Some players make a living by participating in the financing of junior resource companies. As they consider a particular opportunity, they need to take into account a number of factors. By answering the eight questions, below, one can better understand (though not completely) whether or not it’s a good idea to suppress share price in hopes of getting into the financing at a lower cost and ultimately making a gain on the exchange.
One has to assume a number of things in approaching this multi-variate analysis, on a step-by-step basis. Having answered the first five questions, you still have a two variable problem. You don’t know how many of your currently held shares you’ll need to sell into the market, and at what price, to drive the financing price to your desired level. This dilemma may be resolved, at least in part, by tiptoeing into the market with your selling activity, in an effort to identify price elasticity of demand. How much interest will buyers show at various reduced price levels? In some cases, it may be very easy to knock the price down, costing you very few shares. In some cases, it may cost you no shares, if you play the game of selling to yourself from account to account, walking the price down. In others, the market may gobble up everything you’ve got to offer, rendering the prospects for success in churning as unavailable.
The other big unknown, not incorporated into this model, will be the lingering effects of the suppression on share price. I can think of one good example for which share price was hammered down from $1.80 to $1.20 in preparation for a financing. In a tough market environment, the suppressed share price continued down, and almost three years later has only just recovered (to the $1.20 level two months ago and $1.80 last month). Participants in the financing were not able to get their original investment out for almost three years, and their ‘free’ warrants expired worthless. Be careful what you ask for, I say. It’s a good example of the surgeon reporting, “The operation was a success. The patient died, but the operation was a success.”
In any event, those who sell off their placement shares (at least at cost), once they become free-trading, and live off the ‘free’ warrants, can make a good living, having dispensed with the risk four months into the program. What they need to consider, at the same time, is both the opportunity cost of driving share price down, and the likelihood for the warrants to be in the money.
This opportunity cost must be considered from two scenarios, depending on the strategy of the suppressor.
Given a 12 month time frame (not unreasonable), one player may have the intention of holding on to all placement shares, along with the warrants, if there are warrants. In this case, the opportunity cost is equal to the difference between the average selling price of shares sold in the suppression exercise and the realistic 12 month target price. For instance, if you think share price is reasonably targeted at $7 within 12 months, and the proposed placement price is $2.50, you may find that you need to sell 750,000 shares from current holdings at an average price of $1.70, in an effort to drive the financing price down to your target level, whatever that may be. In this case, your opportunity cost for each of those 750,000 shares is $7.00 - $1.70 = $5.30, for a total of $3,975,000. In other words, whatever winnings you may enjoy from the spread between the placement price and the 12 month target (if achieved) must be reduced by the opportunity lost to shares sold.
In the second scenario, however, a player may have no intention of keeping the placement shares, and plans to sell them after the four-month holding period expires. Assuming that this share price at least holds through this period, those shares are a wash, with no impact on the calculation of gain or loss. What does come into play are only the savings on warrants (also reduced in price by the suppression) and the opportunity cost on shares sold. In this case, since the participant has no intention of holding placement shares through the 12 month period, and plans only to sell them at cost four months later, the lost opportunity must be the spread between what the selling price would have been without suppression (by our example, $2.50) and his average suppression selling price (by our example, $1.70). This spread, then, is equal to $0.80, or in total, $600,000.
Of course, the other unknown in this sensitivity analysis is just how much such activity may affect the sensitivities of Company management. If you play this game, driving share price down, you may find yourself left out in the cold on the financing altogether, holding only your loss on shares sold. As I say, be careful what you ask for. In a market that’s flush with financing opportunities, this game is risky, at best.
Once you’ve keyed your final answer, you’ll need to click off of that cell for the form to be updated. I’ll be pleased to have your feedback on this tool. See the Contact Us button at the bottom of the page to reach me directly.
Best,
Kevin Graham
N.B.: Much credit/blame for this tool goes to my friend, Stuart Joynson. As a CMA, his propensity for the anal-retentive matches my own. It would be remiss of me not to make note of his efforts in the creation of what you see here. Just be grateful that we’re not publishing his complex tables, on which this tool is based. Thanks, Stuart. |