Capital Raising Dilution, page-25

"Dilution is irrelevant" is an incorrect statement because it negates the time effect of holding risk.
A BOD failure to understand the effect of dilution is one of the key factors determining overall investor returns.

A pure holistic approach fails to account for shareholder holding risk. When a shareholder makes a decision to purchase a stock prior to a future unknown “event”’ (in this case the BOD decision to purchase Tropicana) they do so on the facts available at that point in time. Nobody “knows the future”. Along with that decision comes risk. Risk that the investor outside the shareholder registry does not hold.

Let's say for argument sake you have two investors. Investor A's competitive advantage is he/she understand how to value gold projects. Investor B has a lesser knowledge of such affairs. Investor A may have purchased into RRL prior to this announcement after valuing the return of investment of RRL's gold reserves at a SP of "X", prior to not knowing the Tropicana decision. Hypothetically, he/she might of valued Tropicana's return on investment at a lower valuation. But investor B gets the chance to make that Tropicana valuation without the holding risk of owning RRL. Once the decision is made by the BOD it's effectively too late for Investor A. He or she is no longer in the position to profit from their previous competitive advantage. The market has already marked down the SP.

Of course renounceable rights issues negate some of the holding risk when companies increase their shares on issue. Because they give the holder a chance to place the additional shares on offer into the market and let the market judge the price of the information announced to the market. But they need to be exclusive rights only available to existing holders for this to stand true. When companies issues shares outside the shareholder base that "judgement advantage" does not occur for investor A.

Holding risk is one of the key factors that BOD never account for in these sort of capital raisings and I believe is one of the major determining factors why large institutions and "sophisticated investors" investment performance is unfairly advantaged over smaller investors who are holding stock prior to a CR.

Further, a major problem with issues that are not exclusive RR (only available to existing shareholders) is it exposes the holding risk of the existing holder to potential vicarious forces who might be in the position to "game the market" - even fraudulently gain an advantage using the illegal practice of insider information. If investor B (for example) knows the details of the price of the CR before it is announced to the market he/she gets the time advantage of working out if it's a good/bad deal before Investor A. Worse, if Investor B already holds the stock as well (prior to the announcement) then that advantage become obvious. They can for example unload their stock at the higher (undiluted) price knowing they can at a future point in time buy the same stock back (should they wish) with the shares they know will be offered to them .

So in summary the effects of dilution are not just about the mathematics of the effect of EPS. Because that negates and does not factor the effect of time and holding risk to shareholders who might be holding the stock before such announcements.

NA/IMO