something’s up!

So, relating to the AGM announcement and the provisions for share issue - with no less than 2 resolutions relating. Herewith a few thoughts. I look forward to further commentary.

I've now read through the AGM notice in detail, and also referred back to the 2011 AGM notice for reference. I’ve read some material relating to ASX share issue rules, so have a better handle on some of the regulatory elements. Link for your perusal http://www.asxgroup.com.au/media/PDFs/Chapter07.pdf

I hear what Mudguts and Frogga say, share issue is the standard funding mechanism available to public companies that don’t yet earn any revenue. 15% appears to be the point at which the ASX deems the investor to be protected to some extent (from excessive dilution), yet provides the mechanism for the company to continue to reasonably fund its activity.

What I see here is a whole lot more than simply allowing for up to 15% of additional stock to be issued to continue funding PEN. Quite frankly I'm alarmed at what I think I see in the AGM notice; in its potential extreme outcome it is nothing close to "normal", it is something that would be radical. Please indulge me with the long posting.

Facts first, then we’ll speculate:
Currently 2,565M ordinary shares on issue ('round about).

Resolution 3 – Share Placement Facility – 10% placement capacity.
(A special resolution, so needs 75% majority to carry)
“The effect of Resolution 3 will be to allow the Company to issue Equity Securities up to 10% of the Company’s fully paid ordinary securities on issue under the 10% Placement Capacity during the period up to 12 months after the Meeting, without subsequent Shareholder approval and without using the Company’s 15% annual placement capacity granted under Listing Rule 7.1.”

Resolution5 – Share Placement Facility – 450 Million shares.
(Ordinary resolution, so needs simple majority of 50%+)
“The effect of passing Resolution 5 will be to allow the Directors to issue these Shares (if required) during the period of 3 months after the Annual General Meeting (or a longer period, if allowed by ASX), without eroding the Company’s annual 15% placement capacity.”

[So Listing Rule 7.1 allows the company to issue up to 15% in new shares without any shareholder approval]

“ASX Listing Rule 7.1 provides that a company must not, subject to specified exceptions, issue or agree to issue more equity securities during any 12 month period than that amount which represents 15% of the number of fully paid ordinary securities on issue at the commencement of that 12 month period. ASX Listing Rule 7.4 sets out an exception to ASX Listing Rule 7.1. It provides that where a company in a general meeting ratifies the previous issue of securities made pursuant to ASX Listing Rule 7.1 (and provided that the previous issue did not breach ASX Listing Rule 7.1) those securities will be deemed to have made with shareholder approval for the purpose of ASX Listing Rule 7.1. By ratifying this issue, the Company will retain the flexibility to issue equity securities in the future up to the 15% annual placement capacity set out in ASX Listing Rule 7.1 without the requirement to obtain prior Shareholder approval” (PEN notice of AGM 2011)

Right, so there are the facts. Now just what does this mean!
It makes sense to grease the way for the execs to make some key decisions quickly and efficiently. However, these provisions we're about to vote for collectively open up the possibility of issuing a massive amount of stock in the next 12 months. Why?

Now I get to the speculation part………
Both Resolutions 3 & 5 allow the company to issue stock in addition to the 15% regularly allowed under Listing Rule 7.1 (the one that doesn’t need SH approval).

Resolution 5 only has affect for 3 months from the AGM (or longer if allowed by ASX?) subject to being passed (simple majority only needed).

Let’s say some event is deemed sufficiently important to execute on the mandate we provide at the AGM.....then potentially,
1) 15% issued under Listing Rule 7.1 = 380M (as a % of shares on issue in the 12 months prior, no approval needed).
2) Res 5 issue – 450M shares (prior to end Feb ’13; ie within 3 months of AGM).
3) Res 3 issue – 10% or 340M (2,565M + 380M + 450M x 10%; any shares on issue during 12 months after AGM).

It would be entirely possible to end up with a total issue of 1,100M new ordinary shares during the ensuing 12 months. IF that were to happen, then I could only imagine it would be primarily to insto’s and/or one or more other companies. The total potential dilution associated would be something of the order of 57%. Pick a number….let’s say on aggregate the SP was 7c for this wildly speculative scenario above, then we’d be diluted back to 3c or thereabouts in relative terms (one would imagine the SP would appreciate significantly in 2013).

So, hey presto that would be $77M in funding into the PEN coffers; more or less what we need to get the show on the road with the capital cost of the CPP etc. (PEN feasibility study upgrade – 3 May ’12). Seeing this number brings me to perhaps the only reasonable conclusion I can draw at 17h30 on a Saturday arvo – this provides the latitude for PEN to fund the Lance project in ways alternate to the traditional funding solutions where we beg for money. This is “progressing well” by the way. Now we have an option to assume the position also; good to have options :)

If this postulation has any merit whatsoever, then it’s going to be a wild ride in 2013, one way or the other.

If this is a look through the keyhole into what PEN managements contingency strategy may look like, then I'm happy they're heading the charge, although I'd prefer to be told that this is a remote contingency if the funding wheels do come off, for whatever reason.

SH deserve to have the "heads up" to make a decision now whether they want to be on this bus or not, rather than being fed the pony down the track.

Time for a glass of red....first of the day!