Relentless selling: will it ever stop?Yes, it will, in my opinion.
The possible culprit for the relentless selling is the share issuance of January 31, 2014, which could be considered a very detrimental act for Alabama Graphite’s share price:
“The Company issued 30,714,285 units (the “Units”) at a price of $0.07 per Unit to raise gross proceeds of Cdn$2,150,000. Each Unit is comprised of: (i) one common share of the Company (a “Unit Share”); and (ii) one common share purchase warrant (a “Unit Warrant”) of the Company, with each Unit Warrant entitling the holder to purchase one common share of the Company at an exercise price of Cdn$0.10 until January 31, 2017 (the “Unit Warrant Expiry Date”), provided that if the closing price of the Company’s common shares on the Canadian Securities Exchange is Cdn$0.20 or greater per common share during any twenty (20) consecutive trading day period at any time (the “Triggering Event”), the Unit Warrants
will expire, at the sole discretion of the Company, at 4:00 p.m. (Vancouver time) on the 30th day after the date on which the Company provides notice of such fact to the holder thereof, which notice must be provided within 30 days of the first occurrence of a Triggering Event”.
Assume I was invited to participate in this share issuance (I was not!), then each share bought was $0.07.
Assume I sold it for $0.19. My profit is $0.12. As a Canadian citizen I am due a capital gains tax of 50% and with my tax rate of 50% the total capital gains tax is 25% or $0.03 in this case. Selling 1 share gives me 0.19-0.03=$0.16, for which I use 1 warrant to purchase 1 share ALP and have $0.06 pure profit (a none-Canadian investor probably keeps $0.09 pure profit).
If I had bought 100,000 shares giving me 100,000 warrants and sold them for $0.19 and used 100,000 warrants to purchase 100,000 new shares, my interest in the company stays at the same level and I have a pure profit of $6,000. My initial outlay was $7,000, so my final amount of 100,000 shares cost me only $1,000 or 1 cent per share. (A non-Canadian would have free shares plus a profit of $2,000!).
Doing the same calculation for a sale of $0.11 per share with a capital gains tax of $0.01 gives me no benefit at all and a very meagre profit for a non-Canadian. For a non-capital-gains investor this is $0.105.
This means that a $0.105 share price is the lowest price you can expect, unless other selling for other reasons occur.
Privately I call this exchange of shares to new shares via the warrants the “Warrant Game”. This game can be played with a share price between $0.105 and a bit over $0.20. You can make your own calculations at any price between the above mentioned.
An indication my surmise supports is the behaviour of the stock prices in the last year: year low:$0.105, two peaks of $.23 and $0.215 respectively, immediately followed by a fall below $.0.20.
When will the warrant game stop? It will stop in 3 possible cases: (other selling outside the warranty game can happen any time):
1). When the share price is close to the “Triggering Event”. It is easy to lower the stock price to below $0.20, just dump sufficient shares. Note there is lots of protection for the shareholders participating in the mentioned share issue so the warrant game can go on indefinitely.
2). When all the warrants are exhausted. Highly unlikely with an overhang of 30,000,000 plus warrants.
3). January 31, 2017, the expiry date of all the warrants.
Based on my surmise the most reasonable explanation of the relentless selling is the warrant game which will end at the expiry date.