The great thing about New Colombia, and the thesis that underpins our bias, is its two-pronged operations in two areas that are both experiencing massive growth right now. Those that followed along with our previous coverage will already be aware of these two focus areas – cannabis and coal (specifically, coking coal).
Before we get in to the latest developments on these two fronts, let’s quickly introduce the company. New Colombia is – at core – a mining company, with primary operations in Colombia. The company mines and crushes rock for the construction space, as well as coking coal, which is a key ingredient in the steel making process. The latter, coking coal, has seen a considerable run up in price over the last year or so, as Chinese related supply contraction issues have translated to a degree of panic loading.
New Colombia announced last month that it is on the edge of receiving a rock lining permit, and it already has a coal mining permit in place. When it picks up the former, it will commence execution on a strategy that allows for the output of 30,000 tons per month of raw product, with this volume translating to circa $7 million monthly revenues at current prices.
Looking at its cannabis operations, New Colombia develops medical marijuana products, and is taking steps to bring one such product to the US market. It’s still early days, but a couple of recent announcements have hinted at progress in the space, and a partnership with a company called Advanced Imaging Projects LLC, through which it intends to submit an Orphan Drug application to the FDA in the US, gave investors something to get excited about mid October.
The thesis of our previous valuation was based on the potential of its coal operations, and we still believe the lion’s share of fundamental valuation is rooted in that side of the company; near term, at least. Over the last couple of weeks, however, management has put out a number of releases relating to the cannabis side of things, and with these falling in line with the legalization ballots, there’s plenty of speculative capital flowing in right now from cannabis traders, as opposed to mining interests.
That’s not a bad thing, of course, but it does put a bit of pressure on management to maintain a news flow (and underpin this with fundamental developments) in its cannabis/drug development operations.
Do the latest announcements suggest this is achievable?
Well, yes, but not with regards on a strictly pharmaceutical level (not in the US, at least). The latest releases relate to what looks to be an aggressive marketing campaign for some of the company’s cannabis based remedies to address pain management in Latin America. These products can be sold legally in this market, and New Colombia has picked up a bunch of TV spots and the endorsement of ex-MLB MVP Edgar Rentaria for its muscle and joint pain cannabis cream. Interestingly, and as a bit of a side note, it was from Rentaria that New Colombia purchased its rock crushing plant back in 2010. The remaining balance on that purchase is set to be settled in an as yet undetermined number of company shares, and we’re assuming that a portion of these shares will also go towards the endorsement payment. Although this has the potential to be dilutive (we don’t yet know the structure of the deal) it aligns Rentaria’s interest in seeing New Colombia succeed to a higher degree than would a purely financial endorsement deal, so we think it’s probably a good thing longer term.
So what’s the bottom line here?
Well, cannabis is going to drive near term valuation as speculative volume flows into the company on the back of the recreational ballots. These gains are likely largely unsupported by fundamentals, however, at least right now. That said, the potential for coking coal driven gains more than makes up for any near term cannabis driven overvaluation, and that’s why we’re maintaining our bullish bias on the company.
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Disclosure: We have no position in NEWC and have not been compensated for this article.