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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.
I’ll also chuck in (for no shares) the fees I’ve been earning since I bought that drone a year or so ago .....
I thunk ya just said you is gonna max out ya visa if anyone bovvers tu set it up......
In a roundabout non committed way. Just like a bank eh? Funny that.....
If I had £1,000 with zero debt and borrowed another £1,000 I wouldn’t be any richer. If anything, I’d be immediately poorer.
Now, if I successfully spent the extra £1,000 on a money making project, in time I would be richer.
We just need Sirius to get the money, build the mine and start selling Poly4.
Yeah Cranleigh you're right , I was trying to find a way to explain to wwguk why the additional debt acquired by Eg SXX would not automatically add to the SP but my example is flawed.The problem is that wwguk is assuming that access to the debt automatically elevates the SP , on the basis that it provides the wherewithal to build the mine. As you say the debt is offset by the cash in the bank,if you can set out a better logical answer to the problem posed in Wwwguk post of Sat 2.51 please do so..
Casa, I think your understanding of Enterprise Value leaves scope for improvement.
EV reflects NET not gross debt.
So if the company’s Market Cap is, in your example, £100m and it borrows £50m that goes into the bank, there is no increase in net debt....nor in EV.
Follow up for WWGUK
I think the best way of dealing with your belief that the Enterprise value (EV) should be regarded as relevant to the subsequent SP value is a little "thought experiment".
Lets assume that you are the FD of a medium sized company and you and your fellow directors design a bonus scheme for yourselves.
The SP is £1, the company has 100 mill shares in issue, market cap £100 mill, your scheme rewards you with 50% of your annual salary as a bonus if the SP in a years time exceeds £1.50. You go to the AGM, the shareholders think yeah fine, we're looking at a 50% profit and vote it through.
9 months on, the SP is still £1 and your bonus is far away , so you trot off to the bank, tell them you want to build a new factory and need £50 mill, they lend you the money, you bank it and suddenly the company's EV rises by £50 mill. Your posts suggest that you believe that the additional lending should affect the SP directly Ie EV now £150 mill still 100 mill shares - SP £1.50, bonus assured!!
It doesn't work that way for, I hope, obvious reasons.
Borrowing money whether as part of, or in parallel with, other fund raising DOES add to the EV BUT not to the SP.
You are correct in assuming that successfully acquired funding will be positive to SXX , but the effect on the SP will be entirely subjective, not arithmetically based .
As ever debate and disagree if you want , I will respond as and when I can
SEEMS FAIR - WONDER WHY THE SMALL GUYS NEVER SEEM TO WIN ?
Hi WWGUK finally got some spare time to respond to your posts of Tue 1.08 et seq.
At the risk of telling you what you already know i'll offer a little background before the arithmetic.
Companies can broadly raise funds in only two ways, via debt or equity (ie new shares)though there are variations , they all amount to these or a combination (ie Convertible bonds)
To quote my old MBA text book "the risk to investors is lower on debt and higher on ordinary shares (ignore prefs),therefore debt is the lowest cost source of funds." If you wonder why this is the case it is because debt ranks above shares in the pyramid in an insolvency and get paid first .
If a company decides to raise funds via equity it can "place" shares or make an "open offer" a placing is organised by "bookrunners " who promise to find Institutions to buy the shares and if they cannot, to buy the shares themselves. Thus obviously the bookrunners take on the risk of buying shares in a company that they might not wish to . In order to ameliorate this risk they earn a fee and they seek to keep the shares on offer at an attractive price , normally below and often well below the market price.It is also the case that IIs who buy in a placing could have bought on the market, but have not,as it is the "discount" to market price which attracts.In addition of course the reason the company needs the money is relevant if it is a "rescue " situation the discount will be higher than if it is a company whit a new idea or product or market opportunity a la SXX.It is mostly silicon valley start ups which have set a fashion for placings at a premium , this is exceptional, and appears to be a passing fad.
So , generally a placing will be in the form of an offer to "sell X million shares at an indicative price of between Y% and Z% BELOW the market price . where the calculation is that X million at Z% brings in enough revenue for whatever purpose it is intended.
THIS IS AN EXAMPLE(in round figures) so please anybody don't start shooting the messenger again.
In the current SXX situation, there are 4.8 bill shares outstanding market cap ~£1 bill and they need $500 (around £385)mill of additional cash, so with a current SP of 20p they could offer 2 .6 bill shares at 15p(ie a 25% discount) to raise the money.The company ends up with 7.4 bill shares in issue and the MC rises to ~£1.4(note as they have sold shares the cash is in the bank and has not added to debt )
The simple logic of this transaction is that the new SP should become £1.4bill divided by 7.4 bill, ie 17.1p. The existing shareholders lose, in that their shares are worth 2.9p less, the placed shares immediately become worth 2.1p more.
Normally as soon as a placing is announced the SP will move sharply towards the new composite price.It is also the case that the "bookrunners" and indeed the company are well aware that the buying II's are lined up and the "book" is closed within hours.
Will follow up with more in a while.
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
= 0.38 (pound), i.e., 38p
4.If the use of the standard way in the above examples are correct, the “impact” as described above look a bit strange to me; as I believe that if the placement price is set at or slightly above the share price before the placement, the share price should not change or be slightly higher (as shown in the examples provided below; Casa, could explain the different effects before the above using the standard city way and the below using a common sense method):
MC at 0.21p: 0.21 x 4.9 = 1.029 billion pounds
Placement at 0.21p, 0% discount
MC at 0.25p: 0.25 x 4.9 = 1.225 billion pounds
Placement at 0.21p, 16% discount
MC at 0.30p: 1.47 billion
Placement at 0.21p, 30% discount
3.You mentioned that this calculating method leaves aside any “sentiment” effects. However, as the method uses the current market cap of a company into calculation (to work out of the percentage), it seems to me that it is actually influenced by the “sentiment” effects implied in the different between the share price just before the placement announcement and the placement price. Take SM for example (to raise 0.4 billion in placement at a placement share price 21p), when its market cap was 1.833 billion pounds (at 39p, 4.7 billion shares). If the placement was made at that time, based the standard way, the 0.4 billion raised fund took around 21% of the market cap, post-placing SP should be 21x(100/121)= 17.35p, the this indicates a 55.5% drop of the share price (the big drop may be explained by the big 46% discount the company provided to the placement investors); Partly due to “sentiment” effects, the SM share price dropped to 20.5p (with a market cap of 1 billion pounds), 21x(100/140)= 15p, the price would have a 26.8% drop from 20.5 to 15p. The percentage drop was less than the above scenario, as the placement discount is less (here actually the placement price is slightly higher than the price before the placement, a low discount rate or a premium price offer deduces the negative impact?).
Sorry, a bit long to read: in a few posts due to limitation on post length.
Casa (20 Dec 18): “IF it were by a placing that's £400mill/1bill ie 28% of the current market cap. At an SP of 21p that level of dilution equals a post-placing SP of 21x(100/128)ie 16.4 pence(leaving aside any ‘sentiment ‘ effects.)” Casa (18 Jan19): the one given about is a “standard City way of calculating the ‘mechanical‘ effect of a share dilution”.,. “If anything I have written is unclear or if you disagree fire away, I will respond”.
Hi, Casa, I made some comments twice on your calculation and explanation, with some disagreement on your use of the “standard city way”. However, I do still have a few things unclear on what you have written (or may have some misunderstanding on the standard city way). Could you please respond on the following (5 questions )?
1.”£400mill/1bill ie 28% of the current market cap”: is the “28%” a typo (as 0.4 billion out of 1 billion is 40% rather than 28%)? Or I missed something on the “28%”?
2.Could you please provide a reference on the standard city way of calculating the “mechanical” effect of a share dilution (especially, on how this formula is derived and when it is proper to apply)? This may help me understand it better.
A hundred years of good times to come. It is mind boggling and a gift that will, fingers crossed, will keep on giving to our families when we are just memories. It is no wonder many if us are emotionally involved.
Good luck all.
Milo "there is risk" - exactly - $4 billion is too much to crowdfund and institutions are investing other peoples money so they have to be super cautious
Two or three years ago there were three huge risks - financial, construction and "will anyone want the stuff?"
All the crop trials and TorPs must have reassured over the last of these. Stage2 ,whatever any dilution, will cut the financial risk and the construction risk reduces every day that nothing goes wrong
BUT we still at least four and a half years away from profits so IMO the helter skelter of the SP will continue
and as you say, there should then be 100 years of good times to come
LITC, you are right. I oversimplified it.
In my experience, it's best to leave the hard calculations to LITC. He knows what he's talking about, nice try though.
Thanks for your feedback Milo. But with regards to your "the NPV does include debt repayment and interest":
The company's own information has always stated that it's own NPV calcs are based on unlevered cashflows.
Eg. you can look at the most recent Investor Presentation Nov 2018 (and any others that preceded it) and see on the "NPV" page (pg.25) that in the very, very, very small print in the footnotes (always read the small print lol), it states:
"Cash flows are unlevered and discounted at 10% WACC".
Be that as it may, I fully agree with you that there is so much upside here for shareholders, even with a possible chunky level of dilution for the $400-600 m contingency, which is why I've got a stupidly overweight holding :-)
Have a great weekend,
LITS / Cranleigh,
Yes, and no = in my opinion. But we are going in the right direction (as so to speak), but also looking at the mine site photos July 2017 and July 2018 ....
'You need to aim for the moon in order to shoot a star', and having done few deals and large scale projects in my life, as long as you are materially going the right direction, within reasonable variances, you take a 'vision' and execute the dream ...
On the other question - the NPV does include debt repayment and interest, it is 100 years worth.... and yes, going to 20m t / year, increases the value more, but what I try to do is show that without baking absolute all positives and no negatives, we see the moon in our sight.
And yes, there is risk ... we currently swipe under the carper the 40% construction risk .... which is there for a reason, and this is not a lego DIY job.
But good discussion and thank you for the contribution, this is way better than other split personalities tantrums seen around.
Quite apart from the large gap between Enterprise Value and estimated NPV at this point in time, consider also the anticipated tripling in that NPV by 2027 (page 95 of the April 2017 Prospectus) assuming we are headed to selling 20mtpa.
That gives me considerable confidence that, assuming a successful Stage 2 with no or minor dilution, our SP has a very long way to go indeed - the famous J-curve, as risks diminish and the build cash outflows become irrelevant to NPV because they are in the past. An SP no doubt boosted by II demand once the risks become palatable to them.
Typo: ULEVERED = UNLEVERED
Hi Milo, thanks for your input on coming up with a calculation of value based on an increase in shares through a possible dilution.
Whilst I agree wholeheartedly that the 10% discount rate is really arbitrary and MAY be (IMO) unrepresentative of the appropriate equity risk premium element within the WACC that should be applied to this project at this point in time (or more specifically straight after after a successful St2 fund-raise) to reflect future construction risk and product market risk, competition risk etc. nevertheless I don't concur with the what you have done with dividing NPV but number of potential future shares in issue.
This is because NPV in standard DCF analysis is a reflection of the present value of future cash flows BEFORE/WITHOUT taking into account how much of the cash outflows are financed through debt or equity, hence the cashflow model for the NPV is an ULEVERED set of cashflows. Your approach is not taking into account the huge debt load that would have to then be factored in to arrive at equity value which is divided but number of potential shares in circulation.
“But is Sirius go back to shareholders the new shares will be offered at a very substantial discount to the current SP.”
Hi Chilting. Whilst I agree with that, I’m not so sure about the terminology “go back to shareholder”. During the stage 1 finance CF gave existing shareholders the chance of collecting shares via a claw back from the II’s involved.
I see this as a true representation of CFs character. He is a man that rewards loyalty. He is a man is fully engaged with the financial structure of this company, providing everyone involved (PIs & II’s alike) a chance to benefit from the financial growth this provides and continue the journey.
I wouldn’t be surprised to see a similar plan for any equity raise required and a percentage being made available to us.
I’d like our 10% at a 10% discount to yesterday’s close SP and the II’s remaining 90 at a significant premium please Chris. :-))
Fred, thanks also to you for your inputs here. Appreciated!
BTW, I filtered the other poster, there is nothing he adds here that warrants me reading it ... I read and try to interact with him once, twice, and wasted 10 min of my life, and not one will give me back these 10 min. Never again.