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Anyone who is persuaded in one evening is not really persuaded. He can be converted by the next person of opposite views with whom he spends an evening. The only person who can truly persuade you is yourself. You must turn the issues over in your mind at leisure, consider the many arguments, let... More
  • Energold & Bought Deal Financing 8 comments
    Mar 7, 2012 1:12 PM | about stocks: EGDFF

    Energold Drilling Company (OTCPK:EGDFF) just announced this week that they have entered into a "bought deal" financing arrangement with a syndicate of underwriters led by TD Securities Inc to the tune of around $20 million dollars (private placement of 3.9 million shares at $5.20). This deal also includes some options (585,000 options at $5.20 as well) that, if converted, would bring the total financing deal to around $23 million. This deal is to be closed on or around March 21, 2012. That being said, this is only slightly troubling, but it's worth noting why and why not.

    To understand why, one must understand that "bought deal" financing is one of the more expensive ways of raising money, and Energold has engaged in this type of financing before in 2010. For an excellent overview of how "bought deal" financing works take a look at the Adventures in Capitalism article link at the bottom of this post about the 2010 financing deal by Energold. I would recommend it for a full understanding of what is taking place, as I am not going to explain all the details. Nor would I be able to as fluently as the author of that article does. To summarize as concisely as possible, bought deal financing is essentially a broker calling the company asking them if they want money, because they have a committed buyer willing to help raise capital, and that it would be of no effort to the company (as long as they agree to the brokers terms). The broker doesn't just offer what the committed buyer wants to invest, but rather a bigger sum that they can then sell to others that obviously include fees.

    The troubling part of this deal comes in different forms. Some are characteristics of all equity issuances, but some are exclusive to bought deal structures. They go as such, 1) this will cause dilution of earnings for shareholders (like me), 2) bought deal financing is the lazier way of raising capital through share issuance, but the little effort on management's part to market the issuance comes with a sacrifice of some percentage points in pricing terms, and 3) one has to hope that the underwriter was able to find shareholders that genuinely believe in the fundamentals of the company.

    The third part is the least important to me because it mainly concerns the short term price; and as you read the Adventures in Capitalism article you will note that with the short term price "damn near anything can happen" with deals like this. Like I said though, I am not concerned with the short term price which is because I am a long term investor, but I figured I'd point that out anyways. From my perspective, one should ignore the short term price fluctuations because they have nothing to do with the fundamentals of this company. For example, if there isn't as much demand as the underwriter assumed for this deal, then the underwriter will probably do anything to get the shares off their hands. This includes selling the shares to funds the will just end up flipping the shares.

    So if the deal isn't popular then the shares aren't going to be going up until it has found a level where buyers become interested again. That's not to say that it won't be popular though, because Energold is in a great position to grow exponentially for a long time and it seems like many are starting to notice this. So these shares could get placed with a few large funds that intend to hold it based on fundamentals, but that is not something that I am willing to pontificate about.

    It is the above reason that points why I believe that this is not necessarily a deterrent to my original thesis that this is an overlooked and undervalued company. This deal should be very accretive in that it will pay for itself through the growth of the company's revenues and market share. The reason they did this is due in part to their aggressive, and very visible, growth plan and potential. And they need more money than they have in unrestricted cash to do this. It is the same reason they did it in 2010, and the growth certainly followed (check their financials if you want proof). Sure, they chose the more expensive way of raising capital, but it also allowed management to focus more on the operations of the company rather than a road show and marketing campaign. Energold is in an industry that has very little viable competition combined with a large potential market to cater to. Frontier mining has many decades of above average growth ahead of it as the easily accessible mining lands become scarcer.

    They are easily the best among the few competitors they do have, and they have the pricing power and reputation to back it up. I believe this deal will pay for itself, but I just wish they would have found a more lucrative and less costly way of financing their expansion. Then again, any sane investor wishes such things. I still believe that their earnings would have been able to finance their growth, as their earnings are getting stronger by the quarter, but I do not know what management has planned. So maybe their aggressive growth strategy necessitates this. I can't say with any certainty that taking on debt would have been a better idea, and maybe they needed to keep 100% of their attention on the operations rather than a marketing campaign that would have made raising capital more lucrative for the shareholders.

    All in all though, this is still a very good investment for anyone who has a long term investment horizon as this company is the front runner in a very lucrative industry, and will continue to be for a long while. In a rush to mine precious metals, I would rather be an investor in the company that supplies the miner rather than the miners themselves. Because then the company is profiting on the exploration potential, rather than the actual precious metal recovery potential (i.e. successful and unsuccessful miners both add to Energold's bottom line). This might not be a terrific comparison, but it's similar to what Levi Strauss did in providing the miners with durable clothing that could withstand the harsh nature of mining during the mid to late 1800's California Gold Rush. And look where it got his business, as he cashed in on the necessities of the miners. Energold could do the same, but in the mining equipment segment of the industry, simply because of the fact that frontier mining is an extremely new industry that was brought into existence because of the kind of equipment that Energold created in response to the demand for being able to mine in areas previously unable to be mined.

    http://adventuresincapitalism.com/post/2010/12/05/Energold-Bought-Deal-Financing.aspx

    http://www.marketwire.com/press-release/energold-announces-20-million-bought-deal-financing-tsx-venture-egd-1628119.htm

    Disclosure: I am long OTCPK:EGDFF.

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Comments (8)
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  • Jon Springer
    , contributor
    Comments (4161) | Send Message
     
    Hi Alex,

     

    I'm sorry I missed this when you posted it. I'm posting a link here to Amoney's December 2011 article on Energold to create links between the few articles on Energold on the website: http://seekingalpha.co...
    29 Mar 2012, 07:52 PM Reply Like
  • Amoney
    , contributor
    Comments (59) | Send Message
     
    Nice work Alex. Smaller players have recently commented on substantial growth, including potential acquisitions so it's very possible that Energold needed the cash quickly for similar reasons. Like you said, I don't think this particular BD was all that destructive; it's frustrating, nonetheless.
    30 Mar 2012, 08:32 AM Reply Like
  • Alex Jantsch
    , contributor
    Comments (148) | Send Message
     
    Author’s reply » I agree! I'm certain that Energold management had reasons for needing the money, and ones that will most likely add value in the long run. My only qualm was how they did it, but I wouldn't doubt that their efforts are better spent focusing on the business itself rather than a marketing campaign that would get them lower cost financing. I imagine that they figured it wouldn't make too much of a difference given their potential explosive growth for the foreseeable future. Thanks for the comment!
    30 Mar 2012, 11:05 AM Reply Like
  • Amoney
    , contributor
    Comments (59) | Send Message
     
    Based on yesterday's earnings call it seems that Fred does not view BDs as a poor financing method, which makes me believe that he is not opposed to another deal in the future. He is also well area that investors hate these deals, and although no names were mentioned on the call I think he specifically referred to Kuppy. His argument about needing cash fast and not having time to wait upwards of 6 months to shop for a good deal is understandable. His other argument about leading Canadian banks supporting these deals, which makes them okay, is a little less agreeable. Fred comments on putting the cash to good use, and it seems that is already in play given the new rigs coming in and additional ones on order.
    12 Apr 2012, 07:24 AM Reply Like
  • Alex Jantsch
    , contributor
    Comments (148) | Send Message
     
    Author’s reply » Thanks for the update, Amoney! Much appreciated.

     

    I was unable to listen into the call at work, but I figured there would be talk/questions about the financing deal. I certainly think that no matter how they have gotten the financing they needed in the past/present that they have been able to make it accretive from a value perspective, and it seems like this will continue, so I'm not all that worried if they do this in the future. And I agree with you that it's understandable to want the money now rather than wait and put in all those man hours and money to do a road show.

     

    I simply hope that they will have managed their cash well enough in the distant future to not need financing so immediately that they resort the the more expensive method once they have saturated the market more thoroughly. The growth potential certainly outweighs the cost paid for immediate financing at the moment, but I think that once they have solid and dependable cash flow coming in every quarter that they won't have a need for such financing arrangements.

     

    Again, thanks for the update. Keep up the good work!
    12 Apr 2012, 12:18 PM Reply Like
  • Jon Springer
    , contributor
    Comments (4161) | Send Message
     
    I'm concerned several large shareholders have not been contacts in advance of the BDs, have not been happy with the BDs (because they feel their stake in the company is chunky enough that they should not be blind-sided by BDs), and that they may consider tempering their positions in the company based on Fred's ongoing stance on this issue (which they view as inconsiderate of shareholders and themselves).
    12 Apr 2012, 12:58 PM Reply Like
  • Stirling Capital Management
    , contributor
    Comments (247) | Send Message
     
    this deal is looking pretty smart now that EGD sits in a brutal downturn surrounded by bankruptcy with the strongest balance sheet in the industry and any deals they do here will make the cost of these shares seem like nothing compared to the ridiculous returns out the other side.
    19 Jan, 10:49 PM Reply Like
  • Alex Jantsch
    , contributor
    Comments (148) | Send Message
     
    Author’s reply » Stirling,

     

    I appreciate the comment, and completely agree. I didn't know how smart of an idea it was at the time, but I just didn't think that it would hurt my thesis. In the end, it actually ended up helping my thesis by stabilizing the company financially. I noted that I thought the growth in earnings might help pay for their aggressive expansion as it was, but I was clearly wrong about how extensive the downturn would be. Fred and Company clearly knew what they needed to do and exercised it, and I'm glad he did (reasons #1-10 of why I love intelligent, experience, motivated, and shareholder aligned management!!). I believe the downside pressures and risks are more than priced in at this level, and the margin of safety is seemingly larger now than it was when the deal was completed due to the drop in price. Only time will tell, but I think we will be hearing good things from Fred and Company for a long while now.....at least let's hope.
    20 Jan, 05:29 PM Reply Like
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