Thoughts on the share issue deal & price drop (long post)(Long post. Perhaps more helpful to newer investors.)
A couple thoughts about the share issuance deal and subsequent price action. As we all know by now, the share issuance was done as a mandatory part of the uplisting process to the TSX. Companies applying to uplist are required to show $10 million in their company treasury, the majority of which has to come via a share issuance. This is both to show the exchange that there is market interest from the investment community (and that they’ll have no trouble raising funds down the road), AND to put some money in the coffers of a newly listed company. There’s been some concern shown on the boards as to why the deal occurred the way it did, why the shares weren’t available to investors, why the share issuance was priced low, and why the share price has dropped since the announcement. First, the share issue deal intracacies: There are generally two ways to issues shares in Canada: 1/ PRIVATE PLACEMENT -- in which a block of shares are sold to a specific single entity, such as when PYR bought 4 million shares and Sheldon Inwentash bought 500,000 shares of HPQ on Sept 1. These shares weren’t offered by HPQ to anyone else, just those two parties, privately. A PP is a very straightforward transaction that is simpler, significantly less expensive to conduct, and extremely fast, with the details generally not even being reviewed stringently by regulators, as the transaction and the parties are often considered “exempt”.
2/ PROSPECTUS OFFERING – when shares are issued to the public at large through a formalized and documented process that is highly regulated
The TSX uplisting criteria mandates that the issuance be done through a prospectus and not a private placement.
So Why a Short-Form Prospectus?
Well, there are generally 4 prospectus types available for use:
1/ LONG-FORM PROSPECTUS, usually only used upon an initial IPO when a company enters their first exchange, and requires significant documentation, financial disclosure/investigation, and time
2/ SHORT-FORM PROSPECTUS, also knows as the 44-101F1, available to companies already trading on an exchange and who have documents filed previously to SEDAR, specifically the current annual information form (AIF) and the most recent financial statements.
3/ SHELF PROSPECTUS, allows a seller, who has no immediate intention to issue shares, to file a single short form prospectus to SEDAR about future intentions to sell shares, and with all future sales of those shares being qualified up front, with no further qualification required, so it can move quickly when funds are needed or when market conditions are more favourable. Most commonly used by mining companies.
4/ POST-RECEIPT PRICING PROSPECTUS, that allows companies to file a notice to issue shares that omits any pricing and size information, then using a subsequent supplemental filing at a later date to fill in the omitted information.
PYR used the short-form prospectus because a long-form wasn’t mandatory (and wasn’t desired, as it’s onerous), it provides better transparency than the shelf and post-receipt prospectus’ and meets immediacy criteria, and is the most common for meeting uplisting criteria.
So Why the Bought Deal?
Using a short-form prospectus, a company can then issue shares in two ways:
1/ GENERAL SHARE ISSUANCE (often known as a “follow-on” offering), where shares are issued by PYR to an underwriter, who does not buy the shares but merely acts as a middle-man in selling these shares to any investor or investment house who inquires, at a set price all at one time.
(*Less frequently, like Tesla recently announced to do, shares can be sold through an at-the-market [ATM] offering [also called a controlled equity distribution], dribbling out different chunks on different days whenever it’s convenient, and based on the price of the day. This can currently be conducted in Canada only with exemptive relief [ATM Relief] from the prospectus delivery and technical prospectus disclosure requirements, but proposed amendments are currently on the table to make it more available.)
2/ BOUGHT DEAL, where the entire block of shares is purchased outright by the underwriter, who then assumes all responsibility to either hold or sell the stocks at their leisure.
PYR chose the bought deal approach. To help understand why…
Bought deals offer advantages and disadvantages to both the issuer (PYR) and the underwriter (in this case Mackie as prime, likely with secondary companies as part of a syndicate).
ADVANTAGE FOR THE ISSUER (PYR):
- the company faces no financing risk, and no risk the shares won’t be sold
- the payment is received immediately, rather than collecting $ only as individual shares sell
- the deal happens immediately, with no waiting until shares have sold
- there is no termination clause or “market-out” clause, so once the underwriter signs on, they cannot back out on the deal due to a change in market conditions or drop in share price.
ADVANTAGE FOR THE UNDERWRITER (Mackie):
- they get a large chunk of shares at a discount to market value, that they can resell on the market pocketing whatever profits they can make
ADVANTAGES TO BOTH:
The bought deal regulations were modified a few years ago to allow advance marketing of the share sale by the underwriter to its client base prior to the prospectus being filed with the regulator, further reducing risk for the underwriter, which further increases the likelihood of the deal being completed, and completed fast, for PYR.
In addition, while pre-marketing of stocks to potential investors before issuance is prohibited by Canadian securities laws, there is an exemption for bought deals. The pre-marketing helps to comfort both PYR and Mackie of the likelihood of the deal’s success.
Now, it’s important to keep in mind the DISADVANTAGES TO THE UNDERWRITER (Mackie). They are assuming all the risk, have to put capital up front, and face the theoretical risk of not being able to resell the issue at a profit right away.
The KEY DISADVANTAGE FOR PYR is having to give shares at a market discount (which always end up affecting the share price briefly… more on that below), but as I relate further above, the discount was only 11%, so far better than most discounts.
We are actually somewhat fortunate, in that bought deals are very much a Canadian standard practice, and not nearly as common in most capital markets. US companies are often envious of how fast Canadian-listed companies can raise capital through bought deals without waiting for shares to sell.
So the bought deal was chosen primarily due to speed (PYR is on an accelerated time frame) and certainty. Faster access to the capital, fast deal time, and it’s virtually guaranteed.
Why Couldn’t You and Other Existing Investors Buy These Shares at These Discount Prices?
THEORETICALLY, YOU COULD. If you have an actual human broker, they could have enquired on your behalf with Mackie.
PRACTICALLY, YOU COULDN’T. In the absence of the high number of IPOs we used to see on the markets, investment banks have to make up a lot of that money through negotiating bought deals and private placements. As a result, bought deals can be well protected and reserved for their private clients and business partners on the buy side. Unless it’s a much larger issuance, there wasn’t enough to spare, and this issuance was quite small at $10MM-ish.
Why Did the Share Price Subsequently Drop After the Issuance?
First, INVESTOR SENTIMENT. The two notorious problem words for shareholders are “dilution” and “financing”.
Adding shares does legitimately “dilute” and devalue one’s ownership percentage, but the reality is it’s by a small amount. Adding shares also lowers earnings per share, again by a very small amount.
Rough math, the share issuance added about 3.2million shares to the existing total of 160MM shares, or 2%. Theoretically your ownership of the company was then reduced 2% (not a math guy, think that’s how it would work). This annoys people who can’t see the forest for the trees, especially with a massively low float company where half the shares aren’t even available for trading because they are owned by the CEO. Annoys people enough to sell, or complain and moan on forums, which causes other people to sell.
There is also far too often a perception that share issuance signals immediate financing need, indicating a company not doing well. Unless you’re a junior minor raising funds to start drilling, financing can be perceived as a sign of trouble, which is incredibly nave and short-sighted, but it remains.
One of the biggest problems in this regard is day traders, swing traders, or casual investors not paying attention, who move to sell on any perception of “negative” news without digesting or even reading the news. When dilution and financing are implied, when a news release comes out they pull the sell trigger – even if that financing was for something MANDATORY AND POSITIVE like meeting essential uplisting criteria to a major exchange.
No matter what happens to a company or why, investors tend to focus on what each share of their investment is producing that very moment, not why or how – too many investors don’t care or even want to know why something happened, just that it did. Sad but true.
Second, FLOOR PRICE / BASE PRICE CHANGE.
As mentioned above, one of the disadvantages of the bought deal is that the issuer (PYR) must agree to a somewhat significant (depending on who you ask) per-share discount, sometimes up to 30% of the share price.
Mackie got a deal at $3.60 when the stock was trading around $4, so around an 11% discount on the price at the time, which is considered very good (for PYR).
That said, while Mackie negotiated a price at $3.60, they also get commission, between 4-6%, so let’s call it 5%. They likely chose to apply that commission to the share price rather than taking cash. So if the publicized price was $3.60, and the commission was 5%, Mackie’s actual price may now be $3.42. That might be their break-even number as they attempt to sell to private clients and institutional investors.
Institutional investors and experienced individual investors know this, so in their minds, $3.42 - $3.60 is the new base or floor price from which things should start today, before moving up. Therefore, "why hold my higher priced shares when I can sell high, then buy back in once the price meets that floor price" reaction takes over. As a result, you see a temporary sell-off.
So, the share price drop in the aftermath of the share issuance is caused by investor sentiment, based on a poor understanding of dilution and financing, plus a street perception that a new floor or base price has been set.
The good news.
Negative market reaction, if any, is almost always TEMPORARY.
After a day or few of drop, then choppiness, the share price will likely start to rise as buyers buy back in, the long holders scoop up the low priced deals, and new people who saw the news release learn about PYR for the first time.
Hope that helps some. Sorry for the long post.