Wow seems like it's announcement season for MHL. Anyway, please find below my thoughts on the latest announcement re: options.
1. POSITIVE: Clarifies that the $1.23m raised from MCL is to be used for "on-going opportunities in SE Asia and other known near-term production areas" and working capital. This in part rebuts the view that the cap raising implies the JV isn't going ahead. Implications: means that there is even less chance that the cap raising has anything to do with whether the JV will go ahead or not.
2a. NEGATIVE: If these options were viewed as 'normal' call options, then the premium of 0.2c implies a time value of 0.2c (since the option is currently out of the money). This low time value means that the writer of the option believes there is a low probability that the SP will go above 2.5c before expiry. Implications: implies ceiling SP of 2.5c.
2b. POSITIVE: However, as these options are not 'normal' call options, the logic above should be no impediment for the SP to go above 2.5c before expiry. Since the 'writer' in this case is the company itself, the thought processes of setting the premium is different to the writer of a normal call option. In this case, the immediate concern of the company is to raise capital, and at the same time reward existing shareholders, hence the low premium is not a concern. Implications: does NOT imply ceiling price of 2.5c as per 2a above.
3. POSITIVE: This has been pointed out by several people already. The fact that MCL and its clients are willing to invest in this company (money is money, no matter how little) shows that there must be some future prospects to MHL.
4. POSITIVE: The issue of options to the directors will serve to further align management interests with shareholder interests, and hence their actions will be more congruent to the goal of maximising shareholder wealth. Implications: Further reinforces that 2a does not hold re: implied ceiling SP.
5. POSITIVE: The issue of options to MCL as consideration for their services shows that MCL believes the options will be valuable. I.e. MCL believes that the SP will be above 2.5c before expiry. As they are a company, they would want this consideration to become valuable in as short a time as possible, hence it can be assumed that MCL views the SP will be above 2.5c in the not-so-distant future (long before 2011). Implications: Implied FLOOR price of 2.5c.
6. POSITIVE: As these options will be quoted on the ASX (refer to second last paragraph of the ann), this effectively means that holders of the options will be exposed to the same upside/downside with minimal cost compared to buying the share itself. This will take some of the momentum/day trading away from MHL and instead traders will trade on MHLO, assuming enough liquidity. This serves to stabilise the SP of MHL -- wild swings and pump-and-dumps to the SP of MHL will be reduced by the introduction of MHLO as a proxy for these day-traders to use instead.
7. Some of you may be concerned that the issuing of this many options will result in dilution to the share pool when the SP goes above 2.5c as some holders of the option will inevitably exercise their right. However, this effect will largely be dissipated with the quotation of the options on the ASX as these sellers will simply sell their options to someone else instead of exercising it. Implications: the issuing of these options actually has no effect on dilution (until close to 2011 when holders of MHLO *will* in fact exercise their option instead of just selling them to someone else), while at the same time raising additional capital for MHL. This is a strong signal from management of good future prospect of the company, as they are deferring this dilution issue until 2011, which means that by that time, they don't believe dilution will be an issue.
Overall, although the exercise price is low, if we view the options issued as: (1) a reward to existing shareholders; and (2) consideration for MCL's services, one might see why that may be the case - i.e. so that the options would become profitable as soon as possible. Remember the issuing of these options by management is different to someone writing options on the stock.
With consideration of the points above, I believe that this effectively sets a floor price of 2.5c for the MHL SP in the near future and is generally a good move by management, implicitly signalling good long-term prospects.
As always, please do your own research.
DISCLOSURE: I hold MHL.
MHL Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
