For the first post of my new Valuation Analysis Series, I will provide financial analysis on Gran Colombia Gold (GCM). Gran Colombia Gold Corp is a Canadian-based gold and silver exploration, development and production company with its primary focus in Colombia. GCM currently has 3 gold mines: Segovia, Marmato and Zancudo. The stock price is currently at CAD 0.10 (as of November 15, 2016). Though the company is a Canadian company, the earnings are reported in USD since the gold price is normally quoted in USD. The company just released its Q3 2016 earnings, posting USD 0.03 EPS on the quarter. The EV/EBITDA [EV/ (Q3 EBITDA x 4)] of the company is less than 3. You can see how stupidly cheap the company is valued at.
Why has the price been so low?
The price of stock has been extremely cheap most likely due to two reasons: its convertible feature of debenture bonds which could significantly increase the outstanding number of shares and the lack of analytical coverage as the company has a small market cap of less than CAD 50M.
However, it is silly to overlook such a great company just because of the possibility of dilutions and its size. Gran Colombia now produces more than 100,000 ounces of gold per year and it has more than 14 million reserves of gold. The company has done a fantastic job with its debt restructuring as well and recently initiated a strategic review which could allow the company to buyback the convertible bonds. I believe, given current circumstances, the stock is significantly undervalued.
As mentioned earlier, due to its size of market cap, there is no analyst coverage for the Gran Colombia Gold. To help investors see how undervalued the company is, I decided to share my valuation.
Let's just jump into the most exciting part.
According to my valuation, my target price lies between CAD 0.21 and CAD 0.61, within the time frame longer than 1 year but shorter than 5 years. The stock price depends on the number of shares converted from the debentures, the result of the strategic review process and the gold price. If the strategic review goes well and the gold price remains near USD 1,200 per ounce, I am expecting the price to be closer to CAD 0.61 within the time frame.
Compared to GCM's current stock price of CAD 0.10, the stock can easily rise by more than 100% in the long-term.
Here is a summary of my assumptions.
My assumptions are mostly very conservative.
- Conservative assumptions
1. Only count cash flows until 2022.
The main reason is that the company website shows that the expected life of Segovia and Marmato mine is 2022 and 2020, respectively. I am not including the potential cash flow from those mines thereafter or the cash flow from Zancudo. The exclusion of such cash flows can be significant since Marmato has more than 11 million ounces of measured and indicated gold resources, which should not be depleted by 2020 and Zancudo has a "good exploration potential to encounter additional mineralization" according to the company's technical report.
2. All-In-Sustaining-Cost (AISC) per ounce at USD 850 for Segovia during the period.
This is the high end of the company's estimate for 2016 guidance.
3. Segovia gold production will remain constant over the period.
This is a very conservative measure considering that production grew 14% from Q3 2015 to Q3 2016.
4. Required rate of return is 10%
I incorporated the cost of 6% coupon on 2020 debentures, 1% coupon on 2018 debentures and the geopolitical risk which comes from the location of the company.
5. All-In-Sustaining-Cost (AISC) per ounce at USD 1,017 for Marmato Mine during the period.
This assumes that there is zero cost improvement at Marmato Mine for the next 6 years, which is not very likely.
- Somewhat optimistic assumptions
1. Marmato production grows at 20% annually over the period.
The 2016 production guidance of Marmato is 24K ounces. The production level is very low considering that 11.6M ounces of gold has been measured and indicated at the mine. Since the major drilling program of Segovia will complete by the end of 2016, I expect the production growth of Marmato to catch up.
2. Roughly 20% of inferred resource of Segovia can be realized.
Cash flow analysis
Based on the assumptions above, I generated the following cash flow analysis (numbers are all in USD).
This is a typical value stock. The company has been completely overlooked by the market despite such attractive valuations and significant upside potential (easily more than 100%) in long term. I sincerely recommend choosing this stock if you are wanting to incorporate a gold stock into your portfolio.
Have any thoughts or suggestions for the next company I should analyze? Please let me know in the comments below.
Disclaimer: I own Gran Colombia Gold (GCM.TO) stock. I am long Gran Colombia Gold and plan to add to my portfolio if the price goes down even further. Since it's considered a penny stock, the price movement can be pretty volatile. Please be aware of the inherent risk of such an investment. I only recommend purchasing the stock if you can endure the price volatility and potential loss of capital.