Silver Lake raises capital
Recommendation
The dramatic fall in gold prices earlier this year rattled a few nerves. Equity prices plunged; miners cut costs; and banks called in loans. Silver Lake Resources hasn’t been spared the reckoning and is raising capital to pay down debt and insulate the business from further gold price weakness.
Silver Lake will raise up to $67.3m, $47.5m of which will be raised from the issue of 56m new shares in an institutional placement at 85 cents per share. A further $15m will be raised from a share purchase plan, allowing existing shareholders to participate in the raising at the same price as institutions. Each shareholder will be eligible to buy up to $15,000 worth of shares, after which a scale back will kick in. Finally, directors will tip in another $1.2m, also at 85 cents per share. This is an encouraging and unusual condition that ensures management’s cash will share the same fate as investors.
The capital raising was a surprise. Silver Lake reported a small debt position of $11m and overall net cash in its previous interim result. Since then, the company has spent its cash and increased debt to $45m to commission the Murchison project and pay a contract dispute. It appears that the plunge in gold prices made it impossible to refinance that debt, making this capital raising vital. The raising is also a defensive measure to shore up cash in case gold prices should plunge again.
Documentation for the share purchase plan will be released shortly. Although we are adjusting our recommendation guide lower to account for the dilution, we recommend shareholders subscribe to the offer, keeping in mind that portfolio limits should be kept to a maximum of 3% of a risk tolerant portfolio. The share price is down 7% since Has the gold bubble burst on 24 Apr 13 (Speculative Buy – $1.045) and Silver Lake remains a SPECULATIVE BUY.
Note: The Growth portfolio owns shares in Silver Lake Resources.