Capital raisings - destroying shareholder value

[Corporate]

In the last month I can not believe how much shareholder value I have seen destroyed through poorly managed and poorly timed capital raising's. The following are three which are HUGELY dilutive and it makes me sick!

NAV raising at 2c - traded as high as 28c in the last 12 months

AED raising at 7.5c - traded as high as 58c in the last 12 months and was once $11 per share

VMG raising at 5c - traded as high as 54c in the last 12 months and was once $3 per share

Unbelievable

[JBmurc]

In the last month I can not believe how much shareholder value I have seen destroyed through poorly managed and poorly timed capital raising's. The following are three which are HUGELY dilutive and it makes me sick!

NAV raising at 2c - traded as high as 28c in the last 12 months

AED raising at 7.5c - traded as high as 58c in the last 12 months and was once $11 per share

VMG raising at 5c - traded as high as 54c in the last 12 months and was once $3 per share

Unbelievable

yep an what really kicks the shareholders when there down is the fact the Mgmt still keep their 300k+shares income p.a

[Corporate]

yep an what really kicks the shareholders when there down is the fact the Mgmt still keep their 300k+shares income p.a

What is worse is that the share base is so large after these type of rights issues that the share price will never get to its previous highs.

Consider VMG

200m shares on issue and they are currently doing a 5 for every 1 share rights issue at 5c. If this is taken up VMG will have 1 billion shares on issue. To regain a share price of 54c the company would have a market cap of 540m!!!!

Prior to the capital raising the share price was 16c with a market cap of $30m

[macduffy]

I don't know the circumstances around the examples quoted but usually these dilutive issues are often the only option left when a company runs out of cash and is unable to increase its borrowings. If the method is a pro-rata rights issue then at least shareholders have the chance to retain an undiluted share of ownership. It's the big placements to a selected few that I object to although there can be times when that is the only feasible alternative if the need is urgent.

By the way, if full entitlements of new shares in VMG are taken up at 5c, the SP will only need to rise to around 14c for the total holding to be worth more than the original (one of six shares) holding at 54c.

[shasta]

In the last month I can not believe how much shareholder value I have seen destroyed through poorly managed and poorly timed capital raising's. The following are three which are HUGELY dilutive and it makes me sick!

NAV raising at 2c - traded as high as 28c in the last 12 months

AED raising at 7.5c - traded as high as 58c in the last 12 months and was once $11 per share

VMG raising at 5c - traded as high as 54c in the last 12 months and was once $3 per share

Unbelievable

Great thread, but dilutive capital raisings are a by product from inept Management, look at URA & ADY, who traded as high as $1.60 & $0.63 respectively, & are now in the penny dreadful category, with the # of shares blowing out year after year.

Look at MCR for example, after a one off capital raising years ago, they have never gone back to the market/shareholders for more money!

When i look at certain companies, i look at the share register, has Mgmt got a supportive cornerstone shareholder, does Mgmt/board own a decent number of shares (purchased on market, not hand out options), have they derisked projects via JV agreements funded by partners etc etc.

An Iron Ore company i've been researching with a view to joining the 5 stock long term portfolio is CXM - It has replaced TRF, as i remain skeptical of IFE costings for the capex requirements. CXM's capex is modest in comparison & seem to have a pro active Mgmt team/Board & tick enough boxes to impress me.

[tobo]

Yes I've been caught by this with juniors. Obviously juniors don't have income so must raise cash to carry out business plan.

I think is is key to gain a clear idea of how much will be raised and whether this amount will carry a junior right through to production.
The best is when the CR is supported by cashflow info that shows this to be one big raising that will be the last until income kicks in.
The worst is a small raising that will clearly not last, followed by another small CR 6-12 months later, where the company gets caught in a dilutative spiral. We can sometimes be forgiven for concluding that management can't be that inept, but are actually milking shareholders to support their lifestyle year after year with vaguely defined plans that just keep getting extended.
I guess simple to say but not always obvious: bad management.

[buns]

This is a good topic.

The examples above seem to relate to small cap miner/oilers which of course struggle for cash flow hence can’t raise debt, so capital raisings quite often become the only possibility. Still, not ideal. Again, the lack of cash flows make these tough to value, hence the SP’s do bounce a lot which in the short term can make capital raisings look especially bad.

The worst cases of capital raisings come in larger companies, with solid cash flows, ability to control debt and have large dividend pay-out ratio’s. I’ve never come across an example as bad as Sky City. This is a company sitting on a monopoly, and an absolute cash cow and paid out 70% of it in dividends. But management never took its eye of EBITDA, and forgot about what it takes to fund/generate that EBITDA. They couldn’t help gambling on mindless capex/projects which never came off, funded all of this with big debt, then once the earning/cash flow took a wee hit (GFC) they were forced to raise capital to pay this debt down. Obviously doing this in the GFC they raised this capital at near an all-time low of 2.61 – after this their amount of Equity nearly doubled, hence shareholders ROE halved!

They had no excuse to get into this state, a short term fix would have been not paying a dividend for a while, but that would have crashed the current SP, but maintained long term value in SKC. Of course company Exec/Directors only care about that SP right now so they can cash in rights etc.

Now get this, A couple of years on, SKC is stoked that it has managed to secure 600m odd of debt, and hinting a raise in dividends…

Un educated investors have no idea of this, no idea about a company’s ability to control cash and will follow these stocks in on the assumption that the share price is low and has to recover to its old highs, but in the SKC example these kind of investors have no idea that SKC is now a different beast.

[Halebop]

Fully agree with you there Buns. Speculative investments like oil exploration is a tough game so often the dilutive raising can only be lamanted in hindsight. Sky City destroyed much value by making poor decisions despite predictable cashflows. They are a salutory lesson on the value good management adds (and evidence that Buffet's ham sandwhich can indeed run a good business)

[whirly]

Yep I've been burnt by cap raisings. I now look very carefully at the cash on hand and cash burn rate before buying. I was lucky to get out of BCC before their 2nd cap raising in 3 months but at the same time that particular company cannot realise its grand plan without having some big players backing it. Not much consolation for those that bought into the first cap raising at 9.5 only to find their shares are now worth about 8c with major dilution to come.

[lissica]

What is worse is that the share base is so large after these type of rights issues that the share price will never get to its previous highs.

Consider VMG

200m shares on issue and they are currently doing a 5 for every 1 share rights issue at 5c. If this is taken up VMG will have 1 billion shares on issue. To regain a share price of 54c the company would have a market cap of 540m!!!!

Prior to the capital raising the share price was 16c with a market cap of $30m

The worst thing about that was, they paid out a 2c dividend only 6m ago.

To run out of cash and have the bank force a capital raising is just poor management

[JBmurc]

Yep I've been burnt by cap raisings. I now look very carefully at the cash on hand and cash burn rate before buying. I was lucky to get out of BCC before their 2nd cap raising in 3 months but at the same time that particular company cannot realise its grand plan without having some big players backing it. Not much consolation for those that bought into the first cap raising at 9.5 only to find their shares are now worth about 8c with major dilution to come.

yeah too right the Days of easy credit are over for many explorers/producers why I have moved my portfolio more an more towards well cashed resource plays
with the adding of the likes of PSA,KRE which now have more cash than their market cap/value, wouldn't buy any explorer than didn't have at least 25% cash backing or a producer with too much short term debt to market value.

[shasta]

Fully agree with you there Buns. Speculative investments like oil exploration is a tough game so often the dilutive raising can only be lamanted in hindsight. Sky City destroyed much value by making poor decisions despite predictable cashflows. They are a salutory lesson on the value good management adds (and evidence that Buffet's ham sandwhich can indeed run a good business)

Are you referring to the "allocation of capital" (One of WB's key criteria to enhance shareholder value?)

These dilutive capital raisings at the mining spec end of the market, really does show which have compentent Mgmt or not.

Shareholders should expect returns to be in excess of the cost of capital/bank deposit rates, thats what Mgmt get well paid to do, as do Directors!

Simply handling the cash back in the form of dividends should really only be for mature businesses, where internal growth is minimal & expansion by acquistion isnt the best use of shareholders fund (ie, no point acquiring something for the sake of it, u would expect acquistions to be earnings accreditive).

This topic has been discussed many times over, ie, share buybacks provide equal treatment to all shareholders, dividends sometimes don't.

Capital raisings for postive eps acquistions/low EBITDA multiples, shows competent Mgmt, continual raisings to fund working capital (or more appropriately keep funding Mgmt's salaries) isn't.

There is some upside from the capital raisings we have seen of late, especially those at a deep discount, where there are attached options.

So long as all shareholders are given the same treatment in a capital raising, the options for Mgmt should be set with concrete KPI's attached, to provide a real incentive & ensuring should they achieve them, shareholders would have enjoyed a decent return as reflected in the share price, if only we had more companies like that!