Fibrek Inc FBKZF

Fibrek and the convertible debentures

[oddykog]

It is pretty clear that the $51 million of convertible debentures are unlikely to convert.  The share value of the company would have to quadruple by the time December 2011 rolls around for the conversion to take place.  If that does not happen there are 2 alternatives:
a) satisfy the debt by issuing shares to the debenture holders based on the value of the shares at the time of taking that decision. 
b) pay off the debentures in cash.

The company accounts for the debentures as dilutive, so at December 31st, 2010 they will show that it would require about 45 million shares to be issued to redeem the debenture without paying cash.  In other words the company assumes that they will choose route (a) above.

I believe the value of the shares is being held down by the dilution threat from all those new shares swapped for debentures.  Once it becomes clear that the company will pay the debentures off in cash the shares will rise.

To my mind the company is quite able to generate enough free cash flow in 2011 to redeem the debentures in cash.  Free cash flow of $15 million per quarter is not improbable.  That would leave cash balances at $84 million on September 30th 2011, starting from a base of $24 million on September 30th, 2010.  Quite sufficient to deal with the debentures according to proposal (b).

An announcement to the effect that they do NOT anticipate dilution from redemption of the debenture would cause the share price to adjust to higher valuation levels.