reversal day, page-33

So much for the reduced shorts being a good sign! Someone or a group of people are determined to drive the SP into the ground, and for the time being at least, they have killed the SPP at 12c. The question on my mind, is does it matter?

Feeling a little nervous I have gone back to the 19 September ASX announcement for a closer look. The first interesting thing I noticed was the title:

USD108 million recapitalisation proposal

This is broken down as follows:

o Share placement – 15% new shares at AUD0.12 to raise approximately AUD8.75 million;
o Convertible Bonds – USD100 million 5% 5 year convertible bond issue, convertible to ordinary shares in the Company at AUD0.15 per share.
o Discovery Metals plans to offer a share purchase plan to shareholders at placement price, capped at AUD10 million.

Without checking the current exchange rate, USD100m plus AUD8.75m is pretty close to USD108m. So the SPP has not even been included in the title! The document seems to have been drafted under the assumption that the SPP was included to be fair to existing shareholders but that it was unlikely any shares would be sold under the plan.

Further down is the breakdown of how the facility money will be applied:

• USD25 million in repayment of the revolving credit facility;
• USD25 million in repayment of principal of the project finance facility;
• USD5.5 million (approximately) in payment of corporate advisory fees payable under the Transaction; and
• the balance for development, exploration and working capital purposes (to be agreed between the Company and Blumont).

That fourth bullet is pretty vague. Without the SPP it is worth about $50m, and with the SPP fully subscribed, there would be an extra $10m to spend on vague unspecified stuff. So even if my interpretation of the title is incorrect, the vagueness of that bullet suggests that the absence of any money from the SPP will not bring the whole house of cards down.

A couple of extra points I noted are first:

"Blumont has agreed that it will not, within 12 months of the issue date, offer all or any of the Placement Shares for sale, unless permitted to do so under the Corporations Act without a disclosure document."

It's not totally clear what that means, but my gut feeling is that Blumont is unlikely to be among the manipulators offloading shares right now.

Second:

"The Company currently expects the Shareholder Meeting to be held before the end of the year." and "The Company expects to make the prospectus available following the Shareholder Meeting."

So there is actually plenty of time. Who knows what could happen to the SP between now and December?

Finally, I note there are some conditions precedent on the bond issue, but I could see nothing in there relating to the SP. So in my opinion, the current SP is pretty much irrelevant to the success of the recapitalisation plan, and to the success of the company over the next couple of years.