While gold gained 14% over the last month intermediate gold miner Gran Colombia Gold Corp. (TSX:GCM) gained over 18% as the performance of its one-time troubled operations in Colombia improved. There has been growing conjecture that now is the time for investors to add Gran Colombia to their portfolios because of a positive outlook for gold combined with the significant enhancements being made to its operations.
Gran Colombia’s operations are in Colombia and its flagship asset is its Segovia mining complex, there it has three operational mines which for the third quarter 2018 produced 50,698 gold ounces or 89% of its total gold output. The miner also owns the Marmoto development stage project and Zancudo exploration property located in Northwestern Colombia. Those properties give Gran Colombia measured and indicated mineral resources of 1.2 million ounces with an average grade of 11.4 grams of gold per ton of ore (g/t). The miner’s core Segovia assets hold reserves of 660,000 gold ounces at an average grade of 12.4 g/t.
While the low volume of reserves is some cause for concern, Gran Colombia has made considerable progress in strengthening its operations, boosting its profitability and reducing balance sheet risk.
Third-quarter gold production soared by an impressive 54% year over year to 57,163 ounces. That can be attributed to the substantial success of Gran Colombia’s drilling program and other work aimed at optimising the mine to boost gold reserves and production. The significant increase in gold output during that period, along with fourth quarter production growing by 7% year over year was responsible for full-year 2018 production beating the miner’s guidance and soaring by 27% compared to a year earlier to 218,001 gold ounces.
During 2018, Gran Colombia also made substantial progress in improving its capital structure, including settling the debentures, which fell due in 2018 by issuing shares as well as refinancing its 2020 and 2024 debentures. That saw long-term debt fall by 1% compared to the end of 2017 to just over US$64 million, a very manageable 0.7 times adjusted EBITDA.
More important, the changes made to Gran Colombia’s capital structure significantly improved its debt profile, with no major debt repayments falling due until 2024. This gives the miner plenty of time to accumulate further cash, pay down or refinance its debt and benefit from firmer gold.
Notably, Gran Colombia’s all-in sustaining costs (AISCs) for the third quarter fell by 8.5% to US$888 an ounce, thereby boosting its profitability. For the full year 2018, the miner anticipates that AISCs will be below US$950 per ounce sold, which along with higher gold and a conspicuous increase in gold production will give earnings a considerable lift.
As a result of the exceptional improvement in Gran Colombia’s operational performance, third-quarter adjusted EBITDA shot up by 78% year over year to US$25 million and net income expanded to US$12.4 million compared to a US$1 million loss a year earlier. It is these developments along with an increasingly optimistic outlook for gold that’s been responsible for giving Gran Colombia’s market value a solid lift.
Why buy Gran Colombia?
There is every sign that this will continue because Gran Colombia appears attractively valued based on a range of metrics, including an enterprise value of roughly 1.7 times EBITDA and US$817 per gold ounce produced. The miner’s appeal is further enhanced by higher gold with increasing speculation that the yellow metal has entered a new bull market.
No investment is without risk, and in the case of Gran Colombia, some of the risks include those normally associated with mining operations and elevated geopolitical risk. The company also has a long history of over promising and failing to deliver for shareholders. However, there are indications that the miner has managed to put many past issues behind it and that it will climb higher over the coming months.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Matt Smith has no position in any of the stocks mentioned.