Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Examples of junior mining companies springing surprises on unsuspecting retail investors abound, but Esperanza Resources Corp’s (TSX-V: EPZ) announcement on Friday certainly wasn’t welcomed by traders.
They soon took the company down a peg or two after it tripled the size of its private placement first announced just two days ago.
The explorer, whose main asset is its wholly-owned Cerro Jumil gold project in Morelos State Mexico, increased the offer to $30 million by increasing the number of warrants being issued from 8 million to 24 million. At the same time the placement agents had their option on the special warrants increased to 3.6 million.
Each warrant costs $1.25 and retail investors pushed the stock as far down as $1.20 before recovering to $1.22 by the close, still down 9.6% from Thursday. Volumes were some four times the usual daily average and the company is now valued at $63 million.
Apart from the share dilution – only 51 million shares are listed in total at the moment – the offer, which closes on 24 May, also creates an overhang of stock for the next five years, by creating the possibility that in total 36 million new shares will flood the market.
The mechanics of the placements are such that each special warrant buys a ‘unit’. Each unit consists of one common share and – here is where it gets a bit complicated – “one-half of one Common Share purchase warrant of the Company (a whole warrant a “Warrant”)” according to the press release.
This ‘whole warrant’ in turn entitles the holder to acquire one common share at a price of $1.80 for a period of five years.
This means that until 24 May 2017 there are an additional 12 million shares waiting to be triggered should the price jump $1.80. If the agents exercise their options, this private placement equates to a doubling of the outstanding stock.
$1.80 a share is equal to almost a 50% increase, but five years is a long time in junior mining stock. In fact, Esperanza Resources, formerly Esperanza Silver Corp, was worth more than $4.00 a share just over five years ago.
If the math seems a bit fuzzy (feel free to email me if I’ve missed something) a prospectus might have cleared things up.
But here is another surprise from the press release: “The Company shall use its reasonable best efforts to obtain such receipt for the Prospectus on or prior to August 7, 2012. If the receipt for the Prospectus has not been obtained by August 7, 2012, each Special Warrant will become exercisable, for no additional consideration, for 1.05 Units.”
It’s been a very busy week for Esperanza. On Wednesday the company poached two Minefinders execs – Greg Smith takes over as CEO and Laurence Morris is the new COO. Pan American Silver Corp recently bought Minefinders for $1.5 billion.
Apart from Cerro Jumil the Vancouver-based company has 11 other exploration interests in Peru and Mexico and last year bought 27% of Global Minerals, owner of the Strieborna silver/copper project in Roznava, Slovakia.
