Chappy,heres what we wanted to see At 23 cents, RM uses creative financing to save excess shareholder dilution
Stockhouse Ticker Trax is equity specific research (Canadian listed and market cap < $300 million) published every Monday to paid subscribers. Our free Friday column may feature companies previously featured to paid subscribers (with a minimum one month delay) or discuss topics of interest to the general investment community and relevant to overall portfolio management.
To all who celebrate Easter we would like to wish you and your families all the best.
Take a moment this weekend to do something good for someone less fortunate than you or contact a family member you haven’t spoken with in a while. Even a small gesture can often have a big impact.
Rodinia Lithium Inc. (TSX: V.RM, Stock Forum) 23 cents – www.rodinialithium.com
I did a report on Rodinia back in November at 27 cents and while it is unfortunate the stock hasn’t performed better, it is a very common theme right now. In fact, now is a good time to be reviewing your small stock portfolios. Many companies will be running low on cash and if they have to finance in this environment, it will be difficult and dilutive. Many will be forced to finance near 52 week lows and that will create even more downside pricing pressure.
The lithium sector itself has been boring and the underlying stocks have a small audience. Rodinia has a world class project in Argentina and is working to prove up a positive feasibility study by the end of 2012. Results to date have been very impressive and as I noted back in November, the early economics are very encouraging – you can find that original report here (it is just as relevant now).
https://www.stockhouse.com/Columnists/2011/Nov/11/Lithium-junior-most-promising-in-relation-to-share
This week I wanted to highlight news Rodinia issued on Monday because it was something other small public companies should pay attention to. More often than not we see small companies finance near the bottom of their charts. They typically issue more cheap paper than they need to and they attach warrants which makes the dilution even worse. As the stock moves higher, those who participated in the financing often dump their original investment and sit on the warrants. All this excess paper and selling pressure makes it very difficult for existing shareholders to recover their investment.
RM Used a Different Approach
Rodinia took the high road to protect the interests of existing shareholders while their share price was depressed. On April 2nd they announced a $3 million financing using subscription receipts. It is a complicated structured tied to future production of potash but has a conversion feature priced at 45 cents per share – 100% higher than the recent trading price.
Not everyone is able to find investors willing to finance under such creative terms, but it demonstrates management’s commitment to protecting and building shareholder value. Many companies finance more than they need to and it puts a lot of cheap paper into the system.
Important Element of Risk Removed
While the sector may have limited interest, you would see the strong (potential) economics of this project in my November report. If they are able to finance mine development, this could be a significant cash cow.
My main concern however, was how they were going to finance work for the remainder of 2012 without suffering significant shareholder dilution. This new financing initiative removes that short term risk – although it is still subject to exchange approval.
The financing monetizes the potash from this project as a by-product. It creates a “potash stream preferred share” that is interest bearing and has a one-half common share warrant that is exercisable at 45 cents. The company has until 2015 to produce potash and if delayed, they would incur a production penalty.
I hear the company maintains talks with their strategic partner Shanshan (a major lithium player in China) and other parties that may be interested in off-take production agreements.
Further due diligence: There is a corporate presentation available on the Rodinia website:
https://www.rodinialithium.com/investors/presentation/