Top Gold Stock for 2014: Gran Colombia Gold
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Top Gold Stock For 2014: Gran Colombia Gold
Dec 2 2013, 17:23by: Steve Nicastro | about: TPRFD
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTC:TPRFD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
In my search for the most undervalued, underappreciated gold mining stock, Gran Colombia Gold ( OTC:TPRFD) could take the crown.
This is a company which possesses tremendous upside potential and leverage to an increase in the price of gold. With that tremendous upside comes risk, which I will discuss in detail, but I believe that Gran Colombia's risk is worth the potential reward at this point. I also feel that the management team is making the right moves, including the recent announcement of an equity offering to provide financial flexibility.
As the price of gold has dropped from the 2011 highs of $1,900 to the current three-year lows of $1,220 an ounce, many of the mining companies have been absolutely crushed. This has forced miners to significantly scale back exploration plans and cut costs to improve profitability, a wise move in my view. No longer are miners focused on adding as much ounces to reserves and production as possible - it is all about cash costs.
Gran Colombia has suffered from higher than expected cash costs at its operating mine, so as gold has declined in price the company has suffered big time.
Smaller mining companies like Gran Colombia are very highly leveraged to the price of the commodity which they produce; for example, a 20 percent decline in the price of gold could equal 50 percent or greater downside, while a 20-30 percent increase in gold could equal 100+ percent upside.
As you can see from the above chart, Gran Colombia started the year at $10 a share and is now well below its 2013 highs:
(click to enlarge) 
This chart looks awful, but I believe Gran Colombia has put an operating plan in place that will increase profitability going forward. The company has a very high-grade operating mine in addition to an exciting development project, and the quality of these projects simply can't be ignored by investors.
I believe shares have bottomed or are very close to it, giving new investors a solid entry point as we enter 2014. I will try to prove my case below.
Company Information and Share Structure
Gran Colombia Gold trades on the TSX under GCM.TO and on the US exchange under TPRFF.PK.
The company has a very, very tight share structure with only 15.3 million shares outstanding. The company also has 8.5 million in warrants and options outstanding, but the warrants and options are at strike prices of $65 and $18.75, making it highly unlikely that they will be exercised.
With a current share price of $1.12 and 15.3 million shares outstanding, Gran Colombia has a market cap of $17.136 million.
Gran Colombia Gold's Projects
In my view, the main reason for an investment in shares of Gran Colombia Gold is the high quality of their projects.
Grade is king, and the Segovia mine has it with 11.8 grams per tonne in the measured and indicated categories, with a total resource base of 1.9 million ounces of gold. This resource base is made up of 95,000 ounces at 14.8 g/t in the measured category, 366,000 ounces at 15.4 g/t in the indicated category, and 1.44 million at 11 g/t in inferred.
At present, Segovia is the 11th highest-grade producing mine in the world. In addition, exploration upside still remains as only 4 of 27 known structures have been explored at the property, as you'll see in the chart below:
(click to enlarge) 
The company expects production of 110K ounces in 2013 at the Segovia mine. However, the company has commenced a plan to expand gold production to 200K ounces annually beginning in Q4 2014 through their Pampa Verde Project.
This expansion at Pampa Verde should also come with lower operating cash costs, which is absolutely crucial. The company expects all-in sustaining costs to fall to $1,150 in the fourth quarter of 2013.
The expansion is being funded by gold-linked notes, which I will discuss later on. The capital cost is estimated at $84 million, which is already funded through the notes and cash on hand.
As I've mentioned above, reducing all-in sustaining costs is the single most important focus for the company going forward in my opinion (as is the case with most gold miners in this present environment). All-in sustaining costs are estimated to drop to $1,125 in fourth quarter of the year, down big from $1,545 in the first quarter of this year. The reduction is mainly due to the decrease in sustaining capex and G&A,which is down due to a 38 percent reduction in work force from the beginning of the year.
The company's ultimate goal is to reduce all-in sustaining costs to under $1,000 beginning in Q4 2014 when the expansion is complete. This is due to mechanized mining at the new 2,500 tons per day plant.
(click to enlarge) 
To put it simply, the Segovia project is a very, very attractive project because of its grade, which should allow the company to produce gold at industry leading cash costs.
If the company can hit their targets of 200K annual gold production beginning in Q4 2014, at all-in sustaining costs of less than $1,100 an ounce, then the mine should be very profitable, even at current gold prices.
Of course, a higher gold price couldn't hurt; indeed, any increase in the price of gold could send shares rocketing much, much higher.
I haven't even mentioned the company's Marmato project yet, which contains a massive resource base of 14.4 million ounces of gold and 89.9 million ounces of silver. Marmato ranks 18th overall in the largest undeveloped gold deposits in the entire world, ranking higher in ounces and in grade than the El Morro project, operated by GoldCorp and NewGold.
Marmato represents an outstanding long-term opportunity for the company and I think the company should consider a joint-venture partnership to help get explore and develop the project. The focus right now is on the higher-grade Segovia mine, but Marmato should not be completely ignored by investors.
Undervalued Compared to Peers
Gran Colombia remains very undervalued to its peers based on a number of metrics.
First, the company has an enterprise value/measured and indicated resources of just $7 per ounce. This takes into account Gran Colombia's total measured and indicated resource base, including the Marmato project.
This makes Gran Colombia insanely cheap compared to its peers; the junior average is $74 an ounce, and the mid-tier average is $79 an ounce, according to the company presentation.
The company also has a EV/Production of $676 per ounce, also significantly less than the junior average of $1,749.
Gran Colombia has a current enterprise value of $136 million (market cap minus cash plus debt). If the company hits their goals and produces 200,000 ounces of gold at an all-in sustaining cost of $1,100 an ounce, then with a gold price of $1,300, the company should record an EBITDA of $40 million.
This would give the company a 2015 EV/EBITDA of roughly 3.4, which is very, very low. Please keep in mind that this is my own estimate and it is a very rough estimate.
Balance Sheet Overview
So why is Gran Colombia so cheap? This leads me to the balance sheet:
- Gran Colombia Gold has $49 million in cash as of Sept. 30, 2013. However, $45 million was held in Cash in Trust as of Sept. 30 and $2.18 million was cash and equivalents. The cash in trust is a restricted cash account to meet debt service obligations, as explained below:
"The Company consolidated COP 15 billion (approximately $8 million) of two existing term loans due April 2014 and January 2015 into a new four-year term loan bearing interest at the DTF plus 4%. The facility is secured by a portion of the operating cash flows from the Segovia Operations which are accumulated through a monthly deposit of COP 450 million (approximately $0.2 million) into a restricted cash account to meet the debt service obligations. The first of sixteen quarterly payments will commence in December 2013." ( Sept. Quarterly Report)
The company has debt in the following forms:
- $78 million in silver-linked notes. (Note: On Aug. 11, 2011, the Company issued 80,000 Silver Notes at a price of $1,000 principal amount per Silver Note for gross proceeds of $80 million. A cash commission of 5% of the gross proceeds was paid to a syndicate of agents who completed the financing. The Silver Notes are listed on the TSX and trade under the symbol "GCM.NT.U". The Silver Notes, due August 11, 2018, bear interest at a rate of 5.0% per year, payable semi-annually in arrears in equal installments on December 31 and June 30 of each year).
- $100 million in gold-linked notes (Note: On Oct. 30, 2012, the company issued 100,000 Gold Notes at a price of $1,000 principal amount of units (the "Offering") for gross proceeds of $100 million. Each unit of the Offering consisted of one $1,000 face amount secured, 10% Gold Note and 10 common share purchase warrants. The Gold Notes bear interest at a rate of 10% per year, accruing and payable monthly in arrears on the last business day of every month. The first interest payment date was November 30, 2012 and consisted of interest accrued from and including the closing date. The Gold Notes will mature on October 31, 2017." (Quarterly Report).
- $6.065 million in credit facilities at 1.6 percent monthly.
- The total long-term debt as of Sept. 30, 2013 stood at $168,384,000. This is quite a high amount for a company the size of Gran Colombia Gold and presents great risk. However, I do believe this debt is manageable and besides increasing profitability at its operating mine, I feel the company has some options to decrease the size of its debt load.
- On Nov. 19, 2013, Gran Colombia announced the filing of a preliminary prospectus for an equity offering. The company is offering a minimum of $7 million to $15 million raised from in shares, with the price per share at market price. For example, an offering of 10 million shares at $1.10 would net the company $11 million in cash. The result would be the company having 25.3 million shares outstanding, still a very low amount.
In addition, principals of the company have indicated that they intend to purchase shares, according to the release.
This is a smart move for the company in my view as they are reducing risk by increasing their financial flexibility. The funds will be used to "support working capital initiatives at the Segovia project, including funding required to implement additional costs savings initiatives." Dilution isn't always a bad thing, and in this case, it looks like it will certainly help the company.
"The balance of the net proceeds will be used to maintain the financial flexibility of the Company including the funding of efforts to improve operating cash flow, grow production and expand its resources at the Segovia project." (Source: Nov. 19 Release).
At first glance, Gran Colombia's debt load is alarming, as any further drop in the price of gold would be worrisome for the company. However, I believe the debt is manageable and I think another equity offering would reduce this risk.
An Obvious Takeover Target or Stream/Royalty Deal
I strongly believe that Gran Colombia Gold is a very attractive takeover target for a mid-tier mining company.
If I had to speculate, I would consider Primero Mining ( P) to be a perfect match. Primero has one operating mine in Mexico, a country which is expected to approve a new mining tax in January 2014. I believe the company will be looking to diversify out of the country, which I think is the case for almost every other company which has a mine solely in Mexico.
Gran Colombia can make a very strong takeover case for reasons mentioned earlier. The company has an exciting high-grade project which is expected to double in production by late 2014. I think the Marmato project is also a very attractive asset. So a mid-tier company with cash looks at Gran Colombia and sees a company with an already producing high-grade asset in addition to a massive project - both which hold exploration upside.
I think that Gran Colombia could also consider selling a net smelter royalty or gold stream on its mine.
We can take a look at a recent deal done by Franco Nevada ( FNV) on Kirkland Lake Gold's high-grade Macassa Gold Mine, a mine with similar production numbers to Segovia. Franco paid $50 million for a 2.5 percent net smelter royalty. A similar deal with Gran Colombia would be a good idea, in my opinion.
I think that Gran Colombia is less-risky than it seems because of these options.
Is Colombia Mining-Friendly?
Colombia is considered to be a relatively mining-friendly region, somewhere in the middle of the pack. It is certainly not as unstable as certain African nations such as Zimbabwe, but it is not exactly Nevada, either.
The Fraser Institute Annual Survey of Mining Companies was sent to approximately 4,100 exploration, development, and other mining-related companies worldwide, and the survey represents responses from 742 of those companies, which has provided sufficient data to evaluate 96 jurisdictions.
Colombia received a score of 34 in the 2012-13 policy potential index ( PPI) survey by The Frasier Institute. This index is a comprehensive assessment of the attractiveness of mining policies.
This was higher than countries such as Guyana, Egypt, China, Russia, and right below South Africa, Panama, Brazil and the Dominican Republic.
In the survey, when asked about Colombia, 29 percent of respondents answered "encourages investment" while 36 percent responded "not a deterrent to investment" and 29 percent said "mild deterrent to investment."
The results of the survey can be found here.
Conclusion - Gran Colombia is a Speculative Buy
Gran Colombia has a very attractive asset which is undergoing a critical expansion which should not only increase production but reduce cash costs at the same time. The company is very highly leveraged to the price of gold; just a 20 percent increase in gold to $1,400 - $1,450 an ounce could mean returns of 100 percent and much more.
Gran Colombia does come with its risks - mainly the company's large debt balance and the fact that they are a single-mine operating company. However, I believe this risk is already priced into the shares and I don't think the market has valued the company at anywhere near a fair price, placing little value on the company's high-grade mine and blue-sky developmental project.
In conclusion, I feel that Gran Colombia is a bargain at current prices and deserves a speculative position in a gold portfolio.
Source: Top Gold Stock For 2014: Gran Colombia
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