New Edison Valuation - Up to 7.27c, page-54

Ugh @Deznuts, what you've just described is a capital raising, and one that isn't particularly fair on the rest of us retail shareholders.

I'm not sure who the people are that don't like a capital raising. It's absolutely necessary for start-ups to do, and I personally prefer that if anyone is getting to buy more shares at a discount, I am one of the people doing so. Both from the point of view of getting to increase my holding at below the market rate, but also to avoid dilution of my holdings from someone else.

As long as there's a renounceable rights offer on the same terms as any big investor coming in, there isn't dilution for the individual shareholders. That is the fairest way to do it.

When GXY came onto the register in 2017, the shares were trading at 1.1-1.2c. Market cap of about 20m. GXY bought 12% of the company for $2.9m at 1c a share. Then all shareholders (including GXY) were given 1-for-6 rights to buy more shares at 1c a share. This raised another $4m.

To demonstrate the importance of that raising structure, here is a simplsitic example:

There were 2,139,506,672 shares outstanding before GXY invested. That means if you owned 2,139,506 shares, you owned approximately 0.1% of the company.
GXY being issued 291,750,910 shares increased the total to 2,431,257,582 and reduced your ownership percentage to 0.088%.
But then you were given the the right to buy another share for every 6 shares you owned, so another 356,584 shares. All shareholders got that opportunity and the rights were fully utilised, so the total shares outstanding rose again to 2,857,520,897.
Your ownership has also risen (assuming you took up the offer) to 2,496,090. Your ownership remains at approximately 0.088%.

You see the effect that private placements have on shareholders? GXY coming on board was great for helping LPD on its way and I'm sure there is more to come from the alliance, but all existing shareholders had their ownership reduced to make way for them on the registry. Thankfully, though, the board acted to give retail shareholders a chance to avoid further dilution with the rights offer, which is really important to me. Small companies like this often don't bother treating their retail shareholders fairly, and you can see massive dilution.

For example, say the $7m they raised in 2017 had been done with a private placement entirely to GXY.

Your holding would have remained at 2,139,506, while total shares outstanding would still have risen to 2,857,520,897.

Your ownership percentage is down to 0.075%.

I guarantee that if we have any investors coming on board like you describe, then it's the second scenario for all of us retail shareholders. Why would we want that?

Again, if the company needs more money and is offering cheap shares, I'll damn well be there with bells on. I'm sure many others will be the same. It is the fairest way to raise money.

Lastly, whenever you're thinking about how a company is going to raise money, you have to ask what is it going to give up in the process? None of this will come free. Nobody is going to say "Oh, you need $35m to build a refinery? Here you go, hope it works out". There will be a give and take.

If it's a new strategic investor, the price is our overall ownership is reduced. We hopefully have a new partner who will bring great value to the organisation, and we hopefully get a chance to avoid the dilution described above, but we will still be diluted in our ownership.

If the strategic investor is an offtake partner who provides a lump of cash in prepayment for their tonnes of supply, then that is a free loan, which is great, but will reduce the profitability when the plant starts up. After all, the repayment will come in the form of reduced income, so the first few years of P1 would probably just be operating at breakeven.

If it's GXY stumping up cash, what will they want? An increased ownership? A tolling arrangement at P1? Again, increased ownership means the rest of us are diluted. A tolling arrangement for P1 means LPD won't be accruing profits from GXY's tonnes; the margin would be earned by GXY.

A JV with GXY or someone else is also a possibility, but again, you dilute the earnings. LPD would only get half of the profit from P1 then. We would all retain a higher stake of the ownership of the IP, which means more value to us from P2, P3, etc, but those are years away from fruition.

So would we prefer to have the same ownership of a business that takes longer to be profitable while it is paying back the tolling to GXY, or the prepayment to the strategic partner? Or would we prefer to have a lesser ownership of the overall business, but have the business be profitable much sooner? Or would we prefer to reduce ownership of this project to get to production and demonstration of the concept sooner, and then really rake it in with P2?

All of these things are trade-offs that have to be considered. I trust the board completely to make careful and measured choices in this regard, so it's just a matter of sitting back and seeing which way things go.

And setting aside some money, as I suspect we will have another rights offer soon enough.

Cheers