Are Sirius Minerals and CloudTag top buys after this month's financing deals?
Popular AIM stocks Sirius Minerals (LSE: SXX) and CloudTag(LSE: CTAG) have both announced financing deals this month. But with their shares currently trading well below previous highs, is now the time for canny investors to buy a slice of these two businesses?
Sirius on track
Sirius is set to begin construction of its North Yorkshire potash mine having announced comprehensive funding for Stage 1 of its two-stage funding requirement.
Back in the summer, at a share price of 26.5p and market cap of £611m, I reckoned the equity component of the funding would be around £400m, giving a prospective market cap of just over £1bn. I rated the stock a speculative buy based on the £1bn valuation and projected annual revenues of $3bn (£2.4bn).
The equity component has turned out to be £370m via a placing and open offer at 20p. But there's also a future $50m share issue at 20p (part of a $300m royalty financing deal with Australian mining magnate Gina Rinehart) and a $400m convertible bond issue with a conversion price of 25p.
Taking all this into account, the prospective diluted market cap is about £1.2bn at a current share price of 21p. So, the funding has been somewhat more generous to the new investors than I envisaged. However, risk has reduced through securing the Stage 1 funding, Stage 2 is expected to be via senior debt and a valuation of 0.5 times projected annual revenues offers some protection against any unexpected further equity dilution before first production in 2021. As such, I continue to believe the stock is an attractive buy.
CloudTag off track
Wearable technology firm CloudTag(LSE: CTAG) started 2016 with a bang, announcing the launch of its first product (a fitness tracker) and a commercial contract with distributor Second Chance that would "guarantee" minimum sales of $5.2m by year-end.
In early June, CloudTag said Second Chance "is now concluding initial product delivery requirements" with 11 retailers -- unnamed but in most cases readily identifiable: for example, "the largest employee-owned UK department store" (John Lewis) and "Europe's largest retailer for consumer electronics, with over 700 Stores in 14 countries" (Media Markt).
On 7 November, CloudTag announced that "no firm purchase orders have as yet been received from Second Chance or otherwise" and that the minimum $5.2m of orders by year-end "is now unlikely to be achieved".
In the same announcement, CloudTag said it intended to raise £4m by issuing convertible notes to "an overseas Institutional Investor." In contrast to Sirius's conventional convertibles issue -- in which conversion is based on a fixed price -- CloudTag's is based on a fluctuating market price. Indeed, CloudTag's deal has several hallmarks of what, in the words of the US Securities & Exchange Commission, "have colloquially been called 'floorless', 'toxic,' 'death spiral,' and 'ratchet' convertibles". Such deals are rarely good news for shareholders.
At a price of 11.2p in early trading today and with 379,295,962 shares in issue, CloudTag has a market cap of £42m. The company isn't short of enthusiastic supporters but for me this is a stock to avoid due to:
- The 'guaranteed' sales that weren't in truth guaranteed.
- The lack of a single firm order more than 10 months after commercial launch and five months after Second Chance was "now concluding" initial orders with multiple major retailers.
- The low-grade financing deal.
A top small-cap stock
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.