Here is something we at Market Blog seldom see: a private placement done at a huge premium to the market.
The case at hand is junior mining stock, Rio Verde Minerals Development , which announced last Friday that it was offering stock through a non-brokered private placement at 42 cents a share, an incredible 90 per cent premium to Thursday's closing price of 22 cents. The company said it has commitments for $11-million of the $15-million worth of stock it's offering. The investor or investors who are paying this baffling premium weren't identified.
Companies flogging stock to investors usually have to price new offerings at a discount to market to move the merchandise, so Rio Verde is something of a rarity. It's also surprising that any investor would pay in a private transaction almost double the going open market price of a stock on the market. Since Rio Verde's announcement, its shares have moved higher and currently trade around 30 cents.
Toronto-listed Rio Verde is trying to develop potash and phosphate deposits in Brazil, and needs the money to fund mineral exploration and development.
The company did not respond to email and telephone requests for comment, but Michael Goldberg, who follows Rio Verde at Stonecap Securities, said one explanation for the premium is that an investor wanted to take a large position, and wouldn't be able to accumulate it on the market without raising the share price anyway.
“If they're were going to buy a fair bit of stock in the market place they would probably drive the stock up considerably doing that. That's one reason” for the above market price purchase, Mr. Goldberg said. “Obviously, the buyer sees quite a bit of value in Rio Verde's projects.”
But he also noted that “it is pretty rare to see a 90 per cent or so premium.”
Like most natural resource stocks these days, Rio Verde's share price has been under pressure, a situation made worse by market worries over a large, dilutive new share issue.
Penny stocks have their fans and Mr. Goldberg says Rio Verde has a few things going for it. One of its potash prospects is near a Vale mine, which is Brazil's only current producer of the crop fertilizer ingredient. Potash mines are capital intensive so any large resource found by Rio Verde might attract a joint venture partner given that Vale is already in the vicinity. Rio Verde also has some phosphate prospects, one of which looks like it could be developed in the next year or two through a low cost open pit mine.
Investors in the private placement will have to hope the positive spin works out, because making good on a 90 per cent premium will require lots of bullish news.