Just for fun.
THE SNAP LAKE CASH DILEMMA
Winspear Resources Ltd. recently revealed that it would place two potentially contentious resolutions before the company's shareholders at its annual general meeting, scheduled for May 16, 2000. The two
resolutions, if approved, could result in significant dilution for existing shareholders. A third resolution, proposing that the company change its name to Winspear Diamonds Inc. was also announced, but it seems likely to
pass easily without much fuss.
The first resolution proposes that the maximum number of common shares that can be reserved for use in the company's incentive stock option plan be increased from the current six million shares to nine million. Also proposed are a few minor adjustments to the wording of the incentive stock option plan to bring it into conformity with the rules of the Toronto Stock Exchange.
At the end of 1999, Winspear had 4.75 million options outstanding, and only 156,600 of them are scheduled to expire this year. The company has been a prolific granter of options in recent years, and went to the shareholders
in 1998 with a similar resolution, seeking approval to raise the maximum number of options outstanding from 4.5 million to the current six million figure. In 1999, the company granted 2.95 million options to its directors,
insiders, and key employees, up from just over one million a year earlier.
The company also granted 2.2 million options in February, 1997, then repriced them lower in June, after the resource sector downturn wreaked havoc on the stock value of most junior explorers. The resolution is hardly unique. In 1998, Aber Resources Ltd. increased its maximum from 2.5 million to three million, Mountain Province Mining Inc. increased its from 2.25 million to 4.2 million, and last year, Rex Diamond Mining Ltd. increased its maximum from four million to 5.9 million shares. Although the Winspear
directors and insiders will not be voting their six million shares on the resolution, the matter is likely to pass as it did two years earlier.
The second resolution should prove to be of far greater concern to shareholders, at least initially. Winspear will be asking its shareholders to approve one or more potential private placements of common shares, to a
maximum of 45 million new shares. If approved, the potentially large private placements could be completed at any time up to May 16, 2001. The company currently has 51.6 million shares outstanding, and issuing a further 45 million shares would amount to nearly a 50-per-cent dilution for existing shareholders.
According to chief financial officer, Don MacDonald, such an event is unlikely to happen. He said that Winspear was advised by its lawyers to obtain the approval at the annual meeting, so that the company could be prepared for any eventuality. "We do not contemplate at all, in the next 12 months, doing anything of that size," he said. According to Toronto Stock Exchange guidelines, the maximum number of shares that may be issued in a six-month period is an amount equal to 25 per cent of the number outstanding. Should a company wish to issue more, approval from the shareholders is required before any private placement can proceed.
Mr. MacDonald said that Winspear chose the 45 million value arbitrarily, simply because it would fall within its authorized limit of 100 million shares. While many shareholders fear that the move heralds a mammoth
private placement at unfavourable prices, Mr. MacDonald stated that the company was looking at quite a different scenario. He said that if circumstances were such that the share price was very high, and a major participant was found, then the company would want to move quickly to close a deal, without being slowed down by the need to hold a special meeting of shareholders. "There is no offering occurring, there is nothing actually happening. It just provides for a more speedy transaction if there ever was
to be one," he added.
The move is hardly unique among juniors attempting to finance a project on their own. At its last annual general meeting, Tahera Corp. sought approval to potentially double its outstanding shares from 170 million shares, to 340 million. The company is potentially seeking $40-million to construct a mine at its Jericho project in Nunavut, and like Winspear, hopes to raise a significant portion of the required funds through debt financing. In 1998,
Aber took another route, adding 200 million preferred shares to its authorized capital, although no preferred shares have yet been issued.
The Snap Lake project has required a steadily increasing amount of cash in recent years as the project works its way toward a production decision. About $3.6-million was spent in 1997, and $4.2-million in 1998. Last year
the figure ballooned to $18-million, and estimates for the 2000 program range upward from $40-million. Beyond that, cash requirements are likely to grow, as the total capital cost of the project was estimated in the scoping study, completed last fall, to be about $240-million, although much of that could be funded out of the initial cash flow.
Winspear is expected to release its prefeasibility study shortly, and much of the work now in progress will be incorporated in a full feasibility report, which is expected to be complete by the end of this year. Once that report is released, the search for funds will begin in earnest.
Traditionally, mining companies have been able to raise a majority of the required cash to develop a mine through debt financing, and Mr. MacDonald said that he expected that Winspear would be able to borrow at least 60 per cent of the funds required.
Mr. MacDonald paints a rosy picture, but Winspear would be required to raise up to 40 per cent of the capital cost through equity financing. That does not necessarily mean significant dilution, however. Mr. MacDonald said
that the company would be actively looking at other sources of cash that bankers would consider equity, but shareholders would not. One of the more likely possibilities would be a deal with a substantial diamond purchaser. Under such an arrangement, the company would agree to sell a set amount of diamonds under stringent terms and conditions, in exchange for subordinated
debt. Mr. MacDonald said that other possible alternatives would be some form of convertible debenture, with a very high conversion price, or a privately placed bond issue in the U.S. market that would be subordinate to any bank loans. While optimistic, Mr. MacDonald agreed that it was not going to be an easy process. "We're not a Rio Tinto, not a BHP, and we have to rely on the strength of the one asset," he conceded.
If Mr. MacDonald's optimistic scenario of a much higher share price is to occur, Winspear will require a steady stream of good news in the coming months. News should be in steady supply, but whether it will be all good is
entirely another matter. The first news should be the prefeasibility report, which is expected to examine the mine plan in far more detail than the preliminary scoping study of last year. One of the primary purposes of the current underground sampling program is to determine the actual mining conditions, which will be incorporated into the final feasibility report. That report will be primarily directed at bankers, and the value and grade data from the underground bulk sample program will be of importance to them, however Winspear vice president, John McDonald, said that from the company's standpoint, it was the actual
mining that was most important, and the work would allow the engineers to adjust their estimated costs from the broader assumptions used in the prefeasibility report. As well, the final report will be designed to optimize the project from Winspear's perspective. Following the release of the feasibility report, the project would proceed to the assessment and permitting phase, and the search for cash would begin in earnest.
In addition to the bankers, Winspear shareholders are undoubtedly eager to receive the results of the three 2,000-tonne underground bulk samples, which should be available this fall. The samples are likely to be the
cleanest ones the company has taken, as the hanging and footwalls can be easily demarcated in the underground environment. Earlier samples, especially the first 100-tonne sample taken in 1998, suffered some dilution
from country rock. To obtain the samples from three different areas, an additional 14,000 tonnes of kimberlite must be mined, and Mr. McDonald said that this material might also be processed. "If we can break even on it and
learn a bit more about the product, then you bet," he said. Meanwhile, drills continue to turn on the property. Mr. McDonald said that a more comprehensive report on the drilling would be issued reasonably soon,likely after the prefeasibility report, and this would be followed by the caustic fusion results from the drill cores.
Still somewhat unclear is the final resolution of the legal dispute over the ownership levels of the Snap Lake joint venture partners. Aber Resources Ltd. successfully sued Winspear to retain its approximate 32-per-cent stake in the play, but both parties are still mulling over their next moves. A recent headline in a Yellowknife newspaper stated that Aber would be filing suit against Winspear for alleged damages, but Aber chief financial officer, Andrew Adams, said that no such decision had been
made on any further action. Meanwhile, Winspear has until early May to decide if it will appeal the court decision which restored Aber's interest.
Although Winspear was clearly disappointed by the decision, returning to the former ownership levels will result in a smaller cash drain from the treasury. Much of the advantage of an increased interest would have been lost had the company been forced to raise additional funds at the current share price. "It is kind of self-defeating," acknowledged Mr. MacDonald.
The steady advancement of the Snap Lake project toward a production decision has failed to captivate the attention of investors in recent months. Winspear shares peaked at $5.30 late last May, as speculators anticipated the initial bulk sample results. Those results, although good, failed to live up to their expectations, and the stock retreated to $2.50 by mid-August, and dipped below $2 by mid-February. In a long anticipated move, the Toronto Stock Exchange listed Winspear shares for trading early
this month, but even that has had little positive impact on the sagging share price. Winspear closed up 5 cents Tuesday, to end the day at $2.25. |
