Good morning, 11:16am, a little under two hours after the opening bell.
The FVI.to bought deal
Last night after the close, Fortuna Silver (FVI.to) announced it was raising $30m via a bought deal, with CIBC and Canaccord as the lead houses. Here's the news release. There is also a 15% over-option that would bring the total proceeds to $35m and shares sold to a touch over 15m if fully taken. Here are some thoughts:
1) I did expect a financing like this to happen, but I did not know what the timing would be. I refer readers to the section of the IKN37 NOBS report pasted at the bottom of this mail.
2) All things considered, it's a good enough deal. Particularly interesting is the low commission on the deal being charged by the brokerages, which I understand is 5%. A deal such as this would normally carry an 8% commission or even higher (if memory serves, EDR.to paid 11% commish on its last round). This is indicative of the strong institutional demand for FVI shares previously mooted.
3) Unless the bottom truly falls out of the market (and by that I mean mid-2008 style, not the blip we're experiencing today) we can fully expect the over-allotment to be taken up. This would take proceeds to a touch over $34.5m (after the 5% rake, around $32.8m) and would take shares outstanding to 110m when all done and dusted. In the IKN37 NOBS report I assumed S/O at 105m, so my guesstimate missed by 5m share. Bite me.
4) Note that it's a bought deal with no type of warrant attached. This means that dilution is kept to a minimum and that even in an extremis situation where the bottom does fall out the market, FVI gets the $30m.
Assuming full take-up of the over-allotment (I repeat, this is a near certainty) this would leave FVI with the following cash resources:
Approx $31m treasury
$32.8m from this financing
The previously arranged $20m revolving credit facility
The quick math gives us $83.8m, which is more than enough to pay for the $70m (NOBS contingency $75m) to construct San José and bring it into production. Note that this $70m/$75m budget estimate covers all expenses, including necessary drill work at San José to firm up the resource, etc etc. The whole shebang.
We can also add a conservative $5/qtr in free cash flow from Caylloma (minus any new drilling programs at the mine that did not go into the original 2010 budget)
5) The numbers work and as long as Caylloma behaves itself and silver remains profitable, it will be without the need for a 'top up' financing later (though that depends on whether they acquire something in the meantime, as mentioned in IKN37).
6) Next, CEO Ganoza is a conservative player and I understand where he's coming from by locking in the $$ for the gig now. We might be able to argue the toss over whether the financing should have been pitched at (let's say) $2.50, but in the end the difference would be 1m to the shares out column. Not a gamebreaker either way. We could also argue about whether it would have been tactically better to wait a while and try for a $3-handle on the financing, but knowing CEO Ganoza as a conservative, bird-in-the-hand type of person the deal struck yesterday makes sense.
7) Finally, the share price action today sees the PPS at a few pennies under the bought deal price. This makes sense when the downspike in silver (and all metals) is taken into consideration. For the duration of the bought deal raise, I'd expect FVI stock to tread water somewhat, either below, at, or a little above the bought deal price. Worth noting that if the stock stays where it is the mkt is saying "yes, they pitched $2.30 correctly". I have no issue with the deal at all. Good for the company and good for the long-term investment policy we have as regards FVI.
We reiterate our buy call on FVI.to. I now leave you with the paste of that section from the IKN37 NOBS report.
Best, O
A possible equity placement
The ballpark numbers run through above regarding the capex needed for the San José expansion show that FVI does not need to run an extra equity financing to get to production day one. However, at this juncture I would not be at all surprised if FVI goes to market and places shares. For one thing, it would likely get the pick of terms and from several sources, as institutional interest in the stock has grown considerably in the last six to twelve months and there would likely be plenty of buyers for a large chunk of shares. This would mean there would be little need to sweeten any pots via an attached half warrant, for example. But more importantly, a well-timed placement would give FVI a cash cushion that would a) bolster the books b) provide contingency to any glitches in the San José construction stage and c) provide a small warchest that would allow the company to go out and buy its next project.
At this point in time, I have allowed for a modest share dilution of 10m shares in the earnings model that adds $25m to the company cash position by end 2010. However this is more of a personal guesstimate than anything else and it remains to be seen what tactical path FVI takes on its financing.