Yes I failed.
The worst idea I ever had -- one rooted in the belief that a company could make a difference in the lives ofColombia villagers and their investors -- is off another 40 percent in stock price Monday.
But then, as a money manager familiar with the Gran Colombia Gold failure just told me, "This company's executives could "$x$% up a one-car funeral."
Gran Colombia Gold's silver and gold-linked notes to raise cash was a good idea two-plus years ago. As long, that is, as Serafino Iacono's GCM engineered lower operating (all-in sustaining) costs at rich Segovia, the former El Frontino mine that produced many tens of millions of ounces of gold since the 1700s, and hundreds of millions of silver ounces.
Now, in the face of default, just announced, on those notes, Gran Colombia looks to have squandered great promise for Colombia's precious metals mining business. Squandered, that is, for most ordinary shareholders, but perhaps not for top managers, or owners of its senior subordinated notes -- the first-in-line gold ones.
For example: Colombia's potential just 7 years ago was as one of Latin America's richest unrealized resources of oil, gold, copper, silver and other minerals. The nation has with the exception of oil, and perhaps coal, done everything it can to stymie its rich resources.
Against a devastating headline of GCM DEFAULTS ON NOTES is a live and positively actionable theme: the Colombian peso's rapid decline these past 12 to 14 weeks makes Gran Colombia more likely than ever to turn a profit, on paper, anyway. That is because a cheaper peso makes expenses that are reported in the operating country a LOT cheaper when translated back into the stronger corporate currency -- in this case Canadian dollars and USA dollars.
And God knows, Colombia under the socialist leanings of 32nd President Juan Manuel Santos needs the currency crutch more than ever these days. Besides, everyone at the mining level that Mr. Santos puts in place is as inept as GCM's top execs.
There is also the question of who will benefit from Gran Colombia's atrocious incompetence as a miner in Segovia and El Marmato, Colombia. By some reports, current management and top investors, led bySerafino Iacono, stand to have lost already between $15 million and $20 million of the GCM equity they bought at higher prices.
Or is something else going on? Well: both.
Segovia, with a little help from El Marmato, the self-tortured village and mountain that brought me back to Colombia starting in 2007, made Gran Colombia that nation's second largest precious metals producer. Expectations are for 112,000 total gold ounces for 2014. I believe that figure is for gold with silver, this gold equivalent ounces.
At some point in 2015, Segovia alone could produce an average of 10,000 ounces monthly, fingers crossed. But remember, this is Gran Colombia Gold company with a working capital deficit that is something like $70 million. See management discussion. Some of that deficit is -- the company has said repeatedly -- bacause the government of Colombia is sitting on $11 million of overdue VAT refunds linked to the Segovia operations.
So, atop the horrific management of Segovia, and El Marmato, GCM managers (and shareholders) must deal with a national government that skins 17 percent of VAT tax off the top every chance it can get, then stalls and stalls on repayment.
The current situation: Gran Colombia Gold, which has been vowing a return to profitability repeatedly in 2014, "has significant liquidity concerns in meeting the debt service requirements associated with the exercise of the put options under the Gold Notes and the interest payments associated with both the Gold and Silver Notes."
Or as a former shareholder tells me, "Use Other People's Money to do the work, pay the bills and themselves. Cash strap the company. Lend the company money that it can't afford. Foreclose on the assets and strip it from the shareholders."That cynical scenario is likely to happen because the largest owners of the senior
subordinated notes are Chiarman Serafino Iacono and associates, which include the Blue Pacific Assetsinvestment entity.
Lots and Lots Of Promises
Mr. Iacono, a New Yorker who now lives in Toronto, in Colombia and I believe in Miami, is in his mid-50s. He and a co-chairman -- along with a CEO, Maria Consuelo Araujo, a former Colombia diplomat who was demoted to GCM president -- paid themselves high salaries and accomplished almost next to nothing of fiscal worth at the historic, veined gold and silver mines in the Segovia, Antioquia, area.
What is left -- and yes, I hold my shares, which are now down 92 percent or something ridiculous since purchase in open market -- is summed up in short:
Gran Colombia Gold, its management influenced by the Blue Pacific investment group, will need near-term financing, and the horribly conflicted company will need to work a deal with the senior secured debt (gold notes) holders on payment of interest and capital.
Let's hope we see a competing proposal for new management (not Blue Pacific but yes, who else could it be?) to take over the assets, which include El Marmato and other properties -- some near the historic mining town of Titiribi, not far from the city of Medellin.
Blue Pacific, as I cull from three years of notetaking, means Blue Pacific Assets Corp. Three directors of GCM, including Mr. Iacono, co-chairman Miguel de la Campa, and Jaime Perez Branger, are I believe in control of more than three-quarters of the shares of Blue Pacific Investments.
In mid-December 2013, Blue Pacific transacted an interest-free loan of $4 million USD to GCM for working capital. At the time, that loan was exchanged for 2.2 million “units” of common shares and warrants that lifted Blue Pacific to just beneath 15 percent of the Gran Colombia common stock.
he common GCM equity and any warrants rank behind any tranches of debt linked to silver and gold notes. One of those notes now is trading at 13 our of a par 100. See quote. The gold notes by covenant own any and all collateral in this clatter. That includes real estate, equipment and so on. The gold note holders get ultimate and first rights on everything.
Any new financing in the future gets Gran Colombia Gold to keep the lights on in Segovia and at El Marmato. That is good if GCM keeps its operating costs at Segovia under control. But good for whom?
Gran Colombia Gold, thanks to long overdue expense trimming and an improved mine development plan at Segovia, along with improved milling operations, is lowering its average cost of hauling that high-grade rock out of the ground and transforming it into gold-silver bars.
A new CEO, I can’t even keep the musical chairs straight at this point, his names is Lombardo Paredes Arenas, says the company expects a cost of $1,025 an ounce or lower – by this past December. As reported, this is $205 an ounce less than the company’s costs in the fourth quarter of 2013.
So there is a shot at Gran Colombia becoming profitable on an operating basis, and it might already be there -- even with gold and silver priced at what some believe to be bargain levels. But the fiscal hocus-pocus looks to make this potential meaningless for most stakeholders who are not Blue Pacific or related somehow.
There are those 6 percent interest payments, for one, on one set of the metals-linked notes. There is a very real need for actual cash to pay bills.
I would point out that Blue Pacific Assets, or Blue Pacific Investments, owns or did own as of October 2014 about 23 percent of Pacific Coal, another Colombia/Serafino Iacono publicly traded company. That ticker, PAK in Canada, has a market cap behind it that is even less than that of Gran Colombia: some $6 million CAD.
Mr. Serafino got involved with the purchase of El Frontino, and El Marmato (via predecessor Medoro Resources), in part because of the political good will and the insane profits he generated for Colombian government officials and businesspeople via Colombia oil and gas producer Pacific Rubiales, which is publicly traded in Canada. PRE is the ticker in Canada -- on the Toronto big board, along with GCM.
Mike Davies, Gran Colombia's chief financial officer in Toronto, tells me today, "We have hired GMP (Gene McBurney's shop in Toronto and the recipient of many millions of dollars of investment banking fees from GCM and Pacific Coal over the years) as financial advisors to help us find a solution to the liquidity issue and SRK are assisting us to optimize the mine plan so we can maximize cash flow in the current gold price environment. Not much more I can comment on at this stage of the process. Further updates will be disclosed as information becomes available."
Fallout? Lots.
-- Any social gains made at Segovia, and at El Marmato, will go to heck in a handbasket when word spreads in Colombia media of this default. That means any advances made on the education front in area classrooms, the environmental front in streams, rivers and hillsides, and the los banditos front in the area of extortion, murder and theft, likely will be reversed.
-- Illegal miners are a menace in the Segovia area -- more so than in high-grade areas elsewhere in Colombia and across the globe. Segovia banditos are shooting people, blowing themselves up with polvo loco gun powder and contaminating water supplies. The dozens of makeshift mon-and-pop smelters that process stolen ore from the many rich veins in Segovia, and nearby Otu, will continue to use mercury in their operations. That is long-term lethal, with a half-life that outlives all of us, and our coming generations.
-- Frank Holmes' U.S. Global Investors is, or was, a large owner of the GCM silver and I believe gold notes and the GCM equity and warrants. That stake was written down long ago. The total common GCM equity now is worth just $8 million after Monday’s drop. U.S. Global, a San Antonio, Texas, money manager, has shares that trade on NASDAQ with the symbol GROW. It is not his fault that Mr. Holmes and his U.S. Global money managers believed in the promise of Colombia's high-grade gold. But we'll see how much U.S. Global retains via its ownership of the senior subordinated notes -- as it does at least have this protection via covenants that put gold note holders first in line.
here is so much more to this melancholy tale. The paradox, of course, is that GCM’s common shares are probably below fair value now with a market worth of $8 million. Especially with the rapid peso declineagainst the USD and to a lesser extend, CAD. And the possible sale of El Marmato. And that VAT refund.
The note holders, first in line, get to negotiate terms if Gran Colombia Gold’s assets, largely Segovia, El Marmato, Zancudo near Tiritibi and an estimated yearly pace of 112,000 ounces of gold of annual production (for 2014), are liquidated.
Those note holders are sitting in Colombia’s cat-bird seat, and of course, as stated, they include Mr. Iacono and top management. Some estimate the value of the resources IN THE GROUND that are owned by Gran Colombia Gold are in the $200 million to $300 million CAD range.
El Marmato: Long Suffering
I always have felt El Marmato will at some point become an attractive gold and silver mine for a large producer, likely Agnico-Eagle but hey, anyone with the ability to improve lives for the long-suffering villagers of the area and in possession of the $100 million or more needed to improve the underground and above-ground layout there at this open sore of a landsliding, gruesome hell-pit.
"Segovia is much the same in many ways as El Marmato, with one difference: anyone who has been there, as I have, knows that Gran Colombia’s jefes -- utilizing political and military (police) connections, will be coveting this vast network of high-grade veins for a long, long time.
Right now, Mr. Iacono and his investors look to have Segovia's promise in their fiscal and legal rights. I am trying to determine the exact amount of ownership o the gold notes, then the silver notes, that Blue Pacific owns.
The company, not much help at this point, tells me only, "It's in the SEDI filings." I'll get to that.
>As for the likelihood that Gran Colombia will continue to operate with the current top managers, well, that is a shame for the rest of us, and for the people of Colombia. Because, as stated, they could screw up a one-car funeral.
I have plenty more on others who will benefit from this default.
Tic-tac-toe. Stay tuned.
As I said, I failed on this one -- in part because I know (having seen) the vast worth of those gold and silver veins .. and the potential social healing that a competent miner can accomplish at both El Marmato and Segovia.
