Gran Colombia’s Debenture Redemption looks favorable
On Thursday Gran Colombia announced the warrant terms of a $152 million USD senior secured note offering. Attached to the notes the company is offering 124 warrants priced at $2.20 per share per $1,000 of note principle.
Dilution amounts to 18.8 million shares. This compares to 72.2 million shares that would have been issued under the existing 2018, 2020 and 2024 debentures if they were fully converted (the table below is from the third quarter MD&A filing).
I think the deal, if it is approved, is pretty positive. Consider:
Under the prior share structure, a $2.50 share price translated into a market capitalization and enterprise value of about $230 million (~92 million x 2.50 = $230 million).
Under the new notes, and considering redemption of all of the existing debentures at par, the share count is roughly 39 million and the market capitalization is $97.5 million (39 million x 2.50). The enterprise value is $202 million (97.5 million + $150 million (x 1.25 CAD/USD exchange) – $45 million (assuming in the money warrant conversion of the 18.8 million warrants) – $9 million).
Debenture Holders can participate
As a debenture holder (I own both the stock and some of the X and V debentures) I’m interested in what my options are with the debentures.
The terms gives existing debenture holders the right to participate in the offering:
Existing holders of the Company’s Outstanding Debentures that are eligible to participate in the Offering may (subject to complying with certain procedures and requirements) be able to do so by directing some or all of the redemption proceeds from their current debentures into Units on a dollar-for-dollar basis.
I’m not entirely sure how to read this. Does it mean that existing debenture holder gets preference to convert their debentures into new notes or is this just on a best efforts basis where an over-subscription to the notes would mean partial allocation?
I’m hopeful that I can direct my debentures into the new notes, but I’m not counting on it.
Its still cheap on Comps
Gran Colombia continues to compare favorably to other gold producers.
One of the quick scans I like to do compares companies on a simple EV/oz produced basis. I’ll do the comparison and then weed out why some companies trade at lower multiples than others. Usually there are good reasons.
At $1,400/produced-oz Gran Colombia trades at one of the lowest multiples of the group. Only the really poor operators that are cash flow negative at current prices (an Orvana Gold for example) are cheaper. Most of the companies I compare to are in the $4,000 – $6,000 per produced-oz range. Even the lower tier companies like Argonaut Gold or the struggling one’s like Klondex trade at over $2,000 per produced-oz.
Its still cheap on Cash flow
Even forgetting that it is a gold stock, Gran Colombia remains reasonably priced as a business.
On the third quarter conference call Gran Colombia reiterated guidance for $16 million USD of free cash flow in 2017. In the fourth quarter they produced 51,700 ounces versus an average of 40,700 ounces per quarter in the first three quarters.
The indication after the strike at Segovia was that new agreements with artisanal miners should lead to more processed ore at the plant. Based on this and progress at the Segovia mine, my expectation is that 2018 free cash guidance will exceed 2017.
I suggested in my original post on Gran Colombia that I thought $20 million USD of free cash flow was not an impossible goal. I still think that’s possible. Assuming the note and debenture deals go through, the market capitalization of the company will be a little under $100 million CAD at current prices. Even though the stock has climbed since my original post, this still means the stock is at less than 4x free cash flow.
Conclusion
Eventually the note offering and debenture redemption should be positive for the stock. But it might take a few months.
What’s tricky is that at $2.40 the stock price is right about where the debentures convert. It isn’t really in anyone’s interest (other than the current debenture holders, though even that is debatable) to see the stock price rise too much above the convert price until the deal is done.
I’ve been adding to Gran Colombia all the way from $1.40 to $2.20. I see no reason to take any off the table yet. The company is doing everything right so far. Hopefully with the new capitalization and simpler structure the market will continue to recognize this.
Reminiscences of a Stockblogger 
Why only US$20 million in free cash flow? With about $100 million Canadian in debt, that should be a lot higher given that last 9 months gave ~US$36 million in adjusted EBIT? And numbers will look better in 2018.
Let’s say that a year out they get down to about $80 million Canadian in net debt, then they probably won’t pay more than 7-8%? And given the huge losses they made, they won’t be paying significant taxes anytime soon. So then FCF should be a lot higher going forward? More like US$30-35 million? What am I missing here?
Not related to gold, but have you looked at Canadian natural gas companies? The lower cost ones like Birchcliff, Peyto, Painted Pony etc look interesting. They look cheap, but as a non Canadian I might be missing a thing or two regarding the political situation with regard to pipelines etc. Since they don’t get a good price for their gas. Heavy insider buying on most of them as well though.
Are we talking two different things? I’m talking free cash flow, so subtracting all capital expenditures, development costs, expansion costs etc. I agree that cash flow from operations is quite a bit higher – I think that cash flow was $30mm USD in 9m (so inline with the $36mm EBIT you point out).
One thing though is GCM seems to refer to all its capex as “sustaining capex” and I’ve wondered if this is truly the case. Most mining operations differentiate between sustaining and development capital. But GCM says the full $17.9mm is sustaining yet they have shown increases in gold production (notwithstanding the Q3 shutdown) so I’m not sure whether they are just conservatively defining what is “sustaining”.
With the nat gas companies I don’t know, the takeaway capacity in Alberta is bad and not going to get better for some time. So the low prices of their product may continue for some time.
The beauty here is that free cash flow at US$20m makes it very compelling so if it’s higher then its only cheaper.
I would argue that with the first sinking fund payment for the new bonds is US$28.75m minimum, implying strong free cash flow for the first year. They will likely end Q1 following the offering and free cash flow at around US$20-25m in cash on hand so perhaps they don’t need too much free cash flow in year 1 to make the payment but I would think they wouldn’t have a sinking fund payment scheduled for less than free cash flow. Perhaps, I am being optimistic.
One thing that will certainly help is that their effective tax rate in Colombia will fall from 40% in 2017 to 37% next year and 33% in 2019.
I agree, there are ways that number can go higher. I just don’t want to speculate too much until we know what 2018 is going to look like, what CAPEX is going to be, when they are going to bring on the larger artisanal miners they talked about in Q3.
Have you looked at Alio gold? 40% of the market cap in net cash. trading at cheap earning multiple. And they have a second site which wil start producing more than 100k ounces per year in 2020. And first mine site is expected to maintain production at over 100k ounces as well for 8 years. If that happens, then I can see CAD$50-60 million in earnings a current gold prices.
But they are free cash flow negative and are a really high cost producer
“$1,000 to $1,100/oz AISC in 2018”
“$20 million in exploration and development expenditure planned for 2018.”
“Cash flow from operating activities after changes in non-cash working capital of $13.1 million”
They plan to more than double output by 2020. The Ana Paula project is expected to have AISC of $550-600/oz. With low future capex requirement for San Francisco mine.
Of course they actually need to pull that off, and it will require further investment. Just thought it was worth a look.
Just saw that GCM announced the $98mm offering with 12.15mm warrants at CA$2.21. In your opinion, should treasury stock method factor in to the dilution we’re calculating (seeing as the share prices is at CA$2.63 last time I checked)?
Yes I would think it should. I have a total of 50mm shares assuming the rest of the 2018 debs get converts at the 81% shares/19% cash.
The warrants should also bring in $27mm once converted I think.
Btw, you mean they announced the closing. This isn’t a new offering.
I’m getting 58m shares fully diluted with all of the 2018s converting to stock and 54.5m shares fully diluted at the 81% ratio. Hopefully no more debentures get converted before May 14! The company should come out of this with a healthy cash position as well so a much lower net debt than US$98m.
Yes you are right, I forgot to change to the new outstanding count in my spreadsheet.
Increased yesterday and got lucky be rally today 6%
They are 1.6ish EV/EBITDA, silly low IMHO, have had 2 years plus may have it for many years more.
Yeah me too. Once gold gets out of this funk I expect things to look better. Someone pointed out there could be arbs that are buying debentures and shorting the stock as well. I didnt really get all the details of that but its another possible shortterm headwind.
I bought another gold stock yesterday, ROXG. Not quite as cheap but still cheap.
Dana,
I’m curious about your EV/EBITDA calculation. What gold price, debt level, production level are you using?
Thanks!
Lane, that would be trailing 12 months, quoted on several sites. I looked into numbers after debt conversions etc, and the number seems right. http://www.grancolombiagold.com/news-and-investors/default.aspx
Their presentation says $89 million EBITDA last 12 months and 31 million diluted shares, that is $3 a share EBITDA, and $908 AISC, so 1.0 mktCap/EBITDA.
Their execution amazing, many expected them to go broke 3 years ago.
That actually wasn’t me that asked but thanks for the reply 🙂
Thanks for the reply. I get a higher EV at US $191m using the fully diluted share count of 62m and a net debt of US$55m. The 2018 debs convert in August and the warrants and significant portion of the options are significantly in the money so I use the treasury method.
Anyway, super cheap whichever way you slice it.
Thanks Safety for #s. That would be 2.1ish EV/EBITDA still dirt cheap. The key to Gran for me is they have centuries old high grade gold mine that just never seems to run out of gold, know of no mine in USA that has lasted over 150 years. And Gran’s Segovia seems to be getting better, and thrown in Marmatto.
So deposits are superb and today it is being run better than ever, it was $1400 AISC and is now about $900 AISC. With reduced interest payments, reduced equity payments and increased production and reduced costs, in coming years they will be gushing cash. Surprised at how slow mkt has been to realize this.
Sorry for the slow posting, I missed this comment until today.
It’s already gushing cash. Likely around US$25m this year which will increase next year assuming the gold price stays around here as there will be lower interest payments on debt and a lower tax rate in Colombia (already enacted).