The "Tight Share Structure" Concept
In various media outlets, I frequently hear North American investors mention that a junior miner has a "tight share structure" as if this is a certain quality to be desired in a junior miner. By this, they mean that a company has a limited number of shares outstanding (e.g., less than 100 million). Many of these commentators will also poke fun at Australian juniors for having 1 billion or 2 billion shares outstanding. This "tight share structure" concept even makes it into investor presentations such as the following slide extract from Constantine Metal Resources (OTCQB:CNSNF):
Setting aside the constituents of the shareholder base - it is preferable to have committed institutional shareholders - the concept of a tight share structure being an advantage is a myth that makes no sense. What does matter is the market capitalization of a junior. The larger the market capitalization, the easier it generally is to raise equity while minimizing shareholder dilution.
Let us look at some examples that make this clear. First, allow me to lay out the parameters for our example. The following table compares a hypothetical Canadian Junior (blue text) with 50 million shares outstanding trading for $1.00 per share to an Australian Junior (green text) with 1 billion shares outstanding trading for $.05 per share. It assumes I bought $50,000 of each which would give me 50,000 shares of the Canadian junior and 1,000,000 shares of the Australian junior [rows 2 and 6]. The market capitalization of both stocks is $50 million. My $50,000 purchase of each gives me .10% ownership of each company.
Now, let us assume that each company raises $5 million by issuing equity which dilutes its shares outstanding. Assuming the stock prices remain constant for both and I do not participate in the equity raises, the Canadian junior's shares outstanding would increase to 55 million and my ownership would fall from .10% to .091% [row 3]. The Australian juniors shares outstanding would increase to 1.1 billion and my ownership would fall from .10% to .091% [row 7]. In both cases, regardless of the number of shares outstanding, my ownership percentage remains the same.
Now, let us assume that each company then raises $50 million by issuing even more equity which further dilutes shares outstanding. Assuming the stock prices remain constant for both and I do not participate in the equity raises, the Canadian junior's shares outstanding would increase to 105 million and my ownership would fall from .091% to .048% [row 4]. The Australian juniors shares outstanding would increase to 2.1 billion and my ownership would fall from .091% to .048% [row 8]. Again, in both cases, regardless of the number of shares outstanding, my ownership percentage remains the same.
Rows 9-16 simply provide an additional example where the stock price falls considerably prior to the $5 million equity raise. Again, in both cases, regardless of the number of shares outstanding, my ownership percentage remains the same.
In all these examples, you can see that my level of ownership of each company remains the same when the market capitalization of each company is the same regardless of the number of shares outstanding for each company. This is the bottom line.
Focus on Market Capitalization
Hopefully, this example makes it clear that a tight share structure is really meaningless and what we need to focus on when it comes to dilution concerns is market capitalization. The higher the market capitalization of a company, the easier it is for them to raise equity capital while minimizing shareholder dilution. Market capitalization is a function of the things we need to focus on, such as (1) deposit quality, (2) fundamentals of associated metals, (3) management strength, and (4) institutional shareholder support. The number of shares outstanding is simply a mathematical function that should not be a factor when it comes to assessing the merits of a company.
Finally, I took the time to write this up and present an example because I am tired of this myth and I do not want to see investors avoid attractive Australian juniors with high numbers of shares outstanding because of it.
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