We phoned your gold tip St Barbara (ASX:SBM) this week to clarify why share price dropped so suddenly this month.
If you’re not familiar with the situation, here are the plain facts. St Barbara was trading along between 60 and 70 cents. It lost a little ground a few weeks ago. Then, on top of that, the company announced a new capital raising for institutional and retail investors…at a price of 40 cents.
As soon as the share market learned the price of the institutional offer, the market price fell to the same level to adjust. It did all that work in one day – 30%. Not pretty.
The confusing thing for shareholders (and us) was price. Why, if the stock had been trading at 60 cents, did the institutional raise take place so far below that mark?
Delphine Cassidy, head of investor relations, explained the details to us. Raising capital is not easy at the best of times. At the moment, in the middle of global credit crunch, it’s even harder. Gold companies have been raising money by offering big investors shares at a discount to the market price. The discount St Barbara applied was around 28.6%. It’s not as outlandish as it seems either. The discount compares well to similar capital raisings by other large gold producers such as Newcrest (ASX:NCM).
But as we said, the share price had lost some ground prior to closing the fund raising. This made the discount look even bigger relative to where the share price had just been. As far as we can tell, the drop in the shares prior to the announcement of the detail was normal market action – investors lacking confidence perhaps, or some randomness in the market. St Barbara had little choice but to apply the 28.6% discount to the already-depressed share price. This meant a big fall overall.
The fact that retail shareholders received no warning didn’t please us much. So, in weighing up whether to keep the company on as a tip, we considered a few different factors. The questions were obvious.
Will the share price readjust? The company expects that it will. If that’s the case, it’s a better buy now than before. The business hasn’t changed in the slightest. But you can purchase St Barbara gold reserves at a much better price.
Deutschbank and other investment analysts sent out reports soon after the stock fell. They set price targets above 70 cents. St Barbara closed this week at 38 cents. The market sentiment is only likely to get better from here. Unless something drastic or unexpected happens, this looks like a buying opportunity.
Does the company plan on doing this again anytime soon? No. Not for another 12 months anyway. Delphine told us that the AU$120 million raised from a public rights issue and institutional placement would keep the firm well-funded for the coming financial year. Phew.
Where will the funds go? Ramping up production, developing its assets, expanding the business. SBM says it should double its gold production by this time next year. That’s a big plus.
The business hasn’t changed – only the structure of ownership. We tipped the stock as an investment. We’re not changing our position from that point of view. The company’s business itself is still good.
We understand you’re probably unhappy with the situation if you held the stock before the drop. The company should’ve have been more clear about the action it was taking, instead of just taking it. But as an investment, this slight by management is outweighed by the value in buying the company at the now-low price.
So we’re keeping the stock on as a buy. But now you can do it at a lower price than before.
Incidentally, if you did hold the stock before the drop, you still have the opportunity to take part in the rights issue. The cut-off date was 7pm, June 13th. If you held the stock before then, you can still take part. St Barbara is offering 2 new shares for every 7 you already own, at a price of 40 cents.
The downside is that a loss of confidence in the stock has pulled the price below 40 cents. You can buy on-market 2 cents cheaper. So at this stage, it doesn’t offer much value.
But the offer closes on the 4th of July. If price has readjusted higher by then, you could get shares at a discount. Watch the price up until that date.
Diggers and Dealers is a great tip sheet and well researched. I do not want to be seen as plugging this, but Obliged at least to reveal the source of Info RE - SBM - I suscribe to the publication.
SBM Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
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