One yellow flag for investors is if company management starts to deviate away from previously professed strategies without giving reasonably decent justification for such changes.
Since 2016’s recapitalization, GCM has been focused on improving its mining operations (so they could pay back the debt incurred from the recap). The debentures issued in the 2016 recapitalization were redeemed and refinanced in May 2018, which provided less restrictive covenants for the debt that was issued (TSX: GCM.NT.U).
At the end of June 2018, GCM had about US$32 million and US$98 million in notes outstanding. For the first half of 2018, they generated US$14 million in “excess cash flow”. They continue to generate excess cash flow today.
The point of the above narrative is to illustrate that GCM’s financial situation is a lot more favourable than it was three years ago. They have a lot more flexibility to invest internally in their own operation (Segovia, Marmato), but they have taken an interest in Sandspring Resources (TSX: SSP).
We continue down the timeline:
- July 26, 2018– GCM buys CAD$4 million of SSP, also receives shares for Chicharron project in Segovia (they sold their 30% interest to SSP for 15M SSP shares, about 5km east of GCM’s current operation in Segovia – SSP owns 100% of it now).
- October 3, 2018 – GCM buys another CAD$1 million of SSP
- February 11, 2019 – GCM buys another CAD$0.7 million of SSP
Everything to this point is consistent – now that they have capital, GCM chose to invest in a project in Guyana. I don’t really like these corporate inter-relationships since there is so much room for error, but at least the strategy is consistent. After this date, things get screwy:
- March 1, 2019 – GCM files for an equity offering, wants to raise gross CAD$25 million. Warrants for C$5.75, stock price to be determined by market. Stock crashes. Cited reason for the capital offering: Accelerated drilling in Segovia. It raises the hidden question – why are they dumping money in SSP (CAD$5.7 million to date plus disposition of 30% Chicharron stake) if it was better spent on drilling in Segovia or Marmato? GCM earned US$44 million in free cash flow in fiscal 2018, is this not enough? GCM ended 2018 with US$39 million cash+equivalent and the only debt on the books was the US$89 million in GCM.NT.U.
- March 4, 2019 – GCM opts to change the offering and raises CAD$20M instead in debentures (convertible at CAD$4.75), CAD$18M from MM Capital Partners, CAD$2M from insiders.
- May 30, 2019 – GCM will be buying 2/3rds of a $3 million non-brokered placement (another CAD$2 million of SSP) – this was “up-sized” two days later to a $4 million placement –
not clear whether the 2/3rds applies to the $4 million or whether it will be a $2 million commitment. Let’s assume $2 million. As of the date of this writing this has not been confirmed.(Update, June 12, 2019: $2 million investment) - June 10, 2019 – NCIB announcement. Wasn’t this capital supposed to go to Segovia drilling? In fairness to management, this does not commit them to repurchasing shares, but it does signal odd capital priorities (raising capital three months earlier, only to buy it back?).
MM Asset Management, the firm that bought the CAD$18 million in debentures, filed June 10, 2019 that their stake is now 6,510,699 shares of GCM, plus $18 million in debentures, for a consolidated ownership of 19.77% if they convert (doesn’t factor in the dilution with the outstanding warrants, however).
To date, GCM has sent CAD$7.7 million into SSP stock (with the $2 million invested on June 12, 2019).
I find these capital allocation decisions to be highly mysterious. Now that the debt covenants have been relaxed (you can read the restrictions in Section 5.10 of the indenture – condensing the legalese, the material points are a 50% consolidated net income (note: as defined on page 9) restriction, subject to a $10 million or 2.5% tangible net asset floor), GCM has the ability to dabble externally and also with its own stock.
At least there is protection for Noteholders.
I still don’t get what the heck is going on other than being cynical and think they are just trying to fatten their pocket at shareholder’s expense.
At least the operation and cash throw looks real
I have edited the post mildly to reflect the fact that GCM invested another CAD$2 million in SSP per today’s press release. They will have a 22% ownership in SSP pending shareholder approval and assuming no exercise of any warrants.
Amazing to think they traded over $10/share back in 2011…
We know a few things that make all of this less mysterious:
1. They killed the equity offering because of the market reaction (big drop in share price). Essentially, GCM was unwilling to sell equity below $4. Good.
2. The convertible debenture was a replacement to #1. I tried to subscribe but was told by Scotiabank that it was fully subscribed by a single group. Conclusion: this financing was accommodating to a large new investor who originally wanted equity but ended up with debentures – i.e. the capital raise was not driven by GCM needs, although they purported to have a good use for the new capital as “over and above” drilling at Segovia. The group turned out to be MM Asset Management who proceed to buy shares in the open market. Also, good.
3. Life of mine issues are a clear issue contributing to the persistent discount of GCM common shares to their peers using normal mining valuation metrics. Extra drilling is highly consistent with putting this to rest.
4. Sandspring is not related to any of the above. At face value, according to GCM releases, it represents an opportunistic investment in a miner in another mining jurisdiction that GCM insiders state they know quite a lot about and a project that they believe they have the expertise to help advance. Expanding their economic interests outside Colombia tackles two other discounting factors – country concentration and single mine (for practical purposes before the PEA is finalized).
5. Capital flexibility. Per your comment Sacha, they now finally have some flexibility to deploy FCF into shareholder friendly activities like buybacks. With the commons trading so far below book (and book set to increase with a mark-up of reserves after substantial new drilling) buybacks make sense.
The timing of all of these developments are coincident but unrelated. This is a reason why they don’t “make sense”. They are not coordinated actions. Higher pricing for gold gives them the opportunity to do it all. The NCIB, as you point out, is not compulsory and may not amount to anything if the FCF doesn’t support it.
All in all, we are wise to be wary of seemingly strange behaviour but in this case I just don’t see the case for abandoning a highly successful corporate recovery story at this time.
For fair disclosure, I sold the remaining equity I had in GCM today. Chart-wise they look like they’ll still rise, but taking the bird in the hand vs. two in the bush.
Still holding onto a good quantity of notes, however, a low-risk 10% yield at present.
What notes yield 10%? I own the .nt.u which yield 8.25%
The very notes you are holding, at least if gold stays at US$1,350. (Actually, it’s closer to 10.4%.)
Oh yeah….forgot about that perk…..is it at $1250 or $1350 (you said $1250 in your original post)
Should have waited until this morning to get rid of my last few shares, oh well. That said I did get rid of most of my stock at last February’s prices before the debenture offering, so I shouldn’t be too depressed…
@Marc: US$1,250 gold you get nothing, but roughly you get 22bps for every US$10 above that over the next 4 quarters. If gold goes to $1,500 then that’s an extra 5.5%, but then again, GCM equity at that price point will be around CAD$2.5 higher…
Thanks Sacha.
FWIW, I went to the AGM last week and management was asked about the inconsistent capital markets strategy.
With respect to the buyback, they said they wanted the flexibility/tool in case the stock gets significantly weaker but they would not participate around these price levels with the exception of the warrants. They think repurchasing warrants reduces the fully diluted share count the same as buying stock but uses less capital.
Buying the warrants makes sense if the time premium is not too high and you don’t have reason to believe that the stock will get below the strike price (otherwise it’s just money thrown out the window).
I noticed today the CEO today decided it was a great time to dump a bunch of stock.
Exercised options but yes he did.
I spoke with Lombardo a few years ago when the stock was $1.50 and asked him why he didn’t buy stock given how cheap it was and FWIW he made it sound like he had bad experiences back during the dot com crash so he shied away. At least that’s what I took away from the conversation.
Insiders continue to take the “bird in the hand” instead of the two in the bush. At US$1,425/Oz, that’s interesting to see.
So far the CEO and VP, Corporate Affairs have both exercised options. I think we are wise to consider that offering options is a form of remuneration and these gents may just be crystallizing some income. It has been a long wait for them. Also, when paid work and investments align, downsides are significantly amplified. I would do the same if I were them.
It is worthy to note that no major shareholders are cashing in.
In no way am I faulting those guys for cashing in some chips. It’s probably prudent, especially since there is a bit of overhang on the convertibles at CAD$4.75/share which will serve as a drag on the stock price.
[…] Read “part 1” here. Gran Colombia Gold (TSX: GCM) announced their quarterly results a few days ago. […]
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