Catching the knife with Gran Colombia
This has been just a brutal week for my portfolio. I have been sliced and diced by the commodity bear market.
I was prudent enough to exit all of my base metal positions and that saved me through the early part of July. But this week oil stocks and gold stocks joined in the carnage and I was not well positioned for that.
I admitted defeat on a few of my oil stocks. I sold Zargon, reduced Gear Energy and reduced GeoPark. I don’t have the conviction. The second quarter has not shown the inventory draws that I had anticipated. I’m worried about what happens as inventory builds begin. What if Saudi Arabia decides to direct more oil towards the US? Even if overall supply remains constant, the market seems to react with blinders to the weekly US storage numbers.
On the other hand I have held onto my gold stocks. Until this week they had been holding up pretty well even as gold fell. I even had a big winner in Wesdome and a little winner in Golden Star Resources. But this week the bottom fell out of all of them, in particular Roxgold, Gran Colombia, Jaguar and Golden Star got creamed. I sold a bunch of Jaguar because it just isn’t operating well but have kept the rest.
The irony of Roxgold, Golden Star and Gran Colombia is that each released second quarter results and they were really quite good. But the market doesn’t care much about results when it is busy panicking.
I’m going to focus on Gran Colombia right now because that stock has gotten into the “this is pretty insane” territory in my opinion.
Gran Colombia Second Quarter
Gran Colombia released second quarter results on Tuesday. Since that time the stock has fallen almost 20%.
When a stock falls 20% in the days immediately following earnings you would expect to see an earnings miss, a reduction in guidance or an increase in costs. Here is what Gran Colombia gave us:
- Raised production guidance to above 200,000 ounces for the year from previous guidance of between 182,000 and 193,000 ounces.
- Produced 52,906 ounces of gold in the second quarter up 15% year over year
- Total cash costs and all-in sustaining averaged $696 per ounce and $913 per ounce, well below the company’s guidance of $735 per ounce and $950 per ounce
If there is a negative side to the results, its that costs were up a little over the first quarter and earnings were down a little, mainly because the price of gold was a bit lower. But the company’s measure of free cash flow was up to $11.4 million USD for the second quarter, up from a little over $2 million the previous quarter.
Anyways those are the results. Next let’s consider the valuation of Gran Colombia.
We can look at the stock two ways. Either using the current share count and debt levels, or assuming that the warrants get converted, increasing the share count but also increasing cash on hand. Because the current share price is below the warrant strike, I am not including the warrants in the calculations below.
After full conversion of Gran Colombia’s 2018 debentures (which happened on August 13th), the company had 48.2 million shares outstanding. So at the current price the market capitalization is $100 million CDN or $78 million USD.
Gran Colombia has $98 million USD of senior Gold notes and $25 million USD of cash. Net debt is $73 million USD. EBITDA last quarter was $26.5 million. EBITDA in the first quarter was $27.3 million. Below is what the company is trading at currently if you annualize first half EBITDA as well as what it’s at based on my estimated EBITDA at $1,200 gold.
Below I have tried to work out a simple pro-forma model of what EBITDA and free cash look like at $1,200 gold. I’m using the company’s own production and cost guidance. They have been consistently beating the cost guidance and are trending above the new production guidance in the first half. I’m also assuming the tax rate for 2019.
So the stock is trading at a little over 3x free cash flow using the company’s own guidance. That seems a little crazy to me. I’ve added to my position here and am hoping the carnage ends soon.