Tag: GCM

Gran Colombia Notes indenture amendment

Gran Colombia Gold (TSX: GCM.NT.U) posted an update to their note indenture regarding the proportional change of the amortization in the event of a redemption or repurchase.

(Attached amendment)

Amendments. Article 4 of the Indenture is hereby amended by adding the following as Section 4.11:

In the case of any partial redemption or repurchase of Notes (for greater certainty, other than pursuant to an Amortizing Payment), the principal amount of Notes redeemed or repurchased shall be proportionately allocated among all remaining scheduled Amortizing Payments set out in Appendix C and shall be allocated to the pro rata reduction of each remaining Amortizing Payment. Within five Business Days of the completion of a partial redemption or repurchase, the Issuer shall deliver to the Trustee an updated Appendix C and Appendix D reflecting the effect of such redemption or repurchase; provided, however, that in respect of the Partial Redemption, the updated Appendix C and Appendix D shall be delivered on the date hereof.

It was not at all clear from the text of the original indenture (indeed, it wasn’t there at all) that the amount of gold held in trust is reduced in the event of a redemption or repurchase.

If you assume that there isn’t a reduction (indeed, there is nothing in the language to suggest that there is a reduction), it dramatically increases the economic value of the notes in periods subsequent to the redemption.

Indeed, on March 26, 2020 you can see my strike-through comments with the said interpretation.

I do not have enough in these notes anymore where it is economically feasible to mount a legal case that this indenture amendment is illegal and that noteholders should receive the full entitlement of gold, unreduced by the redemption.

Indeed, it is going to be somewhat of a moot point, as I would deem it likely the company will redeem for 104.13 on or after April 30, 2021. Even with the reduced amortization, at a US$1,700/Oz gold price, the company will be paying an extra 11.3% on the notes in the upcoming four quarters.

However, if somebody out there owns a few million of these notes, there would be a pretty powerful claim to be made. I suspect that despite receiving an “Opinion of Counsel” from the Trustee that this “defect and inconsistency” wouldn’t be seen as such in the eyes of the court – it instead looks like retrospective contract re-writing, of course in the favour of the issuer.

There is one obvious insider that had to disclose on SEDI that he owns a large volume of notes, but he is unlikely to sue his own company and is likely to claim economic rent through other methods. Any other large holders would probably make due by just settling with the company, away from the public spotlight. The differential amount would not be considered material and likely would not be too visible on the financial statements short of a few extra bucks of legal expenses.

If anybody was wondering, the difference is (at US$1,700/Oz) a total 20.7% payment over the next 5 quarters (April 30, 2020 to April 30, 2021) vs. 13.3% under the revised scheme. This 7.4% difference over the $44.7 million outstanding post-redemption is around a $3 million payment difference (this accounts for the reducing principal amount of the notes over the quarters), not a trivial chunk of change.

Even with all of the regulatory protections of public markets, I’m not surprised to see this happening. I’m happy to have my position reduced and eliminated with the inevitable call-out of notes.

Invest in a gold miner, get a solar project

Alternative title: Gran Colombia Gold’s confusing capital allocation strategy, part 4; (See also: Gran Colombia Gold’s confusing capital allocation strategy, part 1, part 2, and part 3)

(This was supposed to be published the evening of May 5th, but for some reason, I forgot to hit the button until May 11th)

One of the reasons why one of my policies are to be very, very careful before investing in any gold mining equities is that management in these industries is usually less than efficient with shareholder capital, especially when they have lots of it. Right now things are flying high in the gold mining industry because of the US$1,700/Oz commodity price and the general public fear and panic out there due to the aftermath of COVID-19, and looming large government deficits, and just general doom and gloom.

My personal take on the matter is if you believe gold is going to do well, just invest in long-dated commodity futures at a reasonable amount of leverage instead of playing around with companies that are most likely blow your capital away.

Or you can take a debt investment in such companies, where in that case you don’t really care how much management blows shareholder capital short of stunting their ability to pay you back, but a debt investment (in non-distressed situations) defeats the purpose of investing in such companies (i.e. you want double digit returns).

Imagine my thoughts when Gran Colombia Gold (TSX: GCM) announced the following:

Gran Colombia Gold Corp. (TSX: GCM; OTCQX: TPRFF) announced today that it has signed a Letter of Intent (“LOI”) with Renergetica Colombia S.A.S. (“Renergetica”), a subsidiary of Renergetica S.p.A., a developer in the field of renewable energy and of the smart grid worldwide and an independent power producer and asset manager for third party investors. The LOI encompasses Gran Colombia’s acquisition, through its Segovia Operations, of a solar project with a total installed capacity of 11.2 MW of power called “Suarez”, located in the Tolima Region, Colombia (the “Suarez Project”).

Lombardo Paredes, Chief Executive Officer of Gran Colombia, said, “As the leading gold and silver producer in Colombia, we focus our ESG programs on health, education, community and the environment in the areas in which we live and operate. We see the opportunity to invest in renewable energy initiatives, such as the Suarez Project, as the next step in doing our part to combat global warming. With the new Suarez plant, approximately 10,300 tons of CO2 per year will not be released into the environment. We look forward to partnering with Renergetica to make this solar project a reality.”

The Suarez Project is the first project of a pipeline under development by Renergetica in Colombia. Expected to have a 30-year life, the Suarez Project will connect to the Colombian National Electric System and will become operational later in 2020. The capital cost of the Suarez Project, expected to total approximately $8 million, may be financed by up to 70% through local banks involved in “green financing” and will benefit from special tax incentives in Colombia on investments in renewable energy.

Recall on March 1, 2019 the company attempted to raise financing, citing that they wanted to accelerate drilling in their Segovia mine, even though they had sufficient cash on hand and cash flows to do it internally. They have done a couple financings since, in addition to more financings on their separately publicly traded entities (other gold mining projects). You can at least make a justification for raising capital and spending it in majority-owned public entities in the name of gold mining.

But this press release to invest capital in a solar project in the name of ESG? If I owned shares in GCM (I do not), I’d be really wondering.

Hence the title of this post – I invested in a gold mine, but I got a solar project instead!

One last cigar butt puff – Gran Colombia Gold notes

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.

TSX: GCM.NT.U announced:

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.

Gold during the CoronaPanic and another look at Gran Colombia Gold

Nothing feels worse than holding an asset that goes down in price when the S&P 500 is up 9% in a day like last Friday:

Fortunately I didn’t own anything gold-related (other than TSX: GCM.NT.U, which will be 30% called away at the end of March and the remainder stands a good chance of getting called away in April 2021).

Presumably gold assets (and this includes gold companies, which were equally slaughtered last Friday) were under supply pressure to raise cash to bid up other non-gold assets.

I generally do not like gold miners because historically they have been a huge money pit on capital expenditures on projects that have had collectively dubious return characteristics, but when looking at a company like Gran Colombia (TSX: GCM), they at least do have one viable operation (Segovia) that is making a ton of money at current gold prices. Yet the following:

Although they’ve made some sketchy capital allocation decisions, they did raise CAD$40 million at CAD$5.60/share (plus warrants) which Sprott and company is sitting about 35% underwater on now.

They announced in December 31, 2019 they had US$84 million. Adding the CAD$40 million they raised from the offering (minus 6% offering expenses), gives them US$111 million cash. They spent US$6 million on the January GCM.NT.U payment; US$15 million on the Caldas (Marmato) spin-off IPO/Reverse Takeover; and US$19 million in GCM.NT.U in March 31, for US$21 million. This leaves them US$73 million, plus I will assume US$20 million in Q1-2020 earnings (this will be announced around May 2020, but they did US$21 million at US$1,484/ounce).

US$93 million, offset by US$45 million in notes and US$14 million in (privately held) convertible debentures, gives US$34 million net cash. The market cap of CAD$211 million (60.8 million shares) is undiluted; there are 12 million warrants at CAD$2.21 exercise price; the CAD$20 million debentures are convertible at CAD$4.75; 7.14M warrants at CAD$6.50; and 3.26M warrants at CAD$5.40.

The $2.21 warrants will likely be exercised (not anytime soon; expiry is April 2024); thus US$53 million net cash on a market cap of CAD$253 million on an entity that has, roughly, a cash production capability of about US$80 million/year at a gold price of about US$1,490.

Gold closed at $1,516.70 last Friday.

Needless to say, this looks cheap, as long as the company doesn’t blow their earnings on dead-end mining projects (which would be my apprehension).

In general, monetary policy (zero-interest rate environment) would suggest that global currencies are going to mass devalue in order to stimulate economic prices; in theory, gold should do reasonably well in this environment, but not in the absolute throes of the crisis as people seek liquidity.

The following is a chart of gold during the 2008-2009 economic crisis. People liquidated gold, but after the liquidation was over, it did quite well as monetary policy kicked in:

I’m going to guess that gold will follow a similar trajectory this time around.

Gran Colombia Gold’s confusing capital allocation strategy, part 3

(Part 1 on June 12, 2019; Part 2 on November 16, 2019)

Gran Colombia Gold (TSX: GCM) raised CAD$40 million in an equity offering priced at CAD$5.60 which included an additional 3-year warrant to purchase stock at CAD$6.50/share. The offering was initially announced on January 27, 2020 when the stock closed at CAD$5.74, so when you include the price of the warrant, it was a fairly steep discount. The stock was halted mid-day when they announced the offering and it surprisingly did not tank the stock (that day – there was about another hour of trading left when they re-opened the stock).

According to the January 27, 2020 release, “The net proceeds of the Private Placement will be used for general working capital and corporate purposes, including repurchases of the Company’s listed warrants (GCM.WT.B) under its normal course issuer bid.“, which continues the theme of selling stock to repurchase warrants (very confusing).

The reality is that I suspect the Marmato mine project is going to be really, really, really expensive and they just want to vacuum up as much cash as possible while the going is good, and gold remains at relatively elevated prices (although I will no profess to knowing whether gold’s existing US$1,574/ounce price is going higher, lower or staying steady, but it is under the per-ounce cash costs of their main Segovia mining operation). Shareholder value (let alone issuing a dividend) be damned!

What got my interest, however, is the decision made when the offering closed on February 6, 2020:

Gran Colombia also announced today that it will use a portion of the net proceeds of the Private Placement to redeem 30%, equivalent to US$19,162,500, of the aggregate principal amount outstanding of its 8.25% Senior Secured Gold-Linked Notes due 2024 (the “Gold Notes”) (TSX: GCM.NT.U) on March 31, 2020 (the “Redemption Date”), reducing the aggregate principal amount outstanding to US$44,712,500. The redemption price will be equal to 100% of the aggregate principal amount of the Gold Notes redeemed plus the Applicable Premium calculated in accordance with the provisions of the Gold Notes Indenture, currently estimated to be approximately 10%. Further details, including the actual amount of the Applicable Premium, will be announced later in March as it gets closer to the Redemption Date. The balance of the net proceeds of the Private Placement will be used for general working capital and corporate purposes, including potential repurchases of the Company’s listed warrants (GCM.WT.B) under its normal course issuer bid.

Considering that a non-trivial amount of my portfolio is in these notes, I took interest in this decision. They are using about CAD$28 million of the gross CAD$40 million in proceeds of the equity offering to close out some of these notes, which to my calculations, are effectively at a 16% coupon rate at current gold prices. A fairly good capital allocation decision if you ask me, although they easily have justification to retire the whole batch of notes if they wanted to!

The reason why they did what they did is simply because once the 30% of notes are redeemed, it releases security on Marmato – the notes will then only be secured by the Segovia mine operation. In light of its current production, I will be happy to continue collecting coupons and having the quarterly redemptions proceed until I get cashed out.

I have no position in GCM equity nor do I anticipate having any in the future.

Finally, this creates a capital allocation strategy issue for me in terms of where to re-deploy the cash. It really was happy earning a very low risk 16%, but sadly no longer.