Tag: GCM

Gran Colombia Gold’s confusing capital allocation strategy

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.

Holding Pattern

It’s been about three weeks since I’ve written. I’ve read and dissected a billion quarterly reports and now the cycle is mostly done. This time of year is always stressful on time – companies release their annual reports at the end of March and then another quarterly report either at the end of April or the first week or two in May, so there is a lot of reading that has to be done in a relatively short period of time. The most painful part is when I sometimes have to listen to conference calls when transcripts are not available.

Since then I have been on a liquidation spree. My favourite cash parking utility in the public markets (long-time readers here will have a deep suspicion as to what it may be) lately started to trade at a gigantic premium to intrinsic value that I just had to start liquidating – basically investors are pre-paying 7 months’ worth of future dividends on this fixed income instrument (i.e. it is trading at a lofty premium to par value) and I highly suspect it will be a ripe target to get called out by its issuing company (they are paying dividends a good deal higher than their cost of capital if they were to float a bond offering to replace it). So despite the fact that the yield on this was awfully attractive, it had to go for risk concerns.

Another position that was liquidated was a good chunk of my Gran Colombia Gold (TSX: GCM) debentures. I was fortunate enough to cash a good chunk of it out at a premium to par value and convert the rest into stock. I still haven’t decided what I will do with the stock. Financially, the company has made a remarkable turnaround since I invested in the debt early 2016 and basic math suggests that the common shares are undervalued – especially now that the company’s solvency is no longer in doubt because they’ve equitized a good chunk of their debt – US$150 million into what will be US$98 million in August (when TSX: GCM.DB.U auto-converts into stock). The company at that point will have around US$20 million cash in the bank which is no longer encumbered by the cash sweeps mandated by the previous debt holders. The new debt is auto-liquidating, so each year they will pay down about a sixth of the debt principal.

So on paper, in light of the relatively high EBITDAs it is generating, Gran Colombia looks cheap compared to its peer group. One possible explanation is the common stock has been a victim of convertible debt arbitrage and there simply hasn’t been sufficient demand for common shares – this theory will be tested in the upcoming months. The other risk of downside includes being effectively a single mine operation in Colombia, and also the feasibility of future capital expenditures to expand mine growth (I still have a 624 page NI 43-101 to plough through! I’ve prioritized other company quarterly reports before this technical mine report!). GCM is not exactly an unknown company either – other intelligent people have written about this company over the internet and there are various risks to consider which could explain the relatively low share price (especially resentment that equity holders got nearly wiped out in the late 2015 recapitalization).

Besides for this and a few other routine bond maturities (this was just small yield picking on short duration investment grade securities which weren’t worth the research I dumped into them), I’ve raised a lot of cash for future investment. The problem is I have no idea what to invest it in.

I have the highest weighting of cash in the portfolio than I have had in a long, long time. I ended 2015 at +42% cash and percentage cash today is even higher.

I have some marginal investment ideas on queue, but in a rising rate environment the risk one takes is a bit higher. It is nothing like early 2016 when things were being thrown out the window with double digit yields (I do miss those days). However, there are some glimmers of despair and panic out there – I’ve been looking quite closely at pipelines, which are currently the media focus of doom and gloom and all things wrong with society. Pipelines today is what tobacco was in the 90’s.