Those that are betting that conversion lvl of debentures wil
At today’s CAD price of $1.25 the conversion price of the debentures lies at $c 2.375
In August 2016 GCM saw lot of arbitrage, and a substantial part of debentures were then converted. It made sense at that time to buy the debentures, convert them into shares and sell these on the open market for a small profit.
I am aware that GCM is getting on the radar of more and more people, especially with this blockbuster 2017 Q4 results that will be reported at the end of March. But many investors are not in a hurry to get in as the conversion level at $c 2.375 is supposed to be a ceiling. Off course, 140mm of debentures paper is awaiting conversion… is the general thinking.
Well, I am of the (strong) opinion that understanding is incorrect.
The last two years, the company had big distribution moments with the debt restructuring in early 2016, with the arbitrage moment in August 2016, with the (ex-) insider selling at the end of 2016 into February 2017 and the share consolidation (reverse split) in May of last year. At these different occasions GCM stock were swapped from old/weak hands into new and/or strong hands.
Long story short, at $c 2.375 there will be much less supply available than people do think or expect, because the debentures holder will not swap tomorrow when they have the chance. The debentures are kept with strong hands, and with the 6% and 8% coupon, it would be crazy to get out of there high coupon paying bonds now that the financial situation of the company is improving drastically.
With artisanal miners set-up as contract miners that are providing the company with extra ore has been a huge development and allows GCM to increase output and revenue with a leverage effect on margins. I am of the understanding that not yet all contract miners are set-up/regulated and that more ore input can be delivered going forward. But, even taking into account no further growth and conservatively extrapolating the production of 51.699 ounces in 2017 Q4, you will get an annual target of >200.000 ounces for 2018 with improving margins and better leverage to the gold price. The more cash they generate, the more debentures they will be able to buy back or reduce outstanding amounts (pay back) as they did in July 2017.
But continuing the conservative thinking and assuming all debentures will be converted in shares, the fully diluted share basis (including some out of the money options) will be 95mm shares, or at current prices a market cap of US$ 170mm. For a 200.000 ounces a year producer.
Today it is all about Segovia and I’ll take it on Segovia only. But, their second producing asset Marmato might gain in on value too. This mountain of gold gives the company a huge resource basis but to increase production at this side as well, is a story that keeps us warm another day.
Conclusion: Some people might think that the price action of GCM will be levelled off with the conversion price of the debentures that is kicking in, but most of this paper is in strong hands and will not be converted soon. Hence, this $c2.375 could do the opposite as many think, and could be the platform for a new sprint higher. At current valuation, thinking in conservative terms and with a fully diluted share count, this company trades very cheap compared on relative basis versus sector and on an absolute basis on operational cash flow generation.
Disclaimer: Long GCM