Gran Colombia Gold spinning off Marmato

Ladies and Gentlemen, hold onto your wallets!

TORONTO, Oct. 07, 2019 (GLOBE NEWSWIRE) — Gran Colombia Gold Corp. (TSX: GCM, OTCQX: TPRFF) (the “Company” or “Gran Colombia”) announced today, further to the press release of the Company dated September 16, 2019, that it has entered into a letter of intent (the “LOI”) on October 4, 2019 with Bluenose Gold Corp. (TSX-V: BN.H) (“Bluenose”) in respect of the proposed acquisition by Bluenose of certain mining assets (the “Mining Assets”) at the Company’s Marmato Project located in the Department of Caldas, Colombia (the “Transaction”).

Gran Colombia has two operating mines. One is Segovia, which produces the substantial majority (89%) of its gold. The other is Marmato. They have three other potential avenues, all of which are not operating. There is Zancudo, which they optioned off to IAMGOLD for exploration and potential development. There is their Venezuelan properties, which is a “good luck if they democratically elect a new government before the country is completely destroyed” situation, and finally the Chicharron project which is being reflected in GCM’s equity investments in Sandspring (TSX: SSP).

The press release above is an attempt to spin off their Marmato operation in another publicly listed entity.

Marmato is currently undergoing exploration and finalization of another development project that will expand the mining capacity well beyond the 25,000 ounces/year it currently is producing. The initial plan was an open pit mine, but now that is revised in a tunneled project. Needless to say, this will consume gigantic amounts of capital.

The finance deal is very questionable for GCM shareholders.

Bluenose will be the recipient of a reverse takeover. After accounting for a 1:10 reverse split, Bluenose has 10.6 million shares outstanding. The current corporation is a shell (a few bucks on the balance sheet, no debt). GCM will be throwing in its Marmato asset for 28.75 million shares, notionally valued at $2/share.

Is an existing mining operation producing 25,000 ounces of gold a year (US$37.5 million top-line) worth a capitalization of US$43.1 million?

GCM will also be throwing in another $5 million for 2.5 million shares and warrants to purchase at $3. Bluenose will also sell to the public 5-7.5 million shares at the same terms.

It’s going to take a lot more money than this to get the mine up and operating.

There is also an insider relationship involved. On November 2, 2018, the following was announced by Bluenose:

The Company has been advised that Frank Giustra and his related entities will acquire an aggregate of 11,700,000 post-consolidated common shares of the Company representing 11.14% of the issued and outstanding post-consolidated common shares of the Company pursuant to a private transaction. Radcliffe Corporation, Fiore Financial Corp. and Fiore Farms Inc. (companies indirectly owned by Mr. Giustra) will acquire an aggregate of 4,000,000 post-consolidated common shares, representing 3.81% of the issued and outstanding common shares of the Company. Canada Life Ltd. through an investment account controlled and directed by Mr. Giustra) and The Giustra Foundation (a charitable organization controlled by Mr. Giustra) will acquire 7,700,000 post-consolidated common shares of the Company representing in aggregate 7.64% of the issued and outstanding shares of the Company. Following these transactions, Mr. Giustra will have indirect ownership and/or control, over an aggregate of 11,700,000 post-consolidated common shares of the Company representing 11.14% and would have indirect ownership and/or control over an aggregate of 12,050,000 post-consolidated common shares representing 11.43% on a partially diluted basis, assuming the exercise of 350,000 incentive stock options granted to the Giustra Foundation.

This was probably the connection that lead GCM to choose Bluenose as the reverse merger candidate.

Finally, what is most interesting is the following:

The closing of the Transaction will also be subject to the following conditions, amongst others:

…

all liens and encumbrances in respect of Marmato Panama, Marmato Colombia and the Mining Assets granted in favour of the holders of the 8.25% senior secured notes due in 2024 shall have been released and discharged, on terms and conditions satisfactory to Bluenose, acting reasonably;

This remains to be seen how this will be resolved. Noteholders are not simply going to give up security to the Maramato asset. It will cost GCM something to get the noteholders to agree to it. Will noteholders receive shares/warrants in Bluenose, will they receive cash, or will they receive a boost in their coupon to compensate for the loss in collateral? (Disclosure: I own a not insubstantial amount of GCM notes.)

Either way, I view this as a negative for GCM shareholders.

TSX Exchange-traded debt review

I have made some corrections to my initial TSX Exchange-traded debt spreadsheet. So far, this is turning out to be a great replacement for the old one that used to be at the old Financial Post website before it got taken down.

In terms of valuations, none of them appear to be errantly priced where I am tempted to dive in. The ones trading well under par are either visibly insolvent or marijuana companies. In either instance, purchasers of the debentures are likely to lose capital. The best of the worst of them appear to be DHX Media (TSX: DHX.DB) and Just Energy (TSX: JE.DB.C/D) but both of these businesses have issues which make the double-digit YTM warranted.

If your goal with these instruments is to make a relatively easy 5%, however, there are plenty of quality selections to be made, although I’d make the argument that for a non-tax sheltered account you would be much better off with preferred shares.

Mid-tier Canadian oil on the ropes

A couple pieces of evidence to indicate the malaise in the Canadian oil sector.

First one was Pengrowth (TSX: PGF), who announced:

The Company’s $330 million Credit Facility (all amounts in Canadian dollars) is provided by a broad syndicate of domestic and international banks and had a scheduled maturity of September 30, 2019. The lenders have agreed to provide the Company with a 31 day extension of the maturity date under the Credit Facility to October 31, 2019 with a maximum facility draw of $180 million under the Credit Facility and a $5 million Excess Cash provision.

Holders of the Secured Notes have agreed to the extension of the Credit Facility and to a 31 day extension of the maturity date under the October Notes to November 18, 2019.

The Company will continue to operate its free cash flow positive business as usual. This short-term extension will allow the Company to continue to advance discussions with its lenders and noteholders with the objective of completing a long-term extension transaction. The mutual goal of Pengrowth and its senior debtholders is to negotiate a three year extension that allows the Company the flexibility to reduce its outstanding debt with the benefit of additional time and improved market conditions.

The Company believes it has made significant progress with its lenders and noteholders on a number of key areas in respect of the potential extension transaction, but there remain ongoing detailed discussions which require additional time. A transaction may result in dilution of the outstanding common shares of the Company (with an associated impact on the value of such shares) as part of any consideration provided to affected lenders and noteholders. There can be no assurance or guarantee that a long-term extension transaction will be agreed to or on what terms.

Pengrowth has CAD$57 million (denominated in foreign currency) in secured debt that is due on October 18, 2019 which has been extended a month as a result of the above release. They also have significant debt in 2020 and 2022, and also a line of credit which was set to expire on September 30, 2019. Current debt outstanding is $362 million, and non-current portion is $340 million.

The only way the company could pay the upcoming bond maturity is by the extension of its term facility, which of course the banks are unlikely to give without security, but the security has already been pledged to the noteholders. So this is a very sticky situation where both secured entities (noteholders and credit facility) have an incentive to pulling the pin to getting instant payment. Pengrowth also has covenants relating to the secured notes that they are likely to break imminently (even though they were relaxed in the past).

This is not likely to end very well for Pengrowth shareholders. The only wild card here is whether Seymour Schulich (who owns 159,400,000 shares of PGF or about 28.5% of the company) will be asked to put up a bunch more money to salvage his investment, which, needless to say, is seriously under water at the moment.

Second item: Bellatrix Exploration (TSX: BXE) went into CCAA today. Shareholders will probably get little out of it. While an energy company going into CCAA may not necessarily be unexpected news, the surprise here was that it took place after a recent capitalization (June 4, 2019). However, it is pretty clear in retrospect that the replacement of 4 of the 7 directors resulted in them changing gears and instead are representing the debtholders with this action.

TSX 30: Momentum Index – Thoughts

The TSX created a new index, the TSX 30, which is formed under the basis of total return over the past three years for the top 30 companies in the TSX.

The first batch of index constituents are the following and this is an interesting list:

TSX 30: June 30, 2016 to 2019

Note the "3Yr" column is TOTAL return, dividend/distributions adjusted.
RankIssuer NameTicker3Yr
1Canopy Growth CorporationTSX:WEED1823%
2Shopify Inc.TSX:SHOP883%
3Village Farms International Inc.TSX:VFF868%
4Kirkland Lake Gold Ltd.TSX:KL605%
5Trilogy Metals Inc.TSX:TMQ503%
6Aphria Inc.TSX:APHA479%
7Air CanadaTSX:AC346%
8Neptune Wellness Solutions Inc.TSX:NEPT322%
9Ivanhoe Mines Ltd.TSX:IVN312%
10North American Construction Group Ltd.TSX:NOA304%
11Labrador Iron Ore Royalty CorporationTSX:LIF282%
12Ballard Power Systems Inc.TSX:BLDP232%
13Pollard Banknote LimitedTSX:PBL210%
14goeasy Ltd.TSX:GSY209%
15Anglo Pacific Group PLCTSX:APY185%
16North American Palladium Ltd.TSX:PDL183%
17Gran Colombia Gold Corp.TSX:GCM178%
18Resverlogix Corp.TSX:RVX174%
19Wesdome Gold Mines Ltd.TSX:WDO172%
20Cargojet Inc.TSX:CJT166%
21Theratechnologies Inc.TSX:TH161%
22Summit Industrial Income REITTSX:SMU160%
23Constellation Software Inc.TSX:CSU158%
24Tucows Inc.TSX:TC152%
25Great Canadian Gaming CorporationTSX:GC147%
26CAE Inc.TSX:CAE136%
27Park Lawn CorporationTSX:PLC131%
28TerraVest Industries Inc.TSX:TVK131%
29BRP Inc.TSX:DOO131%
30Boyd Group Income FundTSX:BYD126%

I have a few observations.

My initial gut reaction is that anybody investing in this index is nuts simply because it is a momentum index – people would be buying in and more or less facilitating the cash-out of the top players. Buying something solely on the basis of previous price appreciation is a questionable investing strategy.

Indeed, items 1, 3, 6, 7, and 8 on the table above were built on the basis of the cannabis industry (of which readers here should know I am highly skeptical of). I think most of these companies have had their hey-day and are now realizing that getting remotely close to justifying their valuation is not going to be an easy endeavour.

On second glance, the TSX 30 index is actually reasonably diversified among industries, except finance. Considering that the main TSX 60 index is dominated by finance (37% of the index at present), the lack of financials is not a terrible characteristic.

There are a few companies on this list that made me go “really?” and when looking at their stock charts they indeed were able to deliver said returns. Ivanhoe Mines? Seriously!!?? (answer: they got really lucky with the June 30, 2016 to June 30, 2019 date ranges – go take a look at their stock chart).

My other observation is: so few companies appreciated +125% in the past three years. There are a few staple companies where it is really worth buy-and-holding (Constellation Software comes to mind here, although future returns are very likely not to be nearly as good as previous ones), but is one really going to buy and hold any of the marijuana companies or Shopify from here on in? It goes as one more data point to show that being nimble in trading continues to be a key characteristic in being able to outperform – a passive investor does not see the converse index which is the “TSX negative 30”, which contains the list of non-bankrupt companies which have depreciated the most over the past three years – that in itself would be an interesting future exercise.