PLAIN ENGLISH EXPLANATION OF THE FUNDING PACKAGE
I’ve just had a chance to read over today posts. Given there seems to be a bit of misunderstanding about the LDA funding package, here is my explanation of what it means.
What does LDA get?
1. A$4M placement fee - $2M cash and $2M shares. However, this is payable in 12 months, not now. The shares will be issued in 12 months. The issue price will be 90% the of 90 day VWAP ending 12 months from now. Therefore, the number of shares not known.
2. 71,500,000unlisted options. The exercise price will be set two years from now. The exercise price is capped at 70 cents. The maximum LDA will pay when exercising the options is 70 cents. However, a lower exercise price might be set if the 90 day VWAP in the period preceding the two year anniversary is lower than 55 cents (in which case the exercise price is 125% of 90 day VWAP in the period 21 to 24 months from now, being 90 days before the two year anniversary). The options have an exercise period of four years (I assume from now).
3. Anunknown number of Ordinary Shares at an issue price of 90% of the 30 day VWAP witha total issue price of up to $200M at some stage over the next 4 years.
What does HIO get and have to give
1. HIOhas to pay $2M in cash and issue $2M of shares, but neither are payable/issuedfor 12 months. The dilution is not known at this stage. If the 90 day VWAP is $1 in 12 months, then HIO only issues 2M shares (not many shares in my view). If the 90 day VWAP is still 15 cents, then there would be an issue of 13.33M shares. In my view, the shares issued will be much closer to 2M than 13M as I expect the share price to be much higher when BFS completed.
2. Itmust give LDA 71,500,000 options. HIO will only get cash (and need to issue shares) if LDA exercise the options. If the share price struggles over the next four years, the options are unlikely to get exercised. If the share price does well, HIO must issue 71.5M shares but could get up to $50M for the issue of those shares.
3. HIOhas access to up to $200M in funding at any time over the next four years. It can access this funding by issuing shares at 90% of the 30 VWAP prior to requesting the funds (or a minimum price presumably set by HIO). Therefore, issue price and dilution are not known.
Why do I think this is a great deal for HIO
If HIO does not need to access the funding, there is minimal costto HIO. If HIO does not perform well over the next few years, then it might need to issue 13M or so shares for the placement fee, but little else by way of cost.
However, if HIO does well and share price increases, then HIO will get$50M in two to four years time. We probably won’t need the cash then, but this is the real carrot for LDA entering this deal and will be really good for LDA. Given we are currently at around 15 cents, issuing shares at 70 cents at some stage in the next few years means than many holding today will have made around 5 bags from today.
The access to $200M is the carrot for HIO entering this deal. Having this on tap means that it can take advantage of any opportunity that may arise. For example, it could get a head start on some construction items than have long lead times or flexibility to consider various options during BFS and do some extra work. It also part funds construction from equity, which means its borrowing capacity is still at a maximum.
There are two aspects that I think are important advantages to HIO forthis $200M in funding. Firstly, access to the funding is at HIO’s discretion. There is no obligation to draw down. If a better option comes along, HIO can take the deal. Secondly, there is no maximum share price at which shares will be issued. If HIO has a share price of $2 at completion of BFS (see Trans posts why this is possible), then it only needs to issue 100M shares to get the $200M for construction. The dilution, if any, is the choice and responsibility of HIO.
