GCM.TO - Gran Colombia Gold Corp

[SafetyinNumbers]

GCM announces they will settle the rest of the 2018 debentures in stock at the end of the week, which is no surprise.

 

http://globenewswire.com/news-release/2018/08/07/1547916/0/en/Gran-Colombia-Gold-Announces-it-Will-Settle-100-of-its-2018-Debentures-at-Maturity-With-Common-Shares-Expanding-2018-Drill-Program-to-Test-Extensions-of-High-Grade-Discovery-at-Dep.html?ev=1

 

Perhaps, a market cap above $100m can bring in some institutional buyers. It’s interesting how valuation has tracked at 2x EV/EBITDA during the decline in the gold price. It will be nice to get some multiple expansion. Each multiple point is worth more than C$2/share.

[tombgrt]

Doubled position at 2.1x. This is just stupid.

[SafetyinNumbers]

Especially after Q2. Production in July was amazing and cash generation in the quarter was huge. I have it trading at less than 1.7x EV/EBITDA.

 

I think there were some 2018 bond holders who didn’t know their bonds were mandatory convertible.

[tombgrt]

Yes, Q2 was great. Looking forward to the next few Q. The sell-off happened at the samen time as my oil holdings, otherwise I bought more.

[NorteCapital]

IMO, large holders (insiders) of the convertible are using that liquidity event to mostly get out: Serafino, Lloyd Miller, 683 Capital Management. Some will still own some shares but, that is not the big portion of how they held a stake in the company.

 

So your thesis made a lot of sense assuming that these people believe in the story and undervaluation: eliminate the convertible over time through repurchase/conversion.

 

Why they want out now? The strike this Summer was serious enough for me to start looking for an exit.

 

Cardboard

 

Do we know if Cardboard was right and insiders sold? Have they disclosed anything?

[SafetyinNumbers]

IMO, large holders (insiders) of the convertible are using that liquidity event to mostly get out: Serafino, Lloyd Miller, 683 Capital Management. Some will still own some shares but, that is not the big portion of how they held a stake in the company.

 

So your thesis made a lot of sense assuming that these people believe in the story and undervaluation: eliminate the convertible over time through repurchase/conversion.

 

Why they want out now? The strike this Summer was serious enough for me to start looking for an exit.

 

Cardboard

 

Do we know if Cardboard was right and insiders sold? Have they disclosed anything?

 

It’s a bit of a mixed bag.

 

Lloyd Miller died before the notes deal was announced. and his estate did redeem all of the 2020 bonds it owned. 683 Capital left the board and after the 2018 debs converted to equity last week, they are under 10% of the new share count so they no longer have to file but they last controlled around 4.3m shares. I believe they got into the story through the distressed debt so it’s not surprising they left the board after the old debentures were all taken care of. 

 

The insiders like Serafino Iacono and Miguel De La Campa converted their 2024 debentures into the new notes and added more which was originally an investment of around US$8.5m but that has a sinking fund so it’s closer to US$8m now. They also picked up 1.3m warrants with a C$2.21 strike through that deal on top of the 1.67m shares they already owned.

 

The other director that owned significant debs, Herman Martinez, converted his 2018 debs to stock and bought more in the market at higher prices and owns 645k shares now.

 

All insiders have to file on SEDI.

 

[tombgrt]

I bought even more today. Market has a net short position in gold currently. Last time this happened was April 2001. You can look for yourself where gold was trading at that point in time.

 

People are correct that gold has little fundamental value and over time it might even be threatened by other and new stores of value. It is also kinda useless as a hedge against (geopolitical) uncertainty and shit hitting the fan, as we have learned in the last few years.

 

The beauty of those characteristics is that it is very susceptible to pure sentiment. People will push it around to wherever their sentiment allows them to push it. Few limits imposed by rationality, as if investors have much of that trait anyway... Maybe rising rates are making gold less attractive to hold, but I don't see it as the price determinant. The stronger dollar has certainly helped but I'm betting sentiment is still the main cause of the lower price.

 

We don't need a higher gold price for GCM to work out with costs so low and valuation so cheap. But if sentiment is any indicator, this could be one of the best contrarian bets over the next few years.

[SafetyinNumbers]

I wish they could pick up some analyst coverage.

 

They spent almost $5m in fees issuing the new notes, you would think that would buy research for at least 5 years.

 

Research would allow institutional investors to fast track their own work and give them someone to blame if something goes wrong. It would also populate earnings estimates at quant funds that use those sorts of things which might bring in some new investors.

 

At the AGM, they discussed some analyst trip potential in August and September but not sure if those are still on the books.

[Foreign Tuffett]

A few questions, any answers would be much appreciated. I'm a US-based equity investor who has never invested in a miner and has little knowledge of the segment -- so that's the perspective I'm coming at this from.

 

1) Based on their February issuance of the 8.25% gold-linked notes + warrants, their cost of capital is quite high. Why weren't they able to get better terms?

 

2) The most recent MD&A tells me that the end of the "expected mine life" for the Segovia asset ends is 2026. Is this something that's likely to be extended? If not, then a capex-heavy asset in Colombia with little terminal value doesn't seem very attractive.

 

3) Is EBITDA even the best way to value this? Capital expenditures last year ("The Company incurred $26.1 million of sustaining capital expenditures in 2017") were well in excess of D&A ($18.4 million).

 

 

[tombgrt]

For 3: You can annualize depreciation over last few quarters and keep it indefintely this high and you still get fcf over $20m. And they are growing fast. I think d&a vs capex in last few years is more in line. Both ebitda and fcf metrics should be used.

 

 

[SafetyinNumbers]

A few questions, any answers would be much appreciated. I'm a US-based equity investor who has never invested in a miner and has little knowledge of the segment -- so that's the perspective I'm coming at this from.

 

1) Based on their February issuance of the 8.25% gold-linked notes + warrants, their cost of capital is quite high. Why weren't they able to get better terms?

 

2) The most recent MD&A tells me that the end of the "expected mine life" for the Segovia asset ends is 2026. Is this something that's likely to be extended? If not, then a capex-heavy asset in Colombia with little terminal value doesn't seem very attractive.

 

3) Is EBITDA even the best way to value this? Capital expenditures last year ("The Company incurred $26.1 million of sustaining capital expenditures in 2017") were well in excess of D&A ($18.4 million).

 

1) The company had previously run into problems where it had taken on too much leverage (with the 2018/20/24 debentures they were refinancing) and most of the cash flow comes from a single mine so that usually comes with a relatively high cost of financing. I think if you look across the mining world it wasn't out of line.

 

2) Generally, with underground vein type mining, companies don't spend a lot of money ahead of time to drill up reserves as the land position is so large. GCM was also capital starved for a long time as it struggled with lower gold prices, too much debt and a strong peso. All of these things have reversed in the last few years so they have been doing more drilling and increasing reserves. I would expect the drilling to continue over time and that mine life to extend with it. Again, this isn't unusual in gold mining.

 

3) EV/EBITDA tends to be a common approach to value gold miners. Some people use NAV. Others use FCF. The company has grown production significantly (150k in 2016 to over 200k this year) over the last few years so not all of the capex was for sustaining capital. They are catching up on capital they should have spent over the last few years when they were cash strapped. Another blog has a good summary of the investment case for GCM and has it a FCF yield of around 30%. It's hard to find that anywhere while production is growing.

 

https://reminiscencesofastockblogger.com/2018/08/17/catching-the-knife-with-gran-colombia/

[Foreign Tuffett]

A few questions, any answers would be much appreciated. I'm a US-based equity investor who has never invested in a miner and has little knowledge of the segment -- so that's the perspective I'm coming at this from.

 

1) Based on their February issuance of the 8.25% gold-linked notes + warrants, their cost of capital is quite high. Why weren't they able to get better terms?

 

2) The most recent MD&A tells me that the end of the "expected mine life" for the Segovia asset ends is 2026. Is this something that's likely to be extended? If not, then a capex-heavy asset in Colombia with little terminal value doesn't seem very attractive.

 

3) Is EBITDA even the best way to value this? Capital expenditures last year ("The Company incurred $26.1 million of sustaining capital expenditures in 2017") were well in excess of D&A ($18.4 million).

 

1) The company had previously run into problems where it had taken on too much leverage (with the 2018/20/24 debentures they were refinancing) and most of the cash flow comes from a single mine so that usually comes with a relatively high cost of financing. I think if you look across the mining world it wasn't out of line.

 

2) Generally, with underground vein type mining, companies don't spend a lot of money ahead of time to drill up reserves as the land position is so large. GCM was also capital starved for a long time as it struggled with lower gold prices, too much debt and a strong peso. All of these things have reversed in the last few years so they have been doing more drilling and increasing reserves. I would expect the drilling to continue over time and that mine life to extend with it. Again, this isn't unusual in gold mining.

 

3) EV/EBITDA tends to be a common approach to value gold miners. Some people use NAV. Others use FCF. The company has grown production significantly (150k in 2016 to over 200k this year) over the last few years so not all of the capex was for sustaining capital. They are catching up on capital they should have spent over the last few years when they were cash strapped. Another blog has a good summary of the investment case for GCM and has it a FCF yield of around 30%. It's hard to find that anywhere while production is growing.

 

https://reminiscencesofastockblogger.com/2018/08/17/catching-the-knife-with-gran-colombia/

 

Thanks for the response. I just finished purchasing a position in this a few hours ago.

 

Do I like gold: not really

 

Do I like Colombia as an investment destination: not particularly

 

But I agree with the other posters that the company is just too cheap here.

[SafetyinNumbers]

Another solid month of production from GCM and a guidance raise for the year.

 

http://www.grancolombiagold.com/news-and-investors/press-releases/press-release-details/2018/Gran-Colombia-Gold-Provides-August-2018-Production-Update-Latest-12-Months-Total-Reaches-Approximately-212000-Ounces-of-Gold/default.aspx

[SafetyinNumbers]

I don’t usually highlight trading situations but if you have been sitting on the fence on GCM or looking to get back in / add, today might be the day. The DXY is quite weak and sending gold higher.

 

I highlight this because, there has been a seller of GCM offering over 200k at $2.30 for a few weeks which likely has motivated sellers to offer below $2.30 but in the last few days there has been some buying picking away at the $2.30 level. My thought is that when this seller is done (potentially today or soon) the stock will lift higher as the selling has been exhausted.

 

Just a theory which may be entirely wrong but I think it makes sense. The seller might be an iceberg and perhaps there is a ton more for sale than what’s posted!

 

 

[Foreign Tuffett]

I don’t usually highlight trading situations but if you have been sitting on the fence on GCM or looking to get back in / add, today might be the day. The DXY is quite weak and sending gold higher.

 

I highlight this because, there has been a seller of GCM offering over 200k at $2.30 for a few weeks which likely has motivated sellers to offer below $2.30 but in the last few days there has been some buying picking away at the $2.30 level. My thought is that when this seller is done (potentially today or soon) the stock will lift higher as the selling has been exhausted.

 

Just a theory which may be entirely wrong but I think it makes sense. The seller might be an iceberg and perhaps there is a ton more for sale than what’s posted!

 

Thanks for the info. I wondered why the stock was so weak today, despite the gold price being slightly up.

[SafetyinNumbers]

There was still about 150k left at $2.30 the last I saw.

 

Today was definitely not the day.

[IanBezek]

Also there was an attack on Continental Gold in Colombia last night that killed three of their geologists - not good for sentiment.

[SafetyinNumbers]

Also there was an attack on Continental Gold in Colombia last night that killed three of their geologists - not good for sentiment.

 

Which is why it makes sense that CNL was down 30bps and GCM was down 430bps while the attack was an 8 hour drive from Segovia.

 

A gold stock with no analyst coverage leads to a skittish investor base.

[IanBezek]

CNL was down 5% at one point - surprised it closed back up to be honest. The 8hrs thing is a misnomer - Antioquia has terrible highways. Look on a map, and all three projects are near each other (Segovia is within 100km of Berlin where the geologists were killed as the crow flies). I don't think this is a major deal (I live in a part of Colombia that is less secure than Antioquia, and I value my own life) ... but a targeted attack on a gold company is still a troubling development in the post-FARC peace deal era. Remains to be seen how things will settle out with much more aggressive Duque in power.

 

CNL announced today that they are suspending operations at Buritica as well, which adds some color to the idea that the Berlin project is unrelated and far away.

[SafetyinNumbers]

Is there a press release for today’s announcement?

 

I don’t see it yet.

[IanBezek]

It's in Colombian media here. CNL opens down 10%. Parents of one of the dead geologists claim Continental knew an attack was coming. Really ugly story all around. https://www.pulzo.com/nacion/habla-padre-geologa-asesinada-antioquia-PP561832

[SafetyinNumbers]

I don’t see where it says they are stopping Buritica development. Is that in a different article?

 

Is it fair to assume these ex FARC guerillas were trying to get protection money from the company and they refused to pay?

[IanBezek]

I take that back on the suspension, I think somebody got mixed up between this attack and the one two weeks ago at Buritica. As for the attackers' motives, I haven't heard anything.

[tombgrt]

https://theprospectornews.com/wp-content/uploads/2018/09/2018-SEP-Screen.pdf

 

Interview with CFO.

[SafetyinNumbers]

Denver Gold Forum presentation as well (Wednesday at 11am)

 

https://www.denvergoldforum.org/webcast/

 

Also, the Chairman purchased another 400k of the new notes at 98. Recall, these are partially redeemed every quarter which is rapidly reducing debt.