WINSPEAR PREPARES FOR MONEY RAISING
EFFORTS
by Will Purcell
Winspear Resources said Tuesday that it plans to raise
$20-million through a public equity offering. That news has
not played well with many of the company's smaller
shareholders, who see the offering as just another sizable
dilution of their investment. The latest issue of new shares
follows the October, 1999, private placement of 5.74 million
common shares which generated $13.8-million in cash, and
another private placement of five million shares, completed
late in 1998 that brought another $10-million in cash to the
company's coffers. Earlier this year, Winspear sought and
received shareholder approval to issue up to 45 million extra
shares over the next twelve months.
Winspear's chief financial officer, Don MacDonald, said that
there were a number of new twists to the latest round of
financing that might make the deal more attractive to current
shareholders. He confirmed that the issue would be a public
offering of shares and warrants, rather than the usual private
placement, although he stated that the company would be
targeting larger, institutional investors, rather than retail
clients. Although the underwriters, BMO Nesbitt Burns and
Canaccord Capital Corp. will sell to their Canadian retail
customers, the new issue will not be sold to foreign retail
customers, apparently. Nevertheless, Mr. MacDonald hopes
Nesbitt will be able to attract large U.S. investors, while he
looks to Canaccord to do the same in Europe.
A price for the latest issue has not yet been set. Mr.
MacDonald described the offering as a marketing deal, which
apparently means that Winspear officials will now hit the
hustings to tout Winspear to potential institutional investors in
Canada, the United States, and in Europe for about three
weeks. Once that promotional campaign came to an end, the
issue would be formally priced.
The deal appears to be similar to offerings recently made by
Goldcorp Inc. and Teck. Early in 1999, Goldcorp issued five
million common units, consisting of one common share and
one-half warrant. The units were sold at $10 each, a healthy
premium to the prevailing share price, which was then around
$8. Furthermore, the warrants carried an exercise price of
$20 per common share. The Teck offering was similar. With
Teck trading around $13.50, the company announced it would
be selling 10 million units at $15 each. Each unit consisted of
one common share, and one-half warrant, exercisable at $18
per share, but with the added provision that the exercise price
could be adjusted upward by the company under certain
conditions.
Mr. MacDonald confirmed that the proposed Winspear
offering would be similar to the Goldcorp and Teck deals,
adding that the offering price would likely be set at a
premium to the prevailing stock price, and the exercise price
of the warrants would be significantly higher still, perhaps 75
per cent above the unit price. Further, much like the Teck
deal, there will be a provision that will allow Winspear to
adjust the exercise price much higher, should the common
stock appreciate sufficiently. Just how much the stock price
would have to increase remains to be set, but in the case of
the Teck deal, the trigger was set just 25 per cent higher than
the exercise price of the warrants. Mr. MacDonald said that
Winspear's adjustment trigger might be 40 per cent higher
than the warrant exercise price. Whatever that trigger might
be is likely academic, as the net effect of the provision would
be to initiate the quick exercise of most, if not all of the
warrants.
Winspear's shares have been on a bit of a roller coaster ride
of late. The stock had been languishing just above the $2
mark though the first 10 days of June, but suddenly shot up,
peaking at $2.63 on June 13. The stock slumped back to
$2.06 on the news of the latest financing, but rallied once
again Thursday, reaching an intraday high of $2.40. "We
certainly are very wary of the stock price," Mr. MacDonald
said, adding that there was no way of telling what the next
few weeks would bring. Nevertheless, Winspear apparently
has the option of deciding when to set the price, and would
have at least some control over its destiny as a result.
The $20-million figure may not exactly be cast in stone
either. Should the new issue be fully subscribed for early in
Winspear's planned world tour, the company would consider
selling additional units. Mr. MacDonald said that the
"breadth of ownership" that would result was an enticing
proposition, adding that Winspear was clearly hoping for
"some substantial holders that would be around next year
when we do some bigger financings."
If those shareholders who consider dilution to be a four-letter
word were disappointed with the initial news, the potential
of additional sales might cause greater pain, and the mention
of still bigger financings would be simply disheartening. Mr.
MacDonald said that minimizing the dilution experienced by
current shareholders was a priority, but he added: "Dilution
is not your enemy, necessarily. An astute and practical way to
develop a project in our state is to look at bringing in new
shareholders to share in the underlying value of the asset."
Winspear clearly hopes that any new institutional buyers will
buy into the Snap Lake story as well as the units and will
therefore be active participants in future equity offerings,
which clearly will be required.
It appears that Winspear will now have enough cash on hand
to carry the Snap Lake project forward into next year. The
company had about $12.3-million in cash at the end of March,
and about $8.5-million has now been received from Aber
Resources Ltd., with more presumably on the way. Second
quarter expenses are likely in the neighbourhood of
$15-million, leaving about $5-million in the bank. The
approved budget called for expenditures of $49-million,
although this amount included a $7-million contingency stash,
and also included the operator's administration charge, which
could range as high as 10 per cent in some cases.
Much of the budget has already been spent, and as a result,
the additional funds should be more than sufficient to
complete the current work program. The nature of the work
required that a majority of the funds be spent in the first half
of the year, although tangible results will not be released until
later in the year. All of the required equipment was obtained
and trucked in, the airstrip has now been completed, and the
camp and fuel tank farm has been erected. The construction of
two kimberlite dams is nearing completion, as is the setup of
the processing plant.
Meanwhile the underground development is progressing quite
well, with 500 metres of the planned 1,200-metre access now
complete. The access appears to be advancing at about eight
metres per day, and at that rate it should be complete in
mid-September, perhaps just three weeks behind the original
schedule. Once the access is complete, the extraction of the
three 2,000-tonne bulk samples will begin.
Winspear hopes those samples will hold the key to future
concerns about dilution. Mr. MacDonald said that the
underground bulk samples would provide sufficient technical
data that would allow the indicated resource to be upgraded
to reserve status. Although the dike has been extensively bulk
sampled near the surface outcrop, the engineers required
additional grade and value information from the underground
portion of the dyke to confirm the continuity of the dyke.
Winspear clearly hopes the underground bulk sample brings
more than an abundance of quality diamonds. Perhaps
practicing his pitch to foreign institutions, Mr. MacDonald
optimistically predicted: "There is going to be a reality check
in the market, looking at our stock and comparing it to the
underlying asset value, which hopefully will result in a
significant increase in the share price." It is a refrain
frequently sung by many resource companies these days, but it
is one that is now gaining increasing urgency for Winspear,
who must soon set out to raise about $210-million in cash to
pay for its portion of a future Snap Lake mine.
Coming up with the cash will have to wait for the results of
the final feasibility study and the successful completion of the
permitting process, although an initial equity issue might be
completed in advance of those events, if the circumstances
were right. The company still hopes to be able to raise a
majority of the capital cost through debt financing, but it is
likely that one or more equity issues will have to be
completed first. Mr. MacDonald said that he hoped to link
any such equity issue with a debt financing package, and he
cited his experience with the Andacollo mine in Chile, where
a $25-million (U.S.) equity financing was linked to a
$50-million (U.S.) debt deal which followed some months
later.
Even if Winspear successfully raises 60 per cent of the cash
required through debt, the company would still be required to
issue a further $80-million in new equity. That would not be
such a burning issue, if it were completed at $8 per share, but
it would be a significant burden for current shareholders
should the share price continue to languish near the $2 mark.
Although Mr. MacDonald has high hopes for a higher share
price, the company is nevertheless considering its options.
One of those options would be to revive the plan to
commence with a smaller operation, and complete the
development from the resulting cash flow. The plan was first
presented in the 1998 scoping study, but it appeared to be
scrapped during the prefeasibility work.
That plan may be back in vogue. Mr. MacDonald said that
starting with a 1,500-tonne-per-day mine was a definite
option, ramping up to 3,000 tonnes per day in a year or two.
He could not say what the capital cost might be under such a
scenario, but it almost certainly would be well over one-half
the current estimate for the full capacity operation.
Nevertheless, the plan could significantly reduce shareholder
dilution, and it is actively being considered.
The lack of investor interest in the Snap Lake project may
also be a result of the continuing litigation between the two
partners. Winspear is currently appealing an April court
decision that confirmed Aber's ownership at about 32 per
cent, while Aber continues to pursue its $50-million damage
claim against Winspear, an amount that Aber president, Bob
Gannicott said was calculated as the result of an independent
assessment. The whole matter appears almost certain to drag
on for some time, as no court date has yet been set for the
appeal hearing, and the damage case will be heard at various
times over the next full year. Despite the legal turmoil,
neither partner believes progress will be impacted
significantly, but the market clearly has another perspective.
BMO Nesbitt analyst, Steven Butler, not surprisingly rates
Winspear as a top pick, suggesting the company has a net
asset value of over $7 per share, based on a discount rate of
6 per cent. Nesbitt clients appear to accept the positive
assessment of their analyst, as Nesbitt has been the second
largest accumulator of Winspear stock over the past five
weeks. At the other end of the spectrum, Canaccord seems to
be perennially awash in a sea of Winspear paper, and the
house continued to be the largest net seller of Winspear
shares. Winspear rebounded sharply from Wednesday's
slump, gaining 15 cents on Thursday and another 19 cents on
Friday to close at $2.40.
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