Veris Gold Drama Is Only Good For Those With Money

Mariusz Skonieczny profile picture
Mariusz Skonieczny

As you know, I recently wrote an open letter to major shareholders about refinancing Veris Gold (OTCPK:YNGFF). I have not heard any feedback from the major shareholders or the company. The only thing I heard was from Shaun Heinrichs, that he forwarded my letter to the major shareholders.

I don't expect them to respond because it is not in their best interest to refinance the company. It is in our best interest for them to refinance it. If they continue to let Deutsche Bank suffocate the company, they can always come to the rescue through private placements -- which dilute the rest of us, but significantly increase their ownership because they continue to invest more money into the company. The value of the entire company continues to increase as the turnaround progresses while our shares continue to lose value through dilution.

When the company had 100 million shares and the stock was trading for $7 per share, it cost $175 million to acquire 25 percent of the company. Now after the number of shares almost doubled, it only costs $10 million to acquire 25 percent of the exact same company. In other words, at the end of the day what matters is what the major shareholders paid for whatever ownership they have in the company -- whether it is 10 percent, 33 percent, or whatever percent.

Sprott now owns 33 percent of the company on a fully diluted basis. This is about 60 million shares. If the company raises $20 million at $0.30 per share, it will have to print 66 million shares, taking the total from 181 million to 248 million shares. Forget about warrants. I am not saying that this is how much they will raise. I am using this as an example.

So if Sprott buys all of the newly printed shares, he will own 126 million shares. His ownership will increase from 33 percent to 50 percent. And to go from 33 percent to 50 percent all he has to spend is $20 million because people are puking shares. If the loan does not get refinanced and / or the price of gold continues to drop, the company will be raising more money every two months or so. People will continue selling shares and maybe within 18 months, which is when the Deustche Bank loan will be paid off, the share price will be at $0.05 per share versus $0.30 per share today. If Sprott continues to participate in private placements at $0.25, $0.20, $0.15, $0.10, and $0.05, he will end up owning 75 percent of the company. By that time, the company will be debt free and if the price of gold recovers, he might sell the company to Newmont (NEM) for $1 billion and keep 75 percent of it. Or if Newmont does not want to pay the price, he will pay himself out cash flow through dividends.

This is a very good deal for him and his company. The only way we can replicate what he does is through buying more shares in the open market or participating in the private placements. But the problem is that we might not have any extra money. What do you think ?

Disclosure: Long Veris Gold

This article was written by

Mariusz Skonieczny profile picture
Mariusz Skonieczny is the founder and president of Classic Value Investors, He is also the author of several books on investing including Why Are We So Clueless about the Stock Market, The Basics of Understanding Financial Statements, Due Diligence: How to Research a Stock, 100 Ways to Find Investment Ideas, Investment Wisdom and Gold Production from Beginning to End.

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