Each week we screen thousands of corporate bond listings to find what we believe to currently be the best corporate bond for investors seeking higher yields with as minimal risk as possible relative to its projected return. It is not often during this review process that we determine a previously recommended issue either remains or has become such an extraordinary value that it may merit an overweight position. However, this is exactly what we find in these short three-year Brigus Gold (BRD) 6.5% convertible debentures, which are currently selling at a discount and indicating a yield to maturity of about 12%. Therefore, we are adding them as an overweight position in our Foreign and World Fixed Income holdings.
Brigus was formed in 2002 as the result of the amalgamation between International Pursuit Corporation (founded in 1936) and Nevoro Gold Corporation (2002). It changed its name from Apollo Gold Corporation to Brigus Gold Corp. and consolidated its issued and outstanding common shares. Brigus is a growing Canadian-based mining company, headquartered in Nova Scotia, that is principally engaged in gold mining, including extraction, processing, and refining as well as exploration and development of mineral deposits in Canada. Brigus Gold operates the Black Fox Mine in Timmins, Ontario, located on the Black Fox Complex. This property also has tremendous exploration upside and is a proven source for new gold discoveries. In addition to its Black Fox Complex, Brigus also owns the Goldfields Project located in northern Saskatchewan, which hosts an economic gold deposit of about one million ounces.
In addition to the 6.5% coupon (paid semi-annually) that this bond offers, it is also the holder's option to convert it at any time prior to maturity to common stock at the conversion price of $ 2.45. This price represents about a 50% annual rise from the $.73 price that BRD is currently trading at on the NYSE. While these kind of gains are certainly not unheard of in the volatile realm of gold mining and exploration companies, we don't think it is necessary to give any added value for it to the already remarkably high and rewarding 12% annual return that the bonds are likely to average when they mature at par value. For those who don't mind the additional risk and prefer Brigus Gold stock for their growth equity portfolio, we currently also see it as being quite undervalued and likely to make a strong addition to a growth-focused equity portfolio.
Being a smaller issue, Brigus Gold's debt is not covered by the major credit rating agencies and is therefore classified as "unrated." However, this appears to be well managed, sufficiently financed company with reasonably low debt, ready options for additional funding if necessary, and a prudent use of existing cash flows.
Brigus Gold Update
After our first review, Brigus Gold's third-quarter financial results reported solid increases in gold production (up 7% from Q2 2012 and 16% from Q3 2011), reduced cash costs (down 9% from Q2 2012), as well as increased operating margins (up 2%) and greater positive income from operations (up over 126%) over Q3 2011. Subsequent to Q3, the mill optimization program was completed (resulting in increased mill processing capacity of approximately 10%) and the company completed a $10 million flow-through financing (at $1.21/share) to fund its 2013 exploration program. Also subsequent to the quarter, it completed a bought deal debt financing for $30 million in senior secured notes, the proceeds of which were used to repurchase 4% of a goldstream with Sandstorm Gold Ltd. (SAND). It was also reported that the 5,326,782 warrants issued on Dec. 10, 2008, were fully exercised on Monday, Dec. 10, 2012, at an exercise price of $0.884 Canadian, bolstering its cash account by about $4.7 million.
On Dec. 20, Brigus stated that in 2013 it would fund Black Fox and Grey Fox operations with cash flows generated internally, and that cash costs are anticipated to stabilize in the range of $700-$750 per ounce. While this is not intended as an equal comparison to the "all-in sustaining costs" of about $941 average per ounce that Barrick Gold Corp.(ABX) and Goldcorp, Inc.(GG) -- the two biggest producers by market value -- began to report in the fourth quarter of 2012, it can be compared more meaningfully to the $626 average so-called "cash costs" that these two mega giants disclosed in the preceding three months.
The average cash cost of 10 of the biggest gold miners was $694 an ounce in the third quarter, 49% higher than in the same period two years earlier, according to data compiled by Bloomberg. Barrick and its competitors are vowing to focus on margins and to get a grip on soaring production costs, rather than boosting output. In early January Brigus declared its Q4's gold ounces at a record production level of 22,672, and its year-end total at 77,734. Gold production increased every quarter of 2012, a trend that is expected to continue into 2013. The company is expected to complete fourth quarter and year-end financial and operational results on March 28, 2013.
Brigus has continued to report excellent high-grade gold exploration results from the 147 and Contact zones, including the discovery of a new zone named the Grey Fox South Zone. Its Grey Fox property is located on the southern portion of the Black Fox Complex and is comprised of the 147, Contact and Grey Fox South zones. Since last reporting drill intercepts on Jan. 9, chairman and CEO Wade Dawe as well as President and COO Daniel Racine have both made acquisitions of Brigus stock in the public market, totaling 100,000 shares for Dawe and 249,000 for Racine. We like that senior management evidently thinks the company stock is worth investing their own money into, and we like that the company remains focused on increasing gold resources at Grey Fox and at the Black Fox underground mine. A full feasibility study on the Grey Fox property is scheduled to be released during the second half of 2013, and Brigus plans to to develop this property into the company's next mine, which is expected to be in production by early 2015. Given the impressive drill results being reported within the 147 Zone, it would not surprise us to see this resource grow considerably.
The default risk is Brigus Gold's ability to perform. Considering their historical and recent performance, their flexible balance sheet, their sound cash position, and the excellent cash flow that is projected to service their interest bearing debt, as outlined above, it is our opinion that the default risk for this short to medium term bond is minimal relative to its more favorable return potential. An option that further reduces the default risk of this convertible bond, should at its maturity the company decide not to pay off or roll over the debt, is a conversion of the principal (at par) to BRD common stock at a 5% discount to stock's valuation at maturity on March 31, 2016.
The company's performance is highly dependent on the price of gold as it directly affects the company's profitability and cash flow. The price of gold is subject to volatile price movements during short periods of time and is affected by numerous factors, such as the strength of the U.S. dollar, global economic conditions, supply and demand, interest rates, and inflation rates, all of which are beyond the company's control. Slow global growth is expected to continue into 2013 and reflects the compounding effect of a number of factors, most notably increasing fiscal belt-tightening in many advanced nations, prior credit restraint in some key developing countries, and the cascading effect on international trade, credit, and financial conditions associated with the eurozone's lingering sovereign debt crisis. In this environment, precious metals are likely to represent an attractive investment alternative.
The company also has execution and market risks as a relatively young and very fast growth junior mining company, as companies often encounter unforeseen issues. This is a common risk associated with younger, fast-growing companies. We believe that these Brigus Gold convertible debentures have similarities to other Canadian convertible notes we have previously reviewed, including those from Tricon Capital, Neo Materials/Molycorp (MCP), and TransGlobe Energy, several of which have already achieved significant capital gains since our initial recommendation.
We think that Brigus Gold has improved its balance sheet, and should continue to do well considering its increased production and the high prices that gold continues to command. While it would not surprise us to see gold prices soften further as money continues to flow from traditional precious metal safe havens into the equity markets, we believe this relatively small issue as offering excellent returns from a company that has good management, a sound cash position, good cash flow and interest coverage, and a flexible balance sheet. Its bond appears to be a rare opportunity for obtaining an outstanding 12% yield with significantly lower default risk than is typically associated with an unrated (or low-rated) medium-term bond, not to mention the additional capital gains return potential that its conversion at any time feature allows for. As a result, we see both the stock and its convertible debenture as more intelligent opportunities for higher returns, and it is why we have marked Brigus Gold for an overweight position in our Foreign and World Fixed Income holdings.
NYSE: $0.73 Feb. 28, 2013
Maturity: March 31, 2016
Conversion Price: $ 2.45
Yield to Maturity: ~12%
Disclosure: Some Durig Capital clients may currently own BRD and/or its bonds. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports.