MacDonald Mines Exploration Ltd V.BMK

Peter Hodgson of Sprott comments on BMK PP

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COMMENT Lessons in how to issue new shares Treat current shareholders fairly, for a start PETER HODSON Financial Post [e-mail] H View from the Street ow would you like to buy shares in a company at a 50% discount to market? Not enough? Well, how about an 86% discount, then? Read on. The market, as always, remains an interesting place. In the past 10 days two interesting events, both financings, caught my eye. For shareholders, both likely caused some questions, some anger and some extreme nervousness. Halloween related? Can’t say, but one in particular was quite scary, if you ask me. On Oct. 25, Protalix BioTherapeutics Inc. (PLX/AMEX), a US$3-billion company developing therapies for, among other things, Gaucher disease, a lysosomal storage disorder, announced the pricing of its public offering of 10 million shares. Nothing unusual so far, as a biotech company conducting Phase III clinical trials typically needs cash to pay for the expensive trials. Protalix shares, however, plunged 83% that day as the company priced its new share issue at US$5 each, compared with the US$36.06 day prior closing price. That’s right, the share issue was priced at an 86% discount to market. The US$3-billion Protalix suddenly becomes a US$500-million company, overnight. It gets worse. Protalix shares haven’t traded at US$5 in years and years, and in fact have never traded that low since the company merged with Orthodontix Inc. two years ago and became the company that exists today. Going back 11 years, the recent US$5 issue is below the company’s US$6 per share IPO in 1996. If you were an existing shareholder of Protalix, how would you feel seeing new shareholders get the chance to buy stock at US$5? It certainly would add to your distress already in place from seeing your shares plunge 83%. While in my opinion it optically looks absolutely horrible, it is all perfectly legal. Protalix, listed on the American Stock Exchange, can issue shares to whomever it chooses and at whatever price it wants. There are no price protection rules on the Amex. In this case, the underwriters say the company needed the cash and the illiquidity of the shares made the huge discount necessary. Still, with that kind of dilution, it’s not the kind of company I will spend any more time researching. Another deal, this time in Canada, had similar tones, but was actually much less nefarious. MacDonald Mines Exploration Ltd. on Oct. 26 announced a $10million financing, at 40¢ per unit. Its stock at the time was 84¢, so the units were priced at least 50% lower than the then prevailing market price, not including the value of the warrants attached to the unit offering. Units were bought by a prestigious group of individuals in the mining sector, including Pierre Lassonde, chairman of Franco-Nevada Corp. and Bob McEwen, CEO of US Gold Corp. In MacDonald’s case, it is likely the financing was being arranged just as the stock was beginning to run because of the company’s exploratory program in close proximity to Noront Resources’ recent base metals discovery in northeastern Ontario. On the TSX Venture Exchange, companies and dealers can ask for and receive what’s known as “price protection,” when proposing a financing on a company whose share price can rapidly change. This price protection can be in place for up to 45 days. So, while MacDonald shareholders might be disappointed they can’t all buy units at 40¢, there are some big differences to the Protalix deal. First, MacDonald shareholders are likely happy with the group of new shareholders involved — an experienced group indeed. In the Protalix deal, it is unknown who the buyers are. Second, MacDonald shares first went above 40¢ in September and spent most of the month below that price. In fact, the shares have been a dime or less for most of the past year. In comparison to recent and historical prices, a 40¢ unit offering likely pleased the company. Third, MacDonald still has a market capitalization below $100-million, and junior resources companies often need to raise funds when they can and when it is being offered. Protalix, a $3-billion market cap company on the other hand, should have had — in my view — more financing options available and better respect for existing shareholders. Peter Hodson is a senior portfolio manager at Sprott Asset Management. Treat current shareholders fairly, for a start PETER HODSON Financial Post [e-mail] H View from the Street ow would you like to buy shares in a company at a 50% discount to market? Not enough? Well, how about an 86% discount, then? Read on. The market, as always, remains an interesting place. In the past 10 days two interesting events, both financings, caught my eye. For shareholders, both likely caused some questions, some anger and some extreme nervousness. Halloween related? Can’t say, but one in particular was quite scary, if you ask me. On Oct. 25, Protalix BioTherapeutics Inc. (PLX/AMEX), a US$3-billion company developing therapies for, among other things, Gaucher disease, a lysosomal storage disorder, announced the pricing of its public offering of 10 million shares. Nothing unusual so far, as a biotech company conducting Phase III clinical trials typically needs cash to pay for the expensive trials. Protalix shares, however, plunged 83% that day as the company priced its new share issue at US$5 each, compared with the US$36.06 day prior closing price. That’s right, the share issue was priced at an 86% discount to market. The US$3-billion Protalix suddenly becomes a US$500-million company, overnight. It gets worse. Protalix shares haven’t traded at US$5 in years and years, and in fact have never traded that low since the company merged with Orthodontix Inc. two years ago and became the company that exists today. Going back 11 years, the recent US$5 issue is below the company’s US$6 per share IPO in 1996. If you were an existing shareholder of Protalix, how would you feel seeing new shareholders get the chance to buy stock at US$5? It certainly would add to your distress already in place from seeing your shares plunge 83%. While in my opinion it optically looks absolutely horrible, it is all perfectly legal. Protalix, listed on the American Stock Exchange, can issue shares to whomever it chooses and