There is a phrase that was associated with Warren Buffet, and that was the investing concept of grabbing a cigar butt off the sidewalk and giving it one last puff before throwing it away.
Approximately US$0.33095042 per US$1.00 principal amount of Gold Notes issued and outstanding representing a redemption price of US$0.30 for each US$1.00 principal amount of the Gold Notes plus the Applicable Premium, as defined in the Gold Notes Indenture, of approximately US$0.03095042 per US$1.00 principal amount of Gold Notes. The aggregate amount of the cash payments on the Payment Date will be approximately US$21,139,458, of which US$19,162,500 will be applied to reduce the aggregate principal amount of the Gold Notes issued and outstanding and the balance represents the Applicable Premium.
This works out to a redemption call of $1.103 per $1 of notes, a relatively large premium considering I paid a penny above par for these notes in what felt like an eternity ago.
With the remaining US$44.7 million in notes, another $4.875 million gets amortized on April 30, 2020. However, because the amortization is linked to the sale of a fixed amount of gold, the residual value over a gold price of US$1,250 is going to be disproportionately high – at the current gold price of US$1,650 that’s going to be about a 22% coupon return (8.25% interest plus the gold redemption). It is virtually certain that these notes will be called off on April 30, 2021 at 104.13. These notes are first in line on GCM’s capital structure and are secured by the Segovia mining operation. So if you want to take one last puff at the cigarette, see if you can get some liquidity. Even if they shut down the mine for a month or two due to Covid-19, GCM has the capital to pay the notes down to their amortization maturity – October 2022. Even though the notes on their face mature on April 30, 2024, the company is required to redeem $4.875 million a quarter at par. If they choose to do that and not call off at April 30, 2021, then the residual notes will receive insanely ridiculous gold payments at present gold levels.
(Subsequent note: The future amortizations will be reduced by 30% to account for the early redemption, so the assumption in the above was incorrect… this makes the April 30, 2021 redemption to appear to be ‘possible’, but not ‘virtually certain’)
I already have a healthy position in these notes (less after the upcoming redemptions) but am deploying elsewhere. I am content to let my position ride until maturity or redemption.
Their math sounds a little off to me – their redemption price implies a price of 110.3. Given how there are 13 coupons – $8.9375 and the optional redemption price of $104.13 for Apr 30, 2021; and a one-year treasury rate of 0.19% from Fed H15 release – so the discount rate should be 1.19% (1% + 0.19%)
I’m expecting something well over 111.
Your take?
“At any time prior to April 30, 2021, the Issuer may, on any one or more occasions, redeem all or a part of the Notes, upon not less than 30 nor more than 60 days’ notice, at a redemption price equal to 100% of the aggregate principal amount of the Notes redeemed plus the Applicable Premium and accrued and unpaid interest, if any, to but excluding the Redemption Date (subject to the rights of Holders on the relevant Record Date to receive interest due on the relevant Interest Payment Date).”
“Applicable Premium” means, with respect to any Note on any Redemption Date, the greater of:
(d) 1.0% of the principal amount of the Note; and
(e) the excess, if any, of (i) the present value at such Redemption Date of
(1) the redemption price of the Note at April 30, 2021 (such redemption price being set forth in Section 4.1(c)) plus
(2) all required interest payments due on the Note through April 30, 2021 (excluding accrued and unpaid interest to but excluding the Redemption Date), computed using a discount rate equal to the Treasury Rate plus 100 basis points and discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months)
over (ii) the principal amount of the Note.
“Treasury Rate” means, in respect of any Redemption Date, the yield to maturity as of the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519), that has become publicly available three Business Days prior to the Redemption Date (or, if such Statistical Release is no longer published, any publicly available source of similar market data)), most nearly equal to the period from the Redemption Date to April 30, 2021; provided, however, that if the period from the Redemption Date to April 30, 2021 is less than one year, the weekly average yield on actively traded United States Treasury securities adjusted to a constant maturity of one year will be used. The Issuer will (a) calculate the Treasury Rate no later than the second Business Day preceding the applicable Redemption Date and (b) prior to such Redemption Date file with the Trustee an Officer’s Certificate setting forth the Applicable Premium and the Treasury Rate and showing the calculation of each in reasonable detail.
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1.0413 (redemption price at April 30, 2021) + PV of [(13/12)*0.0825] @ 1.19354025% (that’s 1.19% on a half-year compounded basis) gives me 112.36. Let’s email the CFO…
Sacha,
Any word from the company?
Thanks
As of now, there has been no response to my written inquiry, and I have received the CFO’s voicemail twice when I tried calling.
Sacha,
Did the redemption payment showed up in your brokerage account? Mine is itrade and hasn’t showed up yet.
Thanks
I received it myself. No response re: the price. I guess I’m just too small beans for them to warrant a reply, but you’d think a guy like Serafino Iacono who owned US$6.1M of this they’d listen to…
Sacha,
Which brokerage you hold the notes in? iTrade is just ridiculous, payment still hasn’t show up yet.
I called on Monday, the CSR indicates they got the money and know about the redemption just haven’t post the account yet.
@Will: Questrade. So count me surprised. During this whole Covid-19 thing, other than the inability to log in at 11:00pm one night (pacific) they’ve functioned reasonably well. IB has been its usual rock-steady self.
Looks like they also adjust their amortization schedule with everything reduced by 30%
“Based on the London P.M. Fix on April 15, 2020 of US$1,718.65 per ounce, the aggregate amount of the cash payments on the Payment Date will be US$4,691,915, of which US$3,412,500 will be applied to reduce the aggregate principal amount of the Gold Notes issued and outstanding and the balance represents the Gold Premium.”
$3412500 @ 1250 = 2730 ounces = 3900 * 0.7
Yeah, much earlier I revised the earlier post to reflect this. I’d like to know where on the indenture it says that the gold payments will be scaled, but I am guessing there are people with richer pockets than mine that have securities lawyers on staff to ensure they’re not getting ripped off.
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