Africa-focused diamonds explorer Paragon Diamonds Ltd is possibly raising £1.55m at 5p a share in order to finance the Lemphane kimberlite project in Lesotho but the full amount received by the company may be different.
Three directors are subscribing for shares as will 45.4% shareholder Obtala Resources, although Obtala’s stake will be diluted. The majority of the shares, though, will be subscribed for by Lanstead Capital. Lanstead will acquire £1.25m of the shares and Paragon has entered into an equity swap agreement which means that Paragon will “retain much of the economic interest” in these shares.
Unlike Quindell, Paragon has given some details of the equity swap agreement so shareholders know what is happening. Paragon argues that the deal will enable it to benefit from “much of the potential upside” from upcoming news flow.
The swap agreement lasts for 24 months until May 2015 and uses a benchmark share price of 6.67p. Each month, if the measured share price is greater than 6.67p then Paragon will receive pro rata more than 100% of the cash it is due, however, if the share price is lower than 6.67p then Paragon will receive less than the amount due on a pro rata basis.
In return for this deal, Paragon is paying Lanstead £200,000 in cash or 2.5m shares if Lanstead prefers.
This type of deal initially worked for Amur Minerals, which back in May 2011 secured an average price per share from Lanstead of 7.67p, compared with the original placing price of 3.3p less than one year earlier. When fees are taken into account the amount raised was £2.07m, instead of the original £890,000 expected. This money was paid more than one year early.
A second equity swap was agreed in March 2011 following a £2.5m placing at 10p a share. That was less successful because the share price declined over the subsequent 24 months. The benchmark price was 13.33p a share and the share price was nowhere near that level for most of the period. The relevant price is the average share price in the preceding five trading days up to the settlement date.
A third equity swap deal worth £4.86m at 8p a share was entered into in February 2012. The benchmark price was 10.67p and the swap lasted six months to August 2012. In the 2012 interims Amur admitted that the value of this placing had more than halved.
There was a gain on the swaps of £2.6m in 2010 and a loss of £1.51m in 2011. In the first half of 2012, the loss was £4.52m. There is no cash outflow it just means that less cash is received than originally expected. However, that still has relevance to cash flow.
This shows that the values put on these placings combined with equity swaps has no real relevance. Paragon will receive cash for the shares but it will certainly not be £1.25m exactly. It may be more, and therefore less dilutive, or it may be less and more dilutive. Company directors’ tend to believe that their company’s share price is undervalued so it is unsurprising that they believe that these equity swaps will work for them.
Paragon needs positive news to push up the share price but that is unlikely to happen for at least a few months. Paragon’s strategy is to undertake bulk sampling at Lemphane and establish an inferred resource by the second quarter of 2014. Trial mining could start before the end of this year. That could raise $2m-$5m from diamond sales.
Paragon had £492,000 in the bank at the end of 2012, plus loans of £2.62m. This was after a cash outflow of just over £3m in 2012. There is still £200,000 available from Obtala’s loan facility at the end of May 2013.
Paragon has switched its nominated adviser and broker from Fox Davies to Sanlam, who also advised on the Amur equity swaps.
At 5.25p a share, down 0.88p, Paragon is currently valued at £10.2m.
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