Member Info for wwguk

WhichWayNow, I am a researcher on stock market related topics. I used the cost per share at each stage as a minimum share price projection to identify bargain price, and used the cost per share in next stage as the projection of the share price at this stage (due to the fact that market is always ahead of things to be happen in the future (six months or more)). As the cost per share includes all the money spent or to be spent, in this way the impact of cash from debt is brought into calculation. You may look at my previous post as examples. The assumption underlying this is that all the money is spent or to be spent in good ways (i.e., not wasted) and the planned milestones that this money used for have been fulfilled, until the money producing machine (i.e., the mine) is built. This is a simple method, which might be useful for early stage companies to be built using money raised from market and debt lenders.

I gather the model referred to by casa is the not the simple calculation that assumes the new MCAP reflects old MCAP plus the raise. As with the model casa used, when SM MC at £1b (i.e., with a share price about 20.5p), to raise £400m at 21p would result in a new share price about 16.4p; if the simple calculation as you mentioned is used the new share price would be (1+0.4)/(4.8+1.9) = 0.21p as the placement price is almost the same as the pre-placement price. His calculation seems to take the ratio of the money to be raise in a placement and current MC into calculation (without considering the cash from debt, no matter how large this debt is), in his model it seems that the large the ratio, the larger the drop (is this correct, casa?).

As casa said there is no model to include debt into calculation, I sketch this model as a "thought experiment". Unlike yours and casa's success history, the above model has no single success case (or I am wrong as I may re-invite the wheel. Cost analysis in such way may have been used by many for over hundred years....who knows!?).

WhichWayNow, thinks for your comments.

I noticed that you have something in common with Casa on share dealing with HUR and SXX.
Therefore, you may share the same experience as Casa who is a hero in HUR discussion board, and he has also revealed his smartness here. However, one of the big differences between the HUR funding raising and that of SXX lies in with or without cash raising from debt at the same time (correct me, I may be wrong, as I have no knowledge on HUR). In SXX case, the debt takes 3/3.6, i.e., over 83% of the overall funding to be raised. Casa argued that the impact of the debt is difficult to model, and its impact may be very gradual; while I believe a significant impact will show at the time stage 2 deal has been successfully made or closed (as this raising will have the mine built, i.e., the fate of the SM will not be binary any more). Casa mentioned a "standard City way" of share price impact measurement on placement only fundraising. He might get it right in HUR, but this method may not apply to SXX given the reason as mentioned above. I still has not figured out the formula of the "standard City way", casa has not yet made it clear, do you know this if you had understood the method he used and demonstrated in the HUR chat board?

LITC: "Don't forget that the "extra funding" is relative to contingency requirement, and so the IPA-backed debt may ... not needed"

Thanks LITC, I made correction on this in my new posts.

I see, actually the 3rd tranches is largely prepared for contingency, given the above mentioned other incomes and a good construction process, this 3rd tranche may be used by SM as a backup, and SM can select to go with it or without it (if it is not needed at that stage).

The additional money raised in step 1 is of the similar size of the contingency money; although it has been used first, a large part of the contingency money allocated from the debt tranches may be left over when step 3 is completed. Together with other incomes, funding need at the time of step 4 could be served, without accessing the 3rd tranche, and still get a completed 10mtpa mine built. This will leave less debt to pay back, so as to achieve cash flow positive at an earlier date.

I believe when the placement is made together with a debt raising, the share price could be higher rather than lower as in normal placement without additional cash from debt. If the placement price is 21p, without considering the positive debt raising impact, the share price would be: (0.25x4.8+0.5/1.3)/(4.8+1.83) = 1.585/6.63 = 23.9p; If we add the positive debt raising sentiment impact and the positive financial impact of the 3b debt, the share price could be higher than the share price before the announcement, say at 26p or more.

Take a pattern similar to the one in stage 1, existing shareholders may get 8% of their holdings new shares (e.g., for a person held 300,000 shares, he/she can get 24000 new shares at the discount price; this is not a lot really, therefore, if anyone wants more, one may have to get it from the market, particularly when the share is still at a discount price to its cost.

Fred16, is this sound better :)

As we discussed here, now I believe that an IPA guaranteed bond (around $900m) as the third tranche of the senior debt will be included in the overall deal. When no need for it at time, SM can select to go without it (for instance, if a large part of money prepared for contingency raised in step 1 is still not used, and if more income from 2022 and 2023 poly4 sales and 30% income from Cida sales have been generated, which would be enough for the ramp-up activities); Therefore, the worse scenario in my previous post would not happen.

I used 15p as the placement price in my previous examples (as on the day the price had been 18p), and the placement price is normally a bit below the current share price. However, as the placement price will be set after the announcement of commitment letters, positive news may raise the share price, say 25p (or 32.4c). Due to all the money to build the mine has been secured, the risk for the money to be raised from the placement is much lower than those in stage 1, and therefore, the discount will also be lower, say 16%, at 21p.

If the money is well spent and all the planned milestones reached, the detailed cost breakdown after reaching each milestone could be used as an estimate of the MINIMUM share price at the time corresponding to the milestone. For example, if the stage 2 funding is to be provided in the following sequence, then we could arrive at cost per share corresponding to each of the milestone:

step 1: $500m from capital market at 21p (27.3c) from 1.83b new shares, which result in a total 6.63b shares (i.e., 1.83+4.8); cost up to the end of this: 0.2+1.2+0.5 = $1.9b, cost per share = 1.9/6.63 = 28.66 cent, or 22p; start from step 2 cash from debt will be used.

step 2: senior debt tranche one ($600m high yield bond); cost: 0.2+1.2+0.5+0.6= $2.5b, cost per share = 2.5/6.63 = 37.71 cent, or 29p

step 3: senior debt tranche two ($1.5bn of commercial bank debt); cost: 0.2+1.2+0.5+0.6+1.5= $4b, cost per share = 4/6.63 = 60 cent, or 46.41p

step 4: senior debt tranche three ($900m IPA guaranteed bond); cost: 0.2+1.2+0.6+0.6+1.5+0.9= $4.9b, cost per share = 4.9/7 = 70 cent, or 53.85p

The cost per share at each of the step provides a reference point for one to see if the share price at its corresponding time is still a very good bargain that is lower than the cost to build the mine up to that stage. Share price could move much higher than the cost per share at the same stage, if each of the milestone has been achieved and a complete built mine is getting closer and closer.

Fred16, the worst scenario could also be avoided, in case SM do not need that much contingency fund (i.e., much less than $600m) at the end and the income from the initial poly sales (start from 2022) and from Cida investment can fulfill the needs at that stage.

Fred16, Sorry for letting you hit the wine in that way. Although I used the same methodology as I used before, it also caused me to think on the impact of the structure change made in stage 2. The original stage 2 plan was that bank debt and gov guaranteed bonds start in parallel from Q2, and the additional fund raised from market to be used at the end as a part of contingency fund (some of them, such as, 'completion support; even do not needed to be in the bank account, or even do not needed). Apart from the RNS on the changes, what worries me more was the potential as mentioned by CF in the conference call on the possibility to replace the 3nd tranche, i.e., the guaranteed bond, with money raised from market (i.e., the worst scenario in my analysis). After the analysis, I understood better on why some of the reporter mentioned that the funding may become more costly. On the positive side, we can be more confident that the government guarantee will come in some form as good as the kind of arrangement that can kick start other debt lenders to complete an overall deal, such that stage 2 can be achieved (although not as promising as we had inferred from PM comments in the PMQ). The danger of "money in a hole" should be removed. As I mentioned later in my further posts, when the deal is announced, we may see that the placement price could be higher and the number of shares could be lower than the ones I used in the examples. The new shares could also be fewer. Therefore, the results could be much better. The cost per share at different step is only a check point to see if the share price is still a bargain. The forward looking price projection could be much higher than the cost per share, and the price would be influenced by good sentiment on the value adding progress towards a profitable mine that can provide investors with rewards for decades.

Chesh, "as for trading for a profit......... you mean more of a share of SXX ..... :)"

Yes, for more shares and compounded divs....... :)

Casa, from your posts, it seems that you were in and then all out at a good price (with a good profit), with the money only takes 2% of your portfolio. Even many conservative investors use about 10% of their portfolio for more speculative opportunities. If you are more conservative than most of them, why you buy the share in the first place. Or, you are flexible in your investment style (although most long time investors want to claim they are consist on style)? I cannot understand if you "gambled" at an even dangerous early stage, why you are still out now? Welcome on boat (the share price had been and is still at a level as good as you had anticipated), and many here would welcome to have an expert who are on the same boat to help us ;)

Chesh, "holding for divs..........! in a nice way".
Me too :) although I do not want to rule out to trade a small part, in and out, for profit-taking.

a typo! in "The market is already ahead of things that are quite sure to happen."

I mean "The market is ALWAYS ahead of things that are quite sure to happen."

Cherokee101: “Never underestimate human greed.”, Myo: “sentiment”. Yes, we may expect to do some profit-taking just before the first shipment, or even the first poly at a share price already much higher than the total cost per share, e.g. Fortescue, although Long time holders here likes to hear "I have never sold a single share" as we love the company.

Cranleigh, Verde, paaa: “future earnings or cash flow” matters. The market is already ahead of things that are quite sure to happen. Through time, more rewards would overtake cost. Cost, if all well-spent with their corresponding milestones delivered, only gives a lowest check point to see if the share price is at a bargain. It looks not encouraging than forward looking price projections.

Casa, thanks for your praise, though it seems to let many here doubt my intent (although currently we are not on the same boat).

ctrlaltdel, you are right, we still have some convertibles left from stage 1 and stage 2 may also have some of these. In my post, for step 1 to 3, I used 8b; for step 4 I used 8.5b to include shares from convertibles. The post just provides some rough cost per share estimates. Only when stage 2 is announced, we can have more accurate number of shares and the placement price (if any).

IMO, the coming placement or open offer price (if any) is very likely higher than the 15p used in the examples in the previous post. This is because the placement if any will be done after the announcement of the commitment letters. If the arrangement for the 3b debt is not too bad (e.g.., coming together with a clear commitment from IPA on at least 800m bonds), then the SP will be up, say 25p or higher before the placement is arranged, then the placement price could be set at 20p or higher. It also is very likely that a combination of 3 options will be used to raise the ($400m-$600m) additional money. In that case, the funding to be raised from placement would be less than $200m and therefore, less new shares will be issued with less dilution to exiting shareholders (hence higher post-stage2 per share price, than those suggested in previous examples, could be expected).

It is not my intention to argue the relationship between the increase of the Enterprise Value and the increase of share price, as I will not use Enterprise Value or Market Cap in my calculation. I do, however, want to explore how to measure the share price impact by the cash raised from debt. I used basic cost analysis for the purpose.

Given the information on SM, if one believe that stage 2 is going to fail, then he or she would expect the share price to drop to below the sum of its cost up to the end of Q2, i.e., <=£1b, and then to nearly 0.

However, if one believe that stage 2 will be achieved (in whatever ways):
The worst scenario would be with a large additional fund $700m (at 15p or 19c, 3.68b shares), $2.2b debt, and with the third tranches bond replaced by a placement of $800m (at 30p or 39c, 2.05b) after the first product shipment). In this case, the cost up to 10mtpa would reach $5.1b (i.e., 0.2+1.2+3.7), and total number of share 11.23b (i.e., 5.5b+3.68+2.05). The cost per share would be 45.41c (35p) by the end of 2024.
A nearly best scenario would be with an additional fund $500m (at 15p or 19c, 2.63b shares) and $3b debt. The cost would reach $4.9b (i.e., 0.2+1.2+3.5), with a total number of share 8.13b (i.e., 5.5b+2.63). The cost per share would be 60.27c (46.36p) by the end of 2024 (with a mine of 10mtpa built).
If the money is well spent and all the planned milestones reached, the detailed cost breakdown after reaching each milestone could be used as an estimate of the minimum share price at the time corresponding to the milestone. For example, if the stage 2 funding is to be provided in the following sequence, then we arrive at cost per share corresponding to each of them:

step 1: $500m from capital market; cost up to the end of this: 0.2+1.2+0.5 = $1.9b, cost per share = 1.9/8 = 23.75 cent, or 18.26p; start from step cash from debt will be used.
step 2: senior debt tranche one ($600m high yield bond); cost: 0.2+1.2+0.5+0.6= $2.5b, cost per share = 2.5/8 = 31.25 cent, or 24p
step 3: senior debt tranche two ($1.5bn of commercial bank debt); cost: 0.2+1.2+0.5+0.6+1.5= $4b, cost per share = 4/8 = 50 cent, or 38.46p
step 4: senior debt tranche three ($900m IPA guaranteed bond); cost: 0.2+1.2+0.6+0.6+1.5+0.9= $4.9b, cost per share = 4.9/8.5 = 57.65 cent, or 44.34p

If any of the other options for raising the additional funding were adopted or if the placement/open offer price is higher than 15p, then less new shares will be issued (i.e., the total number of shares will be less than 8b). In those cases, cost per share, i.e., the share price estimate at each of the above step could be much higher than the ones listed above.

2) Casa mentioned that there is no method to calculate the precise or mechanic impact to the share price by the money raised from debt. I do not know if there is any, and therefore, I tried to use cost analysis as a replacement. However, I still believe that it is wrong to use a calculation method developed for placement only to situation with a large debt element in the raising. What I questioned was the “standard City way” casa used. Casa, you have warmed me up in your Jan 23 16:39 response to me on the conventional method (which is the same method I called common sense method and used in my Jan 22 01:09 post, question 4). I thought more sophisticated answers to my question 1, 2, 3 on the “standard City way” are to follow. However, you did not answer them. If possible, I still want to learn these. Although the recent movement of SM share price is towards the direction you had predicted, I still believe that your “standard City way” share price estimate is not applicable to the situation where a placement comes with a large debt (and there seems to contain a small error in your calculation; If you can provide me with a reference, e.g., on a research paper or a link, I may understand it better). The price movement is mainly caused by the change and the uncertainly of $3b debt arrangement, rather than the £400 placement impact as reflected in your calculation.

Casa, Thanks for your responses to some of my questions. My purposes to raise this topic are to point out 1) a simple fact that there are situations in which a company’s share price will up when dilution happens; and 2) The potential share price impact as calculated by Casa using the “standard City way” used Casa is wrong (the method has not made clear, and it may only applicable in normal placement without a debt raising at the same time).

1) The share price will also go up if the dilution (i.e. placement) comes together with a cash raising from debt, especially when the debt element is much larger than the replacement element (e.g., $0.6b from placement and $3b from debt as in the SM case). In this case, the share is diluted as it will take a smaller portion of a company. The per share price, however, may go up as the enterprise value will (start to) go up (in the SM case, the mine can be built progressively using both the money from placement and the cash from debt. In this building process, the cash from debt would be turned into shafts, tunnel, and port (after all the $3b is spent, all the £3b becomes the Enterprise Value). Although this happens gradually, the market is always ahead of the things to happen especially when the things are sure to happen. For these reasons, its (i.e., cash from debt) impact to the share price will be immediately (in our case, when the stage 2 deal is announced). The only thing unknown is how much to add (on the impact that could be calculated without considering such debt element). Given now that the $3b debt will come in three tranches, one by one, we can add parts of the debt money into calculation gradually. Such calculation could be very similar to my cost analysis (as I presented in my first post on this topic). The cost per share analysis may provide us with more accurate prediction power, when we have more detailed cost information and use them to perform the cost analysis at each milestone when money from placement, and cash from debt tranches 1, 2, 3 have been used and turned into part of the mine infrastructure progressively.

Cranleigh, thanks for pointing out the difference between Gross and Net Debt in relation to Enterprise Value; Milothe3rd and LITS, thanks for pointing out the potential weakness to use cost per share as a prediction, and to use NPV based method to corroborate the prediction in better ways.

More information on the progress of stage 2 has been provided than most of us had expected. Now, we can be more confident that the stage 2 will be achieved! The mine will be built! The danger of "money in a hole" would not happen! The SP will eventually overtake the cost to build the mine, and most shareholders will get their money back and then enjoy profits for decades.

However, the cost of stage 2 may be slightly higher:

With the modified structure, the stage 2 financing will consist of a sequence of 4 categories of funds: one serves as the cushion of the other, to be delivered and used in a sequence one by one (rns and ft):

step 1: $400-$600m from capital market;
step 2: senior debt tranche one ($500-$700m high yield bond);
step 3: senior debt tranche two ($1.5bn of commercial bank debt);
step 4: senior dept tranche three ($800-$900m IPA guaranteed bond).

Now, all the $400-$600m additional money has to be raised first.
The completion support option might have been ruled out.

The date for receiving all commitment letters may be delayed, probability due to the new arrangement to receive the commitments of $500-$700m from high yield bond lenders (In addition to the original commitments of the 1.5bn bank debt). The stage 2 may be closed in Q1 or Q2.

According to CF, the step 4 part of the fund may also come from capital market, in case the construction and early sells going well and SM can get this part of the money from the market. If the step 4 would end in this way, further dilution may happen.

I initially believe that IPA guaranteed is an essential part of the overall deal i.e., other debt lenders's commitments would be made on the expectation that the IPA guaranteed will be provided. Now, it seems that IPA would only provided a back stop in case SM has difficult to collect the money by itself (hope all other lenders would accept this).

IMO, please correct me if there is any misunderstanding on the above impression on the rns.

5.Using the common sense method, if 1 billion out of the 3 billion debt is to be provided to SM when the placement is made:

MC at 0.25p: 0.25 x 4.9 = 1.225 billion pounds, 1 billion debt added to SM enterprise value.
Placement at 0.21p, 16% discount
(1.225+0.4+1)/(4.9+1.905)
= 2.625/6.805
= 0.38 (pound), i.e., 38p