This week, we revisit Gran Colombia Gold (OTCPK:TPRFF), a Canadian-based gold producer with mining operations concentrated in Colombia, which is slated to report its first quarter 2016 financial report on May 13th. In its 4th Quarter 2015 report, it posted an adjusted EBITDA year-over-year increase of 255% and appeared to be poised for significant positive changes in 2016. Early news slipping out of Colombia have indicated that the Q1 production was up, and confirmed by company reports of an increase of 4.8% from Q4 2015, and up 31.4% from Q1 2015. This increase in production, combined with lower cost projections and the notably higher price of gold, should result in an handsome rise in revenues and a tremendous increase in earnings for this gold producer. Consequently, we think both bondholders and shareholders should have numerous reasons to take a bullish view on this relatively unknown, and evidently overlooked, gold and silver producer.
Gold is up 17% YTD with markets setting up for additional growth this year.
Gran Colombia’s full-year adjusted EBITDA post an outstanding 255% increase, Q4 adjusted EBITDA also showed impressive gains of 78%.
2015 total annual gold production grew 18.5%, from 98,622 ounces in 2014 to 116,857 in 2015.
Gran Colombia continued to bring down production costs, with all-in-sustaining costs per ounce decreasing by 24.6%, from $1,145 per ounce in 2014, to $863 per ounce in 2015.
Gran Colombia recently completed a comprehensive debt restructuring and is now uniquely positioned to take advantage of increasing gold and silver prices on top of its growing production base. Given that production has already increased 4.8% the first quarter of this year, it signals an outstanding start to what should be a banner year for this stock. Gran Colombia has estimated its cash cost per ounce in Q1 at $600. With gold selling at over $1,200/ounce, this should translate to over $600 gross profit per ounce. Using Q4’s production of approximately 30,000 ounces (which also corresponds to 2016 guidance), this would equate to roughly $11 million EBITDA per quarter. The recently restructured convertible bonds, maturing in less than 28 months, are currently priced at a significant discount of about 58.5% and over 25% YTM. In addition to this highly attractive yield, the convertibility feature on this bond could prove to be an extremely lucrative windfall for bondholders. With a current market capitalization of about $9.5 million and last years adjusted EBITDA of nearly $40 million, it appears that the markets might be missing this unknown gem. Therefore we believe these convertible debentures are masking an unseen opportunity for significant additional capital gains if or when the underlying stock meets and exceeds its strike price of $0.13 USD (currently about $0.167 CAD). In light of these factors, we think these short term Gran Colombia Gold’s “Silver notes” in US Dollars, couponed at 1% and priced about 58.5, deserve an oversized position in both of our FX1 and FX2 global high yield income portfolios, as well as our high performing Distressed Debt 1 Hedge fund.
Outstanding Q4 and 2015 Results
In January 2016, Gran Colombia completed its debt restructuring, which we covered in our last review earlier this year. In late March, the company released its Q4 and full year 2015 results. The numbers are impressive. For Q4, gold production had a slight increase over Q4 2014 (30,050 ounces compared to 29,043 ounces). The amount of increase is not the focus, but rather the fact that Gran Colombia had security issues in Q4 at its Segovia mine which caused shut-downs, not once, but twice in Q4. For the year, gold production increased by 18.5%, with the company producing 116,857 ounces in 2015, compared to 98,622 ounces in 2014. Gran Colombia also produces silver, and its silver production also increased in 2015 by 17.4%.
In addition to increasing production, Gran Colombia’s production costs continued to decrease.. Many gold producers now use All-in-sustaining cost (AISC) to give a more accurate cost of gold production. It includes cash costs, general and administrative expenses, sustaining capital and exploration expenses. For Gran Colombia, all-in-sustaining-cost (AISC) for 2015 decreased 24.6% from 2014, going from $1,145 per ounce to $863 per ounce.
Adjusted EBITDA registered outstanding gains both in Q4 and in the full year results. For Q4, adjusted EBITDA was $10.0 million, as compared to $5.6 million for Q4 2014, a 78% increase. For the full year, Gran Colombia posted Adjusted EBITDA of $38.4 million, a dazzling 255% increase over 2014’s Adjusted EBITDA of $10.8 million. With gold prices over 17% higher, production up even more than that, and with costs down… we are expecting a much better 1st quarter – possibly as high as 12 million in EBITDA! We think the shock of a single quarter’s EBITDA reaching 12 million (surpassing its current capitalization value of under 10 million) might be enough to finally rocket its stock (and inherently, its bonds) higher.
Along with its most recent financial results, Gran Colombia also released its guidance for 2016. The company expects gold production to be in the range of 120,000 to 138,000 ounces of gold at an AISC of $850 – $950 per ounce. Even at the low end of this guidance range, this is 3,143 ounces more than 2015’s production with a lower AISC. Couple this with the potential of increasing gold prices this year, and one can see why Gran Colombia truly looks to be that diamond-in-the-rough.
After considering Gran Colombia’s current market cap of about $9.5 million (its Q4 adjusted EBITDA was $10.0 million) and the high probability of a breakout first quarter in 2016, it would seem that the market’s valuation of this company has stepped away from being sound or rational. This should certainly entice debt holders, especially considering the newly restructured conversion terms of these debentures.
About the Issuer
Gran Colombia Gold is a Canadian-based gold and silver exploration, development and production company. Its primary focus is in Colombia, with its Segovia, Marmato and Zancudo projects located in the north central region of Colombia. Gran Colombia is currently the largest underground gold and silver producer in Colombia. The company is currently advancing a project to develop a modern large-scale gold and silver mine at its Segovia operations. The company’s most recent mineral resource reports indicate proven gold reserves to be 12.029 million ounces contained within its Segovia and Marmato projects.
Gold Continues to Rise
At our last review of Gran Colombia in February, gold was up 17% year-to-date. The precious metal continues to post solid performance, with latest trading prices continuing to support year-to-date growth around 17%. The case for being bullish on gold continues to build. Several developed economies now have negative rates, and this made gold more attractive for many investors. In addition, the U.S. dollar has been weakening relative to other major currencies, down 4.8% YTD. Gold is priced in dollars, so when the U.S. dollar drops, gold becomes less expensive and more attractive for buyers in other countries. Independent research company Capital Economics also sees gold’s rally continuing throughout 2016 stating that “physical demand and supply dynamics should also play favor of higher gold prices as global mine output is expected to plateau in 2016…. and demand from central banks and key consumers should remain strong.” In addition, gold sales at the U.S. Mint are booming. As of April 19, 2016 the U.S. Mint sold 310,500 ounces of gold bullion year-to-date. Comparatively, in the first four months of 2015, the U.S. Mint sold just 175,500 of gold. This represents a year-over-year increase of close to 80%. Finally, gold demand is growing abroad as well. Consider India, who in January 2016 imported 93,303 kilograms into the country. This amount represents an increase of 60% over the amount imported just a year earlier, and also represents roughly three percent of total global mine production. While this might not sound like much, if India is importing three percent of global gold production each month, that adds up to 36% over a year’s time!
For 2015, Gran Colombia posted interest coverage of 2.5x. This figure is calculated omitting the Q4 impairment charge (non-cash) of $41.3 million, as well as omitting the the finance costs associated with the debt restructuring, as these are both one time items. In our last review, we also discussed Gran Colombia’s ongoing forward interest expense and interest coverage. After factoring in the company’s debt restructuring, interest coverage (using Q3’s operating income of $9.882 million) should be above 5x going forward.
The risk is Gran Colombia’s ability to perform. The company has successfully restructured its debt, thereby reducing its interest expense. It has also done a fantastic job of increasing its gold and silver production, while bringing down production costs. It has worked through the safety issues experienced in Q4 2015 and is moving forward with its expansion / modernization at the Segovia and Marmato mines. Gold production for 2016 is already up 28%, with gold prices also up YTD by 17%. In addition to this, the convertibility feature also serves to mitigate any default risk at maturity.
Gran Colombia’s mining assets are all located in Colombia. Mining in other countries can carry additional risks as the political and economic climates are often very different from our own. Colombia has recently struggled to maintain orderly mining operations in some of the areas where Gran Colombia maintains its mines. In October of last year, a military group was responsible for the death of one of the mining managers, after the company Samasa, who manages gold production at Gran Colombia’s Segovia project, refused to pay the “gold tax” demanded by the military group. Production was suspended for several days. However, Gran Colombia successfully renegotiated labor contracts and continues to work with local and national governments to get help monitor this situation and to maintain community safety as well as normal mining operations. More recently, following an agenda to support legal, private sector mining, as well as the formalization of small-scale local traditional miners, the national government of Colombia announced in January 2016 additional initiatives to eliminate illegal mining, and took intervention actions in Antioquia and other parts of the country.
As a majority of the GCM’s revenues are from its sales of silver and gold, the company is exposed to volatility in the prices of these commodities on the open market. However, the prices of silver and gold appear to have not only stabilized in the past six months, but appear to be heading higher in 2016.
The hardest risk for us to identify is the geopolitical risk. It is our opinion that diversification into a wide variety of global debt vehicles often reduces risk. Our strategy here, as with other Yankee bonds, is to focus on core services that add key economic value to the countries they are associated with. GCM continues to operate as a key player in this sector, as it has been for many years, maintaining a very good working relationship with the government of Colombia.
This Yankee (US dollar) convertible debenture has similar features and maturity length to other convertible notes previously reviewed on Bond-Yields.com, such as the highly successful 14.38% Brigus Gold (now Primero Mining) and the 9% Lakeshore Gold (now Tahoe Resources) bonds (which increased to over 150% of par value.)
Summary and Conclusion
For Gran Colombia Gold, persistence has definitely brought the company to the threshold of its goal of being the leading Colombia-focused gold producer. With debt restructuring now behind it, the company has launched full force into expanding its operations, increasing production while driving down costs. Its Q4 and full year results are an example of the company’s commitment to building a world-class gold and silver producer. Early production rumors indicate a 28% increase in production Q1 year-over-year, setting the stage for a banner year. This combination of increased production, higher gold prices and lower costs should result in an astounding Q1 report for the company. The convertibility feature of these Yankee bonds gives investors the possibility of significant additional capital gains should the underlying stock appreciate past it’s conversion price (which we see being very likely, considering the possibly of Q1 EBITDA reaching as high as 12 million.) Given the probability of the market awakening to an upside surprise when Gran Colombia Gold reports on May 13, we have decided to target overweight positions in these high 25% yielding bonds for our Fixed-Income1.com and Fixed-Income2.com global high yield income portfolios, as well as our high performing Distressed Debt 1 Hedge fund. It is a rare event for a single quarter’s EBITDA to greatly exceed a company’s stock market capitalization, and in my over 30 years of investing experience I can never recall finding this low of a valuation of a company executing extremely well.
Issuer: Gran Colombia Gold, Inc.
Ticker: GCM.TO (TSX)
Price: $0.095 CAD (04/28/2016)
Conversion Option Price: $0.13 USD (currently ~$0.163 CAD)
Coupon: 1% Cash / 2% PIK rate
Yield to Maturity: ~25.75%
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Disclosure: Durig Capital, Distressed Debt 1 LP, and certain clients may have positions in Gran Colombia Gold’s 2018 convertible debentures.
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