Death spiral financing7/2/2023 However, rising REE prices can bring back interest from Jien Mining, and this would provide Northern Minerals with the cash it needs to cover its development costs, meaning a key aspect of the short thesis could be jeopardized. This risk can be hedged using the aforementioned pair trading strategy, yet we believe that shorts are hedged from this risk given the near-term duration of the trade and the share overhang. Nevertheless, the potential for REE prices to rise, especially HREEs which are only produced in China, must be addressed. This short thesis has long-term fundamental drivers, but near-term catalysts as well, and this, we believe, mitigates a key risk facing those looking to short the stock, namely rising REE prices. While we acknowledge the latter this will be the topic of another article. This last point not only augments the short thesis but introduces the possibility for a pair trade. $36 million may not be a very high valuation for a publicly traded company, but for a resource company with an uneconomical, non-producing asset with limited reserves and complex metallurgy and marketing we think this is a very high price to pay. Given (1) the recent decline in REE prices relative to the proposed economics put forth in the recent definitive feasibility study, and (2) our estimation of the improvements that could come of the optimization research the company has done since releasing the DFS, it is highly unlikely that this can be an economic project.Ĥ: Northern Minerals is the most expensive REE company other than Lynas ( OTCQX:LYSDY), which is in production. Reasons for this are: (1) the market is questioning the company's access to capital, as it should, and (2) the barrage of short-selling that comes with a death spiral financing (structured almost risk-free by Lind Partners LLC, we give credit where it's due).ģ: We question the value of its flagship project-the Browns Range Heavy REE Project. 1 when the halt was supposed to end on the 2nd) that followed the company's failure to receive capital, and Northern Minerals' shares haven't fared well: they're down 28%. We've had three trading days since the formal end of the November 30th-December 1st trading halt(although we saw a couple small, mysterious trades on Dec. It is now December 3rd, and no such financing has been announced: we question whether the company will actually raise it, or any more money for that matter, especially since it has not made a statement to the market since its failure to find financing.Ģ: On November 2nd-clearly desperate for cash-Northern Minerals entered into a "death spiral financing" arrangement providing it with A$1.5 million (nothing compared with the company's cash-burn rate) The company tries to hide the onerous terms of this miniscule financing behind opaque language describing a "A$4 million financing." Don't be fooled: this is a death spiral financing for a company with a stock that is now at A$0.105/share and has traded ~80k shares per day on average for the past 30 days. The company was supposed to receive a critical A$17 million payment (as part of a larger financing package) on November 30th from Jien Mining. On November 9th the company announced that it is slashing personnel, director salaries, management salaries.etc., meaning that cash is likely running thin. It is the most valuable REE-company not in production in spite of all of its problems.ġ: A glance at its balance sheet and cash-flow statements show that it had negative working capital as of the end of September, and it would have had negative equity if creditor Jien Mining didn't convert A$5 million of its debt to equity.Its Browns Range Project is uneconomical at today's REE-prices.There is a massive stock overhang that is largely insensitive to share price.
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