Fitch Ratings has affirmed GCM Mining's (formerly Gran Colombia Gold) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B+'.
In addition, Fitch has affirmed GCM's senior unsecured notes at 'B+'/'RR4'. The Rating Outlook is Stable.
GCM's ratings are constrained by its low cash costs in the face of expected lower grades over the coming years, The company's ratings are also constrained by its small scale of operations, short mine life, and the dependence on its Segovia operations for cash flows. Over the rated horizon, the company is expected to diversify its production profile with the announced merger of Aris Gold, adding gold assets in Colombia and Canada, and the Toroparu project development in Guyana, which Fitch expects will begin operations in 2025.
Fitch estimates the company's gross leverage, defined as total debt to EBITDA, will average 2.5x and FFO to interest expense will be 5.5x over the rated horizon, supporting the company's expansion plans.
Key Rating Drivers
Diversifying Production Profile with Execution Risk: GCM has embarked on a material expansion to diversify its production profile away from its Segovia asset, a constraining factor for the rating. The company's announced merger with Aris Gold will immediately add 40,000 oz of production from its Marmato asset, which will help generate cash flows to partially finance its lower mine expansion and the construction of its Toroparu project in Guyana.
Both projects have a combined budget of USD630 million through 2024, potentially more than doubling GCM's production to 550,000 oz in 2025. Fitch expects Segovia will account for 38% of production, Toroparu 34% and Marmato 29%, with 66% of the production coming from Colombia. Moreover, the combined company reserve's life would grow to 15 from four years considering 3.8 million oz of gold from 745,000 ounces.
Pressured Cost Structure: GCM had an all-in sustaining cost (AISC) of production of USD1,196/oz Au in 2021 and a cash cost per ounce of production of USD814. This places the company in the third quartile of the gold production cost curve, according to metals consultancy CRU. Higher small-scale miners (16% of production) payment rates were readjusted since 2017, and expenditures in social programs increased. In addition, higher exploration and mine development have increased as head grades at Segovia declined. During 1Q22, GCM's Segovia operations had an average head grade of 12.07 grams/tonne (g/t). This compares with average reserve grades of 10.1 g/t at Segovia, which increased from last year's 8.9 g/t.
Low Leverage: GCM is expected to maintain a low leverage profile. The company ended 2021 with gross and net leverage ratios of 1.8x and -0.1x with USD324 million of cash and marketable securities and USD314 million of total debt. However, the expected reduction in gold prices and the increase expenditure for the construction of Toroparu and Marmato will push debt metrics towards an average of gross and net leverage ratios of 2.5x and 1.7x over the rated horizon. Fitch treats the Wheaton financing for both expansion projects as debt and assumes that the bond will be refinanced when due.
Cash Flow Funds, Expansion Plan: Fitch projects that a merged GCM will generate about USD210 million of EBITDA and more than USD60 million of funds flows from operations (FFO) in 2022. The company has an ambitious expansion plan and capex is expected to increase to USD245 million in 2022. This involves the simultaneous development of the Toroparu (USD360 million, USD130 million in 2022) and Marmato Lower Mine (USD270 million, USD50 million in 2022) projects, which expose the company to a degree of execution risk. The combined company is expected to stop dividends and share repurchases. Its Free Cash Flow (FCF) profile will be negative till the completion of its investment phase.
Aris Gold Consolidation: Fitch does not expect GCM's announced merger with Aris Gold will have immediate impact on the company's leverage profile, as the transaction is financed with equity. GCM is expected to fully consolidate Aris Gold, a 44% owned subsidiary. Aris Gold was the subject of a CAD35 million convertible debenture financing from GCM Mining to increase its share on the Soto Norte gold Project in Colombia.
Along with the development of the Marmato lower zone mine and the current production on the Marmato mine at 40,000 oz Au/year, the company holds its Juby project in Ontario, Canada. Fitch expects the combined entity would produce more than 550,000 Au oz/year by 2025. The transaction is pending approvals and regulatory permits towards September 2022.
Derivation Summary
GCM Mining's production of 200,000 oz in a single site in Colombia is similar to Compania de Minas Buenaventura's (BB/Stable) at 200,000 oz in a number of mines in Peru (without considering silver, and base metals), but lower than Eldorado Gold's (B+/Stable) at 475,000 oz sourced from a number of mines in Canada, Greece and Turkey, and considerably less than the sales of gold by Industrias Penoles (BBB/Stable) of 1.1 million ounces (without considering silver, base metals or chemical products) from its mines in Mexico, Yamana Gold (BBB-/Rating Watch Positive) of 885,000 oz (1 million gold equivalent ounces including silver) obtained from Canada, Brazil, Mexico and Chile, or Endeavour Mining's (BB/Stable) of 1.5 million oz from mines across West Africa.
GCM Mining mine life of four years in reserves is lower than those of Eldorado Gold at 17 years, Penoles' 10 years, Yamana's nine years, and Endeavour's 12 years. Buenaventura's main gold mines have a mine life of three years. However, Buenaventura has more silver and base metals contribution and significant stakes in world class assets, such as Cerro Verde.
The third quartile position in the cost curve of GCM Mining is better than Buenaventura's at the fourth quartile, but less competitive than that of Eldorado Gold, Penoles, Yamana, or Endeavour at the second quartile of costs.
GCM Mining's leverage is the lowest among peers with three-year average gross and net leverage of 1.1x and -0.3x. It compares favourably with Eldorado Gold's (1.6x, 0.7x), Yamana Gold's (1.3x, 0.8x) and Endeavour Mining's (1.4x, 0.8x). Penoles has also reached recently a net leverage below 1.0x but its three-year average is 1.2x with gross levels of 2.1x. Buenaventura's leverage metrics are more elevated (4.0x, 2.5x).
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Issuer Include:
Gold prices of USD1,800/oz in 2022, USD1,600/oz in 2023 and USD1,400/oz in 2024;
Gold sales grow to 230,000 oz in 2022, to 290,000 oz in 2023 and to 390,000 oz in 2024;
Capex is USD245 million in 2022, USD495 million in 2023 and USD110 million in 2024. More than half of the figures are explained by the Toroparu and Marmato expansion capex and count with USD260 million of streaming financing;
Dividends and stock buybacks are suspended.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increasing size and diversification over the medium term;
A successful reduction of the company's single mine site risk;
An increase in the reserve life of Segovia would also be a positive consideration for a positive rating action.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration in liquidity position resulting in cash and equivalents below USD35 million on a prolonged basis;
Prolonged strikes or mine closures that would halt or significantly lower gold production;
Large debt-funded acquisitions;
Negative FCF on a sustained basis;
Gross leverage at 3x or higher on a sustained basis.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
GCM reported Fitch-adjusted cash and equivalents of USD315 million and debt comprised of USD300 million of senior unsecured notes due in 2026 and CAD18 million (approximately USD14 million) of convertible debentures due in 2024 as of March 31, 2022. The debentures can be exercised into shares at CAD4.75 per share. Hence, the principal may not require cash to be settled.
The combined GCM and Aris Gold entity had USD397 million of cash and USD387 million of debt as of March 31, 2022. Aris Gold's debt includes USD73 million gold linked notes, which are non-recourse to GCM.
The Toroparu project, from wholly acquired Gold X, will be partially financed with future advance deposits of USD138 million by streaming contracts with Wheaton. The gold stream will be paid with 10% of life of mine gold output at USD400/oz, whereas the silver stream will be paid with 50% of life of mine gold output at USD3.90/oz
Aris Gold Corp, formerly Caldas Gold Corp, a 44.3% owned subsidiary of GCM, has recently received a USD35 million financing from GCM to fund its Soto Norte acquisition. Future advance deposits of USD122 million from streaming contracts with Wheaton will help to fund the USD270 million Marmato Low Zone project.
Issuer Profile
GCM Mining is a Canadian-based precious metals miner. It is the largest gold and silver producer in Colombia with underground mines in Colombia. GCM is building a greenfield project in Guyana and a brownfield expansion in Colombia.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
GCM Mining Corp. has an ESG Relevance Score of '4' for Labor Relations & Practices due to the company's partial reliance on third-party artisanal miners for its gold production, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
GCM Mining Corp. has an ESG Relevance Score of '4' for Human Rights, Community Relations, Access & Affordability due to the company's exposure to local unrest in the communities surrounding its Marmato and Segovia mining operations, which has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
ARIS MINING CORPORATION 
