This week, Durig Capital evaluations the most important underground gold and silver producer in Colombia. Gran Colombia Gold has staged a tremendous transformation from just a brief three years ago, when Durig Capital began to rigorously comply with this issuer. After completing a well-timed and elegantly crafted restructure of its stability sheet early in 2018, the company has persistently continued to smash its manufacturing targets, and has once again impressed us with its most up-to-date outcomes for the fourth quarter and full-year 2018.
- 2018 revenues increased by 25%.
- Full-year production also elevated by 25%, surpassing 200,000 ounces for the primary time.
- Free money movement elevated by 72%.
- Interest (and principal payback) coverage for 2019 estimated to be over 4x’s.
- Pays month-to-month interest and amortizes (redeems) a hard and fast number of notes each quarter.
Gran Colombia is a cash flowing, rising star poised to shine as a gold mining powerhouse estimating manufacturing at over 200,000 ounces annually. Not only can we presently assume that at about 2.3x’s EBITDA it’s widespread stock is considerably undervalued in the market, we also see it’s uniquely structured, amortized bond situation – referred to as “Gold Notes” – as a “golden opportunity” for fastened revenue buyers looking for the rare combination of upper yields with, what we consider is, remarkably excessive money move and probably decrease danger. Along with the accelerated return of principal that results from a quarterly redemption of about 5 million (face value), this senior secured debt gives buyers a further gold “premium” on prime of the traditional month-to-month curiosity cost ought to the worth of the gold bought to redeem the bonds on the end of every quarter exceed 1,250/oz. This means there’s potential for a substantial improve in complete return for bondholders. Given Gran Colombia’s wonderful performance in 2018 and their wonderful prospects for 2019, we expect these 2024 Gold Notes are properly deserving of an overweighted place in Durig Capital’s Fastened Revenue 2 (FX2) High Yield Managed Revenue Portfolios, the averaged efficiency of which is proven under.
Fourth Quarter and Full-Yr 2018 Outcomes
Gran Colombia continues to supply outstanding outcomes as evidenced by its just lately released fourth quarter and full yr results for 2018. The corporate has produced spectacular positive aspects in production, income, adjusted EBITDA, operating cash stream and free money circulate.
- Full yr manufacturing exceeded the corporate’s steerage for 2018, with complete gold manufacturing reaching 218,001 ounces, a 25% improve over 2017 manufacturing. The lion’s share of this production got here from the company’s wildly successful Segovia mine.
- Revenues for 2018 have been up 25% over 2017 levels, coming in at $268.5 million.
- Gran Colombia reported adjusted EBITDA of $102.four million for 2018, representing an increase of 36% over 2017 ranges.
- Internet money offered by working activities for This fall was $23.6 million, up 31% year-over-year. For the complete yr, internet cash offered by working actions was $79.7 million, a rise of 58% over 2017.
- Free money move for 2018 increased by 72% over 2017, coming in at $44.zero million.
The Government Chairman of Gran Colombia, Serafino Iacono, praised the corporate’s wonderful performance in 2018. “2018 was the watershed year for us, the one where everything we had been doing to turn things around in the two prior years all came together.”
An important element of the company’s turnaround was Gran Colombia’s regular improve in its annual gold manufacturing since 2014.
(Source: Gran Colombia This fall and Full Yr 2018 Presentation)
Concerning the Issuer
Gran Colombia is a Canadian-based gold and silver exploration, improvement and production company with its main focus in Colombia. Gran Colombia is presently the most important underground gold and silver producer in Colombia with a number of underground mines and two processing crops in operation at its Segovia and Marmato Operations. Gran Colombia is presently in the midst of an enlargement and modernization venture at its high grade production stage Segovia Operations. In recent times, Gran Colombia has efficiently carried out numerous value financial savings initiatives, bringing its All-In Sustaining Value (AISC) to US $918 per ounce in 2017 and is predicted to be under US $950 in 2018.
Extra Good News
In addition to the outstanding outcomes mentioned above, the company had extra to rejoice with its most recent results when the corporate’s gold production surpassed 200,000 ounces for the primary time. The corporate strengthened its stability sheet during 2018 as nicely. Wanting again three years in the past when the company began its turnaround, the corporate had about $3 million in money and $179 million in debt. Fast ahead to the top of 2018, and the corporate’s money degree had increased dramatically to $36 million and its debt is now right down to roughly $83 million. Additionally, this was the company’s fifth consecutive quarter the place gold production was in extra of 50,000 ounces.
(Supply: Gran Colombia This fall and Full Yr 2018 Presentation)
Protecting Prices Low
One of the reasons Gran Colombia has continued to thrive is its very low money value in addition to its low all-in sustaining costs (AISC) for its gold production. In reality, the company came in under steerage vary for its 2018 cash costs and AISC. For the complete yr 2018, Gran Colombia’s cash costs and AISC have been $680 per ounce and $907 per ounce respectively. For 2019, the company expects that its complete money costs and AISC averages for the yr will remain under $720 per ounce and $950 per ounce respectively.
A Distinctive Sort of Bond
Gran Colombia’s 2024 bonds, generally known as the “Gold Notes”, are a singular sort of debt instrument. These notes pay interest monthly (most notes pay semi-annually) and about 5 million face value of the notes are redeemed each quarter, leading to a proportion discount to the entire bonds held for each bondholder. The rationale these notes are referred to as “Gold Notes” is that each month, Gran Colombia units aside an quantity of physical gold (1300 ounces) in a belief account. Each quarter, this gold (3900 ounces) is bought and the sale proceeds (above $1,250 / ounce, and as much as $1,400 / ounce) are paid as a premium added to the curiosity that month distributed to bondholders. The remainder of the outstanding bonds will not be callable until 2021, after which era they are all callable upon being given correct days discover from the Company.
Phenomenal Interest (and Principal Payback) Protection and Liquidity
Because of the firm’s restructuring a couple of years ago, Gran Colombia has a comparatively low degree of interest expense. This, mixed with the company’s outstanding progress in gold production and revenues over the previous 3 years, has translated to beautiful interest protection for bondholders. For the full-year 2018, Gran Colombia had working revenue of $74.9 million and curiosity and finance (restructuring) expense of $30.0 million. On a go forward basis, estimating about 25 million for curiosity and principal payback costs, estimated protection can be over 4x’s. As talked about previously, Gran Colombia has vastly elevated its degree of cash reserves up to now yr. As of December 31, 2018, the corporate had money and cash equivalents totaling $35.6 million.
Subsequent to their yr finish report, on April four, 2019 the Firm closed its beforehand announced $20 million dollar personal placement offering of five yr eight% convertible debentures, with a conversion worth of C$4.75 per Debenture Share, representing a 33% premium to the closing worth of its widespread inventory on March 1, 2019. These unsecured notes are subordinated to senior indebtedness of the company. The meant use of those further funds will primarily be to right away implement an accelerated exploratory drill program at its highly productive Segovia Operations, carrying out 5 years of drilling inside the subsequent two years. Whereas this will likely make little actual difference from the attitude of the secured senior bond holders (apart from some added safety for reimbursement of the senior notes), we see this probably adding significantly to the measured confirmed and possible reserves, which ought to finally translate to raised analyst critiques and higher inventory prices.
The default danger for bondholders is Gran Colombia’s means to continue on its confirmed success path forward, mining and selling gold. Within the three years that Durig Capital has adopted and invested in Gran Colombia, the corporate has persistently taken steps to enhance its stability sheet, hold costs low and supply value to its buyers. With its current “watershed” yr in 2018, and its outstanding asset in its Segovia mine, 2019 seems to be the perfect yr yet for this mid-tier gold producer. In mild of the company’s robust efficiency in 2018, the competitive, over eight% yield-to-maturity and potential gold premium kicker on these 2024 bonds seems to considerably outweigh the dangers we will determine.
Gran Colombia’s mining belongings are all situated in Colombia. Mining in other nations can carry further dangers because the political and financial climates are sometimes very totally different from our own. The corporate has already overcome native resistance to its operations prior to now and seems to have overcome these disputes and is now shifting forward.
As a majority of the GCM’s revenues come primarily from its sale of gold, the corporate is exposed to volatility within the worth of this commodity on the open market. Whereas no one can accurately predict the worth of gold, traditionally, inventory market uncertainty and international progress considerations have helped gasoline the worth of this valuable metallic.
Generally, bond costs rise when interest rates fall and vice versa. This effect tends to be extra pronounced for lower couponed, longer-term debt devices. Any fastened revenue safety bought or redeemed previous to maturity could also be topic to a achieve or loss. Larger yielding bonds sometimes have lower credit scores, if any, and subsequently contain greater degrees of danger and will not be appropriate for all buyers.
Summary and Conclusion
Gran Colombia Gold is actually a comeback story. Over the past two years, the corporate has remade itself, reaching report manufacturing ranges annually and persevering with to enhance its stability sheet. It has continued to maintain working prices low, whereas making sensible capital investments for the longer term. For buyers looking for a bond with a better return, the “Gold Notes” present a superb opportunity to earn a premium on prime of the interest and principal. For buyers with a better tolerance for danger and volatility, it seems that there may be a lot greater capital positive factors attainable taking a position in its widespread inventory, if we’re right in seeing both its vital progress potential and its at present undervalued place. From our perspective, Gran Colombia has proven to be a sound funding up to now. Consequently, we are decisively drawn in the direction of the month-to-month regularity, the quarterly payback of principal, the chance of a further quarterly premium, and – lest it’s understated – the senior secured place that Gran Colombia’s 2024 Gold Notes maintain within the Company’s debt construction. Subsequently, we see this problem as a premium holding inside Durig Capital’s Fastened Revenue 2 (FX2) Excessive Yield Managed Revenue Portfolio, proven above.
Issuer: Gran Colombia Gold, Inc.
Ticker: GCM.TO (TSX) Worth (four/10/19): C $three.58
Ticker: TPRFF (OTCBB) Worth (4/10/19): $2.671
Warrant Ticker: TPRXF (OTCBB) Worth (four/10/19): $1.365
“Gold Note” Bond Coupon: eight.25%
Said Maturity: 4/30/2024
Average Maturity: 10/30/2021
Callable after four/30/2021
Scores: B- (Fitch Scores)
Yield to Maturity: ~8.1%
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About Durig Capital
Durig Capital supplies buyers with a specialized, transparent fiduciary service at a really low value. Our FX2 (Discretionary Administration) Portfolio over time has enormously outperformed our FX1 (Non-discretionary) Portfolio, giving significantly larger (at occasions double) the returns of FX1. Our skilled service allows entry to a broad spectrum of bond, excessive yields, and lower cost points which might be typically found in less environment friendly markets, but not evidenced in lots of bond providers.
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Disclosure: Durig Capital and certain shoppers might hold positions in Gran Colombia’s 2024 “Gold Notes” / bonds.
Disclaimer: Please observe that each one yield and worth indications are proven from the time of our analysis. Our reviews are never a suggestion to purchase or promote any safety. We aren’t a broker/supplier, and reviews are meant for distribution to our shoppers. The high yield methods introduced on this evaluation by Durig Capital is probably not suitable for all buyers. This isn’t funding advice from Durig Capital, nor a selected suggestion to purchase or promote securities. In case you have any questions or considerations about its suitability in your personal funding, you need to seek particular funding advice from a registered professional earlier than making an investment determination.
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