working capital highlighted appears to be growth in accounts receivable and inventories but you can analyze the 2016 financial statements here: http://s21.q4cdn.com/834539576/files/doc_financials/2017/GCM-Financial-Statements-12-31-16-(FINAL).pdf

 

I disagree on the debentures. I have spoken to a few professional portfolio managers who see the 2018s trading at 70 and assume there is financial distress so they don't touch the equity. In fact, most of this year the 2018 debs traded above par on the partial conversion basis. I think the recent opportunity is just because the CAD rallied so quickly.

 

I think there are lots of reasons for the discount. I don't think all of them are fair which is why I own it but it explains the discount to me. A smart former colleague of mine once said "you can't buy a cheap stock unless you know why it's cheap!"

 

In this case:

 

1. Their costs were out of control under the old CEO, while the peso was really high and the gold price was falling. They have benefited on costs recently from the peso move but also the expansion in production at Segovia.

2. There was too much debt and they had to dilute equity shareholders in the past. With the way EBITDA and FCF has grown, the debt is at a very manageable level. Recall, the market cap with these very same assets was over $1 billion in the past. That's a lot of burned investors.

3. Labour relations have been awful and there is lots of illegal mining / gang activity. Hopefully the settlement in Segovia puts this in the rearview mirror but there will surely be flare ups like almost any mining company.

4. There is no analyst coverage. Hopefully resolved this fall as one would think with all of the fees GMP has received they will launch coverage soon!

5. Market cap is too small for many big investors to get involved. Ironic but true, I think. They will come rushing in when all of the debs are converted and the company is big enough to go in the GDXJ. 

 

I'm sure there are more reasons but those are the most glaring to me at least.

 

Thanks Safety, I'll dig in to see the working capital adjustments and the costs on constant currency basis. Their normalized earnings over a commodity cycle don't look good so I'm trying to figure out how much of the peak earnings are baked into the upside thesis. The debentures are a good deal but US citizens can't buy them. The gold does seem to be breaking out so I'm looking at the basket of these stocks. 

[SafetyinNumbers]

I think it's hard to look at the historical results and determine what costs look like going forward. The significant increase in production has spread fixed costs out over more ounces at Segovia and I believe some (all?) of the agreements with contract miners are in USD their costs won't rise as much as one might think at Segovia at least.

 

I believe the CFO commented on the last conference call about the sensitivity being relatively low.

 

Maybe worth reaching out to him for some clarity?

 

In addition, there is a ton of option value at Marmato. If these drill results are encouraging, they might eventually entice a JV partner to step forward to help develop it (not sure on timeline). That could put a gigantic valuation number on Marmato where the current market might have zero. They already know there is a ton of gold there but they need to evaluate the potential for a large underground mine (need high grade material).