I have decided to sell my position in Platinum Group Metals (NYSEMKT:PLG) for now until some more details are cleared up.
Here's what I'm worried about:
1. The company is running low on cash, and may already technically be in default. The company might have around $20M in cash, but according to the terms of the loan, the company must maintain a working capital position of $5M. Assuming the accounts payable stays around $17M, and the scheduled debt repayments of $15M within the next 12 months are included, their working capital position is currently negative.
2. If they go the way of equity financing to solve this problem, they will actually have to raise double the amount they actually need. This is because the terms of the loan require the company to pay 50% of the proceeds of any subsequent equity financings for early repayment of the Sprott debt. The company will need at least $20M to bridge the gap to profitability, so they may be forced to raise $40M, an amount of dilution that the market doesn't seem to be expecting.
The company's lenders and financers have been very generous with the company so far, giving them more and more time to meet their obligations and fulfill their promises, but there's no evidence that they'll be so generous this time. I'll consider buying back in if the company works something out with their lenders and bolsters their cash position. I don't mind paying a little extra for the shares if the uncertainty clears up.
Here are a few other things that are a cause for concern:
1. Based on the production numbers for the last four months, the company is probably still burning a lot of cash. The company claims to have reduced costs by 20% in February, but at current production levels, they're still burning through about $8M per quarter. March production shows they may be headed in the right direction, but the company will be losing money until they can surpass 10k ounces in monthly production.
2. The grade is significantly lower than expected, coming in at under 2 gpt. The company is assuming it can reach 250k ounces of annual production milling at 140k tonnes per month, which means the grade needs to surpass 4 gpt. That's a huge gap. Considering that 60% of the tonnes mined in March came from the high-grade zone (Block 11), this can't be solved just through an increase in mining the high-grade section. I don't think the company can ever reach profitability with 2 gpt ore.
The company does a good job explaining the production delays and hiccups, but they need money again, and even if the lenders and financers accept the company's excuses at face value, there's still the unexplained question of the low grade, which could give them pause. Even assuming the new mining contractor Redpath is vastly superior, that's still a lot of ground to make up.
I've sold my shares despite the depressed levels hoping the company solves its problems so I can buy back in, but the uncertainty at this point in time is just too great.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.