Placements plunder share equality

All men, we are told, are created equal – but not all shareholders. Placements, a nifty way for a company to raise a swag of cash in a rising market, have also become a fast way to water down the value of an investment for average investors – people like you.

The placement game is an exclusive affair, open only to institutions and so-called professional, or sophisticated investors, people who the law regards as smarter than you.

This is an example of how it works. On February 5 De Grey Mining, one of the hottest stocks on the market, said it was raising $5.25 million through the placement of 9.33 million shares at a price of 56 cents a share. No problem with that. Good company, good management, good projects.

But the placement, which topped up the cash reserves at De Grey, is only being made to Macquarie Bank, and clients of Intersuisse, Montagu Stockbroking and Peregrine Corporate.

If you are a client of Hartleys, Goldman Sachs JBWere, Merrill Lynch, or just a simple shareholder in De Grey (the company you actually own) – too bad.

Even if you were a foundation investor in the mid-2002 float of De Grey and put money in when the professionals were missing in action, you miss out – no invitation to participate in the 56 cent a share placement (a 4 cent a share discount to the ruling market on placement day) and no shareholder purchase plan at the same price.

Supporters of the placement system argue that it is a way of raising fast capital without the need for a full-blown (and expensive) prospectus. They also say that all shareholders benefit because it is cash flowing into their business. De Grey is doing the right thing, spending most of the money on an intensive drilling program at its exciting Wingina gold project.

Critics, however, can see a number of problems. First is the creation of more paper and the dilution effect on those not invited to the party. This is like the boiling frog that fails to notice the rising water temperature until it is dead. The more paper that is issued the harder it is to lift the share price  and it is not long before you become a joke like Anaconda Nickel (now Minara Resources) which, at one stage, had six billion (that’s right, billion) shares on issue.

On the way to the exclusive billion share league is beleaguered contract miner, Brandrill. On December 10 it placed a whopping 137.72 million shares at 2.4 cents to "sophisticated investors". In this case a shareholder purchase plan at the same price has been offered to the Joe Blow’s on the register but the extra shares on issue takes Brandrill’s paper mountain to 894 million pieces, a level that requires an awful lot of heavy lifting to have any effect on the share price which, at last glance, had dropped to 2 cents.

A quick glance at what has happened on the market recently reveals that a lot of companies are playing the placement game. Michelago raised $6.27 million in November with the placement of 57 million shares to clients of Austock. Sedimentary raised $6.5 million with a placement to a mix of institutions and current shareholders. Argonaut raised $3 million on February 6 from a placement with the professionals. Highlands Pacific raised $18.7 million to domestic and overseas institutions via an arrangement with ABN Amro and then extended the offer to all shareholders who stampeded when given the chance to invest more money in their own company – and the list goes on.

Another point about placements and the way they avoid expensive, bulky, and often worthless documentation to comply with laws designed to protect silly people (like you), is that they are a real threat to new floats.

A recent survey of stockbrokers revealed a common theme. The 40-plus new mining floats last year are first in line for the next round of financing because they have made it to the stock market, they are developing a track record and it is so much easier to make a placement to professionals than bother with the detail of a prospectus.

It may take time, but Briefcase thinks this issue has a long way to travel. It is a bit like the Privacy Act which is designed to protect ordinary people but actually makes life more complicated.

In the case of placements, the system has the potential to alienate a whole class of ordinary investors because nothing is more certain – some people are getting priority treatment when issuing shares and no matter what spin is put on it, that is unfair simply because the majority are not even given the chance to say no.

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FOR anyone having trouble sleeping at night because they are worried that the nickel boom is over, breath easy. Nickel has at least another two years in the tank and perhaps a lot more simply because the supply-demand equation just keeps on getting better, or worse, if you’re a buyer of the metal.

The latest ultra-optimistic outlook for nickel came mid-last week when the Canadian nickel giant Inco gave its assessment of the market. In a nutshell, terrific. The global warehouse inventory has dropped to one week’s supply (versus several months for most metals), there is no Russian surplus waiting in the wings (like the past 10 years), there are no big new mines coming on stream and the shortfall between supply and demand this year (and next) will be at least 50,000 tonnes.

For the first time since the 1960s there is talk of rationing available nickel. Substitution will become a fact of life (mild steel with a coat of paint can do the job of stainless steel, the biggest market for nickel). The only hope on the horizon is the 2006 start-up of Inco’s Voisey’s Bay mine in Canada, followed by Inco’s Goro mine in New Caledonia.

In the meantime, Jubilee and Kerry Harmanis makes another squillion dollars and share traders make oodles of hay.

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Thought for the week: "I hate to spread rumours – but what else can one do with them." Amada Lear.



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