(By Randy Durig) At Durig Capital, we have developed a process to screen, review, select, purchase and monitor high yielding corporate bonds. Each week we screen thousands of corporate bond listings to find what we believe to currently be the best corporate bond for investors needing or seeking higher yields with as minimal risk as possible relative to its projected return. The following is our review process showing why we believe this high yielding Brigus Gold (BRD) convertible debenture passes the criteria for our clients.
Denominated in US Dollars, this Canadian company's 6.5% Convertible Unsecured Subordinated Bond matures 3/31/16, and is currently indicating a yield to maturity of about 9.7%. The possibility exists of increasing this already high yield through the capital gains its convertibility feature should this gold miner grow significantly in value, as explained further in this review, and we see this as a rare and unusual opportunity for high yields from a company that directly benefits from higher gold prices. Therefore, we looking to add these 40 month Brigus Gold convertible bonds, in US dollars, to 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). The Corporation 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, which 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.
Brigus is forecasting 2012 gold production of 77,000 to 85,000 ounces, at a per ounce cash cost of $775 – $825, and it expects gold production to increase until it reaches a steady state output of 25,000 ounces per quarter. Planning is underway to develop the Grey Fox Mine located on the southeast portion of the Black Fox Complex. The initial resource estimate from this area, announced in December 2011, added more than 50 percent to the gold resource at the Black Fox Complex. The Black Fox underground ore body is open for expansion with grades that trend higher at depth.
Second quarter highlights for the company included:
- Production of 18,254 ounces of gold, consistent with quarterly production guidance.
- Sales of 18,419 ounces of gold, a 21% increase over the 15,178 ounces sold in Q2 2011.
- Average realized gold price of $1,543 per ounce, a 5% increase over Q2 2011.
- Achieved an average grade from the underground mine of 6.31 gpt.
- Reduced cash costs to $799 per ounce, an 8% reduction in cash costs from Q2 2011.
- Cash flow from operations, of $12.6 million, compared to $3.6 million in Q2 of 2011.
- Increased margins by 24% to $744 per ounce, compared to $598 per ounce in Q2 2011.
- Generated income of $4.7 million, compared to a loss of $2.9 million in Q2 2011.
At June 30, 2012, cash and cash equivalents totalled $24.6 million, compared to $18.8 million at December 31, 2011. The increase is the result of $15.0 million related to the equity financing as well as $15.0 million related to a sale leaseback on certain assets of the Black Fox Mill. Operating activities contributed $10.4 million to cash flow during Q2 2012, while investing activities for the quarter totaled $14.6 million. This included $13.4 million to fund underground mine development, open pit capital stripping and to acquire underground and open pit mine equipment, $2.6 million to fund exploration and development expenditures and $1.2 million for interest payments. Brigus Gold most recently completed a C$30 million note, of which C$24 million will be used to repurchase 4% of their gold stream revenue contracted to Sandstorm Gold. While this added debt increases their quarterly interest payment by about $.68 million, it should also result in a corresponding direct increase in net income of over $.8 million per quarter.
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 anytime prior to maturity to common stock at the conversion price of $ 2.45. This strike price represents about a 33% annual rise from the $0.94 price that BRD is currently trading at on the NYSE. While the possibility for such strong upside growth certainly exists with this company and we see the stock as potentially returning a much greater gain than the bond yield currently indicates, we also see the convertible as having much less risk than directly owning the stock. This reminds us of the opportunity we identified earlier this year in Neo Materials, which soon after became MolyCorp (MCP) convertible debentures and brought a very quick return of over 10% shortly after they were acquired for our clients and subsequently sold with the news of a buyout offer. While we missed the tremendous capital gains that could have been realized in MolyCorp's takeover deal by owning the stock versus its correlated convertible debenture, we did correctly identify a solid opportunity for a notable and very respectable gains with its bond. Brigus Gold's convertible bond holders will benefit directly should the stock increase above $ 2.45, while adding significantly more protection from a possible adverse decline in stock value. For those that don't mind the additional risk and prefer Brigus Gold stock for their growth equity portfolio, we believe it would be a good addition.
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.
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 3/31/2016.
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 US dollar, global economic conditions, supply and demand, interest rates, and inflation rates, all of which are beyond the Company's control. Slower global growth is expected to continue in 2012 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 euro zone'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 are very similar to the previously reviewed Tricon Capital convertible debentures, MolyCorp (MCP) convertible debentures, and other offshore bank income investment opportunities that include the unrated Fred Olsen Energy bonds denominated in Norwegian kroner and the unrated Jaguar Land Rover bonds in British pound sterling, both of which have performed very well since our initial reviews.
We think that Brigus Gold will strengthen with rising gold prices, and see 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 9.3% 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. However, we see both its stock and its convertible debenture as more intelligent opportunities for higher returns, and it is why we have chosen it for addition to our Foreign and World Fixed Income holdings.
NYSE: $.94 11/7/2012
Conversion Price: $ 2.45
Yield to Maturity: 9.7%
Disclosure: Some Durig Capital clients may currently own Brigus Gold stock and/or its bonds.
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. If you intend to use our research efforts to make an investment decision, we kindly ask that you respect our fiduciary business model and allow us the opportunity to assist in your equity acquisition. We sincerely appreciate your courtesy and understanding.