Close associates of GTT are underwriting 8m 3 year 20c Call Options for MQR shares to raise $80k. The directors of MQR currently hold 9m 3 year 30c Call Options.
The purpose of the issue is to meet a soft commitment provided in the IPO Prospectus (Loyalty Options, see s. 2.18) and apparently for additional working capital. A strike price and subscription price for these Loyalty Options was not provided in the IPO Prospectus.
MQR stated in its last quarterly that it is looking at acquisition opportunities, which begs the question: ‘if the Clayton Valley brine property was good enough to IPO then why the need for a new acquisition, and if not then why give the directors all of these performance options and shares?
So, there is apparently an acquisition in the works, and at this point the only people with any knowledge about this are the directors. On the back of this we have a fully underwritten option issue in the works and the underwriters are associates of the directors and were in-fact directors of MQR until March this year. It is likely they have some insights as it is well known that underwriters only underwrite if they are confident.
The options, at 1c, will raise $80k for MQR, of which +25% goes to costs associated with the raising, the costs seem legitimate but as there are no economies of scale the economics are out the window for MQR’s shareholders.
We can comfortably assume: that the income from the sale of the options will offer little benefit to MQR’s treasury and therefore this exercise is hardly worth the effort; that it is unlikely that the majority of shareholders will take up the opportunity as small raisings like this generally solicit a very poor response; and that the underwriters are likely inside the tent as to offer an underwrite you need to have some insights. Which means this is all looking rather smelly.
Options tend to ruin a company’s capital structure, they are only ever exercised if they are deep in the money and the option holders are assured the conversion risk is low, which means that the company will raise money but generally at a steep discount to the then share price. For an example see AVZ’s notice today, 20.5m options converted at 3c, giving the option holder am instant >4x uplift and AVZ cash at a >75% discount. As the MQR directors already hold 9m options, and the underwriters will hold anywhere between 0.5m and 8m options post issue, it would seem the directors and former directors/underwriters are positioning themselves for effective control if the company hits paydirt, i.e. on exercise, assuming no additional raisings, this group could hold anywhere between ~27% and ~44% on a fully diluted basis, the 27% assumes all shareholders take up their option rights and the 44% assumes the underwriters take the full placement.
Using the Black Scholes model the value of these 3 year options, on the basis of a 20c strike, a share price of 18c, and volatility of 30% to reflect the resource sector, which is conservative, values these options at about 2.5c. If the share price creeps up to 20c then they are valued closer to 5c.
In short the issue of these options suggests that something is in the works, and we can safely assume the underwriters know more than we do. In issuing these options at such a steep discount to true value who are the directors of MQR helping, and if it’s the shareholders why not clip them to the shares at IPO? The net proceeds are, after all, hardly worth the effort.
The dynamics around this option issue look very smelly, and at 1c the options look to be dirt cheap - it’s a cheap option, pardon the pun - so if you find yourself positioned to take them up then probably you should do so.
MQR Price at posting:
18.0¢ Sentiment: None Disclosure: Not Held
