PREM is just the latest example of why it’s so essential to read the details.
Premier African Minerals (LON: PREM) pulled a little trick last week that should be used as the poster child for why we should always, but always, read the details. PREM had a rights issue. Well, nothing wrong in that, they’re a mining company trying to bring that Zulu lithium mine in Zimbabwe into operation. Sure, we might worry a bit about lithium – the spot price is down 50% in the past 6 months – and we might worry about property rights in Zimbabwe too. But those were already built into the share price.
Nothing wrong with a rights issue at Premier African, nothing wrong at all
A rights issue isn’t, in the grander scheme of things, a surprise for a junior miner. Until there’s a full mineral reserve and a definitive feasibility study there is no asset there – just hopes of one. So, debt finance really isn’t something available, everything must be funded by shareholder capital. No one at all does this in one fell swoop, it’s always funding to the next stage of proof of the project. For the obvious reason that as each stage of proof is passed and achieved then the project is worth more. So, less of it must be sold for any given amount of money when it has just passed, rather than before, it has passed one of those stages of proof.
Continued calls on shareholder capital as a project progresses is just how exploration and development mining works.
The Credit Suisse bonds example
However, details, details do matter. As with those Credit Suisse AT1 bonds that got everyone so upset. CS was going bust, yes. Those Additional Tier 1 bonds are contingent convertibles. They count as debt but also capital. If the bank gets into trouble then they can be wiped out to reinforce the capital base of the bank – that’s what they’re for. However, everyone assumed that the equity had to die first, only then the AT1 bonds. Which was indeed true in most jurisdictions. But not in Switzerland – which then wiped out the AT1 bonds but not the equity. Making a lot of bond holders very unhappy but the fact that this could be done was there in the bond prospectus – in those details that need to be checked.
The Greek bond example
Another example from the bond world, when Greece was getting into trouble over the euro. It’s common in bonds to have collective action clauses. So, the borrower can’t pay – hey, this happens, it’s called credit risk – so there has to be a renegotiation. This also happens. But the CAC says that some number of the bondholder have to agree. In the past it was often 90%. Meaning that anyone who had 11% of a bond issue could make sure there was no renegotiation on that bond issue.
So, Greece gets into lots of trouble. The bonds will have to be renegotiated. The Greek Parliament decided to change Greek law over the CACs on bonds issued under Greek law – from 90% to 75% if memory serves. That made it much easier to make sure the bondholders lost lots and lots of their money. They got something like 37% of their money back in fact. But one guy (from the family who made their money providing cups etc to McDonalds) read the details. And he noticed that some Greek bonds had actually been issued under English law. Something the Greek Parliament can’t change and Westminster wasn’t going to do it for them. So, he bought 11% and more of these now cheap Greek bonds. He got paid 100% of the face value of the bonds – because he’d read the details. The 90% CAC would stand and so he could, if he didn’t get paid in full, kill the entire Greek bond renegotiation.
Details really, really, matter.
Which brings us back to Premier African Minerals. They had a rights issue at 0.925 pence per share (fractions of a pence, not pound, there) and the price promptly dropped 11% to 0.8 pence. The people who just bought shares at above the new price will not be happy with that, obviously enough. On the other hand, as we’ve said, share issuers in junior miners are just how the sector works.
The Premier African details
But details, details. In those details about Premier African get this: “ The disapplication of the pre-emptive rights approved by shareholders on the 21 May 2021 lapses on 21 May 2023. “ If they’d issued new shares on Monday then they would have had to gone through all of the faff of a full rights issue, pre-emption rights, offering extant shareholders a chance to buy in and so on. If they issued on Friday, they could just sell to some pre-arranged investors. So, guess what? They issued on Friday.
As we say, details really matter. Read the footnotes. But then that’s good advice for life itself.
