Tag: GCM

Continental Gold merger – valuation – Gran Colombia equity

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.

Gran Colombia Gold’s confusing capital allocation strategy, part 2

Read “part 1” here. Gran Colombia Gold (TSX: GCM) announced their quarterly results a few days ago.

At September 30, 2019, the cash position was at US$63.2 million. There is another US$5.8 million that goes to the noteholders. Total debt is US$91 million (US$73.6 million in notes due April 2024, CAD$20 million in convertible debentures due April 2024, convertible at CAD$4.75). The leverage situation is better than it has been for these guys for ages.

Cash-wise, in the past 9 months, the company has made US$38.7 million in free cash flow (operating minus expenditures on mines, but not including SSP.TO investments). As long as gold remains at current price levels, they should be able to generate cash along these lines.

Now this is where things get wonky.

From June 12, 2019 through September 30, 2019, the Company purchased a total of 137,100 warrants for cancellation at an average price of CA$2.41 per 2024 Warrant.

The warrants have a strike price of CAD$2.21/share. Ignoring the time value of the warrants (which is not inconsiderable), GCM effectively repurchased stock at CAD$4.62/share. If they repurchased the actual common shares, they would have paid less.

On November 5, 2019, the Company closed a non-brokered private placement (the “Private Placement”) with 2176423 Ontario Ltd., a corporation that is beneficially owned by Eric Sprott. Through the Private Placement, Mr. Sprott acquired 3,260,870 units of the Company at a price of CA$4.60 per unit for a total investment of CA$15 million, the proceeds of which will be used for general working capital and corporate purposes. Each unit consists of one common share and one common share purchase warrant exercisable into a full common share at CA$5.40 per share expiring November 5, 2023.

This is just strange and contradictory capital allocation. A few months after effectively repurchasing stock at $4.62/share, they then sell a bunch of it at $4.60. There was no need to raise CAD$20 million in debentures back in April 2019, and there is no need to raise CAD$15 million in November… unless if they’re planning on blowing a lot of money on everything else. Their common stock would likely be higher today if they had not done so.

The notes are very likely to be called out or mature, while the common stock will be quite sensitive to the price of gold.

One other theory that I have is the following, and this is relating to GCM dumping their selling partners late last year:

As described in Note 11a, in January 2019, the Company terminated its long-term supply agreement related to the sale of its gold and silver production in Colombia. On May 10, 2019, the Company received notice of a request to settle the dispute, as permitted under the supply agreement, under the Rules of Arbitration of the International Chamber of Commerce. In its notice of arbitration, the former customer has requested reinstatement of the supply agreement and damages related to the intervening period since the supply agreement was terminated. In the alternative, the former customer is claiming general damages in the amount of $50 million, or such other amount as may be determined prior to or at the arbitration, punitive and/or exemplary damages of $1 million, repayment of $0.2 million of disputed interest and reimbursement of costs and expenses related to the arbitration. The Company believes as a result of breach of performance by the former customer on numerous occasions that it had a justifiable basis for terminating the supply agreement and will vigorously defend its position in the arbitration proceedings. The Company believes that it is more likely than not that it will not have any liability from arbitration.

If the company has a 49% probability they will have liability (which is “more likely than not it will not”), they might have a justification for assembling a bunch of cash – much better to have it on hand to pay out instead of scrambling into the markets with your hand stretched out!

Gran Colombia Gold spinning off Marmato

Ladies and Gentlemen, hold onto your wallets!

TORONTO, Oct. 07, 2019 (GLOBE NEWSWIRE) — Gran Colombia Gold Corp. (TSX: GCM, OTCQX: TPRFF) (the “Company” or “Gran Colombia”) announced today, further to the press release of the Company dated September 16, 2019, that it has entered into a letter of intent (the “LOI”) on October 4, 2019 with Bluenose Gold Corp. (TSX-V: BN.H) (“Bluenose”) in respect of the proposed acquisition by Bluenose of certain mining assets (the “Mining Assets”) at the Company’s Marmato Project located in the Department of Caldas, Colombia (the “Transaction”).

Gran Colombia has two operating mines. One is Segovia, which produces the substantial majority (89%) of its gold. The other is Marmato. They have three other potential avenues, all of which are not operating. There is Zancudo, which they optioned off to IAMGOLD for exploration and potential development. There is their Venezuelan properties, which is a “good luck if they democratically elect a new government before the country is completely destroyed” situation, and finally the Chicharron project which is being reflected in GCM’s equity investments in Sandspring (TSX: SSP).

The press release above is an attempt to spin off their Marmato operation in another publicly listed entity.

Marmato is currently undergoing exploration and finalization of another development project that will expand the mining capacity well beyond the 25,000 ounces/year it currently is producing. The initial plan was an open pit mine, but now that is revised in a tunneled project. Needless to say, this will consume gigantic amounts of capital.

The finance deal is very questionable for GCM shareholders.

Bluenose will be the recipient of a reverse takeover. After accounting for a 1:10 reverse split, Bluenose has 10.6 million shares outstanding. The current corporation is a shell (a few bucks on the balance sheet, no debt). GCM will be throwing in its Marmato asset for 28.75 million shares, notionally valued at $2/share.

Is an existing mining operation producing 25,000 ounces of gold a year (US$37.5 million top-line) worth a capitalization of US$43.1 million?

GCM will also be throwing in another $5 million for 2.5 million shares and warrants to purchase at $3. Bluenose will also sell to the public 5-7.5 million shares at the same terms.

It’s going to take a lot more money than this to get the mine up and operating.

There is also an insider relationship involved. On November 2, 2018, the following was announced by Bluenose:

The Company has been advised that Frank Giustra and his related entities will acquire an aggregate of 11,700,000 post-consolidated common shares of the Company representing 11.14% of the issued and outstanding post-consolidated common shares of the Company pursuant to a private transaction. Radcliffe Corporation, Fiore Financial Corp. and Fiore Farms Inc. (companies indirectly owned by Mr. Giustra) will acquire an aggregate of 4,000,000 post-consolidated common shares, representing 3.81% of the issued and outstanding common shares of the Company. Canada Life Ltd. through an investment account controlled and directed by Mr. Giustra) and The Giustra Foundation (a charitable organization controlled by Mr. Giustra) will acquire 7,700,000 post-consolidated common shares of the Company representing in aggregate 7.64% of the issued and outstanding shares of the Company. Following these transactions, Mr. Giustra will have indirect ownership and/or control, over an aggregate of 11,700,000 post-consolidated common shares of the Company representing 11.14% and would have indirect ownership and/or control over an aggregate of 12,050,000 post-consolidated common shares representing 11.43% on a partially diluted basis, assuming the exercise of 350,000 incentive stock options granted to the Giustra Foundation.

This was probably the connection that lead GCM to choose Bluenose as the reverse merger candidate.

Finally, what is most interesting is the following:

The closing of the Transaction will also be subject to the following conditions, amongst others:

…

all liens and encumbrances in respect of Marmato Panama, Marmato Colombia and the Mining Assets granted in favour of the holders of the 8.25% senior secured notes due in 2024 shall have been released and discharged, on terms and conditions satisfactory to Bluenose, acting reasonably;

This remains to be seen how this will be resolved. Noteholders are not simply going to give up security to the Maramato asset. It will cost GCM something to get the noteholders to agree to it. Will noteholders receive shares/warrants in Bluenose, will they receive cash, or will they receive a boost in their coupon to compensate for the loss in collateral? (Disclosure: I own a not insubstantial amount of GCM notes.)

Either way, I view this as a negative for GCM shareholders.

Gran Colombia Gold Notes – Part 2

Since gold is going crazy, I’ll just follow up from my previous post on Gran Colombia Gold’s senior secured notes (TSX: GCM.NT.U).

With gold at US$1,475/Oz, and assuming a call date on May 1, 2021, the notes at a purchase price of 104 will have a 13% YTM if gold continues at that price.

Unfortunately since the notes are amortized quarterly, it is very doubtful you can fully realize this, but as a buy-to-maturity investment, it gives you an equity-like return for a first-priority bond that is linked to a hot commodity. Only real risk is that the income you are being paid with is mostly derived from a single mine in Colombia – just hope for no earthquake in the next two years. Fortunately the only earthquakes presently are financial.

My notes were purchased near par and this one is looking like to be around a 15%er on debt. Not bad. Don’t think we will be seeing this again for a long time.

Gran Colombia Gold notes

A brief update on TSX: GCM.NT.U – the company is required to sell 3,900 ounces of gold on the open market, take the first $1,250 of the sale price and amortize the notes, and the remainder gets distributed to noteholders.

Gold today is roughly US$1,410 an ounce, so I calculate that noteholders will receive an extra 0.79% premium on their notes this quarter, assuming that is the average sale price.

(Update, July 16, 2019: Price received was US$1,412.40/ounce, thus the premium is 0.81%)

If the price of gold remains steady for this quarter and the subsequent 3 quarterly transactions, the total premium received will be an extra 3.53% par value on the notes – the same amount of gold (3,900 ounces) is amortized over a smaller principal of notes as they are amortized, so each quarterly payment becomes slightly larger (0.85%, 0.91% and 0.98%, respectively) – sort of like the effect on EPS of a company executing a share buyback with fixed earnings. This commodity-linked debt amortization arrangement is very uncommon in exchange-traded fixed income securities.

In my estimation, there is a high probability that the notes will be called out shortly before April 30, 2021 for the 3 year government of Canada bond yieldUS Treasury Note yield plus 100bps, so this can be used in your YTM calculations. At par and present gold values, right now investors are looking at about a 13% YTM on senior secured debt, but this will fluctuate depending on gold and 3 year bond yield pricing.

(Update, July 16, 2019: The above paragraph is totally incorrect. Please see the comments below for elaboration.)

Unfortunately for people interested in getting in, the notes have been trading lately above par, which will reduce the yield to maturity.

I have a full position in these notes and I am not interested in adding as they are amortized.