Too long didn't read: This CR may be good for SYR in fighting the shorters.
First of all, I am an immigrant from China. I a CFA holder and did some M&A deals in China, which includes some Chinese graphite companies. So, it is safe to say I am not a rookie in corporate finance. Naturally I noticed Syrah after I arrived in Australia, followed it several years and holding some in my portfolio. To me, Syrah is undoubtedly an attractive stock which has been heavily shorted but with a bright future. (You may disagree with me but I don't plan to argue, as this is a free market and it is not the focus of this article.)
Based on my ride with Syrah, I have some thoughts that I would like to share and discuss. And if in the unlucky event that half of my thoughts are true, then I have to say that ASIC may be THE laziest and most unresponsive regulator in the world.
The trading volume was relatively thin a week before this Capital Raising (CR) announcement. The volume continued to drop dramatically in the past 3 trading days and then it came a trading halt with last price at $2.46. Generally speaking, the CR subscription price is based on a discount on the most recent closing price. As we all know, the CR price this time is as low as $2.23, and the newly issued shares will equals to around 12.4% of the current market cap. Roughly speaking, the fair value of a share after dilution is around $2.43, approximately a 1.2% drop of the closing price. Therefore, as you know, the round CR subscription price is as low as A$2.23, and the new shares will have a market value of 12.4%. My thoughts on this CR is as follow:
1) The issuance is mainly for institutional investors, NO NAME mentioned in the report. For a large-scale issuance (12.4% of market cap), no matter who the buyer is, he/she will become one of the major shareholders of Syrah and have relative voting rights. Based on the evidence that market is not optimistic about SYR (low trading volume). The management of SYR wouldn’t dare to directly issue such a substantial amount of shares, unless they had privately negotiated terms with certain institutions. Because if SYR failed to fully underwritten the subscription, the CR would negatively impact the company. Therefore, there is a high chance SYR has reached an agreement with certain funds or companies in advance to participate in the additional issuance. (Which also explains why the stock price has fallen so much before the issuance, coz no one will buy at a premium)
2) In the past few days, the stock price plummeted. Who gets the most benefit? New shareholders. To a company that is slowly derisking, it is not a bad thing to get equity at a historical low of $2.23. Why would SYR be willing to announce a CR when the stock price is so low? Particulary when you read through the annual report, their cash reserves are still sufficient. And it is not urgent to raise capital at such a big magnitude. What is more, Chief executive Shaun Verner stated in an AFR interview that “he is willing to delay the company’s push into battery grade graphite production if such move is required to avoid a dilutive equity. “
3) It is worth noting that as a listed company with 21% equity being shorted, it must be institutions that is behind the scene. Therefore, as the short seller, they need to take up the issued equity in a CR since they currently hold the shares. If the lender of the stocks needs to participate in the CR. Then the short seller must sell the stock to the lender at the price of 2.23, hence increase the shorters’ exposure.
Based on the above arguments, here is a scenario I speculate that you may treat it as a story.
Due to the frequent shorting of stocks, the management received tremendous pressure from shareholders. After numerous fruitless conversations with the regulator despite asking for assistance, the company finally decided to introduce a new strategic investor to fight against the shorters. Let’s assume the management successfully founds an interested institution, and the terms as follow: The company will issue additional shares, and the participants will promise not to lend out stocks or will continue to increase its positions. Before the confirmation and announcement of the CR, the participants intentionally beat down the stock price to obtain a better CR price, because they know they can always have a better price to refill their positions (of course they may not take this risk). After the CR is announced, the current Institutional Fund will recall all their lent out stocks to participate in the CR. The shorters need to either buy stocks back from the market to fill the gap, or are forced to increase the short exposure (if the shorts are professional enough, they must rebalance, which is to buy stock from market). If this is part of the plan to fight against the short, I have to admit the management is quite smart. The CR seems to be a bad thing, but it actually introduces a white knight to protect the company's stock price.
During my two years observation of SYR, I have repeatedly noticed that the shorters used various law violating methods (including spoofing, etc.) to suppress stock prices. I believe that if the regulators have taken any measures in the past, the SYR management will not need to carry out such action. Overall, I think this is not a bad thing to SYR. I also hope that my guess is wrong. Otherwise, the Australian securities market is basically a market manipulated by the institutions. The regulator is not doing a good job. Feel free to discuss.
SYR Price at posting:
$2.46 Sentiment: Buy Disclosure: Held
(20min delay)