A POORLY CONSTRUCTED RIGHTS ISSUEImperial Metals has resorted to raising money through the issuance of rights on several accasions. I felt strongly that the last year's issue was weak inasmuch as it left the door open for further issues as the money raised was not sufficient to get them through the reopening of Mount Polley. In that issue, they could have used up to a one for four ratio to raise significant additional funds.
But here we are now in the midst of another issue which, again, may not provide sufficient funds to avoid further dilution in the future.. When I was in the business and orchastrated rights issues, I would insist on the full participation of insiders and generally would want a backstop so as to guarantee the complete success of the issue.I also would want to raise sufficient funds such that it would be unlikely that additional funds would be required in the forseeable future. In this case, there is an indication that there is an informal committment that some of the insiders and management will exercise but there is no guarantee nor is there a backstop. Furthermore, it is probable the additional funds wil be required over the intermediate term.
So where does that leave us? I suggest that it is likely that Edco, Edwards, Moeller and Kynoch will exercise, representing a little over 46% of the shares outstanding. But what about Fairholme which owns about 18% of the shares outstanding. Fairholme has many pockets and has a history of selling from time to time. So they are a big question mark. Also, in view of the uncertainty surrounding the ultimate success of the issue, there may be many smaller investors who will stand aside.
It is certainly possible that Edco, Edwards, Moeller, or some new, unidentified, investor will step in to make the issue successful. But if that does not happen, the result would be very negative from a share price perspective.
Please don't get me wrong. I believe that Imperial has solid assets and that the stock could be a marvellous performer over the intermediate term. But to float an issue with this much uncertainty is an unfortunate mistake.