Once in a great while you find or learn something that is so unbelievably good, that you have to hear or read it over and over again, often from different sources or perspectives, before the truth of it actually starts to sink in and really make sense. Perhaps it’s that initial bewilderment that has served to curb much of any demand from the fixed income markets for this otherwise “golden” opportunity. Fortunately, this is great news for those that eventually arrive at a deeper understanding of why these Gran Colombia Gold bonds are so darn good… and it is why these bonds are well deserving of serious overweighting in our high performing FX2 fixed income portfolios.
Consequently, this “flash update” on Gran Colombia Gold will not cover the stunning (and hard to believe) details and improving metrics the company has reported since our April 16 or July 2 reviews of this issue earlier in 2019. Besides, neither the 8.25% coupon nor the April 30, 2024 maturity that are stated on the bond are straight forward, and can easily fool the casual reader into passing by, without giving any second thoughts or serious consideration to what distinguishes this note and actually sets it head and shoulders above any other bond in our portfolios for yields relative to risks. Therefore, it is precisely this mitigation of risks inherent in these Gran Colombia Gold Notes that we want to bring to the forefront and focus upon before discussing what the possible returns on an investment in this debt instrument might bring. However, it is worth noting the simple truth that the higher the price of gold is, the higher the returns are projected for this bond.
Let’s start with the fact that this company has tremendous cash flow, is profitable, and mines well over 200,000 ounces of gold annually – mostly from what now might be regarded as the second highest grade gold mine anywhere in the world. It has no streaming agreements, and owns the land package that it mines, which has no encumbrances upon it, and therefore pays no royalties on it to anyone else. The company’s liquidity continues to improve, with $19 Million dollars in free cash flow in the first half of 2019, bringing its mid-year cash position to over $51 million dollars. That said, rather than delve into any of the minutia of other much less meaningful assets or liabilities on the company’s balance sheet, let’s only consider its major outstanding and long term debts.
The first, and by far the most significant debt that the company holds (as of August 15, 2019) is the $73.625 Million dollars (face value) of these secured Gold Notes, couponed at 8.25%, that remain outstanding. Please note that word “secured” Secured by what? Namely, secured by the ground that all that gold is coming out of. In other words, if they don’t redeem these notes in full, the Gold Note holders take over ownership of the gold mine. But don’t count on that happening, as there is a very clearly defined repayment schedule that appears to have been – and will most likely continue to be – extremely easy for the company to follow. In short, the company is required to set aside a mere 3900 ounces of gold (which represents about 7% on the low end of their current production estimates) to redeem $4.875 Million dollars (face value) of these bonds every 3 months. That is, until July 2020, when the amount required will drop down to 3300 ounces. And the following year (in 2021), it drops again. The decreases in required redemption amounts are simply a reflection of the complete redemption scheduled that is laid out for the bonds. The company does have the option to call the bonds in full in July of 2021, or continue to partially redeem them every three months on a shrinking schedule, stretching all the way out to April 30, 2024, at which time the final $3.125 Million dollars (face value) of paper outstanding will be redeemed in full. This means that this secured debt will never present a “debt wall” that the company has to break through or refinance.
The only other long term debt that the company has on its books is the (privately held) unsecured $20 Million dollars convertible debenture that was added earlier this year in order to enable funding of an accelerated drilling program. Most notable about this debt is: (1) it is unsecured – meaning all of it takes a back seat to the secured debt, (2) it is convertible to equity at the holder’s option, and (3) it becomes partially callable (up to 10% of it) by the company in April of 2020. Considering the current performance of the company and its current market valuation, the stock price is trading far above this debt’s conversion option. Therefore, we think it is quite likely that a significant portion (if not most) of this debt will end up converting to equity should the company opt to exercise its 10% redemption of this privately held convertible note next year.
It should also be noted here that the product of this company, gold, is generally regarded as a “safe haven” asset, and has typically held an inverse relationship to the movement of the stock and equity markets. In other words, if the markets were to significantly increase in volatility, or become bearish in nature, the price of gold (and hence, the profitability of Gran Colombia Gold) is more likely to rise.
Now, having addressed (and presumably, largely mitigated) the default risk of the company’s Gold Notes that we find so attractive, let’s move on to consider what the possibilities are for yields or returns on this investment. (Hey, if they do want to default and turn over control of the gold mines for the small amount of whatever might remain on these bonds… it would be very hard to guess how much more that might boost the returns on investment, so we won’t speculate further on that seemingly faint or remote possibility.)
As mentioned previously (and in our previous reviews of this issue), the coupon for this debt is 8.25%, which is paid monthly. And seeing an interest payment come in every month certainly adds a nice “sleep well” touch to this issue. But that 8.25% represents only the minimum payment. Every third month is the company’s gold escrow redemption time, when the gold bullion that has been set aside for partial bond redemption is sold at the gold market price. And, everything over $1250/oz of the gold goes directly into a “bonus payment” kitty that is then added to that month’s interest payment. For example, at the end of last July, the gold escrow account was sold at $1,412.40 an ounce. The resulting bonus amount that was subsequently added to July’s interest payment pushed that month’s interest rate all the way up to 17.93% (based on face value.)
Obviously, the higher that gold is priced, the higher these bonus returns are going to be for this particular issue. Fortunately, the bond is also structured so that there is never a loss or penalty to the basic 8.25% coupon should gold ever be priced lower than $1,250/oz. While this unique characteristic does make it difficult to estimate (and virtually impossible to accurately predict) what the return on this investment might be, we have endeavored to the best of our abilities to calculate “worst case” yields, and what estimated yields might be presumed at certain gold pricing targets in the chart detailed below.
In light of the attraction to significantly overweight this issue in our FX2 managed fixed income portfolios, and given this added perspective on these Gran Colombia Gold Bonds, we would appreciate any additional questions and/or feedback you might have for us on what might or might may keep you from “sleeping well” at night with your investments.
*The current price of gold appears to be over 1500 per ounce, while a reasonable price target for buying the bonds appears to be about 105.5 to 106.0.
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Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services. Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured, or at Interactive Brokers. We have now started offering our highly successful FX2 service to clients of other Registered Investment Advisors through segregated accounts at TD Ameritrade. Please ask us to learn how this might work for you and your current advisor.
Disclosure: Durig Capital and certain clients may hold positions in Gran Colombia Gold’s 2024 “Gold Notes”.
Disclaimer: Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. The high yield strategies presented in this review by Durig Capital may not be suitable for all investors. This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.
We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful. Our main priority is to provide the best opportunities for our clients. Our bond reviews are first distributed to our clients, then published on our website and our free email newsletter, and lastly on the Internet and distributed to thousands of prospective clients and competitive firms. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients. When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.
To learn more about this bond call our fixed income specialist at (971) 327-8847
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Randy Durig, Durig Capital, Inc.
A Registered Investment Advisor