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Feb 2009 - Enough Shares

Do You Have Enough Shares on Issue?

Hindsight is a wonderful thing, as it so simple afterwards to recognise the possible mistakes. Golden Tiger (GTX) is an exploration company that is holding an EGM on 11 March 2009 to “close down and dispose of it operations” in China, because it appears to have run out of funds.

We (ERA) visited GTX’s operations in Guangxi a number of times, and thought that a number of their properties showed potential - so what happened ?

Looking at the summary table (Table 2 on page 8) of our recent year end review dated 3 February, what is immediately clear is that most companies in the list have at least 150m shares on issue, with a number in the 250m share or so vicinity, and many higher than 250m, but Golden Tiger only has/had 96m shares despite being listed since November 2004.

The general belief is that holding fewer shares in issue, results in higher share prices, based on the North American model. We can recall visiting fund managers over 10 years’ ago in North America who were not interested in any resource stocks that had share prices of less than $5/share, and were encouraging us to get Australian companies to consolidate their numbers of shares on issue. However, that perception appears to have changed.

From an Australian viewpoint, investors appear to have greater interest for shares trading at lower share prices, especially if there is volume, because the share can be traded out, and appreciations appear to be higher. A few c on a 20c share price soon becomes a 10% return, whereas a few c on a share trading in $ can have little impact when trying to achieve a desired return.

It could be an interesting study to see what part the number of shares in issue actually plays in investment.

It is often remarked in the market, that Sino Gold’s and Kingsgate’s share prices should be about the same and periodically they are. There are a number of differences between the shares, but also some similarities (one operating in China, the other in Thailand), and different holdings in their operating mines, and of course, different operating costs etc.

However, Kingsgate’s number of shares in issue has barely changed having risen from 71m in September 2001 to 86m by July 2005 and currently to 93m shares on issue for a market cap of $333m at $3.59/share on 9 February 2009. Compared to Sino Gold’s 129m shares in April 2004 having risen to 292m shares in issue in February 2009, which at its current share price of $5.04 represents a $1.47bn market cap.

Funds as a general rule appear to prefer to invest in companies that have high tradeability, otherwise they end up holding a number of “lobster-pot stocks”, being situations where you buy for the tempting morsel and then find yourself stuck (“in the pot”) with the stock and unable to sell it (despite steadily reducing your acquisition price).

Maintaining high share prices on few shares in issue has its place, but not if the company runs out of money/funds, otherwise the share price collapses to a few cents anyway as in GTX currently trading at 1.5c per share (9 Feb 2009) compared to the 10c to 20c it traded at for most of 2007, during a time when funds were available for most exploration ventures.

It has often been said that the window in which it is possible to raise money opens for a period, and then can close just as suddenly, so when the ducks are “quacking”, feed them. Don’t reject all the offers to raise money, especially if your funds are beginning to deplete and you have relatively few shares in issue, because when the music stops, your company may be the one that is unable to find a chair (with money on it).

Hence from an Australian viewpoint, it appears to be justifiable for a company to have at least 150m to 250m shares or so on issue when it is in exploration as it can always consolidate or if necessary buy some back later when it is in production, recognising that such moves restrict liquidity.

Consequently although companies may like to have few shares on issue to try and result in having higher share prices, such moves do carry the risk of losing the company due to having insufficient funds to continue operating, as appears to have been the case with GTX. (Note, there are other examples, it is simply that we have had a closer association with, and hence greater familiarity to, Golden Tiger Mining [GTX]).

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, may hold interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

  • Written by: Keith Goode
  • Sunday, 01 February 2009

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