HEINZ-PETER BADER/Reuters
Dundee Precious Metals has hatched a plan to lower the exercise price on its warrants, helping the company to raise up to $58-million during a 30-day period window that is planned to start in May.
Currently, the 20 million outstanding warrants allow their holders to buy shares of the company for $3.25 apiece before November 2015. Dundee is proposing to lower the exercise price to $2.85. Should the plan go through – it's already been conditionally approved by the Toronto Stock Exchange – warrant holders will have 30-days to cash in at the reduced price.
To some it may seem like Dundee is giving its warrant holders a break at the expense of its shareholders, who will see their positions diluted. But management swears this isn't the case. They also stress that they aren't desperate for cash.
For starters the warrants are already deeply in-the-money. Even at their old exercise of $3.25, the holders could still buy shares for less than half their current market value of $7.80 each. "They're far enough in-the-money that the question is, 'are we going to get the cash now, or 30 months from now?'" said chief executive officer Jonathan Goodman, who recently announced he is transitioning out of his role but will stay on the board of directors. In other words, the warrants will be exercised, so why wait?
On top of that, management didn't think of this plan themselves; a large warrant holder came to them with the proposal. "We're not in the market looking for cash right now," Mr. Goodman said.
To prove the deal is fair, the company got two fairness opinions. Here's the logic: instead of getting the cash now, Dundee could theoretically borrow the money and pay the loans back when the warrants are ultimately exercised. But those loans would come with interest payments that would leave smaller earnings per share, affecting shareholders. Management also said there are eight or nine precedents for this transaction, so Dundee isn't pulling from thin air.
Finally, for those who worry this plan could be cooked up by insiders who want to buy their shares for cheaper than the original exercise price, the majority of warrants are held by outsiders. Not only that, but two-thirds of the external holders must approve the plan, as well as a majority of shareholders.
(Tim Kiladze is a Globe and Mail Reporter.)
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Tim Kiladze