In retrospect, CA$2.90 doesn't mean much. The holder of the debt converts whenever holder wants. But until rates and institutional risk appetite increases, the holder will keep the 6.5% on the CA$45mil. The more important number is the 6.5%, because the 6.5% is now added to the cost per ounce of production.
In the deal, NAP got ~CA$43million for a present value (if realized) of 14.8million shares. So the Company is borrowing 43million dollars for 14.8 million shares, or the effect of 6.5% of CA$43mil on gross revs.
The Company has added 14.8 million shares to the mix of warrants and options and shares outstanding, thereby reducing the portion of real earnings allocated to each share.
If I am a shareholder, my portion of earnings, which I expect to receive in the form of capital gains or retained earnings to be used in company investment, has been diminished by 8.5% for the price of 43million loonies, or ~16% of the 10Aug2012 closing price. What will the company receive on the EQUITY OF THE RETAINED EARNINGS brought about by what the company buys with 43 million dollars? And of that equity, what percentage is devoted to the 43million at present value? Is that equity going to grow more than 6.5% each year; if so, how much more?
See, the 43 million will have enabled the equity to manifest. At least, that's what mngmt tells us.
The shareholder gets paid based on the return on the equity.
For the sake of argument, let's assume that a shareholder is given 43 million Canadian dollars to invest in something. The lender says, "I get 6.5% each year for five years. And 43mil is all you get because I'm not lending you any more money. I don't care if you pay me back tomorrow!" Is the shareholder able to buy something this year that will afford him, without touching the 43 million dollars ever again, a continuous flow of cash of a particular amount which will enable him to buy something later?
Are you going to be able to buy something with the cash that this 43 million buys you that would beat something else that you could buy with the cash that this 43 million buys you? And is what you're going to buy worth giving 8 1/2% of your share of the TOTAL of that which you can buy to someone who is charging you 6.5% of one QUARTER of what it costs to build the machine that enables you to buy that which he wants an 8.5% share of?
The CA$2.90 per share means little. Ideally NAP will have paid back the 43 million before 2017 with a return on retained earnings. If so, the lenders won't sell the shares. They might convert them but they won't sell them. They'll keep their share of the profits, thereby reducing your share.
My bet is that the lenders believe that NAP has the ability to repay the loan with the sale of LDI alone. The debentures are convertible because the lenders believe the Pd story and the monopoly type roll which NAP plays in the Pd market. I mean, look, if LDI expansion does NOT take place, then the deficit that everybody is forecasting is no longer a forecast. Stillwater is going dry. Russia doesn't have it or can't get it, and South Africa is Africa. NAP will produce what it has, and then money will flood into the company... and then LDI EXPANSION WILL TAKE PLACE.
Don't get me wrong, I don't know what I expect NAP to earn over the coming years. Building that expectation is difficult given no earnings and no ROE history. That's why I want the price to go down. The decision becomes easier. I become a buyer of the mine rather than of the management. I seek to be a buyer of the management AND the mine.
If we truly are in the fourth year of an extended bull market, AND interest rates rise--thereby washing bond buyers into stocks-- then we're not even close to the highs of the industrial stock indexes or the industrial metals.