By Ivan Y.
Shareholders of non-producing mining companies that need to raise money to continue exploration and advance their projects toward development will be some of the biggest losers in this year's mining stock wreckage unless the share prices turn up reasonably soon. Several weeks ago, I wrote about how share dilution is one of the risks of owning a junior mining stock. The example I gave was Pretium Resources (NYSE:PVG), which was forced to dilute shareholders in April when its stock price was depressed. Seabridge Gold (NYSEMKT:SA) is a company that is in a similar situation with PVG because it needs to raise money every year.
Seabridge has two significant gold projects in Canada named KSM and Courageous Lake. Coincidentally, these projects are located next to PVG's projects in British Columbia. At the end of Q1 2013, the company had about $34 million in cash and short-term deposits with no debt, and they are projecting $24 million in expenses this year to fund the advancement of KSM and Courageous Lake. The $24 million is on top of what they will need for general corporate expenses. It seems that they have enough money for this year, but in order to continue next year they will need more financing at the end of the year. At the end of 2012, the company raised roughly $40 million by issuing shares: 1.1 million shares were sold at $21.85 in a private placement and 1 million shares were sold at $17.92 to Royal Gold (NASDAQ:RGLD). RGLD had an option to purchase these shares and they exercised it. At the end of 2011, SA sold 1 million shares at $27.36. In all these transactions, they were able to sell shares at a premium to the share price.
However, if the share price remains where it is now (hovering around $9), they will have to sell shares at roughly half the price compared to last year. Given the negative sentiment towards mining stocks this year, they may not even be able to sell the shares at a premium to the market price. We don't know how much they need to spend in 2014, but assuming its the same as 2013, they will need to raise about another $40 million or so. That would mean about 4.4 million shares need to be issued. Currently, there are 45.6 million shares outstanding, so we are looking at almost a 10% increase in the share count if they do indeed have to issue 4.4 million shares.
This is not disastrous for current shareholders, but it definitely hurts. But what if the share price continues to slide the rest of the year and they have to raise cash in December when the share price is at $5? Then we are looking at an almost 20% increase in the share count. You can see that SA and other mining companies that need to raise cash every year are at the mercy of the market. A low share price hurts in two ways. Shareholders are hurt with unrealized paper losses and they are hurt by dilution when the share price is depressed.
SA has projects in Canada that have a tremendous amount of gold reserves and resources. Five years from now, it is likely that SA's KSM and Courageous Lake projects will be generating large profits. That's assuming the gold price has recovered by then. Getting to that point will be a problem for current shareholders because they will have their shares get diluted at low stock prices unless the stock price recovers. In my opinion, this stock comes with too much risk because of the need for financing every year, and I would not touch it either on the long or short side.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.