Guys & Gals,
I thought I'd start a new thread with my thoughts and feedback on the CR action today, given it's obviously front of many people's minds. I have spoken with both management and TC's today, and do quote them where appropriate/relevant, and also add other unattributed thoughts that are my own reasoning of adding up 2 + 2 and hopefully arriving at the correct answer (i.e. IMO). It's a long read, but KNL won't be trading Wed, so you may as well take the time to read rather than respond to other trolls or those who speculate without making the effort to actually find out.
Background (I'm putting this in for the benefit of recently new shareholders who aren't fully aware):
- KNL's flagship project, Epanko, is progressing, with BFS complete, $200m+ NPV, mining/environmental approvals in place, deposit open in all directions so there is more than is measured. The project is (on current nameplate production) 100% sold out, with the following buyers:
(1) 25% annual production sold to a large by un-named European Graphite Trader (EGT). We know they are German based, with a very large balance sheet, and that they also ran their ruler over other graphite companies at the time (there weren't as many back then, so you can guess the obvious ones) prior to selecting KNL, and this was mentioned in the corporate presentations at that time. Their initial interest was more in the traditional and particularly the expandable capabilities of our graphite. Of strategic interest was their stated aim of securing graphite supply from a non-Chinese source. This was supported 2 years later with the German Govt in-principle debt guarantee. EGT have stated to management in the past that their intention was always to take more graphite once available.
(2) 50% annual production sold to ThyssenKrupp. While purchased by their trading arm (TK are a large conglomorate with many diverse old-age and new-age businesses thrown in), the graphite is intended primarily for their own use, not trading use. Again, this would have provided support for the German Govt to have issued their in-principle debt guarantee. They have also indicated that they want to secure a larger amount of supply than their off-take, and longer term holders will recall that they initially optioned up Merelani graphite, then switched it all to Epanko when it became clear Epanko was going into production first, however they will in all likelihood be taking more from Merelani when that eventually comes on board too.
(3) 25% annual production sold to Sojitz. The keys for us here were that they took out the balance available production (although like the other purchasers, have indicated they want more), and that they are looking heavily for the battery angle. They have undertaken the most extensive testing of a new graphite mine of any buyer so far, with 200 tonnes of actual production testing (as opposed to doing prelim testing on small samples). No other graphite mine has (to my knowledge of what's in the public domain) sent out 200 tonnes, so the testing was robust, and unique.
- Based on obtaining the above 3 buyers, KNL were (and are still) moving towards finalising finance for production at Epanko, with an expected CR due after the finance announcement. Accordingly, today's CR has been a surprise announcement to most of us (myself included).
Current Capital Raise:
- Firstly, nothing has changed with regards to KNL progressing/finalising finance and proceeding with Epanko. I specifically asked this question today, and have been unequivocally told that everything with finance is on track and progressing (or as on track as you can be with a two-bank senior-junior deal). So the finance announcement is still on track to coming out in due course.
- This CR has been opportunistically put forward in KNL's lap. From the TC guys (and I'm a TC client, so I support this), there has been no prior "feeling out" of their clients and checking how much money they have, would they support a CR, etc. While I know the above to be correct from TC, I am speculating/assuming that the same applies to Argonaut (i.e. no prior knowledge, no "feeling out" of clients, etc).
- I've been advised Euroz have some key clients (larger funds/investors) who specifically wanted to place larger investment amount into KNL (I don't know who), but the large (relative) size of the CR supports this. As holders would be well aware, our lower volume average trading means that multiple instos could not feasibly accumulate an aggregate of 47 million shares. A quick glance at the past 12 months trading indicates an average of 465K shares per day. On that basis, if every single other person stopped buying (which is obviously not going to happen), it would take these instos over 100 business trading days, or nearly 6 months in real time, to accumulate their stakes. Throw in other normal buying pressure (even at minimal volumes), and these guys probably would take a year or more to accumulate an aggregate stake that size. The market reality is that a fund/insto was never going to patiently accrue that large a stake over that length of time (given they want to be in now, prior to finance being approved, and not wait till we are in production to finish accumulating).
- Accordingly, while there are 3 brokers (Euroz, TC, Argo) on the termsheet (which I've seen), the reality is that it's been driven through Euroz, by one or two key insto/fund investors. The additional assumption on my part is that I know management have been loyal in the past to existing clients where possible, and it's likely they have added in small amounts of the raise available to TC and Argo clients. I've been advised the TC portion, and likely the Argo portion, are massively oversubscribed, however I think most clients will miss out, because as others have posted, they can only do a 25% increase in the share register without an EGM (47.3m shares divided by 25% equals our share register, +/-), so taking more is not on the cards as yet (unless they change their minds tomorrow, and suddenly go down the EGM path due to another new opportunity)
- From discussions, the main thrust from the new interested investors was waiting for confirmation of Sojitz. The battery stuff appears to be what they are interested in, and Sojitz succesful bulk scale testing would have no doubt given them comfort and confidence. Whether they have been the ones pushing for a large portion of the funds to be directed at the downstream processing we won't know, but I suspect and suggest that that would be the case, otherwise the funds would have been nominated as additional "working capital" or "mine equity".
- Based on the sudden interest, KNL management have been presented with a quality problem of bringing forward other aspects of their strategy, the two most notable being:
(1) Increasing production from 40 Ktpa to 60 Ktpa
(2) Downstream graphite processing (i.e. processing the newly dug graphite for end user specs, rather than merely digging it out and shipping it off as raw materials)
- The above two areas of focus make up the vast majority of the CR funds usage. Management today were particularly pushing the downstream processing, with a stated view that we could expect coming announcements in this regard in the (near) future. I don't know what specifically that would entail, or when, but given this has been mentioned in numerous corporate presentations in the past, it's something that has had some very prelim behind-the-scenes work obviously done (i.e. the downstream processing is not merely something that has been thought of this morning by KNL).
Additional Comments/Reasoning/Conclusions:
- Skrundlow posted that they hoped it wasn't a "bog standard" CR for working capital. Rest assured, it's not. $11m, fast tracking a production increase decision, and downstream processing, should indicate that pressure is coming from our buyers to offer more. This is not "bog standard"
- A number of people have posted about dilution. All other things being equal, a CR at current sp does not dilute a company, as it's cash at bank goes up by the same amount of shares issued. So a CR at modest discount is not that concerning when apportioned over the register. In rough numbers for us specifically:
189m shares on issue at 27c (closing price Mon) is $51.03m market cap.
47m shares additional at 23c (CR price) is $10.17m cash at bank (taking a nominal 6% off for raising costs).
That leaves us with 236m shares and market cap of $61.2m, or a diluted share price of 25.93c.
In other words, the effect of dilution is less than 1.1c per share, or 4%. (there is a separate argument that we "should" be valued higher, and therefore the dilution would have been even less, but that's just pointless arguments at this point in time. Right or wrong, the market is the market).
So the question is, "Is the CR worth what we are doing with the additional money?"
Based on the 2 main uses for the money, the answer is a resounding yes.
(1) We are looking at increasing the production from 40 Ktpa to 60 Ktpa. The additional 20 Ktpa (a 50% increase in production) is likely to lead to an NPV increase of at least 50% to the project (and I'm not referring just to the official BFS either). That's say $100+million, or 42 cents per share.
(2) Battery processing. I don't recall the numbers off the top of my head, but the NPV is likely to be, let's be stupidly conservative and say only $50m NPV. That's a 20c per share NPV for the battery processing, although in the future this is more likely to drive $dollars on the sp, not cents, but let's be safe.
So am I happy "paying" 1.1c of my share price to speed up production increase in the very near term, and potentially start downstream processing of our graphite from Day 1, with a 60+ cent drive in my project NPV? Well, I'll leave you to answer that question.
- Someone asked (Spid, I think) about retail shareholders getting a look in? The reality is that this is going to be highly unlikely, for 2 reasons - the company is at it's limit of how much it can raise without an EGM, and retail shareholders are just not allowed to participate in a CR with quick decisions being made on extremely limited info. And if anyone thinks an insto is going to publicise to the market that it wants to buy in, and allow a company the time to do a SPP, all while watching the price rise to an uncomfortable level over several weeks as traders get in, then they've don't understand how finance and equity work. If there is to be an SPP, it'll likely be done after the finance announcement, when it's all public knowledge (unless they have to go to an EGM anyway, in which case they'd likely tack on an SPP then).
Conclusion:
KNL heading down two separate (but linked) paths officially now. One is increasing production, and the other is the battery processing facility. Expect to see more announcements on the latter (in management's direct words, they are excited about the announcements that will be forthcoming in the near future with these, in particular with the battery processing).
So I'm "paying" (via dilution) a tad over 1c, to drive a potentially enormous amount of additional NPV (60c or $1) to my current share price, that would otherwise not be able to be done until we are in production and have other surplus cashflow. I'm more than pleased with that.
(As I mentioned, I've stated where I'm repeating something from the horse's mouth, or referring to past releases, otherwise the rest is IMO, and I'm not giving investment advice).
Let's recall the recent passing of Jaded and the positive posts, and discuss issues constructively. Negative considered comments are encouraged. One line trolling is not, but if it does arise, let's not respond emotionally.
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