This is the second and final article of the series (link to Part 1). Our goal is to assemble a few securities which, as part of our portfolios, will hedge both inflation and deflation, while providing a +6% yield. As a reminder, I am not proposing that this is a risk-elimination approach -- rather, it is exchanging an inflation/deflation risk profile for one of default and liquidity. Again, the proposed strategy is to buy securities that have the following attributes:
- Buy precious metals securities to address the risk of fiat currency devaluation.
- Buy bonds to mitigate deflationary risks
- Buy convertible bonds to attach an "insurance policy" to your bond (or preferred share) in the event of inflation. Effectively, this can convert your deflation-protected bonds into inflation-protected stocks. If you cannot find bonds with the appropriate industry and features, use preferred shares as a substitute.
- Instead of, or in conjunction with a convertible option, consider buying securities that pay dividends based on the price of the underlying precious metal (or the actual precious metal). This could also provide inflation/deflation protection.
For background information on the valuation and terminology of convertible securities, please refer to Intro to Convertible Debentures.
Given the "slim pickins" of precious metals convertible bonds and preferred shares in the U.S., I have looked to the Canadian market to add to our choices. In addition to convertible securities, I have included those with the yield attached to the precious metal.
Toronto Stock Exchange and TSX Venture Exchange are home to 58% of the world's public mining companies. Start-up miners find Canada a friendly environment to obtain capital, and some of the securities have unconventional features. Two of the securities (tickers end with ".U") pay their yield in U.S. Dollars. To compare to the current Price, all were originally issued at $1,000.00 Canadian Dollars, and are quoted in $100.00 amounts.
Yield at Issue
BRIGUS GOLD CORP CONVERTIBLE SENIOR UNSECURED DEBENTURE U$ Maturity Mar 31 2016 Coupon 6.5%
March 31 2016
Conversion price of US $2.45 per common share.
COLOSSUS MINERALS INC UNSECURED GOLD-LINKED NOTE Maturity Dec 31 2016 Coupon 6.0%
Dec 31 2016
Not convertible - a gold-linked yield.
Detour Gold Corporation 5.5% Convertible, due 11/30/17
Nov 30 2017
Not publicly traded. Information not available.
GRAN COLOMBIA GOLD CORP SENIOR UNSECURED SILVER LINKED NOTES Maturity Aug 11 2018 Coupon 5.0%
August 11 2018
Not convertible - a silver-linked yield.
GREAT BASIN GOLD LTD 8% SENIOR UNSECURED CONVERTIBLE DEBENTURE Maturity Nov 30 2014 Coupon 8.0%
Nov 30 2014
Conversion price of C$2.15 per common share.
Lake Shore Gold Corp. 6.25% Convertible Senior Unsecured Debentures Maturity September 30, 2017 (IPO settlement date 2012-09-07)
Sep 30, 2017
Conversion price of C$1.40 per common share.
NEW GOLD INC., 5% SUBORDINATED CONVERTIBLE DEBENTURES Maturity June 28, 2014
June 28, 2014
Conversion price of $9.35 per common share.
NORTH AMERICAN PALLADIUM 6.15% UNSECURED SUBORDINATED CONVERTIBLE DEBENTURES Maturity Sep 30, 2017
Sep 30, 2017
Conversion price of C$2.90 per common share
Given that many investors are unfamiliar with these junior precious metals companies, I have provided a brief description and a few metrics. To continue your research, I have also provided links to the companies' websites. The company descriptions, below, were obtained from CIBC Investors Edge, and/or The Globe and Mail. Information on Canadian securities is always available from Sedar, which is analogous to Edgar in the US. Unfortunately, one cannot link directly to the prospectus - you must go to the Sedar website and search for the respective security.
Brigus Gold Corp. (BRD:TSX) (BRD)
Brigus Gold is a mining company engaged in the extraction, processing, and refining of gold deposits, as well as related activities, including the acquisition, exploration and development of mineral properties principally located in North America. Its sole mining operation is the Black Fox Mine. As of December 31, 2011, the company was evaluating the Goldfields Project, which hosts the Box and Athona gold deposits. The company wholly owns and operates the Black Fox Mine, an open pit and underground mining operation located in the Timmins Mining District in the Province of Ontario. During the year ended December 31, 2011, the company sold 57,001 ounces of gold, and processed 725,541 tons of ore at an average grade of 2.54 grams of gold per ton and an average recovery of 94.2%.
August 2012 news: Brigus Gold announced that exploration in-fill drilling on the southern portion of the Black Fox Complex continues to return high-grade gold assays from the 147 Zone.
Recent Price: $0.89
Market Cap: $187.3M
52 Week Range: $1.79 - $0.69
BRIGUS GOLD CORP CONVERTIBLE SENIOR UNSECURED DEBENTURE U$ Maturity March 31, 2016 Coupon 6.5%
US$50,000,000 aggregate principal amount of 6.5%, convertible senior unsecured debentures, at a price of US$1,000 per debenture The debentures bear interest at an annual rate of 6.5%, payable semi-annually on March 31 and September 30 in each year commencing September 30, 2011. The maturity date of the debentures will be March 31, 2016. The debentures will not be redeemable before March 31, 2014. Conversion price of US$2.45 per common share, being a conversion rate of 408.1633 common shares for each US$1,000 principal amount of debentures.
Bond information is here.
Colossus Minerals Inc. (CSI:TSX) (COLUF.PK)
Colossus Minerals is a development-stage mining company focused on bringing its Serra Pelada project into production. The Serra Pelada Project is located in the Carajas region in Para, Brazil, and is host to high grade gold and platinum group metals deposits. The company's 3 mineral properties are in Brazil: the Serra Pelada Project (the only material property), the Rio Cristalino Property and the Cutia Property. The company's subsidiaries include Colossus Mineracao Ltda., Mineracao Fazenda Monte Belo Ltda., Serra Pelada - Companhia de Desenvolvimento Mineral, and Grifo Geologia e Participacoes Ltda. In January 2012, the company acquired Cutia Property from Cooperativa Mista do Garimpeiro de Cutia.
August 2012 news: Claudio Mancuso, President & CEO of Colossus commented:
The results of the auger drilling program highlight the potential of the Elefante Area and demonstrate Elefante's value as a target for diamond drilling. We are excited to be able to commence diamond drilling later this year, as the high grade intercepts in soils close to surface could have immediate economic potential.
Recent Price: $4.58
Market Cap: $484.1M
52 Week Range: $7.99 - $3.09
COLOSSUS MINERALS INC UNSECURED GOLD-LINKED NOTE Maturity December 31, 2016 Coupon 6.0%
... public offering ... for total gross proceeds to Colossus of $86,250,000. Each Unit consists of a $1,000 principal amount unsecured gold-linked note and 60 common share purchase warrants. The Units separated into Notes and Warrants on closing. The Notes will mature on December 31, 2016 and will bear interest, accruing and calculated and payable semi-annually in arrears on June 30 and December 31 of each year, at a rate of between 6% and 13%, dependent on the simple average of the Bloomberg Composite New York Gold Price closing price.
Detour Gold Corporation (TSX: DGC) (DRGDF.PK)
Detour Gold Corporation is a Canadian gold exploration and development company focused on exploration and development of the Detour Lake Project. This project had culminated in the completion of 562,879 meters of drilling on the deposit (including 9,366 meters of diamond drilling and 4,159 meters of reverse circulation drilling for grade control exercises, 5,281 meters of drilling for geo-technical work, 8,474 meters of drilling for metallurgy and test work, 8,665 meters of drilling for condemnation purposes), and an additional 15,371 meters for reconnaissance exploration drilling. Detour Lake Property is located approximately 12 kilometers west of the Ontario-Quebec border. It consists of 20 registered leasehold mining claims and 16 patented claims, totaling approximately 33 square kilometers. On December 1, 2011 the company acquired Trade Winds Ventures Inc.
Recent Price: $26.17
Market Cap: $2.9B
52 Week Range: $39.65 - $18.45
Detour Gold Corporation 5.5% Convertible, due 11/30/17
Not traded on the Toronto Stock Exchange.
Bond information is here.
July 10, 2012 update: Detour Gold announces today that it has extended the expiration date of its previously announced solicitation of consents from holders of its 5.50% Senior Unsecured Convertible Notes in the principal amount of US$250,000,000 due November 30, 2017... include an additional proposed amendment to extend the date before which the Convertible Notes may not be redeemed at the option of the company from November 30.
Gran Colombia Gold Corp. (GCM:TSX) (TPRFF.PK)
Gran Colombia Gold Corp. is a gold and silver producer engaged in the acquisition, exploration, development and operation of gold properties in Colombia. Its four operating underground mines include Providencia, El Silencio, Sandra k and Carla, with a total strike length of 5.7 kilometers, located 130 kilometers northeast of Medellin in the Segovia-Remedios mining district, Department of Antioquia in Colombia. The Marmato Project is located in the Municipality of Marmato, Department of Caldas in Colombia. Zona Alta Property is located in the Zona Alta at Marmato, Colombia. Zona Baja Property is located in the Zona Alta at Marmato, Colombia. As of December 31, 2011, it had 6 underground mines in operation and was developing an open-pit gold and silver mine at Marmato. On June 10, 2011, the company completed a merger with Medoro Resources , as a result of which it acquired 100% of Medoro's interest in the Marmato Project and Medoro's 5% interest in Zandor.
August 2012 news: The company has announced that its Executive Co-Chairman, Serafino Iacono, purchased an aggregate of 200,000 common shares of the company on August 22, 2012 at an average price of CDN$0.30 per share on the open market. Together with an additional 447,000 shares purchased since the July 10, 2012 press release, Mr. Iacono currently holds 13,078,916 shares of the company (representing 3.4% of the issued and outstanding shares). Mr. Iacono also purchased an aggregate of 82 of the company's Silver Linked Notes (TSX: GCM.NT.U) at an average price of US$790.00 per unit between August 17 and August 22, 2012.
Recent Price: $0.31
Market Cap: $116.7M
52 Week Range: $0.85 - $0.28
GRAN COLOMBIA GOLD CORP SENIOR UNSECURED SILVER LINKED NOTES Maturity August 11, 2018 Coupon 5.0%
On August 11, 2011, the company issued $80 million of notes (sedar.com). The 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. Holders of the notes will be entitled to receive the greater of i. the principal amount of the note held, or ii. the U.S. dollar financial equivalent to approximately 66.7 ounces of silver per note, as determined using the average realized silver price by the company over the 6-month period immediately prior to any repayment or redemption of principal, representing the U.S. dollar financial equivalent of an aggregate of 5.3 million ounces of silver. The quantity of silver per note was determined using a notional price of $15 per ounce of silver, providing holders with the opportunity to benefit from silver prices in excess of $15 per ounce. There are also complicated redemption rules (info from Sedar):
The company shall repay, on a pro rata basis, a. 10% of the total principal amount of the Notes outstanding on August 11, 2015, with such principal amount being repaid on the basis of the greater of 1. 10% of the total principal amount, and 2. the U.S. dollar financial equivalent to 6.67 ounces of silver per note, b. 20% of the total principal amount of the Notes outstanding on August 11, 2016, with such principal amount being repaid on the basis of the greater of 20% of the total principal amount, and 2. the U.S. dollar financial equivalent to 13.34 ounces of silver per note, c. 30% of the total principal amount of the Notes outstanding on August 11, 2017, with such principal amount being repaid on the basis of the greater of 30% of the total principal amount, and 2. the U.S. dollar financial equivalent to 20.00 ounces of silver per note, and d. the remaining principal amount of the Notes on August 11, 2018 (being the maturity date) such principal amount being settled on the basis of the greater of the balance of the principal amount of the Notes outstanding, and (ii) the U.S. dollar financial equivalent to approximately 26.67 ounces of silver, together in each case with all accrued and unpaid interest thereon to the date of repayment.
Great Basin Gold Ltd. (GBG:TSX) (GBG)
Great Basin Gold is engaged in the acquisition, exploration and development of precious metal deposits. The company has two projects: 1. The Hollister Property gold project, which is located on the Carlin Trend goldfield in Nevada, United States. The Hollister Property consists of a total of 950 unpatented, federal mining claims, covering over 69 square kilometers. 2. The Burnstone Property gold mine, which is located in the Witwatersrand Basin goldfields in South Africa. The Burnstone Property is located approximately 80 kilometers southeast of Johannesburg, near the town of Balfour in the Mpumalanga Province of South Africa. In addition to its two primary projects, it holds interests in early stage mineral prospects known as the Tsetsera Property in Mozambique and properties in Tanzania. During the year ended December 31, 2011, the company disposed of its interest in Kurils Resources.
August 2012 news: The CEO has resigned and the company might be sold after problems at its mines led to a cash crunch. Shares of the South Africa-focused company almost halved to a 14-year low of 22 Canadian cents on the Toronto Stock Exchange. Chief Executive Ferdi Dippenaar resigned as part of a process to consider strategic options, such as a sale of the company or a portion of it.
Recent Price: $0.24
Market Cap: $135.3M
52 Week Range: $2.35 - $0.21
GREAT BASIN GOLD LTD 8% SENIOR UNSECURED CONVERTIBLE DEBENTURE Maturity Nov 30, 2014 Coupon 8.0%
... underwriters will purchase C$110 million principal amount of senior unsecured convertible debentures... The debentures will mature on November 30, 2014 and will accrue interest at the rate of 8.0% per annum payable on a semi-annual basis. At the holder's option, the debentures may be converted into common shares of Great Basin Gold at any time up to the maturity date. The conversion price will be C$2.15 for each common share.
Lake Shore Gold Corp (TSE:LSX) (LSGGF.PK)
Lake Shore Gold is engaged in the operation, exploration and development of three gold complexes located in the Timmins Gold Camp in Timmins, Ontario. Its projects include Timmins West Complex, Bell Creek Complex and Fenn-Gib. The Timmins Deposit property consists of a contiguous block of 23 claims, covering approximately 395 hectares. Its Bell Creek Mine comprises three crown mining leases and five freehold patents. The Fenn-Gib Project consists of 171 mining claims, patents and leases covering approximately 29 square kilometers.
August 2012 update: During the second quarter, the company achieved strong production and cash cost results with production of 24,426 ounces, near the top of the 20,000 to 25,000 ounce target range, and cash operating costs of US$849 per ounce produced, in line with its target for the year of US$825 to US$875 per ounce. Lake Shore Gold also continued to strengthen its balance sheet and make excellent progress with its development program, designed to position the company for strong production growth in 2013.
Recent Price: $1.00
Market Cap: $415M
52 Week Range: $2.39 - $0.74
Lake Shore Gold Corp. 6.25% Convertible Senior Unsecured Debentures Maturity September 30, 2017 (IPO settlement date 2012-09-07)
... $75 million CAD principal amount of convertible senior unsecured debentures, at a price of C$1,000 per debenture, with an interest rate of 6.25% per annum, payable semi-annually on the last day of March and September commencing on March 31, 2013. The Debentures will mature on September 30, 2017.
The debentures will be convertible at the holder's option into common shares of the company at a conversion price of C$1.40 per common share. The debentures will not be redeemable prior to September 30, 2015. On and after September 30, 2015 and prior to maturity, the Debentures may be redeemed in whole or in part from time to time at the company's option, at a price equal to their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price of the common shares on the Toronto Stock Exchange for the 20 consecutive trading days preceding the date on which the notice of redemption is given is not less than 130% of the conversion price.
New Gold Inc. (NGD:TSX) (NGD)
New Gold Inc. is engaged in gold mining and related activities, including acquisition, exploration, extraction, processing and reclamation. Its operating assets consist of the Mesquite gold mine, located in Imperial County, California, 70 kilometers northwest of Yuma, Arizona; the Cerro San Pedro gold-silver mine, which consists of 15 mining and exploration concessions totaling 78 square kilometers in the Cerro San Pedro mining district, in Mexico; and the Peak gold-copper mines in Australia. It also has exploration and development projects, which include the New Afton copper-gold project in Canada, a 30% interest in the El Morro project in Chile, and the Blackwater project in Canada. On June 1, 2011, it acquired Richfield Ventures Corp. On December 21, 2011, it acquired Geo Minerals Ltd. On December 23, 2011, it acquired Silver Quest Resources Ltd.
CIBC analysts suggest that this miner has lower risk than most small caps -- lower geopolitical risk, and lower risk due to four operating mines.
Recent Price: $11.97
Market Cap: $5B
52 Week Range: $14.12 - $7.20
NEW GOLD INC., 5% SUBORDINATED CONVERTIBLE DEBENTURES
The company issued 55,000 convertible subordinated debentures for an aggregate principal amount of $55 million on June 28, 2007... bear interest at a rate of 5% per annum and are convertible by the holders into common shares of the company at any time up to June 28, 2014 at a conversion price of $9.35 per share. The debentures do not allow forced conversion by the company prior to January 1, 2012, but after that date, the company may redeem the debentures if the market price of the company's shares is at least 125% of the conversion price.
North American Palladium Ltd (PDL:TSX) (PAL)
North American Palladium is in the business of exploring and mining palladium, platinum, gold and certain base metals. It operates its flagship Lac des Iles mine located in Ontario, Canada. They also operate the Vezza gold mine located in the Abitibi region, located north of Val d'Or, Quebec. The other Quebec-based properties consist of Discovery, Flordin, Cameron Shear, Florence, Laflamme, Dormex and Harricana. The company's 100%-owned subsidiaries are Lac des Iles Mines Ltd. and NAP Quebec Mines Ltd.
CIBC analysts suggest that the company needs $30M additional capital, and that an important mine will come on-line in 2013.
Recent Price: $1.75
Market Cap: $301.7M
52 Week Range: $3.94 - $1.47
NORTH AMERICAN PALLADIUM 6.15% UNSECURED SUBORDINATED CONVERTIBLE DEBENTURES
43,000 convertible unsecured subordinated debentures... The debentures will mature on September 30, 2017, and will bear interest, calculated and payable semi-annually in arrears on March 31 and September 30 of each year, at a rate of 6.15% per year. The debentures will be convertible at the holder's option into common shares at any time prior to the close of business on the earlier of: 1. the business day immediately preceding the Maturity Date, 2. the business day immediately preceding the date fixed for redemption of the Debentures, and 3. if being repurchased on a "change of control," on the business day immediately preceding the payment date, at a conversion price of C$2.90 per common share.
Other Canadian convertible securities (and special cases)
There are other similar securities, but for the most part, these have small floats and are for very small capitalization companies which are traded on the TSX Venture Exchange (in Vancouver). The main issue is that the Canadian precious metals convertible securities are mostly private placements, so we (retail investors) cannot participate. For example, I was interested in the following issue (among others which yield 10%), but could not purchase it through the exchange or my broker:
Great Western Minerals Group (VSE:GWG) (GWMGF.PK) issued a US$90M convertible debenture, 8.0% per annum, mature on April 6, 2017, conversion rate of C$0.66 per share. It has a $120M market cap, and has a significant part of its operations and exploration in South Africa; the common shares are currently around its 52-week low.
The real goal is to receive interest payments over the period of ownership, and receive the return of the original investment at the maturity of the security. This alone will provide you a +6% yield. The conversion option is the inflation insurance policy. I do not really aspire to convert to the common shares -- perhaps with the exceptions of the U.S. companies: Hecla (HL), which pays a dividend based on the price of silver and, Molycorp (MCP), for which conversion is mandatory. Given the financing requirements of the small Canadian companies, I anticipate that they will exchange the maturing debt for (higher yield?) replacement debt at the end of the term.
The challenge is that one must accept other risks in order to "buy insurance" for inflation or deflation:
- With this strategy, non-Canadians would invest mainly in Canadian Dollars. On the positive side, this is a form of diversification into a less-indebted, developed-country. To counter-balance this, however, it requires investing outside of your domestic currency, and presents the risk of a currency gain or loss.
- All of these Canadian Securities are publicly traded (debt or preferred shares) on the Toronto Stock Exchange (TSX). Therefore, the respective prospectus and supplementary information on Sedar will provide an excellent research source. You will need to find a broker who will trade these Canadian securities for you with an acceptable commission structure.
- The Canadian mining companies that issue these securities are micro-caps. Therefore, there is a much higher risk of default -- none of these securities is rated. Some have operations in developing countries (note that Columbia, South Africa, and Brazil, are represented in this group). Many are restricted to a single geography or mine. Some are pre-production. One last caveat -- most are very-thinly traded on the TSX, so building your positions may take a while. So, If you are seeking a "sleep well at night" portfolio of liquid, highly-rated, mega-caps, these will NOT qualify.
- I would suggest that you manage these investments as very-high-risk, and keep the combined total to a very small position. The risk is not inflation or deflation. Rather, it is access to capital -- the default risk and financial viability of the company (and if it is in a developing country, geopolitical risk).
- It would be convenient to use an ETF to mitigate these risks. I could not find an ETF that is restricted to "precious metals" and "convertible securities" (and pays a high yield). I can find "precious metals" funds, and "convertible securities" funds, and occasionally one fund will include securities that would qualify for both, but not exclusively. Perhaps this is because it is difficult to create a sufficient pool, given the small number of issuers, and the generally small size of the issues. If you know of one with a yield of +6%, please share it with all of us.
Again, these are almost all micro-capitalization companies. I suggest that you buy a few small positions to manage solvency and geopolitical risks.
This article focuses on securities that are convertible, or yield in precious metals. There are many miners that have bond issues which are not convertible, or do not pay out based on the underlying commodity price, and many of these have attractive yields. Perhaps these may be the subject of future articles, but they do not provide the inflation and/or deflation hedge that I seek. Additionally, The Financial Post provides a listing of all Canadian, exchange-traded convertible debt, should you be interested in this feature for other industries.
As one last point, there is currently a political risk for Canadian investments based in Quebec. The Province of Quebec has just held an election (analogous to a state-level election in the U.S.), and the coalition government will be led by a sovereigntist party (they desire to separate Quebec from Canada). Every decade, this seems to occur with regularity. Naturally, the success of this party -- which would then require a majority in a referendum to act on this goal -- would negatively impact the price of the Canadian Dollar, and risk and value of any operations in Quebec. Additionally, this party has stated that it plans to increase the royalties that it receives from Quebec-based mines and mining companies.
I will examine other non-traditional approaches to hedge inflation and deflation in future articles. Nothing is risk-free -- even holding cash is subject to relative currency value erosion -- so I will focus on how to obtain high yields while making risk trade-offs in a portfolio.
Disclosure: I am long TSX:GBG.DB, TSX:CSI.NT, TSX:GCN.NT.U, TSX:BRD.DB.U.