Author Topic: GCM.TO - Gran Colombia Gold Corp  (Read 19844 times)

SafetyinNumbers

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GCM.TO - Gran Colombia Gold Corp
« on: August 19, 2016, 08:48:13 AM »
Gran Colombia Gold is a producing gold company based in Colombia (but you could probably guess all of that from the name!). Gold stocks have been on an amazing run this year but I think this one has been a bit under the radar because of a debt restructuring and an odd capital structure. It also may have lagged a bit because they are in Colombia and they have interference from gangs at times but they are on the right side of the law so while it may cause disruptions at times (that could hurt the stock), I do not think it's an impairment.

They have a good website that details the capital structure and they provide annual guidance which they just raised the past quarter so I don't want to spend too much time rehashing information.

Basically in addition to about 250m shares outstanding, there are two sets of convertibles outstanding GCM.DB.U and GCM.DB.V, with face value of about US$53m and US$100m outstanding. Both sets of converts trade on the TSX in USD and are convertible at US$0.13 vs the last trade of the equity at C$0.125.

Based on the high end of their cash cost guidance of US$750 and using the spot gold price of $1350 and assuming 145k oz of production next year ( I think this is low based on their production growth so far this year and discussions with management), their potential EBITDA for 2017 is about US$87m or about C$110m.

To calculate EV/EBITDA you have some choices for EV. You can use the fully diluted share count as the valuation seems to cheap for the stock to trade at US$0.13 or below even with 1.46bn shares outstanding or you can fix the debt at face value and add the equity value. Either way projected EV/EBITDA is less than 2x.

I own some of the GCM.DB.U and mostly the GCM.DB.V. The latter has a 6% coupon paid monthly, is senior secured and trades at 86 on the dollar so not too far from conversion value. The former only has a 1% coupon and trades at 77 and often trades below conversion value.

This has created an arb at times and hedge funds are rightly buying the debs and converting to stock and selling in the market. In fact the share count has more than doubled this year so far and the amount of GCM.DB.U outstanding has dropped by a decent amount. This overhang is also constraining valuation.

The final thing I want to add is that there is a cash sweep for the debentures on any "excess cash flow" and the company must use it to buy back debentures and they have started that program. This could offset some of the dilution but they have said they will not pay above par for the debs (not a problem yet).

The multibagger potential comes from getting to say 6x EV/EBITDA which would be more in line with tier 3 producers. Even if it gets to 4x and the gold price lifts or they continue to grow it could be a multi-bagger.

Any feedback welcome.
ELF IAM GCM.DB.U/DB.V/DB.X PIF C.N


SafetyinNumbers

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #1 on: August 25, 2016, 03:58:57 PM »
ELF IAM GCM.DB.U/DB.V/DB.X PIF C.N

influx

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #2 on: August 25, 2016, 11:56:02 PM »
I am curious, how did you find this debenture?

SafetyinNumbers

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #3 on: August 26, 2016, 04:24:01 AM »
I think from some of the press releases around the time of the restructuring in January. There were so many iterations in the restructuring that I actually read the wrong circular and bought common and then the GCM.DB.U before figuring out the GCM.DB.V were the best way to get exposure. That being said, at that time the GCM.DB.V and GCM.DB.U were trading at the same price but now with the gap, the GCM.DB.U is pretty compelling too.
ELF IAM GCM.DB.U/DB.V/DB.X PIF C.N

bskptkl

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #4 on: August 26, 2016, 06:48:07 AM »
Gran Colombia Gold is a producing gold company based in Colombia (but you could probably guess all of that from the name!). Gold stocks have been on an amazing run this year but I think this one has been a bit under the radar because of a debt restructuring and an odd capital structure. It also may have lagged a bit because they are in Colombia and they have interference from gangs at times but they are on the right side of the law so while it may cause disruptions at times (that could hurt the stock), I do not think it's an impairment.

They have a good website that details the capital structure and they provide annual guidance which they just raised the past quarter so I don't want to spend too much time rehashing information.

Basically in addition to about 250m shares outstanding, there are two sets of convertibles outstanding GCM.DB.U and GCM.DB.V, with face value of about US$53m and US$100m outstanding. Both sets of converts trade on the TSX in USD and are convertible at US$0.13 vs the last trade of the equity at C$0.125.

Based on the high end of their cash cost guidance of US$750 and using the spot gold price of $1350 and assuming 145k oz of production next year ( I think this is low based on their production growth so far this year and discussions with management), their potential EBITDA for 2017 is about US$87m or about C$110m.

To calculate EV/EBITDA you have some choices for EV. You can use the fully diluted share count as the valuation seems to cheap for the stock to trade at US$0.13 or below even with 1.46bn shares outstanding or you can fix the debt at face value and add the equity value. Either way projected EV/EBITDA is less than 2x.

I own some of the GCM.DB.U and mostly the GCM.DB.V. The latter has a 6% coupon paid monthly, is senior secured and trades at 86 on the dollar so not too far from conversion value. The former only has a 1% coupon and trades at 77 and often trades below conversion value.

This has created an arb at times and hedge funds are rightly buying the debs and converting to stock and selling in the market. In fact the share count has more than doubled this year so far and the amount of GCM.DB.U outstanding has dropped by a decent amount. This overhang is also constraining valuation.

The final thing I want to add is that there is a cash sweep for the debentures on any "excess cash flow" and the company must use it to buy back debentures and they have started that program. This could offset some of the dilution but they have said they will not pay above par for the debs (not a problem yet).

The multibagger potential comes from getting to say 6x EV/EBITDA which would be more in line with tier 3 producers. Even if it gets to 4x and the gold price lifts or they continue to grow it could be a multi-bagger.

Any feedback welcome.
So you asked for feedback:

I have a stake in another Columbian gold company and I asked around about GCM. I was told it was headed towards bankruptcy but bailed out by gold price. Was told most of their production comes from buying ore from small miners and they are trying to sell Marmato. Mine is old and capital starved. Relations with union are poor.

So I guess the arb could still make sense, but I wouldn't want to bet on it becoming an efficient mine.

SafetyinNumbers

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #5 on: August 26, 2016, 07:03:19 AM »
Much appreciated!

I can't disagree with a lot of this. They were bailed out by gold price and by the peso devaluation. You can see the decline in their cash costs and AISC. The last few quarters are very different than what your source is providing because there has been a significant change in performance.

The first two quarters of 2016 a lot of the cash flow was held back from excess cash flow so they could spend money on capex as the operations were capital starved because of the issues they see having with two much debt with coupons that were too high. They are planning on spending a lot on capex in the second half too.

They do use contract miners but a higher gold price helps make relations better quickly. I'm not sure if they are trying to sell Marmato. That may have been one of the plans considered to deal with the debt issue before it was restructured.

At the end of the day though, they have been putting up strong EBITDA. US$18m last quarter on a much lower gold price and production and gold price are up this quarter. They are also active on the buyback of the debentures.

This investment is not about the arb but about the valuation of this cash flow stream once it gets analyst coverage and the market cap gets big enough to show up on the radar of gold and generalist investors.
ELF IAM GCM.DB.U/DB.V/DB.X PIF C.N

SafetyinNumbers

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #6 on: September 01, 2016, 07:17:27 PM »
The FD share count is down about 6m since the last update on August 11, I believe.

It looks like they did a big purchase on Aug 31 of some of the debs but it won't settle until after Sept 1 so not sure if that's in the numbers.

Anyway, 6m shares on 1.459bn (now 1.453bn) isn't much but that's over 3 weeks and the buybacks should continue.
ELF IAM GCM.DB.U/DB.V/DB.X PIF C.N

SafetyinNumbers

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #7 on: September 06, 2016, 09:08:12 PM »
Positive update tonight on August production and highlighting the debenture repurchases and conversions. This update actually lowered my pro forma share count by another 4m shares as it confirmed what I had expected that the last debenture purchase on August 31 was not reflected in the month end share count on the website.

The production update was interesting as it was almost identical to last month with a little more production from Marmato and a little less from Segovia. This trend should continue to the end of the year if they are to meet there year end guidance. If Segovia production can remain this high and they can meet their Marmato guidance, however, they have a good chance of beating the high end of their production guidance.

One risk, is that higher Marmato production and lower Segovia production in the back half might mean higher costs but that is somewhat reflected in their AISC guidance.

I still see it less than 2x EV/EBITDA and think it moves higher as the debenture overhang continues to dissipate.

http://www.marketwired.com/press-release/gran-colombia-gold-provides-positive-updates-on-senior-debt-reduction-gold-production-tsx-gcm-2155951.htm
ELF IAM GCM.DB.U/DB.V/DB.X PIF C.N

SafetyinNumbers

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #8 on: September 16, 2016, 07:26:12 AM »
ELF IAM GCM.DB.U/DB.V/DB.X PIF C.N

SafetyinNumbers

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Re: GCM.TO - Gran Colombia Gold Corp
« Reply #9 on: September 16, 2016, 10:44:48 AM »
With the recent dip in the gold price down to $1310, I just reran my run rate EBITDA estimates.

Assumptions:
Gold = US$1310
Production = 145k oz (high end of 2016 guidance but management discussions indicate up next year)
Cash costs = US$725 (guidance for 2016E is US$700-750 while under $700 for H116)
FD share count = 1.45bn (all debt is convertible at US$0.13).
On that basis, I get US$76m in annual run rate EBITDA. They did US$18.3m in Q2 EBITDA so this estimate shouldn't be controversial!

EV/EBITDA Sensitivity table:

Multiple   C$ share price
    2                  0.14
    3                  0.21
    4                  0.28
    5                  0.35
    6                  0.42

ELF IAM GCM.DB.U/DB.V/DB.X PIF C.N