Chrometco issues mystery shares

[] — IF a company raises only a third or a quarter of its intended funding ahead of a JSE listing, should that company still pursue its market ambitions?

Surely if a company needs R25m to fund its expansion plans, the building of new production facilities, acquisitions or simply to cull debt – and that company can only raise a few million rands from investors – it would be better to put things on ice.

This would apply in a stronger measure to companies needing capital to grease the cogs of day-to-day operations.

A poor reception from the market is not entirely about the money, but rather about the fact that there is unlikely to be much support for the share in the market when the under-funded company does list. A weak share price can mean an inability to use scrip for acquisitions or make it difficult to raise further funding without diluting existing shareholders.

Recent examples of companies that could not whip up too much enthusiasm on the market for their pre-listing share placements would include oil exploration wannabe Exxoteq (now suspended after running out of funds) and golf estate developer Acc-Ross (whose shares have lost over 80% of their value since listing earlier this year).

Market knows best

Company executives – faced with underwhelming investor support for their pre-listing fund raising endeavours are wont to placate market concerns by claiming that the full capital raising was not a pre-requisite for listing. In other words: “we don’t need the money… we have sufficient resources and corporate skills to pull through.”

Whether this kind of bravado is tantamount to corporate recklessness is debatable. Personally, I think contenders that can clearly gauge lack of market enthusiasm should put their listing plans on ice – or the corporate advisors should have the sense to call “time out”. The market usually knows best.

A fair amount of correspondence from readers gave me cause to look more closely at exploration counter Chrometco – listed on the JSE’s AltX market. Chrometco looks a case worth debating in terms of gauging what exactly constitutes an under-funded venture.

The share is currently trading at around 44c – down 65% from its pre-listing share offer of 125c.

Chrometco, which listed just over a year ago, initially signalled an intention to raise between R17m to R22m in pre-listing funding. The company actually raised about R5m from investors – in essence the bare minimum.

Easy money

I wonder whether shareholders who bought in at 125c/share (i.e. those investors assuming the funding risk) checked the prelisting documentation. Not only has the company got a negligible tangible net asset value, but the founding shareholders appear to have got their more than 50% stake in the company for a nominal amount.

The prelisting documentation shows at 116 million share were issued at about 1c/share to “founding shareholders’ initial capital providers in exchange for assets, cash and services”.

These lucky parties – including director Edward Bramley and Stuart Simons – paid R1m for their 54% stake in Chrometco, a shareholding that today is worth around R40m. Easy money some might say…

Now one thing that an exploration company needs – remembering that projects take a while to come on stream – is an abundance of capital. So how far can R5m really go?

The group’s audited results to end February 2006 – released a full six months after year end on August 31 – makes for some interesting reading.

Sufficient funding

Operating expenses came in at R5.2m (remember revenue is nil because Chrometco is an exploration company), which effectively eroded the bulk of the funds raised in the pre-listing share placement exercise. Chrometco – as at end February 2006 – held R1.8m in cash.

Presumably operating expenses in the six months to end August 2006 have now depleted the remaining cash pile.

It’s one thing that the cash has been used up, but worse news is that the exploration activities the Naboom project suggests the cost of establishing a mine and processing infrastructure would be “extremely expensive”. Thus the option agreement on Naboom will not be renewed.

Now much at Chrometco seems to ride on the group’s Ingonyama Copper/Cobalt refinery. But only once sufficient funding is in place will the board vote on Ingonyama’s development.

In May – when the financial results to end February were first published in unaudited form – directors stated that the group had “negotiated with an offshore financial institution and have subsequently signed a term sheet for this company to deliver sufficient funding for Chrometco to commence the development of its Copper Cobalt Refinery and to carry out feasibility studies on its Nickel and Chrome prospects”.

Private placement

Three months later there’s still only vague detail about the funding.
And I quote: “February 2006, management visited numerous potential providers of finance in London and returned feeling comfortable with the positive reception they had received during their brief stay.”

It seems directors also made enquiries regarding a secondary listing on the Alternative Investment Market Sector of the London Stock Exchange (LSE).

Free news alerts: click here to subscribe

Then the really baffling bit: “August 2006, a private placement of ordinary shares took place in order for the company to obtain further cash resources (refer to the discussion of significant subsequent events for further information). The funds received will allow the Company to resume exploration activities on Rooderand, as well as to initiate an exploration programme on its nickel interests and to establish a copper operation.”

Unless I missed a SENS announcement providing key details of the private placement, what I (and presumably Chrometco’s shareholders) would like to know is who were the participants in the private placement, how much was raised and at what price were the shares issued.

With directors noting that Chrometco’s ability to continue as a going concern is largely dependant on the successful conclusion of these actions, it seems reasonable that details are provided sooner rather than later…