Gran Colombia Gold Might Be A Golden Stock After All

| About: Gran Colombia (TPRFF)

Summary

Valuation is extremely cheap.

Cash flow and income are very attractive.

Negative working capital and debentures are a cause for concern.

In the beginning of the year, I was writing about solid precious metals companies that are well run, have strong financial statements, and will turn into cash cows once the resumption of the bull market begins. Now that this bull market has turned, a lot of those companies' valuations started to get expensive. Now, I am not saying these companies aren't a good buy at the moment, but they are no longer the best buy in my opinion for the speculative side of my portfolio.

My last article was about Santacruz (OTCPK:SZSMF). This one is about a gold miner in Colombia. It is called Gran Colombia (OTCPK:TPRFF). The main reason I bought back into this company is because of its valuation. When it comes to its EV/EBITDA ratio, it's trading at only two times its EBITDA, which is really cheap. It's trading way below its book value, which is calculated to be at $1.44 per share. It's even trading at .67 times its revenue.

The main reason the stock is so cheap is because the market still believes in the false premise that the labor market is strong and that the US economy is still in recovery.

But it's not just its valuation that is attractive. This company has good assets also. Its first asset is its Segovia mine, which contains a measure and indicated (M&I) resource estimate of 428,000 ounces of gold, containing grades of 25.3 grams per tonne (G/T) for 77,000 ounces of those reserves, and the rest of the reserves are reported to be at 16.8 G/T, with an expected life up to the year 2022. This mine's all-in sustaining costs are reported to be at $850-950 per ounce of gold. Its next mine is the Marmato mine. This mine has a resource estimate of 11.601 million ounces of gold in its resource estimate.

The estimated cost of total production from these mines is expected to be at $850-950 per ounce on an all-in sustaining cost basis. Its last mine is its Zancudo mine. This mine is located in the middle of the company's Cauca gold belt with recovered grades of 14.6 G/T. Gran Colombia has halted exploration on this property while completing its Segovia project.

In terms of the company's financials, it posted a net income of $10.826 million last quarter. That's a drastic improvement on a year-over-year (YOY) basis, which was reported to be at -$3.75 million this time last year. And if you include its other comprehensive income numbers, it actually generated a higher net income of $18.185 million last quarter. Its cash flow is very healthy. I calculated the company to generate a positive free cash flow of $3.939 million last quarter, and I expect this type of cash flow to continue as we are in a new bull market for gold, which means we will see higher prices in the months and years ahead.

In terms of its balance sheet, that still needs to be cleaned up. Its working capital position is still negative at a rate of $27.353 million. This means the company will have to either borrow more long-term debt to fund its short-term obligations, which I think is unlikely, or may issue more shares now that we are in a bull market, but that is also probably very unlikely, or it's very possible that future cash flows might be able to make up for this negative position if gold hits $1,400-1,500 per ounce this year, but no matter, Gran Colombia will have to solve this. Or it can sell its Zancudo mine since it has stopped exploring it; in fact, selling that mine to help pay off its debt and liabilities might not be a bad option.

In terms of total assets to total liabilities, that is also leveraged. Its total assets to total liabilities ratio turned out to be 1.9. I would like to see two assets for every one liability, but that is not this company's reality. But some encouraging attributes for this company is its debt/EBITDA ratio, which I calculated to be at 6.9, and its EBIT to interest expense ratio, which I calculated to be at 3.

In terms of its debt, it has $79.632 million of long-term debt on its balance sheet, with $1.861 million of term loans being due in 2017, $23.142 million of debentures due in 2018, and it has $55.231 worth of debentures due in 2020. These debentures can be converted into common shares that could devastate shareholder value as the number of shares being traded can increase greatly. This combined with its working capital position does have to be corrected.

In conclusion, I think this is obviously a speculation, and not a core holding. The company is generating a good amount of free cash flow, generating a really strong net income, but it has to solve its working capital position, must pay off its long-term debt, and not allow those debentures to turn into shares. The company has good assets, and there is a strong possibility that it could get bought out. But, no matter what, this company is trading at a valuation which is really cheap at a time period when most gold stocks are looking to be overbought. This is obviously a speculation and not a core holding.

But the main reason this stock is so cheap is because that gold is now in a new bull market, and the general Wall Street consensus has still not caught on to the idea that the Fed will never raise rates, because it can't raise rates in any significant manner without crashing the market. Because of this, gold will go higher, and Gran Colombia's working capital will improve due to the improvement in cash flow, which will go towards paying off its liabilities. As stated above, Gran Colombia generated $3.93 million in free cash flow, because as gold prices improve, its cash flows will also improve. This will pay off liabilities, and not only that, but also it will be able to renegotiate delayed payments, because the bankers and suppliers don't want to write off huge losses, especially now that their producing mineral is in a bull market.

The main reason this stock is cheap is because of its EV/EBITDA valuation, and the fact that gold is in a new bull market now, it should be able to pay off its liabilities through a combination of extension of payments and increased profitability from operations that could pay down liabilities, and the company might get bought out by a senior producer which needs to replace its production significantly. Now, if I am wrong about the gold bull market, and gold prices do tank, there is a downside risk, the risk of bankruptcy, but considering the fact that this stock is $0.10 per share, I am willing to take that risk, especially since I believe sub-$1,200 gold is a thing of the past.

Disclosure: I am/we are long TPRFF.

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.

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