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.
