Tanzanian Royalty Exploration (NYSEMKT:TRX) just announced that it will be raising $10 million in convertible senior notes, and that this figure can go as high as $15 million, should there be demand. The notes will be convertible with an 8% discount to the weighted average price of the shares through December 24, 2014. It follows that the $10 million announcement is slightly misleading - it is actually $9.2 million. CEO Jim Sinclair claims that he is pleased that the company is able to raise money in this difficult environment, and that the company plans on using some of this money to finance the final part of the first stage of the Buckreef project, and the rest to bolster its working capital position.
Investors will recall that I wrote a bearish piece on Tanzanian Royalty Exploration last year. The market was ascribing an inordinate amount of value to a company that, in a best-case scenario, was positioned to get one somewhat economical (yet overvalued) gold mine into production with a substantial capital raise. This gold mine - Buckreef - is located in Tanzania, which is one of the riskier places in the world to mine.
In addition to Buckreef, the company has bad plans to get a small nearby project - Kigosi - into production this year, which clearly hasn't happened. Furthermore, while CEO Sinclair is saying that the $9.2 million is more than sufficient to get Buckreef into its Phase 1 of production, the fact that the mine's feasibility study has an estimated capex of $125 million leaves me scratching my head.
The company has been steadily draining capital, while investors have been jumping ship, as shares are down over 75% from my bearish call. While this financing is a positive development, the fact remains that the company has made several promises that it hasn't kept, while failing to lay out a clear plan of action. What's more, the stock has had a "Sinclair premium," which is the result of Sinclair's clout in the gold space. Unfortunately, knowledge of the monetary system and of gold doesn't necessarily translate into the ability to run a gold mining company, and so, this premium has been dissipating.
I still think shares are overvalued, especially since the gold price is down, the promise to get Kigosi into production never came to fruition, and I don't see how Buckreef gets into production from here. However, with the stock down 75%, a lot of the short opportunity is in the past. If gold turns around, that could give a boost to the shares, especially since we've seen an increase in short interest. My advice at this point is to just stay away.
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