I’m not typically a gold mining investor. Gran Colombia Gold (TSX: GCM) was an exception but just by the method of how I got into the stock (via a debt to equity conversion). I’ve long since gotten out of it since it’s pretty clear management has other capital allocation priorities than optimizing returns for shareholders. I do still own their notes, which I expect to pay out high yield and low risk interest payments until they mature.
Today’s acquisition proposal of Continental Gold (TSX: CNL) by a Chinese company (Zijin) is interesting, mainly because of the very high valuation assigned – $1.4 billion of equity value (fully diluted).
Continental Gold is currently not producing, but is in the process of being able to produce gold sometime in 2020 with their Buriticá project in Antioquia, Colombia.
Building gold mines is not cheap. They’ve spent about $200 million on capital expenditures in the first 9 months of 2019. They had about $80 million left on the balance sheet at the end of September, so simple math would suggest that they needed to raise more money to finish their project.
They’ve got $300 million in loans outstanding, another $88 million in convertible debentures (which will now be converted into equity and sold), and they have sold a 2.1% gold stream and most of the silver output for another $100 million.
The Buriticá project is anticipated to produce 250,000 ounces of gold over 14 years at an all-in cash cost of US$600 per ounce, which is very cheap relative to most gold miners. If one believes these numbers and ignores all other costs, that works out to US$225 million/year in gross profits at an expected gold price of US$1,500/ounce.
Of course, things are never that easy. Projects remain at the 90% completed stage for a very long time, there are cost overruns, things never run as expected, etc., etc. I’m pretty sure after this acquisition closes that the new owners are going to get a “oh by the way…” reception before the predecessor management bolt out as quickly as possible with their new-found fortunes.
But I was thinking, if this company can receive a $1.7 billion enterprise value for a gold mine project that isn’t even operating, but is expecting 250,000 ounces of a gold in production next year, how come Gran Colombia Gold (another Colombian gold producer) with its 233,000 ounces of production is trading at about a $300 million EV? GCM’s all-in sustaining costs are much higher – around $950/ounce, but at least they’re pulling gold out of the ground. Their major mine still has a few years of life left in it, and the drill results they are getting should be able to sustain lower grade production for a few more.
Perhaps smarter minds out there can inform me why there is such a big difference in valuations. I’m still not interested in GCM equity, but relative to CNL’s takeover valuation, GCM stock looks very, very cheap.
I feel like hope is always the main currency in acquisitions, and doubly so in cases like this. I always wonder at what point sunk costs/path dependence/fixation/other primarily psychological factors become paramount, and buyers basically talk themselves into overpaying (grades are higher…we think mine life will be longer…oh, GCM has all these problems…do we really want to lose this and have to start from scratch over a few million dollars, etc.). In other words: not a smarter mind!