Category: Equity

Gran Colombia Gold’s confusing capital allocation strategy, part 4

(Part 1 on June 12, 2019; Part 2 on November 16, 2019); Part 3 on February 7, 2020)

This just gets better and better.

On February 6, 2020, after raising CAD$40 million in an equity offering (at CAD$5.60/share with a healthy dose of 3-year warrants at CAD$6.50) they announced they will be repurchasing 30% of their senior secured notes (TSX: GCM.NT.U) which I thought was a good use of capital (their rate of return will be in the teens for this repurchase).

They spun off their Marmato mine into an entity called Caldas Gold (TSXV: CGC) – this mine is going to require a ton of capital investment to ramp up gold production (it produces about 2k ounces per month prior to this investment). On March 17, they announced they spent $2.4 million to purchase off the open market stock in Caldas.

Then things get a little weird. On May 5, they announced they were going to invest in a solar project. The capital cost of this project is $8 million, and “may be financed by up to 70% through local banks”. Although this isn’t going to cost the company too much, it does seem like a deviation.

Then the company on May 11th announced they were proposing to merge with Gold X (which they held a 19% interest in) and Guyana Goldfields (TSXV: GLDX and TSX:GUY), which would have rendered existing GCM shareholders with 60% of the company. The justification was that the mines involved in Guyana were 50km apart and they were able to realize synergies between them. My quick take, without much mining engineering knowledge, was through a simple Google Satellite view of where both mines would operate and I realized that it would be a monumental undertaking to join them together. GCM shareholders avoided disaster on May 25th when there was a superior offer floated by a competing entity and they decided to drop the bid.

So this wasn’t enough. On June 30, GCM announced they invested another CAD$14 million in Caldas to pursue a project called the Juby Project, which is approximately 15km WSW of Gowganda, Ontario. To acquire this interest, they had to give shares of Caldas to the point where GCM has a 57.5% equity stake in Caldas.

This is very puzzling to me since it isn’t clear that the Juby Project will actually generate a dollar for the company. All that was advertised is they will do drilling in 2021, after “incorporating machine learning and other studies”.

Finally, today (July 19), GCM announced they invested another $1.4 million in Western Atlas Resources (TSXV: WA) to bring their ownership to 25.8%.

What’s the conclusion here? Gran Colombia, by virtue of their Segovia operation and a US$1,800 gold price, is making plenty of cash flow. However, they are proceeding to blow it on everything else at a rapid pace, probably for the reason that grades in Segovia are going to decrease and the economic utility of the mine is continuing to drop and they need to start selling promise rather than actual results.

In particular, I believe they objective with Caldas Gold is to get their ownership in the company under 50% so that way they no longer have to consolidate their expenses (and losses) in their main financial statements. Watch out for another acquisition using Caldas stock to achieve this purpose.

I don’t own any GCM stock, but I do own the notes (GCM.NT.U) which I expected to be called away on or shortly after March 31, 2021. I still think at present prices GCM (and Caldas) should be raising equity capital while the going is good. If for whatever reason gold makes a sustained decline, history will be repeating itself with this firm.

Tailored Brands: Not looking good

Tailored Brands (NYSE: TLRD), retailing as Moore’s in Canada, filed on Form 8-K that they were not paying their unsecured debtholders:

On July 1, 2020, The Men’s Wearhouse, Inc. (“Men’s Wearhouse”), a subsidiary of Tailored Brands, Inc. (together with Men’s Wearhouse, the “Company”), elected not to make the interest payment due and payable on July 1, 2020 of approximately $6.1 million (the “Interest Payment”) with respect to its 7.00% Senior Notes due 2022 (the “2022 Senior Notes”). Men’s Wearhouse has a 30-day grace period to make the Interest Payment before such non-payment constitutes an “event of default” under the indenture governing the 2022 Senior Notes (the “Indenture”). If an event of default under the Indenture occurs as a result of such non-payment, it would result in a cross-event of default under both the Company’s term loan facility and asset-based revolving credit facility (collectively, the “Credit Facilities”). Men’s Wearhouse has elected to enter into the 30-day grace period with respect to the Interest Payment. During the grace period, Men’s Wearhouse may elect to pay the Interest Payment and thereby remain in compliance with the Indenture.

On July 1, 2020, the Company made its scheduled interest payments required under the Credit Facilities and therefore, as of the date hereof, is current with respect to its interest and principal payment obligations thereunder.

Per their last financial snapshot, and 10-Q, it appears they have approximately $1.2-$1.3 billion in senior debt, coupled with $174 million in unsecured notes, which last traded at 7 cents on the dollar. The company itself, by virtue of drawing its asset-backed facility, has about $200 million in cash (and approx. $90 million in restricted cash) in early June.

It looks like they are engaging in a “Mexican Standoff” strategy that will not go very well for everybody involved – implicitly they are trying to get the unsecured noteholders to concede with the threat that they will go to zero in a Chapter 11 proceeding. The question is what price has been negotiated?

The company, similar to most other retailers, has massive lease liabilities and even if they resolve the unsecured debt situation, still has to face that challenge.

Dilution on interest payment election

Stuart Olson (TSX: SOX), for various reasons, is not in the greatest of financial health. They have $87 million in senior debt outstanding, and an unlisted debenture of $70 million. The company is currently cash flow negative and had to obtain a relaxation on their debt covenants due to COVID-19.

On Sunday they announced:

CALGARY, AB, June 28, 2020 /CNW/ – Stuart Olson Inc. (TSX: SOX) (“Stuart Olson” or the “Company”) announces that it will pay the $2,450,000 June 30, 2020 interest payment on its 7.0% Convertible Unsecured Subordinated Debentures (the “Debentures”) through the issuance of shares from treasury pursuant to the agreement of the holders of the Debentures and a corresponding supplement to the indenture for the Debentures. The shares will be issued at a 20% discount to the five day volume weighted average trading price of Stuart Olson’s shares ended June 29, 2020. The Toronto Stock Exchange has conditionally approved the issuance, subject to customary post-closing filings.

The 5-day VWAP puts them at 73.14 cent per share, or approximately 3.35 million shares to be issued for this interest payment, which means that whoever holds the debentures will own about 10.6% of the company. A pretty heavy price to pay for the remaining shareholders, but the alternative is even more glum – it all goes to the creditors. I’m somewhat surprised the shares didn’t trade lower today (no positions).

Dangers of investing in dual class structures

Apparently some institutional shareholders are feeling the political pressure of the company’s ridiculously high executive compensation schemes. They’re voting against the “say on pay” resolution on the upcoming AGM.

Major Bombardier Inc. shareholder and supporter Caisse de dépôt et placement du Québec is voting against the company’s executive pay practices at its coming shareholder meeting.

It’s one of a number of major North American pension plans that intend to rebuff Bombardier’s compensation program. Some, including the Caisse, have grown sufficiently discontented to oppose reappointing directors to the company’s board.

Bombardier, like most major Canadian companies, submits its compensation program to shareholders for a non-binding “say-on-pay” vote at its annual meeting. Canada Pension Plan Investment Board (CPPIB), British Columbia Investment Management Corp. (BCI), as well as two major pensions from California and one from Florida, also say they are voting “no” Thursday.

At issue this year is Bombardier paying former chief executive Alain Bellemare a severance package of US$12.35-million when he was terminated in March, as well as promised future special payments and potential severance packages to other top executives when a deal to sell the company’s train division closes in 2021.

This is purely political posturing to the public to justify holding Class B shares (2.1 billion outstanding) in the company. Bombardier’s Class A shares (309 million outstanding) have 10 votes each, which give its holders effective control of the company. Bombardier’s Class A shares are currently trading at about a 30% premium over the Class B shares, so the market does ascribe some value to the voting component.

There is little remedy for the subordinate shareholders other than to sell if they wish to voice their opinion. This happens in any dual-class share structure company, where typically the founders get the supervoting majority to stack the board. You have cases like Berkshire (NYSE: BRK.A) and Fairfax (TSX: FFH) where you are being a silent partner to Warren Buffett/Prem Watsa, but you also have cases like Dundee (TSX: DC.A), which have made disastrous capital allocation decisions in the past decade (will they get their act together for the next one? Insiders are at least buying now). There are also firms like Biglari Holdings (NYSE: BH), where the controlling shareholder basically has open contempt for its subordinate shareholders – don’t like me? Go ahead and sell! Zuckerberg at Facebook (Nasdaq: FB) also has expressed the same sentiment – my way or the highway.

In all of these cases, investors, especially institutional ones, should know what they have gotten into. This doesn’t mean they can’t complain, but when it comes to exercising power to compel the board of directors to tell management to change their practices, the influence is very weak since controlling shareholders will always be able to replace potentially dissenting directors with those that favour their interests. In the case of Bombardier, who wants to give up $150-$190k for being a human rubber stamp?

(By the way, this board is far too large).

The only way to get any sort of leverage on an entrenched board is to own enough of the debt in a distressed situation, and then you will be able to get enough attention of management by the time the maturity comes to extract better terms. But these situations are rare, and they more often end up with management engaging in asset stripping and other extraction activities to the detriment of both shareholders and debtholders alike before they finally lose control.

Torstar insider trading before NordStar acquisition announcement

The Globe and Mail is reporting potential insider trading that went on before the acquisition announcement of Torstar (TSX: TS.B).

I posted above this possibility the day after the announcement.

It is pretty obvious from my eyes that there is something worth investigating, albeit the dollar values involved were relatively tiny. The transactions are so obvious that anybody conducting trades like they did were not sophisticated enough to know the liquidity of the stock was like trying to squeeze water out of lava rocks – you can look at the trade history to see it did not take a huge amount of volume to move the price up.

My guess, if there was some insider trading going on, was that some receptionist or office worker saw some prominent individuals (e.g. Rivett and/or Bitove) walk out of an office and then he/she tipped off a friend, who then pumped a bunch of market orders into the TSX, in a very unsophisticated manner.